Australia FDI regime must change for Asia success

Author: Ashley Lee | Published: 1 Nov 2012
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Mark Thirlwell
Lowy Institute

The 'Australia in the Asian Century' white paper (White Paper) released October 28 signals the country’s intention to develop deeper relationships with Asia. But it must first clarify its foreign investment policies.

The federal government’s White Paper comes at an especially critical time as Australia repositions itself after the commodities boom. Last month the central bank said it expects resource investment to peak in 2013.

The White Paper compiles the government’s goals regarding Asia, and the country’s own future, in one report. Although Australian businesses have long been active in Asia, sources hope that the White Paper will influence political opinion and perhaps lead to a clearer foreign investment policy.

Mark Thirlwell, director of the Lowy Institute for International Policy’s International Economy Program and the acting director of its G20 Studies Centre, said that in the immediate term the white paper is unlikely to make any significant difference to Australia’s level of economic engagement in the region. Instead, it is a statement of where Australia would like to be as well as of currently planned policies.

“It includes a lot of goals that aren’t particularly new, but are pulled together in one place,” he commented.

Many of its recommendations, though broadly supported by Australia’s business community, require significant commitment and regulatory change as a first step towards ensuring Australia’s ambitious to compete effectively with Asia by 2025, said Allen & Overy Australia’s managing partner Grant Fuzi.

But some experts have criticised the White Paper for being too vague and ignoring cost. The day after it was released, the Lowy Institute’s International Security Program director Rory Medcalf wrote an opinion titled 'Bold on vision, short on funding' in The Australian.

Media hype surrounding the White Paper has made an impact. Thirlwell noted that it’s been on the front page of newspapers which may raise awareness among companies that haven’t yet thought along these lines.

Mark Crean, deputy senior partner of Herbert Smith Freehills, agreed. While bigger businesses have many relationships, plans or investments either into or from many Asian countries, he said the paper focuses on creating more ties with small and medium-sized enterprises.

But larger corporations could also reap benefits. “If the White Paper inspires changes to policies in areas such as working visas, taxation or regulation it may also benefit larger businesses,” he added.

Foreign investment implications

Australia’s foreign investment regime has been criticised in sensitive sectors. But the White Paper may adjust political opinions by creating a dialogue about the two regions in the broader Australian community. Crean said, “While business generally understands, it may assist in changing the way the political world sees Asia.”

This year Australia has been involved in several controversial foreign investment decisions. Chinese technology company Huawei criticised the government after it was blocked from supplying the National Broadband Network (NBN), claiming that it was due to political rather than national security reasons.

In the especially sensitive agriculture sector, Archer Daniel Midland’s $2.7 billion bid for Australian wheat exporter Graincorp is encountering political opposition. Other actions this year include the implementation of a land register for easily accessible information about foreign investment in agricultural land.

“There have also been unfortunate debates in Parliament about keeping firms (or farms) in Australian hands, and in the current discussion about Graincorp, sections of our media have lamented that foreign capital sees value but domestic capital doesn’t,” Crean stated. “This paper may be helpful in beginning community-level discussions about foreign capital by not being dangerous.”

The government has been juggling local anxiety about foreign investment and its goal to attract more inbound interest. Although White Paper does not explicitly include any new foreign investment policies, it does reiterate a commitment to make the prevailing investment regime more transparent.

But clarifications are needed. One of the problems with the investment regime is that it’s sent mixed messages rather than clear signals.

“The official view, which I believe is genuinely held, is that we welcome foreign investment,” Thirlwell said. “But when one looks at the operation of the foreign investment regime, some foreign players – particularly those with state-backed investors – feel a discrepancy between the top-level welcome message and the actual implementation of the policy.”

Crean agreed that there has been a particular focus on state-owned enterprises investing in Australia. “Although our foreign investment principles are supposed to be predictable and transparent, Australia hasn’t always passed this test,” he said. “We need to continually focus on communicating clear principles for what will pass the board – or where issues might arise.”

As markets become more competitive, Australia’s must evolve. Fuzi stated that all of the White Paper’s recommendations, if supported by genuine policy change, have the potential to increase Australia’s attractiveness as a hub for both inbound and outbound investment. But he also noted that Australia cannot be complacent because of its proximity to Asia and wealth of natural resources.

“An issue we must not lose sight of is that we must remain a competitive and legally stable environment to attract Asian capital,” he added. “The cost of doing business in Australia is high, and many of the emerging economies are also looking at investments in other BRIC countries or emerging markets - where the costs are significantly lower. We must remain competitive.”

For more Australia coverage see:

Q&A: Afma’s David Lynch

Australia to help Myanmar build new mining regulatory regime

How Australia hybrid first clarifies Basel III implementation