Discuss about the Effect Of FDI On Hospitality Sector In Australia.
This paper proposes a research work on the effect of foreign direct investment in hospitality sector of Australia. Australia is a leading destination of FDI. Australia is an ideal investment destination as hospitality industry is the sister industry of the tourism sector. Several external hotels show interest to invest in the hospitality sector in Australia. Therefore this present study wants to investigate the opportunity of investment in this sector and the effects of FDI in the growth of the sector. FDI is the major source of capital investment. FDI can be used in this sector to reap several benefits such as infrastructure development, improvement in product and services, which in turn may help in employment generations. However, FDI in the hospitality industry in Australia is less than 1% (aha.org.au, 2013). Therefore, it is required to examine the benefits and adverse effects of FDI on the hospitality sector of this economy. These factors will be examined in the Australian economy.
Foreign investment in the Australian economy has been undertaken in the form of portfolio investment. As per data of Australia Bureau of Statistics, FDI flows have been rising over the years since 2001 (treasury.gov.au, 2016). Mining and quarrying sector has 40.1% share among total FDI flows in Australia, whereas the accommodation and food service activities industry has only 1.8% share, which is lowest (dfat.gov.au, 2015). These figures indicate that the there is substantial scope of foreign direct investment in this hotel sector. Investment in this sector can increase capital for enhancing accommodation and improving food service that can further acts for the growth of revenue.
The purpose of the study is to find out the benefits as well as the challenges of FDI for hotel industry and the economy of Australia. As mentioned by Presutti Holt & Camillo (2015), Australia is rich in resources and high skilled labour and has international reputation for innovation. Therefore, foreign investment is required to supplement domestic savings. An MNC opens a new business in the host country; therefore, several opportunities are open to the host country. One advantage is creating employment at large scale and another advantage is access of different market, with which the MNC is connected. Therefore, the scope of attracting greater number of foreign tourist in the country may increase.
Concept of FDI
Foreign direct investment is the inflow of capital in the domestic economy through investment made by foreign companies. According to the definition of International Monetary Fund, direct investment is made with the aim of obtaining interest in one economy by an enterprise that is located to other country (Shi & Smyth, 2012). The multinational corporations mainly control foreign direct investment. An MNC can make direct investment in a country other than home country by creating a new enterprise or by acquisition of a company located in the target country. Creating new enterprise is known as the Greenfield investment and acquiring a company is known as the Brownfield investment Kabote et al. (2013). As discussed by Staples (2013), direct investment capital has three basic components such ad equity capital, reinvestment earning and other direct investment capital. Equity capital comprises equity in subsidiaries and branches along with capital in the form of machinery. Reinvested earnings come in the form of investor’s share, whose earning has not been distributed. Other investment capital includes debt securities, trade credit.
Opportunities for investing in Australia:
Australia has always been considered as one of the world’s favoured objective for foreign direct investment (FDI). The healthy economy of the country, its strategic location and strong presence in the global market trade along with its established record of accomplishment, places Australia as an ideal target for investment.
Companies from all over the world take this decision of investing in Australia at certain point of their business life, benefiting from the urbane infrastructure, stability in politics and continued sturdy economic performance. The geographical position of Australia plays a significant role in positioning itself as an ideal platform of entering into Asia with time zone crossover to both America and Europe, making Australia an ideal place for doing universal business interface.
In 2011, the overall FDI stock amounted to 6.6 per cent in reaching a staggering AU$ 507 billion. This augmentation was a reflection of the upturn in the global FDI activity happening since 2010, positioning Australia in a competitive situation in the backdrop of global economy. However, in 2012 there was a minor decline with flows of inward FDI expanding more than it doubled over the period of five years to the year 2012. It outpaced comprehensive growth and as per the newest annual data from the United Nations Conference on Trade & Development (UNCTAD). The overall foreign investment stock in Australia amounted to $2.5 trillion in 2013 (increasing by 11.4 per cent from 2012).
In 2013, foreign investors inserted $115 billion of unswerving investment into Australia, which is investing into business where foreign investors possess some rather manage, owning 10 per cent of the regular shares or voting power. The major sources of the direct investment are United States at $35 million, Singapore with $14 billion and United Kingdom with approximately $12 billion. This offered an essential complement to the domestic funds require for country’s overall speculation.
FDI in Australia has also helped in creating jobs, mainly in the hospitability industry, assisting in the stimulation of the economic activity with appropriate research finding that 10 per cent augmentation in the foreign investment in Australia leading to more than an increment of one per cent in the GDP by 2020 (Thorpe & Leitão, 2014).
Through divulging local hotels and restaurants to global standards along with best practices, foreign investment cheering modernism and opposition, driving growth bin productivity. Injecting new businesses with associations in various markets, Australia has been opening up the prospect of additional opportunities in export, enhancing overall performance of export.
