Competitiveness for the Third Millennium: Implications for Croatia

Professor Michael E. Porter Harvard Business School

CEO Agenda Forum Zagreb, Croatia May 15, 2009

This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: May 13, 2pm

• Croatia has experienced solid growth rates over the last few years, taking advantage of the transition to a market economy

• The global economic crisis is now starting to take its toll

• Despite the recent period of growth, however, Croatia is facing serious competitiveness challenges

• Croatia needs to address these issues aggressively instead of hoping for an automatic return to growth after the crisis or that EU ascension is sufficient

• Croatia lacks a clear strategy and an effective implementation mechanism for improving competitiveness

20090515 – CAON Crotia.ppt 2 Copyright 2009 © Professor Michael E. Porter Prosperity Performance PPP-adjusted GDP per Selected Countries Capita, 2007 ($USD) $50,000 Qatar ($57,175, 0.92%) Norway ($54,604) United States $45,000 Ireland Eastern and Southern Europe Other countries Singapore Hong Kong $40,000 Switzerland Canada Kuwait Austria Sweden Australia $35,000 UK Finland Taiwan Germany Japan France Italy Spain $30,000 Greece UAE Slovenia Israel New Zealand $25,000 Bahrain Cyprus South Korea Czech Republic Malta Saudi Arabia Oman Estonia $20,000 Slovakia Hungary Lithuania Poland Croatia $15,000 Libya Latvia (12.6%) Malaysia Russia Mexico Argentina Chile Turkey Kazakhstan (12.3%) Iran Bulgaria Romania Belarus $10,000 Lebanon Brazil South Africa Belize Macedonia Thailand Bosnia & Herzegovina Ukraine Albania $5,000 Guatemala Egypt China (13.0%) El Salvador Syria Jordan Moldova Philippines India Vietnam Yemen Pakistan Laos Cambodia $0 2% 4% 6% 8% 10% 12% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2007

• Croatia has benefited from the end of conflict and market reforms Note: highlighted countries are part of the East African Community (EAC). Source: EIU (2009), authors calculations 20090515 – CAON Crotia.ppt 3 Copyright 2009 © Professor Michael E. Porter What is Competitiveness?

• Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries

• Only competitive businesses can create wealth and jobs • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy

Ireland $80,000 Hong Kong France Eastern and Southern Europe Austria UK Other countries Canada $70,000 Australia Finland Greece Saudi Arabia Italy Germany Spain Switzerland Japan Oman $60,000 Malta Slovenia

$50,000 New Zealand Korea Slovakia Cyprus Hungary Czech Republic Portugal Croatia $40,000 Poland Estonia Lithuania Turkey Malaysia Chile Mexico Latvia $30,000 Argentina Russia Macedonia Romania Iran Belarus (8.6%) Bulgaria South Africa Kazakhstan $20,000 Peru Brazil Albania Algeria Tunisia Egypt Thailand Ukraine Syria Morocco Philippines China (10.1%) $10,000 Indonesia Pakistan India Angola (14.0%) Cote d’Ivoire Cameroon Nigeria Bangladesh Kenya Vietnam Senegal Uganda Cambodia Zimbabwe (-8.9%) Ghana Mozambique $0 -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% Growth of real GDP per employee (PPP-adjusted), 2004 to 2008

• Croatia’s labor productivity is lagging, and overstated by low workforce participation Source:20090515 authors– CAON Crotia.ppt calculation, Groningen Growth and Development Centre (2009), EIU (2009)5 Copyright 2009 © Professor Michael E. Porter Labor Force Utilization

Labor Force Participation Rates, Selected Countries Participation Rate, 2008 65%

Kuwait Eastern and Southern Europe China Singapore 60% Other countries Iceland

Thailand 55% Canada Norway Australia Vietnam Germany Sweden Russia Denmark New Zealand Latvia Japan Czech Rep. Ireland USA UK Estonia Finland Spain 50% South Korea Cyprus Brazil Slovakia Lithuania Indonesia Ukraine France India Netherlands Slovenia 45% Greece Poland Chile Macedonia Ghana Romania Austria Hungary Italy Colombia Mexico Argentina Israel 40% Philippines Malaysia

