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Retooling S'pore's economic engine for the next lap

All hands must now be on deck to clock productivity- driven growth and develop its innovative capability - and be nimble while at it.

Deputy Prime Minister Tharman Shanmugaratnam has set the goal for Singapore to grow a vibrant SME sector in the next decade. Having globally competitive SMEs would establish a longer-term driver for Singapore's next phase of economic development.

AS Singapore surveys the future landscape on its 50th birthday, it has come to the striking realisation that the staying on the frontier of the global economy will entail having a markedly different game plan from that of playing catch-up.

Many opportunities beckon. Yet, in a world becoming increasingly more complex - politically, economically and socially - these could turn into challenges for the city-state. Economists and policy experts say it no longer suffices just to be competitive; the country must now create new products and services to remain ahead of the pack.

The government, it appears, has been moving in this direction. In the past few years, it has marshalled various resources and ensured that all hands are on deck to help Singapore grow this new engine in the form of a vibrant private sector - especially its small and medium-sized enterprises (SMEs) - supported by sharpened skillsets in its workforce with a Singaporean core.

David Skilling, founding director of research and advisory firm Landfall Strategy Group, which focuses on small advanced economies, told The Business Times: "Singapore has grown very strongly over the past few decades in a supportive external economic and political environment: strong growth, globalisation, multinational company (MNC) expansion as well as regional stability.  All of these factors are weakening, which will likely make it more difficult for Singapore to generate growth."

The domestic and international contexts have now changed radically. In a commentary in The Straits Times in June, he wrote: "After 50 years of strong catch-up growth, Singapore now needs to generate growth at the income frontier, manage issues around an ageing population and income inequality and respond to demands for increased provision of public goods and services."

This will require a productivity-driven growth model grounded in innovative capacity, he added.

It is something that the government, too, is now starting to articulate in public. Deputy Prime Minister Tharman Shanmugaratnam said recently: "Our future will depend not only on adapting and perfecting what has been done elsewhere, but more and more on creating value in Singapore - through new skills and technologies, original business solutions and a spirit of experimentation in society."


Recognising resource constraints in the economy, the government has become more picky in the type of foreign direct investments it wants - a shift from its take-all-you-can approach of the past.

As already evident from declining investment commitments in recent years, the Economic Development Board (EDB) has been moderating investment flow into Singapore.

Its chairman Beh Swan Gin said: "When you have workforce and resource constraints, if you keep adding more and more investments at higher and higher levels, you start to disrupt and cannibalise the needs of your installed base. You have to grow in a much more intelligent and targeted manner."

New investments should now build on Singapore's strengths, he said in a phone interview with BT. "In the past, we were more able to say, 'We're not in this industry, we'll start something anew'. Back then, we were a lot less worried about the constraints because there was a lot more land available compared to today."

But he was keen to emphasise that MNCs remain important for the country:

"(This) doesn't signal less reliance on MNCs. We are actually in a very fortunate position in that we have a lot of MNCs that have placed their faith in Singapore and made this their home base in Asia ... because when MNCs locate their critical functions here, this brings to Singapore and Singaporeans access to very-high-quality and senior jobs."

This subtle - but significant - shift comes about as the unquestioned influx of foreign capital and labour, especially since the early 2000s, shifted the shape of Singapore's economic growth toward corporate profits at the expense of wages.

Manu Bhaskaran, partner and director of Centennial Group, wrote in a BT opinion piece in March: "There are reasonable grounds to argue that the over-rapid inflow of foreign workers depressed wages at the low end and brought social costs which could have been avoided."

Meanwhile, the other group of giants in the corporate landscape - government-linked firms (GLCs) - are also due for a shake-up.

Said Mr Skilling: "I think GLCs should reduce in importance over time, allowing resources to flow to other parts of the Singapore economy.  Again, this is part of the process of moving into the next phase of economic development."

Agreeing, Morgan Stanley head of Asean research Hozefa Topiwalla is of the view that the consolidation and divestment of GLCs might act as the driver of Singapore's economy and equity market for the next five to 10 years.

In his view, the restructuring among GLCs has already started. JTC Corp and Temasek, for example, have merged their units Ascendas, Singbridge Group, Jurong International and Surbana International Consultants to create an integrated platform for sustainable urban development.

"This will, first (of all), give cost synergies and scale benefits. Then, you can actually play a much more important role on the global platform and become a more meaningful global player," he said.


Partly compelled by politics, but also due to the economical considerations of resource constraints, Singapore is now moving to grow the new engine of strong local enterprises.

