Singapore Competitiveness Report 2009

Singapore Competitiveness Report foreword by Michael E. Porter Harvard Business School Christian Ketels Ashish Lall Neo Boon Siong with research assistance from Stevenson Q. Yu Susan Chung Lai Ling

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Singapore Competitiveness report foreword by Michael E. Porter Harvard Business School Christian Ketels Ashish Lall Neo Boon Siong with research assistance from Stevenson Q. Yu Susan Chung Lai Ling Singapore CoMpeTiTiVeneSS reporT 1

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Table of Contents Foreword ...............................................................................................................................7 Executive Summary ..............................................................................................................9 Chapter 1: Introduction Singapore’s Competitiveness Challenge in 2009 .......................................................................................... 19 The Report’s Conceptual Approach .............................................................................................................. 19 Report Outline............................................................................................................................................... 21 Chapter 2: Economic Performance Standard of Living .........................................................................................................................................25 Prosperity....................................................................................................................................................25 Equality .......................................................................................................................................................27 Quality of Life ............................................................................................................................................ 28 Components of Prosperity Generation ........................................................................................................ 28 Labour Productivity................................................................................................................................... 28 Labour Mobilisation .................................................................................................................................. 30 Purchasing Power ....................................................................................................................................... 31 Assessment ....................................................................................................................................................33 Chapter 3: Intermediate Economic Outcome Indicators Trade ..............................................................................................................................................................37 A Case Study: Electronics Exports ............................................................................................................. 41 Investment .................................................................................................................................................... 47 Innovation .................................................................................................................................................... 49 Entrepreneurship .......................................................................................................................................52 Assessment ....................................................................................................................................................53 Chapter 4: Competitiveness Fundamentals Assessing Competitiveness ...........................................................................................................................57 Endowments ..................................................................................................................................................57 Macroeconomic Competitiveness................................................................................................................ 58 Social Infrastructure and Political Institutions ........................................................................................ 58 Macroeconomic Policy .............................................................................................................................. 60 Microeconomic 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 ........................................................................................................................... 80 Singapore’s Competitiveness in Perspective................................................................................................ 80 Chapter 5: Conclusions Summary of Findings ................................................................................................................................... 85 Implications .................................................................................................................................................. 86 Recommendations........................................................................................................................................ 87 SINGAPORE COMPETITIVENESS REPORT 3

Boxes Box 1 The Global Economic Context: What Changes Will the Crisis Bring? ............................................................. 44 Box 2 International Rankings of Innovative Capacity .................................................................................................70 Box 3 A Case Study of Singapore’s Interactive Digital Media Cluster .........................................................................78 List of Figures Figure 1.01 The Competitiveness Framework: Determinants of Prosperity ........................................................................20 Figure 1.02 Assessing Competitiveness ................................................................................................................................. 21 Figure 2.01 Singapore’s per-capita GDP per capita, in thousands of 1990 PPP$ ..................................................................25 Figure 2.02 Comparison of GDP per capita ...........................................................................................................................26 Figure 2.03 GINI Coefficient Comparisons, latest year .........................................................................................................27 Figure 2.04 Singapore’s Gini Coefficient among Employed Households..............................................................................27 Figure 2.05 Human Development Index and Components ..................................................................................................28 Figure 2.06 Labour Productivity and Growth ........................................................................................................................29 Figure 2.07 Relative Productivity and Prosperity ..................................................................................................................29 Figure 2.08 Change in Sectoral Labour Productivity.............................................................................................................30 Figure 2.09 Participation and Growth....................................................................................................................................30 Figure 2.10 Contributions to Change in Labour Mobilisation, 2000-2008 ...........................................................................31 Figure 2.11 Comparison of Female Labour Participation Rates, 2009 Estimates .................................................................31 Figure 2.12 Country-level Price Comparisons .......................................................................................................................32 Figure 2.13 Normalized Comparative Price Levels of selected Cities ...................................................................................32 Figure 2.14 Price Accessibility for Selected Products ............................................................................................................ 33 Figure 2.15 Total Factor Productivity..................................................................................................................................... 33 Figure 3.01 Trading Trends..................................................................................................................................................... 37 Figure 3.02 Extent of Re-Exportation ....................................................................................................................................38 Figure 3.03 Comparison of Global Manufacturing Export Shares ........................................................................................38 Figure 3.04 Share in Global Trade of Goods and Services .....................................................................................................39 Figure 3.05 Top Five Goods Export Destinations ..................................................................................................................39 Figure 3.06 Top Five Goods Import Origins ..........................................................................................................................39 Figure 3.07 Domestic Exports Destination in 2008.............................................................................................................. 40 Figure 3.08 Top Five Service Export Partners, by type of Service ........................................................................................ 40 Figure 3.09 Top Five Service Import Partners, by type of Service ......................................................................................... 41 Figure 3.10 Singapore’s Electronics Performance.................................................................................................................. 41 Figure 3.11 Top 25 Destinations of Singapore Electronics Exports ......................................................................................42 Figure 3.12 Singapore Electronics Production by Broad Segment .......................................................................................42 Figure 3.13 Electronics Demand versus Production .............................................................................................................43 Figure 3.14 Production of Electronics Components .............................................................................................................43 Figure 3.15 Investment Intensity ...........................................................................................................................................47 Figure 3.16 Relative FDI Inward Indicators ...........................................................................................................................47 Figure 3.17 Presence of Foreign Investment ......................................................................................................................... 48 Figure 3.18 International Comparison of Patenting Activity ...............................................................................................49 Figure 3.19 Comparative Organizational Patents .................................................................................................................50 Figure 3.20 Singapore-owned Patents in the USPTO (2004-2008) ......................................................................................50 Figure 3.21 Patent Applications by Field of Technology (2002-2006) .................................................................................. 51 Figure 3.22 Singapore Patent Applications in 2007............................................................................................................... 51 Figure 3.23 Papers in the Engineering Citation Index (2007) ..............................................................................................52 Figure 3.24 Measures of Entrepreneurship (average of available 2000-2007 data) ..............................................................52 Figure 4.01 Evolution of Singapore’s Macroeconomic Competitiveness ..............................................................................59 Figure 4.02 Government Effectiveness Scores of Top-Rated Countries............................................................................... 60 Figure 4.03 Evolution of Singapore’s Microeconomic Competitiveness............................................................................... 61 Figure 4.04 The Porter Diamond............................................................................................................................................62 Figure 4.05 Ease of Doing Business Ranks, 2008-2009 ........................................................................................................ 64 Figure 4.06 Comparison of Doing Business Components.................................................................................................... 64 Figure 4.07 Math and Science Test Scores, 2007 .................................................................................................................. 66 Figure 4.08 Innovation Input Trends .....................................................................................................................................67 Figure 4.09 Comparison of Private R&D Spending, 2006 .................................................................................................... 68 Figure 4.10 Relative Comparison of R&D Researchers, 2007 ............................................................................................... 68 Figure 4.11 Relative Comparison of R&D Personnel, 2007 .................................................................................................. 69 Figure 4.12 Attractiveness as Financial City ..........................................................................................................................72 Figure 4.13 Global Internet Use and Penetration ..................................................................................................................72 4 SINGAPORE COMPETITIVENESS REPORT

List of Figures Figure 4.14 Internet Use Comparisons ..................................................................................................................................73 Figure 4.15 Consumer Sophistication Survey, 2007 ..............................................................................................................75 Figure 4.16 Singapore’s Export Profile in 2007, Porter Cluster Methodology ......................................................................77 Figure 4.17 New Global Competitiveness Index and Singapore’s 2009 Ranks ..................................................................... 81 List of Tables Table 2.01 City Prosperity in 2005 ........................................................................................................................................26 Table 3.01 Profitability of FDI in Selected Industries......................................................................................................... 48 Table 3.02 Top Ten Non-OECD M&A Acquirers ..................................................................................................................49 Table 4.01 Ethnic Demographics in Singapore ....................................................................................................................58 Table 4.02 Social Infrastructure and Political Institutions Indicators ................................................................................59 Table 4.03 Macroeconomic Policy Indicators ..................................................................................................................... 60 Table 4.04 Factor (Input) Conditions and Components ......................................................................................................62 Table 4.05 Logistical Infrastructure Indicators ....................................................................................................................63 Table 4.06 Ranks in the 2007 Logistics Performance Index ................................................................................................63 Table 4.07 Shipping Statistics ...............................................................................................................................................63 Table 4.08 Administrative Infrastructure Indicators ...........................................................................................................63 Table 4.09 Innovation Infrastructure Indicators..................................................................................................................65 Table 4.10 Average Education Levels ....................................................................................................................................65 Table 4.11 Public Education Expenditures...........................................................................................................................65 Table 4.12 Comparative Reading Scores ...............................................................................................................................67 Table 4.13 Growth of Innovation Inputs ..............................................................................................................................67 Table 4.14 Academic Ranking of World Universities, 2009 ............................................................................................... 69 Table 4.15 Capital Market Infrastructure Indicators .......................................................................................................... 71 Table 4.16 Financial Sector Development, 2009 .................................................................................................................. 71 Table 4.17 Communications Infrastructure Indicators .......................................................................................................72 Table 4.18 Context for Rivalry and Strategy Indicators .......................................................................................................73 Table 4.19 Largest Companies in Singapore ........................................................................................................................74 Table 4.20 Demand Conditions Indicators ..........................................................................................................................75 Table 4.21 Supporting and Related Industries Indicators ...................................................................................................76 Table 4.22 Company Sophistication Indicators ................................................................................................................... 81 SINGAPORE COMPETITIVENESS REPORT 5

Singapore Competitiveness Report 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. Porter William Lawrence University Professor, Harvard Business School Chair of the International Advisory Panel, Asia Competitiveness Institute SINGAPORE COMPETITIVENESS REPORT 7

Singapore Competitiveness Report Executive Summary SINGAPORE COMPETITIVENESS REPORT 9

Second, Singapore is transitioning from an investment-driven economy to an innovation-driven economy. This is both an EXECUTIVE explicit ambition of the government and the assessment of many outside observers. How far has the country progressed on this SUMMARY 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) Economies around the globe are in turmoil. The downturn is to one more in line with the needs of an innovation-driven significantly deeper and more global than anything experienced economy (strong innovation system, IP protection, quality of since the Great Depression. Unlike their predecessors at the time, life, company sophistication and strategy, demand sophistication, policy makers have now reacted strongly, bailing out banks, entrepreneurship)? launching stimulus packages, and using old and new monetary policy instruments. The outlook now seems slightly more positive, Third, despite the overall economic growth in the last few especially in Asia: the rate of decline has fallen and the hope years, there are concerns about Singapore’s ability to generate is increasing that while a drawn-out period of adjustment lies sustainable productivity growth, especially on total factor ahead, it will not be the abyss that bankers and exporters were productivity. Relative to the United States, Singapore made no facing in late 2008 and early 2009. gains on productivity between 1995 and 2008, after registering strong and consistent catch-up in the previous period. Is this However, in this period of dramatic shocks, forecasts have become slow-down a sign of structural problems, or is it largely cyclical much less accurate than in periods of stable trends and calm. or driven by external shocks? If it is structural, what explains There is little reliable experience on how consumers, investors, Singapore’s failure to continue the previous catch-up to the and producers will react to the massive government efforts under productivity levels of other advanced economies? way. This uncertainty affects not only the short term but also the longer term. Will the crisis only be a - albeit historically deep - Each of these questions could easily motivate an independent bump on the road? Or will it lead to changes in economic policy study. This Report addresses all three of them, drawing on and structures that alter the course of economic development one integrated conceptual framework to organize data from for individual countries and regions? multiple sources. The overall picture that emerges is guardedly optimistic: Singapore is not facing a fundamental threat to its The Singapore Competitiveness Report 2009, the first in this economic position, certainly not in the short- to medium-term. new series of regular assessments by the Asia Competitiveness But Singapore will have to refine its strategic direction and make Institute (ACI) at the Lee Kuan Yew School of Public Policy, some rather fundamental adjustments in its economic structure provides data and analysis to inform the discussions on the impact if it aims to move to a new level of competitiveness. 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 The Report’s Conceptual Approach research centres, financial institutions, and government agencies provide in-depth coverage of this question. The Report’s analysis is grounded in the competitiveness framework that Professor Michael E. Porter of the Harvard Business School Instead, the aim is to put the short-term developments into the and Chairman of ACI’s International Advisory Panel, has developed context of the fundamentals that will drive economic development over the last two decades. This framework is flexible in capturing over longer periods of time. Clearly these are related: many of the role of many different types of factors on competitiveness. It the policy choices made today will impact the fundamentals that recognizes their interdependence and makes no prior assumptions exist tomorrow, even if their primary motivation now is to deal about the critical role of any individual factor. In fact, one of with the immediate crisis at hand. In this time of economic crisis, the framework’s explicit uses is to support the identification of the Report’s discussion of the medium-term fundamentals aims policy priorities based on the specific circumstances that exist to contribute to a better recognition of these linkages. in an economy at a given point in time, rather than providing generic policy advice. Key Competitiveness Challenges for Singapore The central tenet of the competitiveness framework is the notion that productivity – the ability to create valuable goods Improving competitiveness is a constant challenge all economies and services through the use of a country’s human, capital, face, no matter the level of prosperity they have already reached. and natural resources – is the ultimate driver of sustainable This constant challenge then translates into more granular questions prosperity. Productivity depends both on the value of the goods that individual countries face at a given point in time. For Singapore, and services produced and on the efficiency with which they we examine three such specific questions that currently shape the are being provided. High competitiveness, then, is ultimately competitiveness debate. For all of them, the Report suggests a reflected in high productivity. framework to address them, explores the relevant data available, and provides the authors’ evaluation. Productivity is as an outcome influenced by a large number of factors that are shaped by the collective action of all participants First, the global crisis has hit Singapore harder than many of its in an economy. One set of factors, organized under the heading Asian peers, despite the fact that Singapore ranks comfortably of macroeconomic competitiveness, set the overall context in among the most competitive locations in the region. Is the crisis which companies operate. These factors include the quality indicating that Singapore’s economic model does have serious of social infrastructure and political institutions as well as of weaknesses? Are there indications that the crisis has triggered or macroeconomic policy. They do not affect productivity directly accelerated the transition of the global economy towards a new but create the opportunity space in which productivity-enhancing scenario in which Singapore’s strengths are less valuable? actions can be taken. SINGAPORE COMPETITIVENESS REPORT 11

The other set of factors, called microeconomic competitiveness, important driver of prosperity growth, while productivity growth captures the way companies operate and the external dimensions has decreased in prominence. that have a direct impact on the results of their activities. These factors include the sophistication of companies, the strength High labour mobilization is typical for economies with a significant of clusters, and the quality of the business environment. All of share of immigrant labour. In fact, the data suggests that recent them have a direct impact on productivity. growth in labour mobilization has been driven as much by a rising share of foreign workers as by increasing labour mobilization of The Report uses multiple sources of data to assess Singapore’s Singaporean residents. Among residents, Singapore continues competitiveness in this broad framework. It focuses on analysing to register low labour mobilization among females, a group and presenting this data in an integrated fashion, while adding that in other countries has been driving increasing labour additional primary data only in selected areas where gaps exist. mobilization rates. The objective is to present the best possible analysis given the data available, rather than conducting extensive primary research Labour productivity is at a solid level, but the data does indicate as part of this Report. a significant increase in the volatility of productivity growth since 1995, driven by both cyclical trends and one-time shocks. Given The data is organized in a number of key categories that provide these shocks, the selection of time periods to look at can lead to different perspectives on Singapore’s competitiveness position: highly different results. Taking this volatility into account, the data suggests that there is a moderate slow-down in Singapore’s • The first group of indicators assess Singapore’s track record catch-up to the United States, but growth relative to the European on the indicators of economic performance: the quality of Union (EU-15) continued and parity was reached in 2004. life Singaporeans are able to enjoy as a consequence of the fundamentals present in their economy. Relevant data points Starting in 2006, labour productivity growth did stall and overall include prosperity levels, equality, and measures of human growth was driven entirely by higher labour mobilization. In development. this period, total factor productivity growth also slowed down significantly. This is consistent with the cyclical upswing during • The second group of indicators looks at economic outcomes this period; there are no conclusive indications that it is the result that are signs of and contributors to competitiveness but may of a structural change in trend. not be the ultimate goals of economic policy. This includes measures of foreign and domestic investment, international The demographic trends will make it increasingly challenging for trade, innovation, and entrepreneurship. Singapore to keep labour mobilization rates stable at current levels, as an increasing share of the population retires from the workforce. • The third group of indicators then tracks Singapore’s position on Future growth will have to come from productivity growth - with the broad range of macro- and microeconomic competitiveness capital stocks already high and skill levels improving, the main factors that ultimately explain the medium-term trends on driver of growth will have to be total factor productivity growth. the economic outcomes previously discussed. The indicators covered range from assessments of governance quality, the Intermediate Indicators provision of primary public services, and the solidity of public Singapore’s performance on intermediate measures of economic finances to the sophistication of companies, the dynamism of activity indicates that a good foundation has been built for current clusters, the quality of physical infrastructure, the intensity and future prosperity. The defining characteristic of Singapore is of local competition, and many more. 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 Summary of Findings no signs that Singapore’s position in the global trading system is eroding. The position is, however, slowly changing: Singapore is Economic Performance shifting from being a direct supplier to the US and Western Europe Singapore continues to be a highly prosperous economy, ranking to becoming a specialized supplier of services and components among the leading countries both within Asia and globally. to the Asian production system, and increasingly also to meet Singapore’s high standard of living is the result of high income the final demand from Asian consumers. levels and a strong position on life expectancy and basic education. A comparison with other cities reveals that Singapore has solid As an investment location, Singapore remains highly attractive levels of prosperity, but is also experiencing some challenges. for foreign companies. But Singapore is increasingly moving beyond being a host of FDI into becoming an important source Singapore’s environmental performance does not stand out of FDI, especially for other parts of Asia. This is fully in line with globally, but the country does perform better than most of its Asian the changes in Singapore’s role in the global economy revealed peers. The relatively high and rising income inequality suggests in its trading profile. These changes are largely driven by market that there are significant differences across Singaporean society forces, even though individuals policies - for example the growing in the standard of living. Many other countries have recently number of FTAs and the more active outward investment approach experienced a similar increase in inequality, most likely as the of government-linked companies - supported them. result of technological change. As Singapore’s economic strategy explicitly aims to accelerate the pace of technological change, A more recent development is Singapore’s growing position in the tendency for higher inequality is likely to increase, putting innovation. Over the last two decades, the country has developed pressure on the cohesive social model the country has adopted. a capable scientific development system around a core of strong universities, government-funded research institutes, and the Singapore’s prosperity is driven by high labour mobilization research activities of foreign investors. Patenting intensity is and solid but far from exceptional levels of labour productivity. high, although not quite at the level of the best Asian peers. Higher labour mobilization has over time been an increasingly Foreign multinationals play an important role as patentees but increasingly also local universities. 12 SINGAPORE COMPETITIVENESS REPORT

