Why Australia must deepen its Asian investment relationships

Australia’s links to key Asian partners remain under-developed, which will impact the success of foreign investment in the Asian Century. (Shanghai) flickr/cuellar

Foreign investment has been a key issue in national policy debate. Surging levels of foreign investment have provided a fillip to the Australian economy during the global financial crisis, and have been instrumental in financing the resource boom.

However, it has also caused a number of political controversies, particularly over the impact of Chinese state-owned enterprise investments and the sensitive issue of foreign investment in agricultural land. Such has been the attention that no fewer than three Senate inquiries have been launched into foreign investment issues in recent years.

But a major finding of the First Murdoch Commission is that while Australia is relatively successful in attracting foreign investment overall, its investment ties with Asian partners remain relatively under-developed.

Commission of Inquiry

Launched in early 2013 by Murdoch University, the First Murdoch Commission is an independent commission of inquiry into Western Australia and Australia’s role and relationship with the Asian region. Its final report, entitled Western Australia and the evolving regional order: Challenges and opportunities was launched in Perth this week.

The First Murdoch Commission’s aim is to investigate how economic interdependence between Australia and Asia could bring mutual benefits to both parties during the coming “Asian Century”. Its report analyses a range of issues across the spectrum of Australia’s relations in the region, including the drivers of Asia’s rise, regional institution-building, trade and investment agreements, resource security, and engagement and diplomacy.

One of the key issues identified by the Commission was the role of foreign investment, examining the potential benefits it may offer the Australian economy, and its role in supporting the development of economic ties with Asian partners. The Commission found that Australia is arguably not getting foreign investment from the right sources or into the right sectors to fully benefit from the economic opportunities that Asia offers.

Australia’s open door approach

As a small open economy, Australia has relied upon foreign investment to build large-scale, capital-intensive industries. For most of its history, Australia has maintained an “open door” approach to foreign investors, and the Foreign Investment Review Board (FIRB) screens only a small minority of investments over certain size thresholds or in a handful of sensitive sectors. Practically all foreign investments are approved by the government, with only one business investment (the proposed takeover of the ASX by the Singapore Stock Exchange) rejected in the last decade.

As a result, Australia has performed very well in attracting foreign investment. Australia presently hosts some A$2.2 trillion of foreign investment stocks, and its attractiveness as a site has steadily grown in recent years, with annual inflows doubling from an average of A$71 billion per annum during 2001-05 to A$150 billion during 2006-2010.

Distribution of Australia’s inward FDI by source country. The First Murdoch Commission

However, the structure of Australia’s foreign investment patterns is arguably out of kilter with its broader economic relationships. At a country level, Australia’s investment ties with Asian partners remain poorly developed. Europe and the US are the major sources of foreign investment (accounting for 58% of current stocks), while Asian partners collectively account for 11%. This is despite the fact that 67% of Australian exports in 2012 were destined for Asian markets.

On a sectoral basis, the story is similar. One industry – banking and finance – accounts for just over half of foreign investment stocks, with mining accounting for a further 13%. In comparison, many other sectors underperform at attracting foreign investment, particularly manufacturing, agriculture and non-retail services. As these industries will be instrumental in diversifying Australia’s economies ties with Asia beyond resources in future years, this lack of foreign investment is a cause for concern.

The importance of foreign investment links

For a small country like Australia, foreign investment is important for promoting economic growth. Its main – and most discussed – contribution is for financing capital-intensive industries. Australian capital markets are relatively shallow, and companies in large-scale industries (such as mining, infrastructure and construction) often rely on overseas sources of capital to finance investment.

However, foreign investment can also offer several other benefits, which help integrate Australian businesses with partners in foreign countries. One is marketing channels, where foreign investors can help create new export opportunities by opening markets in their home countries to Australia. This is particularly evident in the Australian iron ore sector, where many recent Chinese investments have come with “offtake agreements” that guarantee future sales in China to junior companies developing new mines.

Sectors such as agriculture remain underweighted in terms of foreign investment. flickr/Geoff Penaluna

A second benefit is technology transfer. Globally, the majority of private R&D is undertaken by multinational corporations, who possess the necessary size, scale and technical capacity to develop new technologies. Hosting investment from these corporations allows an economy to access the technologies they hold, avoiding the need to pay onerous licensing fees. The clean energy industry is emerging as one area where Australia could especially benefit from foreign investment, given its sizeable solar, wind and geothermal endowments.

Third, foreign investment also helps promote integration in global value chains. These are industries in which products are not made in a single country, but stages of production are spread across multiple economies. Global value chains are common in the Asian region, and have become well developed in the textiles, electronics, consumer goods, food and automobile industries.

Foreign investment ties are important in connecting companies within global value chains. A key example is in the auto industry, where exports of the VF Commodore have taken off following a decision by General Motors to market the Australian-assembled vehicle as the Chevy SS in the US.

Recalibrating foreign investment ties

Given these benefits, it is clear that Australia can benefit from a recalibration of its foreign investment ties. Developing investment relationships in Asia would help more closely integrate the economy with increasingly important partners in the region, and create opportunities to diversify inward investment away from the financial and mining sectors. There are a number of strategies government could implement to this end.

First, Australia could better communicate its investment openness to partners in the region. While very few investment proposals are rejected by the FIRB, there remains a perception in the region – particularly in China – that Australia is restricting foreign investment. More could be done, both by the Commonwealth Government and statutory bodies such as Austrade, to correct such misperceptions abroad.

In certain sectors, there is deep public antipathy towards foreign investment. This is especially true in agriculture, where foreign investment is often opposed as leading to a loss of national control or being harmful to food security. However, recent research by the Rural Industries Research and Development Corporation reveals that foreign investment in Australian agriculture is relatively low, and has a net positive impact on food security. Efforts to increase public awareness of the benefits of foreign investment in agriculture – especially in terms of technology transfer and marketing channels – may help reduce such community concerns.

Finally, Australia might also explore intergovernmental mechanisms to promote investment ties in the region. Free trade agreement negotiations – including bilateral deals with Japan, China and Korea, as well as the regional Trans-Pacific Partnership – all presently have investment provisions on the agenda. If crafted well, these agreements may help promote regional interest in Australia as an investment location.

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