Said International Enterprise chief executive Teo Eng Cheong: "It's become even more crystal clear that because of our domestic constraints ... it cannot be just adding more manpower or land for growth; it must be about the quality of growth. And the highest quality is when it is about value creation."

Concurring, Mr Topiwalla said that Singapore now has to balance the social and economic aspects of growth, and one of the easiest ways to do so is to create large Singapore enterprises. "If you build enterprises that are globally focused, a person in Singapore who was head of marketing for an SME now becomes head of marketing for a global MNC," he said. "That can basically solves a lot of the long-term issues."

Mr Tharman in his budget speech in February set the goal for Singapore to grow a vibrant SME sector in five to 10 years. This ties in with Mr Topiwalla's view that SMEs growing into globally-competitive companies would be the longer-term driver for Singapore's new phase of economic development.The addition of this third leg would also build resilience in Singapore's economy, IE's Mr Teo told BT.

This push is being made against a backdrop of an increasingly volatile external economy, with slower growth and greater uncertainty seen across both developed and developing economies. Many who have called for greater support for a stronger SME sector over the years have said that it would provide rootedness and stability to the Singapore economy - traits currently lacking, given the country's dependence on MNCs.

The EDB and IE say that the drive to build SMEs must be done through innovation, with an eye on the needs of the Asian markets and internationalisation.

EDB's Dr Beh, formerly a member of IE's board, said: "(For) smaller companies, it's not enough to have ambition. You must have the capability, disruptive ideas and business models to create something that the global markets want. (The government) can throw all the resources it wants to back a company, but if the product doesn't resonate (with the markets), then it won't bite."

The five growth clusters outlined during the budget this year were formed in response to what the government sees in terms of the needs of a growing Asian middle class, and Singapore's competitive advantage, he added. "If you think about how you want to create value, you have to think about what the market needs."

Concurring, Mr Teo said that, in considering the type of projects to support, IE has had an evolution in thinking since its re-positioning from its earlier incarnation as the Trade Development Board in 2002 to focus on building Singapore's external economy. He said: "It's (now) about new capabilities, new technologies and new markets. Can a company build a new business model that it hasn't before through these projects?"

Internationalisation will be key to the growth of SMEs, given the limited domestic market here, he emphasised. "It will give them a bigger market. When you're innovative, it doesn't really necessarily lead to bigger markets for the company. Internationalisation is important because it creates a market and platform for the company to reap the benefits of its innovation."

Heading overseas will also expose Singapore firms to new technologies, Mr Teo added: "(Foreign) companies which have existing technologies - our companies must partner them and build up their own technological capabilities.

"At the same time, by going international, they will be exposed to new consumer preferences. So that will help them in terms of their innovative capabilities."

Mr Tharman said that the building up of SMEs will take place in many ways - by supporting individual companies directly as they invest in their own innovation systems, by investing in innovation platforms that all players can benefit from, and by spurring collaboration between large and small companies.

With the push towards more innovation among SMEs, there is also "clearly room for a more vibrant start-up ecosystem", said Dr Beh.

Government efforts to encourage startups in recent years - such as through the establishing of the new startup cluster Launchpad@one-north and another cluster within the CleanTech Park - have already started bearing fruit. The number of new firms formed rose from 54,000 in 2010 to 77,000 last year; 9 per cent of Singapore's workforce are now employed by startups.

These are akin to "green shoots" in Singapore's new economic strategy, said Mr Topiwalla.


Looking ahead, a lower rate of growthwill be the new norm; the government expects GDP growth of between 2 per cent and 4 per cent a year for the rest of this decade. Many see this as inevitable, as the Singapore economy has evolved into a developed one.

But this does not mean reduced dynamism, in Mr Skilling's view. "Indeed, to succeed at the income frontier, innovation becomes more important," he said. "Singapore has to become more dynamic - not less - to prosper, and generate new companies and areas of economic activity."

He added that Singapore's disadvantage in size could also be its very strength: "Being a small country makes it easier to develop a coherent, rapid-policy response to these changes."

The key to Singapore's continued economic success would therefore rest on being flexible and nimble in the face of a changing world - as it has done for the past 50 years.

"The only constant fact about Singapore's future is that it will be a small country in a region with larger players, and in a world that is changing in unpredictable ways," said Mr Tharman late last month.

He added: "It has to be remembered that successful economic development is not about avoiding errors or strategies that fail to pay off, but about changing course soon enough."