M PRA

Munich Personal RePEc Archive

Selected Macroeconomic Determinants of

Foreign Direct Investment Outflow of
Singapore

Swee-Hui Jerome Kueh and Chin-Hong Puah and Khim-Sen

Liew

Department of Economics, Faculty of Economics and Business,

Universiti Malaysia Sarawak, 94300 Kota Samarahan, Sarawak,
Malaysia.

June 2010

Online at https://mpra.ub.uni-muenchen.de/25940/
MPRA Paper No. 25940, posted 19. October 2010 10:03 UTC
Selected Macroeconomic Determinants of Foreign Direct Investment
Outflow of Singapore
Jerome Swee-Hui Kueh, Chin-Hong Puah & Venus Khim-Sen Liew
Department of Economics,
Faculty of Economics and Business,
Universiti Malaysia Sarawak,
94300 Kota Samarahan, Sarawak, Malaysia.
[email protected], [email protected], [email protected]

Abstract
The role of Foreign Direct Investment (FDI) outflow has become significant and
essential for sustainable economic growth in Southeast Asia region particularly
Singapore. The saturation of the domestic resources accumulation and as export-led
regime, the government of Singapore introduced the regionalization policy in the
1990s to encourage abroad investment. Due to that, this study aims to investigate the
determinants of Singapore FDI outflows from the perspective of selected
macroeconomics variables namely income, trade openness, interest rate and exchange
rate. This study adopted the Johansen and Juselius cointegration test and Granger
causality based on vector error correction model to investigate the annually data from
1975 to 2007. Empirical results indicated that FDI outflow of Singapore is positively
associated with income while inverse linkage with trade openness, interest rate and
exchange rate in the long run. Moreover, exchange rate has the tendency to have
greater influence towards the FDI outflow of Singapore in relative to the other
determinants. Meanwhile, income, trade openness and interest rate portrayed causality
linkage towards FDI outflow of Singapore, except for exchange rate in the short run.
The continuous commitment towards economic integration in the East Asia region via
the Free Trade Area has further contributed to the expansion of FDI outflow of
Singapore in the future.

Keyword: FDI outflow, trade openness, vector error correction model

JEL Classification: F21, F13, C32

Introduction
Foreign Direct Investment (FDI) outflow has become an essential component of
economic growth particularly for developing countries. This is due to the fact that the
main source of FDI outflow is from the developed countries. Nevertheless, the
emergence of globalization leads to the removal of barriers among countries which
allow some developing countries to gain a share as a source of global outward FDI.
Global FDI outflows and outward stocks recorded significant growth as shown in
Table 1. FDI outflows achieved US$1.32 billion in 2006 and expand with tremendous
growth rate of 50.9% to reached US$1.99 billion in 2007. In related to that, developed
countries play significant role as source of FDI outflow with the amount of US$1.69
billion or accounted approximately for 85% of total FDI outflow in 2007.
Notwithstanding, developing countries particularly in Asia region have emerged as
sources of FDI due to the globalization and trade liberalization. The contribution of

1
Asia countries towards FDI outflow reached US$194,662 million which accounted
approximately 77 percent of FDI outflow from developing countries.

Table 1 Global FDI Outflows from 1990-2007

Item Value at Current Prices Annual Growth Rate (%)
(US$ billion)
1990 2006 2007 1991- 1996- 2004 2005 2006 2007
1995 2000
FDI 2.39 1.32 1.99 16.5 36.1 63.5 -4.3 50.2 50.9
outflows

FDI 1.79 12.76 15.60 10.6 17.2 16.4 3.9 20.4 22.3
Outward
Stocks
Source: World Investment Report 2008, UNCTAD.

In view of that, Singapore is among the countries in Southeast Asia region that
involve actively in the FDI outflow. This is due to its ability to achieve remarkable
economic growth especially during the 1970s until 1990s and resilience towards
economic turbulence during the 2000s. Even, Singapore also known as the Newly
Industrialized Economies (NIEs) and acknowledged by the World Bank (1992) one of
the eight Highly Performance Asian Economies (HPAEs).

