SINGAPORE (Aug 12): One of the things my friend Manu Bhaskaran and I have been grappling with for a long time, even when I was working for the government, is how to have a new industrial policy that better supports the development of indigenous companies. The rate of technology disruption, [advances in] artificial intelligence and disintermediation of supply chains is only going to escalate from here on. The shrinkage of the global supply chain in manufacturing, for instance, means that foreign direct investment (FDI), which Singapore has relied on as a staple for growth, may no longer be such a good strategy for the future.
One way to think of it is, we do have big, successful businesses in Singapore today, but given the global disruptions that we are seeing, these business models may not be relevant 20 years from now. We are already seeing global companies pull back to their countries of origin. It would only make sense to start developing another model right now that is driven more by domestic firms. In other words, we need to grow indigenous companies and capabilities.
To be clear, there is still a role for FDI and MNCs in Singapore, but they should only be part of the story. For a long time, we have been too reliant on FDI in manufacturing and not spent enough efforts to grow our own small and medium-sized enterprises (SMEs). There are some homegrown successes such as BreadTalk Group and Creative Technology, but they are outliers.
So, the question now is how do we build indigenous companies that are competitive in services and knowledge exports as global manufacturing slows?
We can take a leaf from the Germans’ book. Their industries are powered by SMEs with fewer than 1,000 employees each, known as the Mittelstand. They develop new technologies and own two-thirds of the patents and train most of the highly skilled apprentices in very niche fields. This becomes a breeding ground from which big local companies develop.
These companies are not shareholder-oriented like their British and American counterparts. The German companies are what you call stakeholder-focused companies. They try to maximise their commitment to and relationship with their suppliers, customers and employees, besides their shareholders. So that is a very different form of capitalism. But it has shown itself to be the most successful form of economic model when it comes to developing technology dominance in knowledge-intensive fields.
These companies are also more durable and resilient in their home market against headwinds in the global economy. One of their main priorities is to restructure the companies so as to retain their employees as far as possible in the home country. So, for example, the management will make sacrifices, it will structure the industry and restructure the company to do that because it is part of its key performance indicators.
Corporate practices in Germany and Japan are geared towards stakeholders. So, if you look at the pay structure of companies in Germany, the salary of the CEO is 50 to 100 times higher than the lowest-ranking employees. But in the US, that would be 250 to 300 times. In a stakeholder economy, inequality — a bugbear in most developed markets, including Singapore — can be substantially smaller.
But we are still stuck in incumbent inertia. We are a bit like Nokia, which took too long to migrate to smartphones. In other words, success breeds complacency. Today, the majority of our SMEs are still serving as subcontractors. What happens when technology shifts or supply chains get disrupted, costs get higher and there is less incentive for MNCs to work with us?
Increasingly, we need to think of export of services and knowledge to fast-growing markets such as Southeast Asia. To do that, we need to think about cultivating our SMEs and how to support them radically. This means developing a robust export-financing infrastructure. Many SMEs in Germany are not listed. They do not take equity financing because the companies would become too short-term-focused. They are supported by cooperative banks.
National policies also need to come in. Policies can gear corporate practice towards focusing on stakeholders. We need radical uprooting. For example, if government policy is serious about adopting stakeholder practices, it could start with the government sector and government-linked companies. If these two sectors lead the way, you can definitely steer the economy towards stakeholder-based practices over time.
We also need to restructure the financial sector, including GIC. We need to restructure it so that more of the funds come into the economy. I am not talking about the major part of the funds because that is too big. But what I am talking about is, out of the total GIC holdings, a proportion of it backs CPF liabilities. In other words, the money from CPF is effectively invested by GIC overseas. It is a portion. I think half of this portion can go to Singapore capital markets. Currently, it is 100% invested overseas.
Then, if we give sufficient subsidies to SMEs and we spend sufficient resources in developing a deeper domestic capital and financial infrastructure, like the one in Germany, we will be able to develop a better, new infrastructure for SMEs to grow. The subsidies today are very piecemeal and they are not that big an investment — as a share of the GDP — as the industrial programmes in Germany.
In the past, we made very big, bold home bets in the domestic market and we had a lot of faith in companies and organisations here. For instance, we formed the HDB, CPF and GIC, which at the time were unequalled anywhere else in the world. We were one of the pioneers in sovereign wealth funds as well as public housing. All these are huge commitments and a statement of trust in local capabilities. Now, we are too risk-averse.
Our commitment to domestic companies has to be consistently larger and more intelligent. We need to subsidise finance. We need to take government stakes in debt and equity in the local market. We need to spend up to 1% to 2% of the GDP in industrial policies. Right now, we do not spend anywhere near that.
The Singapore economy as it is today is robust, at least for the next 20 years. And we have more resources than we had in the last 20 years, so we can afford such radical changes. Because if we do not change in the next 20 years, and if we do not have new policies to replace the disruption we face today, we could well be in serious trouble.
As told to Trinity Chua. Yeoh Lam Keong is the former chief economist of GIC.
