FOREIGN INVESTMENTS IN THE SERVICE SECTOR IN SINGAPORE

Abstract

Foreign investments in services is a broad and complex topic. This study encompasses its conceptual and operational issues and examines the role foreign investments play in Singapore's service sector, which has been recommended by the Economic Committee as one of the twin engines of economic growth in Singapore, the other being manufacturing. Services have often been misconceived as "residual", "tertiary" or "post-industrial" to other non-service activties (usually agriculture and manufacturing) in the economy. Such misconceptions mask the importance of services. Today, services have evolved from a traditional infrastructural mould to become more commercialised and internationalised. Foreign investments in services is a subject hardly explored until recently. Research has shown that the limited tradeability of many services (particularly those which require the interaction between suppliers and users) has often made foreign direct investments (FDI) the only mode of delivery of these services. However, this picture may be changing. New technological innovations have increased the tradebility of certain of these services and new forms of non-equity international investments such as franchising, subcontracting and licensing are replacing the role of FDI in transfering knowledge and technnological resources to countries which have sufficient equity funds but lack the expertise in the production of knowledge-intensive services. This study first analyses the trends and patterns of foreign investments in Singapore's service sector. On a worldwide basis, the share of services in total FDI in Singapore appears to be comparatively larger than those in other developing countries. Within the domestic economy, percentage of foreign investments out of total investments in the service sector are lesser than that in the manufacturing sector, though the share of services in total FDI in the country is larger. An examination of the individual industries in the service sector reveals wide variations in the extent which each industry has relied on FDI. This observation can be explained by examining the relative dominance of state, foreign and local enterprises in specific service industries. Foreign investments are particularly prominent in offshore oriented services such as offshore banking, international consultancy and market research services; local enterpreneurs are well established in traditional consumer oriented services such as commerce; while the state dominates vital service industries like public utilities, communications media and airline. The relative costs and benefits in allowing foreign equity participation are examined to show such distributive trends. The state recently has shown an intention to reduce its entrepreneurial role. In the service sector, this effort may be slower than in other non-service sectors. The underlying objective is to cultivate more sophisticated local entrepreneurship. Hence, this meant that the main "sparring partners" of foreign investors for the future may be the local entrepreneurs. This study also seeks to highlight some of the new incentive schemes the government has extended to service activities and other special tax and non-tax benefits foreign investors enjoy when investing in Singapore. The government policy towards foreign investors is a liberal one and after the 1985 recession, strong measures have been undertaken to cut down operation costs to promote Singapore as a total business centre. The success of these measures and incentive schemes cannot be measured quantitatively, but significant foreign investment commitments in the priority services targeted by the government are sufficient evidence to point towards further commitments from international investors eager to seize the growing business opportunities in the Asia Pacific. This win build Singapore into a regional service centre.