Counting the cost of regulation

EXECUTIVE SUMMARY

Since European settlement Australia has relied heavily on foreign investment, either by borrowing abroad (foreign debt) or by allowing greater foreign ownership of domestic assets (foreign equity).  This has helped to generate faster economic growth and progressively higher living standards.  As a result, Australia usually runs a current account deficit and the accumulated deficits represent the gap between domestic investment and domestic saving.

The increasing tendency for Australian firms to invest abroad has added another dimension to the contribution that foreign investment makes to Australia.  Increasingly they are using investment abroad to expand beyond the domestic market.  By extending their market presence and access to resources, expertise and technology in other markets, Australian firms are able to become more efficient and competitive in global markets.

Foreign investment is regulated by the Foreign Acquisitions and Takeovers Act 1975.  All foreign investment over specified monetary thresholds has to be screened and approved by the Government as being in the "national interest", prior to its execution.  The Government is able to decide cases as it sees fit.  Some 30 per cent of approved investments by value have conditions imposed on them by the Government.

The emergence of a new group of global investors owned or controlled by governments from jurisdictions without appropriate standards of government or business conduct or which provide their investors with unfair advantages.  While such cases raise legitimate concerns about the state of the global "playing field", any discrimination against a class of investors strikes at the heart of the international trading system, on which Australia depends.

To address these issues, the Australian Government has published six principles for considering investment by entities, which are owned or controlled by foreign governments.

These principles are, however, likely to restrict investments simply because they are owned or controlled by a foreign government, and not because they represent a clear and present danger to the welfare of ordinary Australians.  As China is one of Australia's most prospective sources of inwards foreign investment, the strict application of these principles is likely to adversely affect the broader economic relationship between the two countries, as well as reduce investment in the Australian economy.

Even before it adopted the six principles, Australia had one of the most restrictive foreign investment regimes in the OECD, not to mention in comparison with the rest of the world.  Of the 43 countries that are monitored by the OECD, only China, India, Russia, Iceland and Mexico have more a more restrictive foreign investment regime.

Australia's regime needlessly restricts incoming investment and Australians suffer as a consequence.  ITS Global estimates that the economic cost to the Australian economy from the foreign investment foregone is at least $5.5 billion a year.  The OECD has estimated that the removal of Australia's restrictions would increase its stock of inwards foreign investment by nearly 50 per cent over the long term.

Since the 1980s there have been major reforms in every aspect of economic policy in Australia.  The reforms have opened the economy to the rest of the world and have underpinned its recent unprecedented economic growth.  While the tariff wall has been effectively dismantled, however, the moat against foreign investment remains firmly intact.

INTRODUCTION

Since European settlement Australia has relied heavily on foreign investment to underpin its economic development.  This partly reflects the country's extensive endowments of natural resources, such as pastoral land and minerals, as well as the capital intensive nature of the development path that the country embarked upon. ⁽¹⁾

Australians tap foreign savings by either borrowing abroad -- short- or long-term foreign debt -- or by letting foreigners to increase their ownership of Australian assets -- foreign equity.  Foreign direct investment (FDI) is one form of foreign ownership. ⁽²⁾  Portfolio investment is another.  FDI involve either the acquisition of existing assets or the creation of new ones but only the latter increases the nation's capital stock.  After allowing for that distinction, foreigners have been a relatively small source of funds for domestic investment.  Since the early 1960s, inwards FDI flows have only been around 7 per cent of domestic gross fixed capital expenditure. ⁽³⁾

By drawing on foreign savings Australians have been able to finance greater investment than their own savings would have allowed.  FDI has also increased international competitiveness by exposing local management to international business standards and best practice.  It has provided access to advanced technologies and business innovations through the establishment of new businesses and the modernisation of existing ones.  All have helped to raise productivity and living standards.

Despite its considerable importance to Australia's economic development, Australian politicians have exhibited a pronounced ambivalence towards foreign investment.  As a consequence public policy in Australia towards foreign investment has veered between classical liberalism and economic nationalism.

The zenith of the classical liberal approach to foreign investment in Australia occurred in the late 19th and early 20th Centuries.  At that time Australians enjoyed a much higher standard of living than the citizens of the UK or the US. ⁽⁴⁾  Australian banking sector was mature and sophisticated. ⁽⁵⁾  There was no central bank and only minimal regulation of banking.

The retreat to economic nationalism began with the introduction of central banking in 1911 and the imposition of controls on foreign exchange transactions in 1931.  Following the Second World War, the Commonwealth Government began to use its foreign exchange controls to regulate inwards foreign investment from time to time.

In 1975 the Commonwealth formalised a policy explicitly based on economic nationalism.  It wished to encourage foreign investment but "…on a basis that recognises the needs and aspirations of Australians". ⁽⁶⁾  It involved complex tests of the net economic benefit of proposed investments, a preference for Australians as directors and/or employees of foreign-owned companies, and requirements for Australian equity participation in foreign-owned companies in the natural resource industries.

From the mid-1960s to the mid-1980s, the regulation of foreign investment was more restrictive than either previously or subsequently. ⁽⁷⁾  In combination with high trade barriers, these restrictions lead to a misallocation of domestic investment and a severe decline in capital productivity over this period, which has been estimated at around 30 per cent. ⁽⁸⁾

Since the late 1980s the approach to economic policy has swung back towards classical liberalism with the near complete liberalisation of all trade barriers, the floating of the Australian dollar, financial deregulation, and improvements in business regulation and taxation.  These reforms have been critical to the historically unprecedented rates of economic growth that Australia has enjoyed since the early 1990s.  They have not, however, been accompanied by an equivalent liberalisation in foreign investment policy, which continues to impose significant costs on the Australian economy.

AUSTRALIA'S FOREIGN INVESTMENT REGIME

Australia's policy regime on foreign investment is given legal force by the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Regulations 1989 made under that Act. ⁽⁹⁾

The Act requires foreign investment proposals to be screened prior to their execution wherever they exceed the monetary thresholds specified in the Regulations.  After screening proposals may be allowed to proceed unless they are judged as not being in the "national interest".  The screening thresholds are as follows:

• acquisitions of a substantial interest in an Australian business with gross assets in excess of $100 million;
• proposals to establish new businesses involving a total investment of $10 million or morel;
• portfolio investments in the media sector of 5 per cent or more and all non-portfolio investments irrespective of size;
• takeovers of offshore companies whose Australian subsidiaries or gross assets exceed $200 million and represent less than 50 per cent of their global assets;  and
• direct investments by foreign governments and their agencies irrespective of size.

There are additional restrictions in "sensitive" industry sectors.  They include banking, civil aviation, airports, shipping, the media, telecommunications, and residential real estate.

Due to the Australia-United States Free Trade Agreement (AUSFTA), the equivalent thresholds for US investors are now much higher:

• $105 million for investments in prescribed sensitive sectors or by an entity controlled by a US government;  or
• $913 million in any other case.

Moreover, a proposal by a US investor to establish a new business in Australia does not have to be notified to the Government, except when it is made by an entity in which a US government has a prescribed interest.  They are, however, subject to all other policy requirements that are relevant to the case in question.

The screening process is conducted by the Foreign Investment Review Board (FIRB).  The Treasurer is responsible for making the decisions on individual investment proposals.  In cases where the proposal does not conform to the policy, the Government can block the proposal, or to order the sale of any property that was purchased contrary to its guidelines.

In February 2008, the Federal Treasurer announced that the following principles would apply to screening of investments by entities owned or controlled by foreign governments.

1. An investor's operations are independent from the relevant foreign government.
2. An investor is subject to and adheres to the law and observes common standards of business behaviour.
3. An investment may hinder competition or lead to undue concentration or control in the industry or sectors concerned.
4. An investment may affect Australian Government revenue or other policies.
5. An investment may affect Australia's national security.
6. An investment may affect the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community.

On 24 August 2008 the Federal Treasurer announced the result of the first review under these principles, which was to allow the Aluminium Corporation of China Limited (Chinalco) to acquire 11 per cent of the Rio Tinto Group.

ECONOMIC COSTS OF REGULATORY REGIME

The regulatory regime in the Foreign Acquisitions and Takeovers Act and its Regulations generates significant costs for the Australian economy.  The regime reduces the funds available for investment in Australia and thereby foregoing increases in living standards.

• The screening process imposes significant transactions costs on prospective foreign investors.  These costs restrict the funds available for investment.
• Approval of a foreign investment proposal rests on it being in the "national interest".  The ambiguity of this concept and its application significantly increases the uncertainty faced by prospective foreign investors, regardless of how well the screening process has been streamlined.  This also reduces the funds available for investment.
• The new principles for screening investment proposals by entities owned or controlled by foreign governments will simply add to the transaction costs, while duplicating existing regulatory requirements.  They will not, however, resolve the key issue of how best to protect national security.

