The influence of a host state on direct foreign investment attracts the attention of scholars much less than do the constraints of the latter on the former. This study addresses the impact of state regulatory policies on the roles of inward foreign investment in Taiwan and Singapore's manufacturing sector. The similarities between the two small Asian open economies are first discussed. The different roles played by the foreign investors in their economies are then compared. A review of the literature in orthodox theories and radical points of view reveals several possible explanatory variables for such differences. Through the logic of the “most similar systems” design, or method of difference, some seemingly plausible factors are ruled out, due to their similarities in the two chosen entities. It is found that some pull factors (such as geographic location, colonial legacy, external political environment, and indigenous industrial capacity) and conversion factors (such as state policies toward foreign investment) may be responsible for the differences between the two islands. A more detailed analysis is then given to the conversion factors in general and the state regulatory policies toward foreign capital in particular. Finally, some general hypotheses about the conversion factors in the host state-foreign capital relationship applicable to most industrializing countries are suggested for further testing in future studies.
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