1. Transition Economies: Porter Model Comparisons Maj Ryan Craycraft

2. Introduction Thesis Porter Model Explanation Case Studies –Russia –Poland –China Conclusion

3. Proposition If a country is to be successful in the global market economy, its domestic businesses must be competitive. IV: High levels of competitiveness DV: Successful Market Economy

4. Michael Porter’s Index Michael Porter, Harvard Business School has developed a competitive index –“The Current Competitiveness Index examines the microeconomic bases of a nation’s GDP per capita.” Macroeconomic conditions are usually the object of study, but although necessary, they are not sufficient Microeconomic conditions are what actually create wealth and “sustainable productivity” Comparative in nature

5. Porter’s Model Like a business cycle, interactions among the previous activities help countries move along the macroeconomic country cycle

6. Porter’s Model Business Environment Diamond, aka “The Diamond” (Consumers) (Indirect Efficiencies) (Supply Context) (Nat’l Corporate Culture)

7. Poland Transition Plan: –Free Elections –Evolve to purely private economy –Create the Institutions of a capitalist economy Rapidly to market economy Liberalize economic functions (int’l trade / FDI) Privatization Construct Social Safety Net Mobilize Int’l Monetary Aid

8. Poland’s Successes Solid GDP Growth Stable currency Solid Manufacturing Sector Exports FDI Small / Medium business growth

9. Poland’s Challenges Poor Infrastructure Political Instability Small inflation (<5%) Social Safety Net in jeopardy Unemployment (esp. eastern Poland) Debt of 50% GDP (2004)

10. Poland in Porter’s Framework Moving from Factor Driven to Investment Driven Strong Manufacturing Sector, esp. automobiles due to relatively cheap, educated labor force Strong FDI

11. Poland in Porter’s Diamond (Consumers $14K PPP) (Indirect Efficiencies) (Supply Context) (Nat’l Corporate Culture) Neutral Achievement Balanced Income and Competitiveness

12. Russia: A Middle Income Country Also a shock-therapy transition #1 CIS country, but behind E. Europe countries –No EU Charter guidance

13. Russia: Strengths Macroeconomic Stability (oil revenue) –7 th highest fiscal surplus in 2006 Cold War capacities –Higher education –Research institutions spurring innovation –Cultural factors that support innovation Flexible labor market

14. Russia: Challenges Public institutions Health factors –Infant mortality –Life expectancy Petrodollars preventing necessary painful reforms Inflation near 10% Technological readiness of business sector Low intensity of domestic competition

15. Russia in Porter’s Framework Classified by WEF in the Efficiency-driven stage “Needs to focus on higher education and training, market efficiency and technological readiness” While continuing public institution reform

16. Russia in Porter’s Diamond (Consumers $12K PPP) (Supporting Infrastructure) (Mixed Bag) (Low Competitiveness) Overachieving Country High Income compared to low competitiveness index

17. China: Commanded Transition Slow transition method Excess production allowed to go the open market When private enterprise failed, it was cancelled Government-controlled financial system

18. China: Strengths Macroeconomic indicators –High growth rates –Low inflation –High savings rate –Moderate public debt

19. China: Challenges State-controlled banking sector Low penetration of technology in industry Poor secondary / tertiary education system Public and Private institution quality –Turning to capital punishment for corruption –Burdensom government regulation –Poor property rights –Judiciary lacks independence

20. China in Porter’s Framework Moving from capture of cheap labor to need for efficiency to compete because cheap labor in other places Same as Russia’s recommendations: “Needs to focus on higher education and training, market efficiency and technological readiness” While continuing public institution reform

21. China in Porter’s Diamond (Consumers $7.5K PPP) (Supporting Infrastructure) (Macro indicators Public Institutions) (Low Technology) Underachieving Country Low Income compared to higher competitiveness index

22. Conclusion Transition from Factor-driven economy to Investment-driven economy has coincided with evolution from developing country to middle-income, developed country New challenge will be to move from Investment-driven to Innovation-driven in order to sustain growth

23. References Porter, Michael E. “Enhancing the Microeconomic Foundations of Prosperity: The Current Competitiveness Index” Hunter, Richard J. and Leo V. Ryan, “A Transitional Analysis of the Polish Economy: After Fifteen Years, Still a ‘Work in Progress,” Global Economic Journal 5:2, 2005. Economist.com, Poland Country Briefing Factsheet, Marageta Drzeniek, “Russia’s Competitiveness at the Crossroads”, Paper presented at World Economic Forum Russia CEO Roundtable, June 2007, http://www.weforum.org/en/events/russia2007/index.htm http://www.weforum.org/en/events/russia2007/index.htm Economist.com, China Country Briefing Factsheet, Porter, Michael E., World Economic Forum, World Competitiveness Report 2006-2007