International investment issues and Australia’s international investment position Introduction



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Foreign Investment Review Board Report 2002 03



Chapter 4

International investment issues and Australia’s international investment position

International investment issues and Australia’s international investment position

Introduction


One of the Government’s principal policy objectives is to generate and capture benefits for the Australian community through international trade and investment liberalisation. This is pursued through a multi faceted policy involving complementary multilateral, regional and bilateral engagement.

The Treasury’s Foreign Investment and Trade Policy Division (the Division) is responsible for ensuring effective representation of Australia’s foreign investment policy (the policy) and negotiating position on international investment issues. This includes: multilateral forums, such as the Organisation for Economic Co operation and Development (OECD) and the World Trade Organization (WTO); regional forums, such as Asia Pacific Economic Cooperation (APEC); and bilateral mechanisms, such as free trade agreements (FTAs) and investment protection and promotion agreements (IPPAs).

The Division also supports the Executive Member of the Board in his role as the Australian National Contact Point (the ANCP) for the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) and related corporate social responsibility issues. The role of the ANCP is to ensure the effective administration and promotion of the OECD Guidelines in Australia.

Over the past two decades growth in worldwide flows of foreign direct investment (FDI) has been particularly strong. This growth in FDI largely reflects the worldwide relaxation of trade and investment controls, together with advancements in information technologies, communications and transport.

Australia has traditionally relied on inward FDI to meet the shortfall between domestic saving and the level of domestic investment. Foreign investment supplements local savings thereby supporting higher rates of economic growth and employment levels which in turn improves the wellbeing of the Australian people. Inward FDI also continues to play a significant role in making Australian industry internationally competitive, and thereby contributing to export growth, facilitating access to new technologies, financing new and often risky innovations, and providing opportunities for global integration and networking.

Over the past 15 years Australian outward FDI stocks have grown more strongly than inward FDI stocks. This trend of Australian firms increasingly investing abroad has added another dimension to the contribution that FDI makes to Australia’s economic growth. Outward FDI enables Australian firms to expand their business beyond the potential constraints imposed by the limited size of the domestic market. By extending their market presence and access to resources, expertise and technology in other markets, Australian firms are able to become more efficient and competitive in global markets. Outward FDI also has a multiplier effect through stimulating the demand for goods and services provided by component and other input suppliers.

The strong growth in global cross border FDI activity is also linked to the recent increase in government to government investment related negotiations in multilateral, regional and bilateral forums. Given the importance of FDI flows to Australia and the positive role that investment related agreements can play in enhancing international investment flows, Australia pursues a broad agenda on investment in international forums.

Multilateral investment issues


While at the multilateral level there is not a comprehensive instrument covering foreign investment, an international legal framework for foreign investment has begun to emerge. The Division’s role in negotiating international investment agreements and the investment chapters in Australia’s FTAs allows it to contribute to the further development of an international rules based system that takes appropriate account of both the interests of foreign investors and the wellbeing of Australians. The Division’s involvement in the OECD Investment Committee (the Committee) and promotional work on the OECD Guidelines domestically supports Australia’s other contributions to the international policy framework for investment. By promoting the OECD Guidelines, the Division seeks to encourage good corporate behaviour and the positive contribution of multinational enterprises (MNEs) to sustainable development.

While the Division has primary responsibility for the OECD Guidelines and the Government’s engagement on international investment issues in the OECD, the Department of Foreign Affairs and Trade (DFAT) has direct responsibility for Australia’s involvement in trade related forums such as the WTO and APEC. The Division provides advice and briefings on foreign investment issues to the Treasurer and DFAT.


OECD Investment Committee


The Division represents Australia on international investment issues in the Committee. The Committee’s mission is to provide a forum for international cooperation, policy analysis and advice to governments on how best to enhance the positive contribution of investment worldwide.

The Committee facilitates discussion on the policy challenges facing OECD and non OECD countries as they seek to attract investment and maximise its benefits to host societies. It represents the community of policy makers, including treaty negotiators and National Contact Point (NCP) representatives for the OECD Guidelines, from OECD and other participant countries. It is responsible for the OECD Codes of Liberalisation of Capital Movements and Current Invisible Operations.

