Foreign Direct Investment in Singapore

Keywords: Singapore, foreign investment, international, business

Chapter 1: Introduction

Singapore was a commercial trading centre in the early 19th century and today it has since attained a remarkable transformation into one of the most globally integrated economies in the world, achieving total mechanism and service trading performing triple or more its gross national product and inward Foreign Direct Investment (FDI) stock index among the developing market.

Foreign direct investment (FDI) has an exceptional and emerging role internationally. It acquired the primary role in both theoretically and practically, which can be observed in different economic, social, cultural, political, finance, and technological dimensions of the world.

Objective of Study

The objective of this project is to study into the national strategies adopted by Singapore, so far, focusing on their nature and outcomes. A critical assessment will be made on the current challenges ahead, and appropriate strategic options identified. Singapore, to a large extend has relied on foreign MNCs to drive its own industrialization and growth. What is beyond doubt is that Singapore’s unique ability to attract and retain FDI has undoubtedly been a key ingredient of its economic success. Therefore, it is worthwhile to investigate the determinants of Singapore’s FDI inflows.

Scope of Study

In this paper, we examine the interrelations among the variables FDI, the entry modes, the benefits and costs, government policies and the liberalization of FDI. The study of the relationship addresses a few points: Mainly, how dependent is Singapore on FDI? How are the imports and exports of MNCs affecting Singapore’s FDI inflows? What are the factors being driven by the shift of FDI towards services? What is the main driving force of FDI? Is there a contribution and/or positive link between higher GDP and FDI? Does trade liberalization foster FDI in emerging countries/markets?

The overall objective of the study is to determine the efforts that Singapore makes to attract inward FDI, the successful and unsuccessful outcomes and the future developments of FDI in Singapore.

The remainder of the study is organized as follows: In Chapter 2, the trends, source, patterns and forms of FDI is being introduced. Chapter 3 explains the reasons why firms choose foreign direct investment instead of exporting, the trade barriers involved and the other forms of entry modes. In Chapter 4, the connection between Singapore and FDI is being analyzed. Chapter 5 presents the benefits and costs of FDI while Chapter 6 briefly discusses the economic growth in the different industrial sectors and how the culture of Singapore affects inwards FDI. In Chapter 7, it describes government intervention and its policies. Chapter 8 involves the discussion of the liberalization of FDI and MAI. And lastly, Chapter 9 comprehends the findings of the future developments of FDI in Singapore and Chapter 10 ends the study with conclusions.


This project is based on secondary research. Data were extracted and researched from various sources from the internet, report findings, ebooks, ejournals, newspapers, textbooks, and databases from the National Library. The actual figures of the FDI are applied to the project to act as evidence. The research is mainly focused in Singapore to highlight the attractiveness of this country and why is it a popular FDI destination.

Limitation of study

With respect to the analysis and data, there were some limitations that might affect the accuracy of the study – The limited data on the impact of liberalization on Singapore, examples of recent FDI in Singapore, statistical information about the forms and type of entry strategies that FDI or local companies adopted, made this research time consuming and challenging.

Chapter 2: Theories of FDI

Forms of FDI

In recent years, the internationalisation of firms has assumed two new features. First, firms increasingly enter foreign markets by acquiring a local producer also known as merger & acquisition. Secondly, opening a new subsidiary also known as greenfield investment.

Researches suggest that the majority of cross border investments take place in the form of mergers and acquisitions rather than greenfield investments. It is estimated that about 40- 80% of all FDI inflows were in the form of M&As simply because many firms prefer to acquire existing assets which are quicker to execute than Greenfield investments as they are an establishment of a wholly new operation. Also, the outstanding fact that the modern business world’s market evolves rapidly hence firms opt for the easier and perhaps the less risky option- to acquire desired assets than to build them from scratch. Desired assets could include brand name, customer loyalty, trademarks/patents, distribution systems, etc.

Typically, firms adopt this approach as means of making a quick entry into a market or establishing a market presence. For instance, in 2000, cement manufacturer, CEMEX acquire Southland to enter the into U.S growing construction market. Lastly, firms believe that through M&As it enables an increase in the efficiency of an acquired unit by transferring capital, technology, management skills, etc. – like how CEMEX transferred its technological know how to Southland after the acquisition.

The shift towards Services

FDI is increasing shifting away from manufacturing and extractive industries and towards services. As service industries were largely national, are becoming transnational recently. The shift to services is being driven by: the general move in many developed countries towards service as the composition of FDI in services have changed, it is mainly concentrated on trade and financial services. In addition, the fact that many services need to be produced where they are consumed. There is also a liberalization of policies governing FDI in services. Lastly, the rise of internet based global telecommunications networks. For instance, Dell’s call answering centres are located in India.

