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The Determinants of Foreign Direct Investment into Australia 2013

2013
The Determinants of Foreign Direct Investment into Australia

Charlie Lennon Page 0

The Determinants of Foreign Direct Investment into Australia 2013


Contents List of Tables.................................................................................................................................... 3 List of Figures .................................................................................................................................. 3 Abstract ............................................................................................................................................ 4 Abbreviations Used .......................................................................................................................... 5 1.0 Introduction ................................................................................................................................ 6 1.1 Foreign Direct Investment ....................................................................................................... 6 1.2 Growth of FDI ......................................................................................................................... 6 1.3 Determinants of FDI................................................................................................................ 6 2.0 Overview of Australia ................................................................................................................. 7 2.1 Australian Economy ................................................................................................................ 7 3.0 Methodology .............................................................................................................................. 8 3.1 Data Collection ....................................................................................................................... 8 3.2 Variable Selection ................................................................................................................... 8 3.2.1 Employment ..................................................................................................................... 8 3.2.2 Labour Cost ..................................................................................................................... 8 3.2.3 Price of Gold .................................................................................................................... 8 3.2.4 Gross Domestic Product (GDP) ....................................................................................... 9 3.2.5 Exchange Rates............................................................................................................... 9 3.2.6 Interest Rates .................................................................................................................. 9 3.2.7 Spending on Education .................................................................................................... 9 3.4 Research Strategy .................................................................................................................. 9 4.0 Results, Findings and Discussion ............................................................................................ 11 4.1 Model 1: LCST, EMPL, GDP & GOLD .................................................................................. 11 4.2 Model 2 ................................................................................................................................. 12 4.3 Model 3 ................................................................................................................................. 13 4.4 Model 4 ................................................................................................................................. 13 4.5 Selecting the Most Appropriate Model .................................................................................. 14 4.3 Limitations ............................................................................................................................ 14 5 Conclusion .................................................................................................................................. 16

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The Determinants of Foreign Direct Investment into Australia 2013


References..................................................................................................................................... 17 Tables ............................................................................................................................................ 19 Figures ........................................................................................................................................... 21 Appendices .................................................................................................................................... 27 Appendix A TNCs Top 10 perspective host economies 2012-14 ............................................ 27 Appendix B Australia FDI since 1987 ...................................................................................... 27 Appendix C Australia top 10 trading partners .......................................................................... 28 Appendix D Australias Global Location in Relation to Other Major Economies ...................... 28 Appendix E Australias Principal Exports ................................................................................. 29 Appendix F - Australian Population since 2003 ......................................................................... 29 Appendix G - Australia Gross GDP............................................................................................. 30 Appendix H Australias Balance of Payments .......................................................................... 30 Appendix I Sample Data .......................................................................................................... 31 Appendix J Research Strategy Model...................................................................................... 32 Appendix K Definitions of Variables ......................................................................................... 33

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The Determinants of Foreign Direct Investment into Australia 2013 List of Tables
Table 1: Single Regression Results ............................................................................................... 19 Table 2: Model 1 Results ............................................................................................................... 19 Table 3: Model 2 Results ............................................................................................................... 19 Table 4: Model 3 Results ............................................................................................................... 20 Table 5: Model 4 Results ............................................................................................................... 20 Table 6: Comparison of Models ..................................................................................................... 20

List of Figures
Figure 1: Scatterplot of Australia's Employment Rate During 1987-2010 ...................................... 21 Figure 2: Scatterplot of Australias Labour Cost during 1987-2010 ................................................ 21 Figure 3: Scatterplot of the Price of Gold in Australia During 1987-2010 ....................................... 22 Figure 4: Scatterplot of the Australias GDP During 1987-2010 ..................................................... 22 Figure 5: Scatterplot of Australias Exchange Rate During 1987-2010 .......................................... 23 Figure 6: Scatterplot Australias Interest Rate During 1987-2010 .................................................. 23 Figure 7: Scatterplot of the Level of Education Spending in Australia During 1987-2010 .............. 24 Figure 8: Scatterplot of Model 1's Regression Residuals Against Predicted Values ...................... 24 Figure 9: Scatterplot of Model 2's Regression Residuals Against Predicted Values ...................... 25 Figure 10: Scatterplot of Model 3's Regression Residuals Against Predicted Values .................... 25 Figure 11: Scatterplot of Model 4's Regression Residuals Against Predicted Values .................... 26

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The Determinants of Foreign Direct Investment into Australia 2013

Abstract
This report is an empirical study examining the determinants of Australian FDI. Independent variables such as GDP, employment, labour cost and the price of gold have been used to investigate the determinants of FDI. Multiple regression analysis was used to analyse and investigate the relationship between Australias FDI and independent variables. GDP and the price of gold were found to have a significant impact on FDI.

