Foreign Direct Investment in Australia

Executive Summary

This report seeks to understand the various aspects of the Australian economy in relation to its attractiveness and its capacity. It studies the various aspects and the way an investor may approach the market to gain maximally from it. To resolve its weaknesses, a company must also be able to identify the various opportunities that are available within the economy for their exploitation.

Certain companies and industries are favoured by the high demand for their services within the country. These include the construction industry and the food industry. On the other hand, industries like the fashion remain impenetrable owing to the high rates that are charged in the country.

The country needs to improve certain policies to accommodate foreign direct investment. This will ensure that the country gains maximally from companies that are owned by entities from other countries. The country may remove some of its barriers of entry which have been known to impact on the success of the country’s FDI.

The country stands to gain massively from FDI. Amongst the benefits of FDI are the introduction of new technologies and management styles and the provision of employment opportunities. The government should push for the completion of its negotiations with countries like Japan which have a high chance of creating opportunities for its population.

This report also provides recommendations for companies that want to venture into the Australian market. It will serve to assist future investors to make better investment choices in their interaction with the Australian market.

Foreign Direct Investment in Australia

Introduction

Foreign direct investment (FDI) is the act of one an entity that belongs to another economy undertaking an enterprise in another economy with the intention of obtaining and sustaining an interest in the enterprise in the long-run as well as have the capacity to make a significant influence in the management of the enterprise. While it is generally accepted that the foreign entity maintain a 10 % stake of the company, Australia requires a threshold of 15 percent in the screening process of FDIs.

FDI is a component foreign investment in Australia. However, the benefits of FDI are not shared by portfolio investment or any other form of foreign investment. It involves the transfer of technology, management styles, intellectual property and other type of intangible capitals (Drysdale, 2011).

Australia’s Business Environment

PESTLE Analysis

Generally, Australia has a strong democratic government obtained by election. The political system is highly decentralized with the authority being divided distinctly between states. Australia has adopted a variety of measures to have a surplus of its budget to enable it to divert some funds to its anti-money laundering campaign (Marketline, 2014). Until the 2008 global economic crisis, the economy of Australia had been doing very well. While Australia has been performing better than most economies, its overdependence on exports of commodities has been a major drawback (Marketline, 2014).

The aging of the population progressively has led to an elevated expenditure on social security and health. The country’s egalitarian principles need to be improved (Susomrith & Brown, 2013).

Advancements in technology have been applied across the board from traditional to modern fields. Innovation can be improved by universities, government and businesses uniting towards a common goal. Failure to collaborate may hurt innovation in the long-term (Marketline, 2014).

The Australia economy has been very keen to attract investments. The high regulations on product market, however, suppress the economy. Australia has been progressively moving from a policy that is state-based towards one that is more market based with regard to resolving environmental issues (Liu, Davidson & Mitchell, n.d.). The government may fail to achieve its carbon emission targets in future since it has proposed to repeal the carbon tax (Marketline, 2014).

Infrastructure Capacities

According to Business Monitor International (2014), Australia has a railway length of 38,445 km (21,674 km is standard gauge) and 823,217 km of road (356,343 km is paved) (Business Monitor International, 2014). The country also possesses waterways of 8368 km which are mainly for small shallow-draft use. It has 3,609 of crude oil and 30,054 km of natural gas pipelines (Business Monitor International, 2014). The country has also 19 major harbours and ports. Its infrastructure is highly developed with 467 airports (333 with paved run ways) (Business Monitor International, 2014). The major airports include Canberra, Sydney and Melbourne. Its major ports are Geelong, Gladstone, Fremantle, Darwin, Dampier, Cairns, Brisbane, Hay Point, and Hobart among others (Business Monitor International, 2014).

The industry transport infrastructure is expected to increase significantly with an annual growth of 4.1 % expected between 2014 and 2023 (Business Monitor International, 2014). There two major factors that are expected to drive this growth. These include demand passenger transport services and Asia’s demand for energy and commodity exports (Susomrith & Brown, 2013). The latter has caused increased investments in Freight railways and ports in the New South Wales, Western Australia and Queensland. In an attempt to quench the demand for co.als in China, Japan and India, some of the ports are increasing enlarging their coal terminals (Business Monitor International, 2014). The demand in China is however dropping but is expected to return in the medium to long term.

Freight railways are being used to link new mines with ports. The Australian government has plans to lease and privatize some of the freight transport assets which will bring investment into the infrastructure sector (Business Monitor International, 2014). New roads and urban transport plans are underway to improve passenger services. The state has declared billions of investments into transport industry.