Moldova Croatia South Africa Cote d’Ivoire Bulgaria 35% Nigeria Tunisia Turkey Albania Egypt 30% Pakistan Libya

Saudi Arabia 25% -3%-2%-1%0%1%2%3%4%5% Change in Labor Force Participation Rate, 2004 to 2008

• Croatia is caught in a trap where low productivity retards job growth, but unemployment retards needed reforms Source: Economist Intelligence Unit (2009) 20090515 – CAON Crotia.ppt 6 Copyright 2009 © Professor Michael E. Porter Export Performance Exports of Goods and Services (% of GDP), 2008 Selected Countries 100% Malaysia (103.5%)

Slovakia 90% Belgium

Ireland Hungary 80% Czech Republic Vietnam Thailand Netherlands Taiwan Estonia 70% Slovenia Saudi Arabia

Belarus 60% Bulgaria Lithuania Cambodia Austria Korea Jordan Sweden Denmark 50% Cyprus Croatia Norway Macedonia Chile Germany Finland Iceland Egypt Ukraine (-17.5%) Latvia 40% Israel Poland Bolivia Moldova China South Africa Philippines Canada Russia New Zealand Portugal Romania Mexico 30% Indonesia Italy Spain France UK Peru Argentina India Bangladesh Greece Australia 20% Albania Turkey Japan Benin Pakistan Brazil USA 10% Ethiopia Eastern and Southern Europe Other countries Burundi 0% -15% -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP), 2004 to 2008

Source: EIU (2008), authors’ analysis • Croatia's export growth is lagging 20090515 – CAON Crotia.ppt 7 Copyright 2009 © Professor Michael E. Porter Export Performance Selected Countries Exports of Goods and Services (% of GDP) Rank, 2008 95% Slovakia Hungary Czech Republic 85% Slovenia Croatia 75%

65%

55%

45%

35%

25% 1994 1996 1998 2000 2002 2004 2006 2008

World Export Market Share (current USD)

0.50% Processed Goods Semi- and Unprocessed Goods 0.45% Services TOTAL 0.40%

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: UNComTrade, WTO (2008) 20090515 – CAON Crotia.ppt 9 Copyright 2009 © Professor Michael E. Porter Domestic Fixed Investment Rates Gross Fixed Investment Selected Countries as % of GDP, 2008 36% China (40.8%) India Vietnam (44.6%) Eastern and Southern Europe Nicaragua Other countries Romania (11.1%) Bulgaria (12.6%) 32% Croatia Belarus

Latvia Estonia Spain Australia Singapore 28% Kazakhstan Korea Thailand Slovenia Indonesia Slovakia Lithuania Ukraine Chile Colombia Czech Rep. Tunisia 24% Iceland Albania Japan Mexico Argentina New Zealand Canada Austria Russia Cambodia Portugal Denmark France Poland Ireland Switzerland Belgium Cyprus Greece Macedonia Italy Netherlands Norway South Africa Hungary Finland Sweden 20% Malaysia Turkey Egypt Pakistan Hong Kong Saudi Arabia Malta Germany Brazil Israel

UK 16% Philippines USA

12% -4% -2% 0% 2% 4% 6% 8% Change in Gross Fixed Investment (as % of GDP), 2004 to 2008

• High investment is due to catch-up investments and FDI driven by privatization Note: Includes inbound FDI Source:20090515 EIU,– CAON 2009 Crotia.ppt 10 Copyright 2009 © Professor Michael E. Porter Inbound Foreign Investment Performance

Inward FDI Stocks as % of Stocks and Flows, Selected Countries GDP, Average 2003 - 2007 80% Netherlands Estonia Eastern and Southern Europe Singapore Other countries 70% (160.1%, 64.7%)

Hungary Chile Cyprus 60% Vietnam Bulgaria (69%) Switzerland New Zealand Sweden Slovakia Czech Republic 50% Croatia Denmark Kazakhstan

