Beyond the hubris - Why foreign investment matters

3 April 2013

Foreign investment brings many benefits – new jobs, more innovation and access to overseas markets. So, why do Australian Governments continue to act in a way that detracts from Australia’s ability to attract foreign capital?

Inward foreign direct investment (FDI) to Australia dropped by 26% last year,1 a tangible demonstration that foreign capital is mobile.  Australia needs to resist the temptation to assume that “we have the resources they will come.”

Surveys of Australian public opinion show that more Australians are opposed to foreign ownership than are opposed to the death penalty and the Iraq war.  Even “illegal immigration” is more popular.  Now more than ever we need our leaders to engage in a more constructive dialogue on foreign inbound investment.

In order to be successful in the global battle to attract international capital, we don’t need to drop all our standards or be totally subservient to the market but we must be clear about what we want and at what cost.  The lesson that needs to be learnt is that foreign investment is about more than simply reaping the benefits on terms we dictate.

While the Australian Government politely states it welcomes foreign investment in documents such as “Australia in the Asian Century”, the policies it implements sometimes suggest otherwise.  For example, the changes to the thin capitalisation rules currently being contemplated by the Australian Government have serious implications for Australia’s reputation as a destination for investment.  The proposal to reduce the borrowing to equity ratio from 3:1 to 1.5:1 is at best a reactive policy which will provide a mere $300 million to our budget bottom line.  Moreover, it has been done without any serious discussion about the cost to revenue or the cost benefit analyis of such a measure.

Globally, the period November 2012 to February 2013 was marked by a surge in new investment restrictions and regulations bringing the amount of such measures to new heights.2  For example, Canada announced new stricter criteria for the screening of FDI by SOEs and at the same time announced it will find the acquisition of control of oil-sands businesses by a foreign SOE only to be of a net benefit to Canada in exceptional circumstances (see Sow a character, reap a destiny).

Despite this trend, one country that clearly recognises the importance of attracting foreign investment is the UK.  It is one of a handful of developed nations that increased their inflows of FDI in 2012, recording a 22% boost.

Last year’s Heseltine Review of the UK economy (“No stone unturned in the pursuit of growth”), made 89 recommendations to improve wealth creation in the UK.

While the UK government adopted 83 of the 89 recommendations it emphatically rejected recommendation 73 that:

The Government should take a greater interest in foreign acquisitions from the perspective of the UK’s industrial strategy priorities...[and] should do far more to engage with potential foreign investors secure commitments to developing the UK research, skills and supply base and in exceptional case to discourage unwanted investors.

Lord Heseltine went further, proposing the UK Government should intervene in acquisitions where the matter raises an issue of national security. 

In formulating this recommendation, Lord Heseltine drew on the regimes of countries like Australia and the United States noting the review processes that entitle the governments of those countries to scrutinise and potentially prohibit foreign investment where it would be contrary to the national interest. 

While Lord Heseltine might not appreciate the increasingly competitive race to attract foreign investment, the UK Government does.  In unequivocal recognition of the importance of FDI to the UK economy, it rejected the recommendation, stating:

The Government’s position on inward investment is clear: the UK is open for business...The Government is committed to open markets and is equally committed to engaging with companies and investors to promote investment which benefits the UK economy.

The UK is currently the third largest destination in the world by share of inward FDI – its commitment outlined in its response to the Heseltine Review will in all likelihood protect this position.

Other countries seeking to buck protectionist trends also took action to boost their share of global FDI flows - liberalising foreign investment policies and promoting their attractions as an investment location.  China simplified the review procedures related to capital flows and currency exchange quotas and Algeria is offering new incentives to foreign companies wishing to invest in unconventional energy resources.

Australia is not the only nation with resources attractive to foreign investors.  FDI flows to Africa and South America continue to grow while Australia’s have waned.  The onus is on Australian leaders to bridge, not exacerbate, the divide between rhetoric and the economic reality and genuinely commit with tangible policies to support foreign investment. 

 [1] UNCTAD Global Investment Trends Monitor 23 January 2013

 [2] UNCTAD Investment Policy Monitor March 2013

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Lumsden

Partner. Sydney
+61 2 9210 6385


Lizzie Knight

Partner. Sydney
+61 2 9210 6437