Singaporean Businesses Need to Buck Up - Innovate or Die!

Recently reported in the press is the news that SMEs in Singapore are complaining about the restrictions on foreign workers and want the government to loosen the restrictions that limit the hiring of foreign workers. A recent business survey indicates that these SMEs are quoting the same excuses that they have using all along - locals shun labour-intensive jobs, and the turnover rate for foreigners is lower. These business also want to hire foreigners because this reduces business costs, or, in other words, because foreign labour is cheap.

These latest results show that Singaporean businesses are heavily dependent on lowering the cost of factor inputs in order to compete in the market, rather than improving factor productivity. The difference between the two is illustrated as follows.

Company A hires Singaporean worker Mr Chan at $15 an hour to produce 10 widgets per hour. Mr Chan manufactures the widgets using equipment Y, which depreciates at $25 per hour. The cost of production per widget is hence $4 per widget: ($15+$25)/10 = $4. Company A can lower the cost of production by either lowering the cost of the factor inputs (labour or capital equipment), or by improving the productivity of these inputs.

Company A chooses to lower the cost of production by reducing the cost of factor inputs. Company A fires Mr Chan and hires Mr Balakrishnan from India who is willing to work for $5 per hour. However, Mr Balakrishnan was previously a farmer and he has only started to learn how to operate the manufacturing equipment, and so he can only produce 8 widgets per hour. Company A's strategy lowers the cost of production from $4 per widget, to $3.75 per widget: ($5 + $25)/8 = $3.75. However the the productivity of Company A has declined. Its production per worker has fallen to 8 widgets per hour, compared to its previous output of 10 widgets per hour.

Company B chooses a different strategy. Company B starts out with the same equipment as Company A, and employs Mr Wong at the same wage as Mr Chan. Company B also invests in research & development to improve the technology of its manufacturing equipment. Because Company B has been investing in research & development, it has a new piece of equipment. This equipment costs more, and has a depreciation rate of $43 an hour,compared to $25 previously. Company B also trains Mr Wong to use this new piece of equipment. The result of this improved manufacturing process is that Mr Wong is now able to produce 16 widgets per hour, compared to 10 widgets previously. At the same time, because of Mr Wong's improved skillset, Company B increases Mr Wong's salary to $17 per hour.

The net result of this is that Company B's cost of production is now $3.75 per widget = ($17+$43)/16. This is the same as Company A's result. However, unlike Mr Chan, Mr Wong not only keeps his job, but also has received a pay raise. Mr Wong is also able to afford another child because of his higher income, and help improve to Singapore's poor fertility rate. Furthermore, the longer term impact of this strategy is that Company B is able to continue lowering the cost of production, because it can continue to invest in R&D. Company A, however, is unable to bring down its costs further, because it is unable to find workers who are willing to work for much less than $5 per hour. Furthermore, Company B is able to expand its production and hire the experienced Mr Chan, who was previously fired by Company A.

The difference between Company A and B is the difference between night and day. Company A has chosen the strategy of lowering the cost of factor inputs, but this strategy rarely results in sustainable competitive advantage. In most cases, this strategy results in price wars and intense competitive rivalry that ultimately kills profitability when such price wars are not accompanied with increases in productivity.

Company B, however, has a sustainable competitive advantage. Its R&D program will continue to produce better equipment and labour productivity gains, and will allow it to lower its cost of production even further. In contrast, Company A cannot reduce its factor costs much further and will soon be put out of business.

Two fundamentally different strategies, two fundamentally different results.

Singaporean businesses are thinking like company A. Instead of focusing on improving productivity, they have chosen to pursue lower factor input costs. They repeatedly complain that Singaporean workers are too expensive and want to hire cheap foreign labour instead. Eventually, like company A, these businesses will be outcompeted by their more innovative counterparts.

In view of these SMEs' mentality, is it surprising at all that Singapore's productivity growth has remained stagnant relative to the US since 1995, as the recent Singapore Competitiveness Report shows? Is it surprising at all that the standard of living for the average working Singaporean has hardly improved in recent years?

No.

Singaporean businesses need to buck up and start innovating. The government also needs to stop feeding this quick-fix mentality with its liberal immigration program.

Quick-fix is ultimately no-fix, and Singaporean businesses must innovate or die.

Commerce is More than Ease of Doing Business: SG Lags in Key Entrepreneurial Factors

Following up on my recent post on the deficiencies of GDP as a metric for Quality of Living, here's a post on the deficiencies of "Ease of Doing Business" as a metric for the business environment. Here's a recent extract from an article in today's business times:

S'pore scores low on several counts in big-city lineup

But survey finds it pips 10 other global cities as best place for business
BT March 21, 2007

"What sets the study apart, however, is not the choice of cities but the indicators used. The nine indicators and 32 variables go beyond the traditional cost factors to 'provide a more broad-based picture of what drives business location decisions in the 21st century'.

Singapore ranked last in 'technology IQ and innovation' - perhaps the one indicator which, more than any other, defines, in the popular mind, the 21st century city of opportunity, the study says. The variables assessed here included percentage of self-employed and number of registered patents.

Singapore ranked near-last, unsurprisingly, in 'intellectual capital' - an indicator that looked at, among other things, the number of Top 500 universities in a city and number of Nobel Prize winners in the past eight years.

Similarly, Singapore ranked above only Shanghai for 'financial clout', which took into consideration things like the number of Fortune Global 500 headquarters and domestic market capitalisation. The other indicator where Singapore did poorly was 'lifestyle assets', covering entertainment, recreational space and number of hotel beds - though its ranking is expected to improve with the completion of the integrated resorts in 2010."

I shouldn't extract the whole article, for then I'd be at risk of violating copyright. But the message from this article is clear: Focusing single-mindedly on the ease of doing business provides a skewed picture of the "business-friendly" environment here in Singapore.

Particularly in a 21st century developed economy like Singapore, where a country cannot simply rely on low-cost manufacturing to create jobs, there is a premium on entrepreneurship and business startups to renew and drive economic growth. This necessarily makes factors like "Intellectual Capital, Financial Clout & Innovation" particularly important, since these are the factors that help create a strong environment that breeds entrepreneurship.

• Intellectual Capital is important because entrepreneurs often draw upon the knowledge banks which a city has built in order to create new products and services. It is often an important source of competitive advantage since intellectual capital is difficult to replicate and patents can be filed to protect companies'/individuals' intellectual capital.
• Financial Clout is important because startups need more than just entrepreneurs and good ideas, they also need strong financial backing to get their projects off the ground.
• Innovation and Technological IQ is important because without an innovative spirit, we will find few ideas with which to start companies and create new products and services. A low technological IQ means a country runs the risk of falling behind other more innovative cities, and hence losing businesses and jobs to the competition.
  

However, Singapore is ranked rather poorly in all these metrics, far behind its peers whom it seeks to compete against.

Yet, the government likes to brandish the "no.1 in ease of doing business" metric about, as if trying to say Singapore has the best business environment in the world. Yet they fail to acknowledge that the city lags far behind in other crucial metrics that the determine business & entrepreneurial success of a nation.

So, the lesson is, just as you should take GDP with a pinch of salt, so should you take "ease of doing business" with an equally big dose of salt. Just because it's easy to start your business, doesn't mean your business has a high chance of succeeding. The business environment should be measured by many more metrics than the lack of administrative hurdles to get your business started.