In this post I would like to share some of my thoughts on the role of Industrial Policy in Singapore's future economic development. This is a slightly revised version of comments I made as an invited discussant at the 15th Singapore Economic Roundtable organized by the Institute of Policy Studies (IPS) and The Business Times in May last year.
a) Towards A More Productive Debate on Industrial Policy
As a proponent of the selective use of industrial policy in accelerating economic development and technological catch-up of late-industrializing economies, I support the view of development economists like Prof Chang Ha-Joon and Prof Dani Rodrik that it is more productive to move away from an ideological debate on whether government should pursue industrial policy and to focus instead on the conditions under which specific industrial policy will work. Understanding how specific industrial policies work in particular national contexts will allow us to develop general hypotheses on when industrial policy can work.
For example, from the experience of South Korea and Malaysia in car industry development, it can be inferred that the promotion of infant industries through domestic market protectionism is less likely to work without competition policy. The lack of domestic competition in Malaysia led to the failure of its car industry, which shows that competition policy needs to complement industrial policy. Another possible lesson is that industrial policy is less likely to work when it is subordinated to the achievement of other social redistribution goals. The automobile industry in Malaysia was subjected to affirmative action through the bumiputra policy, which made the industry less competitive.
Furthermore, the size of a country’s economy does matter and can affect industrial policy. Large economies such as those of China and India can focus on scale-intensive industries or pursue new leapfrogging technology standards to give their own domestic markets a head start. For example, China is now the world leader in electric bicycles and has clearly achieved global leadership in an emerging industry, which could eventually lead to China moving up the technology ladder to electric vehicles. Industrial policy helped to produce an ecosystem of industries including batteries, charging stations and the production of components. At the same time, by restricting the use of gasoline-based motorcycles, China’s regulatory policy also complemented its industrial policy to develop the electric bicycle industry. Today, in many of China’s second-tier cities, one cannot obtain a license for gasoline-based motorcycles.
China could adopt such a strategy because of its huge domestic market, which provides a large base to work from. Unfortunately, this is not feasible in Singapore due to the small size of our economy. Furthermore, in the local market, the mantra of privatisation and liberalisation may not work well if it results in private monopolies and oligopolies. In Hong Kong’s transport sector, a standard card allows for wide usage across public transport and retail stores, compared to the two incompatible cards in Singapore. It is a huge irony that Singapore, despite its reputation for state intervention, has allowed such an inefficient duopolistic structure to develop in the name of market competition, while Hong Kong, known for its laissez faire philosophy, has managed to create a common standard to emerge.
Rather than using domestic market protection, industrial policy in small economies like Singapore would need to focus on developing deep capabilities in niche sectors that can be exported overseas. Switzerland has become the home-base of global MNCs in pharmaceutical companies, due in part to government's support in the form of huge amounts of public sector investment.
b) The New Economic Landscape for NIEs
Considering the stage of economic development Singapore is in is also crucial to an examination of industrial policy. Throughout history, developing countries that are latecomers to the world economy have used industrial policy to accelerate their learning and catching up. On the other hand, the more advanced countries have always argued against industrial policy, in order to protect their leads. This has been described by Prof. Chang as “kicking away the ladder” (title for one of his books), where countries that have already achieved technological success through industrial policy now deny others the same means with which they achieved their success. Despite many examples of industrial policy failures, the fact remains that all the newly industrialized economies that have managed to achieve rapid industrial and technological catch-up, like Japan, Korea, Taiwan and Singapore, have pursued significant industrial policy intervention. In the context of latecomer countries, governments can learn from the experience of the advanced nations, and hence are able to pick “winner” industries relatively successfully. In a comparative study of Japan and the four Asian NIEs that I coordinated more than 10 years ago (see my edited book, Industrial Policy, Innovation and Economic Growth: The experience of Japan and the Asian NIEs, 2001, Singapore University Press), I and several development scholars from Japan and the four Asian NIEs have documented extensively the various successful industrial policy interventions implemented in these economies, espicially in their early catch up phase. While some mistakes were made, these were outweighed by the successful cases of policy intervention.
However, Singapore and the other Asian NIEs have reached a stage where the easy learning is over. Being much closer to the frontier of technology, and thus producing for markets where demand is unknown, it is more risky to pursue an industrial policy that picks winners. As such, the NIEs need to shift their industrial policy focus to facilitate more investment in innovation and enhance the effective returns to innovation. In Singapore, less than 3% of GDP is devoted to investing in innovation, much lower than South Korea and Taiwan. Furthermore, more than half of this spending is by MNCs rather than local firms, and there is a big difference in how the R&D is being commercialized by MNCs and local firms. For the former, research may not be commercialized in Singapore and the spillover benefits may be less than in the latter case. We do have publicly funded R & D, but we do not have a strong, complementary local industrial base yet to effectively commercialize the research produced.
