Profiling Australian TSM as a Foreign Direct Investment Prospect - Assignment Example

Profiling Australian TSM as a Foreign Direct Investment Prospect Abstract The significance of Foreign Direct Investment (FDI) as a source of revenue in developed economies has highly increased over the last decades. The remarkable increase in FDI is mainly owed to the globalization of the international economy. Since the expansion of multinational production due to the several regional and universal integration agreements, the impediments to global trade and investment have drastically lowered. Additionally, the technical innovations in ICT have necessitated linking of international business networks. Further, many developing economies have been taking part in in what can be termed as ‘location tournament’ via direct adjustments , campaigns and projects geared towards attracting investment by international organizations (Viswanathan, Selvanathan&Selvanathan, 2009). Australia is among the globe’s top destinations for Foreign Direct Investments. 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 the economic growth (Kirchner, 2012). The tourism industry in Australia is still faced with challenges which impede the maximization of returns. In order for the sector to realize its potential, increased investments in hotel capacity, tourism infrastructure and labour supply are highly required. These challengesare present opportunities for potential foreign direct investors to do business in such areas, including the aviation infrastructure, recreation, arts and accommodation.Be that as it may, the level of optimism for investing in the tourism sector in Australia has tremendously improved in the last two years (Australia Trade Commission, 2013). Considerations and Findings Prospects, Features, Frames and Expectations Market size and development potential are important factors that influence the tourism service industry and FDI inflows.Australia rests within the world’s best performing tourism region, as well as the biggest global aviation market.The Australian government launched Tourism 2020, a programme intended to raise Australia’s overnight tourism expenditure to Aus$140 billion by 2020.The high growth economies of Asia present an opportunity for the flourishing of tourism industry in Australia. In May 2014, accommodation occupancy in the capital city of Australia reached new peaks, surpassing 80 per cent in Adelaide, Sydney, Perth and Melbourne. Demand for accommodation is still on the rise, thereby boosting the hotel sectors (Australia Trade Commission, 2013). High demand from Asia plays an important role in attaining growth in global visitation of Australia. The Asian continent is recognized as the world’s fastest growing market for tourists. This is necessitated by stable economic growth, a developing urban and wealthy middle class, as well as 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. Foreign Direct Investment in tourism is therefore 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 harmonize it with the local surrounding with the use of 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 to be detrimental in the service industry. There exists a correlation between several levels 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 important factor, its role cannot be denied.In tourism and hospitality sector of the economy, capable workers are needed to serve clients. The ability to tap and utilize knowledge and exploit personal contact is of immense benefit in 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 as a measure of quality of labour. From that proposition, we can deduce that a large number of skilled workerscan 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 global and regional academic destination is an attestation to the fact that the nation has abundant skilled labourers, hence attracting more Foreign Direct Investments in tourism and hospitality sector of the economy.After the United States, more students enrol for studies in Australia more than other countries globally. Australia is an English speaking nation. That said, the country 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 stronger trade and investment ties with other states all over the world, partly due to in-depth economic reforms. Comprehensivereforms 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, the taxable income of a firm is its net income, which is described as the gross annual income upon deduction of expenditures, costs, tax depreciation claims and losses. Apart from few exempt items, income flowing from all sources is under the corporate income tax. In order to determine an organization’s taxable income, its accounting income is always adjusted by taking into consideration certain non-deductible expenses, non-taxable income and admissible losses and provisions carried forward. As a general rule, losses and expenses realized in the normal course of business are deductible, except in cases where such expenditures are particularly 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 important factor, especially in the tourism industry. Following the fragmentation of the processes of production, 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 trade can also be a standard for assessing the regulatory patterns of and controls existent in the host country. As such, we can argue that the extent of international openness is an important factor that influences FDI inflows.The higher the magnitude of openness, the lower the extent or 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 intourism in Australia. The Australian government usually assesses the consequences of projected climatic change on the country’s tourism sector. In the last two decades, 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). In the coming years, Australia may witness considerable changes in spatial and temporal weather patterns, 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 investments in indoor facilities 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 for the potential rise in visitation and adoption of mechanisms that reduce the impacts of excess use can be of importance. Also, coming up with proactive rather than reactive position on climatic change will increase the ability of tourism to fruitfully adapt (Amelung& Nicholls, 2014). Australia has a political climate that is favourable for foreign investment in tourism. The nation’s electorates elect a representative government in whichcitizens select their representatives to the law making body. In addition, Australia has strong democratic institutions that are uniform at all levels. The cabinet that make part of the executive is drawn from, and answerable to parliament. In 2009, Australia was placed in the 94.3 percentile with regard to voice and accountability, according to the global governance indicators of World Bank. Voice and accountability is the standard for measuring the extent to which a state’s subjects are able to take part in selecting their leaders (Australia Country Conditions, 2013). Australia is politically stable, thus attracting more foreign investors in the tourism sector. Mandatory voting system has led to high voter turnout and is held by a group in order to increase legitimacy to the government. 