Turkey s Competitiveness: National Economic Strategy and the Role of Business

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1 Turkey s Competitiveness: National Economic Strategy and the Role of Business Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School Istanbul, Turkey 16 October 2009 This presentation draws on ideas from Professor Porter s articles and books, including, The Competitive Advantage of Nations (The Free Press, 1990), The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report, (World Economic Forum), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 2008) and ongoing research at the Institute for Strategy 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 Version: October 14, 2009 (6:30pm) 1 Copyright 2009 Professor Michael E. Porter

2 Agenda Turkey s Economic Performance Principles of Competitiveness Assessment of Turkey s Competitive Position Towards an Economic Strategy 2 Copyright 2009 Professor Michael E. Porter

3 Turkey s Prosperity Performance GDP per Capita (in 2008 PPP US$) $14,000 CAGR: +3.27% CAGR: +2.57% CAGR: +4.74% $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ Note: PPP using EKS calculation methodology. Source: Groningen Growth and Competitiveness Development Master ppt Centre, Total Economy Database (June 2009) 3 Copyright 2009 Professor Michael E. Porter

4 PPP-adjusted GDP per Capita, 2008 ($USD) $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Bahrain France Yemen 0% 5% 10% 15% 20% Source: EIU (2009), authors calculations Prosperity Performance Selected Middle and Upper Middle Income Countries Italy New Zealand UAE Cyprus Malta Portugal Japan Germany Spain Oman Saudi Arabia Czech Republic Poland Libya Croatia Chile Panama Mexico Argentina Malaysia Bulgaria Lebanon Israel Korea Hungary Greece Slovenia Turkey Iran Brazil South Africa Colombia Thailand Tunisia Bosnia Egypt Jordan Syria Pakistan India Slovakia Estonia Russia Vietnam Ukraine Lithuania Latvia Romania Belarus Kazakhstan Georgia China Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2001 to 2008 Other countries Neighboring countries Armenia Azerbaijan 4 Copyright 2009 Professor Michael E. Porter

5 Unemployment Rate, 2008 Unemployment Performance Selected Middle and Upper Middle Income Countries 14% Improving Croatia South Africa (22.9%) Tunisia Deteriorating 12% Saudi Arabia Spain Colombia 10% Turkey Poland Morocco China 8% Syria Egypt Indonesia Argentina (-14.6%) Brazil Germany Slovakia Greece Chile Hungary Portugal France Philippines Pakistan 6% Kazakhstan Slovenia Italy India Bulgaria Russia Finland Israel Sweden Canada Ireland Lithuania Estonia Malta USA Latvia Czech Republic 4% Sri Lanka Vietnam Netherlands Romania New Zealand Australia Japan Austria Mexico Hong Kong South Korea Malaysia Ukraine 2% Switzerland Singapore Denmark Thailand Azerbaijan 0% -10% -8% -6% -4% -2% 0% 2% 4% Note: In some cases, 1999 data was unavailable, so 2000 data used. Source: EIU (2009) Albania Iran Change in Unemployment Rate in Percentage Points, Copyright 2009 Professor Michael E. Porter

6 Labor Force Participation Rate, % Source: Economist Intelligence Unit (2009) Labor Force Utilization Participation Rates, Selected Countries Kuwait 60% China Singapore Iceland UAE Switzerland Thailand 55% Canada Vietnam Australia Denmark Portugal Kazakhstan Germany Russia Japan Latvia Finland New Zealand Czech Rep. Ireland USA Estonia Cyprus 50% Spain Slovakia Korea Brazil Bahrain Lithuania Netherlands Indonesia Belgium Ukraine Slovenia India 45% France Poland Greece Austria Macedonia Ghana Romania Italy Chile 40% Hungary Colombia Mexico Malaysia Argentina Israel Philippines Croatia 35% Moldova (-4.98%) Cote d Ivoire South Africa Tunisia Iran Bulgaria Turkey Egypt 30% Pakistan Libya Syria Saudi Arabia Yemen Jordan 25% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% Change in Labor Force Participation Rate, 2001 to 2008 Azerbaijan (66.4%) 6 Copyright 2009 Professor Michael E. Porter

7 Turkey s Export Share Trends World Export Market Share 1.8% 1.6% 1.4% Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Source: WTO (2009) 7 Copyright 2009 Professor Michael E. Porter

