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This paper is concerned with employing cluster theory and Porter's Diamond to consider why certain locations are superior for some industries. It argues that it is important for there to be a strategic fit between what industries are assumed to seek and what that location can provide. The strength of this fit can be measured by employing we rename the Factor-Competitiveness Matrix. This approach allows the researcher, or a government agency, to understand exactly how local cluster conditions are valued and evaluated by companies within the cluster. We illustrate an application of the matrix by reporting on a sample of thirty-three participants in the contemporary Singaporean financial cluster. Literature suggests that one main benefit of clustering is the interaction between companies over and above their physical co-existence and so we report on the attitude of the same sample to thirteen commonly held views about cluster benefits
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Working Paper Series
Revisiting the Porter Diamond: Applying Importance Performance
Matrix to the Singaporean Financial Cluster
Adrian Kuah
John Day
Working Paper No 05/39
November 2005
The working papers are produced by the Bradford University School of Management and are to be circulated for
discussion purposes only. Their contents should be considered to be preliminary. The papers are expected to be
published in due course, in a revised form and should not be quoted without the author’s permission.


W O R K I N G PA P E R S E R I E S
REVISITING THE PORTER DIAMOND:
ABSTRACT
APPLYING IMPORTANCE PERFORMANCE
This paper is concerned with employing cluster
MATRIX TO THE SINGAPOREAN FINANCIAL
theory and Porter’s Diamond to consider why
CLUSTER
certain locations are superior for some industries.
It argues that it is important for there to be a
Adrian Kuah
strategic fit between what industries are assumed
Bradford University School of Management
to seek and what that location can provide. The
strength of this fit can be measured by employing
John Day
we rename the Factor-Competitiveness Matrix.
Huddersfield University Business School
This approach allows the researcher, or a
government agency, to understand exactly how
local cluster conditions are valued and evaluated
by companies within the cluster. We illustrate an
application of the matrix by reporting on a
sample of thirty-three participants in the
contemporary Singaporean financial cluster.
Literature suggests that one main benefit of
clustering is the interaction between companies
over and above their physical co-existence and so
we report on the attitude of the same sample to
thirteen commonly held views about cluster
benefits.
3

W O R K I N G PA P E R S E R I E S
INTRODUCTION
DIAMONDS AND CLUSTERS
This paper is concerned with employing cluster
A decade and a half ago Michael Porter (1990)
theory and Porter’s ‘diamond’ to consider why
posed a fundamental and challenging question -
certain locations are superior for some industries.
why do some nations succeed whilst others fail in
As pointed out by Martin and Sunley (2002), the
international competition? Whilst some have
diamond theory is the spatial manifestation of
found his arguments contentious and less well
clustering. The authors acknowledge that Porter’s
grounded in relevant economic theory than, say,
framework (1990) is contentious in that it seems
his five forces analysis -his work on international
to have as many supporters as detractors.
competition remains an important and compelling
However, it is an excellent organising framework
part of the academic landscape on competitive
through which to understand complex social
advantage. For this paper Porter’s Diamond is
phenomenon. In this paper, we reintroduce the
used as a model to organise our arguments and
Importance Performance Matrix (Martilla and
drive out our conclusions on practice and policy.
James, 1997) as a tool for actualizing the
important factor conditions in Porter’s Diamond
The unit of analysis that Porter focuses upon is
at the regional cluster level. This technique allows
not the nation itself at the macro level but the
the authors to ascertain what really matters to
firm and he argues that nations are most likely to
firms and executives who have chosen to be in a
succeed where their firms exhibit a favourable
particular clustered location. As such we are
diamond of national advantage which captures
focusing one part of the wider thesis.