Electronics is by far the most important sector in which patenting Context for strategy and rivalry is very strong too. Singapore occurs, reflecting the strong position Singapore has in this area. particularly excels on its openness to global trade and investment. The challenge remains how Singapore can extend its significant However, there are some concerns about the strong role of investments in scientific research to the commercial exploitation government-linked companies (GLCs). Their high efficiency and of knowledge. This may include the development of innovations full exposure to global competition limit any negative impact that are not based on the hard sciences but that focus on new on the level of rivalry on local markets; they operate as private commercial ideas using existing technologies and knowledge, companies would. The evidence suggests that government linked including those discovered elsewhere. companies can match the performance of their best private sector-owned peers, if they are appropriately governed and the Start-up rates in Singapore are rising, but this is more likely market environment is right. a reflection of entry into activities serving the local markets, especially in retail and services. In the export-oriented sectors, the But there remains a question as to whether these GLCs are effective presence of private domestic companies is still very limited. And in existing markets but less nimble in pursuing entrepreneurial it remains uncertain as to whether or how fast foreign investors ventures in new fields. If this is the case, the attractiveness of or government-funded entities commercialize the outcomes multinational companies (MNCs) and GLCs for the best available of their Singapore-based research. This is not an indication of talent could explain Singapore’s disappointing performance failure, but a reminder that Singapore has now reached a level on entrepreneurship. The slightly lower ranking on domestic of performance where it has to consider more strategically which rivalry is likely to be a consequence of the small size of the local position it should aspire for in the global innovation landscape. market, which also explains the weaker position on the quantity of locally available suppliers. Competitiveness Singapore’s fundamental competitiveness remains strong, and Remarkably for a relatively small economy, Singapore ranks provides a solid foundation for the level of prosperity and the relatively high on other indicators of clusters or supporting and overall pattern of economic outcomes already achieved. Singapore related industries. This is a clear reflection of the economy’s high does particularly well on the quality of its microeconomic business level of specialization, and the government’s focus on developing environment and the rule of law. Its position in other areas is good, specific sectors. A relative weakness is Singapore’s position on but there it has less of an advantage relative to leading peers. company sophistication. This is quite typical for an economy dominated by foreign multinational companies, where the On macroeconomic competitiveness, i.e. policies and conditions ultimate control of global value chains and strategic decisions that set the overall context in which companies operate, Singapore rests with headquarters located elsewhere. does particularly well on the effectiveness of its public institutions. This is an area where the potential for creating value from exporting Overall, Singapore’s competitiveness fundamentals are strong, this competence in different ways remains underexploited. but remain broadly more in line with a high-skill version of the investment-driven model, rather than an innovation-driven Singapore’s somewhat weaker position on macroeconomic policy economy. Again, this is not an indication of failure, but a reminder is not a major concern. Differences between countries on the that Singapore has now reached a level of performance where specific indicators used are relatively small among the leading it has to consider in more detail which position it should aspire group, and there is little evidence that these differences are strong for in the global economy. 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 Implications needs of society or focus on private benefits rather than overall competitiveness. In Singapore, this risk has not materialized. The analysis discussed above provides perspective on the three However, there remains a concern that the controlled nature of key challenges identified at the outset of this Report. Singaporean society might inhibit “creative” activities that tend to thrive in less-structured environments. Still, macroeconomic There is no indication that the changes in the global economy policy in Singapore is strong and provides an important pillar system currently under way will fundamentally challenge Singapore’s to support the general stability of the economic environment. competitive position. Fundamental competitiveness will remain crucial, or even increase in importance, and Singapore has clear On microeconomic competitiveness, i.e. the dimensions of the strengths to draw on here. Competition will increase, maybe overall context that have a direct impact on company productivity even more quickly than expected before the current crisis, and and innovation, Singapore ranks among the leading countries the geographic profile of markets and value chains globally will in the world. Factor input conditions are world-class across all continue to evolve, possibly at a faster rate. But Singapore seems dimensions, from physical infrastructure and administrative well prepared to adjust to these trends. In fact, the changes in efficiency to skills and innovation capacity. Singapore continues its trade and investment profile already reflect how its position to be ranked as the best country in the world in terms of the is evolving to meet new market dynamics. rules and regulations affecting business (World Bank, 2009). In innovation capacity, Singapore provides a strong mix of Singapore’s transition towards an innovation-driven economy, an world-leading quality in education with high R&D spending, ambition outlined by the Economic Review Committee in 2003, solid quality of research institutions, and effective collaboration remains a work in progress. The necessary scientific infrastructure between companies and universities. 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 SINGAPORE COMPETITIVENESS REPORT 13

to be translating the scientific research into new products and First, while Singapore’s productivity catch-up has not stopped services at a significant scale. “Creative” activities are growing, generally versus other advanced economies, it has done so but they remain a small part of Singapore’s overall economy. versus the United States. Research suggests that the U.S. has Companies in these areas can draw on some clear advantages, done particularly well in taking advantage of new information like the high quality of life that attracts talent, but also face technologies to improve the productivity of its companies through some obvious challenges, like trying to instil innovative thinking the redesign of its systems and processes. It needs to be further and risk-taking in a highly organized society with a tradition investigated why Singaporean companies do not seem to be as of manufacturing for exports products that were created and effective in their response to these new opportunities. designed elsewhere. Second, Singapore’s productivity record has to be seen against These observations do not imply that Singapore has failed in its level of competitiveness: Singapore ranks 3rd in the world on the mission it has laid out for itself. But they indicate that the overall competitiveness, but only 19th on labour productivity. country needs a fundamental discussion to refine its ambition This gap may be the result of operational choices that companies along two key dimensions: make in response to the context of factor costs and business environment conditions they face. Companies face wage costs, First, there are many possible visions of an innovation-driven especially for low skill labour, at which it is not commercially economy that are feasible, and some might be a better fit for attractive to move to an operational model based on higher skills Singapore than others. Being an important global knowledge- and productivity. If future research supports the hypothesis of a innovation hub with focused research laboratories, world-class low-productivity equilibrium, Singapore will need to move to a companies, a secure legal environment, and highly attractive different view on productivity. In the past, the goal has been to conditions for talent is closer to Singapore’s current competitive create an existing product or service with fewer factor inputs. In strengths than is becoming a global R&D hub creating the next the future, the goal has to become creating more customer value generati0n of global technologies and products based on scientific with a better design for organizing a set amount of factor inputs. breakthroughs. Becoming a global connector of knowledge, bridging together scientific research (discovered locally or elsewhere) with companies able to draw on it and identifying Recommendations opportunities where existing knowledge is not fully applied in some geography or field, would also fit well with Singapore’s For policy makers, and particularly for the economic review tradition as a regional business hub. This would also build on process currently under way, this Report aims to inform decisions the existing scientific strengths that are crucial in understanding about possible government action. and leveraging the best knowledge available globally but with greater emphasis on commercializing research, capitalizing on The first recommendation from the analysis above is that unique business solutions implemented in Singapore and the Singapore should not overreact to the current crisis. Singapore’s region, and developing new business models and brands. fundamentals are solid and there is no obvious reason for making any dramatic changes. In fact, a longer term analysis of Singaporean Second, there needs to be a much broader view on what innovation competitiveness indicates how stable the country’s key competitive is. The current view is highly science-oriented - looking at advantages have been over time, despite frequent policy reviews innovation as the translation of knowledge generated in universities and action programs. Changes, like the development of a strong and research labs into products and services. But innovation can research system over the last two decades, have systematically be viewed from a broader perspective - the introduction of new built on existing capabilities to create new strengths. This remains concepts, new strategies, new processes or new business models, an important principle when considering new policies. independent of where the idea is coming from, and whether it is leveraging new knowledge or applying existing knowledge The second recommendation relates to fundamental existing or in different contexts. One of the areas in which Singapore has emerging challenges where staying the course will not be enough arguable been most innovative is public services, because of and decisions are required. The recent slowdown of productivity highly sophisticated local demand. From health care to city is the most immediate challenge to deal with. More research planning and public administrative services, Singapore has on disaggregated productivity and company-level operations always been willing to implement new solutions that create value data would clearly by useful. If this data substantiates the for its citizens. This is an area where huge potential exists for hypothesis of a low-productivity business model outlined below, creating value through exporting this expertise, by translating, there are significant policy implications. Changes in the labour for example, its experience into systematic knowledge that may market, immigration, and potentially wage policy may have to be sold by operating such services abroad or through training be considered. Collaboration with companies and clusters to and consulting. discuss the possible transition to higher-productivity business models should be on the agenda. Singapore’s disappointing recent performance on productivity growth is, to a large degree, a cyclical phenomenon. Since 2006, The third recommendation suggests a policy priority to increase growing demand, especially from domestic sources, has driven the potential for economic growth through trade and investment up labour mobilization, while labour productivity dropped as with neighbouring Asian countries. Singapore’s shift from direct the economy reached its capacity constraints. Looking at longer- exports to the United States and Western Europe, to becoming term trends, productivity growth has become more volatile an important part of the Asian production system and a supplier as Singapore’s economy has been hit by a number of external to Asian markets, is already underway. Singapore could benefit shocks over the last decade. But there is no clear evidence that more from these trends if its partners become more competitive productivity growth and the catch-up to other economies has and the ties within the region are more developed. ASEAN has structurally come to a halt. There are two reasons for concern, made ambitious statements of intent, but much remains to be however. done in order to turn these ambitions into reality. Part of the 14 SINGAPORE COMPETITIVENESS REPORT

reason could be that ASEAN has, in the past, followed a trade Inequality and the mobilization of the female labour force is a liberalization logic that is politically difficult, because it puts fifth challenge that is likely to become more pressing over time. negotiations into a zero-sum game of reciprocal market access Inequality has been rising, and the further transition towards concession. ASEAN would benefit from adopting an approach an innovation-based economy will continue to fuel this trend. aimed at improving competitiveness, where activities are focused Singapore needs to decide how to deal with these dynamics. It on areas where collaboration creates direct benefits to participants. has traditionally placed a high value on the cohesiveness of its society; there is no fundamental reason why this should not The fourth recommendation that concerns a medium-term be possible in the future as well, but it will not stay this way challenge Singapore should address, is defining the specific automatically. Female labour force participation is the result of model of innovation-driven economy that Singapore should individual choices, but government policies set the context in aspire to become. The data presented in this report indicate that which women look at the incentives they receive for entering Singapore has made clear progress on science-related innovation. and sustaining a professional career. Singapore should have an But its success in creative and entrepreneurial activities is more open debate about the type of environment it wants to provide limited, and is achieved in the context of a less favourable to women. business environment. Singapore has become an internationally respected model for a At the minimum, there needs to be a review of whether the policy country that is willing to continuously review its position, and approach in these areas needs to be adjusted. Policy tools that has taken decisive action where needed. This Report is written in have been successful in the attraction of capital-intensive activities this context, hoping to provide Singaporean policy makers with may need to be modified in new innovation-intensive fields our analysis and perspective of the key issues and some possible that rely more on talent and culture than capital investments. options to consider. This is the first Singapore Competitiveness A potential short-term opportunity is to work more intensively Report produced by the Asia Competitiveness Institute, and we with MNCs and GLCs to create programs that allow some of their intend to continue to use subsequent reports to highlight our local managers to create spin-offs, possibly with initial capital analysis and perspective of the competitiveness issues facing stakes of the anchor companies. This would sow the ground for Singapore in the medium term. 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. SINGAPORE COMPETITIVENESS REPORT 15

Singapore Competitiveness Report Chapter 1 Introduction SINGAPORE COMPETITIVENESS REPORT 17

Third, despite the overall solid economic growth in the last few years, Singapore has recently been struggling with falling rates INTRODUCTION 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 Singapore has over the last few decades achieved impressive further catching-up to the productivity levels of other advanced success in moving from a young developing nation to become economies, especially the US? one of the most prosperous economies globally. One important reason among the many individual factors that played a role Each of these questions could easily motivate an independent in this process has been Singapore’s willingness to constantly study. This Report addresses all of them, providing the key review its position in an international perspective. Based on foundations to discuss the direction policy responses should take. these assessments, larger effort such as the Economic Strategy It draws on one integrated conceptual framework to organize Committee (ESC) process currently under way and many smaller data from multiple sources. The overall picture that emerges is reviews of individual policies, Singapore has again and again guardedly optimistic: Singapore is not facing a fundamental threat been able to take action and implement change in response to to its economic position, certainly not in the short- to medium- dynamic global challengers. term. But Singapore is facing some complex challenges on its future growth path. It will have to refine its strategic direction It is in this spirit that the Singapore Competitiveness Report and make much clearer choices about the type of economy it is being launched. Designed to be a recurring publication, it aims to become. Following the role model of successful peers will track multiple indicators of Singapore’s competitiveness is increasingly outliving its usefulness, and could even lead over time and in international comparison. The ambition is to Singapore on the wrong path. 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 The Report’s Conceptual Approach address. The benchmark for this Report’s value is its ability to inspire informed action that helps Singapore reach increasing The Report’s analysis is grounded in the competitiveness framework levels of prosperity over time. 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 Singapore’s Competitiveness Challenge in 2009 in capturing the role of many different types of competitiveness factors, and is not wedded to a particular type of economy or Improving competitiveness is a constant challenge all economies economic ideology. It recognizes the interdependence among face, no matter the level of prosperity they have already reached. the many factors that matter, and makes no prior assumptions This broad challenge then translates into more granular questions about the critical role of any one of them. In fact, one of the that individual countries face at a given point in time. For framework’s explicit uses is to support the identification of Singapore, three such specific questions currently shape the policy priorities based on the specific circumstances that exist competitiveness debate. The Report explores the relevant data in an economy at a given point in time, rather than providing available and suggests a framework to address them. generic policy advice. First, the global crisis has hit Singapore harder than many of its The central tenet of the framework is the notion that productivity Asian peers, despite the fact that Singapore ranks comfortably - the ability to create valuable goods and services through the among the most competitive locations in the region. Is the crisis use of a country’s human, capital, and natural resources - is the indicating that Singapore’s economic model does have serious ultimate driver of sustainable prosperity. Productivity depends weaknesses? Are there indications that the crisis has triggered on both the value of the goods and services produced, and or accelerated the transition of the global economy towards a on the efficiency with which they are being provided. High new scenario in which Singapore’s strengths are less valuable? competitiveness, then, is ultimately reflected in high productivity. Finally, is there a need for new government intervention to put Singapore on a different path for dealing with the changes in Productivity is an outcome influenced by a large number of the global context? factors that are shaped by the collective action of all participants in an economy. One set of factors, organized under the heading Second, Singapore is transitioning from an investment-driven to of macroeconomic competitiveness, set the overall context in an innovation-driven economy. This is both an explicit ambition which companies operate. These factors include the quality of of the government, and the assessment of many outside observers. social infrastructure, political institutions, and macroeconomic How far has the country progressed on this path? What are the policy. They do not directly affect productivity, but create the outcomes on innovation measures? And how much has the profile opportunity space in which productivity-enhancing actions of Singapore’s competitive strengths shifted from one typically can be taken. associated with investment-driven economies (strong business environment - especially physical infrastructure, solid skill base, The other set of factors, called microeconomic competitiveness, rule of law, openness to trade and investment) to one more in line capture the way companies operate and the external dimensions with the needs of an innovation-driven economy (strong innovation that have a direct impact on the results of their activities. These system, IP protection, quality of life, company sophistication and factors include the sophistication of companies, the strength strategy, demand sophistication, entrepreneurship)? of clusters, and the quality of the business environment. All of them have a direct impact on productivity. SINGAPORE COMPETITIVENESS REPORT 19

FIGURE 1.01: THE COMPETITIVENESS FRAMEWORK: DETERMINANTS OF PROSPERITY The Report uses multiple sources of data to assess Singapore’s 2. The second group of indicators looks at economic outcomes competitiveness in this broad framework. It will focus on integrating that are signs of and contributors to competitiveness, but not and analysing this data in an integrated fashion, while adding ultimate goals of economic policy. These include measures additional primary data only in selected areas where gaps exist. of foreign and domestic investment, international trade, The ambition is to present the best possible analysis given the innovation, and entrepreneurship. data that is available, rather than conducting extensive primary research as part of this Report. 3. The third group of indicators tracks Singapore’s position on the broad range of macroeconomic and microeconomic The data is organized in a number of key categories that provided competitiveness factors that ultimately explain the medium- different perspectives on Singapore’s competitiveness position: term trends on the economic outcomes previously discussed. The indicators covered range from assessments of governance 1. The first group of indicators provides an assessment of the quality, the provision of primary public services, and the solidity quality of life Singaporeans are able to enjoy, as well as the of public finances to the sophistication of companies, the direct components of income generation at the economy-wide dynamism of clusters, the quality of physical infrastructure, level. Relevant data points include prosperity levels, equality, the intensity of local competition, and many more. measures of human development, labour productivity, and labour mobilisation. 20 SINGAPORE COMPETITIVENESS REPORT

FIGURE 1.02: ASSESSING COMPETITIVENESS Report Outline The remainder of the Report is organized in three chapters. Chapter 4 provides the assessment of the competitiveness fundamentals that underpin the economic outcomes observed. Chapter 2 looks at economic outcomes as indicators of revealed A short first part of the chapter reviews Singapore’s endowments competitiveness. The first part of the chapter addresses different in terms of geographical location, natural resources, and other dimensions of Singapore’s prosperity. While GDP per capita is a given factors. Policy can do nothing to change them, but they do central benchmark used in the analysis, this section widens the have an impact on the level of prosperity Singaporeans can enjoy. 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 then looks at the two dimensions of macroeconomic competitiveness, e.g. the strength of social infrastructure and The second part of the chapter decomposes Singapore’s overall political institutions (SIPI) and the quality of macroeconomic performance on prosperity into its mathematical components policy. For SIPI, basic human capacity, the rule of law, and of labour productivity, labour mobilisation, and domestic price the effectiveness of the political system are key concerns. For levels. This decomposition provides insights into the strengths macroeconomic policy, the Report looks mainly at the general and weakness of Singapore’s economy, and also an initial focus in approach to fiscal and monetary policy. terms of critical policy areas. Key observations from this analysis are summarized at the end. The third part covers the three dimensions of microeconomic competitiveness, e.g. company sophistication, cluster strength, Chapter 3 looks at a series of intermediate economic outcome and business environment quality. The diamond, a concept indicators that, as signals and contributors of competitiveness, introduced by Professor Michael Porter that encapsulates factor tend to foreshadow future prosperity. They are important input conditions, the context for strategy and rivalry, demand analytical tools but not appropriate policy objectives. Targeting conditions, and supporting and related industries, will be used them directly, as many countries have done, often leads to to analyse the different dimensions of the business environment. better performance on the indicator but no improvement in This part of the chapter also includes summary observations from either prosperity or competitiveness. The economic outcome a case study on the Interactive Media cluster in Singapore, an indicators include measures of investment (domestic, inward interesting example of the country’s more recent push into new, FDI), global integration (FDI, exports, imports), innovation, knowledge-driven activities. Key observations from the analysis and entrepreneurship. This chapter includes a section written of competitiveness indicators are summarized at the end. by Manu Bhaskaran on the external economic environment Singapore is likely to face in the future as a consequence of Chapter 5 will draw on these different observations to derive a the global economic crisis. It also includes a short case study number of overall observations. The three strategic issues identified analysing the changes in Singapore’s global trading position earlier in the Report will be revisited, using the available data in electronics over time. Key observations from the analysis of and analysis to provide preliminary answers. For each of these outcome indicators are summarized at the end. issues, an integrated set of action recommendations are given. SINGAPORE COMPETITIVENESS REPORT 21