8 Exports of Goods and Services (% of GDP), % 90% Export Performance Selected Middle and Upper Middle Income Countries Malaysia (103.5%) Belgium Slovakia United Arab Emirates 80% 70% 60% 50% 40% 30% 20% 10% Ireland (-18.4%) Vietnam Estonia Belarus Malta Hungary Netherlands Qatar Bulgaria Lithuania Cambodia Denmark Kazakhstan Cyprus Croatia Germany Ukraine Finland Iceland Latvia Israel Moldova Philippines South Africa Canada Syria Russia Indonesia Romania Mexico Georgia Yemen New Zealand Italy UK Spain France Iran India Greece Australia Turkey Bangladesh Albania Japan Armenia Brazil Pakistan USA Czech Rep. Thailand Slovenia Kuwait Oman Austria Switzerland Jordan Poland Chile Argentina Vietnam (25%) Azerbaijan (35.3%) Saudi Arabia (31.2%) China Korea Egypt (27.2%) Lebanon 0% -15% -10% -5% 0% 5% 10% 15% 20% Change in Exports of Goods and Services (% of GDP), 2001 to 2008 Source: EIU (2008), authors analysis 8 Copyright 2009 Professor Michael E. Porter

9 Inward FDI Stocks as % of GDP, Average % Inbound Foreign Investment Performance Stocks and Flows, Selected Countries Georgia (60.1%) Bahrain 50% Kazakhstan New Zealand Chile Vietnam Jordan Netherlands Estonia Malta 40% Syria Switzerland Hungary Malaysia Czech Republic Kazakhstan 30% 20% 10% 0% Slovakia Portugal Bosnia Spain Egypt Russia South Africa Thailand Latvia Austria Croatia Slovenia Mexico Lithuania Poland Oman Brazil Philippines Romania Saudi Arabia Indonesia China Greece Ukraine Qatar Turkey UAE Korea Belarus Iran India Japan Georgia Macedonia Cyprus Lebanon Cambodia Turkey ( ) Bulgaria Turkey ( ) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation, Average Source: UNCTAD, World Investment Report (2009) 9 Copyright 2009 Professor Michael E. Porter

10 Average U.S. patents per 1 million population, Innovative Capacity Innovation Output of Selected Countries 5 Hungary Malaysia 4 Cyprus Czech Republic 3 Croatia 2 South Africa Greece Kuwait 1 0 Portugal Argentina Mexico Philippines Egypt -20% -10% 0% 10% 20% 30% 40% 50% 60% CAGR of US-registered patents, patents = Note: Blue shaded countries have similar GDP per capita to Turkey. Source: USPTO (2008), EIU (2008) Russia Chile Brazil Thailand Romania Ukraine Colombia Indonesia Turkey Saudi Arabia Lebanon India Poland China UAE Bulgaria 10 Copyright 2009 Professor Michael E. Porter

11 Strategic Issues Facing Turkey in 2009 There have been significant policy improvements since 2001, such as opening the economy to trade and competition, streamlining regulations, and improving infrastructure However, the slowdown of reforms during 2008 exposed Turkey to the brunt of the global crisis Investors and consumers are still wary given Turkey s historical track record Improving Turkey s future economic performance will require addressing numerous challenges Turkey has only reached the first stage in becoming a truly competitive economy Second stage reforms are considerably more challenging Turkey needs a coherent economic strategy in order to continue its progress The private and the public sector must collaborate in order to take the economy to the next level 11 Copyright 2009 Professor Michael E. Porter

12 Agenda Turkey s Economic Performance Principles of Competitiveness Assessment of Turkey s Competitive Position Towards an Economic Strategy 12 Copyright 2009 Professor Michael E. Porter

13 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 Relentless innovation in technology, products, and organizational methods is necessary to drive productivity growth and a rising standard of living 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 13 Copyright 2009 Professor Michael E. Porter

14 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Natural Endowments Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 14 Copyright 2009 Professor Michael E. Porter

15 Determinants of Competitiveness Microeconomic Competitiveness Social Infrastructure and Political Institutions Human Development: basic education and health care Rule of Law: property rights and due process Political Institutions: stable and effective political and governmental processes and organizations Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Natural Endowments Sophistication of Company Operations and Strategy 15 Copyright 2009 Professor Michael E. Porter

16 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Natural Endowments Sophistication of Company Operations and Strategy Macroeconomic Policy Fiscal policy: public spending aligned with revenues over time Monetary policy: low levels of inflation Macroeconomic management: avoiding structural imbalances and cyclical overheating 16 Copyright 2009 Professor Michael E. Porter

17 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Natural Endowments Sophistication of Company Operations and Strategy Sophistication of Company Operations and Strategy The internal skills, capabilities, and management practices needed to attain the highest level of company productivity and innovation possible 17 Copyright 2009 Professor Michael E. Porter