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The Determinants of Foreign Direct Investment into Australia 2013

Abbreviations Used
GDP = Gross Domestic Product FDI = Foreign Direct Investment SPSS = Predictive Analysis Software and Solutions TNC = Trans National Company INRST = Interest Rate LCST = Labour Cost EMPL = Employment GOLD = Price of Gold EDU = Education Spending EXRT = Exchange Rate OECD = Organization for Economic Coopertation and Development IMF = International Monetary Fund ACB = Australian Central Bank FIRB = Foreign Investment Review Board

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The Determinants of Foreign Direct Investment into Australia 2013


creating a dramatic increase in the global GDP/FDI ratio (UNCTC 1988 cited Yang et al 2000, UNCTAD 1993 cited Yang et al 2000). Australia has seen a steady positive increase in FDI since 1987 (Appendix B).

1.0 Introduction
International investment is crucial to the economic relations between countries (Yang et al. 2000). This study aims to explore the independent variables that determine FDI into Australia.

1.3 Determinants of FDI


Despite extensive research efforts, there is little unanimity with regards to variables determining FDI (Reschenhofer et al, 2011). Noorbakhsh et al (2001) states foreign investors are attracted to locations that offer appropriate combinations of location and advantage. In addition to location, economic variables such as market size, interest rates, taxation, barriers to trade, exchange rate and trade deficit are commonly attributed to determinants of FDI (Agiomirgianakis, 2006).

1.1 Foreign Direct Investment


The OECD defines FDI as: A category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy, in an enterprise that is resident in an economy other than that of the direct investor. (OECD 2008) FDI activity can be demonstrated through international flows, international trade, information and migration. Australia receives high FDI flows in comparison to global standards (Yang et al. 2000). With increasing globalisation and the importance of international trade, FDI intensifies the interaction between states, regions and firms (Johnson 2005). Placing greater need for economies to understand what variables attract and repel FDI for their specific economy.

1.2 Growth of FDI


FDI has demonstrated colossal growth rates since the 1980s. Globalisation activity such as the increased openness of economies and liberalization of markets has strengthened the argument for careful analysis in relation to FDI decisions (Reschenhofer et al. 2012). During 1960-90, estimates show that the growth rate of world FDI exceeded that of world GDP growth by approximately 10%, Page 6

The Determinants of Foreign Direct Investment into Australia 2013 2.0 Overview of Australia
The Australian Government welcomes foreign investment. It has helped build Australias economy and will continue to enhance the wellbeing of Australians by supporting economic growth and prosperity. (FIRB 2013). Australia is the worlds smallest continent and lies south east of Asia, between the Pacific and Indian Oceans (Appendix D). Australia is increasingly attempting to focus their trade activities with Asia (Appendix C) due to its location geographically, in particular with China. Its key strategic relationships, however, are with the United States (Vaughn 2006). Australia boasts vast natural resources, further developed rapidly by foreign investment, particularly in the form of FDI (Yang et al. 2000). Natural resources are Australias top three principal exports in recent years (Appendix E). In 2013 the Australian population was estimated at 22 million and has increased steadily since 2003 (Appendix F). Between 2011 and 2015 it is anticipated that Australias GDP will grow by 4.81% to 5.09% year on year. By the end of 2015, Australian GDP is expected to reach US$1.122 trillion (Economy Watch 2010). In addition to GDP, Australia boasts healthy global trading relations with a $21.3 billion surplus and an export growth reaching 8.9% on a 5 year trend (Appendix H).

2.1 Australian Economy


Latest figures from Trading Economics (2012) show GDP in Australia to be worth US$1371.76 billion in 2011 (Appendix G). The GDP value of Australia represents 2.21% of the world economy. Australias GDP from 1965 until 2011 averaged US$328.1, reaching an all-time high of US$1371.8 billion in December 2011 and a record low of 25.4 USD Billion in December 1965 (Trading Economics 2012). This data combined with population statistics indicates a growing economy.

