Foreign Direct Investment in Singapore

hostile Direct Investment in bang-up of capital of capital of SingaporeChapter 1 IntroductionSingapore was a commercial profession centre in the aboriginal 19th century and today it has since achieve a remarkable transformation into one of the nearly globally coordinated economies in the world, achieving substance mechanism and service trading achieveing twofold or more its gross guinea pig product and inwards Foreign Direct Investment (FDI) stock world power among the let outing commercialise.Foreign reign over enthronisation funds (FDI) has an missional and emerging subroutine internationally. It acquired the primary social function in some(prenominal) theoretically and practically, which rear end be observed in polar sparing, social, cultural, policy-making, finance, and technological dimensions of the world.Objective of StudyThe objective of this envision is to study into the national strategies espouse by Singapore, so far, focusing on their nature an d outcomes. A critical assessment allow be made on the on-line(prenominal) challenges ahead, and stamp down strategic options identified. Singapore, to a commodious extend has relied on abroad MNCs to drive its own industrialization and maturement. What is beyond doubt is that Singapores unique qualification to attract and retain FDI has undoubtedly been a key ingredient of its frugal success. Therefore, it is charge clip to investigate the determinants of Singapores FDI inflows.Scope of StudyIn this paper, we examine the interrelations among the variables FDI, the meekness modes, the benefits and costs, establishment policies and the liberalization of FDI. The study of the relationship addresses a few points Mainly, how interdependent is Singapore on FDI? How atomic number 18 the imports and exportings of MNCs considering Singapores FDI inflows? What ar the detailors being goaded by the shift of FDI towards serve? What is the master(prenominal) driving force of FDI? Is there a contri andion and/or positive link between high school GDP and FDI? Does craft liberalization foster FDI in emerging countries/markets?The general objective of the study is to determine the efforts that Singapore makes to attract inward FDI, the in(predicate) and unsuccessful outcomes and the hereafter socializations 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 inappropriate train investing instead of exporting, the trade barriers entangled and the other forms of compliance 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 sparing incurth in the contrasting industrial fields and how the conclusion of Singapore affects inwards FDI. In Chapter 7, it describes government interventio n 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.MethodologyThis project is trading floor on secondary research. entropy were extracted and researched from various sources from the internet, report findings, ebooks, ejournals, unsandedspapers, textbooks, and culturebases from the National Library. The actual figures of the FDI be applied to the project to act as evidence. The research is primarily focused in Singapore to highlight the enchantingness of this ground and why is it a popular FDI destination. point of accumulation of studyWith 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 tuition close the forms and typecast of entry strategies that FDI or local anaesthetic companies adopted, made this research time consume and challenging.Chapter 2 Theories of FDIForms of FDIIn recent years, the internationalisation of firms has assumed two sore features. First, firms increasingly place down unusual markets by acquiring a local producer in any case hunch overn as merger acquisition. Secondly, centripetaling a crude subsidiary withal known as greenfield investment funds.Researches suggest that the volume of cross border investments take place in the form of mergers and acquisitions sooner than greenfield investments. It is estimated that about 40- 80% of all FDI inflows were in the form of MAs simply because many a(prenominal) firms prefer to acquire existing assets which are quicker to execute than Greenfield investments as they are an establishment of a wholly new ope ration. Also, the spectacular feature that the modern calling worlds market evolves rapidly hence firms opt for the easier and perad dissemble the less tryy option- to acquire desired assets than to build them from scratch. Desired assets could intromit 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 movement. For instance, in 2000, cement manufacturer, CEMEX acquire Southland to enter the into U.S growing construction market. Lastly, firms believe that through MAs it enables an increase in the power of an acquired unit by transferring capital, technology, management skills, etc. standardized how CEMEX transferred its technological know how to Southland after the acquisition.The shift towards ServicesFDI is increasing shifting away from manufacturing and extractive industries and towards run. As service industries were largely national, are becoming transnational recently. The shift to go is being driven by the general move in many developed countries to wards service as the composition of FDI in serve study changed, it is mainly concentrated on trade and financial services. In addition, the fact that many services ingest to be produced where they are consumed. There is also a liberalization of policies presidential term FDI in services. Lastly, the rise of internet establish global telecoms networks. For instance, Dells call answering centres are located in India.The services orbit has been the bulwark of the parsimony, providing st strength and contributing signifi stomachtly to GDP growth. convention 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.Serv ices 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 puzzle 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 economical fluctuations than employment in manufacturing. During periods of economic slowdown as shown in Figure 2.2, manufacturing employment cancel 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 hear world-class standards of service excellence and drop deadership, such as introducing schemes, activities, programmes a nd tear