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The development of Singapore as a business hub for Southeast Asia

February 2013 | Servcorp

Over the last several decades, members of the investment community at large have shifted attentions to the emerging markets of the east.  As centers of growth blossomed in Asia, major businesses with traditional centers in London and New York began to gravitate eastward, establishing monetary as well as physical presences in the Asia. This development has led to the emergence of Singapore as a hub from which Asian and Western operators have begun to center their Asian business interests.

The status of Singapore as a hub of Asian and international business is not surprising. Singapore was long a British Crown Colony and the chief naval base of the British Empire in East Asia.  The presence of the British catalyzed the infrastructural development of Singapore as a sea port. The size and capabilities of the port led to Singapore being iconographed by the media as the "Gibraltar of the East."[1] In 1869 the opening of the Suez Canal saw global trade boom and Singapore's importance as a trade stop expanded. High shipping traffic allowed for the development of strong market based economy based on entrepôt trade.

By the latter half of the twentieth century, the economy of Singapore experienced growth at incredible speeds, topping 7% for the years between the early 1960's and 1990's.  This growth was built on the foundation of Singapore as a central hub for Asian trade engaging heavily on export and on the refinement of imported goods with an emphasis on manufacturing[2].  These factors joined with accommodative, pro-business government policy and tax codes which led to the attraction of foreign investment capital making Singapore the fourth leading global financial center.

Infrastructure and Industrialization

As stated above, Singapore's infrastructure facilitated its ascendancy as a major trade stop on Asian routes and allowed for the small nation to serve as a center for entrepôt trade.  The capabilities of its port established the first infrastructural attraction for foreign investors and following Singaporean independence in 1965, its national government precipitated the development of a modern economy by driving industrialization.

Singapore has made significant investment in information and communication technology infrastructure, specifically geared towards facilitating a greater level of sophistication in tools available for businesses. According to the Global Innovation Index, a measure of innovation by country produced by the Boston Consulting Group and the National Association of Manufacturers, Singapore is rated seventh in the world for innovation taking into account scientific development, policy initiatives, and technological advancement.[3]  These factors play an important role to businesses in a globalized business environment where profits often depend on speed and efficiency of execution.  This is especially important for major financial institutions and investment management companies such as hedge funds.  These companies are dependent on technology to operate their multi-national enterprises effectively.  Many investment groups also make use of high frequency trading strategies which necessitates sophisticated technological infrastructure.  Singapore's investments in these areas created a fertile ground where businesses could potentially grow, in other words opening the door. The question remains as to why so many businesses decided to walk through it.

An Open Economy

One of the strongest factors contributing to Singapore's status as an international market hub is the level of economic freedom in the small republic.   The 2012 Index of Economic Freedom put out by the Heritage Foundation listed Singapore as the second most economically free country in the world after Hong Kong.  This is supported by the open business climate in Singapore which disallows many impediments to free trade seen elsewhere.  Businesses enjoy high levels of freedom to manufacture, consume, and trade goods and services without violating any laws, a characterization of the openness of markets to internal and external trade.  This openness has led to a high level of engagement with other countries.  This is indicated by Singaporean trade volumes which exceed national output by over 300%, the long perpetuating effect of entrepôt style trade. 

The openness of the economy is directly related to the ease of doing business in Singapore, a major factor considering a twenty-first century business climate heavy with ever constricting regulation.  In June of 2011, well global audit firm Pricewaterhousecoopers Executive Chairman in Singapore, Mr. Gautam Banerjee commented, “The business environment in Singapore is really open and very vibrant, and that is what makes Singapore very attractive. The results show that universally, we accept that Singapore is one of easiest places to do business in. All the stakeholders; government, corporate, unions, workforce, civil society, collaborate to ensure that Singapore remains a very competitive economy and that we always punch way above our weight as a small city state.[4]"

The ease of doing business in Singapore is multi-faceted.  The republic has accommodative immigration policy allowing for easy access to foreign nationals seeking to establish businesses locations by allowing for the naturalization of professional staff and executives transferring to new offices in the southeast Asian country.  Government policy is also accommodative in that incorporation of a business can be affected within one to two days.  This is in stark contrast to the majority of Western nations where the process can take months.  These practices are part of an overall pro-business climate supported by the Singaporean government and are directly in line with past measures taken to foster economic growth such as the Singapore government's majority shareholding in Singapore Airlines, a an investment which has yielded significant dividends. Nevertheless, Singapore's government routinely stresses their lack of interference in the running of the business.

