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Major Determinants of Foreign Direct Investments in Australian Tourism Sector

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Abstract

Over the past few decades, the importance of Foreign Direct Investment (FDI) as a revenue stream in developing economies has skyrocketed. The remarkable increase in FDI is mainly owed to the globalisation of the international economy. Since the expansion of global production due to the several regional and universal integration agreements, the impediments to worldwide trade and investment have drastically lowered. Additionally, technical innovations in ICT have necessitated the linking of international business networks. Further, many developing economies have been taking part in what can be termed as ‘location tournament’ via direct adjustments, campaigns and projects geared towards attracting international organisations’ investment (Viswanathan, Selvanathan&Selvanathan, 2009).

Major Determinants of Foreign Direct Investments in Australian Tourism Sector

Australia is one of the most famous foreign direct investment destinations on the planet. In 2011 alone, the nation’s Foreign Direct Investment Stock rose by 6.6 per cent to hit AUS$507 billion. This rise in FDI stock is indicative of the upturn in the world’s FDI activity from 2010 and the nation’s highly competitive status in the international economy (Sharma &Bandara, 2010). The Australian government has placed tourism in the list of ‘Fantastic Five’ sectors that have been identified as instrumental in catapulting economic growth (Kirchner, 2012).

The tourism industry in Australia continues to face obstacles that limit its ability to maximise profits. Increased hotel production acquisitions, tourism facilities, and labour supply are all critical for the industry to reach its full potential. These difficulties offer prospects for prospective foreign direct buyers to do business in fields such as aviation facilities, recreation, the arts, and lodging. Regardless, the degree of trust in investing in Australia’s tourism industry has skyrocketed in the last two years (Australia Trade Commission, 2013).

Considerations and Findings

Prospects, Features, Frames and Expectations

Market size and development potential are essential factors that influence the tourism service industry and FDI inflows. Australia is located in the world’s best-performing tourism area, as well as the world’s largest aviation sector. Tourism 2020, an initiative initiated by the Australian government, aims to increase Australia’s overnight tourism spending to Aus$140 billion by 2020. The high-growth economies of Asia have an impetus for Australia’s tourism industry to thrive. Accommodation occupancy in Australia’s capital cities hit fresh highs in May 2014, surpassing 80% in Adelaide, Sydney, Perth, and Melbourne. Demand for accommodation is still rising, thereby boosting the hotel sectors (Australia Trade Commission, 2013).

High demand from Asia plays a vital role in attaining growth in the international visitation of Australia. The Asian continent is recognised as the world’s fastest-growing market for tourists. This is necessitated by stable economic growth, a developing urban and wealthy middle class, and the fastest-growing aviation industry in the world. Visitation growth from Asia is projected to rise yearly by 5.9 per cent in the coming years. Additionally, the proportion of Chinese who visit Australia has gone up, from 2.4 per cent in 2000 to 11 per cent in 2013. Therefore, foreign direct investment in tourism is promising, given the high growth potential of the market in Australia (Australia Trade Commission, 2013).

The presence of skilled labourers in the host country plays a role in attracting Foreign Direct Investments into the Australian tourism sector. Skilled workers enable the investors to strengthen the ownership advantage they have and harmonise it with the local surrounding with local talents. This helps them to broaden their market in both the host and the entire region. In developing economies, dependence on low wages and low education levels might prove detrimental to the service industry. There exists a correlation between several groups of education of members of the host country and the FDI inflow (Yeung&Ramasamy, 2010).

While earlier researches in tourism FDI have not viewed skilled labour as an essential factor, its role cannot be denied. In the tourism and hospitality sector of the economy, capable workers are needed to serve clients. The ability to tap and utilise the knowledge and exploit personal contact greatly benefits the service sector. Therefore, the need to incorporate skilled labour as a factor is imperative. The number of secondary and higher education enrolments can be used to measure the quality of work. From that proposition, we can deduce that many skilled workers can attract Foreign Direct Investments in the tourism and hospitality industry (Yeung & Ramasamy, 2010).

