Singapore Competitiveness Report · 2019-10-16 · Singapore Competitiveness Report Singapore Competitiveness Report 2009 Christian Ketels Ashish Lall Neo Boon Siong with research

Singapore CompetitivenessReport

Singapore Competitiveness Report 2009

Christian KetelsAshish Lall

Neo Boon Siongwith research assistance from

Stevenson Q. YuSusan Chung Lai Ling

foreword by

Michael E. PorterHarvard Business School

LEE KUAN YEW SCHOOL OF PUBLIC POLICY NATIONAL UNIVERSITY OF SINGAPORE 469C Bukit Timah Road, Oei Tiong Ham Building, Singapore 259772

www.lkyspp.nus.edu.sg/ACI

b SINGAPORE COMPETITIVENESS REPORT

Singapore CoMpeTiTiVeneSS reporT 1

foreword by

Michael E. PorterHarvard Business School

Christian KetelsAshish LallNeo Boon Siong

with research assistance from

Stevenson Q. YuSusan Chung Lai Ling

Singapore Competitivenessreport

2 SINGAPORE COMPETITIVENESS REPORT

SINGAPORE COMPETITIVENESS REPORT 3

Foreword ...............................................................................................................................7Executive Summary ..............................................................................................................9

Chapter 1: Introduction Singapore’s Competitiveness Challenge in 2009 .......................................................................................... 19The Report’s Conceptual Approach .............................................................................................................. 19Report Outline ............................................................................................................................................... 21

Chapter 2: Economic PerformanceStandard of Living .........................................................................................................................................25 Prosperity ....................................................................................................................................................25 Equality .......................................................................................................................................................27 Quality of Life ............................................................................................................................................ 28Components of Prosperity Generation ........................................................................................................ 28 Labour Productivity................................................................................................................................... 28 Labour Mobilisation .................................................................................................................................. 30 Purchasing Power ....................................................................................................................................... 31Assessment ....................................................................................................................................................33

Chapter 3: Intermediate Economic Outcome IndicatorsTrade ..............................................................................................................................................................37 A Case Study: Electronics Exports ............................................................................................................. 41Investment .................................................................................................................................................... 47Innovation .................................................................................................................................................... 49 Entrepreneurship .......................................................................................................................................52Assessment ....................................................................................................................................................53

Chapter 4: Competitiveness FundamentalsAssessing Competitiveness ...........................................................................................................................57Endowments ..................................................................................................................................................57Macroeconomic Competitiveness ................................................................................................................ 58 Social Infrastructure and Political Institutions ........................................................................................ 58 Macroeconomic Policy .............................................................................................................................. 60Microeconomic Competitiveness .................................................................................................................61 Business Environment Quality ..................................................................................................................61 Factor Conditions ................................................................................................................................... 62 Context for Rivalry and Strategy .............................................................................................................73 Demand Conditions ................................................................................................................................75 Supporting and Related Industries ........................................................................................................ 76 Company Sophistication ........................................................................................................................... 80Singapore’s Competitiveness in Perspective ................................................................................................ 80

Chapter 5: ConclusionsSummary of Findings ................................................................................................................................... 85Implications .................................................................................................................................................. 86Recommendations ........................................................................................................................................ 87

Table of Contents


BoxesBox 1 The Global Economic Context: What Changes Will the Crisis Bring? ............................................................. 44Box 2 International Rankings of Innovative Capacity .................................................................................................70Box 3 A Case Study of Singapore’s Interactive Digital Media Cluster .........................................................................78

List of FiguresFigure 1.01 The Competitiveness Framework: Determinants of Prosperity ........................................................................20Figure 1.02 Assessing Competitiveness ................................................................................................................................. 21Figure 2.01 Singapore’s per-capita GDP per capita, in thousands of 1990 PPP$ ..................................................................25Figure 2.02 Comparison of GDP per capita ...........................................................................................................................26Figure 2.03 GINI Coefficient Comparisons, latest year .........................................................................................................27Figure 2.04 Singapore’s Gini Coefficient among Employed Households ..............................................................................27Figure 2.05 Human Development Index and Components ..................................................................................................28Figure 2.06 Labour Productivity and Growth ........................................................................................................................29Figure 2.07 Relative Productivity and Prosperity ..................................................................................................................29Figure 2.08 Change in Sectoral Labour Productivity .............................................................................................................30Figure 2.09 Participation and Growth ....................................................................................................................................30Figure 2.10 Contributions to Change in Labour Mobilisation, 2000-2008 ...........................................................................31Figure 2.11 Comparison of Female Labour Participation Rates, 2009 Estimates .................................................................31Figure 2.12 Country-level Price Comparisons .......................................................................................................................32Figure 2.13 Normalized Comparative Price Levels of selected Cities ...................................................................................32Figure 2.14 Price Accessibility for Selected Products ............................................................................................................ 33Figure 2.15 Total Factor Productivity ..................................................................................................................................... 33Figure 3.01 Trading Trends .....................................................................................................................................................37Figure 3.02 Extent of Re-Exportation ....................................................................................................................................38Figure 3.03 Comparison of Global Manufacturing Export Shares ........................................................................................38Figure 3.04 Share in Global Trade of Goods and Services .....................................................................................................39Figure 3.05 Top Five Goods Export Destinations ..................................................................................................................39Figure 3.06 Top Five Goods Import Origins ..........................................................................................................................39Figure 3.07 Domestic Exports Destination in 2008.............................................................................................................. 40Figure 3.08 Top Five Service Export Partners, by type of Service ........................................................................................ 40Figure 3.09 Top Five Service Import Partners, by type of Service ......................................................................................... 41Figure 3.10 Singapore’s Electronics Performance .................................................................................................................. 41Figure 3.11 Top 25 Destinations of Singapore Electronics Exports ......................................................................................42Figure 3.12 Singapore Electronics Production by Broad Segment .......................................................................................42Figure 3.13 Electronics Demand versus Production .............................................................................................................43Figure 3.14 Production of Electronics Components .............................................................................................................43Figure 3.15 Investment Intensity ...........................................................................................................................................47Figure 3.16 Relative FDI Inward Indicators ...........................................................................................................................47Figure 3.17 Presence of Foreign Investment ......................................................................................................................... 48Figure 3.18 International Comparison of Patenting Activity ...............................................................................................49Figure 3.19 Comparative Organizational Patents .................................................................................................................50Figure 3.20 Singapore-owned Patents in the USPTO (2004-2008) ......................................................................................50Figure 3.21 Patent Applications by Field of Technology (2002-2006) .................................................................................. 51Figure 3.22 Singapore Patent Applications in 2007 ............................................................................................................... 51Figure 3.23 Papers in the Engineering Citation Index (2007) ..............................................................................................52Figure 3.24 Measures of Entrepreneurship (average of available 2000-2007 data) ..............................................................52Figure 4.01 Evolution of Singapore’s Macroeconomic Competitiveness ..............................................................................59Figure 4.02 Government Effectiveness Scores of Top-Rated Countries ............................................................................... 60Figure 4.03 Evolution of Singapore’s Microeconomic Competitiveness ............................................................................... 61Figure 4.04 The Porter Diamond ............................................................................................................................................62Figure 4.05 Ease of Doing Business Ranks, 2008-2009 ........................................................................................................ 64Figure 4.06 Comparison of Doing Business Components .................................................................................................... 64Figure 4.07 Math and Science Test Scores, 2007 .................................................................................................................. 66Figure 4.08 Innovation Input Trends .....................................................................................................................................67Figure 4.09 Comparison of Private R&D Spending, 2006 .................................................................................................... 68Figure 4.10 Relative Comparison of R&D Researchers, 2007 ............................................................................................... 68Figure 4.11 Relative Comparison of R&D Personnel, 2007 .................................................................................................. 69Figure 4.12 Attractiveness as Financial City ..........................................................................................................................72Figure 4.13 Global Internet Use and Penetration ..................................................................................................................72


List of FiguresFigure 4.14 Internet Use Comparisons ..................................................................................................................................73Figure 4.15 Consumer Sophistication Survey, 2007 ..............................................................................................................75Figure 4.16 Singapore’s Export Profile in 2007, Porter Cluster Methodology ......................................................................77Figure 4.17 New Global Competitiveness Index and Singapore’s 2009 Ranks ..................................................................... 81

List of TablesTable 2.01 City Prosperity in 2005 ........................................................................................................................................26Table 3.01 Profitability of FDI in Selected Industries ......................................................................................................... 48Table 3.02 Top Ten Non-OECD M&A Acquirers ..................................................................................................................49Table 4.01 Ethnic Demographics in Singapore ....................................................................................................................58Table 4.02 Social Infrastructure and Political Institutions Indicators ................................................................................59Table 4.03 Macroeconomic Policy Indicators ..................................................................................................................... 60Table 4.04 Factor (Input) Conditions and Components ......................................................................................................62Table 4.05 Logistical Infrastructure Indicators ....................................................................................................................63Table 4.06 Ranks in the 2007 Logistics Performance Index ................................................................................................63Table 4.07 Shipping Statistics ...............................................................................................................................................63Table 4.08 Administrative Infrastructure Indicators ...........................................................................................................63Table 4.09 Innovation Infrastructure Indicators ..................................................................................................................65Table 4.10 Average Education Levels ....................................................................................................................................65Table 4.11 Public Education Expenditures...........................................................................................................................65Table 4.12 Comparative Reading Scores ...............................................................................................................................67Table 4.13 Growth of Innovation Inputs ..............................................................................................................................67Table 4.14 Academic Ranking of World Universities, 2009 ............................................................................................... 69Table 4.15 Capital Market Infrastructure Indicators .......................................................................................................... 71Table 4.16 Financial Sector Development, 2009 .................................................................................................................. 71Table 4.17 Communications Infrastructure Indicators .......................................................................................................72Table 4.18 Context for Rivalry and Strategy Indicators .......................................................................................................73Table 4.19 Largest Companies in Singapore ........................................................................................................................74Table 4.20 Demand Conditions Indicators ..........................................................................................................................75Table 4.21 Supporting and Related Industries Indicators ...................................................................................................76Table 4.22 Company Sophistication Indicators ................................................................................................................... 81




FOREWORD

The Asia Competitiveness Institute (ACI) was created to provide policy-relevant analysis on competitiveness in Singapore and the ASEAN region, based on rich data and a comprehensive framework. Singapore is widely known for its expertise within government, but Singaporean leaders saw clear value in objective outside ideas from an institution dedicated to understanding the “big picture” of where Singapore and ASEAN are heading.

The Singapore Competitiveness Report 2009 is an important milestone in realizing this vision. On behalf of ACI’s International Advisory Panel, I would like to congratulate the ACI team for this important piece of work.

The Singapore Competitiveness Report highlights the need for Singapore to define a new model of an innovation-driven economy that fits its specific capabilities and ambitions. Singapore cannot follow the same approach as the U.S., Japan, or other advanced economies.

The Report highlights the virtue of a stable economic strategy in this time of global economic crisis and uncertainty. Singapore’s fundamental model is working and there is no need for drastic changes. Singapore has shown a remarkable ability to reinvent the key tenets of its competitive model in line with its rising level of development. The report suggests that government needs to support these changes and the overall resilience of the economy. A new approach towards ASEAN collaboration is one of the steps that can make a significant contribution in this direction.

Our ambition with ACI and the Singaporean Competitiveness Report is to provide government leaders with data and frameworks to make more informed policy decisions, whether or not they agree with every conclusion or recommendation. My hope is that this first Singapore Competitiveness Report achieves this purpose and become a model for many other reports to follow.

Michael E. PorterWilliam Lawrence University Professor, Harvard Business SchoolChair of the International Advisory Panel, Asia Competitiveness Institute




Executive Summary



EXECUTIVE SUMMARY

Economies around the globe are in turmoil. The downturn is significantly deeper and more global than anything experienced since the Great Depression. Unlike their predecessors at the time, policy makers have now reacted strongly, bailing out banks, launching stimulus packages, and using old and new monetary policy instruments. The outlook now seems slightly more positive, especially in Asia: the rate of decline has fallen and the hope is increasing that while a drawn-out period of adjustment lies ahead, it will not be the abyss that bankers and exporters were facing in late 2008 and early 2009.

However, in this period of dramatic shocks, forecasts have become much less accurate than in periods of stable trends and calm. There is little reliable experience on how consumers, investors, and producers will react to the massive government efforts under way. This uncertainty affects not only the short term but also the longer term. Will the crisis only be a - albeit historically deep - bump on the road? Or will it lead to changes in economic policy and structures that alter the course of economic development for individual countries and regions?

The Singapore Competitiveness Report 2009, the first in this new series of regular assessments by the Asia Competitiveness Institute (ACI) at the Lee Kuan Yew School of Public Policy, provides data and analysis to inform the discussions on the impact of the crisis on the medium-term development of Singapore’s competitiveness. It does not aim to provide a better forecast on what will happen over the next six or twelve months; other research centres, financial institutions, and government agencies provide in-depth coverage of this question.

Instead, the aim is to put the short-term developments into the context of the fundamentals that will drive economic development over longer periods of time. Clearly these are related: many of the policy choices made today will impact the fundamentals that exist tomorrow, even if their primary motivation now is to deal with the immediate crisis at hand. In this time of economic crisis, the Report’s discussion of the medium-term fundamentals aims to contribute to a better recognition of these linkages.

Key Competitiveness Challenges for Singapore

Improving competitiveness is a constant challenge all economies face, no matter the level of prosperity they have already reached. This constant challenge then translates into more granular questions that individual countries face at a given point in time. For Singapore, we examine three such specific questions that currently shape the competitiveness debate. For all of them, the Report suggests a framework to address them, explores the relevant data available, and provides the authors’ evaluation.

First, the global crisis has hit Singapore harder than many of its Asian peers, despite the fact that Singapore ranks comfortably among the most competitive locations in the region. Is the crisis indicating that Singapore’s economic model does have serious weaknesses? Are there indications that the crisis has triggered or accelerated the transition of the global economy towards a new scenario in which Singapore’s strengths are less valuable?

Second, Singapore is transitioning from an investment-driven economy to an innovation-driven economy. This is both an explicit ambition of the government and the assessment of many outside observers. How far has the country progressed on this path? What are the outcomes on innovation measures? And how much has the profile of Singapore’s competitive strengths shifted from one typically associated with investment-driven economies (strong business environment, especially physical infrastructure, solid skill base, rule of law, openness to trade and investment) to one more in line with the needs of an innovation-driven economy (strong innovation system, IP protection, quality of life, company sophistication and strategy, demand sophistication, entrepreneurship)?

Third, despite the overall economic growth in the last few years, there are concerns about Singapore’s ability to generate sustainable productivity growth, especially on total factor productivity. Relative to the United States, Singapore made no gains on productivity between 1995 and 2008, after registering strong and consistent catch-up in the previous period. Is this slow-down a sign of structural problems, or is it largely cyclical or driven by external shocks? If it is structural, what explains Singapore’s failure to continue the previous catch-up to the productivity levels of other advanced economies?

Each of these questions could easily motivate an independent study. This Report addresses all three of them, drawing on one integrated conceptual framework to organize data from multiple sources. The overall picture that emerges is guardedly optimistic: Singapore is not facing a fundamental threat to its economic position, certainly not in the short- to medium-term. But Singapore will have to refine its strategic direction and make some rather fundamental adjustments in its economic structure if it aims to move to a new level of competitiveness.

The Report’s Conceptual Approach

The Report’s analysis is grounded in the competitiveness framework that Professor Michael E. Porter of the Harvard Business School and Chairman of ACI’s International Advisory Panel, has developed over the last two decades. This framework is flexible in capturing the role of many different types of factors on competitiveness. It recognizes their interdependence and makes no prior assumptions about the critical role of any individual factor. In fact, one of the framework’s explicit uses is to support the identification of policy priorities based on the specific circumstances that exist in an economy at a given point in time, rather than providing generic policy advice.

The central tenet of the competitiveness framework is the notion that productivity – the ability to create valuable goods and services through the use of a country’s human, capital, and natural resources – is the ultimate driver of sustainable prosperity. Productivity depends both on the value of the goods and services produced and on the efficiency with which they are being provided. High competitiveness, then, is ultimately reflected in high productivity.

Productivity is as an outcome influenced by a large number of factors that are shaped by the collective action of all participants in an economy. One set of factors, organized under the heading of macroeconomic competitiveness, set the overall context in which companies operate. These factors include the quality of social infrastructure and political institutions as well as of macroeconomic policy. They do not affect productivity directly but create the opportunity space in which productivity-enhancing actions can be taken.


The other set of factors, called microeconomic competitiveness, captures the way companies operate and the external dimensions that have a direct impact on the results of their activities. These factors include the sophistication of companies, the strength of clusters, and the quality of the business environment. All of them have a direct impact on productivity.

The Report uses multiple sources of data to assess Singapore’s competitiveness in this broad framework. It focuses on analysing and presenting this data in an integrated fashion, while adding additional primary data only in selected areas where gaps exist. The objective is to present the best possible analysis given the data available, rather than conducting extensive primary research as part of this Report.

The data is organized in a number of key categories that provide different perspectives on Singapore’s competitiveness position:

• The first group of indicators assess Singapore’s track record on the indicators of economic performance: the quality of life Singaporeans are able to enjoy as a consequence of the fundamentals present in their economy. Relevant data points include prosperity levels, equality, and measures of human development.

• The second group of indicators looks at economic outcomes that are signs of and contributors to competitiveness but may not be the ultimate goals of economic policy. This includes measures of foreign and domestic investment, international trade, innovation, and entrepreneurship.

• The third group of indicators then tracks Singapore’s position on the broad range of macro- and microeconomic competitiveness factors that ultimately explain the medium-term trends on the economic outcomes previously discussed. The indicators covered range from assessments of governance quality, the provision of primary public services, and the solidity of public finances to the sophistication of companies, the dynamism of clusters, the quality of physical infrastructure, the intensity of local competition, and many more.

Summary of Findings

Economic PerformanceSingapore continues to be a highly prosperous economy, ranking among the leading countries both within Asia and globally. Singapore’s high standard of living is the result of high income levels and a strong position on life expectancy and basic education. A comparison with other cities reveals that Singapore has solid levels of prosperity, but is also experiencing some challenges. Singapore’s environmental performance does not stand out globally, but the country does perform better than most of its Asian peers. The relatively high and rising income inequality suggests that there are significant differences across Singaporean society in the standard of living. Many other countries have recently experienced a similar increase in inequality, most likely as the result of technological change. As Singapore’s economic strategy explicitly aims to accelerate the pace of technological change, the tendency for higher inequality is likely to increase, putting pressure on the cohesive social model the country has adopted.

Singapore’s prosperity is driven by high labour mobilization and solid but far from exceptional levels of labour productivity. Higher labour mobilization has over time been an increasingly

important driver of prosperity growth, while productivity growth has decreased in prominence.

High labour mobilization is typical for economies with a significant share of immigrant labour. In fact, the data suggests that recent growth in labour mobilization has been driven as much by a rising share of foreign workers as by increasing labour mobilization of Singaporean residents. Among residents, Singapore continues to register low labour mobilization among females, a group that in other countries has been driving increasing labour mobilization rates.

Labour productivity is at a solid level, but the data does indicate a significant increase in the volatility of productivity growth since 1995, driven by both cyclical trends and one-time shocks. Given these shocks, the selection of time periods to look at can lead to highly different results. Taking this volatility into account, the data suggests that there is a moderate slow-down in Singapore’s catch-up to the United States, but growth relative to the European Union (EU-15) continued and parity was reached in 2004.

Starting in 2006, labour productivity growth did stall and overall growth was driven entirely by higher labour mobilization. In this period, total factor productivity growth also slowed down significantly. This is consistent with the cyclical upswing during this period; there are no conclusive indications that it is the result of a structural change in trend.

The demographic trends will make it increasingly challenging for Singapore to keep labour mobilization rates stable at current levels, as an increasing share of the population retires from the workforce. Future growth will have to come from productivity growth - with capital stocks already high and skill levels improving, the main driver of growth will have to be total factor productivity growth.

Intermediate IndicatorsSingapore’s performance on intermediate measures of economic activity indicates that a good foundation has been built for current and future prosperity. The defining characteristic of Singapore is its high level of integration into the global economy. While this has exposed the country to the onslaught of the current crisis, it is one of the key drivers of its medium-term prosperity. There are no signs that Singapore’s position in the global trading system is eroding. The position is, however, slowly changing: Singapore is shifting from being a direct supplier to the US and Western Europe to becoming a specialized supplier of services and components to the Asian production system, and increasingly also to meet the final demand from Asian consumers.

As an investment location, Singapore remains highly attractive for foreign companies. But Singapore is increasingly moving beyond being a host of FDI into becoming an important source of FDI, especially for other parts of Asia. This is fully in line with the changes in Singapore’s role in the global economy revealed in its trading profile. These changes are largely driven by market forces, even though individuals policies - for example the growing number of FTAs and the more active outward investment approach of government-linked companies - supported them.

