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- Today's Transcript
Stephen Kirchner: There's nothing wrong with using local savings, but foreign direct investments add to the supply of capital that we can use to invest, which supports long-term economic growth and rising living standards. So it's not a case of foreign investment substituting for domestic saving and investments, it's a case of foreign investment adding to the supply of capital.
Dobbie: What would that do --- if we were more proactive or we were taking more funds from overseas? You make the point in your paper, for example, that we don't have the same ratio of foreign direct investment as other OECD countries. So what sort of increase in GDP could we expect, do you believe, if we were one of the better countries at attracting this investment?
Kirchner: I think the main impact that foreign direct investment has, in terms of long-term economic growth, actually comes via our productivity. So foreign direct investment is associated with the transfer of forms of intangible capital, like superior management techniques, intellectual property rights --- all of these things are potentially adding to productivity growth in Australia. And we know that, for long term, it's actually productivity growth that drives economic growth.
Dobbie: So it's not just the money that's coming in, it's also the experience that's being brought in.
Kirchner: That's right --- in a way, the capital inflows. Although they may contribute to GDP in the short run, the real long-term benefits of foreign direct investment are actually on the productivity side.
Dobbie: I think most people's objection comes when they see profits for businesses going overseas, particularly businesses which have been Australian for some time. Foreign investment comes in, there's a takeover and we start to see those profits going offshore. I think that's where some of the paranoia comes. Is that a fairly narrow view, though, do you think, in most people's minds?
Kirchner: I think it's important to realise that about a third of all foreign direct investments in Australia are actually in the form of retained earnings, which is to say foreign investors who are in Australia reinvesting profits back into the Australian economy. So the idea that all the profits accrue to foreigners is not the full story. The other aspect of this, of course, is that by increasing investment in Australia, you're creating employment for Australians. And so a lot of the profits generated by foreign direct investments need to be balanced against refundable wages that are being paid to employees of foreign-owned businesses in Australia.
Dobbie: You make an interesting point in your paper, which incidentally is called Capital Xenophobia II, the sequel, that we'd all like to see an increase in GDP but we also think that we'd like to avoid a current account deficit. But you seem to say that a current account deficit actually is a good thing.
Kirchner: That's right, because in a way, it's just the flipside of the capital account surplus, which is to say that what the current account deficit is pointing to is the willingness of foreigners to invest in Australia. And their willingness to invest here shows that the rate of return on capital in Australia is relatively high.
Dobbie: Do you think some of our businesses are getting undervalued because there's less foreign investment? Because if you hold stocks, you've got a smaller list of potential buyers, so I guess there's less competition to try and keep those prices up. Are we suffering because of that?
Kirchner: Yes, one of the benefits of foreign direct investment is that it increases competition in the market for the ownership and control of equity capital. So, by quarantining parts of Australia's equity capital stock from foreign participation, you're actually limiting the range of buyers for that equity capital stock.
Dobbie: So is the situation getting better or worse in Australia? I mean, I'd assume we've come a long way since Wolfgang Kasper wrote his paper in the '80s, haven't we?
Kirchner: That's right. There's been a progressive liberalisation of Australia's foreign direct investment (FDI) regime over a period of about 20 years. But despite that liberalisation, we still have one of the world's most restrictive FDI regimes. And we're still underperforming in terms of attracting our share of global foreign direct investment flows. So, even though there's been some liberalisation, it has not gone far enough and we're still lagging behind comparable countries.
Dobbie: You make the point that our share of global foreign direct investment, or FDI, is slipping in relation to our share of global GDP. I mean, wouldn't that be a good thing that shows that our GDP is holding up without the need for this foreign direct investment? And right now, couldn't that be protecting the economy a little bit, because it might protect us from the global economic downturn?
Kirchner: In the context of the global credit crisis, I think what this crisis has shown is that you do not want to be overly reliant on flows of a foreign portfolio investment. And one of the advantages of foreign direct investment is that it's typically long-term, patient capital that's less prone to capital flight. So I think the current crisis actually demonstrated the benefits of FDI versus portfolio flows. I mean, one country that has a more restrictive foreign direct investment regime than Australia is, in fact, Iceland. And Iceland ended up being very dependent on short-term portfolio flows, which is one of the reasons why they're in trouble at the moment.
Dobbie: They're not a good case study for anything, are they, apart from what not to do, I guess. So, why are we falling behind on FDI? Is it largely driven by politics?
Kirchner: I would attribute it to the fact that Australia has the world's fifth most restrictive FDI regime. I mean, if you look at the measures of Australia's attractiveness as a destination for foreign investments, there's no problem there. Australia ranks very highly in measures of FDI attractiveness. But that's not flowing through to actual FDI performance and the only explanation for the gap is the fact that we're not particularly friendly to foreign direct investment.
Dobbie: So we are seen as being attractive --- because that was going to be my question. We're a small market, we're a long away from the rest of the world, it's expensive to produce anything you can export from here. I was wondering whether that was part of it, but people still see us as a country they'd like to invest in.
