Attractiveness of Singapore & Mexico for Foreign Direct Investment - Example

Comparative Attractiveness between Singapore & Mexico for FDI Author’s Name: Author’s Institution: Date: Executive Summary Analysing macro-environment factors is an imperative for businesses so as to be able to leverage on positive aspects and curtail the negative ones. The same is paramount for foreign direct investors who might want to invest in other countries. Rooted on such realisation, the report sought to conduct a comparative study between Singapore and Mexico of the level of attractiveness and risks associated with their markets so as to offer recommendations to Austrade and businesses from Australia with interest in FDI. The report is undertaken in four sections. The first section is the introduction. The section gives overview information on the two chosen countries, reason for investing in the two countries and the purpose for writing the report. The overview information provided is economic, political, legal & technological issues. The rationale for choosing the two is anchored on the possible viability in terms of market size & opportunity they present to Australian FDIs. Ultimate, the report argues that the rationale for writing the report is to offer comparative information that can be utilised by FDIs so as to critically structure their strategic choices in terms of risks and attractiveness. The second section analyses four factors namely political, economical, legal and technological factors using PESTLE framework. Politically, the report established that both countries display different political systems. However, comparatively they turn out to match each other. Economically, the measurements used show that Singapore is comparatively advantageous than Mexico. The same is applicable to technological issues where IP rights are highly guaranteed than Mexico. In terms of legal framework, both two countries show high level of adherence to the rule of law. The third and fourth sections are recommendations and conclusion. The paper recommends need for close working rapport with Singapore; further analysis on the most appropriate sectors that Australian FDIs can invest in; provision of documents on the said in-depth analysis and a more a closer look on Mexico market since it does not imply that if Singapore ranks comparatively higher then, their market is not viable. Table of Contents Executive Summary i Table of Contents ii List of Tables ii 1.0 Introduction 1 2.0 Comparative Analysis of the Attractiveness of Singapore & Mexico for FDI 2 2.1 Comparison for Political Factors 4 2.1.1 Overall Remarks 6 2.2 Comparison for Economic Factors 7 2.2.1 Overall Remarks 9 2.3 Comparison for Legal Factors 10 2.3.1 Overall Remarks 10 2.4 Comparison for Technological Factors 10 2.4.1 Overall Remarks 12 2.5 Discussion on Comparison Remarks 13 3.0 Recommendation to Austrade 13 4.0 Conclusion 13 References 14 Appendices 16 Appendix 1: Singapore’s Profile 16 Appendix 2: Table for comparative analysis of country factors in Country A and Country B 17 Appendix 3: The possible factors & variables of PEST 18 Appendix 4: Example of the Adopted Analysis Framework 19 List of Tables Table 1: Comparison of Political Factors between Singapore & Mexico 4 Table 2: Comparison for Economic Factors between Singapore & Mexico 7 Table 3: Comparison for Legal Factors between Singapore & Mexico 10 Table 4: Comparison for technological factors between Singapore & Mexico 10 1.0 Introduction With globalisation multinational corporations (MNCs) are seeking new markets outside their traditional home countries. This is normally attained through foreign direct investments- FDI (Borensztein, De Gregorio & Lee, 1998, p.116). However, this has to be conducted with a caveat where thorough analysis of macro factors is paramount so as to gain market intelligence on possible risks & possibly inform on competitive & marketing strategies (Peng & Nunes, 2007). Australia is one of the countries with businesses that conduct export and foreign direct investment to other countries. Presently it has stock of direct foreign investment abroad of $440.1billion by 2013 making it the 17th ranked country with most with companies investing abroad (Central Intelligence Agency, 2014a). Therefore it is imperative to have comparative analysis to be utilised by Australian firms on the costs and risks involved in selecting and developing international markets. Singapore as a nation traces its roots from 1819 as British colony. At independence in 1959, the country joined Malaysian Federation. However, this did not last and in 1965 the country opted out of the arrangement (Lam, 2005, p.398). The country has expanded nearly in all aspect and presently it has a population of million individuals with 72.2% being of Chinese ethnic group. Politically, the country has adopted