A more recent development is Singapore’s growing position in innovation. Over the last two decades, the country has developed a capable scientific development system around a core of strong universities, government-funded research institutes, and the research activities of foreign investors. Patenting intensity is high, although not quite at the level of the best Asian peers. Foreign multinationals play an important role as patentees but increasingly also local universities.


Electronics is by far the most important sector in which patenting occurs, reflecting the strong position Singapore has in this area. The challenge remains how Singapore can extend its significant investments in scientific research to the commercial exploitation of knowledge. This may include the development of innovations that are not based on the hard sciences but that focus on new commercial ideas using existing technologies and knowledge, including those discovered elsewhere.

Start-up rates in Singapore are rising, but this is more likely a reflection of entry into activities serving the local markets, especially in retail and services. In the export-oriented sectors, the presence of private domestic companies is still very limited. And it remains uncertain as to whether or how fast foreign investors or government-funded entities commercialize the outcomes of their Singapore-based research. This is not an indication of failure, but a reminder that Singapore has now reached a level of performance where it has to consider more strategically which position it should aspire for in the global innovation landscape.

CompetitivenessSingapore’s fundamental competitiveness remains strong, and provides a solid foundation for the level of prosperity and the overall pattern of economic outcomes already achieved. Singapore does particularly well on the quality of its microeconomic business environment and the rule of law. Its position in other areas is good, but there it has less of an advantage relative to leading peers.

On macroeconomic competitiveness, i.e. policies and conditions that set the overall context in which companies operate, Singapore does particularly well on the effectiveness of its public institutions. This is an area where the potential for creating value from exporting this competence in different ways remains underexploited.

Singapore’s somewhat weaker position on macroeconomic policy is not a major concern. Differences between countries on the specific indicators used are relatively small among the leading group, and there is little evidence that these differences are strong predictors of economic outcomes. The data raises concerns about the risk that a dominant political group, unchallenged by a potent opposition or aggressive press, may become unresponsive to the needs of society or focus on private benefits rather than overall competitiveness. In Singapore, this risk has not materialized. However, there remains a concern that the controlled nature of Singaporean society might inhibit “creative” activities that tend to thrive in less-structured environments. Still, macroeconomic policy in Singapore is strong and provides an important pillar to support the general stability of the economic environment.

On microeconomic competitiveness, i.e. the dimensions of the overall context that have a direct impact on company productivity and innovation, Singapore ranks among the leading countries in the world. Factor input conditions are world-class across all dimensions, from physical infrastructure and administrative efficiency to skills and innovation capacity. Singapore continues to be ranked as the best country in the world in terms of the rules and regulations affecting business (World Bank, 2009). In innovation capacity, Singapore provides a strong mix of world-leading quality in education with high R&D spending, solid quality of research institutions, and effective collaboration between companies and universities.

Context for strategy and rivalry is very strong too. Singapore particularly excels on its openness to global trade and investment. However, there are some concerns about the strong role of government-linked companies (GLCs). Their high efficiency and full exposure to global competition limit any negative impact on the level of rivalry on local markets; they operate as private companies would. The evidence suggests that government linked companies can match the performance of their best private sector-owned peers, if they are appropriately governed and the market environment is right.

But there remains a question as to whether these GLCs are effective in existing markets but less nimble in pursuing entrepreneurial ventures in new fields. If this is the case, the attractiveness of multinational companies (MNCs) and GLCs for the best available talent could explain Singapore’s disappointing performance on entrepreneurship. The slightly lower ranking on domestic rivalry is likely to be a consequence of the small size of the local market, which also explains the weaker position on the quantity of locally available suppliers.

Remarkably for a relatively small economy, Singapore ranks relatively high on other indicators of clusters or supporting and related industries. This is a clear reflection of the economy’s high level of specialization, and the government’s focus on developing specific sectors. A relative weakness is Singapore’s position on company sophistication. This is quite typical for an economy dominated by foreign multinational companies, where the ultimate control of global value chains and strategic decisions rests with headquarters located elsewhere.

Overall, Singapore’s competitiveness fundamentals are strong, but remain broadly more in line with a high-skill version of the investment-driven model, rather than an innovation-driven economy. Again, this is not an indication of failure, but a reminder that Singapore has now reached a level of performance where it has to consider in more detail which position it should aspire for in the global economy.

Implications

The analysis discussed above provides perspective on the three key challenges identified at the outset of this Report.

There is no indication that the changes in the global economy system currently under way will fundamentally challenge Singapore’s competitive position. Fundamental competitiveness will remain crucial, or even increase in importance, and Singapore has clear strengths to draw on here. Competition will increase, maybe even more quickly than expected before the current crisis, and the geographic profile of markets and value chains globally will continue to evolve, possibly at a faster rate. But Singapore seems well prepared to adjust to these trends. In fact, the changes in its trade and investment profile already reflect how its position is evolving to meet new market dynamics.

Singapore’s transition towards an innovation-driven economy, an ambition outlined by the Economic Review Committee in 2003, remains a work in progress. The necessary scientific infrastructure has been put into place. But, while MNCs and government-funded research institutes already draw on the scientific talent that has been attracted to Singapore, their operations here do not seem


to be translating the scientific research into new products and services at a significant scale. “Creative” activities are growing, but they remain a small part of Singapore’s overall economy. Companies in these areas can draw on some clear advantages, like the high quality of life that attracts talent, but also face some obvious challenges, like trying to instil innovative thinking and risk-taking in a highly organized society with a tradition of manufacturing for exports products that were created and designed elsewhere.

These observations do not imply that Singapore has failed in the mission it has laid out for itself. But they indicate that the country needs a fundamental discussion to refine its ambition along two key dimensions:

First, there are many possible visions of an innovation-driven economy that are feasible, and some might be a better fit for Singapore than others. Being an important global knowledge-innovation hub with focused research laboratories, world-class companies, a secure legal environment, and highly attractive conditions for talent is closer to Singapore’s current competitive strengths than is becoming a global R&D hub creating the next generati0n of global technologies and products based on scientific breakthroughs. Becoming a global connector of knowledge, bridging together scientific research (discovered locally or elsewhere) with companies able to draw on it and identifying opportunities where existing knowledge is not fully applied in some geography or field, would also fit well with Singapore’s tradition as a regional business hub. This would also build on the existing scientific strengths that are crucial in understanding and leveraging the best knowledge available globally but with greater emphasis on commercializing research, capitalizing on unique business solutions implemented in Singapore and the region, and developing new business models and brands. Second, there needs to be a much broader view on what innovation is. The current view is highly science-oriented - looking at innovation as the translation of knowledge generated in universities and research labs into products and services. But innovation can be viewed from a broader perspective - the introduction of new concepts, new strategies, new processes or new business models, independent of where the idea is coming from, and whether it is leveraging new knowledge or applying existing knowledge in different contexts. One of the areas in which Singapore has arguable been most innovative is public services, because of highly sophisticated local demand. From health care to city planning and public administrative services, Singapore has always been willing to implement new solutions that create value for its citizens. This is an area where huge potential exists for creating value through exporting this expertise, by translating, for example, its experience into systematic knowledge that may be sold by operating such services abroad or through training and consulting.

Singapore’s disappointing recent performance on productivity growth is, to a large degree, a cyclical phenomenon. Since 2006, growing demand, especially from domestic sources, has driven up labour mobilization, while labour productivity dropped as the economy reached its capacity constraints. Looking at longer-term trends, productivity growth has become more volatile as Singapore’s economy has been hit by a number of external shocks over the last decade. But there is no clear evidence that productivity growth and the catch-up to other economies has structurally come to a halt. There are two reasons for concern, however.

First, while Singapore’s productivity catch-up has not stopped generally versus other advanced economies, it has done so versus the United States. Research suggests that the U.S. has done particularly well in taking advantage of new information technologies to improve the productivity of its companies through the redesign of its systems and processes. It needs to be further investigated why Singaporean companies do not seem to be as effective in their response to these new opportunities.

Second, Singapore’s productivity record has to be seen against its level of competitiveness: Singapore ranks 3rd in the world on overall competitiveness, but only 19th on labour productivity. This gap may be the result of operational choices that companies make in response to the context of factor costs and business environment conditions they face. Companies face wage costs, especially for low skill labour, at which it is not commercially attractive to move to an operational model based on higher skills and productivity. If future research supports the hypothesis of a low-productivity equilibrium, Singapore will need to move to a different view on productivity. In the past, the goal has been to create an existing product or service with fewer factor inputs. In the future, the goal has to become creating more customer value with a better design for organizing a set amount of factor inputs.

Recommendations

For policy makers, and particularly for the economic review process currently under way, this Report aims to inform decisions about possible government action.

The first recommendation from the analysis above is that Singapore should not overreact to the current crisis. Singapore’s fundamentals are solid and there is no obvious reason for making any dramatic changes. In fact, a longer term analysis of Singaporean competitiveness indicates how stable the country’s key competitive advantages have been over time, despite frequent policy reviews and action programs. Changes, like the development of a strong research system over the last two decades, have systematically built on existing capabilities to create new strengths. This remains an important principle when considering new policies.

The second recommendation relates to fundamental existing or emerging challenges where staying the course will not be enough and decisions are required. The recent slowdown of productivity is the most immediate challenge to deal with. More research on disaggregated productivity and company-level operations data would clearly by useful. If this data substantiates the hypothesis of a low-productivity business model outlined below, there are significant policy implications. Changes in the labour market, immigration, and potentially wage policy may have to be considered. Collaboration with companies and clusters to discuss the possible transition to higher-productivity business models should be on the agenda.

The third recommendation suggests a policy priority to increase the potential for economic growth through trade and investment with neighbouring Asian countries. Singapore’s shift from direct exports to the United States and Western Europe, to becoming an important part of the Asian production system and a supplier to Asian markets, is already underway. Singapore could benefit more from these trends if its partners become more competitive and the ties within the region are more developed. ASEAN has made ambitious statements of intent, but much remains to be done in order to turn these ambitions into reality. Part of the


reason could be that ASEAN has, in the past, followed a trade liberalization logic that is politically difficult, because it puts negotiations into a zero-sum game of reciprocal market access concession. ASEAN would benefit from adopting an approach aimed at improving competitiveness, where activities are focused on areas where collaboration creates direct benefits to participants.

The fourth recommendation that concerns a medium-term challenge Singapore should address, is defining the specific model of innovation-driven economy that Singapore should aspire to become. The data presented in this report indicate that Singapore has made clear progress on science-related innovation. But its success in creative and entrepreneurial activities is more limited, and is achieved in the context of a less favourable business environment.

At the minimum, there needs to be a review of whether the policy approach in these areas needs to be adjusted. Policy tools that have been successful in the attraction of capital-intensive activities may need to be modified in new innovation-intensive fields that rely more on talent and culture than capital investments. A potential short-term opportunity is to work more intensively with MNCs and GLCs to create programs that allow some of their local managers to create spin-offs, possibly with initial capital stakes of the anchor companies. This would sow the ground for more locally-rooted entrepreneurship and ultimately innovation.

Going further, the potential for commercially exploiting innovation in fields like public services needs to be more deeply leveraged. This requires creative thinking on how such commercialization could happen; in some of these fields, markets do not traditionally exist. More fundamentally, a more textured policy debate is necessary to decide what type of innovation-driven economy Singapore wants to become. Too often, there is an uncritical benchmarking towards the U.S. model. This might be neither appropriate nor ideal for Singapore. Other models exist that can support high levels of prosperity as well, and could be more in line with Singapore’s capabilities.

Inequality and the mobilization of the female labour force is a fifth challenge that is likely to become more pressing over time. Inequality has been rising, and the further transition towards an innovation-based economy will continue to fuel this trend. Singapore needs to decide how to deal with these dynamics. It has traditionally placed a high value on the cohesiveness of its society; there is no fundamental reason why this should not be possible in the future as well, but it will not stay this way automatically. Female labour force participation is the result of individual choices, but government policies set the context in which women look at the incentives they receive for entering and sustaining a professional career. Singapore should have an open debate about the type of environment it wants to provide to women.

Singapore has become an internationally respected model for a country that is willing to continuously review its position, and has taken decisive action where needed. This Report is written in this context, hoping to provide Singaporean policy makers with our analysis and perspective of the key issues and some possible options to consider. This is the first Singapore Competitiveness Report produced by the Asia Competitiveness Institute, and we intend to continue to use subsequent reports to highlight our analysis and perspective of the competitiveness issues facing Singapore in the medium term.



Introduction Chapter 1




INTRODUCTION

Singapore has over the last few decades achieved impressive success in moving from a young developing nation to become one of the most prosperous economies globally. One important reason among the many individual factors that played a role in this process has been Singapore’s willingness to constantly review its position in an international perspective. Based on these assessments, larger effort such as the Economic Strategy Committee (ESC) process currently under way and many smaller reviews of individual policies, Singapore has again and again been able to take action and implement change in response to dynamic global challengers.

It is in this spirit that the Singapore Competitiveness Report is being launched. Designed to be a recurring publication, it will track multiple indicators of Singapore’s competitiveness over time and in international comparison. The ambition is to inform the policy dialogue in Singapore through data, analysis, and a conceptual framework that helps policy makers evaluate where Singapore stands and what policy priorities it needs to address. The benchmark for this Report’s value is its ability to inspire informed action that helps Singapore reach increasing levels of prosperity over time.

Singapore’s Competitiveness Challenge in 2009

Improving competitiveness is a constant challenge all economies face, no matter the level of prosperity they have already reached. This broad challenge then translates into more granular questions that individual countries face at a given point in time. For Singapore, three such specific questions currently shape the competitiveness debate. The Report explores the relevant data available and suggests a framework to address them.

First, the global crisis has hit Singapore harder than many of its Asian peers, despite the fact that Singapore ranks comfortably among the most competitive locations in the region. Is the crisis indicating that Singapore’s economic model does have serious weaknesses? Are there indications that the crisis has triggered or accelerated the transition of the global economy towards a new scenario in which Singapore’s strengths are less valuable? Finally, is there a need for new government intervention to put Singapore on a different path for dealing with the changes in the global context?

Second, Singapore is transitioning from an investment-driven to an innovation-driven economy. This is both an explicit ambition of the government, and the assessment of many outside observers. How far has the country progressed on this path? What are the outcomes on innovation measures? And how much has the profile of Singapore’s competitive strengths shifted from one typically associated with investment-driven economies (strong business environment - especially physical infrastructure, solid skill base, rule of law, openness to trade and investment) to one more in line with the needs of an innovation-driven economy (strong innovation system, IP protection, quality of life, company sophistication and strategy, demand sophistication, entrepreneurship)?

Third, despite the overall solid economic growth in the last few years, Singapore has recently been struggling with falling rates of productivity growth, especially on total factor productivity. This slowdown has occurred in addition to a higher frequency of economic shocks that have hit the Singaporean economy over the last fifteen years. These trends have occurred despite a stable position on overall competitiveness and an explicit policy focus on productivity. What explains the challenges in further catching-up to the productivity levels of other advanced economies, especially the US?

Each of these questions could easily motivate an independent study. This Report addresses all of them, providing the key foundations to discuss the direction policy responses should take. It draws on one integrated conceptual framework to organize data from multiple sources. The overall picture that emerges is guardedly optimistic: Singapore is not facing a fundamental threat to its economic position, certainly not in the short- to medium-term. But Singapore is facing some complex challenges on its future growth path. It will have to refine its strategic direction and make much clearer choices about the type of economy it aims to become. Following the role model of successful peers is increasingly outliving its usefulness, and could even lead Singapore on the wrong path.

The Report’s Conceptual Approach

The Report’s analysis is grounded in the competitiveness framework that Professor Michael E. Porter, the Bishop William Lawrence University Professor at Harvard Business School and the chairman of the Asia Competitiveness Institute. The framework is flexible in capturing the role of many different types of competitiveness factors, and is not wedded to a particular type of economy or economic ideology. It recognizes the interdependence among the many factors that matter, and makes no prior assumptions about the critical role of any one of them. In fact, one of the framework’s explicit uses is to support the identification of policy priorities based on the specific circumstances that exist in an economy at a given point in time, rather than providing generic policy advice.

The central tenet of the framework is the notion that productivity - the ability to create valuable goods and services through the use of a country’s human, capital, and natural resources - is the ultimate driver of sustainable prosperity. Productivity depends on both the value of the goods and services produced, and on the efficiency with which they are being provided. High competitiveness, then, is ultimately reflected in high productivity.

Productivity is an outcome influenced by a large number of factors that are shaped by the collective action of all participants in an economy. One set of factors, organized under the heading of macroeconomic competitiveness, set the overall context in which companies operate. These factors include the quality of social infrastructure, political institutions, and macroeconomic policy. They do not directly affect productivity, but create the opportunity space in which productivity-enhancing actions can be taken.

The other set of factors, called microeconomic competitiveness, capture the way companies operate and the external dimensions that have a direct impact on the results of their activities. These factors include the sophistication of companies, the strength of clusters, and the quality of the business environment. All of them have a direct impact on productivity.


The Report uses multiple sources of data to assess Singapore’s competitiveness in this broad framework. It will focus on integrating and analysing this data in an integrated fashion, while adding additional primary data only in selected areas where gaps exist. The ambition is to present the best possible analysis given the data that is available, rather than conducting extensive primary research as part of this Report.

The data is organized in a number of key categories that provided different perspectives on Singapore’s competitiveness position:

1. The first group of indicators provides an assessment of the quality of life Singaporeans are able to enjoy, as well as the direct components of income generation at the economy-wide level. Relevant data points include prosperity levels, equality, measures of human development, labour productivity, and labour mobilisation.

FIGURE 1.01: THE COMPETITIVENESS FRAMEWORK: DETERMINANTS OF PROSPERITY

2. The second group of indicators looks at economic outcomes that are signs of and contributors to competitiveness, but not ultimate goals of economic policy. These include measures of foreign and domestic investment, international trade, innovation, and entrepreneurship.

3. The third group of indicators tracks Singapore’s position on the broad range of macroeconomic and microeconomic competitiveness factors that ultimately explain the medium-term trends on the economic outcomes previously discussed. The indicators covered range from assessments of governance quality, the provision of primary public services, and the solidity of public finances to the sophistication of companies, the dynamism of clusters, the quality of physical infrastructure, the intensity of local competition, and many more.


Report Outline

The remainder of the Report is organized in three chapters.

Chapter 2 looks at economic outcomes as indicators of revealed competitiveness. The first part of the chapter addresses different dimensions of Singapore’s prosperity. While GDP per capita is a central benchmark used in the analysis, this section widens the view to capture whether average GDP per capita gives a good sense of the quality of life for broad segments of Singapore’s society.

The second part of the chapter decomposes Singapore’s overall performance on prosperity into its mathematical components of labour productivity, labour mobilisation, and domestic price levels. This decomposition provides insights into the strengths and weakness of Singapore’s economy, and also an initial focus in terms of critical policy areas. Key observations from this analysis are summarized at the end.

Chapter 3 looks at a series of intermediate economic outcome indicators that, as signals and contributors of competitiveness, tend to foreshadow future prosperity. They are important analytical tools but not appropriate policy objectives. Targeting them directly, as many countries have done, often leads to better performance on the indicator but no improvement in either prosperity or competitiveness. The economic outcome indicators include measures of investment (domestic, inward FDI), global integration (FDI, exports, imports), innovation, and entrepreneurship. This chapter includes a section written by Manu Bhaskaran on the external economic environment Singapore is likely to face in the future as a consequence of the global economic crisis. It also includes a short case study analysing the changes in Singapore’s global trading position in electronics over time. Key observations from the analysis of outcome indicators are summarized at the end.

FIGURE 1.02:ASSESSING COMPETITIVENESSCOMPETITIVENESS

Chapter 4 provides the assessment of the competitiveness fundamentals that underpin the economic outcomes observed. A short first part of the chapter reviews Singapore’s endowments in terms of geographical location, natural resources, and other given factors. Policy can do nothing to change them, but they do have an impact on the level of prosperity Singaporeans can enjoy.

The second part then looks at the two dimensions of macroeconomic competitiveness, e.g. the strength of social infrastructure and political institutions (SIPI) and the quality of macroeconomic policy. For SIPI, basic human capacity, the rule of law, and the effectiveness of the political system are key concerns. For macroeconomic policy, the Report looks mainly at the general approach to fiscal and monetary policy.

The third part covers the three dimensions of microeconomic competitiveness, e.g. company sophistication, cluster strength, and business environment quality. The diamond, a concept introduced by Professor Michael Porter that encapsulates factor input conditions, the context for strategy and rivalry, demand conditions, and supporting and related industries, will be used to analyse the different dimensions of the business environment. This part of the chapter also includes summary observations from a case study on the Interactive Media cluster in Singapore, an interesting example of the country’s more recent push into new, knowledge-driven activities. Key observations from the analysis of competitiveness indicators are summarized at the end.