The services sector has been the bulwark of the economy, providing stability and contributing significantly to GDP growth. Figure 2.1 shows that the services sector accounted for about two-thirds of real GDP growth in the 1990s. Further studies also showed that the global FDI stock in the services sector had more than quadrupled during the period 1990-2002. As a result of more rapid growth in this sector than in the other sectors, services accounted for about 60% of the global stock of inward FDI in 2002, compared to less than 50% a decade earlier.

Services now account for the largest share of the inward FDI stock in many countries, and Foreign-affiliate service providers play an important role in a growing number of services. Most service FDI has been domestic-market seeking, in such traditional services as finance, tourism and trading, or in industries that have only recently opened up to the private sector, such as electricity, water or telecommunications.

Employment in services has also been much less vulnerable to cyclical economic fluctuations than employment in manufacturing. During periods of economic slowdown as shown in Figure 2.2, manufacturing employment fell by an average of 5% in contrast to the employment growth of 3% in the services sector. While in 1996, employment in manufacturing grew only 2% as compared to 5% in services.

Realizing the importance, the government takes measures to ensure world-class standards of service excellence and leadership, such as introducing schemes, activities, programmes and even institutes – aimed at enhancing service levels, capabilities, mindsets and leadership. Examples include the Singapore Service Star, the Excellent Service Award (EXSA), Go The Extra Mile for Service (GEMS), Public Service for the 21st Century movement (PS21), The Institute of Service Excellence at SMU (ISES) and Certified Service Professional programme by WDA.

Gradual development over time has garnered its interdependence involving the manufacturing sector. In the long run, manufacturing and services group will replicate each other and allow firms to share the development of new knowledge-based products. However, many countries have difficulty quantifying FDI flows in services sectors. Determining trade in services is complicated given that services are not traded at a distinct entry or exit points, but rather across four modes of supply. While quantifying investment in services presents further challenges due to the complex nature of FDI definitions.

While FDI in services remains more restricted, both developed and developing countries have taken steps to open up their service industries. In fact, starting from a higher level of restrictiveness, developing countries tended to liberalize their service industries at an even more rapid pace than developed countries over the past decade. The competitive impact of FDI entry on service supply conditions depend considerably on initial conditions in a host country, especially the level of economic and service development, market structure of service and the regulatory framework.

Entry strategy and strategic alliances

Any firm contemplating foreign expansion must first struggle with the issue of which foreign market to enter, when (late or early entry) and on what scale to enter (large or small scale entry) and lastly, which entry mode to use. Basic entry decisions are ultimately based on the assessment of a nation’s long run growth and profit potential. It is noted that the attractiveness of a country as a political market for an international business depends on balancing the benefits, costs and risks. Benefits include the ability to leverage products and competencies- both technological and management know-how, realizing location economies, and experience effects. Costs include trade barriers, transportation costs, import quotas, tariffs, etc. While the risks involve are political and economic risks. All of these are associated with doing business in that country.

Other factors like the size of the market, the present wealth of consumers (purchasing power) and the likely future wealth of consumers are dependent upon economic growth rates. For example, India which is relatively poor is growing rapidly. Economies which are well developed, with relatively low inflation rates and private sector debts have an advantage over those without. Taking Singapore’s education system as an example- It is a big part of Singapore’s economic development strategy which attracted and encouraged many international educational establishments. Alternatively, weak economic growth in Indonesia is evidently a far less attractive market.

Once firms have decided to enter a foreign market, they have to choose the best mode of entry. Firms can use six different modes to enter foreign markets:

  1. Exporting, being a temporary strategy is like a stepping stone in the international expansion process for most firms. In the past, Seagate was a well know example which concentrated its manufacturing operations in one location enables it to move down the experience curve and achieve location economies. However, Singapore has recently taken this approach to a higher level as the Singapore Cooperation Enterprise (SCE) collaborates with Hangzhou Xihu (Westlake) to export Singapore’s expertise in Hospitality and Tourism.
  2. Turnkey projects, are popular because firms can continue with normal business operations while the contractor handle the time consuming and resource intensive projects for a foreign client. Singapore shipyard is reputable for handling sophisticated turnkey projects regardless of is complex requirements and other considerations. This industry is well known in the economic development for the last 40 years and will continue to play the critical role in our economy in order to achieve the goal for Singapore to become a leading international maritime link. Another example would be Sitra Holdings (International) Limited, the international producer of integrated wood based products and turnkey services, secured several turnkey design and build contracts in November 2009. Amongst these contracts, the single largest contract is worth S$3.24 million at the Marina Bay precinct.
  3. Licensing, enables a firm to gain access into new markets otherwise inaccessible, hence to facilitate the growth of licensing activities in Singapore with additional focus on brand licensing, character licensing and know-how licensing, the Franchising and Licensing Association (FLA) aims to encourage the adoption of licensing as a growth strategy by producing a report to raise the awareness of how licensing can translate to income stream for companies.
  4. Franchising, in Singapore has grown tremendously and is a preferred strategy for SMEs, as it involves minimal investment and staff, thus reducing costs. Local entrepreneurs have successfully made their mark internationally through franchising like BreadTalk, Charles & Keith, and OSIM. Larger companies can also make use of the networks of their established franchise partners to grow globally.
  5. Joint ventures enable firms to share the benefit of the work process from a local subsidiary’s knowledge of the host country such as the competitors, culture, political and business systems and access to greater resources including staff specialized in technology, finance, and so on. In November 2009, QATARQatar Petroleum International (QPI) and Shell Eastern Petroleum Pte Ltd have sealed agreements in which QPI takes stakes in two Shell Chemicals joint ventures in Singapore. The deal, to be completed in December, Shell will sell its existing shareholdings in two companies to a new joint venture called QPI and Shell Petrochemicals (Singapore) Pte Ltd.
  6. Establishing new wholly owned subsidiaries would be best adopted by firms pursuing the global and transnational strategies, for instance, Temasek Holdings (Private) Limited invested approximately S$900 million in Fraser & Neave Limited (“F&N”) through its wholly-owned subsidiary Seletar Investments Pte Ltd1 in December 2006. The investment would represent approximately 15 per cent of the total shares outstanding of F&N on a fully-diluted basis. This investment marks Temasek’s most substantial investment in the food and beverage space in recent years.
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Chapter 3: Country Focus – political economy and cultural factors of Singapore