Kirchner: Yes, and in fact, if there were no interest on the part of foreigners investing in Australia, then there'd be no need for the controls.
Dobbie: That's very true. Now a lot of those controls relate to foreign ownership in monopolies, or near-monopolies: companies like Telstra and Qantas. And so where do you really beam the public interest, if they were to fall into foreign hands, particularly if that money came from, and here's part of the issue, from foreign governments or companies that are majority-owned or controlled by foreign governments? Surely there is a conflict of interest there.
Kirchner: Well, I wouldn't accept the characterisation of Qantas or even Telstra as monopolies. They are facing very strong competition across most of their product ranges.
Dobbie: Telstra's got about, now I said near-monopolies because Telstra has got about 90 percent of the profit in telecommunications industry so it's close to a monopoly.
Kirchner: Sure, I mean, it's a very large player, but being a monopoly is all about whether it's operating in a contestable market. The issues of competition policy, I think, are independent of issues of foreign investment policy. When we're talking about foreign investment policy, we're talking about ownership. That's a slightly separate question from competition. So if you want to regulate for competition, we already have a regulatory setup to do that, which is the Australian Competition and Consumer Commission. And in a way, what the FDI controls do is duplicate and preempt the regular application of competition law. So you can put in place whatever regulatory regime you want to protect competition without having to rely on controlling foreign investment at the border.
Dobbie: Okay, but the other part of that question related to foreign government ownership. I mean, Sovereign Wealth Funds, including our own Future Fund, of course. When we're talking about free flow of capital across borders, Sovereign Wealth Funds really do muddy the waters a little bit, don't they, when we're talking about free trade?
Kirchner: I think they raise a new set of issues and the issue that it raises is whether the Sovereign Wealth Funds or state-owned enterprises are motivated primarily by commercial considerations, as opposed to political or strategic considerations. But I think, again, the domestic regulatory regime is well set up to handle those issues without having to rely on controlling foreign investment at the border. So basically, you regulate foreign investments after the fact. Once it's in Australia, you can then regulate it in whatever way you see fit, without actually having to control it at the border.
Dobbie: Government restrictions have in certain areas been lifted --- foreign ownership of the media is a recent example. A shame it was probably not going to have a great deal of impact because it's in such a restricted industry where there's no room for new entrants, at least in the electronic media. So what other restrictions do you think need to be lifted? What sort of areas do you think the government should be tackling next?
Kirchner: There're two categories of restrictions with respect to foreign direct investment. The first category is the outright statutory restrictions on investing in certain firms and assets. But probably the more serious controls are in fact the requirements that foreign direct investment proposals above certain thresholds need to meet with approval from the Foreign Investment Review Board. And so there's a regime in place to approve foreign direct investments above those thresholds and I think that has a chilling effect on foreign investment because foreign investors know that they have to run the gauntlet of the political process to get anything approved. And there's certainly quite a bit of anecdotal evidence to suggest that potential foreign investors are deterred from investing in Australia because they don't want to have to run through the gauntlet of that process.
Dobbie: Isn't there a similar process in place for other OECD countries or are we a bit alone in this?
Kirchner: We have a foreign direct investment regime that's more restrictive than both averages of both non-OECD and OECD countries. So if you look at us in terms of a spectrum of regulatory restrictiveness, the most restrictive countries are China, India, Russia, and Australia. And down at the other end of the spectrum you have the UK and the United States --- in other words, the countries that we more traditionally compare ourselves to. So, we really stand out in terms of developed countries, in terms of our approach to foreign direct investment.
Dobbie: Of course, a lot of the countries we're going to be dealing with are the developing nations and countries like China, which obviously have more restrictive practices.
Kirchner: Yes, China's probably the most restrictive in terms of foreign direct investment.
Dobbie: And are they holding themselves back because of that, do you think?
Kirchner: I think so, although, a lot of the restrictiveness is about controlling rather than necessarily preventing foreign investors from coming in. So they've set up a regime that's, for example, forces high levels of domestic participation in foreign direct investment.
Dobbie: So in this country you'd like to see the Foreign Investment Review Board basically abolished so that investors know that, really it's an economic decision rather than a political decision.
Kirchner: I suggest two options for reform in the paper, and one of those options is abolishing the FIRB and the current procedure for regulating FDI. Then you'd be putting the onus on domestic regulatory institutions to do the job of regulating both domestic and foreign investment. The second option I propose is maintaining the current regime, but improving its operation. And so that would involve removing administerial discretion from the process and increasing the independence of the Foreign Investment Review Board, so at least the process is conducted at arm's length from the government.
Dobbie: Do you think, in the current political and economic climate that either of those are realistic? Can you see them happening?
Kirchner: We've come a long way in the last 20 years in terms of liberalising our foreign direct investment regime and I think it's a question of maintaining that momentum and trying to converge on the standards of regulation that we observe in countries that we typically compare ourselves to, like the UK.
Dobbie: All right, Stephen, thanks so much for your time --- a pleasure as always.
Kirchner: Thanks Phil.