With the rapid growth of the Japanese economy over the past 30 years, Australia has experienced growth in Japanese investment and trade. Japan now holds the third largest share of cumulative foreign direct investment in Australia. During Japan's period of high growth, Australia was the major supplier of key raw materials required by Japanese industry. -Currently, Japan is Australia's largest export market.
Foreign investment results in both costs and benefits for the host country. Various studies have discussed the Japan-Australia trade and investment relationship, however, few attempt to quantify the effects of the interdependencies. It is the objective of this study to investigate the effect of Japanese direct investment on Australian employment, trade and economic growth.
The analysis central to this study uses econometric models to quantify the effect of Japanese direct investment upon the Australian economy. The models used are based upon vector autoregression (VAR) and simultaneous equation techniques. Data spanning a 25 year period (1965-1989) is used in this analysis. Japanese direct investment and other relevant variables are employed to estimate the relationships between other direct investment, exports, Australian economic growth and employment, and Japanese economic growth.
Based upon the results of the VAR models, it appears that Japanese direct foreign investment (DFI) has a positive impact upon Australian GDP and exports to Japan. Japanese DFI's impact is greater than that of other foreign DFI upon Australia's GDP and other exports. Exports to Japan were also found to have greater contributions to GDP than the contribution of exports to other destinations.
The simultaneous equation model was estimated using a two-stage-least-squares framework. The results attest to the economic benefits of Japanese DFI, and imply that Japanese investment has greater contributions to Australian GDP and employment than does other DFI. A less-expected finding was that exports to Japan have grown independently of Japanese DFI in Australia, implying that Japanese DFI over the study period has generally not been trade-oriented. A strong cause of growth in exports was found to be growth in the Japanese economy. Reasons for these findings are discussed.
In conclusion, this thesis suggests that Japanese DFI has provided significant economic benefits for Australia; when compared to other DFI. However, changes ill Japanese capital flows and the Japanese economy should be monitored due to their direct and indirect effects upon the Australian economy. Close scrutiny of foreign investment proposals should also continue, addressing the objectives of employment, trade, technology accumulation and economic growth.