Foreign investment should match available skills in Singapore’s labour market

Andrew Michael Teo

Over the years, we have heard how the income gap between the rich and the poor in Singapore has widened rapidly despite the government’s effort to narrow the gap through various fiscal and monetary measures. This could be due to depressed wages or underemployment whereby workers who had been displaced taking up different jobs with a lower wage while looking for opportunities to be reinstated in their same capacity amid different employers.

Capital Flow & Job Creation

The income gap largely comprises of the financial and physical assets that create wealth. Developed economies, like Singapore, possess more of such capital than developing economies, and such capital usually incorporates more advanced technologies. However, one key aspect of economic advancement is the capacity to acquire more capital and to climb the technological ladder. Emerging economies undertake some capital formation on their own, but in this era of globalization, they increasingly rely on foreign capital.

While foreign investment capital has the potential to create jobs and deliver enormous economic benefits to the host country and the local workforce, it can also bridge the gap between savings and investment in especially capital-scarce economies, as well as bring modern technology which encourages development of more mature financial sectors.

Although capital flows have proven effective in promoting growth and productivity in countries that have enough skilled workers and infrastructure such as land-scarce Singapore, it can also create negative yet immediate impact, depending on the nature of investment capital. If investment capital is allowed to be invested in the host country’s real estates and residential properties market, it can lead to inflating prices of assets in the host country’s real estates and residential properties market. This would inevitably create negative sentiments and resentments among the working population of the host country since they will be priced out.

Given our high literacy rate, a skilled and educated workforce, and with a significant number of displaced professionals, is Singapore attracting the right type of foreign investments that she has to rely on migrant workers and professionals to solve her labour shortage issue? In short, how much is understood of our local workforce in relation to the type of foreign investments that Singapore is attracting?

Types of Foreign Investment

Broadly speaking, foreign investment capital flows come in three primary types:

• Portfolio equity investment involves buying of real estates and company shares, usually through stock markets, without gaining effective control.

  While providing publicly listed companies with capital investment, it must not be forgotten that investors could readily withdraw their investments at short notice in times of a crises which could hampered the operations of the company overnight.

  In addition, allowing foreign investments in local real estates and residential properties would only help to inflate property prices in the host country, which will ultimately have a negative impact on the natives of the host country as their ability to afford one, will be further distanced.

• Portfolio debt investment typically covers commercial papers and bonds which include short- and long-term borrowing from banks and multilateral institutions, such as the World Bank.

• Foreign direct investment (FDI) involves forging long-term relationships with enterprises in foreign countries. FDI can be made in several ways.

  First, and most likely, it may involve parent enterprises injecting equity capital by purchasing shares in foreign affiliates. Second, it may take the form of reinvesting the affiliate’s earnings. Third, it may entail short- or long-term lending between parents and affiliates.

  Singapore’s FDI as at end of 2009, is as follows (figures for 2010 are not available at point of writing):

  

How FDI distorts

Establishing foreign affiliates usually requires starting new production facilities or acquiring control of existing entities through cross-border mergers and acquisitions. Recent years have seen a marked shift toward international mergers and acquisitions. Typically, foreign investors build factories in countries where cheap and skilled labours are readily available so that they can produce their goods for export at lower costs, thus creating jobs for the host country’s workforce.

However, it is interesting to note that many developed and developing countries are pursuing FDI as a tool for export promotion, rather than production for the domestic economy since these FDI have preferential access to markets in the parent company’s home country. As a result, host economies such as Singapore will experience labour shortage in the manufacturing industry that can only be solved by admitting cheap migrant workers.

Singapore’s labour cost is not cheap as the costs of living is not cheap either. While this may solve the labour shortage problem, it will, however, have other economic implications on the host economy such as social integration, congestion, housing, transportation, etc. More importantly, it creates redundancy in some professions among our local workforce.

Internationalising the Service Economy

FDI is an important channel for delivery of services across border. The service sector, which doesn’t trade as widely as manufacturing sector, makes up only a fifth of world exports. It is expected that the service sector will expand rapidly. The Internet and other communication technologies have not only made services more accessible, but also have facilitated the spread of outsourcing. In fact, FDI has grown faster in services than in goods in recent years.

As more developing countries further open their economies, services can be expected to continue outpacing goods. As such, as a developed economy, Singapore should, instead of focusing on attracting FDI in manufacturing, focus and do more to attract more FDI in services to create better jobs for her local workforce.

