By international and historical standards, Australia does not appear to be under-capitalised. Nev... more By international and historical standards, Australia does not appear to be under-capitalised. Nevertheless, the past decade has seen a clear reversal of the steady upward trend in capital intensity; this reversal was most marked after the short-lived increase in capital spending associated with improved prospects in Australia's resource-intensive industries in the early 1980s. Since then, there has been a sharp decline in investment relative to GDP, as reductions in real labour costs relative to capital costs encouraged the substitution of labour for capital. The existence of excess capacity in the early 1980s meant that substitution of labour for investment in new capital was possible without a major slowdown in growth of economic activity or employment. The prospects for continued economic growth depend, in part, on the resumption of investment spending to complement the growth of labour. It will be important for investment to occur in those industries where recent gains in c...
The cost of capital is the minimum rate of return that an investment project must earn in order t... more The cost of capital is the minimum rate of return that an investment project must earn in order to cover its funding costs and any tax liabilities. A wide range of outcomes can result from often arbitrary assumptions used in constructing measures of the cost of funds. Any conclusions drawn about intertemporal trends or international comparisons of the cost of capital should be treated with care. For managers, it serves as a reminder that the use of simple invariant rules-of-thumb for investment decisions may be inappropriate. In particular, changes of tax regime and inflation should be taken into account in setting 'hurdle rates' for investment proposals.
By international and historical standards, Australia does not appear to be under-capitalised. Nev... more By international and historical standards, Australia does not appear to be under-capitalised. Nevertheless, the past decade has seen a clear reversal of the steady upward trend in capital intensity; this reversal was most marked after the short-lived increase in capital spending associated with improved prospects in Australia's resource-intensive industries in the early 1980s. Since then, there has been a sharp decline in investment relative to GDP, as reductions in real labour costs relative to capital costs encouraged the substitution of labour for capital. The existence of excess capacity in the early 1980s meant that substitution of labour for investment in new capital was possible without a major slowdown in growth of economic activity or employment. The prospects for continued economic growth depend, in part, on the resumption of investment spending to complement the growth of labour. It will be important for investment to occur in those industries where recent gains in c...
The cost of capital is the minimum rate of return that an investment project must earn in order t... more The cost of capital is the minimum rate of return that an investment project must earn in order to cover its funding costs and any tax liabilities. A wide range of outcomes can result from often arbitrary assumptions used in constructing measures of the cost of funds. Any conclusions drawn about intertemporal trends or international comparisons of the cost of capital should be treated with care. For managers, it serves as a reminder that the use of simple invariant rules-of-thumb for investment decisions may be inappropriate. In particular, changes of tax regime and inflation should be taken into account in setting 'hurdle rates' for investment proposals.
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