18 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment The general external business environment conditions that allow companies to reach high levels of productivity and innovation Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Natural Endowments Sophistication of Company Operations and Strategy 18 Copyright 2009 Professor Michael E. Porter

19 Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness State of Cluster Development Social Infrastructure and Political Institutions Macroeconomic Policies The depth of specialized skills and assets and the ability to capture synergies across related firms and industries Natural Endowments 19 Copyright 2009 Professor Michael E. Porter

20 Quality of the Business Environment Context for for Firm Strategy and and Rivalry Factor (Input) Conditions Efficient access to high quality business inputs Efficient utilization of natural endowments Human resources Capital availability Physical infrastructure Administrative and information infrastructure (e.g. registration, permitting, transparency) Scientific and technological infrastructure Open and vigorous local competition Openness to foreign competition Competition laws Local rules and incentives that encourage investment and productivity e.g. incentives for capital investment, intellectual property protection, corporate governance standards Related and and Supporting Industries Availability of suppliers, supporting industries and institutions, and firms in related fields Demand Conditions Sophisticated and demanding local customers and needs e.g., Strict quality, safety, and environmental standards Consumer protection laws 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 20 Copyright 2009 Professor Michael E. Porter

21 State of Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Market Research Services Travel agents Tour operators Local retail, health care, and other services Food Suppliers Property Services Restaurants Attractions and Activities e.g., theme parks, casinos, sports Local Transportation Souvenirs, Duty Free Maintenance Services Hotels Airlines, Cruise Ships Banks, Foreign Exchange Government agencies e.g. Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g. James Cook University, Cairns College of of TAFE Industry Groups e.g. Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 21 Copyright 2009 Professor Michael E. Porter

22 Development of the Australian Wine Cluster 1930 First oenology course at Roseworthy Agricultural College 1955 Australian Wine Research Institute founded 1965 Australian Wine Bureau established 1970 Winemaking school at Charles Sturt University founded 1980 Australian Wine and Brandy Corporation established 1990 Winemaker s Federation of Australia established 1991 to 1998 New collective organizations created for education, research, market information, and export promotions 1950s 1960s 1970s 1980s 1990s Import of European winery technology Recruiting of experienced foreign investors, e.g. Wolf Bass Continued inflow of foreign capital and management Creation of large number of new wineries Surge in exports and international acquisitions Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster Supplement, Harvard Business School Case Study, Copyright 2009 Professor Michael E. Porter

23 Clusters and Economic Diversification Upgrade UpgradeExisting ExistingExport Export Products Products and and Services Services Turn Turn Products ProductsInto Into Clusters Clusters Local firms MNCs Deepen DeepenExisting ExistingClusters Develop Develop Related RelatedClusters 23 Copyright 2009 Professor Michael E. Porter

24 The Evolution of Regional Economies San Diego Climate and Geography U.S. Military Hospitality and Tourism Transportation and Logistics Aerospace Vehicles and Defense Power Generation Analytical Instruments Communications Equipment Sporting Goods Information Technology Education and Knowledge Creation Medical Devices Bioscience Research Centers Biotech / Pharmaceuticals Copyright 2009 Professor Michael E. Porter

25 Jewelry & Precious Metals Footwear Financial Services Fishing & Fishing Products (by number of industries) in both directions. Clusters and Economic Diversification Processed Food Business Services Apparel Leather & Related Products Agricultural Products Distribution Services Publishing & Printing Oil & Gas Linkages Across Clusters Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Medical Devices Entertainment Aerospace Vehicles & Defense Analytical Instruments Tobacco Note: Clusters with overlapping borders or identical shading have at least 20% overlap Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Textiles Heavy Construction Services Heavy Machinery Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive 25 Copyright 2009 Professor Michael E. Porter

