Australia's Foreign Investment Regime and the Need For Reform

Author: 
East Asian Bureau of Economic Research
Abstract: 
Australia’s ability to attract high levels of foreign investment is critically important to driving employment, productivity growth, and innovation. Foreign investment brings much needed capital, expertise, technology and links to international markets. Maintaining an open investment regime and an attractive investment environment is essential to growth in jobs and maintaining living standards. Australia has historically been an attractive destination for investment and was previously the largest single destination for Chinese capital globally. The Foreign Investment Review Board (FIRB) and the foreign investment regime have played an important role in facilitating investment and reassuring the community through the screening of foreign investment to ensure new investment is in the national interest. Two recent developments have led to pressure on the regime and to changes in its operation. First, the large inflow of investment from China put significant stress on the screening process and resulted in short term politics-driven policy responses as a consequence of political pressures. Community concerns have arisen in response to the rapid increase in the scale of Chinese investment — its unfamiliarity as a new source of investment, the complication of high levels of state ownership, and the expansion of Chinese investors into agriculture and real estate. Second, Free Trade Agreements (FTAs) have de facto amended the foreign investment regime by raising the monetary thresholds that trigger review of investments originating in particular countries and introduce distortions in the treatment of foreign investment from different sources. Investment from Europe, Southeast Asia and all other countries is treated differently from investment from the United States, New Zealand, Chile, China, South Korea and Japan. This does not make policy sense. This paper supports the steps by Australia’s Treasury Department, announced on 18 May, aimed at modernising and simplifying the foreign investment regime and suggests additional reforms that would enhance the operation of the investment regime and strengthen the investment environment. The additional changes suggested seek to maintain Australia’s attractiveness as an investment destination and ensure that incoming investment continues to drive productivity and income growth in the nation’s interest.