THE STRATEGY OF SME DEVELOPMENT IN SINGAPORE

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1 ABSTRACT THE STRATEGY OF SME DEVELOPMENT IN SINGAPORE Joon Chien Doh Nanyang Technological University Singapore Singapore is making a conscious effort to foster local private enterprise. The strategy is to apply its tested approach in economic success to the development of the SMEs. Elements of the strategy include free trade and globalization, capitalizing on the MNCs both as mentors to SMEs and as market outlets for their products, building up the international competitiveness of SMEs through technology and international marketing requisites, and focussing on the winning SMEs. Such an approach enhances the prospect of SMEs becoming a valuable partner in the future economic development of Singapore. INTRODUCTION Singapore has been very successful economically. With hardly any natural resources, the country has succeeded in raising its per capita GNP at current market prices from a low of S$1,330 in 1966 to a high of S$25,575 in 1991 (3, p.29) in the context of a relatively low rate of inflation (5, p.16; 9, p. unnumbered).1 From an economic perspective, its success was built mainly on the foundation of free trade, international competitiveness, its success in attracting investments from MNCs as well as the success of its large state enterprises. In approaching the development of its small and medium enterprises (SMEs), Singapore has basically applied its tested strategy of economic success. The basic ingredients are also present in the republic's strategy for developing its SMES. The experience of Singapore in state entrepreneurship has also given it confidence that: indigeniously owned and managed enterprises in untried fields of business endeavor can not only succeed, but do so by keeping abreast of technological and environmental changes, by becoming internationally competitive and, in the process, becoming self sustaining entities (4, p. 2). ENTERPRISE DEVELOPMENT Development of enterprise can succeed with or without the assistance of government. This is evident in the light of the experience of a number of countries and territorial entity. Hong Kong is an example of a territory with dynamic private enterprises which developed basically on their own without the benefit of governmental assistance. The entrepreneurial achievements have been attributed to the operations of a combination of economic factors (free open market and voluntary exchange), non-economic factors (the shifting of drives from political to economic because of the colonial situation) and psychological factors (a sense of personal or individual achievement, power and influence) (11, pp ). The Republic of China-Taiwan is another example where business enterprises have thrived with relatively little governmental assistance especially in the area of interest rates. In contrast, South Korea which pursued a diametrically opposite policy, whereby the government heavily subsidized the interest rates of a few large private enterprises at the expense of small business enterprises, has also succeeded in achieving economic success (1, pp ). In the light of the above, why does Singapore choose to apply an interventionist model in the development of its SMEs? Loucks, Meredith and Ray has stated, "Intervention by the state implies a dissatisfaction with the rate or quality of existing entrepreneurship development..." (6, p.510). In the case of Singapore, this does seem to be the case. A more conscious role on the part of government in fostering local private enterprise can be attributed to a number of factors which have affected its development. These include: 1. The emphasis of government policy on foreign investment in manufacturing, and 2. The prominent role played by state enterprises. 3. A low tolerance for failure in society which discourages risk-taking, and 4. A successful economic environment characterized by full employment, high salaries and job security which did not give rise to the 'push' factor to propel graduates and professionals to start business of their own (4, p.20-27).

