By CHEN YEW NAH

SINGAPORE is facing one of the most protracted recessions in its history. According to the 2009 Budget, global manufacturing production fell by almost 20 per cent in the fourth quarter of 2008, while global trade and cargo volumes have also slumped. The nation's growth forecast has been revised downward to a chilling range of between -5 and -2 per cent. Minister Mentor Lee Kuan Yew noted recently that it was not inconceivable to have the Singapore economy shrink by 10 per cent if exports continue to fall sharply.

No one knows how prolonged or deep this recession is going to be. The speed of the decline in trade and economic activity has taken most businesses by surprise. Many are now scrambling to change their business strategies in order to survive the crisis and to emerge in a better position when the economy recovers.

While the outlook for the next 12 months looks grim, eventually the consumption power of Asia's emerging middle classes will prove too strong to be held down forever. According to Sandy Flockhart, the Asia-Pacific head of banking giant HSBC: 'While global GDP should shrink in 2009, China and India continue to have high growth rates, and are likely to be the first to recover from the crisis.'

As business slows, SME owners and managers are finding that they now have the opportunity to focus on ways to improve their business competitiveness so that they are better prepared when the economy turns. As with all previous crises, there will be opportunities for the entrepreneurial and the innovative, even in the midst of a recession.

Singapore has established a good foundation in innovation. The prestigious graduate business school Insead ranked Singapore as Asia's most innovative economy and fifth in the world in its new Global Innovation Index.

Our nation has in place a strong legal and regulatory framework to protect intellectual property, as well as one of the easiest processes for starting a business. So it makes sense for SMEs to increase their competitiveness, both locally and overseas, by leveraging on the nation's strong IT infrastructure to roll out unique and innovative products and services.

A good illustration of how a young company has successfully leveraged on innovation to establish a unique foothold in Singapore is Gothere.sg. Started by four Singaporeans in their 20s in April last year, the website provides far more detail than Google maps. The website not only provides maps to assist individuals get around every part of the island, it also includes bus routes and ERP charges at different times of the day.

Gothere.sg is getting more than 15,000 hits daily and is currently collaborating with the Land Transport Authority (LTA) to develop a user-friendly travel advisory for public transport journeys.

The benefits of innovation can be seen beyond the local market. In the recent SME Development Survey released in October, 34 per cent of Singapore SMEs that have ventured overseas attributed their success to their ability to differentiate their products from that of their competitors.

Innovation is also important for SMEs trying to ensure long-term sustainability in overseas markets. While most cited finding the right overseas partners and overseas market knowledge as principal success factors for internationalisation, it appears that product differentiation (34 per cent) and branding (33 per cent) play a very important part in sustaining overseas operations as they allow a company to find its niche amid strong competition in overseas markets.

In fact, close to one-third of SMEs with more than five years of overseas operations cited branding (32 per cent) and product differentiation (31 per cent) as among the top three factors for their sustainability overseas.

Apart from introducing new products and services, innovation can also be applied in technology infrastructure and processes. This requires SMEs coming up with new or advanced business processes that facilitate tasks more efficiently.

Just last year, 80 per cent of the SMEs which adopted technology innovation saw improvement in actual turnover or profit. The two most prominent benefits reaped by our SMEs from technology innovation are increased productivity (76 per cent) and improved cost efficiency (59 per cent). In other words, more profit (see table).

SMEs, by virtue of their smaller size, can be nimble in their responses to the needs of their customers and industries. They can be faster in implementing changes to compete on quality, design, creativity and personalised products and services. They can also become niche players, and be quicker to identify new market needs and to act upon them.

The government has also introduced several schemes to promote innovation, such as the $200 million Test-Bedding Fund and the $180 million Core Innovative Fund in the recent Budget 2009. These government programmes aim to encourage Singapore companies to embrace innovation as well as research and development to build their internal capabilities.

In every crisis only the fittest survive. And that means companies that can adapt quickly and remain competitive as the economy recovers.

SMEs have an advantage when it comes to implementing innovative processes and products. They can react quickly to opportunities and explore new ways of doing things that larger, more 'solidified' companies cannot. And the SMEs that do find their niche or find that new and creative way of meeting a market need will be the ones that are well set to prosper when more optimistic times return.

The author is managing director of DP Information Group

This article was first published in The Business Times.