Strengths and Weaknesses in the Baltic Sea Region
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Strengths and Weaknesses in the Baltic Sea Region Christian H.M. Ketels, PhD Institute for Strategy and Competitiveness Harvard Business School and Center for Strategy and Competitiveness Stockholm School of Economics This presentation draws on joint work with Professor Örjan Sölvell and has benefited strongly from ideas developed by Professor Michael E. Porter. The State of the Region-Report has been financed by the Nordic Investment Bank (NIB) and the Nordic Council of Ministers (NCM) in collaboration with the Baltic Development Forum (BDF). The full Report is available at www.bdforum.org Additional information on competitiveness research can be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu Two Questions • Where does the Baltic Sea Region stand? • Is the Region on a sustainable trajectory? Baltic Sea Region Report 2005 - 08-28-05 CK 2 Copyright 2006 © Christian H. M. Ketels Dimensions of Strengths and Weaknesses •Prosperity • World market position Outcomes • Innovation • Integration • Macroeconomic, political, legal, and social context Assets • Business environment quality • Company sophistication • Institutions •Trust Capabilities • Common ‘language’ • Leadership Baltic Sea Region Report 2005 - 08-28-05 CK 3 Copyright 2006 © Christian H. M. Ketels Economic Outcomes • High prosperity in the north-west, high growth in the south-east • World market position solid but not improving • Innovation position strong but not improving • Level of integration is significant but unbalanced across parts of the region Baltic Sea Region Report 2005 - 08-28-05 CK 4 Copyright 2006 © Christian H. M. Ketels Prosperity Cross-National Regions and BSR Countries GDP per Capita, US-Dollar, PPP, 2005 45,000 Norway 40,000 Iceland 35,000 NAFTA Denmark British Isles N Germany Oceania Finland 30,000 EU-15 Sweden Iberia Baltic Sea Region 25,000 Central Europe 20,000 Estonia 15,000 EU-10 Lithuania N Poland N Russia Latvia 10,000 ASEAN BRIC 5,000 0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% Growth of Prosperity, CAGR, 2000 - 2005 Source: Groningen Growth and Development Centre and The Conference Board (2006), IMF (2006), authors’ calculations Baltic Sea Region Report 2005 - 08-28-05 CK 5 Copyright 2006 © Christian H. M. Ketels Investment and Exports FDI Inflows over Time FDI Inflows as % of Gross Domestic Investment 60% Inward FDI Stock as % of GDP, 2004 European Union: 32% 50% Baltic Sea Region: 32% Baltic Sea Region Central European Region: 23% 40% World: 22% 30% European Union 20% 10% World Central European Region 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -10% Source: UNCTAD (2006), author’s analysis. Baltic Sea Region Report 2005 - 08-28-05 CK 6 Copyright 2006 © Christian H. M. Ketels Patenting Intensity over Time Baltic Sea Region Countries Patents per 1000 Capita 200 180 160 Finland 140 Sweden Germany 120 Iceland Denmark 100 Norway Estonia 80 Russian Federation Lithuania 60 Latvia Poland 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: USPTO (2006), author’s analysis. State of the Region-Report 2006 Baltic Sea Region Report 2005 - 08-28-05 CK 7 Copyright 2006 © Christian H. M. Ketels Share of inward FDI from other BSR countries, 1999 - 2004 80% 70% 60% Foreign Direct Investment Flows 50% 40% Integration 30% 20% 10% 0% Source: UNCTAD, national statistical offices, author’s calculations Baltic Sea Region Report 2005 - 08-28-05 CK Lithuania Finland Estonia Norway Denmark Source country Sweden Sweden BSR average Finland Denmark Estonia N Poland N Germany 8 Norway NW Russia Latvia Iceland Lithuania Iceland NW Russia N Poland N Germany Copyright 2006 © Christian H. M. Ketels Economic Assets • Sound macroeconomic policies, sound institutions and legal systems, and few social issues • But economically small region at the European periphery with few metropolitan regions • Well established financial markets, solid skill and science base, and a regulatory environment supporting fair and open competition • But low attraction of skilled foreign labor, weak incentives for investment and risk taking, and remaining gaps in infrastructure • A core group of multinational companies from the region and wide-spread adoption of modern management practices • But few new companies of significant size emerging Baltic Sea Region Report 2005 - 08-28-05 CK 9 Copyright 2006 © Christian H. M. Ketels Microeconomic Foundations Business Competitiveness Index Ranking over Time Rank 5 Baltic Sea Region 15 BCI – Overall Index NBE – Business Environment Quality COS – Company Sophistication 25 2001 2002 2003 2004 2005 2006 Source: Global Competitiveness Report (2006), author’s analysis. Baltic Sea Region Report 2005 - 