Singapore Investment Report 2020 — A Base, Not a Market

Singapore's role in Asian capital flows is disproportionate to its domestic economy, and analysing it by domestic market size misses what it does.

Its function is as a base. Regional funds are domiciled there. Regional headquarters are located there. Regional deals are structured under its law and arbitrated in its courts. Companies operating across Southeast Asia are frequently incorporated there while their operations are elsewhere.

What is being sold is infrastructure, and it is worth being specific about the components because they are the actual product:

• Legal certainty. Contracts are enforceable, courts are predictable, and commercial law is well developed. For an investor deploying across markets with varying legal predictability, structuring under Singapore law is a risk reduction that costs little.
• Financial infrastructure. Banking, fund administration, custody, audit and legal services at international standard, with the specialist capability that regional transactions require.
• Talent. A concentration of people with regional experience — investors, operators, advisers — and immigration arrangements permitting their employment.
• Connectivity. Physical and digital, allowing regional operations to be managed from one location.
• Regulatory quality. Predictable, internationally aligned, and administered competently.

None of these require domestic market scale. They are services sold to capital and companies whose activity is elsewhere.

The measurement consequence is significant and frequently missed. A large share of venture funding reported as Singaporean is deployed regionally — into Indonesia, Vietnam, the Philippines and elsewhere. National funding figures therefore overstate the domestic ecosystem and understate the region's, because the capital is counted where it is domiciled rather than where it is deployed.

2020 tested the base function, and it performed well. Fiscal capacity allowed a policy response unavailable to most neighbours, and the infrastructure proved more valuable in disruption than in normal conditions.

What a base actually provides

The components deserve enumeration because they explain why the function is difficult to replicate.

Legal certainty is the foundation. A regional investor deploying into several markets faces varying degrees of legal predictability. Structuring the investment through a Singapore holding company, under Singapore law, with disputes arbitrated in Singapore, converts uncertain legal risk into predictable legal risk. The underlying asset risk is unchanged; the contractual risk is reduced. That is worth paying for, and the payment is a small fee relative to the risk reduction.

Financial infrastructure matters because regional transactions require specialist capability — fund administration for multi-jurisdiction structures, custody, audit to international standards, and legal advice on cross-border transactions. This capability concentrates where the volume is, and the concentration is self-reinforcing.

Talent concentration is the component most often underestimated. A regional investor needs people who understand multiple markets. Those people are scarce, and they cluster. Once clustered, the cluster attracts more, because that is where the relevant jobs and relationships are.

Regulatory quality underpins all of it. Predictable, competent regulation reduces the cost of operating and the risk of adverse surprise.

A base sells certainty about the wrapper, not about the contents. The asset risk is unchanged. What changes is everything around it — and for a portfolio deployed across many jurisdictions, that is most of the controllable risk.

Why the position is durable: each component reinforces the others, and all of them take decades to build. A jurisdiction seeking to replicate it must build legal precedent, a service industry, a talent cluster and a regulatory reputation simultaneously — and the talent cluster will not move until the rest exists.

Why national funding figures mislead

The measurement problem is worth stating precisely because it affects every regional statistic.

Venture funding is conventionally attributed to the location of the company receiving it. A company headquartered in Singapore that raises capital is recorded as Singapore funding.

But a substantial share of Singapore-headquartered companies operate primarily elsewhere. A company serving Indonesian consumers, with its engineering in Vietnam and its headquarters in Singapore for structuring reasons, is recorded as Singaporean.

Similarly, funds domiciled in Singapore deploy regionally. A fund raised and administered there investing across Southeast Asia is a Singapore fund making regional investments.

The consequences for anyone reading regional data:

• Singapore's funding figures overstate its domestic ecosystem, sometimes substantially.
• Other markets' figures understate theirs, because capital deployed into them may be recorded elsewhere.
• Cross-market comparison is distorted in a consistent direction.
• The distortion is largest where structuring incentives are strongest — which is to say, for the largest and most institutionally-funded companies.

The correction requires looking at operations rather than domicile: where are the customers, the revenue, the employees. Some data providers attempt this; most do not, and the difference between the two approaches for Southeast Asia is material.

This is not a criticism of Singapore. Companies domicile there for sound reasons and the structuring is entirely legitimate. It is a caution about a specific measurement artefact that affects how the region's markets are compared — and it is the single most useful thing to know when reading Southeast Asian venture data.

Fiscal capacity in 2020

Singapore's 2020 response illustrates the fiscal capacity argument the regional report makes, and it is the clearest regional example.

The capacity existed because of accumulated reserves, low debt in net terms, and a strong currency with full market access. This allowed support at a scale most regional neighbours could not contemplate — not because their policymakers judged differently, but because the capacity was not available.

The response included wage support to preserve employment relationships, direct business support, and household transfers.

Why preserving employment relationships matters more than the headline transfer:

• A preserved relationship is faster to restart than a new one. The worker knows the job; the employer knows the worker.
• Business failure is largely permanent. A business that closes does not usually reopen, and its accumulated capability is lost.
• Skills atrophy during unemployment, and long unemployment spells have persistent effects on earnings.