As services become increasingly tradable, FDI in these industries can forge a strong link with exports of emerging economies. Multinationals operating in such services as banking, telecommunications and trade enhance the efficiency of homegrown providers in myriad ways, contributing to the export competitiveness of these economies’ service sectors. With both FDI and trade rising rapidly in services, FDI has an important role in promoting the sector’s globalization in other emerging economies.

FDI & Economic Growth

Foreign investment can ripple through receiving economies in many ways. It can finance current account deficits through its effect on investment or offset other financial transactions, such as increases in reserves or capital outflows. The imported capital may simply result in additional consumption rather than investment. In principle, it need not always boost the country’s productive capital stock. If foreign and homegrown companies vie for the same investment pie in the host country, FDI may simply offset domestic investment.

FDI may represent a net capital gain through a number of channels, such as transfers of technology and key expertise that does not exist in host countries. India, for example, has opened up parts of its retail sector to foreign investment, although it limits outsiders to a maximum 49 percent stake. FDI is likely to spur domestic investment in India’s retail sector as existing players partner with foreign giants to open stores.

Despite FDI’s potential to boost technology, productivity, investment and savings, economists are still struggling to find a strong link to economic growth. Some studies have detected a positive impact, but only if the country has a threshold level of human capital. This seems to confirm FDI’s important role in propelling growth in China and India, which have vast, untapped technical workforces. China produces 600,000 engineering graduates every year; India produces 215,000.

However, despite such claims, fake graduate degrees from these two countries are not uncommon. Conversely, although FDI in China and India have been steadily increasing, it is interestingly worthwhile to note that unemployment in these two economies is relatively high. As a result, more migrant workers are seen coming from China and India.

Limitations of FDI

A stumbling block to identifying FDI’s impact on growth lies in the fact that these investments can be the cause as well as the result of economic vitality since foreign capital beats a path to the world’s hottest developing-market economies. Other problems make it difficult to disentangle FDI’s effect on GDP growth. For countries with high tariff and nontariff barriers, FDI may simply be the result of multinational corporations trying to access domestic markets because the export route has been closed. In this case, FDI may contribute to economic growth, but the impact will be reduced to the extent high tariffs stunt growth.

Countries also woo foreign investors with tax breaks and subsidies. Fiscal incentives are, doubtlessly, a good way to attract FDI. After all, tax havens are prominent FDI recipients. However, such policies may not necessarily be the most effective ways to reap FDI’s economic benefits. Conversely, these policies may create distortions that would significantly blunt FDI’s efficiency and productivity gains. Tax incentives may prove wasteful since FDI responds more to factors such as labor market quality and flexibility, the cost of doing business, political stability and the quality of infrastructures.

Although the impact of FDI to economic growth can not be felt immediately, it delivers positive effects in the year after FDI increases. This suggests a significant link between FDI and GDP growth – one that develops over time because investment spending increases the nation’s productive capacity. Although the growth effect dies down, the cumulative effect on output in the long run is still positive.

The relative advantages of FDI during crises are well documented. Despite this, capital flight can not be ruled out. In times of extreme financial crisis, FDI may be accompanied by distress sales of domestic assets in the host country, which could be harmful to the host country. Even in normal times, FDI can be reversed or diminished through domestic borrowing by affiliates of multinational corporations and repatriation of funds.

Too much FDI may not be beneficial. Through ownership and control of domestic companies, foreign firms learn more about the host country’s productivity, and because of this, they could overinvest at the expense of domestic producers. There is a possibility that firms with high productivity will be financed through FDI, leaving domestic investors stuck with low-productivity firms. Such “adverse selection” is not the best economic outcome.

Conclusion

Regardless of these pitfalls, FDI seems to be helping emerging economies to develop. It complements the host country’s institutions and human resource. In many other countries, however, barriers to FDI remain. These barriers may range from limits on foreign ownership and control to outright bans on FDI in selected sectors, such as telecommunication services.

As both developed and developing economies continue with their pursuit for foreign investment capital, however, they should be cautious of the type of foreign investments they are attracting since not all foreign investments are generating growth for their economies productively.

As mentioned earlier that in land scarce Singapore, allowing foreign private individuals, who are non-residents and do not reside in Singapore, to invest in private residential properties, despite its small percentage of the entire residential property market, has an immediate negative impact on the economy as the demand for private properties, regardless leasehold or freehold, from this category of foreign investors has a spiral effect on the overall property prices, including public housing. This, perhaps, is one type of foreign investment capital which Singapore should strongly discourage, short of prohibiting it altogether.