26 Specialization of Regional Economies Leading Clusters by U.S. Economic Area, 2007 Denver, CO CO Business Services Medical Devices Entertainment Oil Oil and and Gas Gas Products and and Services Seattle, WA WA Aerospace Vehicles and and Defense Information Technology Entertainment Fishing Fishing and and Fishing Fishing Products Chicago, IL-IN-WI Metal Metal Manufacturing Lighting and and Electrical Equipment Production Technology Plastics Pittsburgh, PA PA Education and and Knowledge Creation Metal Metal Manufacturing Chemical Products Power Power Generation and and Transmission Boston, MA-NH MA-NH Analytical Instruments Education and and Knowledge Creation Medical Devices Financial Services San San Jose-San Francisco, CA CA Business Services Information Technology Agricultural Products Communications Equipment Biopharmaceuticals New New York, York, NY-NJ-CT-PA Financial Services Biopharmaceuticals Jewelry and and Precious Metals Metals Publishing and and Printing Los Los Angeles, CA CA Entertainment Apparel Distribution Services Hospitality and and Tourism Raleigh-Durham, NC NC Education and and Knowledge Creation Biopharmaceuticals Communications Equipment Textiles San San Diego, Diego, CA CA Medical Devices Analytical Instruments Hospitality and and Tourism Education and and Knowledge Creation Dallas Dallas Aerospace Vehicles and and Defense Oil Oil and and Gas Gas Products and and Services Information Technology Transportation and and Logistics Houston, TX TX Oil Oil and and Gas Gas Products and and Services Chemical Products Heavy Heavy Construction Services Transportation and and Logistics Atlanta, GA GA Transportation and and Logistics Textiles Motor Motor Driven Driven Products Construction Materials Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 26 Copyright 2009 Professor Michael E. Porter

27 Regions and Competitiveness Economic performance varies significantly across sub-national regions (e.g., provinces, states, metropolitan areas) Many essential levers of competitiveness reside at the regional level Region s specialize in different sets of clusters Cluster strength directly impacts regional performance Each region needs its own distinctive competitiveness agenda Competitiveness requires effective policy collaboration between regions and the national government Decentralization of economic policy is especially important in large countries to foster regional specialization, internal competition, and accountability 27 Copyright 2009 Professor Michael E. Porter

28 Economic Integration Among Neighboring Countries Turkey s Neighborhood Turkey sits at the crossroad between Europe and the Middle East Economic coordination among neighboring countries can significantly enhance competitiveness Integration offers greater opportunities than participation in broader economic forums (e.g., EU) 28 Copyright 2009 Professor Michael E. Porter

29 Competitiveness and the Neighborhood Opening trade and investment among neighbors A nation s neighbors are its most natural trading and investment partners The natural path of internationalization for local firms is the neighborhood Open trade and investment make each a more attractive location for investment Economic coordination to drive improvements in the business environment Capturing synergies in policy and infrastructure Gaining greater clout in international negotiations External agreements to help overcome domestic political and economic barriers to reform 29 Copyright 2009 Professor Michael E. Porter

30 Economic Integration Among Neighbors Capturing Synergies Factor Factor Conditions Conditions Context Context for for Strategy Strategy and and Rivalry Rivalry Demand Demand Conditions Conditions Related Related and and Supporting Supporting Industries Industries Macroeconomic Macroeconomic Competitiveness Competitiveness Improving the efficiency of the regional transportation infrastructure Creating an efficient energy network Enhancing regional communications and connectivity Linking financial markets Opening the movement of students for higher education Eliminating trade and investment barriers within the region Simplifying and harmonizing cross-border regulations and paperwork Coordinating anti-monopoly and fair competition policies Harmonizing environmental standards Harmonizing product safety standards Establishing reciprocal consumer protection laws Opening government procurement within the region Facilitating crossborder cluster development e.g., Supplier networks Transport & Logistics Quality standards Coordinating macro-economic policies Coordinating programs to improve public safety Harmonizing administrative requirements for businesses 30 Copyright 2009 Professor Michael E. Porter

31 The Need for an Economic Strategy Policy Improvement Economic Strategy Implementing best practices in each policy area A prioritized agenda to create a unique competitive position for the country or region There are a huge number of policy areas that matter No country can or should make progress in all areas simultaneously 31 Copyright 2009 Professor Michael E. Porter

32 The Need for an Economic Strategy National Value Value Proposition What are the distinctive competitive assets of the nation s economy given its location, legacy, rate of progress, existing strengths, and potential strengths? What unique value as a business location? In what types of fields / clusters? What roles with neighbors, the broad region, and the wider world? Refining Unique Strengths Addressing Crucial Constraints What elements of the business environment and institutional context can be unique strengths relative to peers/neighbors? What existing and emerging clusters can be developed? What are the crucial weaknesses and constraints that must be addressed to achieve parity with peer countries and allow the country to move to the next level? Priorities and sequencing are a necessity in economic development 32 Copyright 2009 Professor Michael E. Porter

33 The Process of Economic Development Shifting Roles and Responsibilities Old Model New Model The central government drives economic development through policy decisions, spending and incentives Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations Competitiveness must be a bottom-up process in which many individuals, companies, and institutions take responsibility and act 33 Copyright 2009 Professor Michael E. Porter

