The great SME challenge

Continuing state assistance remains a sine qua non for productivity improvements, going by the sentiments expressed by businesses, including a call for a single authority to support small and medium-sized enterprises here. The question, however, is whether more of the same will help SMEs to soar to the next level, as demanded by the national effort to restructure the economy.

Under the Productivity and Innovation Credit Scheme alone (introduced in 2010), over $1.8 billion in tax savings and cash payouts (as at last August) had been made available to businesses qualifying for the scheme. Yet, overall labour productivity shrank again last year as gains in some sectors were offset by the weakness of the traditional laggards.

Midway through a 10-year plan to restructure the economy, productivity is a far cry from the aspirational target of 2 to 3 per cent a year. Ahead of the Budget statement to be announced on Monday, the Government said it will offer targeted, sector-specific assistance. But one could reasonably ask if SME bosses are doing enough on their part. Wage subsidies, that cost billions of dollars, are to free up their resources to make investments in productivity. But if it becomes a crutch to simply manage costs, this could blunt the drive to become more innovative.

Spring Singapore, which administers the Innovation and Capability Voucher scheme, said its help for Singapore companies last year will create about $8 billion in value-add for the economy when fully realised. However, the number of SMEs that took advantage of the agency's support last year was just 9,000 (about 5 per cent of the pool).

The great challenge for SMEs is to grow demand through innovation. Hence, Budget measures to help shake more SMEs out of survival-and-maintenance mode and into innovation mode would be welcome. That leap of faith will require them to develop new products, venture into new markets, target niches in established markets or collaborate with new partners.

One road block is that SMEs find it difficult to qualify for PIC tax exemptions related to innovation. These make up only 3 per cent of PIC claims, the bulk of which are for automation and training. Policymakers should take heed.

Encouragingly, three-quarters of SME bosses said they were planning to implement innovation, according to a survey conducted last year, and the share of SMEs planning to expand overseas rose to 20 per cent last year, up from 14 per cent in 2013.

Such value creation is what will yield and sustain higher productivity, growth and incomes. This approach carries risks, of course, but to resist change is to risk a slow death through a loss of competitiveness.