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Rethinking Singapore SME strategy for broad-based growth

SBF SME Convention

New Economic Paradigm – Are SMEs Heading in the Right Direction Towards Transformation?

Parth S. TewariCompetitive Industries Practice, World Bank Group

October, 28th 2013

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– Why it is important to focus on SMEs – particularly towards maximizing the number of firms with revenues greater than $100 million

– Some global trends on SME strategy (e.g. case studies from Chile and Austria)

– What can Singapore do further in order to significantly enhance its SME strategy around:• International market strategy • Technology strategy• Better targeting at limited resources towards growth of high potential

SMEs

Today’s discussion

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Singapore punches above its weight by dynamic policy implementation and by leveraging its geographic advantage

Singapore’s share of WorldBasis points

1 Energy resources include petroleum, natural gas and coal2 Basic materials scan included Iron ore, Copper ore, BauxiteSource: World Bank; USGS; EIA; Team analysis

38

0

PopulationBasic Materials2

7.6

0.05

TradeLand Energy resources1

~0

GDP

220

Human and natural endowments

4

Import substitution

Export Orientation and Labor-intensive Manufacturing

Capital intensive

manufacturing

Innovative

competitiveness

Singapore’s economy has evolved to stay competitive

1965 - 1985 1986 - 1997 1997 – 20XX1960 - 1964

19601962

19641966

19681970

19721974

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$395

$46,241

CAGR of 10.2%

Source: Civil Service College of Singapore (May 2012)

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Singapore is significantly ahead of most countries in the world in terms of business climate

1st Ease of doing business (World Bank Group)

Rank

1st Index of Economic Freedom (Wall Street Journal)

3rd Global Competitiveness Index (World Economic Forum)

1st Asia’s most “Tech ready” City (PwC)

11th Quality of Life index (Economist)

1st Potential net migration index (Gallup)

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Singapore has an ambitious SME development goal

50

3-5

10-15x

United States experience (1980-2010) – scaled to Singapore GDP

Singapore goal*(next 10 years)

Number of local firms per year that go on to cross $100 million annual revenue

* ESC sub-committee on developing vibrant SME landscape and globally competitive local enterprises

50

100

150

200

250

1980 1985 1990 1995 2000 2005 2010

$100 million companies by founding year; United States

125-250 companies per year that are founded reach $100 million in revenues in reasonable time

Source: Kauffman Foundation

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Besides the key SME issues, the main challenges facing Singapore firms today include the troika of rising labor cost, pressure on sales and economic uncertainty

Top 3 challenges

2009 2010 2011 2012

Top 1 Slower sales High labour cost

High labour cost

High labour cost

Top 2 Uncertain economic environment

Increasing competition in area of sales

Uncertain economic environment

Uncertain economic environment

Top 3 Increasing competition

Increasing competition in other areas

Increasing competition in area of sales

Slow growth in sales

Source: SBF national business survey report 2012/13

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Three ideas to further enhance Singapore’s already strong SME strategy

Based on…

1. Detailed study of Singapore’s current SME strategy and initiatives

2. Latest global trends and best practices

Three ideas to further enhance Singapore’s SME strategy

Market

Product innovation

Firms

Not just well known large markets

Target and identify most promising international micro-markets

Not just productivity technology adoption

Move up the technology capability curve (innovator, creator) through smart industry collaboration

No more clunky and unsegmented support to SMEs

Support competitive SMEs in a more systematic yet inclusive way

1

2

3

All three ideas have been seeded in Singapore but are still far from prime-time

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Target and identify most promising international micro-markets

1

Source: McKinsey Global Institute; team analysis

11%

37%

16%29%

26%

100%

Developedeconomies

70%

55 $Tn

GDP2007

EM megacities

EM small/rural

GDP growth2007-25

EM middleweight3%

56 $Tn

8%

Contribution to GDP and GDP growth by type of city; Per cent

• 2/3rd of a company’s growth comes from “where it is playing”, only 4% from “how to play” or market share. Rest 30% from M&A

• Usual suspects on “where to play” does not work. Top cities by GDP today are not the most promising cities. 230 EM middleweights of 2025 do not make it today’s 600 (e.g., Ahmedabad, Fushan, Medan)

• India has a negative macro-story currently but that belies underlying strength of select states e.g., Gujarat, Bihar

• Within a city like Mumbai or Beijing, there are large differences in growth of Micromarkets within city (e.g., proxy is new bank or customer retail branches)

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Move up the technology S-curve from adaptor to creator…2

Creators: creating the future

Innovators: developing the next generation of innovations

Adaptors: Adapting available technologies to own context

Users: Consuming technology as-is

Significant portion of Singapore investment and focus• PIC• Technology adoption

program

• Major investment in science and technology research (A-Star)

• Beginning to invest in industry collaboration (CIP)

Technology capability level of firms

Singapore’s current focus

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… through focusing on smart industry collaboration 2

Chile BHP Billiton – world class supplier program

Clusterland Upper Austria – innovation through cooperation

• Vision: Convert 250 of the 3000+ local suppliers to BHP Copper mining cluster into world class suppliers (>30% sales from exports)

