AUSTRALIA’S INTERNATIONAL COMMERCIAL ENGAGEMENT  2019

INTRODUCTION

With the disruption and rethinking prompted by the Covid-19 Virus, Australia’s commercial linkage with the global community will be significantly changed, and how that change will evolve, and what the end result will be, is not yet clear. There is some conjecture on the shape of the post Covid commercial environment, but to prepare for the future this commentary is intended to establish the actual position as it was in the years leading up to 2019, in order to give us a firm foundation from which to launch into the post pandemic period.  One of the issues which is examined in some detail is the cross-border investment both inward and outward, as it is expected to be of increased significance in the post pandemic period.

TYPES OF INVESTMENT

The cross-border investment types have been characterised into 3 categories

DIRECT; usually equity capital, in which the debt holder has a [theoretical] control.  Generally referred to as Foreign Direct Investment FDI

PORTFOLIO: usually equity securities, shares, and debt securities in which the debt holder has no influence on the business decisions, and

OTHER: usually financial derivatives, and other investments.

The proportions of foreign investment stock as at Dec 2018 is as follows; - The Inward Investment Is Portfolio 52 % FDI 28 % and Other 20% , and Our Outward Investment Is Portfolio 44 % FDI 28 % and Other 28%.

WHY OFFSHORE INVESTMENT???

There are a number of quick answers questions reasons which indicate that Australian companies should be investing in cross-border activities particularly in the emerging markets, and some of these reasons are outlined here.

Australia has a very low offshore investment in comparison to our contemporaries. It is easy to be blinded by the big resource companies like BHP and the Rio’s and we tend to overlook the fact that the operating companies which take a position in a foreign market compete with both domestic suppliers and other imports.

However, within Australia, foreign companies have taken equity positions, and in almost every sector the significant companies are foreign owned or foreign controlled. French, Italian, German, Scandinavians and the developed nations of Korea and Japan have taken significant equity positions inside Australia. It is notable over the last several years, various companies including Canadian, South African, Spanish, and more recently Singaporeans also have significant investments.

It is not a pretty picture, as it means that Australia’s market is seen as an investment target, the investors take advantage of available resources and skills and the relatively small but sophisticated and rich market. Unfortunately, Australian companies are not reciprocating and are neither acquiring nor creating businesses in other markets and if this trend continues, the end result is very clear, Australia has little income from overseas investments or subsidiaries, but we pay dividends, royalties and technical fees to these companies which may or may not add to the tax collection pool.

WHY OFFSHORE?

The advantages of an offshore policy can be measured by several parameters, with the underlying assumption that the investment is undertaken with appropriate planning and execution.

In relation to the significant benefits accruing to the home country and the benefits to the individual company which chooses to enter another market and adopts a multi-domestic strategy are quite notable and can include

-- Many markets are cyclical and not necessarily synchronised with other markets and being a multidomestic they are somewhat insulated from the cyclic character of individual markets.

provides a perception to the market that it is local company and for the privileges of such a perception can be gained

Be much closer to the market a better understanding of the customer requirements and product suitability

Often it is the expansion of the home market as it is becoming saturated

Create a stronger company which can more easily and really compete with global companies in the home market

Exposure to technical and managerial opportunities

THE 2 WAY INVESTMENT

Historically the investment pattern can be derived from the stocks of investments as follows

INWARDS OUTWARDS

FDI $1019.5 billion $826.8 billion

PORTFOLIO $1996.4 billion $1314.8 billion

OTHER    $826.6 billion   $811.5 billion

TOTAL FOR 2019 $3842.5 billion $2953.1 billion

TOTAL FOR 2018 $3514.4 billion $2538.8 billion

The stock of inward investment is slightly above the average of the 37 OECD member countries, which is based on a % of GDP.  

The Productivity Commission [3 & 4] indicate that Australia is slightly above average in attracting FDI, which is a contradiction of the oft quoted dictum that reduced taxation attracts investment, given that Australia is a relatively highly taxed country.

