Determinants of Foreign Direct Investment in Australia

Abstract

Determinants of Foreign Direct Investment (FDI) in Australia were analyzed from 1986 to 2011, based on data availability. The determinants considered FDI inflows according to aggregate FDI inflows and FDI inflows by the top three source countries (USA, UK and Japan). Empirical studies identified four results. (1) For the determinants of FDI in Australia, a larger market size will attract more FDI, whereas more openness and a higher corporate tax rate will discourage FDI inflows into Australia. Lower customs duty and lower interest and depreciation of exchange rates will attract more FDI. The relationship between FDI inflows into Australia and wages was not significant. (2) For the determinants of US inward FDI in Australia, a larger market size will attract more US inward FDI in Australia, whereas more openness and an appreciation of the exchange rate will discourage US inward FDI in Australia. A negative and significant relationship was obtained between customs duty and US inward FDI in Australia. There were positive and significant relationships between US inward FDI in Australia and both the interest and corporate tax rates. (3) For the determinants of UK inward FDI in Australia, greater research and development in Australia will attract more UK inward FDI in Australia, whereas a higher corporate tax rate will discourage UK inward FDI in Australia. The positive relationship between market size and UK inward FDI in Australia was not significant. Openness, customs duty and inflation did not have significant relationships with UK inward FDI in Australia. (4) For the determinants of Japanese inward FDI in Australia, higher wages and greater research and development will attract more Japanese inward FDI in Australia, whereas higher customs duty and a higher corporate tax rate will discourage Japanese inward FDI in Australia. There was no significant relationship between Japanese inward FDI in Australia and either the interest or exchange rates.