Australia stands as an important regional and global educational hub. Australia’s status as a worldwide and regional academic destination is an attestation that the nation has abundant skilled labourers, hence attracting more Foreign Direct Investments in the tourism and hospitality sector of the economy. After the United States, more students enrol for studies in Australia more than in other countries globally. Australia is an English speaking nation. That said, the government offers citizens of other English speaking states an opportunity to pump Foreign Direct Investments into the economy (Harvie, 2004).

Australia has strengthened trade ties with other nations in a bid to attract more foreign investments. In the last 20 years, Australia has been setting up more robust trade and investment ties with other states worldwide, partly due to in-depth economic reforms. Comprehensive reforms have led to increased productivity. Such reforms include reviewed taxation laws, deregulation, lowering inflation rate to predictable levels and the efficient provision of necessary infrastructures for the tourism industry. Other steps that the Australian government has taken to attract foreign investments in the tourism industry range from introducing a more flexible labour market to bringing down the interest rate climate (Harvie, 2004).

In Australia, a firm’s taxable income is its net income, which is described as the gross annual income upon deduction of expenditures, costs, tax depreciation claims, and losses. Apart from a few exempt items, income flowing from all sources is under the corporate income tax. To determine an organisation’s taxable income, its accounting income is always adjusted by considering certain non-deductible expenses, non-taxable income and admissible losses and provisions carried forward. As a general rule, losses and expenses realised in the ordinary business course are deductible, except in cases where such expenditures are mainly denied in the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 (Australia Country Conditions, 2013).

In services FDI, the extent of bilateral trade is an essential factor, especially in the tourism industry. Following the fragmentation of production processes, coupled with the concentration of international firms in their competencies, investments and trade in tourism is steadily rising in popularity. The extent of openness to work can also be a standard for assessing the regulatory patterns and controls existent in the host country. We can argue that the degree of international exposure is an essential factor that influences FDI inflows. The higher the magnitude of openness, the lower the extent of restrictions put by the host country on international trade, hence the lower the cost of doing business in Australia (Yeung&Ramasamy, 2010).

Favourable climatic condition plays an integral role in attracting Foreign Direct Investments in tourism in Australia. The Australian government usually assesses the consequences of projected climatic change on the country’s tourism sector. In the last two decades, the Australian government has examined the possible changes in climatic attractiveness for the country’s major tourism destinations and discussed the impacts for tourist inflows and planning, management and development (Amelung& Nicholls, 2014).

Australia may witness considerable changes in spatial and temporal weather patterns in the coming years, favourable for tourism. This is owed to the southward shift in the most suitable conditions and a reduction in the climatic attractiveness of northern parts of the country. For destinations in which the weather patterns are predicted to decline, increased indoor facilities’ investments may prove to be highly needed. This is because where the climatic conditions are anticipated to improve, the setting up of sufficient infrastructure to cater to the potential rise in visitation and adoption of mechanisms that reduce excessive use can be of importance. Also, coming up with a proactive rather than reactive position on climatic change will increase tourism’s ability to adapt (Amelung& Nicholls, 2014) fruitfully.

Australia has a political climate that is favourable for foreign investment in tourism. The nation’s electorates elect a representative government in which citizens select their representatives to the law-making body. Also, Australia has strong democratic institutions that are uniform at all levels. The cabinet that makes part of the executive is drawn from and answerable to parliament. In 2009, Australia was placed in the 94.3 percentile about voice and accountability, according to the global governance indicators of the World Bank. Voice and responsibility is the standard for measuring the extent to which a state’s subjects can take part in selecting their leaders (Australia Country Conditions, 2013).

Australia is politically stable, thus attracting more foreign investors in the tourism sector. A mandatory voting system has led to high voter turnout and is held by a group to increase government legitimacy. During the nine general elections and referendums conducted before 1924, the average voter turnout was 65%. After 1924, in the 38 subsequent elections and 14 referendums, Australia has long been lauded as the nation with the highest voter turnouts internationally, at 95%. Another indicator of Australia’s political stability is the familiarity of the voting mechanism among citizens. Additionally, there is a high magnitude of citizens’ compliance with the system since its utilisation creates no administrative challenges for the government’s executive arm (Country Analysis Report, 2011).