Performance of FDI Outflows of Singapore

Singapore commenced to participate in abroad investment since 1972 with US$20.72
million and also experienced severe inverse implication in 1981 and 2006. However,
Singapore recorded its peak investment abroad in 1996 and resilience towards the
Asian financial crisis in 1998 with average strong abroad investment activities. The
exception in 2006 indicates sharp diminishing trend to US$526 million but recovered
impressively in 2007 to reached US$2,034 million and US$10,989 (see Table 2). In
fact, the government of Singapore has adopted a number of national development
strategies with the objective to enhance the sustainability of the country in the wake of
globalization. In the early 1990s, the government of Singapore has implemented a
regionalization programme where domestic firms are encouraged to participate in the
abroad investment. Most of the Singaporean firms involved in abroad investment
related greenfield and joint ventures instead of cross-border M&A (UNCTAD, 2005).

Meanwhile, the investment destination for the Singaporean firms focuses more in
Asia region which accounted for 45.8% in 2007, followed by 17.7% in South and
Central America and the Caribbean, 15.0% in Europe, 5.8% in Oceania region, 4.6%
in North America while 11.1% in others. In Asia region (see Table 3), the major
destinations of Singapore’s investment in 2007 are China (US$39.3 billion), Malaysia
(US$21.2 billion), Indonesia (US$18.3 billion), Hong Kong (US$17.5 billion),
Thailand (US$15.4 billion) and Taiwan (US$5.0 billion). Abroad investment of
Singaporean firms in China recorded an upsurge of 17.2% from US$33.5 billion in
2006 to US$39.3 billion in 2007. In detail, most of the abroad investment of
Singaporean firms is towards services sector such as financial and insurance service
which accounted approximately 56.5%, followed by manufacturing, 22.1% in 2007
while the rest of the shares are as shown in Table 4.

2
Table 2: FDI Outflow of Singapore, 1990-2007 (USD Millions)
Year Total Year Total
2007 2,034 1998 8,002
2006 526 1997 5,915
2005 1,317 1996 19,965
2004 2,152 1995 2,329
2003 4,577 1994 2,695
2002 6,787 1993 10,803
2001 7,951 1992 6,943
2000 10,904 1991 12,241
1999 2,165 1990 12,300
Source: International Financial Statistic, IMF

Table 3: Destination of Singapore FDI Outflow (USD Million)

– Top 8 Investment Destinations based on 2007
Country 2003 2004 2005 2006 2007
China 19,816 22,183 27,254 33,519 39,294
British Virgin Island 21,973 23,744 25,941 33,587 34,342
United Kingdom 7,534 7,222 7,220 20,197 31,210
Mauritius 5,987 11,097 10,513 15,715 30,789
Malaysia 13,592 14,733 17,878 18,925 21,159
Indonesia 10,298 12,024 14,631 16,730 18,270
Hong Kong 11,059 11,768 15,324 15,579 17,514
Australia 4,648 11,081 8,935 10,872 15,791
Source: Department of Statistics, Singapore

Table 4: Singapore FDI Outflow by Activity (USD Million)

Country 2003 2004 2005 2006 2007
Financial & Insurance Services 85,140 99,124 104,756 131,240 167,983
Manufacturing 33,009 37,502 46,352 54,761 65,802
Wholesale & Retail Trade 9,222 10,342 11,215 13,137 13,574
Information & Communication 7,057 9,252 10,365 13,021 14,556
Real Estate, Rental & Leasing 7,440 7,540 8,986 10,744 11,684
Services
Transport & Storage 5,800 6,766 9,335 8,250 8,410
Professional & Technical, 913 2,819 4,035 4,457 4,952
Administrative & Support
Services
Hotel & Restaurant 2,350 2,241 2,230 2,323 2,651
Construction 749 978 881 850 615
Others 1,892 3,178 3,866 4,905 7,325
Source: Department of Statistics, Singapore

Despite the economic uncertainties, Singapore has the capability to engage in the
abroad investment activities where some corporations have been listed in the top 100
non-financial Transnational Corporations (see Table 5). Among the exceptional
performance of Singaporean firms are Singtel Limited (ranked 6) followed by top 50
corporations such as Capitaland Limited (ranked 17), Flextronics International
Limited (ranked 35), Keppel Corporation Limited (ranked 50) and six corporations
from ranked between 50 to 100. Among the industries involved are
telecommunications, real estates, electrical and electronic, food and beverages,
transport and storage and hotels.

