Servicing a smarter economy

By Zaid Hamzah, Published The Straits Times, 2 Sep 2013

WHEN SATS provides its services in airports worldwide and leaves the Changi Airport imprint, that is Singapore exporting its intellectual capital.

In its first joint venture in the Maldives, for example, SATS brought along its "expertise and know-how" to help design and build the inflight kitchen, SATS president and chief executive Tan Chuan Lye recalled last month.

Another company that showcases how Singapore monetises its know-how and exports its intellectual capital is Singbridge.

Singbridge, wholly owned by Temasek Holdings, invests in, develops and manages integrated cities and sustainable solutions internationally.

It brings with it Singapore's strong country brand capital, the trust and reliability factor in addition to Singapore's main intellectual capital assets of know-how and expertise.

Singapore has now exploited its intellectual capital in Indonesia, China, India and Vietnam.

Then you have Surbana with its humble origin as a unit in the Housing Board, now owned by Temasek and CapitaLand, making inroads internationally as a premium international building consultant with offices across Asia and the Middle East.

For a small and trade-dependent economy with no natural resources, the export of intellectual capital is a major income source for the Singapore economy.

A nation's intellectual capital comprises human capital, intellectual assets such as inventions and brands, and legally protected rights which include patents, copyrights and trademarks.

Deputy Prime Minister Teo Chee Hean announced last week that a new intellectual property (IP) financing scheme would allow local companies to use their IP as collateral when applying for bank loans.

The scheme, to be launched next year, is a necessary step as the Singapore economy restructures into a more innovation-driven intellectual capital economy.

Since 1997's publication of Thomas A. Stewart's Intellectual Capital: The New Wealth of Organisations, intellectual capital has emerged as the new economic value driver.

According to a study by investment banking firm Ocean Tomo, the market value of the United States' top 500 companies in 2010 was made up of 80 per cent intangible assets and only 20 per cent tangible assets.

Services in Singapore contribute around 70 per cent to the economy while manufacturing contributes a steady 30 per cent. Monetisable services such as SATS, Singbridge and Surbana are a type of intellectual capital that generates export earnings for Singapore.

Beyond services, the Government has identified innovation and the creation of intellectual property rights as a major economic driver.

Allocating over $16 billion between 2011 and 2015 to focus on research, innovation and enterprise, the Government has also sharpened its focus on restructuring the economy to a more productivity-led innovation economy.

Singapore ranks eighth in this year's Global Innovation Index out of 142 countries. It is conceivable that as an economy, a substantial part comes from intangible assets, just as the present-day components of the American S&P 500 companies' market value comprises of intangible assets which includes patented technology.

Singapore's intellectual capital portfolio includes inventions, technology and brands.

Singapore Airlines was Singapore's No. 1 brand valued at US$3.2 billion (S$4.1 billion) in 2012, according to a global intangible asset valuation firm Brand Finance.

Singapore's sustainable competitive advantages feature four main types of intangible assets: these are "trust" (where there is political integrity, strong judiciary); "financial" (a stable financial system, assets such as Temasek), "operating assets" (airport, port, MRT infrastructure), and "country brand".

The brand value of government-linked companies such as Singapore Airlines, Singbridge or SATS is reinforced by the good country brand value, and can command a higher market premium.

Maintaining Singapore's competitive advantage will be increasingly about how its political and business leaders manage its intellectual capital assets.

While tiny Singapore would be hard pressed to find another Google in our start-up ecosystem, there are still many tiny nooks and crannies where we can find our competitive advantage.

Singapore can never be an "aircraft carrier" economy like China or India, so it makes sense to position the Singapore economy as a small, nimble and flexible luxury yacht.

We should aspire to be a small but high-value economy. We want to conquer and lead a services sector underpinned by intellectual capital assets.

Since services now make up roughly 70 per cent of Singapore's gross domestic product, it makes sense to transform Singapore's future intellectual capital economy as a "specialist" services innovation economy. There are limits to seaward land reclamation or burrowing deeper into the ground. And we don't have the sheer number of engineers that large economies like China and India can produce.

The services industry, however, is inherently less scalable, unlike mass manufacturing where the factory can be automated, robotised and multiplied with great precision. The services sector depends on the quality of personal interactions, and it is difficult to measure or calculate value in "hard numbers".

The answer possibly lies in the "industrialisation" of services, which Singapore can probably lead (if it wants to).

According to Mr Francis Gurry, the director-general of the World Intellectual Property Organisation, the geography of innovation has shifted to Asia with China, Japan and South Korea now contributing more than 25 per cent of all international patent applications, compared to only 7 per cent in the 1990s.

In the emerging intellectual capital economy, Singapore is in a unique situation to lead in this new drive for service innovation, where goods, people, ideas and financial capital can merge and flow seamlessly.

