by Dinesh Senan: Submitted to the Chairman of the Government Parliamentary Committee for Finance Trade & Industry: 26 September 2003
Given the economic challenge we are presently addressing, it is simply not enough to only look at controlling our costs. There is a law of diminishing returns which operates on all cost-cutting efforts, over time. Whilst it is necessary for us to remain as cost-competitive as may be possible, keeping both eyes transfixed on this effort will not do us very much good, and may devolve into an exercise in mounting frustration, for it would not go to the root of the economic challenge before us today…..namely, where will our new revenues, or growth, come from, and how? At any rate, comparative cost assessments may only be meaningfully done when juxtaposed, in relative terms, against the revenue-generating capacity of our national economy. And towards this end, it will ultimately be the successful pursuit of net value contribution that will form the bedrock upon which one nation’s revenue-generating engine capacity may be deemed more economically viable than another.
We must therefore keep one eye strategically focused on the top line, that is, on new revenues which need to flow into our hands. This aspect of our economic redevelopment efforts has been largely ignored, or inadequately debated. There is a compelling need for us to establish a clear ‘mental framework’ that will help bring into sharp focus the key strategic directions in which we may choose to expend our new revenue generating energies.
A Value-Centric Framework for Action
It is suggested that what we need to place at the centre of our planning table is a notional Value Pyramid, the ultimate source of all economic growth. Using this as the focal point of our economic planning, we should then adopt a mindset that bravely (as ‘idealists, but without illusion’, per John F Kennedy) targets the planting of our flags at numerous strategic points on this Pyramid (aiming to have the highest possible average altitude of all our flags so planted thereon). From such bold Value Pyramid positioning targets, may flow our corresponding implementation efforts, and consequently, new revenues.
Just where should we plant our Target Flags?
(I) First, Let’s Start as Close to the Top of the Pyramid as we may think Achievable
What’s happening at the apex of the Value Pyramid globally is very exciting. It’s all about the fervent quest for the ownership of intellectual property (‘IP’), or the underlying knowhow of any area of expert human endeavour. In less than a decade from now, most countries will not so much seek to compare their wealth in terms of GDP/GNP output levels, as in terms of the worth of the collective IP owned by each nation.
When properly harnessed and protected, the Value contained within such packaged IP may be leveraged through the device of global licensing, yielding a smart, repeating source of revenues for each piece of packaged IP, which would correspondingly derive geometrically higher orders of economic return for the owners thereof, than for all who merely use such licensed packages to generate their downstream activity- based value and earnings therefrom (at the foothills of the Value Pyramid).
The race is therefore already on, with every nation effectively competing to carve out its niche at the top of this Value Pyramid, thereby effectively banishing all other laggard economies into lower rung positions on the Pyramid, in many cases irretrievably, where one has to sweat a lot more in order to eke out a reasonable rate of return, in relative terms.
The question then emerges for tiny little us … how high up this Pyramid should we realistically attempt to set our sights, at this stage in our economic development?
Starting at the Top, let’s analyse what goes on at the Apex of the Value Pyramid today, component by component, and then see if there may be some value contribution therein which we may set our sights upon for delivery to the global economy. In the realm of high-end IP ownership, what effectively happens is:
[a] A confluence of (i) Human Domain Experts (who hold the knowhow / best practice methodologies of their vertical areas of specialisation within their heads) on the one hand, and (ii) Technological Design Architects (who have the ability to harness such knowhow within a technological platform that is capable of packaging the knowhow into a generic, licensable medium);
[b] where this confluence may be catalysed by (iii) a strong Physical Infrastructure (wherein such technologically harnessing may take place), (iv) a strong Legal Environment (which provides for global IP rights protection) and (v) a supportive Financial Environment (which may help finance the costs of the overall exercise).
For us in Singapore, the most immediate piece of good news is that this realm of IP packaging, there is no need either for large tracts of land nor for a large population base. When we examine the pieces of the jigsaw above, it may be argued that, at least to a certain extent:
Re (ii): We already do have many high-end Technological Design Architects onshore in Singapore, including many highly talented technology experts who have come from India and made Singapore their home…..further, there already do exist certain new, high-end technological solutions which render it possible to ‘harness’ human domain expertise onto software platforms for generic deployment as packaged solutions , which such Technological Design Architects may utilise as facilitative tools here;
Re (iii): We have excellent Physical Infrastructure already in place, capable of facilitating such works, including Science Parks I, II and III, as well as numerous other world-class TechnoParks;
Re (iv): We already do have a strong, globally recognised and respected Legal Environment for the protection of IP rights around the world, (which has been further significantly enhanced via our recent Free Trade Agreement with the US)…..In this regard, it is worth noting that as we troop into the future, we will increasingly observe that the quality of Legal Protection provided will be of paramount concern to true global entrepreneurs, whose business sentiments may not so much revolve around notions of patriotism, as much as who can provide her/him the best and most respected global protection for their precious IP…..for as the IP rights go to the root of the value of the business built thereupon, the quality of the Legal Protection thereof will also largely determine the value and growth of the business, including such growth related considerations as the ability of such a business to be listed say in the US or elsewhere; &
Re (v): We have a Financial Environment that comprises a potentially healthy balance of Public Sector funding vehicles as well as Private Sector Venture Capital that may be made available to support and help catalyse such activities.