3
Table 5 Top 100 Non-Financial Transnational Corporation for Singapore in 2006
Ranking Corporation Industry Assets Sales Employment No. of
(US$ million) (US$ million) (Persons) Affiliates
6 Singtel Limited Telecommunications 21,288 8,575 19,000 108
17 Capitaland Limited Real Estate 13,463 2,053 32,876 233
35 Flextronics International Limited Electrical & Electronic 12,341 18,854 116.000 149
50 Keppel Corporation Limited Diversified 9,009 4,956 29,185 233
56 Fraser & Neave Limited Food & Beverages 6,307 2,475 14,000 143
58 City Developments Limited Hotels 7,175 1,660 12,281 54
62 Asia Food & Properties Food & Beverages 2,370 458 45,000 3
63 Neptune Orient Lines Limited Transport & Storage 4,271 7,264 11,000 107
73 Stats Chippac Limited Diversified 2,458 1,617 13,817 17
95 Want Want Holdings Limited Food & Beverages 1,206 868 31,740 129
Source: World Investment Report 2008, UNCTAD.

4
Related Literature Reviews
There are several critical macroeconomic determinants of FDI outflow such as the
income of a country (Kyrkilis and Pantelidis, 2003; Wu et al., 2003). In term of the
income, the economic structure of a country will experience modification along with
the growth of the income. Subsequently, country will move towards capital-intensive
industry and has the capability to increase production despite become more efficient.
This is due to the effect of economies of scale and adoption of new technologies
(Chenery et al., 1986). This will lead to the potential of establishing production
abroad due to the gaining of ownership advantage (Lall, 1980; Grubaugh, 1987).
Meanwhile, the well-known concept of Investment Development Path (IDP)
introduced by Dunning (1981) provides essential point associating income and FDI
outflow. IDP consists of five degree of FDI expansion – Level 1: Almost non-
existence of outward FDI; Level 2: Low pace of inward and outward FDI growth rate;
Level 3: Gradual expansion of inward and outward FDI; Level 4: Expansion of
outward FDI surpasses inward FDI; Level 5: Expansion of outward and inward FDI
resume. IDP indicates linkages between net FDI outflows and varies stages of
development of a country, measured by income of a country. This framework further
postulated that higher income is link to higher level of FDI outflows.

Meanwhile, trade liberalization or trade openness has great implication on the FDI
outflow (Kogut, 1983; Scaperlanda and Balough, 1983; Scaperlanda, 1992). The
association of higher degree openness led to higher level of FDI outflow is mainly due
to the acquisition of knowledge on the foreign market. This valuable knowledge
includes skills related to operating or managing production abroad. Eventually, this
will become the driving force for the firms to engage in the foreign investment rather
than relying on exportation. Firms will be able to gain advantage in term of
internalization (Dunning, 1993).

Despite that, interest rate also play significant role on the FDI outflow (Hymer, 1976;
Lall, 1980, Pugel, 1981; Grubaugh, 1987). Their justification on the inverse
association between interest rate and FDI outflow is due to the abundance capital in
home country that serve as motivation to expand firms dominance such as
establishing operation abroad. Capital abundance in fact decrease the opportunity cost
of seeking capital. Therefore, firms have the ability to finance their abroad investment
via the lower interest rate.

