AN ECONOMETRIC ANALYSIS OF TRADE AND FOREIGN DIRECT INVESTMENTS IN SINGAPORE

Abstract

In the past, trade and foreign direct investments (FDI) theories have attempted to forge a link between each other. In addition, many empirical studies were performed by incorporating capital movements in the theories of international trade or by working on the theories of FDI on trade flows. However, most of these theories and studies neglected the fact that a causal (cause and effect) relationship might exists between trade and FDI. Singapore being an open economy with minimal trade barriers (tariffs, excise duties, etc.) and liberal foreign investment policies (tax incentives, tax holidays, free repatriation of profits etc.) is an ideal country for a study involving trade and FDI. In particular, Singapore's manufacturing industry is selected as our area of study as it is highly export-oriented with a very large share of foreign participation in the form of FDI. The objective of this exercise is to establish whether the relationship between trade and FDI in Singapore is complementary or substitutary. An econometric approach is adopted to test for this relationship using data on the manufacturing industry. To capture the causal relationship between trade and FDI, the method of the simultaneous equation models of the Three-stage-Least Squares is used. In this model, the trade variable is placed as a determinant of FDI index and vice versa. For the model to be realistic, other variables which are believed to affect trade or FDI are introduced. This exercise is divided into six chapters. Chapter I deals with trade and FDI theories and how attempts are made to link the two. Chapter II examines Singapore’s trade and FDI patterns and the links between trade and FDI. In Chapter III, the econometric model is presented along with the methodology. Problems faced in this study are covered in Chapter IV, namely data source limitations and measurement problems. Chapter V sums up all the regression results with appropriate interpretations. Finally, we conclude with some policy implications as well as identify further areas of research.