Venture Capital and Economic Growth: Singapore's Experience - Case Study Example

Singapore The World Bank Report (2004) ranks Singapore behind New Zealand and USA as the easiest country to conduct business. Singapores political environment has been on of the most stable in the region, and no history of incidents involving damage to foreign investments in Singapore along with investment friendly policies provide an excellent level of comfort to foreign investors. The government is focused on maintaining the free market and takes a lead role in its economic development. Government linked investment firms play a major role in Singapore’s venture capital environment. The governments active use of the public sector as both an investor and catalyst for development has given rise to the characterization of Singapore as “Singapore Inc.” Through its government’s strategy, Singapore has evolved into a base for multinational companies (MNCs) to engage in high value-added manufacturing and product development, and coordinate regional procurement, production, marketing, and distribution operations. Singapore continues to have a sophisticated investment promotion strategy designed to attract major investment in high value-added manufacturing and service activities. Even though there has been criticism for availability of venture investment opportunities (Koh, 2002), the government policies are very friendly towards foreign investors who are subjected to same basic laws as local investors. The judicial system in Singapore is efficient in its decisions and their enforcement. Singapore has institutionalized and internationalized arbitration through the creation of arbitration bodies and ratification of international conventions. The intellectual property rights enforcement has also improved significantly since early 1990s. The Singapore government promotes its regulatory environment as one that is business-friendly, with transparent and clear regulations. Tax, labor, banking and finance, industrial health and safety, arbitration, wage and training rules and regulations are formulated and reviewed with the interests of foreign investors and local enterprises in mind. Procedures for obtaining licenses and permits are generally transparent and not burdensome, but there have been occasional exceptions. Singapore has, and actively enforces, stringent anti corruption laws and is known as one of the least corrupt countries in the world. The legal and regulatory system currently in place provides comfort to investors as compared to China. Earlier Singapore had restrictions on telecommunications, broadcasting, financial and other services industries which have been consistently reduced. The barriers in telecommunications industry have been reduced but concerns remain over SingTel’s - Singapore Telecom which was the monopoly service provider – dominance in market. In broadcasting sector, even though government has taken steps to convert the monopoly of MediaCorp TV to duopoly with Singapore Cable Vision but the tender floated for second player had no takers leaving SCV in monopoly position (Koh, 2002). Singapore has consistently liberalized its financial sector since 1999. However the government has not allowed acquisition of local bank by foreign investor and the foreign banks in domestic retail banking sector faces significant restrictions. Singapore has proved to be a home ground for a number of foreign venture capital funds owing to government support. VC funds have established their head office and/or regional offices in Singapore for their Asia Pacific operations. This allows easier entry mechanism especially since all trading restrictions placed in foreign owned stock brokers were removed in 2002 (Koh, 2002). Singapore places no restrictions on reinvestment or repatriation of earnings and capital, and maintains no significant restrictions on remittances, foreign exchange transactions and capital movements. Singapore has a streamlined free flow of financial resources. Foreign investors can access credit from the local market in U.S. dollars, Singapore dollars (SGD), and other foreign currencies and is available on same terms as local investors. The legal, regulatory and accounting systems are transparent and either already match or are being upgraded to align with international norms and best practices (Koh, 2002). Construction industry does represent opportunities in Singapore but do face restriction. The firms can be foreign owned but need to fulfill criteria such as registration with local professional bodies and/or valid certificates to practice. There are also restrictions on ownership of real estate. Labor force – skilled and unskilled – is readily available in the country. Singapore has flexible local laws. Labor-management relations in Singapore are very good. None of unionized labor has gone on strike since 1986. Industrial disputes are usually settled at the enterprise level or through mediation by the government via industrial Arbitration Court, whose rulings are binding (Brown, 2004). Singapore has a mature bourse which represents an easy exit opportunity for venture capitalist. Singapore represents a mature market for venture capitalists with multiple incentives for investment, especially in the field of biotechnology and startups. Focus of pension funds on venture capital and silicon valley funds is a cause of concern considering the earlier bubble burst (Brown, 2004). However owing to mature market and free trade policies, Singapore is more attractive for VC funds compared to direct VC project investments. Limitations and Future Prospects The pacific rim represents different set of limitations and prospects in the world owing to the economic conditions and policies of major players. China represents huge prospects owing to its size and facilities while at the same time its not the easiest places to do business. Different set of rules are not just prevalent in legal system but also in financial system of the country. Also the application of government policies can be confusing to new entrants. Language is a major barrier for human resource. However low production costs and size of the market is a huge opportunity for any investor. Hong Kong competes with Singapore as the free economy but carries an edge as a doorway into china with an economic system that is much more conducive to business compared to China. The policies are similar to what were implemented under Britain’s rule and carry guaranteed continuity for a considerable time. However the instable political conditions are one of the major limitations faced by investors which increases the risk to their investment. Taiwan represents similar political instability as Hong Kong owing to China’s dominance. The financial sector also poses a limitation along with matured tax incentives that are no longer available. The reforms promised by the government could drastically improve the investment climate – especially considering its efficient integrated circuit industry and promising biotechnology development. India has a booming economy limited perhaps only by protection provided by the government. The spin off companies from major multinationals represent excellent venture capital opportunities along with support of skilled human resource and mature financial markets. Even though retail sector is protected by the government, it is promoting manufacturing sector for investment. Japan is probably the most mature market in the region. The financial sector has been facing chronic problems and there are lack of entry opportunities and exit strategies available. Singapore is a mature market which has consistently made its policies investor friendly and government not only supports in rules and regulations but is also involved in investment activities. Singapore also has easy availability of human resource and funding and also provides a good option for exit strategy. However owing to geographical limitations the focus is changing towards investment in services and venture capital activity is driven by investment in VC funds. Each country represents its own set of limitations and opportunities which collectively display a region full of potential and promise of growth. They all have their areas of specialization and offer prospects of investment – ranging from retail to manufacturing to specialized services. Abstract The experience of Silicon Valley has shown that thoughtful policies and support of the venture capital industry can create the right climate for innovation and entrepreneurship, which in turn will pay dividends in terms of job and wealth creation. The basic environment for innovation to thrive is an economy open to trade and investment, a sound infrastructure, a sensible approach to intellectual property rights, risk-taking and achievement-oriented culture, an open-door policy to global talents, as well as a robust financial system which includes private equity and venture capital (Koh, 2002). Asia Pacific region has exploded on the world map by its growth. There are multiple areas that have contributed to this growth. Some countries had mature markets and others are in process of maturing. These countries exhibit their own set of challenges and opportunities which are attracting a lot of investment from western world. The challenges are in the form of rules and regulations, human resource, political climate and financial markets. However at the same time these challenges also transform into opportunities in other countries in the same region. We look at China, India, Japan, Hong Kong, Taiwan and Singapore as the drivers of this growth, opportunities available and challenges faced in this region. Brown, E (2004), ‘Double Bubble’ Forbes, May 2004, Vol 174, Issue 1, p 58 Kentouris, C. (2003), ‘Singapore Adopts Risk Capital Regs.’ Securities Industry News, Vol. 15 Issue 5, p6 Koh, F. and Koh, W. (2002), ‘Markets and Industry — Venture Capital and Economic Growth: An Industry Overview and Singapores Experience’ Singapore Economic Review, Vol. 47 Issue 2, p243 The World Bank (2004), ‘World Development Report 2005: A Better Investment Climate for Everyone’ World Bank Publications, USA Trombly, M. (2007), ‘NYSE, 3 Others Buying Stakes in India Exchange; SGX in the Wings’ Securities Industry News, Vol. 19 Issue 2, p1-18. Read More