18 January 2002

SPEECH BY MR THARMAN SHANMUGARATNAM, SENIOR MINISTER OF STATE, MINISTRY OF TRADE & INDUSTRY AND MINISTRY OF EDUCATION, AT THE SINGAPORE 1000/SME 500 AWARDS CEREMONY ON 18 JAN 2002 AT THE ISLAND BALLROOM, SHANGRI-LA HOTEL, AT 7.15 PM

SUCCEEDING IN AN UNPREDICTABLE WORLD - MOVING FROM A MANAGED TO AN ENTREPRENEURIAL ECONOMY

I would like to extend my heartiest congratulations to the Singapore 1000 and Singapore SME 500 winners for this year. Their achievements are the more commendable against the backdrop of the economic recession. Tonight's winners illustrate how our organisations must respond to adversity, transform themselves, emerge stronger and help Singapore succeed in its next phase of growth.

2 Last year, the economy contracted by 2.2%, the largest decline in Singapore's post-independence history. How soon the economy will recover remains uncertain, despite some signs of bottoming out in our exports. Recent improvements in US economic indicators have been accompanied by a burst of optimism in the financial markets. Most Wall Street forecasters now predict a recovery in the US no later than the second quarter, and a 'V' rather than a 'U'. The latest conventional wisdom is that US GDP growth will reach 4% by the fourth quarter. In deciding how much confidence we can place on these forecasts of recovery, we should recall that most forecasters failed to predict last year's US recession to begin with. It is worth heeding the cautionary statement by US Federal Reserve Chairman Alan Greenspan a week ago. US consumers are still holding back on spending, notwithstanding recent improvements in signals of consumer confidence. Corporations are still laying off workers - Ford Motors just announced that it will be laying off 35,000

and corporate earnings continue to decline. Elsewhere in the world, growth remains anaemic or negative. China is the exception, but its domestic economy is not yet large enough to serve as a new engine of growth for the rest of the world.

3 With an engineless global economy, it may be a while before the Singapore economy begins humming again. We would be wise to prepare for tough times in 2002. The challenge, however, does not lie in the current recession. The Government has the resources and will to help citizens tide over the downturn. Our strong reserves position has allowed for two off-budget packages of measures totalling $13.5 billion. The new Jobs Task Force will be looking into how to preserve jobs for Singaporeans and facilitate new job opportunities.

4 The real challenge before us is not in riding out the recession but in remaking the Singapore economy so that we remain a competitive nation and secure good growth for the next 5 to 10 years, and beyond. The Economic Review Committee (ERC) that has been set up under DPM Lee Hsien Loong is seeking to chart new directions to make this possible.

5 We are in a new world, a fundamentally uncertain world. We will have to make a living in an environment that will be more unpredictable than at any time since the sixties. There are a few reasons for this new situation. First, the global and regional environment is now more prone to shocks

political, security and economic. After the events of the last 4 months, little persuasion is needed on this point. The last 3 decades already look distinctly placid.

6 Second, global competition is now much more intense, and more fluid. New players are emerging, catching up with and often leapfrogging existing players. The ascendance of China, which may itself be marked by disruptions, will mean major changes in the division of labour across the region. Globally, whole industries

such as telecommunications, chemicals and textiles

are being reshaped under the impact of new international competition, new technological opportunities, and increased pressures from the capital markets. Creative destruction is in full swing, especially in sectors showing the most rapid growth and innovation. Firms that were once big and powerful are falling by the wayside, and others that we had not heard of 5 years ago, have become household names. In knowledge-intensive industries, big incumbent players are being challenged by new players

witness for example the rapid emergence of smaller biotechnology groups in the pharmaceutical industry.

7 The third reason why we face increased uncertainty is inherent in our stage of development as an economy. We have succeeded over three decades of investment-driven growth, in achieving income levels comparable to the developed countries. To achieve future economic growth, we have to migrate up the value chain and seek to achieve innovation-driven growth. Relying on innovation as the basis for competitiveness will involve greater uncertainty. Whether as individuals, firms or as a country, the higher up the innovation value chain we progress, the higher the potential rewards, and the higher the risk of failure. We have no choice but to embrace these risks if we are to sustain our economic growth.

