02 Partners In Prosperity - ANZ

06 Partners in prosperityExecutive summaryInvestment is key to anycountry’s growth. It fuelsproductivity, providesemployment and expandsthe economy. These benefitsflow through to the entirecommunity, who benefitthrough higher wages, andgreater choice of products.The profits generated by the investmentalso create additional tax revenues thatin turn lead to the provision of increasedgovernment services (or reductions in taxburdens elsewhere). When investment hasa foreign source there are further benefitsthat can be generated, including theopening up of businesses to global supplychains and new international markets, aswell as exposing firms to new technologies.Put simply, foreign investment has been,and will continue to be, fundamental tomaintaining the standards of living thatAustralians enjoy.At one level these statements arerelatively uncontroversial: economistsand policy makers accept the need forforeign investment to boost Australia’sproductive capacity and realise the naturalcomparative advantages we possess.Indeed, the current debate over thecompany tax rate explicitly recognisesthe need for Australia to be competitivein attracting global capital. However, thecommunity more broadly has not alwayswelcomed foreign investment uncritically.This report seeks to inform this debateby highlighting the significant benefits thatAustralia receives from foreign investment.The report focuses on the opportunitiespresented from new sources of investmentfrom China, a country that will continueto be key to Australia’s prosperity into thefuture, and draws on three recent examplesof Chinese investment to demonstratehow the in-principle benefits of foreigninvestment are realised in practice.Australia is well placed to benefitfrom Chinese economic growthAs the Australian economy transitionsaway from resources, it is well placed tobenefit from increased demand from China.Indeed, the growth of China’s economyhas already provided significant benefitsto Australia. Chinese demand was a keydriver of the resources boom that delivereda temporary but significant boost toAustralia’s income over the last decade.Rising incomes and a growing middleclass is supporting a new wave ofgrowth in Australia. Increasing affluenceamong Chinese consumers has boosteddiscretionary spending on many itemsincluding quality food and healthproducts, attractive holiday destinationsand internationally esteemed educationinstitutions. Australia is well placed tosupply these goods and services becauseof our geographic positioning, highlyskilled workforce, and regulatory andpolicy settings that support the perceptionof quality in our products.Australia needs foreign investmentto benefit from the Asia boomJust as with the mining boom, increaseddemand for services and otherconsumption-based products will alsorequire further investment to scale up1.Our current capital stock is around three times our GDP.Australian industries to meet theseopportunities. Indeed, Australia needsto spend around 20 percent of GDPeach year just to replace depreciationand maintain its capital stock at currentlevels.1 Not all of this investment can besourced domestically, while Australianshave comparable saving rates relative toother advanced economies we simply donot save enough to fund our capital needs.This means that each year we see inflowsof foreign investment to make up the gap.In recent years foreign investment hashelped Australia make the most of theresources boom. With the investmentphase behind us, Australia will look toforeign investment to fund new sourcesof growth in the industries in which wehold a comparative advantage. While themajority of foreign investment in Australiacontinues to be held by the United States(27% of foreign investment or 861 billion)and the United Kingdom (16% of foreigninvestment or 516 billion), China hasrecently emerged as a significant newsource of investment. Indeed, Chineseinvestment in Australia quadrupled invalue between 2010 ( 19 billion) and 2016( 87 billion). Importantly, the majority ofnew Chinese investment is in servicesand consumption-led activities such ashealth, tourism and agribusiness, assistingAustralia in its transition to towards broadersources of growth. This report notes thatwhile Chinese investment may currentlybe at relatively low levels, if Australia is tocontinue to benefit from the growth ofChina (as we did during the mining boom)we will need to facilitate further capitalinflows to ensure that our industries havethe scale and ‘China-readiness’ to take fulladvantage of these opportunities.

