Asian-tiger governments are steering their economies with a lighter touch – Innovation

FOR AN OPERATION that originated in Singapore, it was improbably grim and bloody. Last month Jack and 49 others boarded a transport aeroplane and parachuted onto an island. Their mission was simple: kill or be killed. Jack picked up grenades and worked his way to an abandoned factory. He crouched for safety, thinking he had escaped detection. He was wrong. After a hail of bullets, silence descended. Jack had once again failed to pass level one.

Welcome to Free Fire, one of this year’s most downloaded fighting games for phones. Its developer is Sea Group, an internet company founded in Singapore a decade ago, now worth $17bn. As well as its hit game, the group also has an e-commerce app, Shoppee, which is far more popular in South-East Asia than Amazon. Its success reflects an important shift in the tigers’ economies.

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During their boom years, many of their biggest companies were outgrowths of government policy. South Korea’s chaebol were showered with cheap credit and tax breaks. Taiwan’s semiconductor champions were spin-offs from an official research institution. Hong Kong’s tycoons cultivated close ties with officials and benefited from its land policies. Singapore’s biggest firms were ultimately owned by the state.

Sea represents something else. Its success has few direct links to government policy. Singapore’s technocrats, the authors of many detailed economic blueprints, presumably never dreamt of a multiplayer fighting game that includes such characters as a beauty queen turned arms dealer. Lee Kuan Yew would have been unamused. Officials today are grateful.

Industrial policy was a big factor in the tigers’ take-off. Even the International Monetary Fund, traditionally a sceptic, published a lengthy paper this year about the success of their government-led models. But what works for a developing country does not necessarily help a wealthy one. In the 1970s, the tigers could follow others. South Korea’s focus on heavy industry borrowed liberally from Japan. They could also license advanced technology, as Taiwan did in its semiconductor sector. And they could poach researchers.

Progress won’t drive itself

Now the challenge is different. When officials and entrepreneurs look ahead, they see only the mists of the future. It might sound clever to develop national strategies for artificial intelligence or quantum computing. But how? There is no technology to copy because it has not been created yet. Genuine innovations are inherently difficult to spot in advance. So the game is more about creating the right conditions for companies to press ahead and to seize on breakthroughs when they arrive.

The tigers’ plans these days can sometimes sound like old-fashioned industrial policies. President Tsai Ing-wen in Taiwan has her “5+2 Innovative Industries Plan”, eyeing sectors such as green energy and smart machinery. Singapore has its 23 Industry Transformation Maps, covering everything from food manufacturing to aerospace. South Korea aims to invest 30trn won (more than $25bn) over five years in eight emerging industries, from artificial intelligence to autonomous vehicles.

But look a little more closely, and the difference with the schemes of yesteryear becomes clear. These are not top-down exercises in planning but rather the outcome of deliberations with companies and experts. And the point is not to recommend subsidies for this or that sector but rather to work out what building blocks are needed. “The process of developing the plan was just as important as the final product,” says Gabriel Lim, permanent secretary of Singapore’s Ministry of Trade and Industry.

Some of the elements are obvious: good infrastructure, from ports to internet; openness to trade; highly educated workforces; and high spending on research and development (see chart). But the tigers also have innovative ways to promote innovation.

The big decisions these days are made in corporate boardrooms

Taiwan has one of the world’s most robust frameworks to encourage lending to small- and medium-sized enterprises (SMEs), the kinds of firms that have ideas but few resources. It combines a centralised information-sharing system about company performance with a menu of credit guarantees, giving banks more confidence. “When I explain our system to bankers in other countries, you can see them salivate,” says Lee Chang-Ken, president of Cathay Financial Holdings, Taiwan’s largest financial group. Loans to SMEs now account for 64% of bank loans to private enterprises in Taiwan, up from 41% in 2005. Singapore has created a large demonstration factory that gives SMEs access to state-of-the-art 3D printing and robotic equipment. Similar facilities exist in Hong Kong. If an entrepreneur has a brilliant idea, they no longer need a giant dollop of capital to bring it to life.

Nevertheless, the tigers’ officials also know their limits. The big decisions these days are made in corporate boardrooms: Samsung’s bet on foldable screens; TSMC’s huge investment in capacity in Taiwan; the rise of startups like Sea in Singapore; the Hong Kong Stock Exchange’s quest to remain Asia’s premier financial market (even if its bid for the London Stock Exchange was ill-fated). Economic technocrats now lead from behind.

The tigers have also started to concentrate on the parts of their economies that remain far behind the technological frontier. Despite their flair for manufacturing, their service-sector productivity is little more than half that of America, according to some estimates. Part of the reason is the tyranny of small markets: a retail chain in a country of 6m people is more constrained than one in a market of, say, 1.3bn. But partly it is self-inflicted. South Korea imposes high regulatory barriers on its service and network industries—higher than in any other OECD member except Belgium.

Singapore has been the boldest in trying to whip its service sector into shape, from its restaurants to its construction firms. It has refined its gauges for measuring productivity (for example, floor area completed by a construction worker each day). It identifies promising companies and offers help: developing new business plans, say, or guiding them abroad to expand. Edward Robinson, chief economist of the Monetary Authority of Singapore, believes that rich Asian countries ought to have an advantage in modernising their service sectors. Given that so many of their people are trained for high-tech work, they are well-placed to deploy digital tools to serve the population more efficiently.

Not keeping up

In Hwaseong, 35km south of Seoul, a newly built village enjoys 5G network speeds that would be the envy of any city. Visitors will find other essential amenities, such as a school, a car wash and a restaurant offering chicken’s feet. But lest it sound too appealing, be warned: the buildings are all fakes. The counterfeit town, built by the Korean Automobile Testing and Research Institute, is used to test autonomous vehicles, like the Kia car that successfully completed a circuit one recent afternoon. Reaching speeds of almost 70kph, the car coped with flashes of dazzling sunlight and road-markings that can confuse computer vision. The technician in the driver’s seat kept his hands on his chest as the wheel turned itself.

South Korea has some of the best infrastructure in the world for autonomous vehicles, including world-class chipmakers and carmakers, as well as a growing 5G network. The government is supportive, permitting tests on real roads for vehicles that prove themselves at test sites. Why then is South Korea ranked only 13th by KPMG, a consultancy, on a list of countries best prepared for autonomous vehicles?

One reason is the country’s ambivalence towards other related technologies, such as ride-sharing apps. A popular version, Kakao Mobility, was vociferously opposed at rallies in Seoul by the drivers of traditional taxis. In protest at the emergence of such apps, four older drivers have set themselves on fire.

Innovation, though glorified by businessmen and policymakers, adds nothing to an economy’s productivity until it is widely adopted. As Paul David of Stanford University long ago pointed out, it was not until the 1920s, four decades after Thomas Edison’s first power station, that manufacturers embraced a killer app for electricity, designing factories to accommodate dynamo-powered assembly lines.

South Korea’s wariness towards ride-sharing apps highlights the infrastructure in which the tigers are most lacking: well-functioning social-security systems. The key to progress in a new technology, like autonomous vehicles, may not be a better 5G network but a better pension system. Without a cushion for those left behind by technological progress, it is harder to marshal support for that progress in the first place.

The tigers have always been good at mobilising resources quickly. They are becoming better at allocating them creatively. But as recent signs of social discontent attest, some of them now struggle to muster public support effectively.■