How Australia’s openness to trade and investment is driving our prosperity: Part II

Part 1 of this blog analysed some of the trade-related aspects to Australia’s unprecedented 28-year run of uninterrupted economic growth. Our liberalised trade, our strategic links to Asia and our human capital have all played their part.

But Australia’s openness to investment has also proved crucial – and in Part II of this blog I look at where Australia’s foreign direct investment (FDI) comes from, and the impact it has on some of our most valuable export industries.

Australia’s inwards FDI continues to grow

Australia presently hosts around A$3.5 trillion of foreign investment stock.[1] Both FDI (which involves ownership and control of a business) and other investment (which involves portfolio investments, such as equities) have recorded strong growth in recent decades, up by an average of 8.5 per cent and 8.4 per cent each year, respectively, since 2001.

As a percentage of nominal GDP, Australia’s total value of foreign investment stock reached 185 per cent in December 2018, 50 per cent more than the ratio in 1991.

This impressive outcome clearly shows that Australia has become a more open and attractive economy to foreign investors. Increased FDI benefits Australia in three ways:

1. It brings new businesses into Australia with connections in different markets around the world

2. It helps develop fresh export opportunities and boost our overall export performance

3. It brings new technologies and services models into Australia, stimulating competition and innovation.

Globally, the eighth-largest recipient of FDI inflows in 2017

From 2011–17, Australia’s average annual FDI inflow was US$47 billion, compared with an annual average of US$28 billion over the previous seven years (2004–10). This represents a growth rate of close to 70 per cent over the two time periods.

The strong performance raised Australia’s share of global FDI inflows from an average 2.2 per cent during 2004–10 to 3 per cent during 2011–17. The higher ratio is a direct reflection of investors’ strong confidence in Australia’s economic outlook and business environment. This has ensured Australia maintains its ranking as a global top 10 destination for FDI (see table below).

Asia: feeding Australia’s appetitive for overseas investment

After an average annual increase of 7.6 per cent over the three-year period from 2015 to 2017, Australia’s inward FDI stock value grew by 9.5 per cent to A$968 billion in 2018. Australia’s inward FDI stock was worth the equivalent of half of Australia’s annual GDP in 2018, up from 37 per cent in 2011.

One very interesting trend is the growth in FDI that originates in Asia. While North America and Europe remain the dominant sources of FDI, there has been a solid increase in capital inflows from Asia, in particular from China and the ASEAN region (refer to the detailed analysis of our former blog).

Australia’s corporate friends

Foreign-owned businesses make a vital contribution to inward investment and economic growth. US-owned businesses predominate, according to figures from the Australian Bureau of Statistics (2014–15). EU-28-owned businesses also have a substantial presence in Australia, as do organisations from Japan. Many have developed longstanding investment relationships, built on a history of shared values and common approaches to global challenges.

Some Australian sectors are more reliant on foreign-owned enterprises than others, and this is an important part of Australia’s investment story. The share of ‘value add’ contributed by overseas companies in Australia’s mining industry is currently riding at 33 per cent, for example. In manufacturing, it is 30 per cent.

Foreign-owned enterprises are also powerful contributors in other sectors. For example, the proportion of value add in the 'Professional, Scientific and Technical Services' and 'Wholesale Trade' categories are 26 per cent and 43 per cent respectively.

So, when asking why Australia has enjoyed an unprecedented run of economic growth – unequalled in any major developing economy – examine our trade. With liberalised trading relationships and an openness to foreign investment, trade is contributing an ever greater share of Australia’s twenty-first century prosperity.

[1]  Latest data from Australian Bureau of Statistics Cat. No. 5352.0 - International Investment Position, Australia: Supplementary Statistics, 2018 (Released 8 May 2019)

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