Figure 3.1 Private business investment growthTrend gross fixed capital formation
Australian Bureau of Statistics (2015) Australian National Accounts: National Income, Expenditure and Product, Sep 2015, cat. no. 5206.0, table 6
Business investment accelerated rapidly after the global financial crisis, but has fallen since mid-2013.
Growth levels in business investment are associated with future business activity and patterns of economic growth.
Business investment growth has been negative since 2013 and goes some way to explaining current subdued business conditions and lower levels of economic growth.
Much of the recent slowdown is attributable to the wind-back of mining investment, with other sectors and industries unable to make up the shortfall. This was inevitable given that mining investment reached record-high levels.
New investment, including gross fixed capital formation, is correlated with expectations and market sentiment. Low commodity prices, and the uncertainty that this brings, is likely to mean that investment remains subdued for the short-term.
Figure 3.2Capital expenditure levels by industryYear-ended quarterly estimates, chain volume measures
Capital expenditure for Agriculture, Forestry and Fishing; Public Administration and Safety; Education and Training; Health Care and Social Assistance; and Superannuation Funds are not captured by this ABS survey.
Australian Bureau of Statistics (2015) Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2015, cat. no. 5625.0, table 3b
Capital expenditure grew strongly during the mining boom, but has fallen since 2012.
In 2005, capital expenditure levels in Mining and Manufacturing were $14 and $13 billion respectively. Since then, the mining sector’s expansion has generated unprecedented investment, while manufacturing has experienced a persistent decline. Non-dwelling construction experienced the strongest growth in terms of the broader gross fixed capital formation.
The large levels of mining investment peaked in 2012, and have fallen rapidly since then. This is likely to be accentuated by the recent fall in commodity prices, as profit margins narrow. While a return to more normal levels of investment for mining was inevitable, small rises in investment from other sectors is providing support. When disaggregating gross fixed capital formation, much of this support is accounted for by the growth in dwelling construction.
Figure 3.3 Foreign direct investmentForeign direct investment stock, current prices
Australian Bureau of Statistics (2015) Australian National Accounts: National Income, Expenditure and Product, Sep 2015, cat. no. 5206.0, Table 1 and Australian Bureau of Statistics (2014) International Investment Position, Australia: Supplementary Statistics, 2014, cat. no. 5352.0, table 1
Increasing levels of foreign direct investment indicates that Australia is an attractive investment destination.
The flow of foreign direct investment to Australia was $55 billion in 2014 which contributed to a year ended stock of foreign direct investment of $688 billion.
Growth in foreign direct investment has been significant for the last 10 years in absolute terms and as a proportion of GDP. Even with the global financial crisis, foreign direct investment slowed only slightly — the stock of foreign direct investment has increased from 27 per cent of GDP in 2005 to 44 per cent of GDP in 2014. The falling Australian dollar will make foreign direct investment in Australia more attractive for foreign entities.
The US accounts for the largest proportion of foreign direct investment in Australia at 24 per cent in 2014. It is followed by the UK with 13 per cent and Japan with 10 per cent.
Table 3.1 International Institute for Management Development rankingsInvestment incentives and funding sub-rankings
|OECD ranking||Cost of Capital||14||16|
|Overall ranking||Cost of Capital||19||23|
The overall rankings are for 61 countries. The OECD ranking is relative to 34 countries.
Australian firms have less ready access to finance.
The World Competitiveness Yearbook is an annual report published by the Swiss-based International Institute for Management Development. The Yearbook provides rankings using a competitiveness index. It uses statistical data and perceptions via their Executive Opinion Survey.
Cost of Capital and Venture Capital are two sub-rankings that provide insight concerning Australia’s performance in these areas.
Australia’s performance is mid-ranking. The leading countries for Cost of Capital were Switzerland and Germany in 2015. The US and Israel were countries where it was easiest for businesses to access venture capital.
