Foreign Direct Investment: Drivers and Impact

The assignment delves into the factors that drive foreign direct investment (FDI) into specific countries. It highlights the influence of stable political environments, flexible trade policies, favorable taxation regimes, and a conducive economic climate on attracting FDI. The analysis emphasizes how these elements create opportunities for foreign companies, contribute to economic growth, and ultimately lead to increased earning capacity for local populations.

Running head: INTERNATIONAL RELATION
International Relation and Global Economy
Name of the Student:
Name of the University:
Author’s Note:

2INTERNATIONAL RELATION
Table of Contents
Introduction......................................................................................................................................4
Factors influencing foreign direct investment.................................................................................4
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

3INTERNATIONAL RELATION
Executive Summary
This present report consists of an overview of the different factors that are associated
with the foreign direct investment. Hence, it has been received that the foreign direct investment
in a particular country needs stable political environment and flexible trade policies. On the other
hand, it has been received that Singapore is the good country for the foreign investment as it has
a stable political environment, low taxation policy, and good economic growth. Therefore, low
wage and skilled labor are the prior areas of the foreign investment in a country as every foreign
company wants to increase their productivity by reducing their operating cost. Therefore, it can
be said that return on investment is another factor of foreign direct investment.

4INTERNATIONAL RELATION
Introduction
Foreign direct investment in a country is one of the most important approaches to
increase the economy of the country. However, to strengthen the economic condition of the
country a struggle occurs between the countries as every country wants to attract the foreign
investors. Foreign investors play a crucial role in developing the economy of a country. Since
1914 the foreign investment process has been evolving rapidly. However, foreign investment
provides the alternative products and also maximizes the supply of the essential products through
the import mechanism (Sharma 2017). Often policies that are developed by the government
affects the foreign investment as these are favorable for the local investors than the foreign
investors. On the other hand, double taxation influences the foreign investors negatively while
investing in a country. This study deals with the potential factors involved in influencing the
foreign investment in the context of Singapore and other countries.
Factors influencing foreign direct investment
Various factors are involved in the foreign direct investment since 1914 that leave both
negative and positive effect on the foreign direct investment in different countries.
Government stability
Stable political environment and the government is necessary for the foreign investment
in a country. However, the foreign investors always look for the country that has a stable
government and trade policies that are favorable for them (Pathan 2017). Therefore, it is
essential for the government to support the foreign investment thus the investors do not fear to

5INTERNATIONAL RELATION
take over by the foreign government and they are able to expand their business. As for example,
Singapore is one of the most politically stable country and important for the foreign investment.
The Ruling People Actions Party of Singapore is stable since 1959 that offers a big scope to the
foreign investors to invest in their country. On the other hand, Singapore is an independent
country that provides more opportunity to the foreign investors. Election held in the Singapore
after 6 years, which ensures the political stability, rules, and regulation of the government that
are essential for the foreign investors (gov.uk 2017).
Government policies
Government policies should be flexible for the foreign investors as strict government
policies may affect the business expansion of the foreign investors. However, government
policies of a country often provide scope only to the local investors rather than the foreign
investors, which influence the foreign investors negatively in this country (Sharma 2017). As for
example, Singapore government keeps the trade dependent economy that includes open
investment regime with some restrictions in terms of financial service. According to the World
Bank's report, Singapore is considered as the second country after New Zealand where the
foreign investors can expand their business easily. Singapore Free Trade Agreement allows the
foreign investors to maximize their market share in a flexible manner. The government of the
Singapore offers the free market to the foreign investors that influence them to expand their
business in this country (export.gov 2017).
Economic Stability
Economic stability is another factor of the foreign direct investment in a country.
However, if the people of a country are not economically strong then they will not able to

6INTERNATIONAL RELATION
purchase the product from the foreign companies (Li, Huang and Song 2017). On the other hand,
if the country has low economic growth then it leads the foreign investors to get the opportunity
to invest in such country as it will essential for economic growth of such country. As for
example, the economy of the Singapore is open and its GDP is US$ 55,000 per capita that is
higher than many OECD countries. Hence, this country will be a good scope for the foreign
investors to expand their business in such country.
Market scope
The market scope is a big factor of the foreign direct investment (FDI) in a country. The
foreign investors need the scope to expand their business both domestic and international market
of a country (Bokpin 2017). Expansion of the business in both domestic and international market
leads the foreign investors to cut their production cost and they get an opportunity for the product
diversification. As for example, Singapore gets the place among the top ten countries that are
associated with FDI. However, this country gives its all effort to attract the foreign investors and
develops a good trade environment. However, the foreign investors find a promising market in
the Singapore for the many businesses. As for example, this is a good sector for oil, gas, aircraft,
software and educational industry. Therefore, this country offers skilled employees and high
demand in the domestic and international market. The current market of the Singapore shows
high demand for oil and gas products, which allow the foreign investors to invest in their
countries in order to get a good return on their investment.
Skill of the labor and low wage
Labor skill is a vital factor that influences the FDI in a particular country. Foreign
investors look for the country where they get high skilled labor with low wage (Hassan and