• How: Project-based development strategy• Project problem floated by mining co• Suppliers need to innovate to solve• Suppliers supported by mining co, univs,

govt• Suppliers supported in scaling up and

exporting successful solutions

• Example: Prodinsa (local supplier) improved shovel cable life by 40%; Biohydro automated wetting phase in Copper leaching process

• Goal: Promote innovation in Upper Austria province in 6 clusters (e.g., auto, plastic etc) and 3 cross-cutting themes (HR, design, energy efficiency)

• How: Collaborative Projects• Institution co-owned by govt and chamber of

commerce and federation of austrian industry

• 76% self-financed through annual fees from companies

• Main goal is to catalyse multi-company innovation projects, which eventually are submitted as proposal for bigger funding

• Impact: • 323 projects, 1375 partners• E.g., microchip prototype for dental braces to

monitor temperature;

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Support competitive SMEs in a more systematic yet inclusive way

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Competitive SMEs matter disproportionately – 6% of firms surpass net new jobs by economy

-4.9

4.8

6.0

5.8

HIClarge

HICSME

Allfirms

Otherfirms

Net new jobs created (Mn)USA, 2004-08

100%

6%

0.01%

94%

Share of total US firms

This calls for new policy themes and importantly new process of policy development

From… … To

• Increase #firms in economy

• Enable high potential firms to grow

• Business planning, productivity tech adoption and broad internationalization

• Management capacity building;

• internationalization (micromarket );

• innovation (“creator”)

• Broad themes, each of which ends up supporting a few promising companies (note: selection and resource prioritization happens but it is ad-hoc)

• Define ~500-1000 competitive SMEs

• Understand special needs, design policy/initiatives

• Track progress of this set

• Measure and feedback effectiveness of govt program based on fate of these firms

Policy Process

Policy Goals

Policy Themes

Source: US Small Business Administration

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Thank You

Parth S. TewariHead, Competitive Industries Practice

Finance and Private Sector Development NetworkThe World Bank Group, Singapore

ptewari@worldbank.org 

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Appendix

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Singapore firms’ top overseas challenges are competition, unclear rules and manpower issues; funding was much less of a concern

Source: SBF national business survey report 2012/13

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Singapore firms’ major internationalization strategy is around local partnership building and deeper penetration

Source: SBF national business survey report 2012/13

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Trends in SME strategy

Goal: Maximize companies > 100 mn revenue

(Secondary goal: Improve average firm productivity)

Where to play

Which products? – sector mix, value chain

How to win?

Which Geography? – country/city/subnational

Optimal cost (through productivity measures)

Differentiation (quality, innovation)

Execution

Cross-cutting enablers (factor condition)

Talent and capacity

Capital

Knowledge and Tech

Business environment, infrastructure and institutions

Key global trends (selected examples)

• Rising middle class in developing world• Rapid urbanization of developing world• Hausmann product space• Technology boom (3D-printer, smartphones)

• Granularity of growth – strategy at country level is not enough

• 400 mid-sized Emerging market cities to generate 40% of global growth

• Structure limited resources to support Competitive SMEs in an inclusive way

• Net new jobs (6 mn) created by 6% of US SMEs surpassed the total net new jobs (5.8 mn) created by the whole economy (2004-08)

• Chile case study: Target to make suppliers to anchor investors as world class companies that export internationally

• Austria case study: Promote innovation through an institution that actively works on collaboration

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Singapore’s SME productivity strategy seems to be focused on tech updgration Singapore’s current strategy

• Internationalization in sectors with core strength – logistics, planning and management, industrial parks and zones

• Diversified across many market; strong institutions (IE Singapore). Is the strategy granular enough?

• Govt initiatives: Market readiness assistance (MRA), support for in-market business development

• Singapore is a high income country with cost competitiveness coming from productivity measures:

• Productivity and Innovation Credit (PIC)• Technology adoption program• Collaborative industry products (CIP)• Land productivity grant (LPG)• Capability development grant (CDG)

• Singapore’s current approach is more focused on lower end of the technology chain

• Workforce and training support; wage credit scheme; major initiatives in both vocational and formal education

• #1 in WB Doing Business; EnterpriseOne; SME centres

• Government backed loans

• Strong institutions (A-star)

Goal: Maximize companies > 100 mn revenue

(Secondary goal: Improve average firm productivity)

Where to play

Which products? – sector mix, value chain

How to win?

Which Geography? – country/city/subnational

Optimal cost (through productivity measures)

Differentiation (quality, innovation)

Execution

Cross-cutting enablers (factor condition)

Talent and capacity

Capital

Knowledge and Tech

Business environment, infrastructure and institutions

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What does Singapore export?

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Where does Singapore export to?

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60

20

15

100

All firms started in a cohort

Exit Self-employed lifestyle

High growth/competitive

SME

5

Moderate/capped growth

Only 5 percent of firms in a cohort of SMEs become competitive

Growth profile of a representative SME cohort(After 7 years)

Source: Team analysis

High level estimates