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Monday 10 Dec 2018 | 14:49 | SYDNEY
Monday 10 Dec 2018 | 14:49 | SYDNEY

Economic diplomacy: foreign cash at home & abroad

Cheltenham Festival 2013, England (Photo: Matt Cardy/Getty)

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COMMENTS

16 August 2018 14:00

US still rules

It might not fit with the increasingly nationalist public debate, but detailed new numbers on the size of foreign-owned businesses in Australia suggest they have not changed dramatically since the turn of the century.

This is the first time in 15 years the ABS has produced such comprehensive numbers on foreign business operations (in contrast to the annual foreign investment figures), and it cautions against making direct comparisons with the last similar effort in 2001 due to data and calculation differences.

Whether the government can marshal this positive data about economic openness to fend off rising public concern about foreign investment will be interesting to see.

Mining, wholesale trade, and manufacturing have the highest levels over foreign ownership, but only 0.1% of agriculture businesses are foreign-owned.

Notwithstanding the comparison difficulties, the data provides fodder for all sides of the debate about our most important economic partners. The US remains by far the largest player in numbers of businesses and investment value added (IVA), which is different to conventional foreign investment stock. But the number of US companies and their share of foreign IVA has declined by at least 25% over 15 years depending on the measure.

Britain comes second but is also in relative decline, while some other large European economies remain relatively strong.

China is growing but remains less significant in overall terms than is popularly perceived. While 2039 US businesses account for 32% of foreign IVA, 424 businesses from China and Hong Kong account for only 5% of foreign IVA.

The growth in the number and IVA size of foreign businesses from Japan, Singapore, and Canada particularly stands out.

The caution about specific comparisons with the 2001 data makes the overall figures more relevant to the broader political battle about the value of such foreign investment to the economy than to the important economic partners debate. In this country, while the number of majority foreign-owned businesses has risen from 7864 to 9946, this is actually a relative decline from 1% to 0.5% of the overall number of businesses in Australia. But those foreign businesses are still producing just over 20% of the total IVA, which is about the same proportion as in 2001 and underlines the value of foreign investment.

Directly comparable data for the past five years released with the latest survey suggests the number and IVA of foreign businesses has increased slightly in that time but the proportion of employees has grown much faster, from 7.6% of the workforce to 8.7%. Whether the government can marshal this quite positive data about economic openness to fend off the rising public concern about foreign investment that is showing up in its private polling will be interesting to see.
 

Rules-based infrastructure

Australian Prime Minister Malcolm Turnbull might be warming to China’s regional infrastructure ambitions but his foreign investment regulator is still trying to clarify how much of this will be in Australia.

Turnbull used his so-called “reset” speech on China at the University of New South Wales last week to say his government was looking forward to working with China on Belt and Road Initiative projects, and welcomed more Chinese investment in Australia.

But Foreign Investment Review board chairman David Irvine, a former China ambassador and intelligence official, was left to explain the terms of engagement for Australia after a flurry of new and somewhat opaque rules particularly focused on “critical infrastructure”. (See the Japanese confusion about Unsolicited Proposals in the infrastructure space here).

Irvine reiterated the fact that despite controversy over some power, telecommunications, and agriculture investment rejections, Australia’s case-by-case approach allows a liberal flow of inward capital. Indeed, he argued: 

The case-by-case approach can allow investment in transactions that might otherwise be blocked if we followed a more prescriptive approach.

But the new regime that has evolved over the past couple of years is still going to require some patient attention by potential foreign investors. Irvine emphasised there would still be limited information when projects are rejected for national security reasons; aggregated ownership by one investor is now a more important issue; conditional approval will be more common; and there will be requirements for diverse ownership of some assets.
 

Island banking

Westpac Chief Executive Brian Hartzer made a rare intervention into the foreign policy space in July with a call for corporate Australia to step up its investment in the Pacific or run the risk of someone else filling the void. This was very much in line with the sudden new focus on the South Pacific as a more contested strategic domain but for the inconvenient fact Westpac sold out of its operations in the Cook Islands, Samoa, and Tonga in 2015.

However, new research from the Reserve Bank of Australia suggests that island economies are doing quite well managing the inflow of money from their citizens abroad despite cutbacks by international banks, such as Westpac, in the region.

Foreign worker remittances constitute a bigger share of GDP in Pacific economies than many other low-income countries, but the contraction of correspondent banking services in the Pacific has been greater than other parts of the world. This is a challenge for Australia because the Pacific worker mobility program is one of the ways Australia can help bolster the fragile island economies within a constrained direct foreign aid budget.

The RBA research warns that the reduced footprint of foreign banks due to new regulations on money laundering and tax evasion could endanger the efforts by these countries to be better connected to global markets. For example, 720 accounts for South Pacific remittance service providers were closed by Australian banks in 2014–15.

But unlike so many other aspects of South Pacific economic development, remittances have still been growing in value and volume through this tightening up by global banks. Indeed, the study says remittance costs have come down as the remaining local providers have modernised under the regulatory pressure. 

The study’s recommendations for greater standardisation and technology improvements deserve attention in the context of an otherwise expensive competition over strategic infrastructure projects in the region.

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