Political and economic systems of Singapore

The Government of Singapore (GOS) is substantially consigned to maintaining an open economy and taking a leadership role strategize Singapore’s future economic development. The government do so by adopting a free enterprise, open door policy to attract foreign investors from all types of services sector involving finance, business, tourism, telecommunication and consultancy services.

As such, Singapore has exports hitting 186% of 2008 GDP. While Singapore’s stock of foreign direct investment (FDI) increased by 23.4% from $370.5 billion in 2006 to $457.0 billion in 2007. United States, Netherlands, United Kingdom, and Japan were the top sources of FDI in Singapore. Evidently, the high FDI index reflects Singapore’s role as a manufacturing base for foreign multinationals (MNCs) and as a financial, transportation, logistics, and trading hub. Also, with high real growth rate and low inflation played a great role in shaping the Singapore economy. Singapore is one of the most enterprising and dynamic economies in the world.

In this section, we compare Singapore’s recent trade performance with its performance in past crises, namely the 1997-1998 Asian Financial Crisis where many countries and industries were affected by the deep fall of exports during the recession and the 2001-2002 Dot-Com Bust where IT industries around the world were affected by the large scale cancellation of electronic orders due to the over-investments by IT firms.

In 2008 till present, Singapore is experiencing a slow down in the economy due to the US subprime crisis. The main issue is that the US Subprime Market is generating an extension of recessions in some economies and accelerating global recession in a way. Thus, Singapore’s total output of the country has decreased and the export of electronics goods has reduced significantly.

Differences in culture

The difference between international and domestic business is that countries are different. In this section, we will explore how differences in culture across and within countries can affect international business. The culture of a nation is the values that are shared among a group of people living together. While it is possible for a nation/state to have a uniform culture, this is not always the case. Multiple cultures can exist, and cultures can also cut across national borders. Taking Singapore as an example, where it is a multi-ethnic and multi-cultural society with the residential population in Singapore – 75% are ethnic Chinese, 17% ethnic Malays, 7% ethnic Indians and a small category of `Others’. Therefore foreign direct investors and managers need an understanding of the culture or cultures prevail in the countries where they do business in or intend to.

Culture, society, and the nation state

International business is different from national business because countries and societies are different. Societies differ because their cultures vary. Their cultures vary because of profound differences in social structure, religion, language, education, economic and political philosophies. 2 important implications flow from these differences:

The first is the need to develop cross- cultural literacy. There is a need not only to appreciate that cultural difference exist, but also to appreciate what such difference mean for international business. Therefore, one of the biggest dangers comforting a company is the danger of being ill-informed. Being ill-informed about the practices of another culture, any business is likely to fail. Doing business in different cultures requires adaption to embrace all aspects of an international firm’s operations in a foreign country. For instance, the way in which discussions are organized, the welfare of employees, the structure of a firm, the manner in which is the product is being promoted, the tenor of relations between the management and labour, and so on, are all sensitive to cultural differences. To overcome the danger of being ill-informed, the solution is for international business to consider employing local citizens to help them do business in a particular culture, while ensuring home-country executives work along side and understand the differences in culture and how it affects their business.

With the incorporation of large western MNCs, the Singapore work culture is a unique interaction of Asian and Western cultural exchanges. Where large western MNCs often exhibit predominantly western-style work culture, a greater influence of traditional Asian culture exists. Local firms are mainly influenced by cultural characteristics: collectivism, high power distance and high-uncertainty avoidance. Additionally, among the differences between US and Singapore’s working culture, local jargon is only one of the many. There are several other differences that are mainly caused by different circumstances and cultural values of the two nations. The bottom line is what works in one culture may not work in another.