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The Determinants of Foreign Direct Investment into Australia 2013 3.0 Methodology
3.1 Data Collection
Quarterly data for all variables was collected since 1987. The data was transformed with logarithm to allow for more accurate observations (Appendix I). The data was obtained from the Australian Central Bank, a reputable governmental source, to ensure validity and reliability. All data was formulated on Excel 2010 and regressions were run using SPSS20. technological advances and the shift of FDI towards more skill intensive industries might be responsible for the increasing demand for skilled labour. Faeth (2005b) states however, that a higher unemployment rate encourages FDI as attracting labour becomes cheaper for TNC's. Appendix J shows a positive data trend analysis for employment over time. 3.2.2 Labour Cost There is wide debate within the literature regarding labour cost and FDI. Chingarande (2012) believes that since labour cost is a cost of production, the higher the labour cost, the greater the negative impact on FDI. Lucas (1993) states however, that despite higher employment costs making production in the host country less attractive than elsewhere, a replacement of labour with capital is often considered an acceptable substitution leaving FDI unaffected. Alternatively, Faeth (2005b) takes a contrasting view, finding that higher wages may represent a higher skill level; hence, firms might substitute capital for labour, attracting FDI. Appendix K displays a positive data trend of labour cost since 1987. 3.2.3 Price of Gold Gold mining through resource liberalisation is indeed one of the central environmental and FDI discussion points around the world (Arol. 2002). By drawing on free market forces in 2001, mining accounted for 95% of Australia's primary sector FDI and 17% of total FDI (Faeth, 2005). Approved Chinese FDI during this period, reached almost $60bn, of which approximately 87% was in minerals and resources. This provides strong argument for

3.2 Variable Selection


Labour cost, GDP, exchange rate, interest rate, employment rate, price of gold and education spending were identified from extensive preliminary research suggesting a possible link to FDI. Single regressions were run to determine the significance of the variables in determining FDI independently. The results of the initial linear regression can be viewed in Table 1. Four variables performed well, GDP (GDP), the price of gold (GOLD), employment (EMPL) and labour cost (LCST), with strong significant coefficients ranging from 0.00 to 0.04. Interest rates (INRST), education spending (EDU) and exchange rate (EXRT) however, displayed insignificant coefficients outside of the 0.05% confidence level and were removed for the main regression. 3.2.1 Employment Markusen & Maskus (2002) suggest a markets size and characteristics, in particular, a countrys skilled labour endowment to be an important factor of FDI. A well-educated labour supply has become increasingly attractive for TNCs (Pfefferman and Madarassy 1992). It may be argued that new

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The Determinants of Foreign Direct Investment into Australia 2013


Australias geographical demographics and resources influencing its FDI. Australia's richness in minerals thus prompts an investigation into whether inward FDI would be affected by the price of specific minerals, such as gold. Appendix L conveys the data trend analysis for the price of gold. The trend is initially stable, horizontal and linear, extending into a positive curve. 3.2.4 Gross Domestic Product (GDP) The majority of empirical studies on FDI contain a measure of the size of the host market, most commonly represented by real GDP (see Bajo-Rubia & Sosvilla-Rivero (1994); Moore (1993); Wang & Swain (1995) cited in Yang (2000)). The literature consistently portrays a strong relationship between GDP and FDI. Appendix M demonstrates data trend analysis for GDP, outlining a continuous positive linear trend. 3.2.5 Exchange Rates The literature commonly expresses that exchange rates influence FDI with both their levels and their volatility. When a currency depreciates, becoming relatively cheaper in terms of another currency, two implications can be identified. Depreciation can reduce a countrys wages and production costs relative to other countries (Goldberg 2009), this will attract FDI. Secondly, a domestic depreciation can be an advantage to potential investors if the exchange rate is expected to appreciate in the future, improving future rates of return and consequently FDI. Appendix N outlines the data trend of exchange rates since 1987, showing an upward, positive trend with many fluctuations. 3.2.6 Interest Rates Fedderke (2002) states that the core drivers of FDI fall into two categories, rate of return and risk factors. He found that there is a positive response of FDI to interest rates by virtue of a negative response overall to the risk factors. Whilst According to Gross and Trevino (1996) a relatively high interest rate in a host country has a positive impact on inward FDI. Appendix O depicts the data trend analysis performed, outlining a negative trend of interest rates over time. 3.2.7 Spending on Education A high level of education is regarded as the most important element in human resource development (UNCTAD, 1994). Buckley and Matthew (1979) found that highly skilled and educated workers in the manufacturing industry were the most influential factor in expansion into Australia as opposed to any other global economy. Nicholas et al. (1996) established that investors are attracted to Australia due to the belief that higher spending on education develops an increasingly efficient work force with limited risk on investment. Appendix P illustrates the data trend for education spending over time, portraying a linear and somewhat cyclical relationship.

