Singapore can overcome its "productivity trap" by investing overseas to take advantage of stronger growth elsewhere, said a DBS report out yesterday.
If this strategy succeeds, the country's investments abroad could eventually contribute more to growth than goods and services made at home, said economists Irvin Seah and Ma Tieying.
Rather than be constrained by a "mere 1 to 3 per cent" in domestic growth, Singapore could invest in higher-growth neighbouring countries that offer a 5 to 6 per cent returns, they said.
Such an outward direct investment strategy has benefited other mature Asian economies such as Japan and Taiwan.
Mr Seah and Ms Ma said Singapore's outward direct investment has been rising over the years but is still dwarfed by foreign direct investment inflows.
While foreign direct investment and the presence of multinationals will remain key to Singapore's economic growth, "having a pool of globally successful local companies could help sustain national incomes in the face of rising domestic cost pressures and the challenges of an ageing population", they said.
This strategy could also entail measuring the Republic's economic growth in a different way.
"If the presence of multinational companies in Singapore fades in the longer term and if Singapore companies are successful in venturing overseas, then gross domestic product could under-represent the true improvement in Singaporean incomes," they said.
Instead, another statistic called gross national income - which measures the income earned by Singaporeans regardless of whether it is earned domestically or abroad - would be a better gauge.
Singapore Management University economist Hoon Hian Teck said that while Singapore companies are already being encouraged to internationalise, it will "take many years" for the Republic to build a pool of established global firms.
Meanwhile, foreign direct investment by multinational firms here remains essential to growth and despite being a high-cost location, the Republic still holds comparative advantages in areas like intellectual property protection, he noted.
In the long run, however, "Singapore might be able to benefit regional economies the same way Singapore benefited from foreign direct investment in the past," added Prof Hoon.
Chia Yan Min