34 Role of the Private Sector in Economic Development The competitive advantage of companies depends partly on the quality of the business environment at the national and regional level A company gains advantages from being part of a strong cluster Corporate role in competitiveness Inform government on business needs and constraints bearing on company and cluster development Nurture local suppliers and attract foreign suppliers Work closely with local educational and research institutions to improve their quality and create specialized programs addressing the cluster s needs Collaborate with other companies to enhance competitiveness through trade associations and other mechanisms Participate actively in national and regional competitiveness initiatives Focus corporate social responsibility initiatives on enhancing the business environment 34 Copyright 2009 Professor Michael E. Porter

35 Private Sector Role in Economic Development Turkcell in Anatolia Turkcell was facing wage pressure and high turnover in its Istanbul call center operations, where employees faced long commutes and had many alternative job opportunities Turkcell opened new call centers in Erzerum and Diyarbakir, which had become much more accessible by improved air travel and infrastructure Turkcell was able to attract a highly loyal staff from local universities at significantly lower wage costs Erzerum and Diyarbakir each gained jobs and momentum in improving competitiveness 35 Copyright 2009 Professor Michael E. Porter

36 Agenda Turkey s Economic Performance Principles of Competitiveness Assessment of Turkey s Competitive Position Towards an Economic Strategy 36 Copyright 2009 Professor Michael E. Porter

37 Real GDP per employee (PPP adjusted US$), 2008 $70,000 $60,000 Comparative Labor Productivity Selected Countries Austria Kuwait Australia Saudi Arabia Greece Switzerland Germany Spain Japan Oman Singapore Israel Malta Slovenia $50,000 $40,000 Mexico Malaysia $30,000 Russia Chile Latvia Argentina Macedonia Romania Iran Belarus South Africa Bulgaria Azerbaijan $20,000 Kazakhstan Albania Brazil $10,000 Egypt Armenia Jordan Ukraine Thailand Bosnia Georgia Syria Serbia Philippines Indonesia Pakistan India Vietnam Cambodia China $0-3% 0% 3% 6% 9% Source: authors calculation Groningen Growth and Development Centre (2009), EIU (2009) UAE New Zealand Cyprus Croatia Portugal Lithuania Turkey Korea Hungary Czech Republic Estonia Slovakia Poland Growth of real GDP per employee (PPP-adjusted), 1990 to 2008 Turkey (Avg. growth 2001to 2008) 37 Copyright 2009 Professor Michael E. Porter

38 Decomposing Turkey s GDP per Capita Growth Contribution to change in real GDP per Capita (PPP adjusted) $250 $200 $150 $100 Labor Productivity $50 $0 -$50 Labor Force Participation -$100 -$150 -$ Source: EIU (2008), GGDC total economy database (2008) 38 Copyright 2009 Professor Michael E. Porter

39 Turkey s Competitiveness Profile, 2009 Macroeconomic Competitiveness (71) Microeconomic Competitiveness (53) Social Infrastructure and Pol. Institutions (78) Macroeconomic Policy (68) Business Environment Quality (56) Company Sophistication (41) Political Institutions (92) Rule of Law (75) Human Development (73) Note: Rank versus 128 countries; overall, Turkey ranks 57 th in 2008 PPP adjusted GDP per capita and 64 th in Global Competitiveness Source: World Economic Forum and nstitute for Strategy and Competitiveness, Harvard University (2009) 39 Copyright 2009 Professor Michael E. Porter

40 Corruption Perception Index, 2007 Low corruption Rank in Global Corruption Index, 2007 High corruption 1 Finland New Zealand Iceland Sweden Worsening Switzerland Improving Canada Norway Hong Kong UK Austria Germany Ireland Japan United States France Chile Spain Uruguay Portugal Estonia Slovenia Israel Taiwan Hungary Czech Republic South Africa Italy Malaysia South Korea Lithuania Slovakia Latvia Jordan Greece Tunisia Poland Croatia Turkey 91 Venezuela Zimbabwe Peru Panama Egypt Philippines Brazil Argentina Cote d Ivoire Mexico Russia Colombia China Vietnam Thailand Pakistan Bangladesh Change in Rank, Global Corruption Report, 2007 versus 2001 Senegal Indonesia Nigeria Romania India Ukraine Tanzania Uganda Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, Copyright 2009 Professor Michael E. Porter

