Uncertainty and investment: Evidence from the Australian mining industry

Abstract

Using Australian firm data, this study constructs an error correction model of capital stock adjustment to examine the uncertainty–investment relationship in the mining industry. As indicated, with firm features, the effect of demand uncertainty on the short run investment response to demand shocks is positive, while the effect of demand uncertainty on investment is negative. In addition, changes in exchange rate costs and Chinese ownership promote investment. More specifically, separating the sample period into before and after 2003, the estimation suggests that only after 2003 with the negative effect of Chinese GDP growth uncertainty, Chinese ownership had a positive effect on Australian mining investment. This suggests that rising Chinese demand after 2003 has a large impact on Australian mining investment.