RDP 9401: Resource Flows to the Traded Goods Sector 4. Allocation of Investment

4.1 Sectoral Shares of Total Investment

Initially, we consider the allocation of investment to the traded goods sector as a whole. The disaggregated data used in the estimation are only available for the period since the mid-1980s. This precludes a longer assessment of tradeable capacity. It does, however, permit an examination of the sectoral allocation of investment during a period in which there has been an accelerated increase in the international integration of the Australian economy – a factor central to the development of the traded goods sector.

Estimates of tradeable capacity are shown in Figure 3. In this and subsequent figures, the bold line represents tradeable capacity based on profiles of the traded goods sector obtained from input-output data for 1986/87 and 1990/91. We call this series a “variable profile” estimate. A distinguishing feature of this estimate is its similarity to the “rule of thumb” estimate presented in Figure 1. Whilst the investment share is less than that found using the rule of thumb approach, movements in the series accord closely.^[22] The results suggest that following the historic currency depreciation of the mid 1980s there was an increase in the share of investment in the traded goods sector. This share subsequently fell as a consequence of the oft-cited speculative boom in non-tradeables in the late 1980s.^[23] Recently, however, the share of total investment in the traded goods sector has increased significantly, rising from 31 per cent in 1988/89 to 37 per cent in 1992/93.

One question that arises is the extent to which the recent increase in the share of investment in the traded goods sector represents the entry of new industries to the sector or existing industries in the sector investing more. In Figure 3, and in subsequent figures, the broken line represents the share of investment in tradeables based only on the profile of the traded goods sector obtained from the 1986/87 input-output tables: it is a “fixed profile” estimate. The gap between it and the bold line reflects a change in the industries that comprise the traded goods sector. For observations since 1986/87, if the bold line lies above the broken line, the gap indicates the effect of investment decisions of net entrants to the traded goods sector.^[24] Conversely, if the bold line lies below the broken line, the gap reflects the investment decisions of those industries making a net exit from the traded goods sector. As shown in Figure 3, there has been a small net exit of industries from the traded goods sector. In consequence, the bulk of the recent increase in tradeable capacity stems from existing industries in the traded goods sector increasing their share of total investment spending.

Another question is the extent to which trends in investment in the traded goods sector as a whole mask changes in the capacity to export or compete with imports. In particular, how different is the pattern of entry to (or exit from) those subsectors of the economy that produce exports or import competing goods? As shown in Figure 4, the share of total investment allocated to export oriented industries has increased, with a significant contribution made by net entrants to the subsector. This result accords with the increased export orientation of the economy. On the other hand, the share of total investment allocated to import competing industries has gradually fallen, reflecting a substantial net exit of investors from the subsector. Thus priors about a sectoral switch in investment that correspond to a switch in the focus of production are largely satisfied. This result is opposite to that derived from the standard propensity approach where it was shown that there had been growth in Australia's capacity to replace imports.

Clearly, the recent increase in tradeable capacity has been driven by an increase in the share of total investment in export oriented industries, with net entry of industries to the exportable subsector playing an important role in the growth of exportable capacity. In fact, the role of net entrants to the exportable subsector may be understated in the present framework. In this framework, only an industry that becomes export oriented can be treated as an entrant to the exportable sector.^[25] Consequently, the investment decisions of individual firms – the “emerging exporters” that have entered export markets since the mid 1980s – will not be captured in the gap unless the increase in their exports has caused an entire industry to be classified as exportable.

The propensity approach adopted by BIE (1989) and Kent and Scott (1991) was, however, used to examine the tradeable capacity of the manufacturing division only. Thus a further comparison of the two approaches can be made by applying the methodology outlined in Section 3.1 to manufacturing data.^[26] As shown in Figure 5, when using the preferred methodology, the switch in investment towards industries that are export oriented, and away from those that compete with imports, is now magnified.^[27] So too is the role played by the net entry of export oriented industries and the net exit of import competing industries.^[28] Certainly, the increased share of manufacturing investment in export oriented industries is consistent with the accelerated growth of Australia's manufactured exports, also evident since 1986/87.^[29]

Similarly, the fall in the share of investment in import competing industries is consistent with the claim that the domestic supply of import competing goods has become constrained.^[30]

4.2 Sectoral Levels of Investment

The above discussion of tradeable investment has been couched in terms of the share of total investment allocated to the traded goods sector. However, the level of investment is prone to substantial swings. In particular, during the recent recession, there has been a protracted fall in the level of real private investment in the economy. Of interest is the extent to which the increased share of investment allocated to the traded goods sector, and its exportable subsector, represents an absolute increase in investment.

The following figures give some indication of the disaggregated level of real investment.^[31] Figure 6 shows the level of real investment in the traded and non-traded goods sectors. An interesting feature of the figure is that investment in the non-traded goods sector has been more volatile than that in the traded goods sector, at least since the mid 1980s. While the level of investment in the traded goods sector increased steadily up until 1989/90, investment in the non-traded goods sector surged towards the end of the decade. Correspondingly, as the economy went into recession, the absolute level of investment in the traded goods sector fell only marginally while that in the non-traded goods sector fell sharply.

Figures 7 and 8 show the level of real investment in the subsectors. The level of investment in export oriented industries began to increase in 1986/87 and, during the recent recession, has virtually “held ground”. The level of investment in import competing industries, on the other hand, has fallen significantly. In fact, the resilience of investment in export oriented industries suggests that capital shortages are less likely to be an issue for the expansion of Australia's export oriented industries than may be the case for other sectors of the economy.^[32]

Footnotes

The investment share is less because classifying all output in the mining and manufacturing divisions as traded overstates the size of the sector relative to estimates presented in Dwyer (1992). [22]

This was fuelled by the growth of investment by real estate operators and developers. However, as noted by Kent and Scott (1991), a significant part of this growth may have represented a trend away from ownership of buildings and structures by end users, to renting such premises. Part of the growth in investment by real estate operators and developers was replacing investment formerly undertaken by other industries. [23]

It is indicative only: some information is lost in the process of interpolation (see footnote 19). [24]

Or, an industry that engages in intra-industry trade and increases exports as a share of its total production of traded goods. [25]

Where manufacturing is defined as in the national accounts. [26]

With the exception of 1992/93 where results are driven by a fall in investment by the non-ferrous metals industry to levels that were similar to those in 1990/91. [27]

This reflects, in part, the movement of basic iron and steel from the import competing subsector to the exportable subsector. However, even when basic iron and steel are removed from the data set, the switch towards export orientation of manufacturing investment remains prominent, as does the role played by entry of new industries. [28]

See McKinsey & Co. (1993), Bullock et al. (1993) and Menzies and Heenan (1993). [29]

Dwyer and Kent (1993) show that the dismantling of protection has corresponded with a reduction in the domestic supply of import competing goods. It is argued that this supply side constraint has been a key explanator of recent trends in import penetration. [30]

In those years where interpolation was used to determine exportable and importable shares of sectoral GDP, the level of investment will not be exactly equal to that reported in the Australian national accounts. [31]

Fahrer and Simon (1994) have argued that insufficient capital is installed in some industries to accommodate sustained growth in output and employment. They note that exceptions include the mining and manufacturing divisions; industries that comprise the bulk of the traded goods sector. The relative strength of investment in export oriented industries is consistent with their findings. [32]