Singapore Competitiveness Report Chapter 2 Economic Performance SINGAPORE COMPETITIVENESS REPORT 23

Standard of Living ECONOMIC Prosperity PERFORMANCE Singapore’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). A high standard of living for its citizens is the ultimate benchmark for high competitiveness and successful economic policy. The In 1965, Singapore had, at $2,667 (in 1990 PPP adjusted international most widely used indicator for assessing living standards is real dollars, a measure used for long-term comparisons of real prosperity per-capita Gross Domestic Product (GDP). trends across countries) the third highest PPP-adjusted GDP per- capita in East Asia, after Japan and Hong Kong. Singapore started GDP per capita is a central but imperfect measure of the from a higher initial level of GDP per capita, and kept its lead standard of living, for a number of reasons. First, average GDP over Taiwan and South Korea despite experiencing lower growth per capita might not give a good sense of the median citizen’s of about one-half to one percentage per annum over 1965-2008. income level if economic participation differs significantly across groups of society. These differences might be the result Singapore’s prosperity growth was stable at 4.8% between 1965 of a skewed distribution of income, but can also be based on and 1984 when the country was hit by a severe recession. After that gender, regions, social and ethnic factors. Second, GDP per capita crisis, Singapore moved in 1987 to a higher growth path, with an does not capture important non-income related dimensions of annual growth rate of 5.65% that lasted until the Asian financial the quality of life. Individuals value leisure time, good health crisis struck in 1997/1998. After the shock abated, growth rates and well-being, and a clean environment. There are many other rebounded to put Singapore back on the previous growth trajectory. issues that a more comprehensive analysis would aim to address The bursting of the internet bubble in 2001 again disrupted this (Stiglitz et al., 2009). While this Report does not capture all of development. Once again, Singapore recovered, and by 2007 these dimensions, it looks at both inequality and non-income had reached the level it would have reached if growth between measures of the standard of living. 1997 and 2007 continued at the pre-Asian crisis decade rates. GDP per capita is, in a simple accounting sense, the result of real Since 2002, Singapore has done particularly well compared not labour productivity and labour mobilisation. Purchasing power only to Taiwan and South Korea, but also to selected Scandinavian parity (PPP) adjustments then translate the income level into an and OECD countries. In late 2007 however, Singapore’s economy internationally-comparable level of consumption that citizens was one of the first in the region to go into a recession, despite can afford given local prices. This accounting exercise does not a positive spike in the first quarter of 2008. 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. 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. SINGAPORE COMPETITIVENESS REPORT 25

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. In 2008, Singapore’s comparative PPP-adjusted per-capita GDP Even in advanced economies like the United States, the per capita ($51,226) was below only that of Norway ($53,738). Consensus income in urban areas is significantly higher than in rural areas, forecasts suggest that the worst will be over by the end of 2009, although different price levels, especially for housing, lead to much and Singapore’s GDP is expected to grow by 3.5% in 2010. All smaller differences in the actual living standards. But overall, other Asian economies are expected to show positive growth as there is evidence that among advanced economies, differences well in 2010. in urbanization rates are an increasingly less important factor in explaining prosperity differences. Singapore’s prosperity figures are influenced by its character as a city state. Urban areas tend to register higher GDP per capita levels A comparison with other major urban cities (Table 2.01) shows than surrounding regions. Higher density provides opportunities Singapore’s average prosperity level to be solid and comparable for higher productivity, and often offers significantly better access to leading Asian, European, and North American peers. to public infrastructure and services. Economic development, especially at lower and medium levels of prosperity, goes hand in hand with urbanization. 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). 26 SINGAPORE COMPETITIVENESS REPORT

FIGURE 2.03: GINI COEFFICIENT COMPARISONS, LATEST YEAR Source: CIA World Factbook, retrieved on June 18, 2009. Equality Average GDP per capita figures can give a misleading view of actual The high level of inequality could, as the positions of Singapore standards of living if inequality is very high. A location’s GINI and Hong Kong suggest, be a function of being a city state. coefficient, a measure which increases with greater inequality However, available data on inequality across cities indicate that of income distribution, is an important indicator as to whether this explains Singapore’s high inequality level to a relatively modest that might be the case. degree (UN-HABITAT, 2008). In addition to Hong Kong, only New York City and a number of Latin American metropolitan At a value of 0.481 (0.462 after government transfers and taxes), areas register inequality at or above Singaporean levels. Singapore ranks as an economy with relatively high income inequality. Singapore’s inequality is higher than in the vast Inequality has risen significantly over the last decade, in Singapore majority of other advanced economies. Across a wider sample as well as in many other economies. The key reasons often cited of countries, only Hong Kong and a number of Latin American are: technological change providing higher returns to talented countries register higher levels of inequality. individuals, and more open markets creating greater opportunities for entrepreneurs to leverage their capabilities across larger China, after a significant increase of inequality over the last few markets. Singapore’s rise in inequality was more pronounced years, is the other Asian economy that comes closest to Singapore than in all OECD countries. However, some emerging economies, in inequality levels, followed by the Philippines. After government including China, Russia, and Indonesia, have seen even stronger transfers and subsidies are taken into account, inequality in jumps in inequality. China is even higher than in Singapore. FIGURE 2.04: SINGAPORE’S GINI COEFFICIENT AMONG EMPLOYED HOUSEHOLDS Source: Singapore Department of Statistics (2009). SINGAPORE COMPETITIVENESS REPORT 27

It is not obvious that inequality has created significant problems in Environmental quality is another factor influencing the quality Singaporean society. This is the result of the high level of public of life which is not well captured through income measures. The services available to all citizens, which disproportionately benefit demand conditions created by public policy measures trying lower income groups. But the dynamics in this area need to be to ensure environmental sustainability are also an increasingly further analysed. Singapore puts great weight on its cohesion. important factor, as many countries, including Singapore, aim As a relatively young nation of significant ethnic heterogeneity, to establish positions in clean technologies. cohesion is seen as a critical condition for developing as a peaceful society. As Singapore moves further towards a knowledge-driven A study by the ADB (2006) provides information on urban air economy, the forces pushing towards higher income inequality are quality in Asian cities. While no Asian city meets the World likely to strengthen. This could create tension if these dynamics Health Organization’s (WHO) guidelines of 20 micrograms per are not carefully considered in advance. 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 Quality of Life of all Asian cities to meeting the WHO standards with annual The exclusion of non-income indicators that have a significant average ambient concentrations of 30 micrograms per cubic impact on the actual standard of living is another reason that meter in 2006. There is also increasing evidence that mobile economic measures alone tend to be a potentially misleading individuals see better environmental quality as an important indicator. These indicators are an important signal of the overall reason to locate in Singapore. 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 Components of Prosperity Generation attractiveness as a place to live, independent from the income level individuals can reach, have become increasingly important Income is ultimately the result of how productively labour is being assets. This is especially relevant for countries like Singapore used, and how effective the economy is in mobilizing available that thrive on their ability to attract foreign capital and talent. labour. These two factors, both important drivers of income, are driven by different dimensions of the business environment. The UN Human Development Index (HDI) extends the economic Understanding the relative strengths and weaknesses of an economy perspective by adding further information on health and education with respect to the drivers of its prosperity thus gives important as basic requirements for meaningful participation in society insights for policy makers on the action priorities they face. (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 Labour Productivity up with East-Asian levels and reached the average HDI level of Singapore’s current GDP per employee performance puts it only OECD countries in 2005. marginally ahead of the weaker economies within the OECD (Figure 2.06). In 2008, most OECD, Scandinavian and Asian However, Singapore still comes in behind Japan and Hong Kong. comparator countries, with the exception of South Korea, had Leading European countries and the U.S. also rank higher. The higher labour productivity than Singapore. Similarly, the rate main reason for Singapore’s somewhat disappointing performance labour productivity growth from 1995 to 2008 was higher in is a particularly low rank on the education measure used: at a Asian comparator countries such as Hong Kong, South Korea combined gross enrolment ratio of 85%, Singapore only reaches and Taiwan, as well some Scandinavian and OECD countries. a level comparable to countries like Venezuela, Bolivia, Brazil, Singapore did perform better than Continental European countries or the Czech Republic. like Germany and France. FIGURE 2.05: HUMAN DEVELOPMENT INDEX AND COMPONENTS Source: UNDP, 2009. 28 SINGAPORE COMPETITIVENESS REPORT

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. Between 1965 and 1990, Singapore has registered stable productivity The productivity decline affects the entire economy and is not catch-up relative to the US and Western Europe. Since then, the principally driven by structural change. Between 1970 and 2005, picture has become much more volatile. Singapore has continued the change in Singapore’s labour productivity was, like in most to register higher labour productivity than its OECD peers from advanced economies, dominated by within effects of productivity 1990 to 2007. Since 2005, the country registers a labour productivity growth in individual sectors.1 levels above the EU and the OECD level. However, two periods of fast labour productivity growth (1992-1997 and 2003-2007) were Structural change did make a positive contribution, but was much interrupted by a period with low growth (1997-2003). Relative to smaller in size: over this period, the within effect accounted for the United States, a significant productivity gap, which shows 85% of the change in labour productivity, while the shift effect little signs of closing over the last decade, remains intact. (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 2.07: RELATIVE PRODUCTIVITY AND PROSPERITY Source: Total Economy Database (January 2009), The Conference Board and Groningen Growth and Development Centre; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 29

FIGURE 2.08: CHANGE IN SECTORAL LABOUR PRODUCTIVITY Source: Singstat Time Series Online, provided by the Singapore Department of Statistics. The patterns have changed over time. Before 1995, within industry Labour Mobilisation effects contributed 3.6% to labour productivity, with the shift Labour mobilisation reflects how well a country uses its human effect contributing 0.8%. After 1995, and up to 2008, within resources and gives an indication of possible policy challenges effects dropped to 2.1%, and shift effects declined to 0.1%. The in this respect. Since 1995, Singapore has registered a significant drop of the within effects was especially pronounced after the increase in labour mobilisation, growing the rate of employees in dotcom crisis in 2001. The shift effect made an ever-decreasing its working age population at a rate surpassed by only a very small contribution to labour productivity growth. number of countries globally. Singapore’s labour mobilisation rate was already relatively high at the beginning of this process; Sectoral productivity data reported confirms this view. Figure 2.08 it now ranks among the five countries with the highest rates of shows the change in labour productivity for selected goods and labour mobilisation globally. service sectors over 2003-2008. Together, these sectors account for about 65% of employment and 60% of real GDP. FIGURE 2.09: PARTICIPATION AND GROWTH 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. 30 SINGAPORE COMPETITIVENESS REPORT

A closer look at the Singaporean data provides more insights The cost of a standard basket of goods in Singapore is relatively into the process of labour force mobilisation. The data on labour modest compared to the cost for the same goods in most comparable mobilisation among Singaporean residents shows a high level countries and cities. For the cross-country comparisons, the ratio of stability over the long term. Since 2000, 61% of the change in between purchasing power parities (PPP) and market exchange Singaporean labour mobilisation has been the result of higher rates is often used. Most European countries register high local activity levels among Singaporean residents. The remainder has prices, the United States comes in at a middle level, while Asian been driven by an increasing share of non-residents in the overall countries have more affordable local prices. Singapore, together with labour force and an increasing activity level among non-residents. Hong Kong, registers even lower relative local prices than Korea. 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 FIGURE 2.10: female labour participation. Singapore ranks roughly on par with CONTRIBUTIONS TO CHANGE IN LABOUR the OECD average but significantly below the Nordic countries. MOBILISATION, 2000-2008 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 Power The 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 Source: Singapore Department of solid labour productivity and mobilisation, but with very high Statistics; calculations by ACI. 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. FIGURE 2.11: COMPARISON OF FEMALE LABOUR PARTICIPATION RATES, 2009 ESTIMATES Source: LABORSTA Labour Statistics Database, provided by the ILO. SINGAPORE COMPETITIVENESS REPORT 31

FIGURE 2.12: COUNTRY-LEVEL PRICE COMPARISONS Source: World Economic Outlook (April 2009), provided by the International Monetary Fund. The ratio of PPP to market exchange rates is an appropriate Hong Kong, below most European and North American cities measure, so long as market exchange rates reflect international but pricier than other countries in emerging economies across price equalisation for traded goods and services. There is some Asia. The data also suggests that rent levels are relatively modest discussion as to whether Singapore’s monetary policy is keeping in Asia compared to Western Europe and North America, a fact the parity of the U.S. dollar at a price below the market-based rate that also applies to Singapore. (IMF, 2008).3 This would suggest that a low purchasing power factor relative to the foreign exchange rate is at least partly the Another way to look at the standard of living is the measure result of an undervalued currency, and not only of low local how long an average person has to work to be able to purchase prices. After adjusting for this, Singapore’s local cost position specific goods or services across different locations. This measure would look less favourable, but is most likely still better than combines information on local prices (which we discussed in this the situation in the United States. section) and on wage levels. On this measure, Singapore performs much less favourably. Given the data on relative prices, this is to Comparisons of price levels across cities are regularly done by a large degree the effect of low average prices, both in absolute private companies to help multinational companies set wages terms and in relation to the level of GDP per capita reported for their expatriate staff, with a view on the standard of living earlier. This is consistent with relatively high inequality and a that income can afford in different locations. The data (Figure low wage share in GDP. 2.13) again shows Singapore roughly at the same price level as FIGURE 2.13: NORMALIZED COMPARATIVE PRICE LEVELS OF SELECTED CITIES Source: Price and Earnings 2009 Edition: A Comparison of Purchasing Power Around the Globe, published by UBS AG. 32 SINGAPORE COMPETITIVENESS REPORT

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. A factor that is not captured well in the existing data is the segmentation of prices across different consumer groups. In FIGURE 2.15: countries like Singapore, casual observation suggests that for TOTAL FACTOR PRODUCTIVITY 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 Source: Singstat Time Series Online, provided by the Singapore Department of Statistics; calculations by ACI. 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 data in this chapter indicates that the recent productivity the long term challenge is clearly to increase labour productivity. slowdown occurred across the entire economy. Singapore’s strategy over the last few years was to develop activities with Figure 2.15 confirms this assessment: Factor inputs, either higher higher levels of productivity. So far, these activities have not labour mobilisation or a larger capital stock, have become the led to structural change towards these sectors becoming a dominant drivers of GDP growth. Total factor productivity growth, significant growth driver. A limited role of structural change which includes the growth in labour productivity not accounted combined with a simultaneous productivity slowdown in many for by higher labour input (accounting for improvements in sectors suggests that the Singaporean economy is facing broader skills) or higher capital intensity, has dropped in importance. 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. SINGAPORE COMPETITIVENESS REPORT 33

Endnotes 1. 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 References Asian 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. 34 SINGAPORE COMPETITIVENESS REPORT

Singapore Competitiveness Report Chapter 3 Intermediate Economic Outcome Indicators SINGAPORE COMPETITIVENESS REPORT 35

boost exports and inward FDI, but are costly and lead to little upgrading of underlying competitiveness. Performance on INTERMEDIATE intermediate indicators is the outcome of the interplay of many dimensions of underlying competitiveness, which will be the ECONOMIC subject of Chapter 4. OUTCOME INDICATORS 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 The second stage of analysis, adding to the analysis of outcomes imports for all basic goods. Between 1988 and 2001, the ratio of that directly contribute to living standards discussed in the Singapore’s total trade (goods and services) to GDP fluctuated previous chapter, are intermediate indicators of economic activity. between 3.0 and 3.5, however, since 2002, this ratio has increased Exports, investments, entrepreneurship, and innovation outputs more or less monotonically and it stood at about 4.5 (3.5 for are such indicators that provide insights in the process leading goods and 1 for services) in 2008. up to ultimate prosperity and are analytical tools to identify potential weaknesses. Figure 3.01 show the overall trends, with data on goods and services. Total trade in goods increased from $43 billion in These intermediate indicators have a number of interesting 1980 to $658 billion in 2008, representing an annual growth of characteristics. They are the result of strong underlying 10.2%. Export growth of goods (at 10.75% per annum) outpaced competitiveness - high export levels, for example, signal the growth in imports (9.69%) over the period of 1980 to 2007. A ability of companies to compete successfully on the world market. positive goods trade balance is a relatively recent phenomenon But they also contribute to higher competitiveness; exposure to that started to be the norm after 2001. Service trade registered a international competition through trade and investment, for surplus in the 199os and has been broadly balanced for the last example, leads companies towards higher levels of performance. decade. Only in 2007 and 2008 did Singapore again register a Some of the intermediate indicators also signal whether current service trade surplus. prosperity levels will be sustainable in the medium-term future; high innovation or investment rates, for example, indicate a Entrepöt trade is an important component of Singapore’s economy build up capacity that is likely to lead to future market success. and trade mechanism. The Department of Statistics defines re- exports as goods that were exported without undergoing any While intermediate indicators are important analytical tools, transformation (except repacking, sorting, grading, marking, targeting them directly can lead to poor policy choices. Direct and similar activities). In 2008, re-exports under this definition subsidies or an undervalued exchange rate, for example, can 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. SINGAPORE COMPETITIVENESS REPORT 37