Chapter 5 will draw on these different observations to derive a number of overall observations. The three strategic issues identified earlier in the Report will be revisited, using the available data and analysis to provide preliminary answers. For each of these issues, an integrated set of action recommendations are given.



EconomicPerformance

Chapter 2




FIGURE 2.01: SINGAPORE’S PER-CAPITA GDP PER CAPITA, IN THOUSANDS OF 1990 PPP$

Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre.

A high standard of living for its citizens is the ultimate benchmark for high competitiveness and successful economic policy. The most widely used indicator for assessing living standards is real per-capita Gross Domestic Product (GDP).

GDP per capita is a central but imperfect measure of the standard of living, for a number of reasons. First, average GDP per capita might not give a good sense of the median citizen’s income level if economic participation differs significantly across groups of society. These differences might be the result of a skewed distribution of income, but can also be based on gender, regions, social and ethnic factors. Second, GDP per capita does not capture important non-income related dimensions of the quality of life. Individuals value leisure time, good health and well-being, and a clean environment. There are many other issues that a more comprehensive analysis would aim to address (Stiglitz et al., 2009). While this Report does not capture all of these dimensions, it looks at both inequality and non-income measures of the standard of living.

GDP per capita is, in a simple accounting sense, the result of real labour productivity and labour mobilisation. Purchasing power parity (PPP) adjustments then translate the income level into an internationally-comparable level of consumption that citizens can afford given local prices. This accounting exercise does not give insights into the ultimate drivers and causes of prosperity. However, measuring an economy’s performance along these different dimensions provides initial insights into the possible challenges and policy priorities it faces.

ECONOMICPERFORMANCE

Standard of Living

ProsperitySingapore’s current GDP per capita of SGD53,192 puts it among the most prosperous economies in the world. It ranks seventh globally and is second in Asia, behind Hong Kong, with prosperity at 90.3% of the US level. Singapore has done remarkably well in catching-up to the income levels of industrialized countries, and in outperforming its East Asian peers such as Taiwan and South Korea (Figure 2.02).

In 1965, Singapore had, at $2,667 (in 1990 PPP adjusted international dollars, a measure used for long-term comparisons of real prosperity trends across countries) the third highest PPP-adjusted GDP per-capita in East Asia, after Japan and Hong Kong. Singapore started from a higher initial level of GDP per capita, and kept its lead over Taiwan and South Korea despite experiencing lower growth of about one-half to one percentage per annum over 1965-2008.

Singapore’s prosperity growth was stable at 4.8% between 1965 and 1984 when the country was hit by a severe recession. After that crisis, Singapore moved in 1987 to a higher growth path, with an annual growth rate of 5.65% that lasted until the Asian financial crisis struck in 1997/1998. After the shock abated, growth rates rebounded to put Singapore back on the previous growth trajectory. The bursting of the internet bubble in 2001 again disrupted this development. Once again, Singapore recovered, and by 2007 had reached the level it would have reached if growth between 1997 and 2007 continued at the pre-Asian crisis decade rates.

Since 2002, Singapore has done particularly well compared not only to Taiwan and South Korea, but also to selected Scandinavian and OECD countries. In late 2007 however, Singapore’s economy was one of the first in the region to go into a recession, despite a positive spike in the first quarter of 2008.

CAPITA, IN THOUSANDS


In 2008, Singapore’s comparative PPP-adjusted per-capita GDP ($51,226) was below only that of Norway ($53,738). Consensus forecasts suggest that the worst will be over by the end of 2009, and Singapore’s GDP is expected to grow by 3.5% in 2010. All other Asian economies are expected to show positive growth as well in 2010.

Singapore’s prosperity figures are influenced by its character as a city state. Urban areas tend to register higher GDP per capita levels than surrounding regions. Higher density provides opportunities for higher productivity, and often offers significantly better access to public infrastructure and services. Economic development, especially at lower and medium levels of prosperity, goes hand in hand with urbanization.

FIGURE 2.02: COMPARISON OF GDP PER CAPITA

Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI.

TABLE 2.01: CITY PROSPERITY IN 2005

Sources: World Urbanization Prospects: The 2007 Revision Population Database (provided by the UN Population Division) and UK Economic Outlook March 2007 (published by PWC).

Even in advanced economies like the United States, the per capita income in urban areas is significantly higher than in rural areas, although different price levels, especially for housing, lead to much smaller differences in the actual living standards. But overall, there is evidence that among advanced economies, differences in urbanization rates are an increasingly less important factor in explaining prosperity differences.

A comparison with other major urban cities (Table 2.01) shows Singapore’s average prosperity level to be solid and comparable to leading Asian, European, and North American peers.


FIGURE 2.04: SINGAPORE’S GINI COEFFICIENT AMONG EMPLOYED HOUSEHOLDS

Source: Singapore Department of Statistics (2009).

EqualityAverage GDP per capita figures can give a misleading view of actual standards of living if inequality is very high. A location’s GINI coefficient, a measure which increases with greater inequality of income distribution, is an important indicator as to whether that might be the case.

At a value of 0.481 (0.462 after government transfers and taxes), Singapore ranks as an economy with relatively high income inequality. Singapore’s inequality is higher than in the vast majority of other advanced economies. Across a wider sample of countries, only Hong Kong and a number of Latin American countries register higher levels of inequality.

China, after a significant increase of inequality over the last few years, is the other Asian economy that comes closest to Singapore in inequality levels, followed by the Philippines. After government transfers and subsidies are taken into account, inequality in China is even higher than in Singapore.

FIGURE 2.03: GINI COEFFICIENT COMPARISONS, LATEST YEAR

Source: CIA World Factbook, retrieved on June 18, 2009.

The high level of inequality could, as the positions of Singapore and Hong Kong suggest, be a function of being a city state. However, available data on inequality across cities indicate that this explains Singapore’s high inequality level to a relatively modest degree (UN-HABITAT, 2008). In addition to Hong Kong, only New York City and a number of Latin American metropolitan areas register inequality at or above Singaporean levels.

Inequality has risen significantly over the last decade, in Singapore as well as in many other economies. The key reasons often cited are: technological change providing higher returns to talented individuals, and more open markets creating greater opportunities for entrepreneurs to leverage their capabilities across larger markets. Singapore’s rise in inequality was more pronounced than in all OECD countries. However, some emerging economies, including China, Russia, and Indonesia, have seen even stronger jumps in inequality.


It is not obvious that inequality has created significant problems in Singaporean society. This is the result of the high level of public services available to all citizens, which disproportionately benefit lower income groups. But the dynamics in this area need to be further analysed. Singapore puts great weight on its cohesion. As a relatively young nation of significant ethnic heterogeneity, cohesion is seen as a critical condition for developing as a peaceful society. As Singapore moves further towards a knowledge-driven economy, the forces pushing towards higher income inequality are likely to strengthen. This could create tension if these dynamics are not carefully considered in advance.

Quality of Life The exclusion of non-income indicators that have a significant impact on the actual standard of living is another reason that economic measures alone tend to be a potentially misleading indicator. These indicators are an important signal of the overall performance that a country reaches. Over the last few years, they have also become important factors in global competition. As countries compete for global talent, their quality of life and attractiveness as a place to live, independent from the income level individuals can reach, have become increasingly important assets. This is especially relevant for countries like Singapore that thrive on their ability to attract foreign capital and talent.

The UN Human Development Index (HDI) extends the economic perspective by adding further information on health and education as basic requirements for meaningful participation in society (UNDP, 2009). Singapore has improved its position on the HDI in the last 30 years. Starting from a low base in 1975, it has kept up with East-Asian levels and reached the average HDI level of OECD countries in 2005.

However, Singapore still comes in behind Japan and Hong Kong. Leading European countries and the U.S. also rank higher. The main reason for Singapore’s somewhat disappointing performance is a particularly low rank on the education measure used: at a combined gross enrolment ratio of 85%, Singapore only reaches a level comparable to countries like Venezuela, Bolivia, Brazil, or the Czech Republic.

Environmental quality is another factor influencing the quality of life which is not well captured through income measures. The demand conditions created by public policy measures trying to ensure environmental sustainability are also an increasingly important factor, as many countries, including Singapore, aim to establish positions in clean technologies.

A study by the ADB (2006) provides information on urban air quality in Asian cities. While no Asian city meets the World Health Organization’s (WHO) guidelines of 20 micrograms per cubic meter for PM10 (particulates with a diameter of no more than 10 microns), Singapore, which has adopted the United States Environmental Protection Agency Standards, was closest of all Asian cities to meeting the WHO standards with annual average ambient concentrations of 30 micrograms per cubic meter in 2006. There is also increasing evidence that mobile individuals see better environmental quality as an important reason to locate in Singapore.

Components of Prosperity Generation

Income is ultimately the result of how productively labour is being used, and how effective the economy is in mobilizing available labour. These two factors, both important drivers of income, are driven by different dimensions of the business environment. Understanding the relative strengths and weaknesses of an economy with respect to the drivers of its prosperity thus gives important insights for policy makers on the action priorities they face.

Labour ProductivitySingapore’s current GDP per employee performance puts it only marginally ahead of the weaker economies within the OECD (Figure 2.06). In 2008, most OECD, Scandinavian and Asian comparator countries, with the exception of South Korea, had higher labour productivity than Singapore. Similarly, the rate labour productivity growth from 1995 to 2008 was higher in Asian comparator countries such as Hong Kong, South Korea and Taiwan, as well some Scandinavian and OECD countries. Singapore did perform better than Continental European countries like Germany and France.

FIGURE 2.05: HUMAN DEVELOPMENT INDEX AND COMPONENTS

Source: UNDP, 2009.


Between 1965 and 1990, Singapore has registered stable productivity catch-up relative to the US and Western Europe. Since then, the picture has become much more volatile. Singapore has continued to register higher labour productivity than its OECD peers from 1990 to 2007. Since 2005, the country registers a labour productivity levels above the EU and the OECD level. However, two periods of fast labour productivity growth (1992-1997 and 2003-2007) were interrupted by a period with low growth (1997-2003). Relative to the United States, a significant productivity gap, which shows little signs of closing over the last decade, remains intact.

FIGURE 2.07: RELATIVE PRODUCTIVITY AND PROSPERITY

Source: Total Economy Database (January 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI.

FIGURE 2.06: LABOUR PRODUCTIVITY AND GROWTH

Source: Total Economy Database (September 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI.

The productivity decline affects the entire economy and is not principally driven by structural change. Between 1970 and 2005, the change in Singapore’s labour productivity was, like in most advanced economies, dominated by within effects of productivity growth in individual sectors.1

Structural change did make a positive contribution, but was much smaller in size: over this period, the within effect accounted for 85% of the change in labour productivity, while the shift effect (increase in employment shares of industries with above-average levels or above-average growth rates of productivity) accounted for 15% of the total labour productivity change.2


FIGURE 2.08: CHANGE IN SECTORAL LABOUR PRODUCTIVITY

FIGURE 2.09: PARTICIPATION AND GROWTH

Source: Singstat Time Series Online, provided by the Singapore Department of Statistics.

Note: Utilizes combination of data sources. Percent of population aged 15-65 for 2007 was taken from the WDI and multiplied against population reported in the TED. Employment is from TED.

Sources: Total Economy Database, January 2009 (The Conference Board and Groningen Growth and Development Centre) and World Development Indicators online (World Bank); calculations by ACI.

The patterns have changed over time. Before 1995, within industry effects contributed 3.6% to labour productivity, with the shift effect contributing 0.8%. After 1995, and up to 2008, within effects dropped to 2.1%, and shift effects declined to 0.1%. The drop of the within effects was especially pronounced after the dotcom crisis in 2001. The shift effect made an ever-decreasing contribution to labour productivity growth.

Sectoral productivity data reported confirms this view. Figure 2.08 shows the change in labour productivity for selected goods and service sectors over 2003-2008. Together, these sectors account for about 65% of employment and 60% of real GDP.

Labour MobilisationLabour mobilisation reflects how well a country uses its human resources and gives an indication of possible policy challenges in this respect. Since 1995, Singapore has registered a significant increase in labour mobilisation, growing the rate of employees in its working age population at a rate surpassed by only a very small number of countries globally. Singapore’s labour mobilisation rate was already relatively high at the beginning of this process; it now ranks among the five countries with the highest rates of labour mobilisation globally.


A closer look at the Singaporean data provides more insights into the process of labour force mobilisation. The data on labour mobilisation among Singaporean residents shows a high level of stability over the long term. Since 2000, 61% of the change in Singaporean labour mobilisation has been the result of higher activity levels among Singaporean residents. The remainder has been driven by an increasing share of non-residents in the overall labour force and an increasing activity level among non-residents. Activity levels among non-residents are about 30%-points higher than among residents, but the gap has been slightly falling in the years of high economic growth prior to the current global crisis.

Contrary to its overall profile, Singapore does only average on female labour participation. Singapore ranks roughly on par with the OECD average but significantly below the Nordic countries. High education levels of women, labour scarcity, and availability of domestic help should result in much higher participation rates, but Figure 2.11 shows otherwise.

In Singapore, the decline in female participation starts in the relatively young age group of 25-29. This is different from South Korea and Japan, two Asian countries overall with relatively low female participation rates that are, however, much more stable over the women’s life cycles than in Singapore.

Purchasing PowerThe final step in the evaluation of the standard of living is to understand the amount of products and services that can be bought in a location for a given amount of income. Data again provides important insights into the actual performance of an economy and on the policy areas that need attention. Japan, for example (Porter et al., 2000) was the classic example of an economy with solid labour productivity and mobilisation, but with very high local prices that reduced the benefits citizens could ultimately gain from their income. Its challenge was a highly-inefficient local sector that drove up prices. The right policy response was to break up the local market structure inhibiting higher performance in this sector of the economy, not just implementing broad based policies for higher productivity.

The cost of a standard basket of goods in Singapore is relatively modest compared to the cost for the same goods in most comparable countries and cities. For the cross-country comparisons, the ratio between purchasing power parities (PPP) and market exchange rates is often used. Most European countries register high local prices, the United States comes in at a middle level, while Asian countries have more affordable local prices. Singapore, together with Hong Kong, registers even lower relative local prices than Korea.

FIGURE 2.10: CONTRIBUTIONS TO CHANGE IN LABOUR MOBILISATION, 2000-2008

Source: Singapore Department of Statistics; calculations by ACI.

FIGURE 2.11: COMPARISON OF FEMALE LABOUR PARTICIPATION RATES, 2009 ESTIMATES

Source: LABORSTA Labour Statistics Database, provided by the ILO.


The ratio of PPP to market exchange rates is an appropriate measure, so long as market exchange rates reflect international price equalisation for traded goods and services. There is some discussion as to whether Singapore’s monetary policy is keeping the parity of the U.S. dollar at a price below the market-based rate (IMF, 2008).3 This would suggest that a low purchasing power factor relative to the foreign exchange rate is at least partly the result of an undervalued currency, and not only of low local prices. After adjusting for this, Singapore’s local cost position would look less favourable, but is most likely still better than the situation in the United States.

Comparisons of price levels across cities are regularly done by private companies to help multinational companies set wages for their expatriate staff, with a view on the standard of living that income can afford in different locations. The data (Figure 2.13) again shows Singapore roughly at the same price level as

FIGURE 2.12: COUNTRY-LEVEL PRICE COMPARISONS

FIGURE 2.13: NORMALIZED COMPARATIVE PRICE LEVELS OF SELECTED CITIES

Source: World Economic Outlook (April 2009), provided by the International Monetary Fund.

Source: Price and Earnings 2009 Edition: A Comparison of Purchasing Power Around the Globe, published by UBS AG.

Hong Kong, below most European and North American cities but pricier than other countries in emerging economies across Asia. The data also suggests that rent levels are relatively modest in Asia compared to Western Europe and North America, a fact that also applies to Singapore.

Another way to look at the standard of living is the measure how long an average person has to work to be able to purchase specific goods or services across different locations. This measure combines information on local prices (which we discussed in this section) and on wage levels. On this measure, Singapore performs much less favourably. Given the data on relative prices, this is to a large degree the effect of low average prices, both in absolute terms and in relation to the level of GDP per capita reported earlier. This is consistent with relatively high inequality and a low wage share in GDP.


A factor that is not captured well in the existing data is the segmentation of prices across different consumer groups. In countries like Singapore, casual observation suggests that for housing, food, and possibly other areas, markets are highly segmented across income groups. This provides society’s low-income segments access to affordable dining in, (for example, local hawker centres) while prices in the international restaurants frequented by the higher-income groups are at or above the level of comparable restaurants in Europe or North America. Whether or not these prices differences across market segments are larger or smaller than in other countries could be a topic for further investigation.

Assessment

Singapore’s prosperity rests on high labour mobilisation combined with respectable but unexceptional positions on labour productivity and local price levels. This profile is quite similar to North America and Australia. Scandinavian countries tend to have higher local price levels, and many continental European countries combine higher productivity with much lower labour mobilisation.

Singapore’s key challenge is the problematic trajectory over time: labour productivity growth has become more volatile, and the productivity gap with the United States remains high. The recent growth in labour mobilisation rates, already high in international comparisons, has been driven by cyclical factors and has little long-term potential. Improving the female participation rate among Singaporean residents would bring some temporary relief. But the long term challenge is clearly to increase labour productivity.

Figure 2.15 confirms this assessment: Factor inputs, either higher labour mobilisation or a larger capital stock, have become the dominant drivers of GDP growth. Total factor productivity growth, which includes the growth in labour productivity not accounted for by higher labour input (accounting for improvements in skills) or higher capital intensity, has dropped in importance.

FIGURE 2.14: PRICE ACCESSIBILITY FOR SELECTED PRODUCTS

Source: Price and Earnings 2009 Edition: A Comparison of Purchasing Power Around the Globe, published by UBS AG.

FIGURE 2.15: TOTAL FACTOR PRODUCTIVITY

Source: Singstat Time Series Online, provided by the Singapore Department of Statistics; calculations by ACI.

The data in this chapter indicates that the recent productivity slowdown occurred across the entire economy. Singapore’s strategy over the last few years was to develop activities with higher levels of productivity. So far, these activities have not led to structural change towards these sectors becoming a significant growth driver. A limited role of structural change combined with a simultaneous productivity slowdown in many sectors suggests that the Singaporean economy is facing broader underlying challenges. Only a look at the country’s underlying competitiveness, provided in the following sections of this Report, can unmask the drivers of these trends.


Endnotes1. These calculations were done using the ten sector database for Singapore. See http://www.ggdc.net/databases/10_sector.htm, accessed July 25,

2009.2. The static shift effect is the product of changes in employment shares and productivity levels. The dynamic shift effect is the interaction

between changes in employment shares and changes in productivity and can be negative if either of these components is negative. Most developed countries show large within effects; positive static shift effects and negative dynamic shift effects. See Pender (2002) for further explanations and estimates for EU, U.S. and Japan.

3. The Singaporean authorities did not challenge this assessment of the IMF. However, they argued that it was appropriate to support a structural current account surplus that provides foreign reserves to shelter the Singaporean economy in case of external volatility.

Chapter ReferencesAsian Development Bank (2006) “Urban Air Quality Management: Summary of Country/City Synthesis Reports Across Asia”, Discussion Draft,

Manila.International Monetary Fund (2008), “Singapore: 2008 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board

Discussion; and Statement by the Executive Director for Singapore,” IMF Country Report No. 08/280, IMF, Washington, D.C.Pender, Michael, (2002) “Industrial Structure and Aggregate Growth”, working paper no. 182, WIFO, Vienna.Porter, Michael E., Hirotaka Takeuchi, and Mariko Sakakibara, Can Japan Compete?, 2000.Singapore Department of Statistics (2009), “Key Household Income Trends, 2008,” Occasional Paper on Income Statistics, Singapore.Stiglitz, Joseph, Amartya Sen, Jean-Paul Fitoussi (2009), “Report of the Commission on the Measurement of Economic Performance and Social

Progress,” Commission on the Measurement of Economic Performance and Social Progress, Paris.UNDP (2009), “Human Development Report 2009,” United Nations, Geneva.UN-HABITAT (2008), “State of the World’s Cities 2008/2009: Harmonious Cities,” United Nations, New York.


IntermediateEconomic OutcomeIndicators

Chapter 3




The second stage of analysis, adding to the analysis of outcomes that directly contribute to living standards discussed in the previous chapter, are intermediate indicators of economic activity. Exports, investments, entrepreneurship, and innovation outputs are such indicators that provide insights in the process leading up to ultimate prosperity and are analytical tools to identify potential weaknesses.

These intermediate indicators have a number of interesting characteristics. They are the result of strong underlying competitiveness - high export levels, for example, signal the ability of companies to compete successfully on the world market. But they also contribute to higher competitiveness; exposure to international competition through trade and investment, for example, leads companies towards higher levels of performance. Some of the intermediate indicators also signal whether current prosperity levels will be sustainable in the medium-term future; high innovation or investment rates, for example, indicate a build up capacity that is likely to lead to future market success.

