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MNCs and other business organizations in Singapore

MNCs and other business organizations in Singapore

 

Sam Choon Yin (2003)

 

Singapore is a small city-state with a population of about 4.1 million of which 3.3 million are Singapore citizens and permanent residents. With a land area of 682.3 square kilometers, Singapore has a high population density of more than 6,000 persons per square kilometer. Since gaining self-governed status from the British in 1959 and full independence in 1965 (after separating from Malaysia), Singapore has transformed from a third-world city to a first-world country enjoying an average growth rate of eight percent in the last three-and-a-half decades. Her current GDP per capita reads around S$40,000 up from S$4,000 in 1965. This is a great achievement given the fact that the city-state has no natural resources with the exception of its strategic location and strong labor force.

 

Many have attributed Singapore’s success to strong political leadership led by former Prime Minister Lee Kuan Yew (who is currently a senior minister in the cabinet). The government plays a crucial role in eliminating corruption, building the necessary infrastructure and institutions to support economic development, and taking the lead in business ventures through government-linked companies. The multinational corporations also played a significant role in Singapore’s economic development process.

 

Singapore’s modern history begins with the arrival of Sir Stamford Raffles in 1819. Located strategically between the Indian and Pacific oceans, Raffles was attracted to Singapore and quickly secured Singapore as a trading and administrative post for the East Asian Company from Temenggong Abdul Rahman and Sultan Hussein Mohamed Shah of Johor. Entrepot trade developed rapidly in Singapore where primary goods were shipped to Singapore and exported to the west. Capital and manufactured items were imported from Europe, India and China, to Singapore where they were distributed to other parts of Asia. The opening of the Suez Canal in 1869 and innovations in transportation such as railways and steam ships, and in communications (for example telegram), further developed Singapore as an entrepot. British control of Singapore was halted during the Second War World when it lost Singapore to Japan.

 

Japan ruled Singapore (which was known as Syonan during the Japanese occupation) from 1942 to 1945 before returning the control of Singapore to the British at the end of the War. The Japanese occupation period functioned as the catalyst for the eventual independent of Singapore in 1965, although before that day came, Singapore was merged with the Federation of Malaysia in 1963.

 

The People’s Action Party (PAP) of Singapore had wanted the merger with Malaysia for economic and political reasons. It was felt that Singapore would not survive economically, militarily and politically. The merger was short-lived. Clashes and tensions between the Chinese (the dominant group in Singapore) and Malays (the dominant group in Malaysia) were high. The political leaders of the United Malays National Organization (UMNO) (led by Tunku Abdul Rahman) and the PAP (led by Lee Kuan Yew) turned sour. Differences in the nature of the political parties, criticisms of the UMNO leaders, and the insistence of the PAP for the Malaysian leaders to adopt the Malaysian Malaysia concept, all led to the expulsion of Singapore from the Federation in 1965. The year 1965 therefore marked the year of independence for the Republic of Singapore.

 

For a brief period during the years when Singapore was part of Malaysia, Singapore adopted the import substitution strategy. This was a logical move given a larger domestic market of around 10 million in the ‘merged’ Malaysia. After the separation, the government realized that the strategy would do no good to the country’s economy and hence decided to open up its economy to the outside world and adopt the export promotion strategy. Unemployment rate was high at that time.

 

Trade was important in Singapore with exports and imports accounted for more than three times of the GDP. MNCs were attracted to Singapore to take advantage of the lower production costs here. Tax incentives were provided and infrastructures were constructed and improved to push the country’s economy forward. Thanks to growing trade around the world at that time, the MNCs were looking for places outside their home countries to produce their goods for ease of selling to other countries. Locating strategically between the west (United States and Europe) and the east (Japan), Singapore was considered an attractive place by the MNCs to build their plants.

The business organizations in Singapore can be categorized into three groups; the government-linked companies (GLCs), the MNCs and the local private sector organizations. Following separation from Malaysia in 1963, the Singapore government had pursued the two-legged policy which focused on the GLCs and MNCs to spearhead the government’s industrialization initiative. The local private sector enterprises took third placing in the initiative although financial support was available to assist small local enterprises (an example was the Small Industries Finance Scheme launched in 1976). Changes took place over the years with more focus given to local enterprises particularly the small and medium sized enterprises (SMEs). The recession in 1985 heightened the change. During the 1985 economic recession, the government began to take more notice of local enterprises and recognize the potential contributions of the SMEs to the local economy. The Economic Committee (headed by the then Minister for Trade and Industry Lee Hsien Loong) was set up to study, among other things, measures to assist the SMEs. The recommendations were recorded in the SME Plan in 1989.

