While Australians had a stock of $A2.1 trillion in offshore investment in 2015 (compared with a total stock of foreign investment in Australia of $A3 trillion), the CEDA report is focused on the long term FDI rather than short term portfolio investment. This was $A542.6 billion in 2015 which was unusually down slightly for the first time in several years.
The US (with 19.4 per cent), Britain (15 per cent) and New Zealand (11.2 per cent) dominate this investment reflecting the way many businesses are more comfortable investing in similar political and economic cultures abroad.
But these shares have fallen significantly over the past decade (especially for the US from 40 per cent in 2005) with the percentage shares for China and South East Asia rising although not as fast as the US decline.
“Despite the growth of outbound investment to Asia, it is still underweight given the nation’s export flows,” CEDA economists Sarah-Jane Derby and Nathan Taylor argue. “Australia’s history with manufacturing may, at least partially.”
PwC partner Andrew Parker writes the end of the mining boom means Australia must look for new means to drive growth.
“The good news for Australia is that we are rebalancing growth back towards a greater reliance on our service sector at the same time as Asian countries, most notably China, are increasing consumption as the middle-class consumer population expands,” he says.
“But if Australia is to participate in the growing Asian consumer economy as more than just a farm, a quarry or a beach, we are going to have to engage and invest more in Asia’s markets and businesses.”
Parker argues Australia’s overall outward level of FDI is about the same proportion of GDP as the average for major economies around the world but the distribution is wrong.
Only a bit more than 10 per cent of Australian FDI goes to Asia compared with about two thirds of exports raising the question of whether Australia can sustain its export performance when services are growing in importance without greater investment.
But finding the right benchmark for the appropriate level of direct investment into fast growing Asia is more complex than simply using the benchmark of export success. The right benchmark is very much in the eye of the beholder.
For example, Australia’s proportion of FDI going into Asia seems to be about the same as the proportion of US and British investment going to the region.
Australia should arguably have a larger share because it is so geographically close to Asia but on the other hand companies from the US and Britain have been investing into Asia since before Australia became a country.
Another way of considering this conundrum (detailed here) is to look at how about seven per cent of Australia’s FDI now goes to South East Asia which is more than a 300 per cent increase over the past decade.
That may seem small based on proximity but it is more than double the proportion of US investment in Mexico despite the US having a 23-year old trade agreement with Mexico and a shifting border during its early history.
Japan provides the counter example for Australia with about 30 per cent of its FDI in Asia (including a large chunk in China despite diplomatic tensions) or 35 per cent if Australia is included in Japan’s version of Asia. This is more than what Japan has in the US.
The CEDA study particularly highlights food processing and agriculture as industries where Australia needs to develop a new investment strategy for sustaining and building a growing export opportunity.
“The case for new, outbound investment is stronger for Australian exporters of high-value agricultural and processed goods, such as premium-quality food and beverages, and in services delivered into Asian markets,” former trade minister Craig Emerson says.
“Offshoring of manufacturing and back-office services is becoming less important, as the impact of relative wage costs on locational decisions declines in the Digital Age.”
University of Southern Queensland agriculture value chain expert Alice Woodhead says the “country or companies that will gain the most market share in Asia will do a lot more than sell food to importers at a food fair.”
“For Australian companies to compete in these markets there needs to be deeper engagement in Asian business that includes managing, partnering or investing in food distribution infrastructure and services,” she says.
“Finding better ways to connect Australia’s natural product advantages and expertise with emerging global businesses in Asia will be critical to future contribution of the agrifood sector to economic growth.”
Greg Earl is an editor and writer. He co-authored the CEDA report essay Integrating Australian agriculture with global value chains with Professor Alice Woodhead and Dr Shane Zhang.