“The main factors, which a firm would consider in selecting a location for

foreign direct investment & the impact of foreign direct investment (FDI) in
Singapore”

Abstract
Foreign direct investment (FDI) has played a central role in Singapore’s
remarkable economic success. Rapid growth of FDI is an integral element of
economic globalization and governments around the world are competing
vigorously with each other to attract FDI by offering fiscal incentives to foreign
investors. At the heart of Singapore's thriving business ecosystem is a unique
blend of competitive strengths that makes Singapore the location of choice for
global enterprises. This distinctive combination of CORE competencies, coupled
with Singapore's physical and metaphorical location between Western
sophistication and Eastern growth potential, confers a host of benefits to the
businesses that invest and reside here. A cosmopolitan society, Singapore is an
ideal platform for the meeting of global talents, ideas, funds and businesses. In
this paper, I show the factors for selecting a location for Foreign Direct
Investment (FDI) and the impact of Foreign Direct Investment (FDI) in economic
development of Singapore.

Introduction

FDI is now more important than trade as a vehicle for international economic
transaction (World Investment Report 1995). In the age of anxiety it has been very
crucial task both for the foreign investors (MNCs) and Governments whether the
investment would be viable in consideration of the expected return and sustainability of
the project on the one hand, and the socio-economic development of the country on
the other (Rana, 2005).
.

Foreign direct investment (FDI) is an integral part of an open and effective international
economic system and a major catalyst to development. Yet, the benefits of FDI do not
accrue automatically and evenly across countries, sectors and local communities.
National policies and the international investment architecture matter for attracting FDI
to a larger number of developing countries and for reaping the full benefits of FDI for
development. The challenges primarily address host countries, which need to establish
a transparent, broad and effective enabling policy environment for investment and to
build the human and institutional capacities to implement them.

Singapore is a highly developed and successful free market economy in which the state
plays a major role. It has an open business environment, relatively corruption-free and

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transparent, stable prices and one of the highest per capita gross domestic products
(GDP) in the world. Exports, particularly in electronics and chemicals, and services
provide the main source of revenue for the economy, which allows it to purchase natural
resources and raw goods which it does not have. Singapore could thus be said to rely
on an extended concept of entrepot trade, by purchasing raw goods and refining them
for re-export, such as in the wafer fabrication industry and oil refining. Singapore also
has a strategic port which makes it more competitive than many of its neighbors to carry
out such entrepot activities. In this paper I try to explain the impact of FDI in Singapore’s
economic development and also the factor affecting on selection of a location for FDI.

Key factors affecting on selection of a location for FDI

Revenue Cost factor –Risk

Investment decisions are made on the basis of expected opportunities versus risks.
Opportunities, in turn, are determined by revenues, less cost. From a broad scanning
perspective, there are variables that indicate the amount of revenue, cost factors, and
risk that might be forthcoming from one country versus another. The factors that have
the most influence on the placement of sales and production emphasis on market size,
ease and compatibility. Some of these variables are more important for sale allocation
decision; other is more important for the production allocation decision; others affect
both (Daniel 1998). Either way, management must make projections about what will
happen to future sales. Such data as GNP, per capita income, growth rates, and size of
the middle class and level of industrialisation, inflation rate often are used as broad
indicators of market size and opportunity (Rana, 2005).

Influential Financial Variables- Risk

Companies use a variety of financial techniques to compare potential projects in terms
of different locations, including discounted cash flow, economic value added, payback
period, net present value, return of sales, return on assets employed, internal rate of
return, accounting rate of return and return on the equity (Daniel 1998).

Monetary Risk
If a company expansion occurs through direct investment abroad, access to the
invested capital and the exchange rate on its earnings are key considerations. Liquidity
preference is the theory that investors usually want some of their holding to be in highly
liquid assets, on which they are willing to take a lower return (Lesleie 1996). Therefore,
investors must assess the risk level of host country currency, exchange rate fluctuation,
foreign debt and currency reserve of the country (Rana, 2005).

Competitive Risk factor

MNCs are always looking for the markets where entry barrier is not strong enough to
overcome the competitive risk and monetary risk (Kanabayashi 1992). Therefore,
number of competitors are also a crucial factors considered in the selection of a
location. Aside, forward and backward linkage of the industry in a certain country is also
important factors that MNCs must consider for foreign direct investment (Rana, 2005).

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Cost and Resource Availability
The analysis some what simpler for a resource that is to be transferred, such as raw
material or technology, than for a resource that will be used to make a product or
component abroad for export into other markets. A company eventually must examine
the costs of labour, raw material inputs, capital, taxes and incentives provided by host
Government, transfer costs in relation to productivity in order to determine a least-cost
location to enjoy the benefit of economies of scale (David 1994).

Institutional Prerequisites considered

The role of governments in providing an environment conductive to FDI cannot be over-
emphasized. First of all they need to establish prerequisites such as a stable political
and economic environment, the rule of law and secondly infrastructure. An educated
and technically skilled work force, low wage, an open economy and stable currency are
also essential (UNCTAD 1997). Most of these prerequisites can be examined through
the lens of macro institutional economies (North 1991).

