RDP 9106: The Direction of Australian Investment from 1985/86 to 1988/89 7. Conclusion

Drawing on unpublished data at a disaggregated level, we were able to provide a more detailed picture of the direction of investment over the 1985/86 to 1988/89 investment boom. The disaggregated data shows that just over one quarter of the growth in real non-farm capital expenditure was in the real estate and property development industry. We present evidence that the investment undertaken by real estate operators and developers was substituting for building and structures investment formerly undertaken by end users. At the same time however, the composition of building and structures investment had changed. In particular the share of building investment going to offices grew quite strongly from September 1987 to September 1989.

Using the same investment data combined with trade data, we calculated an improved measure of the proportion of total investment directed towards the tradeable sector. We extended the Wood et al. (1990) methodology to investment in import competing industries. Our measure takes account of the fact that a significant proportion of any industry's output is neither exported nor subject to import competition – even for highly tradeable industries. Measures of the share of investment in the tradeable sector which do not take account of this fact (Treasury (1990) and the BIE (1990)) will overstate the proportion of investment in the tradeable sector.

Our findings suggest that there has been a modest rise in the proportion of manufacturing investment which has gone into tradeable capacity in the later part of the period studied. This has been because of the share of investment going into import replacement capacity. This is consistent with a lagged response of investment to movements in relative prices.