8 To succeed in this new environment of unpredictability, Singapore will need to evolve new economic and social structures, and new ways of running businesses. We have to move from a managed economy to an entrepreneurial economy.

9 We are not alone in facing this transition. Most industrial societies in the postwar period ran what has been described as a managed economy. They relied on traditional inputs like land, labour, and capital to achieve desired outputs. It was suitable for a stable, predictable world where the targeted outputs could be clearly identified, and the inputs needed to achieve the outputs could be determined with some certainty. The managed economy focused on achieving efficiencies as the basis for competitiveness.

10 In a more unpredictable, innovation-driven environment, there will be no certainty that we get the economic outcomes we hope for. It will be more difficult to pick winners

to predict which products, firms or even industries will succeed - and provide them incentives. We also have no way of knowing exactly what inputs we need. We will have to focus on developing broader capabilities, not targeting specific numbers for specific skills. We should be able to tell that we need to retain a strong capability in engineering, for example, but we will not know with any precision how many graduates in engineering we need in the workforce ten years from now, or even five.

11 To thrive in an uncertain environment, we need to move towards a more market-based, entrepreneurial economy. We have to create an environment in which individuals and firms take their own chances and succeed on the strength of their capabilities and efforts, rather than Government direction or subsidies. We have to strengthen the incentive for individuals and firms to look for opportunities in uncertainty, and to experiment with new approaches in the hope of great reward.

12 An entrepreneurial economy will require greater diversity in our economic structure

large companies and small, local and foreign

creating and trying out a diverse range of business ideas. We need both the institutionalised entrepreneurship of larger players and the risk-it-all culture of startups. We need a diversity of business models and approaches, feeding off and competing with each other. EDB and the other MTI agencies are seeking to promote this enterprise ecosystem in Singapore. They will not be confined to companies with a technological bent. Many local companies in more traditional activities are doing well, and should continue to do so in future. Take the food industry for example, where Khong Guan, Yeo's, Gold Roast, Tee Yih Jia, Bee Cheng Hiang, Thong Siek and others have a footprint well beyond Singapore.

13 This shift to an entrepreneurial economy will have many implications for Singapore society, our economic culture and institutions. It cannot be achieved instantly, and will take some years to evolve. It will not assure us of success. But it will improve the odds on Singapore succeeding.

14 We have to make this shift in our economic system, but do so with a degree of pragmatism. We have to recognise our limitations as a small country, with a small population base and relatively small domestic markets. Can we afford a complete free for all

free market players making their own decisions without any Government promotion or nudging? If we let natural selection run its full course, will we get the firms and corporate groups, the private funding and the talent that we need to succeed? A large country, like a large jungle, can expect that biodiversity and natural selection will assuredly produce winning species. Small countries like Singapore are in a less privileged position. Left entirely to the market, there is no guarantee of winners emerging in Singapore and being able to provide continued growth, investment and employment for the majority of our people.

15 This is all the more so as we move up the value chain and seek innovation-driven growth, where success depends not just on taking chances, but on having deep pools of capability. Even as we develop local talent, aggressively attract foreign talent, and link up with other global centres of excellence, there will be limits to the number of areas in which we can specialise and acquire deep competence within a workforce of little over 2 million. We therefore have to identify the broad strategic capabilities that we should retain or focus on, so as to stay competitive in an innovation-based environment.

16 We cannot shrink from setting these broad priorities, and ensuring a reasonable degree of diversification in the economy. We need a more coherent and proactive strategy to develop the service industries that Singapore has a comparative advantage in, and where we can hold our own regionally and internationally. We should also build on our strengths in manufacturing

not to preserve everything that exists, but to use the accumulated capabilities in the sector as a platform for future innovation. We will not know if we can retain 25% of GDP in manufacturing. It would be futile to target a precise percentage. The increasing overlap between 'manufacturing' and 'services', as manufacturing companies in Singapore move into areas such as supply chain management, treasury and other HQ activities, also makes any precise target uninteresting. But it would be quite simplistic to assume that we should now move out of manufacturing as one of the key engines of growth for Singapore, and key provider of future jobs.