parliamentary democracy with a unicameral parliamentary system. Economically, the country has adopted free-market economy. As per the 2013 estimates, the country had a GDP per capita (PPP) of $62, 400 making it the seventh ranked globally. Legally, the country has adopted English Common law system. Technologically, the country has made significant growth in technological advancement in various sectors of the economy (Central Intelligence Agency, 2014b). For more description on Singapore see appendix 1. On the other hand, Mexico a former colony of Spain gained her independent in 1810. It is estimated that by July 2014, the country will have approximate population of 120, 286, 655. Politically, the country is a federal republic with presidential system governance structure and bicameral parliament system where election is done through universal suffrage. Legally, the country has adopted civil law system which has been highly influenced by US constitutional law theory. Economically, GDP per capita (PPP) of the country is $15, 600 therefore ranking her 88th globally (Central Intelligence Agency, 2014c). The rationale for investing in Singapore is anchored on the political stability & rule of law in the country, strong economic indicators and thriving businesses (Central Intelligence Agency, 2014b). Finally, the investment decision also is aligned with the mutual interest of the country through its foreign policy that sought to bring Australia tie with Asia-Pacific region closer (Rudd, 2008, p.8 & 10; Capling, 2008, 611-618). For Mexico, the rationale is anchored on huge population that would easily offer a massive market. Secondly, the country has stable economy with significant growth that offers opportunity for other ventures (Central Intelligence Agency, 2014c). The purpose of this report is to conduct comparative analysis through Political, Economic, Social, Technological, Legal & Environmental analysis framework (PESTLE) so as to establish the attractiveness of Mexico and Singapore markets. The parameters to be analysed within context are political, economic, technological and legal factors. This comparative analysis constitutes significant advice & market intelligence that can be used to guide Australian businesses wishing to engage in FDI on the costs and risks involved in selecting and developing international markets of Mexico and Singapore. Secondly, the report seeks to propose various recommendations to Austrade regarding which of the two countries is likely to present fewer risks and challenges to Australian businesses seeking to engage in FDI. 2.0 Comparative Analysis of the Attractiveness of Singapore & Mexico for FDI This section engages in an in-depth cross comparative analysis in terms of differences among Mexico and Singapore so as to establish the level of attractiveness for FDI by Australian businesses. However, before, engage in the said task, it is imperative to conceptualise albeit in brief comparative analysis so as to show what exercise will be conducted under the section. Secondly, it is equally prudent to conceptualise albeit in brief the framework to be employed in conducting the comparative analysis and the significance of the framework. In this regard, the report defines what PESTLE analysis entails. Finally, the factors to be assessed are outlined before the actual encounter is conducted. In a rhetorical manner, Clasen (2004, p.94) presupposes if there is any study which is not comparative in nature since most findings are done against a given reference point. He conceptualise the term as a research strategy that engages in cross-sectional study. Ishiyama (2012, p.3) sees it as a mode of study that is rooted on cross comparison so as to establish differences. In a nutshell, comparative analysis is anchored on its outstanding theme where the hallmark of the process entails the systematic study of given phenomena say political system, employment relations or national culture so as to identify differences between as well as similarities among the two sets of references such as country, city, organisations and associations among others. One of the premises for business survival & market leadership is a function of how they leverage on external macro-environment. PESTLE constitutes one of the external business environment analysis tools (Cadle, Paul & Turner, 2010, p.3; Qasemi, 2009, p.4-5). PESTLE analysis has been utilised since 1967so as to explore external business environment. This subsequently empowers strategist or managers to draw implications & consequences for the business and how management can respond by identifying areas of attention (Colins, 2010, p.2). CIPD (2013) notes that PESTLE analysis is the process of establishing environmental influences to a given phenomenon such as organisation so as to have a grasp of the larger picture which can be used to inform