Besides that, exchange rate serves as prominent indicator towards FDI outflow
(Kohlhagen, 1977; Stevens, 1993; Gopinath et al., 1998; Kyrkilis and Pantelidis,
2003). Their findings implied significant association between home country exchange
rate and FDI outflow. Appreciation of currencies enables home country firms to
conduct abroad investment due to the ability to mitigate the capital requirement. On
the other hand, depreciation of the currencies indicates higher cost of abroad
investment and therefore will hinder domestic firms to participate in oversea
investment.

5
Methodology
This study employs annually data range from 1975 until 2007. The data set consists of
FDI outflow of Singapore as endogenous variable while real income of Singapore,
trade openness, interest rate of Singapore and nominal exchange rate as exogenous
variables. The real income variable is measured in real Gross Domestic Product
(GDP), trade openness is proxied by the summation of aggregate export and import of
Singapore, meanwhile interest rate refers to Euro-Dollar rates. Euro-Dollar rates is
used as a proxy of interest rate in Singapore as Singapore is play prominent roles as
international financial hub and moreover, foreign interest rate has great influence on
the interest rate in Singapore. All the data are obtained from World Investment Report,
UNTACD and International Financial Statistics from International Monetary Fund.
All the variables in the data set are transformed into natural logarithms for statistical
purpose.

Equation (1) represents the assumption that FDI outflow of Singapore is determined
by several factors as shown:

LOFDIt  1   2 LRGDPt   3 LTOt   4 LINTt   5 LEXCt  et (1)

where LOFDI signifies logarithm of FDI outflow of Singapore, LRGDP denotes

logarithm of real income of Singapore, LTO represents logarithm of trade openness of
Singapore, LINT denotes interest rate, LEXC denotes nominal exchange rate,  s are
coefficients to be estimated and e represent error term.

The vector error-correction model (VECM) is adopted with the purpose to examine
the long run deviation from the equilibrium association between endogenous variable,
FDI outflow of Singapore and the determinants. The model is as shown in Equation
(2).

LOFDIt  LOFDIt 1   LOFDIt 1   OFDI 

LRGDP  LRGDP   LRGDP   
 t  t 1   t 1   RGDP 
LTOt   ( L) LTOt 1     LTOt 1    TO  (2)
       
LINTt  LINTt 1   LINTt 1   INT 
LEXC  LEXC   LEXC   
 t   t 1   t 1   EXC 

where (L) represents a 5x5 polynomial matrix of coefficient to be estimated. 

denotes the short run adaptation among the variables across the five equations in the
system while L denotes the lag operator. Furthermore,  signifies the error-correction
component at levels,  represents the first difference operator and ’s denotes the
white noise error terms.

Empirical Results and Discussion

Initially, the test for stochastic trends in the autoregressive representation of each
individual time series will be conducted prior cointegration test. This study adopted
the Augmented Dickey-Fuller (ADF) unit root test proposed by Dickey and Fuller
(1981) as shown in Equation (3).

6
p
Yt   0  1Yt 1   iYt i   t (3)
i 1

where Yt represents the first difference of the Yt , 1 and  0 refer to the coefficients
and intercept respectively, t denotes time, p is the number of lagged terms chosen
while  t refers to white noise. The selection of optimal lag length of p is based on
Schwartz Information Criteria (SIC). The null hypothesis can be rejected when the t-
statistic value is negative and statistically significant. Table 6 depicts the results of the
ADF unit root test. The results indicate that the null hypothesis of a unit root cannot
be rejected at level, nevertheless, it can be rejected after first differencing at 1% and
10% significance level respectively. This implies that all the time series variables are
non-stationary at level I(0), but stationary at first difference, I(1).

Table 6: Augmented Dickey-Fuller Unit Root Tests Results

Variable Level First Difference
LOFDI -1.682(3) -4.788(2)***
LRGDP -0.742(0) -4.107(0)***
LTO -2.392(2) -2.739(1)*
LINT -2.898(6) -3.647(5)***
LEXC -1.823(0) -4.871(0)***
Notes: LOFDI = natural log of FDI outflow, LRGDP = natural log of real GDP, LTO =
natural log of openness of the economy and LINT = natural log of Euro-Dollar rate, LEXC
= natural log of nominal exchange rate. Asterisks (***) and (*) indicate significant at 1%
and 10% levels respectively.

