The Experience of Australian Small and Medium Sized Enterprises in Singapore

An increasing number of small and medium sized enterprises are engaging in overseas operations. This paper reports on research carried out on 18 small Australian businesses which have established an on the ground presence in Singapore. This constituted approximately half of the Australian small and medium sized enterprises which were identified as operating in Singapore. It was found that Singapore was not chosen to be their main market but rather to act as a base in which to penetrate the region. Most of these firms received no support from government agencies in setting up their operations, many finding the processes too cumbersome to be worthwhile. A number of the firms were induced to set up by the availability of a local manager to operate the business. Over half the firms used local rather than expatriate managers. Two major problems encountered in employing local staff were the tendency to job hop for small increments in pay and a lack of long term commitment to the employer. A number of respondents also found it difficult to adapt to what they termed the "trading mentality" of many Singaporeans. This was the tendency to think in terms of price and quantity rather than the suitability of the goods for the purpose. Many businesses found that the Singapore market was not as open as they thought with many cliques being formed in industries which attempted to exclude outsiders. A clique was also formed by Singapore government owned companies and a number of respondents avoided government tendering because of the tendency for the work to be given to other government owned companies. The implications of the above findings are discussed and the relationship to the literature is explored. INTRODUCTION Recent changes in the world economy have included deregulation of major industries, the reduction and dismantling of trade barriers and advances in communication technologies. These have changed the way we • view and interact with the world. The world is increasingly be seen as a global market place where companies are no longer insulated from international forces. Many domestically oriented firms are finding that their home markets are no longer sheltered from international competition. Others are finding that international markets are providing sources of growth that otherwise would not be available to them. This is leading to increasing rates of internationalisation,wi th companies being urged to "think local, act global" and to be part of the "global village" (Parker 1999:235). FOREIGN DIRECT INVESTMENT AND AUSTRALIAN Sl\·IALL BUSINESS: A BRIEF ACCOUNT The process of the globalisation ofbu siness has attracted considerable academic interest. See for instance Ohrnae (1990) and Oesterle (1997). One of the ways in which firms may internationalise their activities is by undertaking foreign direct investment (FDI). Foreign direct investment is defined as " . the investment of capital in an enterprise that gives the investor a significant influence over the management and operation of that enterprise" (BIE 1995:2). It usually involves the direct overseas transfer of capital and may include transfer of management skill, technological knowledge or intangibles such as brand names. There are significant management implications for firms undertaking FDI. Rather than a passive shareholding, FDI involves the making of major management decisions such as those involving strategy, staffing and often day to day management decisions. Most academic studies ofFDI have concentrated on large countries of the so-called triad nations of North America, Europe and Japan (Ohmae 1990, Hirst and Thompson 1996). As a traditional importer of capital, Australia is latecomer to making major overseas investments. It is only since 1980 that Australian firms have been active participants in this activity (BIE 1995a; BIE 1995b; Marsh 1996). By 1999, Australian investment abroad had reached A$258 billion. (ABS Cat No 5363.0). Most of this investment has been directed at towards other English speaking countries with the United States, United Kingdom and New Zealand accounting for 59% of the total (Marsh 1996; PortJackson Partners 1992). Most of the literature in relation intemationalisation of business has been directed towards large corporations, with authors such as Bartlett and Ghoshal (2000) promoting globalisation strategies. However, small and medium sized enterprises (SMEs) are increasingly looking towards overseas markets as a form of expansion (Haati, Hall and Donkels 1998; Neilsen, Pedersen and Vestergaard, 1999 and Bell, 1995. For the purposes of this study we have defined a small enterprise as one with a global workforce of less than 20 employees in the service sector and less than 100 in the manufacturing sector. Medium sized enterprises have a global workforce of between 20 and 500 in the service sector and between 100 and 500 employees in manufacturing (ABS 1993-94). These companies have grown in importance in the intemationalisation of the Australian economy over the last ten years (Australian Department ofIndustry, Technology and Commerce, 1992; AMC McKinsey, 1993; Philp 1998). As most research has been directed towards larger corporations, not a great deal is known about the motivations or actions involved in the internationalisation of the SME sector. However useful research in relation to Australian SMEs overseas may be found in DFAT (1995). It is the aim of this paper to contribute to knowledge in this area. AUSTRALI. ~~ BUSINESS AND SINGAPORE The geographic proximity of Australia and South East Asia has not led to significant investment flows out of Australia to the region. Various factors such as historical ties and cultural and commercial familiarity may explain why investors have not made Asia a priority (BIE, 1995b; Yetton, Davis and Swan, 1992). In making this observation, it should be noted that up until the independence of South East Asian countries, Australian companies were active in the region, particularly in mining. Subsequent to independence, many of these investments were either taken over or discouraged by the host governments. It is only since the early 1980s that a new wave of investment has taken place. Between 1985 and 1990, Australia's outwards FDI directed towards ASEAN countries grew at an annual rate of nearly 40% (BIE, 1995a). During the 1980s, the region held 39% of Australian FDIbu t this proportion fell sharply to 7.5% by the early 1990s (BIE 1995a). One of the reasons given for failure of investment in the ASEAN region to match the investment growth in other parts of the world has been that the perception that the risks outweigh the rewards. (Port Jackson Partners 1992). Of the ASEAN countries, Singapore is the major recipient of Australian FDI. Singapore received 25% of the total outward Australian FDI in 1982/83 and 9 I% by 1990/9 I. This makes Singapore the largest recipient of Australian FDI in the ASEAN region (BIE 1995a). The Singapore government has actively promoted the country as an attractive investment destination (TDB 2000). Factors such as an open economy, political and financial stability and its centrality and strong links with the region are often quoted as "pull" factors for foreign investors (Weinberger, 1998). The Singaporean government also provides various incentives such as tax holidays and reduced tax rates for desired investors (Wong and Edward 1996). From the Australian side, the Australian government provides assistance to potential overseas investors through its AusIndustry program (AusIndustry 2000). GENERA TION OF RESEARCH QUESTIONS There has been little research as to why Australian SMEs would choose Singapore as a location for establishing an overseas presence. The "pull" factors noted by Weinberger (1998) and EEAU (1994) have often been quoted in relation to Singapore's advantage and are used to promote Singapore as an investment destination. However, against this, Singapore in relative tenus is an extremely small economy and at 3.5 million people, is an extremely small part of the South East Asian region. From a business proposition point of view, it would appear that better opportunities may exist elsewhere in the region. This has led to the following research question: ! Research question 1: Why do Australian SMEs want to establish a presence in Singapore? l Both the Australian and Singapore governments provide support for businesses undertaking FDI. The provision of these services consumes a large amount of public money, and questions as the effectiveness of this expenditure have previously been raised (Hooper 1991). This leads to the second research question: Research question 2: How useful have SMEs found the sources of support provided by the Australian and Singapore governments when investing in Singapore? The range of options available for SMEs to use, such as joint ventures and wholly owned subsidiaries, leads to the third research question: Research question 3: What type of ownership structure have Australian SMEs adopted when establishing a presence in Singapore? SMEs rarely have the management depth or the resources of larger corporations. Overseas operations are therefore likely to place a significant strain upon the management of the organisation. This leads to the generation of the fourth research question: Research question 4: What are the challenges Australian SMEs have experienced in managing their Singaporean operation. The issue of inter-cultural management is often raised as an ongoing challenge when managing in an overseas country. See for instance Trompennaars and Hampden-Turner (1997). This leads to the final