7INTERNATIONAL RELATION
Nassar 2017). In comparison to the US, the labor wage is low in Singapore that gives a big
opportunity to the foreign investors to invest in this country. However, high skilled labor with
low wage leads the foreign companies to enhance their productivity by cutting their production
cost. Hence, people of the Singapore are highly educated and technologically advanced in the
recent years. This is a big factor that attracts the foreign investors to expand their market share in
this country (Danakol et al. 2017). However, the aim of the Singapore government is to improve
their economic condition for this reason they use their skilled people as the resource to gain the
concentration of the foreign investors.
Rate of the tax
High tax rate often resists the foreign investors to invest in a country. Hence, foreign
investors choose the country for their business expansion that possesses low tax for the foreign
business (Adhikary and Adhikary 2017). In the context of Singapore, they offer good trade
environment to the FDI while the tax rate is varied based on the annual income of the foreign
companies. Singapore government charges 8.5% tax for those foreign investors having annual
income up to S$300000. On the other hand, the foreign companies having annual income above
S$300000 need to pay 17% tax on their income. This is a good taxation policy of the Singapore
government that influences the foreign investors to start their business in this country as they
have to pay tax based on their income.
Culture and social lifestyle
The culture of the country and the lifestyle of the people is a big element that affects the
foreign investment in a country. However, if the country consists of high-class people then it is a
good scope for the foreign companies (Saidi, Mchirgui and Hammami 2016). On the other hand,

8INTERNATIONAL RELATION
cultural diversification is another part that influences the foreign investment in a business.
Singapore includes a mixed culture of Western and Asian culture. However, some countries only
follow either the western culture or the Asian culture that resists the foreign investors to bring
product diversification in a country. Hence, the lifestyle of the people and the mixture of
Western and Asian culture in the Singapore give a golden opportunity to the foreign investors to
launch different products in this country that will enhance their sales revenue generation.
Return from the investment
ROI or return on investment is the potential factor of foreign direct investment in a
country as it identifies the profit that the investors get against their capital (Saini, Madan and
Batra 2017). However, if the foreign investors do not get the significant return on their
investment then they will not be interested in a country. Since 1914 the ROI is a crucial factor of
foreign investment as based in it the profitability of the investors in a foreign country can be
counted. The return might be consistent or it could be enhancing over the time. In the context of
Singapore, there is good opportunity to get the significant return on the investment as the GDP is
higher in this country. There is a high demand in the domestic and international market of
Singapore, which ensures the good return on the foreign investment (Hlavacek and Bal-
Domanska 2016). Thus, in the recent years, many foreign investors come from the different
countries and invest in the Singapore market in order to get the highest return than other
countries. Therefore, the favorable trade policies of the government of Singapore ensure the
foreign companies to get their investment back as their investment is safe in this particular
market.

9INTERNATIONAL RELATION
Conclusion
The entire piece of work reveals the different factors influencing the foreign investment
in the context of Singapore market. However, since, 1914 the FDI process has been evolving
based on the nature of different countries. Hence, it has been found that government stability and
trade policies of a particular country leave a big effect on the FDI. In the context of Singapore,
the stable political environment and the flexible trade policies trigger the opportunity for the
foreign companies. Therefore, the economic condition of such country is good that ensures the
good earning capacity of the people. Therefore, the taxation policy is also favorable for the
foreign investors in such country that is based on their annual income. The foreign investors get
a chance to have a significant return on their investment in this country, which influences then
positively to invest in this country.

10INTERNATIONAL RELATION
References
Adhikary, B.K. and Adhikary, B.K., 2017. Factors influencing foreign direct investment in South
Asian economies: A comparative analysis. South Asian Journal of Business Studies, 6(1), pp.8-
37.
Bokpin, G.A., 2017. Foreign direct investment and environmental sustainability in Africa: The
role of institutions and governance. Research in International Business and Finance, 39, pp.239-
247.
Danakol, S.H., Estrin, S., Reynolds, P. and Weitzel, U., 2017. Foreign direct investment via
M&A and domestic entrepreneurship: blessing or curse?. Small Business Economics, 48(3),
pp.599-612.
Export.gov. 2017. Singapore - 1-Openness to, and Restriction Upon Foreign Investment. [online]
Available at: https://www.export.gov/article?id=Singapore-Openness-to-Foreign-Investment
[Accessed 31 Aug. 2017].
Gov.uk. 2017. Overseas Business Risk - Singapore. [online] Available at:
https://www.gov.uk/government/publications/overseas-business-risk-singapore/overseas-
business-risk-singapore [Accessed 31 Aug. 2017].
Hassan, M. and Nassar, R., 2017. AN EMPIRICAL STUDY OF THE RELATIONSHIP
BETWEEN FOREIGN DIRECT INVESTMENT AND KEY MACROECONOMIC
VARIABLES IN MEXICO. Journal of International Business Disciplines, 12(1).

11INTERNATIONAL RELATION
Hlavacek, P. and Bal-Domanska, B., 2016. Impact of foreign direct investment on economic
growth in Central and Eastern European countries. Engineering Economics, 27(3), pp.294-303.
Li, X., Huang, S.S. and Song, C., 2017. China's outward foreign direct investment in
tourism. Tourism Management, 59, pp.1-6.
Pathan, S.K., 2017. An empirical analysis of the impact of three important aspects of Eclectic
Paradigm on Foreign Direct Investment (FDI). International Research Journal of Arts &
Humanities (IRJAH), 45(45).
Saidi, S., Mchirgui, N. and Hammami, S., 2016. Attractiveness Factors of Foreign Direct
Investment in Tunisia: Recent Evidence from Panel Data Analysis. International Journal of
Economics and Empirical Research (IJEER), 4(8), pp.400-410.
Saini, A., Madan, P. and Batra, S., 2017. Foreign direct investment and Indian export growth: A
co-integration analysis. World Affairs: The Journal of International Issues, 21(2), pp.128-139.
Sharma, S., 2017. Factors affecting foreign direct investment. International Journal of
Management, IT and Engineering, 7(2), pp.1-8.