Creating a Competitive Rwanda

Professor Michael E. Porter Harvard Business School

Kigali, Rwanda June 2007

This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report 2006 (World Economic Forum, 2006), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and ongoing research on clusters and competitiveness. 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. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu

• Fewer barriers to trade and investment Drivers • Rapidly increasing stock and diffusion of knowledge • Competitiveness upgrading in many countries

• Globalization of markets • Globalization of capital investment Market • Globalization of value chains reaction • Increasing knowledge and skill intensity of competition • Value migrating to the service component of the value chain

• Improving competitiveness is increasingly essential to Rwanda’s prosperity

$14,000 Botswana

South Africa $12,000

$10,000

$8,000 Gabon Namibia

$6,000 Swaziland Cape Verde

Angola $4,000 Cameroon Mauritius (6.2%) Lesotho Zimbabwe Guinea Ghana Chad (-6.3%) Cote D’Ivoire Madagascar $2,000 Kenya Rwanda Tanzania Togo Burundi Nigeria Mozambique Eritrea Uganda, Zambia Malawi Ethiopia $0-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6%

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2006 Source: EIU (2007) Kenya CAON 2007 June-07.ppt 3 Copyright 2007 © Professor Michael E. Porter Comparative Economic Performance Real GDP Growth Rates Countries sorted by 2001- 2006 annual real GDP Annual growth rate of real GDP growth rate (CAGR) 20% ANGOLA MOZAMBIQUE TANZANIA NIGERIA 15% ETHIOPIA UGANDA BURKINA FASO GHANA CAPE VERDE 10% MALAWI BOTSWANA NAMIBIA RWANDA 5% CONGO (BRAZZAVILLE) ZAMBIA SOUTH AFRICA SENEGAL 0% SAO TOME AND PRINCIPE KENYA BENIN THE GAMBIA -5% CAMEROON MAURITIUS GUINEA BURUNDI -10% LESOTHO TOGO SWAZILAND MADAGASCAR ERITREA -15% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GABON COTE D'IVOIRE ZIMBABWE

0 l re a a a a ina co na i razi rica hile xi ana Haiti Af C e hi 'Ivoi h B gascar C d ganda G Benin nzani thiopi M Niger U Zambia na Faso donesi Rwanda Argent e ki Ta In E ada ot Cameroon ur Mauritania South M C B Note: Most recent Gini index data available for each country (1999 – 2003). Rwanda’s data is from 2000. Source: World Bank, World Development Indicators, 2007. Kenya CAON 2007 June-07.ppt 5 Copyright 2007 © Professor Michael E. Porter The Rwandan Economy in 2007

• Economic growth rates have rebounded strongly since 2003 • Many areas of the Rwandan business environment have improved (e.g., communications and IT, education) • Established clusters (coffee, tea, tourism) have performed well

However

• The global economic environment has been favorable • Rwanda’s growth rates are still moderate relative to peers • Numerous areas of the business environment need further improvement • Strengthening the private sector and increasing public-private collaboration is essential to achieving the next level of progress

• Rwanda must dramatically improve its competitiveness

• Competitiveness is determined by the productivity (value per unit of input) with which a nation uses its human, capital, and natural resources. – Productivity sets a the standard of living (wages, returns on capital, returns on natural resources) that a nation can sustain – Productivity depends on the prices that a nation’s products and services command (e.g. uniqueness, quality), not just on efficiency – It is not what industries a nation competes in that matters for prosperity, but how it competes in those industries – Productivity requires a combination of domestic and foreign firms operating in the nation – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of traded industries – Devaluation does not make a country more competitive

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

Productivity

Inbound Outbound Domestic Domestic Exports Foreign Direct Foreign Direct Investment Innovation Investment Investment

Competitiveness Environment

Gambia Angola (94%, 80%) 60% Tunisia Namibia Zambia

50% Eritrea Tanzania Lesotho Nigeria 40% Swaziland Morocco Mozambique Australia 30% Canada Zimbabwe South Africa Egypt Ethiopia Brazil Malawi Ghana Sudan 20% Russia Uganda Congo Uganda Rwanda China Mali Senegal Botswana Mauritius Madagascar 10% Cameroon Algeria Kenya India Niger Libya 0%0% 5% 10% 15% 20% 25% 30% 35% 40%