Each of these issues is elaborated below.

REGIME RESTRICTS INVESTMENT

Some argue that the current regulatory regime does not restrict foreign investment to any significant degree.  This is generally rationalised by referring to the low rate of rejection of applications to the Foreign Investment Review Board (FIRB)

Each year, the Treasurer rejects around 100 of all applications to the FIRB and executes a small number of divestiture orders. ⁽¹⁰⁾  Since 2000-01, an average of 1.3 per cent of proposed investments by value has been rejected following the screening process, although rejections tend to be relatively infrequent. ⁽¹¹⁾  Table 1 has the year-by-year details of the applications to the FIRB and the outcomes from the review process.

The conclusion that the regime is not particularly restrictive is misplaced for two reasons.

• A number of investment applications are never fully assessed by the FIRB but are withdrawn before the Board can complete the process.
• Some investments, which would be commercially sustainable in the eyes of the potential investors, are never put forward to the FIRB for a formal review.

The foreign investment foregone as a consequence of the review process is a clear cost of the regime.  It is likely to have increased due to the increasing share of domestic savings being invested offshore.  Loss of such investment is, however, inevitable given the transaction costs that prospective investors confront in participating in the process.

Table 1:  Foreign investment applications considered & decided, 2000-01 to 2006-07

Outcome of Foreign Investment Application to FIRB	2000-01	2001-02	2002-03	2003-04	2004-05	2005-06	2006-07	Average
No. of applications submitted to FIRB	3,858	5,097	5,315	5,036	4,884	5,781	7,025	5,285
Share of applications exempt from FA&T Act	5.0%	3.4%	3.8%	4.1%	3.7%	3.2%	2.8%	3.6%
Share of applications withdrawn from review	8.2%	7.9%	6.9%	6.3%	5.9%	6.5%	9.0%	7.3%
No. of applications decided by review process	3,347	4,523	4,747	4,511	4,415	5,223	6,196	4,709
Proposed investment for applications decided by FIRB ($ billion, current prices)	116.0	118.0	85.8	99.1	119.5	85.8	156.4	111.5
Share of proposed investment rejected by review process	8.4%	0.1%	–	0.1%	–	–	–	1.3%
Share of proposed investment unconditionally approved	69.0%	59.5%	62.4%	60.4%	50.5%	84.5%	89.7%	68.8%
Share of proposed investment conditionally approved	22.7%	40.4%	37.5%	40.5%	49.5%	15.5%	10.3%	30.1%
Proposed investments as a share of GDP	16.8%	16.0%	11.0%	11.8%	13.3%	8.9%	14.9%	13.1%

Source:  FIRB [Foreign Investment Review Board], 2006, Annual Report 2005-06, Commonwealth of Australia, Canberra, and FIRB 2008.

Transaction costs are the resource costs involved in concluding any exchange, such as the purchase or sale of a good or service.  They include the search and information costs in locating the other party, the bargaining costs in concluding the terms for a contract with them, the costs to police and enforce that contract, as well as any the costs of any taxes or regulatory compliance associated with the exchange.

Such costs are an inevitable part of the screening process.  Decisions on foreign investment proposals are meant to be made within 30 days of their being submitted to the FIRB and the Act allows a further 10 days for the interested parties to be advised of the outcome.  Moreover, the review period may be extended for up to 90 days.  Applicants may also be allowed additional time to provide information required by the FIRB and interested parties may be given time to address issues arising from a proposal.  Proposals that are not subject to the Act are handled under the policy but are not subject to the statutory deadlines. ⁽¹²⁾

The transaction costs created by the screening process include the following.

• Professional services fees -- for example for legal, accounting, investment and operational advice -- are involved in preparing an application of any consequence.
• There are opportunity costs associated with the time and effort of investors, their executives and their staff in preparing an application for and in participating in the review process.
• Prospective investors face highly uncertain outcomes from the review process.

Rational foreign investors have to assess the rate of return from prospective investment opportunities in Australia after making due allowance for the opportunity cost of the resources in question as well as the probability of their receiving approval on terms and conditions that would be acceptable to them.  If the net rate of return is greater than what they can obtain elsewhere, they will proceed with the FIRB application.  If it is less than the alternative, they will pass up the Australian opportunity.  The opportunities foregone as a consequence may not be readily evident but they are real nonetheless.

The uncertainty in such assessments can have a powerfully negative effect on foreign investors' willingness to proceed with an application to the FIRB.  This reflects uncertainty about what constitutes Australia's national interest as far as foreign investment is concerned -- an issue which is taken up in the next section of this paper.  The extent of the uncertainty is such that there are probably investment opportunities that could well be approved by the Australian Government but never get to be considered due to the miscalculation of the prospective foreign investors and their natural aversion to such uncertainty.

A prospective investor's decision to proceed with a FIRB application, however, is merely the start of the review process and it impact on investment.  Foreign investors will tend to modify how they structure their proposed investments so as to improve their chances of approval.  They will progressively review their decision to apply and update their evaluation of the net worth of the Australian investment opportunity in the light of new information, both as a consequence of their interaction with the review process as well as more generally.

The uncertainty for foreign investors in doing so is considerable.  As Table 1 shows, some 30 per cent of approved foreign investments have had terms and conditions imposed on them by the Government.  Some of these are likely to have been unacceptable to the relevant investors and, as a consequence, they did not proceed with the proposed investment.

All of this means there are likely to be losses of prospective foreign investment at every stage of the review process, compared to what would have happened in the absence of the regulatory regime.  The loss of any foreign investment almost certainly means lower domestic investment, a smaller capital stock, lower productivity, and lower living standards.  In other words, restrictions on foreign investment have a similar impact on the domestic economy as restrictions on foreign trade.

A key issue is how large are these economic losses for the Australian economy.  The following evidence suggests that they are likely to be significant.

The policy regime imposes a delay on all inwards foreign investment that is subjected to review.  In 2006-07, 90 per cent of investment proposals were decided within 30 days of their receipt by the FIRB, compared to 92 per cent in 2005-06 (FIRB 2008).  The FIRB does not publish details of the average time taken to decide investment proposals weighted by the value of the proposed investment.  This is likely to be significantly longer than the median decision time, which the FIRB also does not publish.

Such delays represent a permanent and continuing cost to the domestic economy.  The cost is the return foregone on the investment approved by the Government over the period of the delay.  Based on 2006-07 data, we estimate that the economic cost of the delay in making the investment is around $4 billion a year.  This estimate is based on approved foreign investment totalling $156.4 billion in 2006-07 and an assumed average delay of three months for each approval when they are weighted by the value of the proposed investment.  The Social Opportunity Cost of the capital services foregone by the delay is assumed to be 10 per cent per year in real terms.

This estimate does not, however, include any allowance for those foreign investment proposals that are either withdrawn from FIRB review.  It also excludes those that are not put forward to the Board due to an expectation that they would not be approved or not approved on terms and conditions, which would be acceptable to the investors in question.

Over seven per cent of investment applications to FIRB are withdrawn before the review process is completed.  The FIRB does not publish details of either the applications that are subsequently resubmitted in a modified form or the investment that is involved.  Based on 2006-07 data, we estimate the economic cost of the withdrawn investment could be as high as $1.5 billion a year.  This estimate assumes that the value of the investment in withdrawn applications is equivalent to that in approved ones, that withdrawn applications are never resubmitted, and that the Social Opportunity Cost of capital is 10 per cent per year.

Some 30 per cent of the investments that are approved by the Government have restrictions placed on them.  These vary considerably but apparently relate to ensuring or preserving the Australian character of the business being established or acquired.  Given the absence of information on the precise nature of the restrictions that have been applied in each case, it is difficult to estimate the economic benefits and costs.

An unknown number of investment opportunities are never even considered by the FIRB.  These cases do not generate an application due to the assessment by the relevant foreign investors that the probability of success is too low and/or the time and effort involved in making an application to the FIRB is too high.  The lack of hard information on such cases makes it near impossible to estimate the foreign investment suppressed by the regime.

The Organisation for Economic Co-operation and Development (OECD) has confirmed the restrictiveness of Australia's regime.  The OECD Investment Committee has developed an index to measure the restrictiveness of national regimes for regulating inwards FDI. ⁽¹³⁾  The OECD Index covers nine industry sectors in 43 countries.  The industry sectors are business services (legal, accounting, architectural, and engineering services), telecommunications (fixed line and mobile telephony), construction, distribution, finance, (insurance and banking), tourism, transport (air, maritime and road transport), electricity and manufacturing.  The countries in the Index are:

• the 29 OECD member countries; ⁽¹⁴⁾
• the ten non-OECD signatories to the OECD Declaration on International Investment and Multinational Enterprise;  ⁽¹⁵⁾  and
• China, India, Russia and South Africa.