the inter-relationships and interdependencies
between their innate factor endowments. Porter
We illustrate our arguments through a case study
makes one further crucial assumption that a
on the clustering of contemporary financial
nation’s most globally competitive industries are
services firms in Singapore. Apart from the
likely to be geographically clustered within that
intrinsic interest in considering this sector and
nation. As neatly captured by Martin and Sunley
country, the case highlights several issues with
(2002):
the application of Porter’s Diamond, namely, that
despite the worries of some critics, we can apply
“the competitive diamond is the driving force
the model to young, open economies; that we can
behind cluster development, and simultaneously
focus the arguments down to a practical level;
the cluster is the spatial manifestation of the
that it is the cluster that drives the outcome
competitive diamond”
rather than the firm or the nation; and that the
diamond is a viable framework. We hope that
Whilst clusters such as Silicon Valley, Route 128
others may consider that employing the
Boston and The City of London are vibrant
Importance Performance Matrix is a worthwhile
exemplars in practice, however, concentration
approach for other economic clusters. In this
alone does not make for a viable cluster. One
paper the data for demonstrating the application
needs to look inside the cluster itself and to pay
of the Importance Performance Matrix is taken
due regard to its history. Positive feedback,
from a small questionnaire survey undertaken in
strategic fit and the level of networking all
August 2003. Data was collected as part of a
contribute to how well a cluster functions. This
face-to-face interview, or we asked the
paper therefore concentrates on a particular
interviewees to forward the questionnaire to the
cluster - the Singaporean financial cluster and
most appropriate colleague.
uses the Importance Performance Matrix (Nielsen,
1983; Martilla and James, 1977) to consider
This paper proceeds by reviewing the literature on
particularly the issue of strategic fit. By
Porter’s Diamond and clustering and then
concentrating upon a single cluster this papers
introducing a contemporary case study on the
attempts to overcome two problems - the variable,
Singaporean financial cluster. We then use the
and complex, explanations that surround the
Importance Performance Matrix to see how, in
development and survival of clusters, and that,
practice, this cluster fulfils important cluster
one of the criticisms levelled at the Porter
conditions. Because it is the relationships within a
Diamond approach is that it too generalised an
cluster that generate their unique dynamics we
explanation when we seek to apply it across
briefly consider such. Finally, we draw the
nations (Davies and Ellis, 2000).
practical and theoretical lessons from this
approach.
Porter (1990) argued that the creation of such
competitive advantage does not happen merely
by chance. He contended that there are four key
4

W O R K I N G PA P E R S E R I E S
determinants that together constitute the
application of the Diamond in Ireland and the
‘diamond of national advantage’. The four
Netherlands respectively.
determinants are: factor conditions; demand
conditions; related and supporting industries; and
We now consider clusters, innovation and
firm structure, strategy and rivalry. Exhibit One
competitive advantage from essentially a
shows the elements of the basic model.
Porterian perspective, then draw on another
mainstream approach - ‘agglomeration’, and
It is not the purpose of this article to provide a
conclude by reviewing the work on positive
detailed critique of the Diamond, for readers
feedback which is at the heart of cluster
particularly interested in this debate then Oz
dynamics. Martin and Sunley (2002), Porter
(2001; 2002) and Davies and Ellis (2000) cover
(1998a:197; 1998b-c), Rosenfield (1997:4)
the wide spectrum of views from those academics
Roelandt and den Hertog (1999:9) Swann
who see the work as a simple and insightful
(1998:1) and Feser (1998:26) have all offered
framework with which to understand complex and
definitions of clusters or contributed to their
important competitive conditions through to
precise definition but from their, and other work,
those who see it as too simplistic an abstraction
one can discern three main elements.
of economic reality. In particular, contentious
debates have arisen as to whether the model is
Firstly, a cluster must consist of groups of
appropriate for small, open, less developed
associated and interconnected firms that are
economies as well as the extent to which the
linked vertically and/or horizontally through their
multinational structure of international business
commonalities and complementariness in
renders the model inappropriate.
products, services, inputs, technologies or outputs
activities. Secondly, clusters are physical
Some critics would argue that Porter shifts
proximate groups of interlinked companies which
between national and local, or industry specific,
can encourage the formation of, and enhances
competitiveness and places too great an emphasis
value creating benefits via their interaction.
on the role of home based companies when the
Lastly, co-location itself does not imply clustering
driving force is the multinational company (see,
when these associated clustering benefits like
Davies and Ellis, 2000; Dunning, & Lundan,
innovation, productivity, growth or other superior
1998). Other critics consider that culture is
competitiveness cannot be shown or described.
under-represented in the analysis and that a
‘double-diamond’ approach that places the
Porter (1990) defines clusters in the Competitive
Exhibit One: Porter Diamond
economy in its proper international context is
Advantage of Nations as being: groups of
preferable (Shaughnessy, 1996; Moon et al.,
interconnected firms, suppliers, related industries
1998). Clancy et al. (2001) and Brouthers et al.