Apart from the determinants above of foreign investments in tourism, cultural distance, and geographic proximity may be necessary for studies that consider inward investments from specific countries. However, several broad risk factors, such as political and economic risks, influence the selection of investment locations. Political risk factors usually emerge from several sources, such as nationalisation and exploration of revenue streams. Significant policy changes in tackling taxation rates, depreciation schedules, rate of tariffs, capital controls, and exchange rates pose a direct risk on international firms (Australia Country Conditions, 2013).

Country Risks and Economic Situations

Political Risks

Being a continent and country with the biggest and stable states, Australia is welcoming to economic immigrants and refugees. This poses domestic instability and tension since the issue has been tightly discussed in parliament severally. This is because the capsizing of a boat resulted in the loss of several refugees. Also, the state governments have fragile finances compared to the vast infrastructural investments that may be required. This has led to questions being raised concerning the federal government system’s compatibility with the nation’s current development requirements (Australia Business Forecast Report, 2014).

Australia’s Liberal-National Coalition, a party, headed by Tony Abbott, was handed 86 out of the 150 seats in the House of Representatives. Therefore, the party has more seats than the Australian Labour Party, which has been leading for more than six years under the leadership of Prime Minister Kevin Rudd. During and after the electioneering period, the two leading political parties’ policy position has converged, indicating that the sad trajectory of the country’s fiscal finances will not change under the new leadership. While it is widely believed that the coalition government will seek to boost the business environment, its underrepresentation in the Senate shows that its policies will be watered down and delayed (Australia Business Forecast Report, 2014).

Economic Risks

Australia faces a constant current account deficit, thereby increasing vulnerability to capital flows and currency volatility. Also, the export basket is heavily revolved around commodities. As such, the country’s economy and currency are always vulnerable to fluctuations in global prices, especially for coal, metals and farm products. The rising level of private sector debts, such as mortgage loans, catapulted by foreign funding, poses risks to economic progress. Furthermore, a downfall in exports caused by a decline in resource demand from China and other resource-thirsty economies causes negative economic growth implications. Also, Australia is susceptible to hostile weather conditions that may result in floods and droughts. This has become increasingly extreme over the past decade following global climate change (Australia Business Forecast Report, 2014).

Various local and external factors have improved the level of economic activity in the region. Although Australia revised up its GDP improvement forecasts for 2014 to 2%, from the initial 1.8%, the sudden revision raises fundamental concerns on the ever-increasing risks within Australia’s economy. Since a rising capital proportion is heavily invested in the housing industry despite the staggering performance of business expenditure, such misallocation of capital raises the economy’s susceptibility to external shocks. The effect is further made worse by the mining industry’s present weakness (Australia Business Forecast Report, 2014). 

Appraisal of Indicative Investment Returns and Risks

Following the electioneering period in September, the nation’s economy has witnessed an uptick in business sentiment and activity levels from the lows noted in 2013, enhanced by external and domestic factors. Locally, prospects of lower regulatory burden, such as regulatory procedures and taxes, have helped lift the outlook for some sectors like gas and oil. Additionally, the last readings of performance indices suggested that the decline in services and construction industries were moderating. In contrast, activity in the manufacturing industry recorded an increase in October and September. The expansion indicates that the recent activity uptick may persist in the coming term (Australia Business Forecast Report, 2014).

Figure 1: Australia’s national economic activity (Australia Business Forecast Report, 2014).

: Australia's national economic activity

Figure 2: A graphical indication of the performance of manufacturing, services and construction sector indices (Australia Business Forecast Report, 2014).

services and construction sector indices

Further Issues

Having reviewed the major determinants of foreign investments in the Australian tourism sector, it is essential to note that Australia ranks sixth in the global Foreign Direct Investment Confidence Index. This is for a second straight year because the country’s natural resources attracted the interest of hundreds of executives of organizations, having combined yearly revenue of more than US$2 trillion. This looks favourable to organizations interested in channelling their millions of dollars into the Australian economy. Therefore, the future of Foreign Direct Investments in tourism and other service industries in Australia appears promising (Bawaba, 2013).

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