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The role of FDI in the development of

Gary Dean, April 2000

The rapid economic development of the NIEs (Hongkong, Singapore, South Korea, and
Taiwan) over the past three decades has necessitated the utilisation of external resources,
principally foreign capital.[1] Without such resources, industrialisation and development
on the scale undertaken could simply not have occurred. These external capital resources
have taken the form of aid, grants, borrowing, and direct foreign investment (FDI).

Of the NIEs that have taken conscious control of the national economy -- which is to say,
all of them with the exception of Hongkong -- only Singapore chose to use FDI as its
principal source of external capital. Taiwan and South Korea, by stark contrast, chose a
completely opposing route and in the main relied upon external borrowings and aid to
support their developmental agendas. Consequently, 'technological deepening' and
innovation is now far more apparent in Taiwan and South Korea. These two economies
have retained control of investments and developed the skills and infrastructure to

This ability to innovate is crucial to an economies ability to extract rents from the market
for new products. Because Singapore's export economy is dominated by non-Singaporean
transnational corporations (TNCs) who have not been burdened with the need to directly
share their technologies, Singapore's capability to innovate is said to be much less than
that now displayed by Taiwan and South Korea.

This essay shall briefly discuss the role that FDI has played in Singapore's economic
development, in particular in relation to 'technological deepening' and technological
innovation. The FDI policies of Singapore shall be compared with those of the other
developmental NIEs, South Korea and Taiwan, before moving onto a discussion of FDI's
important role in technology transfer. An overview of Singapore's contemporary
development history shall be given, and the implications of its pro-FDI policies

FDI's role in the NIEs

More than any other single factor, what has characterised the industrialisation and
development of Singapore, Taiwan and South Korea has been a militaristic mobilisation
of national resources that focussed sharply upon economic objectives. Far from free
market capitalism, it was rather systems of 'command capitalism' that enabled these
countries to become major players in the world economy. Forceful state interventions
were used to break into an unforgiving capitalist world economy, incurring short-term
costs and inefficiencies, but in the long-term securing effectiveness as exporters.[2] In all
these countries, 'free trade' was a concept generally only accorded to exporters.

Along with the other NIEs, Singapore shared certain factors that tended to increase its
international competitiveness, among them stable macroeconomic policies, sound
financial systems and good infrastructure, an educated workforce, a work ethos, and
policies which encouraged entrepreneurial activity.[3] However, in the area of foreign
investment Singapore took quite another path compared to South Korea and Taiwan. In
fact, the Singapore government's treatment of foreign investors -- at least in the early
years of development -- was almost preferential when compared to indigenous capital.
Through infrastructural subsidies and tax incentives to foreign exports, the local
Singaporean business class was to an extent marginalized.[4]

By way of contrast, South Korea's foreign investment code was one of the world's most
restrictive. Unlike Singapore, South Korea had a large population and a relatively large
domestic economy. South Korea's subsidised conglomerates used their highly-protected
domestic markets as a base to produce the economies of scale required to launch
themselves aggressively into foreign markets in the late 1960's and 1970's.[5]

In effect, the Singaporean government's policies hoped to attract TNCs to establish

manufacturing facilities in Singapore to not only provide employment, but also with the
hope that sophisticated foreign technology would 'trickle down' to local companies
effecting technology transfer. Government policy-makers tended to believe that TNCs
were better vehicles for the acquisition of high technology.[6] However, to what extent
this trickle-down effect actually happened is debatable. It is suggested that TNCs are
generally reluctant to use local contractors, which is where transmission of techniques
and practices would be expected to take place, and that the technology actually used in
locations such as Singapore is not cutting edge, but rather at the end of its product life-

FDI, Technology and Innovation

Lall (1996) identifies two broad interventionist strategies that have been employed to
encourage 'technological deepening' of economies. The approach taken by Taiwan and
South Korea tended to restrict technology imports from FDI, and strongly promoted
technology acquisition by the use of licensing and joint ventures. Singapore's strategy
went the opposite way, increasing dependence on FDI but at the same time attempting to
encourage TNCs with the use of incentives to spread their sourcing out into the local
economy and to encourage the use of local skilled labour.[8]