 

The GLCs are basically state-owned enterprises with the autonomy to make decisions like private sector companies. Established under the Companies Act, the GLCs obtain no protection from the government (as the government often claims). They are allowed to fail just like any other private companies. Many have grown into large conglomerates comprising several companies bounded by a common culture. These companies are groomed to become world-class companies. The government, through the Temasek Holding Private Limited (THL), exercises its right to make sure that the GLCs are effectively and efficiently managed. It is not uncommon for the government to appoint retired senior government officials to sit on the GLCs’ boards of directors. The government intends to maintain political links with the GLCs. It is also the government’s interest to make sure that high standards of corporate governance are adopted in the GLCs. The initiative is a positive one and signals well about the government’s quest to raise the standards of corporate governance in Singapore.

 

The definition of the GLCs is given in terms of the proportion of shares owned by the holding company and statutory boards. According to the Singapore Department of Statistics (DOS), a GLC is a company with some or all its shares owned by the government (the THL or a statutory board) directly if it is a subsidiary or indirectly if it is an associate. According to the study by the DOS, a first-tier GLC is one where the government owns at least 20 percent of voting shares when the government is regarded as an effective owner of the company with the right to appoint the chairmen, some directors and senior management, and the setting of board strategies. The 20 percent cut-off point to indicate effective ownership of a company is in line with the international business practice (Low, 2002). A second-tier GLC on the other hand is one in which the government owns at least 20 percent of the voting shares in an associate or a subsidiary of a first-tier GLC.

 

Using the 20 percent voting share cut-off point, the DOS noted that the GLCs contribution to the Singapore’s gross domestic product (GDP) was 12.9 percent in 1998 as compared to the MNCs’ contribution of 42 percent (Table 1). This was higher than the 10.6 percent recorded for 1996 due mainly to the corporatization of the statutory boards in Singapore rather than an expansion in the GLCs. Further privatization of the statutory boards is likely to lower the percentage contribution of GLCs to Singapore’s GDP.

 

The local private sector companies comprise two sub-categories as defined by the government; the small and medium enterprises (SMEs) and the medium and large enterprises (the Big Business organizations). Local SMEs are defined as enterprises having at least 30 percent local equity, fixed productive assets (defined as net book value of factory building, machinery and equipment) not exceeding S$15 million, and employment size not exceeding 200 workers for non-manufacturing companies. Local companies in the private sector with asset and employment size that exceed the figures defined above are regarded as big business organizations. The big local businesses in Singapore are relatively more concerned with corporate governance issues particularly those listed in the main board. However, a concern remains in the sense that the local organizations have acquired only the form of good corporate governance practices, and not the substance. For example, in Singapore, it is not uncommon to see some listed companies that sell shares to the public which are so strongly family-controlled that minority shareholders or even larger shareholders, who are not family-members, have little influences in the operations of the businesses.

 

Table 1

GLC’s Contribution to GDP (Singapore)

 

 

Value added (S$ billion)

Share of GDP (%)

1996

1997

1998

1996

1997

1998

GLCs:

Of which:

 

GLCs (equity > 50%)

GLCs (20% < equity < 50%)

13.7

 

 

9.2

4.5

15.9

 

 

10.7

5.2

17.9

 

 

12.7

5.2

10.6

 

 

7.1

3.5

11.3

 

 

7.6

3.7

12.9

 

 

9.2

3.8

Notes: Figures do not add up because of rounding errors.

Source: Singapore Department of Statistics ‘Contribution of Government-linked Companies to Gross Domestic Product’, Occasional Paper on Economic Statistics, March 2001 (Ministry of Trade and Industry: Singapore). Abstracted from Low (2002), p. 287.

 

The setting up of the Economic Development Board (EDB) in 1961 was very important to help attract MNCs in Singapore. Providing jobs appeared to be a top priority in the young nation then with the unemployment rate recorded at more than 10 percent when the PAP took over. Albert Winsemius and I. F. Tang recommended the setting up of the EDB from the United Nations (the UN sent the officials to Singapore to advice the government on economic issues).

 

Together with other statutory boards like the JTC Corporation and SPRING, the EDB tactfully sells Singapore to the foreign investors and make sure that the investors’ needs are taken care off. National Semiconductor, Setron Electronics, Fairchild Semiconductor Texas Instruments, General Electric and Matsushita were some of the early MNCs attracted to Singapore back in the 1960s. Basically labor intensive in nature, these companies helped Singapore to solve its unemployment problem from a high rate of around 14 percent in the early 1960s to less than four percent in 1973.

