WHY SOME SINGAPOREAN FIRMS INVEST ABROAD AND OTHERS DO NOT?

Abstract

Until recently, Singapore was primarily dependent on foreign investments from abroad. However, with the saturation of investment opportunities in the traditional sectors, Singapore became selective in the choice of foreign investors. With high growth in the Asian region, Singaporean investors are continually being urged by the government to seize the opportunities arising from these developments. These factors together with the increasing labour costs due to the full employment situation in Singapore, the small market size, the need to hedge against risk arising from any possible slowdown of the domestic economy, and development within the firms have motivated entrepreneurs to invest abroad. Foreign direct investment has been an important subject of research. However, most of these studies have focused on the macroeconomic perspective of foreign direct investment or on the industry-specific factors. There is a general lack of studies in the area of firm-specific determinant of foreign direct investment. Studies done in the ASEAN region have also tended to address the issue of inflows of foreign direct investment into these countries rather than on the outflows of such investments. This study aims to shed light on the firm-specific determinants as distinct from the macroeconomic determinants of Singapore's direct investment abroad. Conventional theories explaining foreign direct investment from a firm's perspective are investigated in order to test their applicability for Singaporean firms. This academic exercise starts with a discussion of issues relating to foreign direct investment in Singapore. It also provides some data on foreign investment in Singapore and attempts to discuss briefly the nature and pattern of outward investment from Singapore. A review of the theories of foreign direct investment from various major perspective is undertaken and the discussion is focused on the microeconomic perspective on which this study is modelled on. A logit type econometric model is used in the study to investigate the firm-level determinants of foreign investment. Some descriptive statistics are presented to show the basic difference between firms that invest abroad and those that do not. The results of the econometric study indicate that none of the determinants identified in the traditional theories such as firm size, product diversity, research and development expenditure and capital intensity can explain investment abroad by Singaporean firms. Profitability of firms, as represented by net profit margin, seems to be the only significant explanation for firms' investment abroad. Some likely alternative explanations are provided for this observed difference between Singaporean firms that become multinational with similar firms elsewhere in the world. The study is concluded with some discussion on the future course of research and discussion of policy implication of the results.