17 We should avoid dependence on one sector alone. We should avoid any illusion that we are a city economy with a frictionless natural hinterland, like New York is as a service hub for the US, or London for much of Europe. Our economic strategies should continue to be dictated by realism.

18 We would not be able to preserve manufacturing if market players considered it uncompetitive. Firms are progressing up the manufacturing value chain, investing in new and higher value added skills and technologies in new growth areas like nanotechnology, network storage, and cutting edge industrial design. They are doing more R&D in Singapore. (Our gross expenditure on R&D has almost doubled from under 1% in 1990 to 1.89% in 2000.) MNCs which have set up significant R&D operations in Singapore include the Philips Innovation Campus, the largest outside of Holland; Eli Lilly's system biology lab

which employs creative approaches to studying whole biological systems, and Dupont's R&D centre, which looks at advanced polymer technology. These are long-term, strategic decisions by major global players based on the capabilities they recognise in Singapore, not the dictates of Government.

19 Within manufacturing and services, we will have to leave it to the market to spot future winners. Some broad clusters of growth activity are clear enough in global markets - within manufacturing, these include electronics - notwithstanding its cyclical gyrations - chemicals and the biomedical sciences. But we cannot tell what proportions of Singapore manufacturing each of these clusters will occupy in future, or which firms and which specific industries within these clusters will remain winners. Nor can we tell if other new clusters will emerge as major growth potentials for Singapore. We should therefore leave room for more 'white space' in our economic structure. The Government can support market players where they decide it is worth basing their operations in Singapore. But we should aim to make our tax system and other incentives less targeted and more broad based, so as to accommodate a greater degree of market experimentation, whether in manufacturing or services.

20 Moving toward an entrepreneurial economy will reduce the role of Government in the economy. It will also shift the nature and priorities of the Government's economic role. But good governance will remain essential if we are to develop a culture of enterprise, flexibility and innovativeness. The economic priorities of Government should be 3-fold in this new economy. First, to provide an environment that encourages, not stifles, enterprises. This means cutting red tape and removing obstacles to enterprise, reducing the tax burden to the limits possible, and setting a regulatory framework to prohibit cartels and allow for free and fair competition. Second, to help markets function better by plugging externalities, such as by encouraging the free flow of information, and promoting networks of supporting services and the critical mass of participants necessary for an enterprise ecosystem to thrive. As the economists would put it, Government can help market players exploit the value of networks. The third and most important role of Government will be to develop the broad base of skills, capabilities and talent required for our economy to remain competitive.

21 Each of these roles has Government as the enabler, not mover. Government cannot create entrepreneurs, but it can free up rules and act as a catalyst for individuals and firms to spur themselves and take their own risks.

22 Our key economic strategy for the long haul is in getting education right,. It will be the most fundamental determinant of whether we succeed or fail in an innovation age. We have to develop a stronger base of intellectual capital in Singapore. We also need a greater spirit of innovation, enterprise, and tolerance of risk, beginning in schools and extending through to the polytechnics and universities.

23 With our plans for a fourth university, MOE intends to increase the local university participation rate to 25%. NUS and NTU have introduced programmes to cultivate entrepreneurship through courses, business plan competitions and exchange programmes. They are also focusing more on knowledge creation as opposed to mere knowledge dissemination, going beyond being teaching-oriented institutions to becoming research-oriented institutions

24 We will require greater increased diversity in the education system. This is already underway in the university sector, and we are studying how best we can move in this direction within the school system. We have to allow for more experimentation with new approaches and greater customisation to cater to different aptitudes and abilities, while retaining our ability to keep future generations of Singaporeans cohesive and sharing a deep sense of their common future together.

