Productivity Drive Bearing Fruit But Innovation Yet to Bloom

Rising costs, a tight labour market and raising productivity were the main concerns of businesses surveyed in Singapore ahead of Budget 2014. At the same time, many found the pace of economic restructuring too fast, and some felt business rules could be simplified.


Conducted by KPMG and supported by the Singapore International Chamber of Commerce, the survey found that 96.8 percent of respondents want the Productivity and Innovation Credit (PIC) scheme extended after 2015, suggesting that productivity schemes were effective.


Less than half or 45.2 percent wants less complex business regulations and more simplified rules for tax incentives, while 50.3 percent of respondents indicated that existing measures did not have the desired impact on their innovation-related activities, suggesting more needs to be done to encourage innovation.


The survey also reveals that 85.1 percent of respondents think more incentives are required to encourage the development of indigenous Singapore brands.


Meanwhile, 65.8 percent of respondents saying the pace of economic restructuring coming too fast. Some businesses were unsure how to restructure, with 21.3 percent calling for more help.

Business concerns and continuing the productivity push

In 2010, the Economic Strategies Committee called for a Singapore economy based on skills, productivity and innovation. Aimed at reducing reliance on labour, it targeted 2-3 percent annual productivity growth with a 30 percent increase in wages over 10 years.


“Businesses have come to accept the need for Singapore to push productivity growth," says Tay Hong Beng, Head of Tax at KPMG in Singapore. "With the PIC due to expire by 2015, it is no surprise any are calling for an extension. This is because the productivity journey is a long and continuous one. Some companies are also just starting out and need more help.”


While affecting most companies in Singapore, the manpower restrictions were felt more acutely by SMEs, with 24 percent citing manpower and 39 percent generally citing costs as a concern.


At the same time, 23.4 percent called for simplifying and increasing the relevance of tax and other monetary incentives. Some 21.8 percent wanted existing tax and monetary incentives to be simplified.


Creating value through Branding and Innovation

The chase for productivity, containing costs and managing manpower issues appear to have come at the expense of value creation activities, especially among SMEs.


Hence, while the drive for productivity appears to have caught on, the drive for innovation does not seem well-heeded. Slightly more than half of the respondents cited that innovation-related measures had made no impact on their business.


Investing in innovation activities have a longer timeframe than productivity investments. They often also involve complex business structuring of operations and workflows. “In Singapore, the uncertainty around businesses’ R&D incentive claims is putting a dampener on Singapore’s innovative efforts,” said Tay.


“The experience overseas suggests that countries which are more receptive to commercially-driven R&D, where products and services are developed in respond to market needs, can be more effective in encouraging innovative-activities than those with the largest incentives,” he added.


For this reason, current incentive frameworks may not sufficiently provide enough encouragement to companies. Survey respondents also indicated an urgent need for more support to Singapore companies expanding regionally.


This is especially urgent given the formation of the ASEAN Economic Community in 2015 and the opportunities it brings to Singapore enterprise. Specifically, more support for more branding initiatives and other value-creation activities would help SMEs concentrate on value creation activities.


Underpinning this is a need to encourage more home-grown brands.


Tay says, “Current incentives do not recognise the intangible nature of efforts to create a strong brand. For this reason, large majority of respondents hope this could be addressed, such as through a tax incentive by way of a tax allowance for internally-generated brands.”


Simplifying regulations and incentives

Inevitably, increasingly complex business regulations are symptomatic of a maturing economy, and many businesses are at the crossroads of fast advancing business regulations but yet do not have the resource or capability to deal with this issue.


Many businesses cited claiming of tax incentives was not straightforward; despite best efforts to make correct claims, mistakes may still be made. Due to that, 45.2 percent wants less complex business regulations and more simplified rules for tax incentives. Thus, government agencies may need to be more business-centric and try to understand the unique needs and situation of each industry.


Sustaining inclusive growth
The aim of inclusive growth is one of the key reasons for the productivity-led economic strategy so that the lowest income groups would not be left behind. Tackling rising social expenditure has been a feature of the last few Budgets.


As the population ages, social spending is expected to increase. Unsurprisingly, the survey indicates that few respondents were in favour of increasing corporate taxes or GST to fund this expected increase in social spending.


Business and tax regulations

Many respondents also felt that government agencies had to be more business-centric: be less broad-brushed and try to understand the unique needs and situation of each industry. The top wishes for businesses were less complex business regulations and simplified incentive rules.


“Increasingly complex business regulations are symptomatic of a maturing economy," says Philip Overmyer, Chief Executive, Singapore International Chamber of Commerce. "For Singapore to remain competitive to foreign investment, not only do tax rates have to remain low, but perhaps the Singapore Government should continue to simplify the existing regulatory environment. Such efforts will increase the effectiveness of current and future policies aimed at restructuring the economy.”

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