The OECD Index measures deviations from "national treatment" -- i.e. the discrimination against foreign investors compared to domestic ones.  Regulations that apply equally to foreign and domestic investors are not considered, except for state monopolies.  The Index accounts for barriers to entry such as limitations on foreign ownership, special screening procedures, and post-entry management and other operational restrictions.  The methodology used is a variant of that developed for a Productivity Commission study of FDI in APEC economies. ⁽¹⁶⁾

Each of the restrictions in the OECD Index is weighted for its severity on a scale from zero -- no restrictions on foreign investment -- to one -- a complete prohibition of foreign investment.  The heaviest weights are reserved for foreign equity restrictions and the lightest for screening and approval processes.  The somewhat arbitrary nature of these weights means that the OECD Index does not always measure restrictiveness accurately.  In combination with other known explanatory factors, however, it has proved to be very useful in assessing foreign investment regimes. ⁽¹⁷⁾

The latest results from the OECD indicate Australia has one of the most restrictive regimes inside or outside the Organisation.  Only China, Russia, India and Iceland are more restrictive than Australia.  Were Australia to remove its restrictions, its stock of inwards foreign investment is expected to rise by nearly 50 per cent over the longer term. ⁽¹⁸⁾

REGIME INCREASES UNCERTAINTY FOR INVESTORS

Australia's foreign investment regime is based on the superficially appealing notion of the national interest.  The concept, however, is open to numerous interpretations and there is no generally agreed definition of it in either common or academic usage. ⁽¹⁹⁾  It cannot be distinguished from related concepts, such as "the public interest", "the interest of the state", "national welfare", or "community welfare".

Notwithstanding the importance of the concept to Australia's foreign investment regime, the Foreign Acquisitions and Takeovers Act does not provide a definition of the "national interest" but allows the Government to decide it on a case-by-case basis.  The Act provides no guidance on how the concept is to be applied and does not constrain the Government in how restrictive or liberal it may be in doing so.

The FIRB has been equally silent on the issue.  It does not publicly comment on how it applies the concept in assessing proposals and in framing its recommendations to the Government.  It does not discuss these issues in its annual reports, despite the fact that they are central to its mission.  Indeed, the FIRB regularly opposes requests under the Freedom of Information Act from members of the public for additional information on foreign investment matters under its jurisdiction.  It generally justifies its opposition on the grounds of protecting commercially sensitive information provided by applicants. ⁽²⁰⁾

In such an environment the only substantive constraint on the Government's handling of foreign investment issues is democratic accountability thorough the Australian Parliament.  This makes all foreign investment issues inherently political and policy tends to reflect the views of the median voter, regardless of how little the median voter knows about foreign investment or the economic trade-offs that are involved in restricting it.

For prospective investors, political uncertainty is the hardest form of uncertainty to address.  There are several reasons for this.

• Political uncertainty is qualitatively different to other forms of uncertainty investors have to contend with.  For example, its adverse consequences can be far more extreme, given the coercive power the state has at its disposal
• Unlike most commercial uncertainty, political uncertainty is well outside the knowledge and experience of most investors.  Their ignorance is exacerbated by the relative opacity of the political process.
• Given the complex and diffuse nature of political uncertainty, it is outside the ability of most prospective investors to manage in any practical way.
• Finally, there is generally little scope for investors to insure against the adverse consequences of political uncertainty. ⁽²¹⁾

Most investors exhibit a high degree of aversion to political uncertainty.  For this reason, foreign investment regimes involving a high degree of uncertainty are much more restrictive of investment.  While successive Australian Governments have liberalised aspects of the foreign investment regime, the continuing heavy reliance on "the national interest" remains the least liberal component of the regime and is inconsistent with the direction of policy reform in other areas of economic policy.

REGIME SELECTIVELY RESTRICTS FOREIGN GOVERNMENT INVOLVEMENT

The principles announced by the Treasurer are inappropriate for assessing the implications of foreign government ownership or control in the cases Australia is most likely to confront.  These are expected to involve Asian countries, such as China, which have a fundamentally different view of the respective roles of the public and private sectors in commercial life.

The principles are likely to increase the restrictiveness of Australia's foreign investment regime and to result in the Government turning down substantial amounts of foreign investments that would have benefited the country.  The following canvasses the reasons for this conclusion by examining each principle in turn.  In doing so its discussion focuses on prospective investments by Chinese State Owned Enterprises (SOE).

Investor independence

A strict requirement for investor independence would almost prohibit any economically significant merger or acquisition by a Chinese SOE.

The lack of commercial independence of Chinese SOEs reflects China's institutional development as it evolves from a centrally planned to a market economy.  Property rights are weak, the Chinese judicial system is politicized;  and executive and legislative transparency is poor.  The State maintains tight control over the financial sector and directly or indirectly owns all the banks.  Investment is tightly controlled and regulated. ⁽²²⁾

In such an environment there is little or no basis for expecting that a major investment decision in a foreign country by a Chinese SOE could be taken without at least the tacit approval of the Chinese Government.  This is widely believed to have been the case even for the proposal by Chinalco to acquire what was a minor stake in the Rio Tinto Group. ⁽²³⁾  Indeed were positions to be reversed and an Australian SOE to be completing a major investment in China, it would be unthinkable for the Board of Directors to proceed without at least the informal blessing of the Australian Government.

In such circumstances, the real issue is not the commercial independence of the investing entity but the objectives of its owner in allowing it to make the investment in the first place.  If those objectives are essentially commercial in nature, and are expected to remain so, there would seem to be little point in worrying about the formal independence of the SOE.  The main policy concern for a recipient country should be to ensure the transparency of the decision-making processes of the investing Government.

Adherence to common legal & business standards

In 1998 China had 5.6 million SOEs.  They accounted for 80 per cent of all enterprises, employed 122 million people, and produced 57 per cent of non-farm gross domestic product (GDP). ⁽²⁴⁾  By 2006 the role of the State in the economy had shrunk so dramatically that there were, at that time, only 1.8 million SOEs employing fewer than 76 million workers to produce only 35 per cent of non-farm GDP. ⁽²⁵⁾

The extensive SOE reforms China has implemented to date have been an unqualified success.  China has deliberately avoided the "shock therapy" of rapid privatisation, which had occurred in the former Soviet Union.  Although the Chinese Government kept key sectors under State ownership, it formalised and clarified SOE objectives, streamlined the legislative regimes to regulate business and the agencies that administered them, broke up sectoral monopolies into multiple competing businesses, gave SOE management and staff strong incentives to improve financial performance, including thorough employee ownership, and allowed foreign investors to buy into its SOEs. ⁽²⁶⁾

The performance of Chinese SOEs has significantly improved but they are still not as efficient as their private sector counterparts.  The efficiency gap between them is substantial and there is no evidence it has narrowed. ⁽²⁷⁾  Moreover, transparency has not improved to anywhere near the same degree as efficiency.  Most Chinese SOEs operate thorough opaque holding entities and it is generally impossible to determine the exact ownership structure of Chinese business corporations.  This includes those that claim to be privately owned. ⁽²⁸⁾

For these reasons the strict application of this principle would probably prohibit an investment by any Chinese business entity, regardless of its formal ownership.  If the Chinese Government's policy aims are essentially commercial and are expected to remain so, there would seem to be little point in prohibiting the proposed investment.  The better approach would be to give the entity in question the opportunity to demonstrate how well it observes the laws and business standards of the host country.

Implications for competition

The competitive implications of any merger or acquisition, which involves at least one business that operates in Australia, are clearly important from a public policy perspective.  For this reason, all such transactions are subject to the Trade Practices Act, which, among other things, prohibits any merger or acquisition that is likely to reduce competition, unless they can be shown to have some offsetting public benefit.  This is regardless of who owns the Australian businesses or assets in the transaction or where those owners reside.

The ACCC enforces the Trade Practices Act.  As a consequence, it reviews mergers and acquisitions before the event and may authorise potentially anti-competitive transactions, provided it has assessed them as generating an offsetting "public benefit".  Given this, it is not clear why the FIRB should undertake a second, parallel assessment of the competitive implications as proposed by the Treasurer's principles.

Doing so simply imposes additional compliance costs on prospective foreign investors and additional administration costs on the Australian Government for no obvious benefit for the Australian community.  Moreover, of the two review processes, that by the ACCC is to be strongly preferred:  it has to observe the requirements of the Trade Practices Act;  its process is more transparent than that of the FIRB and is protected from political influence;  and all decisions taken by the ACCC are subject to judicial review in Australian courts.