strategic moves. The whole process is anchored on auditing or scanning the macro environmental elements so as to figure out long term trends. PESTLE analysis is also referred to us as ETPS, STEP, PEST & STEEPLE analysis and include analysis of polical, economic, socio-cultural, technological, legal and environmental factors (Cadle, Paul & Turner, 2010, p.3-5; Qasemi, 2009, p.4-5). This report specifically narrows on political, economic, legal and technological factors. The rationale for narrowing on the four is anchored on the fact that the four are the principal priming factors in external environment (Cadle, Paul & Turner, 2010, p.3-5). For instance, nearly all aspects of national or local economy is intertwined with politics as politics offers the platform to exert power and make decisions in relation to trade policies, mode of production and taxation regime. Under each factor, the issues to be analysed are benefits, risks and cost (see appendix 2 for a diagrammatical representation of the comparative analysis table). Additional as an additional guide, the report has certain dimensions/ variables that will be measured (see appendix 3). As result of this approach, a new comparative analysis table is utilised in the report (see appendix 4). 2.1 Comparison for Political Factors Table 1: Comparison of Political Factors between Singapore & Mexico Comparative analysis Measurement Identified issue Benefits Risks Costs Singapore Change trend of governmental laws The country has several constitutions with last being promulgated in 1965. However, it has equally undergone numerous amendments with the last being in 2010 (Central Intelligence Agency, 2014b). Such amendments are positive trends towards conforming to changing times therefore creating a legal framework that support economic activities such as FDI. Some amendments are done to favour the ruling. For such processes to occur there is need for financial expenditure. Development rate of parties Multiparty democracy under parliamentary system with approximately 7 political parties Government excesses can be counterchecked. This is true for FDIs who have genuinely invested in the country. There is possibility of constant political bickering leading to constant change in government as result of coalition building in parliamentary system. This number of parties sometimes may lead to collapse of government if they fail to agree where there is no clear majority or a partner withdraws. Power-shift rate between major parties of the country People’s Action Party has dominated since independent. This ensures political stability which good for an FDI. One political party dominating the system might not herald change. No much associated cost as the system is dominated by PAP. Mexico Change trend of governmental laws The country has had numerous constitutions. However, the last one was promulgated in 5 February, 1917. This document has been amended several times with the last one being in 2012 (Central Intelligence Agency, 2014c). Such amendments can herald new administrative structure anchored on democracy that can spur growth and economic opportunities for businesses. Additionally, it mirrors changing trends. However, such amendments can be used to limit free economy & stifle foreign investors. Such changes imply cost through lobbying, referendum and so an has a direct implication on revenue collection/ taxation which has a bearing on businesses/ Development rate of parties A multiparty state; presidential system & bicameral parliament approximately 7 political parties and several political pressure groups (Central Intelligence Agency, 2014c). There is proper checks and balances which is a healthy environment for FDI High number of parties can imply numerous political bickering. Possibility of over focus on acquiring power as opposed to legislations benefiting public. Power-shift rate between major parties of the country PRI & PAN have constantly dominated power shift. However, there instances of military rule (Central Intelligence Agency, 2014c). With parties changing leadership, domination & lethargy is kept at bay. With executive president, there is possibility for dictatorship. Possibility of dictatorship tendencies. Source: Author, 2014 2.1.1 Overall Remarks Both countries have constantly modified their constitution several times. In this regard, they have a tie. Both are multiparty democracy. In terms of power shift rate, Mexico has had numerous shifts. The only difference is that Singapore has parliamentary system while Mexico as presidential system. The shortcoming is that Mexico has had experience of military dictatorship which is not suitable to FDI. In this regard, Singapore scores high. In a nutshell, the two countries show certain similarities and differences, but there political systems are fairly stable making it viable for FDIs. 2.2 