41 Country GDP per capita (PPP US$), 2007 Human Development Turkey vs. Peer Countries GDP per capita Human Development Index (HDI) Life Expectency Index Rank, 2007 Education index Gender Development Index (GDI) Slovakia $ 20, Hungary $ 18, Lithuania $ 17, Latvia $ 16, Croatia $ 16, Poland $ 15, Gabon $ 15, Russia $ 14, Libya $ 14, Mexico $ 14, Chile $ 13, Botswana $ 13, Malaysia $ 13, Argentina $ 13, Turkey $ 12, Romania $ 12, Venezuela $ 12, Montenegro $ 11, Panama $ 11, Mauritius $ 11, Bulgaria $ 11, Uruguay $ 11, Iran $ 10, Kazakhstan $ 10, Costa Rica $ 10, Belarus $ 10, Serbia $ 10, Source: World Bank, Human Development Index Copyright 2009 Professor Michael E. Porter

42 Turkey s Macroeconomic Competitiveness - Continued Action Priorities Strengthen the independence of institutions like the Central Bank Stronger fiscal discipline Create greater stability in government spending through fiscal rules Agree on a process of resolving the domestic political tensions among key institutions and interest groups Improve the quality of governmental organizations, including at the provincial level Continue efforts to improve the accessibility and quality of education and health care services across the country 42 Copyright 2009 Professor Michael E. Porter

43 Turkish Company Sophistication Assessment Significant improvements, especially among large companies Solid operational efficiency in manufacturing but weaker performance in services A huge gap between the large business groups, that compare favorably to international peers, and the huge number of SMEs that are far behind The World Bank reports significant entry and exit of new companies, but little sustained growth of small companies in the Turkish economy Action Agenda Consolidate efforts to improve the performance of SMEs Strengthen the linkages between large business groups and SMEs Use cluster policy as a tool to boost SME development 43 Copyright 2009 Professor Michael E. Porter

44 Turkey s Business Environment Overall Strengths and Weaknesses STRENGTHS Domestic transportation and communication infrastructure Rules and regulations for starting new companies Openness to foreign investment Moderate level of tariff barriers Domestic rivalry improving Availability of local suppliers IT policies Improving sophistication of the financial system WEAKNESSES Tax system Access to credit, especially for SMEs Limited workforce skills Low sophistication of local buyers Weak governance and auditing Distortive effects of government-owned companies on competition Unreliable electricity supply Innovation infrastructure Burdensome customs procedures Intellectual property protection Low patenting rates Limited management schools Labor rigidity Regulatory quality Note: Rank versus 128 countries; overall, Turkey ranks 57 th in 2008 PPP adjusted GDP per capita and 64 th in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard University (2009) 44 Copyright 2009 Professor Michael E. Porter

45 Ranking, 2009 (of 183 countries) Favorable Ease of Doing Business Turkey, 2009 Unfavorable Turkey s per capita GDP rank: Ease of Doing Business Enforcing Contracts Registering Property Starting a Business Protecting Investors Trading Across Borders Getting Credit Paying Taxes Closing a Business Dealing with Licenses Employing Workers Source: World Bank Report, Doing Business (2009/10) 45 Copyright 2009 Professor Michael E. Porter

46 4.5% Cluster Development Turkey s National Cluster Export Portfolio, 1997 to 2007 Change In Turkey s Overall World Export Share: +0.18% Apparel 4.0% Turkey s world export market share, % 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Tobacco Business Services (-1.59%) Agriculture Products Communications Equipment Footwear Financial Services Biopharmaceuticals Information Technology Hospitality and Tourism Building Fixtures and Equipment Motor Driven Products Metal, Mining and Manufacturing Transportation and Logistics Construction Services (-5.2%) Processed Foods Leather and Related Products Automotive Entertainment Plastics Jewelry, Precious Metals and Collectibles Lighting and Electrical Equipment Turkey s Average World Furniture Export Share: 0.87% Heavy Machinery Production Technology Oil and Gas Aerospace Vehicles and Defense Construction Materials Prefabricated Enclosures and Structures Marine Equipment -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Change in Turkey s world export market share, 1997 to 2007 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business Exports of US$3.3 Billion = School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 46 Copyright 2009 Professor Michael E. Porter Textiles

47 World Market Share 0.9% - 1.5% Share of World Exports by Cluster Turkey, % - 3% > 3% Jewelry & Precious Metals Processed Food Fishing & Fishing Products Business Services Financial Services Apparel Agricultural Products Transportation & Logistics Distribution Services Publishing & Printing Oil & Gas Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Medical Devices Aerospace Vehicles & Defense Tobacco Entertainment Analytical Instruments Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Textiles Heavy Construction Services Aerospace Engines Heavy Machinery Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Automotive Footwear Leather & Related Products Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. Sporting & Recreation Goods Marine Equipment 47 Copyright 2009 Professor Michael E. Porter

