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2013
The Determinants of Foreign Direct Investment into Australia
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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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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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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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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.
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).
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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
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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
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
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
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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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
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References
Agiomirgianakis, A. 2006. The Determinants of Foreign Direct Investment: A Panel Data Study for the OECD Countries. Department of Economics, City University London. Available: http://www.city.ac.uk/__data/assets/pdf_file/0019/90424/0306_agiomirgianakis-et-al.pdf. Last accessed 08/03/201 Buckley, P.J. and Matthew, A.M., 1979. The motivation for recent first time foreign direct investments in Australia by UK firms. Management international review, 19 (1), 57-69. Chakrabarti, A.,2001. The determinants of foreign direct investment: sensitivity analyses of crosscountry regressions. Kyklos, 54 (1), 89-114. Claudio Felisoni de Angelo, Rangamohan V. Eunni, Nuno Manoel Martins Dias Fouto, (2010) "Determinants of FDI in emerging markets: evidence from Brazil", International Journal of Commerce and Management, Vol. 20 Iss: 3, pp.203 - 216Economy Watch. (2010). Australia Economic Forecast. Available:http://www.economywatch.com/world_economy/australia/economicforecast.html. Last accessed 01/03/2013. Faeth, I., 2005a. Determinants of FDI in Australia: Which theory can determine it best? Melbourne, Australia: The University of Melbourne. Faeth, I., 2005b. Foreign Direct Investment in Australia: Determinants and Consequences. Australia: The University of Melbourne. Faeth, I., 2006. Consequences of FDI in Australia-Causal Links Between FDI, Domestic Investment, Economic Growth and Trade Melbourne. Australia: The University of Melbourne.
Fexco. (2013). Worldwide Locations. Available: http://www.fexco.com/corporate-information/worldwidelocations/. Last accessed 13th Mar 2013.
FIRB. (2013). Home. Available: http://www.firb.gov.au/content/default.asp. Last accessed 01/03/2013. Goldberg, L, (2009) Exchange Rates and Foreign Direct Investment. Kenneth A. Reinert and
Ramkishen S. Rajan, eds. The Princeton Encyclopedia of the World Economy. Princeton, N.J. Princeton University Press. IMF. (2000). International Financial Statistics Yearbook. Washington D.C. Introduction. page 17. Johnson, A. (2005). Host Country Effects of Foreign Direct Investment: The Case of Developing and
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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http://stats.oecd.org/glossary/detail.asp?ID=778.
Last
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:
OECD. (2001). Spot Price. Available: http://stats.oecd.org/glossary/detail.asp?ID=2523. Last accessed 06/03/2013. Prime, P., Subrahmanyam, V., & Lin, C. (2012). Competitiveness in India and China: The FDI puzzle. Asia Pacific Business Review, 18(3), 303-333. doi:10.1080/13602381.2011.605673 Reschenhofer, E; Schilde, M; Oberecker, E; Payr, E; Tandogan, H; Wakolbinger, L;. (2012). Identifying
the determinants of foreign direct investment: a data-specific model selection approach. Stat. Papers. 53 (1), 739-752. Trading Economics. (2012). Australia GDP per Available:http://www.tradingeconomics.com/australia/gdp-per-capita-ppp. 01/03/2013. UNCTAD, 1994. World Investment Report. Geneva: UNCTAD. Vaughn, B (2006). Australia: Background and US Relations. Library of Congress Washington DC Congressional Research Service. p.1-19 Yang, J; Groenewold, N; Tcha, M;. (2000). The Determinants of Foreign Direct Investment in Australia. The Economic Record. 76 (232), 45-54. capita PPP. Last accessed
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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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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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Employment - '000
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Gold ($/Oz)
GDP $000
400000 350000 300000 GDP 250000 200000 150000 Sep-1989 Mar-2007 Mar-2002 Jun-1993 Sep-2004 Dec-2000 Sep-2009 Mar-1992 Jun-1998 Dec-2005 Jun-1988 Mar-1987 Sep-1994 Mar-1997 Sep-1999 Dec-1995 Dec-1990 Jun-2003 Jun-2008 Dec-2010 MA4 MA8
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Exchange Rate($)
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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Figure 10: Scatterplot of Model 3's Regression Residuals Against Predicted Values
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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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Model 3 - Multiple regression with two most significant variabes. Weakest variable gets rejected for model 4.
Analyse models 1,2,3,4 to asses which model best determines FDI into Australia.
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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)
"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 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 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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