Implications for tax & other policies

Clearly, all foreign businesses operating in Australia should be expected to observe all Australian laws.  This includes any obligations to pay the taxes, fees and charges levied by every level of government and to comply with appropriate Commonwealth and State regulation, such as environmental protection.

The obligations in this regard, however, should be no more onerous than those imposed on locally-owned businesses.  Should existing Australian legislation fail to implement this principle in an even handed fashion, the best solution is to correct the anomalies at their source rather than to refuse entry to particular investors or particular investments.  There is no sound argument for the Australian Government making any approval under the Foreign Acquisitions and Takeovers Act conditional upon an assessment of these issues.

Implications for national security

Sovereign governments have the right and the obligation to protect national security.  Recent international arbitral decisions have confirmed such rights vis-à-vis foreign investors under customary international law. ⁽²⁹⁾  Multilateral and bilateral International investment instruments -- including those signed by Australia -- allow a degree of freedom for governments to judge their national security requirements for themselves. ⁽³⁰⁾

All countries, however, have an interest in limiting the restrictions on foreign investment to those cases where their security and other essential interests are clearly at stake.  Excessive impediments will impose significant costs on both countries, including the one responsible for imposing them, and could lead to retaliatory action by the others, which would simply exacerbate the economic losses for both parties.

OECD governments have agreed that sound policy is based on the principles of regulatory proportionality, predictability and accountability. ⁽³¹⁾  Any restrictions on foreign investment should be no more costly or no more discriminatory than is absolutely necessary and should not duplicate other regulation that could do the job better.  While both foreign investors and governments should protect commercially sensitive information, any restrictions need to be as transparent as possible.  Finally, comprehensive parliamentary oversight and/or judicial review are essential for accountability.

Implications for Australian business, the economy & the community

On the face of it, this category is "catchall" to provide the Government with an excuse for refusing a investment without having to disclose its real reasons for doing so.

Every investment project can be expected to have a negative impact on certain groups in the community, regardless of its impact on the community as a whole.  New investment bid resources away from some businesses and increase competition with others.  The purchase of an existing business can lead to legitimate and economically sensible cutbacks in labour or other resource use to improve profitability.

To avoid this trap, each and every impact of a proposed investment would have to be assessed before the Government approves it.  At a practical level this is impossible.  No person or organisation could possibly know the nature and the extent of every impact an investment might produce or could acquire that knowledge.

In any arms length transaction between a willing Australian seller and a willing foreigner buyer -- regardless of who owns or controls that entity -- Australian policy should focus solely on the implications for the welfare of the community as a whole, to the exclusion of every other consideration.  Given the severe information constraints, all transactions should be allowed to proceed in the absence of a clear and precise demonstration that:

• it would reduce community welfare compared to what would otherwise have been the case;  and/or
• preventing the transaction from proceeding or requiring its terms to be modified would increase community welfare.

CONCLUSIONS

The OECD rates Australia's foreign investment regime as is the sixth most restrictive out of the 43 economies it monitors:  only China, India, Russia, Iceland and Mexico are worse.  We estimate the regime costs the Australian economy around $5.5 billion a year (0.6 percent of GDP).  The OECD has estimated that the removal of these restrictions would increase Australia's stock of inwards foreign investment by nearly 50 per cent over the longer term

Reforms since the 1980s have opened the economy and underpinned unprecedented economic growth.  While the tariff wall has been effectively dismantled, however, the moat against foreign investment remains intact:  the Australian Government can decline to approve any significant foreign investment "in the national interest"without constraint.

Concerns are rising about investments owned or controlled by foreign governments.  When such investors lack appropriate standards of business conduct or enjoy unfair advantages, there are legitimate concerns about the state of the global playing field.  On the other hand, discrimination against foreigner business strikes at the heart of the global trading system on which Australia depends for its prosperity.

The principles announced by the Australian Government to address this issue are likely to further restrict foreign investment, raising the costs to the Australian economy without getting to the nub of the issue.  This is how to tap the foreign savings essential for Australia's economic development, while minimising the risks to its economy and its national security.

The economic risks are that such investors would create monopolies, evade taxes, or ignore business regulations in Australia.  The legislative means to address such problems are well-established and non-discriminatory.  All foreign government owned and controlled businesses are subject to all Commonwealth and State laws but there is no basis to expect more of them.

While Governments need to protect national security, a generally agreed approach has yet to emerge.  Any restrictions on foreign investment should be no more costly or more discriminatory than is absolutely necessary, should not duplicate other regulations, and should be as transparent as possible with comprehensive parliamentary oversight and/judicial review.

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ENDNOTES

1.  NG Butlin, Investment in Australian Economic Development 1861-1900 (Canberra:  Department of Economic History, Research School of Social Sciences, Australian National University, 1976)

2.  Officially FDI is any equity interest of 10 per cent or more in an enterprise.

3.  The Treasury, "Trends in Foreign Direct Investment Inflows", Economic Roundup (Canberra:  Department of the Treasury, Spring 1997, pp. 19-25) cited on 13 August 2008

4.  IanW McLean, "Australian Economic Growth in Historical Perspective", Economic Record 80:250 (September 2004, pp. 330-345)

5.  SG Butlin, Foundations of the Australian Monetary System 1788-1851 (Melbourne:  Melbourne University Press, 1953)

6.  The Treasury, "Foreign Investment Policy in Australia -- A Brief History and Recent Developments", Economic Roundup (Canberra:  Department of the Treasury, Spring, 1999, pp. 63-70) cited on 13 August 2008

7.  The Treasury 1999

8.  Ted Evans, "Economic Nationalism and Performance:  Australia from the 1960s to the 1990s", Ninth Colin Clark Memorial Lecture, Address by Secretary to the Treasury (Canberra:  Department of the Treasury, 4 June 1999) cited on 13 August 2008

9.  The description of Australia's foreign investment policy is from The Treasury, Summary Of Australia's Foreign Investment Policy (Canberra:  Australian Government, 2008) cited on 13 August 2008

10.  Most of the rejections are in the real estate sector (FIRB 2008)

11.  As the FIRB recently changed how it reports the outcomes of the review process, the data published prior to 30 June 2000 are not comparable with those published since (FIRB 200?).

12.  FIRB 2008

13.  The latest results are to be found in OECD, 2007a, International Investment Perspectives:  Freedom of Investment in a Changing World (Paris:  Organisation for Economic Co-operation and Development, 2007a) cited on 20 August 2008.  A detailed discussion of the methodology is to be found in Stephen S Golub, 2003, "Measures of Restrictions on Inward Foreign Direct Investment for OECD Countries", OECD Economic Studies, 36:1 (2003, pp. 85-116)

14.  Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland, Turkey, the UK, the US.

15.  Argentina, Brazil, Chile, Egypt, Estonia, Israel, Latvia, Lithuania, Romania, and Slovenia

16.  See Alexis Hardin and Leanne Holmes, Service Trade and Foreign Direct Investment, Productivity Commission Staff Research Paper (Canberra & Melbourne:  Productivity Commission, 27 November 1997) and Alexis Hardin and Leanne Holmes, "Measuring and Modelling Barriers to FDI", in Bijit Bora, (ed.), 2002, Foreign Direct Investment:  Research Issues (London:  Routledge, 2002)

17.  Giuseppe Nicoletti, Stephen S Golub.  Dana Hajkova, Daniel Mirza and Kwang-Yeol Yoo, "The Influence of Policies on Trade and Foreign Direct Investment", OECD Economic Studies, 36:1 (2003. pp. 7-83)

18.  For the purpose of this analysis, the baseline capital stock level was defined in terms of 1998 (see Nicoletti et al 2003)

19.  Wikipedia defines the national interest as "a country's goals and ambitions whether economic, military, or cultural".  In the process it observes that "As considerable disagreement exists in every country over what is or is not in "the national interest”, the term is as often invoked [in international relations] to justify isolationist and pacifistic policies as to justify interventionist or warlike policies." (Wikipedia, "National interest", The Wikipedia Foundation Inc, cited on 20 August 2008)

20.  The FIRB had two requests under the Freedom of Information Act in 2006-07 and five in 2005-06.  In one of the former cases, the applicant sought a review in the Administrative Appeals Tribunal of the FIRB decision to refuse the information sought.  The appeal was eventually settled out of court but the terms of settlement were undisclosed (FIRB 2008).

21.  Most of the insurance against sovereign risk is underwritten by government in most developed countries, and even then, only in respect of certain exports by their nationals to developing countries, which are considered to represent the highest sovereign risks.