Table 3.2 Business use of digital technologyIndicators of business technology adoption
|Internet access (per cent)||91.9||92.6||94.7|
|Web presence (per cent)||44.6||47.2||47.1|
|Social media presence (per cent)||18.1||26.1||30.8|
|Income from orders received via the internet ($ billion)||237.1||246.4||266.8|
Australian Bureau of Statistics (2014) Business use of Information Technology 2013 –14, cat.no. 8129.0
The rapid pace of technological advancement continues. Australian businesses are embracing digital technology, though it is yet to be fully integrated.
Almost all businesses have internet access as of 2013–14. But figures for those with a web presence remained unchanged. This suggests that many businesses are yet to be convinced of the benefits of going online.
Social media presence is rising, though it is not yet widespread.
Income from orders received via the internet increased from $246 billion in 2012–13 to $267 billion in 2013–14, an increase of 8 per cent. This is substantial and is equivalent to roughly 17 per cent of Australia’s GDP.
Figure 3.4 OECD product market regulation indexKey countries and Australia
The bars refer to the index score calculated by OECD whereas the rank refers to the index score relative to all other countries. A lower index score is preferable to a higher index score. There is no data for the United States for 2013
OECD (2013) OECD statistics, Public Sector, Taxation and Market Regulation, Market Regulation, economy-wide regulation, Product Market Regulation, 2013, Viewed 1 December 2015, http://stats.oecd.org/Index.aspx?DataSetCode=PMR
Australia’s regulatory framework compares favourably with other countries.
The OECD Indicators of Product Market Regulation are comprehensive and internationally-comparable measures of the degree to which policies promote or inhibit competition.
Australia’s index rating worsened between 2003 and 2008 and then improved to 2013. The most recent ranking (8th) means that Australia is close to the world leaders. This is consistent with other measures such as the ABS Business Characteristics Survey results and the World Bank Doing Business Indicators.
Chapter three of the Australian Industry Report 2015 explores regulation and its impact on Australian businesses at length.
Figure 3.5 World Bank Doing Business IndicatorsDistance to the frontier scores
The distance to the frontier scores shows the distance of each economy to the best performance observed for each of the indicators. A score of 100 represents the frontier.
World Bank Group (2015), Doing Business Indicators, 2012 and 2016, custom query, Viewed 1 January 2016, http://www.doingbusiness.org/custom-query
Australia is competitive relative to other countries according to the World Bank’s Doing Business Indicators.
The World Bank’s Doing Business Indicators provide an assessment of the business environment within a country. The distance to the frontier scores provide a quantitative measure of the conditions relating to each category. A score of 100 indicates that a country is the world leader.
Australia’s distance to the frontier scores have remained similar over the past four years. The main change has been a fall in the ability of Australian firms being able to trade across borders.
Australia performs particularly well in relation to starting a business and getting credit. Protecting minority investors is where Australia performs relatively poorly.
In the 2016 report, Australia was ranked 13th out of 189 countries. Singapore and New Zealand top the rankings. Australia was ranked 15th out of 183 countries in 2012.
Figure 3.6 Contributions to annual gross operating profitTrend estimates of profit growth
Australian Bureau of Statistics (2015) Business Indicators, Australia, Sep 2015, cat. no. 5676.0, table 15
The gross operating profits of Australian firms have fallen in three of the previous four years.
The overall performance of Australian firms has been largely influenced by the volatility in profits attained by the mining sector. This aligns with the rapid rise of this industry as well as the significant fluctuations in commodity prices.
For 2014–15, gross operating profits were estimated at close to $300 billion. This is down from $310 billion in 2013–14. This fall and the three recent years of negative profit growth indicate that business conditions have been challenging for Australian firms. Current low commodity prices are likely to mean that profit growth remains low. This is because these low prices directly impact the profitability of the mining sector, which is a significant portion of the Australian economy.
Continued growth will also be affected by world economic conditions, including those in Australia’s largest trading partner, China.