2 To overcome the above obstacles to local enterprise, the Government has developed a SME Master Plan to create a "pro-enterprise environment" (12, p.4). In Singapore, SME development constitutes part of the thrust for further economic development. The Subcommittee Report on Entrepreneurship Development states, "The issue is how best to channel our entrepreneurial alent in a direction that best serves Singapore's future development aspirations (4, p.3). In a way the SME Master Plan of 1989 can be viewed as a plan to respond to the above emphasis so that "Singapore can develop into a major node in global business and a total business center" (12, p.1). FREE TRADE AND GLOBALIZATION In its transition from a developing country into a newly industrialized economy, Singapore has benefitted tremendously from international investments and trade. Investments from MNCs have provided the capital and technical knowhow for industrialization while access to markets to industrialized countries has enabled its export-oriented economy to succeed. In fact, so important has international trade become that in 1991 the sum total of exports and imports (S$203 billion) even exceeded its gross domestic product (S$69 billion) by almost three times (9, p. unnumbered). Given the small size of its domestic market, free trade and globalization therefore have become the economic culture of Singapore and essential to its economic health and well-being. Hence in the promotion of its SMEs, the call is for them to have a global perspective and for their business activities to be linked to global business. With the trend towards the formation of economic and trade groupings in Europe (Single European Market), North and South America (North America Free Trade Area), and Asia (ASEAN Free Trade Area) as well as the 15-nation Asia- Pacific Economic Cooperation (APEC) Forum, international trade, at least in the short run, runs the risk of becoming increasingly protectionist. This is obviously detrimental to the economic interests of Singapore and will also affect the globalization of its local enterprises. Far-sighted leaders in Singapore, however, seem to have taken early moves ahead of this development. The strategy, while not coherently verbalized, appears to be for Singapore to put a leg everywhere. In relation to the Single European Market, for example, Singapore wanted to take advantage of the emerging opportunities and to by-pass and circumvent any protectionist measures. Local firms have been encouraged to set up joint ventures with European companies (2, pp.12-13). In the American scene, Singapore has been named by the Deputy Assistant Secretary of Commerce for East Asia, Mr. Frank Lavin, as a likely free trade partner (14). In the September 1992 meeting of APEC at Bangkok, Singapore was named as the location for its permanent secretariat (13). And in the ASEAN grouping, Singapore has been a member from the beginning. All the above seem to indicate that the republic has positioned itself well; it will be less seriously affected even if international trade takes a step backward in the direction of protectionalism. CAPITALIZING ON THE MNCs MNCs constitute a very significant economic force in Singapore. There are more than 600 large manufacturing operations and 2,800 branches and subsidiaries in commerce and services (12, p.14). Singapore's experience with the MNCs has been a mutually beneficial one. The MNCs' investments have contributed to the rapid growth of the economy. They have created employment opportunities for a large number of Singaporeans; there has been considerable diffusion of technical knowhow including the upgrading of skills and expertise whether manufacturing or financial. They have also helped Singapore to be better linked to the international centres of trade and finance. However, in sheer numbers, the SMEs dominate the economic scene in Singapore. They make up about 90 percent of the establishments in the manufacturing, commerce and service sectors employing 44 percent of the workers. In terms of value added and direct exports, they are, however, much less significant as they account for only 24 percent and 16 percent respectively (12, pp.17-28). Fully aware of the important contributions that MNCs can continue to make to the future development of Singapore, in designing its strategy of SME development, the republic capitalizes on the strengths of the MNCs in two ways:

3 1.MNCs Serving As Mentors To Local Enterprises Under the Local Enterprise Upgrading Programme (LIUP), the Economic Development Board brings together local companies and MNCs for the purpose of improving the operating efficiency of participating SMEs, widening their product range and introducing new processes and finally to undertake joint product or process development with the MNCs. Currently, there are more than 130 local firms under the tutelage of 26 MNCs (8, p.66). 2. SMEs Providing Supporting Industries And Services To MNCs MNCs can not only coach the SMEs but can also provide the market outlet for their products which are of high quality. Even as far as 1985, the MNCs located in Singapore were already purchasing materials, parts and components worth S$16 billion; however, only 18 per cent or about S$3 billion were sourced locally (12, p.14). There is therefore tremendously scope for the SMEs to increase their supplies and sales through the provision of supporting industries and services to the MNCs. LIUP, as mentioned earlier, is one way to upgrade the quality of the products of the participating SMEs to make them suitable as manufacturing inputs for MNCs. COMPETITION-ORIENTED Singapore leaders have always emphasized the need for the republic to maintain its international competitiveness. This is obviously the key to Singapore's economic well-being in the future. This emphasis has become part of the vision for enterprises. Thus the SME Master Plan stresses: By the turn of the century, Singapore must have a core of our own high-calibre entrepreneurs and world class enterprises capable of matching their counterparts in industrialised countries [emphasis added] such as West Germany, Japan and Switzerland (12, p.10). Loucks, Meredith and Ray have emphasized that in entrepreneurship development, "Policies should be guided by goal or goals to be achieved" (6, p.514). Since Singapore's economic goal is to become a major node in global business, the republic's SMEs have to be internationally competitive. This implies that they have (1) to be technologically sophisticated in order to be efficient and productive as well as quality and design conscious, and (2) to be strengthened in the area of international marketing. The strategy of Singapore has been to focus on the following: (1) Technology, Automation And Information Technology (IT) Raising the level of technology has been given high priority in the development of SMES. There are three complementary aspects which are mainly spear-headed by the Singapore Institute of Standards and Industrial Research (SISIR). The first is the provision of technology information through seminars, courses and exhibitions, etc. The second is the provision of opportunities for technology transfer. This is done through a number of competency centres (such as the Design and Development Centre, and the Grumman International/Nonyang Technological University CAD/CAM Centre (GINTIC)) and specialized training institutes. The third is quality upgrading, and the idea is to enable SMEs to produce products which meet the export quality requirements. For this purpose, SISIR gives assistance in the establishment of proper production and quality systems in meeting quality requirements of importing countries and in the quality certification of products. In labor scarce Singapore, automation is seen as essential to reducing production costs, cutting down dependency on labor, ensuring consistency in quality and increasing flexibility in production. Automation in SMEs is being promoted jointly by EDB and the Automation Application Centre (AAC). To accelerate the tempo of automation, a number of incentives have been introduced to encourage the SMES. These include grants for automation feasibility study, training automation engineers and technicians and investment allowance for installing automation equipment. It is seen as essential in the globalization of business for accessing and disseminating information, increasing organizational capabilities and decreasing costs, etc. To help the SMEs to take advantage of IT potential, the National Computer Board (NCB) undertakes promotional and informational work on IT, training and education, the establishment of sector-wide IT network, and the provision of assistance for computerization (12, pp.47-53). (2) Strengthening International Marketing

4 As part of the strategy to enhance Singapore's competitiveness in international trade, the Trade Development Board (TDB) has paid special attention to building up infrastructures for trade. These include Trade Information Service (information on market trends and opportunities abroad, etc.) and Tradenet (electronic access and processing of trade documents, etc.). More specific international marketing assistance takes two forms. The first relates to the promotion of products and services under which SMEs are offered the opportunity to participate in trade missions organized by TDB and in international trade fairs in both established and new markets. The second, of a financial and incentive nature, consists of a number of schemes directed at encouraging SMEs to underake activities to promote their companies, image and brand names, to improve their product design and packaging, to conduct overseas market studies, to develop new markets or explore and get overseas business partners (12, pp.86-89). FOCUSSING ON THE WINNERS Singapore has approached the issue of assistance to the SMEs in its own way. This can be discerned from the SME Master Plan. While many of the incentives and financial assistance schemes are available to all SMES, there is also a special emphasis on the winners. This is not surprising since the objective is for the SMEs to contribute effectively