A simple example illustrates how important cross cultural literacy can be. According to my lecturer, Mr. Rowland Sam, with his many years of experiences has shared with us how the Chinese in China who tend to be informal in nature, does not mix business and pleasure. The Chinese perceives their lunch/ tea breaks as an important factor in the lives as when it is lunch/ tea time, they would stop all work for that. Initially, Mr. Sam was taken aback as they have not finished their respective jobs or meet the deadline, but they would still go for their breaks. He then finally concluded that the breaks were the only time workers get to drink, eat and enjoy themselves after a long day’s work.

A second implication centres on the connection between culture and national competitive advantage. Fundamentally, the value systems and norms of a country influence the costs of doing business in that country which in turn influences the ability of firms to establish a competitive advantage in the global marketplace. For instance, the choice of countries in which to locate production facilities and do business; It makes little sense to base production facilities that require skilled expertise to operate, in a country where education is so poor, the pool of skilled and educated workers are unavailable, the degree of stratification of class is high and there are more than 2 linguistic groups.

But as important as culture is, it is probably less important than economic, political and legal systems in explaining differential economic growth between nations. Cultural differences are significant, but we should not overemphasize their importance in the economic sphere.

Other implications

Besides transferring of management and technological know-how, FDI also has the capabilities to bring environmental and social benefits to host country’s economies. However, there is a danger or probability that foreign owned enterprises would use FDI to “export” productions or equipments that are prohibited in their home countries due to their regulations and policies. Host countries that are keen on attracting FDI are especially prone to fall into this trap where the government would risk lowering or freezing regulatory standards. For example, MNEs moving equipments that considered to be environmentally unsuitable in their home country, to their subsidiaries in developing countries. The sort of environmental risk associated with FDI is being reflected.

Additionally, some micro-oriented problems such as the distributional changes and the need for industrial restructuring in the host economy, increases costs and inconveniences to the people. Fortunately, these problems can be salvaged when appropriate practices are pursued towards flexibility, couple with macroeconomic stability and the implementation on adequate legal and regulatory frameworks.

Not to mention that using FDI, the presence of financially strong foreign enterprises may not be sufficient to assist economic development when domestic legal, competition and environmental frameworks are weak or weakly enforced. Finally, like official development aid, FDI cannot be the foundation for solving poor countries’ development problems. With an average of 15% of capital formation in developing countries, FDI acts a complement to domestic fixed capital rather than a primary source of finance.

Likewise, while FDI may contribute significantly to human capital formation, the transfer of state-of-the-art technologies, enterprise restructuring and increased competition, it is the host country authorities that must undertake basic efforts to raise education levels, invest in infrastructure and improve the health of domestic business sectors.

The link between FDI inflows and accessibility of government information

In this section, we will find out to what extend does government information contribute to investors’ decision making and how does it influence FDI decision making. Firstly, with governments’ information, the quality of investors’ knowledge of the performance, operations and functions of companies in the target market can be further enhanced for better understanding, which enforces rules of equity and resource utilization, and promotes competition.

Secondly, by providing information, the government contributes data and perspectives on how investment projects can be best commenced and managed as foreign investors are able to obtain sufficient information from host governments in order to make informed decisions and meet obligations and commitments. Generally, it also helps build the country’s image. However, it is still possible for a country to receive lower FDI than its potential if it has a generally negative image, despite having a good resource base and strong economic fundamentals, taking Indonesia for instance. Apparently, a country’s image does affect investors’ perception and investment inflows. Hence it is a legitimate practice to use specialized and general forms of government information in order to build an affirmative image of a country. Also, reduces uncertainty about changes in policies and administrative practices in the business environment in the near future.

Finally, the accessibility of government information increases transparency of transactions, however there may be some concerns. Both the host country and investors may want to have access to information concerning each other as part of its policy-making processes and for regulatory purposes. The main objective of transparency with relation to FDI is to limit circumvention, boost the predictability and stability of the investment relationship, monitor performance and evasion of obligations by covert or indirect means.

Certain country characteristics are quote as attracting FDI, including substantial macroeconomic policy management, political freedom and stability, physical security, reliable legal frameworks, an open trading environment, competent institutions, and no or low corruption. Regulatory regimes based on transparency, predictability, and fairness is also important. But the potency of these conditions is dependent of the accessibility of information, especially government information, because foreign direct investors are affected by market failures due to their lack of adequate information due partly to geographical asymmetry of information accessibility (Portes and Rey, 2000).

Chapter 4: FDI strategy

Background to Singapore’s FDI strategy

Singapore’s assertive efforts to attain FDI for more support of its economic strategy have enabled the country to develop into a basis for multinational corporations (MNCs). Singapore’s investment promotion agency, the Economic Development Board (EDB), focuses on obtaining major investments in highly valued services and/or manufacturing activities, deepening its industrial and export structure, using selective interventions to capture cross-industry externalities and move away from labour intensive to capital-skill and technology-intensive activities, by acquiring and upgrading the modern technologies in highly internalized forms. This strategy allowed the country to concentrate in specific phases in the production process, depriving from the flow of innovation and investing lesser in its own innovative effort.

