Extending the Second Wing: The Outward Direct Investment of Singapore
University of Vaasa, Department of Economics Working Paper No. 3
19 Pages Posted: 19 Dec 2002
Date Written: September 2002
The outward FDI of Singapore have increased rapidly during the last few decades, a development that strongly contributes to deeper integration of the country's economy with that of other countries in the region. A good deal of investment is targeting other parts of the world as well, especially Western Europe and the United States. Among the reasons for the increasing FDI have been mentioned the small domestic markets, the high costs of labour and land the opportunities that are emerging in neighbouring countries. Moreover, it has been Government policy to promote building an "external wing" for Singapore. In terms of equity capital this "wing" now corresponds to about 12 percent of the domestic economy of Singapore. In this paper an attempt at explaining the determinants of Singapore's FDI using a systematic econometric approach was made. The results suggest that access to (more or less) protected markets does not seem to be important for Singapore investors. The labour costs seem to play some role, however, as can be expected, but membership in ASEAN does not, as such, encourage Singapore FDI. Much of the variation in FDI to different countries remains unexplained, however. Although one may speculate about the role of national security strategy as a reason for this, we do not really know to what extent this may be the case. Finally, because of statistical reasons, as well as due to a somewhat shaky theoretical framework, the results should be interpreted with great caution and are, at best, tentative. More research is certainly needed before more solid arguments can be presented.
Keywords: Singapore, foreign direct investment, internationalization
JEL Classification: F29, O53
Suggested Citation: Suggested Citation