Since the variables are stationary at first difference, then we can proceed with the
cointegration test as introduced by Johansen (1988) and Johansen and Juselius (1990).
The main purpose of this test is to investigate the existence of a long run association
among the variables which are integrated with same order. Table 7 indicates the
results of the cointegration test. The null hypothesis of non-cointegration (r=0) can be
rejected as both trace (λtrace) and max-Eigen (λmax) statistic values exceed the critical
values and significant at 1% level. Meanwhile, the null hypothesis of at most one
cointegration vector cannot be rejected. This indicates that existence of a single
cointegration vector in the model and implies a stable long run linear equilibrium
among the variables.

7
Table 7: Johansen and Juselius Cointegration Test Results
H0 H1 λtrace CV (trace, 5%)

Variables: LOFDI, LRGDP, LTO, LINT, LEXC

r=0 r>1 88.708*** 66.819
r≤1 r>2 36.724 47.856
r≤2 r>3 14.619 29.797
r≤3 r>4 2.485 15.495
r≤4 r=5 0.009 3.841
H0 H1 λmax CV (max, 5%)
r=0 r=1 51.983*** 33.877
r=1 r=2 22.104 27.584
r=2 r=3 12.135 21.132
r=3 r=4 2.476 14.265
r=4 r=5 0.009 3.841
Notes: r is the number of cointegrating vector. Asterisks (***) indicate significant at the 1% level.

Table 8 presents the normalized cointegrating vector results. The coefficient estimates
of the cointegrating vector denote the long run elasticity of the variables and are
statistically significant at 1% significance level. The results portray that FDI outflow
of Singapore is elastic with respect to all the determinants in the long run with
exchange rate has the tendency to be more elastic in relative to the determinants.

Table 8: Johansen Cointegration Equation Parameter Estimates

Parameter Estimates t-statistics

Normalized
Constant 7.567
LOFDI 1.000
LRGDP 5.730 3.468***
LTO –3.036 –3.101***
LINT –1.313 –5.389***
LEXC –6.091 –5.040***
Note: Asterisks (***) indicates significant at the 1% level.

Granger causality test based on Vector Error Correction Model (VECM) is adopted
subsequently existence of cointegration among the variables. The main purpose of this
test is to examine the causality linkage among the variables within the VECM
environment. The system consists of a lagged ECT in each of them as to capture the
long run adjustment upon their equilibrium trail. The inclusion of the ECT is
prominent as to overcome the misspecification and exclusion of vital constraints.
Table 9 indicates the outcome of the Granger causality based on the VECM. The
results portray that all the determinants have causality association with the FDI
outflow of Singapore in the short run, except for exchange rate variable.

8
Table 9: Granger Causality Test based on Vector Error Correction Model

Variables LRGDP LTO LINT LEXC ECTt 1

LOFDI 3.460 13.837 5.062 0.683 –0.758
(0.063)* (0.001)*** (0.025)** (0.409) (0.000)***

Diagnostic Test

JB AR (2) ARCH (1) RESET (1) CUSUM CUSUM2

1.309 1.414 0.005 1.166 Stable Stable
(0.519) (0.272) (0.945) (0.295)
Note: JB is the Jarque-Bera statistic for residuals normality test. AR is a test of 2 nd order serial
correlation using Breusch-Godfrey serial correlation LM test. ARCH and RESET refers to White
Heteroscedasticity test and Ramsey RESET specification test respectively. Parenthesized values are the
probability of rejection (p-value). Asterisks (***), (**) and (*) indicates significant at the 1%, 5% and
10% level respectively.

The empirical outcomes depict the significance of the income, openness, interest rate
and exchange rate as the determinants of the FDI outflow of Singapore in the long run
as proven by Kyrkilis and Pantelidis (2003). Nevertheless, interesting to discover that
income, interest rate and exchange rate carry similar effect on FDI outflow while only
openness exhibits contradict direction on the endogenous variable for the case of
Singapore.