While intermediate indicators are important analytical tools, targeting them directly can lead to poor policy choices. Direct subsidies or an undervalued exchange rate, for example, can

INTERMEDIATEECONOMIC OUTCOMEINDICATORS

boost exports and inward FDI, but are costly and lead to little upgrading of underlying competitiveness. Performance on intermediate indicators is the outcome of the interplay of many dimensions of underlying competitiveness, which will be the subject of Chapter 4.

Trade

Singapore is a trading nation, which is primarily a function of geography. Entrepöt trade continues to be important and in addition being an island city-state, Singapore is dependent upon imports for all basic goods. Between 1988 and 2001, the ratio of Singapore’s total trade (goods and services) to GDP fluctuated between 3.0 and 3.5, however, since 2002, this ratio has increased more or less monotonically and it stood at about 4.5 (3.5 for goods and 1 for services) in 2008.

Figure 3.01 show the overall trends, with data on goods and services. Total trade in goods increased from $43 billion in 1980 to $658 billion in 2008, representing an annual growth of 10.2%. Export growth of goods (at 10.75% per annum) outpaced growth in imports (9.69%) over the period of 1980 to 2007. A positive goods trade balance is a relatively recent phenomenon that started to be the norm after 2001. Service trade registered a surplus in the 199os and has been broadly balanced for the last decade. Only in 2007 and 2008 did Singapore again register a service trade surplus.

Entrepöt trade is an important component of Singapore’s economy and trade mechanism. The Department of Statistics defines re-exports as goods that were exported without undergoing any transformation (except repacking, sorting, grading, marking, and similar activities). In 2008, re-exports under this definition accounted for 42.62% of Singapore’s total exports.

FIGURE 3.01: TRADING TRENDS

Source: UN Comtrade database, retrieved on July 9, 2009 via WITS; calculations by ACI.


Since 1990, this share has been increasing significantly. Growth in re-exports has accounted for 51.13% of total Singaporean export growth between 1990 and 2008. Singapore’s re-exports are dominated by high-tech products, with the pattern becoming more pronounced over time. The share of high-tech products in total re-exports increased from 63.22% in 1995 to 67.17% in 2008, reaching its highest level at 74.1% in 2005. The other important product category among re-exports is petroleum and related products.

The significant share of Singapore’s growing trade in recent years has been driven by the strong growth in total world trade. Gains in market shares have played a role until the Asian crisis, but not since then. Between 1986 and 1995, Singapore’s world market share of global exports doubled (Figure 3.04). Market shares then dropped during the Asian crisis, recovered somewhat in the immediate aftermath of the crisis, and were again hit during the dotcom crisis. After 2000/2001, Singapore managed to regain some market share, but in 2007/2008, some of the gains evaporated.

FIGURE 3.02: EXTENT OF RE-EXPORTATION

FIGURE 3.03: COMPARISON OF GLOBAL MANUFACTURING EXPORT SHARES

Source: Singapore Department of Statistics

Source: WTO Statistics Database provided by the World Trade Organization, retrieved September 1, 2009; calculations by ACI.

Trade patterns have development somewhat differently in services, goods, and the narrower category of manufacturing goods (which excludes fuel and mining products). Singapore’s share in world manufacturing trade peaked at 5.52% before the Asian financial crisis, and declined thereafter to 4.37% in 2007.

This is the part of world trade where China’s growing exports have had the biggest impact (Figure 3.04). During the rapid expansion of Chinese exports after 2000, Singapore managed to keep its relative position quite stable while most other countries saw a significant loss of market share.

Singapore’s global share in fuel and mining products peaked at 4.84% in 1993, and was 3.94% in 2007. This is a segment of world trade that has grown strongly prior to the current crisis, largely as the result of significant prices increases for energy and raw materials. While trade in services still account for less than a third of total world trade value, this has has grown more quickly during the past few years. Over time, Singapore has gained market position in service exports, despite huge drops in the mid-1980s, the Asian crisis, and after 2007.


Below the aggregate levels of trade volumes and market shares, it is revealing to look at Singapore’s trading partners. Singapore has seen a gradual shift from trading mainly with North America and Europe to increasingly growing ties with the rest of Asia.

FIGURE 3.04: SHARE IN GLOBAL TRADE OF GOODS AND SERVICES

FIGURE 3.05: TOP FIVE GOODS EXPORT DESTINATIONS

FIGURE 3.06: TOP FIVE GOODS IMPORT ORIGINS




On the goods side, the United States dropped in 2008 to 3rd rank among Singapore’s most important trading partner, behind Malaysia and China. Europe’s share has dropped even more over time, from 17% share a decade ago to 10% in 2008. In 2008, trade with Asia accounted for 65% of total trade. There is a significant increase in the share of ASEAN countries, and Sino-Asia (China, Hong Kong and Taiwan).


The importance of Japan has declined, whereas that of China and Indonesia has increased. Malaysia has become Singapore’s most important trading partner, starting from 1995. Trade patterns became more concentrated in the 1990s, culminating in 1995 when 59% of trade was with the five largest partners. Since then the pattern has been reversed; the share of the five largest partners is now slightly below 50%.

Figure 3.07 shows the top 25 destinations of Singapore’s domestic exports, i.e. mainly processed raw materials and basic manufacturing goods. The important role of Asian destinations, both in magnitude and growth, is even more evident than for goods exports.

Europe is not an important destination, and though the United States remains important in terms of size, growth from 1993 to 2008 was low. This indicates a declining importance in the future

FIGURE 3.07: DOMESTIC EXPORTS DESTINATION IN 2008


if these trends continue. China is growing faster than any other major export partner, and has therefore become more important over the years. India, although growing from a small base, is another fast-growing destination.

On the services side, patterns are somewhat more varied with Asia being more important as an export destination of service and the United States and Europe being more important import partners. Figure 3.08 and 3.09 show the top three trading partners for various service categories. The United States and Europe provide financial services, management services, and knowledge, while Asian countries are partners on trade-related services and, in the case of ASEAN, on construction. With the exception of construction where the top three trading partners are all Asian, the United States and the European Union figure prominently in most service categories.

FIGURE 3.08: TOP FIVE SERVICE EXPORT PARTNERS, BY TYPE OF SERVICE



A Case Study: Electronics ExportsThis section further explores the changing profile of Singaporean trade, looking closer at electronics. Often also called information technology (IT) goods, electronics is one of Singapore’s most important exports. IT is Singapore’s largest cluster by export value (USGD83.5 billion in 2007) and specialization (9.7% of global IT exports in 2007; RCA of 4.5). Despite clear growth in absolute export value, Singapore has lost significant market share in this cluster over the last decade.

FIGURE 3.09: TOP FIVE SERVICE IMPORT PARTNERS, BY TYPE OF SERVICE


FIGURE 3.10: SINGAPORE’S ELECTRONICS PERFORMANCE

Source: Yearbook of World Electronics Data 2008, provided by Reed Electronics Research; UN Comtrade database, retrieved on November 2, 2009 via the World Integrated Trade System software; calculations by ACI.

A look at export destinations provides a first indication on how the changes in the global IT industry affect Singapore’s trade. Figure 3.11 shows that the United States figures prominently, but is losing share over the years. Malaysia is now the largest market and others such as Hong Kong and China are large customers which have grown in importance. Asian destinations figure prominently in electronics.


A look at product categories provides another important angle. Figure 3.12 shows how Singapore’s product export portfolio has changed over time. Consumer electronics, the initial focus of the cluster, still figured prominently in Singapore’s portfolio in 1985; their value peaked in 1995 and declined ever since. Electronic data processing (EDP) products such as computer peripherals were the most important between 1985 and 1998, but their production has declined since 1997. Active and passive components have been the dominant product category since 2004.

FIGURE 3.11: TOP 25 DESTINATIONS OF SINGAPORE ELECTRONICS EXPORTS

Source: UN Comtrade database, retrieved on April 6, 2009 via the World Integrated Trade System software; calculations by ACI.

Singapore’s changes in electronics production have roughly paralleled shifts in global demand. There is a clear upward-sloping trend in Figure 3.13, which plots growth in global demand against growth in Singapore’s production, with bubble size representing the value of Singapore’s production in 2008. Industries are clustered either in the top-right or bottom-left quadrants.

FIGURE 3.12: SINGAPORE ELECTRONICS PRODUCTION BY BROAD SEGMENT

Source: Yearbook of World Electronics Data 2008, provided by Reed Electronics Research; calculations by ACI.


Figure 3.14 shows the emerging competition in the electronics sector from China. China dominates electronic data processing (EDP) products and accounted for well over 40% of world production in 2008. The average annual growth rate of Chinese production in this segment over the period 1992 to 2008 was about 30% per annum. In this product segment, China’s gains have come primarily at the expense of the United States and Japan, not so much at the expense of Singapore.

Overall, the electronics/IT case study is an example of how Singapore has been able to deal with the dramatic changes in global markets and value chains. Singapore has grown in those product categories that have seen the highest demand globally. And it has sold its output increasingly to other Asian countries, where they have been integrated into final products for the domestic as well as for the US and European market.

FIGURE 3.13: ELECTRONICS DEMAND VERSUS PRODUCTION


FIGURE 3.14: PRODUCTION OF ELECTRONICS COMPONENTS



The global economy is suffering its worst economic crisis since the Great Depression of the 1930s. The immediate consequences of this crisis have been substantial enough - major financial institutions have collapsed, developed economies are enduring the largest job losses in a recession for many decades and efforts are underway to re-shape global financial regulation. More than that, some trends that were emerging before the crisis are now likely to intensify. These include the relative decline of the United States economy and associated with it the likely erosion of the dominant role played by the United States Dollar. Changes of such a momentous nature are unlikely to occur without having a material impact on Singapore’s economy and its competitiveness.

The Changed Structure of the Post-Crisis Global Economy The global economy is likely to see substantial changes once the worst of the crisis is over. The changes we outline below amount to a transformation of the economic environment that Singapore will operate in.

First, Singapore will have to deal with a more volatile and unpredictable global economy, one that is probably subject to various stresses and shocks in the aftermath of the crisis. Such is the scale of the policy response that it is reasonably likely that the global economy will emerge from recession by early 2010 at the latest. However, this has probably been achieved at a high cost - new vulnerabilities have been created in the global economy by the extraordinarily large monetary, fiscal, regulatory and other changes that policy makers have put in place. At some point, the costs of these policies will become more of an operating concern for businesses and policy makers. These costs could be higher inflation in some countries because of the extraordinary amount of monetary easing. Or it could be the fallout from not bringing massive fiscal deficits under control in a timely fashion. Moreover, the contrasting approaches likely to be taken by major economies in reversing the monetary and fiscal stimuli could itself create new stresses in the longer term, particularly in relation to currency risks. For instance, if the European Central Bank tightens monetary policy ahead of the Federal Reserve Bank in the United States, there are likely to be substantially negative implications for the US Dollar.

Second, there are likely to be important changes in currency values after the crisis. While it is not clear if there will be a substantial depreciation of the US Dollar, it seems reasonable to conclude that Asian currencies on average will tend to appreciate against the currencies of the major economies after the crisis ends, particularly the US Dollar and perhaps even the Euro. Given the political mood in the United States and Europe regarding what they see as Asia’s responsibility in bearing part of the burden of adjustments in global re-balancing plus the rising protectionist pressures in the developed countries, self-interest and prudence suggest that Asian policy makers will choose to allow a gradual but material appreciation of their currencies.

THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING?BY MANU BHASKARANCEO, CENTENNIAL ASIA ADVISORS PTE LTD AND ADJUNCT SENIOR FELLOW, INSTITUTE OF POLICY STUDIES.

BOX 1:

Third, Singapore will also have to manage the political fallout from this crisis on policy formulation in developed economies. Increased regulation, particularly in financial sectors; more rigorous taxation; and other forms of intrusive state involvement in the economy are likely in the United States and Europe. The distribution of growth between profits and wages will also probably become less skewed towards profits than it has been in the past two decades, a result of the growing backlash against widening income gaps. Specifically, countries such as Singapore will have to watch the following closely:

President Obama in the United States and Prime Minister Gordon Brown in the United Kingdom have pledged at the recent London G20 summit to crack down on tax havens. To this end, the OECD had put Singapore on a “grey list” of countries that had agreed to improve transparency standards but had not yet signed the necessary international accords. This has implications for Singapore, which due to its low tax and highly developed financial system, could in future be labelled a tax haven. Despite Foreign Minister George Yeo’s statements about Singapore being a “low tax” country and not a tax haven, pressure might still be put on Singapore if the political backlashes intensify. In that case, Singapore might lose some measure of attractiveness, and therefore competitiveness.

Greater financial regulation, together with the de-leveraging process in global financial institutions, capital destruction and the rising risk-aversion we are witnessing, suggests that financial sectors and cross-border capital flows will shrink, and financial innovation diminish, for a probably significant period of time. There may even be a retreat from globalization toward some “localization of finance” just as there may be some localization of tourism and manufacturing supply-chains because of energy costs. None of this is good for Singapore’s current economic model.

Fourth, it is almost certain that global economic growth will be slower. The crisis will create more headwinds to growth or accelerate emerging trends. The developed economies will almost certainly see slower growth as their banks and companies restructure in response to the crisis and their household sectors raise their savings rates to rebuild damaged pension assets (see the diagram below which shows the International Monetary Fund’s estimates of declining potential growth in the major economies and emerging countries). Accommodating climate change will also become a more important aspect of the business environment and add to business costs.


GROWTH OF POTENTIAL GDP

Source: Collated by Centennial Group from IMF World Economic Outlook, April 2009.

Fifth, the post-crisis period will probably see some consolidation of production networks. Singapore and other Asian economies had been able to exploit the international fragmentation of production involving the splitting of production process into discrete activities which were then allocated across countries in recent years (Athukorala, 2006). Production networks have played a central role in the massive expansion of Asia’s intra-industry trade, especially in machinery parts and components. While the share of parts and components in world manufactures trade grew by 3 percentage points between 1992 and 2003 (from 18% to 21%), it grew by 8 percentage points in Asia (from 19% to 27%).

There are some indications that this could change - fragmentation of production expanded when the benefits of fragmentation in the form of lower labour and other costs offset the logistics and other costs involved in such fragmentation, especially transport costs. With a post-crisis energy cost likely to be substantially higher than pre-crisis, with currencies of source countries set to depreciate against Asian currencies as a result of the crisis; and with increasing political backlashes at home, the multinational companies that drove production fragmentation are likely to be more circumspect about pushing this process too hard.

Sixth, countries and companies will restructure their business models and operations in response to these fundamental changes. The crisis has concentrated minds and allowed reformist policy makers in emerging market economies to press their case for liberalisation more successfully. Governments in competitor countries, knowing that external demand will not be as bountiful a source of growth, will react in ways which will impact us. For example, they are spending more on infrastructure, which over time could narrow the advantage we have over them in this respect. China and India are certainly upgrading their capacity to compete but so too are other emerging market economies, including Singapore’s closest neighbours:

THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING?

China’s policy responses during the crisis will tend to reinforce and accelerate emerging trends in its economy that were changing its competitiveness structure even before the crisis began. Rising land, labour and other costs coupled with a gradual appreciation of the Renminbi had caused labour-intensive export activities such as toys and garments to suffer a loss of competitiveness. This forced Chinese producers to restructure and move up the value chain into higher-value activities, including some that competed more directly with economies at Singapore’s level of development. Well before the crisis, for instance, China’s imports of higher-value components from the rest of Asia were already slowing as Chinese companies re-tooled themselves to be competent in producing these items.

China’s policy response to the crisis involves a massive push to build up its already impressive infrastructure. The result will be vastly improved connectivity between coastal and hinterland regions in China, enhancing the lower-cost hinterland regions’ ability to compete in global markets. China’s stimulus package also includes a step up in the spending on upgrading technology. Afraid that its reserves are over-exposed to the US dollar, it is also encouraging its companies to use the opportunities presented by the crisis to acquire technology through acquisitions of innovative companies in the United States and elsewhere. This will help enhance the technological competence of Chinese companies over time.


Source: Collated by Centennial Group from the World Bank and the National Development Reform Commission of China

THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING?

India, too, is likely to emerge from the crisis in a relatively stronger position than pre-crisis. Its economy has not been hurt much by the crisis - its financial institutions remain strong, its companies continue to restructure aggressively especially in manufacturing and the re-elected government of Prime Minister Manmohan Singh is in a much stronger position to, at least, modestly accelerate the pace of competitiveness-enhancing reforms.

Other large developing economies are also well positioned. Indonesia has weathered the crisis well and with President Yudhoyuno’s re-election along with top economic technocrat Mr Boediono as Vice President-elect, Indonesia is also poised to see an acceleration of reforms that will strengthen its economy. Like India and Indonesia, Brazil has suffered relatively little damage from the crisis. If anything, its central bank and policy makers come out of the crisis with their credibility strengthened as a result of their skilful management of the crisis fallout.

Malaysia is also stepping up the pace of economic reforms, with several major liberalisation initiatives launched this year. Many of these address shortcomings in its investment environment so as to attract foreign investment while also striving to enhance the competitiveness of its financial sector.

These initiatives in competing economies will help to narrow the gap between these economies and Singapore in a range of areas - attractiveness of policy regime to foreign investors, infrastructure quality and macro-economic stability.

Implications for SingaporeEssentially, the changes discussed above mean that Singapore is likely to face a changed landscape of competitive advantage in the post-crisis period.

First, some the driving forces of competitiveness will be different:

Singapore has geared its export industry to service demand in the United States, Japan and Europe. The multinational companies it attracted built production facilities here that ultimately serviced demand in these developed economies. Direct non-oil exports to these economies accounted for 34.8% of the total in 2008 while the indirect exports (through components exported to other countries which eventually ended up as finished goods in the developed economies) adding another approximately 23%).

THE CHINESE GOVERNMENT’S 10-POINT PLAN FOR INFRASTRUCTURE

With considerably slower growth post-crisis in Singapore’s most important trading partners, Singapore may have to look elsewhere. However, its manufacturing industry may not be structured to service growth in China, India and other large emerging market economies. An analysis conducted by Citibank found that “China’s imports from Singapore for its own domestic demand comprise just 37% of Singapore’s domestic exports to China (including oil), and just 4.2% of Singapore’s total domestic exports. Effectively, within Asia, Singapore ranks as the third least exposed to China’s domestic demand” (Sim and Kit, 2009).

The likely consolidation of production networks reverses a very important factor in Singapore’s competitiveness. The Singapore economic model relied heavily - and perhaps disproportionately - on attracting to Singapore MNCs keen to outsource production as part of this process of fragmenting production networks. A fundamental change in this process will dilute an important driver of its competitiveness - its ability to attract MNCs to locate production in Singapore.

Second, the structure of competitiveness is changing. Putting together the points made above:

China is becoming less competitive in lower-value goods while raising its competence in higher range goods, including some that will compete more directly with Singapore-made products. Indian manufacturing is likely to expand the spectrum of products it is globally competitive in as a result of the restructuring going on in Indian manufacturing.

Currency depreciation and crisis-induced def lationary cost adjustments in the United States, United Kingdom and other parts of Europe are likely to increase the number of manufacturing activities that these developed economies are competitive in. The rising cost of transport will add impetus to the cost advantages of domestically produced goods versus imports in these countries.

Clearly, the competitiveness landscape will change substantially and this will require countries such as Singapore to re-think its policy approaches towards the broader issue of economic growth and specifically towards competitiveness. The winners from this new global landscape will be those who are quick to devise new economic models - new approaches that build resilience to the inevitable stresses of the new global economy and which accommodate the structural changes of competitiveness identified above.


FIGURE 3.16: RELATIVE FDI INWARD INDICATORS

Source: World Investment Report 2009: Transnational Corporations, Agric ultural Production and Development, published by the United Nations Conference on Trade and Development.

Investment

Most East Asian countries have relied on investment-intensive models (domestic and foreign) of economic growth. Investment intensity continues to be high in Singapore with gross fixed investment accounting for 28.5% of 2008 GDP. Among the comparator countries used earlier, only South Korea had a marginally higher rate. The rest of the comparator countries hover around a fifth of GDP, with the United States and the U.K. having the lowest investment intensity. China and India lead the BRIC countries, while Russia and Brazil are comparable to Singapore’s European and Scandinavian counterparts.

For Singapore, foreign investment accounts for about 80% of gross fixed capital formation, one of the highest rates in the world with only Hong Kong relying even more on foreign capital to finance investment. In 2007, Singapore’s share of global inward flows was 1.32%; the peak was in 1996 at about 2.8%, just before the Asian financial crisis. While Singapore’s share of global FDI flows has declined, FDI plays a growing role in the Singaporean economy. As a proportion of GDP, FDI inflows doubled from 82% (of GDP) in 1991 to 171% in 2007.

Traditionally manufacturing and financial services attracted most of the FDI inflows. Since 2004, finance has outpaced manufacturing as a target for FDI. Western foreign firms continue to dominate investments in the manufacturing sector with the United States continuing to be the leading investor.

