Address to the In The Zone: “Crisis Opportunity and the New World Order” Conference
Monday, 09 November 2009
Plenary Session: “Foreign Investment and Sovereignty: a domestic perspective”
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Australia has long been a beneficiary of foreign investment, in fact throughout our history Australia has welcomed foreign investment from the UK, the United States, Japan and elsewhere.
A Senate Report into Foreign Investment in Australia tabled mid year concluded that it was in Australia’s interests to welcome foreign investment as it generates a range of potential benefits including productivity and competitiveness through the provision of new technology, specialist knowledge, marketing expertise, access to global supply chains, access to capital, and domestically it can result in increased tax receipts and higher incomes. With a relatively small population Australia has been able to attract foreign investors who have supplied the necessary capital not available through domestic savings.For the purposes of today’s discussion I will concentrate on foreign direct investment (FDI) defined by the Australian Bureau of Statistics as “investment undertaken by an entity resident in one economy in an enterprise resident in another economy with the objectives of obtaining or sustaining a lasting interest in the enterprise and exercising a significant degree of influence in its management.”
Consider this. The latest figures available from the Australian Bureau of Statistics on FDI are as at 31 December 2008. The top 6 countries for FDI were: United Kingdom ($427.1 billion or 25%), United States of America (24%) and Japan (5%). So the top 3 accounted for almost 55%, then Hong Kong, Singapore and Switzerland around 2 to 3%. And below Malaysia, Belgium, the British Virgin Islands (but I won’t go into that!) came China at number 15 at 0.5%.
During the 2008 calendar year, Australia had a net increase of FDI by $149 billion down on the 2007 level of $160 billion.
The source of the 2008 inflows were the United States (28%), United Kingdom (17%), Japan (14%), Germany (10%), Hong Kong (8%) and Switzerland (6%).
What will be apparent is that up until 2008 there was relatively little Chinese investment in Australia (although there had been investment in the mining sector from the 1980s) and that these latest figures do not reflect the substantial increase in the levels of Chinese investment throughout the first 10 months of 2009.
China is emerging as a dominant player in global investment, with its massive foreign currency holdings and its foreign reserves estimated at more that $2,000 billion or over $2 trillion and Australia’s mining and resource sector has, of late, been a significant recipient of Chinese outbound investment.
Somewhat predictably there has been a flurry of interest in the intensification of Chinese investment and a heightened public concern in foreign investment.
At its most basic, there is an underlying concern that foreigners are buying up all our assets, we’re selling off the farm.
Indeed a 2008 Lowy Institute Poll: Australia and the World conducted in July 2008 found that 90% polled thought the Australian Government had a responsibility to ensure major Australian companies are kept in majority Australian control.
But this is nothing new.
It has happened with each new wave of foreign investment.
In a submission to that recent Senate Inquiry, Rio Tinto put the current public reaction to Chinese investment in an historical perspective, first identifying the investment from the UK and the US as raising concerns whether Australia was losing control of its destiny to companies overseas, and then in the 1980s investment by Japanese companies in mining, manufacturing, tourism and the like receiving close scrutiny and considerable public opposition.
These debates are not unique to Australia.
In the US, experts are asking whether the US is ready for FDI from China? Are there lessons from history?
According to an analysis by University of Colombia Professor Curtis Milhaupt, investment from Japan into the United States increased from less than $1 billion per year in late 1970s and early 1980s to almost $20 billion per year in the early 1990s.
Japan's share of total foreign investment in the US increased from just over 6% to more than 20% during that time.
This caused considerable controversy but, according to Prof Milhaupt, Japanese investors learned important lessons that can serve as an example to the increasing interest from China for FDI into the United States and elsewhere.
He said Japanese investors took great pains to be good corporate citizens and are now established and welcome investors in the US, with that investment in companies employing many thousands of people.
Likewise in Australia, Japan remains a longstanding and trusted trade and investment partner.
Prof Milhaupt concluded that Chinese investment will inevitably be met with scepticism and hostility from some quarters, however he believes the experience with Japanese investment shows that these concerns are likely to ease over time, despite the clear differences in terms of State Owned Enterprises driving the investment from China.
It is important to keep the situation in clear perspective.
Investment from China is likely to increase in coming years, but in terms of our total stock of FDI, it remains at relatively low levels and there is likely to be another wave of significant investment from India in coming years.