The income of Singapore exhibits positive linkage towards FDI outflow in the long
run and is parallel to the studies conducted by Kyrkilis and Pantelidis, (2003) and Wu
et al., (2003). The association of the ownership, location and internationalization
advantages gained by Singapore has contributed to the economic development path of
the country. Singapore had experienced tremendous economic growth in the 1960s
and known as the Newly-Industrialized Economies (NIEs) as well as being
recognized as one of the 10 economies of the East Asian Miracle by World Bank
(1992). This recognition is due to the exceptional economic growth of above average
6% and ability to maintain for a long time of periods. The significant changes of the
economic structure of Singapore towards export-led regime of capital accumulation
have contributed to the sustainable of its economic performance. Subsequently,
Singapore has transformed from an entreport to an economy that highlight on high
value-added particularly manufacturing products as well as nexus of international
financial and business centre (Huff, 1994 and Perry et al., 1997). These accumulations
of resources have been the solid pillar for Singapore to expand its foreign investment
globally. Furthermore, sturdy fundamental economic policy enable the country to
become resilient to the external economic turbulences such as Asian Financial Crisis
in 1998, economic recession in 2001 and global recession in 2008. Despite that, the
realization of the government of Singapore on the saturation of the domestic growth
expansion constraint, the adoption of regionalization policy (Kanai, 1993 and Reigner,
1993) in the 1990s had contributed to the expansion of the international trade and
investment activities. Consequently, this further generates sustainable income to the
country and thus auxiliary encourage investment at broader aspect such as Asia region
and Western region.

9
Meanwhile, the empirical results indicate that linkage between exchange rate and FDI
outflow of Singapore is moving together in the same direction in the long run. The
empirical results indicate that exchange rate variable has great tendency to influence
the FDI outflow where it carries the highest coefficient estimates or very elastic in
relative to the other determinants. This means that appreciation of the Singapore
currency tends to increase the volume of abroad investment activities (Kohlhagen,
1977; Stevens, 1993; Gopinath et al., 1998; Kyrkilis and Pantelidis, 2003). Great
achievement of economic performance during the past three decades with average of
US$5,222 million, US$19,305 million and US$70,965 million respectively due to the
successful economic strategies. Despite economic turbulences in several periods such
as oil crisis in 1985, Asian Financial Crisis in 1998, United States recession in 2001,
effect of severe acute respiratory syndrome (SARS) and recently global financial
crisis, the economy of Singapore is resilient towards those phenomenons and
demonstrated swift recovery process. These has induces sturdy currency in the market
and therefore contributed to the expansion of the abroad investment of Singaporean
domestic firms. Ultimately, appreciation of Singapore’s currency indirectly minimizes
the capital requirements of the foreign investment activities. This also means that it is
easier for the Singaporean firms in obtaining capital in order to finance their abroad
investment.

In term of the interest rate effect, empirical results portray that existence of inverse
relationship between interest rate and FDI outflow of Singapore in the long run
(Hymer, 1976; Lall, 1980, Pugel, 1981; Grubaugh, 1987). Furthermore, the results
also indicate that this determinant has the lowest coefficient estimates or elasticity
compared to the other determinants. The lessening of the interest rate reflects
abundance of capital in Singapore and subsequently reduces the opportunity cost in
seeking capital elsewhere. Ultimately, this will serve as the motivation for the
Singaporean firms to rigorously expand their abroad investment activities. In other
words, those firms have competitive advantage in financing foreign investment due to
lower cost of borrowing in home country. On the other perspective, higher interest
rate may reduce the intention of the domestic firms to invest abroad. This is due to the
higher interest rate may attract more accumulation of investment via the saving.
Therefore, domestic firms will have the tendency to invest locally to gain favorable
return instead of taking risk investing abroad.