Portugal Cambodia 40% Macedonia UK Spain Thailand Philippines Moldova Australia Canada Latvia South Africa Poland Egypt Iceland (46.7%) Finland Lithuania France 30% Armenia Israel Romania Colombia Bosnia & Laos Mexico Norway Austria Herzegovina Slovenia Brazil Russia Ukraine 20% Germany Turkey Greece China USA Malaysia South Korea Italy Saudi Arabia Indonesia Pakistan 10% Belarus India Japan 0% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% FDI Inflows as % of Gross Fixed Capital Formation, Average 2003 - 2007

• Foreign direct investment inflows have been a key driver of economic growth, but Source: UNCTAD, World most are due to privatization rather than greenfield investments Investment20090515 – CAON Report Crotia.ppt (2009) 11 Copyright 2009 © Professor Michael E. Porter Foreign Investment in Croatia

Average FDI by Selected Activities activity, millions of € 2,750

2000 2,250 2006

2007 1,750 2008*

1,250

750

250

-250 Hospitality Chemicals Sports Automotive Real Estate Retail Trade Construction equipment Food Products Food Other Activities Recreation and Recreation and distrubtion and Wholesale Trade Water purification Oil, Gas and Coaland Gas Oil, Financial Services Mft. machinery and Telecommunications *2008 is estimated figure. Source: Foreign Direct Investment in Croatia (by activity), Croatian National Bank, 2009 20090515 – CAON Crotia.ppt 12 Copyright 2009 © Professor Michael E. Porter Innovative Capacity Innovation Output of Selected Countries Average9 U.S. patents per 1 million population, 2003-2007 Slovenia 8

5 Hungary

4 Malaysia Czech Republic 3 Croatia Estonia South Africa Greece Romania 2 Brazil Belarus Chile Mexico Russia Poland Argentina Portugal Egypt 1 Indonesia Saudi Thailand Arabia Colombia China Philippines India 0 -30% -20% -10% 0% 10% 20% 30% 40% CAGR of US-registered patents, 2003 – 2007

• Croatia has technological strengths, but these have not 50 patents = Source:20090515 USPTO– CAON Crotia.ppt (2008), EIU (2008) been mobilized in business development13 Copyright 2009 © Professor Michael E. Porter Causes of Competitiveness

Microeconomic Competitiveness

Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy

Macroeconomic Competitiveness

Social Infrastructure Macroeconomic and Political Policies Institutions

Natural Endowments

• Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition

Social Infrastructure and Macroeconomic Political Institutions Policies

• Basic human capacity • Fiscal policy – Education – Health

• Safety and security • Monetary policy

• Political institutions

• Rule of law

20090515 – CAON Crotia.ppt 15 Copyright 2009 © Professor Michael E. Porter Croatia’s Competitiveness Progress on the Competitiveness Index 2007 2008 Estimated Ranking: New Global Competitiveness Index 63 63

Macroeconomic Competitiveness 67 68

Social Infrastructure and Political Institutions 58 59 Macroeconomic Policy 91 84

Microeconomic Competitiveness 60 69

GDP Per Capita Rank (ppp-adjusted) 48 48

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt 16 Copyright 2009 © Professor Michael E. Porter Governance Indicators Selected Countries Best country in the world Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption

Index of Governance Quality, 2006

Worst country in the world

S Y IN IA IA A IA RK OM N LIC ZIL N RUS A DIA A P EN B AK ANIA IN SS M P S V V M RA CHI O PU O LATVIA B RU EN AUSTRIAIRELAND CY L E GREECEPOLANDCROATIA ERLAND GERMA RO D PORTUGAL S R SL LITHUANIA BULGARIA ED KINGD H ETH T N UNITED STATES UNI CZEC

Note: Sorted left to right by decreasing average value across all indicators. The ‘zero’ horizontal line corresponds to the median country’s average value across all indicators. Source: World Bank (2008) 20090515 – CAON Crotia.ppt 17 Copyright 2009 © Professor Michael E. Porter Corruption Perception Index, 2007

