Foreign investment

Question 1

What is foreign investment

Answer 1

Foreign investment is the cross border movements in finance resulting from the borrowing or the sale of assets

Question 2

Australia & FI

Answer 2

Australia has always relied on foreign investment to develop the economy and supplement our domestic savings
Normally, Australia would record a CAD and a KAFS.
- Foreign Liabilities are created when Aussie residents borrow money from overseas or sell assets such as shares to foreign residents.
- Foreign Assets are created when Aussie residents lend money to foreign residents or purchase foreign assets.

Question 3

Trends of our Liabilities & Assets

Answer 3

Trends of our Liabilities & Assets
1. Since 2008, both FA & FL have increased, however FA has increased faster.
2. Measured as a proportion of GDP.
3. FL increased from 118% to 193%, FA has increased from 68% to 141%
4. The difference between the two is net foreign liabilities (NFL)
An increase in NFL is a good thing! It represents net foreign investment into Australia which has enabled our economy to develop & grow overtime.
Ø This increased our national income
Ø This increased our standard of living
(NFL has decreased from 56% to 45%) The FA and decreased in NFL is all due to the superannuation.

Question 4

What are the two forms of foreign investment

Answer 4

Be in the form of borrowing ( Foreign debt)

Or in the form of ownership ( Foreign equity)

Question 5

Foreign Debt

Answer 5

Foreign Debt
Whenever we record a CAD, our FL increases
- Foreign debt: refers to the money which Australian residents owe to the rest of the world.
- Foreign equity: refers to the extent to which foreign residents own Australian assets.
- Gross foreign debt: refers to the total amount of money owed to foreign residents from Australia
- Net foreign debt: Gross debt – Australian lending to overseas
- Public debt: when the government borrows money from overseas
- Private Debt: when the private sector, firms and business borrows money from overseas

Question 6

Is foreign debt a problem

Answer 6

Borrowing is beneficial to all individuals, firms & nations.
- Foreign Debt is a stock variable
- GDP is a flow variable
We should not measure FD as a proportion of GDP.
Instead it should be measured in relation to our total wealth
Foreign Debt and Foreign equity have been used to increase Australia’s net worth, rather than a burden, FI has enabled Australia to increase it’s level of real income and living standard.

Question 7

What are the Main Drivers of foreign investment in Australia?

Answer 7

Main Drivers of foreign investment in Australia
·       Political Stability
·       Natural Resources
·       Macroeconomic Stability
·       Opportunities for profits

Question 8

Types of FI

Answer 8

Divides into: Direct, Portfolio, Other investment & Reserve Assets

• Portfolio is the dominant form of FI.
• Most FI is in the form of debt securities
• Direct investment is either foreign ownership or control over Aussie enterprises.

Question 9

Direct and portfolio investment

Answer 9

Direct Investment: It can include the borrowing & reinvestment of earnings.

Portfolio investment: Can include any other form of investment that isn’t more that 10%.
Foreign investment is influenced by the following factors
· Profit expectations
· Interest rate differentials
· Political stability

Question 10

What do foreign investors see Australia as?

Answer 10

Australia is considered a safe haven for FI

• It’s geographical location is advantageous
• Interest rates are higher than other developed countries attracting portfolio investment chasing higher returns and yields
• Australia has a well regulated financial market which offer low risk returns

Question 11

Effects of investment:

Answer 11

Effects of investment:
· Increases economic activity, employment, national income
· Shifts AS & AD curve to the right
· Expands productive capacity through increased physical capital
· Investment also boosts GDP.
What has foreign investment done for Australia?
· Growth of the economy -> Higher standard of living
· Industries and resources have been developed
· Increased infrastructure
· Large surplus within the KAF.

Question 12

Effects of foreign direct investment:

Answer 12

Effects of foreign direct investment
· Brings expertise (US, UK, Japan)
· Managerial skills improves efficiency and aids long term growth
· Establishing subsidiaries adds to employment and contributes to tax revenue
· A large proportion of profits are reinvested.

Question 13

Effects of portfolio investment:

Answer 13

Effects of portfolio investment
· Destabilizing due to its speculative nature
· Brings about short term benefit
· Very sensitive to interest rate differentials

Question 14

Conclusion to foreign investment

Answer 14

The weakness of foreign investment is due to the misconception to which foreign debt is a bad thing, in reality, foreign debt is simply the outcome of foreign investment
This is referred to as the ‘twin evils’
If foreign investment is perceived as a good thing, then foreign debt is a good thing too.