EC2373 Global Economic Dimension of Singapore

Topic: Singapores New Growth Areas

Research Objective: To Examine the Sustainability of the New Growth Areas

Tutorial Group W1Group 2 : Michael Christopher C. Cruz, A0093852X Fong Jin Wen U091420L1.0 IntroductionHarvard Business Professor Michael Porter once said: Innovation is the central issue in economic prosperity, and in many ways, he has been proven correct. Throughout history, countries that have been centers of research and innovation have used their technological prowess for economic gain improving economic efficiency, which in turn, raised their nations standards of living. For Singapore and the other so-called Asian Tigers, this has been proven true as well. The island nation has been at the forefront of economic and technological efficiency. As observed by Minister Mentor and former Prime Minister Lee Kuan Yew, What it took the West 200 years, East Asia is experiencing in half a century. In the present day, the Singaporean government is pursuing an ambitious, long-term economic plan that involves developing what it considers to be new growth areas, spending billions on Research and Development projects, free trade areas, and offering generous incentives to talented foreigners who can help develop these Singapore-based infant industries.Singapores economic policy is geared towards developing the two areas of Manufacturing and Services, or the so-called twin engines of growth. The new growth areas can be grouped within either one of these two areas.

1.1 Research ObjectiveThis paper aims not just to describe these growth areas but also aims to examine and analyze these growth areas, to see what constraints and issues these growth areas face, and to examine the sustainability of pursuing the new growth areas.

1.2 Key driver of Sustainable Growth is ProductivityContinually raising productivity through innovation is vital for Singapores sustainable growth because our only resource is human capital. Hence, both manufacturing and services greatly rely on productivity to remain competitive.

2.0 Overview of Manufacturing SectorSingapores manufacturing sector currently accounts for about 20-25% of the countrys GDP. (Economic Strategies Committee, 2010) The sector have played an important role during the countrys early stages of development, with an electronics sector boom leading the stellar growth of the 1970s. Today, it remains an important and essential sector in the economy, and is called by the Ministry if Trade (MTI) as one of Singapores twin engines of growth, along with services. As the world becomes more connected, as Asian countries develop at a fast pace, and as Singapore moves to a more knowledge-based, future-ready economy, the sector faces several threats regarding the sustainability and future of Singapore manufacturing. These threats stem from both structural constraints, and policy implications. Of the 23 major growth areas identified by the Economic Development Board, more than half are high value manufacturing industries, including Aerospace engineering, Chemicals & Petrochemicals, Green technology, Pharmaceuticals and Biotechnology, and Precision Engineering. New growth areas in this sector aim to increase the industrys value added through capital investment, technological innovation, and skills training.

2.1 Key Challenges and ConstraintsThe future development of the manufacturing sector in Singapore face several challenges, many of which can be grouped along three main areas that also represent the constraints to be faced: Land, Labor, and Capital.

LandIt is basically a clich to call Singapore a red dot, because of its small size. At only 710 square kilometers, the islands main physical constraint is its small land area and the lack of natural resources within this area. Economically, it means that it cannot, to minimize risk, diversify its economic activities like other countries. Singapore can and must make strategic choices with regard to what industries it can develop, or for the purposes of this paper, investing in a lot of new growth areas. (Krause, et. al, 1987.) In developing the countrys new growth areas, the countrys main constraint is how these areas could be accommodated in a small island.Despite the countrys size, however, several of its industrial estates are actually at par with large industrial estates in Asia. However, Singapore can only build a limited number of highly concentrated estates. The JTC Corporation, the principal industrial developer in the island, manages 43 estates, the largest of which already cater to the new growth areas and totaling about 3.4 million square meters of facilities. (See Table 3.1, 3.2)

