Monday 31 March 2014

Is Singapore too business friendly for local firms?

With no entry barriers, S'pore companies face full brunt of global competition
By Han Fook Kwang, The Sunday Times, 30 Mar 2014

Singapore is one of the easiest places in the world to do business.

That's an achievement the country is proud of, and it is a key part of its successful economic strategy.

The more attractive it is for companies to set up shop here, the more economic activity will be generated, with more jobs and income for all.

There couldn't be a more straightforward and uncontroversial approach to growing the economy.

The funny thing is that of late, I have been hearing more Singapore companies complain that Singapore has been so successful doing this, the policy is working against them.

And you thought local enterprises should be the first to champion the business-friendly environment.

What's happening?

Local businessmen complain that because there are virtually no barriers to the entry of foreign companies, Singapore firms face the full force of international competition.

The widespread use of the English language, the rule of law, and the open and transparent system level the playing field for all, with local companies enjoying no advantage over foreign ones.

This is unlike in many countries, especially in Asia, where it is notoriously difficult for foreigners to operate.

Japan was a classic example in the early years of its industrialisation after World War II.

In the car industry, the Japanese market was closed to foreign automakers for a long time through a combination of rules and tariffs, all part of a deliberate government policy to help its own manufacturers secure the domestic market first before going on to conquer the world.

When Japan removed these tariffs later, it perfected the art of imposing non-tariff barriers, putting many administrative roadblocks in the way of these imports.

The market is freer now, partly as a result of the World Trade Organisation rules and pressure from exporting countries, especially the United States, but the long years of protection enabled companies like Toyota and Nissan to build their global reputation.

You could say the policies worked during a critical period in Japan's modernisation, though its present economic problems raise questions about their long-term impact.

China is another example where there have been many complaints about how difficult it is for foreign companies to operate.

There is a well-known dictum: When in China, do as the law says, not as the Chinese do, because there is one set of laws for foreigners and another for locals.

Despite it not being an easy place to do business, China continues to be the largest magnet for foreign investment propelling its economic growth over the last few decades.

In both China and Japan, the language barrier is a major impediment that foreign players need to overcome.

Not so in English-speaking Singapore.

Here, the mantra is a familiar one: Singapore is too small, with no domestic market for its local companies to lean on. They need to compete with the rest of the world, and if they can't, no amount of protection will help them. Better to expose them to the harsh world outside and hope they become stronger as a result.

Singapore Airlines (SIA) is perhaps the best example of this approach. So strongly does the Government believe in this that it has the most liberal open skies policy in the world, attracting the world's best airlines to make Singapore an aviation hub of choice.

It is on record as saying that if being so open results in SIA folding up because it cannot compete, so be it.

Making Singapore an air travel hub with all its attendant economic spin-offs is much more important than keeping its own airline flying, even one as iconic for the country as SIA.

Local businesses say this whiter-than-white policy has resulted in the economy dominated by government-linked companies (GLCs) and foreign companies, both of which have the resources and wherewithal to compete against the best.

The construction industry is a good example, with foreign contractors winning most of the large infrastructure projects such as MRT stations and tunnels.

One local contractor complained that many of these foreign firms - dominated by the Japanese, Koreans and Chinese - bid loss-making prices in a race to the bottom to win these contracts.

There's a name for this - social dumping - coined from the term used when companies price their exports lower than in their own countries or below the cost of production.

In social dumping, cheap foreign labour is usually involved, and it is a hot issue in many European countries facing a large influx of migrant workers.

Another SME boss lamented how, when large Singapore companies including GLCs win projects abroad, they almost never favour local companies to sub-contract the work to.

Instead, the local companies have to compete against the rest of the world, including those where the project is based.

There is no Singapore connection to speak of.

The SME boss related how his own business was struggling until he managed to secure an overseas contract in Indonesia which opened the door to other opportunities.

Often it is this one break that companies seek to help them establish the track record they need to secure future business.

They look to the big Singapore boys to give them that helping hand. But here, open tenders and arm's-length relationships rule.

This is in sharp contrast to, say, the way Japanese companies favour their own sub-contractors with whom they have built a long relationship.

Singapore's approach is tied to its long-held belief in keeping everything above board, with no hint of corrupt practices and dubious guanxi or connections.

The policy has many pluses, and has resulted in the efficient, competitive economy we see today.

But can Singapore have its cake and eat it?

Can it give a leg up to local companies yet make the competition fair and avoid the problems associated with a less than open system?

Can it be more nuanced - smarter even? - and take a leaf from some of its Asian competitors which have succeeded in developing world-beaters?

Or will local enterprises continue to face daunting odds in the most open economy in the world?

These questions deserve some airing as Singapore restructures its economy and takes it to the next level - hopefully with world-class local companies in tow.

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