Author: Editors, East Asia Forum
China has become one of the largest new sources of foreign investment globally. The ‘going out’ policy that allowed Chinese enterprises to invest abroad released a surge of Chinese investment, initially from the state-owned-enterprise (SOE) sector, that flooded into the global resource industry around the world at the height of the resources boom. Private investment from China has now become more important and investments across the industrial spectrum, including agriculture, services and real estate are part of the mix. Some hosts have been more open than others to new business with China.
Like many countries, for Australia, direct foreign investment helps maintain high productivity, living standards and economic security. There are not enough domestic savings to develop infrastructure, natural resources, and openness to foreign investment helps maintain a globally competitive economy. Foreign investment brings ideas, technologies and linkages into foreign markets. Allowing capital to go where it is most productively invested brings the highest return — not only to its owners but to the societies that receive it.
Foreign investment brings foreign business into the backyard adding assets and lifting the economic game. For the investor, it requires setting up shop in a foreign country and operating in a culturally, legally and institutionally different environment. For hosts of foreign investment it means getting a higher price on assets like land, buildings, systems, access or resources. If foreign business fails to reap the higher return and falls over, it can’t take these assets away: it has to sell-off at a price that will pay.
Yet new and unfamiliar sources of investment commonly create unease among some parts of the community. Opposition to foreign investment does not, in most circumstances, make any sense. But it is widespread. It’s a product of many things: instinctive xenophobia and protection against foreign competition, on the one hand, concerns over national security on the other. No country would want to give foreign entities access to key defence and security assets. And control over critical infrastructure that can be compromised by either a national or foreign investor needs supervision by the state. But using national security as an excuse to raise barriers to foreign investment is sloppy policy logic, and creates an environment antipathetic to productive investment that would otherwise strengthen the national economy and national security, not weaken it.
Foreign investment is fickle. The perception of hostility towards it can shift sentiment and channel valuable capital elsewhere.
There is no global regime for the management of foreign investment. International trade rules are underpinned by the WTO that settles trade disputes between countries peacefully and acts to keep markets open. An attempt to create a Multilateral Agreement on Investment in the 1990s was killed off by opposition led by civil society NGOs. As a result countries have different regimes that regulate the entry of foreign investment or use bilateral investment treaties to facilitate and protect it.
Australia’s foreign investment regime, like those in a number of other countries, involves screening ‘at the border’ or prior to the investment taking place. That is done through the Foreign Investment Review Board (FIRB). But FIRB is only one aspect of the regime. It is the domestic regulatory regime that does all the work once the investment has been established.
The competition regulator ensures against anti-competitive behaviour, tax authorities keep an eye on whether taxes are being paid (and not dodged or transferred abroad) and all foreign and domestic firms have to follow environmental and labour laws. If there are gaps and, for example, it becomes clear that multinational companies are using clever accounting to avoid paying tax in Australia, the answer is to strengthen the tax agency’s capacity and reach. Restricting foreign investment is the wrong solution to the wrong problem.
Australia’s FIRB screening regime is a gatekeeper at the border which only lets in foreign investment that is said to be in ‘the national interest’. To date it has only rejected a handful of foreign investment applications and let in 99.9 per cent. Australia has had a very open regime and FIRB has served to reassure the public that incoming investment was being screened and is in the national interest. However, in times of surges of new investment like that from China, the regime comes under narrower, protectionist political pressure.
As Peter Drysdale and Neil Thomas argue in this week’s lead essay Australia’s ‘foreign investment review framework [now] bears re-examination in light of recent politically motivated changes to the regime as well as supra-cyclical sensitivities about Chinese investment.’
FIRB ‘was established in the 1970s to allay popular concerns about investment from the United States’, Drysdale and Thomas explain. Those concerns subsided over time, but were later replaced by anxieties about Japanese investment. Japanese investment is now welcomed across the community as it expands into retail, food and beverage and Australia’s logistics business. Now the concerns are about Chinese investment.
Chinese direct investment has grown from close to nothing a decade ago and is today one of Australia’s most important sources, with the fifth largest stock of foreign capital in Australia. It is an important source of new investment and will become even more so as China’s capital account opens and capital is freer to move abroad.
So should Australia be worried about increasing Chinese investment?
Australia was in fact the largest single destination for Chinese outbound direct investment globally between 2005 and 2012, driven by investment in iron ore mines and other natural resources. The United States attracts more Chinese investment now. With the commodities boom over, Australia will have to compete with other countries to attract Chinese investment in infrastructure, agriculture and other sectors.
China’s political system and its state-owned enterprises’ being large foreign investors complicate the reaction to its presence in Australia and other advanced market economies. But these countries, Australia included, have regulatory institutions that are robust and market frameworks that naturally extract the premium to asset values and incomes that foreign investors, state-owned or private, deliver. Genuine questions of national security associated with large scale investments by any investor, domestic or foreign, in critical infrastructure projects are best dealt with not by screening foreign investment at the border but by identifying the specific threat at a national level.
Australia’s foreign investment screening regime has already been changed through piecemeal reform and via trade agreements that lift the screening threshold for investment from some countries but not for others. And it has become more complicated with different rules for investment from different countries in different sectors.
As Drysdale and Thomas point out ‘[s]ome of Australia’s major competitors in international capital markets, such as the United Kingdom, do not have a foreign investment screening regime. They rely entirely on national regulatory and policing regimes to manage foreign and domestic investment alike’.
Australia’s screening regime has operated like the wickets on most train stations around the world — as a gateway that only opens once a ticket is inserted. Train station gates in Japan are open as the default position, thus ensuring that people move through rapidly — they close and ring alarm bells only if you put in the wrong ticket.
It’s time Australia’s investment regime moved from being a closed gateway that only opens once investments are screened, to being an open door that only closes if something is wrong.
Read EABER’s submission to the Inquiry by the Senate Economics References Committee on Australia’s Foreign Investment Review Framework here.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.