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Singapore’s FDI policies were based on liberal entry and ownership conditions, easy access to expatriate skills and generous incentives for the activities that it was seeking to promote. The EDB was mainly set up to synchronize policy, offer incentives to lead foreign investors into targeted activities, acquire and construct industrial estates to attract MNCs. The public sector played an important role in launching and promoting activities selected by the government, acting as a catalyst to private investment or entering areas that were to risky for the private sector. Often it was the efficiency, effectiveness and flexibility of government response that gave Singapore the edge over competing host countries.

The importance of inward FDI to Singapore

FDI has played a crucial role through the years in accelerating the economic development in Singapore. Being a small country with no natural resources, Singapore had depended on leading international companies not only in bringing in capital funds to broaden her economic base, but also in upgrading the technology and skill content of her industries. Since FDI is one way that Singapore can tap foreign technology, therefore a substantial amount of capital is required to help generate GDP. Furthermore, exchange rate will also play a role in determining GDP. A slow appreciation of the currency will increase the confidence of those who are investing in Singapore and help to attract more investment. The Singapore dollar appreciation will also curb imported inflation.

The importance of FDI in Singapore is reflected in the country’s ratio of inward FDI stock to GDP: at 72%, the ratio is the highest in the world. That importance is also reflected in the fact that 90% of value added in Singapore’s electronics industry (remarkable growth in exports and income) is accounted for by foreign investors, and that FDI accounts for fully two-thirds of equity capital in the country’s manufacturing sector. In addition, Singapore’s productivity increased fastest in those industries in which FDI was concentrated. The rank correlation coefficients between increases in value added per worker and increases in FDI share and FDI level were .62 and .45.

Moreover, because foreign direct investors’ profits and outward remittances have tended to move in close tandem with the general performance of Singapore’s economy and the health of its balance of payments, while the economic risk taking function is also borne by those investors, time and again Singapore’s exceptional reliance on FDI has effectively cushioned its economy from the balance of payments and debt crises that have hurt many other developing economies.

Host Country policies

FDI is attracted to Singapore mainly due to Singapore’s favourable investment climate and strategic geographical location. Some other reasons include non-fiscal advantages, Singapore’s small domestic market combined with no tariffs on most imports and low corporate tax rates have made Singapore into a popular low-risk high-return FDI destination.

In general, corporate taxes, or taxes imposed on corporate income, is an important determinant of MNCs’ location decisions, just as individual income tax rates is an important determinant of where a person decides to work and live. Theoretically, other things equal, MNCs would prefer countries with lower corporate tax rates over countries with higher rates.

Furthermore, a wide range of new incentives have been added over the years to promote FDI inflows. Burdensome regulations and performance requirements for FDI can offset a generous package of tax incentives. However, in Singapore’s case, the restrictions and regulations governing both the entry and operation of foreign enterprises and personnel are minimal. Overall, foreign investors are subject to the same government regulations as local investors, and both have a lot of freedom in pursuing their profit objectives. In addition to the general absence of performance requirements, Singapore has also signed a large number of avoidance of double taxation agreements, which mutually protect countries for a specific time against war and non-commercial risks of expropriation and nationalization.

The four areas of Singapore’s government regulations in different areas relevant to foreign investors are the foreign exchange regime, equity ownership, performance requirements and human resources. First, the foreign exchange regime is highly liberal and freely allows repatriation of capital and remittance of profits, dividends, interests, royalty payments and technical licensing fees, as well as the free importation of goods and services for consumption, investment and production purposes. Second, foreign participation is permitted in most sectors of the economy except for some limitations in the monetary sector, areas of trained and skilled personnel. However, 100% foreign equity ownership is readily permitted. Third, there are no performance requirements for foreign investors such as domestic value-added content and local sourcing of inputs, no restrictions on borrowing from the domestic capital market, and no regulations and restrictions governing the transfer of technology. Fourth, there are only minimal restrictions on the recruitment of foreign personnel; employment passes are required but the government issues these quite liberally. However, the government does encourage foreign companies to hire local managerial and technical personnel.

Singapore’s non-fiscal advantages for foreign investors include strategic location, physical and financial infrastructure, human resources, political and social stability, good governance and a foreign investment policy that is liberal, comprehensive and well co-ordinated.