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 for 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 exists a high magnitude of citizens’ compliance with the system since its utilization creates no administrative challenges for the executive arm of the government (Country Analysis Report, 2011). Apart from the aforementioned determinants of foreign investments in tourism, cultural distance and geographic proximity may be important in studies that take into consideration inward investments from specific countries. However, there are several broad risk factors such as political and economic risks that influence the selection of investment locations. Political risk factors usually emerge from several sources such as nationalization and exploration of revenue streams. Major policy changes in tackling taxation rates, depreciation schedules, rate of tariffs, capital controls as well as exchange rates, pose direct risk on international firms (Australia Country Conditions, 2013). Country Risks and Economic Situations Political Risks Australia, being a continent and country with the biggest and stable states, the nation 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 to the loss of several refugees. In addition, the state governments have fragile finances in comparison to the huge infrastructural investments that may be required. This has led to questions being raised concerning the compatibility of the federal government system with the nation’s present 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 number of 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 policy position of the two leading political parties has converged, indicating that the sombre 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 constant current account deficit, thereby increasing vulnerability to capital flows and currency volatility. Also, the export basket is heavily revolves around commodities. As such, the country’s economy and currency are constantly 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 the economic progress.Furthermore, a downfall in exports caused by a decline in resource demand from China and other resource-thirsty economies causes negative implications on the GDP growth. In addition, Australia is susceptible to hostile weather conditions that may result to floods and droughts. This has turned out tobe increasingly extreme over the past decade following the global climate change (Australia Business Forecast Report, 2014). There are various local and external factors that 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 the economy of Australia.Since a rising capital proportion is heavily invested inthe housing industry in spite of 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 present weakness in the mining industry (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 of noted in 2013, enhanced by external and domestic factors.Locally, prospects of lower regulatory burden, such as regulatory procedures and taxes, have been of assistance in lifting the outlook for some sectors like gas and oil. Additionally, the last readings of performance indices suggested that decline in services and construction industries were moderating whereas activity in the manufacturing industry recorded increase in the months of 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). Figure 2: A graphical indication of the performance of manufacturing, services and construction sector indices (Australia Business Forecast Report, 2014). Further Issues Having reviewed the major determinants of foreign investments in the Australian tourism sector, it is important 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. The future of Foreign Direct Investments in tourism and other service industries in Australia therefore appears promising (Bawaba, 2013). References Amelung, B., & Nicholls, S. (2014). Implications of climate change for tourism in Australia. Tourism Management, 41228-244. doi:10.1016/j.tourman.2013.10.002 Australia Business Forecast Report. (2014). Australia Business Forecast Report, (1), 1-59. Retrieved from http://www.ebscohost.com Australia Country Conditions. (2013). Political Risk Yearbook: Australia Country Report, 1-14. Retrieved from http://www.ebscohost.com Australia Trade Commission.(2013). Australian Tourism Open for Investment. Australia Unlimited. Retrieved from http://www.ebscohost.com Bawaba, A. (2013). Australia: Australia Ranks Sixth in world FDI Confidence Index. Menu Report. Retrieved from http://www.ebscohost.com Country Analysis Report. (2011). Australia: I-depth Pestle Insights. Datamonitor. Retrieved fromhttp://www.ebscohost.com Harvie, C. (2004). Prospects for an FTA between Australia and Korea.Seoul Conference. Retrieved from http://www.ebscohost.com Kirchner, S. (2012). Foreign Direct Investment in Australia Following the Australia-US Free Trade Agreement.Australian Economic Review, 45(4), 410-421. doi:10.1111/j.1467- 8462.2012.00686.x Sharma, K., &Bandara, Y. (2010). Trends, Patterns and Determinants of Australian Foreign Direct Investment. Journal of Economic Issues (M.E. Sharpe Inc.), 44(3), 661-676. doi:10.2753/JEI0021-3624440305 Viswanathan, B., Selvanathan, E.A., &Selvanathan, S. (2009). Causality between Foreign Direct Investment and Tourism: Empirical Evidence from India (Doctoral Dissertation). Retrieved from http://www.ebscohost.com Yeung, M., &Ramasamy, B. (2010). The Determinants of Foreign Direct Investment in Services.The World Economy. Doi:10.1111/;1467-9701.2009.10256.x Read More