FIGURE 3.02: EXTENT OF RE-EXPORTATION Source: Singapore Department of Statistics Since 1990, this share has been increasing significantly. Growth Trade patterns have development somewhat differently in services, in re-exports has accounted for 51.13% of total Singaporean goods, and the narrower category of manufacturing goods (which export growth between 1990 and 2008. Singapore’s re-exports excludes fuel and mining products). Singapore’s share in world are dominated by high-tech products, with the pattern becoming manufacturing trade peaked at 5.52% before the Asian financial more pronounced over time. The share of high-tech products crisis, and declined thereafter to 4.37% in 2007. 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 This is the part of world trade where China’s growing exports important product category among re-exports is petroleum and have had the biggest impact (Figure 3.04). During the rapid related products. expansion of Chinese exports after 2000, Singapore managed to keep its relative position quite stable while most other countries The significant share of Singapore’s growing trade in recent years saw a significant loss of market share. 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 Singapore’s global share in fuel and mining products peaked since then. Between 1986 and 1995, Singapore’s world market at 4.84% in 1993, and was 3.94% in 2007. This is a segment of share of global exports doubled (Figure 3.04). Market shares world trade that has grown strongly prior to the current crisis, then dropped during the Asian crisis, recovered somewhat in the largely as the result of significant prices increases for energy immediate aftermath of the crisis, and were again hit during the and raw materials. While trade in services still account for less dotcom crisis. After 2000/2001, Singapore managed to regain some than a third of total world trade value, this has has grown more market share, but in 2007/2008, some of the gains evaporated. 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. FIGURE 3.03: COMPARISON OF GLOBAL MANUFACTURING EXPORT SHARES Source: WTO Statistics Database provided by the World Trade Organization, retrieved September 1, 2009; calculations by ACI. 38 SINGAPORE COMPETITIVENESS REPORT

FIGURE 3.04: SHARE IN GLOBAL TRADE OF GOODS AND SERVICES Source: UN Comtrade database, retrieved on July 9, 2009 via WITS; calculations by ACI. Below the aggregate levels of trade volumes and market shares, On the goods side, the United States dropped in 2008 to 3rd it is revealing to look at Singapore’s trading partners. Singapore rank among Singapore’s most important trading partner, behind has seen a gradual shift from trading mainly with North America Malaysia and China. Europe’s share has dropped even more over and Europe to increasingly growing ties with the rest of Asia. 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). FIGURE 3.05: TOP FIVE GOODS EXPORT DESTINATIONS Source: UN Comtrade database, retrieved on July 9, 2009 via WITS; calculations by ACI. FIGURE 3.06: TOP FIVE GOODS IMPORT ORIGINS Source: UN Comtrade database, retrieved on July 9, 2009 via WITS; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 39

FIGURE 3.07: DOMESTIC EXPORTS DESTINATION IN 2008 Source: Singapore Department of Statistics; calculations by ACI. The importance of Japan has declined, whereas that of China and if these trends continue. China is growing faster than any other Indonesia has increased. Malaysia has become Singapore’s most major export partner, and has therefore become more important important trading partner, starting from 1995. Trade patterns over the years. India, although growing from a small base, is became more concentrated in the 1990s, culminating in 1995 another fast-growing destination. when 59% of trade was with the five largest partners. Since then the pattern has been reversed; the share of the five largest On the services side, patterns are somewhat more varied with partners is now slightly below 50%. Asia being more important as an export destination of service and the United States and Europe being more important import Figure 3.07 shows the top 25 destinations of Singapore’s domestic partners. Figure 3.08 and 3.09 show the top three trading partners exports, i.e. mainly processed raw materials and basic manufacturing for various service categories. The United States and Europe goods. The important role of Asian destinations, both in magnitude provide financial services, management services, and knowledge, and growth, is even more evident than for goods exports. while Asian countries are partners on trade-related services and, in the case of ASEAN, on construction. With the exception of Europe is not an important destination, and though the United construction where the top three trading partners are all Asian, States remains important in terms of size, growth from 1993 to the United States and the European Union figure prominently 2008 was low. This indicates a declining importance in the future in most service categories. FIGURE 3.08: TOP FIVE SERVICE EXPORT PARTNERS, BY TYPE OF SERVICE Source: Singapore Department of Statistics; calculations by ACI. 40 SINGAPORE COMPETITIVENESS REPORT

FIGURE 3.09: TOP FIVE SERVICE IMPORT PARTNERS, BY TYPE OF SERVICE Source: Singapore Department of Statistics; calculations by ACI. A Case Study: Electronics Exports This section further explores the changing profile of Singaporean A look at export destinations provides a first indication on how trade, looking closer at electronics. Often also called information the changes in the global IT industry affect Singapore’s trade. technology (IT) goods, electronics is one of Singapore’s most Figure 3.11 shows that the United States figures prominently, but important exports. IT is Singapore’s largest cluster by export is losing share over the years. Malaysia is now the largest market value (USGD83.5 billion in 2007) and specialization (9.7% of and others such as Hong Kong and China are large customers global IT exports in 2007; RCA of 4.5). Despite clear growth in which have grown in importance. Asian destinations figure absolute export value, Singapore has lost significant market share prominently in electronics. in this cluster over the last decade. 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. SINGAPORE COMPETITIVENESS REPORT 41

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. A look at product categories provides another important angle. Singapore’s changes in electronics production have roughly Figure 3.12 shows how Singapore’s product export portfolio has paralleled shifts in global demand. There is a clear upward-sloping changed over time. Consumer electronics, the initial focus of the trend in Figure 3.13, which plots growth in global demand against cluster, still figured prominently in Singapore’s portfolio in 1985; growth in Singapore’s production, with bubble size representing their value peaked in 1995 and declined ever since. Electronic data the value of Singapore’s production in 2008. Industries are processing (EDP) products such as computer peripherals were clustered either in the top-right or bottom-left quadrants. 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 3.12: SINGAPORE ELECTRONICS PRODUCTION BY BROAD SEGMENT Source: Yearbook of World Electronics Data 2008, provided by Reed Electronics Research; calculations by ACI. 42 SINGAPORE COMPETITIVENESS REPORT

FIGURE 3.13: ELECTRONICS DEMAND VERSUS PRODUCTION 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 Overall, the electronics/IT case study is an example of how sector from China. China dominates electronic data processing Singapore has been able to deal with the dramatic changes in (EDP) products and accounted for well over 40% of world global markets and value chains. Singapore has grown in those production in 2008. The average annual growth rate of Chinese product categories that have seen the highest demand globally. production in this segment over the period 1992 to 2008 was And it has sold its output increasingly to other Asian countries, about 30% per annum. In this product segment, China’s gains where they have been integrated into final products for the have come primarily at the expense of the United States and domestic as well as for the US and European market. Japan, not so much at the expense of Singapore. FIGURE 3.14: PRODUCTION OF ELECTRONICS COMPONENTS Source: Yearbook of World Electronics Data 2008, provided by Reed Electronics Research; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 43

BOX 1: THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING? BY MANU BHASKARAN CEO, CENTENNIAL ASIA ADVISORS PTE LTD AND ADJUNCT SENIOR FELLOW, INSTITUTE OF POLICY STUDIES. The global economy is suffering its worst economic crisis since Third, Singapore will also have to manage the political fallout the Great Depression of the 1930s. The immediate consequences from this crisis on policy formulation in developed economies. of this crisis have been substantial enough - major financial Increased regulation, particularly in financial sectors; more institutions have collapsed, developed economies are enduring rigorous taxation; and other forms of intrusive state involvement the largest job losses in a recession for many decades and efforts in the economy are likely in the United States and Europe. The are underway to re-shape global financial regulation. More than distribution of growth between profits and wages will also probably that, some trends that were emerging before the crisis are now become less skewed towards profits than it has been in the past likely to intensify. These include the relative decline of the United two decades, a result of the growing backlash against widening States economy and associated with it the likely erosion of the income gaps. Specifically, countries such as Singapore will have dominant role played by the United States Dollar. Changes of to watch the following closely: such a momentous nature are unlikely to occur without having a material impact on Singapore’s economy and its competitiveness. President Obama in the United States and Prime Minister Gordon Brown in the United Kingdom have pledged at the recent The Changed Structure of the Post-Crisis Global London G20 summit to crack down on tax havens. To this end, Economy the OECD had put Singapore on a “grey list” of countries that The global economy is likely to see substantial changes once the had agreed to improve transparency standards but had not yet worst of the crisis is over. The changes we outline below amount signed the necessary international accords. This has implications to a transformation of the economic environment that Singapore for Singapore, which due to its low tax and highly developed will operate in. financial system, could in future be labelled a tax haven. Despite Foreign Minister George Yeo’s statements about Singapore being First, Singapore will have to deal with a more volatile and a “low tax” country and not a tax haven, pressure might still be unpredictable global economy, one that is probably subject to put on Singapore if the political backlashes intensify. In that various stresses and shocks in the aftermath of the crisis. Such is case, Singapore might lose some measure of attractiveness, and the scale of the policy response that it is reasonably likely that the therefore competitiveness. global economy will emerge from recession by early 2010 at the latest. However, this has probably been achieved at a high cost - Greater financial regulation, together with the de-leveraging new vulnerabilities have been created in the global economy by process in global financial institutions, capital destruction and the extraordinarily large monetary, fiscal, regulatory and other the rising risk-aversion we are witnessing, suggests that financial changes that policy makers have put in place. At some point, sectors and cross-border capital flows will shrink, and financial the costs of these policies will become more of an operating innovation diminish, for a probably significant period of time. concern for businesses and policy makers. These costs could be There may even be a retreat from globalization toward some higher inflation in some countries because of the extraordinary “localization of finance” just as there may be some localization amount of monetary easing. Or it could be the fallout from not of tourism and manufacturing supply-chains because of energy bringing massive fiscal deficits under control in a timely fashion. costs. None of this is good for Singapore’s current economic model. Moreover, the contrasting approaches likely to be taken by major economies in reversing the monetary and fiscal stimuli could itself Fourth, it is almost certain that global economic growth will create new stresses in the longer term, particularly in relation be slower. The crisis will create more headwinds to growth to currency risks. For instance, if the European Central Bank or accelerate emerging trends. The developed economies will tightens monetary policy ahead of the Federal Reserve Bank in almost certainly see slower growth as their banks and companies the United States, there are likely to be substantially negative restructure in response to the crisis and their household sectors implications for the US Dollar. raise their savings rates to rebuild damaged pension assets (see the diagram below which shows the International Monetary Second, there are likely to be important changes in currency values Fund’s estimates of declining potential growth in the major after the crisis. While it is not clear if there will be a substantial economies and emerging countries). Accommodating climate depreciation of the US Dollar, it seems reasonable to conclude change will also become a more important aspect of the business that Asian currencies on average will tend to appreciate against environment and add to business costs. 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. 44 SINGAPORE COMPETITIVENESS REPORT

THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING? 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 China’s policy responses during the crisis will tend to reinforce of production networks. Singapore and other Asian economies and accelerate emerging trends in its economy that were changing had been able to exploit the international fragmentation of its competitiveness structure even before the crisis began. Rising production involving the splitting of production process into land, labour and other costs coupled with a gradual appreciation discrete activities which were then allocated across countries in of the Renminbi had caused labour-intensive export activities recent years (Athukorala, 2006). Production networks have played such as toys and garments to suffer a loss of competitiveness. a central role in the massive expansion of Asia’s intra-industry This forced Chinese producers to restructure and move up the trade, especially in machinery parts and components. While value chain into higher-value activities, including some that the share of parts and components in world manufactures trade competed more directly with economies at Singapore’s level grew by 3 percentage points between 1992 and 2003 (from 18% to of development. Well before the crisis, for instance, China’s 21%), it grew by 8 percentage points in Asia (from 19% to 27%). imports of higher-value components from the rest of Asia were already slowing as Chinese companies re-tooled themselves to There are some indications that this could change - fragmentation be competent in producing these items. of production expanded when the benefits of fragmentation in the form of lower labour and other costs offset the logistics and China’s policy response to the crisis involves a massive push to other costs involved in such fragmentation, especially transport build up its already impressive infrastructure. The result will be costs. With a post-crisis energy cost likely to be substantially vastly improved connectivity between coastal and hinterland higher than pre-crisis, with currencies of source countries set to regions in China, enhancing the lower-cost hinterland regions’ depreciate against Asian currencies as a result of the crisis; and ability to compete in global markets. China’s stimulus package with increasing political backlashes at home, the multinational also includes a step up in the spending on upgrading technology. companies that drove production fragmentation are likely to be Afraid that its reserves are over-exposed to the US dollar, it is also more circumspect about pushing this process too hard. encouraging its companies to use the opportunities presented by the crisis to acquire technology through acquisitions of Sixth, countries and companies will restructure their business innovative companies in the United States and elsewhere. This models and operations in response to these fundamental changes. will help enhance the technological competence of Chinese The crisis has concentrated minds and allowed reformist policy companies over time. 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: SINGAPORE COMPETITIVENESS REPORT 45

THE GLOBAL ECONOMIC CONTEXT: WHAT CHANGES WILL THE CRISIS BRING? THE CHINESE GOVERNMENT’S 10-POINT PLAN FOR INFRASTRUCTURE Source: Collated by Centennial Group from the World Bank and the National Development Reform Commission of China India, too, is likely to emerge from the crisis in a relatively stronger With considerably slower growth post-crisis in Singapore’s most position than pre-crisis. Its economy has not been hurt much by important trading partners, Singapore may have to look elsewhere. the crisis - its financial institutions remain strong, its companies However, its manufacturing industry may not be structured to continue to restructure aggressively especially in manufacturing service growth in China, India and other large emerging market and the re-elected government of Prime Minister Manmohan Singh economies. An analysis conducted by Citibank found that “China’s is in a much stronger position to, at least, modestly accelerate imports from Singapore for its own domestic demand comprise the pace of competitiveness-enhancing reforms. just 37% of Singapore’s domestic exports to China (including oil), and just 4.2% of Singapore’s total domestic exports. Effectively, Other large developing economies are also well positioned. within Asia, Singapore ranks as the third least exposed to China’s Indonesia has weathered the crisis well and with President domestic demand” (Sim and Kit, 2009). Yudhoyuno’s re-election along with top economic technocrat Mr Boediono as Vice President-elect, Indonesia is also poised to see The likely consolidation of production networks reverses a very an acceleration of reforms that will strengthen its economy. Like important factor in Singapore’s competitiveness. The Singapore India and Indonesia, Brazil has suffered relatively little damage economic model relied heavily - and perhaps disproportionately from the crisis. If anything, its central bank and policy makers - on attracting to Singapore MNCs keen to outsource production come out of the crisis with their credibility strengthened as a as part of this process of fragmenting production networks. A result of their skilful management of the crisis fallout. fundamental change in this process will dilute an important driver of its competitiveness - its ability to attract MNCs to locate Malaysia is also stepping up the pace of economic reforms, with production in Singapore. several major liberalisation initiatives launched this year. Many of these address shortcomings in its investment environment so Second, the structure of competitiveness is changing. Putting as to attract foreign investment while also striving to enhance together the points made above: the competitiveness of its financial sector. China is becoming less competitive in lower-value goods while These initiatives in competing economies will help to narrow raising its competence in higher range goods, including some the gap between these economies and Singapore in a range that will compete more directly with Singapore-made products. of areas - attractiveness of policy regime to foreign investors, Indian manufacturing is likely to expand the spectrum of products infrastructure quality and macro-economic stability. it is globally competitive in as a result of the restructuring going on in Indian manufacturing. Implications for Singapore Essentially, the changes discussed above mean that Singapore Currency depreciation and crisis-induced def lationary cost is likely to face a changed landscape of competitive advantage adjustments in the United States, United Kingdom and other in the post-crisis period. parts of Europe are likely to increase the number of manufacturing activities that these developed economies are competitive in. The First, some the driving forces of competitiveness will be different: rising cost of transport will add impetus to the cost advantages of domestically produced goods versus imports in these countries. Singapore has geared its export industry to service demand in the United States, Japan and Europe. The multinational companies it Clearly, the competitiveness landscape will change substantially and attracted built production facilities here that ultimately serviced this will require countries such as Singapore to re-think its policy demand in these developed economies. Direct non-oil exports approaches towards the broader issue of economic growth and to these economies accounted for 34.8% of the total in 2008 specifically towards competitiveness. The winners from this new while the indirect exports (through components exported to global landscape will be those who are quick to devise new economic other countries which eventually ended up as finished goods in models - new approaches that build resilience to the inevitable the developed economies) adding another approximately 23%). stresses of the new global economy and which accommodate the structural changes of competitiveness identified above. 46 SINGAPORE COMPETITIVENESS REPORT

FIGURE 3.15: INVESTMENT INTENSITY Source: EIU CountryData database (provided by Bureau Van Djik Electronic Publishing), retrieved on October 12, 2009. Investment For Singapore, foreign investment accounts for about 80% of gross fixed capital formation, one of the highest rates in the world Most East Asian countries have relied on investment-intensive with only Hong Kong relying even more on foreign capital to models (domestic and foreign) of economic growth. Investment finance investment. In 2007, Singapore’s share of global inward intensity continues to be high in Singapore with gross fixed flows was 1.32%; the peak was in 1996 at about 2.8%, just before investment accounting for 28.5% of 2008 GDP. Among the the Asian financial crisis. While Singapore’s share of global FDI comparator countries used earlier, only South Korea had a flows has declined, FDI plays a growing role in the Singaporean marginally higher rate. The rest of the comparator countries economy. As a proportion of GDP, FDI inflows doubled from hover around a fifth of GDP, with the United States and the U.K. 82% (of GDP) in 1991 to 171% in 2007. having the lowest investment intensity. China and India lead the BRIC countries, while Russia and Brazil are comparable to Traditionally manufacturing and financial services attracted most Singapore’s European and Scandinavian counterparts. 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 3.16: 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. SINGAPORE COMPETITIVENESS REPORT 47

FIGURE 3.17: PRESENCE OF FOREIGN INVESTMENT Source: Singapore Department of Statistics; calculations by ACI. In 2007, local investment accounted for 28% of gross fixed Over the last few years, Singapore has also become an important investment in the manufacturing sector; the United States investor in its own right, with outward FDI f lows reaching accounted for 29%; Japan for 16% and European countries for USGD8.9 billion (4.91% of GDP) in 2008, and outward FDI stock another 18%. These shares have remained remarkably stable amounting to 103.9% of GDP. M&A activity is the dominant form since 1997. of foreign direct investment, accounting for well over 80% of cross border flows of capital. Table 3.01 shows a key reason for why foreign companies continue to come to Singapore: In the majority of sectors, they are generating Table 3.02 shows the value of acquisitions firms from non-OECD attractive returns from their investments. 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. 48 SINGAPORE COMPETITIVENESS REPORT

TABLE 3.02: TOP TEN NON-OECD M&A ACQUIRERS Source: OECD (2007). Innovation Innovation, the generation of new knowledge and of profitable innovations, such as Wal-Mart’s big-format retail concept that new products, services, or ways of providing them to customers, was a huge contributor to American prosperity growth in the is a key characteristic of advanced economies. As it is increasingly last decade, are much more complex. Most researchers focus insufficient to support rising prosperity levels by exploiting on science-related indicators because data is readily available existing competitive advantages, the creation of new competitive and tends to be significantly correlated to other dimensions of advantages gain in importance. innovation. Patenting activity in the United States is a particularly attractive measure because the U.S. is the largest market for Innovation is notoriously hard to measure. The simple dimensions intellectual property, and thus attracts patent activity covering of innovation are those related to direct outcomes of scientific the creation of most meaningful scientific knowledge. research, such as patents or publications. But many commercial FIGURE 3.18: INTERNATIONAL COMPARISON OF PATENTING ACTIVITY Source: Various databases provided by the United States Patents & Trademarks Office; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 49