48 Regulatory Bodies Ministry of Public Ministry of Public Works & Works & Settlement Settlement Laws Setting Standards Town Urban Town Urban Planning Depts. Planning Depts. Awarding of Licenses Inspections Educational Institutions Univ. Degrees Univ. Degrees BillKent (Private) Middle East Technical Univ. (Public) Istanbul Technical Univ. (Public) Private Universities The Turkish Construction Cluster Professional Professional Associations / Associations / Chambers Chambers Contractors, construction employees Engineers, city planners, architects Institutions of Collaboration Related Cluster Related Cluster Assoc. Assoc. Multiple associations for each related cluster Construction Services Real Estate Development Real Estate Development Firms Firms Housing projects Hotels Office space Road construction Dams Energy projects Contractors, Contractors, Subcontractors, Design Subcontractors, Design Services Services Builders Urban Planning firms Architects Repair & Maintenance Engineering firms professionals Related Clusters Real Estate Real Estate Investment Investment Associations Associations One major association 200,000 companies with 100,000 in informal sector 15 large companies Real Estate Real Estate Investors Investors National / Local National / Local Government Government Households Households Industry Industry Equity Financing Debt Financing Banking Banking Institutions Institutions Mortgages Construction Services Co Funding Project Finance Domestic Foreign TOKI Southeastern Anatolia Project Administration Primary & Secondary Housing Energy Manufacturing Sources: HBS student team research (2007) Yannis Katsarakis, Amr Rezk, Emrah Sazak, Hayder Shaydurrllin, Bahadir Yadikar Transport / Tourism Transport / Tourism Logistics Logistics 9 th largest exporter in world 28 th largest exporter in the world Building Building Fixtures & Fixtures & Equipment Equipment 19 th largest exporter in the world Construction Construction Materials Materials 8 th largest exporter in the world Other: Furniture, Other: Furniture, Mining, Heavy Mining, Heavy Machinery Machinery Multiple successful related clusters 48 Copyright 2009 Professor Michael E. Porter

49 State of Turkish Cluster Development Assessment Turkey s economy has naturally developed around clusters Organized collaboration within these clusters remains low Economic policy has not leveraged cluster development as a tool to create synergies and deliver government policies more effectively Recent EU-financed cluster programs have not yet had a significant impact in Turkey Action agenda Pursue an aggressive national cluster development agenda to support existing clusters and enable the emergence of new clusters in related fields Utilize clusters as a central tool for upgrading company sophistication, stimulating growth in SMEs, and driving regional competitiveness 49 Copyright 2009 Professor Michael E. Porter

50 Clusters and Economic Diversification Upgrade UpgradeExisting ExistingExport Export Products Products and and Services Services Turn Products Into Clusters Turn Products Into Clusters Local firms MNCs Deepen DeepenExisting ExistingClusters Develop Develop Related RelatedClusters 50 Copyright 2009 Professor Michael E. Porter

51 2.0% Turkey s Automotive Cluster, Exports by Subcluster Automotive Components Glass Subcluster s share of World exports, % 1.0% 0.5% Subcluster Overall Export Share: 1.37% Engines Automotive Parts Production Equipment Motor Vehicle Assembly 0.0% Overall change in Subcluster World Export Share : +1.21% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% Change in Subcluster s share of World Exports, Exports of US$2.5 billion = Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. 51 Copyright 2009 Professor Michael E. Porter

52 GDP per Capita, 2001 (USD, PPP-adjusted) $10,000 $8,000 $6,000 $4,000 $2,000 $0 Regional Economic Performance Turkish Provinces Istanbul Yalova Izmir Kocaeli ($17,036) Ankara Kirikkale Bilecik Tekirdağ Bursa Eskişehir Manisa Çanakkale Mersin Edirne Adana Artvin Denizli Antalya Sakarya Nevşehir Aydin / Karaman Balikesir Burdur Kilis Kütahya Hatay Rize Samson Unweighted Turkish Çorum Elaziğ Niğde Kayseri / Kastamonu Tunceli Average: $4,888 Kanya Kahramanmaraş Uşak Maltya Isparta Kirşehir Sinop Giresun Sivas Diyarbakir Çankiri Afyon Batman Osmaniye Ezrincan Gümüşhane Ezurum Siirt Düzce (-13.13%) Aksaray Mardin Kars Ordu Bayburt Iğdir Yozgat Adiyaman Ardahan Hakkari Van Bingöl Şirnak Bitlis Muş Agri Unweighted Turkish Average: 0.81% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% Muğla Kirklareli Growth of Real GDP per Capita (PPP-adjusted), CAGR, Bolu (10.82%, $11,649) Zonguldak (8.37%) Note: 2001 is latest available data for Turkish provinces. Source: OECD Regions at a Glance: Copyright 2009 Professor Michael E. Porter