22.  Kim R Holmes, Edwin J Feulner, and Mary Anastasia O'Grady, 2008 Index of Economic Freedom, (Washington, DC and New York, NY:  The Heritage Foundation and Dow Jones & Company Inc, 2008)

23.  See Paul Murphy, "Rio Tinto, Chinalco and the road to 'cast magnificence' ", Financial Times (1 February 2008) cited accessed on 25 August 2008;  Dexter Roberts and Chi-Chu Tschang, "Why Chinalco's Buying Into Rio Tinto", Business Week (5 February 2008) cited on 25 August 2008;  and Michael Sheridan, "Beijing shows its hand in Rio Tinto grab", The Sunday Times, (10 February 2008), cited on 25 August 2008

24.  Gabriel Wildau, "Albatross turns phoenix", China Economic Quarterly, 12:2, (Beijing:  Dragonomics Advisory Services Ltd, June 2008, pp. 27-33)

25.  Wildau 2008

26.  Wildau 2008

27.  OECD, OECD Economic Surveys:  China, (Paris:  Organisation for Economic Cooperation and Development, 2005)

28.  Barry Naughton, "Profiting the SASAC way", China Economic Quarterly, 12:2 (Beijing:  Dragonomics Advisory Services Ltd, June 2008, pp. 19-126) and Arthur Kroeber, "Where the state is still king", China Economic Quarterly, 12:2 (Beijing:  Dragonomics Advisory Services Ltd, June 2008, p 24)

29.  OECD, 2007a, "Essential Security Interests under International Investment Law", International Investment Perspectives:  Freedom of Investment in a Changing World, (Paris:  Organisation for Economic Co-operation and Development, 2007a, pp. 93-134)

30.  OECD 2007a

31.  OECD, 2007b, "Freedom of Investment, National Security and 'Strategic' Industries:  An Interim Report", International Investment Perspectives:  Freedom of Investment in a Changing World (Paris:  Organisation for Economic Co-operation and Development, 2007b, pp. 53-63)

Public attitudes toward foreign investment

EXECUTIVE SUMMARY

In the course of the past 25 years, Australian governments of both Labor and Coalition persuasions have opened up the economy to trade and foreign investment.  Yet although the community appreciates the benefits of globalisation, the public remains deeply uneasy about foreign investment.

Indeed, attitudes towards foreign investment have been consistently wider than other mainstream public policy issues for an extended period of time.  A close assessment of public opinion towards several intense national political issues over the past decade -- the Iraq war, the republic, the apology, the death penalty and illegal immigration -- suggests that foreign ownership stirs the community's emotions on a more consistent and long-term basis.

Australians are two-faced about foreign investment and globalisation more generally.  On the one hand, poll trends show that a broad consensus of Australians is very uneasy, even hostile, about how much of the nation should be in the control of foreign investors:  90% of those polled say the federal government should ensure major Australian companies are kept in majority Australian control;  and 85% say they either strongly agree or agree that investment by companies controlled by foreign governments should be more strictly regulated than investment by foreign private investors.

On the other hand, Australians recognise that foreign investment leads to job growth and wealth creation.  When asked whether globalisation is good or bad for jobs, 79% said either very good or good;  for consumers, 87% were positive.  In other words, Australians sneer at the very foreign investment they know has been crucial to the nation's prosperity.

Australians are especially two-faced about Chinese foreign investment and economic growth:  On the one hand, we are very uneasy about Chinese state-run companies that are increasingly investing in the Australian resources sector:  78% are opposed to a state-run company, bank or investment fund that bids for a controlling stake in a major local company.  Yet 62% of Australians also think China's economic growth is a good thing because it underpins our growth cycle and may enable Australia to shield itself from the global financial crisis.

To be sure, Australian protectionist and anti-foreign investment attitudes have antecedents in the birth place of the nation in 1901.  And it is true that public unease about foreign investment is by no means an Australian peculiarity -- witness the US Congressional rejection of several much publicised Chinese and Arab takeover bids of US oil and port interests in recent years.

Nonetheless, the onus falls on Australia's political leaders and policy makers to try to bridge the divide between elite and public opinion by explaining more clearly the benefits of foreign investment.  Ultimately, Australia is deeply meshed into the global economy.  The nation has more to gain from relaxing barriers to foreign investment than from searching for hidden perils.

INTRODUCTION

Not many political issues stir the emotions in the way that foreign ownership does.  It is a subject that provokes deep, visceral feelings of possession, solidarity and national identity.  Indeed, compared with other intense political and public policy issues over the past decade -- the Iraq war, the apology, the republic, the death penalty for terrorists after the Bali bombing, and illegal immigrants during the Tampa asylum-seeker stand-off -- foreign ownership arguably produces the greatest degree of enmity in Australian society.

To be sure, the issue of foreign ownership does not generate enormous heat in the form of mass street protests and marches -- as the Iraq war and Aboriginal reconciliation did in 2003 and 2000 respectively.  But, as the public opinion polling and surveys consistently show, it nonetheless taps deep feelings of identity and violation.  And, given that government policy has generally taken a different position in recent decades -- namely a pro-foreign investment policy -- it raises the question of whether public attitudes ultimately matter much.

Still, we have witnessed the emotive force of this issue in the reaction to Royal Dutch Shell's takeover bid of Woodside Petroleum in 2001;  and we have witnessed it again this year, with Canberra's attempts to whip up spurious opposition to China Inc's plans to buy a direct shareholding in resources giant BHP-Billiton.  Whether it was Kraft's decision to move jobs to low-cost India or Dick Smith's warnings about food icons falling into foreign hands, the message is consistently clear:  Australians are very uneasy whenever a well-known local brand is sold to foreigners.

All the more remarkable, then, that a second thing that is true about foreign investment is that it has been a good thing for Australia, that its flow into the nation is a sign of economic strength, not weakness, and that so long as the political issue is framed in general terms of promoting economic growth and job creation, foreign investment is widely recognised as benefitting the broad cross-section of the community.  Australians know they are deeply meshed into the global economy and that the nation is better for it.

Foreign-owned Australian retail brands, according to public opinion polls, strike a raw nerve in the general community.  But much foreign investment has also been aimed at the services sector and the largest share goes into our mineral assets.  In particular, Chinese investment in Australia's resources sector has sky-rocked during the past year or so and looks set to increase and so remain a source of public unease in coming years.

A WIDE GULF IN PUBLIC OPINION

Perhaps no other political and public policy issue generates as much unease, even hostility, as foreign ownership does.  Indeed, as Graph 1 shows, the gulf between elite and public opinion on foreign ownership is so wide that it is difficult to think of any other subject in the past decade that unites so many disparate Australians on such a consistent basis. ⁽¹⁾

Graph 1:  What Issue Produces the Most Hostility in Australia?Source:  Compilation of Newspolls (1991-2008);  Lowy Survey 2008.

Take the death penalty.  Within ten months of the Bali bombing in 2002, Newspoll asked whether capital punishment should be introduced in Australia for those found guilty of committing major acts of terrorism:  56% supported the death penalty while 36% opposed;  the result for the execution of the Bali bombers was 57% in favour versus 33% opposed. ⁽²⁾

Take the Iraq war.  The question that was repeatedly asked from mid-2002 to early 2007 was whether it was justified for Australia to be part of the Coalition invasion of Iraq.  With the rare exception of Newspoll on April 1, 2003, most of the other polls showed overwhelming opposition to a unilateral (that is, non-UN-authorised) strike on Iraq before and after the March 2003 invasion.  The last Newspoll shows that 23% favoured the invasion while 68% opposed. ⁽³⁾

Take the Aboriginal apology.  The nearby graph figures of 56% in favour versus 38% opposed are based on a calculated average of the February 2008 Newspoll in the week following the Prime Minister's formal apology (69% in favour versus 26% opposed) as well as the April 2000 Newspoll in the week leading up to the march across the Sydney Harbour Bridge (43% in favour versus 49% opposed). ⁽⁴⁾

Take illegal immigrants.  The nearby graph's figures of 12% in support versus 43% in opposition are based on a calculated average of the September 2001 Newspoll at the height of the Tampa asylum seeker stand-off (9% in favour of allowing all boats into Australia versus 50% opposed) as well as the August 2004 Newspoll (14% in favour versus 35% opposed).  (The middle ground was to allow some boats in depending on the circumstances, and that number varied from 38% in 2001 to 47% in 2004.) ⁽⁵⁾

Finally, there is the republic.  Again, the nearby graph's figures of 44% in support versus 38% in opposition are based on a calculated average of 11 Newspolls from 1991 (34% in favour versus 52% opposed) to 2007 (45% in favour versus 36% opposed).

