As the Japanese economy has grown over the past 30 years, Australia has experienced growth in Japanese investment. Research undertaken for the purpose of this study reveals that Japan is now the third largest foreign investor in Australia behind The United states and The United Kingdom. Japan is also Australia's largest export market, accounting for 26 percent of total exports in 1990.
The purpose of this study is to investigate the effect of Japanese direct investment on Australian economic growth, relative to other foreign direct investment and exports to both Japan and other destinations. No other work known to the author has been undertaken in this area. The study surveys the theory of direct foreign investment and the role of Japan as a global investor. The main focus of the study is the impact of Japanese investment on Australian exports and the real growth rate of GOP.
The relevant relationships were estimated using a simultaneous equation model in a two-stage-least-squares (2SLS) framework. The variable for Japanese direct investment was found to be significantly correlated with both exports to Japan and the real GOP growth rate. The variable for other foreign direct investment did not show any correlation using the real GOP growth rate. From the estimates generated by the 2SLS procedure, it was evident that Japanese direct investment showed a much greater contribution to economic growth than other foreign direct investment.
The possible reasons for the amplified contribution of Japanese direct investment include, inter-alia: trade linkages created and maintained through investment; the technology transfer component of Japanese direct investment; investment choices of Japanese investors; and, the high growth rate of the Japanese economy coupled with the linkages and complementarities which are formed with the Australian economy through trade and foreign investment.
From the results of this analysis, it is concluded that the xenophobic concerns of some Australians directed at deterring Japanese investment appear to be unfounded, from a purely economic perspective. Australia is the fourth largest recipient of Japanese direct investment globally, limited in significance relative to The U.S. and UK. Japan is Australia's third-largest foreign direct investor and is much less significant than The u.s. and U.K. as a direct foreign investor. The funds invested in Australia by Japanese direct investors appear to have much greater domestic welfare benefits than the direct investments of other foreign investors.