ATAR Economics - Foreign Investment

Foreign Investment

Is the inflow of money from overseas investors. This may take the form of borrowing or in the form of equity - selling of assets.

Foreign Investment - Forms (Australia)

1. Direct Investment - known as FDI (Foreign Direct Investment)
2. Portfolio Investment
3. Other Foreign Investments (trade credits, loans, currency deposits)
4. Financial Derivatives (Currency swaps, options, and other derivative products).
5. Reserve Bank - foreign currency, gold and their special drawing rights

Foreign Liabilities

Created when Australian residents borrow money from overseas or sell assets such as shares to foreign residents. It is called foreign investment in Australia, and is an inflow of money from overseas (stock of domestic assets owned by overseas residents).

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Recorded as a credit (inflow) in the capital and finacnial account, but servicing costs (interest, dividends) are recorded as a debit in the primary income account. If foreign liabilities increase, repayments out of the primary income will increase

Foreign Assets

Created when Australian residents lend money to foreign residents or purchase foreign assets. It is called Australian investment abroad, and is an outflow of money.

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Recorded as a debit (outflow) in the capital and financial account because this is Australian’s lending money or buying assets from foreigners. But servicing costs (interest, dividends) are recorded as a credit (inflow) under the primary account.

What FI does to assets and liabilities

Foreign Investment into Australia increases Australia’s foreign liabilities while Australian investment abroad increases Australia’s foreign assets.

Net Foreign Liabilities is =

= Foreign Liabilities - Foreign Assets

Foreign Liabilities =

Total Foreign Debt + Total Foreign Equity

Foreign Equity

Is the level of foreign ownership of domestic assets. For example, if an overseas resident purchases shares in an Australia company, such as Telstra, then the overseas resident retains ownership stake in domestic assets and hence is classified as foreign equity. Australians tend to have a negative attitude to foreign equity due to fears that Australia is selling too much of it’s domestic assets and that future generations could be pushed aside by high levels of foreign ownership (AUS owns more equity overseas than foreigners own in AUS)

Foreign Debt

Foreign debt is Australia’s level of borrowings from overseas residents. For example, if an Australian company such as Telstra, takes a loan from a foreign bank, such as HSBC, this would be classified as a foreign debt transaction. Foreign debt is serviced with interest payments, recorded in the current account under the primary income. Foreign debt is the amount of money that Australia residents, both public and private, owe to the rest of the world.

What foreign liabilities do to the accounts

An increase in the amount of FI, increase foreign liabilities, increasing the I>S gap causing a CFAS, and a CAD.

With increased FI, an economic expansion is bound to happen, where consumers demand more, leading to more imports, causing a CAD

With more FI, higher dividend payments result as Aus has to pay back more, which is recorded as an outflow out of current primary account which caused a CAD.

With more FI, more foreign capital exists, meaning more imports of capital goods, hence BOGS decrease and CAB decreases.

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Foreign Debt Trends

Gross Foreign Debt - the total of Australia’s overseas borrowing; net foreign debt - gross debt minus Australian lending to overseas residents.

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NET FOREIGN DEBT HAS RISEN from 51% of GDP in 2008 to 54% of GDP in 2020

Foreign Direct Investment Trends

FDI occurs when a FI establishes a new business or acquires 10% or more of an Australia company.

FDI is viewed as long-term and stable due to the degree of ownership and influence.

FDI makes up about 1/4 of total stock of foreign investment into Australia

Portfolio investment is usually greater than FDI, but in 2019-20 portfolio investment was negative which means it was withdrawn from the economy. This usually indicates a contraction in economic growth (which was the case with slow economic growth and low interest rates in 2019 and in 2020 COVID-19 caused a recession.

Mining industry comprised the largest share of the stock of FDI at 37% and manufacturing at 12%.

USA, Uk, Japan main sources of FDI for Aus

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Benefits of Foreign Debt

Borrowing can be of benefit to the individual, the firm or nation

When borrowing is used for investment, living standards rise. Families borrow for housing, firms borrow for capital equipment and expansion

Most debt is owned by the private sector (75%) whose motive is profit.

Debt is used to expand Aus’s industry which leads to increased econ growth.

The debt as a % has stabilised meaning that it is easier to sustain in terms of repayments on that debt.

The debt servicing ratio has fallen meaning repayments have fallen.

Costs of Foreign Debt

EXCESSIVE AMOUNT OF BORROWING

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Australia’s credit rating may be downgraded which means that future borrowing will be subject to higher interest rates. Higher interest payments lower standards of living as more income must be diverted from consumption.

If terms of trade deteriorate, this will reduce export income so that the burden of debt will increase.

If $AUD depreciates this will increase the size of foreign currency, further increased interest repayments.

If borrowing is not used productively then national wealth may decline over time

If the growth rates of our trading partners fall, this will decrease export income and increase burden of debt.

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FDI (Benefits)

Helps close savings-investment gap (supplemts national savings)

FDI allows industries to increase capacity (enabled development of mining)

Enables Aus to have higher living standards and real incomes

FDI allows access to new tech from foreigners when they transfer. Encourages competition and innovation.

Increase employment and economic growth.

FDI (Negative)

Loss of ownership and control

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Outflow of dividends and profits - outflow of profits associated with FDI, adding to outflow out of the primary income. Reduces level of income that flows to Australians.

Bad behaviour of multi-national cooperation’s - tax avoidance, employment of overseas workers) operating against national interests.

Investment overseas increase I-S Gap