 

The MNCs and GLCs represented the main driver of economic growth in Singapore back in the early years since independence. There appeared to be not much option to the government then. Local entrepreneurs were not interested to venture into the manufacturing sector, which was deemed essential at that time to create as many jobs as possible. Most of the local entrepreneurs were temporary migrants from China. Because of economic and political uncertainties prevailing during the 1960s, many were not willing to invest in the manufacturing industries. High initial expenditure outlay and long gestation period to reap returns, if any, hindered their interests. They preferred to venture to trading and services industries. The government had to take the lead by setting up the GLCs. MNCs were also attracted to stimulate the growth of manufacturing sector (mainly the labor intensive ones).

 

In the 1970s, Singapore went through a restructuring strategy moving away from labor-intensive operations to capital-intensive methods of production. One of the targeted industries was the precision engineering industry. MNCs like Philips, Rollei, Sunstrand Engineering and Seiko were attracted to operate in Singapore. The 1980s saw the movement to high value added industries in the electronics (like wafer fabrication industry), computing-related industries and chemical industry and the 1990s to life sciences industry. This essentially saw strong investments from world-class MNCs like Apple Computer, Seagate Technology, IBM, Hitachi, Glaxo, Petrochemical Corporation of Singapore (jointly with Japan), Du Pont and Hoechst Celanese. A good discussion on the role of the EDB in attracting MNCs to Singapore is contained in Chan (2002).

 

Singapore’s attractiveness in attracting foreign direct investments comes from several sources. First, Singapore has a pool of relatively more skilled labor force at reasonable costs as compared to other countries in the East Asian region. The recent move to lower the employers’ CPF contribution from 16 percent to 13 percent (with effect from 1 October 2003) further enhances Singapore’s ability to attract foreign investors (see Sam, 2003). Second, Singapore is socially and politically stable. The PAP government is essentially pro-business. It remains in power since independence. Among other things, the enactment of the Employment Act and Industrial Relations (Amendment Act) in 1968 promoted calmness in labor relations and industrial environment. To many Singaporeans, going on strike appears alien and socially unacceptable. More importantly perhaps is that the government is clean and honest thus eradicating uncertainties in doing business in Singapore. Third, Singapore has excellent infrastructure. The city-state is well connected to other parts of the world electronically and through various modes of transport. Singapore’s port and airlines have been voted for many years as one of the best in the world.

 

Fourth, corporate tax rates in Singapore are competitive. In the 2002 budget statement, the Minister for Finance Lee Hsien Loong (who is concurrently the Deputy Prime Minister) reduced the corporate and top personal income tax rates from 24.5 percent and 26 percent respectively to 22 percent effective from 2003. In this year’s budget statement 2003, the Minister did not change the rates but reiterated the government’s stance to bring down the tax rates to 20 percent by 2005. Fifth, Singapore has a strategic location. She locates along the major trading route linking the US in the west and Japan in the east.

 

Table 2

Net investment commitments in manufacturing (Singapore)

 

Industry

Million dollars

Percentage

Food, beverages and tobacco

             40.0

0.4

Petroleum and chemical products

        2,553.3

28.3

Rubber and plastic products

             51.1

0.6

Fabricated metal products

           372.9

4.1

Machinery and equipment

           436.2

4.8

Electronic Products and Components

        4,652.3

51.6

Instrumentation equipment

           197.0

2.2

Transport equipment

           288.5

3.2

Other manufacturing

           415.4

4.6

Total*

        9,008.7

 

 

 

 

Region

Million dollars

Percentage

Local

        1,969.7

21.9

Foreign

        7,039.0

78.1

US

        2,432.2

27.0

Japan

        1,778.2

19.7

Europe

        2,122.8

23.6

EU

        2,088.5

23.2

Other European countries

             34.3

0.4

Others

           705.8

7.8

Total*

        9,008.7

 

* The figures may not tally because of rounding off errors.

Source: Yearbook of Statistics 2003 (Singapore). All figures are in SGD.

 

Table 2 shows the net investment commitments in the manufacturing sector. Clearly, the US took up the largest percentage (27 percent) of the total share indicating Singapore’s vulnerability to the US economic outlook. External shocks like the 11 September 2001 incident in the US could severely affect Singapore’s economic performance. This is a problem that Singapore, like many other countries around the world, faces. It is also clear, from Table 2, that there is a strong reliance on the electronics industry in driving investments growth in the manufacturing sector. The industry accounts for more than 50 percent of the net investment commitments in manufacturing.