The Committee also has primary responsibility for the OECD Declaration on International Investment and Multinational Enterprises (the Declaration). The Declaration was adopted by OECD Governments in 1976 to facilitate direct investment among OECD Members. It represents a broad political commitment to open and transparent investment policies and encourages the positive contribution of MNEs. Since adoption, the Declaration has been the basis for extensive inter governmental cooperation on developing best policy practices and peer review based approaches to outreach activities. The text of the Declaration is included in the OECD Guidelines provided at Appendix F.

The Committee’s work programme falls into five main categories: promoting transparent and non discriminatory investment policies; encouraging the positive contribution of MNEs to sustainable development; cooperating with non Members to mobilise investment for development; monitoring developments in international investment agreements; and monitoring FDI trends.

During 2006 07 the Committee initiated a project on Freedom of Investment, National Security and ‘Strategic’ Industries. The aim of the project is to help policy makers to find ways to safeguard legitimate national security and essential public interests while at the same time keeping their investment regimes transparent and non discriminatory and thus continuing to reap the demonstrated benefits of free international investment flows. Four roundtables have been held during 2006 07 to solicit input from relevant stakeholders including policy makers and business representatives. A final report on the project is due to be completed in 2009.

The Committee also developed and approved new principles to help governments in working with private sector partners to finance and bring to fruition major infrastructure projects in areas of vital economic importance such as transport, water and power supply and telecommunications.

The OECD’s Policy Framework for Investment (PFI), which was developed in 2006, was used in a preliminary evaluation of policy priorities for investment climate reform in Vietnam. Australia jointly funded this OECD project with Japan and is involved in an investment climate reform assessment of Vietnam using the PFI chapters, of its investment policy, competition policy, public governance, investment promotion and facilitation, and trade policy.

OECD Guidelines for Multinational Enterprises


The OECD Guidelines provide voluntary principles and standards for responsible business conduct consistent with applicable domestic laws (see Appendix F).

The OECD Guidelines are recommendations by governments to MNEs operating in or from the 30 OECD Member countries and ten non Member adhering countries (Argentina, Brazil, Chile, Estonia, Israel, Lithuania, Slovenia, Latvia, Romania and Egypt). They are the only comprehensive and multilaterally endorsed code of conduct for MNEs that governments are committed to promoting.

The OECD Guidelines apply to the activities of MNEs in OECD and non OECD countries alike. They establish principles covering a broad range of issues including information disclosure, employment and industrial relations, environment, combating bribery, consumer interests, science and technology, competition, human rights and taxation.

The Australian Government has established a National Contact Point (known as the ANCP) to implement and promote the OECD Guidelines to Australian businesses and other interested parties. The ANCP is the Executive Member of the Foreign Investment Review Board.

An important aspect of the OECD Guidelines is its formal review mechanism, which provides for an examination of a MNE’s conduct where that conduct is claimed to be contrary to the OECD Guidelines. Such an examination is termed a specific instance and it is conducted by the relevant NCP. In accordance with the OECD’s Procedural Guidance for NCPs, the ANCP has committed to contribute to the resolution of issues relating to the implementation of the OECD Guidelines in any such specific instances.

During 2006 07 the ANCP conducted a review of a specific instance lodged in August 2006 by a consortium of five non government organisations (NGOs). The specific instance alleged that, through its financial links with the Malaysian owned forestry company Rimbunan Hijau operating in Papua New Guinea, the ANZ Bank had breached the human rights and environmental provisions of the OECD Guidelines. While the ANCP was unable to accept this case as a specific instance, the parties were encouraged to resume their dialogue. The ANCP released a public final statement on 13 October 2006. This statement is available on the ANCP website at www.ausncp.gov.au.