Comparison for Economic Factors Table 2: Comparison for Economic Factors between Singapore & Mexico Comparative analysis Measurement Identified issue Benefits Risks Costs Singapore Inflation rate A decreasing inflation rate. In 2012 it was 4.6% & in 2013 2.4% giving it a global ranking of number 84. Empowering public to have more disposable income thus increased purchasing power. Good for export business NA NA Unemployment rate & population below poverty line A significant increase in unemployment from 1,9% in 2012 to 2.1% making it rank 15 globally. A fairly low unemployment means that purchasing power is high and thus ready market. However, from trend in last year inflation is increasing and FDIs have to worry as this may imply increase in prices thus reduced purchasing power and demand A reduced demand can lead to FDIs failing. Status of industrial, agricultural, and service sectors in the economy By 2012, GDP by sector consisted of agriculture 0%, industry 27.3% & services 72.7%. By 2013, industrial production rate stood at 3.5 making rank 81 globally. Focusing on high value sector. Export oriented which might hurt their economy especially if a slump occurs in their traditional markets. Significant cost in importing food since it is not significant in local production. Mexico Inflation rate An increasing inflation rate. In 2012 it was 3.6% while in 2014 it was 4% therefore giving a global ranking of 131. NA Reduces consumer purchasing power at domestic level. Domestic product might be susceptible to imported products produced in country with low inflation Reduced disposable power hence reduced demand in terms of quantity demanded. Unemployment rate & population below poverty line A decreasing unemployment rate. In 2012 it had 5.3% & in 2013, 4.9%. Globally it is ranked 44 in unemployment rate. At 2012, 52.3% were in the bracket of below poverty line. While the unemployment rate is high, it is decreasing heralding a bright future. NA Unemployed population cannot easily afford products on offer thereby reducing demand. Those mostly below poverty line seek only to meet their basic needs and thus, might not afford higher order goods. A constricted demand. Status of industrial, agricultural, and service sectors in the economy By 2013, GDP consisted of agriculture 3.6%, industry, 36.6% & services 59.8%. Industrial production at 2013 was 3.5% making it ranked 83 globally. Value of industrial & service sector is higher than agricultural products. Over focus on export especially to US thereby placing local economy at their mercy which might augur well if their id decline in export markets. Might spend considerable amount in import of agricultural product. Source: Author, 2014 2.2.1 Overall Remarks Inflation rate in Singapore is lower as compared to Mexico. Thus, Singapore scores high. Significantly Singapore has low unemployment rate as compare to Mexico. Globally, Singapore is ranked 15 while Mexico is ranked 44. Thus, Singapore has lead. The GDP and economy of Singapore is mostly industrial & service based with agriculture with no tangible contribution and on the other hand, the GDP and economy of Mexico is mostly industrial & service based, but agriculture has a marginal presence of 3%. Thus one FDI especially for Singapore to be exploited is agriculture. In terms of industrial productivity, Singapore marginally ranks higher than Mexico globally since they are ranked 81 and 83 respectively. Singapore is mostly export oriented economy. Coupled with small population Mexico ranks favourably in this regard as they export and consume domestically. In a nutshell, economically speaking, Singapore emerges the better option. 2.3 Comparison for Legal Factors Table 3: Comparison for Legal Factors between Singapore & Mexico Comparative analysis Measurement Identified issue Benefits Risks Costs Singapore Rule of law The country has strong rule of law anchored on British common law FDI firms are guaranteed of freedom of operation so long as they adhere to rules (Merryman, 1985). Common law is dynamic in terms of interpretation (Papadopoulos, 2004). Legal fines if rule of law is contravened. Mexico Rule of law The country observes rule of law anchored on civil law. Firms are sure of environment anchored on rule of law (Merryman, 1985). Common law can be rigid in certain instances (Papadopoulos, 2004). Possibility of legal fines if rules are not adhered to. Source: Author, 2014 2.3.1 Overall Remarks In this regard both two countries tie as they governed by the rule of law. 2.4 Comparison for Technological Factors Table 4: Comparison for technological factors between Singapore & Mexico Comparative analysis Measurement Identified issue Benefits Risks Costs Singapore Legislation on technology. Set up trend of technological organization, Inventions & innovations rate The country protects intellectual property