FDI Inflows as % of Gross Fixed Capital Formation, Average 2002 - 2005

$8.0

$7.0

$6.0

$5.0

$4.0

$3.0

$2.0

$1.0

$0.0

1 3 5 8 0 3 5 990 9 992 9 994 9 996 9 999 0 001 0 004 0 1 19 1 19 1 19 1 1997 19 1 20 2 2002 20 2 20

45Gross Fixed Investment as % of GDP Sorted by 2006 Share China 40 Senegal Ghana 35 India Zambia Namibia 30 Nigeria Madagascar 25 The Gambia Uganda Mozambique 20 Ethiopia Rwanda 15 Kenya Tanzania Botswana 10 South Africa Russia 5 Cameroon Brazil Zimbabwe 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Burundi Malawi Source: EIU, 2007. Kenya CAON 2007 June-07.ppt 11 Copyright 2007 © Professor Michael E. Porter Determinants of Competitiveness

Macroeconomic,Macroeconomic, Political,Political, Legal,Legal, andand SocialSocial ContextContext

MicroeconomicMicroeconomic CompetitivenessCompetitiveness Sophistication Quality of the of Company Business Operations and Environment Strategy

State of Cluster Development

• A sound context creates the potential for competitiveness, but is not sufficient • Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition

Free Mauritius Botswana South Africa Namibia Uganda Madagascar Brazil Kenya Senegal Ghana Zambia Mozambique Tanzania India Malawi Ethiopia Cameroon Lesotho China Russia Mali Niger Mauritania Egypt Nigeria Algeria Rwanda Chad 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Zimbabwe Libya

ContextContext forfor FirmFirm StrategyStrategy andand RivalryRivalry

z A local context and rules that encourage investment and productivity Factor –e.g., Intellectual property Factor Demand (Input) protection Demand (Input) Conditions Conditions z Meritocratic incentive systems in Conditions Conditions businesses and other institutions z Open and vigorous local z Presence of high quality, competition z Local demand with improving specialized inputs available –e.g., Anti-monopoly laws, sophistication to firms openness to imports z Local customer needs that –Human resources anticipate those elsewhere –Capital resources z Unusual local demand in –Physical infrastructure RelatedRelated andand specialized segments that can be –Administrative infrastructure SupportingSupporting served nationally and globally –Information infrastructure IndustriesIndustries –Scientific and technological infrastructure z Access to capable, locally based suppliers –Natural resource availability and firms in related fields

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

Rwanda’s GNI per capita rank: 168 160

Median Ranking, 140 Sub-Saharan Africa

120

100

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

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 RestaurantsRestaurants ActivitiesActivities 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 Kenya CAON 2007 June-07.ppt 16 Copyright 2007 © Professor Michael E. Porter The Kenyan Cut Flower Cluster Trade Performance

Kenyan Cut Flower Kenyan Cut Flower Exports in thousand US $ World Export Market Share

$250,000 4.5%

4.0% $200,000 3.5%

3.0% $150,000 2.5% Value Market Share 2.0% $100,000 1.5%

$50,000 1.0%

0.5%

$0 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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. Kenya CAON 2007 June-07.ppt 17 Copyright 2007 © Professor Michael E. Porter Kenya’s Cut Flower Cluster

Sources: HBS student team research (2007) - Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, Tijan Watt Kenya CAON 2007 June-07.ppt 18 Copyright 2007 © Professor Michael E. Porter National Cluster Export Portfolio Rwanda, 1997-2003 0.008%

Change In Rwanda’s Overall World Export 0.007% Share: 0.00%

Hospitality and Tourism

0.006% Agricultural Products

0.005%

Transportation and Logistics 0.004%

0.003%

Metal Mining and Manufacturing 0.002% Rwanda’s world2003 market share, export

Rwanda’s Average World Export Share: 0.0012% 0.001% Leather and Related Products Textiles Oil and Gas Products -0.004% -0.003%Processed -0.002% Food -0.001% 0.000% 0.001% 0.002% 0.003% 0.004% 0.000% Automotive