 

It may be useful at this juncture to look more specifically at the benefits and costs for attracting the MNCs into Singapore. Let me start with the benefits. First, the MNCs help to create more jobs to the local people. The inflows of MNCs in the past enabled Singapore to solve its unemployment problem quickly. Today, with about five percent of unemployment rate, the inflows of MNCs are most wanted to provide jobs to the unemployed. However, the MNCs coming to Singapore today are more capital and knowledge intensive. They are less likely to create abundant jobs to the people as in the past. A potential outcome is that the skilled and richer individuals are more likely to gain from globalization and inflows of MNCs than the less ‘endowed’ individuals. Wider disparity in income distribution may be resulted.

 

The second benefit is that inflows of MNCs can bring financial resources into Singapore. This helps to maintain strong Singapore dollar currency. It may be worth noting that strong dollar exchange rate policy has been almost exclusively maintained (at least in the past) ‘to neutralize the effects of imported inflation and promote sustained non-inflationary growth’ (Peebles and Wilson, 2002, p. 212). Relating to this is the argument that MNCs were able to save the host country foreign exchange earnings. By establishing their operations in Singapore for example, the host country (in this case Singapore) could obtain the goods and services provided from the MNCs. Otherwise, Singapore might have to import the goods from abroad which represents a drain to the country’s foreign earnings. Given the smallness of Singapore’s domestic market, the argument might not be a strong one. However, being major exporters, the MNCs do bring in foreign exchange earnings to Singapore. Provided that the repatriation of profits is not significantly high, the foreign earnings retained in Singapore helped to improve the country’s balance of payments position. This had been the case for Singapore.

 

Third, the MNCs bring with them technologies and management know-how to Singapore. These developments can be transported to the local people as a mean to support the growth of entrepreneur spirit among the locals. A positive outcome was the ‘emergence’ of the local entrepreneur Sim Wong Hoo. Founder of Creative Technology (with two other partners in 1981), Sim was once an employee in an MNC in Singapore. In fact, the small and medium local enterprises (SMEs) in Singapore were positioned in a way that they could act as subcontractors and main suppliers to the MNCs. Doing so facilitated the process of transferring technology and management know-how from the MNCs to the local organizations.

 

Fourth, the MNCs generally contribute to the country’s economic and social development provided that they are pleased with how their subsidiaries have performed. This is the case for the MNCs in Singapore. Anisha Sabhlok (2001) in her pilot micro study on some companies based in Singapore, noted that MNCs in Singapore contributed to the society by adopting the best practices, driving innovation, developing green products and attaining eco-efficiency targets. In an interesting article, co-chairman of the EDB, Philip Yeo, recalled his conversation with the Chairman of Glaxo, Sir Paul Sirolami, which ended up with Glaxo contributing and setting up of a S$50 million trust fund to award scholarships. The fund was meant to develop Singapore’s pool of talent. Yeo wrote:

 

‘He (Sir Paul Sirolami) spent the evening telling me how happy Glaxo was with the Singapore operations. Sir Paul asked: ‘What can I do for the EDB and Singapore to show our appreciation?’. I asked Sir Paul for Glaxo to sponsor a scholarship programme that would send 30 of Singapore’s brightest young students each year to the best universities in the UK and the US. …. ‘How much do you need?’ he asked. I did a quick calculation on a dinner paper napkin. Thirty scholars per year for 10 years; that would take ‘about S$50 million’…. Sir Paul immediately arranged for Glaxo to donate and set up a S$50 million trust fund’ (Yeo, 2002, p. 303).

 

Glaxo was not the only MNC that had wanted to return something back to Singapore. As Yeo revealed, Sunstrand was the first company to set up a scholarship programme followed by Mobil (now ExxonMobil), Seiko-Epson, Takashimaya and others. Generally, the presence of MNCs helps to improve the quality of factors of production in Singapore. Competition, cooperation and assistance all played a role in this aspect.

 

MNCs also provide training to local enterprises in Singapore. Chua Soo Tian brought this up in an interesting write-up. While working for the EDB, he recalled the idea of using the MNCs as teachers to teach local companies and help them implement the best practices. The idea led to the birth of LIUP (Local Industries Upgrading Programme) in 1986 with Philips Singapore as the first partner (Chua, 2002).