53 Specialization by Cluster of Turkish Regions, 2007 Istanbul Textiles Leather and and Apparel Distribution Services Jewelry Bati BatiMarmara Apparel Textiles Chemicals Construction Materials Bati BatiKaradeniz Tobacco Apparel Metal Metal Mining Mining and and Manufacturing Forest Forest Products Orta OrtaAnadolu Furniture Textiles Agricultural Products Metal Metal Mining Mining and and Manufacturing Dogu DoguKaradeniz Food Food Processing Distribution Services Furniture Forest Forest Products Dogu DoguMarmara Textiles Automotive Apparel Furniture Kuzeydogu Anadolu Agricultural Products Footwear Distribution Services Hospitality and and Tourism Ege Ege Tobacco Textiles Construction Materials Apparel Bati BatiAnadolu Furniture Construction Materials Distribution Services Aerospace Akdenziz Textiles Hospitality and and Tourism Apparel Distribution Services Ortadogu Anadolu Textiles Agricultural Products Apparel Distribution Services Guneydogu Anadolu Textiles Tobacco Oil Oil and and Gas Gas Food Food Processing Note: Source: European Cluster Observatory, Copyright 2009 Professor Michael E. Porter

54 Regional Economic Development in Turkey Action Agenda Decentralize economic policy making to enhance regional leadership while creating incentives / accountability for performance Create a sound development platform in each region, including sound physical infrastructure and the provision of basic public services Create regional governmental capability to assume responsibility for regional economic development Decentralization of economic policy should be seen as a long term process, with devolution taking place in stages as regional government capabilities develop 54 Copyright 2009 Professor Michael E. Porter

55 Economic Integration Among Neighboring Countries Turkey s Neighborhood Turkey sits at the crossroad between Europe and the Middle East Economic coordination among neighboring countries can significantly enhance competitiveness Integration offers greater opportunities than participation in broader economic forums (e.g., EU) 55 Copyright 2009 Professor Michael E. Porter

56 Economic Coordination with Neighboring Countries Assessment Turkey s geographic position between a number of important global regions provides huge opportunities While government policy has focused on politically stable relations with neighbors, companies have started to extend their operations into these neighboring countries Action Agenda Turkey should pursue economic coordination with neighboring countries as a critical tool of economic policy to reap the full benefits of its geographic location Turkey has a great opportunity to create a new Eastern neighborhood 56 Copyright 2009 Professor Michael E. Porter

57 Agenda Turkey s Economic Performance Principles of Competitiveness Assessment of Turkey s Competitive Position Towards an Economic Strategy 57 Copyright 2009 Professor Michael E. Porter

58 Toward a Turkish Economic Strategy Unique Strengths Large workforce with a strong work ethic at competitive wage levels Strong entrepreneurial trading legacy Significant and growing domestic market Large, spread out geographic area with heterogeneous regions Geographic position at the crossroads of major world regions Companies with experience to operate in challenging policy environments Stronger market institutions than other emerging economies Implications Maintain a sound macroeconomic policy platform Continue to strengthen workforce skills Achieve political stability Strengthen physical infrastructure connecting provinces and neighbors Simplify trade of goods and services Mobilize cluster development Consolidate efforts for SME development Decentralize economic policy and strengthen regional institutions Intensify economic collaboration with neighbors 58 Copyright 2009 Professor Michael E. Porter

59 Turkey: Moving to Action Strong private sector leadership is needed to address the well documented competitiveness challenges facing Turkey Encourage Provincial Competitiveness Councils working with the new economic development agencies to drive consensus on provincial plans which monitor implementation Involve representatives from the public, private and academic sectors as well as federal government participation Work towards the creation of a private-sector led National Council on Competitiveness to build consensus on an overall economic strategy and track implementation Public sector and academia participation is critical in order to develop effective national policy and coordinate implementation 59 Copyright 2009 Professor Michael E. Porter

60 Moving the Next Level of Turkish Competitiveness: The Role of the Private Sector The recent improvements in Turkish economic policy have created new opportunities for Turkish companies to grow and upgrade The next stage of economic development will require companies to become a more active partner in the design and implementation of economic policy Participate in national and regional competitiveness efforts Collaborate with other companies in upgrading the business environment A coherent economic strategy for Turkey will be crucial to allow the country to be able to fundamentally enhance competitiveness Such a strategy will only be effective only if it is based on a new model of collaboration between business and government 60 Copyright 2009 Professor Michael E. Porter