What then appears to be ‘missing’ is the Human Domain Experts component. Here, whilst this is indeed a key ingredient in the picture, all is not lost for us. For it is argued that we may creatively set as our initial goal the ‘Packaging & Protection of IP’ for the global market, as our targeted economic value adding activity, such that:
[a] We market and aggressively position ourselves as a ‘prospective partner’ to all Human Domain Experts from around the world, such that
[b] We work with them in order to design the packaging of their knowhow, to be built within our high-end technoparks, with participating funding agencies as may be required (public and/or private sector financing being available as options) and strong global IP rights protection for the resultant packaged knowhow, as well as the ability to contribute to a certain extent towards the global distribution of the resultant packaged IP (through our private sector and GLC networks); &
[c] Where we in turn negotiate a fair percentage of co-ownership of the resultant packaged IP. (Here, to the extent that financial and other contributions towards the development of such packaged IP solutions shall have come from our local participating private sector businesses and / or local private sector funding agencies, we may thereby witness the emergence of co-ownership of such globally-viable packaged IP solutions by our own private sector players).
Whilst we may not realistically expect to be able to fully own the resultant IP, (which would position us at the very apex of the Value Pyramid), given that we may not have all of the requisite pieces of the jigsaw ourselves, the above proposition would nevertheless effectively see us adopt a mindset that proactively seeking to plant our flags almost at the very apex of the Value Pyramid. In due course, as we develop an even more entrepreneurial society, we may hope to emerge with fully-owned packaged IP, developed through the inputs of Singaporean Human Domain Expertise. However, given our small population size and the normal bell-curve distribution of talent, this will not be so easy to achieve (yet it is not impossible, if we think of the astounding success of the numerous small Scandinavian countries).
It is therefore argued that emerging with a co-ownership of global IP is not a bad prize for us at all, within the very near-term. For even though we may not have all of the pieces of the jigsaw to participate unilaterally at the apex of economic value-adding activity, we may nevertheless emerge, through smart planning and synergising, with at least a partial ownership of IP for ourselves, and a real value contribution to the world at such exalted levels. At least, we will already be ‘in the game’ at this strong position on the global Value Pyramid, upon which we may seek to build upwards as the years go by.
In order for such a goal to succeed, it may be useful for us to consider establishing a focused ‘Centre for IP Globalisation’ in Singapore, responsible for the disciplined implementation of such a high-level goal. A focused Centre such as this would effectively be responsible for pulling together all of the above components of activity as we are able to harness, whether onshore or offshore, and then to be responsible for a concerted global marketing effort to help bring awareness to the Human Domain Experts around the world of our ability to help them in the harnessing, technological packaging, financing, legal protection and eventual global distribution of their knowhow, so as to draw them towards working with us.
(II) Looking further down the Value Pyramid…
Whilst not all of our population may realistically be able to contribute at this apex level of economic value- adding effort, we would also need to look at ‘how’ we structure ourselves, both at the public sector policy levels as well as at the corresponding private sector planning and activity levels, in respect of further Value Adding Activities down the Value Pyramid which we may also aim to participate in.
For activities further down the Value Pyramid, it may be necessary for us to create an environment that strongly encourages active regionalisation through a Value Chain Dispersal approach, to maximise our returns, avoid the perils of a hollowed out economy, and also help us stay economically viable and relevant in respect of the economic value adding activities that do remain, at any point in time, to be carried out in Singapore. Towards this end, George Yip’s book, entitled ‘Total Global Strategy’, is highly instructive.
Again, starting from the perspective of the Notional Value Pyramid at the centre of our planning table, we should be able to see that all our economic business activities are really a composite of value adding ‘steps’, each occupying a specific, though transient, position on the Value Pyramid. The challenge then is to be able to adjust our mindsets such that we no longer hold on to the sentimental notion of planting a flag at one point on the Pyramid, and then clinging on to it forever. That does not work, for the world is characterised by change. And those who can truly embrace change, (this is counter-intuitive, as our brains are naturally drawn towards patterning / habit forming), are the ones who will undoubtedly thrive. Such people will also adopt policies and mindsets that encourage fluid change.