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 A fair comparison with the U.S. is difficult because of the home patenting rate per capita in the U.S. has grown quickly over the bias for U.S. patenting. Patentees from Massachusetts, one last decade, and is now approaching the level of strong innovators of the strongest patenting states in the U.S., registered about like Canada, Germany, and Sweden. However, countries like seven times as many patents with the United States Patent Finland, Israel, Switzerland in Europe and Japan, South Korea and Trademarks Office (USPTO) over the last five years than and Taiwan in Asia, continue to be much more active patentees, Singaporean patentees. Massachusetts also has a larger pool of especially on a per-capita basis In absolute terms, Singapore’s would-be innovators to draw from – its 2008 population of 6.5 patenting in the U.S. over the past five years is comparable to that million is about 41% higher than Singapore. of Denmark and not far behind India. However, while countries like Australia, China, India, South Korea, and Taiwan have seen Among Singaporean patentees in the U.S., electronics companies their annual patent counts in the U.S. steadily go up since 2002, and government-related research institutions play the most Singapore’s patenting has remained broadly unchanged. 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. 50 SINGAPORE COMPETITIVENESS REPORT

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. Singapore has the strongest focus on electrical engineering in received. Singapore amended its intellectual property laws about its patenting of all major innovation countries. Public research a decade ago, and trademarks, industrial designs and patents institutions have filed more patents in the U.S. than Harvard can since be registered here at the Intellectual Property Office. University (excluding the significant patenting of Harvard- related teaching hospitals) and reached about a third of MIT’s Figure 3.22 shows data on patent applications. U.S. institutions patenting level. dominate patent applications in Singapore and together, Japanese and U. S. institutions account for over half of all patent applications In 2007, the United States was the most popular location for received in Singapore in 2007. Singapore residents to file patents. A little more than a third of all applications by Singapore residents were filed in the United States. There is limited data on academic publications, but available Only a fifth of the patents filed by Singapore residents in 2007 evidence is in line with patent data impressions. Singapore is were filed in Singapore, which is about 7% of total applications strong, and has a particular focus on engineering. FIGURE 3.22: SINGAPORE PATENT APPLICATIONS IN 2007 Source: Statistics Database (July 2008), provided by the World Intellectual Property Organization; calculations by ACI. SINGAPORE COMPETITIVENESS REPORT 51

FIGURE 3.23: PAPERS IN THE ENGINEERING CITATION INDEX (2007) Source: National Science Council of Taiwan, 2008. Entrepreneurship Entrepreneurship, the mobilisation of new combinations of assets just one aspect of entrepreneurship - the number of new businesses within new or existing companies, is another characteristic of registered every year - does not distinguish between truly new particular importance to advanced, knowledge-driven economies. ventures and the registration of merely new legal entities, and As is the case with innovation, entrepreneurship is complex to is mired by differences in legal systems. measure. New business formation is one such widely-used indicator. However, this measure excludes the entrepreneurship within The World Bank database provides two measures. The first is a companies and includes the creation of many small companies measure of density, which is the number of registered businesses that have no ambition to grow and thus create little if any of per-capita (calculated using economically active population the dynamism that is usually associated with entrepreneurship. rather than total population) and the entry rate (which is the number of new business registrations divided by the ‘stock’ of The annual Global Entrepreneurship Monitor (GEM) is perhaps registered businesses in the previous year). Developed countries the best available source for comparative data on both the country have both high density and entry rates. context for entrepreneurship and attitudes and aspirations of entrepreneurs. However, Singapore has not participated in this Figure 3.24 shows data averages for Singapore between 2000 survey since 2006. As a result, this section relies on business and 2007. It illustrates that Singapore has the highest entry rate registration data as a proxy measure. Comparative business in the group of comparator countries, but has a relatively low registration data is available from the World Bank.4 This measures 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. 52 SINGAPORE COMPETITIVENESS REPORT

While Hong Kong has the highest business density among Asian Singapore’s progress in shifting its position towards becoming a comparators, Singapore has traditionally been dominated by a knowledge-driven economy is more questionable. The indicators small number of large domestic and multinational companies. of scientific outcomes are quite impressive: Singapore has over Over the last decade, however, there is evidence that a large the last 10-15 years been able to establish itself as an important number of smaller companies, presumably predominantly private academic hub in Asia with global relevance. And patenting and domestic enterprises, have been created. These types of companies publication/citation intensity clearly point in this direction. are particularly prevalent in services focused on the domestic The evidence on Singapore’s ability to translate its growing market. The data is consistent with Singapore becoming a more scientific potential into economic outcomes, however, is less entrepreneurial place, even when the vast majority of these new convincing. Entrepreneurship remains relatively low and seems companies are likely to remain small. 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 Assessment effectiveness with which new ideas and technologies have been introduced into the overall economy. 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. Endnotes 1. See http://go.worldbank.org/C8Q8EGTTH0. Chapter References Klapper, 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 COMPETITIVENESS REPORT 53

Singapore Competitiveness Report Chapter 4 Competitiveness Fundamentals SINGAPORE COMPETITIVENESS REPORT 55

of elements that policy makers can work with. These categories should also be structured in a way that highlights critical action COMPETITIVENESS priorities in a natural way. FUNDAMENTALS 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 Competitiveness captures the medium-term economic fundamentals on the value of another (e.g.: quality of infrastructure). that ultimately determine the level of prosperity an economy Importantly for public policy, no individual institution and its citizens can enjoy. At its core, prosperity is driven by the controls microeconomic competitiveness; it is the outcome level of productivity that companies achieve in a location and of myriad decisions taken independently by many different the ability of an economy to mobilize its resources, especially players in companies, government agencies, universities, and its human capital, for productive economic activity. Data on many other institutions. Effective competitiveness upgrading prosperity and of intermediate economic outcomes provide depends on indentifying the interrelated set of issues that important information on the ultimate success of an economy hold back firm performance, and then mobilizing the right and indicate patterns of strengths and weaknesses; however, coalition of public and private players to address them. it does not provide information on the ultimate root causes of these outcomes. Only an understanding of the competitiveness • Macroeconomic Competitiveness. These factors set the fundamentals that ultimately explain performance differences context in which companies operate, but do not directly across locations can provide this information. influence their productivity and innovativeness. Government, particularly central government, controls most of these The productivity of an economy depends on many factors. factors. Social infrastructure and political institutions are The concept of competitiveness applied here, building on the hard to change in the short term; in the academic literature, work by Professor Michael E. Porter since 1990, provides a they are often identified as the most critical determinant framework to deal with this complexity. The data collected for the of prosperity over longer periods of time. Macroeconomic Global Competitiveness Report (GCR), an annual assessment of policies can be changed relatively quickly, often with a strong competitiveness across more than 120 countries published by the short-term impact on the economy. But without corresponding World Economic Forum, is an important source of information. change in other competitiveness areas, their effects tend to It is based on statistical data collected from international be unsustainable; the academic literature on growth finds organizations and on a survey of more than 10,000 business few independent long-term effects of macroeconomic policy executives around the world. The data was collected between on prosperity levels once the quality of institutions is February and April 2009, i.e. at a period where the extent of the controlled for. global crisis had become very visible. • Endowments. These are factors that may have a direct impact The ranking methodology presented in this report uses a new on prosperity, but are not easily amendable to policy. Their approach developed by a team under the leadership of Professor value for prosperity might, however, depend on government Michael Porter. Thus, the rankings published here are not policy or competitiveness in more general terms. Natural identical to those published by the World Economic Forum resources are an obvious example. Like a gift, they add to wealth in their global competitiveness report. The 2008/09 Global but not to productivity. The wealth they provide depends not Competitiveness Report has a chapter with more detail on the only on what is in the ground, but also on the way a country new index methodology applied for calculating the rankings is able to exploit and leverage these assets. 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. Endowments The remainder of this chapter is organized in three parts. First, Our competitiveness assessment focuses on microeconomic we provide some more detail on the conceptual approach, i.e. and macroeconomic aspects, because these are dimensions the choice of indicators and there relation to each other. Second, which policymakers can act upon. But in order to understand we assess Singapore’s macroeconomic competitiveness. Data is Singapore’s overall position more fully - and especially the way available on the institutional capacity of the country, and we its competitiveness translates into prosperity and the specific briefly discuss the quality of macroeconomic policy. Third, we look competitive position it has developed - it is useful to summarize at indicators of the country’s microeconomic competitiveness. Singapore’s endowments as well. The dimensions covered include different aspects of business environment quality as well as company sophistication. 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, Assessing Competitiveness humid conditions. These include mosquito-borne diseases such as malaria, dengue fever, and yellow fever, as well as infectious Many elements have an impact on competitiveness, which is defined diseases like cholera and tuberculosis. But its location at a major here as “the set of factors that influence the level of prosperity a global shipping route also provides significant opportunities that location can reach.” For policy-relevant analysis, these elements turned out to have strong impact on the specialization of the have to be organized in a way that creates categories, i.e. groups Singaporean economy. SINGAPORE COMPETITIVENESS REPORT 57

TABLE 4.01: ETHNIC DEMOGRAPHICS IN SINGAPORE Source: Population Trends 2009, published by the Singapore Department of Statistics. Singapore is a small island with an area of about 700 square Macroeconomic Competitiveness kilometres, with a present population of about five million. Of this, 74.9% are citizens and permanent residents (who are Macroeconomic factors include two quite different categories: collectively called “residents” by the Department of Statistics), The Social and Political Infrastructure (SIPI) provides the with the rest of the population being foreigners with temporary basic condition that enables citizens and companies to engage in work permits. Ethnic Chinese account for 74.2% of Singapore economic activity. Basic human development, like basic levels of residents, while Malays and Indians account for 13.4% and 9.2%, health care and education, are necessary so that individuals can respectively. Due to a lower fertility rate, Chinese residents as a go beyond pure subsistence activities. Rule of law provides the proportion of total residents have steadily declined over the years. necessary stability in the incentive structure, and sound political institutions ensure that the laws put into place remain legitimate. Singapore’s heterogeneous ethnic composition has the potential to lead to political strife, a fate that it has managed to avert. Macroeconomic Policy keeps the economy in balance at an However, this ethnic diversity can provide an interesting magnet, aggregate level. Fiscal policy largely has to ensure that the balance should it become the foundation for an open society attractive of public revenues and spending remain within what economist for foreign talent. call the inter-temporal budget constraint, i.e. government does not build up unsustainable levels of debt. Monetary policy The small size of the country reduces the attractiveness of the has to ensure that inflation remains in check. Macroeconomic domestic market for foreign investors. But size also makes it management also needs to avoid the emergence of overall easier to reach consensus on policies, especially since there is imbalances in the economy. no conflict between rural and metropolitan areas. Metropolitan areas like Singapore have an advantage, in that public services Social Infrastructure and Political Institutions can usually be offered more efficiently. Singapore’s position on social infrastructure and political institutions is strong on average, but there are differences across Singapore has no meaningful natural resources or inherited sub-areas. Singapore ranks highly on rule of law (5th) and on sources of prosperity to fall back upon. However, it also free the quality of political institutions (6th). from the negative consequences of natural resource wealth, be it Dutch Disease-dynamics or the corrosive impact of these On political institutions, the rank would have been higher were endowments on the quality of public institutions. From the it not for decentralization of economic policy-making (106th) - a beginning, Singapore was forced to focus on creating prosperity, concept that does not really apply in a city-state like Singapore. with no inherited wealth to distract the policy process. Other areas where ranks are low, particularly press freedom (106th) and the measure of voice and accountability (93rd), reflect the Overall, Singapore’s limited endowments were a short-term specific nature of Singapore’s political system. challenge but a long-term opportunity. 58 SINGAPORE COMPETITIVENESS REPORT

FIGURE 4.01: EVOLUTION OF SINGAPORE’S MACROECONOMIC COMPETITIVENESS 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 Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. SINGAPORE COMPETITIVENESS REPORT 59

FIGURE 4.02: GOVERNMENT EFFECTIVENESS SCORES OF TOP- RATED COUNTRIES Source: Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi (2009). “Governance Matters VIII: Governance Indicators for 1996- 2008”. World Bank Policy Research June 2009 In many countries, such low rankings would be associated with Macroeconomic Policy a government leadership that is not accountable to the people, Singapore reached a mediocre rank of 58 on macroeconomic and would pursue their narrow private interests. However, there policy, but this overstates the actual differences to the best is no evidence that the dynamics have played out in this way in ranked countries on these measures. Singapore always had Singapore. sound macroeconomic management, and typically runs budget surpluses as a result of which it has accumulated some of the Singapore is ranked 25th overall on human development. While highest reserves in the world. Singapore’s poor ranking on this overall rank is solid, Singapore gets dragged down by low national debt - consistent with the data reported by the IMF scores on healthcare expenditures as a proportion of GDP (3.3% (where Singapore provides the data) - is a reflection of how the ranked at 122nd); secondary school enrolment (63% ranked at Central Provident Fund (CPF) is treated. CPF contributions are 101st); and the incidence of tuberculosis (48th). captured as public debt, while the corresponding assets (e.g. the stakes in GLCs) are not taken into account. These low ranks warrant further investigation, but are not necessarily signs of weakness. Singapore has, for example, worked Due to the present economic crisis, the government announced hard to keep healthcare costs from escalating, and the government a SGD20.5 billion resilience package which will result in a deficit encourages people to maintain healthy lifestyles. Thus, the focus of SGD8.7 billion (the biggest since 1965) or 3.5 per cent of GDP; is on prevention rather than on treatment. Indeed, Singapore’s the government would incur the biggest deficit since Singapore’s weakness on incidence of tuberculosis could possibly be a result independence in 1965. SGD4.9 billion of this deficit is funded by of its reliance on workers from other Asian countries, such as an unprecedented draw from accumulated reserves, while the India and China, with high incidence rates for tuberculosis. rest draws on previous budget surpluses. Unlike other countries, Singapore is not relying on issuing debt instruments to fund the stimulus. TABLE 4.03: MACROECONOMIC POLICY INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. 60 SINGAPORE COMPETITIVENESS REPORT

FIGURE 4.03: EVOLUTION OF SINGAPORE’S MICROECONOMIC COMPETITIVENESS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. On the monetary policy side, inflation (ranked 52nd) has recently The strength of local clusters determines the level of positive dropped dramatically, as in many other countries. There is no externalities that companies can nurture at a particular location. strong evidence that differences in inflation at the modest levels The cluster perspective adds a geographic dimension to the usually seen in Singapore have a significant impact on long-term analysis: productivity is not just a function of the presence of prosperity. Given that the differences in inflation rates between related and supporting industries in a country, but also of their Singapore and the countries ranked highest globally on this specific co-location in regional clusters. And clusters are more measure are small, the significant rank difference is no major effective if there is joint action, not just co-location, and when reason for concern. government actively engages with clusters in its economic policies. The strength of clusters is discussed in the section on related The interest rate spread, the difference between lending and and supporting industries. deposit rates, has always been high (ranked 60th) in Singapore. This is likely caused by Singapore’s size, which generally implies The sophistication of company strategies and operations higher levels of industry concentration. Despite the large spread, directly sets the economic value that they are able to generate real interest rates are typically very low in Singapore compared to from factor inputs for their customers. Changes in macroeconomic other countries – a result of the exchange rate policy objectives competitiveness or other dimensions of microeconomic that Singapore pursues. 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 Microeconomic Competitiveness companies are not uniform, it is also important to understand performance differences across the different types of companies Microeconomic factors include three key dimensions: The quality (by size, by ownership) in the economy.’ of the general business environment shapes the productivity of the assets that companies can access as well as the opportunities Business Environment Quality for their productive use. Michael Porter introduced in 1990 the Overall, Singapore ranks first in the world on business environment Diamond framework to capture the four dimensions of the quality, a position that it gained for the first time in 2007 and has business environment, i.e. factor input conditions, the context retained since then. It also ranks first on three of four dimensions for the strategy and rivalry, demand conditions, and the presence of business environment quality. Only on the presence of related of related and supporting industries. 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. SINGAPORE COMPETITIVENESS REPORT 61

TABLE 4.04: THE PORTER DIAMOND Source: Professor Michael E. Porter. Factor Conditions Factor conditions include a wide range of infrastructure The World Bank’s 2007 Logistics Performance Index (LPI), elements, ranging from typical physical infrastructure to public provides a complementary view on Singapore’s position, including services and knowledge. Singapore does not rank first in any of additional elements of logistics-related administrative efficiency these elements, but its balanced position puts it in the global and presence of related and supporting industries in this field. pole position overall. The LPI ranked Singapore first among all countries covered. Logistical Infrastructure Singapore compares favourably on most dimensions; only in Logistical infrastructure, mainly physical transportation assets, domestic logistics costs does it register a lower position. To a large is a traditional strength of the Singaporean economy. An efficient degree, this is the consequence of being a prosperous economy port infrastructure was an important element that enabled with higher input costs. Singapore to take full advantage of its geographical location at a major global shipping line. Over time, airport connectivity has been Singapore’s strong position on logistical infrastructure is also added, as well as an efficient city road system that enables access reflected in the economic performance of its port and airport. to warehouses and production sites island-wide. Singapore has Both have achieved significant global market share, and Changi been able to defend its leading position over the years, expanding Airport continues to be ranked as one of the best airports globally in the capacity of the infrastructure in line with the rising demands independent international assessments, especially for passengers. of a growing economy and burgeoning world trade. TABLE 4.04: FACTOR (INPUT) CONDITIONS AND COMPONENTS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. 62 SINGAPORE COMPETITIVENESS REPORT

TABLE 4.05: LOGISTICAL INFRASTRUCTURE INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. TABLE 4.06: RANKS IN THE 2007 LOGISTICS PERFORMANCE INDEX 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. TABLE 4.07: SHIPPING STATISTICS Source: Shipping Statistics, Air Cargo World. TABLE 4.08: ADMINISTRATIVE INFRASTRUCTURE INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. SINGAPORE COMPETITIVENESS REPORT 63