But however much these issues present wide gulfs of opinion, none compares to the deeper, more consistent and long-term, divide that is shown in any detailed assessment of public opinion attitudes towards foreign ownership.  Simply put, it consistently rates as the issue that is mostly likely to galvanise the broad cross section of the Australian people.  A series of surveys commissioned by Lowy Institute, Morgan and Newspoll as well as the Australian Survey of Social Attitudes and other groups demonstrate the community's consistently deep unease with globalisation, foreign ownership and free trade.  In all the years of opinion polling on the subject, not one survey has shown any real support for foreign ownership.

Yet however much the Australian people exhibit interventionist sentiments, the irony is that protectionist and anti-foreign investment voices are rarely found in the newspapers' editorial and opinion page commentary.  The Australian Financial Review and The Australian strongly support foreign ownership and free trade, although academic John Quiggin is a rare voice of dissent as is the veteran columnist Kenneth Davidson at The Age.  Even the more populist, tabloid papers such as the Daily Telegraph in Sydney and the Herald Sun in Melbourne are rarely given to any Buy Australia First agendas or protectionist and anti-foreign ownership campaigns.  True, in the lead up to the Howard government's decision to reject Shell's takeover bid of Woodside in April 2001, the Herald Sun and the Daily Telegraph editorialised against the foreign ownership deal. ⁽⁶⁾  But for the most part, the tabloid press remains a relatively disinterested observer of foreign investment deals -- at least when it comes to general news and opinion page coverage.

POLLING / SURVEY DATA

Perhaps the most revealing poll on foreign investment in the past year has been the Lowy Institute's annual foreign policy survey, which was released in late September. ⁽⁷⁾  The results were overwhelmingly negative.  Ninety per cent of those polled said the federal government has "a responsibility to ensure major Australian companies are kept in majority Australian control."  According to the survey:  "A majority of Australians oppose major foreign investments by companies, banks or investment funds controlled by governments -- 78% oppose those controlled by the Chinese government."  With respect to British foreign investment in Australia, 53% opposed while 43% supported;  US:  63% opposed while 34% supported;  Singapore:  70% opposed while 23% opposed;  Japan:  72% opposed while 22% supported;  and United Arab Emirates:  74% opposed while 17% supported.  When it came to foreign investment into Australia, not one nation recorded a positive majority reading.  Not one.

Australians also distinguished between foreign private investment here and investment by foreign government-controlled companies.  The latter, according to the poll, requires tighter regulations.  Eighty-five per cent of respondents said they either "strongly agree" (49%) or "agree" (36%) that "investment in Australia by companies controlled by foreign governments should be more strictly regulated than investment by foreign private investors."

Of course, polls showing widespread unease about foreign investment are hardly new.  A few weeks before the 1996 federal election, for instance, Newspoll showed that 56% of voters believed the level of foreign investment in Australia was too high, 19% thought it was about right while only 7% considered it too low. ⁽⁸⁾  Interestingly, more coalition voters (62%) were more worried about foreign investment than Labor supporters (53%). ⁽⁹⁾

Consider too, the response to the private equity bid for Qantas in 2007.  Auspoll, an ACTU-commissioned poll in February that year, showed that 79% of voters in key Coalition-held marginal seats were opposed to the sale of the kangaroo carrier on the grounds that it could lead to job losses, lower safety standards and reduced services in regional Australia.  Eighty per cent believed the Howard government was not doing enough to stop local businesses being sold overseas and jobs being lost offshore. ⁽¹⁰⁾

According to the 2005 Australian Survey of Social Attitudes, which represented opinions of a broad sample of some 4300 adults, a large majority of Australians are anxious about the impact of multinational companies.  Three quarters agree that "Large international companies are doing more and more damage to local business in Australia."  Only 6% disagree. ⁽¹¹⁾

TWO CHINA VIEWS

China's spectacular economic rise and its burgeoning investment stake in local companies are generating considerable unease among the Australian people.  Until 2007, according to Mark Thirlwell, Chinese investment in Australia accounted for less than $3.5 billion, not even half of 1% of total foreign investment.  That is changing rapidly. ⁽¹²⁾

With Beijing's leaders determined to plan for the minerals China needs to sustain its growth and so underwrite a massive boom in income for Australia, it is no wonder our government and business sectors are trying to find ways of encouraging more investment.  After sending uncertain and confusing messages earlier this year, Treasurer Wayne Swan approved Chinese state-controlled company Chinalco to buy about a 12% stake in the UK-common stock of Rio Tinto.  Meanwhile, the Foreign Investment Review Board has delayed the Chinese government-backed Sinosteel's bid to buy iron ore miner Murchison Metals.  More Chinese investment bids in the resources sector are in the pipeline.

At the heart of the matter in any foreign investment deals with China lies the issue of foreign government-controlled companies.  According to the Lowy poll, 85% believe such investment must be more strictly regulated than private foreign investment.  And in the case of China, whose government remains a dictatorship, 78% of Australians are opposed to a state-run company, bank or investment fund that bids for a controlling stake in a major local company.

Interestingly, though, the Lowy poll also shows that 62% of Australians believe China's growth is good for Australia.  The rapidly growing China is now Australia's largest merchandise trading partner, third largest services export market, largest source of overseas students and fifth largest tourism market.  Rio Tinto's chief executive Tom Albanese recently pointed to the findings of an Access Economics study:  without the improved terms of trade contributed by Chinese trade from 2001 to 2007, real post-tax wages in Australia would have dropped by more than 13% and unemployment would have dropped by more than 1 per cent. ⁽¹³⁾  From resources to consumer goods to technology and financial services, it is not surprising both nations have a strong common interest in deepening economic ties.

So two attitudes prevail here:  on the one hand, Australians think the level of our exports that China's booming economy absorbs is a good thing because it could ensure our prosperity for years to come.  On the other hand, however, we are also very uneasy about the consequences of China's economic rise and foreign investment deals in Australia.  After all, China remains a communist one-party state and state-owned companies may still be subject to direction from Beijing bureaucrats.

In these circumstances, the onus falls on Australia's leaders to strike a balance between these concerns.  Canberra should be vigilant about monitoring Chinese state-run investment bids, especially where issues of energy and resource security emerge.  But as one of the first developed nations to confer "market economy" status on China, it should also recognise that Beijing is in the process of making a transition from communism to capitalism and that its state-run companies are becoming more independent.

Graph 2:  Two China ViewsSource:  Lowy Institute Poll, 2008

PROTECTING LOCAL ICONS:  THE CASE STUDY OF DICK SMITH

When the public debate gets bogged down in individual case studies, and the issue becomes one of protecting national icons, then it is even easier to detect a protectionist pulse in the wider Australian community.  In March 2000, a Bulletin-Morgan poll showed that a majority of Australians in most statistical categories prefer to buy Australian-made items, although the appeal for local goods and services declined when the question was focused on Australian-made cars. ⁽¹⁴⁾  The poll showed that 61% of Australians try to buy locally made products whenever possible.  Sixty-six per cent of grocery buyers said they'd aim to buy Australia-made groceries.  When it came to buying a car, however, the number came to 54%.  Older Australians admitted they were more likely to buy Australia first (50 years:  76%) than the young (18-24:  40%).

This published polling data in 2000 coincided with a feature article in The Bulletin magazine on the local business icon Dick Smith, who was launching a range of Australian food brands to compete directly with foreign-owned companies Vegemite, Rosella, Arnotts, and Aeroplane Jelly.  Smith's widespread popularity at the time, according to the veteran Canberra journalist Fred Brenchley, was due largely to a "backlash, particularly in rural areas" against foreign investment and free trade.  "Globaphobia still grabs at Australia's soul," he argued.  "While both sides of politics in Canberra believe Australia has no option -- indeed, can greatly benefit -- from pushing the nation to the forefront of the borderless world created by free trade, footloose capital and technology, many Australians crave for the old days of walls to keep out trade and investment." ⁽¹⁵⁾

The accompanying Morgan-Bulletin opinion poll showed that Smith was reflecting the conventional wisdom.  An earlier Morgan-Bulletin poll, published in July 1999, revealed 80% of Australians -- up 16 points since 1962 -- believe import quotas should be imposed on clothing, footwear, textiles and cars. ⁽¹⁶⁾

The Dick Smith campaign was illustrative of community sentiments, so it's worth taking a close look at how his company was marketing its products.  His first product, a crunchy peanut butter, represented a full throttle attack on foreign investment.  For one thing, there was a picture of Smith, with his trademark glasses and head thick of hair, under the headline "Genuine Australian Foods" that accompanied the label with an Australian flag and message:  "Most Australians buy Kraft and eat peanut butter which are owned by the US cigarette giant Phillip Morris.  That's why we're fighting back for our children's future with Dick Smith's genuine Australian products."  A five-point test then awarded ticks for:  "Highest quality;  Proudly Australian made;  Fully Australian owned;  Taxes paid here;  and Gives our Kids a Future." ⁽¹⁷⁾  The consumer response was overwhelmingly positive.  Within two years, sales of Dick Smith-branded foods reached more than $150 million. ⁽¹⁸⁾

Nor was Smith alone in tapping into populist sentiments.  Golden Circle, a co-operative of 700 or so Australian farmers, used foreign ownership to its advantage.  In 2001, for instance, its advertising slogan read "Give a damn about your jam". ⁽¹⁹⁾  It subsequently recorded increased sales, doubling its share of the jam market during the next financial year.