 

Fifth, the presence of MNCs can help mitigate the negative impact of external shocks. In the recent East Asian financial and economic crises for instance, consumer demand in the regional countries like Indonesia, Malaysia, Thailand and Korea fell. Although Singapore was negatively impacted, the shock was not as detrimental here as compared to other countries. The reason being that the MNCs in Singapore served the needs of many ‘external’ countries, not just those countries in the region. Intra-industry trade was (still) active during the crisis particular between Singapore and US, Europe, China, India, and Latin American countries. These countries were performing better economically than many countries in the East Asian region therefore bringing business opportunities to MNCs sited in Singapore. Peebles and Wilson (2002) wrote:

 

‘…the increasing amount of Singapore’s trade in the region consists of intra-firm transactions of intermediate inputs through MNCs to meet demand outside the region. Therefore, while exports destined for local consumption in the region were badly hit by the 1997-98 Asian financial crisis as domestic demand collapsed, those used as intermediate inputs and eventually re-exported to developed countries outside the region remained healthy. This had the effect of mitigating, to some extent, the effect of the crisis on Singapore’s overall trade performance’ (Peebles and Wilson, 2002, p. 177).

 

It is difficult to deny the importance of the MNCs in their contributions towards Singapore’s economic growth and development. But some observers have voiced out their concerns over some issues regarding the presence of MNCs in Singapore. For example, the government was accused of over-relying on MNCs in spearheading Singapore’s development efforts. This makes Singapore vulnerable to external shocks particular those that concerns the US and electronics industry. The 911-incident in the US proves the former view. Downturn in the electronics industry in 1997-99 also affected Singapore’s economic performance. In the disk drive industry for example, the downturn saw MNCs like Seagate and Western Digital retrenching workers in Singapore. Western Digital eventually shifted their operations across the causeway to Malaysia leading to more people without jobs. The general view is that a society that relies heavily on the MNCs will not achieve sustainable growth. Some observers have suggested the creation of local enterprises as a mean to maintain high economic growth on a sustainable level.

 

In my view, it is not economically sound to disregard the MNCs. The MNCs have served Singapore well. They have not interfered with the domestic politics but have transferred technology and managerial know-how to Singapore, create many job opportunities and contributed significantly to the country’s national income. A development effort led by local enterprises and MNCs perhaps could be strengthened to replace the MNCs-GLCs led strategy. The Economic Review Committee, which submitted its report early this year, seems to be in line with this thinking. But one thing to recognize is the fact that MNCs have more options these days in terms of where they might want to locate their operations. With the rapid advancement in information technology, the desire to set up headquarters of MNCs in Singapore may soon be disappearing. As quoted in a recent book on MNCs:

 

‘Using Hong Kong or Singapore as your regional base just for copycat reasons, because everyone else is there, makes no sense. The improvements in telecommunications over the last decade have definitely made and will continue to make these places increasingly redundant save for the odd few specialized sectors. These are other countries not which have better air travel, lower renting costs and lower salaries – it’s always best to look hard before you leap’ (quoted from Andrews, Chompusri and Baldwin, 2003, p. 33).

 

Singapore’s recent signings of free trade agreements with foreign countries may be a positive option to give business opportunities to organizations in Singapore. It can be seem as a move to buy Singapore some time in developing local companies and attracting MNCs from yet-to-tap niche areas.


References

1.                  Andrews, Tim; Chompusri, Nartnalin and Baldwin, Bryan (2003) The Changing Face of Multinationals in Southeast Asia. Routledge (London).

2.                  Chan, Chin Bok (2002) Heart Work. Singapore Economic Development Board and EDB Society (Singapore).

3.                  Chua, Soo Tian (2002) ‘How MNCs Helped Start-up SMEs’ in Chan, Chin Bok (2002) Heart Work. Singapore Economic Development Board and EDB Society (Singapore).

4.                  Low, Linda (2002) ‘Rethinking Singapore Inc. and GLCs’, in Southeast Asian Affairs 2002, Institute of Southeast Asian Studies (ISEAS: Singapore).

5.                  Peebles, Gavin and Wilson, Peter (2002) Economic Growth and Development in Singapore: Past and Future. Edward Elgar (Great Britain).

6.                  Sabhlok, Anisha (2001) The Evolution of Singapore Business: A Case Study Approach. IPS Working Paper No. 10 (Volume 1 and 2).

7.                  Sam, Choon Yin (2003) ‘Wage cuts and demand for labour in Singapore’ (unpublished manuscript)

8.                  Yeo, Philip (2002) ‘Passion Drives’ in Chan, Chin Bok (2002) Heart Work. Singapore Economic Development Board and EDB Society (Singapore).