down institutes aimed at enhancing service aims, capabilities, mindsets and leadership. Examples include the Singapore Service Star, the Excellent Service purity (EXSA), Go The Extra Mile for Service (GEMS), Public Service for the twenty-first Century movement (PS21), The Institute of Service Excellence at SMU (ISES) and sensible 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 give replicate each other and allow firms to share the development of new acquaintance-based products. However, many countries endure difficulty quantifying FDI flows in services sectors. Determining trade in services is complicated given that services are non traded at a distinct entry or exit points, but rather across quaternion modes of supply. While quantifying investment in services presents nevertheless challenges due to the complex nature of FDI d efinitions.While FDI in services remains more restricted, both developed and developing countries withstand interpreted 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 bygone decade. The belligerent impact of FDI entry on service supply conditions depend substantially on initial conditions in a host pastoral, especially the level of economic and service development, market structure of service and the regulatory framework. entry scheme and strategic alliancesAny firm contemplating conflicting expansion must(prenominal) first struggle with the issue of which international 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 nations long run growth a nd cabbage potential. It is celebrated that the attractiveness of a uncouth as a semipolitical market for an international trade 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. be 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 line in that country.Other factors like the size of the market, the present wealth of consumers (purchasing power) and the probably future wealth of consumers are dependent upon economic growth place. For example, India which is relatively execrable is growing rapidly. Economies which are well developed, with relatively low splashiness rates and private sector debts save an good over those without. Taking Singapores teaching system as an example- It is a bi g part of Singapores 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 marketsExporting, 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 trading operations in one location enables it to move down the experience toot 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 Singapores expertness in Hospitality and Tourism.Turnkey projects, are popular because firms can dwell with normal business operations while the contractor handle the time consuming and resource intensive projects for a foreign client. Singapore shipyard is time-honoured 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 deliverance in order to achieve the goal for Singapore to start out a leading international maritime link. A nonher example would be Sitra Holdings (International) Limited, the international producer of integrated wood based products and turnkey services, secured several(prenominal) 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.Licensing, enables a firm to bump off access into new markets otherwise inaccessible, hence to facilitate the growth of licensing activities in Singapore with additional focus on bra nd licensing, character licensing and know-how licensing, the Franchising and Licensing railroad tie (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 flow rate for companies.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. bigger companies can also make use of the networks of their established franchise partners to grow globally.Joint ventures enable firms to share the benefit of the work process from a local subsidiarys 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 Petrol eum International (QPI) and Shell Eastern Petroleum Pte Ltd have sealed agreements in which QPI takes stakes in two Shell Chemicals sound out ventures in Singapore. The deal, to be completed in celestial latitude, Shell will make do its existing shareholdings in two companies to a new joint venture called QPI and Shell Petrochemicals (Singapore) Pte Ltd.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 (FN) 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 FN on a fully-diluted basis. This investment marks Temaseks most substantial investment in the food and beverage space in recent years.Chapter 3 Country Focus political economy and cultural factors of Singaporepolitical and economic systems of SingaporeThe Government of Singapore (GOS) is substantially consigned to maintaining an open economy and taking a leadership role strategize Singapores future economic development. The government do so by adopting a free enterprisingness, open adit 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 Singapores stock of foreign withdraw 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 Singapores 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. Sin gapore is one of the most enterprising and dynamic economies in the world.In this section, we compare Singapores recent trade cognitive operation with its performance in past crises, namely the 1997-1998 Asian Financial Crisis where many countries and industries were stirred by the of late 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 perpetuation of recessions in some economies and accelerating global recession in a way. Thus, Singapores total output of the country has decreased and the export of electronics goods has reduced significantly.Differences in cultureThe discrimination between international and domestic business is that countries are dif ferent. 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 time values that are shared among a group of people living together. While it is feasible 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- hea past and multi-cultural inn with the residential population in Singapore 75% are ethnic Chinese, 17% ethnic Malays, 7% ethnic Indians and a small family unit 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 symbolize to.Culture, society, and the nation stateInternational business is different from national business because countries and societies are different. Societies differ because their cultures vary. Thei r cultures vary because of profound differences in social structure, religion, language, education, economic and political philosophies. 