ECONOMIC ISSUES

Foreign Investment and National Security

Insights

What Has Happened?

In the past week, a $600 million sale of Lion Dairy to Mengniu Dairy Group, a Chinese corporation, fell through due to rejection by Treasurer Josh Frydenberg. While far from unique, this incident reminds us of the need to vet and review foreign investment prior to approval. For example, national security concerns were quoted in a 2019 decision to prevent Huawei from participating in the construction of Australia’s 5G network.

However, in protecting Australia’s national security, associated investment regulations can be burdensome on economic growth by potentially stunting development of capital. Due to the recent escalation of protection by China on certain Australian agricultural exports, decisions to reject large-scale investments could fuel the fire and lead to a trade war.

Syllabus Links

Investment – whether from domestic or foreign sources – refers to the expenditure on goods and services used in the production of future goods and services. As a small economy reliant on machinery-dependent industries such as agriculture and natural resources, coupled with its low savings ratio which has contributed to a persistent savings-investment gap, Australia has seen continuous inflows of foreign investment.

This foreign investment has been critical in sustaining Australia’s economic growth, with foreign investment in the commodities sector having contributed to an aggregate improvement in GDP by around $1 trillion across the 8 or so years since the mining investment boom. In other words, this investment has contributed to approximately 6—8% of each year’s GDP since the mining investment boom – or approximately $125 billion of each year’s GDP. And this is just the mining sector.  

As such, the level of regulation surrounding foreign investment can significantly influence economic growth. While these regulations are required for national security, they do have the potential to stunt economic growth.

Australia has been subject to a current account deficit for almost the entirety of the past 50 years. While this is the product of several structural factors, one key influence has been the savings-investment gap that has required a steady inflow of foreign funds to clear. These inflows are recorded as credits in the capital and financial account. As a result, many Australian firms, especially in the mining sector, have significant financial obligations to overseas, and will pay dividends, interest and other payments to overseas. These payments are recorded as debits on the net primary income component of the current account, thus leading to a lower balance on the current account.

However, there has been a movement favouring “Australia-centric” attitudes towards investment, favouring investments that are not “contrary to the national interest”, as quoted by Treasurer Josh Frydenberg. In doing so, Australia has developed a framework for reviewing foreign investment proposals. For example, investment in sensitive areas such as national infrastructure by countries with a free trade agreement with Australia are subject to review if the value of investment exceeds $275 million. This is significantly lower than the threshold of $1192 million for investment in non-sensitive sectors. Another recent piece of legislation reflecting these attitudes is a 2018 requirement that sellers of farmland worth over $15 million must advertise for 30 days to Australian buyers prior to sale to foreign investors.

The relatively recent tightening of investment criteria can potentially stimulate increased domestic investment by Australian firms due to lower levels of foreign investment competition. If domestic investment increases in the long-run, this could reduce Australia’s reliance on foreign inflows of funds, and help to reduce the net primary income account deficit. However, the low level of national savings, which is in part responsible for the savings-investment gap, must also be addressed.

Rising Australia-China tensions are believed to have influenced Treasurer Josh Frydenberg’s decision to reject the recent $600 million sale of Lion Dairy to China Mengniu Dairy.

There are several other examples of Chinese investments being rejected or amended prior to approval. While these are justified, they may have unintended repercussions on Australian economic growth. The trade spite between Australia and China has the potential to escalate further, fuelled by such rejections of Chinese investment and the Chinese government imposing protectionary measures on certain Australian agricultural exports. Since Australia is reliant on China for not only agricultural, but also commodities exports which are at risk of facing protectionary measures, a “protection battle” may compound to impact economic growth by stunting exports.

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