Discuss the Role of Different Governments in Attracting Foreign Direct Investment (FDI)

Where attracting FDI in attempts to boost development as a whole is concerned, all governments in various countries have played slightly differing roles, albeit with a common foundation, which is that their role is mainly through the implementation of various policies and regulations.

The role of governments can first be divided somewhat into the less developed country(LDC) and developed country(DC)/Newly Industrialising Economies(NIEs), as their roles are quite distinct. In LDCs,basic infrastructure and political stability is usually not even secured. This means that to many foreign firms, LDCs have not even passed the basic criteria of having a safe business environment free of violence and disruptions that can cause businesses to suffer. Thus in this case the government’s role would mainly be policies that target improving the peoples’ quality of life and standard of living so that businesses can be more viable there. Also another role would be to be the provider of basic infrastructure for firms to operate in, by launching development programs and goals. As LDCs usually have not attained satisfiable health standards among the people, firms may be discouraged to invest as they do not trust the productivity of the workers who may be in ill health. Thus the government would also have to improve basic health care standards on the whole which is a complex process.

In Thailand, the government has had such a role. The Thai King implemented a comprehensive education policy specialised towards remote and poorer areas, while encyclopedias were printed for urban areas. A school was built in every remote village and adults were trained in rural areas to be the school’s teachers and some who were invited from urban areas. Mathematics, English and basic sewing and other life skills were taught to children and interested adults for free. Cooperating with the United Nations Millenium Development Goals(UNMDG), the “Hills Tribe Education Program” was virtually free for the villagers. This increased primary school enrolment rates by almost twice within 2 decades. Today, such policies have come a long way as today’s Thailand is well-known among investors for their widespread availability of talented and versatile workers ranging from low-skilled manufacturing to high-end engineers, technicians and professionals. Investors have stated their preference for Thailand due to their versatility of workforce which ensures firms that manufacturing, whether menial, low-skilled or capital and technology-intensive, can be done with pools of workers possessing various skills ready.

The Thai government has also been extremely active in being the provider of basic infrastructure in the context of an LDC, Thailand which barely possessed impressive setups in the 1980s. Deliberately going for industrial clusters for cost-effective operations, the government had dedicated more than $100 million worth of funds towards building 6 deep-sea ports, 28 commercial airports and comprehensive highway and rail networks to ensure ample logistical support for firms in nearly every of the 60 industrial estates. Multi-billion dollar projects are also constantly underway to ensure flood management to ensure supply chain networks run smoothly. $74 billion worth of mega-infrastructure projects are underway, which keep investors’ expectations and business outlook here optimistic. The government’s role as a whole was to improve the peoples’ living standards and ensure decent business infrastructure to attract FDI. In 2012, Thailand’s FDI increased by 130% year-on-year through the first nine months, making it the 2nd largest investor’s country of choice in ASEAN.

But when it comes to DCs/NIEs, the governments role is more advanced and sophisticated owing to the already developed and strong foundation of political stability, quality of life, infrastructure and such. Thus in this case the role would be going a step further to formulate conducive trade policies or create Export-Processing Zones(EPZs) or Special Economic Zones(EPZs) to boost the country’s attractiveness. In Malaysia, the government offered virtually 100% foreign ownership of branch plants and 5 years profit tax exemption, up to 10 for huge firms with significant potential to boost their economy. Firms who are eligible may apply for “strategic-project” status and receive the 10-year exemption as well as production subsidies and imported duty-free raw materials among others. They also set a certain criteria for foreign firms, including a minimum revenue of $200,000 annually and such. The firm only has to prove that it has met the criteria and bureaucratic red tape during administrative processes are minimised, making setup relatively hassle-free. This has done wonders in attracting FDI for Malaysia as this is what drove Dell there, which contributed almost half of their FDI in 2000, as well as making them the top destination of FDI from Singapore since the late 1990s.

Another way to attract FDI to a DC would be to create a comparative advantage specific to that country to attract many related foreign firms to boost FDI on the whole. In Singapore, since the 1980s, the government has had well-laid out plans for Singapore’s transformation into a biomedical hub with a booming medical industry. The building of new hospitals has been constant, apart from Public ones like Tan Tock Seng to private ones like Mount Alvernia which boast different specialities, such as the Burn Unit being the niche cultivated in Singapore General Hospital(SGH). 7 more are to be built within the next 3 years in Sengkang, Jurong and other areas. The creation of the Duke-NUS medical school to cultivate future doctors and related professionals for the medicine industry was relentless, pursuing science programs and excursions in secondary and post-sec schools was also to promote the importance of such knowledge to a future medically inclined country. Training programs for medical staff like nurses was also promoted, as seen from that in Institue of Technical Education(ITE) and such. All these measures worked together to give Singapore a niche in pharmaceuticals and industries. Singapore is thus one of the biomedical hubs of the world today, attracting many related firms toward different niches in the medical industry we have purposely crafted, such as Glaxosmithkline(GSK) to pharmaceuticals. FDI toward the medical industry has a large influence on total FDI, making up close to 40%, thus its effect in boosting FDI received can be derived.

In conclusion, the role of different governments in attracting FDI mainly depends on the type of countries they are in as the foundation of the country’s business climate as a whole sets the tone for the recommended steps of the government. However sometimes this might not hold true, albeit rarely. Assuming a foreign investor decides to set up manufacturing in an LDC not as a main plant but as supply chain backup, then the lack of technological and related infrastructure is not a huge impediment and foreign investment might still flow in after all. However, rarely do we hear of such cases where the government’s role is almost insignificant in determining FDI. After all, it was proven that firms base their choice of host countries by first looking at what the country has to offer in terms of benefits for the firm while maximising productivity and revenue, which is almost wholly dependent on government policies.