08-28-05 CK 10 Copyright 2006 © Christian H. M. Ketels Knowledge Creation Top Universities in the Baltic Sea Region Copyright © 2005 Institute of Higher Education, Shanghai Jiao Tong University Baltic Sea Region Report 2005 - 08-28-05 CK 11 Copyright 2006 © Christian H. M. Ketels Capabilities • Wide set of cross-regional institutions and long historical legacy of linkages across the region but very different recent historic experiences • Generally high level of trust in the north-west but unclear whether this carriers over to cross-regional relations and the south-east • Broad consensus on the importance of competition and the impact of globalization but different views on the role of government • General tendency to believe in the power of institutions with less tradition in individual leadership Baltic Sea Region Report 2005 - 08-28-05 CK 12 Copyright 2006 © Christian H. M. Ketels The Formula of Baltic Sea Region Growth The Nordic Model SoundSound domesticdomestic TechnologicalTechnological policiespolicies GlobalizationGlobalization changechange •Macro•Macro •• Huge Huge opportunitiesopportunities •• Increasing Increasing rolerole ofof fromfrom openingopening •• Institutions Institutions know-howknow-how inin valuevalue xx marketsmarkets xx creationcreation andand growthgrowth •• Skills Skills •• Companies Companies withwith ofof science-relatedscience-related • Infrastructure • Infrastructure longlong legacylegacy ofof globalglobal industriesindustries playplay toto •• Openness Openness presencepresence strengthsstrengths ofof thethe regionregion = Strong economic growth Baltic Sea Region Report 2005 - 08-28-05 CK 13 Copyright 2006 © Christian H. M. Ketels The Formula of Baltic Sea Region Growth The Baltic Model OpennessOpenness andand Legacy Legacy IncentivesIncentives LocationLocation •• Sound Sound skillskill basebase •• Openness Openness forfor tradetrade •• Revitalization Revitalization ofof xx andand investmentinvestment xx historichistoric relationsrelations toto •• Aggressive Aggressive FDIFDI NorthernNorthern andand attractionattraction effortsefforts WesternWestern neighborsneighbors •• Low Low taxestaxes = Strong economic growth Baltic Sea Region Report 2005 - 08-28-05 CK 14 Copyright 2006 © Christian H. M. Ketels The Formula of Baltic Sea Region Growth The Integration Model HistoricHistoric LegacyLegacy InstitutionsInstitutions OpportunityOpportunity •• Tradition Tradition ofof closeclose •• Leveraging Leveraging EUEU andand •• Willingness Willingness inin tiesties acrossacross thethe xx NATONATO institutionalinstitutional xx WesternWestern EuropeEurope toto RegionRegion structuresstructures toto provideprovide pushpush forfor integrationintegration stabilitystability •• Consensus Consensus inin EasternEastern EuropeEurope = Strong growth of integration Baltic Sea Region Report 2005 - 08-28-05 CK 15 Copyright 2006 © Christian H. M. Ketels The Formula Hitting its Limits Traditional challenges remain in place o Economically small region at the European periphery Baltic Sea integration policies Domestic policy models are losing traction are losing traction • Past model of west-to-east transfers • Nordic countries need to provide better has reached its limit environment for human skill-intensive • EU membership of Baltic countries and entrepreneurial companies Poland create a competing arena • Baltic countries need to invest in • The EU context changed the dynamics creating new capabilities of relations to Russia Competitors are catching up o Many countries are significantly upgrading their domestic policies Baltic Sea Region Report 2005 - 08-28-05 CK 16 Copyright 2006 © Christian H. M. Ketels The Challenge of Economic Heterogeneity Low DegreeDegree ofof HeterogeneityHeterogeneity High • Easy to develop a common • Huge potential gains from identity regional benchmarking • Easy applicability of others’ • Huge potential gains from experience division of labor • Balanced distribution of benefits • Regional cooperation is easier • Regional cooperation is harder but provides fewer benefits but provides higher benefits Baltic Sea Region Report 2005 - 08-28-05 CK 17 Copyright 2006 © Christian H. M. Ketels Putting the Baltic Sea Region at the Top of Europe Key Issues • Aggressively pursue full regional integration, especially when it hits politically sensitive areas • Intensify the integration of private sector leaders and companies into regional cooperation efforts • Identify the unique economic value that the Baltic Sea Region aims to provide as part of the global economy • Address individual weaknesses in the business environment, focusing on the areas most critical to the Region’s strategic position Baltic Sea Region Report 2005 - 08-28-05 CK 18 Copyright 2006 © Christian H. M. Ketels.