Change in Rwanda’s world export market share, 1997 – 2003 Exports of US$10 Million = 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. Kenya CAON 2007 June-07.ppt 19 Copyright 2007 © Professor Michael E. Porter Achieving Superior Company Performance

Differentiation (Higher Price)

CompetitiveCompetitive AdvantageAdvantage

Lower Cost

Firm Infrastructure (e.g. Financing, Planning, Investor Relations)

Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) M Value Procurement a (e.g. Components, Machinery, Advertising, Services) r What g buyers are Inbound Operations Outbound Marketing After-Sales i willing to Logistics Logistics & Sales Service pay n (e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation, Material Component Processing, Force, Customer Storage, Data Fabrication, Warehousing, Promotion, Support, Collection, Branch Report Advertising, Complaint Service, Operations) Preparation) Proposal Resolution, Customer Writing, Web Repair) Access) site)

Primary Activities

• Competing in a business involves performing a set of discrete activities, in which competitive advantage resides

•• Service Service withwith aa “human“human touch,”touch,” includingincluding somesome •• Low Low costcost fastfast foodfood chchickenicken tailoredtailored toto thethe tabletable serviceservice tastestastes andand preferencespreferences ofof thethe CentralCentral •• Heavy Heavy andand distinctivedistinctive mamarketingrketing andand promotionpromotion AmericanAmerican customercustomer –– “An “An affordableaffordable treattreat foforr thethe wholewhole family”family” –– Frequent Frequent gimmicksgimmicks andand promotions,promotions, targetingtargeting everyevery membermember ofof thethe familyfamily –– Strong Strong civiccivic pridepride andand socialsocial awarenessawareness •• Emphasize Emphasize highhigh productiviproductivityty inin thethe laborlabor forceforce throughthrough incentives,incentives, eeducation,ducation, andand trainingtraining •• Engineering Engineering departmentdepartment studiesstudies motionmotion toto improveimprove restauranrestaurantt efficiencyefficiency •• Company-owned Company-owned chickenchicken farmsfarms toto ensureensure highhigh qualityquality rawraw materialsmaterials

•• TheThe lowlow costcost strategystrategy expandsexpands thethe marketmarket •• PolloPollo CamperoCampero competescompetes effectivelyeffectively agagainstainst U.S.U.S. fastfast foodfood companiescompanies inin CentralCentral AmericaAmerica throughthrough betterbetter undeunderstandingrstanding ofof locallocal customercustomer needsneeds •• PolloPollo CamperoCampero isis penetratingpenetrating thethe LatinoLatino segmentsegment inin thethe U.S.U.S. WestWest CoastCoast

Source: Condo, A. “Internationalization of Firms Based in Developing Countries.” Ph.D. dissertation, Harvard Business School, Boston, 2000. 20070511 AMP – Final 20070508 22 Copyright © 2007 Professor Michael E. Porter Rwanda’s Role in the Neighborhood

FactorFactor ContextContext for for RelatedRelated and and DemandDemand RegionalRegional (Input)(Input) StrategyStrategy SupportingSupporting ConditionsConditions GovernanceGovernance ConditionsConditions andand Rivalry Rivalry IndustriesIndustries

• Improve regional • Coordinate • Coordinate • Harmonize • Coordinate • Share best transportation macroecono- antimonopoly environmental development of practices in infrastructure mic policies and fair standards cross-border government competition clusters, e.g. operations • Create an efficient • Eliminate • Harmonize policies energy network trade and product safety – Tourism • Create regional investment standards institutions • Interconnect regional – Agribusiness barriers within – Dispute communications • Establish the region – Transport & resolution reciprocal • Link financial Logistics mechanisms • Simplify and consumer markets – Regional harmonize protection laws – Business development • Facilitate the cross-border services bank movement of students regulations to enhance higher and paperwork • Develop a education regional marketing • Harmonize regulatory strategy requirements for business • Coordinate programs to improve public safety

OldOld ModelModel NewNew ModelModel

•• GovernmentGovernment drivesdrives economiceconomic •• Economic Economic developmentdevelopment isis aa developmentdevelopment throughthrough policypolicy collaborativecollaborative processprocess involvinginvolving decisionsdecisions andand incentivesincentives governmentgovernment atat multiplemultiple levels,levels, thethe privateprivate sector,sector, universities,universities, researchresearch institutions,institutions, andand businessbusiness associationsassociations