LabourThe second of Singapores omnipresent scarcities is its lack of labour. Human Capital is arguably Singapores main and most important resource (having no natural resources of its own.) To be fair, Singapore is structurally disadvantaged in this regard because of its small size and small resident population. However, this constant shortage represents a threat to its long-term economic prospects, this shortage being both a numerical shortage of workers and a qualitative shortage of specific human capital. (Terauds, 2011) While the solution is a matter of debate, the presence of the problem isn't. A study in the Grant Thornton International Business Report reports that up to 41% of Singapore Businesses believe that the lack of skilled labour is the number one constraint to Singapores growth (land/space did not even feature as a problem.) As Singapore pursues the development of new growth areas, it will follow a labour and development policy that it has followed before. When Singapore began its economic development, it acknowledged its lack of experience in several fields by using what is called the import-adopt process: importing and adopting locally both foreign labour and capital into the islands economy. However, the source of Singapores lack of skilled labour also has its roots in government policy. In the 1970s to 80s, the government pursued an anti-natal population policy, called the two is enough policy. While this may have been sound policy given a spatially challenged island, the shortage repercussions of this is exacerbated in the long-term for a rapidly developing, diversified globalized economy. As early as November 1987, the problem began to be seen when the Trade and Industry Ministrys Economic Survey identified a labour shortage, rather than a lack of export markets will curb the islands long term prospects. (Reuters, 1987)A short-term problem of the new growth areas would be restructuring issues, resulting in unemployment for many locals.

Capital External Market DependenceLike Land and Labor constraints, the manufacturing sectors dependence on the world market is a given, inherent challenge for Singapores growth prospects. With its lack of an economic hinterland, Singapore is extremely vulnerable to price shocks. With one of the highest Trade-to-GDP ratios in the world (second only to Hong Kong), Singapore is particularly vulnerable to global crises, such as in October 2008, when the country officially slid into recession after failing consumer demand from the US and Europe cut through its exports. (See Table 3.4) Despite Singapores healthy recovery the following year, the specter of recession remains real. Up to 97% of Singapore executives surveyed by APAC fear a recession, and the countrys growth prospects in the immediate future remain low due to the crises plaguing the globe. (SBR, 2011)As shown, the manufacturing sector is a leader of growth during its boom years, yet it can also be a cause of economic woes in bad times. In other countries, a basic response would be to stimulate domestic demand, an option that is simply not practicable in Singapore as it is simply too small a market for its large manufacturing output. Any move to pursue new growth areas is thus reliant on the state of the global economy. The industries chosen by the country must be resilient even through times of crises. However, the risks will remain. In the 1970s, then-Finance Minister Goh Keng Swee said that Singapores manufacturing sector was greatly helped by the decades of prosperity achieved by Western countries. However, current uncertainty regarding western economies, together with increased competition from Asia, threatens the prospects of the sector. (Federal Research Division, 1989)

Small and Medium EnterprisesAnother important issue with regards to the sustainability of Singapores manufacturing sector is its relative lack of small native companies, due mainly to an over-reliance on MNCs. When Singapore achieved independence, a cornerstone of the governments first economic plan is to attract a lot of foreign investors, especially multinational corporations (MNCs) into the country. Over the years, this policy has undoubtedly borne fruit, bringing in billions to Singapores economy. However, a major issue is the sustainability of this policy. Singapore SMEs may find it very difficult to compete due to their smaller capital. . (Rajan, Thangavelu 2009) Another major challenge for local companies is their need to expand globally, due to Singapores small domestic market. Already, Singapore is facing stiff competition from its Asian neighbors because of high labor costs. The relative lack of local companies is also a source of worry if Singapore is to continue growing its manufacturing sector.