1 Finland New Zealand Sweden Deteriorating Iceland Switzerland Improving Low Canada Norway UK corruption Hong Kong Austria Germany Ireland Japan United States France Chile Spain Uruguay Portugal Estonia Slovenia Israel Taiwan Czech Republic Hungary Italy Malaysia South Korea South Africa Lithuania Slovakia Latvia Rank in Jordan Global Greece Tunisia Poland Corruption Croatia Turkey Index, Colombia Romania 2007 Peru Brazil Mexico China Senegal India

Panama Thailand Tanzania Argentina Egypt Uganda Ukraine Vietnam Philippines Pakistan High Russia Indonesia corruption Zimbabwe Cote d’Ivoire Nigeria

91 Venezuela Bangladesh -20 -15 -10 -5 0 5 10 15 20 Change in Rank, Global Corruption Report, 2007 versus 2001

Note: Ranks only countries available in both years (91 countries total) Source:20090515 – Global CAON Crotia.ppt Corruption Report, 2007 18 Copyright 2009 © Professor Michael E. Porter Macroeconomic Competitiveness

• Croatia has a solid position in terms of basic human development indicators, in line with many other former Communist countries

• Croatia has made some progress on macroeconomic policy indicators, but the current global crisis will test the sustainability of these improvements – Croatia has been running high current account deficits for the last decade

• Croatia remains a regional laggard in terms of political and legal institutional quality and there are few signs of fundamental improvements

• Croatia’s government is much too big • Croatia has much work to do to improve its macroeconomic competitiveness, especially its institutions

2007 2008

Estimated Microeconomic Competitiveness Index 60 69

National Business Environment 63 69

Company Operations and Strategy 58 64

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt 20 Copyright 2009 © Professor Michael E. Porter Microeconomic Competitiveness: Quality of the Business Environment ContextContext for for FirmFirm StrategyStrategy andand Rivalry Rivalry

 Local rules and incentives that encourage investment and productivity Factor – e.g. salaries, incentives for Factor Demand (Input) capital investments, intellectual Demand (Input) Conditions Conditions property protection, corporate Conditions Conditions governance standards  Vigorous local competition – Openness to foreign competition  Access to high quality business  Sophistication of local customers inputs – Competition laws and needs – Natural endowments – e.g., Strict quality, safety, and – Human resources environmental standards Related and – Capital availability Related and – Consumer protection laws Supporting – Physical infrastructure Supporting Industries – Administrative and information Industries infrastructure (e.g. registration, permitting, transparency)  Availability of suppliers and supporting – Scientific and technological industries infrastructure

• Many things matter for competitiveness • Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita

Mobile telephone subscribers per 100 26 Protection of minority shareholders’ 101 population interests Telephone lines per 100 population 30 Burden of government regulation 97 Quality of roads 30 Time required to start a business 91 Quality of math and science education 35 Venture capital availability 87 Internet users per 100 population 35 Quality of port infrastructure 84 Utility patents per million population 36 Quality of air transport infrastructure 83 Ease of starting a new business 42 Ease of access to loans 81 Personal computers per 100 population 43 Brain drain 80 Quality of telephone infrastructure 44 Quality of management schools 76 Quality of electricity supply 44 Regulation of securities exchanges 74 Quality of railroad infrastructure 44 Financial market sophistication 71 Number of procedures required to start a 44 Burden of customs procedures 63 business Quality of the educational system 62 Quality of scientific research institutions 47 Demand conditions 61 Soundness of banks 60 Change up/down of more University-industry research collaboration 51 than 5 ranks since 2007 Tertiary enrollment 49

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt 22 Copyright 2009 © Professor Michael E. Porter ContextContext for for Firm Firm Context for Strategy and Rivalry StrategyStrategy andand Rivalry Rivalry Croatia’s Relative Position 2008

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Low Tariff rates 34 Business impact of rules on FDI 114 Cooperation in labor-employer relations 110 Low market disruption from state-owned 110 enterprises Impact of taxation on incentives to work and 103 invest Rigidity of employment 102 Effectiveness of antitrust policy 98 Extent of market dominance by business 98 groups Efficacy of corporate boards 98 Strength of investor protection 95 Pay and productivity 88 Distortive effect of taxes and subsidies on 80 competition Restrictions on capital flows 76 Strength of auditing and reporting standards 76 Prevalence of trade barriers 73 Intensity of local competition 71 Change up/down of more Intellectual property protection 68 than 5 ranks since 2007 Regulatory quality 54

