Foreign Direct Investment in Australia - Essay Example

China's demand for iron ore has driven the growth of Rio Tinto. BHP Billiton, Vale and Rio Tinto, control about 70% of the world's trade in iron ore.Each year they negotiate annual supply contracts with their main customers, and as demand has surged, so has the price. In 2005 the price rose by 72%. Australia benefits the most since it is the world's biggest exporter of iron ore. The output from Rio Tinto's mines in the Pilbara, in north-west Australia, has increased by an average of 15% a year since 1999. Between now and 2013 it plans to triple its output. Demand for goods and services in the Pilbara's state, Western Australia, grew by 11% in 2007. Studies have touted the benefits of foreign direct investment. (China Elections and Governance, May 8, 2008). Chinese investment in Australia's iron-ore business is increasing. Gindalbie, an Australian iron-ore miner, and Ansteel, a Chinese steelmaker, agreed to invest A$1.8 billion in a joint venture to develop a mine in Western Australia in 2007. This new investment translates to5,000 new jobs. (China Elections and Governance, May 8, 2008) Foreign direct investment (FDI) should be free from the strict controls which are implemented by host governments. (Main Idea Statement). Foreign direct investment has speeded up the economic development of Australia. If the foreign direct investment in the iron ore and coal mining sector continues, Western Australia will need an extra 400,000 workers within 10 years ding to the Australian Chamber of Commerce. Australia has entered its 17th year of uninterrupted growth. The pace of domestic demand that monetary authorities have pushed interest rates to their highest in close to 12 years in order to combat inflation. Inflation has been identified as the country's chief economic ill. Skills shortage and infrastructure bottlenecks at congested ports continue to hound the growing economy. Due to the massive foreign direct investments, Australia's unemployment record is at a 33-year low, net immigration is at a record high and the prices paid for Australia's most important exports such as iron ore, coal and have risen. Moreover, household wealth has more than doubled in 15 years, the national car fleet is younger than before and contains more luxury brands, while homes are replete with high-end consumer electronics. The federal and state governments have registered budget surpluses and A$31bn (US$28bn, 14bn, 18bn) in tax cuts will soon be handed to the twenty one million population. The China-led boom in Australia is expected to last for many years as China is heavily dependent on imported raw materials for industrial production. British foreign direct investment in Australia spans several industries. The UK companies dominate EU direct investment in Australia at about 53 per cent. The UK is the second-largest source of direct investment in Australia behind the United States. The level of the UK's direct investment in Australia was about $51 billion. British firms held substantial investments in Australia, setting up operations in the resources and energy sector (for example, Shell and Rio Tinto-Zinc), telecommunications (Vodafone and British Telecommunications) and food and beverages (Cadbury and Unilever). (DFAT, 2005). Moreover, Germany has 330 subsidiary companies and 470 branch offices in Australia. German investments are in banking and finance (Deutsche Bank), automotives (DaimlerChrysler, BMW, Bosch, Hella and VDO), telecommunications (Siemens) and chemicals (Boehringer, Schering). These investments have increased the economic growth of Australia. (DFAT Report, 2005) Free trade fosters the inflow of foreign direct investment hence, enhancing competition and innovation. (Heritage website). One of the supporting reasons for free trade is greater access to a greater variety of goods and services. The second argument is that trade generates economic growth. The Asean Free Trade Area registered a growth of 8% per annum due to the influx of foreign direct investment. Free trade disseminates democratic values. Free trade fosters a strong support for the rule of law. Companies that engage in international trade have reason to abide by the terms of their contracts and international agreed-upon norms and laws. The World Trade Organization requires its member countries to honor trade agreements and if a trade dispute occurs, it exhorts member countries to abide by the decisions of the WTO's duly designated mediating body. Free trade fosters economic freedom. The ability to trade freely increases opportunity, choices, and standards of living. The countries with free economies have implemented a capitalist model of economic development and seek new international trade and investment opportunities. Finally, the societies that enact free trade policies create their own economic dynamism. This can be found in the development of freedom, opportunity, and prosperity that benefits every citizen. Australia has a strong and resilient economy, which was the 15th largest in the world in 2006. The resilience of the Australian economy has seen 16 consecutive years of economic expansion to 2007. Australia's GDP growth has averaged an impressive 3.5% per annum. The Australian economy is forecast to grow above the OECD average in 2008. Australia has capitalized on close ties to the fast growing Asian markets to propel economic growth. Economic growth has been