As a late developer, Singapore had to plan and enforce policies that helped them become the wealthy nation-state that they are today. One key factor of their economic growth was their open policy towards foreign direct investment―when an “individual or business owns 10 percent or more of a foreign company―and is important due to its ability to assist the economic development of countries (Amadeo). The United States on the other hand has been an economic powerhouse for decades, and maintains that their moderately liberal policies as the fundamental policy of the United States government toward international investment is “neither to promote nor discourage inward or outward flows of capital” (Foreign Investment and U.S. National Security).
This paper will apply Zysman’s explanations through the interests of political power holders as well as Hall and Soskice’s varieties of capitalism theory to the question, “Why does Singapore have a more liberal Foreign Direct Investment (FDI) policy than the United States?” In order to deeply analyze the impact of those policies, it is important to factor out the obvious size difference between Singapore and the US and instead, argue that the combination of interests of elites, tax policies, and labor institutions is what causes Singapore’s policies to be more liberal than the US.
It is important to analyze the pros and cons of FDI in order to understand the reasoning behind a nation’s policy. The benefits of FDI is usually enough incentive for nations to adapt their policy to be receptive of foreign investment. Foreign direct investment is critical for developing and emerging market countries as “their companies need the multinationals' funding and expertise to expand their international sales.” Private foreign investment in infrastructure, energy, and water would be able to increase jobs and wages, speeding up the nation’s development process (Amadeo). FDI investments are also long term investments, which is much more important to developing nations than economic powerhouses such as the US (Amadeo). If short term investors decide to sell their investments, the huge drop in capital would make a bigger impact on the weaker developing economies and halt the development of the nation. However, FDI can also be used to take advantage of foreign nations as investors could aim to take advantage of a business’s value without adding any, which adds a risk factor to having liberal FDI policies. (Amadeo).
Elites
Foreign direct investment policies in Singapore are structured in order to help the economy grow as much as possible, especially because that they were late developers. Zysman’s explanation of interest groups can be applied here to explain Singapore’s liberal FDI policies. The elites with the power to act of political interests would be based almost solely on the Prime Minister Lee Kuan Yew and his political party, the People’s Action Party (PAP), who has “held power since 1959 and holds 90 percent of the seats in the nation’s parliament” (Levine). Singapore is able to set such liberal FDI policies due to the lack of political opposition, as opposing parties are crushed by litigation into bankruptcy (Levine). Lee Kuan Yew, recognized the benefits of FDI and chose to push for an open, heavily-trade dependent economy. Through Singapore’s FDI policies, the small nation state would develop more, ultimately leading to better lives for the civilians. The people would continue to support the current political leaders, which is ultimately, in the best interest of those in power. Those in power would also want the support of the local businesses and having friendly FDI policies allows them to gain new knowledge and become more technologically advanced, strengthening the relationship between market and government (Amadeo). Zysman would argue that due to the autocratic-like government prime minister Lee Kuan Yew ran, he was able to make the final decision on foreign direct investment. Lee Kuan Yew favored liberalization and believed that it would be in Singapore’s best interest to have liberal FDI policies in order to speed up the development process. Opposing parties are crushed by litigation into bankruptcy (Levine).
Much like Singapore, the fundamental policy of the United States government toward international investment is an open investment policy which neither “promote nor discourage inward or outward flows of capital” (Foreign Investment and U.S. National Security). This policy welcomes foreign investment and is clearly effective as the US has one of the highest FDI rates with a total of $4.025 trillion invested in a variety of different industries (United Nations conference on trade and development, 16). However the question that needs to be asked is the reasoning why United States foreign direct investment policy is less liberal even though it is more developed and an economic powerhouse. The US elites based on Zysman would be the democratic/republican parties, as the political party with more support are the ones that are able to make decisions based on their interests for the nation. Domestic corporate interest groups would influence the parties to ensure that their direct stake in the Industry is protected from foreign investments.
