Why Singapore Was Able to Attract $338b Foreign Direct Investment in the Past 10 Years While Sierra Leone Attracted Only $1.9b

Abstract

This study seeks to understand the reasons Singapore attracted far more Foreign Direct Investment (FDI) than Sierra Leone. The choice of these two countries is based on their historical similarities. Both Sierra Leone and Singapore were under British rule from the nineteenth century to the 1960s. Both countries gained their independence in the early 1960s. The countries share the same colonial heritage and therefore gained their colonial master’s system of government, legal framework, and economic systems. At independence, both countries had similar population size, as well as economies size. Sierra Leone’s population was 2.2m and Singapore’s was 1.6m in 1961. Between 1961 and1965, both countries held similar GDPs and their colonial master (United Kingdom) was their major trading partner. Using data from the World Bank Doing Business and the World Bank Enterprise Survey for Sierra Leone and Singapore, the study finds that Singapore has attracted more FDI than Sierra Leone because of the difference in the type of economy. Singapore’s economy is more formalized and efficient, whereas Sierra Leone’s economy is informal and less efficient. The process of registering a business, obtaining a construction permit, buying and registering property, getting credit, paying taxes, trading across borders, and enforcing contracts are much more streamlined and formalized in Singapore than in Sierra Leone. An informal economy makes it difficult to start and operate a business; and it plays a critical role in why some countries attract far less FDI than others.