Budget 2016 for business continues the themes of Budget 2015 — that Singapore is in the midst of economic restructuring and needs to press on with near-term concerns by supporting innovation, driving automation and skills development.

Targeted initiatives and cost pressures

What is new is the emphasis on value creation and innovative enterprises. Under the Industry Transformation Programme (ITP), the government is focused on the ambitious transformation of enterprises. This signals a gradual scaling back of cyclical and transition support packages for businesses and the concurrent expansion of support for growth-oriented companies through automation and research, scaling up of enterprises and new technological platforms.

With the forthcoming lapse of the Productivity Innovation Credit (PIC) scheme by YA2018, the government has also signalled the shift towards more targeted and sectoral-focused initiatives, with an expanded role for Trade Associations and Chambers (TACs) in driving industry transformation.

The current approach signals continuity in applying cost pressures on businesses to invest in productivity, merge and scale up, or move low value-added production offshore. On the labour front, these cost pressures will arise from:

• the expiry of the deferment of levy increases for S-Pass holders;
• the rise in levies for R2 (basic tier) workers in construction and services, with levies in manufacturing and the marine and process sector remaining unchanged;
• the expiry of the Wage Credit Scheme (WCS) extension next year, which provides co-funding for 20% of wage increases given to Singaporean employees earning a gross monthly wage of $4,000; and
• the expiry of the Special Employment Credit (SEC), which provides targeted wage offsets for workers aged 55 and above earning up to $4,000 a month.

Continued real wage growth or employment creation at current rates is likely to be unsustainable, considering current headwinds in the global economy, labour market tightening measures that inflate real wage growth, as well as rising labour costs. Real wage growth has also been outpacing productivity gains since 2012, particularly in the construction, general manufacturing and retail service sectors. Since 2011, there has been overall stagnation in real labour productivity growth.

The government will spend S$4.5 billion on the ITP, which includes initiatives such as:

• a Business Grants Portal;
• an Automation Support Package;
• an expanded SME Mezzanine Growth Fund;
• an extension of the Double Tax Deduction for Internationalisation scheme;
• a National Trade Platform, support for the National Robotics Programme; and
• an enhanced Local Enterprise and Association Development programme (LEAD-Plus).

In addition, to drive transformation through innovation, a new entity, SG-Innovate, will be established to provide stronger support for start-ups. There will also be a top-up to the National Research Fund (NRF), and the launch of the Jurong Innovation District. In the rest of the essay, we look specifically at two Budget measures.

Focus on Innovation

The focus on innovation suggests several structural shifts in the government approach.

First, it recognises the importance of developing growth-oriented enterprises aimed at value creation — that is, business model innovation and the creation of new products and services to capture the high value-added components of the value chain. Hence, the Automation Support Package will specifically target subsidies for qualifying automation equipment. Internationalisation support to help competitive businesses venture abroad will be integrated with automation support.

However, several questions have been raised about the return on investments in research funding so far, in particular the success rate of SMEs and spinoffs in capitalising on innovation to build strong market positions and achieve strong revenue growth. Singapore-based companies face enormous structural challenges relative to their multinational counterparts in commercialising research, such as having a limited domestic market and considerable barriers of entry due to regional differences in cultural, commercial and legal frameworks.

Data from a study conducted in 2003 by Professor Toh Mun Heng and Associate Professor Shandre Thangavelu shows that majority foreign-owned industries have higher Total Factor Productivity (TFP) growth than majority locally-owned industries. Local public R&D investment also has greater positive impact on the productive performance of majority foreign-owned industries than majority locally-owned industries.

Another study conducted in 2009 by Ms Ho Yuen Ping, Professor Wong Poh Kam and Professor Toh Mun Heng found that the productivity of spending on R&D in Singapore falls behind developed nations, with an elasticity of 8.14% for productivity research on output as compared to 23% for G7 nations.

