Risk Analysis Of Singapore Economics Essay

Singapore is currently one of the most economically developed states in the South East Asia. For a firm considering a direct investment in Singapore, a risk analysis to ensure the element of safety of investment is necessary.

Economical Risk.

Economic risk is the probability that economic activities of a country could cause severe changes to a country’s business environment which could negatively affect revenue, as well as short and long term targets of companies.

Economically, Singapore is highly developed and market based, with a history of being a free trading zone, where imports and exports are carried out without paying import duties. The Singapore economy is heavily dependent on the export industry, as well as refining of imported goods (usually raw goods). According to “The Globalization Index 2009” report, the ‘movement of goods and services in Singapore relative to total output outshone all comers, making it the most open and the most globally connected economy’. This, however, has a few downsides, namely that during this period, Singapore exports fell vastly, which led to the downfall of the GDP in the first quarter.

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In 2007, the World Bank rated Singapore to be the best place in the world to do business for the second year running. Also, Singapore has been rated number one in terms of being a logistics hub by the World Bank, reason being its extremely efficient and reliable supply chain along with competitive costs.

In Singapore, foreign investment and the presence of MNC’s (Multi National Corporations) account for more than two-thirds of the manufacturing output and direct export sales. Some sectors are still under the government or corporations linked to the government. More than 3,000 MNC’s are a part of Singapore’s economy currently.

Two major industries which drive the Singapore economy are manufacturing, and financial business services, which accounted for a total of 48% of Singapore’s GDP in the year 2000.

According to the US Census Bureau report 2008, Singapore ranks at number 15 on the list of the top trading partners on the United States of America, with a total of $16.3 billion dollars worth of trade (imports and exports combined).

Singapore has a lot of positive economical aspects that are appealing, for example the low level of corruption, the low unemployment rate, stability of prices, the strategic location it is in, etc.

Taking a wider approach, Singapore looks like an economically stable environment to invest in. However, it is very important to access factors such as the unavailability of raw materials and natural resources, being an important factor to consider before investment in any economical environment. As mentioned previously, Singapore suffers acute unavailability of raw goods and resources, which make it a risk for any organization considering investment.

Another major risk factor in Singapore is the relatively high-cost operating environment of the country. Cost cutting is mandatory for any organization that wants to survive in the business market, and Singapore operates in an environment that does not allow this. However, the country still attracts foreign investors from all over the world.

As of the 27th of July 2010, the exchange rate between an American dollar and a Singaporean Dollar was $0.73 = S$1 (One Singaporean dollar equals 0.73 American dollars).

Political Risk

Any company wanting to invest in a foreign country would first want to know the political stability and any risks that a country may face politically. Any perceived political doubt results in political risk. According to the Political and Economic Risk Consultancy, Singapore enjoys the lowest political risk in Asia

According to the Transparency International Singapore is one of the least corrupt countries in the world. Singapore follows democracy, and it has been politically stable since its independence, which has given the country better business opportunities.

Because of its strict laws and penalties, including caning (whipping) for violence, drug abuse, vandalism, rape etc, as well as a compulsory death statement for murder, crime rate in Singapore is low. This however becomes a cause of concern for companies that want to invest in Singapore for illegal activities and business.

Singapore’s risk is at an ultimate low, another reason being the dominance of a single political party, hence no inter-party conflict.

Politically, Singapore is a relatively calm country and poses minimal risk to any company considering a foreign direct investment.

In a Meeting with the Finance Minister – Singapore

Singapore has a widespread reputation of being a relatively stable country. From the above risk analysis, we can deduce the following points.

Singapore is one among the developed countries of the world.

Singapore is a free trade zone.

Singapore has one of the most open economies in the world.

Singapore is the best place to do business in the world.

Singapore encourages foreign investment.

Singapore has the least level of corruption in the world and a very low level of unemployment rate.

Singapore suffers lack of raw goods/materials.

Singapore has a relatively high cost of living compared to general standards throughout the world

Singapore has a stable exchange rate with the American dollar.

Singapore has low political risks, because of its strict punishments for offences.

Singapore has no enmity with any of its neighboring countries.

Singapore is a single party country, hence no political party conflicts.

In my opinion, the economical and political factors assessed above show a favorable environment for foreign business. However, I would like to suggest a few points to better the business environment.

Increasing the funds allocated to security, health and education: These three factors are an important consideration for a firm wanting to invest in any country. The concentration of efforts and funds towards these three projects will also increase the goodwill of the country.

High cost of living: This comes as a major issue for people who wish to invest and reside in the country together. Initiatives must be taken to avoid the increase of prices of goods in the country.

Differentiation of low end and high end earners in terms of tax payments: As mentioned in the previous point, the cost of living of Singapore is high. Therefore it is mandatory to differentiate tax payments for low and high end earners. In my opinion, I would like to suggest a decrease in the taxes for low end earners, and a compensational increase in the taxes for the high end earners.

Increase on the taxes for “Sin” products like cigarettes, alcohol, drugs, etc, firstly to reduce the intake of such harmful substances, and secondly for the goodwill and reputation of the country.

Encouraging foreign direct investments by simplifying the registration process of a firm wishing to invest. This reduces levels of bureaucracy in the process of registration. For any firm considering a foreign investment, it is always a let-down to see bureaucracy in a government sector. One way of reducing bureaucracy, in my perception, would be to have a one stop registration counter where serious investors can get all information and documentation that they need without the hassle of visiting multiple offices/people.

Reduction of corporate taxes (if necessary): reduction of taxes for foreign investors will encourage more foreign investment in the country.

Conclusion

Thus, the analysis for the potential of doing business in Singapore ends here. As we can see, Singapore is potentially very good for conducting a foreign business. With the good points being the strategic location, stable economy, and stable political environment among the many others, we can expect any entrepreneur with a good idea to succeed with flying colours.

References

http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_484164.html

http://business.asiaone.com/Business/News/SME%2BCentral/Story/A1Story20070926-27084.html

http://app.mfa.gov.sg/pr/read_content.asp?View,8743,

http://en.wikipedia.org/wiki/Economy_of_Singapore

http://www.census.gov/foreign-trade/statistics/highlights/top/top0804yr.html#total

http://www.tradechakra.com/economy/singapore/political-risk-in-singapore-23.php

http://www.transparency.org/policy_research/surveys_indices/cpi/2009