Singapore recognised the connection between foreign investment and

internationalisation, and viewed TNCs as being powerful agents for the transference of
modern technologies to developing countries. TNCs are at the forefront of innovation;
their presence can provide a way of keeping up with technical progress. In addition to
these technological advantages, TNCs also possess internationally established brand
names, global marketing presence and superior knowledge of marketing channels, and
access to international flows of information.[9]

However, one important weakness in Singapore's approach is the question of

technological innovation, considered the last stage of technology transfer.[10] For a
variety of reasons, state-of-the-art R&D by TNCs is nearly always concentrated in a few
developed countries, and high technology tends not to be developed outside the TNC's
home-base. Cutting-edge R&D in particular is usually undertaken close to management
and decision-making centres where there exists a large local market, and a pool of
advanced and specialist technical skills.[11] Another important weakness is that the very
presence of strong TNCs can inhibit local companies from deepening their technological
capabilities, preferring to import foreign technologies that are proven and ready-to-use,
rather than invest in their own R&D.[12] This is arguably what has already happened in
Singapore as a consequence of their developmental path.

Singapore's development path

The history of contemporary Singapore begins in the mid-sixties. At that time, Singapore
and the surrounding regions were highly-charged politically, and their economies weak.
The turmoil of post-colonial dynamics caused confusion and a fair measure of uncertainly
in the region, based around explosive mixtures of 'nationality', race, religion and class.
Into this mixture stepped several demagogues who variously exploited the situation to
pursue their own personal political ambitions. Amongst them were Sukarno, Tunku
Abdul Rahman, and a fellow then known as Harry Lee, later better known as Lee Kuan

Singapore was ostensibly "thrown out" of the Malaysian federation in 1965, the result of
a conspiracy of mutual benefit between the Tunku and Lee. The Tunku, with good
reason, saw Lee as a direct threat to his position as leader of the Malaysian federation.
Cutting off Singapore not only meant getting rid of a dangerous potential rival, but it also
reduced the proportion of Chinese within the federation, thus reducing the electoral
power of the Chinese in the parliament.

So it was that LKY, his own little country in tow, was forced to steer a course within a
sea of conflict and hostility from every side.

The break from the Malaysian federation was traumatic politically, psychologically, and
economically. For Singapore, separation meant loss of a large captive national domestic
market. Malaysia was now a foreign land, and a rather sensitive and belligerent
neighbour at that. The entrepot of Singapore had -- for the moment at least -- lost its
hinterland, and industrial expansion through a common market was now not possible.[13]
To make matters worse, in 1967 the UK decided to withdraw its military from Singapore.
Spending on these bases accounted had for about 12% of Singapore's total GNP at that

Hard times called for radical measures. Singapore was forced to abandon its ISI approach
to development. In its place, the government re-positioned itself firmly on a path of
export-oriented industrialisation (EOI), in a manner similar to that undertaken by
Hongkong and Taiwan starting in the mid-60's. Preparation for this new course included
actions designed to neutralise the power of organised labour. Wages were reduced,
working conditions weakened, and working hours increased.[15] The government set out
in deliberate fashion to attempt to produce the social, political and economic
preconditions for industrial investment in export production.[16] The doors to foreign
investment were thrown wide open.

(Strategically, Singapore's wide-open door to foreign investment indirectly provides an

enormous level of security for the island, given its geo-political position squeezed
between two large and unstable states. The presence of a very large number of
multinational corporations from the major economic and military powers of the world in
itself provides a measure of protection that a nation the size of Singapore could never by
itself provide. Singapore's national psyche was formed under the shadows of its
neighbours; most Singaporeans are acutely conscious of their vulnerability. In fact, the
social repression seen in Singapore is sometimes justified and excused in terms of its
location, and the need to not offend often-prickly governments in Kuala Lumpur and

Foreign companies began to pour into Singapore, with cumulative investment in

manufacturing rising from S$157 million in 1963 to S$995 million in 1970, and reaching
S$3054 in 1974.[17] Although the rate of foreign investment plateaued during 1974-1977
due to the effects of the oil shock, this was only a temporary phenomenon. By 1984,
cumulative foreign investment in manufacturing had reached over S$12,000 million. The
impact on unemployment in Singapore was nearly as dramatic, falling from 9% in 1965,
down to less than 4% in 1974.[18] In fact, because of a shortage of skilled workers,
Singapore had to start to import labour, mainly from Malaysia.