Benefits of FDI for hospitality industry
Important advantage of FDI is that this is the main source of external capital, when there is shortage of capital in domestic economy or that particular industry. Therefore, FDI can be an important source of revenue through investment. The MNCs opening business in a foreign county, uses labour, equipment, to construct the new business. Opening a new business helps to create new employment opportunity. In a country like Australia, where unemployment rate is high, hospitality industry can be a major source of employment as a result FDI. Chakraborty, Mukherjee & Lee (2016) explained that FDI makes domestic industry competitive as domestic firms have to compete with foreign firm operating at a low cost. Therefore, consumers are benefitted due to foreign direct investment.
In the latest years, FDI has been beneficial for investors using it as more of a strategy for entering into the market. There has been a demur in the barriers of trade where the growth of FDI has been at a much higher rate than the trade at global level with the business attempting to evade the protectionist approaches through the direct investments (Sood, 2017). With the idea of globalization, the limits within the hospitality or any other industry have been comprehensive with organizations viewing the global economy as their market.
Kabote et al. (2012) pointed out that as government of the host country receives tax revenue from MNC that can be contributed to the growth of the economy. FDI in hospitality industry can provide financial support and fiscal incentives to the hospitality sector. As hospitality industry has backward linkages, any improvement in this industry has positive effect on the growth of the economy. FDI can be used in this industry for infrastructure development to attract more tourists. Improving accommodation is major challenge to the government. Development in hospitality sector using FDI has positive spill over effect on the other related sector of the economy.
Australia is a country that is high on resource, having skilled labour force and enjoying an international status for innovation. The support provided by the foreign investment in matters of growth pays rich dividends for all the Australians through increased tax revenues to State and Federal Governments, augmenting the funds available to be spending on schools, hospitals and hospitality industry. FDI’s focus on the hospitality sector of Australia would be of immense help for the country as upgrading that sector would attract more tourists, generating more revenue for the country and decreasing the factor of unemployment as with new hotels and travel agencies would crop up new job vacancies (Presutti, Holt & Camillo, 2015).
Australia’s need for foreign investment:
Foreign investment helps in filling the gap between what Australia invests and saves every year. The total investment is furnished by the savings that is domestic in nature along with the foreign ones, making up the disparity. In 2015, the total flow of investment was showing a figure of $424 million that comprised of $348 billion in household savings and $76 billion in the investments from foreign aspects (Wood, 2015). Foreign investment helps in encouraging competition in various sectors, especially in the hospitality one along with injecting new technologies and services in the markets of Australia. It is essential from the perspective of Australia to have more FDIs, which its government needs to understand and support.
Methodology of the study
In order to carry out the research, both primary and secondary survey need to done in the hospitality sector. Hospitality sector comprises industries such as hotel, tourism industry. The researcher needs to focus on any one sector. Data will be collected from different hotels of a target location Australia. The survey will evaluate the effectiveness of FDI in this sector. Secondary research is used to evaluate different FDI theories and its effectiveness practically on the hotel industry. As the secondary source online article, journals, government official website will be used. This secondary survey will justify the findings from survey.
The researcher would extensively research through all the relevant journals and articles on the related topic in order to gain knowledge evaluate and analyze the effectiveness of FDI in the hospitality sector in Australia. There have been limited prior researches on the topic, which would enable the researcher in gaining deep insights into the theories of FDI and evaluate them. The factors that would be focused on is the ways FDI has increased competition in the hospitality industry and the issue that have cropped up for various small players in the sector to cope up with the FDI factor.
Conclusion and recommendation
This study has found that FDI has significant impact on the hospitality industry in terms of growth and employment. The focus of the study is specifically on the hotel industry. In order to carry out the research, secondary survey will be undertaken. FDI has been brought in Australia in various sectors. Although there is scope, FDI percentage in hotel industry is not much in Australia. There is not much research work that has been done on this issue. This research paper focuses on the issues, possible impact on both industry and regional economy. FDI is huge in Australia, so the focus would be on the issues on why the hospitality industry is finding it difficult to attract and encourage foreign investments when other sector are enjoying healthy benefits. It is essential to understand the root cause and come up with probable solutions for the benefit of the economy of Australia. Tourism sector has the most opportunity of benefitting from the FDI as has happened with countries like India. The opportunity is huge, the industry just needs to tap the benefits out of it.
This sector has strong forward and backward linkage. FDI can be utilised in this industry to enhance capacity, accommodation, infrastructure in order to maximise customer satisfaction. Government alone may not support this industry in every respect. FDI can be a major source of capital in the Australian economy. It is to perform the research using large sample to make quantitative study robust. It is essential for Australia to tap in the international capital for supplementing the domestic savings. Foreign investment have the power of helping Australia to reach its economic prospective through offering of sufficient capital to fund different sectors, especially the hospitality sector.
aha.org.au (2013). Australian Hotels: Contributing to economic growth and national prosperity Retrieved on 16 Apr, 2017. from https://aha.org.au/wp-content/uploads/2013/07/AHA-National-Policy-Platform-2013.pdf