Singapore's Transition to Innovation-Based Economic Growth: Infrastructure, Institutions and Government's Role Winston T
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Singapore Management University Institutional Knowledge at Singapore Management University Research Collection School Of Economics School of Economics 3-2006 Singapore's Transition to Innovation-based Economic Growth: Infrastructure, Institutions and Government's Role Winston T. H. KOH Singapore Management University, [email protected] DOI: https://doi.org/10.1111/j.1467-9310.2006.00422.x Follow this and additional works at: https://ink.library.smu.edu.sg/soe_research Part of the Asian Studies Commons, and the Growth and Development Commons Citation KOH, Winston T. H.. Singapore's Transition to Innovation-based Economic Growth: Infrastructure, Institutions and Government's Role. (2006). R&D Management. 36, (2), 143-160. Research Collection School Of Economics. Available at: https://ink.library.smu.edu.sg/soe_research/100 This Journal Article is brought to you for free and open access by the School of Economics at Institutional Knowledge at Singapore Management University. It has been accepted for inclusion in Research Collection School Of Economics by an authorized administrator of Institutional Knowledge at Singapore Management University. For more information, please email [email protected]. Published in R&D Management, Volume 36, Issue 2, March 2006, Pages 143-160 https://doi.org/10.1111/j.1467-9310.2006.00422.x Singapore’s transition to innovation-based economic growth: infrastructure, institutions and government’s role Winston T. H. Koh School of Economics and Social Sciences, Singapore Management University, 90 Stamford Road, Singapore 178903, Singapore. [email protected] Technological progress and innovation plays a central role in a country’s economic progress. As an economy advances to the global technological frontier and narrows the technological gap, an innovation-based growth strategy that focuses on investments in R&D and technology creation offers the greatest potential for economic growth. In this paper, we discuss the requirements for a successful transition, in terms of changes to the technology infrastructure, economic institutions and the incentives’ structure. This paper outlines the efforts made by Singapore to re-make itself as an innovation-based economy, and the challenges faced by the government in transforming the nation’s infrastructure and institutions to develop innovation capabilities and encourage entrepreneurship. 1. Introduction talent are mobile – as opposed to the earlier, easier task of technological catchup. ince becoming an independent nation in 1965, Singapore’s growth strategy in the 1960s and S Singapore has grown at an average annual 1970s focused on the attraction of multinational rate of about 8% until the late 1990s. Singapore companies (MNCs) to locate in the city-state, to has no external debt, and its foreign exchange produce for global export markets. This strategy reserves, at more than US$110 billion in 2004, was initially borne out of necessity. As an island ranks as one of the highest in the world, and the economy with few natural resources, employment highest, on a per-capita basis. Singapore’s eco- creation was an urgent task in the early years of nomic development model over the past four independence. Later, this strategy of targeting decades has combined an open-economy frame- foreign direct investment by MNCs became part work with strong government involvement in of the economic development strategy that seeks labor, land and industrial development policies. to position Singapore as a major business hub in While this approach has enabled Singapore to the global network of trade and capital flows. transit from the Third World to First World Generous tax incentives and grants were given to status in the span of less than 40 years (Lee, MNCs to locate their regional operations in 2000), there has lately been some concerns that Singapore. While this economic strategy was this development model is no longer appropriate immensely successful in accelerating growth, the or relevant now that the country has to compete side-effect was that Singaporean companies came ‘close to the technological frontier’ of a global to play a largely supporting role in the MNCs knowledge economy – where capital, ideas and with little incentive to invest in indigenous R&D Management 36, 2, 2006. r 2006 The Author. Journal compilation r 2006 Blackwell Publishing Ltd, 143 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA Winston T. H. Koh capabilities in high-tech innovation. Manufactur- in basic research and infrastructure, there was ing currently accounts for 25% of the contribu- also coordinated effort to review and modify tion to GDP, with electronics being a key sub- government policies to stimulate innovation and sector in terms of employment creation. entrepreneurship. Changes to the regulatory frame- Singapore is fast reaching the limit of this devel- work and the institutional environment are being opment strategy. From 2000 to 2002, Singapore made to encourage innovation in Singapore. The experienced a fall in its total factor productivity government has already set aside more than US$1 performance, as a result of severe capacity under- billion fund in 1998 to invest in venture capital utilization in Singapore’s manufacturing sector funds and to promote entrepreneurship. Techni- caused by adverse shocks in the global economy. cal professionals and skilled workers are being The global slowdown in electronics demand and courted through an aggressive ‘foreign talent’ technology spending in the aftermath of the tech- policy. Funding for basic research at the univer- bubble burst in April 2000, coupled with the nega- sities and at government-established research in- tive impact of the September 11 event in 2001, had stitutions has also been increased substantially. significantly affected the electronics manufacturing The shift to an innovation-based growth strat- and IT services cluster in Singapore. Singapore egy requires coordinated changes to be made to a must now look for alternative sources of growth nation’s technology infrastructure, economic in- and reduce its reliance on MNCs. The current stitutions and incentive systems. The appropriate heavy dependence on electronics in the manufac- economic structure for science and innovation turing sector has made the Singapore economy that creates an environment for investments in vulnerable to the vagaries of the global business scientific and technological endeavors is essen- cycle. Singapore’s relatively high levels of wages tially the same one that fosters a climate for and domestic costs also render it vulnerable to investment, jobs and sustainable growth. The competition from lower-wage economies, such as factors that are necessary for a conducive envir- China and India in Asia, and Mexico further onment for innovation are: macroeconomic sta- afield. Already, there are signs of hollowing out bility; openness to trade, foreign direct investment in Singapore’s manufacturing sector, as MNCs as well as immigrant talent; strong intellectual relocate their Asian manufacturing facilities to property rights protection; and a set of policies to China, not just because of the lower cost of ensure fair competition. Adequate intellectual operation, but to tap directly into the burgeoning property protection plays a strong role in creating consumer market there. It is becoming increas- incentives for R&D and innovation, and in pro- ingly more difficult for Singapore to compete for moting the diffusion of knowledge, while a well- global investments from MNCs, not just because structured competition policy, by creating a level of high costs of doing business in Singapore, but playing field, facilitates the entry and exit of firms also because of the general reluctance of MNCs to into new markets, thus stimulating innovation shift their innovation centers to Singapore.1 and commercialization of new technologies. Competition for capital and talent is also em- The transition to the technological frontier re- erging from high-tech regions that include Israel, quires the development of a set of micro-economic Ireland, Shanghai and Beijing in China, Seoul capabilities and incentive structures, through gov- in South Korea and Bangalore in India. These ernment policies that focus particular attention regions provide the critical mass of advanced on the careful coordination among interdepen- knowledge institutions (universities, public re- dent components. In this paper, we discuss the search institutes and corporate laboratories), ven- challenges that an economy faces as it shifts to an ture capital, entrepreneurial talents, knowledge innovation-driven growth strategy. We shall fo- workers, sophisticated corporate end-users, well- cus on the role that governments can play in this developed financial markets, etc. process, and review Singapore’s current efforts to As Singapore enters a new phase of national chart a new economic strategy to compete closer development, its economic future will depend in- to the global technological frontier. In particular, creasingly on its ability to engage in technological we shall discuss Singapore’s efforts to strengthen creation and create internal engines of growth. its technological infrastructure, adapt its institu- This transformation, however, will take time, as tions and develop innovation capabilities. innovation capabilities and new supporting insti- The rest of the paper is structured as follows: In tutions are being strengthened and transformed. Section 2, we discuss the role