How Singapore Built an Innovative Economy

The Government fueled the transition from manufacturing to skills-based economy 

• Singapore has developed an economy based on real technical innovation.
• From mid-90s, the government invested heavily in research centers to develop the skills and knowledge of its local people.
• It is the easy-to-do business hub for the emerging South East Asia Region.
• Startup innovation is maturing.
• Companies — of all technologies — are investing.

Google recently announced it will open one of three new R&D centers in Singapore. United just opened a direct flight linking San Francisco to Singapore. Singapore ranks #1 in Asia and #7 across the world on the Cornell World Innovation Index. The top business school ranked by Bloomberg, Insead, is also co-based here and France. For a country of just over 5 million people, what on earth is going on?

It was just in the 90’s when Mike Moritz invested in Flextronics. Flextronics provided contract-manufacturing services from printed circuit board assemblies to complete box building for original equipment manufacturers in the US like Motorola and Nortel. It quickly grew to be the largest outsourcer in Asia. But the late Lee Kuan Yew knew the coming emergence of China and other more populous countries would obviate low cost manufacturing at home. To avoid that, he leveraged the manufacturing experience to transform Singapore into a high-end R&D center and a knowledge based economy.

How? By funding advanced research over the past two decades, Singapore has created a surplus of knowledge based workers and an economy based on new innovation. That married with an easy and safe place to do business in emerging South East Asia has now baited the most attractive technology companies to invest.

South East Asia has over 600 million consumers. Many companies and economists expect the region to deliver the same kind of economic growth that China experienced in the last decade. A haze looms over the region, however. Indonesia’s corruption and false-start economy, Thailand’s never-ending riots, and Vietnam’s questionable communist government scare investors, companies and even local citizens.

Singapore has created a safe haven from these differences in South East Asia. It is not only safe for the smartest people in Southeast Asia to come study but for also for companies doing business in the region. Google has said it will create a Singapore hub to not only recruit new R&D talent from the region but also support its market entry and development for Indonesia, Philippines, India, and even Brazil.

Google is not the only company that values Singapore’s global comparative advantage in high-end knowledge-based workers. HP, Medtronic, and Proctor & Gamble also have hundreds of researchers in Singapore. Proctor and Gamble employ over 500 researchers. In fact, Singapore is home to over 250 corporate R&D centers.

What’s most impressive is that Singapore has learned how to lure companies to manufacture, AND research and develop (R&D) in Singapore. Most companies manufacture in Asia but do not R&D there. Medtronic, for example, has both research and a small manufacturing facility. Singapore still offers tax breaks, hiring subsidies, and property discounts to keep manufacturing in the country. Companies will set up a small manufacturing center, which subsequently grows into a research and development facility. The investment the government makes to attract and keep manufacturing is repaid by the further investment these companies make by hiring more expensive R&D employees.

This did not happen overnight. In the 90’s the government heavily funded research at universities, independent research centers and polytechnics and today this investment exceeds $12 billion each year. These labs focus on diverse technologies including petrochemicals, nanotech, biotech, instrumentation, and aviation. Singapore now reaps the benefit of this investment via both foreign direct investment and innovation at home.

The government-funded research centers have successfully commercialized this research.The National University of Singapore (NUS) and Nanyang Technological University (NTU) have not only licensed the patents but also spun out 70 companies. These are no simple mobile applications but more advanced companies including microscope systems, medical devices, and 3D modeling software.

To let innovation flourish, Singapore has also planted seeds in the startup environment. In 2010, the government created the Technology Incubation Scheme to invest up to USD$350,000 (no paltry sum!) alongside VCs with the right for this to be re-purchased by the company — call it a startup loan. Among Asian countries, only China attracts more venture capital startup funding. Sequoia originally opened an office to help expand its companies to the region but now has made numerous investments says Yinglan Tan.

The new startup investment capital has made Singapore a hub for all startups in the region. But there are other reasons too. Venture capitalists prefer to invest in a Singapore entity that holds subsidiaries in each South East Asian country rather than directly in companies based in politically unstable countries. And surprisingly, these emerging economics lack technical talent. Tokopedia — an Indonesian company that raised $100 million — hires engineers in Singapore because it can’t find them at home.

Singapore also is more friendly place for potential buyers or IPO. The potential exits warrant more investment says Hian Goh, founder of Asia Food Channel which he sold to Scripps for nearly $65M. Other notable exits include Viki and Non-Stop Games. Hian now has his own fund called NSI Ventures which has invested in many new startups like GoJek (Uber on motorbikes) and TradeGecko (ERP Software).

And it’s also sooo easy to do business in Singapore. In just a few hours, companies can set up their Singapore branch with few questions. Tax rates are as low as 15% and can be even lower for companies in certain industries or number of employees. And from a withholding tax perspective, it’s much easier to transfer money from its neighboring SE Asian countries to Singapore than to the West.

Singapore is clearly the hub to do business in South East Asia. It is one of the world’s major commercial hubs, the fourth-largest financial center and one of the two busiest container ports in the world for at least the past ten years. If this trend continues, it will be one of the world’s major technology hubs developing a wide array of technologies.