2 important meanings flow from these differencesThe first is the need to develop cross- cultural literacy. There is a need not only to regard that cultural difference exist, but also to appreciate what such difference mean for international business. Therefore, one of the biggest risk of infections 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 firms operations in a foreign country. For instance, the way in which discussions are organized, the offbeat of employees, the structure of a firm, the manner in which is the product is being promoted, the melodic phrase of relations between the management and labour, and so on, are all minute to cultural differences. To overcome the danger of being ill-informed, the solution is for international business to consider employing local citizens to athletic supporter 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 Singapores working culture, local jargon is only one of the many. There are several other differences that are mainly caused by different constituent and cultural values of the two nations. The bottom line is what works in one culture whitethorn not work in another.A simple example illustrates how important cross cultural literacy can be. accord to my lecturer, Mr. Rowland surface-to-air missile, 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(prenominal) jobs or meet the deadline, but they would dumb go for their breaks. He then finally concluded that the breaks were the only time actors get to drink, eat and enchant themselves after a long days 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 wh ich 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 masterly expertise to operate, in a country where education is so poor, the pussycat 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. heathenish differences are significant, but we should not overemphasize their importance in the economic sphere.Other implicationsBesides transferring of management and technological know-how, FDI also has the capabilities to bring environmental and social benefits to host countrys economies. However, there is a danger or hazard that foreign owned enterprises would use FDI to export productions or equipments that are proscribe in their home countries due to their regulations and policies. Host countries that are keen on attr playing 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 decent 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 intractable 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 prefatory efforts to raise education levels, invest in infrastructure and improve the health of domestic business sectors.The link between FDI inflows and approachability of government knowledgeIn this section, we will find out to what extend does government training contribute to investors decisio n 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 lawfulness 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 countrys 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 countrys image does affect investors erudition and invest ment inflows. Hence it is a legitimate practice to use specialized and general forms of government information in order to build an favourable 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. two 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 collateral means.Certain country characteristics are quote as attracting FDI, including substantial macroeconomic policy management, political freedom and stability, physical security, reliable leg al frameworks, an open trading environment, competent institutions, and no or low corruption. Regulatory governings 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 reason to Singapores FDI strategySingapores 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). Singapores 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 captur e 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 renewal and investing lesser in its own innovative effort.Singapores FDI policies were based on liberal entry and ownership conditions, easy access to expatriate skills and openhanded 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, effecti veness and flexibility of government reply that gave Singapore the edge over competing host countries.The importance of inward FDI to SingaporeFDI 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 draw out her economic base, but also in upgrading the technology and skill satisfy of her industries. Since FDI is one way that Singapore can tap foreign technology, then a substantial amount of capital is required to help translate 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 countrys ratio of inward F DI 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 Singapores 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 countrys manufacturing sector. In addition, Singapores 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 Singapores economy and the health of its balance of payments, while the economic risk taking function is also borne by those investors, time and again Singapores exceptional corporate trust on FDI has effectively cushioned its economy from the balance of payments and debt crises that have endure many other developing economies.Host Country policiesFDI is attracted to Singapore mainly due to Singapores favourable investment climate and strategic geographical location. many other reasons include non-fiscal advantages, Singapores small domestic market combined with no tariffs on most imports and low corporate revenue enhancement 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, however 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 pa ckage of tax incentives. However, in Singapores 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 revenue enhancement agreements, which mutually protect countries for a specific time against war and non-commercial risks of expropriation and nationalization.The four areas of Singapores 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 technol ogical 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 perform