• On some indicators, Croatia is ranked at the level of some African countries Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness 20090515Source: – CAON Institute Crotia.ppt for Strategy and Competitiveness, Harvard University (2009) 23 Copyright 2009 © Professor Michael E. Porter Doing Business Indicators

Ranking, 2009 (of 181 countries) Favorable Unfavorable 180

160 Median Ranking, Central EU countries* 140

120

100

60 Croatia’s per capita GDP rank: 46

0 Ease of Paying Enforcing Getting Closing a Trading Registering Starting a Protecting Employing Dealing Doing Taxes Contracts Credit Business Across Property Business Investors Workers with Business Borders Licenses

* Central European EU countries include: Austria, Bulgaria, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia Source: World Bank Report, Doing Business (2009) 20090515 – CAON Crotia.ppt 24 Copyright 2009 © Professor Michael E. Porter DemandDemand Demand Conditions ConditionsConditions Croatia’s Relative Position 2008

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita

Buyer sophistication 92 Government success in ICT promotion 76 Government procurement of advanced 68 technology products Presence of demanding regulatory 67 standards Stringency of environmental regulations 54

Change up/down of more than 5 ranks since 2007

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt 25 Copyright 2009 © Professor Michael E. Porter Croatia’s Business Environment Quality Overview

• Basic factor conditions are relatively strong but weaknesses exist in more advanced dimensions – Relative strength in road transportation and communications infrastructure as well as fundamental innovative capacity – Relative strength in primary and secondary education – Relative weakness in financial market sophistication – Relative weakness in port and airport infrastructure

• Business rules and regulations remain cumbersome and distortive – Problematic labor relations – Local market still dominated by entrenched domestic business groups – Rules and regulations for foreign direct investors are cumbersome

PublicPublic RelationsRelations && LocalLocal retail,retail, MarketMarket ResearchResearch TravelTravel agentsagents TourTour operatorsoperators healthhealth care,care, andand ServicesServices otherother servicesservices

Food Food LocalLocal Suppliers Attractions and Suppliers Attractions and TransportationTransportation Activities RestaurantsRestaurants Activities e.g.,e.g., themetheme parks,parks, casinos,casinos, sportssports PropertyProperty Souvenirs,Souvenirs, ServicesServices DutyDuty FreeFree

Airlines,Airlines, HotelsHotels Banks,Banks, MaintenanceMaintenance CruiseCruise ShipsShips ForeignForeign ServicesServices ExchangeExchange

GovernmentGovernment agenciesagencies EducationalEducational InstitutionsInstitutions IndustryIndustry GroupsGroups e.g.e.g. AustralianAustralian TourismTourism Commission,Commission, e.g.e.g. JamesJames CookCook University,University, e.g.e.g. QueenslandQueensland TourismTourism GreatGreat BarrierBarrier ReefReef AuthorityAuthority CairnsCairns CollegeCollege ofof TAFETAFE IndustryIndustry CouncilCouncil

Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20090515 – CAON Crotia.ppt 27 Copyright 2009 © Professor Michael E. Porter The Australian Wine Cluster Trade Performance

Australian Wine Australian Wine Exports in thousand US $ World Export Market Share $2,700,000

10.0% $2,400,000 Value Market Share $2,100,000 8.0% $1,800,000

$1,500,000 6.0%

$1,200,000 4.0% $900,000

$600,000 2.0% $300,000

$0 0.0% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. 20090515 – CAON Crotia.ppt 28 Copyright 2009 © Professor Michael E. Porter The Australian Wine Cluster History

1930 1965 1980 1991 to 1998 First oenology Australian Wine Australian Wine New organizations course at Bureau and Brandy created for education, Roseworthy established Corporation research, market information, and Agricultural established 1990 College 1955 1970 export promotions Winemaker’s Australian Wine Winemaking Federation of Research school at Charles Australia Institute founded Sturt University established founded