through robust IP framework. It is ranked first in Asia and seventh globally (Singapore Government, 2014). The country encourages invention and innovation through national innovation system and through initiatives such ‘future Singapore’ aimed at developing & test bed new ideas & solutions. Enhances productivity. FDI seeking a pie in this market have to be highly innovative. For large corporations its imperative to allocate fraction of budget towards research & development/ Mexico Legislation on IP. This protects invention and innovations. They are spread across 7 main IP legislations and 27 related IP laws (WIPO, 2014). IP are protected. The legislations are spread across numerous legislations which might make it difficult to apply. Breach of these regulations can lead to fines. Source: Author 2014 2.4.1 Overall Remarks Singapore ranks high in protection of intellectual property as compared to Mexico and thus, offers a viable option to FDI inventions & innovations. 2.5 Discussion on Comparison Remarks Anchored on the four factors comparatively analysed, the two countries tied in politics and legal factors. However in the remaining three factors, Singapore has a comparatively higher score. Therefore it is prudent for an FDI from Australia to invest in Singapore as the macro-environmental factors are highly viable and businesses can leverage on the same. 3.0 Recommendation to Austrade Austrade should forge a stronger link with Singapore through trade agreements so as to open up opportunity for Australians who might wish to engage in FDI in that country. This would be equally eased as result of geographical proximity to each other. A further research on possible sectors for investment should be commenced by Austrade in Singapore. Austrade within their offices should have relevant materials on macro factors about Singapore. Austrade should not forsake Mexico in totality since it has potential owing to its massive population and growth it is experiencing. Thus, forging close working rapport is necessary so as to open more opportunity outside Australia traditional trade partners. 4.0 Conclusion The aim of this report was to conduct a comparative analysis between Mexico and Singapore so as to highlight the possible risks and opportunities that exist in those markets and thus, presenting an opportunity to inform Australian businesses who might wish to engage in FDI. Anchored on this realisation, the report using PESTLE framework, analysed macro environmental factors that impact on doing business in those two countries. The four factors analysed include political factors, economical factors, legal factors and technological factors. Apart from political system and legal system, in all the remaining factors, the report found out that Singapore outperformed Mexico therefore making it the most suitable destination for FDI by Australian businesses. References Borensztein, E., De Gregorio, D. & Lee, J. W. (1998). 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Appendices Appendix 1: Singapore’s Profile Source: Lam, 2005, p.398 Appendix 2: Table for comparative analysis of country factors in Country A and Country B Comparative analysis Benefits Risks Costs Political factor Country A Country B Economic factor Country A Country B Legal factor Country A Country B Technological factor Country A Country B Source: Lecture notes Appendix 3: The possible factors & variables of PEST Factor Measurements Political Change trend of governmental laws Development rate of parties during early ten years Development rate regional and international political crisis Power-shift rate between major parties of the country Political-shift rate in the relevant industry Economical Inflation rate Investment rate (internal & foreign) Savings rate Employment rate GDP Economical growth rate Status of industrial, agricultural, and service sectors in the economy Development trend of import and export Technological Set up trend of technological organization Inventions & innovations rate Legislation on technology Mechanization trend in the country Mechanization trend of the relevant industry: (IT, Nanotechnology, Biotechnology, Quantum). Legal Rule of law; Legislations Source: Adapted from Qasemi, 2009, p.6 Appendix 4: Example of the Adopted Analysis Framework Political factor Comparative analysis Measurement Identified issue Benefits Risks Costs Country A Change trend of governmental laws Development rate of parties Development rate regional and international political crisis Power-shift rate between major parties of the country Political-shift rate in the relevant industry Country B Change trend of governmental laws Development rate of parties Development rate regional and international political crisis Power-shift rate between major parties of the country Political-shift rate in the relevant industry Source: Author, 2014 Read More