Should nations limit foreign investment?

What limits should nations place on investment from other countries?

As concerns around foreign investment become more pointed, experts weigh in on what exactly should be done...if anything.

Tim Harcourt

J. W. Nevile fellow in economics at the
UNSW Australia Business School


Tim Harcourt

Tim Harcourt

Australia’s experience shows just how an economy can prosper by allowing foreign investors access to its markets.

Since European settlement, as a small and open economy with a small population and savings pool, Australia has always relied on foreign investment for its economic development. 

The convict settlement was reliant on investment for infrastructure in the age of Governor Macquarie – in fact, as eminent historian Geoffrey Blainey notes, Pacific trade and investment saved the early penal colony of New South Wales.

Now Australia is a large foreign investor itself, [but] many countries with Australia’s resources and agriculture (“rocks and crops”) have had mixed results with foreign investment.

There are three reasons for this:

  1. Big swings in governments’ approaches – from open regimes to vastly restrictive ones – have caused investor uncertainty in places such as Latin America in the 1970s.
  2. A lack of transparency in rules and overlapping regimes has worried potential investors. 
  3. Trust in the foreign investment regulators matters. In Argentina, despite rich agricultural land and industrious entrepreneurs, no-one could trust its officials.
Australia has combined investment openness with these three factors. That has helped it prosper while other countries have failed on the investment attraction front. 

Professor Michael G. Porter

Research professor of public policy at
Deakin University


Professor Michael G. Porter

Professor Michael G. Porter

In the interests of competition, foreign investment should be open to any person free of criminal convictions. National security requires we put some conditions on foreign government entities.

Generally, though, even state-owned companies should enjoy the same freedoms and obligations as locals in each market.

Restrictions should only apply where there are strategic concerns, and regulation should be open and subject to appeal processes.

That includes essential services such as aviation, telecommunications, transport, water and sewerage, education and health. All should have sound regulation, and none should be sheltered from international competition. 

Foreign investment should be open to any person free of criminal convictions.
I welcome investment in my country’s infrastructure. I recognise that in times of war or crisis, industries such as telecommunications, energy and air services can expect government interventions. To achieve this, governments can use a “golden share” – a special share that is able to outvote all others in certain specified circumstances.

The finance industry should also be open to foreign investors, subject to normal prudential regulation by national authorities. The nationality of an institution or a finance instrument matters little compared to issues of debt transparency and management.

Finally, residential and farm land – the classic “home” of all newcomers to Australia should have uniform rights that are tuned to our aspirations in terms of prosperity, environment and access.

Saul Eslake

Consultant

Saul Eslake

Saul Eslake

First, in my view there is no sound, logical or rational basis for stipulating any arbitrary dollar amount, or any percentage of GDP, as a limit on the amount of foreign investment that a country should accept.

Second, I cannot think of any specific sector of the economy that should be subject to any special or different rules from those that apply more generally.

Neither can I think of any sector of the economy in which no foreign investment should be allowed at all. I include here agriculture, where Australia’s National Party – the junior partner in the Coalition government – takes the view that there should be different rules.

“Material foreign investment proposals should be subject to scrutiny.” Saul Eslake

Third, and notwithstanding the first two points, I do believe that material foreign investment proposals should be subject to scrutiny and either regulation or rejection if they’re found – for reasons that should be made public – to be against the national interest

This is how Australia’s system works, and by and large Australia has been well served by the forms of scrutiny and regulation that we have, particularly the Foreign Investment Review Board (FIRB).

The only improvement I would suggest is that when the FIRB or government makes decisions, particularly decisions to reject foreign investment, they should say why they’re doing it.

They’re not required to do that at the moment, and it’s in everyone’s interest that the process be as clear and transparent as possible. That’s different to banning it or limiting it by some pre-determined amount.

The experts

Tim Harcourt
Tim Harcourt is one of Australia’s leading economics commentators, through media writings, radio interviews and his books The Airport Economist and Trading Places. He is currently the inaugural J. W. Nevile fellow in economics at the UNSW Australia Business School.

For more than a decade, he served as chief economist of the Australian Trade Commission (Austrade), analysing the global economy to help Australian companies devise their own international business strategies. 

Professor Michael Porter
Professor Michael Porter is a pioneer of Australian privatisation and infrastructure investment who currently serves as a research professor of public policy at Deakin University.

In the 1980s and early 1990s, he established the market-oriented Centre of Policy Studies and the privately funded Tasman Institute, to examine Australian economic policy issues.

He has taught at Yale, Stanford, Monash University and ANU, and has also worked for governments in Australia and overseas, as well as for the Committee for Economic Development of Australia and Macquarie Bank. 

Saul Eslake
Saul Eslake has worked as the chief economist at four Australian financial institutions – McIntosh Securities, National Mutual Funds Management, ANZ Bank and Bank of America Merrill Lynch. From 2009 to 2011, he was director of the productivity growth program at the Grattan Institute think tank. He is now a private consultant, as well as a media commentator on economic issues.

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