FIGURE 3.15: INVESTMENT INTENSITY

Source: EIU CountryData database (provided by Bureau Van Djik Electronic Publishing), retrieved on October 12, 2009.


FIGURE 3.17: PRESENCE OF FOREIGN INVESTMENT


In 2007, local investment accounted for 28% of gross fixed investment in the manufacturing sector; the United States accounted for 29%; Japan for 16% and European countries for another 18%. These shares have remained remarkably stable since 1997.

Table 3.01 shows a key reason for why foreign companies continue to come to Singapore: In the majority of sectors, they are generating attractive returns from their investments.

Over the last few years, Singapore has also become an important investor in its own right, with outward FDI f lows reaching USGD8.9 billion (4.91% of GDP) in 2008, and outward FDI stock amounting to 103.9% of GDP. M&A activity is the dominant form of foreign direct investment, accounting for well over 80% of cross border flows of capital.

Table 3.02 shows the value of acquisitions firms from non-OECD countries. Singapore tops both lists and in dollar terms its acquisitions were evenly split between OECD and non-OECD targets.

TABLE 3.01: PROFITABILITY OF FDI IN SELECTED INDUSTRIES

Source: Singapore Department of Statistics (2007-2009); calculations by ACI.


Source: OECD (2007).

Innovation

Innovation, the generation of new knowledge and of profitable new products, services, or ways of providing them to customers, is a key characteristic of advanced economies. As it is increasingly insufficient to support rising prosperity levels by exploiting existing competitive advantages, the creation of new competitive advantages gain in importance.

Innovation is notoriously hard to measure. The simple dimensions of innovation are those related to direct outcomes of scientific research, such as patents or publications. But many commercial

TABLE 3.02: TOP TEN NON-OECD M&A ACQUIRERS

FIGURE 3.18: INTERNATIONAL COMPARISON OF PATENTING ACTIVITY

Source: Various databases provided by the United States Patents & Trademarks Office; calculations by ACI.

innovations, such as Wal-Mart’s big-format retail concept that was a huge contributor to American prosperity growth in the last decade, are much more complex. Most researchers focus on science-related indicators because data is readily available and tends to be significantly correlated to other dimensions of innovation. Patenting activity in the United States is a particularly attractive measure because the U.S. is the largest market for intellectual property, and thus attracts patent activity covering the creation of most meaningful scientific knowledge.


FIGURE 3.19: COMPARATIVE ORGANIZATIONAL PATENTS

Source: Various databases provided by the United States Patents & Trademarks Office.

Singapore ranks high on measures of scientific outputs. Its patenting rate per capita in the U.S. has grown quickly over the last decade\, and is now approaching the level of strong innovators like Canada, Germany, and Sweden. However, countries like Finland, Israel, Switzerland in Europe and Japan, South Korea and Taiwan in Asia, continue to be much more active patentees, especially on a per-capita basis In absolute terms, Singapore’s patenting in the U.S. over the past five years is comparable to that of Denmark and not far behind India. However, while countries like Australia, China, India, South Korea, and Taiwan have seen their annual patent counts in the U.S. steadily go up since 2002, Singapore’s patenting has remained broadly unchanged.

A fair comparison with the U.S. is difficult because of the home bias for U.S. patenting. Patentees from Massachusetts, one of the strongest patenting states in the U.S., registered about seven times as many patents with the United States Patent and Trademarks Office (USPTO) over the last five years than Singaporean patentees. Massachusetts also has a larger pool of would-be innovators to draw from – its 2008 population of 6.5 million is about 41% higher than Singapore.

Among Singaporean patentees in the U.S., electronics companies and government-related research institutions play the most important role. The share of the most active patentees in total Singaporean patenting in the U.S. has stayed roughly stable over time at about 70% of Singapore-owned patents.

FIGURE 3.20: SINGAPORE-OWNED PATENTS IN THE USPTO (2004-2008)

Source: Various databases provided by the United States Patents & Trademarks Office.


Singapore has the strongest focus on electrical engineering in its patenting of all major innovation countries. Public research institutions have filed more patents in the U.S. than Harvard University (excluding the significant patenting of Harvard-related teaching hospitals) and reached about a third of MIT’s patenting level.

In 2007, the United States was the most popular location for Singapore residents to file patents. A little more than a third of all applications by Singapore residents were filed in the United States. Only a fifth of the patents filed by Singapore residents in 2007 were filed in Singapore, which is about 7% of total applications

FIGURE 3.21: PATENT APPLICATIONS BY FIELD OF TECHNOLOGY (2002-2006)

Source: Statistics Database (September 2009), provided by the World Intellectual Property Organization; calculations by ACI.

FIGURE 3.22: SINGAPORE PATENT APPLICATIONS IN 2007

Source: Statistics Database (July 2008), provided by the World Intellectual Property Organization; calculations by ACI.

received. Singapore amended its intellectual property laws about a decade ago, and trademarks, industrial designs and patents can since be registered here at the Intellectual Property Office.

Figure 3.22 shows data on patent applications. U.S. institutions dominate patent applications in Singapore and together, Japanese and U. S. institutions account for over half of all patent applications received in Singapore in 2007.

There is limited data on academic publications, but available evidence is in line with patent data impressions. Singapore is strong, and has a particular focus on engineering.


EntrepreneurshipEntrepreneurship, the mobilisation of new combinations of assets within new or existing companies, is another characteristic of particular importance to advanced, knowledge-driven economies. As is the case with innovation, entrepreneurship is complex to measure. New business formation is one such widely-used indicator. However, this measure excludes the entrepreneurship within companies and includes the creation of many small companies that have no ambition to grow and thus create little if any of the dynamism that is usually associated with entrepreneurship.

The annual Global Entrepreneurship Monitor (GEM) is perhaps the best available source for comparative data on both the country context for entrepreneurship and attitudes and aspirations of entrepreneurs. However, Singapore has not participated in this survey since 2006. As a result, this section relies on business registration data as a proxy measure. Comparative business registration data is available from the World Bank.4 This measures

FIGURE 3.23: PAPERS IN THE ENGINEERING CITATION INDEX (2007)

Source: National Science Council of Taiwan, 2008.

just one aspect of entrepreneurship - the number of new businesses registered every year - does not distinguish between truly new ventures and the registration of merely new legal entities, and is mired by differences in legal systems.

The World Bank database provides two measures. The first is a measure of density, which is the number of registered businesses per-capita (calculated using economically active population rather than total population) and the entry rate (which is the number of new business registrations divided by the ‘stock’ of registered businesses in the previous year). Developed countries have both high density and entry rates.

Figure 3.24 shows data averages for Singapore between 2000 and 2007. It illustrates that Singapore has the highest entry rate in the group of comparator countries, but has a relatively low business density.

FIGURE 3.24: MEASURES OF ENTREPRENEURSHIP (AVERAGE OF AVAILABLE 2000-2007 DATA)

Source: 2008 World Bank Group Entrepreneurship Survey (Leora Klapper) and World Development Indicators Online (provided by the World Bank); calculations by ACI.

ENTREPRENEURSHIP


While Hong Kong has the highest business density among Asian comparators, Singapore has traditionally been dominated by a small number of large domestic and multinational companies. Over the last decade, however, there is evidence that a large number of smaller companies, presumably predominantly private domestic enterprises, have been created. These types of companies are particularly prevalent in services focused on the domestic market. The data is consistent with Singapore becoming a more entrepreneurial place, even when the vast majority of these new companies are likely to remain small.

Assessment

Singapore has retained its strong position as a global trading hub and an attractive investment destination, the traditional hallmarks of the country’s competitive position. Trading intensity remains high, FDI flows - both inward and outward - are solid, and the returns foreign investors can achieve in Singapore are attractive. While Singapore’s position in these areas is not weakening, it is clearly undergoing a transformation. Asia is becoming a more important destination of Singaporean exports, partly as an emerging end market and partly as a step on the way to the U.S. market. The growing role of Asia is also visible in the nature of Singapore’s exports. Advanced services and capital-intensive production for Asian final demand is becoming more important. In most traditional export sectors targeting the U.S. and Western Europe, such as electronics, Singapore’s role is increasingly focused narrowly on specific activities within overall Asian value chains that serve these markets.

Endnotes1. See http://go.worldbank.org/C8Q8EGTTH0.

Chapter ReferencesKlapper, Leona, Love, Inessa, Bruhn, Miriam, and David McKenzie, (2008) “2008 World Bank Group Entrepreneurship Survey and Database”,

http://go.worldbank.org/C8Q8EGTTH0.National Science Council of Taiwan, (2008) “Indicators of Science and Technology: Taiwan 2008”, Taipei, China.Organization for Economic Cooperation and Development, (2007) “International Investment Perspectives, 2007 Edition”, pg. 32, Paris.Singapore Department of Statistics, (2007) “Foreign Equity Investment in Singapore 2005”, Ministry of Trade and Industry, Republic of Singapore.Singapore Department of Statistics, (2008) “Foreign Equity Investment in Singapore 2006”, Ministry of Trade and Industry, Republic of

Singapore.Singapore Department of Statistics, (2009) “Foreign Equity Investment in Singapore 2007”, Ministry of Trade and Industry, Republic of

Singapore.

Singapore’s progress in shifting its position towards becoming a knowledge-driven economy is more questionable. The indicators of scientific outcomes are quite impressive: Singapore has over the last 10-15 years been able to establish itself as an important academic hub in Asia with global relevance. And patenting and publication/citation intensity clearly point in this direction. The evidence on Singapore’s ability to translate its growing scientific potential into economic outcomes, however, is less convincing. Entrepreneurship remains relatively low and seems more concentrated on activities serving the local market than on existing or emerging export sectors. And the productivity data presented in the previous chapter sheds doubts on the effectiveness with which new ideas and technologies have been introduced into the overall economy.



Competitiveness Fundamentals

Chapter 4




Competitiveness captures the medium-term economic fundamentals that ultimately determine the level of prosperity an economy and its citizens can enjoy. At its core, prosperity is driven by the level of productivity that companies achieve in a location and the ability of an economy to mobilize its resources, especially its human capital, for productive economic activity. Data on prosperity and of intermediate economic outcomes provide important information on the ultimate success of an economy and indicate patterns of strengths and weaknesses; however, it does not provide information on the ultimate root causes of these outcomes. Only an understanding of the competitiveness fundamentals that ultimately explain performance differences across locations can provide this information.

The productivity of an economy depends on many factors. The concept of competitiveness applied here, building on the work by Professor Michael E. Porter since 1990, provides a framework to deal with this complexity. The data collected for the Global Competitiveness Report (GCR), an annual assessment of competitiveness across more than 120 countries published by the World Economic Forum, is an important source of information. It is based on statistical data collected from international organizations and on a survey of more than 10,000 business executives around the world. The data was collected between February and April 2009, i.e. at a period where the extent of the global crisis had become very visible.

The ranking methodology presented in this report uses a new approach developed by a team under the leadership of Professor Michael Porter. Thus, the rankings published here are not identical to those published by the World Economic Forum in their global competitiveness report. The 2008/09 Global Competitiveness Report has a chapter with more detail on the new index methodology applied for calculating the rankings reported here (Porter et al., 2008). In addition, our analysis will also make use of other data sources, which will be credited in more depth where appropriate.

The remainder of this chapter is organized in three parts. First, we provide some more detail on the conceptual approach, i.e. the choice of indicators and there relation to each other. Second, we assess Singapore’s macroeconomic competitiveness. Data is available on the institutional capacity of the country, and we briefly discuss the quality of macroeconomic policy. Third, we look at indicators of the country’s microeconomic competitiveness. The dimensions covered include different aspects of business environment quality as well as company sophistication.

Assessing Competitiveness

Many elements have an impact on competitiveness, which is defined here as “the set of factors that influence the level of prosperity a location can reach.” For policy-relevant analysis, these elements have to be organized in a way that creates categories, i.e. groups

COMPETITIVENESS FUNDAMENTALS

of elements that policy makers can work with. These categories should also be structured in a way that highlights critical action priorities in a natural way.

The approach for assessing competitiveness used here organizes policy categories in three broad groups:

• Microeconomic Competitiveness. These factors that have a direct influence on the productivity and innovativeness of firms. Their impact on firms is often systemic, with the value of one factor (e.g.: a skilled workforce) that depends on the value of another (e.g.: quality of infrastructure). Importantly for public policy, no individual institution controls microeconomic competitiveness; it is the outcome of myriad decisions taken independently by many different players in companies, government agencies, universities, and many other institutions. Effective competitiveness upgrading depends on indentifying the interrelated set of issues that hold back firm performance, and then mobilizing the right coalition of public and private players to address them.

• Macroeconomic Competitiveness. These factors set the context in which companies operate, but do not directly influence their productivity and innovativeness. Government, particularly central government, controls most of these factors. Social infrastructure and political institutions are hard to change in the short term; in the academic literature, they are often identified as the most critical determinant of prosperity over longer periods of time. Macroeconomic policies can be changed relatively quickly, often with a strong short-term impact on the economy. But without corresponding change in other competitiveness areas, their effects tend to be unsustainable; the academic literature on growth finds few independent long-term effects of macroeconomic policy on prosperity levels once the quality of institutions is controlled for.

• Endowments. These are factors that may have a direct impact on prosperity, but are not easily amendable to policy. Their value for prosperity might, however, depend on government policy or competitiveness in more general terms. Natural resources are an obvious example. Like a gift, they add to wealth but not to productivity. The wealth they provide depends not only on what is in the ground, but also on the way a country is able to exploit and leverage these assets.

Endowments

Our competitiveness assessment focuses on microeconomic and macroeconomic aspects, because these are dimensions which policymakers can act upon. But in order to understand Singapore’s overall position more fully - and especially the way its competitiveness translates into prosperity and the specific competitive position it has developed - it is useful to summarize Singapore’s endowments as well.

Singapore is located at the southern tip of the Malaysian peninsula, about 97 kilometres north of the equator. Its geographical location makes it susceptible to many infectious diseases that thrive in hot, humid conditions. These include mosquito-borne diseases such as malaria, dengue fever, and yellow fever, as well as infectious diseases like cholera and tuberculosis. But its location at a major global shipping route also provides significant opportunities that turned out to have strong impact on the specialization of the Singaporean economy.


Singapore is a small island with an area of about 700 square kilometres, with a present population of about five million. Of this, 74.9% are citizens and permanent residents (who are collectively called “residents” by the Department of Statistics), with the rest of the population being foreigners with temporary work permits. Ethnic Chinese account for 74.2% of Singapore residents, while Malays and Indians account for 13.4% and 9.2%, respectively. Due to a lower fertility rate, Chinese residents as a proportion of total residents have steadily declined over the years.

Singapore’s heterogeneous ethnic composition has the potential to lead to political strife, a fate that it has managed to avert. However, this ethnic diversity can provide an interesting magnet, should it become the foundation for an open society attractive for foreign talent.

The small size of the country reduces the attractiveness of the domestic market for foreign investors. But size also makes it easier to reach consensus on policies, especially since there is no conflict between rural and metropolitan areas. Metropolitan areas like Singapore have an advantage, in that public services can usually be offered more efficiently.

Singapore has no meaningful natural resources or inherited sources of prosperity to fall back upon. However, it also free from the negative consequences of natural resource wealth, be it Dutch Disease-dynamics or the corrosive impact of these endowments on the quality of public institutions. From the beginning, Singapore was forced to focus on creating prosperity, with no inherited wealth to distract the policy process.

Overall, Singapore’s limited endowments were a short-term challenge but a long-term opportunity.

TABLE 4.01: ETHNIC DEMOGRAPHICS IN SINGAPORE

Source: Population Trends 2009, published by the Singapore Department of Statistics.

Macroeconomic Competitiveness

Macroeconomic factors include two quite different categories: The Social and Political Infrastructure (SIPI) provides the basic condition that enables citizens and companies to engage in economic activity. Basic human development, like basic levels of health care and education, are necessary so that individuals can go beyond pure subsistence activities. Rule of law provides the necessary stability in the incentive structure, and sound political institutions ensure that the laws put into place remain legitimate.

Macroeconomic Policy keeps the economy in balance at an aggregate level. Fiscal policy largely has to ensure that the balance of public revenues and spending remain within what economist call the inter-temporal budget constraint, i.e. government does not build up unsustainable levels of debt. Monetary policy has to ensure that inflation remains in check. Macroeconomic management also needs to avoid the emergence of overall imbalances in the economy.

Social Infrastructure and Political Institutions Singapore’s position on social infrastructure and political institutions is strong on average, but there are differences across sub-areas. Singapore ranks highly on rule of law (5th) and on the quality of political institutions (6th).

On political institutions, the rank would have been higher were it not for decentralization of economic policy-making (106th) - a concept that does not really apply in a city-state like Singapore. Other areas where ranks are low, particularly press freedom (106th) and the measure of voice and accountability (93rd), reflect the specific nature of Singapore’s political system.


Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness.

TABLE 4.02: SOCIAL INFRASTRUCTURE AND POLITICAL INSTITUTIONS INDICATORS

FIGURE 4.01: EVOLUTION OF SINGAPORE’S MACROECONOMIC COMPETITIVENESS



In many countries, such low rankings would be associated with a government leadership that is not accountable to the people, and would pursue their narrow private interests. However, there is no evidence that the dynamics have played out in this way in Singapore.

Singapore is ranked 25th overall on human development. While this overall rank is solid, Singapore gets dragged down by low scores on healthcare expenditures as a proportion of GDP (3.3% ranked at 122nd); secondary school enrolment (63% ranked at 101st); and the incidence of tuberculosis (48th).

These low ranks warrant further investigation, but are not necessarily signs of weakness. Singapore has, for example, worked hard to keep healthcare costs from escalating, and the government encourages people to maintain healthy lifestyles. Thus, the focus is on prevention rather than on treatment. Indeed, Singapore’s weakness on incidence of tuberculosis could possibly be a result of its reliance on workers from other Asian countries, such as India and China, with high incidence rates for tuberculosis.

Macroeconomic Policy Singapore reached a mediocre rank of 58 on macroeconomic policy, but this overstates the actual differences to the best ranked countries on these measures. Singapore always had sound macroeconomic management, and typically runs budget surpluses as a result of which it has accumulated some of the highest reserves in the world. Singapore’s poor ranking on national debt - consistent with the data reported by the IMF (where Singapore provides the data) - is a reflection of how the Central Provident Fund (CPF) is treated. CPF contributions are captured as public debt, while the corresponding assets (e.g. the stakes in GLCs) are not taken into account.

Due to the present economic crisis, the government announced a SGD20.5 billion resilience package which will result in a deficit of SGD8.7 billion (the biggest since 1965) or 3.5 per cent of GDP; the government would incur the biggest deficit since Singapore’s independence in 1965. SGD4.9 billion of this deficit is funded by an unprecedented draw from accumulated reserves, while the rest draws on previous budget surpluses. Unlike other countries, Singapore is not relying on issuing debt instruments to fund the stimulus.

FIGURE 4.02: GOVERNMENT EFFECTIVENESS SCORES OF TOP-RATED COUNTRIES

TABLE 4.03: MACROECONOMIC POLICY INDICATORS

Source: Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi (2009). “Governance Matters VIII: Governance Indicators for 1996-2008”. World Bank Policy Research June 2009



On the monetary policy side, inflation (ranked 52nd) has recently dropped dramatically, as in many other countries. There is no strong evidence that differences in inflation at the modest levels usually seen in Singapore have a significant impact on long-term prosperity. Given that the differences in inflation rates between Singapore and the countries ranked highest globally on this measure are small, the significant rank difference is no major reason for concern.

The interest rate spread, the difference between lending and deposit rates, has always been high (ranked 60th) in Singapore. This is likely caused by Singapore’s size, which generally implies higher levels of industry concentration. Despite the large spread, real interest rates are typically very low in Singapore compared to other countries – a result of the exchange rate policy objectives that Singapore pursues.

Microeconomic Competitiveness

Microeconomic factors include three key dimensions: The quality of the general business environment shapes the productivity of the assets that companies can access as well as the opportunities for their productive use. Michael Porter introduced in 1990 the Diamond framework to capture the four dimensions of the business environment, i.e. factor input conditions, the context for the strategy and rivalry, demand conditions, and the presence of related and supporting industries.

FIGURE 4.03: EVOLUTION OF SINGAPORE’S MICROECONOMIC COMPETITIVENESS


The strength of local clusters determines the level of positive externalities that companies can nurture at a particular location. The cluster perspective adds a geographic dimension to the analysis: productivity is not just a function of the presence of related and supporting industries in a country, but also of their specific co-location in regional clusters. And clusters are more effective if there is joint action, not just co-location, and when government actively engages with clusters in its economic policies. The strength of clusters is discussed in the section on related and supporting industries.

The sophistication of company strategies and operations directly sets the economic value that they are able to generate from factor inputs for their customers. Changes in macroeconomic competitiveness or other dimensions of microeconomic competitiveness have to result in changes on the company level, in order to have a sustained and thorough effect on prosperity. Prosperity is ultimately created only at the company level. Since companies are not uniform, it is also important to understand performance differences across the different types of companies (by size, by ownership) in the economy.’

