SINGAPORE and Hong Kong's similarity in size, geographical proximity and common history have routinely pitted the two cities as traditional rivals. Both cities are global hubs for investments, trade, finance and tourism.

The recent budgets of both countries have also unearthed another area where we may see Singapore and Hong Kong go head to head again: innovation.

However, Hong Kong and Singapore are today are on a different footing in fostering innovation. Singapore ranks third on the Bloomberg 2018 Innovation Index while Hong Kong is placed 37th.

Based on the most recently available data in 2016, Hong Kong's research and development (R&D) expenditure was only 0.79 per cent of GDP (gross domestic product). In comparison, Singapore's R&D expenditure was 2.4 per cent of GDP in 2015 as reported last year.

In some ways, this points to the early start that Singapore made in transforming its economy towards an innovation-driven economy.

Singapore launched its first National Technology Plan in 1991. Over the next 25 years, four more national science and technology plans were implemented, with S$19 billion being poured into the latest Research, Innovation and Enterprise 2020 plan. As part of this, the National Research Foundation was established in 2006 to plan, coordinate and execute the strategies.

One of the more tangible outcomes of Singapore's innovation strategy was the launch of the biomedical sciences initiative in 2001. Today, Singapore has established itself as a global hub for pharmaceutical and medical technology manufacturing.

On the other hand, the Hong Kong government made one of its first moves to boost innovation and technology by spending HK$5 billion (S$8.4 million) in 1999 to set up the Innovation and Technology Fund. But it was only in 2015 that the Innovation and Technology Bureau was specifically established to promote innovation and technology.

Singapore has also taken steps to enhance its tax and legal environment for intellectual property-related activities. This includes its intellectual property protection laws, ranked first in Asia for intellectual property protection in the World Economic Forum's Global Competitiveness Report.

One key strategy that Singapore embarked on was enhancing its tax regime to support its aspirations as an innovation hub. While Hong Kong relied on its low and simple tax regime to attract foreign direct investments, Singapore designed a tax regime to capture the entire value chain of the innovation process, from creation to commercialisation of intellectual property.

Singapore offered enhanced R&D tax deductions and tax incentives to anchor R&D-intensive multinationals, and boosted its tax treaty network to facilitate the commercialisation of intellectual property from Singapore.

Last year, Hong Kong - lagging in the global innovation rankings - introduced for the first time a R&D tax incentive providing up to 300 per cent tax deduction for the first HK$2 million of qualifying R&D expenditure. This was a move aimed at leapfrogging Singapore, even as Singapore's own Productivity and Innovation Credit (PIC) scheme was due to end in the Tax Year of Assessment 2018.

A KPMG analysis, published in The Business Times in January, found that the expiry of the PIC scheme would make Singapore's R&D tax incentive one of the least beneficial in the world.

We are glad that in Budget 2018, Finance Minister Heng Swee Keat has decisively responded by enhancing the R&D incentive with a 250 per cent deduction on all qualifying R&D expenditure in Singapore, with no limit on the amount of spending that could qualify.

This announcement would have been even more complete, if the incentive also extended to R&D activities carried out overseas, especially with the talent crunch that Singapore businesses are currently facing.

While the benefits appear to be lower than Hong Kong's, our view is that Singapore's enhanced scheme will have a greater impact on attracting global R&D investments as there is no cap on the claim.

However, the effectiveness of any government scheme will ultimately boil down to the administration of the incentives.

In Hong Kong, the Commissioner for Innovation and Technology participates in reviewing the R&D tax incentive claims made, while in Singapore, the Inland Revenue Authority of Singapore (IRAS) is primarily responsible for assessing R&D tax incentive claims.

Our opinion is that having a national innovation body administering the R&D tax incentive scheme has the benefit of ensuring consistency across various government schemes to promote innovation.

We therefore suggest that Singapore should adopt a similar approach to Hong Kong, and have an R&D tax incentive administered either by the National Research Foundation, or under each of the 23 Industry Transformation Maps (ITMs). This would find a closer alignment to the transformation objectives of each cluster than its administration by a tax authority.

We would also like to see the administration of the scheme by lead agencies of each ITM as this would allow successful stories to be showcased. This is something that IRAS cannot currently do because it is constrained by secrecy provisions as a tax administrator.

Showcasing of successful businesses is important to inspire would-be entrepreneurs and exposes other businesses to new possibilities.

In addition, administration of the applications for the incentive should be as centralised, expedient and straightforward as possible to encourage suitable applicants to come forth.

Too often, governments focus too much on funding public sector R&D, but a successful innovation ecosystem would need a thriving private sector community to bring the new ideas to the market.

For example, startups bring fresh ideas to the system, but many lack resources to bring their concepts to the market. On the other hand, many large businesses are in need of new ideas and solutions to grow.

Singapore has successfully cultivated an active startup community. However, as it faces increasing pressure from Hong Kong and other economies, it is now time to develop a "smart ecosystem" that can allow these players to connect and collaborate.

The introduction of the Open Innovation Platform and the streamlining of programmes such as the Partnerships for Capability Transformation scheme announced in Budget 2018 is a step in the right direction.

To provide further support especially to startups, the Singapore government should consider allowing startups to encash the benefits from the R&D tax incentive scheme especially as most startups are not profitable in the early years.

So while Hong Kong has some catching up to do, it has the advantage of being physically close to China where businesses can have access to research talent as well as manufacturing hubs more closely aligned to R&D activities.

For instance, in the area of fintech, Hong Kong is fast catching up to Singapore despite the latter's headstart. An early start from the sprint line for Singapore in innovation-related activities is therefore no guarantee of long-term success.

It is therefore important that Singapore continues to ensure that its policies remain relevant, flexible and responsive to market conditions so that we continue to remain a top innovation hub for talent and investments.

Contributed by Chiu Wu Hong, Head of Tax and Harvey Koenig, Head of R&D incentives KPMG in Singapore. Views expressed are their own.