1950s 1960s 1970s 1980s 1990s Import of Recruiting of Continued inflow Creation of Surge in exports European winery experienced of foreign capital large number of and international technology foreign investors, and new wineries acquisitions e.g. Wolf Bass management

Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 20090515 – CAON Crotia.ppt 29 Copyright 2009 © Professor Michael E. Porter The Evolution of Regional Economies San Diego

Hospitality and Tourism ClimateClimate Sporting and Leather Goods andand Transportation GeographyGeography and Logistics

Power Generation Aerospace Vehicles Communications and Defense Equipment U.S.U.S. Information Technology MilitaryMilitary Analytical Instruments

Education and Knowledge Creation Medical Devices

BioscienceBioscience Biotech / Pharmaceuticals ResearchResearch CentersCenters

1910 1930 1950 1970 1990

20090515 – CAON Crotia.ppt 30 Copyright 2009 © Professor Michael E. Porter RelatedRelated and and SupportingSupporting Related and Supporting Industries IndustriesIndustries Croatia’s Relative Position 2008

Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita

State of cluster development 105 Extent of collaboration in clusters 98 Local supplier quantity 88 Supporting and related industries and 77 clusters Local supplier quality 72 Local availability of process machinery 61

Change up/down of more than 5 ranks since 2007

Note: Rank versus 130 countries; overall, Croatia ranks 48th in 2008 PPP adjusted GDP per capita and 63rd in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 20090515 – CAON Crotia.ppt 31 Copyright 2009 © Professor Michael E. Porter National Cluster Export Portfolio Croatia, 1997 to 2007 0.5% Change In Croatia’s Overall Hospitality and Tourism (1.11%) World Export Share: 0.029%

Power and Power Generation Equipment Marine Equipment Tobacco (0.85% ,1.26%) 0.4%

Construction Materials Prefabricated Enclosures and Structures

0.3% Furniture Footwear (-0.34%) Communication Services Building Fixtures and Equipment

Transportation and Logistics Leather and Related Products Processed Foods 0.2% Fishing and Fishing Related Products Croatia’s Average World Apparel Export Share: 0.16% Forest Products

Croatia’s world export market share, 2007 share, market export world Croatia’s Business Services Publishing and Printing Construction Services Agriculture Products Plastics Oil and Gas 0.1% Heavy Machinery Biopharmaceuticals Production Technology Light and Elec. Equipment Metal, Mining and Manufacturing Communications Equipment Jewelry, Precious Metals and Collectibles Chemical Products Analytical Instruments Automotive Information Technology Financial Services Entertainment 0.0% -0.2% -0.1% 0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6%

Change in Croatia’s world export market share, 1997 to 2007 Exports of US$1.5 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 20090515 – CAON Crotia.ppt 32 Copyright 2009 © Professor Michael E. Porter Croatian Maritime Cluster

Worldwide Shipping Local Transport Yacht Retail Related Cluster: and Logistics Industry (Europe) Adriatic Tourism Industry (Ferries)

Specialized Suppliers 6’500 employees Shipbuilding Boatbuilding Universities Design / Engines Archit. • University of 6 companies ~ 70 companies Engineering and ~ 20 ships p.a. (commercial, yachts, Boatbuilding, Zagreb Technical Fittings 11’000 employees “nutshell”) • University of Equipment Value added: USD Value added: USD 80 Boatbuilding, Split 750 million p.a. million p.a. Coatings R&D

Supporting Industries Government Industry Associations Trade Unions 1’800 companies / 26’000 Agencies employees • Brodarski Institut • Association of Metal • Ministry of Economy, • Boatbuilding Association at Croatian Workers Chamber of Commerce • Association of Plastics Metal Labor and Entrepreneurship • Association of Boat Equipment Workers Trade • Ministry of Sea, Tourism Producers at Croatian Chamber of Unions of Croatia Related Clusters: and Transport Commerce • Croatian Trade Union • Shipbuilding Cluster at Croatian Association Automotive / Metal • Croatian Privatization Fund Employers Association. • ... Processing

Sources: Harvard Microeconomics of Competitiveness student team research (2009) - Jetemir Balaj, Neil McCullagh, Mirela Mrvelj, Peder Plaz, Malgorzata Steiner 20090515 – CAON Crotia.ppt 33 Copyright 2009 © Professor Michael E. Porter Shipbuilding Cluster Productivity Select European Countries