Partners in prosperity 07Australia receives significantbenefits from foreign investmentWhen an overseas investor commitscapital in the form of direct investment2they typically do so because they see anopportunity to unlock unrealised valuein the business. This could include: Better linking the business into globalsupply chains or international marketsnot currently accessed by the business; Bringing strong management, industry,or technological ‘know-how’ to a businessthat allows it to realise greater value fromits current operations; or Injecting capital that allows a businessto efficiently and quickly scale up tomeet growing demand for its output.What’s good for the investor is generallygood for Australia too. The benefitslisted above help create opportunitiesfor Australian businesses, both thosereceiving the additional capital and thosethat benefit from the expansion of thesebusinesses (such as upstream suppliers).Australian workers also benefit throughmore employment opportunities, higherwages and greater consumer choice.Case study analysis showed thatAustralia benefits from ChineseinvestmentAll of these potential benefits werepresent in the case studies included inthis report. In these case studies we focuson three growth sectors where Australia’scomparative advantage overlaps withgrowing demand from China. The industriesconsidered here are agribusiness,health products and tourism. All threeof these were identified by the DeloitteAccess Economics report Positioningfor Prosperity: Catching the next waveas being key to Australia’s next waveof growth following the mining boom.2.The case studies demonstrate that: Australian agribusinesses will benefitfrom increased demand for high qualityfood from China, but require capital toincrease productivity and output, andto better compete with global players.Given low levels of domestic investmentin agriculture, Chinese investmenthas become an important source ofinvestment for domestic producers Australian health businesses are wellpositioned to benefit from China’sgrowing demand for health products,but often require assistance whenexpanding into the China market. Indeed,the complexity of the Chinese market andthe dynamics of consumer preferences,means that working with Chineseinvestors with established businessrelationships can be hugely beneficial forAustralian businesses seeking to expandinto the market. Australian tourism businesses are wellplaced to benefit from the rapid increasesin Chinese visitations. But again, theknow-how needed to both marketproducts in China, and make Australianofferings “China ready” can be key toattracting additional visitors to Australia.Investments in high-end hotel offeringsand, increasingly, bespoke regionalattractions can also help drive increasedvisitation by target groups. Theseadditional travellers benefit not just theimmediate business owner, but the wholesuite of tourism industries and regionsin which visitors spend money on whilein Australia.In each sector we selected one exampleof a recent investment from China in anAustralian business. What was perhapsstriking about these case studies werethere similarities. In no case was theexisting management team replaced bythe new owners, but rather the investorsadded value through a combination ofcapital investment to scale up activities,and the injection of managerial and marketknowledge to better link companies to theChinese (and other) markets. Further, in allcases the benefits of the investment flowedto a broader group within the community:whether it was the Queensland cattlefarmers that supply to Kilcoy PastoralCompany, the universities and researchinstitutions that are funded by Swisse, orthe tourism and entertainment businessesbenefitting from the additional visitorsgenerated by Fu Wah’s investment in thePark Hyatt in Melbourne.Partners in prosperityChina’s growth and transition to aconsumption-led economy will thereforego hand in hand with Australia’s ownstructural change towards these high valueindustries: the two countries will continueto be partners in prosperity.But this is not an opportunity that canbe taken for granted. Just as with themining boom, realising this opportunitywill require significant investment to scaleAustralian industry up to meet the demand.But perhaps more than the previousboom, success in these industries willrequire an understanding of the Chineseconsumer and how Australian businessescan best position themselves for success inthe Chinese market, and other global supplychains. Chinese investment is more thanjust a source of capital, it brings knowledgeand connections. Australia has much togain, but we cannot go it alone.Defined as investment that leads to an ownership share of greater than 10%, a level indicative of providing the investor with some control in the direction of a business.

08 Partners in prosperityThe roleof foreigninvestmentChapter 1

Partners in prosperity 09Australia has long beena beneficiary of open globalcapital markets. Flows ofcapital into Australia havehelped our economy andits constituent businessesrealise their potential, bothby providing access to fundsat cheaper borrowing ratesthan available domestically,or through bringing withit access to technology,managerial knowledge,and international marketsand supply chains that wouldnot otherwise be accessibleto domestic businesses.These benefits of foreign investment aregenerally well recognised. For example, theReserve Bank of Australia Governor, PhillipLowe, recently stated:“Capital from the rest of the world hashelped build our country. If we had had torely on just our own resources, we wouldnot be enjoying the prosperity that we dotoday. Our asset base and our productivecapacity would be lower, and so too wouldour standard of living.”3This statement recognises that allAustralians benefit from foreigninvestment. Rather than just increasingbusiness profits (which it certainly does),investment increases employment andwages, consumption opportunities, andtax revenues that can fund public services.But while exporting Australian goods(that is, selling goods and services tooverseas buyers) is almost unanimouslyseen as a positive for the country, foreigninvestment (that is, selling assets tooverseas buyers) in Australia has oftenbeen met with suspicion and questionsof national interest. In recent years, severalChinese investments in Australia havebrought these concerns to the fore.Such concerns often ignore the nationalgains from foreign investment andoverstate the prevalence of Chineseinvestment in Australia. The largest sourceof foreign investment in Australia is theUnited States, followed by the UnitedKingdom and Belgium (see Chart 1.1).4While China accounts for a relativelysmall proportion of the stock of foreigninvestment, it is growing at a substantialrate.5 China’s build-up of savings andappetite for expansion has facilitated thecountry’s role as a supplier of capital forAustralia and for many other economies.3.4.5.Dinner Remarks to A50 Australian Economic Forum (2017) Philip Lowe, Governor Reserve Bank of Australia.ABS 5352.0 International Investment Position (2015) Australian Bureau of StatisticsForeign Investment Into Australia (2016) Australian Commonwealth TreasuryChart 1.1: Stock of foreign investmentin Australia in 201627.0%32.7%16.1%3.2%2.7%3.1%8.5%6.7%United StatesSingaporeUnited KingdomChinaJapanHong KongBelgiumOther Countries

