With its abundance of natural resources and proximity to key emerging
markets in Asia, Australia is a top destination for foreign direct
investment (FDI). In fact, according to data compiled by the United Nations Conference on Trade and Development, the land down under currently ranks fourth for total FDI, with USD41.3 billion of inflows in 2011.
Beyond that, it is one of the few major developed-world economies
where FDI inflows exceed outflows. Last year, for example, Australia’s
total outflows were just under USD20 billion, or less than half the
reported inflows.
According to the Organisation for Economic Co-operation and Development
(OECD), Australia’s inflows were a substantial 4.4 percent of gross
domestic product (GDP) in 2011, which was almost two-and-a-half times
the average among the 34 member nations of the OECD. By contrast, its
outflows constituted just 1.1 percent of GDP, which was less than half
the average among its OECD peers.
While that’s an enviable situation for a country’s internal growth
and development, it also means that Australia has yet to fully avail
itself of nearby opportunities among Asia’s emerging markets.
Before proceeding further, it should be noted that the calculation
for FDI does not include all inflows of foreign capital into a country.
Rather, the figure is limited to those inflows that result in a foreign
firm holding at least 10 percent voting power in a domestic enterprise
or expanding an existing business in which it already has a significant
ownership stake.
Since the downturn, Australia’s outflows to key trading partners in
Asia are still well below their peak. Its direct investment in nearby
Indonesia plunged 52.5 percent in 2009, and though it ramped back up to
USD340.3 million in 2010, that’s still roughly USD50 million shy of the
peak in 2008. For the sake of context, that amount accounts for just 2.5
percent of Indonesia’s total inflows for that year.
Meanwhile, other Asian countries that are transforming themselves
into low-cost manufacturing centers, such as Cambodia, Vietnam and
Bangladesh, have received scant attention from Australia. There were no
reported outflows toward Cambodia and Bangladesh in 2010, while outflows
to Vietnam were just USD35.8 million. Direct investment in Malaysia,
however, is at USD266.9 million, just 9 percent below the high in 2009,
though that level still only constituted 2.9 percent of Malaysia’s total
inflows.
Overall, Australian companies’ investments overseas have yet to
recover to the heady days of 2008, when outflows peaked at USD33.6
billion.
Given the recent downturn in the global commodities market, it’s
unlikely that this situation will change in the near term since so much
of the Australian economy is heavily dependent upon its resources
sector. But over the long term, it’s in the nation’s best interest to
diversify its economy beyond merely being one of the world’s key
suppliers of raw materials.
Should China enter into a protracted slowdown, the resulting regional
vacuum could afford Australian firms the opportunity to expand their
investments among their growing neighbors in Southeast Asia. In 2011,
China’s outflows dipped 5.4 percent to USD65.1 billion. Additionally,
European firms have slowed their pace of investments or withdrawn from
the region due to the sovereign-debt crisis.
At the same time, Japan has increased its role as a significant
investor in the region, particularly in some of the aforementioned
Southeast Asian countries that offer low-cost manufacturing. In 2010,
Japan’s outflows to Malaysia jumped 67.1 percent from the prior year to
USD1 billion. And outflows to Thailand rose 38.8 percent to USD2.3
billion. In 2011, Japan’s merger and acquisition activity in the region
climbed 42 percent from the prior year and is on track to sustain that
torrid pace.
As far as outflows to Australia are concerned, Japan has hardly been a
slouch there either, with USD52.3 billion in direct investment in 2011.
While Australia has understandably been focused on China the past few
years, the Middle Kingdom’s direct investment in Australia is still
dwarfed by Japan’s stake.
And now, Japanese companies are anxious to extend that ownership bond
toward Asia’s emerging markets. Indeed, some Japanese management teams
believe Australian firms would make natural partners in establishing an
enduring presence in emerging Asia. The question is whether Australian
firms possess the strategic vision as well as the wherewithal to explore
such joint ventures. Should they do so, then the Australian growth
story could eventually become about more than just resources.