The ANCP’s main method of informing the public about the Guidelines and other OECD Investment Committee work is through the ANCP’s website at www.ausncp.gov.au. This website provides a range of information including: core documents such as the text of the Guidelines and the Risk Awareness Tool; basic procedural information such as the NCP’s service charter, procedures for lodging specific instances and the NCP’s procedures for handling them; and official OECD Investment Committee and Guidelines related documents (in a secure section for registered social partners). It also hosts other useful documents including conference papers and submissions by NGOs. An example is the recent submission from NGOs to a parliamentary inquiry on corporate responsibility.

The ANCP did not undertake any formal consultations on the Guidelines in 2006 2007 due to major staff changes within the ANCP and the ANCP’s involvement in the ANZ Bank specific instance. However, the ANCP is currently considering how to maximise the impact and effectiveness of its promotional activities going forward.

The promotional activities of the ANCP during the period have included:


  • Attending regular interdepartmental committee meetings chaired by the Attorney General’s Department on the OECD Convention against Bribery of Foreign Public Officials in International Business Transactions.

  • Continuing efforts to promote the OECD Guidelines through embassy and consular networks. This has included the ANCP personally briefing senior DFAT officials prior to them taking up postings.

  • Attending corporate social responsibility conferences hosted by other organisations (for example, the bi annual DFAT and NGO Human Rights Consultations).

World Trade Organization


In July 2004, negotiations on multilateral rules on investment were discontinued as part of the current Doha Round of WTO trade negotiations. As a consequence, the WTO related work of the Division was largely confined to advising DFAT on investment issues relating to negotiations covering trade in services.

Asia Pacific Economic Cooperation


Australia continues to participate actively in the work of APEC (in 2007, Australia’s host year), including in relation to foreign investment. Australia’s main investment interest in APEC is to encourage APEC Members to enhance the environment for investment in their economies and to improve transparency.

The Division, which holds the chair of the Investment Experts Group (IEG) has developed a range of work programmes focused on investment liberalisation and improving the transparency of investment regimes in the APEC region. Work projects undertaken by IEG in the last year have included:



  • conducting analysis of at border and behind the border barriers to investment climate reform;

  • exploring the usefulness of the OECD’s Policy Framework for Investment for investment climate reform by APEC’s developing member economies;

  • examining the relationship between investment and trade in services in regional trade agreements and other international investment agreements;

  • cooperating with the United Nations Conference on Trade and Development (UNCTAD) in the area of investor state dispute settlement; and

  • updating and publishing the sixth edition of the APEC Investment Guidebook.

Business is an active contributor to IEG in sharing its ideas on how to improve the regional investment environment, with particular focus on behind the border impediments to investment and the need for improved investment policy coherence.

Bilateral investment negotiations


With the slow rate of progress in multilateral trade negotiations and the decision not to negotiate multilateral rules on investment in the current Doha Round, Australia has significantly increased its participation in bilateral trade and investment agreements.

Bilateral agreements can play an important role in improving investment climates, reducing regulatory barriers to international trade and investment and enhancing the benefits that can be derived from FDI. Evidence indicates a link between the quality of the overall investment climate and the quality of productive investment that is ultimately attracted. Bilateral agreements can provide greater security, certainty and opportunities for outward FDI from Australia, and at the same time, ensure that Australia is a desirable destination for overseas investors. This includes by reducing existing compliance costs faced by investors and the cost of capital for Australian businesses.



In contrast to multilateral forums, bilateral agreements are less cumbersome to initiate and maintain, and they may be tailored to meet the needs of unique relationships between nations. They can secure practical results for Australian businesses and provide momentum to our wider multilateral trade objectives. However, they can also introduce complexity and hence new compliance costs where each agreement contains slightly different provisions and thresholds or triggers.

Free trade agreements


The coverage of modern FTAs has extended beyond trade in goods, with non trade provisions such as investment, services, government procurement and competition policy playing important roles. In fact, research has suggested that the effects of these non trade provisions in FTAs are more positive than the trade provisions.6 The Division, through its policy responsibility for foreign investment, is involved in the negotiation of the investment and services chapters of Australia’s FTAs.

