Foreign Investment Productivity Commission in Australia Research Paper June 2020 Commonwealth of Australia 2020 ISBN 978-1-74037-698-3 (PDF) ISBN 978-1-74037-697-6 (Print) Except for the Commonwealth Coat of Arms and content supplied by third parties, this copyright work is licensed under a Creative Commons Attribution 3.0 Australia licence. To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/au. In essence, you are free to copy, communicate and adapt the work, as long as you attribute the work to the Productivity Commission (but not in any way that suggests the Commission endorses you or your use) and abide by the other licence terms. Use of the Commonwealth Coat of Arms Terms of use for the Coat of Arms are available from the Department of the Prime Minister and Cabinet’s website: https://www.pmc.gov.au/government/commonwealth-coat-arms Third party copyright Wherever a third party holds copyright in this material, the copyright remains with that party. Their permission may be required to use the material, please contact them directly. Attribution This work should be attributed as follows, Source: Productivity Commission, Foreign Investment in Australia. If you have adapted, modified or transformed this work in anyway, please use the following, Source: based on Productivity Commission data, Foreign Investment in Australia. An appropriate reference for this publication is: Productivity Commission 2020, Foreign Investment in Australia, Commission Research Paper, Canberra. Publications enquiries Media, Publications and Web, phone: (03) 9653 2244 or email: [email protected] The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au). Foreword To facilitate public debate about foreign investment, the Productivity Commission’s 2016 inquiry into the Regulation of Australian Agriculture recommended that the Australian Government should request the Commission, in its annual Trade and Assistance Review, to report on the trends, drivers and effects of foreign investment. In 2019, the Australian Government supported this recommendation. This report forms a broad initial examination of Australia’s foreign investment policies as part of that response, with subsequent Reviews anticipated to build on this work. Evidently, this report is being released against the background of an unprecedented health and economic crisis due to the coronavirus (COVID-19) pandemic and heightened awareness of national security risks. The sweeping disruptions to businesses and expectations of a deep economic contraction have prompted some changes in Australia’s foreign investment policies. The Australian Government announced on 29 March 2020 that all foreign investment applications will be subject to screening by the Foreign Investment Review Board for the duration of the pandemic. Permanent changes were announced in June to strengthen the national security assessment of foreign investments in sensitive sectors. The Commission has not analysed the impacts of these changes in detail, given the still unfolding situation and the highly uncertain outlook, but will consider the pandemic and national security measures, where relevant, in the next Trade and Assistance Review. As the economy begins to recover after the pandemic passes, the role of foreign investment will be more crucial than ever. Many struggling Australian brands will be shielded from damage by foreign investment, while other businesses and employers will be able to recover faster if they have access to foreign funding and expertise. Government policy needs to continue to recognise and facilitate these benefits, even as it acts to mitigate the risks from some investments. Jonathan Coppel Commissioner June 2020 FOREWORD iii Contents Foreword iii Acknowledgments vii Abbreviations viii Key points 2 Overview 3 About this project 3 Trends in foreign investment 3 Australia’s foreign investment policy 8 Contemporary concerns in foreign investment policy 15 Getting the balance right 18 1 The trends and drivers of foreign investment 23 1.1 What is foreign investment? 24 1.2 The drivers of foreign investment 27 1.3 What is Australia’s net investment position? 28 1.4 Inward FDI — recent trends 30 1.5 Outward FDI — recent trends 35 2 Current policy settings 39 2.1 Outline of Australia’s foreign investment framework 40 2.2 Australia’s FDI policy restrictiveness 48 3 The benefits and costs of foreign investment 51 3.1 Foreign investment allows access to additional capital funding 53 3.2 Direct investment can also lead to spillovers 58 3.3 Foreign investment and national security risks 64 3.4 Multinational tax avoidance 69 3.5 Residential real estate and agriculture 71 CONTENTS v 4 Getting the balance right 81 4.1 Design of the national interest test 82 4.2 Too many conditions are being imposed 86 4.3 Improving certainty and transparency 89 4.4 Summing up 93 A Modelling methodology 95 A.1 Scenarios modelled 95 A.2 Methodology 95 A.3 Sensitivity analyses 103 B Would the ultimate beneficial owner please stand up? A China-Australia case study 107 B.1 Alternative data on investment flows 108 C A history of policy changes 111 References 115 vi FOREIGN INVESTMENT IN AUSTRALIA Acknowledgments The Commission is grateful to all those who have given their valuable time to meet with Commission staff during consultation on this paper. Your assistance helped us better understand the current system and provided us with insights on where the current policy pressures lie. We also want to thank those government organisations for the time they spent responding to our questions and for providing information and data that helped inform our analysis. The Commission’s modelling is its own and has not been verified by the relevant Departments, although it has been subject to comments by external referees. The report was overseen by Commissioner Jonathan Coppel. Production of the report was led by Ben Dolman, and a team comprising Jacob Conway Smith, Aaron Mollross, and George Steel. ACKNOWLEDGMENTS vii Abbreviations ABS Australian Bureau of Statistics ACCC Australian Competition and Consumer Commission ASIO Australian Security Intelligence Organisation ATO Australian Taxation Office BEPS Base erosion and profit shifting CFIUS Committee on Foreign Investment in the United States CGE Computable general equilibrium CIC Critical Infrastructure Centre EU European Union FDI Foreign Direct Investment FIRB Foreign Investment Review Board G20 Group of 20 GDP Gross Domestic Product GNI Gross National Income NSC National Security Committee of Cabinet OECD Organisation for Economic Cooperation and Development PC Productivity Commission R&D Research and Development RBA Reserve Bank of Australia UNCTAD United Nations Conference on Trade and Development US United States viii FOREIGN INVESTMENT IN AUSTRALIA OVERVIEW Key points Over the past two centuries, foreign funding has supported Australia’s economic development by permitting more capital investment than domestic savings would have otherwise allowed. – Foreign investment brings ‘spillover’ impacts too, both positive (access to new technologies, better management practices, increased competition) and negative (potentially less competition, social and environmental costs). – Foreign investment also stirs strong community reservations, although Australians are generally supportive of globalisation and free trade. To balance the economic benefits of foreign investment against the risks, and to maintain community confidence that foreign investment is in the national interest, Australia regulates foreign investment through a range of mechanisms. – Since 1974, foreign acquisitions with a value above certain thresholds are screened and require a decision of the Treasurer that they are not contrary to the ‘national interest’. Recent changes have lowered these thresholds to zero for sensitive national security businesses. – Australia has a broadly open policy towards foreign investment, but is more restrictive than many other advanced economies, by some measures. – To the extent that foreign investment proposals are blocked or discouraged, this results in lower Australian household incomes — Commission modelling estimates that these economic costs would be material, though not large. Foreign investment policy has become more prominent over recent years. Greater attention is being given to the difficulty of taxing multinationals and the national security risks associated with sensitive sectors or critical infrastructure assets — as, for the first time, one of our largest sources of investment is not a democracy or a military ally. Policy change in response has been piecemeal. Monetary thresholds for screening vary by source country, sector and type of investor, while the use of approval conditions is increasing. – The role of the Foreign Investment Review Board has become more akin to a regulator than a gatekeeper, yet its powers and institutional arrangements have changed little.