3.4 Research Strategy


The results of the initial linear regression can be viewed in Table 1. Four variables performed well, GDP (GDP), the price of gold (GOLD), employment (EMPL) and labour cost Page 9

The Determinants of Foreign Direct Investment into Australia 2013


(LCST), with strong significant coefficients ranging from 0.00 to 0.04. Interest rates (INRST), education spending (EDU) and exchange rate (EXRT) however, displayed insignificant coefficients outside of the 0.05% confidence level and were removed for the main regression. As outlined in Appendix I, the framework used to examine the four remaining variables consisted of four regressions and a process of elimination. Systematic analysis was conducted by eliminating the weakest variable prior to running the next regression. The results are analysed in Chapter 4.

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The Determinants of Foreign Direct Investment into Australia 2013 4.0 Results, Findings and Discussion
In this chapter, the regression results are presented, interpreted and analysed. conventions of below 0.01 and is therefore, classified as significant. Likewise, the t-test at 95% significance proves that the price of gold is statistically significant in determining FDI as the absolute value of t 4.81, is greater than the critical value 2.776, allowing the rejection of the null hypothesis at a 94.4% confidence level. On the other hand, both coefficients of employment (EMPL) and labour cost (LCST) are insignificant at the significance levels of 0.412 and 0.106 respectively. The t-test results of both coefficients display similar results, with both absolute values of t being less than the critical value at 95% significance. The result causes the acceptance of the null hypothesis and consequently proves that in this particular model, there is no statistical relationship between FDI, labour cost and employment. The results are surprising as the literature suggests that both variables influence FDI and therefore, an acceptable significance level was to be expected. In addition to this, during our preliminary testing, each variable showed a significant influence on FDI. The results show that within the particular combination of variables tested, despite being significant when tested independently with FDI, EMPL and LCST do not have a significant impact on determining FDI, with EMPL being the weakest. It is for this reason therefore, EMPL has been removed from the regression in Model 2. The r2 of the model is equal to 0.823, therefore, Model 1 explains 82.3% of the variance of the relationship between GDP, GOLD, EMPL and LCST. In other words, assuming all coefficients are significant, the combination of all independent variables used in this model, is appropriate in predicting FDI. Page 11

4.1 Model 1: LCST, EMPL, GDP & GOLD


The regression equation for model 1 is as follows:
FDI = -7.988 + GDP1 + GOLD2 + EMPL3 + LCST4

The objective of the regression was to test whether the null hypothesis should be accepted or rejected in favour of the alternative hypothesis. The null hypothesis (H0) and alternative hypothesis (H1) for model 1 are as follows:
H0: 1 = 2 = 3 = 4 = 0 H1: 1 0, 2 0, 3 0, or 4 0

The results from model 1 are displayed in Table 2. The coefficient of GDP performed well. With a P value of 0.004, it is the most significant coefficient and is substantially within the preferred economic significance standard of 0.05 confidence. The t-test results for the coefficient of GDP show that |t| is greater than the critical value of t by 4.324 at a 5% significance level, hence, the null hypothesis is rejected at a 99.6% confidence level. It is evident therefore, that the coefficient of GDP is statistically significant in determining FDI. As the coefficient is a positive figure, the relationship between FDI and GDP is also positive, this means as GDP increases, the level of Australias FDI will rise. The coefficient of the price of gold shows a significance of 0.056. Despite the figure falling short of the preferred standard by 0.006, it remains within the economic