• Croatia’s clusters have developed naturally and reflect the strengths of legacy and location but also the challenges of the current business environment conditions

• Clusters provide an important perspective to understand the issues facing the Croatian economy

• Cluster-level competitiveness efforts are less politicized and enable action on more tractable issues related to productivity

• Cluster efforts are an opportunity to engage in a new model of public- private dialogue and cooperation

• Clusters are so far an unexploited dimension of economic policy that Croatia can ill-afford to neglect

Science and Technology Education and Investments Workforce Training (e.g., centers, university departments, technology Management Training transfer)

Standard setting and Business Attraction quality initiatives ClustersClusters

Export Promotion Environmental Stewardship

Market Information Natural Resource and Disclosure Protection Physical Infrastructure

• Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness

World Economy WTO

Broad Economic Areas Europe

Groups of Southeast Europe Neighboring Nations

Nations Croatia

States, Provinces Regions

Metropolitan and Rural Areas Zagreb

Denver,Denver, CO CO Chicago,Chicago, IL-IN-WI IL-IN-WI Pittsburgh,Pittsburgh, PA PA EntertainmentEntertainment MetalMetal Manufacturing Manufacturing EducationEducation and and Knowledge Knowledge Creation Creation MedicalMedical Devices Devices BiopharmaceuticalsBiopharmaceuticals MetalMetal Manufacturing Manufacturing Boston,Boston, MA-NH MA-NH OilOil and and Gas Gas Products Products and and Services Services ChemicalChemical Products Products ChemicalChemical Products Products AnalyticalAnalytical Instruments Instruments HospitalityHospitality and and Tourism Tourism LightingLighting and and Electrical Electrical Equipment Equipment LightingLighting and and Electrical Electrical Equipment Equipment EducationEducation and and Knowledge Knowledge Creation Creation MedicalMedical Devices Devices FinancialFinancial Services Services Seattle,Seattle, WA WA AerspoaceAerspoace Vehicles Vehicles and and Defense Defense InformationInformation Technology Technology EntertainmentEntertainment FinancialFinancial Services Services

NewNew York, York, NY-NJ-CT-PA NY-NJ-CT-PA FinancialFinancial Services Services SanSan Jose-San Jose-San Francisco, Francisco, CA CA BiopharmaceuticalsBiopharmaceuticals BusinessBusiness Services Services Apparel Agricultural Products Apparel Agricultural Products PublishingPublishing and and Printing Printing CommunicationsCommunications Equipment Equipment BiopharmaceuticalsBiopharmaceuticals

LosLos Angeles, Angeles, CA CA Entertainment Entertainment Raleigh-Durham,Raleigh-Durham, NC NC Apparel Apparel EducationEducation and and Knowledge Knowledge Creation Creation Distribution Services Distribution Services BiopharmaceuticalsBiopharmaceuticals Hospitality and Tourism Hospitality and Tourism CommunicationsCommunications Equipment Equipment MotorMotor Driven Driven Products Products

SanSan Diego, Diego, CA CA DallasDallas Houston,Houston, TX TX Atlanta,Atlanta, GA GA AnalyticalAnalytical Instruments Instruments AerospaceAerospace Vehicles Vehicles and and Defense Defense OilOil and and Gas Gas Products Products and and Services Services TransportationTransportation and and Logistics Logistics HospitalityHospitality and and Tourism Tourism OilOil and and Gas Gas Products Products and and Services Services ChemicalChemical Products Products TextilesTextiles MedicalMedical Devices Devices InformationInformation Technology Technology HeavyHeavy Construction Construction Services Services ConstructionConstruction Materials Materials EducationEducation and and Knowledge Knowledge Creation Creation TransportationTransportation and and Logistics Logistics TransportationTransportation and and Logistics Logistics PlasticsPlastics

Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 20090515 – CAON Crotia.ppt 38 Copyright 2009 © Professor Michael E. Porter Croatian Counties