However, due to political/racial reasons, and also to the limited physical space for further
large-scale industrial expansion, the Singapore government was disinclined to simply
continue importing labour. The industries that Singapore had managed to attract through
its foreign investment policies up until the beginning of the '80s were labour intensive, of
a low-technological standard, requiring relatively low skill levels.[19] It was at this point
that the 'Second Industrial Revolution' was devised, which comprised a strategy to
increase the technological sophistication of Singapore's manufacturing base. This
strategy aimed to reduced the number of low-tech, low-skill, labour intensive industries
and attempt to move to high-tech, high-skill, capital-intensive industries.[20] One of the
elements of this policy was to actually encourage wage increases, in contrast to the
government's earlier policies of suppressing labour costs.
The essence of this vision was for Singapore to become 'a total business centre' and for
international companies to make Singapore their regional operational headquarters.[21]
Thus, there was a very important shift in emphasis from Singapore as a destination for
manufacturing investment, to Singapore as a major regional business hub from where
TNCs would base their entire operations for East Asia and the western Pacific. It was a
vision of "an advanced economy fully integrated into the global production system,
exploiting its strategic location and highly skilled population to retain a leading position
in production and services."[22] To a point, Singapore has successfully realised this

With or without FDI, Singapore would have found it difficult to languish as an economic
backwater. Accidents of location, culture and history came together in Singapore, and
given a modicum of political stability, such a country could only prosper. Singapore was
lucky; its apparent 'success' was certainly not only due to its FDI policies, but also due to
many other factors.

What FDI has done for Singapore is to assist in the creation of a nation with one of the
highest per capita incomes in the world, for what that is worth. Singapore could be said
to be wealthy in the same way that ancient Athens was said to be democratic. In both
cases, a huge, anonymous underclass of cheap labour supported the superstructure; in the
case of Singapore, Malaysians (of every race, not just Malays) and other Southeast
Asians, who are offered only the barest of legislative protection by the government.

The cost in human terms of this success has been high: Singapore today is an
authoritarian corporatist state that intervenes in virtually every aspect of citizen's lives.
Singapore has become a nation of functionaries who serve the interests of the TNCs and
the Singaporean state elite. Within such an environment there exists very little true
entrepreneurship. FDI has not assisted in the development of an innovative population;
rather it has assisted in the creation of a self-satisfied, arrogant society that seems content
to live off its natural advantages.[23] Singapore today resembles an enormous air-
conditioned shopping mall, with squeaky-clean streets and traffic so orderly as to border
on the bizarre.

Nonetheless, the material benefits that have accrued to Singapore partly due to its FDI
strategies are undeniable. However, given Singapore's unique circumstances, it is
doubtful whether such strategies should be emulated by other developing countries
seeking sustainable pathways to industrialisation and modernisation.

[1] Anis Chowdhury and Iyanatul Islam (1993), The Newly Industrialising Economies of
East Asia, London, Routledge, p.107
[2] Walden Bello and Stephanie Rosenfeld (1990), Dragons in Distress: Asia's Miracle
Economies in Crisis, Harmondsworth, Penguin, p. 8
[3] S. Lall (1996), 'Foreign Direct Investment Policies in the Asian NIEs' in Learning
from the Asian Tigers, London, ch. 8, p.210
[4] Walden & Rosenfeld (1990), p. 6
[5] Walden & Rosenfeld (1990), p. 4
[6] Chowdrey & Islam, p.118
[7] Chowdrey & Islam, p.117,118
[8] Lall (1996), p.199
[9] Lall (1996), p. 197-198
[10] Chowdrey & Islam p.116
[11] Lall (1996) p.198
[12] Lall (1996) p.198
[13] Garry Rodan (1997), 'Singapore: Economic Diversification and Social Divisions' in
Garry Rodan, Kevin Hewison, Richard Robison (eds.), The Political Economy of
Southeast Asia: an Introduction, South Melbourne, Oxford UP, p.152
[14] Rodan (1997) p. 152
[15] Rodan (1997) p.152
[16] Rodan (1997) p. 153
[17] Rodan (1997) p.153
[18] Rodan (1997) p.152
[19] Rodan (1997) p.154
[20] Rodan (1997) p.155
[21] Rodan (1997) p.157
[22] Lall (1996) p.210
[23] Much like Australia.
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