The Determinants of Foreign Direct Investment into Australia 2013


The f-test is performed to calculate the statistical use of the model. The test for Model 1 is as follows: f(4,95) = 1794.694, p<0.05 The critical value of f at the 0.05 significance level is 2.467, this result is clearly below the f statistic and thus the null hypothesis is rejected. In other words, the alternative hypothesis is accepted because at least one coefficient is non-zero proving that Model 1 is statistically useful. Figure 8 displays a scatterplot of residuals against predicted values satisfying the equation: e=y-. The plot displays no outliers, few values with the same predicted value, no bends and a horizontal stretch. This means that the linearity condition and outlier condition show that model 3 is a reasonable model to use. The scatter is about equal for all x-values, meaning that the assumption of homoscedasticity holds, showing that the model is appropriate. By observation, Model 1 includes two insignificant coefficients, labour cost and employment. Despite the f-test rejecting the null hypothesis, the presence of insignificant coefficients means that the model is not appropriate to be used to predict FDI. H1: 1 0, 2 0, or 3 0 The results from model 2 are outlined in Table 3. As with Model 1, the coefficient of GDP shows a strong significance that is positively correlated to FDI, in this instance, 0.004. The t-test result shows that the absolute value of t (9.377) is greater than the critical t value (3.182), this causes the null hypothesis to be rejected at a 99.6% confidence level and evidently demonstrates a positive link between FDI and GDP, again, consistent with the literature. Once again, the price of gold bears also, a strong significance of 0.010, which is positively correlated to FDI. Additionally, the t-test proves the rejection of the null hypothesis at a 99% confidence level as the absolute t value (3.989) is greater than the critical t value (3.182) presenting a positive relationship between the price of gold and FDI, providing consistency with the literature. Interestingly, in contrast to Model 2, labour cost becomes significant at -0.066. The t-test accepts the alternative hypothesis at a 93.3% confidence level which suggests a link between labour cost and FDI. As the sign of the coefficient is negative, the relationship is negatively correlated whereby as labour cost falls, FDI will rise. This complements Chingarandes (2012) findings, the higher the labour cost, the greater the negative impact on FDI due to labour cost being a cost of production. Despite being significant, labour cost is notably less significant than its preceding coefficients and consequently removed for the regression in Model 3. The r2 in Model 2 is 0.778. This states that 77.8% of the variance between GDP, GOLD Page 12

4.2 Model 2
Due to the results of the previous Model 1 and the decision to drop EMPL, Model 2 includes LCST, GDP and GOLD. The regression equation is stated below, followed by the null hypothesis and alternative hypothesis: Y = -7.619 + GDP1 + GOLD2 + LCST3 H0: 1 = 2 = 3 = 0

The Determinants of Foreign Direct Investment into Australia 2013


and LCST is explained by the model. This provides argument that the model is useful in predicting FDI. The f-test performed is as follows: f(3,95) = 2261.663, p<0.05 The value of critical f is 2.700, this is subsequently lower than the absolute value, hence, H0 is rejected in favour of the alternative hypothesis H1 showing that Model 2 is statistically valid. The scatterplot in figure 9 illustrates the residual values against predicted values. It can be interpreted to demonstrate that the linearity condition and outlier condition show that model 3 is a reasonable model to use and that homoscedasticity holds due to the fairly equal scatter. Secondly, the price of gold is also significant at a level of 0.010. The t-test proves the positively correlated relationship by rejecting the null hypothesis as the absolute value of t (4.518) is greater than the critical value of t (4.303) proving a relationship between the price of gold and FDI. As the price of gold however, is the least significant from both coefficients, it is removed for the regression in Model 4. This result complies with the literature which emphasises the importance of Australias mining sector to its FDI level and therefore, the price of gold is expected to convey a correlation with FDI. The r2 is fairly high, showing that 67.4% of the variance between GDP and the price of gold is explained by the model. The f-test performed is as follows: F(2,95) = 3426.272, p<0.05

4.3 Model 3
Model 3 tests the combination of GDP and GOLD due to the decision in model 2 to eliminate LCST. The regression equation, null hypothesis (H0) and alternative hypothesis (H1) are as follows: Y = -9.927 + GDP1 + GOLD2 H0: 1 = 2 = 0 H1: 1 0, or 2 0 The results from model 3 are outlined in Table 4. Firstly, the coefficient of GDP is extremely significant at 0.000 and positively correlated. The t-test proves the relationship between GDP and FDI by rejecting the null hypothesis, as the absolute value of t (9.377) is greater than the critical value of t (4.303).

The critical level of f is 3.092, this is lower than the absolute value of F (3426.272), this allows the null hypothesis to be rejected and supports the alternative hypothesis whereby the coefficients have an impact on FDI and that the model is reliable. The scatterplot in figure 10 illustrates the residual values against predicted values. It can be interpreted to demonstrate that the linearity condition and outlier condition show that model 3 is a reasonable model to use and that homoscedasticity holds due to the fairly equal scatter.

4.4 Model 4
Having completed all prior regressions, the remaining variable is GDP. The regression equation, null hypothesis (H0) and alternative hypothesis (H1) are as follows:

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Y = -9.741 + GDP1 H0: 1 = 0 H1: 1 0 The results from model 4 are summarised in the table 5. The coefficient of GDP shows a positively correlated significance of 0.003. The relationship between GDP and FDI is further supported by the t-test result whereby the null hypothesis is rejected at a 99.7% confidence level because the absolute value of t (15.249) is greater than the critical value of t (12.71). The r2 is moderate at 62.8%, however as this model only contains one coefficient, it is more appropriate to analyse the adjusted r2 to take this into account. The adjusted r2 is high at 79%, supporting the validity of the model and showing that 79% of the variance is explained by the model. The f-test performed is as follows: f(1,95) = 17756.301, p<0.05 The test proves that the null hypothesis should be rejected and alternative hypothesis accepted as the critical value of f (3.941) is lower than the absolute value of f. This test further supports Model 4 as being statistically useful. This result is to be expected as it coincides with the findings from our literature review. As mentioned in the GDP section of Chapter 3, the majority of the literature found that GDP is a determinant of FDI (see BajoRubia & Sosvilla-Rivero (1994); Moore (1993); Wang & Swain (1995) cited in Yang (2000)). The scatterplot in figure 11 illustrates the residual values against predicted values. It can be interpreted to demonstrate that the linearity condition and outlier condition show that model 3 is a reasonable model to use and that homoscedasticity holds due to the fairly equal scatter.

4.5 Selecting the Most Appropriate Model


Table 6 displays the comparison of models 1 to 4. As Model 1 and 2 both contain insignificant coefficients, these models are not adequate to be selected as a reliable predictors of FDI and can consequently be eliminated. Both remaining models, 3 and 4, accept the alternative hypothesis (H1) as a result of the f-test and are therefore both statistically useful. To determine the most useful from model 3 and 4, the highest adjusted r2 belongs to model 4, which shows that the model explains 79% of the variance. It is for this reason, model 4 is selected as the most appropriate model in predicting FDI. In other words, the variable of GDP when used independently, is the most useful predictor of FDI. The findings subsequently show, as GDP rises, FDI will rise due to the positively correlated relationship.

4.3 Limitations
Due to the nature of the research, time limit and resources there were several limitations to the project. Australia publish quarterly FDI data, hence, only quarterly data was able to be obtained. To improve accuracy, monthly data would have been preferred. Due to the variables included in this paper being relatively exogenous, a limitation of causality exists. Ideally, more variables would have been included to minimise causality Page 14

The Determinants of Foreign Direct Investment into Australia 2013


distortions improving the robustness of the models. This project was limited by time and specification. If there were no limits on time or wordcount, there would have been more time to incorporate more variables with more detailed analysis.

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The Determinants of Foreign Direct Investment into Australia 2013 5 Conclusion


With an increasingly globalised economy, the Australian government is focussed on gaining increasing FDI for their country. The aim of this paper was to discover the determinants of FDI in Australia. Having researched existing studies, the empirical results in this paper are generally consistent with the widely accepted determinants of FDI found within the literature, such as GDP and labour cost. The price of gold is also found to be a significant factor of FDI in this study. This study found GDP to be the most significant determinant of FDI in all models. GDP run independently with FDI was found to be the most appropriate model. It can be concluded therefore, that GDP can be used to predict Australias FDI levels in the future. The price of gold was also found to be a significant determinant of FDI in all models. Both results are consistent with the literature. Labour cost and employment were found to be significant only when run independently with FDI however, the models validity was questionable due to low r2 values. The literature states that labour cost and employment are determinants of FDI hence, further investigation would be useful to analyse our contradictory result for LCST & EMPL.

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References
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Transition Economies. Jibs Dissertation Series. 31, 194. Lucas, R. B., 1993. On the Determinants of Foreign Direct Investment Evidence from East and Southeast Asia, World Development 21, 391406.

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OECD. (2001). Gross Domestic Product. Available: http://stats.oecd.org/glossary/detail.asp?ID=1163. Last accessed 06/03/2013. OECD. (2003). Labour Cost - ILO. Available: http://stats.oecd.org/glossary/detail.asp?ID=1484. Last accessed 06/03/2013. OECD. (2001). Real Effective Exchange http://stats.oecd.org/glossary/detail.asp?ID=2243. Last accessed 06/03/2013. Rates. Available:

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The Determinants of Foreign Direct Investment into Australia 2013 Tables


Table 1: Single Regression Results Variable GDP(1) GOLD(2) EMPL(3) LCST(4) INRST(5) EDU(6) EXRT(7) R Square 0.628 0.558 0.520 0.498 0.429 0.203 0.155 Adjusted R Square 0.790 0.528 0.255 0.344 0.378 0.195 0.045 1.589 2.193 0.589 -0.875 -5.675 0.438 0.597 t 15.249 6.242 3.669 5.275 -7.434 4.995 2.391 Sig 0.03 0.00 0.04 0.01 0.70 0.50 0.84

