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Foreign Investment in Australia

Commission research paper

This research paper was released on 23 June 2020. It looks at the trends, drivers and effects of foreign investment in Australia, and the Australian Government’s foreign investment policy. Foreign investment is beneficial for the Australian economy, but brings some risk which can be managed by government policy.

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  • Key points
  • Media release
  • Contents
  • Over the past two centuries, foreign funding has supported Australia’s economic development by permitting more capital investment than domestic savings would have otherwise allowed
    • Foreign investment brings ‘spillover’ impacts too, both positive (access to new technologies, better management practices, increased competition) and negative (potentially less competition, social and environmental costs).
    • Foreign investment also stirs strong community reservations, although Australians are generally supportive of globalisation and free trade.
  • To balance the economic benefits of foreign investment against the risks, and to maintain community confidence that foreign investment is in the national interest, Australia regulates foreign investment through a range of mechanisms.
    • Since 1974, foreign acquisitions with a value above certain thresholds are screened and require a decision of the Treasurer that they are not contrary to the ‘national interest’. Recent changes have lowered these thresholds to zero for sensitive national security businesses.
    • Australia has a broadly open policy towards foreign investment, but is more restrictive than many other advanced economies, by some measures
    • To the extent that foreign investment proposals are blocked or discouraged, this results in lower Australian household incomes — Commission modelling estimates that these economic costs would be material, though not large.
  • Foreign investment policy has become more prominent over recent years. Greater attention is being given to the difficulty of taxing multinationals and the national security risks associated with sensitive sectors or critical infrastructure assets — as, for the first time, one of our largest sources of investment is not a democracy or a military ally.
  • Policy change in response has been piecemeal. Monetary thresholds for screening vary by source country, sector and type of investor, while the use of approval conditions is increasing.
    • The role of the Foreign Investment Review Board has become more akin to a regulator than a gatekeeper, yet its powers and institutional arrangements have changed little.
  • Overall, the design and vesting of responsibility with the Treasurer for administering the ‘national interest’ test works well. It gives flexibility to quickly adapt to new concerns, weighing up not just the costs, but also the benefits from foreign investment. The ‘negative’ nature of the test (deciding whether proposals are contrary to the national interest) also limits the risk of rejecting projects that are in the national interest. These features should be retained.
  • Other aspects of the foreign investment policy framework could be improved.
    • The national interest test lacks clarity around how it is interpreted from case to case. Tighter policy guidance and excluding risks from the test that can be mitigated through national regulations (such as competition) would lower compliance costs and lift investor certainty.
    • Attaching conditions to foreign investment approvals provides only a limited means to mitigate risks. National laws and regulations, together with purpose-built and adequately-resourced regulators (such as the Australian Competition and Consumer Commission, or the Critical Infrastructure Centre), where available, should be preferred.
  • Publication of reasons for decisions to block proposals, greater certainty around timelines, and aligning applications fees with the actual cost of administering the screening regime would increase transparency, enhance predictability and lower the costs of the screening regime.

Background requests

Michelle Cross – Media, Publications and Web – 03 9653 2115 / media@pc.gov.au

Foreign investment crucial for Australia

Foreign investment has always been important for Australia’s economy, for jobs, and is crucial for Australia’s COVID-19 recovery, the Productivity Commission finds in a new research report.

Investment expands the Australian economy, leading to higher wages and more jobs, but the money for this investment must come from somewhere — foreign funding lets us make better and more investments than would be possible from Australian investors alone.

However, the benefits to the Australian economy must be carefully balanced against community concerns and Australia’s national interest. Australia regulates foreign investment, and although the system works well, it could be improved.

‘In the wake of the COVID-19 pandemic, foreign investment will be crucial to Australia’s recovery, for jobs, for incomes, but the risks in this vulnerable time need to be managed.’ Commissioner Jonathan Coppel said.

‘We want to encourage foreign investment in the national interest while at the same time avoiding the very few investments that are not.’ Mr Coppel said.

Managing these risks is important, but comes with costs. A stricter foreign investment screening regime can discourage investment from all sources, not just those against the national interest.

‘This balance can be achieved by tightly screening sensitive areas of investment, while having a fast lane for those with no risk to Australia’s interest.’ Mr Coppel said.

‘It’s therefore important to get the balance right to ensure Australians benefit as much as possible for our short-term recovery, and our long-term prosperity.’ Mr Coppel said.

The Foreign Investment in Australia research report can be found at: www.pc.gov.au/foreign-investment

Background requests

Michelle Cross – Media, Publications and Web – 03 9653 2115 / media@pc.gov.au

  • Cover, Copyright and publication details, Foreword, Contents, Acknowledgments and Abbreviations
  • Overview
    • Key points
    • About this project
    • Trends in foreign investment
    • Australia’s foreign investment policy
    • Contemporary concerns in foreign investment policy
    • Getting the balance right
  • Chapter 1 The trends and drivers of foreign investment
    • 1.1 What is foreign investment?
    • 1.2 The drivers of foreign investment
    • 1.3 What is Australia’s net investment position?
    • 1.4 Inward FDI — recent trends
    • 1.5 Outward FDI — recent trends
  • Chapter 2 Current policy settings
    • 2.1 Outline of Australia’s foreign investment framework
    • 2.2 Australia’s FDI policy restrictiveness
  • Chapter 3 The benefits and costs of foreign investment
    • 3.1 Foreign investment allows access to additional capital funding
    • 3.2 Direct investment can also lead to spillovers
    • 3.3 Foreign investment and national security risks
    • 3.4 Multinational tax avoidance
    • 3.5 Residential real estate and agriculture
  • Chapter 4 Getting the balance right
    • 4.1 Design of the national interest test
    • 4.2 Too many conditions are being imposed
    • 4.3 Improving certainty and transparency
    • 4.4 Summing up
  • Appendix A Modelling methodology
    • A.1 Scenarios modelled
    • A.2 Methodology
    • A.3 Sensitivity analyses
  • Appendix B Would the ultimate beneficial owner please stand up? A China–Australia case study
    • B.1 Alternative data on investment flows
  • Appendix C A history of policy changes
  • References

Printed copies

Printed copies of this report can be purchased from Canprint Communications.

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