and specialised institutions in particular fields that
(1997) provide interesting insights into the
are present in particular locations. Innovation,
EXHIBIT ONE: PORTER DIAMOND
Modified from: Porter, M.E. (1998), On Competition, HBS Press, page 325
5
Modified from: Porter, M.E. (1998), On Competition, HBS Press, page 325
critics would
that
between
industry
competitiveness
Davies
2000; &
Lundan,
under-
‘double-diamond’
context
(
1996;
(1997)
Ireland Netherlands
We

work
Rosenfield
Feser
5 of 34

W O R K I N G PA P E R S E R I E S
improvement and change is seen to be central to
synchronised with individual firm lifecycles, or
creating competitive advantage. Moreover
that as clusters mature, diseconomies of scale
competitive advantage is seen as encompassing
and/or group think set in and reduce the virtuous
the entire value system comprising the value
cycle. A detailed consideration of this is outside of
chains of the firm, suppliers, channels and buyers.
the scope of this paper but we should note the
The very strongest of competitive advantage often
obvious: both positive and negative lessons can
emerges from within a geographically localised
be drawn from clusters and that path dependency
cluster. Arthur (1990) noted that strong clusters
may not necessarily be sustainable for the long
tended to attract more firms and those regions
run. Thus the population of clusters will change.
with a strong innovative record have an advantage
Pouder and St John (1996), Martin and Sunley
in achieving more innovation: they become ‘self
(2002), Porter (2000:24) all consider inertia and
fulfilling’, that is path dependent. Baptisa and
group think in some detail and Swann and
Swann (1999) and Baptista et al (1996) argue
Prevezer (1998) consider the notion of lifecycle
that not only does a region that has an
stages more formally.
accumulation and concentration of knowledge
attract increased human capital but that as
A separate stream of thought can be traced
information exchange matures, and becomes more
through the work on so called industrial districts
informal and intangible that the spread of
or agglomeration externalities. This started with
knowledge becomes limited outside of that area.
Marshall (1890) who in his book Principles of
Of course clusters are dynamic in their character
Economics characterised ‘concentration of
and so it is not surprising that innovative activity
specialised industries in particular localities’ that
and output are positively correlated with new firm
he termed as industrial districts. As such they
entry and productivity growth in the cluster.
exhibited three features: external economies in
the ready availability of skilled labour; the growth
Both Oakey (1985) and later Porter (1998c)
of supporting and ancillary trade; and the
considered how the boundary would be set for a
specialisation of firms in different stages and
cluster and in essence this would depend upon
branches of production. Marshall (1890) argued
the nature of the linkages and complementarities
that once localisation and specialisation processes
across the industries and institutions that are the
had got under way, it became cumulative and
most important for that industry in its search for
socialised in that locality. Although he had
competitiveness. Oakey (1985) argues that for
described the phenomenon and acknowledged
Silicon Valley not only is there the advantageous
industrial districts as an integral feature to
infrastructure, but also because transactions and
industrial organisation, he did not provide any
benefits are of high value and transportation
explanation on how and why it started in certain
costs are relatively small for the consumer that
places and not others. The three features
there is no benefit to the consumer in seeking
identified above later became core components of
particularly local (to them) suppliers - so firms
the Porter Diamond.
cluster rather than scatter. Porter (1998c)
considers also rather wider clusters and cites
In the urban economics literature we see similar
examples of “a pharmaceutical cluster straddles
arguments develop, for example Evans (1985) has
through New Jersey and Pennsylvania in the US.
three drivers: economies and cost reductions as
Similarly, a chemical cluster in Germany crosses
firms locate near to one another; customers thus
over into the German-speaking part of
being able to reduce their search costs through
Switzerland”. Oakey (1985) noted that electronics
compact comparison ‘shopping’; and customers
suppliers would lie within a 50-km radius
being drawn to an area because of its reputation.
encircling the firm, whilst May et al (2001) noted
Jacobs (1969, 1984) argues for location
in the Hi-Fidelity cluster in U.K. suggested a 50-
externalities resulting from geographical
mile range for this proximity.
agglomeration within the same industry and
urbanisation externalities arising from the
Whilst one tenet of cluster theory is path
agglomeration of firms in different industries. One
dependency, it has to be noted that clusters are
explanation for the growth of great cities such as
not consistently successful, for example, it is only
Manchester or London would be that customers
in 2005 that investment returns in Silicon Valley
are able to obtain almost everything from one trip
are recovering from the 2000 downturn.
to the city centre.