Singapore’s location astride major sea and air routes and in the heart of Southeast Asia – an economically dynamic region rich in natural resources – gives it a significant locational advantage in trade and investment. Singapore’s highly liberal trade regime has further reinforced its natural locational advantage and turned it into Southeast Asia’s undisputed trade hub, which, in turn, facilitates the export and import activities of foreign firms locating in Singapore. In addition, Singapore’s time zone advantage, straddling East Asia and Western Europe, enables its financial markets and institutions to perform transactions with Japan, Europe and the US within its working hours. Singapore had reinforced and exploited its strategic geographical location through large investments in physical infrastructure. Comprehensive air and sea transport and telecommunications link the city-state with the rest of the world. The domestic land transportation network is also well-developed and efficiently connects the airport and sea port to the business and financial districts. Singapore’s airport and sea port are world-class facilities that are consistently ranked as among the best in the world. Its advanced telecommunications infrastructure facilitates business transactions with the outside world. Singapore has achieved world-class status in information and communications technology (ICT), while the government has ensured a reliable supply of power and water.

Industrial estates, business parks and science parks provide ready access to land and factory/office space and industrial, commercial and research facilities and amenities -reduces the capital investment requirements of foreign investors, enables quick start-ups, and promotes external economies of industrial clustering. Singapore is a major Asia-Pacific financial centre, and its well-developed financial markets, large inflows of capital, and abundance of national savings all contribute to the low cost of capital. The government’s human resource policy focuses on improving the productivity of the labour force through education and training. Singapore has adopted one of the most liberal immigration regimes in the world in order to expand its quantity as well as enhancing its quality. In terms of education, the government emphasizes technical and vocational education below tertiary level to provide a growing pool of technically competent workers, along with rapid expansion of engineering, business and computer science education at the tertiary level. Women were also encouraged to enter the workforce in a bid to boost the female labour force participation rate.

Another major selling point of Singapore for foreign investors is its well-known socio-political stability and good governance. Its political background is well-secured and there is no history of incidents concerning politically motivated damage to foreign investments in Singapore. Not to mention that Singapore ranks as one of the least corrupt country in the world. Singapore has, and dynamically enforced, strong and solid anti-corruption laws. Political stability and an honest and effective political leadership and government have always been key elements in Singapore’s favourable business environment.

A pro-business government policy environment and high-quality civil service complements Singapore’s excellent infrastructure and public capital. A remuneration system of paying relatively high salaries to civil servants attracts a constant stream of talented individuals to work for the government. World-class infrastructure and world-class government combine to offer a highly favourable environment for doing business. Singapore is consistently ranked among the most competitive countries in the world terms of providing a sound business environment. According to the World Competitiveness Yearbook (WCY) 2005 by the Institute for Management Development (IMD), which ranks nations’ business environments by analyzing their ability to provide an environment in which enterprises can compete effectively, in 2005 Singapore ranked 3rd among the sample of 60 major industrialized and emerging economies.

The FDI has increased and better enhanced the quality of Singapore’s entrepreneurial, managerial, marketing, technological and manpower resources. FDI had significantly contributed to higher exports and economic growth. However, further investigation also suggests that continuing large inflows of FDI may not be fully absorbed by the economy due to the scarcity of land and shortage of labour. This may lead to crowding out of domestic entrepreneurs. In order to overcome this problem, more domestic entrepreneurs are needed to emerge and invest outward so as to reduce the reliance on FDI.

Chapter 5: The outcomes of Singapore’s strategies at attracting inward FDI

Recent FDI

Since 2003, one of the most active sectors in attracting FDI is the chemical sector. Through its subsidiary Faci Asia Pacific Private Ltd., Faci SpA, has invested approximately US$5 million in a second metal stearate plant on Jurong Island, Singapore’s chemical complex. And in 2006, GlaxoSmithKline (GSK) has developed a special relationship with the country, opening a number of ventures, with its investment in an antibiotics plant in the Tuas Biomedical Park. Not to mention, the Integrated Resorts have unnoticeably boost the foreign investments scene in Singapore and the many efforts made by the government to attract and sustain FDI such as, the revamping of Orchard Road for reportedly $40 million and establishing of the Circle line to facilitate travelling which completes just in time for the Youth Olympic games in 2010.

Demography of FDI inflows into Singapore

This section shows the detailed statistical tables on FDI, earnings and return on investment by country and activity are presented in the report. See Appendix A.

Chapter 6: Impact of global efforts at Liberalization of FDI

The impact on development and economic growth warranted since the early 1980s succeeded with vast exports and the practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise. With regard to static comparative advantage which refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower marginal cost and opportunity, such has low impact for industries that were near maturity. In any case, even if liberalization is necessary when an industry attain the maturity level, it must be rolled out selectively and with moderate inclination.

Trade liberalization has several impacts including: (a) a decrease in imported goods prices due to relaxation and reduction in tariffs; (b) an increase in consumer demand due to low prices of goods and services; and (c) an increase in domestic competitiveness in international markets due to tariff reductions across national borders. This situation clearly will create opportunities for exporting and importing. However, some experts have criticized trade liberalization by arguing that it potentially damages domestic production and food security as reductions in tariffs will cause a decline in the relative price of imported goods and an increase in imports.

