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Foreign direct investment: Ten simple questions

Foreign direct investment: Ten simple questions

1. Why is FDI so sensitive? 

Here is an impolite truth about international commerce: governments, even 'liberal capitalist' ones, are obsessed with sovereignty. Foreign direct investment (FDI) represents a breach of sovereignty. This year's Lowy Institute Poll shows that most Australians view FDI in key infrastructure as undesirable. All countries consider FDI to be of national concern, and some have even established panels to review incoming investment.

2. Is there 'too much' FDI?

In the 2014 Poll, about half of Australians think FDI, generally, is excessive. To put this in a global context, the total stock of world FDI in 2012 was US$23 trillion. This sounds like a lot, but world GDP in 2012 alone was US$72 trillion. And remember, that US$23 trillion FDI stock was accumulated over decades; the annual flow of FDI compared to GDP is but a trickle. Rhodium predicts that outgoing Chinese FDI may be $1-2 trillion by 2020 and there is alarm that it is 'buying the world'. Such concern overlooks the fact that the US and EU today have invested multiple times this amount abroad.

3. Does FDI work? 

It has long been thought that America's FDI, typically through its multinational companies, is highly profitable. This contrasts with the scant returns yielded by China's official portfolio investment in reserves. No wonder China wants to diversify more into FDI, as many governments do with sovereign wealth funds. But such funds seeking riches abroad should beware: often they are scavenging the opportunities discarded by domestic buyers. They risk the 'winner's curse'. [fold]

4. Isn't the fuss mostly about jobs? 

Yes, although other emotional factors are at play too. Who in Australia welcomes GM, Toyota and Ford shutting down car factories? Obviously, that is all about jobs, and the 2014 Poll shows FDI in manufacturing is mainly (58%) welcome. Pfizer's bid for AstraZeneca flailed over price, but the real hurdle awaiting Pfizer was MPs worried about keeping capabilities within Britain — the ultimate expression of sovereignty. An identical debate is ongoing with GE's bid for Alstom.

'Greenfield' investment that creates jobs is welcomed, while mergers & acquisitions often aren't. The British and French won't object if US firms pour billions into new factories and labs in Europe, but they are upset about the sale of their national icons. Australians were horrified by Chinalco's bid for 18% of RioTinto, yet unfazed by Citic's shambolic attempts to build a new iron ore mine. 'Land grabbing' is also sensitive, and 60% of Australians are against FDI in agriculture.

5. Do 'strategic industries' matter? 

Industrial policy is contentious. But I think reciprocity is an important principle in international relations. If China views certain sectors as strategic, then perhaps others should too. Its 'negative list' (off-limits to foreigners) remains huge. A former US senator told me one reason CNOOC's bid for Unocal was scuppered was that Beijing would never countenance a US takeover of a major Chinese oil firm. For him, it was a matter of fairness.

6. So, take a quid pro quo approach to FDI? 

Although it sounds petty, 'cross-retaliation' is permitted sometimes in international trade. The problem is asymmetry: countries aren't equal. If Beijing bought Fonterra, New Zealand couldn't take a proportionately significant stake in the Chinese economy. Likewise, Norway may seem open and friendly, but Oslo would never give up control of Statoil, though foreigners would (and could afford to) buy it. The Australian public understands this. In Lowy's 2012 Poll, 51% agreed with the statement 'China has so much money to invest it could end up buying and controlling a lot of Australian companies'.

7. Do negotiated agreements help? 

They should. FDI transactions are often conditional on governance and other terms. Pre-clearance rules are also a good idea. But bilateral investment treaty negotiations are bogged down and Australia's FTA bargaining with China may be stuck on this very point. Minority stakes are politically safer. Possibly the most successful FDI into Australia was Mitsubishi's 50% buy of BMA, a company few Australians have even heard of.

8. Is Australia special? 

Australia has seen all sides of the FDI dilemma. For instance, the Foreign Investment Review Board allowed SingTel's purchase of Optus but disallowed SGX's takeover of ASX. BHP and Rio have been serial acquirers overseas, but BHP's bid for Potash was rejected. Australia's mixed experience (and indeed mixed sentiment towards FDI) doesn't look anomalous.

9. Does state capitalism matter? 

There are many reasons why government's own enterprises, but most obviously they want SOEs to serve policy objectives, which may be domestic (providing phone lines for everyone or nationalising oil rents) or foreign (securing resources or projecting prestige). SOEs act differently from private companies; they are political actors and they should be treated differently.

10. Why is Chinese FDI unpopular? 

It is odd that 31% of Australians view China as Australia's 'best friend in Asia', yet almost one half view it as a military threat and 56% feel there is too much Chinese investment in Australia. This suggests either an extremely polarised public, or ambivalent attitudes (perhaps 'best customer' would be more accurate than 'best friend'). 

Here's why. China's form of state capitalism is particularly opaque, and in the eyes of some foreigners this taints all Chinese companies, not just SOEs. The reason is so simple yet so sensitive that few dare speak of it: the Chinese Communist Party. The Party is powerful and pervasive yet also completely elusive, like a secret ethnic masonic lodge backed by the world's largest standing army. My friends in the Party (many of them in 'private sector' cells) view membership as useful and elite and, yes, patriotic. That's fair enough, but they need to ponder how their secret senior club looks to outsiders. Then they'll understand the wariness to Chinese FDI.

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