Singapore's iconic leader Lee Kuan Yew used centralized control to develop the island-nation's corporate stalwarts, but now the city-state may need to loosen the reins to keep its market relevant.
"The last 50 years, the focus clearly was job creation," Hozefa Topiwalla, head of research for Southeast Asia at Morgan Stanley, said in a press briefing Monday, noting that the government built up a stable of government-linked companies (GLCs) and wooed multinational companies (MNCs). But now, "it's probably stifling entrepreneurship," he said.
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The effects of picking key sectors can be seen in the city-state's stock market. Shipping, ship-builder and commodity plays once made up a large portion of the market capitalization, but now many of those stocks have stumbled; some of them have been cut from the benchmark Straits Times Index. Average daily volume has dropped to 1.15 billion Singapore dollars ($850 million) in May, compared with 1.756 billion Singapore dollars in May 2010.
At this point, foreign countries and the GLCs combined account for 70 percent of SGX's market capitalization, according to Morgan Stanley data.
"Investors tend to discount Singapore to a certain extent because of a potential lack of long term story in the equity market," Topiwalla said.
But he is optimistic on Singapore's ability to shift to "value creation," instead of "job creation," a sea change that he expects will give the country's equity market a long-term structural story -- something other regional markets such as the Philippines and Indonesia get from their demographic dividends and rising middle classes.
Singapore's government and its sovereign wealth fund Temasek, are already shifting focus to investing in emerging businesses and creating a better environment for entrepreneurship, he said.
"Historically they were focused on industries and what they wanted and what they don't want. What they are doing right now, as a strategy and philosophy clearly, is saying we clearly don't know what's going to work," he said. "Hence, it's facilitation now, rather than directing which sectors and what's going to work."
Topiwalla sees confirmation of the shift in data showing new firm formation rose to 77,000 in 2014 from 54,000 in 2010, with 9 percent of the country's workforce now employed by start-ups. Additionally, the proportion of Temasek's portfolio in unlisted private investments has risen to 30 percent in 2014 from 20 percent in 2004 and it has established an Enterprise Development Group to help build businesses, according to Morgan Stanley research.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1