WITH WHOM DO WE INVEST??

The countries with which we invest is quite interesting.  The top inward total Investment sources up to Dec.  2018 are USA 939,476; United Kingdom 574,788 [$A millions]; and together they account for 43.1% of our foreign investment stock.  And top total investment targets were USA at 718,934, and United Kingdom at 408,008 [$A millions]; and together they account for 44.4% of our foreign investment stock.

THE RELUCTANCE FOR OFFSHORE INVESTMENT

The reluctance which Australian corporates have toward an offshore investment is known and is oft commented upon, however the real reason is not so clear.  There have been several studies seeking to establish the reason, and they are not reported here, but there is some interesting anecdotal information

There are approx. 170  Australian public companies with investments in Indonesia and the number of SME’s with Australian heritage is 750, and similarly, the number of  Australia’s public companies which have invested into Thailand is approx. 190 and the number of SME’s with Australian heritage is 1250.  The numbers of SME’s with Australian heritage is based on counts being taken some years ago, and these companies may or may not have a corporate connection to Australia, but they have an established position in country, apparently abide by the laws and rules, are financially stable, and they do not seem in a hurry to return to Australia.  Their presence, in such numbers, probably point to the ease by which foreigners can invest in these markets and stay the course.

WHERE TO NOW??

The outcomes of the Pandemic are yet to unfold, but there are certainly some pointers,

We must think differently and consider, maybe even try, new ideas
We must discard our preconceived notions, such as we cannot compete because of labour costs, distances, tax rates, none of which stand up to serious examination.
We must move out from under the USA and become a fiercely independent middle order country prepared to voice our opinion on global matters and take action which are in our own interests.
We must be prepared to open and service new markets and treat them with respect, regardless of their political leanings or affiliations
We must recognise that Asia is our nearest neighbour, is developing rapidly and should be seen as a fertile market.  To take advantage of it, we must become far more adept at operating in that market
We must recognise that the directors and decision makers of our companies, particularly the SME’s, really need experience and expertise in marketing, distribution channels, and fitting the product to the customer needs or requirements.
We must recognise that in a post Covid world, global value chains will be a significant part of the processing world

The post Covid redevelopment of our processing industries is going to be an interesting time.  There will almost certainly some failures but there will be some spectacular successes.  We hope that our government leaders and business leaders are up to the challenge, and don’t revert to the old, tired, outdated and ineffective platitudes.

SOURCES

[1] FOREIGN INVESTMENT IN AUSTRALIA; Productivity Commission Research Paper; June 2020

[2] URBAN WORLD: THE GLOBAL CONSUMERS TO WATCH. McKinsey Global Institute; April 2016

[3] WORLD INVESTMENT REPORT 2019; United Nations Conference on Trade & Development; 2019

[4] WORLD INVESTMENT REPORT 2020; United Nations Conference on Trade & Development; 2020

[5] ABS, International Investment Position, Australia: Supplementary Statistics, 2018, cat. No. 5352.0

[6] TRADE & INVESTMENT AT A GLANCE 2019; DFAT

[7] TRADE & INVESTMENT AT A GLANCE 2020; DFAT

[8] ACCESSING NEW OPPORTUNITIES; KPMG July 2020

Author

Glen Robinson, AFG Venture Group

+61 412 229 664 This email address is being protected from spambots. You need JavaScript enabled to view it.

September  2020

About the Author

Glen Robinsons experience and expertise lie in the manufacturing, processing and distribution areas, with specific emphasis on business management and strategic planning. Glen has more than 30 years’ experience in management consultancy and has worked with a wide range of industries from agriculture through to manufacturing and distribution industries. He gained his South East Asian experience as chief executive officer for the Asian subsidiaries and joint ventures of a major International manufacturing and marketing organisation. Glen previously sat on the boards of Asian related business organisations and has for many years advised a number of Foreign Investment Boards in the ASEAN region

Note.

The comments and expressions in this article are those of the authors and not AFG Venture Group, nor Asean Focus Group Pty Ltd