Technological Advancement
However, companies must emphasis on technological development of the host country
and support services with company personnel. It also assesses the degree of restriction
on the percentage of ownerships and profits to be easily remitted. Recently, we see the
software investments are heading towards India (Bangalore).

Geographic- language- market –similarities

Companies are highly attracted to countries; that are located nearby, that share the
same language, that have conditions similar to those in their home countries ( Daniel
1998). Therefore, it might seem that companies would go first to those countries where
economies are least correlated with that of the home country. Though it is not applicable
now, the current scenario of FDI is moving towards cost–cutting and resource seeking
or market seeking destinations.
Many previous studies have found cultural proximity to the home country to be a
significant determinant of FDI (Dunning1993). But now a day, due to globalisation, the
effect of cultural distance is likely to dilute progressively. Moreover, MNEs might also be
compelled to ignore the greater cultural distance of developing countries in favour of
their low-wage advantages and opt for them as the ‘next best’ locations.
Notwithstanding each MNEs unique FDI location decision collectively integrated regions
rather than specific countries (Sethi 2003).

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Impact of FDI in Singapore

Singapore is a leader in developing Asia in both these respects, and its strategy is
therefore worthy of brief mention. The Government has displayed an ability to adjust the
policy settings as the economy has shifted quickly from its labor-intensive
industrialization phase to one that is increasingly knowledge and technology intensive.
The Government anticipated the shift out of low-wage activities, and developed several
programs to upgrade local capacities (ADB, 2004).

In addition to its excellent infrastructure, critical for highly trade-intensive industries, the
Government introduced a Local Industry Upgrading Program, as a means of tapping
into MNEs’ expertise. Technical skills were upgraded continuously through high-quality
technical, vocational, and tertiary education. As the country began to lose comparative
advantage in labor-intensive sectors, the Government worked with MNEs to induce
them to stay and upgrade, while shedding uncompetitive segments. On-the-job training
was facilitated by the Skills Development Fund, funded in part by a levy on foreign
workers. The Economic Development Board introduced schemes to fund MNEs’ local
R&D activities. The Board was highly attentive to these firms’ requirements, and was
also willing to target specific MNEs that it considered would be useful for future
industrial growth (ADB, 2004).

Some commentators feel that, as a tiny, heavily managed city state, Singapore’s
experience is not internationally replicable. However, while the country’s geography,
history, and political economy are unique, there is no reason why other countries cannot
learn from its success. After a huge FDI in Singapore there are so many improvements
are visible. These are:

• Its economy is open, and so firms are immediately subjected to some sort of market
discipline and test.

• As part of the package to induce MNEs, it offers some of the world’s best physical
infrastructure, and a predictable and business-friendly investment climate.

• The Government has demonstrated a clear capacity to recover and learn from
mistakes. A highly open economy reveals these mistakes quickly, and Singapore’s
largely meritocratic Government is not hostage to the usual set of vested interests that
constrain governments from adopting first-best solutions.

• The Government has revealed a willingness to open its labor market to an extent that
is rare among modern nation states. At least 25% of its work force are foreign, and a
higher percentage were born overseas. With its high salary structure, it is able to recruit
in the most cost-efficient labor markets regionally and internationally.

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Conclusion

The FDI impacts on competition, concentration, and profitability in Singapore is mixed,

as it is in the general literature. A priori, FDI entry might be expected to lower
concentration simply because a new entrant means more producers. Of course, in the
longer term, concentration could rise if the foreign firms were able to drive out local
competitors, or if they located in oligopolistic industries. In addition, here too the host
Singapore’s trade policy matters: MNEs are more likely to be attracted to countries with
outward-oriented regimes to be able to fully exploit their vertically integrated
international production activities. Thus, if their primary motivation is export orientation,
as it normally is, competition issues are largely irrelevant. In some cases, MNEs, by
their sheer size, can even eliminate competition by crowding out domestic producers.
As integral parts of global value chains, MNEs have a built-in advantage over their local
competitors.

No absolute consensus on the positive effects of FDI have been reached by all
governments or the general public, reflecting differences in economic conditions,
specific histories of utilizing FDI, cultural variation, and ideological differences. However,
greater flows of FDI across borders have increased the impact of FDI on national
economies and the international economy as a whole, with the view widely held in
Singapore that the net effect was positive.

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References
1. Rana, Md.Bakhtiar and Rahman, M.Bazlur (2005), ‘Index of Bangladesh as a destination of
FDI: an assessment of FDI impact on socio-economic development’, Indonesian
of Management & Accounting Review, Trisakti University, Indonesia
2. Asian Development Bank (2004), ‘Impact of Foreign Direct Investment’, Asian Development
Outlook 2004: III. Foreign Direct Investments in Developing Asia