Published daily by the Lowy Institute

Economic diplomacy: A snapshot of overseas investment trends

New data sheds light on how Australian businesses have (and haven’t) shifted their foreign engagements.

Singapore skyline (Pakin Songmor/Getty Images)
Singapore skyline (Pakin Songmor/Getty Images)

Going out

One of the big questions facing Australian companies in the new world of reshoring and diversification is how to get the balance right in a time of disruption and power shifts.

The federal government and two recent independent reports have told business to invest more in Asia, against the long-established pattern of Australian offshore capital still going to the Anglo world while exports increasingly go to the region.

In a timely contribution to this debate, a new data series from the Australian Bureau of Statistics has provided the first update on the scope and performance of offshore investment by Australian-based enterprises for the first time in 15 years.

It reinforces some old trends, but also reveals some interesting new insights into this commercial activity, which is both a driver and beneficiary of government economic diplomacy actions.

Australian overseas investment affiliates

 Number (2019)Number (2003)Equity value ($bn) (2019)Sales margin (%) (2019)Return on equity (%) (2019)

There were 5176 Australian affiliate businesses operating abroad in 2018–19 owned by 275 parent companies, compared with 4012 in 2002–03, when this information was last collected.

The top five locations by number were the United States, the United Kingdom, New Zealand, Singapore and Canada, with scarcely any change on 2002–03 apart from Canada supplanting Malaysia – an increase in the Anglophile nature of this measure of international engagement.

While the two data series have differences in collection and presentation, there has been no significant change over 15 years in the number of investments in Asia, with the proportion stuck at about 22% of the total.

And consistent with the annual but less detailed regular foreign investment data, the money invested is strongly skewed towards the more familiar and longer-standing business destinations. The offshore investors have $187 billion in equity investment in the Americas, $170 billion in Europe and only $78 billion in Asia (which in this data includes the Middle East).

But there has been a striking shift in the type of business with manufacturing affiliates falling by more than half, from 1281 to 540, while mining affiliates have quadrupled from 130 to 563, and finance/insurance affiliates have tripled from 463 to 1216.

Follow the money

The two recent reports on Asian business – from the Business Council of Australia/Asia Society Australia and Asialink/Commonwealth Bank – have called for more investment in order to take advantage of emerging new middle-class consumers.

But they run up against perceptions that Asian business is harder and less profitable than familiar English-speaking options.

These latest figures provide some new insights for this debate – especially at a time when the government is embarked on a challenging exercise of encouraging diversification from high-growth China in favour less developed markets such as India and Southeast Asia.

Despite all the focus on business opportunities in the ASEAN region, the number of businesses there has only increased marginally over 15 years.

As the table above shows, there is some variation in the performance of the investment in the three main global zones. But Asia is relatively competitive, especially when viewed through the more specific lens of the three competing zones of interest in the US, China/Hong Kong and Southeast Asia.

The Australian affiliates in the Americas had a better sales margin and return on equity (ROE) than the affiliates in Asia and Europe. However, at the three-country comparison level, the returns from investment in China/Hong Kong and the US are very similar.

The notable thing when the government is particularly focussed on Southeast Asia as a diversification location and new growth centre is that the 517 affiliates in that region performed better on average than those in both China and the US. However, despite all the focus on business opportunities in the ASEAN region, the number of businesses there has only increased marginally over 15 years.

The multinational path to Asia

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 this data suggests that 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% of these businesses are operating in Asia or Oceania (largely New Zealand), whereas only 29% of fully Australian-owned offshore affiliates are operating in Asia or Oceania. 

This is perhaps not surprising, since it is unlikely that an Australian MNC subsidiary would be investing in the US or Europe, where these multinationals are typically based. And this investment trend was apparent back in 2003.

Australian expertise and products may be making their way to Asia via the underappreciated backdoor of MNC investment. But this is not so good for soft-power projection.

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

Her calculations show that ROE for the MNC affiliates in Asia was 16%, compared with 5% for the Australian-owned businesses. The margin was even greater in Southeast Asia, where the MNC businesses earned 20%, compared with 3% 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 was recently launched to pitch this idea to foreign companies planning to exit Hong Kong over concerns about increased Chinese control.

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

Service business

With the China crisis yet again drawing attention to Australia’s heavy dependence on the export of commodities to Asia, calls have been growing for more on-the-ground investment to facilitate services exports.

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 on the ground. These figures appear to suggest there is 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 $89 billion of services, which is equivalent to 90% of Australia’s official services export value, compared with $123 billion of goods exports, which is only 32% of Australia’s total goods exports.

While Australia has 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. There figures seem to suggest investment will be a necessary driver of services export success.

ASEAN shifts

Given the relatively good performance of the Australian investments in Southeast Asia it is worth looking at how they compare across that region.

Singapore, not surprisingly dominates, with 187 investments with equity of $35 billion and sales of $7.1 billion. Indonesia broadly ranks second, with equity of $11.5bn and sales of $7 billion from 77 investments (Malaysia has a bigger presence, with 97 businesses).

But in terms of public impact, Australian businesses in Indonesia may be more important, with 31,000 employees compared with 11,000 in Singapore and the Philippines.

And surprisingly, according to this data, Australian businesses now have more equity in Vietnam ($2.4 billion) than Malaysia, Thailand and the Philippines, although Vietnam still lags behind those longer-standing Australian relationships in terms of employees, sales and actual businesses.

You may also be interested in