2.2 Opportunities Several opportunities present a case for the sustained growth of the sector:

1. The rise of China, India, and other Asian countriesThe spectacular economic rise of Singapores Asian neighbours need not necessarily be seen as a threat because of competition, but an opportunity for greater partnership and stronger trade links. The ESC Subcommitee report of 2010 recommends that Singapore must strengthen its status as a Global-Asia hub, where MNCs can manage and integrate their Asian operations, without being tied down by market challenges and constraints. The report also recommends improving Singapores cross-border finance links, allowing for the development of the region as a whole by investing in it and Singapores economy benefitting from more Asian growth. 2. Knowledge-driven growthSingapores manufacturing sector has, for the last decade, pursued the higher-value added, high technology products. If this shift is continued, the sector will continue to be globally competitive, especially in areas enhanced by Singapores high R&D investment and well-developed precision engineering base, an area generally called Complex manufacturing.These next set of jobs created will need a diverse skill set, provide opportunities for upgrading, and stimulate demand for even more sophisticated products. New growth areas in manufacturing fit the criteria, and stands to continue technology-driven growth of the sector. Singapores highly skilled manpower base is crucial for continuing this development. 3. Industry Flexibility and ResilienceWhile some may see Singapores large external dependence as a handicap, Jayaram et.al argues that Singapores volatile business cycle can be seen in a different light: mainly that first, the benefits of big trading links with the world has much more advantages, and that market volatility, and the fact that Singapore makes spectacular recoveries soon after a recession, is a sign of resilience that the countrys economy is flexible enough to remove inefficient firms easily from the market. The benefits would be easier seen in the medium to long run, yet result in lost output for the short run as firms re-allocate resources. (Jayaram et. al, 2009)

2.3 OutlookThe prospects for Singapores manufacturing sector looks bright. Despite the recent recession, Singapore remains a competitive location for manufacturing, with several indicators, such as Industry Value Added rising from $12.5 B to $14.4 B from 2009-11 and Fixed Asset Investment rising from S$ 12.5B to S$12.9B. (EDB Annual Report, 2009-11)The S$ 13.6B 2010 Science plan has also made Singapore a frontrunner in innovation, a budget to be surpassed by the 2015 R&D plan, which plans to inject another S$ 16.1B for R&D. The countrys growing science and research talent base, coupled with this massive public and private investment, has already begun to bear fruit: with the resulting products and services already yielding over S$18 B. This comprehensive Research and Development plan serves as a strong foundation that will help the sectors future growth.With regard to the constraints, Singapore has never looked upon land or the lack of natural resources as a major constraint, but as an impetus to make strategic shifts towards higher value added, land-efficient economic activities. Using advanced strategies such as the Cluster Industrial Complex and the Plug-and-Play factory, Singapore has been able to do maximize land resources. Also, instead of focusing on just sheer land area, Singapore land management also aims to maximize the plot ratio (gross floor area.) The countrys new growth areas are also aligned to maximizing land space. The new growth areas are mostly catered to high value-added activities, ensuring that the economic output of Singapores land is higher relative to density.Singapores well-developed infrastructure stands to help the sector grow, as seen in the rapid development of facilities at the countrys industrial parks. For example, the Biopolis and Fusionopolis areas in One-north area have state-of-the-art facilities that encourage the research and development in the biological and physical sciences. On the other hand, the Seletar Aerospace Park is designed to support the business infrastructure needed for Aviation maintenance and assembly, using the facilities of the old Seletar airport. In terms of infrastructure development as a whole, Singapore already ranks 2nd in the World Banks 2010 Logistics Performance Index, easily outstripping its neighbors Malaysia (29th), Thailand (35th), and Indonesia (75th). (Southeast Asian Economic Outlook, 2010) Regarding labour, the government has set up a Continuing Education and Training scheme (CET) to help Singaporeans re-adjust their skills for the new economy on top of its already successful policy of attracting skilled foreign talent into the country. (World Bank, 2010)Given Singapores location, its strong free-market credentials, a skilled and constantly upgrading labour force, strong government investment, well-developed infrastructure and logistics systems, land maximization, and sound government policies, the manufacturing sector stands to continue its strong role in the island nations economy.