Hall and Soskice would describe Singapore as a unique mix of LME and CME as it incorporated LME openness and liberal policies, but still worked closely with companies. Since Hall and Soskice believed that the only way for a capitalist society to be successful was to be either be completely LME or CME, they wouldn’t have predicted Singapore’s success based off of it’s unique governing strategies. Singapore’s FDI policies seems to be a mixture of the best of both worlds, considering that it is extremely open, which attracts foreign investors, as well as coordinated to ensure that company employees are the most qualified in the applicant pool.
Hall and Soskice would describe US FDI policies as model policies that everyone should follow. As a sovereign country, it has sought to modify FDI policies to be less open and liberal in order to protect its national security interests (Foreign Investment and U.S. National Security). To accommodate this shift in policy, the US government has placed certain limitations on overseas investment in strategically sensitive sectors of the U.S. economy (Foreign Investment and U.S. National Security).
The argument formulated from the combined the ideas of Zysman as well as Hall and Soskice in essential to explain reasoning behind why singapore is more liberal. It argues that Singapore is able to have a more liberal policy due to the political stability as well as having a unique mix of a CME and LME. With the power solely lying in the hands of Lee Kuan Yew combined with working closely with companies, he was able to control corruption and instill liberal FDI policies that allowed capital to flow into Singapore’s markets. Disregarding any arguments of the unjust autocratic-like government they have, having one sole leader making executive decisions is an effective strategy for political stability, making Singapore an attractive destination for investors due to their political stability. The US political parties often compete for power over each other, causing them to constantly oppose each other’s policies, making it hard for a coherent FDI policy to be put in place. Since the leader of Singapore clearly recognized the urge for rapid development, having liberal foreign development policies would be the best strategy to grow its economy. The US elites on the other hand would recognize that having an open policy is important, but also wants to ensure that foreign investors wouldn’t be able to take advantage of FDI policies and obtain economic advantages over them.
Tax Policies
Establishing the fact that the best interest of the developing city-state would be to have friendly FDI policies, low tax policies on FDI would further prove the argument that they have a more liberal policy than the US. Higher taxes generally discourage of investment, thus the lower it is, the more freedom other nations would have to invest. Singapore’s tax policies based on Zysman would be explained through its coalition of interests, arguing that applying low taxes on foreign investment would mean that the government would make less money but incentivise foreigners to invest huge amounts of capital to grow its economy.
US tax policies regarding FDI can be explained perfectly through Zysman’s explanation using national coalitions. The US coalition would be interested in FDI as it would be able to grow its economy, but also needs to make sure that it’s critical infrastructure, “assets that are essential for the functioning of a society and economy”, are protected (National Archives and Records Administration). However FDI is able to offer many benefits to society that is persuasive enough to drop rates significantly low. The “enacted fiscal legislation reduces the single corporate tax rate from 35% to 21% and suspends the corporate alternative minimum tax” (Enovado). Hall and Soskice would argue that this change in tax policy to protect domestic industries was a necessary action to take to ensure that the US would be economically advantageous, although it meant less liberal FDI policies.
Singapore’s friendly tax policies serve as a prime example of an open and liberal nation, able to attract and welcome FDI. For example, “Singapore provides exemption from income tax for 5 years to pioneer companies involved in industries that are not adequately developed in the country” (United Nations conference on trade and development,16). This is backed up by statistics showing their rapid growth of inward FDI, jumping from 62 million USD per year to 77 million USD per year (Singapore: Foreign Investment). Based on the tax policies alone, Hall and Soskice would agree that Singapore is leaning towards a Liberal Market Economy which correspond to its liberal FDI policies.
The overall synthesis would conclude that Singapore’s tax policies correlates with the interests of its national coalitions. Since they are still a less developed country, the need to improve its economy and markets is the driving factor behind its liberal FDI policies. The US on the other hand, is already economically dominant, so the priority of the national coalition would be to protect domestic company market shares, which results in applying a less liberal and open FDI policy.
