Curbing foreign worker numbers and other strategies to lift productivity could turn out to be counterproductive, warned two economists yesterday.

They said some investors are troubled that policies have focused on changing processes, such as replacing workers with technology, instead of on creating better quality products that raise the value of each worker's output.

The report released by Citi economists Kit Wei Zheng and Brian Tan yesterday was based on discussions last week with the Monetary Authority of Singapore and the Trade and Industry Ministry, as well as with political analysts, other economists and foreign investors who buy Singapore stocks and bonds.

It said the success of the drive towards "process innovation" will be limited because service firms still need a human touch.

On top of that, cutting worker numbers deprives service firms of labour and curbs their ability to come up with new and more valuable products and services.

"Whereas product innovation would allow Singapore to be a leader in international supply chains, an excessive focus on process innovation would keep it as merely a follower," they said.

The economists also noted that reducing foreign worker numbers could depress output and ironically lower productivity, calculated as output per worker, in the short term. Indeed, productivity has fallen steadily this year compared with last year, according to official data.

Mr Kit and Mr Tan said policymakers responded to this dismal performance by citing a slowdown in economic growth, while pointing out that it is hard to tell how much of the fall in productivity was due to fewer foreign workers.

A third concern is that foreign worker curbs have crimped industries where Singapore already has a leading position, such as the labour-intensive marine and offshore engineering sector.

Policymakers also had an answer for this: that the short supply of land and workers here would have forced such sectors to restructure anyway, by moving some activities to lower-cost countries.

Indeed, there is "growing chatter within policymaking circles that there is 'no choice' but to help firms relocate" for survival, said Mr Kit and Mr Tan.

Iskandar, and the wider Malaysia, are shaping up as a key piece of the puzzle, but logistical bottlenecks, strategic differences and competitive tensions remain, they added.

The economists also said that while more firms have been showing interest in signing up for government incentives to raise productivity, it might be tough to deliver on productivity targets.

Officials themselves told Mr Kit and Mr Tan that it will be difficult to achieve their goal of growing productivity by 2 per cent to 3 per cent a year, and they would be happy with a 2 per cent increase.