Services Sector: Making Singapore Asias leading provider of world-class services

3.0 Overview of Services SectorThe services sector has been a vital component of Singapores GDP and is expected to grow amidst the opportunities present in this century. As seen in Table 3.1, the services sector accounts for 69.7% of GDP in 2010 and reflects the importance of Singapore as a regional hub for financial and professional business services. According to the World Trade Organization, Singapore is a major exporter of services accounting 2.3% of total global trade in services (Table 3.2). Since the global crisis, there has been a shift of markets to Asia and the opening of new growth opportunities as a result of increasing demand for services in China, India and ASEAN playing to the strengths of Singapore-based companies. Particularly, Singapore is looking to develop its financial markets abroad in a knowledge-based economy that capitalizes on our high level of education.

3.1 Key ChallengesThe strategic focus to develop our service sector is not new, however we have yet to exploit the services sector to its full potential due to the following reasons.

Firstly, competition in services is intensifying as countries shift their focus to aggressively develop their service industries. The openness of our economy has necessitated our embrace towards globalization, which brings along stiffer competition from region wide. For example, in the logistics sector, our port has been facing rising competition from Malaysias port of Tanjung Pelapas (PTP) (Abeysinghe, 2007). Singapore has already lost two major shipping lines, Maersk and Evergreen, to PTP. In addition, competition in the airline industry has been fierce as Hong Kong and Taiwan are positioning themselves as the regional aviation hub.

Secondly, we have allowed regulatory hurdles to get in the way of services growth. Powerful regulations would often end up hindering the growth of the exportable component, whether intentionally or otherwise. For example, for social policy reasons, we have deliberately restricted the supply of healthcare and legal services in Singapore. For instance, under MOMs regulation, a stringent foreign labor quota is imposed on the logistics industry. This would reduce cost effectiveness and flexibility for firms to supplement their workforce, acting as a deterrent to conduct business in Singapore. (Economic Review Committee, 2002)

Thirdly, the same labor constraints discussed for manufacturing applies to the service sector. Singapore needs a large pool of highly skilled workers that are well equipped to provide professional services such as accountancy and legal advice to encourage foreign investments. Also, Singapore must seek growth through an increase in workers productivity over size of labor force to remain competitive. A slower growing workforce reinforces the importance of extracting value through innovation to maximize the potential of every worker. There is room for improvement in productivity as seen in Figure 1, where Singapores productivity level is only 55-65% of those in Japan and US in manufacturing and services. (Economic Strategies Committee, 2010)

3.2 Competitive EdgeHowever, Singapore also possesses strong competitive edges in services:1) Well-educated workforce and good physical infrastructure that includes integrated transport and efficient communication system2) Strategic geographical location and well-placed to service countries in Asia3) Reputation for reliability, quality and trustworthiness and a conducive legal environment4) Sophisticated base of MNCs activities provide services such intellectual property and brand equity management, aggregating a strong demand for professional services

3.3 OpportunitiesA 2011 survey conducted by BERI ranked Singapore first in the world as the city with best investment potential. Hence, we are in a good position to be a major services hub in Asia (refer to Table 3.3). There are also opportunities that are fertile ground for Singapores foray into the service sector.

1) The most important window of opportunity is that emerging economies in Asia are expected to grow and will hence be a significant production base as well as a growing market for professional and business services such as legal and management consultancy. As a global city in the heart of Asia, Singapore is well positioned to seize the new growth opportunities that may arise. (Economic Strategies Committee, 2010) The recent Euro crisis has shifted the focus of markets in Asia with the contraction of the G3 economies. Also, growing urbanization would increase demand for services in India, China and ASEAN that would complement Singapore-based companies.

2) The Euro crisis has altered the landscape of global finance, leading to a reduction in the capacity to finance cross-border and emerging markets that could persist for some years. Singapore should further develop our financial markets and be an enabler for Singapore enterprise venturing abroad through its role in the intermediation of capital.

In short, there is no lack of opportunities for Singapore in the next decade. Our companies have an important window of opportunity to create a strong presence in Asia over the next 5 to 10 years, while their skills are high in demand. (Economic Strategies Committee, 2010) In time, other Asian economies will catch up as they start investing in human capital. Hence, we must establish our key niche areas that would act as a springboard to add further value in this golden time frame. Hence, the following section seeks to discuss Singapores attempt at positioning itself as a pre-eminent financial centre in Asia.

3.4 Financial Sector as an engine of growthThe financial sector has been an integral source of Singapores growth in the past ten years. In Table 3.4, financial services accounts for about 12% of total revenue for the services sector in 2010. Broad initiatives have been employed to achieve our goal of building a world-class financial hub and Singapore must position itself to exploit the opportunities abound in Asia and the following are reasons why Asia is a fertile ground for future growth.

First, Singapore is well placed to tap the growing wealth in Asia and is a Premier Asian Asset Management Centre. The lesson learnt from the financial crisis in 2008 is that there is a shift in investors mindsets. (SG Press Centre, 2009) Investors are demanding more protection for their wealth and risk protection for their portfolios. This plays to Singapores advantage as we have a reputation for a sound regulatory regime and a trusted legal framework. Hence, Singapore should build on this fundamental ground to facilitate the growth of a trusted financial system with high standards of risk management. Findings from the results of the 2010 Singapore Asset Management Industry survey results, which showed that assets under management (AUM) by fund managers in Singapore have reached a new high of S$1.4 trillion, representing a 12% year-on-year growth, thereby reaffirming Singapores position as a leading Asian investment centre for global investors.

Second, Singapore should leverage on the massive infrastructure needs in Asia. A recent ADB study showed that Asia needs to spend about US$8 trillion on transport, power and communications infrastructure over the next ten years for Asia to emerge as a viably connected, integrated and competitive region. Singapore is able to play a significant role in regional infrastructural financing because of our urban infrastructure management expertise and strong legal and regulatory framework.The government has been proactive in channeling investments towards this area. For instance, Singapore has entered into a Memorandum of Understanding (MOU) with the World Bank last year, which would leverage on our developmental expertise to provide urban solutions for developing countries, which will also have spillover benefits to our financial sector. (Goh, 2009)

Overall, there is a positive outlook and Asia remains a fertile ground for investments. However, Singapore should also take caution of more volatility ahead for Asian financial markets as they mature and deepen. While the economic centre of gravity is shifting to Asia, Asian economies are not immune from troubles in the West. In a speech delivered by Prime Minister Lee Hsien Loong to celebrate the Monetary Authority of Singapore's 40th anniversary in 2011, he said the Monetary Authority of Singapore (MAS) must remain alert to new developments in the financial sector. Regulation has to keep pace with new products and processes, and larger and more diverse institutions."

ConclusionThe sustainability of Singapores new growth areas is largely dependent on productivity as the key driver of growth. Through experience, we have seen that certain propellers of growth are only temporary at best. For example, over-leveraging in developed markets exposes us to the risk of asset bubbles and crashes. As we move to a knowledge-intensive and sophisticated economy, innovation is vital for increasing the productivity of our workforce as we move ahead to improve the quality of our workforce in both manufacturing and services.While both sectors remain as the twin engines of growth, we conclude that Singapore should shift its focus more on the service sector with the increase in demand for services in emerging Asian economies in the near future. As Singapore is unable to compete with developing economies for low manufacturing products, we should capitalize on our high skilled labor to produce higher value products. However, both sectors should not be seen as competing but rather as complementing roles. There are significant opportunities to grow service sectors that are closely tied to manufacturing. (Economic Strategies Committee, 2010) For example, aerospace companies do not only produce high-end components, but also significant value through services such as maintenance and repair. With the current economic landscape, the outlook for Singapore is largely positive and Singapores targeted new growth areas are sustainable for the next 5 to 10 years. However, past performances are not guarantees for success in the future. There is no panacea for a countrys economic troubles. Hence, Singapore should be sensitive to changes in the macroeconomic environment and continually revise its strategies for growth.

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