In order to sustain economic growth, policies that enable an economy open to investment and trade to the rest of the world are needed. If the people’s living standards are not introduced to the rest of the world, then evidently, no country in the immediate future and the recent past has achieved economic success.

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Therefore, the move away from FDI liberalization would raise important questions about whether the high growth rates that have accompanied the current era of globalization can be sustained. This section, we will analyze the increasing set of new rules governing inward FDI. This analysis has four main parts. First, it identifies these legislative and regulatory changes to see what features seem to be common across countries, and to evaluate whether these policies are actually restricting FDI flows or may be enhancing them by codifying and clarifying practices. Second, it assesses the economic consequences of greater FDI restrictions, not just for host countries but for source countries and for the global economic system overall. Third, it discusses the economic and political drivers of these FDI policy changes, including the emergence of new countries as large foreign investors, the greater role for government-linked firms, and the growing wariness in many countries toward globalization of all forms. And fourth, it recommends policies for both individual countries and multilateral organizations such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD).

Impacts on Singapore

In summary, a protectionist drift in FDI policy is in progress. Unfavourable acknowledgement can be seen in official actions in some countries as well as in the changed public sector. An increased politicization of FDI has resulted in chill investment. As such, quantity and quality of global FDI flows is reduced which may affect the growth greatly should policy become even more restrictive. Smaller and poorer-quality FDI flows, in turn, matter because it is well documented that FDI tends to benefit both host and source countries alike. The policy recommendations in this report aim to correct this protectionist drift by proposing guidelines for how countries can better regulate FDI yet still reap its economic benefits.

APEC trade liberalization can have significant effects on international capital flows, although this mechanism affects real exchange rates and trade flows. Allowing for the adjustment, international capital flow shows that some common perceptions in industrial economies of the effect of opening up to trade with developing economies need to be re-evaluated.

A positive impact by APEC trade liberalization was found by Chan and Nugent (1998). Their study showed that APEC trade liberalization could be quite important in terms of trade and income growth, both of APEC countries and the world. Based on reliable model, bilateral trade flows on country size, the study showed that the removal of tariff barriers would have the greatest impact, increasing APEC imports (and presumably exports) by more than 13 per cent. Eliminating NTBs would increase APEC imports by an additional 5.5 per cent.

Another important reap from APEC liberalization is due to stimulating the liberalization barriers relating to imports worldwide. If this is successful, APEC imports would rise by an additional 4.1 per cent, global imports would also have this effect, however, the greatest expansion would have to be from liberalization by the rest of the world.

Due to being encouraged by liberalization measures in Indonesia, Malaysia, the Philippines, and Thailand and in the Indochina states of Cambodia, Laos, and Vietnam, Singapore is taking the role in regional integration. Singapore is also captivating the lead in trading partner and investor in these territories. With the growing investment cooperation in the ASEAN growth triangle and under the ASEAN Free Trade Area, trade and investment has flourished.

Multilateral Agreement of Investment (MAI)

“The MAI is a new international economic agreement being negotiated at the Organization for Economic Cooperation and Development (OECD). The MAI is designed to make it easier for individual and corporate investors to move assets – whether money or production facilities – across international borders. The MAI would take the investment provisions of the NAFTA, amplify these provisions, and apply them world-wide.” [1]

The Multilateral Agreement on Investment (MAI) would open up all the economic sectors of a signatory nations’ economy to foreign investment including real estate, natural resources and media broadcasting. There is a provision that in terms of taxes and regulations, foreign-owned companies and local companies would be granted the same privileges. However, most countries are in compliance with restrictions on foreign investment according to the nation’s interest.

Under the MAI, foreign-owned companies are not obligated Under the MAI, foreign-owned companies are not obligated to abide by the governments’ demand on performance standards in the areas of the required amount of local material in production, taking in local manpower, being cautious of workplace safety and the sharing of latest technology – which measures are also imposed on domestic companies. In the growing countries, investment requirements are a means to ensure that the local population embrace the benefits directly from the foreign investors as well as to avoid damages. Due to this process of equal treatment principle and ban on performance requirement, it restricts the types of laws a government can impose on non local companies. As such the government has minimal options that their country directly benefits from these non local investors.

Will it benefit the world economy?

Beside standard procedures of liberalizing investment rules, there is a powerful process being developed to enforce these far-reaching rules. It is a binding dispute resolution process which is accessible by corporations and their home nations. In the event it is unfairly affected by a national requirement, the affected company could apply to seek a full hearing and action through this mechanism that a response from the country is mandatory. However, there will be no equal access to citizens or even governments who alleged that they have been harmed by the negligence or misconduct of corporations.

The agreement is structured in a manner that will establish the corporations with no word about their responsibilities and obligations to operate in an environmentally sound manner, to be more transparent and provide information to communities in which they operate, to abide by worker protection laws and fair labour standards, and to respect human rights. However, the environmental and social obligations of corporations were not being considered and analyzed critically.

