Ch 6 - Foreign Investment

term 2

"What is foreign investment?"

"The flow of financial capital into and out of Australia through the buying and selling of financial assets."

"What is the difference between investment and foreign investment?"

"Investment = spending on capital goods. Foreign investment = buying/selling financial assets internationally."

"Give examples of financial assets."

"Shares

"What is inward foreign investment?"

"Foreigners investing money into Australia."

"What is outward foreign investment?"

"Australians investing money overseas."

"What is Australia’s foreign investment in Australia (FIA)?"

"The stock of foreign investment held in Australia by overseas investors."

"What is Australian investment abroad (AIA)?"

"The stock of overseas investment owned by Australians."

"What is the International Investment Position (IIP)?"

"The difference between foreign liabilities and foreign assets."

"Formula for IIP?"

"IIP = FIA − AIA"

"What are foreign liabilities?"

"Investments foreigners own in Australia."

"What are foreign assets?"

"Overseas investments owned by Australians."

"What are the two main types of foreign investment?"

"Foreign direct investment (FDI) and foreign portfolio investment (FPI)."

"What is foreign direct investment (FDI)?"

"Investment where the investor owns at least 10% and can influence business operations."

"Examples of FDI?"

"Building mines

"What is foreign portfolio investment (FPI)?"

"Investment in financial assets without control of the business."

"Examples of FPI?"

"Buying shares

"Which is more stable: FDI or FPI?"

"FDI."

"Why is FDI more stable?"

"It involves long-term commitments and ownership."

"Why is FPI more volatile?"

"It is short-term and speculative."

"What ownership percentage defines FDI?"

"10% or more ownership/equity."

"Which type of investment is larger in Australia: FDI or FPI?"

"FPI."

"What are Australia’s major FDI source countries?"

"United States

"Which industry receives the most FDI in Australia?"

"Mining."

"Why is Australia attractive to foreign investors?"

"Stable economy

"What is the relationship between foreign investment and the current account?"

"Foreign investment helps fund Australia’s current account deficit."

"What is the S − I gap?"

"The difference between national saving and investment."

"Formula linking the current account and saving/investment?"

"Current Account Balance = Saving − Investment"

"Why does Australia usually need foreign investment?"

"Because investment is greater than saving (I > S)."

"What balance of payments account records foreign investment flows?"

"The financial account."

"What does a financial account surplus mean?"

"Net inflow of foreign investment."

"What income flows result from foreign investment?"

"Interest

"Where are interest

profits

"Why does Australia usually record a net primary income deficit?"

"Because income payments to foreigners exceed income receipts."

"Main benefit of foreign investment?"

"Helps fund Australia’s investment and economic growth."

"How does foreign investment affect living standards?"

"Increases productivity

"How can FDI improve productivity?"

"Through technology transfer and managerial expertise."

"How does foreign investment reduce borrowing costs?"

"Increases supply of loanable funds."

"How does foreign investment help infrastructure?"

"Funds transport

"How does foreign investment affect employment?"

"Creates jobs through business expansion and investment."

"Main criticism of foreign ownership?"

"Loss of Australian control over assets."

"Main criticism of foreign debt?"

"Interest repayments increase income debits."

"Why is foreign debt not necessarily a problem?"

"If borrowed funds increase productive capacity and future income."

"What is foreign debt?"

"Money Australians owe overseas."

"What is foreign equity?"

"Overseas ownership of Australian assets."

"Is most of Australia’s foreign debt public or private?"

"Private."

"Why is private foreign debt generally less concerning?"

"Usually linked to productive investment and profits."

"What happens to portfolio investment if Australian interest rates rise?"

"Capital inflow increases."

"What can reduce foreign portfolio investment into Australia?"

"Lower interest rates

"What happened to Australia’s saving-investment gap during COVID?"

"Saving exceeded investment temporarily."

"Why did Australia not require foreign savings during COVID?"

"Domestic saving became larger than investment."

"What is capital deepening?"

"Increase in capital per worker

"What is infrastructure?"

"Basic systems supporting economic activity like transport and energy."

"What percentage of Australia’s foreign debt is private?"

"Around 74%."

"Why has Australia’s net foreign liabilities fallen over time?"

"Growth in Australian overseas assets

"How has compulsory superannuation affected foreign assets?"

"Increased Australian investment overseas."

"What is the relationship between foreign investment and economic growth?"

"Foreign investment increases capital

"Why is Australia’s mining sector heavily linked to foreign investment?"

"Large capital requirements need overseas funding."

"What does a depreciation of the AUD do to foreign assets?"

"Increases their value in AUD terms."

"Why do economists generally support foreign investment?"

"It boosts investment

"What percentage of foreign investment in Australia is debt?"

"Around 60%."

"What percentage of Australian investment abroad is equity?"

"Around 60%."

"What was Australia’s net IIP in 2024?"

"A liability of about $720 billion."

"What was Australia’s foreign investment in Australia (FIA) in 2024?"

"About $4.7 trillion."

"What was Australian investment abroad (AIA) in 2024?"

"About $4 trillion."

"Which form of foreign investment dominates inward portfolio investment?"

"Debt securities."

"Why do Australian banks borrow overseas?"

"To help fund the housing market."

"Why do super funds invest overseas?"

"To diversify risk and maximise returns."

"What percentage of Australia’s workforce has tertiary qualifications?"

"About 50%."

"How many free trade agreements does Australia have?"

"18."

"What is the Australian dollar’s ranking among traded currencies?"

"6th most traded currency worldwide."

"Why can FDI increase productivity?"

"Technology transfer and better management practices."

"Why is portfolio investment considered speculative?"

"Investors seek short-term returns from interest rates or exchange rate changes."

"Why does Australia usually record a financial account surplus?"

"Net inflow of foreign investment."

"What happens to the financial account when foreign investment inflow rises?"

"The financial account surplus increases."

"Why does foreign investment create income debits?"

"Australia must pay interest

"What is the main benefit of foreign borrowing?"

"Fills the saving-investment gap."

"Why is foreign debt often exaggerated as a problem?"

"Borrowing boosts growth if used productively."

"Why is government foreign debt potentially more concerning than private debt?"

"Government borrowing may fund consumption instead of productive investment."

"What share of Australia’s foreign debt is government debt?"

"About 26%."

"Why has net foreign equity become negative?"

"Australians now own more foreign equity than foreigners own Australian equity."

"What happened to foreign direct investment during COVID?"

"Fell sharply due to global recession."

"Why did FDI recover after COVID?"

"Long-term investor confidence returned."

"Evaluate whether foreign investment is good for Australia."

"Generally positive because it funds investment

"Why is foreign investment essential for Australia?"

"Australia has historically low savings relative to investment needs."

"Why are foreign liabilities not automatically bad?"

"They reflect foreign investment helping economic growth."

"Why is net foreign debt manageable for Australia?"

"Most debt is private

"Why does Australia rely heavily on foreign capital?"

"Large mining/resource sector requires significant funding."

"Distinguish between foreign debt and foreign equity."

"Debt requires interest repayments; equity requires dividends/profit payments and ownership transfer."

"Why is FDI preferred over FPI?"

"FDI is long-term