Creatively Destroying Our Old Economic Model
Mr Speaker, I second the motion in the name of my honorable friend, Kenneth Tiong. I cannot agree more that we need both dynamic local companies and opportunities for businesses to succeed, which is why my contribution to this debate will focus on how we should wean ourselves away from the top-down, foreign investment-reliant, multinational corporation (MNC)-centric economic model, and instead build a bottom-up, domestic capital-led, small and medium enterprise (SME)-focused one. I will also weave in constructive critique on the recently-released Economic Strategy Review (ESR).
Singapore’s traditional (and successful) growth model
To start, it is useful to sketch out what our traditional growth model has been. Essentially, the strategy was to accumulate of what economists call “factors of production”: to ride on increases in the labor force due to demographic change, while simultaneously building up complementary capital, both manufactured—in the form of machines, equipment, and factories—as well as human, through education.
For the former, we marshalled foreign savings: with heavy foreign direct investment from MNCs in the early years, and, since the turn of the century, inward portfolio investment from global funds and family offices. We supplemented this with domestic forced saving, from households in the form of CPF, and from the state, by maintaining large fiscal surpluses.
For the latter, we cranked up educational attainment: first, by rapidly educating our school-aged children, then, starting in the 1990s, by increasingly absorbing skilled workers from abroad.
We coupled this buildup of factors with fundamentals: exploiting our geographical location, we fostered an economy open to trade in goods, services, and finance. We also placed emphasis on quality institutions: an attractive, low-tax business climate, respect for property rights and rule of law, and a high-functioning civil service.
We fired on all these cylinders, which brought us, famously, from a per-capita income of around $1,600 at independence, to more than $121,000 today, a massive increase. Notwithstanding how we were already ahead in the 1960s—at least relative to the rest of the developing world—our growth story is undeniably impressive.
This model is not unique to us. It was successfully deployed by Japan during its early industrialization. The approach, with some idiosyncratic variations, was how the other East Asian “Dragon” economies of Hong Kong, South Korea, and Taiwan became wealthy. And starting in the 1980s, China successfully adapted the selfsame model.
Drawbacks of the original model
As successful as this traditional model was, it had, embedded within it, several pathologies. It made us obsessed with courting foreign capital, and fearful of right-minded, pro-worker policies that could reduce our attractiveness as regional headquarters. Our educational system has churned out a formidable number of excellent operators, but far fewer risk-taking entrepreneurs. And in a drive to economize on scarce land, the government’s leasehold model has fostered a rentseeking mindset in real estate, rather than treating land as a normal input to production.
But perhaps the most damning drawback is a known design flaw: in the relentless pursuit of accumulating inputs to production, we have lagged in productivity growth. To be fair, this was also the case for many of the other Dragon economies. Yet even among them, Singapore has fared the worst. Just as important, these other economies—once they entrenched their high-income status—began to evolve their model toward a more internally-driven, self-sustaining, productivity-led one. We have yet to do so decisively.
Some may argue that we should make no excuses for growth. I believe that this is incomplete at best, and misguided at worst. After all, we already know how to drive rude growth: crank up capital expenditure, to the detriment of labor income and productivity. Indeed, this has been a consistent criticism of Singapore’s growth model during its rapid-growth phase from the 1960s through 1990s, and was arguably the impetus for the menagerie of productivity campaigns and bodies that, alas, has not overturned our nation’s productivity woes.
While it is tempting for us to look to bolstering growth from tried-and-tested tools—such as building up yet more of our already-intensive capital stock—we must resist, because it is clear that disproportionately prioritizing resource allocation into hard infrastructure investment—especially in real estate—is running up against diminishing returns.
A new model, built from the bottom up
What would a new model look like? For starters, we must evolve away from our traditional reliance on foreign MNCs as a driver of growth, and pivot toward SMEs as our economic engine. While the ESR speaks about both, it betrays an implicit bias toward the former. We need a conscious shift away from too much fixation with tax competition, an undervalued exchange rate, and the wooing of footloose multinationals. We must instead promote bottom-up formation and growth of our indigenous companies, and unleash the innovative and entrepreneurial spirit of our local workforce.
This means weaning our companies off a race-to-the-bottom focus on cost cutting as the only means to be competitive. Revenue and wages should instead hinge on productivity gains, not a relentless search for cheaper inputs. Margins can, and should, be driven by elevating value-add and quality. What we want is for “Made in Singapore” to be synonymous with better, not just faster or cheaper, which is best left to economies lower down the income ladder.
This is an appeal to foster growth not just for growth’s sake. It is of existential importance, especially in an age of artificial intelligence (AI). Research shows that, worldwide, small firms drive disruptive innovation, and startups are the bulwark of sustainable growth, through this process of creative destruction.
Yet while SMEs account for 99 out of every 100 registered enterprises here, and provide jobs for 7 in 10 Singaporean workers, they currently only contribute to half of the economy’s value-added. If our SMEs are stifled because business or funding opportunities are crowded out by the big players, we will never discover our own homegrown, globally-competitive unicorn. Or if they choose to simply coast along without feeling empowered to challenge large, incumbent firms, we will never build a vibrant body of SMEs that form the backbone of the economy, like Germany’s Mittelstand, or Japan’s Taiheiyō Industrial Belt.