Business Environment QualityOverall, Singapore ranks first in the world on business environment quality, a position that it gained for the first time in 2007 and has retained since then. It also ranks first on three of four dimensions of business environment quality. Only on the presence of related and supporting industries does Singapore continue to rank lower, which is quite typical for an economy of limited total size. These patterns have remained similar over time, although Singapore registered the strongest gains since 2001 in areas where it had previously been weaker, i.e. especially related and supporting industries.


Factor ConditionsFactor conditions include a wide range of infrastructure elements, ranging from typical physical infrastructure to public services and knowledge. Singapore does not rank first in any of these elements, but its balanced position puts it in the global pole position overall.

Logistical InfrastructureLogistical infrastructure, mainly physical transportation assets, is a traditional strength of the Singaporean economy. An efficient port infrastructure was an important element that enabled Singapore to take full advantage of its geographical location at a major global shipping line. Over time, airport connectivity has been added, as well as an efficient city road system that enables access to warehouses and production sites island-wide. Singapore has been able to defend its leading position over the years, expanding the capacity of the infrastructure in line with the rising demands of a growing economy and burgeoning world trade.

TABLE 4.04: THE PORTER DIAMOND

Source: Professor Michael E. Porter.

The World Bank’s 2007 Logistics Performance Index (LPI), provides a complementary view on Singapore’s position, including additional elements of logistics-related administrative efficiency and presence of related and supporting industries in this field.

The LPI ranked Singapore first among all countries covered. Singapore compares favourably on most dimensions; only in domestic logistics costs does it register a lower position. To a large degree, this is the consequence of being a prosperous economy with higher input costs.

Singapore’s strong position on logistical infrastructure is also reflected in the economic performance of its port and airport. Both have achieved significant global market share, and Changi Airport continues to be ranked as one of the best airports globally in independent international assessments, especially for passengers.

TABLE 4.04: FACTOR (INPUT) CONDITIONS AND COMPONENTS



TABLE 4.05: LOGISTICAL INFRASTRUCTURE INDICATORS

TABLE 4.06: RANKS IN THE 2007 LOGISTICS PERFORMANCE INDEX

TABLE 4.07: SHIPPING STATISTICS


Source: Logistics Performance Index 2007, published by the International Trade and Transport Department of the World Bank, in cooperation with the Turku School of Economics in Finland.

Source: Shipping Statistics, Air Cargo World.

TABLE 4.08: ADMINISTRATIVE INFRASTRUCTURE INDICATORS



Administrative InfrastructureAdministrative infrastructure, essentially the efficiency of government services and procedures, is another area in which Singapore traditionally excels. Singapore is strong across all the individual indicators used to measure administrative infrastructure. The indicator in which it ranks the lowest, the number of procedures to register a new business, is also the area where it has made the most progress of the last few years.

The World Bank’s Doing Business project provides an additional perspective on Singapore’s administrative infrastructure. Some (but not all) of its indicators are also used in the GCI analysis. The

WB focuses exclusively on rules and regulations on the books, not on the perceptions of business people affected by them.

Doing Business ranks Singapore ranking first out of one hundred and eighty one countries. It has maintained its first place since 2006. While other countries tend to be strong in some areas, while lagging far behind in others, Singapore has been to achieve high markers for its administrative procedures across the board. Singapore’s relative weaknesses lie in two areas: Ease of registering property (16) and Ease of enforcing contracts (14).

FIGURE 4.05: EASE OF DOING BUSINESS RANKS, 2008-2009

FIGURE 4.06: COMPARISON OF DOING BUSINESS COMPONENTS

Source: Doing Business 2009, jointly published by the World Bank and IFC.

Source: Doing Business 2009, jointly published by World Bank and the IFC.


Innovation InfrastructureInnovation Infrastructure, an area covering education, science, and science commercialization, is another area of Singaporean strengths. It is also an area where steady progress has been made over the past few years.

Singapore is particularly strong in educational quality. A majority of Singaporeans has at least some secondary education. Any skills shortages are made up by having open immigration policies particularly for educated individuals. Table 4.10 shows that on average permanent residents and new immigrants have a better educational profile than the domestic population.

Table 4.11 shows that Singapore is spending less of its GDP than other advanced economies on education. This could be the result of higher efficiency. But it is also consistent with a policy that uses migrations as a more cost-effective means to increase the skill stock in the labour force.

Despite Singapore’s lower spending on education, its outcomes in terms of education achievements are strong. Singapore tops the attainment indicators both in terms of math and science scores and in reading scores.

TABLE 4.09: INNOVATION INFRASTRUCTURE INDICATORS

TABLE 4.10: AVERAGE EDUCATION LEVELS

TABLE 4.11: PUBLIC EDUCATION EXPENDITURES


Source: Education at a Glance, 2008 (published by the Singapore Department of Statistics.

Source: Education Finance Indicators (retrieved October 1, 2009), provided by the UNESCO Institute for Statistics.


Opinions on how these strong showings on standardized tests should be interpreted vary. There is a concern that Singapore focuses too much on the type of repetitive memorization of knowledge that generates high performance in standardized tests, but is not necessarily the best driver of intellectual capabilities.

At the same time, standardized test have proven to provide better opportunities for children from lower social strata to progress than more comprehensive assessments of intellectual abilities, where social background is a significantly stronger determinant of performance.

Singapore has over the last decade or so made great strides in strengthening its science capabilities. This has been reflected in the inputs into R&D but over time also in patenting, publications, and more broadly the international positioning of Singaporean research and educational institutions.

Singapore’s R&D push is evident from Figure 4.08, which shows a consistent increase in both spending and personnel since 1994;

FIGURE 4.07: MATH AND SCIENCE TEST SCORES, 2007

Sources: Trends in International Mathematics and Science Study (TIMSS) 2007.

in absolute terms both have increased by about a factor of five over the period 1994 to 2006. In 2007, the total number of R&D personnel stood at 24,506 research scientists and engineers, and gross expenditure on R&D was SGD6.34 billion, with the private sector accounting for about two-thirds (4.23 billion) of the expenditure. R&D manpower as a per-thousand of the total labour force increased at an average annual rate of 8.5% from 1994 to 2006 and R&D expenditures per capita grew at 12.95% per annum over the same period.

These figures all compare favourably to the OECD average but lag behind Singapore’s leading peers, like Korea, Japan, and the Nordic countries.

Business enterprises led the way as their expenditures on R&D increased at an average annual rate of 15.63% between 1994 and 2006. The higher education sector drove the growth in manpower with both the number of R&D personnel and researchers increasing at about 14.3% per annum.


TABLE 4.12: COMPARATIVE READING SCORES

TABLE 4.13: GROWTH OF INNOVATION INPUTS

FIGURE 4.08: INNOVATION INPUT TRENDS

Sources: The TOEFL(®) Test - Test of English as a Foreign Language(TM) (retrieved October 1, 2009 from the IMD World Competitiveness Online 1995-2009 database; The Reading Literacy of U.S. Fourth-Grade Students in an International Context: Results from the 2001 and 2006 Progress in International Reading Literacy Study (PIRLS), published by Institute of Education Sciences, National Center for Education Statistics, U.S. Department of Education.

Sources: The Global Information Technology Report 2008-2009, jointly published by the World Economic Forum and INSEAD.

Sources: Science and Technology Indicators 2008/2, published by OECD; calculations performed by ACI.


FIGURE 4.09: COMPARISON OF PRIVATE R&D SPENDING, 2006

FIGURE 4.10: RELATIVE COMPARISON OF R&D RESEARCHERS, 2007

Sources: Science and Technology Indicators 2008/2 and 2007/1, published by the Organization for Economic Cooperation and Development.

Sources: Science and Technology Indicators 2008/2 and 2007/1, published by the OECD; Taiwan Science and Technology Indicators 2008, provided by the National Science Council of Taiwan; Singapore Yearbook of Manpower Statistics 2008, published by Singapore’s Ministry of Manpower.

At 35%, the government’s share in total R&D spending is higher than in most other OECD countries. About 55% of all R&D spending (private and public) is focused on the electronics sector and within that sector an overwhelming proportion of the expenditure is on semiconductors. In the data available so far, there is little evidence that private R&D spending has significantly gone into ‘new’ areas like biotechnology, where government has made major investments. As shown in Figure 4.09, countries such as Taiwan and South Korea also have a focus on electronics, whereas OECD countries such as Germany, Japan, the United Kingdom and the United States have a much more diverse research portfolio.

Figure 4.10 and Figure 4.11 show that Singapore ranks quite well on both R&D researchers and personnel, but the focus appears to be on the former as Singapore’s researcher population (10.22 per 1,000 employed workers) places it in the top four, ahead of every Asian country except Japan. This number is surprisingly high, compared to 2005 data, where Singapore had 7.41 full-time equivalent researchers per 1,000 employees, and a very low 0.38 full-time equivalent R&D personnel per 1,000 employees. Singapore also has comparatively more public institute researchers than any other country except the UK.


FIGURE 4.11: RELATIVE COMPARISON OF R&D PERSONNEL, 2007

Sources: Science and Technology Indicators 2008/2 and 2007/1, published by the OECD; Taiwan Science and Technology Indicators 2008, provided by the National Science Council of Taiwan; Singapore Yearbook of Manpower Statistics 2008, published by Singapore’s Ministry of Manpower.

Apart from direct spending on R&D, Singapore has also focused on building a stronger institutional base in the form of high-quality universities. The Academic Ranking of World Universities (AWRU) ranks universities by different measures of scientific achievements. Other rankings, like the Times Higher Education ranking and the Webometrics Ranking of World Universities, confirm this general perspective.

NUS and NTU are among the top fifty universities in Australasia, focusing mainly on engineering and technology:

• The National University of Singapore (NUS) is the highest ranked university in Asia outside of Japan and Australia.

It contains dozens of research centres and has affiliations with many national centres. The “NUS Enterprise” program promotes industry engagement and entrepreneurship; it includes an Industry Liaison Office specifically charged with protecting the university’s intellectual property and promoting collaboration between the university and industry.

• Nanyang Technological University (NTU) has six “clusters” of research centres in intelligent devices and systems, nano- and micro-fabrication, biomedical and pharmaceutical engineering, advanced computing and media, information and communications, and environmental and water technologies.

TABLE 4.14: ACADEMIC RANKING OF WORLD UNIVERSITIES, 2009

Sources: Academic Ranking of World Universities 2009, compiled by Shanghai Jiao Tong University.


Singapore has also taken many steps to provide an attractive environment for science-related investments. In terms of intellectual property rights, Singapore’s legal regime of protection is “TRIPS-plus,” and the country has recently emerged as one of only three Asian countries (along with Japan and Taiwan) on the list of the top twenty-five countries in the world with the lowest software piracy rates. Singapore has a very strong intellectual property regime in place with legislation relating to patents, copyright and industrial design. It also has a local registry of patents.

The Agency for Science, Technology and Research (A*STAR) is the national research body that oversees public sector R&D activities in Singapore. It not only manages R&D activities, but contains

education and commercialization arms as well. Because of A*Star, significantly more public research activity is in Singapore taking place outside universities than in the comparator countries.

An important ingredient for the effective translation of scientific research into commercial success is the ease and intensity of company-university interaction. Singapore has been able to get high scores in this area, reflecting widespread satisfaction among business leaders with their access to universities. However, Singaporean universities have hitherto been unable to generate significant income from royalties. While this is not the key indicator of commercialization success, it is one of the relevant channels.

INTERNATIONAL RANKINGS OF INNOVATIVE CAPACITY

Over the last few years, rankings that aimed to capture the innovative capacity of countries and regions proliferated. Most of these were a mix of outcome and input measures, which limits their use for giving policy advice. Singapore tends to do well on most of these rankings, especially those that focus more on general business environment conditions than on specific economic returns from innovation.

The World Bank’s Knowledge Economy Index measures the country’s ability to generate, adopt, and diffuse knowledge. The index is based on four pillars: use of information and communications technology; education and human resources, the innovation system, and the economic incentive and institutional regime. Singapore (ranked 20) and Hong Kong (ranked 26) are particularly weak in per-capita spending on education). Otherwise, all other components are very strong.

The Boston Consulting Group (BCG), the National Association of Manufacturers, and the U.S. Manufacturing Institute released an international innovation index comparing innovation inputs and performance across countries. Singapore ranked first on the index and on inputs, which largely covers general business environment quality. But it ranked only ninth on innovation performance, a measure that combines R&D spending, patenting, and general economic performance measures like technology-intensive exports and labour productivity growth.

Singapore’s profile of relative strengths and weaknesses is atypical of advanced economies such as South Korea (2nd), Iceland (4th), the United States (8th), and Japan (9th). Hong Kong, which ranked sixth overall, is also stronger than Singapore on innovation performance vis-à-vis innovation inputs. Singapore’s relative profile is more similar to economies like Armenia, Peru, and Uganda.

BOX 2:

The EIU-Cisco Innovation Index ranking of the most innovative countries in the world also includes data on innovation inputs and outputs. Innovation output is measured by total patents granted by the European, Japanese and U.S. patent offices. Innovation inputs include measures such as R&D spending as a proportion of GDP, educational and technical skills and the quality of IT infrastructure. The innovation environment is measured by factors such as policies towards trade and investment, the political environment, taxes, the labour market and infrastructure. This ranking places Singapore in 16th place; as in other rankings, the country performs higher on inputs than on outputs. Japan is first, while the United States ranked fourth over the period 2004-2008. Taiwan (7th) and South Korea (11th) are ahead of Singapore while Hong Kong comes in lower at 21st.

INSEAD and the Confederation of Indian Industry also released global innovation rankings for the year 2008-2009. Innovation inputs were measured using five pillars: institutions and policies, human capacity, general and ICT infrastructure, markets sophistication and business sophistication. Innovation outputs included knowledge creation, competitiveness and wealth creation. Many of the measures were drawn from Global Competitiveness Report data. The United States is in first position and Singapore is fifth, followed by South Korea (6th), Japan (9th) and Hong Kong (12th). Singapore has a relatively low score on the general and ICT infrastructure (14th) input pillar, and obtained the lowest output pillar rank in “competitiveness.”

The Innovation Index of the Information Technology and Innovation Foundation in the United States follows a similar approach, giving a large weight to indicators on general business environment quality. These include general economic business environment indicators such as trade balance, foreign direct investment, corporate tax rates and the World Bank’s doing business rankings and new business registration data. Singapore is ranked first, and the United States placed sixth on this index. The ranking also provides a change score between 1999 and 2009, which puts China as the country with the best improvement, followed by Singapore.


Capital Market Infrastructure Capital Market Infrastructure is the fourth dimension of factor conditions in which Singapore has a position at the very top of global rankings, ranking 2nd overall. This is an area in which Singapore has made significant improvements over the last few years. Looking more closely at different aspects of capital market infrastructure, Singapore has traditional strengths in the regulatory environment. More recently, this has also translated in better access to different forms of capital. Local equity market access remains somewhat lower ranked, despite clear gains over time. Financial market sophistication and the soundness of banks are ranked among the global top ten, but also come in at levels lower than Singapore’s overall position.

The somewhat weaker position on financial market sophistication might be a reflection of the relative cautious approach that domestic banks have taken in their operations; an approach that has, however, enabled them to weather the current global fiscal crisis relatively unharmed.

It could also be a consequence of the weaker position in some market segments, where especially the strong position of the Singaporean sovereign wealth funds have led to less private sector activity. Singapore’s slightly lower position on domestic credit to the private sector does not seem to be a reflection of barriers to accessing loans or other sources of finance. However, it might

also be that the lack of local SMEs with growth ambitions - the companies one would expect to have the strongest need of loans - is driving this result.

The overall positive assessment is confirmed by a number of other analyses. The WEF’s Financial Development Report ranks Singapore 4th globally, up from 10th rank in 2008. The WEF uses many of the economy-wide indicators used in our overall assessment of competitiveness, but adds a few financial sector-specific indicators.

A recent ranking of financial centres ranks Singapore third in the world, after London and New York. It is the highest ranking financial centre in Asia, slightly ahead of Hong Kong and with a larger advantage ahead of Tokyo and other Asian centres. The ranking is based on an index combines a multitude of financial sector, competitiveness, and liveability factors from various sources.

The headline Global Financial City (GFC) score (coloured blue in Figure 4.12) is used to rank global financial cities. The online survey assessment is a separate qualitative measure, and estimates city’s reputation as a financial hub. The figure below shows both the score from the data analysis and from the survey. Singapore has an excellent reputation as a financial centre, even stronger than its position on the hard data assessment.

TABLE 4.15: CAPITAL MARKET INFRASTRUCTURE INDICATORS

TABLE 4.16: FINANCIAL SECTOR DEVELOPMENT, 2009

Sources: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness.

Sources: The Financial Development Report 2009, published by the World Economic Forum.


FIGURE 4.12: ATTRACTIVENESS AS FINANCIAL CITY

FIGURE 4.13: GLOBAL INTERNET USE AND PENETRATION

TABLE 4.17: COMMUNICATIONS INFRASTRUCTURE INDICATORS

Sources: The Global Financial Centres Index 5, by Mark Yeandle, Jeremy Horne, Nick Danev, and Alexander Knapp of the Z/Yen Group. Published by the City of London on March 2009.

Sources: Internet World Stats - http://www.internetworldstats.com (Miniwatts Marketing Group) and the World Development Report Online (World Bank). Retrieved June 26, 2009.


Communications InfrastructureCommunications Infrastructure is the final dimension of factor conditions. This is an area where Singapore ranks as 7th globally slightly lower than in the other dimensions, with little changes over time. The main reason is the slightly lower penetration rates for fixed line telephony and internet usage.

Figure 4.13 shows internet penetration rates for various countries. While Singapore compares well with comparator countries, penetration rates are much higher in Scandinavian countries and in other Asian countries such as South Korea and Japan. Broadband penetration rates in Singapore are also not the highest

in Asia; recent data shows that Hong Kong and South Korea have higher penetration rates than Singapore.

Figure 4.14 shows internet use by age group and shows less internet use across all age groups, include the younger age groups that drive usage in other countries. Thus while Singapore’s IT infrastructure compares well with developed countries, it is not outstanding and neither is internet use. This is a concern given Singapore’s ambition to promote industries such as interactive digital media; a sector which relies both on IT infrastructure as well as consumers of digital media.


Context for Rivalry and StrategyThe Context for Rivalry and Strategy captures the incentives and challenges companies face in leveraging factor conditions in the market place. The role of government - as a policy maker and regulator, but in some cases also as a market participant - has a central impact on this dimension of the business environment. But the corporate structure of companies and their actual behaviour on the market is also important.

Singapore ranks traditionally very high on the Context for Rivalry and Strategy. This is driven by the high openness of the country

to foreign investment and trade, as well as by other policies in areas like labour markets, capital markets, and IP that ensure a high level of flexibility and strong property rights. The Singapore government has over the last few years continued to actively pursue trade liberalization at all levels; bilateral, regional as well as multilateral, with countries in all regions. It has signed sixteen trade agreements either bilaterally, or through ASEAN with more than twenty trading partners from all geographies and is presently exploring further trade liberalization with countries such as Ukraine, Peru, and Canada.

FIGURE 4.14: INTERNET USE COMPARISONS

Sources: World Internet Project: International Report 2009, published by the World Internet Project.

TABLE 4.18: CONTEXT FOR RIVALRY AND STRATEGY INDICATORS



The World Economic Forum’s Global Enabling Trade Report combines much of this data with more specific information on trade-specific outcomes and policies. The report measures the extent of necessary attributes that countries have adopted, which will enable the free-flow of trade into a country and to its final destination. Singapore is ranked second out of 118 countries, following only Hong Kong. Singapore is especially strong in the “Border Administration” sub-index, while it has a marked weakness under “Market Access.” Singapore suffers from a surprisingly weak rank for the Presence of Non-Tariff Barriers and the Openness to Multilateral Trade Rules. Unfortunately, the report does not provide more detail on how these indicators were compiled. Incidentally, Hong Kong reported no data for these two indicators.

The deeper concerns that exist are related to the actual market structures in Singapore. One issue is the relative low level of rivalry on domestic markets. This is not atypical of smaller economies, and Singapore has made significant improvements in this area over recent years. But it remains an issue that needs to be closely watched and address more actively by policy than in larger economies. The other issue is the dominance of business groups, and particularly government-linked companies in the economy.

Singapore businesses are split between foreign firms, many of them large multi-nationals; government-linked companies (GLCs) and private domestic firms. While domestic and foreign firms, as well as SMEs and larger firms, account for similar shares of value added, foreign firms dominate in the manufacturing sector and are larger than domestic firms.

The 2007 Census of Manufacturing shows that domestic firms accounted for 90% of establishments and 58% of workers, but the share of domestic firms in terms of value added, value of

sales, exports and assets was between 20% and 29% depending on which measure is used. Clearly, Singapore’s manufacturing sector has large foreign firms and small domestic firms, and the small firms are likely suppliers to large foreign firms. Domestic SMEs dominate general manufacturing, while GLCs dominate transport and engineering. Large foreign firms can be found in sectors such as electronics, chemicals, and pharmaceuticals.