Labor Institutions
Hall and Soskice would agree that this would be the best route to take as they believe a capitalist economy is the most highly effective system of wealth generation. Hall and Soskice focuses on “vocational training and education, where firms face the problem of securing a workforce with suitable skills, and workers face the problem of deciding how much to invest in what skills” (Barma and Vogel, 293). The outcomes of this coordination problem turn not only on the fortunes of individual companies and workers but the skill levels and competitiveness of the overall economy (Barma and Vogel, 293). The value of vocational training and education plays a huge factor in capitalist societies, leading Singapore’s LME governments to have more incentive policies to attract foreign investors. By selecting the qualified workers in each company, Singapore governments are able to ensure that they would be able to help innovate and grow companies into assets that foreigners would be willing to invest in. Singapore’s government also provides incentives for those with the talent to innovate, by subsidizing and providing grants to start up companies and their employees (Tegos). With the combination of providing rewards for productive labor that leads to technological advancements and liberal FDI policies, Singapore market itself as an attractive nation to invest in. The unique addition of CME qualities guarantees that the domestic companies would be looked after by the government, allowing companies to trust that the liberal FDI policies are in their best interest as well.
Career allocations are controlled by those with political power, as Lee Kuan Yew sought to utilize those with special talents and skills, giving them job positions (Davies and Lomax). An explanation of the effect Singapore’s labor institutions has on its FDI based off of Zysman would be a need to respond to an economic problem. The country’s single biggest economic problem was severe unemployment due to the rapid increase in population. Hence the government’s first priority was to create job opportunities through industrialization, making Singapore more attractive to foreign nations (Soon and Stoever, 318).
In an attempt to attract foreign investors, Singapore has gradually moved from being a location for labor-intensive manufacturing during the 1960s to 1980s, to one focused on high-value industries and business services (Hsu, 7). As Singapore faced increasing competition from neighbors with lower and other costs, new directions were adopted to offer broader incentives for investments that leveraged Singapore’s location and world-class infrastructure, such as those for operational headquarters and research and development projects. The continual drive to restructure and diversify by carefully identifying new growth areas/engines has been a characteristic of Singapore’s economic strategy” (Hsu, 7).
US has worker unions, that fight for workers wages and limits the power those with political elites have. If FDI taxes were too low and were out-competing US companies, those worker unions would protest and try to make the government raise the taxes. One problem that arises from labor institutions would be the poor working conditions for immigrant workers. Singapore on the other hand, integrates its immigrants, which plays a big factor on its ability to develop. By convincing everyone to have the same mindset and work towards a common goal, the workers would be even more productive as they would believe they are being looked after, a common theme in an CME society, that would appeal to foreign investors (Hall and Soskice, 313).
The synthesis that can be made from looking into the role labor institutions plays in determining FDI policies would be that labor institutions such as unions would hinder the . Looking at the effects from a purely economic standpoint, lower wages would generally favor the benefit of the nation as a whole and allow development speed to increase significantly.
Conclusion
Although Singapore has only recently developed into an economic force, the liberal policies they implemented were able to speed up the process and urbanize the nation-state. Furthermore, Singapore’s government were able to utilize the increase in productivity and combine it with low FDI taxes in order to convince foreign investors to invest in its markets. Overall, this paper argues that liberal FDI policies would be extremely beneficial under perfect alliances, where the interests of those with political power in one nation align with the interests of the other, as the more developed countries can invest while less developed countries lower their tax policies in order to increase their flow of capital within their economy. However, one reason why this isn’t completely achievable, is because nations are still competing to be more dominant over the other, which is the top priority of such interest groups, leading to limitations being placed on what foreign nations are allowed to invest in. This competitive alliance shows that liberal FDI policies are dependent on those with political power to implement strategies using the influence of tax policies.