Knowledge-Capital model of Multinational Enterprises used on Singapore Investment Sector
Singapore, in its fiftieth year of existence as a nation-state, has been remarkably successful in attracting foreign direct investment (FDI) and in recent years has also become a significant foreign investor, especially in developing countries (Chellaraj et al. 2013; Shin 2006). This two-way investment has increasingly been in services. In 2012, the share of services was four times larger than manufacturing in Singapore’s inbound investment stock, and three times greater in its outbound investment stock. Here, we’ll apply the Knowledge-Capital (KK) model of multinational enterprises (MNEs) to compare the determinants of manufacturing and services foreign investment to and from Singapore.
Knowledge-Capital (KK) model
The KK model has be previously apply to aggregate and manufacturing investment (Carr et al., 2001 (hereafter CMM); Chellaraj et al., 2013). But it has not to our knowledge been test for bilateral services investment even though the latter has grown in importance globally. Singapore has rapidly closed its skills gap with most industrialized countries over the past three decades. Through the expansion of higher education and by facilitating the inflow of foreign talent (Sim, forthcoming; Hanushek and Woessmann, 2015; Yusuf and Nabeshima, 2012; Anwar, 2008).
Nature of Singapore
As a result, the nature of Singapore’s aggregate inward foreign investment from industrialized countries has shifted from a labor-seeking orientation to a skill-seeking orientation. While its outward investments in developing countries. Particularly in the ASEAN region, is more focus on labor-seeking activities (Chellaraj et al., 2013). While there is evidence on the determinants of aggregate FDI (Chellaraj et al., 2013), studies on FDI in specific sectors such as services are rare. The application of the KK model separately to Singapore’s manufacturing and 3 service sectors is both novel and appropriate because it incorporates market-seeking, skill-seeking and labor-seeking motivations into a single model.
Increasing relative skill
It is plausible that Singapore’s increasing relative skill endowments also underlay the increase in inbound service sector investment from both industrialized and developing countries. Outbound services investment in developing countries is expect to be labor-seeking and in industrialized countries skill-seeking. We explore further the significance of two key distinctions between services and manufacturing. First, services, especially financial, education and health, communications and business services, are on average much more skill intensive than manufacturing. Therefore, we would expect a stronger skill-seeking motivation for FDI in skill intensive services compared to manufacturing and less skill intensive services. Second, services, particularly construction and commerce. But also to some extent business and finance, need greater face-to-face contact between suppliers and customers than goods.
Apart from the technological imperative for proximity, there may also be a regulatory imperative: preference in bidding for publicly-funded service sector projects (e.g. light rail projects) in countries such as Thailand is given to firms located in the ASEAN region including Singapore. Therefore there is likely to be a stronger market-seeking or horizontal orientation to FDI in face-to-face services. Our results indicate that the direct coefficient on relative skill differences, specified as the percentage of the labor force with a tertiary education in the parent country, less the corresponding ratio in the host country, is negative and significant for the services inbound sample, but insignificant for the manufacturing inbound sample.
Investment stocks rose
These findings suggest that services inbound investment stocks rose with a relative increase in Singapore skills compare to parent nations, which were predominantly industrialize economies. Disaggregate results suggest that both inward and outward investment with respect to industrialized countries in both manufacturing and services was skill-seeking. Inward investment from developing countries in services was also skill-seeking. But outward investment to developing countries in both sectors was labor-seeking. Furthermore, when we distinguish between services on the basis of skill-intensity. We find a significant difference between the determinants of FDI in skill-intensive services and FDI in other services and goods.
However, when services are disaggregated on the basis of “proximity” needs. We do not find any significant difference in the determinants of FDI in proximity services compared to FDI in non-proximity services.
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