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Macroeconomics and Long Term Investment in a Nation

   

Added on  2021-05-31

41 Pages10685 Words409 Views
Running Head: MACROECONOMICSMacroeconomicsName of the StudentName of the UniversityCourse ID

MACROECONOMICS1Executuve Summary The paper examines how movement of different mcroeconomic variables influences the decisionof long term investment of a company. Before investing in a nation the management considerspast performance of the selected nation on a number of different indicators. For this paper, theinvestment decision of an Australian company belongs to a particular industry is dicussed. Thecompany is willimng to make long term investment in one of the existng trade and investmentpartner countries. The selected Australian company is the mining gian BHP Billion. The targetedinvestment destination is China. For both the nation, mining is considere as one of the vitalsectors of the economy. China is a large importers of Australian mining resource and rawmaterials. With rapid growth of China, the consumption demand consitutes an exponentialgrowth rate. Since the beginning of its growth phase Chins constituted a large demand forminerals. China regarded as leasing consumer of mineral has a very high demand for iron oreand thermal coal. Demand approximated to be 58% of total world for iron ore. For thermal coalthe corresponding percentrage is 49% (Liu 2015, pp.1-5). Mining industry of China is aframented industry. Despite operation of several companies in the nation, domestic supply ofminerals fall shirt of domestic demand. Comsequently, China needs to depend on importedmineral to satisfy domestic demand. TheThe main importinhg partner of China is Australia.Australia has a huge reserve of minerals which are used to meet domestic and external demand.Because of long standing important of mineral resources in both the nation, the concernedindustry is chosen for this paper. Conducting business operation in China has now semmed toeasier following initiates taken by the nation to attract foreign investment. After experiencing adouble digit growth rate for past few recades China has now experienced a relatively slowergrowth rate. The growth though slower than previous quarter but is still in line with the standard

MACROECONOMICS2of advanced nation. Relatively lower average wage rate, policies of tax incentice and highresilience towards global financial crisis indicates a prospects of high return from investment inChina.

MACROECONOMICS3Table of ContentsIntroduction......................................................................................................................................4Analysis and Discussion..................................................................................................................6Overview of general business environment.................................................................................6Economic growth and analysis of business cycle........................................................................8Unemployment..........................................................................................................................11Average wage rate.....................................................................................................................14Inflation......................................................................................................................................17Real interest rate........................................................................................................................19Domestic Credit to private sector..............................................................................................21Government expenditure on infrastructure................................................................................23Taxation Policy..........................................................................................................................24Exchange rate.............................................................................................................................26Effect of Global Financial crisis in China.................................................................................27Conclusion and Recommendation.................................................................................................30References......................................................................................................................................34

MACROECONOMICS4IntroductionIn the last fee decade Australia and China have developed a strong international relationin terms of cross border trade and foreign investment. The economy of China entered a newgrowth phase since 1970. Rapid expansion of China’s economy was based on development ofmanufacturing, mining industry, urbanization and infrastructural development. Fast growth ofindustries generated huge demand for raw material (Heilmann et al. 2014, p.28). The demand forenergy to develop transport and infrastructure and materials necessary for manufacturing sectorrose rapidly. Australia since the very beginning of China’s growth support the nation by supplynecessary raw materials on time. China gradually became one of the largest import and exportpartners of Australia. The trade relation between the two nation further strengthened byexpansion of foreign investment. In the rapid growth process of China there was a major shift inkey drivers of growth. China gradually shifted from producing labor intensive simplemanufacturing to the production of complex goods and services. This somewhat moderates theresource demand from Australia. China’s demand has now shifted from raw materials to agreater demand for service and manufacturing expertise (Lardy, 2016, pp. 85-111).Long term investment decision crucially depends upon the macroeconomic environmentof the targeted country. The macroeconomic environment of a country is a much broader conceptand hence, cannot be explained by one single indicators. Rather this involves evaluation of anumber of different aspects (Fan et al. 2016, pp.187-203). In this paper some of the crucialmacroeconomic factors are analyzed to examine whether investment of one of the leadingmining companies of Australia BHP Billiton in China is profitable or not.The first aspect that is considered is the general business environment. It indicates theoverall business condition of the nation. Performance scores of the targeted nation are measured

