Theoretical framework

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Singapore has long been overlooked by academics that seem to prefer Hong Kong as their subject of research when it deals with finance clusters. However, Singapore, due to its nature as a country per se, has a clearer path ahead; on the contrary to Hong Kong that will see after June 30, 2047 the end of the Hong Kong Basic Law, which so far has allowed the Special Administration Region to be considered as a safe point of entry to the Chinese market.

Therefore this research will aim at answering the following question: “In what measure the successful liberalization of Singapore’s financial cluster has been influenced by internal and external forces?”

Throughout my research I will limit myself to the most relevant historical events (policies and developments) that have shaped Singapore’s financial sector, in order to more clearly outline the connections and interactions between the variables analyzed. Concerning the data collection process, I will use primary and secondary sources.

I hope this thesis will bring a more holistic approach to the current body of literature, by focusing on a broader set of variables, and adopting a case study approach when necessary. As a result, I wish to make clearer the mutually beneficial spillover effects between these variables and Singapore’s financial sector.

1.3 Theoretical framework 1.3.1 Cluster theory

There has been extensive research made by academics on clustering effects.

The concept of cluster originates from previous researches focused on “Industrial district”, as first mentioned in Becattini’s paper entitled “Sectors and/or Districts:

Some Remarks on the Conceptual Foundations of Industrial Economics” (1989). The emergence of “Industrial districts” is due to the combination of many factors, including economy of scale, multi-sectorial industries, stable environment, and abundance of labor. All that can foster the rise of whole areas called “Industrial districts”, unlike Clusters that are identified as geographic areas where a group of similar businesses are located. Efficiency and practicality are seen as the primary reasons leading to clusters’ development.

Academics like Camagni (1991) developed the idea of clusters linked to the notion of “knowledge spillover”, where companies and institutions learn from each

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other due to their close geographical location, and the subsequent ease with which information circulates. As far as Cooke (2003) and his followers are concerned, they drew more attention to “local knowledge spillovers”. Grabher (1993) interestingly added, to the current existing knowledge when speaking about clusters, a stress on

“traded linkages” that increase economies- of scale. Porter (2000) on his side focused on how companies are interconnected in a specific field; most interesting is his use of the “external linkage” theory that studies synergies between local government, universities, etc. Martin (2003) for his part emphasized the “innovative milieu” that puts forward the discovery of new processes and technologies as the foundation for an optimal cluster. The ideas of a “global linkage” trend as developed by Grabher (1993), and the “global pipeline” as discovered by Bathelt, Malmberg and Maskell (2004) emphasize more on clusters through the prism of globalization. Thus clusters are no longer seen as isolated entities that seem to develop on their own, secluded from the outside world, but also as phenomena that appear thanks to external factors.

Those last two developments of the cluster theory have strongly impacted the study of cluster areas as they show that clusters would be nothing without their overseas interconnection. This thesis will therefore include an in-depth study of Singapore’s financial cluster in consideration to the latest regional and international developments in the financial world.

1.3.2 Porter’s diamond model

1.3.2.1 Overview

Michael Porter in his book published in 1990 and entitled “The competitive advantage of nations” developed what is now known as the “diamond model”. This model aims at identifying and proving the existence of clusters in some specific areas and industrial sectors. His methodology can be divided into two steps, first identifying booming industries located in specific locations. The second step aims at proving the existence of a competitive advantage through the historical analysis of four main variables: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure and rivalry. Government and chance are sometimes added, but are not crucial, which if taken into consideration would make it a five-variable model (Porter, 1990).

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This model has so far been the only one used to study clusters in academic research, therefore it is worth reviewing it in order to better grasp the true essence of what a cluster is, but also to understand the limitations of this model.

Figure 1

Porter’s Diamond Model

Source: Kaplan Financial Knowledge Bank, 2012.

1.3.2.2 Demand conditions

Demand in the home country is seen as vital to ensure that the industry in which the cluster is specialized has a clear understanding of the needs of the customers (individuals, firms, and government). The greater the demand is, the greater the competition is, which means incentives for constant innovation and quality. For instance, in the financial sector the more locals have high standards and are educated concerning the financial products they consume, the more local banks and asset management firms will develop sophisticated investment vehicles fitting in with their needs (Porter, 1990, p. 82).

1.3.2.3 Factor conditions

Simple factor attributes, as plentiful natural resources or abundant workforce, constitute positive conditions. However factor conditions can be cultivated, such as the educational level of manpower, transportation infrastructure, pro-business legal environment, etc. In a financial cluster, this would translate with the need to have

Demand conditions

Factor conditions

Related and supporting industries Firm strategy,

strucutre and rivalry

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access to a large pool of trained financial managers and bankers. Fast Internet broadband speed would also be crucial to ensure that “high-frequency trading” (HFT), which is usually operated within 30 milliseconds or less, is processed without any problems (Porter, 1990, pp. 79-82).

1.3.2.4 Related and supporting industries

Related and supporting industries are essential to ensure that clusters provide main industries with a full array of services and technologies indispensable to the optimal run of firms. Thus the cluster behaves like a one-stop shop where no external help is needed, hence positioning the cluster as a world-level hub. In the banking sector this would mean lower transaction costs thanks to readily available technologies in the same location (Porter, 1990, pp. 82-83).

1.3.2.5 Firm strategy, structure and rivalry

Firms with a long-term strategy are determinant as they focus on research, and state-of-the-art services and products, thus ensuring a recurrent flow of customers.

Rivalry to some extent is good as it guarantees that the cluster will grow past its natural factor endowment through increased competition. Consequently a free market ensuring the lowest entry barriers, fair competition, and a strong legal framework should be put forward to ensure that for instance, a financial cluster and its institutions have management structures as lean and organic as possible (Porter, 1990, pp. 83-86).

1.3.2.6 Limitations of Porter’s diamond model

Michael Porter developed the diamond model and the cluster theory, through a close study of ten developed countries, which consequently leaves Davies and Ellis (2000) wondering whether his work applies to developing countries, as there is no use of a control group. Furthermore, the existence of clusters can be debated in the case of small-scale and open economy; as whatever competitive advantage could exist, firms have no real choice about their location, such as in Singapore (a country with a total land area of a bit more than 687 square-kilometers, nearly 47 times smaller than Taiwan).

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Furthermore, in his book entitled the “The competitive advantage of nations”

Porter was rather pessimistic about the case of Singapore that he viewed as a cluster whose only strong point was its factor conditions. This however has been proved wrong since he published his book, as the Republic has shown considerable ability in fostering the rise of two successful clusters, one in manufacturing, and the other in the financial sector.

What’s more, he also missed the importance of multinational corporations (MNCs), which in some countries are more important than local companies, such as in the Singaporean banking sector (Yetton, Craig, Davis, & Hilmer, 1992).

All in all, we can say that the diamond model has until today been the only major tool to analyze clusters, yet there are a few drawbacks linked to the non-scientific path used. Heavy reliance on deduction leads some academics to consider it as a non-relevant method.

1.3.3 Summary

To conclude, this thesis will primarily use the Porter’s diamond model as its theoretical background, with a specific focus on factor conditions. The other three variables will be to a lesser degree used in this research.