Harvard Professor on Competitiveness, Michael E. Porter, speaks to a large audience at Dexia's annual Repères conference, and issues a warning that Luxembourg should develop a more defined economic strategy for its future.

Try to imagine the reaction when Michael E. Porter offered his opinion on Luxembourg's competitiveness to a packed audience at the Hémicycle (Congress Centre) in May. Based on data from EU statistics and from a survey conducted amongst top businessmen, he concluded that, "There is a sense of urgency for Luxembourg to develop an economic strategy." Not necessarily what everyone wants to hear, but as he said, someone had invited him to speak, so someone already knew there was a need for improvement.

Harvard Professor Porter speaks widely on competitive strategy to business and government leaders throughout the world. The author of 17 books and over 125 articles, Porter extends his microeconomics-based theory of competitiveness by exploring the shifting role of various microeconomic influences as a nation's economy becomes more advanced, and the relationship between macroeconomic conditions and microeconomic conditions in development.

His snapshot of Luxembourg is that it is in a highly unusual situation. It has a rising GDP (real growth rate: 1.2% 2004). Everyone is comfortable and relaxed and praises the financial services industry. But with globalisation, the strength of the financial centre will continually be eroded by other centres that offer more (or at least the same) in terms of finance, but have more to offer in other areas.

What parts of Luxembourg can become world class

Based on his findings, Luxembourg's economy is higher than is justified. "It used to be industrial, but where will it go now'" he asked. He cited weakness such as: average skills, no world-class university (it can take 10 years to make a university work, 20 to 30 years to really reap its academic harvest), no world-class airport, and a poor infrastructure. When research and development was proposed to him as a possible area where Luxembourg invests focus and money, he said, "Maybe Luxembourg talks a good game about R & D but the figures don't bear out." With R & D funding currently two thirds private in Luxembourg and one-third public, and with less than 1% of government money being spent in this area, he considered the state of R&D in Luxembourg almost shameful.

He also pointed to a danger sign - citizens and businesses are paying too high a price to live and work here.

So what can be done? Certain questions need to be asked. "Where does Luxembourg stand in the world economy? What parts of Luxembourg can become world class'" Porter spoke about clusters, or concentrations of interconnected companies and institutions in a particular field. Luxembourg economic leaders should look for strength sets that can be built upon. "There is little evidence of systematic cluster building."

He cited potential in the plastics or the entertainment industry. Mostly, he felt that Luxembourg clusters should try to build on knowledge. What Luxembourg needs to become more competitive are: improved skill sets, better infrastructure investment, to use languages more as a differentiator, and to aim to become a knowledge centre that attracts top people.

Success stories that could be copied included the Basques and Catalonia regions of Spain. These areas had leaders with a strong competitive focus and a clear economic vision. He also said, "Ireland is an excellent example of a country that defined a value proposition. There are a lot of assets in a lot of fields in Luxembourg but you have to have a strategy. Maybe Amazons and AOLs could be clusters but then you have to ask, what do we need to attract and keep these clusters'"

"With competitiveness, everything matters. It's a mind set more than a set of policies. What is celebrated in a culture? This is a litmus test that can give you a pretty good idea of how competitive an economy is." Putting this question to the reporters at the Dexia press conference, few gave Porter an answer. "Conspicuous consumption," was the first thing that popped to mind. Maybe it's time to give Porter's analysis some very serious consideration.