Putting it to Work in Developing Countries - Nathan Associates

Singapore’s Rise and FDI
Throughout the world, Singapore is regarded
as a major economic success. In the past
40 years the city-state has transformed itself
from a developing country to a high income
one, and a world-class business center.
Attracting FDI has been one key to its success—annual
FDI inflows were about $90
million in 1970, but are $20.1 billion
today. By harnessing the technological and
business power of multinational enterprise
associated with these flows, Singapore
moved rapidly from a labor-intensive economy
to one increasingly based on knowledge
and technology. Its Local Industry
Upgrading Program, Skills Development
Fund, and schemes to encourage local
research and development by multinational
companies have all been highly effective in
this regard. All of these initiatives build on
Singapore’s excellent systems of basic education
and worker training. In maximizing the
impacts of FDI, Singapore has adopted a
carefully managed industrial policy that
rests on five prerequisites: (1) an open economy
that imposes market discipline; (2)
excellent infrastructure and a predictable,
business-friendly investment climate; (3) an
open labor market; (4) a high-quality professional
civil service; and (5) meritocratic,
results-oriented government, able to rapidly
recover from and correct its mistakes. See
Asian Development Bank, Asian
Development Outlook 2004, Part 3 Foreign
Direct Investment in Developing Asia, pp.
230–231.
enterprise to merge with or acquire an existing
company in a foreign location. Over the years
2003–2005, cross-border M&A accounted for
about two-thirds of the world’s FDI flows (Table
1-2). The remaining third consisted of greenfield
FDI as well as other follow-up FDI flows, such
as reinvested earnings and intracompany loans
(see below). 7 This global average hides considerable
year-to-year variability in cross-border
M&A. It also masks a striking difference in the
relative portions of M&A versus greenfield and
other flows in the developing and developed
worlds. M&As consistently make up by far the
greatest share of FDI flows in developed countries
as a group, but greenfield FDI dominates
in developing countries (Figure 1-3).
Initially at least, the two types of FDI may have
distinct impacts in host economies: greenfield
investments add immediately to capital stock
and employment, while cross-border M&A
brings ownership change but not necessarily
near-term expansion in productive capacity.
UNCTAD research suggests, however, that their
relative effects differ little over time. 8 Both tend
to generate follow-on investments, as well as
potential technology and knowledge transfers for
the host economies.
One new trend in cross-border M&A activity is
the involvement of private equity funds based in
the United States and the United Kingdom, as
well as Hong Kong and the Middle East. 9
Compared to multinational corporations, the
traditional sources of FDI, private equity funds
have shorter time horizons for their investments
(e.g., five to six years), and are more concerned
with generating near-term returns for shareholders
than with developing global production or
distribution networks. Consequently, their
impact on the nature and growth of cross-border
M&A transactions in developing countries and
FDI in general, while still uncertain, may be different
than that of multinational corporations.
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