Aus business growth in Asia in the slow lane

The data include businesses which are at least 50 per cent Australian-owned or Australian-based multinational owned. The lack of change in Asian investment is consistent with the annual foreign investment data but this special data series provides much more detailed information about where offshore investment is located and how it is performing.

Offshore investors have $A187 billion in equity investment in the Americas, $A170 billion in Europe and only $A78 billion in Asia (which in the 2019 data includes the Middle East). However, while there has not been much change in the offshore location in 15 years, there has been a striking shift in the type of business. Manufacturing affiliates fell by more than half from 1,281 to 540 while mining affiliates have quadrupled to 563 and finance/insurance affiliates have tripled to 1,216.

The lack of substantial growth in Asian numbers comes as the interim report from the Asia Taskforce, convened by Asia Society Australia and the Business Council of Australia, has argued more on the ground investment will be necessary for Australian business to take advantage of continued high growth in the region, particularly in the services sector. 

The new data reveal three interesting findings which are highly relevant for more on the ground investment:

• The return on investment in Asia is relatively more competitive than is sometimes perceived. The chart below compares this through the lens of three competing zones of investment interest in the US, China/Hong Kong and Southeast Asia.
• Foreign-owned multinationals (MNCs) based in Australia play a key role in boosting the return on investment in Asia.
• Investment on the ground appears to be crucial to exporting services to Asia. 

With the China crisis yet again drawing attention to Australia’s heavy dependence on the export of commodities to Asia, calls for more on the ground investment to facilitate services exports have been growing. The argument goes that commodities can often by exported with little investment on the ground but taking Australian services to the emerging middle-class markets requires people and infrastructure to be physically present.

The new ABS data appear to suggest there is a greater correlation between offshore affiliates and services exports than goods exports, although it is hard to disaggregate goods and services produced on the ground by the affiliates and those brought in from Australia.

Nevertheless, the offshore affiliates sold $A89 billion of services which is equivalent to 90 per cent of Australia’s official services export value compared with $A123 billion of goods exports which is only 32 per cent of Australia’s total goods exports.

While Australia has an obvious comparative advantage in commodities exports, services exports are seen as having stronger long-term growth as Asian economies mature away from infrastructure construction and manufacturing. These figures suggest investment will be a necessary driver of services export success.

It is often noted how private businesses – small and large – seem to have more appetite for the risks involved in Asian investment than the big publicly listed companies that face fund manager demands for quick and regular quarterly profits. But these data suggest the pacesetters in Asian investment are the Australian subsidiaries of foreign owned multinationals (MNCs) which are using Australia as a base for Asian investment.

Almost 700 of the Australian affiliates operating abroad are owned by MNCs. But 80 per cent of these businesses are operating in Asia or Oceania (largely New Zealand), whereas only 29 per cent of fully Australian owned offshore affiliates are operating in Asia or Oceania. This is perhaps not surprising since it is unlikely an Australian MNC subsidiary would be investing in the US or Europe from where these multinationals typically come. And this investment trend was apparent back in 2003.

The little understood importance of Australian-based MNCs in leading Asian investment is better revealed in unpublished analysis of these data by Austrade economist Divya Skene which shows those MNC affiliates in Asia are performing much better than fully Australian-owned subsidiaries.

Her calculations show return on equity (ROE) for the MNC affiliates in Asia was 16 per cent compared with 5 per cent for the Australian-owned businesses. The margin was even greater in Southeast Asia where the MNC businesses earnt 20 per cent compared with 3 per cent for the Australian owned ones.

This is quite a stunning finding for Australian based companies but it is positive for the periodic government campaigns to promote Australia as a base for MNC regional operations. A new industry group recently launched to pitch this idea to foreign companies planning to exit Hong Kong due to concerns about increased Chinese control.

The finding means Australian expertise and products may be making their way to Asia via the little appreciated backdoor of MNC investment. But this is not so good for soft power projection because on the ground it is likely this business engagement will be seen as coming from the MNC’s home country rather than Australia.

Greg Earl is the editor of Asia Society Australia's monthly publication Briefing Monthly and was a former south east Asia correspondent for the Australian Financial Review.

This article draws on articles published by Asia Society Australia’s Briefing Monthly and the Lowy Institute’s The Interpreter.