In this fast growing world dominated by private capital flows, which have more say in a nation’s future, Singapore need leadership from the United States and the other OECD nations to guarantee that corporations have some responsibilities, not just more privileges, that they become accountable to the public’s interest and not just to their interest in profit.


As the MAI is currently foreseen, it is a risk to environmentally and socially sustainable development. Nevertheless, there is a higher possibility to undertake some of the problematic issues augmented by uncontrolled capital mobility and enforce liable environmental and social standards for corporations, if MAI is properly devised with public reviews and feedbacks. Despite the fact that trade and investment agreements are not the ideal medium for addressing the issues of sustaining environmental and social development, it seems that they are the only medium that appears to have the political interest and will of governments to obstruct progress on sustainability issues. Nations should therefore use the agreement as an opportunity to exert some control over the extensive pursuit of private capital flows.

Chapter 7: Future directions of Singapore

The new wave of FDI

Although not new, the internationalization of R&D activities by MNCs has been intensified and at present incorporates new host countries. Recently, due to increasing global competition, the advancement of technologies and more constructive environments for investments, developing countries have a greater level of significance as a destination for the global relocation of R&D investments. New technologies in sectors such as microelectronics, biotechnology, pharmaceutical manufacturing, chemicals, and software are being introduced by MNCs. Since developing countries want to benefit from learning through spillovers, they attempt to make their economic environment more desirable and valuable in order to attract FDI that is particularly linked to R&D. Taking for example, Singapore in 2003, has drawn over $500 million of biotechnology investments and in 2004, it rose to $700 million with several large investments made by biotechnology transnational corporations (TNCs). See Appendix B for Figure 7.1.

My Views

In my opinion, for Singapore to attract and sustain FDI in all aspects, the structure that supports innovative activities must be further reinforced such as increasing research ability in public and private sectors, the availability of skilled human resources, policies to strengthen R&D infrastructure and so on, so as to foster innovation and local development. Although Singapore’s education system and its no tariffs on most imports and low corporate rates are its main elements of attraction, there is always room for improvement.

Chapter 8: Conclusion

Summing up, the study of the strategies adopted by Singapore to attract inward FDI, the challenges that occurred, results and future directions were critically analyzed and supported with references and findings. Although Singapore is a very attractive destination of FDI, it still has a few areas where improvements can be made in order to maximise economic growth, profits and strategic development. So long as Singapore keep up with trends in the shift towards services, develop cross cultural literacy to avoid being ill informed, sustain its competitive advantage, ensure accessibility of government information to foreign investors and continue to invest in the up and coming, biotechnology industries, it will continue to prosper.



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Periodical articles

  • Ministry of Trade and Industry, Mr S Iswaran at Franchising & Licensing Asia 2009, 15 Oct 09. URL:

Theses, projects, reports

  • Leo Grunfled.(2005) Greenfield investment or acquisition? Optimal foreign entry mode with knowledge spillovers in a cournot game.
  • Parisa Manafnezhad. Foreign Direct Investment and Steady Shift to Services (Trade Offs and Challenges), Statistical Center of Iran.
  • URL:
  • Hangzhou Xihu (2006) News Release, Exporting Singapore’s Expertise in Hospitality and Tourism to Hangzhou Xihu (Westlake). URL:
  • Temasek Holdings Limited (2006) announces investments in Fraser & Neave Limited URL:
  • Organization for economic co-operation and development (OECD). Foreign direct investment for development, maximising benefits, minimising costs. URL:
  • Associate Professor Donghyun PARK, Foreign Direct Investment and Corporate Taxation -Overview of the Singaporean Experience. URL:
  • Abraham A. Azubuike.(2006) Accessibility of Government Information as a Determinant of Inward Foreign Direct Investment in Africa, ECA Library, United Nations Economic Commission for Africa Addis Ababa, Ethiopia URL:
  • Rina Oktaviani & Eka Puspitawati & Haryadi, Impacts of ASEAN Agricultural Trade Liberalization on ASEAN-6 Economies and Income Distribution in Indonesia URL:

Electronic information

  • Singapore’s services sector in perspective: trends and outlooks.
  • URL:
  • Sitra scores several turnkey project contracts with new SBU – total design and build solution. URL:
  • Association of Singapore Marine industries – A closer look at the marine industry. URL:
  • SPRING, franchising and licensing association (Singapore). URL:
  • Qatar buys stakes in Shell Chemicals joint venture in Singapore. URL:
  • Global recession due to US Subprime crisis.
  • URL:
  • Guide to Singapore work culture for newcomers. URL:
  • Singapore investment developments, first quarter, 2003. URL:
  • GlaxoSmithKline Vaccine Manufacturing Facility, Tuas, Singapore. URL;
  • WINDS, Multilateral Agreement on Investment, URL:
  • Transnational Corporate Bill of Rights’ – Negotiations for a Multilateral Agreement on Investment (MAI) URL:


  1. WINDS, Multilateral Agreement on Investment, URL:
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