25 Ultimately, whether we make a successful shift from a managed economy to an entrepreneurial economy will depend on whether we can create an environment that produces and attracts individuals and companies that are able to beat the competition. International surveys such as the Year 2001 Global Competitiveness Report and World Competitiveness Yearbook, put Singapore near the top of the rankings for a pro-business environment and world-class infrastructure, but we fare less well on the strength of our companies' operations and strategies. (Singapore was ranked 15th in Company Operations and Strategy in the Current Competitiveness Index of the Global Competitiveness Report 2001.)

26 We will continue to eliminate obstacles to business and improve the business environment. It was not long ago that SMEs viewed Government with great suspicion, and would think twice about approaching Government for assistance. When they did, they often found themselves sent from pillar to post. This is no longer the case. There is no lack of assistance from Government for SMEs. In fact, PSB now counts 113 assistance programmes for SMEs. Some simplification may be in order, so as to offer broad- based help that is relevant and can be adapted to whatever industry or company needs it

mass customisation of Government assistance within a few common programmes.

27 Many local companies have given us feedback on the lack of appropriate financing in Singapore for young, small companies. The ERC is studying this issue. Already, the EDB has been working with the venture community to make more capital available to a wider base of enterprises. The judgement on which enterprise deserves funding will have to remain with the private sector. (Under the Start-Up Enterprises Development Scheme, or SEEDS, EDB provides equity financing for start-ups at the seed stage by co-investing with third party investors on a matching basis. EDB leverages on the expertise of the private sector to do the evaluation of the projects, and matches the market's contribution dollar for dollar, up to a cap of $300,000. There were over 100 enquiries about the scheme within weeks of its launch, and 10 successful applicants so far.)

28 We have also been seeking to reduce hindrances to business and even the playing field over time. The Government's Pro-Enterprise Panel has been actively soliciting feedback from the public on how to cut red tape affecting businesses. As of a week ago, 260 suggestions had been received, of which 35% had been accepted by the relevant agencies. To take one example, the Registry of Companies and Businesses has reduced the time needed to incorporate a business, from 5 working days, to 2 working days

not as quick as Delaware, which does it in 24 hours, but faster than most.

29 We have to keep the barriers low for firms wishing to enter as well as exit a business. As you know, PSB has piloted a Voluntary Retirement Scheme to help HDB shopkeepers who do not want to carry on their businesses to exit from the retail sector. It is working well. Of the 237 shopkeepers offered this option to date, 91 or 37% have decided to take up the ex-gratia payment of $48,000 offered by the Government, and terminate their tenancies.

30 We will have to ensure we stay competitive in areas where Singapore can sustain a comparative advantage, and move out of areas where we cannot. We have to accept the reality of being a relatively high wage economy in Asia. We should find ways to lower costs where they are artificially propped up or out of sync with our capabilities. But the aim of economic strategy is ultimately not to lower wages and our standard of living, but to develop the capabilities and pools of expertise to sustain high standards of living.

31 We need greater flexibility in our remuneration structures to cope with uncertainties in business conditions. But high wages, not low wages, will be the outcome of a successful entrepreneurial economy. High wage costs have not stopped countries like Finland, Switzerland, Sweden, Japan and the UK from competing successfully in the global arena. They have each produced home-grown firms that have gone on to become world beaters

companies which are now household names: Nokia, Swatch, Ikea, Kikkoman and The Body Shop. High wage costs have also not stifled many local companies from excelling in their chosen niches and expanding abroad.

32 Tonight's winners show that there are different routes to success, and no standard formula. Of the 10 winners in turnover and top profit amongst the SME500, two are in technology-oriented industries

C-Pak in electronics and Matex in chemicals - but the rest are in traditional businesses. Our successful SMEs will not stay SMEs for long. Three of last year's winners

Lim Kim Hai Electric, South Asia Textile and Habitat Property - have in fact already attained more than $50 mil in sales, and have graduated out of the SME 500 category. PSB has identified the following ingredients in this year's stable of winners: their willingness to invest in products R&D, projecting a quality image through branding and service; and exploiting the advantages offered by information technology. They show us what it takes to rise to the challenges of the entrepreneurial economy. I wish them all the best as they go on to explore new opportunities, and hopefully blaze new trails to success.