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FDI: Less restrictive than we used to be



15 July 2010 09:15

During the recent debate  over Australia's response to Chinese foreign investment, many references were made to the OECD's index of foreign direct investment (FDI) regulatory restrictiveness. 

That index measures the restrictiveness of a given country's policy towards FDI on a scale of 0 (no restrictions) to 1 (prohibition of FDI). The index in use at the time covered nine sectors and provided results for 29 OECD member economies (excluding Luxembourg and before Chile joined this year) as well as 14 other non-member economies.

On this measure, Australia appeared to operate one of the most restrictive FDI regimes among advanced economies. According to the 2007 index, Australia operated the sixth most restrictive FDI regime out of the 43 economies covered. The only two OECD economies judged to have tougher regimes were Iceland and Mexico, along with the non-OECD economies of China, India and Russia. 

Australia was identified as running a much more restrictive regime that its close neighbour, New Zealand, and a tougher regime than Canada, which is sometimes depicted as a competitor for foreign investment. Australia's index of restrictiveness was above the OECD average, the non-OECD average, and the overall country average. 

Moreover, the index also highlighted the fact that the main reason Australia stood out from the other OECD economies in its restrictiveness was as a result of the Foreign Investment Review Board (FIRB) screening process: as the OECD chart shows, the level of equity and operational restrictions did not significantly distinguish Australia from the rest of the world.

While this was useful information, it suffered from several drawbacks as a measure of the overall restrictiveness of Australia's FDI regime in the context of the China debate. First, as the producers of the index themselves emphasised, its design features mean that it does not take into account some important factors:

  • It only scores overt regulatory restrictions on FDI and ignores other important aspects of the regulatory framework, such as the nature of corporate governance and other institutional and informal restrictions. 
  • It excludes other policies that indirectly impinge on FDI, including economic and social regulation. 
  • It relies on countries being transparent in reporting their restrictions. 
  • It does not adjust for the actual enforcement of restrictions.

Second, the index excluded most of the so-called primary sectors of the economy, including mining. Mining, of course, was precisely the sector where most of the China action was taking place.

Third, and perhaps partly as a result of the first point, some of the rankings in the index just looked a bit peculiar. So, for example, the rating of Japan and Korea as substantially less restrictive to FDI than Australia seemed surprising.

The good news is that the OECD has now updated the index in a way that takes care of the second point and provides a bit more comfort on the third. (The first set of shortcomings remains, and in addition, the new version of the index no longer attempts to take into account the effects of rules on state ownership and state monopolies.)

The new index now covers 48 economies (including all of the G20) and covers all primary sectors, including mining. The chart below shows that Australia continues to run one of the more restrictive FDI regimes of the countries covered by the measure, with a level of restrictiveness still above both the OECD average and the overall average (although its now a little below the non-OECD average). However, the restrictiveness of Australia's FDI regime is now below that of Canada and New Zealand, and also is also below Japan and Korea: 

What about mining? Here the OECD gives Australia a score of 0.1. That is less than the OECD, non-OECD, and overall average. It's also below the scores given to Canada and New Zealand.

How has the level of FDI restrictiveness changed over time?  The changes to the index methodology render invalid a straight comparison between the old and new index values for Australia. However, the OECD has recalculated the 2006 numbers using the new methodology, and on this basis, Australia's regime is judged to have become more liberal over recent years:

Photo by Flickr user mag3737, used under a Creative Commons license.

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