Existing agreements


Australia concluded its first FTA with New Zealand in 1983 (the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA)). Since 2003, it has concluded FTAs with Singapore, Thailand and the United States (US). The Australia United States Free Trade Agreement (AUSFTA) involved significant liberalisation of Australia’s foreign investment framework. Further information on the rules that now apply to US investors is at Appendix A. Detailed information on Australia’s existing bilateral FTAs is available at www.fta.gov.au.

Current negotiations


Investment is a significant component of Australia’s current FTA negotiations with Chile, the Gulf Cooperation Council (GCC), Japan, China, Malaysia and (with New Zealand) the Association of South East Asian Nations (ASEAN).

Australia Chile Free Trade Agreement negotiations


On 18 July 2007, Australia announced its decision to proceed with FTA negotiations with Chile. The second round of negotiations was held in October 2007.

Australia Gulf Cooperation Council (GCC) Free Trade Agreement negotiations


On 13 December 2006, Australia announced it would be seeking FTA negotiations with the GCC. The second round of negotiations was held in November 2007. The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Australia Japan Free Trade Agreement negotiations


Australia and Japan agreed to commence negotiations on an FTA on 12 December 2006. The third round of negotiations was held in November 2007.

Australia China Free Trade Agreement negotiations


Australia and China announced their intention to commence FTA negotiations on 18 April 2005. The tenth round of negotiations was held in October 2007.

Australia Malaysia Free Trade Agreement negotiations


The commencement of FTA negotiations was announced on 7 April 2005. The fourth round of negotiations was held in July 2006.

Australia New Zealand ASEAN Free Trade Agreement negotiations


Australian, New Zealand and ASEAN leaders announced the commencement of FTA negotiations on 30 November 2004. The twelfth round of negotiations was held in December 2007.

Australia New Zealand Closer Economic Relations


In February 2006, Australia’s Treasurer and New Zealand’s Finance Minister agreed to commence negotiations on an Investment Protocol to form part of the ANZCERTA. The third round of negotiations was held in November 2006.

FTA feasibility studies


Australia is currently undertaking joint FTA feasibility studies with Indonesia, India and the Republic of Korea.

In 2006, Australia and Mexico agreed to commence a Joint Experts Group (JEG) process to investigate ways of strengthening economic relations, including the negotiation of a possible FTA. JEG meetings were held in April 2007 and June 2007.


Investment protection and promotion agreements


IPPAs are bilateral investment agreements between governments, which aim to stimulate the flow of investment by providing investors with guarantees relating to non commercial risk.

To date, Australia has IPPAs in force with Argentina, Chile, the Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Mexico, Pakistan, Papua New Guinea, China, Peru, the Philippines, Poland, Romania, Uruguay and Vietnam. Agreements with Sri Lanka and Turkey have also been signed, but are not yet in force.


Australia’s international investment position


This section summarises trends in foreign investment in Australia and Australian investment abroad using Australian Bureau of Statistics (ABS) data.7 Foreign investment in Australia refers to the stock of financial assets in Australia owned by non residents and financial transactions that increase or decrease this stock. Conversely, Australian investment abroad refers to the stock of foreign financial assets owned by Australian residents and financial transactions that increase or decrease that stock.

ABS data on Australia’s international investment position is compiled in accordance with the relevant international statistical standards promulgated by the OECD and the International Monetary Fund. This data is a measure of the actual cross border transactions that have occurred and the level of foreign investment held at a particular time. By contrast, FIRB statistics relate to proposals submitted for approval, regardless of the source of finance or whether proposals were actually implemented. These differences are explained in Chapter 2.


Foreign investment levels8


According to ABS statistics,9 the stock of foreign investment in Australia at the end of June 2007 was $1,565.7 billion. This represents an increase of $244.9 billion (19 per cent) over the level at 30 June 2006. FDI accounted for $331.4 billion of total investment, a $41.5 billion (14 per cent) increase over the level at 30 June 2006.

At the same time the stock of Australian investment abroad was $923.3 billion. This represents an increase of $155.1 billion (20 per cent) over the stock at 30 June 2006. FDI accounted for $318.8 billion of the total stock of investment abroad, an increase of $44.4 billion (16 per cent) from 30 June 2006.


