The pace of new company formations in Singapore during 2010-2012 correlated with the healthy growth of the economy, and the Internet and digital industries showed the greatest surge.
According to the latest study by The Business Times and the Accounting and Corporate Regulatory Authority (Acra), company formation experienced a growth of 13 per cent in 2010 to 27,642, after climbing just 2.8 per cent in 2009 to 24,389. The trend is similar to Singapore's GDP (gross domestic product) surge of 14.8 per cent in 2010, following a dip of 0.8 per cent in 2009.
In subsequent years, the rate of new company formation too tracks the pace of the economy, growing at an average annual rate of 7.1 per cent. In 2011, there were 29,987 companies formed in Singapore while in 2012, this increased to 31,742. Web portal firms and interactive digital media software companies saw an average of 48.8 per cent and 46.7 per cent growth respectively in their formations, possibly driven by market demand for apps and website development.
Some key factors have contributed to the expansion of companies in these sectors, according to the World Entrepreneurship Forum's co-president, Inderjit Singh.
"Firstly, young people these days are more Internet and IT-savvy and so it is natural that they have the skills and the knowledge to enter into these sectors. Moreover, the barrier to entry to these industries is also relatively low and it is not expensive to start a company in them as compared to brick and mortar businesses," said Mr Singh, who is also a Member of Parliament.
Besides, the valuation of successful Internet-based companies such as Google, Facebook and Twitter has been attractive and draws more interest to such sectors. The higher valuations have also seen venture capitalists (VCs) putting in more money into these businesses as growth rates of these companies are exponential.
"We have even seen this in the Silicon Valley, where VCs are now putting in money into these social media and Internet-based companies as opposed to hardware and semiconductor manufacturing firms," Mr Singh said.
The BT-Acra study revealed that the cessation rate of Singapore companies during the troubled economic period of 2010 was relatively flat - ranging between 3,000 and 4,000 for each quarter that year. There was no spike in the cessation rate during 2010.
The industry with the largest average annual increase in cessations was money-lending, at 97.7 per cent on average, over the two-year period, reflecting the fact that demand for this service declined once the economy bounced back in 2010.
On the other hand, industries such as wholesale of timber and audio equipment showed more resilience, with cessations slowing on average by 28.5 per cent and 24.3 per cent respectively from 2010-2012.
The study showed that the median survival time of companies incorporated from 2000 to 2012 was 111 months or 9.25 years. Among these, travel agencies and pawn brokerages survived longest at 147.3 months or 12.3 years and 143.2 months or 11.9 years, respectively.
Conversely, real estate investment trust (Reit) companies, which invest in or manage Reits, had the shortest survival times at 31 months or 2.6 years and 49.4 months or 4.1 years, respectively.
Size of the issued paid-up capital had a strong impact on the survival rate of companies.
"Issued capital should be strongly related to firm survival from the capital resource perspective. For many small businesses that rely on a single product or service, lack of financial capital in the initial stage often leads to a higher rate of exit. In comparison, large firms have more financial slacks and can often cross-subsidise between various business lines," said Chiu Shih-chi, assistant professor of strategy at the Nanyang Business School in the Nanyang Technological University (NTU).
According to Dr Chiu, the median survival time of Singapore companies, at 9.25 years, is much higher than the survival time for new businesses in the United States and China, which are less than four years.
The study also showed that the proportion of sole proprietorship and single director companies slid, while those with corporate shareholders rose.
Data shows that the growth in new sole-proprietor and single-director companies incorporated between 2010 and 2012 moderated to between 37 and 43 per cent, from 43-47 per cent in 2009. In contrast, the proportion of companies with one or more corporate shareholders rose by as much as 18 per cent between 2010 and 2012, from 10 per cent in 2009.
Wong Meng Weng, co-founder of tech accelerator Joyful Frog Digital Incubator, sees this is a sign that the business eco-system is maturing. "The existence of a corporate shareholder is a telling sign: It costs around $5,000 in yearly audit fees more that way, and a company would do that only if it had a commercial or strategic investor on board, or if one of the founders was a serious enough businessperson to operate through a corporate entity," said Mr Wong.
Dr Chiu added that the increased influence from corporate shareholders is consistent with the trend in the US and other market-based economies. Having multiple owners, she said, helps diversify risks. It also helps smaller firms enhance their human and social capital.