Table 2: Model 1 Results Variable Model Summary 1 2 3 4 GDP (1), GOLD(2), EMPL(3), LCST(4) GDP GOLD EMPL LCST R Square Adjusted R Square 0.812 F t Sig

0.823

1794.694 2.017 0.587 0.300 -0.870 7.100 4.810 0.824 -0.59 0.004 0.056 0.412 0.106

Table 3: Model 2 Results Variable Model Summay 1 2 3 GDP(1), GOLD(2), LCST(3) GDP GOLD LCST R Square 0.778 Adjusted R Square 0.762 F 2261.663 2.154 0.601 -0.074 9.377 3.989 -2.983 0.004 0.010 0.066 T Sig

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The Determinants of Foreign Direct Investment into Australia 2013


Table 4: Model 3 Results Variable Model Summary 1 2 GDP(1), GOLD(2) GDP GOLD R Square 0.674 Adjusted R Square 0.659 F 3426.272 2.402 0.601 9.377 4.518 0.000 0.010 T Sig

Table 5: Model 4 Results Variable 1 GDP R Square 0.628 Adjusted R Square 0.790 F 17756.301 1.589 T 15.249 Sig 0.003

Table 6: Comparison of Models Significant Coefficients (p<0.05) 2 2 2 1 Insignificant Coefficients (p<0.05) 2 1 0 0 0.812 0.762 0.659 0.790 Reject H0; accept H1 Reject H0; accept H1 Reject H0; accept H1 Reject H0; accept H1

Model 1 2 3 4

Adjusted R2

F-test result

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The Determinants of Foreign Direct Investment into Australia 2013 Figures


Figure 1: Scatterplot of Australia's Employment Rate During 1987-2010
12000 11500 11000 10500 10000 9500 9000 8500 8000 7500 7000 6500 6000 Q1-1987 Q2-1988 Q3-1989 Q4-1990 Q1-1992 Q2-1993 Q3-1994 Q4-1995 Q1-1997 Q2-1998 Q3-1999 Q4-2000 Q1-2002 Q2-2003 Q3-2004 Q4-2005 Q1-2007 Q2-2008 Q3-2009 Q4-2010 Employment MA4 MA8

Employment - '000

Figure 2: Scatterplot of Australias Labour Cost during 1987-2010


1400.0 1300.0 1200.0 1100.0 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 Mar-2003 Mar-2004 Mar-2005 Mar-2007 Mar-1991 Mar-1995 Mar-2001 Mar-2002 Mar-2008 Mar-2009 Mar-2000 Mar-2006 Mar-1992 Mar-1993 Mar-1994 Mar-1997 Mar-1996 Mar-1988 Mar-1998 Mar-1990 Mar-1989 Mar-1999 Mar-1987 Mar-2010 Mar-2011 FDI MA4 MA8

Labour Cost $000

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The Determinants of Foreign Direct Investment into Australia 2013


Figure 3: Scatterplot of the Price of Gold in Australia During 1987-2010
1800.00 1600.00 1400.00 1200.00 1000.00 Gold ($) 800.00 600.00 400.00 200.00 0.00 Q1-1987 Q1-1988 Q1-1989 Q1-1990 Q1-1991 Q1-1992 Q1-1993 Q1-1994 Q1-1995 Q1-1996 Q1-1997 Q1-1998 Q1-1999 Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010 Q1-2011 MA4 MA8

Gold ($/Oz)

Figure 4: Scatterplot of the Australias GDP During 1987-2010

GDP $000
400000 350000 300000 GDP 250000 200000 150000 Sep-1989 Mar-2007 Mar-2002 Jun-1993 Sep-2004 Dec-2000 Sep-2009 Mar-1992 Jun-1998 Dec-2005 Jun-1988 Mar-1987 Sep-1994 Mar-1997 Sep-1999 Dec-1995 Dec-1990 Jun-2003 Jun-2008 Dec-2010 MA4 MA8

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The Determinants of Foreign Direct Investment into Australia 2013


Figure 5: Scatterplot of Australias Exchange Rate During 1987-2010
1.1500 1.0500 0.9500 0.8500 Exchange Rate ($) 0.7500 0.6500 0.5500 0.4500 Q1-1987 Q2-1988 Q3-1989 Q4-1990 Q1-1992 Q2-1993 Q3-1994 Q4-1995 Q1-1997 Q2-1998 Q3-1999 Q4-2000 Q1-2002 Q2-2003 Q3-2004 Q4-2005 Q1-2007 Q2-2008 Q3-2009 Q4-2010 MA4 MA8

Exchange Rate($)