To enable this transformation, we need a domestic body of medium-sized enterprises, capable of growing to become the next wave of corporate champions, and driving a 21st century innovation-led economy. We need Singaporeans to start companies, and for these companies to grow, and succeed.
Impediments to our SMEs
Singapore is no stranger to support for SMEs. The government will undoubtedly point to the veritable grab bag of schemes, such as the Productivity Solutions Grant, SkillsFuture Enterprise Credit, Enterprise Development Grant, Market Readiness Assistance, Enterprise Workforce Transformation Package, and more.
The question isn’t whether these are useful; they are. The issue is whether these catalytic grants spur SME activity sufficiently to allow them to systematically advance to the next stage of their growth, or whether there are other structural impediments that inhibit them from transforming themselves from small local firms to medium sized, international ones.
Businesses themselves report several key constraints to growth. Most notably, SMEs struggle with low levels of productivity, something that the government has itself explicitly acknowledged. Many report an inability to attract and retain the sort of talent that would allow them to elevate their efficiency and output. To be fair, our SMEs have to confront business costs among the highest in the world. And to compound the challenge, SMEs must secure financing for investment, which is especially scarce once they exit the startup stage.
Elevating productivity in small firms (and some large ones)
Our SMEs must stand ready to be the source of development innovation: the “D” in R&D. I have shared with this House previously about how—at less than 2 percent of GDP—our nation’s R&D remains squarely below the global average, and significantly behind that of leading innovation nations. But I also explained that this was because of anemic R&D spending by the private sector, not the government. Alas, among SMEs, this is even worse; the overwhelming majority of business R&D expenditure (BERD) is likely to be from large enterprises. The ESR talks about R&D, but does not underscore the importance of this pivot.
I note that the Prime Minister’s Office announced, last year, a $37 billion commitment to Research, Innovation, and Enterprise (RIE) funding over the next five years. This will bring our public expenditure to around 1 percent, which will indeed be among the global leaders. But we need to accelerate private R&D, not just with more public funding, but with complementary funding from private capital markets as well.
To be fair, tax incentives for corporations to undertake R&D are already very generous, with up to 400 percent deduction on the first $400,000 of qualifying expenditures every assessment year, supplemented more recently by up to 100 percent in refundable investment credits. SMEs have also been a major beneficiaries, making up 85 percent of R&D claims.
But improving productivity is not just about innovation alone. Research has shown that one important impediment to improving the efficiency of firms, especially smaller ones, is the quality of management. There may be a case to expand the scope of qualifying R&D activities, for the purposes of tax deductions. This is especially for activities aimed at product commercialization, enhanced internal business operations, or overseas expansion.
What is also missing is a coherent innovation pathway for all SMEs, not just those oriented toward sexy, cutting-edge fields. Founders of “old economy’ startups may not necessarily possess the technical sophistication to navigate the GoBusiness directory, or the awareness to seek out business advisers in EnterpriseSG. They may not be able to string together the myriad packages available, or to even put together credible applications.
What is needed is a push rather than pull strategy, where new business registrants are automatically and routinely offered information on how they can access support from the government to roll out business development innovations, over the course of their initial years. Even better, startups can be matched with seconded experts that grow their R&D capabilities in-house, akin to A*Star’s T-Up Program.,
There remains additional room for the state to act as well, through its indirect influence on GLCs. Despite being half of our economy’s value-added, R&D spending by domestic enterprises accounts for only $1 out of every $5 dollars. Our GLCs can lead the way by dedicating more of their retained earnings toward expenditures in applied research and development, subject to a reasonable return-on-investment period. Over the medium run, they can look toward elevating their spending to more closely match that of MNCs.
Finally, we can also support SME productivity indirectly, by tackling our sky-high business costs. Speaking to SMEs, the subject of crushing manpower and rent inevitably emerges. Yet scaling up or relocating is not always an option, and hence we need to look for alternatives. One simple strategy is to cap the maximum quantum that rents may increase every year, to the historical increase of around 3 percent annually. This is a limit on the rate, not the level; market rents will still prevail in the long run. Still, doing so gives time for businesses to adjust to jumps in their fixed costs. Such restrictions have been employed in many jurisdictions worldwide, and even if we limit it to government or agency landlords—such as HDB or JTC—it would be a major step forward. It may also be time to revisit the dependency ratio ceiling (DRC) for certain sectors, like F&B, where Singaporeans continue to shun open positions that are advertised at attractive wages.
Attracting jobseekers to SMEs
At the heart of the challenge of raising up our local SMEs is the difficulty of attracting (and retaining) talented workers. Singaporeans often view small-firm jobs as small-time, second-tier options, compared to a more lucrative, prestigious MNC career. The ESR report, while rightly emphasizing the importance of good jobs, remains largely silent on how the gap between SME and MNC positions may be bridged.