Explanations could be that even dynamic clusters
are not immune from the economic cycle; that the
Crucially, it is not just the physical co-existence of
natural development cycle of the cluster is not
business - it is knowledge spillovers - formal and
6

W O R K I N G PA P E R S E R I E S
informal, tangible and intangible that drive the
same industry; to measure and compare
competitiveness of the cluster. In short, such
performances because local rivals share general
spillovers are a broader concept than traditional
circumstances. Companies within clusters have
agglomeration externalities. Rocha and Sternberg
intimate knowledge of their suppliers’ costs and
(2005) differentiate clusters from industrial
managers are able to compare costs and
agglomerations by the very existence of these rich
employees’ performance with other local firms -
interpersonal and interfirm associations. Romer
this is also a result of close working relationship
(1986, 1990) and Baptista (1996) bring into
with each other.
focus the notion of the crucial role of externalities
or spillovers and this is at the heart of Porter’s
Proximity improves communications and
approach. So Romer (1986, 1990) discusses the
relationships with the suppliers as well. It could
earlier works by Marshall (1920) and Arrow
induce instantaneous support from the supplier to
(1962), and concluded that MAR externalities
the incumbent firm like debugging and
(Marshall-Arrow-Romer) have positive influences
installation even on short notices during night
on firms’ growth as knowledge accumulated by
breakdowns. Saxenian (1994) noted that joint
one firm would help the technology evolve in
developments with the suppliers were common
other firms. Industries that are regionally
during the start-up phase of Silicon Valley. Porter
specialised would benefit from the within-cluster
(1998c) also observed that a well-developed
transmission of knowledge and therefore should
cluster provides an efficient means of obtaining
grow faster on the whole of being together
important input linkages such as a deep and
(Baptista, 1996). In practice spillovers resulting
specialised supplier base located within the
from contact with other firms or institutions do
proximity. The importance of such input and
not simply influence technological innovation and
output linkages cannot be overemphasised in
productivity. They have a wider range of effects
defining the effects and advantages of the
such as altering the financing, marketing,
clustering phenomenon.
managerial and organisational practices of the
beneficiaries and through affecting firm growth
Positive feedback is seen to be playing a central
changing the nature of the market structure.
role in clusters (Baptista and Swann, 1999;
Knowledge spillovers arise from everyday contact,
Beaudry et al., 1998; Swann et al., 1998; Swann
networking through geographical proximity, as
and Prevezer, 1996). Because demand and supply
well as from formal arrangements such as joint-
conditions as well as non-market spillovers are
ventures and joint research work with Universities.
better in a cluster than in isolation (Martin and
The relationship between the firm and the cluster
Sunley, 1998) not only does this promote the
is bi-directional not only does the activity of
growth of incumbent firms but it also attracts the
individual firms define and shape the behaviour
entry of new firms. This growth and entry
of the cluster but individual firms benefit from
increases the intensity of agglomeration and so
being within the cluster. Many authors
promotes further growth and entry which begins
investigated into the rate of growth of the firm as
to accelerate once a cluster has reached a critical
a function of the strength of the cluster in which
mass (Pandit et al., 2001a). Porter (1998c) also
it is located and whether strong clusters attract a
acknowledged that the positive feedback loop
disproportionate number of new start-up firms
within a cluster and that the formation of new
(see, for example: Porter 1998c; Baptista and
businesses amplifies the benefits of clustering.
Swann, 1999; Beaudry et al., 1998; Cook et al.,
Other extraneous effects from this positive
1999; Pandit et al., 2001: a-b, 1999; Swann et al.,
feedback include a higher rate of productivity
1998; Swann and Prevezer, 1996).
growth (Henderson, 1986), more prolific
innovation (Baptista and Swann, 1999) and
Companies in vibrant clusters can tap into an
significant information and knowledge spillovers
existing pool of specialised and experienced
(Oakey, 1985). However, the feedback will not
capital resources, thereby lowering their search
remain positive indefinitely. Beyond some
costs and time wasted on the learning curve
saturation point, congestion and competition
(Porter, 1998c). On the other hand, vibrant
might slowdown the growth and entry of
clusters like Silicon Valley are able to attract
individual firms, and eventually even contributing
specialists to the cluster, who felt that they
to the decline of the cluster. This is suggested by
actually work for the cluster (via job hopping and
Porter and is consistent with the argument on a
cross sharing of resources) rather than for one
cluster life cycle theory advanced by Swann et al.
