Thursday 02 Apr 2020 | 23:48 | SYDNEY
Thursday 02 Apr 2020 | 23:48 | SYDNEY

Different worries about foreign investment


Mark Thirlwell

22 December 2008 13:06

Earlier this month, IPA hosted a conference in Melbourne on foreign investment in Australia. My colleague Andrew Shearer and I submitted a paper looking at the extent to which the current Australian investment regime operated in the national interest, in the context of the recent surge in Chinese investment into our resource sector. 

One thing we talk about in our paper is how the international context for the Chinese investment debate has undergone a marked change since the deepening of the global financial crisis. So, back at the start of this year, investment protectionism was on the rise around the globe. This reflected a combination of factors:

  • A boom in foreign direct investment (FDI) that extended to flows from emerging markets to the developed world, a trend that partially reversed the ’traditional’ order of things in a way that some rich countries found uncomfortable.
  • A large share of this new emerging market outward investment was funnelled through state-owned enterprises (SOEs), state-owned banks (SOBs) and sovereign wealth funds (SWFs). This posed a tricky dilemma for developed world policymakers. The latter had spent the past couple of decades convincing their voters that the private sector, not government, should take the lead in managing most businesses. They also stressed the benefits that come from openness to foreign investment. When confronted by government-controlled foreign investment, one of these propositions had to give, but which one?
  • A dramatic surge in commodity prices fueled resource insecurity in consuming countries and resource nationalism in producing countries, simultaneously making the resource sector both an increasingly attractive and an increasingly sensitive target for foreign investment.
  • A growing scepticism on the part of rich country voters regarding the benefits of globalisation in general.

The global financial crisis has changed this environment in several interesting ways:

  • The crisis has produced a sharp fall in asset prices and a rise in risk aversion. This will reduce the availability of capital worldwide: Projections for FDI next year have been slashed. More competition for scarce foreign investment could encourage governments to be more mindful of discouraging foreign investors through regulatory changes. That is, governments may now be worrying about too little foreign investment, rather than too much. At the same time, however, lower asset prices might encourage bargain hunters, which may in turn trigger fears about so-called ‘fire sale FDI’.
  • The downturn in global economic and financial conditions has turned the commodity boom into a commodity bust. As a result, resource scarcity/nationalism issues may now fade somewhat in importance.
  • There is a danger that the global recession will intensify protectionist pressures.
  • Finally, the crisis has produced a dramatic expansion in the role of the state in developed country financial systems. As a result, rich country claims regarding any desire to limit the role of government in their economies in the face of SOE, SOB or SWF investment ring somewhat hollow. But the glaring examples of market failure also mean voters are likely to be even less inclined to accept ‘leave it to the market’ as a credible defence for a hands-off approach to controversial foreign investment proposals.