MACROECONOMICS5in terms of procedure of getting permission to operate in the nation, process of obtaining license,tax registration, availability of credit, solution toward the problem of insolvency and others. Allthese matters in directing business operation and hence affects the return from long termsinvestment (Rezai & Stagl 2016, pp.181-185). Next to general business environment economicgrowth is the second crucial aspects to be considered while making investment decision.Investors always desired that the targeted nation has a smooth growth path. A fluctuating growthpath implies instability of economic activity. Nation with a stable growth path provides a higherand secure return to the investors. The most conventional measure for trend growth rate is theovertime movement of GDP growth rate. Unemployment indicates performance of labor market.This is associated with economic growth. A higher growth is associated with a low level ofunemployment and vice versa. The statistics for unemployment indicates presence of surpluslabor. A country with a high rate of unemployment thus have an excess supply of labor. Thishelps the newly entered foreign companies to find workers at a low wage. The next importantmacroeconomic variable is rate of inflation. It measures the percentage change in cost ofmaintaining same standard of living in two different time period. Depending on the causes ofinflation, an upward revision of price level might be supportive for economic growth. Everyeconomy requires some modest increase in price level to encourage producers by generating ahigher profit from high price. The available supply of labor is supplemented with the trend inaverage wage growth. It is beneficial for a company to invest in another country if wage isrelatively lower in the chosen country as compared to that in home country. In selection of nationfor making long term investment infrastructure of the chosen nation has an important role toplay. The infrastructural facilities include structure of transport and communication, availabilityof water, electricity and other utilities. Such spending is generally conducted by government of a

MACROECONOMICS6nation. Therefore, strength of fiscal position matters to build infrastructure of a nation. Afavorable taxation policy smoothens the path of foreign investment. When government wants toencourage foreign investment in a nation then it offers investors he facility of tax break or offersspecial exemption from certain type of taxes. In the cross border movement of fund both interestrate and exchange rate are important. A lower interest rate implies a lower cost of borrowingcapital. A devalued currency by lowering value of domestic currency in terms of foreigncurrency lowers the cost of production of foreign currency in relation to domestic currency.Finally, the impact of global financial crisis and associated crisis management mechanism inChina is evaluated to examine the internal stability of the economy.Analysis and DiscussionOverview of general business environment In the investment decision of a company, general business environment of the targetednation plays an important role. In order to set up a subsidiary factory in other nation the companyneeds to take permission from appropriate authority. The extent pf difficulty that a companymight face in seeking permission determines favorability of the business investment. Thetargeted country need to have uninterrupted supply of electricity. In order to secure investment,property right has to defined properly (Sauvant & Nolan 2015, pp.893-934) The easy availabilityof credit provides confidence to the business firm. Complicated and discriminating structure oftax considered as a hurdle to enter in a nation. On the other hand, non-discriminating andfavorable tax structure attract foreign investment. To examine whether China is an appropriatedestination for investment of the company that depends on these factors. The general businessenvironment of China is summarized in the following table

MACROECONOMICS7Table 1: China’s Business Environment(Source: World Bank 2018)The table above provides an overall picture of current business environment in China. Itrepresents how the nations performs on different indicators determining a favorable businessenvironment. During 2016, in terms of overall business environment China ranked 80. In 2017,the rank however improved making China’s rank two point above. Owing to reforms undertakenbusiness environment in China has improved. The rank now increased to 78. Several measures have been undertaken in China to favor business investment. Theprocess of registration, availing business license or tax registration now has made as simple aspossible. Company can easily avail these facilities with only a single form. In order to increaseprofit shares of companies China has reduced the amount payable for social contribution informs of relaxation of concerned tax (Wang, Chen & Benitez-Amado, pp.160-170) The system of electronic filling for payable tax and implementation if new and improvedchannel of taxpayer service have made tax payment easier than it was before. The credit

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