Again, there is no question that Smith reflected community concerns about the perils of foreign ownership of food icons, but the backlash was somewhat irrational.  As Benchley pointed out, one of Smith's foreign competitors Kraft was employing some 1500 Australians at five manufacturing locations in three states.  It had been based in Australia since the late 1920s and had remained a consistently big exporter of cheese products and Vegemite to up to 25 nations.  In 2000, moreover, Kraft had just relocated its regional headquarters from Hong Kong to Melbourne and one of its three world-wide research centres on food products was also running out of Australia.  Add to this that companies with more than 50 per cent foreign ownership were more likely to pay higher wages and export more than local ones, and it is clear that much of the backlash against foreign investment in the early part of this century was based more on emotion than evidence. ⁽²⁰⁾

In 2001 and 2002, several industry-sponsored studies showed that Australians "feel good" about buying Australian-made goods.  Interestingly, though, they were not so concerned about the declining number of Australian-owned companies and brands.  One Australian Made Campaign (AMC) study found that the primary motivators for buying products were price and quality. ⁽²¹⁾

Still, so parochial are Australian attitudes that a case could be made that political leaders are compelled to criticise foreign ownership on the campaign trail.  The Pulitizer-prize winning columnist Thomas Friedman recalls the protectionist spirit of the 1996 election campaign when the then-opposition leader John Howard slammed the Keating Labor government for creating, Friedman observed, a climate "in which Australia's most cherished companies were losing their national icons, indeed their very sovereignty and identity, to the global marketplace."  As Friedman noted:

[Howard] pointed to the fact that Arnott's Biscuits, which every Australian schoolchild grew up with, had been sold to a US company (Campbell's Soup, no less!), which would probably start tampering with its recipe for Iced Vo-vos Australia's most famous cookie, made of marshmallows and coconut.  The same was true, Howard said, of Australia's famous Speedo bathing suits, which, he complained, had been sold to a US firm.  What happened to Iced Vo-vos and Speedo bathing suits actually became a hot topic of one of the election debates.  And these olive-tree-hugging arguments helped Howard defeat the Lexus-loving Keating in a landslide. ⁽²²⁾

Although Friedman overstated the case -- Howard, after all, had been a long-time supporter of foreign investment and economic reform -- the story shows how protectionist and anti-foreign investment sentiments can shape a heated political campaign. ⁽²³⁾

PARADOX OF PUBLIC ATTITUDES

Most clouds, to be sure, have a silver lining, and this one is no different.  Although polls show great unease about foreign ownership, other data reveals that most Australians nevertheless believe they have become economically more secure, not less, by exposing themselves to the global economy. ⁽²⁴⁾  As the Australian Financial Review has editorialised:  "Putting aside risible appeals to sentiment about 'iconic' products, it would be hard to find any credible person who would say our quality of life is suffering because of foreign investment." ⁽²⁵⁾

Consider the 2004 Australian Election Survey.  When asked whether globalisation is good or bad for jobs and strengthens the economy in poor nations, 79% said either very good or good.  For consumers:  87% were positive;  for Australian companies:  76.5% positive;  for the Australian economy:  83%;  Australian living standards:  84%;  job creation in Australia:  64%.  On the issue of job security for Australian workers, the picture is more mixed;  51% believe globalisation is a very good or good thing while 49% say bad or very bad. ⁽²⁶⁾  But this is still a far cry from the more divergent views on the specific question of foreign ownership.

A Lowy survey in 2007 revealed that a majority of Australians think free trade is a good thing for the nation's well being.  A whopping 84% either strongly agree or somewhat agree that free trade enables Australian business to open new markets for Australian products.  Seventy-two per cent are optimistic that free trade leads to lower prices and more product choices for consumers.  And 67% are confident that free trade helps to increase prosperity, both in Australia and other parts of the world. ⁽²⁷⁾

Graph 3:  Paradox of Public Attitudes about Foreign InvestmentSources:  Lowy Institute Poll 2008;  Australian Election Survey, 2004

A Lowy survey in 2005 also reported a generally positive attitude about the impact of free markets.  Asked whether globalisation has had a good or bad effect on Australian living standards, 66% said good.  On the economy, 69% said good;  and on the culture, 57% also said good.  With respect to job security for the Australian worker, again, the message was more pessimistic, with 39% saying good, but 49% saying bad. ⁽²⁸⁾

What is one to make of all this?  Well, apart from the fact that we are more easily disposed to investment from British multinationals than Chinese state-run companies and the fact that older generations are more resistant to foreign investment than the younger crowd, the available evidence suggests this:  although a large majority of Australians are uneasy about foreign investment -- indeed, as we have seen, more galvanised about foreign ownership than any other public policy issue -- they nevertheless concede some benefits from close engagement with the global economy.  In other words, Australians sneer at the very foreign investment they know has been crucial to the nation's prosperity.

Such contradictory views are consistent with public attitudes towards other aspects of the free-market policy agenda over the past 25 years.  Andrew Norton, one of Australia's leading authorities on public attitudes towards economic reform, says that taken individually, none of the micro-economic reforms (save income tax cuts) on which there is extensive polling -- import tariff cuts, industrial relations reform, privatisation -- has been popular. ⁽²⁹⁾  According to Norton, the major reason for the public's opposition to micro-economic reform, free trade and more liberal foreign ownership laws has been concern about the well-being of those negatively affected by change, particularly in the case of job security.  But the irony here is that Australia's unemployment rate has been at 30-plus-year record lows at around 4 per cent in recent years. ⁽³⁰⁾

The 2005 Australian Survey of Social Attitudes reveals that on the question of whether Australia should limit the import of foreign products in order to protect its national economy, 65% support and only 14% disagree.  Many respondents believe economic openness threatens job security, but they also believe globalisation enhances consumer choices and leads to higher living standards:  49% agree that "Free trade leads to better products becoming available in Australia."  Only 18% disagree.  Again, just as in the case of public attitudes towards foreign investment, the polling here suggests that Australians hold paradoxical views on the global economy:  they see the benefits, but still oppose closer global engagement.  Support for high import restrictions fell from a high of 78% in 1995 to 65% in 2003.  Yet Australians were more likely to support trade protectionism than citizens of any other of the 14 advanced economies asked in the survey, such as US, UK, Sweden, Germany, Norway, Japan, Holland, Spain and Austria.  The consistent message is that Australia stands out as the population with the most protectionist attitudes among rich democracies surveyed. ⁽³¹⁾

HISTORICAL AND INTERNATIONAL ATTITUDES

Of course, Australians have long held protectionist sentiments and our unease with foreign ownership is by no means a local peculiarity.  Rex Connor is often identified with discredited economic nationalist polices, but the truth is a closed, insular economic outlook precedes the Whitlam era -- and not just to the post-war days of Black Jack McEwen's industry protectionism and agrarian socialism, but to the very founding of the nation.  Since federation in 1901, Australians had come to depend on the powers of central government to solve nearly all of the nation's problems:  high import tariffs and large subsidies protected domestic profits;  a heavily regulated workplace arbitration system guaranteed a large share of the protected pie for workers;  and a restrictive immigration policy kept out competition from cheap Asian labour.  By the early 1980s, Australia remained economically insular, weighed down by protectionism, over-regulation and chronic inflation.  And it was not until the election of a Labor government in the mid-1980s that the reform agenda of tariff cuts, relaxed capital and investment flows and reduced union power was implemented.