Bridging this gap must recognize that smaller firms often struggle to round up sufficient financing for investment, compared to larger ones. Relieving internal and external access to finance—for the purposes of easing cashflow that would unlock hiring—is first-order, if we wish to improve the viability of young, dynamic companies.
There are already schemes that support small business investment. For example, the Enterprise Development Grant (EDG)—aimed at projects—and Productivity Solutions Grant (PSG)—targeted at IT equipment—ostensibly relieve financial constraints. The EDG even recognizes human capital development projects as a core capability. Our PSG should do the same, since productivity is boosted as much by human capital as it is by IT equipment. While one may argue that Workforce Development Grants (WDGs) do much the same thing, the WDG appears overly restrictive, reliant on a pre-approved consultant panel, and isn’t available on an ongoing basis. I believe the scope should be more flexible, and allow SMEs to bolster compensation and benefits to better match starting salaries offered by MNCs.
Beyond salaries, jobseekers may be attracted to SMEs because of the promise of greater work variety and flexibility, and greater exposure to business roles and functions. Internship and apprenticeship programs, including those from polytechnics, universities, and the Graduate Industry Traineeship (GRIT), should actively look to enfold SMEs into the slate of potential employers. The Career Conversion Programme should not be limited to the wholesale trade, but be expanded to encompass a wider range of SME sectors.
That said, application and reporting requirements for these programs are often onerous, stretching the already-thin resources of small businesses. While I accept the need for prudence in managing public funds, we should not turn SMEs into another government bureaucracy. There should be a simplified application process for grants, and reporting requirements should focus on fraud audit, rather than extensive documentation for compliance.
Moreover, funds are provided on a reimbursement basis. But any small business owner—especially one that is just starting up—knows that one of the principal challenges they face is sustaining cashflow. We should also disburse support up front, and trust SME owners to deploy these grants wisely.
Of course, supporting SMEs with young talent can occur ever earlier upstream. SMEs in search of skilled workers often seek out interns. Unfortunately, many young would-be graduates remain unmatched to potential SME employers.
This is not for lack of trying. Most tertiary institutions already include a job exposure stint. But takeup remains low. In 2024, there ITEs supplied 1,300 students, while AUs sent 800. This is despite how attachments often translate into actual jobs. SME participation also remains low; around 3,000 firms have joined such programs, which is less than 1 percent of registered SMEs.
One factor behind the low take-up rates could be because companies that hope to partner with tertiary institutions must codesign and codeliver bespoke curricula. This can be an insurmountable hurdle for smaller companies with limited resources and understanding of how to go about doing so. It may be better to take the cue from the German approach—where more than 1 in 10 companies participate in their equivalent program—and expand the scope of potential applicants, by allowing interns to also be hired using employer SkillsFuture funds, and accepting simpler application criteria from SME employers.
Yet even when directed toward hiring talent, there is little structure to ensure the systematic transfer of skills, such that the benefits of human capital are spread across the firm. This is especially the case for foreign talent. There is room to place greater emphasis on local capability development, built into schemes such as the Pioneer Certificate Incentive or Development and Expansion Initiative, to embed skills transfer to Singaporean employees. Larger grants, in particular, should be paired with a clear proposal and timetable for ensuring skills transfer, including the possibility of a sunset of foreign employment passes after a designated duration, if no additional transfer is taking place. And when local employees are sent for skills upgrading, employers of micro and small enterprises can be partially reimbursed with makeup pay to cover costs of temporary hiring or overtime, similar to makeup pay when NSmen fulfill their reservist commitments.
Conclusion
Sir, let me close. To be clear, what I am calling for here is not a wholesale overhaul of our GLC-heavy, MNC-led, and foreign capital-reliant model, which has, to date, served us well. Sidelining these actors would amount to killing off the golden geese that have established themselves as cornerstones of our corporate and industrial landscape; foreign affiliates contributed $368 billion to our economy in 2024, which accounts for more than half of all enterprise value added. Our GLCs have also been increasingly competitive on international shores, projecting the economic influence of Singapore Inc, worldwide. This is excellent, and local companies should continue to look toward foreign markets as their source of growth.
Nor am I proposing that we abandon foreign investment and shut the door to cross-border financial flows. That would hollow out our capital base, which amounted to $14 billion in fixed asset investments in 2025 alone. No modern economy—much less a globalized one like ours—operates without due attention to international players.
What I am calling for are policy and institutional shifts that will usher in a changed mindset for how we should view our homegrown companies in an already wealthy, advanced economy. This shift will place small, but especially medium-sized, firms at the beating heart of the nation’s economic model, away from the interests of large, foreign-based MNCs or even our GLC behemoths.
What we need is creative destruction: an industrial policy that rebalances the playing field between the large and the small, and one that eventually sheds the existing model for a better one. This destruction must be led by local, upstart firms as the source of disruptive innovation, not because business costs are so high that only larger players possess the economies of scale or are able to access the financing necessary to survive. By destroying, we will simultaneously create an economy ready for the 21st century.