• Competitiveness must become a bottom-up process in which many individuals, companies, clusters, and institutions take responsibility

Business Attraction Education and Workforce Training

Science and Technology Export Promotion Investments (e.g., centers, university departments, technology ClustersClusters transfer) Market Information Standard setting and Disclosure

Specialized Physical Environmental Stewardship Infrastructure Natural Resource Protection

• Clusters provide a framework for organizing the implementation of public policy and public investments towards economic development

• A company’s competitive advantage depends partly on the quality of the business environment • A company gains advantages from being part of a cluster • Companies have a strong role to play in upgrading their business environment

• Take an active role in upgrading the local infrastructure • Nurture local suppliers and attract foreign suppliers • Work closely with local educational and research institutions, to upgrade their quality and address the cluster’s needs • Inform government on regulatory issues and constraints bearing on cluster development • Focus corporate philanthropy on enhancing the local business environment

• An important role for trade associations – Collaboration, cost sharing, and increasing influence

BusinessBusiness EnvironmentEnvironment ClusterCluster DevelopmentDevelopment

• Land use • Activate a formal cluster development • Physical infrastructure program led by the private sector – Roads • Established clusters – Airport – Tea – Economic zones – Coffee • Energy – Tourism – Renewable – Niche mining • Urbanization outside of Kigali • Emerging clusters • Skills development – Construction and real estate, • Capacity-building across institutions logistics, silk, ICT services, • Government efficiency and cross agency horticulture coordination

PrivatePrivate SectorSector NeighborhoodNeighborhood

• Engage the private sector in economic • Initiate actionable economic integration development initiatives with each neighboring country • Support cooperative private investment • Kenya represents an important potential vehicles to jumpstart the private equity strategic partner market

ValueValue Proposition Proposition

• What is the unique competitive position of the nation given its location, legacy, and existing and potential strengths? – What roles with neighbors, the region, and the broader world? – What unique value as a business location? – For what types of activities and clusters?

AchievingAchieving and and Maintaining Maintaining Parity Parity DevelopingDeveloping Unique Unique Strengths Strengths withwith Peers Peers • What elements of context and the • What weaknesses must be addressed to business environment become crucial achieve parity with peer countries? priorities? • What existing and emerging clusters should be developed first?

Competitiveness cannot be achieved only by reducing weaknesses, but by building on existing and potential strengths

National Value Creating Unique Mitigating Proposition Strengths Weaknesses

• What roles in regional and Macro/political/legal/social Macro/political/legal/social world economy? e.g., Absence of corruption e.g., Expand cultural attractions e.g., Business, financial, and knowledge hub of Southeast National Diamond National Diamond Asia e.g., Singapore’s physical e.g., Upgrade Singapore’s research infrastructure institutions; improve the efficiency of • What unique value as a Singaporean domestic economy business location? e.g., Highly efficient place to Cluster Development Cluster Development do business; access to skilled and hardworking staff e.g., Singapore’s logistical services, e.g., Develop more Singaporean financial services, petrochemical SMEs to deepen clusters; improve processing, tourism the number and quality of IFCs • For what range of clusters, activities within clusters? Company Capabilities e.g., clusters benefiting from Company Capabilities a business hub but not e.g., large number of world-class e.g., build the capability of dependent on a large home multinationals with regional Singaporean companies and market or physical proximity headquarters and significant encourage regional strategies to markets operations in Singapore

Geographic Levels Geographic Levels e.g., Growth Triangle, ASEAN e.g., Create friendly relationships with ASEAN neighbors

What is Unique about Rwanda? Some Implications

• Corruption-free • Rwanda must accelerate • Stable with social progress improvement of business • Secure infrastructure, the ease of doing business, and improve Kigali • Clean • Rwanda should seize the opportunity • Responsive to transform agriculture • Unique climate and growing • Rwanda is unlikely to be competitive conditions in exporting bulky goods with low • Central location on the African value-to-weight continent • Air freight and services exports • Growing position in tea, coffee, nullify Rwanda’s logistical tourism disadvantages • Opportunity to lead the region in ICT • Rwanda must create a positive and services image for economic and social development “Switzerland of Africa”