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The Potential Benefits of Foreign Investment in Australia

Discuss about the Foreign Investment in Australia.

Foreign Investment can be defined as an investment of one company belonging to a nation on the assets and ownership of stakes in another company belonging to a different nation. In other words, it is an investment made on overseas businesses to expand the operations over the globe (Drabek and Mavroidis 2013). With increased globalisation, it has become common for large companies to invest on businesses situated in other countries to seek comparative advantages. On the other hand, foreign investment is also considered profitable for the recipient country (Garnett 2015). Hence, different economies compete with each other by providing better conditions that encourage foreign investment in the nation.

The paper has been developed to analyse the foreign investment made by overseas companies in the Australian market. The study starts with a basic introduction of foreign investment. Along with that, the study discusses the benefits and problems of foreign investment that are faced by the Australian Economy or any other economy in the world. Furthermore, the foreign Investment made in Australian market is discussed in details to know the current status of the economy. Additionally, the research discusses the problems related with foreign debts that are faced by the Australian economy in the previous and current years.

Several potential benefits of foreign investment have been identified for recipient country. The primary benefit of the foreign investment is the increase in the real GDP of the nation that increases the economic status of the country (Sornarajah 2014). It can be seen that Australia had its highest GDP in the year 2013 due to high level of foreign investment in that particular year. On the other hand, a downfall in the GDP can be seen in the recent years due to fall in the foreign investment because of decreasing opportunities for the foreign business in the Australian market. Furthermore, foreign investment also leads to technology development in the economy. The funding brought from other developed countries leads to development of technology in the current business scenario (PARRY 2013). Furthermore, foreign investment provides capital for the growth of business in the country. It can be seen that several local business of Australia has grown to expand on international level due to foreign direct and indirect investments. On the other hand, another primary benefit of foreign investment is the better management techniques that are implied to control and monitor international businesses. It can be seen that there are several MNCs that operates in the Australian market with best corporate model and governance that has changes the management overview in the country (Salter 2011). The domestic practices are converted into international strategies with introduction of foreign investment and growth of globalisation. The most beneficial impact of foreign investment is the reduction in the need for savings. The domestic entrepreneurs do not need to save more amount of money in terms of retained earnings to expand their businesses. There is an easy availability of foreign funds that increases the potential growth opportunities in the country.

The Potential Problems Arising From Foreign Investment

Developed economies such as Australia may find foreign investment a bit difficult in context to the existing economic performance. Understandably, foreign investment brings possible significant issues to an economy as discussed in this particular study paper. First of all, the cost of foreign investment can be recognised through the change in transfer pricing within an enterprise. Meanwhile, transfer price is a setting that controls the price of the products and services put up for sale between the legal entities within a firm (PARRY 2013). For instance, if a subsidiary business of an enterprise has sold any product or services to its parent firm, the cost paid to the subsidiary business has been identified as transfer pricing. In the case of foreign investment, the transfer pricing seems to be shifted creating issues for the management of the MNEs to deal with. Secondly, foreign investment develops monopoly business that is not significant for the health of an economy. Decisively, monopoly businesses minimise the profit allocation to the different market operating firms creating issues in the market. Thirdly, the cost of foreign investment has created an adverse impact on the domestic SMEs and MNEs as the liquidity of the host country has been utilised for the economic progress of the another country. Therefore, the national interest can be an issue arise from foreign investment. Moreover, foreign investment has somewhat restricted the sovereignty of the host economy. Due to foreign investment, the rights of the governing bodies have been diluted to some extent as the investment creates an interface with other international economies  (Nottage 2015).  Last but not the least; foreign investment has created significant foreign debt for the host country. The rise in external debt can be problematic for any developed economy as the net foreign debt can create a negative effect on the Real GDP of the country.

In the last five years, a high level of foreign investment can be seen in the Australian market that increases the GDP of the nation to its top in the year 2013 at around $1550 billion. It can be seen from the statistical reports that the United States and the United Kingdom are the prime players in the Australian industry with 28.40 percent and 16.50 percent of foreign investment in the Australian market respectively ("Which Countries Invest In Australia?" 2016). A table has been presented below that shows the contribution of different countries through their foreign investment in the Australian market for further consideration.

Foreign investment in Australia by country

Rank

Country

AU$ billion

% of total

1

United States

 $  860.30

28.40%

2

United Kingdom

 $  499.90

16.50%

3

Belgium

 $  238.50

7.90%

4

Japan

 $  199.60

6.60%

5

Singapore

 $    98.60

3.30%

6

Hong Kong (SAR of China)

 $    85.40

2.80%

7

China

 $    74.90

2.50%

8

Netherlands

 $    63.00

2.10%

9

Luxembourg

 $    58.30

1.90%

10

Switzerland

 $    50.20

1.70%

11

Germany

 $    41.20

1.40%

12

New Zealand

 $    39.70

1.30%

13

Canada

 $    38.80

1.30%

14

Bermuda

 $    25.90

0.90%

15

Republic of Korea

 $    23.30

0.80%

16

Virgin Islands, British

 $    22.90

0.80%

17

France

 $    22.10

0.70%

18

Malaysia

 $    20.50

0.70%

19

Ireland

 $    18.40

0.60%

20

Cayman Islands

 $    13.80

0.50%

Source: ("Which Countries Invest In Australia?" 2016)

The Australian domestic production has gradually increased after the global financial crisis due to increase in the foreign investment that has led to an increased competition in the current market scenario. It has made the Australian market saturated that has resulted in the fall of foreign investment in the country in the year 2015, which has also led to a fall in the GDP to $1339 billion (Garnett 2016). The current valuation of foreign investment in Australia stood at $3 trillion in the year 2015. On the other hand, the investment of India and China in Australia has increase to $12 billion and $75 billion in the year 2015. Furthermore, it is expected that the foreign investment will increase in the upcoming years due to the economic reforms made by the Australian government to attract foreign investors (Abhijnan 2015). Currently, the Australian government is working on the improvement of Australian education, tourism and sports industry to attract more foreign investment. A graphical presented of the above table is presented below for further understanding.