Zagreb (city) $16,000

$14,000

$12,000 Istria Primorje-Gorski Kotar Lika-Senj $10,000 Croatia Average: $9,400 Varazdin Koprivnica-Krizevci Dubrovnik-Neretva Zadar $8,000 Zagreb (county) Medjimurje Sisak-Moslavina Krapina-Zagorje Karlovac Split-Dalmatia Virovitica-Podravina Osijek-Baranja Bjelovar-Bilogora $6,000 Pozega-Slavonia Sibenik-Knin Vukovar-Srijem Brod-Posavina

$4,000 8% 9% 10% 11% 12% 13% 14% 15% Growth of GDP per Capita (€), CAGR, 2005 to 2008 Source: Croatia Central Bank, Croatia Statistical Institute 20090515 – CAON Crotia.ppt 40 Copyright 2009 © Professor Michael E. Porter The Neighborhood Southeastern Europe

• Economic coordination among neighboring countries can significantly enhance competitiveness

• Croatia’s recent economic growth has been driven by natural catch-up following integration into the European and global economy • Process can only be sustained if Croatia is able to continuously upgrade its competitiveness • EU accession is an important opportunity, but the benefits will depend on reforms by Croatia to address its own competitiveness challenges

Key Challenges • There are numerous weaknesses in the Croatian business environment • The vitality of competition remains weak as a consequence of policy choices and a relatively isolated domestic market • Clusters are present in the Croatian economy (e.g. tourism), but they have not been used as an effective policy tool • The institutional weaknesses of the country have been a key barrier to achieve sustain improvements • Croatian regions have not been challenged and enabled to contribute to competitiveness improvements

•Addresscorruption and weaknesses in political and legal institutions • Ensure the sustainability of public finances • Reform the rules and regulations for business • Open up local markets to competition • Create attractive conditions for foreign investors • Strengthen the higher education system, financial markets, and airport/port infrastructure •Use clusters as an organizing principle for upgrading workforce skills, infrastructure, and FDI attraction • Support Croatian regions in their competitiveness efforts • Strengthen economic cooperation in South-East Europe

OldOld ModelModel NewNew ModelModel

•• GovernmentGovernmentdrivesdrives economiceconomic •• Economic Economic developmentdevelopment isis aa developmentdevelopment throughthrough policypolicy collaborativecollaborative processprocessinvolvinginvolving decisionsdecisions andand incentivesincentives thethe privateprivate sector,sector, governmentgovernment atat multiplemultiple levels,levels, universities,universities, labor,labor, andand civilcivil societysociety

• Competitiveness must become a bottoms-up process in which many individuals, companies, and institutions take responsibilities • Every community and cluster can take steps to enhance competitiveness • The private sector must become more engaged in competitiveness to improve rapidly

NationalNational Economic Economic Strategy Strategy

• What can be the unique competitive position of Croatia given its location, legacy, endowments, and potential strengths? – What is its unique value as a business location? – What role can it play with neighbors? – In what range of clusters does the nation excel?

AchievingAchieving and and Maintaining Maintaining Parity Parity DevelopingDeveloping Unique Unique Strengths Strengths withwith Peers Peers

• What are the key potential strengths • What weaknesses must be neutralized to that Croatia must preserve or build? achieve parity with peer countries?

• The private sector must lead the process of competitiveness improvement and provide continuity and accountability

• Croatia has institutions like the National Competitiveness Council designed to guide competitiveness upgrading

• Croatia has sensible plans that identify the weaknesses the country needs to address

BUT

• Croatia has made limited if any progress on upgrading its competitiveness in recent years

• Government is preoccupied with short-term crises and EU acsencion

• The struggle for independence, the war with Serbia, and the path to political normality after the war have shifted political focus away from competitiveness • Economic growth due to a natural catch-up has been sufficiently good so that there has not been pressure for real reform • EU membership has been seen as the automatic path to competitiveness, requiring no further action within the country • Entrenched interest groups in the political and economic sphere have paid lip service to competitiveness but have been unwilling to engage in real reforms that threaten the status quo

• Leaders in business and government must launch a new chapter in Croatia’s economy if the country is to hold its gains, much less see further standard of living improvements