S'pore as Asia's start-up nation, infrastructure financing hub?

Singapore's economic model over the last 50 years has, undoubtedly, been a great success.

The state recognised early on the limitations of a small domestic market and embarked on an aggressive drive to attract foreign capital from the developed West.

This, combined with a hard-working workforce, generous tax incentives for multinational corporations (MNCs) and a competent and honest bureaucracy, enabled Singapore to become the most attractive place for foreign businesses looking to grow in Asia.

But after 50 years of almost unparalleled success, what's next for Singapore's growth model?

The basic premise of version 1.0 still holds: Singapore remains the best conduit of capital and enterprise in the region. What has changed is the source of the impetus: Growth is now closer to home. A model that funnels funds from "East to East" could replace our traditional focus on "West to East".

In particular, two ideas for Singapore's growth model 2.0 are worth considering: Singapore as Asia's infrastructure financing hub and as Asia's start-up nation.


First, there may be a silver lining for Singapore as the United States begins to normalise monetary policy over the next few months. As monetary conditions in the US tighten, emerging markets will find it harder to attract long-term capital.

While this should give countries in the region impetus to attract long-term capital, most will find it hard to do so, given their relatively undeveloped financial systems and the risks inherent in taking long-term positions in frontier markets. This creates opportunities for Singapore because of its more developed and better regulated financial industry.

At the same time that the US is unwinding quantitative easing, China is looking for ways to reduce its reliance on American debt and diversify its investments abroad. This is at least a partial, if not the primary, motivation behind recent policy announcements such as the Asian Infrastructure Investment Bank and President Xi Jinping's "One Belt, One Road" initiative.

Many of Singapore's neighbouring countries need large investments in infrastructure if they are to boost domestic consumption and develop their cities. China is keen to invest in the region's infrastructure, but domestic concerns about Chinese hegemony may crimp its investment potential.

Singapore is ideally placed to play a key role in intermediating financial flows for long-term investments in Asian infrastructure. Not only is Singapore already a trusted financial centre that possesses the expertise to structure complex, risky long-term infrastructure projects, but it also possesses thought leadership in a number of areas in urban and infrastructure development.

Singapore's own record in mobilising and channelling savings to develop its urban infrastructure in a comprehensive, highly integrated way also provides a living example of how patient capital can support long-term economic development.


Second, Singapore should strive to lead innovation in Asia. It should be Asia's start-up nation. But getting there is a huge challenge as Singapore continues to be dependent on low-end and high- end imitation.

Little genuine innovation, in terms of new and creative activities, happens in Singapore - or, indeed, in much of Asia. While much of our future innovation will have to come from foreign entrepreneurs in Singapore (this is inescapable for a global city), Singapore also needs much more innovation from Singaporeans and domestic enterprises.

It is easy to be sceptical about Singapore's state-led efforts to foster the growth of globally competitive home-grown enterprises. Previous efforts have mostly floundered; the few successful Singaporean companies are still government-linked ones in the "old" distributive parts of the economy (such as real estate and banks) rather than the "new" creative parts.

Heavy state investment in research and development has had mixed results - although in a few niche areas such as water technologies, Singapore has a few globally competitive firms.

The Government's approach has been to shower small and medium-sized enterprises with tax and other incentives. But this leaves the economy's structural problems unaddressed.

The domestic private sector is squeezed between MNCs and government-linked corporations, accounting partly for its low productivity. In particular, it is crowded out in local markets for land, talent and capital. The result is a safe, bureaucratic capitalism in Singapore that lacks sufficient competition - unlike the much more vibrant, freewheeling capitalism in New York and many other American cities that foster innovation.

The world is also at the cusp of significant technological, industrial and business model disruptions that would upend many traditional businesses. Infocomm technologies are disrupting an entire swathe of service industries that were relatively insulated from foreign competition, and threatening the survival of less efficient domestic firms (think Uber, Airbnb, 3D manufacturing, machine intelligence and robots).

These disruptions raise questions about manufacturing in Singapore, which is still about a fifth of the economy, and about the relatively low productivity levels of Singapore's services sector.

Not only must Singapore embrace these new technologies and asset-light business models, but more importantly, for future growth, it must also become a producer of such innovations. This is especially so in areas where Singapore has advantages - such as education and health, where infocomm technologies could turn what were previously non-tradable services into highly scalable and exportable ones.

Singapore should therefore strive to be Asia's premier destination for MNCs that do real innovation here, not just have regional headquarters to coordinate production, sales and distribution, with their core innovation still done in their home markets.

Similarly, Singapore can be Asia's most attractive destination for global entrepreneurial talent. Business and technological innovations by start-ups based in Singapore but serving the region and the world, and financed by a deep and knowledgeable venture capital industry here, should be an integral part of efforts to reinvent the Singaporean economy.

Achieving these goals demands a hard look at Singapore's existing policies and institutions. History also shows that innovation cannot be engineered top-down. It needs a genuine competition culture in an open society.


This article was first published on December 21, 2015.
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