A Safe Place to Do Business

A major concern in the information age is the violation of intellectual property given that often development without corporeal form, completely intellectual in nature.  Singapore's intellectual property laws support the highest standards according to the World Economic Forum, the Institute for Management Development (IMD) and the Political Economic Risk Consultancy (PERC).[5]

As an added consideration, corruption is also not a problem in Singapore as it is consistently ranked as one of the least corrupt nations in the world according to the Corruption Perception Index, a measure of perceived levels of corruption as assessed by teams of experts and surveyors, which is published annually by Transparency International.[6]

Corporate Taxation in Singapore

As always with any business, efficient means of approaching the tax code of a given business's resident nation is as important to profitability as ensuring effective operations or quality control.  Many global businesses centers have corporate tax rates which eat significantly into their bottom line.  The oppressiveness of some such taxation prohibits many businesses from operating or causes them to discontinue operations.  It is therefore to be expected that executives seeking to capitalize on emerging Asian growth would seek out an environment with a generous taxation policy. 

In January of 2010 the Milken Institute a report entitled Jobs for America: Investments and Policies for Economic Growth and Competitiveness.  This report highlights the elasticity of firms' investment decisions when regarding corporate tax rates. Also pointed out is that the US statutory corporate tax rate has not been competitive since the late 1980's; conversely, many Asian countries including Vietnam, Hong Kong, and Singapore have slashed their corporate tax rates to encourage businesses towards their shores.  Of particular note are the tax cuts made in 2008 where Singapore lowered the corporate tax rate to 18%, lower than any other nation in the region except for Hong Kong.[7]  This was during a period of significant economic decline, a macroeconomic condition which open economies such as Singapore as particularly sensitive to given its entanglement with so many global entities.  Nevertheless, the nation's commitment to supporting businesses never faltered, instead committing all the more by sacrificing margin revenue for an increased base.

The Singaporean business environment has proven it is a fertile ground for developing and established businesses.  While not surprising given Singapore's history as a trading hub, its prodigious posture is the result of national and government will to support a culture based on a strong pro-business environment.  It is for this reason that laws and tax codes have been created to be competitive with other nations vying for large business and it because of this that the small republic has managed to remain adaptable in the dynamic global business environment of the modern age.  Their will to support a business infrastructure has only increased with time and the infrastructure and support system for international business has experienced a strengthening commensurate with this increase.

[1] Leitch Lepoer, Barbara. Singapore: A Country Study. Washington: GPO for the Library of Congress, 1989. Print.

[2] "Gross Domestic Product by Industry" Singapore Department of Statistics n.d., 2007. Web. 8 Feb 2013 http://web.archive.org/web/20080624200246/http://www.singstat.gov.sg/stats/themes/economy/ess/essa11.pdf

[3] "Singapore Ranked 7th in The World for Innovation." EuroCham News, n.d., March 2010. Web. 8 Feb 2013 http://eurocham.org.sg/index.php?option=com_eurochammobile&view=news&id=289.

[4] "Singapore is Still Asia's Leading Business Hub." Singapore Business Review Online. N.d., 23 Jun 2011. Web. 9 Feb 2011

[5] "Singapore Incorporation Advantages." Guide me Singapore. n.d., n.d., Web. 9 Feb 2013.

[6]  "Overview and Rankings" Transparency.org. Transparency International, n.d. Web 9 Feb 2013

[7] Devol, Ross and Perry Wong, Jobs for America: Investments and Policies for Economic Growth and Competitiveness. The Milken Institute, 2010. Print.