to the future development of Singapore. Thus, the target group for government development assistance consists of: Innovative start-ups and local enterprises which have the critical mass, capacity, capability and commitment to innovate and grow... and the objective of the SME Master Plan is to provide assistance to SMEs: which possess the necessary factors for success to merge and grow by adding value to their people, products and capital (12, p.2). Such an emphasis has its theoretical underpinning. Sexton has stressed the entrepreneurial growth orientation as the real factor behind economic success rather than the smallnes of the firm per se. Hence, to him: initiative to attract or initiate firms that will contribute to economic development should be directed toward entrepreneurial growth-oriented firms and not toward small businesses in general (10, p.28). The focus on the winners can be illustrated by referring to the features in a number of the assistance schemes. Take for example, LEFS (Local Enterprise Finance Scheme) which makes low cost financing available to small firms for the improvement and expansion of their operations. However, within LEFS, for qualifying firms there is an even lower interest rate scheme (the Special Interest Rate Scheme) if their equipment would achieve either a substantial savings in manpower, a significant increase in production output per worker or introduce a more sophisticated manufacturing technique. To encourage SMEs to go international, the Market Development Assistance Scheme (MDAS) of TDB provides financial assistance to firms which desire to prospect new markets or to identify niches in such markets. Beneficiaries of this scheme have included Creative Technology (a computer peripherals firm now listead in NASDAQ) which received a grant in 1988 to help it open its marketing office in San Francisco, and Bonia (leather goods manufacturer and retailer) which received a grant to have a liaison office opened in Italy (7, p.72). CONCLUSION Singapore has achieved tremendous economic success in its short span of history (dating from 1965) as a nation. The republic is applying its economic success factors to the development of SMEs in the overall context of linking SME development to the future economic development of Singapore. These factors include free trade and globalization, capitalizing on the MNCS, competition-oriented and focussing on the winners. These are also elements common to successful enterprises and successful economies. Such an approach enhances the prospect of SMEs becoming a valuable partner in the future economic development of Singapore.

5 FOOTNOTES The author would like to thank Professor Dennis M. Ray and Professor Raymond Kao Wen-yuan for going through the preliminary draft of this paper. The responsibility for the paper, however, belongs solely to the author. 1.The rate of inflation averaged 3.1 per cent for the period ; 4.1 per cent for , and 1.2 per cent for See References [5 and 9]. 2.Termed "The SME Initiative," the package includes the following: * Fiscal incentives and access to financial assistance; * Technical problem solving and help in technology adoption, automation, innovation and product development; * Exploitation of information technology; * Expert help on productivity improvement and training; * Practical advice on business development and help in establishing business partnership; * Assistance in international marketing and design; and * The Local Industry Upgrading Programme (LIUP) to build up the supporting industry. REFERENCES [1] Leo Paul Dana, "A Comparison of Two Contrasting Models of Development, Case Study: Republic of China- Taiwan and South Korea," Proceedings of ENDEC World Conference on Entrepreneurship and Innovative Change, Singapore, July 3-5, [2] DBS Bank, Economic Research Department, "No. 8, An Integrated European Market in 1992: Implications for Singapore," January [3] Department of Statistics, Yearbook of Statistics Singapore [4] Economic Committee, Singapore, Subcommittee Report on Entrepreneurship Development, December [5] Lim, Chong Yah and Associates, Policy Options for the Singapore Economy (Singapore: McGraw-Hill Book Co., 1988). [6] Loucks, K. E., Meredith, G. G. and Ray, Dennis M., "Entrepreneurship Programming for Economic Development: Some International Perspectives," Proceedings of ENDEC. [7] Maddox, Marvin, "Providing Incentives for that Overseas Push," Singapore Business, July [8] Maddox, Marvin, "In the Footsteps of MNCS," Singapore Business, August [9] Monetray Authority of Singapore, Annual Report , unnumbered page entitled "Key economic and financial Statistics." [10] Sexton, D. L., "Role of Entrepreneurship in Economic Development," in Entrepreneurship, Intrapreneurship and Venture Capital, ed. by R. D. Hirish (Lexington, Massachusetts: D. C. Heath and Company, 1986). [11] Siu, Wai-sum and Martin, Robert G., "Entrepreneurship of Hong Kong," Proceedings of ENDEC. [12] SME Committee, EDB, Singapore, SME Master Plan, May [13] The Straits Times, September 12, [14] The Straits Times, October 8, 1992.