Figure 6: Scatterplot Australias Interest Rate During 1987-2010

20.00 18.00 16.00 14.00 12.00

Interest Rate (%)

Interest Rate 10.00 8.00 6.00 4.00 2.00 Q1-1987 Q1-1988 Q1-1989 Q1-1990 Q1-1991 Q1-1992 Q1-1993 Q1-1994 Q1-1995 Q1-1996 Q1-1997 Q1-1998 Q1-1999 Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010 Q1-2011 MA4 MA8

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The Determinants of Foreign Direct Investment into Australia 2013


Figure 7: Scatterplot of the Level of Education Spending in Australia During 1987-2010
8000 7000 6000 5000 4000 3000 2000 1000 0 -1000 -2000 Q1-1987 Q1-1988 Q1-1989 Q1-1990 Q1-1991 Q1-1992 Q1-1993 Q1-1994 Q1-1995 Q1-1996 Q1-1997 Q1-1998 Q1-1999 Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010 Q1-2011 Education MA4 MA8

Education Spending ($000)

Figure 8: Scatterplot of Model 1's Regression Residuals Against Predicted Values

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The Determinants of Foreign Direct Investment into Australia 2013


Figure 9: Scatterplot of Model 2's Regression Residuals Against Predicted Values

Figure 10: Scatterplot of Model 3's Regression Residuals Against Predicted Values

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The Determinants of Foreign Direct Investment into Australia 2013


Figure 11: Scatterplot of Model 4's Regression Residuals Against Predicted Values

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The Determinants of Foreign Direct Investment into Australia 2013 Appendices


Appendix A TNCs Top 10 perspective host economies 2012-14
Adapted from UNCTAD, world investment report 2012

Appendix B Australia FDI since 1987


Source: Reserve Bank of Australia (2012)

FDI - Australia
1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Dec-1990 Mar-2007 Jun-1993 Mar-2002 FDI MA4 MA8

Dec-2000

Sep-2009

Sep-2004

Jun-1998

Dec-2005

Jun-1988

Mar-1992

Mar-1987

Sep-1994

Mar-1997

Sep-1989

Sep-1999

Dec-1995

Jun-2003

Jun-2008

Dec-2010

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix C Australia top 10 trading partners

Appendix D Australias Global Location in Relation to Other Major Economies

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix E Australias Principal Exports

Appendix F - Australian Population since 2003

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix G - Australia Gross GDP
Adapted from: Trading Economics (2012)

Appendix H Australias Balance of Payments

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix I Sample Data

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix J Research Strategy Model
Model 1 - Multiple regression with four most significant variables. Weakest variable gets dropped for Model 2. Model 2 - Multiple regression with three most significant variables. Weakest variable gets dropped for Model 3.

Model 3 - Multiple regression with two most significant variabes. Weakest variable gets rejected for model 4.

Model 4 - Single most significant variable

Analyse models 1,2,3,4 to asses which model best determines FDI into Australia.

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The Determinants of Foreign Direct Investment into Australia 2013


Appendix K Definitions of Variables
Variable Employment Definition
"Persons in employment comprise all persons above a specified age who during a specified brief period, either one week or one day, were in the following categories: - paid employment and self employment." (OECD 2002)

Cost of Labour

"For the purpose of labour cost statistics, labour cost is the cost incurred by the employer in the employment of labour. Labour costs are based on the concept of labour as a cost to an employer rather than from the perspective of earnings to an employee. The concept of labour cost is broader than compensation of employees as it includes expenditure on welfare services, recruitment and training and other miscellaneous costs including work clothes and taxes on employment " (OECD 2002)

Spot Price of Gold

"A spot price in the selling price of a commodity (Gold, oil etc.) for immediate value rather than forward delivery." (OECD 2001)

Gross Domestic Product (GDP)

"Gross domestic product is an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs). The sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers' prices, less the value of imports of goods and services, or the sum of primary incomes distributed by resident producer units." (OECD 2001)

Exchange Rates

"Exchange rates take account of price level differences between trading partners. Movements in real effective exchange rates provide an indication of the evolution of a countrys aggregate external price competitiveness." (OECD 2001)

Interest Rates or Bank Rate

"Interest is payment for the use of borrowed money. The discount interest rate is the rate at which central banks lend or discount eligible paper for deposit money banks. Also known as the bank rate." (IMF 2000)

Spending on Education

"Expenditure on goods and services consumed within the current period, which needs to be made recurrently to sustain the production of educational services. Minor expenditure on items of equipment, below a certain cost threshold, is also reported as current spending. " (OECD 2003)

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