It is important that we carefully manage Australia's international relationships and its international reputation, when dealing with foreign direct investment.
I had the privilege of meeting with senior government figures last week in Japan, China and South Korea – our three most important trading partners in East Asia.
All were well aware of the debate surrounding the Rio-Chinalco deal, and all made their views known.
With reference to the past six months labelled as “difficult”, Chinese leaders were at pains to assure me that investment from their SOEs should not be viewed as a threat, and that they were seeking to partner with Australian companies, many of whom were major suppliers of resources.
While Australia must always act in its national interest with regard to foreign investment, and we can safely assume China will behave similarly in its national interest, I would argue that the Chinese Government is more concerned about resource security than any attempt at international market manipulation.
And it was pointed out to me that China’s SOEs are changing in character. As part of China’s ‘going out’ strategy for Chinese enterprise, China is engaged in deeping its economic reforms, reforming monopolistic sectors, corporatising entities and listing some on the Chinese and international stock markets.
But it was also pointed out that during its period of rapid economic development since 1978, China was the recipient of large inflows of foreign direct investment.
Funds flowed into China from private investors, private companies, public companies and investment vehicles which would have included funds held by various governments around the world.
With China developing, and consuming ever increasing amounts of resources from Australia's mining sector, there was enthusiasm for this growth model.
However, as China's foreign reserves grew, it came with the spectre of investment flows outward from China. If we welcome individual and corporate investment in China, should we not ensure that we welcome Chinese investment in Australia, as a matter of fairness? At the very least, we must ensure that perceptions of unfairness or discrimination are not allowed to grow in the minds of potential Chinese investors.
While I realise this does not address some of the complexities involving foreign direct investment and SOEs, we should also seek to understand the Chinese view.
Chinese investment has highlighted our concerns about SOEs. The fundamental issue is control. Who controls the SOE, and how will the SOE behave if it achieves a controlling stake in an Australian company?
One of the arguments during the debate about the proposed Chinalco investment in Rio Tinto was that it could simply transfer that shareholding to a Chinese steel company at some stage and result in vertical integration, not in Australia's national interest.
While Chinalco refutes this suggestion, and it could be blocked by the Australian Government, it reveals the level of concern about investments from SOEs.
However, would there be the same level of concern about an investment from, let us say, a SOE from the United States? For example, since the global financial crisis decimated the US car manufacturing sector, the US Government as part of its bailouts took a major shareholding in General Motors.
As a China specialist G.E Anderson from UCLA wrote in his ChinaBizGov blog recently (we quote blogs now?) if Ford Motor Co in the US wanted to buy an Australian parts company, this would be deemed ‘private’ investment. But if GM wanted to buy the same parts company this would be considered ‘public’ investment since the US Government is the majority shareholder.
Are we concerned that the US Government may use that shareholding to pursue political objectives, or to engage in market manipulation?
I am not seeking to dismiss concerns about SOEs or other forms of foreign direct investment, but I make the very important point that whatever foreign investment regime our national government chooses to impose, it must be applied consistently and without discrimination.
It must also be seen to be non-discriminatory, if we are to ensure that it does not unnecessarily offend other countries, including some of our most important economic and strategic partners.
In Australia, there has been a bipartisan approach to most issues involving foreign investment. The political environment in Australia ensures that Oppositions scrutinise the decisions of Government, and all Oppositions reserve the right to question any decision of Government any time, anywhere, however that has rarely been an issue in foreign investment over the years.
It has been official Government policy for decades to welcome foreign investment, although we apply a number of tests to ensure that the investment is in Australia's national interest. There is nothing controversial in that approach, and it is a given that all governments will act in their national interest.
In Australia, the Foreign Investment Review Board (FIRB) makes recommendations to the Treasurer, who has discretion regarding final approval of any proposed investment.
This has advantages and disadvantages.
The strength of the process is that Government can respond to the rapidly changing investment environment, and the increasing complexity of investment products and vehicles. It would be difficult to update legislation quickly enough to enable it to respond to the dynamic marketplace of global finance and investment flows.
The major disadvantage is that it inevitably has a political dimension, and that often leads to perceptions of bias, particularly when the proposal has been subject to controversial public debate. And as has been argued, why should a politician determine inward investment flows rather than the markets?