firm alone (Saxenian, 1994). Clustering makes it
(1998). Earlier work within the urban economics
earlier to benchmark against other players in the
field (Henderson, 1986) found strong evidence
7

W O R K I N G PA P E R S E R I E S
that industry location raises factor productivity
cluster theory and the Importance-Performance
and that being part of a cluster allowed
Matrix. If we are to understand competitiveness
companies to productively source for inputs;
at the cluster level then we need to be able to see
access information, technology and institutions;
into the often subtle and micro aspects of such,
and coordinate with other firms both horizontally
however we need to be able to strike off a
and vertically. For Porter it is such increased
balance for the reader between too little depth of
factor productivity that is, the created competitive
description and too much breadth. In this section
advantage.
we concentrate on some broad financial history, a
discussion of financial markets structure and then
In addition to the externalities associated with
focus down to banking through applying the
cluster strength, the dynamism of a cluster will be
Porter Diamond to the sector (Exhibit Three) and
influenced by a number of regional fixed effects or
then offer Exhibit Four as a ‘pen sketch’ of the
attributes. These fixed effects are attributes, which
economic history of the three leading domestic
influence the attractiveness of a cluster, but are
banking groups.
not themselves changed as the cluster expands or
contracts (Swann et al, 1998). A country could be
The clustering of financial services is sometimes
competitive in numerous attributes that are
thought to be less important than other clusters
important to businesses, such as the presence of a
in, say, biotechnology or industrial parks. This
strong government, stable financial institutions
might be because public bodies responsible for
and good transport infrastructure but not develop
developing clusters at the regional level simply
a viable cluster. One could argue that two drivers
see financial and business services as the
in particular determine the outcome. One would
backbone of industrial activities and thus ignore
be strategic fit - can the cluster exploit the existing
them as a cluster in their own right. However
factor conditions and from these leverage positive
those studies that have looked into financial
feedback. In this paper it is the first driver that we
services clusters (see, for example: Pandit et al,
consider in particular and through the use of the
2001a & b, Beaudry et al, 2001) have
Importance-Performance Matrix we attempt to
demonstrated that they display similar
measure=re and capture such a strategic fit
characteristics in terms of growth and entry of
(Exhibit Two)..
firms to other clusters in biotechnology,
computing and broadcasting. However, most of
THE SINGAPOREAN FINANCIAL SERVICES SECTOR
these studies were done at the macro-level and
The purpose of this section is to provide some
did not reveal much insight at what actually goes
context for our application of the Porter Diamond,
on in the cluster.
Exhibit: Strategic Fit and Importance Performance Matrix
EXHIBIT TWO: STRATEGIC FIT AND IMPORTANTANCE PERFORMANCE MATRIX
Nation’s Competitiveness
Firm / Industry Strategies
as provided by the
that are leveraged from
country and planned by
those location benefits that
their policymakers for
firms perceive as important
businesses
to themselves
Infrastructure
Technology Leadership
Science & Technology
Product/ Service Reliability
Skilled Human Resources
Cost to market
Government
Time to market
Domestic Economy
Other Winning Strategies
Internationalisation
STRATEGIC FIT
- where perceptions
meet and are
actualised
As evidenced by:
And demonstrated by:
The Importance-
The 13 key measures
Performance Matrix
of cluster benefits
8

W O R K I N G PA P E R S E R I E S
Singapore is a small country with little endowed
The U.S. Singapore Free Trade Agreement (USS
factor condition and has been keen to succeed as
FTA), signed on 15 Jan 2003, was a landmark
an offshore banking and financial centre since the
event that helped further develop financial
formation of this Asian Dollar market. With a
services in Singapore. At that time (actually 2001)
land area of 685.4 square kilometres and
two-way trade between the U.S. and Singapore
population estimated at 4.19 million in 2003,
totalled $33 billion and it was the 11th largest
Singapore has attracted many foreign banks and
U.S. export market worldwide. By then more than
institutions to set up operations over the last
1300 American companies had a presence in
three decades. In its own right, Singapore has a
Singapore, with about 330 of these having made
vibrant banking cluster with about 107 banks
Singapore their regional business headquarters.