On the services side, financial services are dominated by large foreign firms, whereas transportation, hotels, and restaurants are dominated by large domestic firms. Domestic SMEs focus on providing business services where as foreign ones focus on wholesale and retail activities.

Table 4.19 provides data on the top 1,000 Singapore firms and again, domestic private firms account for a larger proportion of employment than they do of revenues, assets and net income whereas domestic GLCs account for a small proportion of employment and a much larger proportion of assets.

The makeup of the corporate sector - that is, large GLCs, large MNCs, and the presence of smaller domestic private firms which are likely geared towards servicing their larger counterparts – might also explain some of the shortcomings in company sophistication in Singapore. Given their size and resources, GLCs have no problems either in attaining international prominence (as in the case of Singapore Airlines) or expanding to the region (as in the case of Singapore Telecom which has even expanded to Australia).

But for smaller local companies, especially those with growth ambitions, it is hard to attract talent in an environment where foreign companies, large GLCs, and in some cases – even the government - provide attractive and established career paths.

TABLE 4.19: LARGEST COMPANIES IN SINGAPORE

Source: Singapore Top 1000, provided by the DP Information Network Pte. Ltd; calculations performed by ACI.

1 Revenues are “Gross Operating Income” as reported by the company in its financial statements, and includes sales to related parties. 2 Net income represents profit/loss after tax, but before adjustment for minority interest. 3 Total assets exclude deferred expenditures, goodwill, patents, trademarks, and other intangible assets. All figures are annualized in respect of a financial period from June 2006 and 2007 to May 2007 and 2008. 4 Nationality of companies are determined by the place of incorporation by their ultimate holding companies. 5 GLCs were arbitrarily determined based on material published by Temasek Holdings and GIC Pte. Ltd.


Demand ConditionsDemand conditions, more specifically the nature and sophistication of local demand, have long been ignored in the academic debate. In recent years however, the awareness has grown that local demand conditions play a significant role in shaping company behaviour. Innovation is often the result of sophisticated customers that are willing to experiment and push companies in directions that later become market standards.

Demand sophistication is a reflection of consumer behaviour, but can also be the result of government action, either in terms

TABLE 4.20: DEMAND CONDITIONS INDICATORS

FIGURE 4.15: CONSUMER SOPHISTICATION SURVEY, 2007


Sources: National Competitiveness Research 2008-2009, published by the Institute for Industrial Policy Studies and the Institute for Policy & Strategy on National Competitiveness.

of rules and regulations or in the form of public procurement, which in many industries is an important part of overall demand.

Singapore ranks first globally on demand sophistication. This is driven by government policies affecting IT, both in terms of regulation and procurement. In other areas of demand sophistication, both in terms of consumer behaviour and government regulation, Singapore ranks significantly weaker, but still within the range of other advanced economies.


The South Korean IPS National Competitiveness Research survey provides more detailed information on different aspects of consumer behaviour. On demand quality, Singapore is ranked 23rd overall and 9th among small economies. This is significantly lower than its overall rank and falls behind especially the US and European countries. The data suggests that the nature of demand is currently not a key driver of Singapore’s competitiveness and innovative capacity.

Supporting and Related IndustriesSupporting and Related Industries are the second dimension of the business environment that has traditionally not been covered by academic research. With the growing interest in geographic factors in economics, this perspective has started to change in recent years. The local availability of relevant inputs and knowledge is now seen as a relevant factor, providing complementary advantages to the ones derived from global sourcing. Without cluster specialization, which is the natural corollary of a high presence of related and supporting industries, it is increasingly hard to achieve competitive levels of productivity. Some of the advantages of strong clusters relate to the pure presence of relevant companies in the same location. But other advantages only materialize if there is active collaboration among companies,

either on their own initiative or as the result of government policies that mobilize clusters.

Singapore ranks tenth on supporting and related industries. It gets the highest marks on efforts to mobilize collaboration within clusters. On the actual presence of related and supporting industries, Singapore’s position is somewhat weaker, which is typical for a small economy. Encouragingly, the weaknesses are more in quantity than in quality.

Singapore is a relatively specialized economy with a strong focus of activity in a small number of key sectors. This is particularly visible in the export sector, where information technology (IT) exports (including re-exports) account for one-third of all export revenues. This is high compared to other exports that are not dominated by natural resources.

With the growing development of the domestic economy, Singapore has become somewhat more diversified. In exports, Singapore’s IT cluster has lost share relative to other clusters. But while the dominance of IT might be falling, the importance of key clusters for the economy remains high.

TABLE 4.21: SUPPORTING AND RELATED INDUSTRIES INDICATORS



In terms of cluster-specific competitiveness, Singapore has ranked highly in two recent studies looking at IT and at Biotech:

1. The Economist Intelligence Unit’s IT industry competitiveness index evaluates countries on their ability to support a strong IT industry. Singapore’s rank improved from eleventh of sixty four countries in 2007, to ninth of sixty six countries in 2008. Singapore’s overall rank was dragged down by low scores in the R&D environment (17th) and the Legal Environment (14th).

2. The Worldview Scorecard aims to measure the capacity for biotech innovation in nations around the world. Singapore ranks second only to the United States. Singapore does best on education and workforce, enterprise support, and general business environment foundations, while it ranks somewhat weaker on the IP environment.

Singapore’s cluster portfolio has evolved in a policy environment of open markets and active government support for specific clusters. In terms of physical infrastructure and institutional support structures, a number of sector-specific efforts have been launched over time:

• In chemicals, there is a dedicated Jurong Island industrial park, the Chemical Process Technology Centre, and the Institute of Chemical and Engineering Sciences.

• In digital media, there is infrastructure (Fusionpolis), educational programs, and new economic development agencies (Infocomm Development Authority and Media Development Authority). The box below provides a more detailed discussion of the policy activities in this field.

• In biomedical sciences, there is super-cluster effort including pharmaceuticals, biotech, medical technology, and health care services. It includes efforts to attract life science manufacturing to Tuas Biomedical Park, the creation of the Biopolis Research Park, a SGD1 billion Biomedical Sciences Investment Fund, the creation of a Genome Institute, an Institute of Cell and Molecular Biology, and an Institute of Bioengineering, and regulatory decisions to legalize stem cell research.

FIGURE 4.16: SINGAPORE’S EXPORT PROFILE IN 2007, PORTER CLUSTER METHODOLOGY

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.


A CASE STUDY OF SINGAPORE’S INTERACTIVE DIGITAL MEDIA CLUSTER

BOX 3:

Singapore has for some time now followed an explicit policy of moving the country towards becoming a knowledge-driven economy. Part of this strategy is a number of programs in areas like biotechnology, design, and interactive digital media to develop new clusters that fit this description. This short case study summarizes an analysis of the interactive digital media cluster that the Asia Competitiveness Institute has conducted; the full analysis will be available as a separate working paper. The key question is whether the program is achieving its goal of promoting structural change towards a new type of economic activities in the Singaporean economy.

Defining Interactive Digital MediaInteractive Digital Media (IDM) is part of a wider “creative” sector, which includes activities in media, art, theatre, film, design, architecture, and other related areas. Singapore’s media fusion plan has set a goal to have, by 2015, a media industry that has a value-added of about SGD10 billion creating 10,000 jobs.

The global entertainment and media sector is expected to grow at the rate of 2.7% per annum between 2009 and 2013. Sectors such as magazine and newspaper publishing and recorded music are expected to decline over this time period whereas those such as video games, internet access and internet advertising are expected to grow by at least 6% per annum. The United States will remain the largest market for entertainment and media, accounting for over USGD400 billion of a USGD1.4 trillion market in 2008, followed by Japan and the United Kingdom. The Singapore market was estimated at USGD3 billion in 2008 and is expected to be at about the same level in 2013.

Singapore has broadly defined interactive digital media to include anything that is interactive and digital. Core activities include, for example, the creation of content and supporting activities include delivery and distribution systems such as telcos or internet service providers. Sector definitions as well as estimates differ depending on the particular approach used by various consulting firms. However, IDM in general includes advertising, mobile content, gaming, television and radio, film and video, online publishing and music. Others choose to segregate sectors based on whether they are ‘going digital’ (such as interactive television, film and publishing) or were ‘born digital’ (such as games, animation and interactive online and mobile media). Nonetheless, the basic value chain includes creation of content, processing, aggregation and archiving and distribution and delivery.

Estimates on cluster size vary significantly depending on the specific definitions applied. One estimate for 2005 indicates that revenues of digital media and entertainment in Singapore were about SGD1.8 billion, with content accounting for 0.14 billion, processing for 0.13 billion, aggregation for 0.95 billion and distribution for 0.58 billion. Estimates for 2010 suggest revenues of SGD3.86 billion with aggregation and distribution accounting for SGD3.0 billion.

Another estimate indicates that value added in IDM was SGD1 billion in 2005 with “core” activities accounting for SGD0.6 billion. This is expected to expand to SGD4.7 billion by 2015 with the “core” accounting for SGD3.7 billion. Within the IDM

sector, games, interactive TV, film and advertising are expected to grow at least at an annual rate of 20%. For interactive game development, 2007 revenues in Singapore were estimated at around SGD 150-175 million; value added at about SGD75 million and employment at 714 individuals.

The Cluster Development ProgramSingapore’s interest in the IDM sector can be traced back to recommendations by the Economic Review Committee in 2002. The committee was of the view that that the next phase of development would have to rely on the creative and imaginative capability of Singaporeans. Thus, creative and cultural products were to be the new engines of the economy.

Government plays a leading role in this sector, providing infrastructure and venture capital, attracting foreign investment, and providing demand. Government set up the IDM Programme Office (IDMPO) in 2006. The IDMPO is an inter-agency outfit hosted by the Media Development Authority (MDA) to coordinate efforts between agencies such as Agency for Science, Technology and Research (A*STAR), Defence Science and Technology Agency (DSTA), Economic Development Board (EDB), Info-communications Development Authority (IDA), International Enterprise (IE) Singapore, Ministry of Education (MOE), Ministry of Information, Communications and the Arts (MICA) and the Ministry of Trade and Industry (MTI). The IDMPO strategy is to create a sustainable ecosystem that links four key groups of stakeholders - Institutes of Higher Learning, Research Institutes; industry; individuals; and schools. For instance, one of IDMPO’s tasks is to manage the dispersion of SGD500 million from the National Research Foundation (NRF). This fund is dispersed via initiatives like IDM Research Oriented Centres of Knowledge, Futurescape, and IDM Jumpstart and Mentor. The investment from the NRF is spread out over five years (2006-2010) and is expected to generate SGD10 billion value-add and create approximately 10,000 new jobs by 2015.

In June 2009, government launched the Singapore Media Fusion Plan (SMFP) which focuses on Asia and in growing Singapore’s competitive advantage in IP protection and content management capabilities. Instead of just being a “Global Media City” the objective was for Singapore to be the “Trusted Global Capital for New Asia Media.”

An additional SGD230 million will be pumped into the media industry over the next five years (2009-2013). Several projects included in the plan will directly enhance the IDM sector. For instance, development of the 19-hectare Mediapolis complex, expected to be completed within 10-15 years, will house digital production, broadcast facilities, IDM and R&D activities, and post-production activities. This complex is expected to house an ecosystem that will nurture the development of the media cluster.

The Next-Generation National Broadband Network will be implemented within the SMFP parameters to dramatically upgrade Singapore’s internet connection speeds. The fibre-optic network will cost more than SGD1 billion to build, and promises to increase internet speeds tenfold (to 1Gbps) at a cost lower than current broadband connections. Work has started



in 2009, and 95% of all homes and offices are expected to be connected by 2012.

Another project that will enhance the local IDM sector is the setting up of the Broadcast Innovation Centre (BIC). This is a joint project between MDA and Singapore Telecommunications. The BIC aims to boost Singapore’s media development and distribution capabilities by serving as a digital media exchange and content distribution hub that connects companies in Singapore to major media capitals worldwide via high-speed satellite and terrestrial fibre networks. The intent is to draw foreign media companies to use Singapore as a base for the development and distribution of their work, as well as, enable Singapore-based broadcasters and content producers to share their work with global audience easily.

Government departments provide demand and have contracted with local firms to develop applications of 3D environments for both mundane tasks such as finding one’s way around a hospital and more sophisticated ones such as to help the police to conduct simulations.

Overall, the government’s approach to cluster promotion has also been similar to that used in manufacturing, which is to first attract multinationals and rely on imported talent and then to try and link domestic firms to the MNCs and to train local labour.

A number of other countries also have initiatives in this sector. Canada for example which has a highly developed interactive digital media sector uses employment tax credits as the main instrument to promote this sector. In addition there are a number of funds such as the Bell Fund and the Quebecor Fund which provide up to half a million dollars per project to produce and develop content. Game developers can also take advantage of a scientific research and experimental development tax credit. In Australia, Screen Australia provides a number of grants which include both development of digital content, and travel to showcase projects. In addition, there are a number of seed and commercialization funding programs to help start-ups.

AssessmentSingapore’s experience so far in IDM provides a number of lessons that have important implications for the country’s broader strategy to become a knowledge driven economy.

First, in pushing towards areas like IDM, Singapore is moving beyond its traditional set of advantages. Singapore has an established IT industry, a strong general business environment valued by foreign investors, and living conditions that are attractive for foreign talent. But technical IT skills turned out to be less critical then creative abilities. And while Singapore has a strong tradition of discipline, hard work, and efficiency, it still has much less of a tradition in more free-wheeling creative activities.

Interviews with companies in the Singaporean IDM sector confirm this view. The foreign companies are in Singapore because of traditional business environment strengths, not because of the creativity of Singaporeans. The strengths that they find include:

Singapore’s location between East and West; its multicultural environment which some indicated is hard to find outside of the United States; and its immigration rules which allow firms to hire employees from other countries in the region.

Many firms are also attracted by the low tax environment and other incentives the government is providing to promote the sector. The weaknesses include: a small domestic market and a weak talent pool; and some firms indicated that business costs appear to have increased dramatically in the past few years, particularly when compared to Hong Kong.

The general view among industry participants is that Singapore’s IDM sector may take as much as ten to twenty years to develop. As a “managed society,” Singapore is perceived to lack the sufficient room for social and political debate that characterizes the environment in which creative clusters thrive. Thus it is seen as very likely that Singapore may have to settle for “another” part of the value chain rather than content creation, one related to data warehousing and distribution.

Singapore has quite a different competitive profile from many other countries active in IDM. This does not rule out that Singapore can be an effective competitor in this field. But it does indicate that this process will take time, that the economic benefits are initially going to be modest, and that it will require the development of new competitive strengths rather than just the appropriate marketing of the existing strengths to a new constituency.

Second, in pushing towards areas like IDM, Singapore is moving into fields where the traditional policy tools might not work as well. Singapore has generally adopted a heavily government-led approach. It focuses on providing an attractive business environment, targets foreign investors to become the anchors of the new cluster, uses a highly differentiated menu of targeted policy interventions and subsidies, and plays a dominant role in developing the cluster.

In other countries, and particularly in Canada, the private sector and trade associations appear to be taking the lead with government playing a supportive role. Focusing on foreign investment is more typical in production-oriented activities, while creative clusters tend to rely on a strong base of local talent. Incentives are usually much simpler with, for example, Canadian provincial governments relying only on employment tax credits. The literature on vibrant IT clusters in countries like Taiwan, India, Ireland and Israel indicates that innovative clusters do not respond well to such directive government policy.

Singapore uses essentially the same policy approach in IDM that it has used successfully in the past in capital-intensive activities. The experience of other countries suggests that this approach might have its limits, if Singapore is serious about moving into the creative parts of the cluster.

Third, Singapore so far remains a small player in IDM. Other countries such as the United States, Japan, South Korea, United



Kingdom and Canada are ahead not just in creative industries in general, but in IDM and games in particular. And the contribution that IDM makes to the Singaporean economy is still very modest compared to the size of traditional IT activities.

Developing IDM to an economically meaningful scale will not be easy for Singapore. Foreign investors spend relatively small amounts compared to the traditional capital-intensive industries attracted to Singapore. While there is often a significant amount of local outsourcing in manufacturing industries due to transportation cost considerations, it is easier to integrate Singaporean IDM operations with sites elsewhere in the region or globally, in the digital sphere. This might limit the positive spill-overs of foreign investment on local company activity to the spin-offs by local entrepreneurs that have gained experience working for the MNCs.

Overall, the experience in IDM suggests that Singapore has to take a realistic view in its development of knowledge-driven activities. It will be critical to target the right kind of activities. The more Singapore wants to move towards knowledge-driven activities that move beyond its existing strengths - especially its attractiveness to foreign investors and talent - the more challenging the process will be; science-related research activities might be a better fit than creative activities or large-scale entrepreneurial start-ups.

It will be necessary to review the policy tools applied. The more Singapore wants to move away from the traditional model of MNC-driven growth, the more it needs to adopt a new policy approach where government is a facilitator rather than driver. And it will be important to have patience. The more Singapore wants to move into activities based on individual talent, the longer it will take for economic activities to reach meaningful economic scale.

Company SophisticationSingapore is ranked ninth on the aggregate measure for company sophistication. While this is a respectable position, it is relatively weaker than the business environment score that the economy has achieved.

Singaporean companies are ranked best on organizational practices, where they are sixth overall. This is a significant improvement from recent years, and signal changes in the way companies in Singapore are structured. Within this area, the only indictor in which Singapore continues to do less well, and actually lost position on, is the willingness to delegate authority. This is quite typical for relatively traditional organizational structures that integrate strong incentive elements without changing their underlying architecture.

On strategy and operational effectiveness, Singaporean companies have made steady progress and now rank within the global top ten. Still, a number of observations remain reasons for concern. While companies in Singapore are seen to invest significantly into R&D, their capacity for innovation is ranked relatively low. This gap reflects the imbalance between R&D inputs and outputs on an economy-wide level, and needs to be understood more thoroughly. Companies in Singapore also do not rank that well on the nature of their competitive advantages. This is consistent with high levels of efficiency and short-term orientation towards meeting consumer needs but lower levels of innovation and unique market positions.

On the internationalization of firms, the specific profile of the company base in Singapore shines through visibly. Foreign companies, and increasingly, GLCs target international markets from a Singaporean base. But the control of the international distribution channels, especially for the MNCs, rests with foreign headquarters or companies, not with the enterprises located in Singapore itself.

Singapore’s Competitiveness in Perspective

Singapore is one of the most competitive economies in the world. And there are no signs that its position is slipping. If anything, the country has further accentuated some of its key strengths over time.

The overall profile of Singapore’s competitive strengths and weaknesses remains much in line with an investment-driven economy focused on delivering high levels of efficiency for foreign investors. The key assets of Singapore remain a very strong physical infrastructure, a highly open market, and flexible and efficient government rules and regulations. Singapore also provides an attractive workforce, combining well educated nationals, foreign talent attracted by Singapore’s quality of life, and low-skill low-wage workers temporarily in Singapore.

Within this context, the focus has increasingly shifted, expanding to include a strong science base. Science has become important in two dimensions:

1. First, Science is an important driver of efficiency at the performance levels reached by the Singaporean economy. Without a strong scientific base, advanced technologies and ideas would become out of reach in many of the sectors where Singapore is specialized in.

2. Second, scientific research is a new activity where Singapore’s traditional model of attracting foreign companies to conduct operations can be applied. Singapore’s attractive for foreign talent, not only from the region but also globally, makes it one of the locations where MNCs can tap into the global skill pool. Without a strong scientific base, Singapore would lack the credibility and key skills to compete in this area.


TABLE 4.22: COMPANY SOPHISTICATION INDICATORS


FIGURE 4.17: NEW GLOBAL COMPETITIVENESS INDEX AND SINGAPORE’S 2009 RANKS



Many of the traditional weaknesses of Singapore’s competitiveness are directly related to the small absolute size of the economy. On related and supporting industries, Singapore had to specialize in terms of clusters and specific activities to be able to reach sufficient critical mass. This remains the only feasible way to create the foundations for high productivity. But in some areas, it implies that Singapore is reliant on foreign suppliers not present in the domestic economy, thus exposing the country to sector-specific shocks than a larger economy that can support a broader portfolio of clusters.

On the context for strategy and rivalry, Singapore registers a lower level of domestic competition than larger economies, despite a policy regime that has opened the market to international trade and investment. Where China with its huge market receives the automatic attention of foreign companies trying to penetrate its market, Singapore has to work harder to increase the level of actual competition domestically.

Foreign companies are, of course, present in large numbers. But their focus is often the entire region, not just the local market. In addition, the strong presence of government-linked companies (GLCs) seems to have a dampening effect on local market dynamism. While the efficiency of the GLCs seems to compare favourably to their global peers, they make it harder for local start-ups to grow and attract the top talent they need to succeed. With the GLCs’ focus increasingly shifting beyond Singapore’s borders, they too do not infuse much dynamism to the local market.

