Innovation: Singapore Is No. 1, Well Ahead of the U.S.

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It has little choice: The city-state has a population of just 4 million, and without importing top talent it would be hard-pressed to achieve bureaucrats' outsized plans to make Singapore a hub for the electronics, semiconductor, pharmaceutical, and biotech industries. For instance, every year Singapore gives 100 scholarships to science and engineering students, funding their doctorate programs in foreign universities. "In order to do well, you need people trained abroad," says Beh Kian Teik, director of biomedical sciences at the Singapore government's Economic Development Board. The $650 million program, launched in 2000, is now seeing its first PhDs return to Singapore, where they work in government research labs or local universities for several years.

Singapore's Excellent Science Education

Government commitment to education is one reason many large drugmakers have made Singapore a base for their manufacturing and research. In January, GlaxoSmithKline (GSK) announced plans to invest $65 million to expand its Singapore operations. Schering-Plough (SGP) is opening a center to conduct research and clinical trials in the country, and Novartis has made Singapore the center for company researchers investigating treatments for malaria, tuberculosis, and dengue fever. "Science education is very good here," says Thierry Diagana, project manager for Novartis' malaria research team. "There's a nice constant flow of young graduates."

The global recession threatens to halt the flow of talent. The Singapore economy, which relies heavily on exports, is suffering badly. The country's gross domestic product is likely to fall 4.9% this year, according to a government survey of economists released on Mar. 16, and the unemployment rate is likely to double from that of a year ago, to 4.4%. Credit Suisse (CS) predicted last month that Singapore would see an outflow of foreign workers, with the population declining by 160,000. The pharma and biotech industries, two of the few industries expected to create jobs in the city-state, are now facing renewed uncertainty following the announcement of several large mergers, including Merck's (MRK) proposed acquisition of Schering-Plough.

Still, BCG's Andrew believes governments and companies are not going to retreat on their commitment to innovation. The crisis, he argues, makes it even more apparent that there's no turning back. "There is always somebody out there who can make the same thing cheaper," he says. In hard times, he adds, "the imperative is to become more innovative, not less." For companies, that means "doing anything humanly possible to avoid scaling back on innovation budgets," says Andrew. "Governments are going to be in much the same situation. If you want to attract and position companies in your countries, you have to continue to do the things that make you an attractive destination."

Reports about an exodus of foreign workers from Singapore don't worry Andrew. With the economy contracting, many low-skilled workers are leaving, he says, but that doesn't mean Singapore's attractiveness as an innovation hub is declining. "If I'm losing my PhDs, scientists, technologists, that's one thing," he says. "For other types of foreign workers, that's something different."

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau.