On Monday, Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam will deliver the Budget statement in Parliament. One of his top priorities is surely to stimulate innovation and grow productivity. As an advanced economy, Singapore can only sustain growth of living standards by raising productivity. And key to higher productivity is innovation.
In 2010, the Economic Strategies Committee, chaired by Minister Tharman, set a target of raising productivity by 2-3 percent a year. The government backed up the national effort by introducing the Productivity and Innovation Credit (PIC).
Since 2011, the PIC has offered a 400% tax deduction or 60% cash payment on up to $400,000 expenditure per year. The PIC applies to expenditure on IT and automation equipment, employee training, intellectual property, R&D, and design projects.
In 2013, the government boosted the PIC by raising the expenditure limit to $600,000 and adding a dollar-for-dollar matching cash bonus.
When launching the PIC, Minister Tharman estimated that it would cost $480 million. Following subsequent enhancements, the annual cost of the PIC has risen to about $1 billion. So, the government has certainly spared no effort on the fiscal side to encourage businesses to raise productivity. But what happened?
Labour productivity, which measures the amount that each worker produces, grew by 11.6% in 2010, 2.2% in 2011, then fell by 1.4% in 2012 and fell a further 0.2% in 2013. Last year, labour productivity rose by 0.8% in the first quarter, and then fell by 1.4% and 0.8% in the next two quarters.
The record on multifactor productivity (MFP) is equally disappointing. MFP is a broader concept that measures gains in production over and above the contributions of additional labour and capital. Put simply, it measures "working smarter" as contrasted with "working harder". In tandem with labour productivity, MFP grew by 9.7% in 2010, and 1.4% in 2011, and then fell by 2.3% in 2012, and a further 0.7% in 2013.
Apparently, productivity growth has fallen to the point that the level of productivity is dropping. Apparently, the PIC hasn't worked. (I write with caution because, actually, we do not know the counterfactual. What if there had been no PIC? Would innovation and productivity have been even lower?) Stipulating that the PIC hasn't worked, we need to understand why.
KPMG surveyed Singapore-based companies about business conditions and their wishes for Budget 2015. Of the 203 companies that responded to the survey, 30% (40% among small and medium enterprises (SMEs)) used the PIC to defray operating expenses without any direct impact on productivity.
Why aren't Singapore businesses taking advantage of the PIC to innovate and increase productivity?
The root cause is possibly poor management, particularly among SMEs. Some years ago, the National Productivity and Continuing Education Council carried out a study of management practices in Singapore. Among manufacturers with 100 or more employees, the quality of management among multinational corporations in Singapore fell below those in the United States but exceeded those in Japan, Germany, and Sweden. However, the quality of management among other Singapore companies was much lower, lying between those in Portugal and Chile.
Among the companies who responded to the KPMG survey, 41% reported their most serious operational issue to be rising costs of rental and labour, while only 20% reported it to be innovation or raising productivity. Obviously and regrettably, four of 10 companies do not see that innovation and raising productivity can help them resolve higher rental and labour costs.
Obesity contributes to heart disease, diabetes, and other health problems. One way to address obesity is to subsidize exercise. But a better solution is to treat the root cause: educate people to want to keep fit.
The PIC is like a subsidy for exercise. As with tackling obesity, a better solution is to treat the root cause -- poor management -- either directly or indirectly. If businesses do not wish to innovate or raise productivity, dishing out more subsidies will not help. Far better to increase competition and let the market drive out the weak performers.
The writer is Distinguished professor, NUS Business School and Departments of Economics and Information Systems, National University of Singapore.