Nevertheless, the trade openness of Singapore exhibits inverse linkage towards the
FDI outflow of Singapore in the long run and contradict to the findings from Kogut
(1983), Scaperlanda and Balough (1983) and Scaperlanda (1992). This may due to the
substitution effect of the trade activities against the FDI outflow of Singapore.
Singapore ranked first for the most open economy for international trade and
investment ahead of Hong Kong and Switzerland (The Global Enabling Trade Report
2009, World Economic Forum). This favorable atmosphere has attracted many
foreign firms to invest in Singapore despite attractive tax incentive and condusive
business environment. Most of the source of the foreign companies and entrepreneurs
laying operation in Singapore are from Asia and European. Subsequently, domestic
firms have the tendency to establish cooperation with the foreign companies
particularly via joint venture. As a result, this may mitigate the opportunity cost for
the domestic firms to invest abroad as they will enjoy great benefits from the
cooperation with the foreign companies in Singapore.

10
Meanwhile, the determinants such as income, trade openness and interest rate have
causality relationship with the FDI outflow of Singapore in the short run. The level of
income of Singapore, the degree of trade openness in Singapore which represents the
volume of the international trade activities and attractive interest rate will influence
the volume of the FDI outflow of Singapore in the short run. On the other hand,
exchange rate has no causality implication on the FDI outflow of Singapore in the
short run. This may due to the monetary policy adopted by the government of
Singapore. Exchange rate targeting policy has been adopted by Singapore since late
1970s. This means that the fluctuation of the exchange rate in the market is closely
monitored by the government as to ensure the exchange rate is competitive. Due to
that, exchange rate has no implication towards the FDI outflow of Singapore in the
short run.

Conclusion
This study aims to investigate the association between FDI outflow of Singapore and
selected macroeconomic determinants namely income, trade openness, exchange rate
and interest rate. Empirical outcomes depicted that income has significance influence
on the FDI outflow of Singapore where generation of higher income will contribute to
the expansion of abroad investment of Singaporean firms. Therefore, sustainable
economic growth is crucial with the ability of the economy to be resilient during
economic uncertainties. The saturation of the domestic expansion and accumulation
of valuable resources further encourage the Singaporean firms to invest oversea.
Meanwhile, favorable interest rate indicates abundance of capital in home country.
This will enable Singaporean firms to expand their cross border investment due to
lower cost of financing in the home country. Besides, higher interest rate tends to
influence the domestic firms to invest locally due to higher return instead of investing
abroad, hence restraint the expansion of FDI outflow. In term of exchange rate,
currency also plays significant role in the abroad investment of Singapore where
stable economy and flexible towards external economics turbulences strengthen the
currency of Singapore and thus encourage foreign investment by domestic firms in the
long run. However, in the short run, exchange rate has no significance implication
towards FDI outflow. This is due to the close monitoring on the fluctuation of the
Singapore currency under the Exchange rate targeting policy. Nevertheless, results
also indicate that trade openness exhibited inverse association with FDI outflow of
Singapore. This is due to the substitution effect as higher degree of trade openness
contributed to the influx of establishment of foreign companies and entrepreneurs in
Singapore. Subsequently, Singaporean firms will have the propensity to cooperate
with those foreign companies via joint venture. Due to that, the motivation for
domestic firms to invest abroad will decline as they will still enjoy enormous benefits
if they are able to cooperate with foreign companies.

Despite that, the continuous pledge towards integrating with the countries globally
provides solid foundation for the Singaporean firms to participate in the international
trading and investment activities. This can be seen via the establishing of Free Trade
Area such as China-ASEAN Free Trade Area or maintaining current trading
agreement such as ASEAN Free Trade Area (AFTA). The expansion of the abroad
investment provide the solution for Singapore to acquire necessary resources
particularly technologies adoption as well as valuable knowledge as to support the
development of Singapore in the future.

11
Acknowledgement
Financial support from UNIMAS and Ministry of Higher Education Malaysia through
Fundamental Research Grant Scheme [FRGS: 05(06)/620/2006(53)] is gratefully
acknowledged. All remaining flaws are the responsibilities of the authors.