Australian Domestic Business Environment

Current Business Barriers

Australia has significant barriers that are likely to cause difficulty for investors. The most significant is the slow growth in the economy. The 2008 economic crisis caused a slow-down in the economy (Hussey, & Kenyon, 2011; Alloway, Dalley-Trim, Patterson, & Walker, 2006). The slowdown is one reason why it has been difficult to invest in the country. Investors have been intent to observe the direction the economy is going to head. Secondly, the country has also had very high tariffs for clothing and apparel (Hussey, & Kenyon, 2011). The tariffs have been the most significant barrier between Australia and the EU region. Removal of those tariffs would highly impact the growth of the economy and the FDI in the country (Drysdale, 2011).

Short-Term Political Influences

Insecurity issues that are fed by threats from the ISIS have been occurring in the near past (Susomrith & Brown, 2013). This has influenced investor confidence in the short-run. It may be necessary for the company to intensify its security to win back investor confidence.

Long-Term Political Influences

The most significant political influence has been the change in government. In 2013, the government of Australia had a change of government to a more conservative government system. This change in government has had some impacts in the political system (Pomfret, 2009). The government is significantly different from the earlier government system. They have made significant alterations to the business system. These include the elimination of coal taxes which may influence the workability of the environment of business. The government has also reduced the funds it put into foreign aid and invested it in infrastructure.

SWOT analysis

Strengths

• Australians are highly educated hence offering the country a competent workforce
• The highly advanced infrastructure favours business activities
• The country has signed various free trade agreements with countries like the US, Thailand, and New Zealand.

Weaknesses

• While the country experiences a high level of openness, the country approves all investments worth $5 million and above through the Foreign Investment Review Board (Daojiong, 2013).
• By regional standards, the country’s domestic consumer product is low for its population of over 23 million.

Opportunities

• The country stands to benefit from talks with various countries including Japan, South Korea, India, Indonesia, Malaysia and China in which they are negotiating for free trade agreements (Daojiong, 2013).
• The upsurge in population growth will require an upgrade and expansion of infrastructure especially in the main cities
• The government is targeting infrastructural improvement in rural areas
• The country requires improving its health infrastructure to cater for the rising aged population. This industry might see to an increase in the demand of services

Threats

• The government seems unlikely to lower the corporate taxes that are charged to foreign investors while they are significantly higher than those of other countries
• The recent interest by Chinese firms to invest in Australia’s resource extraction and agricultural sectors has raised fears that foreign firms will take charge of strategic assets. Consequently, trade agreements have been affixed with conditions hence lowering the attractiveness of the assets

Proposed Australia FDI Investors

Leighton Holdings

Selected industries/companies assessment

Company overview: The company was founded in 1949 as a small private Engineering firm. It has since diversified into a fully integrated solutions provider in the infrastructure industry (Business Monitor, 2014). The company offers services in mining, construction and services. It handles contracting and project development services and operates in over 20 companies in the Middle East and Asia Pacific regions (Daojiong, 2013). However, large opportunities for growth and in the local market have seen the company generate the most of its revenue from Australia. It has subsidiaries that include Thiess and John Holland which among the largest and most recognized Australian construction companies with an experience of 120 years. The major shareholder is a German company called Hochtief, which is owned by a Spanish company called Grupo ACS (Business Monitor, 2014).

SWOT Analysis

Strengths

• It is the largest construction group in Australia and has a history of over half a century.
• It offers its services across a diverse market
• It is the largest contract miner in the world
• Made near record highs revenue for year ended Dec 2013
• The companies project development division is performing excellently as contracts increase

Weaknesses

• Its significant overseas exposure increases its currency risks
• Leighton’s venture in the Middle East is likely to keep lowering its revenues as it is still unable to sustain itself
• The risk management system has seen various lapses

Opportunities

• The government has shown an increase spending on infrastructure which implies an increase in the number of available contracts
• Many Australian miners are investing in Africa hence increasing market opportunities for the company

Threats

• The direction of Leighton is unclear owing to the changes in the leadership of the company since 2011

Global Risk implication

The economic instability of the Middle East risks the performance of the company. The increase in the aged population has implied a higher demand for labour and therefore a possibility of the labour prices increasing (Collins, Sun & Li, 2012). This may hurt the business in the long-run. The company is also at risk of suffering the implications of fuel increases.