The result was that Singapore's economic damage was more cyclical and less structural than in economies without the capacity to respond at that scale.

The general point, which the regional report makes and this illustrates: the policy response was not a choice between more and less. For most economies it was a choice between what was affordable and what was needed. Fiscal capacity accumulated in good years is what determines the options available in bad ones — which is an argument for the reserves that look like an unnecessary cost for decades at a time.

The base proved more valuable in disruption

The most informative finding of 2020 is that the base function performed better under disruption than it does in normal conditions, which is unusual and is strong evidence for its durability.

Why disruption raises the value of a base:

• Legal certainty matters more when contracts are stressed. In normal conditions, contracts are performed and enforceability is theoretical. When counterparties fail to perform, an enforceable contract in a predictable jurisdiction is worth a great deal.
• Financial infrastructure matters more when transactions are difficult. Fund administration, audit and banking that continue functioning through disruption have value that is invisible when everything works.
• Regulatory predictability matters more when rules are changing. An economy making policy changes competently and communicating them clearly reduces the cost of adapting.
• Concentration matters more when travel is restricted. A regional operation manageable from one location has an advantage when moving between locations is difficult.

The evidence was in behaviour rather than in statements. Regional headquarters functions consolidated rather than dispersed. Fund domiciliation continued. Companies structuring regional operations continued to choose the same base.

The durable observation: infrastructure that is invisible in good conditions is what is valued in bad ones. A base's worth is demonstrated in disruption, which is precisely when it is hardest to build an alternative — and which is why the position, once established, is difficult to displace.

Why a base function is hard to replicate

Several jurisdictions have attempted to build what Singapore provides, and the difficulty is instructive because it explains why the position is durable rather than merely current.

The components must exist simultaneously. Legal certainty is worth little without the financial services to use it. Financial services do not locate where there is no volume. Volume does not arrive without the talent to service it. Talent does not move without the jobs, which do not exist without the volume. Each component requires the others, which means a jurisdiction building one at a time never reaches the threshold.

Legal precedent accumulates rather than being enacted. A commercial legal system's value is substantially in the body of decided cases that make outcomes predictable. Legislation can be written quickly; precedent cannot. A jurisdiction with new commercial law has rules without the accumulated interpretation that makes them reliable, and the gap takes decades to close.

Reputation is a lagging indicator. Regulatory quality is assessed on track record. A regulator that has behaved competently and predictably for thirty years has an asset that a competent new regulator does not, and cannot acquire faster than time passes.

Talent clusters are self-reinforcing and slow to move. People with regional expertise cluster where the relevant jobs and relationships already are. Moving a cluster requires moving enough of it simultaneously that the relationships survive the move, which is very difficult to engineer.

Switching costs protect the incumbent. Re-domiciling a fund, restructuring a group, or relocating a headquarters is expensive, disruptive and consumes management attention. The saving has to be substantial to justify it, and administrative cost savings rarely are.

What this implies for competitors: displacing an established base requires offering something materially better across the whole set of components, sustained long enough for the switching costs to be worth paying. Offering one component more cheaply is not sufficient, which is why the competition described in the 2022 Gulf report is a decades-long project rather than a policy initiative.

A base function is not a service that can be undercut. It is a set of mutually-reinforcing conditions, and a competitor must assemble all of them before any of them is worth anything.

What an allocator could act on

Separate domicile from operations before reading any regional statistic. Singapore's venture figures include companies operating elsewhere and funds deploying elsewhere. Reading them as a measure of the domestic ecosystem overstates it; reading other markets' figures without the corresponding correction understates them. This is the single most useful correction available for Southeast Asian data.

Look at revenue geography and employee location, not registration. A company with a small Singapore team and a large Indonesian operation is an Indonesian company with a Singapore holding structure, and its prospects depend on Indonesia.

Price legal certainty as a genuine risk reduction. Structuring a regional investment under a predictable legal system converts uncertain legal risk into predictable legal risk at modest cost. The underlying asset risk is unchanged, but for a portfolio deployed across jurisdictions with varying legal predictability, that is most of the controllable risk.

Assess fiscal capacity when assessing sovereign or quasi-sovereign counterparties in the region. The dispersion in 2020 policy response was a function of capacity, and capacity is observable in advance from free IMF data.

Expect infrastructure positions to be resilient when activity is not. Activity levels fall in a contraction; infrastructure positions generally hold, because the value of certainty rises when conditions are stressed and the switching costs do not fall. That asymmetry is the strongest evidence that a position is genuine infrastructure rather than a beneficiary of good conditions — and the 2024 Singapore report describes it being tested directly.

What 2020 established for Singapore

• The base function is the product, and analysing by domestic market size misses it entirely.
• The components — legal, financial, talent, regulatory — reinforce each other, which is why the position takes decades to build and is durable once built.
• National funding figures are distorted by domicile, which is the most important caveat when reading Southeast Asian data.
• Fiscal capacity determined the response available, illustrating the regional constraint.
• The base proved more valuable under disruption, which is the strongest available evidence for its durability.