Macroeconomic Determinants of Direct Investment Abroad of Singapore

Kueh, Jerome Swee-Hui and Puah, Chin Hong and Liew, Venus Khim-Sen (2010): Macroeconomic Determinants of Direct Investment Abroad of Singapore. Published in: Engineering Economics , Vol. 25, No. 1 (February 2014): pp. 72-81.

Abstract

The objective of this study is to discover the determinants of Direct Investment Abroad (DIA) of Singapore. It also measures the impacts of various determinants on the DIA of Singapore. Based on theoretical justification, several potential determinants including aggregate income, interest rate, trade openness and exchange rate are considered in this study. Results obtained reveals that higher aggregate income will contribute to the expansion of abroad investment of Singaporean firms. Meanwhile, the increase (decrease) of DIA of Singapore is significantly related to the appreciation (depreciation) of the Singapore dollar per US dollar exchange rate in the long run. This finding is in tandem with the literature that suggests that appreciation of the home currency tends to increase the volume of abroad investment activities. Meanwhile, the current study finds the existence of inverse relationship between interest rate and DIA of Singapore in the long run. This finding is consistent with the argument that lower interest rate reflects the abundance of capital in Singapore and subsequently lowers the opportunity cost in seeking capital for DIA. In other words, these firms have competitive advantage in financing foreign investment due to lower cost of borrowing in home country. Nevertheless, trade openness of Singapore exhibits inverse linkage towards the DIA of Singapore in the long run. This may due to the substitution effect of the trade activities against the DIA of Singapore, as explained in the text. It is also discovered that exchange rate and aggregate income have larger influence on the DIA of Singapore, compared to other determinants. It is argued that the association of the ownership, location and internationalization advantages gained by Singapore has contributed to the economic development path of the country.

• Item Type: MPRA Paper
• Language: English
• Keywords: Direct Investment Abroad; Economic Growth; Trade Openness; VECM; Singapore
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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