(www.mas.gov.sg) and is the world’s seventh
Continuing globalisation can only bring about
largest holder of foreign currency reserves at
more opening up of free trade areas and
US$bn85.8 (May 2003). There are approximately
deregulation of financial services.
3.9 banks per thousand of the population. About
97% of these are foreign banks with most of
FINANCIAL MARKETS STRUCTURE
them involved in regional industrial investment or
The successful development of this regional
private banking activities.
financial centre resided in its market activities and
transactions and these included the: Asian Dollar
From the late 1960s, Singapore embarked on its
market; Asian Dollar Bond market; Money market;
development as an international financial centre.
Foreign Exchange market; Capital market, Stock
With sound financial and economic fundamentals,
market; Gold market; Future market and
favourable political and business environment,
Commodity Exchange.
skilled and highly educated workforce, good
infrastructure and telecommunications facilities,
The Asian Dollar market or offshore banking
and strategic location, Singapore had attracted
activities started in 1968 after Singapore’s
many reputable international financial institutions
successful bid against Tokyo and Hong Kong. The
over the years. The financial centre offered wide
Singapore Government offered incentives to the
ranging financial products and services such as
Bank of America to establish the Asian Currency
foreign exchange, derivative products, trade
Units (ACU) and deal with deposits in hard
financing, loan syndication, securities trading,
currencies (US dollars, Sterling, Japanese yen) to
specialised insurance services, capital markets,
non-nationals. Multinational corporations,
assets management, underwriting, and financial
commercial banks, other central banks and
advisory services, some of which were recognised as
wealthy individuals (non-resident) traded on the
world-class. In 2002 the sector contributed 12.3%
Asian Dollar market with tax-exemption benefits.
to GDP and it was one of the main pillars of the
The Asian Dollar Bond market resulted in 1971
economy (Economic Survey of Singapore, 2002).
and that attracted many international
organisations and national governments to issue
This financial services cluster has been both
Asian Bonds. The total amount of Asian Bond
actively supported and promoted by the Monetary
issued peaked in 1989 and 1993 at US$3.5
Authority of Singapore (MAS) for the last thirty
billion (Tan, 1999)
odd years since the first Asian Dollar market was
attracted to Singapore in 1968. In 1970,
Singapore had an efficient money market dealing
Parliament passed the Monetary Authority of
in short term funds and instruments such as
Singapore Act leading to the formation of MAS on
treasury bills, short-dated government securities,
1 January 1971. This Act gives MAS the authority
bills of exchange, and other commercial papers.
to regulate all elements of monetary, banking and
Total money market investments were S$17.0
financial aspects of Singapore. MAS’ Mission is to
billion as of the end of 2003. The capital market
promote sustained non-inflationary economic
in Singapore comprised longer-term corporate
growth, and a sound and progressive financial
securities (bonds and equities) and government
centre. Following other initiatives to widen and
securities.
harmonise MAS’ functions it now administers the
various statutes pertaining to money, banking,
Being a small country that was dependent on
insurance, securities and the financial sector in
trading with foreign partners, Singapore’s foreign
general. Following its merger with the Board of
exchange market was the world’s seventh largest
Commissioners of Currency in October 2002, it
holder of foreign currency reserve at US$ 85.8
has also assumed the function of currency
billion ending May 2003. Exchange control was
issuance. (www.mas.gov.sg).
lifted in 1978, following the floating of sterling in
9

W O R K I N G PA P E R S E R I E S
1972. Singapore has maintained its top position
futures in 1984. In 1998, trading on SIMEX was
amongst the top four global foreign exchange
very active with a volume of 27.86 million lots
markets for the tenth consecutive years since
(Tan, 1999). In December 1999, the Singapore
1992, after the UK, the US and Japan. The
Exchange (SGX) was created resulting from the
average daily volume of foreign exchange trading
merger of the SES, SEADAQ and SIMEX. The
in Singapore for April 2001 was US$101 billion
Rubber Association of Singapore Commodity
(BIS, 2001). Singapore also ranked 4th in the
Exchange (RASCE), privatised in 1992, was
Over-The-Counter (OTC) Foreign Exchange
renamed the Singapore Commodity Exchange
derivatives turnover. Exhibit Three gives some
(SICOM) in 1994 to incorporate trading in other
background detail on the leading overseas and
commodity futures using a computerised network
domestic banks. Players in the foreign exchange
linking Kobe, Tokyo and London on rubber and
market were mainly commercial and merchant
coffee futures respectively.
banks, ACUs, money brokers, and companies
managing a multi-currency portfolio.