Despite its many achievements, Singapore struggles with the transition to a knowledge-driven economy characterized by strong innovation as the key prosperity driver. While it is solid on key ingredients of an innovation economy, it does not outperform key peers. On demand conditions, the government has done their part in implementing sophisticated regulations and procurement rules, at least in IT. But Singaporean demand is not the key innovation driver in any of the clusters in which Singapore is strong at, or aims to grow its position. On cluster development, a critical driver of innovation, Singapore has traditionally fared well. But there are serious questions as to whether the strongly government-driven approach around foreign anchor investors provides the right policy tools for knowledge-driven activities with strong local dynamism.

Singapore is quite clearly behind its most advanced peers when it comes to having a dynamic private sector with entrepreneurial companies that have the ambition to grow. The conditions for such companies seem generally good; this is also the impression from international assessments that look at the general business environment for entrepreneurs. But once in Singapore, they face both cultural barriers and very tough competition for talent. Culturally, Singaporeans are risk averse, and are, as a society, not very open to the notion that failure in a business venture is an important educational experience. Marketwise, there are so many opportunities within MNCs, GLCs, and even the public sector, that too little talent is left for new start-ups.

The challenge Singapore is facing developed from a combination of already having a very successful model, and yet being of small absolute size. Growing a new entrepreneurial sector on the basis of the strong science system will be challenging, as long as the successful MNCs and GLCs outcompete start-ups for the limited talent available in Singapore. Creating the conditions for this transition to happen would require taking greater risks.

The GLCs are an important example: privatizing the GLCs would have a high likelihood of causing their advanced functions (and local demand for advanced financial and business services) to disappear relatively quickly. This could free up some of the talent now working in executive functions in the GLCs for positions in new companies. But their growth would take a longer period of time, and is subject to significant uncertainty.

Singapore thus needs to carefully consider which options are available in terms of developing its competitiveness profile: Sticking to Singapore’s traditional strengths, developing these strengths gradually by adding more science-oriented elements, or moving ahead towards a truly knowledge-driven economy with more radical reforms.

Chapter ReferencesEconomist Intelligence Unit, (2009) “A new ranking of the world’s most innovative countries”, An EIU report sponsored by Cisco, April 2009,

London, United Kingdom.Scientific American World View, (2009) “The 2008 R&D Scoreboard”, http://www.innovation.gov.uk/rd_scoreboard/?p=68.


ConclusionsChapter 5




Economies around the globe are in turmoil. The downturn is significantly deeper and more global than anything experienced since the Great Depression. Unlike their predecessors at the time, policy makers have now reacted strongly, bailing out banks, launching stimulus packages, and using old and new monetary policy instruments. The outlook now seems slightly more positive, especially in Asia: the rate of decline has fallen and the hope is increasing that while a drawn-out period of adjustment lies ahead, it will not be the abyss that bankers and exporters were facing in late 2008 and early 2009.

However, in this period of dramatic shocks, forecasts have become much less accurate than in periods of stable trends and calm. This far outside the normal parameters, there is little reliable experience on how consumers, investors, and producers will react to the massive government efforts under way. This uncertainty affects not only the short term but also the longer term. Will the crisis only be a - albeit historically deep - bump on the road, or will it change the course of economic development for individual countries and regions?

The Singapore Competitiveness Report 2009, the first in this new series of regular assessments, provides data and analysis to inform the discussions on the impact of the crisis on the medium- to long-term development of Singaporean competitiveness. It does not aim to provide a better forecast on what will happen over the next six or twelve months; other research centres, financial institutions, and government agencies provide in-depth coverage of this question.

Instead, the ambition is to put the short-term developments into the context of the economic fundamentals that will drive economic development over longer periods of time. Clearly these are related: many of the policy choices made today will impact the fundamentals that exist tomorrow, even if their primary motivation now is to deal with the immediate crisis at hand. In this time of economic crisis, the Report’s discussion of the medium-term fundamentals aims to contribute to a solid recognition of these linkages.

Summary of Findings

Singapore continues to be a highly prosperous economy, ranking among the leading countries both within Asia and globally. A comparison with other cities reveals that Singapore has solid levels of prosperity, but is not quite as exceptional as the country rankings would suggest. Singapore’s high standard of living is the result of high income levels and high life expectancy, with its position on basic education and environmental quality somewhat lower. The influx of less skilled temporary workers is part of the reason for the relatively modest position on basic education.

Environmental quality tends to be lower in many cities, and Singapore is not an exception. Its environmental performance does not stand out globally, but the country does perform better than most of its Asian peers. The relatively high and rising income inequality suggests that there are significant differences

CONCLUSIONSacross Singaporean society in the standard of living. Many other countries have recently experienced a similar increase in inequality, most likely as the result of technological change. As Singapore’s economic strategy explicitly aims to accelerate the pace of technological change, the tendency for higher inequality is likely to increase, putting pressure on the cohesive social model the country has adopted.

Singapore’s prosperity is driven by high labour mobilisation and solid (but far from exceptional) levels of labour productivity. High labour mobilisation is not atypical for economies with a significant share of immigrant labour. The recent growth in labour mobilisation has benefited from higher activity levels among residents but a rising share and activity level of non-residents continued to make a positive contribution. Singapore has further potential to increase labour mobilisation among females, a group that in other countries has been an important driver of increasing labour mobilisation rates. Labour productivity has reached a high level, above the average levels of the EU and OECD. But the volatility of productivity growth has increased and catch-up to the US has proven hard to sustain. The most recent improvements in prosperity have been predominantly the result of higher labour mobilisation, not gains in productivity.

The demographic trends will make it increasingly challenging for Singapore to just keep the current labour mobilisation rates, as an increasing share of the population retires and leaves the workforce. Future growth will have to come from productivity growth. With capital stocks already high and skill levels solid, the main driver of growth will have to be total factor productivity growth.

Singapore’s performance on intermediate measures of economic activity signals a solid foundation for current and future prosperity. The defining characteristic of Singapore is its high level of integration into the global economy. While this has exposed the country to the onslaught of the current crisis, it is also one of the key drivers of Singapore’s medium-term prosperity.

There are no signs that Singapore’s position in the global trading system is eroding. This position is, however, slowly changing: Singapore is shifting from being a direct supplier to the US and Western Europe to becoming a specialized supplier of services and components to the Asian production system, and increasingly also to Asian final demand. These changes are driven by market forces, not by a clear policy to transform the economy in this way.

Singapore also remains a highly attractive location for foreign investment. Here, Singapore is increasingly moving beyond being a host of FDI to also becoming an important source of FDI, especially towards other parts of Asia. This is fully in line with the changes in Singapore’s role in the global economy revealed in its trading profile.

A more recent development is Singapore’s growing position in innovation. Over the last two decades, the country has developed a capable science system around a core of solidly ranked universities and the research activities of foreign investors. Patenting intensity is high, although not quite at the level of the strongest Asian peers. Because of the size of the Singaporean economy, the total amount of patenting is also moderate at a global scale. The bigger challenges remain the stepping from scientific exploration to commercial exploitation of knowledge, and the development of innovation that is not science-based but focuses on new commercial ideas using existing technologies and knowledge.


Start-up rates in Singapore are rising, but this is most likely a reflection of entry into activities serving the local markets, especially in retail and services. In the export-oriented sectors, the presence of private domestic companies is still very limited. And it remains uncertain as to whether foreign investors or domestic government-linked entities commercialize the outcomes of their Singapore-based research locally. This is not an indication of failure, but a reminder that Singapore has now reached a level of performance where it has to consider in more detail which position it should aspire for in the global innovation landscape.

Singapore’s fundamental competitiveness remains strong, and provides a solid foundation for the level of prosperity and the overall pattern of economic outcomes already achieved. On macroeconomic competitiveness, i.e. policies and conditions that set the overall context in which companies operate, Singapore does particularly well on the effectiveness of its public institutions. This is an area where the potential for creating value from exporting this competence in different ways remains underexploited.

The data raises concerns about the openness of the political system. In most countries, the risk is that a dominant political group, unchallenged by a potent opposition or aggressive press, will become unresponsive to the needs of society and focus on private benefits rather than overall competitiveness. In Singapore, this risk has not materialized. However, there remains a concern that the controlled nature of Singaporean society might inhibit creative activities that thrive in less-structured environments. Still, macroeconomic policy is solid, and provides an important pillar to support the general stability of Singapore’s economic environment.

On microeconomic competitiveness, i.e. the dimensions of the overall context that have a direct impact on company productivity and innovation, Singapore ranks among the leading countries in the world. Factor input conditions are world-class across all dimensions, from physical infrastructure to administrative efficiency, to skills and innovation capacity. The context for strategy and rivalry is very strong, too.

Singapore excels on its openness to global trade and investment. There are some concerns about the dominant role of government-linked companies. Their high efficiency and full exposure to global competition limit any negative impact on the level of rivalry on local markets; they operate as private companies would. The evidence suggests that government linked companies can match the performance of their best private sector-owned peers, if they are appropriately governed and the market environment is right.

But there remains a question as to whether these GLCs are effective in existing markets but less nimble in pursuing entrepreneurial ventures in fundamentally new fields. If this is the case, the attractiveness of MNCs and GLCs for the best available talent could explain Singapore’s disappointing performance on entrepreneurship. The slightly lower ranking on domestic rivalry is more likely to be a consequence of the small size of the local market, which also explains the weaker position on the quantity of locally available suppliers.

Remarkably for a relatively small economy, Singapore ranks relatively high on other indicators of clusters or supporting and related industries. This is a clear reflection of the economy’s high level of specialization, and the government’s focus on developing specific sectors. A relative weakness is Singapore’s position on company sophistication. This is not atypical for an economy dominated by foreign multinational companies, where the ultimate control of global value chains and strategic decisions rests with headquarters located elsewhere.

Overall, Singapore’s competitiveness fundamentals are strong, but remain broadly more in line with a high-skill version of the investment-driven model, rather than an innovation-driven economy. Again, this is not an indication of failure but a reminder that Singapore has now reached a level of performance where it has to consider in more detail which position it should aspire for in the global economy.

Implications

The analysis discussed above provides perspective on the three key challenges identified at the outset of this Report.

There is no indication that the changes in the global economy system currently under way will fundamentally challenge Singapore’s competitive position. Fundamental competitiveness will remain crucial, or even increase in importance, and Singapore has clear strengths to draw on here. Competition will increase, maybe even more quickly than expected before the current crisis, and the geographic profile of markets and value chains globally will continue to evolve, possibly at a faster rate. But Singapore seems well prepared to adjust to these trends. In fact, the changes in its trade and investment profile already reflect how its position is evolving to meet new market dynamics.

Singapore’s transition towards an innovation-driven economy, an ambition outlined by the Economic Review Committee in 2003, remains work in progress. The necessary scientific infrastructure has been put into place. But, while MNCs and government-funded research institutes already draw on the scientific talent that has been attracted to Singapore, their operations here do not seem to be translating the scientific research into new products and services at a significant scale.

Creative activities are growing, but they remain a small part of Singapore’s overall economy. Companies in these areas can draw on some clear advantages, like the high quality of life that attracts talent, but also face some obvious challenges, like trying to instil innovative thinking and risk-taking in a highly organized society with a tradition of manufacturing for exports products that were created and designed elsewhere.

These observations do not imply that Singapore has failed on the mission it has laid out for itself. But they indicate that the country needs a fundamental discussion to refine its ambition along two key dimensions:

First, there are many possible different versions of an innovation-driven economy that are feasible, and some might be a better fit for Singapore than others. Being an important global knowledge-innovation hub with focused research laboratories, world-class companies, a secure legal environment, and highly attractive conditions for talent is closer to Singapore’s current competitive strengths than is becoming a global R&D hub creating the next generati0n of global technologies and products based on scientific breakthroughs. Becoming a global connector of knowledge, bridging together scientific research (discovered locally or elsewhere) with companies able to draw on it and identifying opportunities where existing knowledge is not fully applied in some geography or field, would also fit well with Singapore’s tradition as a regional business hub. This would also build on the existing scientific strengths that are crucial in understanding and leveraging the best knowledge available globally but with greater emphasis on commercializing research, capitalizing on unique business solutions implemented in Singapore and the region, and developing new business models and brands.


The initial implication of the analysis above is not to overreact to the current crisis. Singapore’s fundamentals are solid and there is no obvious reason for making any dramatic changes. In fact, a longer term analysis of Singaporean competitiveness indicates how stable the country’s key competitive advantages have been over time, despite frequent policy reviews and action programs. Changes, like the development of a strong research system over the last two decades, have systematically built on existing capabilities to create new strengths. This remains important advice when considering new policies.

Another implication concerns fundamental existing or emerging challenges where staying the course will not be enough and decisions are required. The recent slowdown of productivity is the most immediate challenge to deal with. More research on disaggregated productivity and company-level operations data would clearly be useful. If this data substantiates the hypothesis of a low-productivity business model outlined below, there are significant policy implications. Changes in the labour market, immigration, and potentially wage policy may have to be considered. Collaboration with companies and clusters to discuss the possible transition to higher-productivity business models should be on the agenda.

RECOMMENDATIONS FOR PRODUCTIVITY GROWTH• Focus on productivity growth in existing and emerging

sectors; don’t focus too much on “new opportunities” in narrow industries

• Productivity improvements should go beyond developing worker skills (to get more output for the same input) to:– Deploying knowledge effectively to produce new and

different outputs that have higher customer value– Enabling innovative recombination of knowledge from

different sources to produce new higher-value products and applications

– Strengthening management capabilities to organize the best use of the knowledge and skills of every employee and business partner

• Productivity improvements should be targeted at the company and cluster level:– Encourage companies to re-invent their business

models to create higher value through knowledge and innovation rather than depend on low-cost, low-skill foreign workers

– Strengthen cluster linkages to enable companies to develop highly specialized skills that have significant value-added

Increasing the potential for economic growth through trade and investment with neighbouring Asian countries is a second policy priority. Singapore’s shift from direct exports to the United States and Western Europe, to becoming an important part of the Asian production system and a supplier to Asian markets, is already underway. Singapore could benefit more from these trends if its partners become more competitive and the ties within the region are more developed. ASEAN has made ambitious statements of intent, but much remains to be done in order to turn these ambitions into reality. Part of the reason is that ASEAN has, in the past, followed a trade liberalization logic that is politically difficult, because it puts negotiations into a zero-sum game of reciprocal market access concession. ASEAN would benefit from adopting a competitiveness logic, where activities are focused on areas where collaboration creates direct benefits to participants.

Second, there needs to be a much broader view on what innovation is. The current view is highly science-oriented - looking at innovation as the translation of knowledge generated in universities and research labs into services and products. But innovation can be viewed from a broader perspective - the introduction of new concepts, new strategies, new processes or new business models, independent of where the idea is coming from, and whether it is leveraging new knowledge or applying existing knowledge in different contexts. One of the areas in which Singapore has arguable been most innovative is public services, because of highly sophisticated local demand. From health care to city planning and public administrative services, Singapore has always been willing to implement new solutions that create value for its citizens. This is an area where huge potential exists for creating value through exporting this expertise, by translating, for example, its experience into systematic knowledge that may be sold by operating such services abroad or through training and consulting.

Singapore’s disappointing recent performance on productivity growth is, to a large degree, a cyclical phenomenon. Since 2006, growing demand, especially from domestic sources, has driven up labour mobilisation, while labour productivity dropped as the economy reached its capacity constraints. Looking at longer-term trends, productivity growth has become more volatile as Singapore’s economy has been hit by a number of external shocks over the last decade. But there is no clear evidence that productivity growth and the catch-up to other economies has structurally come to a halt.

There are two reasons for concern, however.

First, while Singapore’s productivity catch-up has not stopped generally versus other advanced economies, it has done so versus the United States. Research suggests that the U.S. has done particularly well in taking advantage of new information technologies to improve the productivity of its companies through the redesign of its systems and processes. It needs to be further investigated why Singaporean companies do not seem to be as effective in their response to these new opportunities.

Second, Singapore’s productivity record has to be seen against its level of competitiveness: Singapore ranks 3rd in the world on overall competitiveness, but only 19th on labour productivity. This gap is most likely the result of operational choices that companies make in response to the context of factor costs and business environment conditions they face. Companies face wage costs, especially for low skill labour, at which it is not commercially attractive to move to an operational model based on higher skills and productivity.1

If future research supports the hypothesis of a low-productivity equilibrium, Singapore will need to move to a different view on productivity. In the past, the goal has been to create an existing product or service with fewer factor inputs. In the future, the goal has to become creating more customer value given a set amount of factor inputs.

Recommendations

For policy makers, and particularly for the economic review process currently under way, this Report aims to inform decisions about possible government action.


RECOMMENDATIONS TO ADDRESS A CHANGING GLOBAL ECONOMIC LANDSCAPE

• Stay the course; no need for drastic changes in Singapore’s economic strategy

• Continue with policy to support the market-driven process towards tighter integration into the Asian economy

• Revive ASEAN around a competitiveness agenda where collaboration creates direct benefits for participants – Current trade liberalization approach has clear

economic rationale but faces strong political challenges (market access as “concession”)

– Competitiveness approach focuses on individual activities with direct mutual benefits o Policy learningo Cross-border infrastructureo Cluster networkso FDI attractiono Skills and research

Defining the specific model of innovation-driven economy that Singapore should aspire to become is a third medium-term challenge that Singapore has to address. The data presented in this report indicate that Singapore has made clear progress on science-related innovation. But its success in creative and entrepreneurial activities is more limited, and is achieved in the context of a less favourable business environment.

At the minimum, there needs to be a review of whether the policy approach in these areas needs to be adjusted. Policy tools that have been successful in the attraction of capital-intensive activities may need to be modified in new innovation-intensive fields that rely more on talent and culture than capital investments. The other short-term opportunity is to work more intensively with MNCs and GLCs to create programs that allow some of their local managers to create spin-offs, possibly with initial capital stakes of the anchor companies. This would sow the ground for more locally-rooted entrepreneurship and ultimately innovation.

Going further, the potential for commercially exploiting innovation in fields like public services needs to be more deeply leveraged. This requires creative thinking on how such commercialization could happen; in some of these fields, markets do not traditionally exist. More fundamentally, a more textured policy debate is necessary to decide what type of innovation-driven economy Singapore wants to become. Too often, there is an uncritical benchmarking towards the U.S. model. This might be neither appropriate nor ideal for Singapore. Other models exist that can support high levels of prosperity as well, and could be more in line with Singapore’s capabilities.

RECOMMENDATIONS FOR TRANSITIONING TO A KNOWLEDGE-DRIVEN ECONOMY

• Develop and choose among different visions for a knowledge-driven economy– Efficient research hub vs. global trader of knowledge

vs. entrepreneurial hotspot• Move beyond science-driven innovation

– Go beyond scientific patents and have a broader perspective of innovation as a global knowledge hub

– Leverage Singapore’s knowledge and expertise in public services into a strong export industry

• Review policy approach in knowledge-driven sectors– Have a closer alignment between developing and

commercializing knowledge in publicly-funded research labs

– Develop programs to encourage commercial spin-offs from MNCs, GLCs and Statutory Boards

– Infuse talent into local enterprises to develop them into more knowledge-intensive business with higher value-added outputs

Inequality and the mobilisation of the female labour force is a fourth challenge that is more likely to become more pressing over time. Inequality has been rising, and the further transition towards an innovation-based economy will continue to fuel this trend. Singapore needs to decide how to deal with these dynamics. It has traditionally placed a high value on the cohesiveness of its society; it will not stay this way automatically. Female labour force participation is the result of individual choices, but government policies set the context. Singapore should have an open debate about the type of environment it wants to provide to women.

Singapore has become an internationally respected model for a country that is willing to continuously review its position, and has taken decisive action where needed. This Report is written in this context, hoping to provide Singaporean policy makers with our analysis and perspective of the key issues and some possible options to consider. This is the first Singapore Competitiveness Report produced by ACI, and we intend to continue to use subsequent reports to highlight our analysis and perspective of the competitiveness issues facing Singapore in the medium term.

Endnotes1. The phenomenon of an economy being stuck in a relatively low-productivity environment despite high or rising

Chapter ReferencesPorter, Michael E. and Christian H. M. Ketels, (2003). “UK Competitiveness: Moving to the Next Stage”, UK Department of Trade and Industry

Economics Paper No. 3, http://www.berr.gov.uk/files/file14771.pdf.

LEE KUAN YEW SCHOOL OF PUBLIC POLICY NATIONAL UNIVERSITY OF SINGAPORE 469C Bukit Timah Road, Oei Tiong Ham Building, Singapore 259772

www.lkyspp.nus.edu.sg/ACI

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Singapore Competitiveness Report · 2019-10-16 · Singapore Competitiveness Report Singapore Competitiveness Report 2009 Christian Ketels Ashish Lall Neo Boon Siong with research