supported by higher productivity, ongoing economic adjustments and robust financial, legal and political systems. These factors have reinforce Australia's competitiveness, with the World Economic Forum ranking Australia 18th out of 127 countries for business competitiveness. Chinese foreign direct investments in Australia is expected to increase from 2008-2010 as China's demand for coal, iron ore and minerals also increase. Sinosteel, a big Chinese minerals firm, has bid A$1.2 billion for Midwest, a Western Australian iron-ore producer. Chinese firms are even said to be thinking about a counterbid for Rio Tinto, to prevent BHP from cornering the market for ore. The state-owned Aluminum Corporation of China joined Alcoa on February 1, 2008 to take a 12 percent stake in Rio Tinto. Chinalco described its $14.05 billion stake in Rio Tinto as China's biggest foreign investment. The Chinese company also said it might buy more shares to derail a hostile takeover attempt by BHP Billiton, a merger that China fears could drive up prices for raw materials. Rio Tinto is listed in Melbourne, Australia. The additional Chinese investments will result in a higher GDP growth next year from the mining sector. Chinese demand for agricultural goods have also expanded. Australia's farmers are sending lots of beef, wheat, lamb and dairy products to China. China is now Australia's second-biggest market for agricultural goods, and the fastest-growing. China has replaced Japan as Australia's biggest trading partner. It still accounts for 14% of the continent's exports, and in 2006 it ranked 17th for foreign investment in Australia. Countries which are the recipient of various FDI are known for their operational efficiency. Australia has a highly efficient business sector which operates under a well-established corporate governance framework. Australia was rated seventh in the world for business efficiency, and corporate boards were ranked second for effectively supervising the management of companies. Australia's financial regulatory environment is well-known for promoting stability and certainty. The local banks are well managed and profitable. Chinese foreign direct investments in the US have increased tremendously particularly in the banking and private fund sector. China poured in US $5 billion through its government investment fund, the China Investment Corporation into Morgan Stanley and its purchase of a US $3 billion stake in the Blackstone Group, a private equity fund. Blackstone has a long term investment horizon. Private equity, by nature, is long term orientated. The business of buying companies on the cheap, making them leaner and meaner and then selling them is a time consuming process. It requires patience, talent and strategic thinking. Unlike mutual fund managers, private equity requires active and continuous management of acquired companies. Moreover, Blackstone boasts of 52 company portfolios which are very well diversified geographically and industry wise spanning the U.S to China, while passing by Europe and Latin America. In 2007, Blackstone registered total sales close to approximately 100 billion dollars. Blackstone's global reach presents a high flexibility in deploying huge funds in exciting investment areas areas and industries all over the world. These multiple foreign direct investments by China were the result of persistent increases in foreign reserves. China's foreign reserves have jumped to $1.3 trillion. Faced by a trade surplus worth US $26.91 billion in June 2007, China's central bank issued torrents of yuan and bought dollars to prevent the yuan from rising quickly against the dollar in currency markets. The government's large purchases of dollars has led to the inevitable problem of how and where to invest the money. The Chinese government has started chasing higher returns which presents greater risk and sometimes losses. The previous examples of unhindered foreign direct investment have led to the phenomenal economic growth and development of the recipient country. Previous foreign direct investment had benefited China also. The Pearl River Delta region in south China has undergone economic development due to foreign direct ivestment since the 1970s. Foreign investment from Hong Kong, has largely been constant and increasing. The wide diffusion of foreign investment from Guangzhou and two special economic zones near Hong Kong to surrounding areas is clearly identified. The FDI inflow occurred after 1992 when it became the largest host country of FDI. In 1997 China received US$52.4 billion FDI, and about 40 per cent of the total FDI, US$21 .6 billion, was from Hong Kong (). In 1997, the FDI to Guangdong was US$12.6 billion. A big chunk of Guangdong's FDI has been poured in the Pearl River Delta projects. For example, in 1995, US$8.58 billion out of US$10.18 billion total FDI to Guangdong went to the Pearl River Delta. (Shen, et. al., 2000). The Pearl River Delta in China has been a hot spot of FDI activities, particularly for investors from Hong Kong. Its economy has expanded due to this. (Shen, et. al., 2000). Regional integration leads to increased FDI flows to the integrating region and to its member countries. The setting up of the Asean Free Trade Area (AFTA) is a proof of this. The FDI flows to ASEAN have increased more than six-fold in the post-1992 period, from an annual average of US$557 million in the period 1968-91 to an average of US$3,612 