"CEOs can't wait to read Sunny Bindra's articles every week."

Michael Porter in Nairobi – Part 2: Let businesspeople be our heroes

Jun 28, 2007 Business Daily, Strategy

Sunny Bindra, strategy consultant and business writer, continues his three-part series on the ideas of Michael Porter. Harvard’s Professor Porter was in Nairobi on Monday and delivered a memorable address on “Global Competitiveness” at the Strathmore Business School. This second article examines the question: What are the sources of national competitiveness?

“You can become very poor making shoes, or you can become very rich making shoes”, said Michael Porter on Monday this week. He was explaining the phenomenon of international competition. International advantage, said the famous don, is not about WHAT you do; it’s about HOW you do it. Shoe-making in the modern era would not, on the face of it, seem to have much going for it. A low-tech industry, a boring product, not something to stake your national fortune on. Unless you happen to be Italian. Those who run shoe companies in Italy, Porter revealed, are rich enough to live in castles and own private planes. Those who work as ordinary labourers in that industry earn up to thirty dollars an hour.

In Italy, shoe-making is serious business. In many other countries, it is an uninteresting pastime churning out low-cost footwear made by low-paid armies. What makes Italy different? The talent of its designers, for one thing. The tremendous investment in building exclusive global brands, for another. Not to forget the softness of the leather itself. All of that means that Italy can sell shoes to the world for five hundred dollars per pair – and do it year after year. The trick lies in the uniqueness of the ‘how’.

Capital, labour, natural resources: these are no longer the things that determine international success. What matters are the knowledge and skills that you can bring to bear. The countries that can take their given resources and create the correct environment for business are the ones that prosper. Competitiveness happens in the mind, not in factory floors or farm fields. No country has the God-given right to be successful. Success has to be earned. Many were given very little by way of endowments – Japan, Singapore, Taiwan, Hong Kong are all barren islands – but took their countries onto remarkable growth trajectories.

Inputs do not make you rich – it is what you do with those inputs that matters. If we accept that productivity is the ultimate driver of competitiveness, then we must ask what makes countries productive. Porter asks us to focus on certain indicators: exports (whether we can make things well enough to make others want them); investment (inbound, outbound and domestic); and innovation (whether we can do things in ways different from the herd), are key.

Kenya’s share of world exports is 0.03 per cent. Porter pulled no punches here: we are not exporting enough. He asked us to go for at least three times that, as a broad target. The recent Economic Survey revealed that we are actually going in reverse – the value of Kenya’s exports declined by 3.6 per cent in 2006. We are still not able to consistently produce the goods and services demanded by others because they offer a unique value proposition. A strong exchange rate is enough to send us scuttling for cover.

Investment? For all our oft-lauded location and heritage, we are way behind the pack in attracting foreign investment. Professor Porter lays that squarely at the door of governance. International perceptions, real or imagined, paint us as a place where corruption breeds unchecked, where connections count for more than capabilities. Even locally, we invest a far smaller proportion of our GDP (15 per cent or so) than the countries that experience rapid transformation. We do not trust our own economy to be clean.

On one point, Porter was unequivocal: modern international competition demands that you have a combination of local firms and foreign firms. You can’t do it alone anymore; the world has changed. Foreign firms bring advanced skills and technology; local firms have a deep understanding of domestic conditions and needs. If you are to produce a powerhouse economy, the two must go hand in hand. This is often viewed with suspicion in Kenya: many of us prefer to think of foreign firms as exploitative and unnecessary. ‘Reserving’ key parts of the economy for local firms, Porter asserts, always fails. It fails because it breeds complacency and mediocrity.

Consider this: studies of entrepreneurship show that gifted entrepreneurs do not just pluck their ventures out of thin air: they usually have worked for others in the industry before they obtain the skills and knowledge that help them set up unique enterprises of their own. The ‘others’ are often foreign. We have observed this many times: our local flower firms took their lead from Dutch and Israeli pioneers; our burgeoning telecommunications industry was seeded by Safaricom and Celtel; our hotel industry was once dominated by foreigners, but the leading hotel chain these days is TPS Serena, a local firm with an international shareholding that is now a regional giant renowned for its quality. This very newspaper combined local knowledge with internationally sourced expertise to produce a fast-growing daily that is nurturing a generation of future business journalists.

So what determines competitiveness? There is always a ‘macro’ context: economic policies, social norms, strength of the legal system, the political environment all have a role to play. But these are ‘necessary’ conditions; they are never ‘sufficient’. Sufficiency comes by bringing into play a set of ‘micro’ conditions: the quality of the business environment; the sophistication of local competition; and the state of ‘cluster’ development.

Private-sector firms loom large in the Porter worldview, and for this he is unapologetic. Governments do not create wealth. The unit of wealth creation is the firm. Wealth is created by firms making and selling things at a profit, and by the economic repercussions of that success. The professor wondered out loud: why is the pecking order so strange in Kenya? Politicians and bureaucrats at the top: the most revered, the most wealthy. We’ve got that horribly wrong, he told us; in America the heroes of the republic are the leading businesspeople.

A productive economy, in the final analysis, is created by productive firms. Firms with clear strategic direction; firms with sophisticated work methods; firms with international renown. The other parts of society merely shift wealth around; only firms create it. And there you have it: the future of Kenya does not lie in politicians; it lies in the people who will envisage, run and manage firms. If we allow those people to emerge to take their place, we will prosper. If we allow the politicians to stifle them and hog all the national attention, we will stagnate. As we know to our cost, talent does not wait around for things to get better; it walks. The Kenyans who run scientific institutions, hotels, and IT firms from Cape Town to Cape Cod are testimony to that fact.

The prescription for policymakers is obvious: create the conditions for business success, and do very little else. Businesses, no matter how sophisticated, depend on their environment. A company with the greatest supply chain can do nothing about the efficiency of the Port of Mombasa, or about the speed of customs procedures. A good business environment is a pre-requisite to national and international success.

Michael Porter views us, as indeed we view ourselves, as a country with all the correct fundamentals; but a country that is always being held back. Shackled by corruption; hampered by a compromised legal system; meandering because of lack of vision. The path to prosperity is a long one, make no mistake; but it is one in which we can all do more than just praying for good leaders.

Tomorrow in Business Daily: The final part in this series reviews Michael Porter’s recommendations on the way forward for Kenya.

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