Administrative Infrastructure Administrative infrastructure, essentially the efficiency of WB focuses exclusively on rules and regulations on the books, government services and procedures, is another area in which not on the perceptions of business people affected by them. Singapore traditionally excels. Singapore is strong across all the individual indicators used to measure administrative Doing Business ranks Singapore ranking first out of one hundred infrastructure. The indicator in which it ranks the lowest, the and eighty one countries. It has maintained its first place since number of procedures to register a new business, is also the 2006. While other countries tend to be strong in some areas, area where it has made the most progress of the last few years. while lagging far behind in others, Singapore has been to achieve high markers for its administrative procedures across the board. The World Bank’s Doing Business project provides an additional Singapore’s relative weaknesses lie in two areas: Ease of registering perspective on Singapore’s administrative infrastructure. Some property (16) and Ease of enforcing contracts (14). (but not all) of its indicators are also used in the GCI analysis. The FIGURE 4.05: EASE OF DOING BUSINESS RANKS, 2008-2009 Source: Doing Business 2009, jointly published by the World Bank and IFC. FIGURE 4.06: COMPARISON OF DOING BUSINESS COMPONENTS Source: Doing Business 2009, jointly published by World Bank and the IFC. 64 SINGAPORE COMPETITIVENESS REPORT

Innovation Infrastructure Innovation Infrastructure, an area covering education, science, Table 4.11 shows that Singapore is spending less of its GDP than and science commercialization, is another area of Singaporean other advanced economies on education. This could be the result strengths. It is also an area where steady progress has been made of higher efficiency. But it is also consistent with a policy that over the past few years. uses migrations as a more cost-effective means to increase the skill stock in the labour force. Singapore is particularly strong in educational quality. A majority of Singaporeans has at least some secondary education. Any Despite Singapore’s lower spending on education, its outcomes skills shortages are made up by having open immigration policies in terms of education achievements are strong. Singapore tops particularly for educated individuals. Table 4.10 shows that on the attainment indicators both in terms of math and science average permanent residents and new immigrants have a better scores and in reading scores. educational profile than the domestic population. TABLE 4.09: INNOVATION INFRASTRUCTURE INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. TABLE 4.10: AVERAGE EDUCATION LEVELS Source: Education at a Glance, 2008 (published by the Singapore Department of Statistics. TABLE 4.11: PUBLIC EDUCATION EXPENDITURES Source: Education Finance Indicators (retrieved October 1, 2009), provided by the UNESCO Institute for Statistics. SINGAPORE COMPETITIVENESS REPORT 65

FIGURE 4.07: MATH AND SCIENCE TEST SCORES, 2007 Sources: Trends in International Mathematics and Science Study (TIMSS) 2007. Opinions on how these strong showings on standardized tests in absolute terms both have increased by about a factor of five should be interpreted vary. There is a concern that Singapore over the period 1994 to 2006. In 2007, the total number of R&D focuses too much on the type of repetitive memorization of personnel stood at 24,506 research scientists and engineers, knowledge that generates high performance in standardized tests, and gross expenditure on R&D was SGD6.34 billion, with the but is not necessarily the best driver of intellectual capabilities. private sector accounting for about two-thirds (4.23 billion) of the expenditure. R&D manpower as a per-thousand of the total At the same time, standardized test have proven to provide better labour force increased at an average annual rate of 8.5% from opportunities for children from lower social strata to progress 1994 to 2006 and R&D expenditures per capita grew at 12.95% than more comprehensive assessments of intellectual abilities, per annum over the same period. where social background is a significantly stronger determinant of performance. These figures all compare favourably to the OECD average but lag behind Singapore’s leading peers, like Korea, Japan, and the Singapore has over the last decade or so made great strides in Nordic countries. strengthening its science capabilities. This has been reflected in the inputs into R&D but over time also in patenting, publications, Business enterprises led the way as their expenditures on R&D and more broadly the international positioning of Singaporean increased at an average annual rate of 15.63% between 1994 and research and educational institutions. 2006. The higher education sector drove the growth in manpower with both the number of R&D personnel and researchers increasing Singapore’s R&D push is evident from Figure 4.08, which shows at about 14.3% per annum. a consistent increase in both spending and personnel since 1994; 66 SINGAPORE COMPETITIVENESS REPORT

TABLE 4.12: COMPARATIVE READING SCORES 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. FIGURE 4.08: INNOVATION INPUT TRENDS Sources: Science and Technology Indicators 2008/2, published by OECD; calculations performed by ACI. TABLE 4.13: GROWTH OF INNOVATION INPUTS Sources: The Global Information Technology Report 2008-2009, jointly published by the World Economic Forum and INSEAD. SINGAPORE COMPETITIVENESS REPORT 67

FIGURE 4.09: COMPARISON OF PRIVATE R&D SPENDING, 2006 Sources: Science and Technology Indicators 2008/2 and 2007/1, published by the Organization for Economic Cooperation and Development. At 35%, the government’s share in total R&D spending is higher Figure 4.10 and Figure 4.11 show that Singapore ranks quite well than in most other OECD countries. About 55% of all R&D on both R&D researchers and personnel, but the focus appears spending (private and public) is focused on the electronics to be on the former as Singapore’s researcher population (10.22 sector and within that sector an overwhelming proportion of per 1,000 employed workers) places it in the top four, ahead of the expenditure is on semiconductors. In the data available every Asian country except Japan. This number is surprisingly so far, there is little evidence that private R&D spending has high, compared to 2005 data, where Singapore had 7.41 full-time significantly gone into ‘new’ areas like biotechnology, where equivalent researchers per 1,000 employees, and a very low 0.38 government has made major investments. As shown in Figure full-time equivalent R&D personnel per 1,000 employees. Singapore 4.09, countries such as Taiwan and South Korea also have a focus also has comparatively more public institute researchers than on electronics, whereas OECD countries such as Germany, Japan, any other country except the UK. the United Kingdom and the United States have a much more diverse research portfolio. FIGURE 4.10: RELATIVE COMPARISON OF R&D RESEARCHERS, 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. 68 SINGAPORE COMPETITIVENESS REPORT

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 It contains dozens of research centres and has affiliations on building a stronger institutional base in the form of high- with many national centres. The “NUS Enterprise” program quality universities. The Academic Ranking of World Universities promotes industry engagement and entrepreneurship; it (AWRU) ranks universities by different measures of scientific includes an Industry Liaison Office specifically charged with achievements. Other rankings, like the Times Higher Education protecting the university’s intellectual property and promoting ranking and the Webometrics Ranking of World Universities, collaboration between the university and industry. confirm this general perspective. • Nanyang Technological University (NTU) has six “clusters” NUS and NTU are among the top fifty universities in Australasia, of research centres in intelligent devices and systems, nano- focusing mainly on engineering and technology: and micro-fabrication, biomedical and pharmaceutical engineering, advanced computing and media, information and • The National University of Singapore (NUS) is the highest communications, and environmental and water technologies. ranked university in Asia outside of Japan and Australia. TABLE 4.14: ACADEMIC RANKING OF WORLD UNIVERSITIES, 2009 Sources: Academic Ranking of World Universities 2009, compiled by Shanghai Jiao Tong University. SINGAPORE COMPETITIVENESS REPORT 69

Singapore has also taken many steps to provide an attractive education and commercialization arms as well. Because of A*Star, environment for science-related investments. In terms of intellectual significantly more public research activity is in Singapore taking property rights, Singapore’s legal regime of protection is “TRIPS- place outside universities than in the comparator countries. plus,” and the country has recently emerged as one of only three Asian countries (along with Japan and Taiwan) on the list of the An important ingredient for the effective translation of scientific top twenty-five countries in the world with the lowest software research into commercial success is the ease and intensity of piracy rates. Singapore has a very strong intellectual property company-university interaction. Singapore has been able to regime in place with legislation relating to patents, copyright and get high scores in this area, reflecting widespread satisfaction industrial design. It also has a local registry of patents. among business leaders with their access to universities. However, Singaporean universities have hitherto been unable to generate The Agency for Science, Technology and Research (A*STAR) is the significant income from royalties. While this is not the key indicator national research body that oversees public sector R&D activities of commercialization success, it is one of the relevant channels. in Singapore. It not only manages R&D activities, but contains BOX 2: INTERNATIONAL RANKINGS OF INNOVATIVE CAPACITY Over the last few years, rankings that aimed to capture the The EIU-Cisco Innovation Index ranking of the most innovative innovative capacity of countries and regions proliferated. Most countries in the world also includes data on innovation inputs and of these were a mix of outcome and input measures, which outputs. Innovation output is measured by total patents granted limits their use for giving policy advice. Singapore tends to do by the European, Japanese and U.S. patent offices. Innovation well on most of these rankings, especially those that focus more inputs include measures such as R&D spending as a proportion on general business environment conditions than on specific of GDP, educational and technical skills and the quality of IT economic returns from innovation. infrastructure. The innovation environment is measured by factors such as policies towards trade and investment, the political The World Bank’s Knowledge Economy Index measures the country’s environment, taxes, the labour market and infrastructure. This ability to generate, adopt, and diffuse knowledge. The index is ranking places Singapore in 16th place; as in other rankings, based on four pillars: use of information and communications the country performs higher on inputs than on outputs. Japan technology; education and human resources, the innovation is first, while the United States ranked fourth over the period system, and the economic incentive and institutional regime. 2004-2008. Taiwan (7th) and South Korea (11th) are ahead of Singapore (ranked 20) and Hong Kong (ranked 26) are particularly Singapore while Hong Kong comes in lower at 21st. weak in per-capita spending on education). Otherwise, all other components are very strong. INSEAD and the Confederation of Indian Industry also released global innovation rankings for the year 2008-2009. Innovation The Boston Consulting Group (BCG), the National Association inputs were measured using five pillars: institutions and policies, of Manufacturers, and the U.S. Manufacturing Institute released human capacity, general and ICT infrastructure, markets an international innovation index comparing innovation inputs sophistication and business sophistication. Innovation outputs and performance across countries. Singapore ranked first on included knowledge creation, competitiveness and wealth creation. the index and on inputs, which largely covers general business Many of the measures were drawn from Global Competitiveness environment quality. But it ranked only ninth on innovation Report data. The United States is in first position and Singapore performance, a measure that combines R&D spending, patenting, is fifth, followed by South Korea (6th), Japan (9th) and Hong and general economic performance measures like technology- Kong (12th). Singapore has a relatively low score on the general intensive exports and labour productivity growth. and ICT infrastructure (14th) input pillar, and obtained the lowest output pillar rank in “competitiveness.” Singapore’s profile of relative strengths and weaknesses is atypical of advanced economies such as South Korea (2nd), Iceland The Innovation Index of the Information Technology and (4th), the United States (8th), and Japan (9th). Hong Kong, Innovation Foundation in the United States follows a similar which ranked sixth overall, is also stronger than Singapore on approach, giving a large weight to indicators on general business innovation performance vis-à-vis innovation inputs. Singapore’s environment quality. These include general economic business relative profile is more similar to economies like Armenia, Peru, environment indicators such as trade balance, foreign direct and Uganda. 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. 70 SINGAPORE COMPETITIVENESS REPORT

TABLE 4.15: CAPITAL MARKET INFRASTRUCTURE INDICATORS Sources: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. Capital Market Infrastructure Capital Market Infrastructure is the fourth dimension of also be that the lack of local SMEs with growth ambitions - the factor conditions in which Singapore has a position at the very companies one would expect to have the strongest need of loans top of global rankings, ranking 2nd overall. This is an area in - is driving this result. which Singapore has made significant improvements over the last few years. Looking more closely at different aspects of capital The overall positive assessment is confirmed by a number of market infrastructure, Singapore has traditional strengths in the other analyses. The WEF’s Financial Development Report ranks regulatory environment. More recently, this has also translated Singapore 4th globally, up from 10th rank in 2008. The WEF in better access to different forms of capital. Local equity market uses many of the economy-wide indicators used in our overall access remains somewhat lower ranked, despite clear gains over assessment of competitiveness, but adds a few financial sector- time. Financial market sophistication and the soundness of banks specific indicators. are ranked among the global top ten, but also come in at levels lower than Singapore’s overall position. A recent ranking of financial centres ranks Singapore third in the world, after London and New York. It is the highest ranking The somewhat weaker position on financial market sophistication financial centre in Asia, slightly ahead of Hong Kong and with might be a reflection of the relative cautious approach that a larger advantage ahead of Tokyo and other Asian centres. The domestic banks have taken in their operations; an approach that ranking is based on an index combines a multitude of financial has, however, enabled them to weather the current global fiscal sector, competitiveness, and liveability factors from various sources. crisis relatively unharmed. The headline Global Financial City (GFC) score (coloured blue It could also be a consequence of the weaker position in some in Figure 4.12) is used to rank global financial cities. The online market segments, where especially the strong position of the survey assessment is a separate qualitative measure, and estimates Singaporean sovereign wealth funds have led to less private sector city’s reputation as a financial hub. The figure below shows both activity. Singapore’s slightly lower position on domestic credit the score from the data analysis and from the survey. Singapore to the private sector does not seem to be a reflection of barriers has an excellent reputation as a financial centre, even stronger to accessing loans or other sources of finance. However, it might than its position on the hard data assessment. TABLE 4.16: FINANCIAL SECTOR DEVELOPMENT, 2009 Sources: The Financial Development Report 2009, published by the World Economic Forum. SINGAPORE COMPETITIVENESS REPORT 71

FIGURE 4.12: ATTRACTIVENESS AS FINANCIAL CITY 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. Communications Infrastructure Communications Infrastructure is the final dimension of factor in Asia; recent data shows that Hong Kong and South Korea have conditions. This is an area where Singapore ranks as 7th globally higher penetration rates than Singapore. slightly lower than in the other dimensions, with little changes over time. The main reason is the slightly lower penetration rates Figure 4.14 shows internet use by age group and shows less for fixed line telephony and internet usage. internet use across all age groups, include the younger age groups that drive usage in other countries. Thus while Singapore’s IT Figure 4.13 shows internet penetration rates for various countries. infrastructure compares well with developed countries, it is not While Singapore compares well with comparator countries, outstanding and neither is internet use. This is a concern given penetration rates are much higher in Scandinavian countries Singapore’s ambition to promote industries such as interactive and in other Asian countries such as South Korea and Japan. digital media; a sector which relies both on IT infrastructure as Broadband penetration rates in Singapore are also not the highest well as consumers of digital media. TABLE 4.17: COMMUNICATIONS INFRASTRUCTURE INDICATORS Sources: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. FIGURE 4.13: GLOBAL INTERNET USE AND PENETRATION Sources: Internet World Stats - http://www. internetworldstats.com (Miniwatts Marketing Group) and the World Development Report Online (World Bank). Retrieved June 26, 2009. 72 SINGAPORE COMPETITIVENESS REPORT

FIGURE 4.14: INTERNET USE COMPARISONS Sources: World Internet Project: International Report 2009, published by the World Internet Project. Context for Rivalry and Strategy The Context for Rivalry and Strategy captures the incentives to foreign investment and trade, as well as by other policies in and challenges companies face in leveraging factor conditions in areas like labour markets, capital markets, and IP that ensure a the market place. The role of government - as a policy maker and high level of flexibility and strong property rights. The Singapore regulator, but in some cases also as a market participant - has a government has over the last few years continued to actively central impact on this dimension of the business environment. But pursue trade liberalization at all levels; bilateral, regional as the corporate structure of companies and their actual behaviour well as multilateral, with countries in all regions. It has signed on the market is also important. sixteen trade agreements either bilaterally, or through ASEAN with more than twenty trading partners from all geographies and Singapore ranks traditionally very high on the Context for Rivalry is presently exploring further trade liberalization with countries and Strategy. This is driven by the high openness of the country such as Ukraine, Peru, and Canada. TABLE 4.18: CONTEXT FOR RIVALRY AND STRATEGY INDICATORS Sources: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. SINGAPORE COMPETITIVENESS REPORT 73

The World Economic Forum’s Global Enabling Trade Report sales, exports and assets was between 20% and 29% depending combines much of this data with more specific information on which measure is used. Clearly, Singapore’s manufacturing on trade-specific outcomes and policies. The report measures sector has large foreign firms and small domestic firms, and the the extent of necessary attributes that countries have adopted, small firms are likely suppliers to large foreign firms. Domestic which will enable the free-flow of trade into a country and SMEs dominate general manufacturing, while GLCs dominate to its final destination. Singapore is ranked second out of 118 transport and engineering. Large foreign firms can be found in countries, following only Hong Kong. Singapore is especially sectors such as electronics, chemicals, and pharmaceuticals. strong in the “Border Administration” sub-index, while it has a marked weakness under “Market Access.” Singapore suffers from On the services side, financial services are dominated by large a surprisingly weak rank for the Presence of Non-Tariff Barriers foreign firms, whereas transportation, hotels, and restaurants and the Openness to Multilateral Trade Rules. Unfortunately, are dominated by large domestic firms. Domestic SMEs focus the report does not provide more detail on how these indicators on providing business services where as foreign ones focus on were compiled. Incidentally, Hong Kong reported no data for wholesale and retail activities. these two indicators. Table 4.19 provides data on the top 1,000 Singapore firms and The deeper concerns that exist are related to the actual market again, domestic private firms account for a larger proportion of structures in Singapore. One issue is the relative low level of employment than they do of revenues, assets and net income rivalry on domestic markets. This is not atypical of smaller whereas domestic GLCs account for a small proportion of economies, and Singapore has made significant improvements employment and a much larger proportion of assets. in this area over recent years. But it remains an issue that needs to be closely watched and address more actively by policy than The makeup of the corporate sector - that is, large GLCs, large in larger economies. The other issue is the dominance of MNCs, and the presence of smaller domestic private firms which business groups, and particularly government-linked companies are likely geared towards servicing their larger counterparts in the economy. – might also explain some of the shortcomings in company sophistication in Singapore. Given their size and resources, GLCs Singapore businesses are split between foreign firms, many of have no problems either in attaining international prominence them large multi-nationals; government-linked companies (GLCs) (as in the case of Singapore Airlines) or expanding to the region and private domestic firms. While domestic and foreign firms, as (as in the case of Singapore Telecom which has even expanded well as SMEs and larger firms, account for similar shares of value to Australia). added, foreign firms dominate in the manufacturing sector and are larger than domestic firms. But for smaller local companies, especially those with growth ambitions, it is hard to attract talent in an environment where The 2007 Census of Manufacturing shows that domestic firms foreign companies, large GLCs, and in some cases – even the accounted for 90% of establishments and 58% of workers, but government - provide attractive and established career paths. the share of domestic firms in terms of value added, value of 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. 74 SINGAPORE COMPETITIVENESS REPORT

TABLE 4.20: DEMAND CONDITIONS INDICATORS Sources: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. Demand Conditions Demand conditions, more specifically the nature and of rules and regulations or in the form of public procurement, sophistication of local demand, have long been ignored in the which in many industries is an important part of overall demand. academic debate. In recent years however, the awareness has grown that local demand conditions play a significant role in Singapore ranks first globally on demand sophistication. This shaping company behaviour. Innovation is often the result of is driven by government policies affecting IT, both in terms sophisticated customers that are willing to experiment and push of regulation and procurement. In other areas of demand companies in directions that later become market standards. sophistication, both in terms of consumer behaviour and government regulation, Singapore ranks significantly weaker, Demand sophistication is a reflection of consumer behaviour, but still within the range of other advanced economies. but can also be the result of government action, either in terms 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. SINGAPORE COMPETITIVENESS REPORT 75