The Contribution of Different Countries to Foreign Investment in Australia

 Foreign investment in Australia by country

Figure: Foreign investment in Australia by country

Source: ("Which Countries Invest In Australia?" 2016)

The current economic environment of Australia has focused on the worries about foreign debt situation. The fundamentals of international trade promote foreign investment to increase the business standards of a developed economy around the world. Also, from economic perspective, economic activities of an economy needs significant borrowing to improve the normal trading standards. But, the monetary policy of Australia does not allow sufficient savings level to invest in the foreign economies (Bruns 2013). As a result of the scenario, the foreign investments of Australia are continuously increasing the pressure on the GDP. On the other hand, there is another vital issue attached to external debt situation. Currently, the debt repayments as a share of Gross Domestic Product made by the Australian government is significantly low in compared to the normal standards. Therefore, the foreign debt is kept mounting at a considerable rate (Thorpe, Leita and o 2014). If the trend of the foreign debt scenario has been followed since 1972, the net external debt is seemed to be crept up till 2015. Currently, Australia’s net foreign debt was recorded to be 60 percent of the GDP in 2015.

Net foreign debt as a percentage of GDP, Australia

Figure: Net foreign debt as a percentage of GDP, Australia

Source: (Garnett 2015)

Convincingly, the adverse effect of net foreign debts has other issues associated to be dealt with by the host country. As the borrowing of the economy has increased against lending, loan default situation can be increased. Invariably, loan defaults situation can decline the credit rating of the economy forcing unmanageable economic uncertainties (Kirchner 2012).  In this way, further borrowing can be restricted due to credit rating decline. On the other hand, if the non-productive expenditure of government can contribute to the net foreign debt, fresh issues may arise.

Conclusion

Under the existing economy condition of Australia, large foreign companies are seemed to be mostly benefitted from the foreign direct investments. Hence, the outward FDI is technically hurting the host country to a significant impact. On a bigger perspective, for outstanding economic benefits, FDI has been identified as one of the important ways to improve the international trade facilities of a developed economy. As discussed in the study before, the United States and the United Kingdom have been recognised as the major foreign investing economies selected by Australia. On the other hand, based on the data sources of the Australian Bureau of Statistics (ABS), it can be stated that the increasing FDI has added the pressure of net foreign debt to the economy. Currently, Australia’s net foreign debt was recorded to be 60 percent of the GDP in 2015. Meanwhile, the half of the net external debt has been contributed to federal, territory, state level government debt. However, Australia needs to improve the inward flow of FDI for further investment in the domestic industries. Additionally, FDI improves the standards of living of the country. Currently, the debt figure is manageable though the trend is increasing with time adding further pressure to GDP.

Abhijnan, M. 2015. "Economic Rationale Behind The Policy Regarding Foreign Investment In The Australia". SSRN Electronic Journal. doi:10.2139/ssrn.2311391.

Bruns, Gordon. 2013. "Restricting Foreign Investment In Australia". The Round Table 63 (251): 391-401. doi:10.1080/00358537308453094.

"Which Countries Invest In Australia?". 2016. Department Of Foreign Affairs And Trade. https://dfat.gov.au/trade/topics/investment/Pages/which-countries-invest-in-australia.aspx.

Drabek, Zdenek and Petros C Mavroidis. 2013. Regulation Of Foreign Investment. Singapore: World Scientific Publishing Company.

Garnett, Anne. 2015. Balance Of Payments And International Investment Position. Australia: Time Series Workbook.

Garnett, Anne. 2016. "'Data - Indicators', Exports Of Goods And Services (% Of GDP); Imports Of Goods And Services (% Of GDP)". World Bank. https://data.worldbank.org.

Kirchner, Stephen. 2012. "Foreign Direct Investment In Australia Following The Australia-US Free Trade Agreement". Australian Economic Review 45 (4): 410-421. doi:10.1111/j.1467-8462.2012.00686.x.

Nottage, Luke R. 2015. "The Evolution Of Foreign Investment Regulation, Treaties And Investor-State Arbitration In Australia". SSRN Electronic Journal. doi:10.2139/ssrn.2685941.

PARRY, THOMAS G. 2013. "Arguments For and Against Foreign Investment in Australia". Economic Papers: A Journal Of Applied Economics And Policy 2 (4): 28-40. doi:10.1111/j.1759-3441.1983.tb00244.x.

Salter, Arthur. 2011. Foreign Investment. Princeton, N.J.: International Finance Section, Dept. of Economics and Social Institutions, Princeton University.

Sornarajah, M. 2014. The International Law On Foreign Investment. Cambridge: Cambridge University Press.

Thorpe, Michael, Nuno Carlos Leita, and N.A. o. 2014. "Economic Growth In Australia: Globalisation, Trade And Foreign Direct Investment". Global Business And Economics Review 16 (1): 75. doi:10.1504/gber.2014.058079.

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