Effects of Australian inward FDI: a time series approach

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This paper examines the effects of inward FDI on economic growth, fixed capital formation, imports and exports for the case of Australia – an area where limited empirical research has been undertaken. A time series approach is chosen to model the variables dynamically and endogenously using quarterly real data from September 1985 to June 2019. This involved the estimation of a restricted vector error correction model (VECM), impulse response and variance decomposition analysis, and Granger-causality testing using the asymptotically-reliable Toda-Yamamoto (1995) procedure.

Results revealed bi-directional causality running between FDI and imports, and showed that FDI was import-substituting in Australia. More importantly, there was no evidence to support claims made by the Australian government, various industry groups and several economists that inward FDI (as measured by balance of payments accounting) leads to economic growth, capital accumulation and increased exports.