10 Partners in prosperityThis report seeks to reinforce the benefitsthat foreign investment brings to Australia.It begins by providing an overview of thein-principle benefits that investment bringswith it, and a snapshot of the current flowsof investment into Australia, with a focuson China. It then seeks to go beyond thesesomewhat abstract in-principle benefitsfrom foreign investment to draw on threecase studies of recent investment fromChina in agribusiness, healthcare andthe tourism sector. Through these threecase studies this report provides concreteexamples of the benefits that foreigninvestment can bring, and why Australia’songoing prosperity will continue to relyon access to international, and particularlyChinese, capital.1.1 Foreign investment raisesliving standardsForeign investment provides a numberof benefits for Australian householdsand businesses. Households benefit frommore employment opportunities, a morediversified range of goods and servicesand increased business competition placingdownward pressure on prices. Businessesbenefit from increased productivity fromtechnology spillovers and knowledgetransfer, better linkages to global supplychains, and the opportunity to expandproduction (see Figure 1.1).6Even small increases in foreign investmenthave substantial impacts on economicgrowth. In previous modelling for theBusiness Council of Australia, AccessEconomics estimated that a 10% increasein foreign investment over the period2010 to 2020 would lead real GDP to be1.2% higher at 2020 than it otherwisewould have been had the additional foreigninvestment not occurred. Given the slowrate of productivity growth currently beingseen in Australia, this would representa significant gain.76.7.Foreign Investment in Australia (2010) Access EconomicsIbidFigure 1.1: Benefitsof foreign investmentBusiness expansionBusinesses benefit from theopportunity to expand theirproductionProductivityBusinesses benefit fromincreased productivity fromtechnology spill overs andknowledge transferGlobal linkagesBusinesses benefit frombetter linkages to globalsupply chainsDiversified economyHouseholds benefit froma more diversified rangeof goods and servicesEmployment opportunitiesHouseholds benefit fromincreased employmentopportunitiesCompetitionHouseholds benefitfrom increased competitionamong businesses whichincentivises firms to improveservice offerings andreduce pricesChanges to foreign investment have a rangeof impacts on the economy. Increasesin foreign investment add to the capitalstock, increasing the productive capacityof an economy, allowing firms to producemore with less, and ultimately increasingeconomic output. More productive workersincrease firms’ demand for additionalworkers, boosting wages and householdincome. Our previous analysis for theBusiness Council of Australia estimated thata 10% increase in foreign investment wouldnot just raise GDP, but would increasewages by just over 1%, and employment byaround 0.3%. In this, the economic benefitsof foreign investment flow beyond simplythe businesses that receive the capital.20%Australia needs to investaround 20% of GDP eachand every year just tomaintain our capital stock

Partners in prosperity 111.2 Foreign investment increasesproductivityInvestment is vital to economic growthas it shapes the productive capacity of aneconomy. While in the short run economicgrowth can fluctuate with changingdemand for goods and services, or externaleconomic shocks, long run and ongoinggrowth depends almost entirely on theproductivity of a country’s factors ofproduction (capital and labour).Australia’s productivity surged in the 1990sas a result of a range of economic reformsimplemented by Australian governmentsin the earlier part of that decade. Thisunderpinned sustained and strong growthover that period (see Chart 1.2).8 Followingthis period of productivity-fuelled growthAustralia’s ongoing growth came to relymore on good fortune in the form ofan unprecedented appreciation in ourterms of trade as resource prices rose.Following the mining boom, Australia willonce again need to rely on sustained andstrong growth in productivity if we are tocontinue to enjoy the prosperity we havecome to expect over recent decades.One such source of productivity gainis through the investment channel.Investment creates greater capital for thelabour force to use and thereby increasesthe productivity (and therefore wages) ofworkers. Indeed, the benefits of increasingthe capital stock through investment liesat the heart of the current debate aroundcompany tax cuts: the benefits from suchcuts are increased foreign investmentand domestic wages, the cost is the losttax revenue. The need for Australia toincreasingly compete with other countriesfor global capital features strongly inthis debate.8.9.10.11.Investment is also needed to effectivelymaintain the capital stock. Government,household and business assets wearout over time and continued investmentis required to ensure they continue tofunction effectively. The value of Australia’scapital stock is three times larger thanGDP and wears out at a rate of around6% per annum, meaning that around 18%of GDP is needed each year just to maintainthe capital stock.9Investment must also keep pace withlabour growth in order to maintain the ratioof capital stock per worker.10 In Australia,the employment growth is around 1.2%.11This means that to maintain the amountof capital per worker over time, Australiain fact needs to allocated around 20% ofGDP to investment each and every year.The economic and productivity impactof an investment decision will differaccording to the form and type oftransaction. Investment projects thatmaintain the existing capital stock, suchas reinvested earnings for the generalupkeep of commercial equipment, helpto retain our current living standards.Investment projects that add to the existingcapital stock, such as finance for newinfrastructure or business capital, have thepotential to increase productivity and liftliving standards.Get out of your own way: Unleashing productivity. Building the lucky country 4 (2015) Deloitte Access EconomicsStagnation nation? Australian investment in a low-growth world (2016) Jim Minifie – Grattan InstituteIbid.ABS 3101.0 Australian Demographic Statistics (2016) Australian Bureau of StatisticsTo improve Australia’sperformance and boostproductivity, furtherinvestment will be needed.Australia simply doesnot save enough to fundsufficient investment,and this ‘savings gap’must be made up forby foreign investment.