Not surprisingly, old habits die hard, and every so often populist and protectionist sentiments resurface with a vengeance.  The rise of Hansonism in the mid-to-late 1990s, for instance, had a great deal to do with the widespread perception in rural and regional parts of the nation that free markets and economic openness wreak havoc.  It also coincided with a rising backlash against globalisation, culminating in the April 2001 decision of the Howard-Costello government to reject Shell's takeover of Woodside Petroleum.  At the time, commercial talk-back radio led by popular broadcasters Alan Jones and Neil Mitchell in Sydney and Melbourne showed a high level of opposition to the takeover bid.  The reasons were many:  the Dutch firm should not have a hand in 90% of local gas projects and a big say in gas and oil exploration;  more profits from the local projects would flow overseas;  and taxpayers who had underwritten the skills behind Woodside's interests would see less returns. ⁽³²⁾

To be sure, the public unease about foreign ownership is by no means an Australian peculiarity.  In the United States, Chinese and Arab interests -- Cnooc Ltd (China's third largest oil company) that sought to acquire Unocal (America's ninth-largest oil company) in 2005, and the United Arab Emirates state-owned company Dubai Ports World that had planned to run commercial operations at six US ports in 2006 -- were rejected to secure oil and ports operations. ⁽³³⁾  And in France, even food and music are "protected" from foreign influences as a matter of national survival.  In 2006, for instance, the French government blocked the sale of Groupe Danone, the yogurt maker, as contrary to France's national interest!

CONCLUSION

Polls show widespread unease about foreign ownership, especially when the source is Chinese state-run companies.  Yet Australians also understand the benefits of foreign investment and free trade as well as the importance of robust Chinese economic growth.  So long as specific case studies do not get sensationalised -- Dick Smith's advocacy of food icons, for instance, or Shell's campaign for Woodside petroleum in an election year -- then it is likely that takeover bids won't attract such controversy and hostility.

In the recent weeks, the Japanese Mitsui group has lifted its investment stake by $100 million in Australian uranium mining, and Britain's BG Group is making $5 billion-plus moves on Queensland Gas.  All concerned are confident of gaining approval from the Foreign Investment Review Board.  The fact that these bids have not generated much critical commentary in the media, much less a hysterical response in the general community, perhaps suggests that the public instinctively recognises that foreign investment can be a positive industry development even as they reject it so forthrightly to pollsters.  Or perhaps the Japanese and British bids merely don't attract the same stigma as equivalent Chinese investments.

Nonetheless, faced with public unease about economic reform, the onus falls on the political class and policy-makers to sell more effectively the benefits of foreign investment.  How should they approach this issue?  What sort of attitudes should they cultivate?  What assumptions should they make?  And what should they be careful to reject and avoid?  Here are some suggestions:

• Point out that since the mid-1980s, the economic reform agenda of tax cuts, monetary stability and free trade has created a giant sucking sound of billions of dollars of foreign investment into Australia.  Properly vetted, this investment often leads to domestic jobs and economic growth, and it has made an immense contribution to building our huge resources industry.  Just think how the old Australia -- the over-regulated, over-protected and inflationprone Australia -- would have coped with the Asian financial crisis of 1997-98, the US tech wreck of 2000-01 and the fallout from the US sub-prime mortgage collapse.
• Stress that foreigners are not buying up Australia's stock of wealth;  they are investing in ways that add to it.  If the deals are blocked, Australian shareholders could lose hundreds of millions of dollars in stock appreciation.
• Insist that globalisation goes both ways:  Australia can't take advantage of it abroad and try to protect itself from it at home.  Australian restrictions give foreign governments one more excuse to bar Australian investment in their nations.  Remember, too, that Australian investment offshore has exceeded foreign investment in Australia for much of the past decade.
• Feel the pain of those Australians who are uneasy about foreign investment and disoriented about the pace of modernisation.  But remind them that the same forces that have bred economic insecurity -- the information age revolution and the spread of global capitalism -- can't be stopped.  A nation which pretends that the changes accommodating these irresistible forces can be ignored will become poorer and more despairing.
• Engage China.  Of course, Chinese investment should face scrutiny, especially given that the lines between government and corporations are blurred.  But by inviting the rising power into a web of free-market economic entanglements and giving it a stake in global commerce and prosperity, a Chinese middle class will eventually demand more political freedom.  It will also enable the Chinese to use their clout and the dollars they accumulate from trade to bid up the value of Australian assets.
• Be aware that many influential thinkers from a wide range of political and ideological perspectives will say that globalisation might be very well for other nations but is inappropriate for Australia, because a free-market world view is fundamentally at odds with our history and national ethos.  Treat this view respectfully, but reject it.  Australia, after all, has long relied on foreign capital and expertise for its development:  British investment in the 19th century;  US and Japanese investment for the 20th century;  and increasingly Chinese investment this century.  In keeping faith with an economic reform agenda which includes relaxed foreign investment controls and low import tariffs, our leaders would be following a course that has served the nation well in the past, particularly during the past quarter century.

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ENDNOTES

1.  See Richard J. Wood, "Odd Bedfellows", Backgrounder, Spring 1998.

2.  Newspoll, 19 August 2003.

3.  Newspoll, 20 February 2007.

4.  Newspolls, 4 June 2000 and 19 February 2008.

5.  Newspolls 31 August 2001 and 20 August 2004.

6.  see, for instance, "The great sell out", Herald Sun, March 9, 2001.

7.  The Lowy Institute Poll 2008:  Australia and the World Public opinion and Foreign Policy, compiled by Fergus Hanson.

8.  Newspoll, in The Australian, 1 February 1996.

9.  Newspoll, 21 January 1996.

10.  see Michael Harvey, "Scrutiny on buyout," Herald Sun, February 5, 2007.

11.  Ian Marsh, Gabrielle Meagher and Shaun Wilson "Are Australians Open to Globalisation?" in Australian Social Attitudes:  The First Report, UNSW Press, Sydney, 2005.

12.  Mark Thirlwell, "Into the crisis, enter the dragon," Herald Sun, 6 October 2008.

13.  Tom Albanese, address to the Melbourne Mining Club, October 2, 2008. "Rio chides Rudd over China," The Australian, October 3, 2008.

14.  Bulletin-Morgan poll, Indigenous consumption, The Bulletin, March 7, 2000.

15.  Fred Brenchley, "Hot air ballooning", The Bulletin, March 7, 2000 pp 30-31.

16.  Bulletin-Morgan poll, Indigenous consumption, The Bulletin, March 7, 2000.

17.  Fred Brenchley, "Hot air ballooning", The Bulletin, March 7, 2000 pp 30-31.

18.  Simon Lloyd, "Green, gold and true blue," BRW, July 4-10, 2002.

19.  Lloyd, BRW, July 4-10, 2002 p 47.

20.  Australian Bureau of Statistics figures, quoted in Brenchley, The Bulletin.

21.  Simon Lloyd, "Green, gold and true blue," BRW, July 4-10, 2002.

22.  see Thomas Friedman's revised edition of The Lexus and the Olive Tree:  Understanding Globalisation (Farrar, Straus and Giroux, 2000)

23.  Interestingly, as James Paterson points out in "The politics of protection:  America and Australia compared," Policy (Spring, 2008), although Australian voters show a stronger aversion to free trade than Americans, Australian politicians rarely indulge in protectionist spirit and are often reluctant to appeal to voters' worst fears about globalisation.

24.  Internal Labor and Liberal polling also back these contradictory attitudes:  that most Australians are very wary of foreign ownership and do not want to lose national icons, but they also realise that foreign investment is a good thing so long as it leads to economic growth and job creation.

25.  Editorial:  "Worldwide battle for capital and talent," Australian Financial Review, January 21, 2006.

26.  Australian Election Survey 2004.

27.  The Lowy Institute Poll, 2007.

28.  Lowy Institute Poll, 2005.

29.  According to an amalgam of Irving Saulwick poll 1991, the 1996-98 Australian Election Survey and the 2003 Australian Survey of Social Attitudes compiled by Andrew Norton, support for import tariffs to protect Australian industry has ranged from 75 per cent in 1991 to 55 per cent in 2005.  This 20 per cent drop is a notable decline in 15 years, yet support for protection remains stubbornly high, especially given that import tariffs have been slashed dramatically during the past 35 years.)

30.  see, for instance, Andrew Norton, "The politics of protection", Policy, Winter 2004.

31.  Ian Marsh, Gabrielle Meagher and Shaun Wilson "Are Australians Open to Globalisation?" in Australian Social Attitudes:  The First Report, UNSW Press, Sydney, 2005.

32.  see Rehame/Media Monitoring public opinion sampling from talk back programs on Sydney Radio 2UE and Melbourne Radio 3AW in March-April 2001.

33.  It is worth noting, however, that Chinese sovereign wealth funds have poured billions of equity into Wall Street investment funds Morgan Stanley, Merrill Lynch and Citigroup, which were in desperate need for liquidity following the sub-prime mortgage collapse in September 2007.