Chinese ODI and the Need to Reform Australia’s Foreign Investment Regime

Peter Drysdale, Shiro Armstrong, Neil Thomas
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Foreign direct investment (FDI) plays an important role in the Australian economy through the provision of capital additional to that which can be mobilised domestically, new know-how and technology, and greater linkages to international markets and value chains. Its benefits derive from the increased competition for, and thus the increased value of, assets in Australia, the increased increment of incomes to Australian labour and other inputs used in additional production, increased national product, and increased taxes and other charges that accrue to governments at all levels. By creating a global market for Australian assets, FDI provides Australians with a stronger incentive to invest and grow their own assets.

Australia has long had a strong policy consensus around the importance of continuing to attract high levels of foreign investment. This is because Australia is a small economy with a low savings base, and foreign capital is essential to fund the investment necessary to support Australia’s advanced patterns of growth, income and consumption. FDI also has a number of potential advantages over foreign ‘portfolio’ investment (involving equity stakes below 10 per cent): it has the capacity to generate significant productivity dividends through the transfer of foreign management, technology and knowledge; it encourages local reinvestment of foreign earnings; it endows foreign investors with a long-term stake in the Australian economy; and it increases the competitiveness, efficiency and valuations of Australian enterprises.