12 Partners in prosperityChart 1.2: Component contributions to growth in national incomeper head, by decadeWhile most of the research has focusedon developing countries, the findings ofhigh productivity levels among foreignowned firms have been replicated in anumber of studies in developed countries,for example:4%3% Foreign-owned manufacturing firms inthe US were found to be concentratedin industries where productivity is highand within a given industry tend to havelarger plants, greater capital intensityand more skilled ��252025–55L abour utilisationNet foreign incomeTerms of tradeLabour productivityP er person income growthThe remainder of thisChapter sets out the variousmechanisms through whichforeign investment has beenfound to boost economicperformance at the firm andnational level. It draws onresearch from the literatureto demonstrate some of themore concrete conclusionsthat researchers have madeon the impacts of foreigninvestment.12.13.14.15.1990sForeign-owned firms can be moreproductiveForeign firms are able to unlock valuein domestic businesses that had notbeen previously realised, as evidencedby empirical studies that find higher levelsof productivity among foreign firms relativeto domestic firms. Lipsey (2004)12 concludesin a review of the literature on foreigninvestment and productivity that:The evidence on productivity, whatever themeasure, is close to unanimous on the higherproductivity of foreign-owned plants in bothdeveloped and developing countries. Someof that higher productivity, but not all in mostcomparisons, can be attributed to highercapital intensity or larger scale of productionin the foreign-owned plants. US and foreign multinational firmswere found to have higher labourproductivity and total factor productivity(a measure of output controlling fordifferences in capital and labour inputs)than firms which just do not operateacross borders.14 Firms that invest overseas were foundto be 15% more productive on averagethan firms that simply export fromtheir home country, which in turn aremore productive than firms that do notexport at all.15These findings indicate that there is clearlysomething about foreign-owned firms thatleads them to realise greater productivity.The following sections identify some of thefactors that may be driving this outcome.Home- and Host-Country effects of Foreign Direct Investment (2004) Robert E. LipseySurvey of Current Business, Characteristics of Foreign-Owned U.S. Manufacturing Establishments (1994) Howenstein and ZeileComparing Wages, Skills, and Productivity between Domestically and Foreign owned Manufacturing Establishments in the United States (1998) Doms and JensenExport Versus FDI with Heterogeneous Firms (2004) Helpman, Melitz and Yeaple

Partners in prosperity 13Foreign investors can offer improvedmanagement practices and access toglobal marketsIt is entirely possible that foreign-ownedfirms are more productive simply becausemultinationals are better at selectingproductive firms to begin with. That is,foreign investors may simply be betterat picking winners. However, Arnold andJavorcik (2009)16 show that although foreigninvestors do tend to favour investingin more productive domestic firms,even after accounting for differencesin initial productivity, firms that receiveforeign investment are significantly moreproductive than comparable firms that donot receive additional foreign investment.Indeed, the firms that received foreigninvestment had total factor productivitylevels that were at least 10% higherthan matched firms that did not and thedifference in labour productivity waseven greater.In particular, their findings suggest thatfirms that received foreign investment had: Strong management practices and moreproductive workers–– Multinational firms had higheremployment and wages Opportunities to expand–– Multinational firms had higher outputand investment Access to global markets–– Mu

Foreword by Shayne Elliot, Chief Executive Officer, and Mark Whelan, Group Executive, Institutional at ANZ 05 Executive summary 06 1 The role of foreign investment 08 1.1 Foreign investment raises living standards 10 1.2 Foreign investment increases productivity 11 2 Foreign investment in Australia 16 2.1 Foreign investment in Australia 17