Global ties encourage vital foreign investment

09 Oct 2020

Tags

  • Edmund Tang
  • FDI

Part 1 of this blog analysed some of the trade-related aspects to Australia’s economic resilience. Our liberalised trade, strategic links to Asia, free trade agreements and human capital have all played their part.

In Part II of this blog we look at where Australia’s foreign direct investment (FDI) comes from and the impact it has on some of our most valuable export industries.

One point is crucial: FDI is vital to the Australian economy. It is a source of external finance for investment, and an engine for economic and employment growth.

By bringing in new businesses with global expertise and connections, investment triggers innovation and creates fresh opportunities. It also contributes directly to our overall export performance – especially in mining.

A top destination for foreign investment

Australia presently hosts approximately A$4 trillion of foreign investment stock. Both FDI and other investment (including portfolio investment) have recorded strong growth since 1999. The former has grown by 8.4 per cent per year; the latter by 8.6 per cent per year.

As a percentage of GDP, Australia’s total value of foreign investment stock reached nearly 200 per cent in December 2019. This means it has risen sharply – by 120 per cent – over the last two decades. (see table below).

Looking just at FDI, Australia’s inward stock reached A$1.02 trillion in 2019. This means that FDI rose three per cent from 2018, and the stock value of FDI in Australia has more than doubled over the past decade (see table below).

Europe and North America are major investors

The European Union (EU) and North America have contributed almost half of all the investment that has arrived on Australian shores. Following an exceptional growth rate of about 14 per cent per year from 2016 and 2018, FDI stock from the EU rose by 6 per cent to A$238 billion in 2019.

FDI from the US fell 6.5 per cent to A$205 billion in 2019, while Canada continued to increase investment activity by 17 per cent to exceed A$47 billion (see table below).

Strange to say, the UK has now overtaken Japan as Australia’s second largest investor. With a total FDI stock of over A$127 billion in 2019, British investors now hold 12.5 per cent of the total stock value of FDI in Australia.

Increased inflows from Asia

Nevertheless, in recent years there has been a solid rise in capital inflows from Asia. This means Australia's close ties to fast-growing economies in Asia are now reflected in investment flows.

Chinese FDI in Australia grew by 10 per cent in 2019 and has experienced a compound annual growth rate (CAGR) of 18 per cent since 2009. As a result, China has now become Australia’s sixth largest direct investor, with a total stock value of A$46 billion.

For the moment, however, the stock value of Chinese FDI in Australia remains much lower than traditional investors such as the US and the UK, and Japan.

Total Foreign Investment Stock by Country, 2009-2019

Notes 1. % CAGR and value growth for Virgin Islands from 2012 to 2019; 2. The strong growth in EU’s FDI in Australia was largely due to the sale of Westfield to a French commercial property company in June 2018 estimated to be valued at over A$30 billion.
Sources: Australian Bureau of Statistics (ABS), Cat. No. 5352.0 – International Investment Position, Australia: Supplementary Statistics, 2019 (released 7 May 2020), Table 2; ABS Cat. No. 5206.0 – Australian National Accounts: National Income, Expenditure and Product, December 2019, Table 3 (released 4 March 2020); Austrade

  A$ billion     2009-2019
Ranking by Economy, 2019 2009 2015 2016 2017 2018 2019 % Share 2019 % Change 2018-19 % CAGR Growth (A$ billion)
1   USA 98.2186.2 198.9 199.2 219.5 205.2 20.1 -6.5 7.6 107.0
2   UK 61.0 64.4 75.8 89.4 98.8 127.1 12.5 28.6 7.6 66.2
3   Japan 45.6 91.9 97.9 97.9 109.1 116.1 11.4 6.4 9.8 70.5
4   Netherlands 31.4 48.0 51.5 55.9 52.0 54.8 5.4 5.4 5.7 23.4
5   Canada 12.2 24.8 27.8 32.6 40.4 47.1 4.6 16.6 14.4 34.9
6   China 9.1 35.7 38.7 38.4 41.8 46.0 4.5 10.1 17.6 36.9
7   Bermuda 9.5 36.8 37.7 42.2 44.5 41.6 4.1 -6.5 15.9 32.1
8   Singapore 16.7 29.2 23.6 27.7 32.7 36.1 3.5 10.1 8.0 19.3
9   Germany 18.1 17.0 19.5 24.0 24.3 22.0 2.2 -9.3 2.0 3.9
10   Virgin Islands, British1 NA 21.5 21.5 20.8 22.0 21.9 2.1 -0.4 1.8 NA
11   Hong Kong SAR 5.4 12.6 13.7 15.9 17.9 16.1 1.6 -10.0 11.5 10.7
12   Malaysia 4.5 10.8 12.3 13.5 14.1 14.7 1.4 4.5 12.7 10.3
13   France2 13.0 6.4 6.1 6.3 27.5 12.6 1.2 -54.0 -0.3 -0.4
14   Switzerland 17.8 9.6 10.0 9.7 11.3 10.5 1.0 -6.4 -5.1 -7.2
15   Luxembourg 3.2 2.8 6.3 9.4 8.4 8.1 0.8 -4.2 9.6 4.8
16   South Korea 1.3 3.2 4.6 5.4 6.8 7.5 0.7 10.4 19.3 6.2
    FDI stock - All Economies 490.2 775.3 844.5 896.9 994.3 1,019.5 100.0 2.5 7.6 529.3
    OECD 327.4 474.4 518.6 547.4 618.6 630.8 61.9 2.0 6.8 303.4
    APEC 200.6 404.3 428.2 442.0 494.6 500.7 49.1 1.2 9.6 300.1
    EU1 144.8 153.3 172.5 196.0 224.5 238.1 23.4 6.0 5.1 93.3
    ASEAN 22.1 45.6 40.6 46.6 52.6 56.6 5.6 7.5 9.9 34.5
    FDI Stock - % of GDP 38.8 47.3 49.6 49.6 52.4 51.1        

 

Other Asian economies are also emerging as fast-growing sources of FDI. Investment from ASEAN countries (which collectively ranked fourth) has risen by 10 per cent a year to A$57 billion. Investment from Singapore has risen eight per cent to A$36 billion; from Hong Kong by 12 per cent to A$16 billion; and from South Korea by 19 per cent to A$8 billion.

Japan remains Australia’s third largest source of FDI, with a total stock value of A$116 billion in 2019. This represented a CAGR of ten per cent over the past decade.

Overall, these investment inflows are an extremely positive sign. They are a direct reflection of global confidence in the Australian economy – and they have helped build the resilience that keeps us strong in a very challenging year.