Singapore companies invested US$22.6b overseas in 2011

That's a doubling of outbound FDI since 2004, but still down from a record 2007.

FDI outflow from Singapore is expected to reach US$38.6b by 2020, according to Ernst & Young’s Beyond Asia: Strategies to support the quest for growth report. FDI outflow has already more than doubled between 2004 and 2011 to reach US$22.6b, with peak outflow at US$32.7b in 2007.

The report, based on a survey of over 600 business executives based in East and Southeast Asia, including close to 70 from Singapore, revealed that Singapore executives are firmly focused on the opportunities in Asia. The top three most significant international business locations for Singapore companies are Malaysia (54%), mainland China (46%) and Thailand (42%). They are also more confident of the growth prospects in Asia than their Asian counterparts. About twice as many Singapore executives, compared to the Asian survey average, view Mainland China (Singapore 42% vs. Asia 20%), Indonesia (Singapore 33% vs. Asia 16%) and India (28% vs. Asia 16%) as offering the best growth opportunities in the next three years.

Max Loh, Singapore Country Managing Partner at Ernst & Young LLP, says: “As companies from both inside and outside Asia continue to target the region, Singapore companies must be prepared for increased competition for assets, resources, talent and customers as they set sights on the opportunities in Asia. Companies have to continually raise their game or risk losing ground to new competitors. This is particularly pertinent given the country’s small domestic market and its reliance on open trade.”

Executives to improve management skills and knowledge in operating abroad
In internationalizing their businesses, there are several areas where Singapore executives feel less optimistic about their abilities than their Asian counterparts. Fifty-two percent of Singapore respondents believed that making corporate culture more international is the most critical change needed for their international plans to succeed (vs. Asia 42%). Only a quarter (25%) thought that their top management has an international outlook in their decision-making (vs. Asia 34%). “This is surprising if you consider that Singapore companies are likely to have more experience in internationalizing their business compared to their Asian counterparts. But this also suggests the steep learning curve that other Asian companies need to climb as they venture abroad,” Max adds.

Relatedly, 51% of Singapore executives felt that their organization’s management needed more insights into local cultures and ways of doing business in order to excel in the global marketplace. The other top two areas in which management is perceived as needing to improve their knowledge are the strategic hiring process for international markets (45%) and ways to incentivize employees in different markets (45%).

Specifically for talent management, Singapore executives are noticeably less confident of their company’s abilities compared to their Asian counterparts. The greatest disparity is seen in recruiting and retaining key global talent, where only 22% of Singapore executives think their companies are very effective in doing so – 12 percentage points below the Asian survey average of 34%. Other talent aspects where Singapore companies are seen to be least effective are motivating employees from different cultures, and evaluating and rewarding high performance across different markets.

“The challenge for companies is in combining local relevance with global scale when designing their organizational structures and business operating models. Management executives need to have experience in different markets, as well as the ability to understand and reconcile different cultural norms, and combine local and global talent seamlessly. Much attention has been paid to ensuring compliance with financial standards and tax laws – and rightfully so given the increasingly complex regulatory landscape worldwide – but this needs to be complemented with an improved understanding of the cultural nuances and people dynamics of doing business,” Max explains. Indeed, only 10% and 15% of Singapore executives felt that management needed improved knowledge of regulatory compliance in global markets, and international accounting and reporting standards, respectively.

The survey also found Singapore companies more willing to cede control to local operations, particularly within Asia. Thirty-seven percent of Singapore respondents said their international operations in Asia have a large degree of autonomy; a quarter say it varies. Despite this, only 3% of Singapore executives viewed their companies as being effective at empowering local decision-making, compared to 10% across Asia.

“Tight control from the center will be increasingly counterproductive in terms of speed and agility in decision-making as companies expand into multiple markets,” Max comments. “Singapore companies recognize the benefits – and challenges – of empowering local operations. Those who are able to devolve greater autonomy to local markets within defined parameters and risk frameworks, and derive economies of scale through centralization of core support functions such as finance, HR and IT without losing sight of local needs, will have better chances at succeeding.”

“To sustain any expansion strategy, it is important to improve performance in all parts of the business. Ultimately, it’s about improving the bottom-line and this may not always keep pace with the growth in revenue and sales as a result of new market entry. As Singapore companies’ investments mature, doing more to enhance efficiency and productivity will matter to their profitability in the long run,” concludes Max.