The current Research Innovation Enterprise (RIE) programme, with six key thrusts, includes a series of grants and accelerator schemes from idea conceptualisation to the pre-IPO stage; funding for basic research and IP offices; and key support for synergies between research and industry, through the Industry Alignment Fund and Technology Transfer Offices. A*STAR and SPRING’s GET-Up Programme seconds public researchers in institutes of higher learning, research institutes and polytechnics to SMEs to undertake innovation projects. To date, more than 600 researchers have been seconded to SMEs. However, it is unclear what the overall measured outcomes of this programme have been.

One way to increase the efficiency of product innovation is to expand resources to understanding the competitive landscape where innovation funding is channelled to. Business development skills and commercialisation expertise are critical to productive research. At the firm level, innovations aimed at establishing durable competitive advantages would help to increase the selectiveness and productivity of innovation and product development funding. This can be facilitated through private intermediaries such as Heliconia Capital and Vertex Holdings, or through accelerator programmes.

Still, further collaboration and tie-ups between state-funded agencies and strategic consulting companies to enhance the business development functions of SMEs in Singapore may be required. In Canada, a study has found that insufficient marketing expertise and business skills result in public R&D becoming “in effect, a subsidy to US businesses which acquire the most promising of these capital-starved but R&D-rich Canadian companies cheaply, then reap the financial rewards by commercialising R&D and bringing those companies to industry leadership.”

Trade Associations and Chambers (TACs)

The Budget sees sector-focused TACs playing a larger role in assisting SMEs. The aim of policy here is to catalyse private sector linkages, rather than to breed reliance on government handouts — and TACs play an important role in fostering intra-industry cooperation. A Local Enterprise and Association Development-Plus (LEAD-Plus) programme, costing S$30 million over the next five years, will be introduced to improve the capabilities of trade associations and chambers and help them strengthen their outreach.

The Government will also second up to 20 public officers to interested trade associations and chambers to forge closer partnerships between Government and Industry. The shift away from a top-down approach and applying blunt policy tools to a class of highly diverse SMEs, to greater involvement at the sectoral level by private intermediary organisations, is a welcome development. A greater role for TACs in both policy design and implementation will allow for nimbler policymaking and greater integration of government assistance with business development of individual SMEs across different stages in their life cycle.

The current proposal focuses on capacity building, including strengthening leadership for strategic planning roles, building capability in TAC secretariats, developing robust processes, and enhancing TACs’ service provision capacities. During the Parliamentary debates on the Budget, Trade and Industry Minister Lim Hng Kiang said, “TACs will source for bottom up scalable solutions to industry-specific productivity and innovation needs.” The government will also partner the TACs to drive 30 Collaborative Industry Projects over the next three years. This aims to encourage enterprises to form consortia that develop and deploy solutions for innovation and productivity.

Currently, the proposals are broad and actual outcomes will be sector-specific. However, a roadmap for the development for TACs, with clear provisional endpoints and performance targets, is required to ensure that LEAD-plus funds are allocated efficiently. For example, funds could be disbursed on the basis of implementing a series of sustainable TAC functions within a given timeframe. According to a paper by Doner & Schneider (2000), TACs commonly serve six functions. They include:

• Macroeconomic stabilisation and reform (such as cyclical capacity rationing)
• Horizontal coordination (facilitating joint ventures, representing industry groups, etc.)
• Vertical coordination (enhancing bargaining power with suppliers, etc.)
• Lowering information costs (trade fairs, navigating international standards, market research, etc.)
• Setting standards (accreditation programs)
• Quality upgrading (innovation support, etc.)

 

Based on these core functions, feasible endpoints for TACs receiving assistance should be developed, within the context of the operating landscape of various industries.

Budget 2016 represents a step in the right direction in positioning Singapore for innovation by expanding research capacity, cluster linkages, collaborative activities, and human capital, as well as initiating targeted assistance. Strategic implementation will be key to reaping the maximum benefits from the resources committed.
Dr Faizal bin Yahya is a Senior Research Fellow and Ng Yan Hao is a Research Assistant with the Economics and Business research cluster at IPS.

Top photo from Flickr | Jundy Tiu.