Singapore firms go regional, not global.By HENRY YEUNG WAI-CHUNG.
18 July 1999
(c) 1999 Singapore Press Holdings Limited
THE global economy has always been Singapore's "hinterland". The city-state has always been a key player in the globalisation of economic activity.
The recent Asian economic crisis has made that role even more urgent.
This article summarises the findings of a research project funded by the National University of Singapore to investigate the Republic's global reach.
It was based on interviews with top executives from 204 Singapore-based transnational corporations (SINTNCs) and 56 of their subsidiaries in Hongkong and China.
These SINTNCs are defined as any Singapore headquartered company having the power to coordinate and control operations in more than one country, even if it does not own them.
Large companies with an annual turnover of at least $50 million dominated the sample (41 per cent). While private companies made up 66 per cent of the sample, public-listed companies and government-linked companies (GLCs) accounted for 23 per cent and 11 per cent, respectively.
Our objectives were: to investigate the nature and organisation of foreign investments by indigenous companies from here; to identify problems encountered by these companies and the solutions they have adopted; and to provide practical insights for business strategy and public policy formulation in Singapore to meet the challenges of globalisation and regionalisation.
HOW GLOBAL IS GLOBAL?
THE Department of Statistics (DOS) estimates that at the end of 1976, foreign direct investment (FDI) from Singapore was slightly above $1 billion. This grew to $55.7 billion by 1996.
Today, the Republic has become one of the major sources of FDI among the Asian newly-industrialised economies. Much of this outward FDI flow from here, however, originates from Singapore-based affiliates of foreign TNCs.
In 1996, foreign controlled companies accounted for 46.8 per cent of the Republic's total direct investment abroad. Malaysia, Hongkong, China and Indonesia were the largest Asian recipients.
In Europe and North America, Britain emerged as the largest host country.
Singapore is also one of the largest foreign investors in many Asian economies, including China, Indonesia, Myanmar and Vietnam.
Published data from the DOS indicate that over 50 per cent of total outward FDI from here went into the financial sector in 1996, in particular, Western Europe and tax havens.
Much of the manufacturing investment from here went to China.
Over 58 per cent of the 204 SINTNCs sampled have operations in China and Malaysia. Most of them had established their overseas operations from the mid-'80s to the early '90s.
WHY GO GLOBAL AT ALL?
WE FOUND market presence to be the single most important motive driving Singapore's global reach.
This was prompted in turn by three factors: the host country being located in an important growth region in the industry; the need to serve customers in host regions/countries; and to maintain regional coverage of operations.
Interestingly, cost saving was not the most important motive in driving this global reach. Most SINTNCs in our sample were not labour intensive manufacturers per se, but high value-added manufacturers or service providers.
To establish themselves successfully in the host countries, the sample SINTNCs relied upon two major strategies and mechanisms.
One was through an expansion of their existing operations. This was highly relevant in Europe and North America because of their relatively open and transparent business environments.
The other was using local partners and personal relationships to set up their overseas operations, especially in host countries in Asia which have opaque regulations and strict foreign investment rules.
More than half of the SINTNCs established wholly-owned subsidiaries only in countries (like Hongkong) and regions (Europe and North America) reputed to be transparent in their business environments.
Operations by them in Indonesia, Thailand and China have the highest proportion of joint ventures, a reflection of the business environments in these host countries.
Once established, parent SINTNCs tend not to exercise strict control over their foreign subsidiaries, indicating that the latter are relatively independent.
The overall picture of Singapore's global reach is not always rosy at present.
Many of the face tremendous problems in foreign operations (see table).
A major problem is the lack of home government support.
Studies in international business have shown that this is important for aspiring transnational corporations to overcome initial disadvantages of entering into and competing in foreign business environments.
In our survey, the GLCs tended to benefit more than other companies from the government's regionalisation programme.
Another problem is host government regulations, particularly in China.
SINTNCs complain about the uncertainty and subjective interpretations of government regulations, particularly at the local government level.
LESSONS FOR FIRMS GOING GLOBAL
IT IS clear from our survey that SINTNCs have largely regionalised, rather than globalised, in their operations.
In light of the recent Asian economic crisis, it is imperative for Singapore companies to globalise into major regions of Europe and North America.
This can help to reduce its exposure to the business risks of a particular region, but more importantly, it is perhaps the only effective means to tap into the advanced knowledge base and markets of other regions.
These regions host some of the most advanced hubs of technology (like Silicon Valley) and expertise (like the financial district of London) that homegrown companies will not find at home.
However, it is easier to say we want to globalise than to do it.
It makes no sense to jump onto the globalisation bandwagon if a Singapore company is not ready for it.
To globalise successfully, companies from the US, Japan and Britain (three top global direct investors today) often organise their foreign operations by forming business associations and industry institutions abroad.
These help companies to overcome initial barriers to market entry and to appreciate better the competitive and regulatory dynamics of the host countries.
Being relatively small, we cannot expect homegrown companies to form similar kinds of business associations in all major markets abroad.
But this economies-of-scale argument should not detract us from thinking about industry-or trade specific organisations in selected host countries.
In addition, many of today's global corporations are successful because they are able to integrate their diverse operations across borders, to achieve cross-market subsidisation, to perform information intelligence functions and to enhance their sourcing capabilities.
Most of the SINTNCs surveyed, however, still considered their foreign operations appendages to their (successful) domestic operations.
The Government can play a role here by establishing institutional support to facilitate the global reach of Singapore's companies.
This support can take the form of "business incubators".
Through various personal interviews with Singaporean executives in Hongkong and China, I also found that their main worry was not business per se, but their children's education and future here.
This is termed a "re-entry problem" because they feel that upon returning home, their children might not fit into the education system, or for that matter, the country in general.
In view of the Singapore 21 vision to keep Singaporeans global in their orientation and local in their loyalty, it becomes imperative for the Government to continue its provisions of support for family and education of its citizens abroad.
BACK TO THE FUTURE
IS THERE a future then for the Republic's global reach?
We asked our respondents to evaluate the short-term and long-term profitability of their foreign operations by regions.
Most agreed that long-term profitability will improve, with European subsidiaries emerging as the most profitable.
The future therefore remains bright.
In conclusion, it appears that Singapore's global reach through foreign direct investments has just taken off.
It may well be that this will accelerate in the next millennium to enable it to become not just a global city, but also a city-state with significant economic influence in many parts of the world.
We need relentless joint effort by homegrown companies and government agencies to put Singapore Unlimited on the global map.
(c) 1999 Singapore Press Holdings Limited.