Foreign direct investment levels by country


Chart 4.1 depicts recent trends in FDI flows between Australia and its five most important FDI partners: the US, the United Kingdom (UK), Japan, New Zealand and the European Union (EU) (other than the UK).

The US is Australia’s single largest source of inward FDI and the most important destination for Australian FDI abroad. Almost a quarter of all FDI in Australia comes from the US and approximately 40 per cent of all Australian direct investment abroad flows to the US. At 31 December 2006, Australia had $42.7 billion more direct investment in the US than the US had in Australia.

The UK has traditionally been Australia’s other major source of FDI. At the end of 2006, $54.0 billion, or approximately 17 per cent, of the level of FDI in Australia originated from the UK. The level of Australian direct investment in the UK grew strongly in 2006 to $53.5 billion.

The level of Japanese FDI in Australia in 2006 was $23.5 billion. However, Australian FDI in Japan remains at a very low level.

The level of Australian direct investment in New Zealand grew in 2006 to $41.1 billion. New Zealand direct investment in Australia increased to $7.9 billion in 2006.

The level of EU (excluding the UK) direct investment in the Australian economy grew in 2006 to $53.1 billion. Australian direct investment in the EU has almost doubled over the past two years to $20.2 billion as at the end of 2006.



Chart 4.1: Level of foreign direct investment by country at 31 December 2006

Source: ABS cat. no. 5352.0 International Investment Position, Australia: Supplementary Country Statistics 2006.



Foreign investment flows


Foreign investment transactions involve changes in the levels of Australian foreign assets and liabilities (including the creation or extinction of foreign assets and liabilities). A current account deficit is balanced by a surplus on the capital and financial account, after allowing for errors and omissions. The balance on the financial account represents net financial transactions with the rest of the world, that is, the inflow of foreign investment into Australia, minus the outflow of Australian investment abroad.

International investment flows and stocks are divided into direct, portfolio, financial derivatives, other investment, and reserve assets. Under the international standards used to compile ABS foreign investment statistics, direct investment represents capital invested in an enterprise by an investor in another country which gives the investor a ‘significant influence’ (either potentially or actually exercised) over the key policies of the enterprise. Ownership of 10 per cent or more of the ordinary shares or voting stock of an enterprise is considered, under the ABS framework, to indicate significant influence by an investor. Portfolio investment is cross border investment in equity and debt securities other than direct investment. Financial derivatives are linked to a specific financial instrument or indicator, or to a particular commodity. Other investment is a residual group that comprises many different kinds of investment. Reserve assets are those external financial assets available to and controlled by the Reserve Bank of Australia or the Australian Treasury for use in financing payment imbalances or intervention in foreign exchange markets.

Table 4.1 provides a breakdown of the flow of foreign investment over the past five years measured by ABS statistics. The inflow of $176.8 billion in 2006 07 is the largest ever annual inflow of foreign investment into Australia. The outflow of $119.6 billion in 2006 07 is the largest ever annual outflow of Australian investment abroad.

Table 4.1: Foreign investment flows 2002 03 to 2006 07



  1. The figures for 2004 05 were significantly affected by one particular transaction whereby a major corporate reorganisation was recorded both as a transaction reducing Australian investment abroad and also reducing direct investment in Australia. The net effect of this transaction was zero.

  2. In keeping with balance of payment conventions, credit entries are shown without sign and debit items are shown as negative entries. Thus, investment flows going from Australia to offshore destinations are shown as a negative.

  3. Other investment includes all other investment.

Note: Figures may not add due to rounding.

Source: ABS cat. no. 5302.0 Balance of Payments and International Investment Position, Australia, June Qtr 2007, Table 25 — Financial Account (a)(b).

Chart 4.2 summarises major trends in foreign investment flows using the data in Table 4.1. It indicates that Australia remains a net importer of capital.

