Foreign Direct Investment and Economic Growth: The Cases of Singapore and Oman
| Published date | 01 September 2017 |
| Date | 01 September 2017 |
| Author | Philipp Eudelle,Ashin Shrestha |
| DOI | http://doi.org/10.1111/1758-5899.12482 |
Foreign Direct Investment and Economic
Growth: The Cases of Singapore and Oman
Philipp Eudelle
Offenburg University
Ashin Shrestha
Siemens Financial Services
Abstract
Economic growth is associated with improvements in productivity, and increasing productivity is driven by growth in eco-
nomic efficiency, structural changes and substitutional activities. To raise these factors, innovation and trade are substantial
drivers. However, there are many economies with a high potential for economic growth but a lack of domestic investment.
Foreign direct investment (FDI) is able to fill the gap between investment needed to promote economic growth, and locally
available investments. This article highlights the potential of FDI for small economies using Singapore and Oman as examples.
Relationship between FDI and economic growth
Several studies have been conducted to understand the nat-
ure of the relationship between FDI and economic growth.
One of the pioneering works in the area was provided by
Caves (1974). He mentions increased productivity, technol-
ogy transfers from investor to host nations, the introduction
of new processes contributing towards efficiency, manage-
rial skills and know-how, as well as access to international
markets as benefits hosts enjoyed through FDI. Other schol-
ars argue that FDI further promotes economic growth
through a ‘contagion effect’by helping the rate of techno-
logical progress in the host country or introducing better
management practices. There is also significant evidence
that FDI contributes to economic growth through an
improvement in the stock of knowledge, labour training and
skill acquisition, as well as better organizational structures
(De Mello, 1999; Findlay, 1978).
Furthermore, FDI does not only improve the productivity of
the firm receiving the investment but helps the entire host
nation through technological spillovers. The evidence of spil-
lovers is prominent not only in intra-industry externalities but
also in inter-industry externalities through forward or back-
ward linkage. FDI results in synergistic results as it does not
simply bring in investments but also may bring along knowl-
edge and technology that might not be accessible to host
country investors. In addition, a positive contribution of FDI
through interaction with human capital has been a discussion
topic in scholarly work (see, e.g. Borensztein et al., 1998).
Singapore: a pioneer in seeking FDI
The country’s modern economic history can be traced back
to the period of its independence from the British Empire in
1959. Singapore was a small island with no natural
resources, suffering problems of severe unemployment and
poverty. 70% of the country’s household lived in over-
crowded slums. Independence brought along not only the
right of political self-governance to Singapore but also some
degree of economic vulnerability. Although a merger with
Malaysia in 1963 briefly helped Singapore’s economic stabil-
ity through local market expansion and import substitution
policies, the union broke off in less than two years in 1965.
The hopes of Singapore not only to serve Malaysia’s market
as its own local market but also gain from natural riches of
Malaysia came to an abrupt halt (Andrews, 1986). Without
natural resources, all it had that it could rely on was its
small population, half of which was illiterate. Since then, FDI
has played a major role in helping economic growth in the
country.
Singapore’s initial efforts and the EDB formation
After the consultation with the United Nations Bureau of
Technical Assistance and a subsequent industrial survey mis-
sion to help Singapore solve its looming economic crisis, the
United Nations proposed industrialization for lack of pro-
spect of an international trade expansion in its then eco-
nomic status. Furthermore, the formation of the Economic
Development Board (EDB) was initiated with a prime man-
date to aid in industrialization, job creation and economic
development. However, Singapore did not have sufficient
capital and thus attracting foreign capital was thought to be
crucial (Siddiqui, 2010). The economy focused on attracting
labour-intensive manufacturing investments that were seen
as a solution to help it deal with the problem of severe
unemployment rates. To further motivate investors, the gov-
ernment liberalized all trade and investment related aspects
©2017 University of Durham and John Wiley & Sons, Ltd. Global Policy (2017) 8:3 doi: 10.1111/1758-5899.12482
Global Policy Volume 8 . Issue 3 . September 2017
402
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