Singapore has consistently maintained its top spot
amongst the world financial markets as a result of
The Stock Exchange of Singapore Limited (SES)
the contributions made by the strong presence of
started in 1973 incorporated the Stock Exchange
the world leading financial institutions and their
of Singapore Dealing and Automated Quotation
conduct of sophisticated financial transactions. In
(SESDAQ) from 1987 for smaller companies to
August 1999, the World Economic Forum Global
raise funds. In 1978, the Gold Exchange of
Competitiveness Report ranked Singapore among
Singapore (GES) was formed. The Singapore
the most sophisticated financial markets in the
International Monetary Exchange (SIMEX)
world.
replaced the GES and started trading in financial
EXHIBIT THREE: FULL BANKS IN SINGAPORE RANKED BY ASSETS SIZE, 2002
Exhibit Three: Full Banks in Singapore ranked by Assets Size, 2002
Territory
No. of
Banks' Name
Origin
Total
Ranked
Full
Assets
By
Banks
Size US$
Total
(%
bn
Assets
Total)
(2002)
Size
North America
3
Citibank NA
USA
1100.0
1
(12%)
JP Morgan Chase Bank
USA
758.8
5
Bank of America
USA
662.4
6
Europe
4
BNP Paribus
France
867.9
2
(16%)
Credit Agricole Indosuez
France
655.8
7
ABN Amro Bank NV
Netherlands
627.6
8
Standard Chartered Bank
UK
119.9
9
Asia
18
Sumitomo-Mitsui Bank
Japan
825.4
3
(72%)
Corp
HSBC
Hong Kong
759.0
4
DBS Bank
Singapore
84.9
10
UOB Bank
Singapore
60.9
11
OCBC Bank
Singapore
47.8
12
Malayan Banking Berhad
Malaysia
39.4
13
Bangkok Bank Public Co
Thailand
29.9
14
Ltd
Bank of India
India
16.7
15
Indian Overseas Bank
India
9.0
16
Indian Bank
India
7.7
17
UCO Bank
India
7.6
18
Bank of Tokyo-Mitsui
Japan
Ltd
Bank of East Asia Ltd
Hong Kong
HL Bank
Malaysia
RHB Bank Berhad
Malaysia
Southern Bank Berhad
Malaysia
Bank of China
China
PT Bank Negara
Indonesia
Indonesia
Total
25
Notes:
2 locally incorporated banks not included
10
Exchange
Quotation
1978, Gold
was (SIMEX)
15 of 34

W O R K I N G PA P E R S E R I E S
THE BANKING INDUSTRY
- DBS, UOB and OCBC. The local banking industry
The Monetary Authority of Singapore (MAS), the
was expecting more competition, since for a long
de-facto central bank in Singapore, was formed
time prior to the liberalisation with the exception
via the MAS Act (1971) which streamlined the
of 1970 and 1983, no new licences were granted.
various monetary functions from government
In Singapore, the banks were constituted either as
agencies into a single body. It conducted
the 23 full banks, the 37 wholesale banks or the
monetary policy making; managed the country
47 offshore banks depending on their license
foreign reserves and government securities;
granted (www.mas.gov.sg) Singapore however had
supervised the banking, insurance, securities and
a high ratio of banks per thousand population
future industries; oversaw the function of currency
(3.9) relative to other countries implying that these
issuance; and promoted Singapore as an
banks were operating over a much wider
international financial centre in partnership with
geographical are than just the local domestic
the private sector.
market. The initial intent of the financial services
industries was to provide for Singapore’s
The recent liberalisation (1999-2003) of
manufacturing base in the 1970s, and there
Singapore’s banking sector has had significant
continued to be a high degree of integration
impacts on the local banking industry. These
between the financial sector and the
include consolidation, the disposal of non-banking
manufacturing sector, which were then, and still
related assets and mergers, and this resulted
are, the twin pillars of economic activities in
resulting in only three major local banking groups
Singapore.