The following approach may be helpful: if we were to start to see our business activities as composites of value adding steps, rather than as a single unit of activity, we might then be able to strategically analyse on a component-by-component basis which of those steps may most optimally be located where, at any point in time, and then plan the coordinated execution of such efforts accordingly, working in tandem with a policy environment that provides incentives for the private sector to plan and execute their activities in this strategic manner.
Let’s take a random and perhaps overly-simplified example: assume ABC Pte Ltd has been in the business of publishing magazines.
(a) editing
(b) typesetting
(c) printing
(d) binding
(e) packaging
(f) distribution.
For simplicity, let’s say that the value adding ‘steps’ involve:
The traditional way of looking at this activity would be to see the whole series of steps as comprising one block of activity. In this way, the private sector owner of ABC would calculate his economic returns quite simply, toting up the costs of executing all of the above activities and subtracting that from his revenues, to determine that every dollar invested in this business in Singapore may yield, for example, S$1.20.
In this example, if the proprietor of ABC were to consider merely replicating his business’s entire value chain, ie activities (a) to (f) above, say in China, he may see that S$1 of his, invested in the replicated value chain in China, may then yield him a return of say S$1.60. If so, we should assume that it will not take very long before he asks why he should continue to invest any further dollars in his operations here. If this is not properly addressed, then the fear of hollowing out of our economy may well become a reality for us.
However, a tweak in our policy environment, based on Value Chain Dispersal considerations, may yield a different outcome. If, for instance, the proprietor of ABC was granted strong tax and other relevant financial incentives by the government against a regional / global business plan that saw his expanded business activities structured such that, say, step (a) may best be carried out in Singapore, steps (b) and (c) may best be done in Malaysia, steps (d) and (e) most optimally done in Thailand and step (f) coordinated from Singapore, the net results may be:
- From the proprietor’s perspective, he may now see a net yield well in excess of the S$1.60 earned through simple Value Chain Replication in China, for every S$1 invested, as each step of the economic value adding activities is now carried out in its respective optimal location for the time being (although the management of the business becomes more challenging for the proprietor of ABC); &
- From our national perspective, if we encouraged the proprietor to plan his activities along such ‘Value Chain Dispersal’ lines, by offering him specially reduced tax rates on the economic steps that do remain to be done in Singapore, (in addition to the nil tax on offshore profits remitted to Singapore), we may then see that, over time, all that does remain to be carried out onshore, in terms of value adding activities, will necessarily be relevant and best suited for our environment, at any one point in time (thereby avoiding as best we may, the threat of a hollowed-out economy, which could otherwise happen).
It is recognised that such a Value Chain Dispersal framework may take some time to be put into effect, particularly as great mindset shifts will be involved within both sectors —- namely, the public sector will have to find new ways to offer compelling ‘holistic’ incentives to the private sector players to redevelop their business activities, moving offshore what’s not cost-effectively done here, whilst keeping that portion that is best done onshore still running here, but within a composite regional whole.
At the same time, our private sector operators will have to embark upon the more complex management path of building and earning a sustainable growth business across numerous national boundaries. However, not to do so may not be an option at all for either sector. The result of failing to have such an encouraging public sector policy environment may be a hollowed out economy. And the result of a private sector that does not wish to take on the challenge of such complex value chain dispersals of activities may be that our businesses never achieve truly globally competitive operational status to survive, let alone compete.
As an example, and as discussed by George Yip in his afore-mentioned book, Toyota Inc in the US has so diversified its economic value adding components within the process of manufacturing each car, that whilst the final assemblies are done in the US, the components are actually manufactured in more than 50 different countries. And their strategic approach taken is so meticulously planned that every such component of activity is actually carried out in a minimum of 2 different localities, so as to avoid the perils of being held ransom to economic and/or political risk occurring at any of such countries of operations. We have got a long way to go before arriving at such sophisticated multi-country business process planning, but there’s never been a better or more compelling time to start than now.
Conclusion
It is being remarked all across Singapore and beyond that we have not been able to articulate a tangible strategy to generate our future revenues for our economy. The gloom and pessimism is truly quite unnecessary. All that is required is for us to have the right mental framework erected, and to have a clear focus on the Value Pyramid at the centre of our economic planning table, and where we wish to plant our flags thereon. Once that framework is in place, the tenacity, dedication, focus and professionalism of the Singaporean will see to the swift and sure implementation of the ensuing strategies for the realisation of our future value based returns.
Where exactly we should plant our target flags on the global value pyramid is ultimately a question of choice, and how well we fare, directly linked to our will to succeed.
The Pragmatic Idealist 