References
Chenery, H. B., Robinson, S. & Syrquim, M. 1986. Industrialisation and Growth:
Comparative Study. Oxford University Press, New York, NY.
Dickey, D. A. & Fuller, W. A. 1981. Likelihood Ratio Statistics for Autoregressive
Time Series with a Unit Root. Econometrica, 49, 1057-1072.
Dunning, J. H. 1993. Multinational Enterprises and the Global Economy.
Workingham: Addison-Wesley.
Gopinath, M., Pick, D. and Vasavada, U. 1998. Exchange Rate Effects on the
Relationship between FDI and Trade in the U.S. Food Processing Industry.
American Journal of Agricultural Economics, 80, (5), 1073-79.
Grubaugh, S. J. 1987. Determinants of Foreign Direct Investment. Review of
Economics and Statistics, 69, (1), 149-152.
Huff, W.G. 1994. The Economic Growth of Singapore: Trade and Development in the
Twentieth Century, Cambridge: Cambridge University Press.
Hymer, S.H. 1976. The International Operation of National Firms: A Study of
Foreign Direct Investment. MIT Press, Cambridge, Mass.
International Monetary Fund. International Financial Statistics. Various issues.
Washington, D.C.: IMF.
Johansen, S. & Juselius, K. 1990. Maximum Likelihood Estimation and Inference on
Cointegration – With Application to the Demand for Money. Oxford Bulletin of
Economics and Statistics, 52, 169-210.
Kanai, T. 1993. Singapore’s New Focus on Regional Business Expansion, NRI
Quarterly, 2, 18-41.
Kogut, B. 1983. Foreign Direct Investment as a Sequential Process. In C.P.
Kindleberger & D.P Audretsh (Eds.), The Multinational Corporations in the
1980s. Cambridge, MA: MIT Press.
Kohlhagen, S. W. 1977. The Effect if Exchange-Rate Adjustments on International
Investment: Comment. In P.B. Clark, D.E. Logue and R.Sweeney (eds.) The
Effect of Exchange Rate Adjustments, US Government Printing Office:
Washington, DC, 194-197.
Kyrkilis, D. & Pantelidis, P. 2003. Macroeconomic Determinants of Outward Foreign
Direct Investment. International Journal of Social Economics, 30, (7), 827-836.
Lall, S. 1980. Monopolistic Advantages and Foreign Involvement by US
Manufacturing Industry. Oxford Economic Papers, 32, 102-122.
Perry, M., Kong, L. and Yeoh, B. 1997. Singapore: A Development City-State,
London: John Wiley.
Prugel, T. A. 1981. The Determinants of Foreign Direct Investments: An Analysis of
US Manufacturing Industries. Managerial and Decisions Economics, 2, 220-
228.
Regnier, P. 1993. Spreading Singapore’s Wing Worldwide: A Review of Traditional
and New Investment Strategies. The Pacific Review, 6, 305-312.
Scaperlanda, A. 1992, ‘Direct Investments Controls and International Equilibrium:
The US Experience’, Eastern Economic Journal, 18, 157-170.
Scaperlanda, A. and Balough, R. 1983, ‘Determinants of US Direct Investment in the
EEC Revisited’, European Economic Review, 21, 381-390.

12
Stevens, G. V. G. 1993, ‘Exchange Rate and Foreign Direct Investment: A Note’,
International Finance Discussion Papers, No.444, Board of Governors of the
Federal Reserve System, Washington, DC.
The Global Enabling Trade Report 2009, World Economic Forum.
UNCTAD 2005. World Investment Report 2005: Transnational Corporations and the
Internationalization of R&D. Switzerland: United Nations.
UNCTAD 2008. World Investment Report 2005: Transnational Corporations and the
Infrastructure Challenge. United Nations: New York and Geneva.
Wu, F., Toh, M. H. and Ho, T. 2003. Outward Foreign Direct Investment and Its
Impact on the Home Economy: The Case of Singapore. Journal of Asian
Business, 19, (3), 27-48.

13