Can the Knowledge Capital Model Explain Foreign Investment in Services? The Case of Singapore

Abstract

Singapore has been a powerful magnet for foreign direct investment and in recent years has also made significant investments abroad, especially in developing countries and increasingly in services. This paper analyzes the determinants of Singapore's investment using the Knowledge-Capital Model and compares the impact of skill endowments on manufacturing and service sector investments. The results suggest that inward and outward investment with respect to industrialized countries in manufacturing and services was skill-seeking. A 10 percent decline in skill differences with industrialized countries resulted in a 19 percent rise in inbound manufacturing investment stocks, but only a 7 percent rise in inbound services stocks. Inward investment from developing countries in services was also skill-seeking, but outward investment to developing countries in both sectors was labor-seeking. A 10 percent increase in skill differences with developing countries resulted in a 23 percent rise in outbound manufacturing investment stocks and a 13 percent rise in outbound services stocks. Furthermore, when the analysis distinguishes between services on the basis of skill intensity, there is a significant difference between the determinants of foreign direct investment in skill-intensive services and foreign direct investment in other services and goods. However, when services are disaggregated on the basis of "proximity" needs, there is no significant difference in the determinants of foreign direct investment in proximity services compared with foreign direct investment in non-proximity services.