Academic journal article Journal of Business Economics and Management

Outward FDI, Merchandise and Services Trade: Evidence from Singapore

Academic journal article Journal of Business Economics and Management

Outward FDI, Merchandise and Services Trade: Evidence from Singapore

Article excerpt

1. Introduction

As globalization continues to increase, the world economy is becoming more integrated and interdependent, leading to a rapid expansion of international trade as well as foreign direct investments (FDIs). One of the salient features of the globalization process is a change in the FDI pattern, that is, a rise in outward FDI (OFDI) activities by developing economies of the Southeast and East Asian regions; this rise is an indication that these regions have become an emerging source of the world's FDI (UNCTAD 2008). As a consequence, this indication has raised an interesting empirical question pertaining to the effects of OFDI on home country trade. However, the literature surveyed shows that relatively little empirical work has been conducted to ascertain the causal linkages between OFDI and the components of external trade. The direction of causality between OFDI and external trade may vary not only between the external trade variables (i.e. exports and imports) but also between the types of trade (i.e. merchandise and services). The aim of this paper is to fill this gap in the empirical literature by examining the causality pattern between OFDI and the external trade components, namely, merchandise imports and exports, as well as services, using Singapore as a case study. Singapore was selected as the site for the case study because the city-state is one of the largest outward investors in the Asian region and is overly dependent on trade (as popularized by her successful engagement in entrepot trade) (1). Thus, the main contribution of this study is to provide an additional perspective to the existing literature using external trade component data. Because an empirical analysis based on aggregated external trade data may tend to conceal the economic interactions between OFDI and the trade component variables, the empirical findings may be misleading for policy analysis. Conversely, an empirical analysis using external trade component data may suggest useful implications for policy formulation, such as forging linkages between cross-border direct investments by foreign-controlled and locally controlled firms from Singapore, external trade variables and the type of trade in which Singapore engages.

The structure of this paper is organized as follows. The next section presents a profile of Singapore's OFDI and external trade with a focus on recent developments and economic performance. A sound understanding of the dynamics of the city-state's OFDI and external trade can provide important information on the linkages between the two. Section 3 presents the theoretical considerations, provides a description of the data, and unit root tests, a prerequisite for Granger causality analyses. The causality results are reported and analyzed in Section 4. Finally, concluding remarks and policy implications are discussed in Section 5.

2. Singapore's OFDI and external trade

Singapore is renowned as a globalized city-state (2) in which foreign multinational corporations (MNCs) have played a pivotal role in industrializing the economy and facilitating the country's external trade (which is dominated by merchandise exports and imports). The combined share of merchandise exports and imports in total trade in 2010 was 76.3% (see Table 1). Since 2007, merchandise exports continued to exceed merchandise imports, resulting in a surplus in merchandise balance (see Table 1). The services account also displays a similar trend in the services balance. Nonetheless, merchandise exports remained an important component of Singapore's external trade vis-a-vis services exports (see Table 2). For instance, in 2010, merchandise exports were the largest foreign exchange earner, contributing approximately 76.1% to the total export revenue, followed by services exports (23.9%).

The city-state's spectacular economic performance and development in the course of the implementation of its open foreign investment policy and liberalized trade regime is well-documented in the literature (e. …

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