HR Capacities

The nation of Australia has prioritized innovation for a strong economic development and to strengthen the completion among the firms. For this sole purpose, human resource management plays the greatest role in fostering innovation to build a strong workforce in any firm.

Initial Entrance Phase

Initially, in the mid-1990s, there wasn’t a clear and developed human resource transformation. Only a few companies, among those that were present used to interview or benchmark its joining workforce (Watson, 2014). There were no project plans during this first phase. Many of the efforts in the HR transformation were global. The main vision at first was to be able to process transactions and administer before they could get in the more strategic issues. All started with employee evaluations, i.e. benefits, their payrolls, performance management as well as how they were to be compensated. Centres were set up for HR administration and services. After this they gave the managers and the employees the most important tools so that they could easily handle their daily HR transactions.

Global expansion through (Asia Pacific, America and Europe)

With the expansion HR globally, there has been more growth in Asia pacific, America and Europe’s HR departments. This led to more development of companies. At this phase, the companies started focusing on the experience of its employees and how they could enhance the customer care services (Amarakoon, Weerawardena & Verreynne, 2013). This was majorly done by raising the employee contact and support. The organisation’s management was trained on delivery. The HR departments did international assignments as well as diversification (Amarakoon, Weerawardena & Verreynne, 2013). At this point of global growth, the HR departments had grown to capacities that they were the ones recruiting and also doing the employee evaluations and reports on the behalf of the organisations. HR has led competitiveness among companies which has led to Australia’s economic growth.

Recommendation

The Australian economy has been performing well for a long time in the past. For any companies that are trying to venture into the market may require to watch on certain areas to improve its probability o f success in the country. First, the company should improve its product quality. Australia has been very vigilant to ensure that companies provide the best quality products. FDI companies with low quality products may meet challenges trying to venture into the market.

Second, the company may also require using its subsidiaries in certain countries that have an easier time working with Australia. These include the USA, UK, Japan and others. Some markets however do not have a good relationship and have even led to the creation of restrictions to manage hoe the country manages its partnerships with other countries. One such country is China. Its investors’ interest in certain areas of the economy has led to the creation of restrictions that govern how companies may acquire other firms.

Certain sectors of the economy are also more favourable than others. The growth of the aged potential has created a ready market for health services. An increase in urban population has also called for a more advanced infrastructure system. This has created a developmental gap in the construction industry. On the other hand, the country has high rates in the clothing and apparel industry which makes it difficult to venture in. Companies looking to venture in this field require obtaining more advanced technology to create more superior and more cost effective systems. This way, the company will be able to make savings in the production process.

Conclusion

Australia is one of the most widely accepted FDI destinations. It has made it easier for certain companies to take advantage of the economy by signing free trade agreements with various countries. The country also has a big and advanced infrastructure. It also continues to expand its financial allocations into infrastructure hence increasing the possibility of success of companies like Leighton Holdings.

References

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Amarakoon, U., Weerawardena, J., & Verreynne, M. 2013. HR innovation for competitive advantage: insights from Australia, 25–28.

Collins, R., Sun, X., & Li, C. 2012. Are supply-chain relationships more influenced by buyer-supplier relationships or the business environment of the country itself? Evidence from the ‘China-Australia’trading relationship. Asia Pacific Business Review, 18(3): 391–405.

Daojiong, Z. 2013. Chinese FDI in Australia: drivers and perceptions. speech presented to the Lowy Institute for International Policy, Sydney.

Daojiong, Z. 2013. Chinese FDI in Australia: drivers and perceptions. speech presented to the Lowy Institute for International Policy, Sydney.

Drysdale, P. 2011. A new look at Chinese FDI in Australia. China \& World Economy, 19(4): 54–73.

Hussey, K., & Kenyon, D. 2011. Regulatory divergences: a barrier to trade and a potential source of trade disputes. Australian Journal of International Affairs, 65(4), 381-393. doi:10.1080/10357718.2011.586668

Liu, T., Davidson, S., & Mitchell, H. n.d. Regional trade agreements—an incentive factor for strengthening Australia and China’s FDI.

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Susomrith, P., & Brown, A. 2013. Motivations for HR outsourcing in Australia. The International Journal of Human Resource Management, 24(4): 704–720.

Pomfret, R. 2009. The Post-2007 Financial Crisis and Policy Challenges facing Australia. Economic Papers, 28(3), 255-263. doi:10.1111/j.1759-3441.2009.00030.x

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