The South Korean IPS National Competitiveness Research either on their own initiative or as the result of government survey provides more detailed information on different aspects policies that mobilize clusters. of consumer behaviour. On demand quality, Singapore is ranked 23rd overall and 9th among small economies. This is significantly Singapore ranks tenth on supporting and related industries. lower than its overall rank and falls behind especially the US and It gets the highest marks on efforts to mobilize collaboration European countries. The data suggests that the nature of demand within clusters. On the actual presence of related and supporting is currently not a key driver of Singapore’s competitiveness and industries, Singapore’s position is somewhat weaker, which is innovative capacity. typical for a small economy. Encouragingly, the weaknesses are more in quantity than in quality. Supporting and Related Industries Supporting and Related Industries are the second dimension of Singapore is a relatively specialized economy with a strong focus the business environment that has traditionally not been covered of activity in a small number of key sectors. This is particularly by academic research. With the growing interest in geographic visible in the export sector, where information technology (IT) factors in economics, this perspective has started to change in exports (including re-exports) account for one-third of all export recent years. The local availability of relevant inputs and knowledge revenues. This is high compared to other exports that are not is now seen as a relevant factor, providing complementary dominated by natural resources. advantages to the ones derived from global sourcing. Without cluster specialization, which is the natural corollary of a high With the growing development of the domestic economy, presence of related and supporting industries, it is increasingly Singapore has become somewhat more diversified. In exports, hard to achieve competitive levels of productivity. Some of the Singapore’s IT cluster has lost share relative to other clusters. advantages of strong clusters relate to the pure presence of But while the dominance of IT might be falling, the importance relevant companies in the same location. But other advantages of key clusters for the economy remains high. only materialize if there is active collaboration among companies, TABLE 4.21: SUPPORTING AND RELATED INDUSTRIES INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. 76 SINGAPORE COMPETITIVENESS REPORT

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. In terms of cluster-specific competitiveness, Singapore has • In chemicals, there is a dedicated Jurong Island industrial park, ranked highly in two recent studies looking at IT and at Biotech: the Chemical Process Technology Centre, and the Institute of Chemical and Engineering Sciences. 1. The Economist Intelligence Unit’s IT industry competitiveness index evaluates countries on their ability to support a strong • In digital media, there is infrastructure (Fusionpolis), educational IT industry. Singapore’s rank improved from eleventh of sixty programs, and new economic development agencies (Infocomm four countries in 2007, to ninth of sixty six countries in 2008. Development Authority and Media Development Authority). Singapore’s overall rank was dragged down by low scores in the The box below provides a more detailed discussion of the R&D environment (17th) and the Legal Environment (14th). policy activities in this field. 2. The Worldview Scorecard aims to measure the capacity for • In biomedical sciences, there is super-cluster effort including biotech innovation in nations around the world. Singapore pharmaceuticals, biotech, medical technology, and health care ranks second only to the United States. Singapore does best services. It includes efforts to attract life science manufacturing on education and workforce, enterprise support, and general to Tuas Biomedical Park, the creation of the Biopolis Research business environment foundations, while it ranks somewhat Park, a SGD1 billion Biomedical Sciences Investment Fund, weaker on the IP environment. the creation of a Genome Institute, an Institute of Cell and Molecular Biology, and an Institute of Bioengineering, and Singapore’s cluster portfolio has evolved in a policy environment regulatory decisions to legalize stem cell research. 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: SINGAPORE COMPETITIVENESS REPORT 77

BOX 3: A CASE STUDY OF SINGAPORE’S INTERACTIVE DIGITAL MEDIA CLUSTER Singapore has for some time now followed an explicit policy sector, games, interactive TV, film and advertising are expected of moving the country towards becoming a knowledge-driven to grow at least at an annual rate of 20%. For interactive game economy. Part of this strategy is a number of programs in areas development, 2007 revenues in Singapore were estimated at like biotechnology, design, and interactive digital media to around SGD 150-175 million; value added at about SGD75 million develop new clusters that fit this description. This short case and employment at 714 individuals. study summarizes an analysis of the interactive digital media cluster that the Asia Competitiveness Institute has conducted; The Cluster Development Program the full analysis will be available as a separate working paper. Singapore’s interest in the IDM sector can be traced back to The key question is whether the program is achieving its goal recommendations by the Economic Review Committee in of promoting structural change towards a new type of economic 2002. The committee was of the view that that the next phase of activities in the Singaporean economy. development would have to rely on the creative and imaginative capability of Singaporeans. Thus, creative and cultural products Defining Interactive Digital Media were to be the new engines of the economy. Interactive Digital Media (IDM) is part of a wider “creative” sector, which includes activities in media, art, theatre, film, Government plays a leading role in this sector, providing design, architecture, and other related areas. Singapore’s media infrastructure and venture capital, attracting foreign investment, fusion plan has set a goal to have, by 2015, a media industry that and providing demand. Government set up the IDM Programme has a value-added of about SGD10 billion creating 10,000 jobs. Office (IDMPO) in 2006. The IDMPO is an inter-agency outfit hosted by the Media Development Authority (MDA) to coordinate The global entertainment and media sector is expected to grow at efforts between agencies such as Agency for Science, Technology the rate of 2.7% per annum between 2009 and 2013. Sectors such and Research (A*STAR), Defence Science and Technology as magazine and newspaper publishing and recorded music are Agency (DSTA), Economic Development Board (EDB), Info- expected to decline over this time period whereas those such as communications Development Authority (IDA), International video games, internet access and internet advertising are expected Enterprise (IE) Singapore, Ministry of Education (MOE), Ministry to grow by at least 6% per annum. The United States will remain of Information, Communications and the Arts (MICA) and the the largest market for entertainment and media, accounting Ministry of Trade and Industry (MTI). The IDMPO strategy is for over USGD400 billion of a USGD1.4 trillion market in 2008, to create a sustainable ecosystem that links four key groups of followed by Japan and the United Kingdom. The Singapore stakeholders - Institutes of Higher Learning, Research Institutes; market was estimated at USGD3 billion in 2008 and is expected industry; individuals; and schools. For instance, one of IDMPO’s to be at about the same level in 2013. tasks is to manage the dispersion of SGD500 million from the National Research Foundation (NRF). This fund is dispersed via Singapore has broadly defined interactive digital media to include initiatives like IDM Research Oriented Centres of Knowledge, anything that is interactive and digital. Core activities include, for Futurescape, and IDM Jumpstart and Mentor. The investment from example, the creation of content and supporting activities include the NRF is spread out over five years (2006-2010) and is expected delivery and distribution systems such as telcos or internet service to generate SGD10 billion value-add and create approximately providers. Sector definitions as well as estimates differ depending 10,000 new jobs by 2015. on the particular approach used by various consulting firms. However, IDM in general includes advertising, mobile content, In June 2009, government launched the Singapore Media Fusion gaming, television and radio, film and video, online publishing Plan (SMFP) which focuses on Asia and in growing Singapore’s and music. Others choose to segregate sectors based on whether competitive advantage in IP protection and content management they are ‘going digital’ (such as interactive television, film and capabilities. Instead of just being a “Global Media City” the publishing) or were ‘born digital’ (such as games, animation and objective was for Singapore to be the “Trusted Global Capital interactive online and mobile media). Nonetheless, the basic for New Asia Media.” value chain includes creation of content, processing, aggregation and archiving and distribution and delivery. An additional SGD230 million will be pumped into the media industry over the next five years (2009-2013). Several projects Estimates on cluster size vary significantly depending on the included in the plan will directly enhance the IDM sector. For specific definitions applied. One estimate for 2005 indicates instance, development of the 19-hectare Mediapolis complex, that revenues of digital media and entertainment in Singapore expected to be completed within 10-15 years, will house digital were about SGD1.8 billion, with content accounting for 0.14 production, broadcast facilities, IDM and R&D activities, and billion, processing for 0.13 billion, aggregation for 0.95 billion post-production activities. This complex is expected to house an and distribution for 0.58 billion. Estimates for 2010 suggest ecosystem that will nurture the development of the media cluster. revenues of SGD3.86 billion with aggregation and distribution accounting for SGD3.0 billion. The Next-Generation National Broadband Network will be implemented within the SMFP parameters to dramatically Another estimate indicates that value added in IDM was SGD1 upgrade Singapore’s internet connection speeds. The fibre- billion in 2005 with “core” activities accounting for SGD0.6 optic network will cost more than SGD1 billion to build, and billion. This is expected to expand to SGD4.7 billion by 2015 promises to increase internet speeds tenfold (to 1Gbps) at a cost with the “core” accounting for SGD3.7 billion. Within the IDM lower than current broadband connections. Work has started 78 SINGAPORE COMPETITIVENESS REPORT

A CASE STUDY OF SINGAPORE’S INTERACTIVE DIGITAL MEDIA CLUSTER in 2009, and 95% of all homes and offices are expected to be Singapore’s location between East and West; its multicultural connected by 2012. environment which some indicated is hard to find outside of the United States; and its immigration rules which allow firms Another project that will enhance the local IDM sector is the to hire employees from other countries in the region. setting up of the Broadcast Innovation Centre (BIC). This is a joint project between MDA and Singapore Telecommunications. The Many firms are also attracted by the low tax environment and BIC aims to boost Singapore’s media development and distribution other incentives the government is providing to promote the capabilities by serving as a digital media exchange and content sector. The weaknesses include: a small domestic market and a distribution hub that connects companies in Singapore to major weak talent pool; and some firms indicated that business costs media capitals worldwide via high-speed satellite and terrestrial appear to have increased dramatically in the past few years, fibre networks. The intent is to draw foreign media companies to particularly when compared to Hong Kong. use Singapore as a base for the development and distribution of their work, as well as, enable Singapore-based broadcasters and The general view among industry participants is that Singapore’s content producers to share their work with global audience easily. IDM sector may take as much as ten to twenty years to develop. As a “managed society,” Singapore is perceived to lack the Government departments provide demand and have contracted sufficient room for social and political debate that characterizes with local firms to develop applications of 3D environments the environment in which creative clusters thrive. Thus it is seen for both mundane tasks such as finding one’s way around a as very likely that Singapore may have to settle for “another” part hospital and more sophisticated ones such as to help the police of the value chain rather than content creation, one related to to conduct simulations. data warehousing and distribution. Overall, the government’s approach to cluster promotion has Singapore has quite a different competitive profile from many other also been similar to that used in manufacturing, which is to first countries active in IDM. This does not rule out that Singapore can attract multinationals and rely on imported talent and then to try be an effective competitor in this field. But it does indicate that and link domestic firms to the MNCs and to train local labour. this process will take time, that the economic benefits are initially going to be modest, and that it will require the development A number of other countries also have initiatives in this sector. of new competitive strengths rather than just the appropriate Canada for example which has a highly developed interactive marketing of the existing strengths to a new constituency. digital media sector uses employment tax credits as the main instrument to promote this sector. In addition there are a number Second, in pushing towards areas like IDM, Singapore is moving of funds such as the Bell Fund and the Quebecor Fund which into fields where the traditional policy tools might not work as provide up to half a million dollars per project to produce and well. Singapore has generally adopted a heavily government- develop content. Game developers can also take advantage of a led approach. It focuses on providing an attractive business scientific research and experimental development tax credit. In environment, targets foreign investors to become the anchors Australia, Screen Australia provides a number of grants which of the new cluster, uses a highly differentiated menu of targeted include both development of digital content, and travel to policy interventions and subsidies, and plays a dominant role in showcase projects. In addition, there are a number of seed and developing the cluster. commercialization funding programs to help start-ups. In other countries, and particularly in Canada, the private Assessment sector and trade associations appear to be taking the lead with Singapore’s experience so far in IDM provides a number of lessons government playing a supportive role. Focusing on foreign that have important implications for the country’s broader strategy investment is more typical in production-oriented activities, to become a knowledge driven economy. while creative clusters tend to rely on a strong base of local talent. Incentives are usually much simpler with, for example, First, in pushing towards areas like IDM, Singapore is moving beyond Canadian provincial governments relying only on employment its traditional set of advantages. Singapore has an established IT tax credits. The literature on vibrant IT clusters in countries industry, a strong general business environment valued by foreign like Taiwan, India, Ireland and Israel indicates that innovative investors, and living conditions that are attractive for foreign clusters do not respond well to such directive government policy. talent. But technical IT skills turned out to be less critical then creative abilities. And while Singapore has a strong tradition of Singapore uses essentially the same policy approach in IDM that discipline, hard work, and efficiency, it still has much less of a it has used successfully in the past in capital-intensive activities. tradition in more free-wheeling creative activities. The experience of other countries suggests that this approach might have its limits, if Singapore is serious about moving into Interviews with companies in the Singaporean IDM sector confirm the creative parts of the cluster. this view. The foreign companies are in Singapore because of traditional business environment strengths, not because of the Third, Singapore so far remains a small player in IDM. Other creativity of Singaporeans. The strengths that they find include: countries such as the United States, Japan, South Korea, United SINGAPORE COMPETITIVENESS REPORT 79

A CASE STUDY OF SINGAPORE’S INTERACTIVE DIGITAL MEDIA CLUSTER Kingdom and Canada are ahead not just in creative industries in Overall, the experience in IDM suggests that Singapore has to take general, but in IDM and games in particular. And the contribution a realistic view in its development of knowledge-driven activities. that IDM makes to the Singaporean economy is still very modest It will be critical to target the right kind of activities. The more compared to the size of traditional IT activities. Singapore wants to move towards knowledge-driven activities that move beyond its existing strengths - especially its attractiveness Developing IDM to an economically meaningful scale will not be to foreign investors and talent - the more challenging the process easy for Singapore. Foreign investors spend relatively small amounts will be; science-related research activities might be a better fit compared to the traditional capital-intensive industries attracted than creative activities or large-scale entrepreneurial start-ups. to Singapore. While there is often a significant amount of local outsourcing in manufacturing industries due to transportation It will be necessary to review the policy tools applied. The more cost considerations, it is easier to integrate Singaporean IDM Singapore wants to move away from the traditional model of operations with sites elsewhere in the region or globally, in the MNC-driven growth, the more it needs to adopt a new policy digital sphere. This might limit the positive spill-overs of foreign approach where government is a facilitator rather than driver. investment on local company activity to the spin-offs by local And it will be important to have patience. The more Singapore entrepreneurs that have gained experience working for the MNCs. wants to move into activities based on individual talent, the longer it will take for economic activities to reach meaningful economic scale. Company Sophistication Singapore’s Competitiveness in Perspective Singapore is ranked ninth on the aggregate measure for company sophistication. While this is a respectable position, it is relatively Singapore is one of the most competitive economies in the world. weaker than the business environment score that the economy And there are no signs that its position is slipping. If anything, has achieved. the country has further accentuated some of its key strengths over time. Singaporean companies are ranked best on organizational practices, where they are sixth overall. This is a significant improvement The overall profile of Singapore’s competitive strengths and from recent years, and signal changes in the way companies in weaknesses remains much in line with an investment-driven Singapore are structured. Within this area, the only indictor economy focused on delivering high levels of efficiency for foreign in which Singapore continues to do less well, and actually lost investors. The key assets of Singapore remain a very strong physical position on, is the willingness to delegate authority. This is infrastructure, a highly open market, and flexible and efficient quite typical for relatively traditional organizational structures government rules and regulations. Singapore also provides an that integrate strong incentive elements without changing their attractive workforce, combining well educated nationals, foreign underlying architecture. talent attracted by Singapore’s quality of life, and low-skill low- wage workers temporarily in Singapore. On strategy and operational effectiveness, Singaporean companies have made steady progress and now rank within the global top Within this context, the focus has increasingly shifted, expanding ten. Still, a number of observations remain reasons for concern. to include a strong science base. Science has become important While companies in Singapore are seen to invest significantly in two dimensions: into R&D, their capacity for innovation is ranked relatively low. This gap reflects the imbalance between R&D inputs and outputs 1. First, Science is an important driver of efficiency at the on an economy-wide level, and needs to be understood more performance levels reached by the Singaporean economy. thoroughly. Companies in Singapore also do not rank that well Without a strong scientific base, advanced technologies and on the nature of their competitive advantages. This is consistent ideas would become out of reach in many of the sectors where with high levels of efficiency and short-term orientation towards Singapore is specialized in. meeting consumer needs but lower levels of innovation and unique market positions. 2. Second, scientific research is a new activity where Singapore’s traditional model of attracting foreign companies to conduct On the internationalization of firms, the specific profile of the operations can be applied. Singapore’s attractive for foreign company base in Singapore shines through visibly. Foreign talent, not only from the region but also globally, makes it companies, and increasingly, GLCs target international markets one of the locations where MNCs can tap into the global skill from a Singaporean base. But the control of the international pool. Without a strong scientific base, Singapore would lack distribution channels, especially for the MNCs, rests with foreign the credibility and key skills to compete in this area. headquarters or companies, not with the enterprises located in Singapore itself. 80 SINGAPORE COMPETITIVENESS REPORT

TABLE 4.22: COMPANY SOPHISTICATION INDICATORS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. FIGURE 4.17: NEW GLOBAL COMPETITIVENESS INDEX AND SINGAPORE’S 2009 RANKS Source: Unpublished data from the New Global Competitiveness Index (2009), Professor Michael Porter and the Institute of Strategy and Competitiveness. SINGAPORE COMPETITIVENESS REPORT 81