EXHIBIT FOUR (A): PORTER DIAMOND AND THIS SECT
Exhibit Four (a): Porter Diamond and this Sector
OR
Diamond Component
Example or Comment
FACTOR CONDITIONS
Porter (1990) argues that for a nation
Singapore is an example of a nation that overcame the disadvantages in general
possessing basic factor conditions
factor endowment to create national competitive advantage. A small island-state
alone, such as a pool of educated
situated at the southernmost tip of Peninsular Malaysia, Singapore only had a
labour or a local raw-material source,
strategic geographical location and excellent natural harbour that was centrally
this does not constitute an advantage
located between the East and the West to make it an ideal place for banks to reside
in knowledge-intensive industries.
there and develop as an international financial hub.
The small population base, (54th in the world (WCY 2004) was turned to its
Basic factors are defined as generic
advantage when the government relaxed its policy on the employment of foreign
factors that are available to all general
talent and on immigration, this created a positive feedback loop for Singapore’s
activities, such as roads, airports,
vibrancy. Competent senior managers with international experience were generally
seaports and abundance of labour.
available, as were the high-skilled foreign workforce whom was now attracted to
They are important for resource
the vibrant business environment.
development and agricultural
Advanced factors for financial services included productivity, communications
industries where the requirement for
infrastructure, sophisticated and specialised labour, research facilities, and
technologies and skills are much
technological know-how that required time and substantial investment in human
simpler.
and physical resources. Singapore was proactive in forging links with appropriate
universities in the USA. Productivity was another advanced factor condition that
However, lasting competitive
was key to Singapore’s sustained growth. It had maintained a high productivity rate
advantage is generated out of
in line with the GDP growth, and labour productivity was also among the highest
advanced and specialised factors.
in the world, and in Asia, second only to Hong Kong. Its workforce had a literacy
rate of 93.7% and had one of the lowest productivity days lost in the world.
For further factors conditions see the: World Competitive Table below.
DEMAND CONDITIONS
Porter (1990) postulates that home
Manufacturing is the most important sector, followed by business services,
demand conditions for an industry’s
financial services and wholesale and retail trade. Manufacturing accounted for
product or service formed the second
24.3% of GDP in 2002, out of which a significant portion is electronics
broad determinant of national
manufacturing. The wholesale and retail trade dominates the services industries
competitive advantage. Three broad
accounting for 14% of GDP in 2002 (Economist.com available at
attributes of demand are significant:
http://economist.com/countries/Singapore/profile.cfm) These activities generated a
the composition of demand, the size
huge and growing demand for financial and business services to be located in
and pattern of growth, and the
Singapore. Financial services have expanded since 1960, increasing its
mechanism on how a nation’s
composition of GDP from 2.6% in 1960 to 12.3% in 2002.
domestic preferences can be
The pattern of growth in demand for financial services was analogous to the growth
transmitted to foreign markets. It is
of the Singapore economy. The total value of trade in goods (exports plus imports)
not the size of the home market, per
was equivalent to 273% of GDP in 2002. This figure includes a large volume of re-
se, that is important but the extent to
export trade, encouraged by Singapore’s location and excellent port facilities. Re-
which it drives innovation:
exports accounted for 47% of total exports in 2002 (Economist.com).
Advantage is created in industries
Real GDP in Singapore grew at an average rate of 8.4% per annum between 1965
that are the most important in the
and 2001 (also see Figure 4.3), although the Singapore economy suffered a
home market since demanding buyers
contraction of 2.37 % in 2001 and was sluggish with 2.25 % growth in 2002. The
in the home market pressure
growth in demand looked promising as the region was posed to recover.
companies into meeting high
standards. Also because buyers at
In respect of the sophistication of demand it could be said that Singapore domestic
home needs pre-empt those in export
financial consumers were far less demanding and sophisticated due to the historic
markets companies build up a
heavily regulation – importantly the 1999 MAS deregulation introduced more
learning curve advantage:
QFB licenses to foreign players and local banks encouraged by the MAS to
consolidate their operations to prepare for this further competition The introduction
Porter (1990) feels that the
of foreign competition would certainly drive up the sophistication of consumers
sophistication of demand is much
(buyers) and increase the bargaining power of buyers.
more important than the size of
demand. When an industry faces a
sophisticated and demanding
domestic market it is forced to
innovate and sell superior products
because the market demands high
quality.
11
17 of 34

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