Chart 4.2: Foreign investment flows 2002 03 to 2006 07



  1. The figures for 2004 05 were significantly affected by one particular transaction whereby a major corporate reorganisation was recorded both as a transaction reducing Australian investment abroad and also reducing direct investment in Australia. The net effect of this transaction was zero.

  2. The net foreign investment figure has been derived from determining the difference between foreign investment in Australia and Australian investment abroad.

Source: ABS cat. no. 5302.0 Balance of Payments and International Investment Position, Australia, June Qtr 2007, Table 25 — Financial Account (a)(b).

Foreign investment by sector


Over the period 1 July 2006 to 30 June 2007, the percentage of foreign ownership of Australian equity declined for private non financial corporations, banks and life insurance corporations and increased for financial intermediaries and other insurance corporations (see Chart 4.3).

Chart 4.3: Foreign ownership of Australian equity by sector 2002 03 to 2006 07

Source: ABS cat. no. 5232.0 Financial Accounts, Australia, June Qtr 2007, Tables 40 and 41 — Listed and Unlisted Shares and Other Equity Market (a).


Useful references on international investment issues

Websites


Organisation

Address

APEC: Investment Experts Group (IEG)

www.apecsec.org.sg

Attorney General’s Department

www.ag.gov.au

Australian Bureau of Statistics (ABS)

www.abs.gov.au

Australian Competition and Consumer Commission

www.accc.gov.au

ANCP for the OECD Guidelines for Multinational Enterprises

www.ausncp.gov.au

Australian Prudential Regulatory Authority

www.apra.gov.au

Australian Securities and Investments Commission

www.asic.gov.au

Australian Treasurer

www.treasurer.gov.au

Business and Industry Advisory Committee to the OECD

www.biac.org

ComLaw (Commonwealth Law)

www.comlaw.gov.au

Department of Foreign Affairs and Trade

www.dfat.gov.au

Foreign Investment Review Board

www.firb.gov.au

International Monetary Fund

www.imf.org

The OECD Guidelines for Multinational Enterprises

www.oecd.org

Online guide to Australia’s Free Trade Agreements

www.fta.gov.au

Organisation for Economic Co operation and Development (OECD)

www.oecd.org

The Treasury

www.treasury.gov.au

United Nations Conference on Trade and Development (UNCTAD)

www.unctad.org

World Trade Organization (WTO)

www.wto.org

Documents


Document title

Available at:

Code of Liberalisation of Capital Movements

www.oecd.org

Economic Roundup (Treasury series)

www.treasury.gov.au

General Agreement on Tariffs in Trade (GATT)

www.wto.org

General Agreement on Trade in Services (GATS)

www.wto.org

Guide to the Investment Regimes of the APEC Member Economies (5th Edition)

www.apecsec.org.sg

International Direct Investment Statistics Yearbook

www.oecd.org

OECD Code of Liberalisation of Current Invisible Operations

www.oecd.org

OECD Declaration on International Investment and Multinational Enterprises

www.ausncp.gov.au

The OECD Guidelines for Multinational Enterprises

www.ausncp.gov.au

Policies and International Integration: Influences on Trade and Foreign Direct Investment (OECD Study)

www.oecd.org

The Trade and Investment Effects of Preferential Trading Arrangements Old and New Evidence (Australian Productivity Commission Staff Working Paper)

www.pc.gov.au

The Treasury Annual Report 2006 07

www.treasury.gov.au

UNCTAD Series on Issues in International Investment Agreements

www.unctad.org

UNCTAD World Investment Directory

www.unctad.org

UNCTAD World Investment Report

www.unctad.org



6 R Adams, P Dee, J Gali, and G McGuire, The Trade and Investment Effects of Preferential Trading Arrangements — Old and New Evidence, Productivity Commission Staff Working Paper, Canberra, May 2003.

7 As ABS data is subject to periodic revision, data included in the current report may differ from that published for the same period in previous reports.

8 Prior to 2005 06, foreign investment levels were reported on a non financial year basis.

9 Source: ABS Catalogue No. 5302.0 Balance of Payments and International Investment Position, Australia, June Qtr 2007.


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