We can be the growth bridge between the large economies and be positioned as the value-adding intellectual capital service hub in Asia. This could be the new growth order for Singapore's economy.

The writer is director of intellectual capital company Intellectual Futures Private Limited.

Driving the innovation economy

By Zaid Hamzah, Published The Straits Times, 5 Sep 2013

DEPUTY Prime Minister Teo Chee Hean recently announced that a new intellectual property (IP) financing scheme would allow local companies to use their IP as collateral when applying for bank loans.

The scheme, to be launched next year, is a step in the right direction for the Singapore financial system and economy.

Despite Singapore's sophistication as a leading financial centre in the region, both local and foreign banks here have traditionally been reluctant to lend money based solely on the security of intangible assets such as patented technology or copyrighted animated feature films.

The reason? Unlike land or equipment that can be easily sold off, IP often lacks ready buyers. In financial market parlance, the market for IP is less liquid.

Imagine a start-up that creates a unique software-based technology for movie subtitling that is of great interest to movie distributors. If the company raises $1 million in the form of bank borrowings and is unable to repay the loan, can the bank sell off the asset in the event of a foreclosure?

Another challenge is valuation. Banks and financial institutions typically finance up to 60 to 70 per cent of the value of the security or collateral. This is the buffer they need to protect their financial interests. While it may be easy to value land based on market data and trends, how do you value subtitling software for the movie industry?

Sure, the financial industry has evolved a range of methodologies to value intangible assets such as the cost, market or income approach that takes into account the value contribution of intangibles such as IP and brand value.

But the use of such valuation methodologies really depends on the types of IP, the complexity of the technology and the marketplace that is being evaluated as part of the entire system.

Under the new financing scheme, the Government will partially underwrite the value of companies' IP to be used as collateral for bank loans.

Back in 2010, Prime Minister Lee Hsien Loong announced that the Singapore Government will spend $16.1 billion over 2011-2015 on research, innovation and enterprise.

This new IP-based financing will complement and further enhance the Government's strategic investment into R&D and IP creation.

If we can learn from the lessons of Silicon Valley and Wall Street, intangible assets such as patents, copyrights, trademarks and trade secrets, along with brand value and corporate reputation, have played and will continue to play a key part in driving financial value. IP can provide enterprises with a unique competitive edge.

Over the past few decades, IP has emerged as a valuable asset class in financial markets, along with real estate, equities, fixed income, cash equivalents or money market instruments and commodities.

According to studies by Ocean Tomo, a US intellectual capital investment banking firm, the market value of the components of the S&P 500 in 2010 comprised 80 per cent intangible assets and 20 per cent tangible assets. The corresponding figure in 1975 was 17 per cent intangible assets and 83 per cent tangible assets.

With the emergence of IP as the new asset class, capital markets and the financial systems have responded to this shift in an attempt to capture the new value of IP and other intangible assets.

The challenge is to create innovative funding mechanisms that can ensure the flow of capital to spur business growth and investment in enterprises that are truly driving value in today's economy.

Companies, in turn, will be able to access capital in new ways to finance innovation and expand their businesses.

As Singapore strives to be the centre for innovation in Asia and the Government steps up its plan to accelerate the move up the innovation value chain, this move to promote IP-based financing could have major strategic impact, not just on the Singapore financial system but also on the economy in general.

In its early years, the Singapore economy depended upon entrepot trade. In the seventies and early eighties, we ramped up manufacturing to become the preferred centre for multinational companies. In the 21st century, we are seeking to position our economy as a productivity-led and innovation-driven one.

In this next phase, IP will clearly be one of our key strategic national assets. As a nation used to not having any natural resources, this new intangible asset will be the source of a new competitive advantage.

But if IP is going to be the new value driver in our economy, the banking and financial infrastructure must also be aligned both strategically as well as operationally.

The new IP financing scheme will strengthen not just Singapore's innovation ecosystem, but also its banking and financial system. After all, the two sides of the equation are inextricably linked. Strengthen both, and the whole economy will benefit.

Only time will tell how effective the new financing scheme will be.

If the lessons of Silicon Valley and Wall Street are anything to go by, we should get it right so long as the screening process is tight and we are financing quality IPs with high commercial value.

There is tremendous potential for Singapore to take the lead in this new emerging area of intangible asset financing, particularly in developing related financial tools and products.

According to Mr Francis Gurry, director-general of the World Intellectual Property Organisation, the geography of innovation has shifted to Asia, with China, Japan and South Korea now contributing to more than 25 per cent of all international patent applications. This compares with only 7 per cent in the 1990s.

We have the potential to service the whole of Asia, if we want to. If Singapore is to become the innovation capital of Asia, then the suite of financial and banking products and services must cater to the Asian market.

The writer is an IP investment counsel and director of Intellectual Futures, which specialises in intellectual capital management.