million in the period 1992-97. The increase is evident when a shorter time period is selected prior to integration, as the average FDI flows for the 1986-91 period was US$1,362 million. This increase was experienced by all the ASEAN-5 members. Tests for differences in the means reveal that FDI flows prior to the creation of AFTA (1992) are different from those after AFTA. A United Nation's study published in 1992 concluded that foreign direct investment flows are related to the GNP levels and its underlying growth, but that no clear link to short-term changes in rates of GNP growth can be found (UNCTC, 1992) Foreign direct investments in English clubs have been helpful as the additional funds are used to develop the stadiums and to hire new team players. Thailand's former prime minister, Thaksin Shinawatra placed an 81.6-million-pound bid for English Premiership football club Manchester City. Shinawatra's bid for the Blues, worth 121.5 million euros or 162.6 million dollars, was made by Thaksin's UK Sports Investments company and was approved by management at Manchester City. The boards approved it on June 22, 2007. The ownership list of Premiership shows that overseas investors want to own top flight English teams. According to Paul Rawnsley, director in the sports business group at Deloitte, this development should not be a cause for concern. Regardless of nationality, it is good business for owners to conduct their affairs in a proper manner. The Premiership attracts foreign buyers in big numbers because it is the richest league in the world as it earns 400 million pounds a year. A new broadcasting rights deal will put additional pounds 300 million to the Premiership's coffers in the 2007/08 season. Deloitte states that if clubs can preserve this extra income from being taken up by wages the business case for team ownership will increase tremendously. Deloitte's 16th Annual Review of Football Finance revealed that the top 20 clubs generated pounds 1.4 billion for the past three years. Earnings will reach pounds 1.8 billion when the new TV deal starts. (The Birmingham Post, October 25, 2007). Foreign direct investment in Korea has also grown exponentially. Foreign direct investment (FDI) amounted to US $15.690 billion in 2000, eclipsing the US $15 billion-mark for the second consecutive year after $15.541 billion recorded in 1999. This sum represents more than double the $7 billion attracted in 1997. Inbound FDI contributed greatly to the country's foreign exchange holdings, accounting for 30 percent of the increase in the 1998-1999 period. As a result, inbound FDI made a huge short-term contribution in helping Korea overcome the crisis. Foreign investments played a role in the corporate restructuring strategy by closing down marginal Korean companies that had lost their international competitiveness. (Korea Times, January 18, 2001). The government intervenes in cases where foreign direct investment is channeled to sensitive areas. For instance, the Chinese investments in banking have raised concerns from US legislators. The first Chinese direct foreign investment covers the banking transaction between Bear Stearns and its Chinese financial counterpart called Citic. The second Chinese foreign direct investment is computer and information technology with Bain Capital, 3Com Corporation, and the Chinese company Huawei Technologies. To assess these transactions, the US Congress should be vigilant. The possible downsides here are that these foreign investments which are open to foreign governments may endanger the national security of the United States. Australia's growth, as well as that of other countries, has been funded by Chinese foreign direct investment. These investments were largely unhindered by any form of government controls. Prime Minister Rudd will focus on bilateral co-operation and trade and investment opportunities for Australian companies in china. Thus, in order to ensure Australia's resources boom, the government needs to respect foreign direct investments. Works Cited Bayari, Celal. (2004). "Japanese Business in Australia." The Otemon Journal of Australian Studies, vol.30, pp. 119-149. Freeman, Nick and Frank Bartels. (2004). The Future of Foreign Investment in Southeast Asia. NewYork: Routledge Curzon. . "Foreign Investment in Korea Is Win-Win Proposition" Korea Times. January 18, 2001. "Foreign Investment Counsel." The Washington Times. November 2, 2007. Page Number: A16. Lague, David. "China and Alcoa Buy Stake in Rio Tinto." The New York Times. February 1, 2008. MacLeod, Andrew. "Foreign Investment Fears 'Misplaced'." The Birmingham Post. October 25, 2007. Page Number: 6. Shen, Jianfa, Kwan Yiu-Wong and Kim Yee-Chu. (2000). "The Spatial Dynamics of Foreign Investment in the Pearl River Delta, South China." The Geographical Journal. Volume: 166. Issue: 4. Page Number: 312 Smith, Peter and Richard MacGregor. "Good days: Australia prospers from China's resource needs." Financial Times. April 2, 2008. Online Sources The Benefits of Free Trade. Heritage Website. Available at URL: http://www.heritage.org Recent Trends in Trade between Australia and the European Union. Available at URL: http://www.dfat.gov.au/publications/stats-pubs/downloads/Aus_EU_recent_trends.pdf The lucky country: Australia can't dig fast enough to meet demand from China. China Elections and Governance. Available at URL: http://en.chinaelections.org/newsinfo.aspnewsid=17384 Read More