Chapter 6 Foreign Investment Flashcards

Question

Where does much of Aus outward FPI

Answer 1

Outward Foreign Portfolio Investment (FPI) is driven by growing Australian superannuation funds Superannuation = mandatory employer contributions, invested for retirement Super balances grew from $148 billion (1992) to $3.5 trillion (2024) Super funds invest in assetsglobally, increasing Australia’s foreign assets

Answer 2

mining industry around 33% of all FDI

Answer 3

Foreign Portfolio Investment (FPI): Investment in shares, bonds, or assets of a company No intention to control or manage the firm Typically involves less than 10% equity Short-term and often speculative Less stable and prone to sudden outflows Example: Buying shares on a foreign stock exchange without aiming for control

Answer 4

Much of Australia’s inward FPI is in the form of debt securities (about 2/3)

Answer 5

Australian Government Bonds – Foreign investors purchase Australian government-issued bonds, which provide fixed interest payments over time. These bonds are considered low-risk and are attractive to international investors seeking stable returns. Corporate Bonds – Similar to government bonds, however Australian companies issue bonds to raise funds from international investors

Answer 6

FDI - 2016 62 billion 2022 -43 billion reccession 2024 59 billion FPI 2016 -20 BILLION 2018 -83 BILLION 2020 0 BILLION 2024 43 BILLION

Answer 7

net foreign debt 70% private 30% public

Answer 8

Every time Australia records a CAD in the BoP, our total foreign liabilities increase, either as an increase in foreign debt or as an increase in foreign equity. Remember – Foreign Debt is borrowing, whilst Foreign Equity is ownership of assets

Answer 9

privately and publicly

Answer 10

Foreign debt is not necessarily “bad” – it depends on how it's used: If used for productive purposes (e.g. infrastructure), it can: Boost future income Support long-term economic growth If due to a contracting economy, it can: Reduce tax revenue Increase welfare spending Worsen the budget balance Lead to foreign borrowing to cover the gap — a less ideal reason for debt

Answer 11

The most important benefit of foreign investment into Australia is that it has supplemented Australia’s domestic savings to fund a higher level of investment. Investment expenditure is a component of GDP and plays an important role in the economy to increases the level of economic activity, employment and national income and therefore higher living standards. Foreign investment increases the rate of investment and economic growth. This will increase government tax receipts from income (income tax), from higher employment and higher business profits (corporate tax) as well as tax receipts from expenditure and consumption (ie GST).

Answer 12

Private debt, is considered superior, as it has the profit motive in mind. The reason businesses take on debt is to increase investment and expand productive capacity of the economy in general. The increased income from the investment will then hopefully be able to service the interest payments of the debt.

Answer 13

Another issue with the size of our net foreign debt is that the interest payments feed into our current account balance. During COVID-19, world interest rates declined meaning that the interest payments also declined. As world interest rates increased so too will the interest payments.

Answer 14

Foreign direct investment encourages the transfers of new ideas and technologies, which will increase productivity, aggregate supply and international competitiveness. Most of our inward FDI comes from the US, UK and Japan. Their technological know-how and managerial skills can help improve the efficiency of Australian industries and assist in the long term growth of the economy. In addition, improvements in capital and infrastructure such as transport or communication networks can improve the capital to labour ratio. This means that workers have access to better tools, machinery, and systems, which allows them to produce more output per hour worked. As a result, labour productivity increases, leading to higher real incomes and improved living standards.

Answer 15

Investment also finances and expands the productive capacity of the economy by increasing the stock or amount of physical capital. (Airports, rail links, mines, agriculture projects) This moves the production possibility frontier of an economy outwards. A higher level of capital stock will increase aggregate supply, increasing economic growth and lowering price levels. Capital will increase the international competitiveness of Australia's exports.

Answer 16

The costs of foreign investment are associated with the “twin evils” of foreign ownership and foreign debt. When most capital inflow in Australia was in the form of equity, the concern was in regards to the “selling” of Australian assets. Increases in foreign equity will result in a loss of control of domestic assets or a loss in economic sovereignty. Foreign control may conflict with government economic policy and profits would be siphoned back to foreign company’s. New concerns are now around foreign control of critical infrastructure posing a security risk. For example, there has been debate over Chinese ownership of the Darwin port as it is used by the Australian Navy and could pose a national security risk. This Darwin port was leased for 99 years to a Chinese company in 2015.

Answer 17

Most inward foreign investment in Australia is now in the form of borrowing. This adds to the stock or level of Australia’s foreign debt. An argument is that this large foreign debt imposes a burden on the economy. An increase in interest rates could see Australia's servicing costs on foreign investment also rise, to levels that could be unsustainable or compromising on future generations. Interest payments on foreign debt are now our largest debit in the income balance. However, as long as the borrowing boosts Australia’s future productive and economic capacity, the servicing of the debt should not be an issue.

Chapter 6 Foreign Investment Flashcards

(41 cards)