Herein lies the big difference between Singapore and South Korea, where the large chaebols are able to provide the necessary infrastructure and deep pockets to sustain large and long-term investments. Its current problem of talent shortage notwithstanding, South Korea corporations can still provide the career structure and monetary support to support advanced R&D. In Taiwan, until recently, many SMEs are too small to invest individually in R & D, but they are still able to pursue innovation through a consortium approach orchestrated by public industrial R&D institutions like ITRI that fund most of the applied R & D, and the results are then diffused through the consortium, enabling the SMEs to achieve rapid adoption of new innovation. Hence, Taiwan used industrial policy to overcome the problem of SMEs lacking the size and resources to take on large innovation projects on their own. Unlike Taiwan, Singapore has no effective means to foster collaboration among SMEs to achieve scale economy in innovation investment and to speed up the diffusion of innovation. This is a weakness that must be overcome.
c) The Way Forward I: Targeting Emerging Markets
Singapore’s publicly funded R & D has been trying to compete with the R & D labs and research universities in the US and Europe, targeting markets in advanced countries. However, growth in the next 20 years will be much higher in emerging economies such as China, India, Indonesia, Brazil and Turkey. These countries are moving up the income ladder, but the average consumer still cannot afford innovations targeted at advanced markets. There are many opportunities for Singapore to target these markets by diversifying research and innovation into lower-cost mass-market products for emerging economies, instead of focusing exclusively on the advanced economies and competing with the advanced research centres there. While many MNCs from advanced countries are starting to recognise the need to innovate for the emerging markets, there is still a window of opportunity for Singapore to compete, given our locational and cultural proximity to some of the largest emerging economies in Asia.
Furthermore, it is ironic that, while Singapore draws top students from emerging economies around the world such as India and China, they are often encouraged to work on research projects targeting advanced markets. Instead, some of them should be tasked to strengthen Singapore’s links back to their own markets, working on projects such as using wireless sensor technologies to reduce leakages/wastage in irrigation systems or improving the supply chain efficiency of agricultural produce to market. We need a more comprehensive policy to link the market opportunities in emerging economies that our government has identified to the public R & D investment policies to target them. In particular, we need to fundamentally relook how we can build linkages of our universities and public R&D institutions to key partner institutions in the emerging markets, to complement our current strong linkages to partner institutions in advanced countries.
d) The Way Forward II: Social Policy-Driven Service Innovation
Singapore has developed a strong services sector due to our pivotal role in the region, and it is time to move away from a manufacturing R&D mentality. We need to think about innovating services and building intellectual property out of services, as a way to diversify our sources of competitive advantage. As part of our industrial policy, we should focus more on service sector innovation and know-how creation, which can be subsequently exported to other countries. In addressing our social problems such as ageing, urban transport, healthcare or low-cost housing, we must learn to turn our solutions into exportable intellectual properties and know-how, i.e. we must use our domestic market as a test bed for innovation. At the same time, service innovation can be tied to social policy, as service innovations in the domestic market will create new jobs in elder-care and healthcare for the segment of workers that do not have high-end skills. For example, service innovations like telemedicine and visiting home-care services will enable more elderly to be cared for at home, reducing reliance on hospitals and nursing homes. On the whole, we need to think about meeting social needs through service innovations and at the same time leverage on such domestic market service innovations to build up exportable knowledge and capabilities. In short, the two are not mutually exclusive: done right, the pursuit of domestic social policy goals through innovation can help create new export industries.
This does mean that new skills in the branding and marketing of services have to be acquired. Asian companies have made huge inroads in technology-intensive manufacturing industries, but it is primarily Western firms who own leading brand names in healthcare, advertising, legal and accounting services. There is still scope for Singapore to develop services that are adapted to the context of Asian markets- Asian brand names that are based on Asian understanding and know-how. We are already good at adopting a system engineering approach to solving problems like public housing, public transport and infrastructure, but we need to couple this with better marketing, branding and intellectual property management practices to turn our know-how into commercializable intellectual assets. With the right policy support, we can produce more globally competitive service exports like airline services (SIA), port services (PSA) and offshore engineering (Keppel and Sembawang).
In this regard, the success of Denmark in leveraging social policy-driven innovation to grow globally competitive industries should serve as an inspiration for Singapore to emulate, as we target service innovation that is driven by social policy goals. Denmark has become a world leader in hearing aids, but the industry was initially funded because of the government's commitment to social policy to help the deaf. Denmark also became a world leader in windmill technology because the government promoted innovation in windmill technology to achieve the social goal of increasing the efficiency of Denmark's agricultural sector.