Australia's Experience With Foreign Direct Investment by State Controlled Entities: a Move Towards Xenophobia or Greater Openness?
| Publication year | 2013 |
I. INTRODUCTION
In the first decade of the twenty-first century, a growing global debate has focused on the appropriateness of restrictions on foreign direct investment (FDI) by entities controlled in some way by foreign governments. It is no surprise that this debate has coincided with the rise in economic power of the BRIC(fn1) nations, national insecurities arising from the spread of global terrorism, and the challenges of the global financial crisis in the period following the worldwide economic collapse of 2007.
Australia is at the epicenter of this debate. In the early stages of the global financial crisis, the role of sovereign wealth funds (SWFs) came under increasing scrutiny as SWFs invested heavily outside their home local jurisdictions, particularly in struggling financial institutions.(fn2) Further, as a once-in-a-generation resources boom developed in Australia, increased interest in Australian investment from Chinese state owned enterprises (SOEs) posed certain challenges, particularly when considered in the context of the developing Australia-China trade relationship.
The purpose of this Article is to assess the effectiveness of the Australian regulatory regime in addressing the policy challenges posed by SWF and SOE foreign direct investment in Australia.
II. THE STATE OF THE FDI DEBATE IN AUSTRALIA
Australia has a long history of economic growth facilitated by FDI: In the early part of the twentieth century and in the decades following the Second World War, foreign investment helped fund the expansion of the infrastructure required to support Australia's rapidly growing population. This period of economic growth extended through the 1970s when foreign investment assisted the development of some of Australia's now-key mineral resource projects.(fn3)
The significance of foreign investment to Australian growth arises from the historically low level of savings in the Australian economy. Access to foreign investment, particularly in capital-intensive areas such as the resources sector, has enabled Australia to achieve a higher rate of economic growth than would otherwise be the case.(fn4) Competition for the limited capital within Australia to fund growth would increase the cost of capital by driving up interest rates and result in slowed rates of investment and growth. Impeding or blocking FDI can also be expected to depress the expected returns from investing in host-country assets. A host-government veto of a proposed FDI signals to potential foreign investors that they will have to deal with only residents of that country in a future sale, thus reducing the potential pool of future purchasers.(fn5)
Foreign investment has also had spillover benefits for Australian businesses, including technology transfer and improved management expertise.(fn6) These forms of intangible capital are difficult to quantify but are believed to have positive implications for domestic economic welfare and yield productivity gains. Foreign investment also contributes to the strength of Australia's trade relationships(fn7) and can help to reduce security risks through the development of strong political and economic relationships between investing nations.(fn8)
The general benefits of FDI are recognized and advanced globally through principles adopted by the Organization for Economic Cooperation and Development (OECD).(fn9) The OECD advances the general principle that foreign investment should be treated in the same way as domestic investment. This principle is recognized by the OECD Code of Liberalization of Capital Movements, first enacted in 1961,(fn10) and the OECD Declaration on International Investment and Multinational Enterprises, first enacted in 1976.(fn11)
In advancing this principle, the OECD also recognizes the international legal precept that governments are entitled to protect their national security. National security may be threatened by foreign non-commercial investment in sensitive areas. As such, it is accepted that foreign investment regulation may be appropriate where national security might be at risk. The relevant OECD Council(fn12) has recommended that where a recipient country imposes restrictions on foreign investment for national security reasons, such measures should be formulated narrowly so that the regulatory regime is predictable, transparent, proportionate, and accountable.(fn13)
It is an unfortunate political reality in Australia that many members of the general population have a negative attitude toward FDI and do not appear to appreciate the economic benefits derived from access to such investment. A Lowy Institute Poll of Australians' opinions on foreign direct investment reported that 90% of those surveyed believed that the Australian government has a responsibility to keep Australian companies under majority Australian control.(fn14) Further, 85% of those surveyed said that investments by companies controlled by foreign governments should be more strictly regulated than investments by foreign private investors.(fn15)
The key criticisms leveled against Australia's foreign investment regime are a lack of transparency and accountability. The foreign investment review process in Australia is inherently political in its ultimate decision making. The Treasurer is not required to publish reasons for decisions, and there is no system of appeal after a decision is made.
III. GOVERNMENT-CONTROLLED ENTITIES: SWFS AND SOES.
An SWF is defined as a special purpose investment fund or other arrangement that is owned by a general government.(fn16) SWFs are not new as an asset class. The oldest SWF, the Kuwait Investment Authority, was established in 1953. In recent years, the number of SWFs has proliferated. There are now SWFs in many parts of the world, including Australia.(fn17) SWFs are currently estimated to hold assets of approximately US$5.2 trillion,(fn18) and this is expected to grow significantly in the coming years.
SWFs cover a broad range of investment vehicles, investment objectives, and governance structures. Some of the different types of SWFs include the following:
The debate regarding financial stability centers around the fact that the governance arrangements surrounding SWFs and their operations may be unregulated and lack transparency. Due to the size and financial capacity of some SWFs, there are concerns that a lack of transparency may mean that investment decisions made by SWFs could have destabilizing effects on financial systems.(fn23) On the other hand, some commentators suggest that SWFs actually have a stabilizing effect on the financial system by virtue of their long-term investment horizon, generally unlev-eraged positions, and capacity to enhance the depth and breadth of markets they serve. There is little, if any, evidence of investments being made by SWFs for political rather than commercial purposes.(fn24)
Due to the potential influence the state may have over the operations and investment decisions of SWFs, there is a concern that SWFs may exercise its control over recipient companies for political rather than commercial purposes. There is also a concern that the closeness between an SWF and the government of the SWF's country may give that entity privileges and advantages that are not available to other enterprises. Finally, there is concern that foreign governments may obtain access to information or technology through the investments of SWFs, which jeopardizes the recipient country's national security.(fn25)
In view of some of these concerns, an International Working Group (IWG) of SWFs was established by the International Monetary Fund (IMF) in 2008.(fn26) The working group drafted a set of generally accepted principles reflecting agreed upon investment practices and objectives.(fn27) In October 2008,(fn28) the Santiago Principles were voluntarily adopted as a set of SWF best practice objectives.
The Santiago Principles have attempted to address these concerns in various ways. While there are thirty-four principles and sub-principles comprising the Santiago Principles, some of the key principles are as follows:
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