Interest Rates and Foreign Direct

Interest Rates and Foreign Direct Investments in Australia

For a foreign investors Australia remains as one of the popular places to invest since the 1980's. However, the growth of the various East Asian countries has meant the foreign direct investment (FDI) is facing increasing amounts of competition. In spite of what is taking place, Australia continues to provide stability and above average economic growth. An example of this can be seen, with the large amounts of FDI that the country receives in comparison to their neighbors. Where, Australia had the highest number of foreign direct investment projects in comparison to other countries, as a total of 152 different projects were received in new FDI funding. This is higher than China (which had total of 132 FDI projects) and Taiwan (which had a total of 112 FDI projects). ("Australia's FDI Stock up 20% to U.S. $246 Billion," 2007) Yet, to fully understand the impact of foreign direct investments, requires that you examine the relationship between interest rates. This will be accomplished by conducting a literature review, which will highlight the correlation between the two. It is through understanding this relationship that will provide the greatest insights as to how interest rates impact foreign direct investments.

Literature Review

Yang, J. (2007). The Determinants of Foreign Direct Investment in Australia. Economic Record, 76 (233), 45 -- 54.

In the article the Determinants of Foreign Direct Investment in Australia, it talks about how there is little evidence to determine what affects FDI rates into the country. After carefully examining a number of different variables; the author found that there are a variety of factors that affect FDI rates to include: interest rates, wages, the ability to quickly settle industrial / labor disputes and a business friendly atmosphere. In the case of Australia, all of these different factors are important in underscoring the overall reasons as to what attracts FDI capital.

Lee, J. (1998). How Does Foreign Direct Investment affect Economic Growth. Journal of International Economics, 45(1), 115 -- 135.

In the article How Does Foreign Direct Investment affect Economic Growth, it talks about the direct relationship between the overall amounts of foreign capital and interest rates. In the article, they surveyed 69 different countries, searching for answers on what affects FDI. Where, they found that interest rates will affect FDI flow: as the cost of financing, purchasing new equipment and the strength or weakness of the economy will play an important part. In the case of Australia, this is significant because the low interest rates that they have had in place since the 1980's, have helped contribute to this capital inflow. This is an interesting point, because the interest rates were lower in Australia than China. As a result, because of the lower interest rates, Australia attracted the largest amounts of FDI.