Many of the traditional weaknesses of Singapore’s competitiveness Singapore is quite clearly behind its most advanced peers when are directly related to the small absolute size of the economy. On it comes to having a dynamic private sector with entrepreneurial related and supporting industries, Singapore had to specialize companies that have the ambition to grow. The conditions for in terms of clusters and specific activities to be able to reach such companies seem generally good; this is also the impression sufficient critical mass. This remains the only feasible way to from international assessments that look at the general business create the foundations for high productivity. But in some areas, environment for entrepreneurs. But once in Singapore, they face it implies that Singapore is reliant on foreign suppliers not both cultural barriers and very tough competition for talent. present in the domestic economy, thus exposing the country to Culturally, Singaporeans are risk averse, and are, as a society, sector-specific shocks than a larger economy that can support a not very open to the notion that failure in a business venture is broader portfolio of clusters. an important educational experience. Marketwise, there are so many opportunities within MNCs, GLCs, and even the public On the context for strategy and rivalry, Singapore registers a lower sector, that too little talent is left for new start-ups. level of domestic competition than larger economies, despite a policy regime that has opened the market to international trade The challenge Singapore is facing developed from a combination and investment. Where China with its huge market receives the of already having a very successful model, and yet being of small automatic attention of foreign companies trying to penetrate its absolute size. Growing a new entrepreneurial sector on the basis market, Singapore has to work harder to increase the level of of the strong science system will be challenging, as long as the actual competition domestically. successful MNCs and GLCs outcompete start-ups for the limited talent available in Singapore. Creating the conditions for this Foreign companies are, of course, present in large numbers. transition to happen would require taking greater risks. But their focus is often the entire region, not just the local market. In addition, the strong presence of government-linked The GLCs are an important example: privatizing the GLCs would companies (GLCs) seems to have a dampening effect on local have a high likelihood of causing their advanced functions (and market dynamism. While the efficiency of the GLCs seems to local demand for advanced financial and business services) to compare favourably to their global peers, they make it harder disappear relatively quickly. This could free up some of the talent for local start-ups to grow and attract the top talent they need now working in executive functions in the GLCs for positions in to succeed. With the GLCs’ focus increasingly shifting beyond new companies. But their growth would take a longer period of Singapore’s borders, they too do not infuse much dynamism to time, and is subject to significant uncertainty. the local market. Singapore thus needs to carefully consider which options are Despite its many achievements, Singapore struggles with the available in terms of developing its competitiveness profile: transition to a knowledge-driven economy characterized by strong Sticking to Singapore’s traditional strengths, developing these innovation as the key prosperity driver. While it is solid on key strengths gradually by adding more science-oriented elements, ingredients of an innovation economy, it does not outperform or moving ahead towards a truly knowledge-driven economy key peers. On demand conditions, the government has done their with more radical reforms. 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. Chapter References Economist 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. 82 SINGAPORE COMPETITIVENESS REPORT

Singapore Competitiveness Report Chapter 5 Conclusions SINGAPORE COMPETITIVENESS REPORT 83

across Singaporean society in the standard of living. Many other countries have recently experienced a similar increase in CONCLUSIONS 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 Economies around the globe are in turmoil. The downturn is solid (but far from exceptional) levels of labour productivity. significantly deeper and more global than anything experienced High labour mobilisation is not atypical for economies with since the Great Depression. Unlike their predecessors at the time, a significant share of immigrant labour. The recent growth in policy makers have now reacted strongly, bailing out banks, labour mobilisation has benefited from higher activity levels launching stimulus packages, and using old and new monetary among residents but a rising share and activity level of non- policy instruments. The outlook now seems slightly more positive, residents continued to make a positive contribution. Singapore especially in Asia: the rate of decline has fallen and the hope has further potential to increase labour mobilisation among is increasing that while a drawn-out period of adjustment lies females, a group that in other countries has been an important ahead, it will not be the abyss that bankers and exporters were driver of increasing labour mobilisation rates. Labour productivity facing in late 2008 and early 2009. has reached a high level, above the average levels of the EU and OECD. But the volatility of productivity growth has increased However, in this period of dramatic shocks, forecasts have become and catch-up to the US has proven hard to sustain. The most much less accurate than in periods of stable trends and calm. recent improvements in prosperity have been predominantly the This far outside the normal parameters, there is little reliable result of higher labour mobilisation, not gains in productivity. experience on how consumers, investors, and producers will react to the massive government efforts under way. This uncertainty The demographic trends will make it increasingly challenging affects not only the short term but also the longer term. Will the for Singapore to just keep the current labour mobilisation rates, crisis only be a - albeit historically deep - bump on the road, or as an increasing share of the population retires and leaves the will it change the course of economic development for individual workforce. Future growth will have to come from productivity countries and regions? growth. With capital stocks already high and skill levels solid, the main driver of growth will have to be total factor productivity The Singapore Competitiveness Report 2009, the first in this new growth. series of regular assessments, provides data and analysis to inform the discussions on the impact of the crisis on the medium- to Singapore’s performance on intermediate measures of economic long-term development of Singaporean competitiveness. It does activity signals a solid foundation for current and future prosperity. not aim to provide a better forecast on what will happen over The defining characteristic of Singapore is its high level of the next six or twelve months; other research centres, financial integration into the global economy. While this has exposed the institutions, and government agencies provide in-depth coverage country to the onslaught of the current crisis, it is also one of the of this question. key drivers of Singapore’s medium-term prosperity. Instead, the ambition is to put the short-term developments There are no signs that Singapore’s position in the global trading into the context of the economic fundamentals that will drive system is eroding. This position is, however, slowly changing: economic development over longer periods of time. Clearly Singapore is shifting from being a direct supplier to the US and these are related: many of the policy choices made today will Western Europe to becoming a specialized supplier of services impact the fundamentals that exist tomorrow, even if their and components to the Asian production system, and increasingly primary motivation now is to deal with the immediate crisis at also to Asian final demand. These changes are driven by market hand. In this time of economic crisis, the Report’s discussion of forces, not by a clear policy to transform the economy in this way. the medium-term fundamentals aims to contribute to a solid recognition of these linkages. 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, Summary of Findings especially towards other parts of Asia. This is fully in line with the changes in Singapore’s role in the global economy revealed Singapore continues to be a highly prosperous economy, ranking in its trading profile. among the leading countries both within Asia and globally. A comparison with other cities reveals that Singapore has solid A more recent development is Singapore’s growing position in levels of prosperity, but is not quite as exceptional as the country innovation. Over the last two decades, the country has developed a rankings would suggest. Singapore’s high standard of living is capable science system around a core of solidly ranked universities the result of high income levels and high life expectancy, with its and the research activities of foreign investors. Patenting intensity position on basic education and environmental quality somewhat is high, although not quite at the level of the strongest Asian lower. The influx of less skilled temporary workers is part of the peers. Because of the size of the Singaporean economy, the total reason for the relatively modest position on basic education. amount of patenting is also moderate at a global scale. The bigger challenges remain the stepping from scientific exploration to Environmental quality tends to be lower in many cities, and commercial exploitation of knowledge, and the development Singapore is not an exception. Its environmental performance of innovation that is not science-based but focuses on new does not stand out globally, but the country does perform better commercial ideas using existing technologies and knowledge. than most of its Asian peers. The relatively high and rising income inequality suggests that there are significant differences SINGAPORE COMPETITIVENESS REPORT 85

Start-up rates in Singapore are rising, but this is most likely Overall, Singapore’s competitiveness fundamentals are strong, a reflection of entry into activities serving the local markets, but remain broadly more in line with a high-skill version of the especially in retail and services. In the export-oriented sectors, the investment-driven model, rather than an innovation-driven presence of private domestic companies is still very limited. And economy. Again, this is not an indication of failure but a reminder it remains uncertain as to whether foreign investors or domestic that Singapore has now reached a level of performance where government-linked entities commercialize the outcomes of their it has to consider in more detail which position it should aspire Singapore-based research locally. This is not an indication of for in the global economy. 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. Implications Singapore’s fundamental competitiveness remains strong, and The analysis discussed above provides perspective on the three provides a solid foundation for the level of prosperity and the key challenges identified at the outset of this Report. overall pattern of economic outcomes already achieved. On macroeconomic competitiveness, i.e. policies and conditions that There is no indication that the changes in the global economy set the overall context in which companies operate, Singapore does system currently under way will fundamentally challenge Singapore’s particularly well on the effectiveness of its public institutions. This competitive position. Fundamental competitiveness will remain is an area where the potential for creating value from exporting crucial, or even increase in importance, and Singapore has clear this competence in different ways remains underexploited. strengths to draw on here. Competition will increase, maybe even more quickly than expected before the current crisis, and The data raises concerns about the openness of the political the geographic profile of markets and value chains globally will system. In most countries, the risk is that a dominant political continue to evolve, possibly at a faster rate. But Singapore seems group, unchallenged by a potent opposition or aggressive well prepared to adjust to these trends. In fact, the changes in press, will become unresponsive to the needs of society and its trade and investment profile already reflect how its position focus on private benefits rather than overall competitiveness. is evolving to meet new market dynamics. In Singapore, this risk has not materialized. However, there remains a concern that the controlled nature of Singaporean Singapore’s transition towards an innovation-driven economy, an society might inhibit creative activities that thrive in less- ambition outlined by the Economic Review Committee in 2003, structured environments. Still, macroeconomic policy is solid, remains work in progress. The necessary scientific infrastructure and provides an important pillar to support the general stability of has been put into place. But, while MNCs and government-funded Singapore’s economic environment. research institutes already draw on the scientific talent that has been attracted to Singapore, their operations here do not seem On microeconomic competitiveness, i.e. the dimensions of the to be translating the scientific research into new products and overall context that have a direct impact on company productivity services at a significant scale. and innovation, Singapore ranks among the leading countries in the world. Factor input conditions are world-class across Creative activities are growing, but they remain a small part of all dimensions, from physical infrastructure to administrative Singapore’s overall economy. Companies in these areas can draw efficiency, to skills and innovation capacity. The context for on some clear advantages, like the high quality of life that attracts strategy and rivalry is very strong, too. talent, but also face some obvious challenges, like trying to instil innovative thinking and risk-taking in a highly organized society Singapore excels on its openness to global trade and investment. with a tradition of manufacturing for exports products that were There are some concerns about the dominant role of government- created and designed elsewhere. linked companies. Their high efficiency and full exposure to global competition limit any negative impact on the level of rivalry on These observations do not imply that Singapore has failed on local markets; they operate as private companies would. The the mission it has laid out for itself. But they indicate that the evidence suggests that government linked companies can match country needs a fundamental discussion to refine its ambition the performance of their best private sector-owned peers, if they along two key dimensions: are appropriately governed and the market environment is right. First, there are many possible different versions of an innovation- But there remains a question as to whether these GLCs are effective driven economy that are feasible, and some might be a better fit in existing markets but less nimble in pursuing entrepreneurial for Singapore than others. Being an important global knowledge- ventures in fundamentally new fields. If this is the case, the innovation hub with focused research laboratories, world-class attractiveness of MNCs and GLCs for the best available talent could companies, a secure legal environment, and highly attractive explain Singapore’s disappointing performance on entrepreneurship. conditions for talent is closer to Singapore’s current competitive The slightly lower ranking on domestic rivalry is more likely to strengths than is becoming a global R&D hub creating the next be a consequence of the small size of the local market, which generati0n of global technologies and products based on scientific also explains the weaker position on the quantity of locally breakthroughs. Becoming a global connector of knowledge, available suppliers. bridging together scientific research (discovered locally or elsewhere) with companies able to draw on it and identifying Remarkably for a relatively small economy, Singapore ranks opportunities where existing knowledge is not fully applied in relatively high on other indicators of clusters or supporting and some geography or field, would also fit well with Singapore’s related industries. This is a clear reflection of the economy’s high tradition as a regional business hub. This would also build on level of specialization, and the government’s focus on developing the existing scientific strengths that are crucial in understanding specific sectors. A relative weakness is Singapore’s position on and leveraging the best knowledge available globally but with company sophistication. This is not atypical for an economy greater emphasis on commercializing research, capitalizing on dominated by foreign multinational companies, where the unique business solutions implemented in Singapore and the ultimate control of global value chains and strategic decisions region, and developing new business models and brands. rests with headquarters located elsewhere. 86 SINGAPORE COMPETITIVENESS REPORT

Second, there needs to be a much broader view on what innovation The initial implication of the analysis above is not to overreact to is. The current view is highly science-oriented - looking at the current crisis. Singapore’s fundamentals are solid and there innovation as the translation of knowledge generated in universities is no obvious reason for making any dramatic changes. In fact, and research labs into services and products. But innovation can a longer term analysis of Singaporean competitiveness indicates be viewed from a broader perspective - the introduction of new how stable the country’s key competitive advantages have been concepts, new strategies, new processes or new business models, over time, despite frequent policy reviews and action programs. independent of where the idea is coming from, and whether it Changes, like the development of a strong research system is leveraging new knowledge or applying existing knowledge over the last two decades, have systematically built on existing in different contexts. One of the areas in which Singapore has capabilities to create new strengths. This remains important arguable been most innovative is public services, because of advice when considering new policies. highly sophisticated local demand. From health care to city planning and public administrative services, Singapore has Another implication concerns fundamental existing or emerging always been willing to implement new solutions that create value challenges where staying the course will not be enough and for its citizens. This is an area where huge potential exists for decisions are required. The recent slowdown of productivity is creating value through exporting this expertise, by translating, the most immediate challenge to deal with. More research on for example, its experience into systematic knowledge that may disaggregated productivity and company-level operations data be sold by operating such services abroad or through training would clearly be useful. If this data substantiates the hypothesis and consulting. of a low-productivity business model outlined below, there are significant policy implications. Changes in the labour market, Singapore’s disappointing recent performance on productivity immigration, and potentially wage policy may have to be growth is, to a large degree, a cyclical phenomenon. Since 2006, considered. Collaboration with companies and clusters to discuss growing demand, especially from domestic sources, has driven the possible transition to higher-productivity business models up labour mobilisation, while labour productivity dropped as should be on the agenda. the economy reached its capacity constraints. Looking at longer- term trends, productivity growth has become more volatile RECOMMENDATIONS FOR PRODUCTIVITY GROWTH as Singapore’s economy has been hit by a number of external • Focus on productivity growth in existing and emerging shocks over the last decade. But there is no clear evidence that sectors; don’t focus too much on “new opportunities” in productivity growth and the catch-up to other economies has narrow industries structurally come to a halt. • Productivity improvements should go beyond developing worker skills (to get more output for the same input) to: There are two reasons for concern, however. – Deploying knowledge effectively to produce new and different outputs that have higher customer value First, while Singapore’s productivity catch-up has not stopped – Enabling innovative recombination of knowledge from generally versus other advanced economies, it has done so different sources to produce new higher-value products versus the United States. Research suggests that the U.S. has and applications done particularly well in taking advantage of new information – Strengthening management capabilities to organize technologies to improve the productivity of its companies through the best use of the knowledge and skills of every the redesign of its systems and processes. It needs to be further employee and business partner investigated why Singaporean companies do not seem to be as • Productivity improvements should be targeted at the effective in their response to these new opportunities. company and cluster level: – Encourage companies to re-invent their business Second, Singapore’s productivity record has to be seen against models to create higher value through knowledge and its level of competitiveness: Singapore ranks 3rd in the world on innovation rather than depend on low-cost, low-skill overall competitiveness, but only 19th on labour productivity. foreign workers This gap is most likely the result of operational choices that – Strengthen cluster linkages to enable companies to companies make in response to the context of factor costs and develop highly specialized skills that have significant business environment conditions they face. Companies face value-added wage costs, especially for low skill labour, at which it is not commercially attractive to move to an operational model based Increasing the potential for economic growth through trade and on higher skills and productivity.1 investment with neighbouring Asian countries is a second policy priority. Singapore’s shift from direct exports to the United States If future research supports the hypothesis of a low-productivity and Western Europe, to becoming an important part of the Asian equilibrium, Singapore will need to move to a different view on production system and a supplier to Asian markets, is already productivity. In the past, the goal has been to create an existing underway. Singapore could benefit more from these trends if its product or service with fewer factor inputs. In the future, the partners become more competitive and the ties within the region goal has to become creating more customer value given a set are more developed. ASEAN has made ambitious statements amount of factor inputs. 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 Recommendations difficult, because it puts negotiations into a zero-sum game of reciprocal market access concession. ASEAN would benefit from For policy makers, and particularly for the economic review adopting a competitiveness logic, where activities are focused on process currently under way, this Report aims to inform decisions areas where collaboration creates direct benefits to participants. about possible government action. SINGAPORE COMPETITIVENESS REPORT 87

RECOMMENDATIONS TO ADDRESS RECOMMENDATIONS FOR TRANSITIONING A CHANGING GLOBAL ECONOMIC LANDSCAPE TO A KNOWLEDGE-DRIVEN ECONOMY • Stay the course; no need for drastic changes in Singapore’s • Develop and choose among different visions for a economic strategy knowledge-driven economy • Continue with policy to support the market-driven – Efficient research hub vs. global trader of knowledge process towards tighter integration into the Asian vs. entrepreneurial hotspot economy • Move beyond science-driven innovation • Revive ASEAN around a competitiveness agenda where – Go beyond scientific patents and have a broader collaboration creates direct benefits for participants perspective of innovation as a global knowledge hub – Current trade liberalization approach has clear – Leverage Singapore’s knowledge and expertise in economic rationale but faces strong political public services into a strong export industry challenges (market access as “concession”) • Review policy approach in knowledge-driven sectors – Competitiveness approach focuses on individual – Have a closer alignment between developing and activities with direct mutual benefits commercializing knowledge in publicly-funded o Policy learning research labs o Cross-border infrastructure – Develop programs to encourage commercial spin-offs o Cluster networks from MNCs, GLCs and Statutory Boards o FDI attraction – Infuse talent into local enterprises to develop them o Skills and research into more knowledge-intensive business with higher value-added outputs Defining the specific model of innovation-driven economy that Singapore should aspire to become is a third medium-term Inequality and the mobilisation of the female labour force is a challenge that Singapore has to address. The data presented fourth challenge that is more likely to become more pressing in this report indicate that Singapore has made clear progress over time. Inequality has been rising, and the further transition on science-related innovation. But its success in creative and towards an innovation-based economy will continue to fuel this entrepreneurial activities is more limited, and is achieved in the trend. Singapore needs to decide how to deal with these dynamics. context of a less favourable business environment. It has traditionally placed a high value on the cohesiveness of its society; it will not stay this way automatically. Female labour force At the minimum, there needs to be a review of whether the policy participation is the result of individual choices, but government approach in these areas needs to be adjusted. Policy tools that policies set the context. Singapore should have an open debate have been successful in the attraction of capital-intensive activities about the type of environment it wants to provide to women. may need to be modified in new innovation-intensive fields that rely more on talent and culture than capital investments. The Singapore has become an internationally respected model for a other short-term opportunity is to work more intensively with country that is willing to continuously review its position, and MNCs and GLCs to create programs that allow some of their has taken decisive action where needed. This Report is written in local managers to create spin-offs, possibly with initial capital this context, hoping to provide Singaporean policy makers with stakes of the anchor companies. This would sow the ground for our analysis and perspective of the key issues and some possible more locally-rooted entrepreneurship and ultimately innovation. options to consider. This is the first Singapore Competitiveness Report produced by ACI, and we intend to continue to use Going further, the potential for commercially exploiting innovation subsequent reports to highlight our analysis and perspective of in fields like public services needs to be more deeply leveraged. the competitiveness issues facing Singapore in the medium term. 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. Endnotes 1. The phenomenon of an economy being stuck in a relatively low-productivity environment despite high or rising Chapter References Porter, 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. 88 SINGAPORE COMPETITIVENESS REPORT

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

Singapore Competitiveness Report 2009

by Dinah Saw on Nov 29, 2009

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Singapore Competitiveness Report 2009 Document Transcript