As the Senate Inquiry noted: “At a time of heightened public interest in foreign investment, it is critical that the Australian regulatory system provides certainty, predictability, transparency and confidence. It is important that the Australian public, and potential foreign investors, have confidence in Australia's system for administering foreign investment applications. ”
It went on to say: “One of the specified roles of the Foreign Investment Review Board (FIRB) is to 'foster an awareness and understanding, both in Australia and abroad, of the policy and the FATA' (Foreign Acquisitions and Takeovers Act 1975). The committee believes that public debate about foreign investment should be facilitated by the availability of information and therefore in Chapter 2 recommends that FIRB do more to inform the community of how Australia's foreign investment regime operates and how Australia benefits from foreign investment.”
The inquiry came up with three recommendations summarised as:
First, that FIRB develop a more effective communication strategy to improve public understanding of the risks and benefits of foreign investment to Australia. Secondly, that the Minister require FIRB to be more assiduous in producing a timely annual report and thirdly, that the government look at tightening Foreign Acquisitions and Takeovers Act 1975 (FATA) legislation to deal with complex acquisitions where takeovers of smaller strategic assets may be masked by an application which, in total, does not represent more than 15 per cent, and therefore does not trigger review.
The Report makes it clear that Australia relies on foreign direct investment because of the magnitude of investment requires to develop the nation's large resource base, and we have a relatively shallow domestic capital market that is unable to support such large scale development.
A recent article by researchers at the Clingendael Institute in The Hague, and published on the East Asia Forum website, discussed the announcement in July by Premier Wen Jiabao that China's foreign exchange reserves would be used to support international expansion and acquisitions by Chinese companies.
The researchers concluded that China's ‘going out’ strategy will benefit nations in receipt of this investment, in terms of increased employment, taxation revenues and has the potential to support increased two-way trade and investment.
They also pointed out that Chinese investment in Western companies can also encourage Chinese companies to adopt higher standards of governance and management.
However, the researchers argued that while foreign investment generally brings great benefits, it is important to review the investment on a case-by-case basis to ensure it is in the national interest of the recipient nation.
Interestingly, they point to Australia's system of applying a national interest test as a potential template for use by European nations, where there is disquiet about increasing investment from China, given that China's foreign reserves are estimated at more than $2 trillion.
I am aware of criticisms that our national interest test is vague but that in itself should not deter investors. While our national interest test has adequately handled our foreign investment issues to date, we should be wary of unnecessary regulation of capital flows which would only serve to divert it to other markets.
It is also important that we not lose sight of the fact that FDI is much more than simply flows of capital around the globe.
FDI also often facilitates technology transfer.
I am aware that a major element of the Chinalco proposal was for China's mining sector to improve its performance by allowing greater access to Rio's project management expertise.
Similarly, Australia has benefited in terms of our motor vehicle manufacturing sector, the aviation and telecommunications sectors, among many others.
Let me give another example – into the future. Australia is also facing a looming challenge in terms of meeting its targets for emissions reductions. As we are largely dependent upon coal for our energy needs, Australia will be at a greater disadvantage than many comparable economies as we seek to transition to a low carbon-emissions economy.
Currently, the major focus has been on transitioning to clean coal – a technology as yet unproven anywhere in the world.
For Australia to significantly reduce its emissions, we will have to debate the alternatives to coal for our energy production, including natural gas and renewables. But this will inevitably mean a debate about nuclear power – the only low emission technology capable of supplying the base-load power required by developed cities and industries.
It is said that 19 of the G20 economies have included nuclear power as a core component of their future energy needs – Australia being the exception. While Australia has the necessary expertise to mine uranium (and we have the second largest reserves in the world) Australia lacks the expertise to develop a nuclear power sector, should we eventually choose that path.
We would have to rely on foreign investment for the construction and operation any nuclear power facility, and the training of staff to operate it.
In concluding, Australia has a robust system of managing FDI which has served the nation well, and I would argue against any significant changes to the current system.
However, in terms of managing our international relationships, the recommendations of the Senate Committee on greater clarity and understanding of our system, both domestically and internationally, are eminently sensible.
We should not underestimate the potential for cultural misunderstandings to occur. From my discussions in Beijing last week, there is a very strong desire to more clearly understand our motives and concerns when rejecting any proposed investment.
There is also a strong desire on behalf of the Chinese for the Australian government to understand the nature of their investments and their motivations in seeking to make these investments.
I am confident that if we work closely with our friends in China, we can maintain a productive dialogue and build greater levels of mutual understanding and mutual respect.
