Chinese Foreign Direct Investment in Australia

DRAFTChineseForeignDirectInvestmentinAustralia:PolicyIssuesfortheResourceSectorPeterDrysdaleCrawfordSchoolofEconomicsandGovernmentTheAustralianNationalUniversityandChristopherFindlaySchoolofEconomicsUniversityofAdelaideAbstractThelastninemonthshasseenChineseforeigndirectinvestmentintheAustralianresourcesectorbecomeanissueofpolicyinterest.Therearetwobigquestionsthattheprospectsofasignificantriseinforeigndirectinvestment(FDI)fromChinaintotheAustralianresourcessectorhaveraised.IsthesurgeofFDIintoAustralianminingandenergyconsistentwithachievingthetraditionalgainsfromforeigninvestment?Andarethereanyparticularproblemsassociatedwithinvestmentfromforeignstate-ownedenterprisesorstatemanagedsovereignwealthfunds?Theseareamongthequestionsaddressedinthispaper.Thepaperarguesthattherearenoissuesthatcannotbedealtwithundertheumbrellaoftheestablishedtestof‗nationalinterest‘inmanagingthegrowthofChineseFDIintotheAustralianmineralssector.Itarguesthataconfusionhasbeenintroducedintopolicyoverthequestionsofstate-ownershipandsupplier-buyerrelationsinrespectofChineseinvestmentsandthatclarifyingtheseissuesislikelytobeimportanttoAustralia‘scapturingthefullbenefitsfromthegrowthofChineseresourcesdemandandlongertermeconomicandstrategicinterestsinChina.PaperforPresentationtoCrawfordSchoolPublicSeminar,SeminarRoom1,CrawfordBuilding,AustralianNationalUniversity,12.30pm,Thursday,4September20081ChineseForeignDirectInvestmentinAustralia:PolicyIssuesfortheResourceSector*_____________________________________________________________________TheescalatinginterestinresourceinvestmentworldwideisdrivenbytheappetiteforresourcesintherapidlygrowingChineseandIndianmarkets(Streifel,2006).Theseeconomiesthemselveshavenowemergedasmajorplayersinoverseasresourceinvestmentanddevelopment.TheinternationalresourceindustrywasdominatedinitsearlydaysbyNorthAmericanandEuropeaninvestment,oftenthroughverticallyintegratedoperationsthatincorporatedsupplyofmetalproductstoindustrialcountrymarkets.ThispatternofdevelopmentchangedremarkablyaroundfortyyearsagoasJapanemergedasamajorconsumerofimportedmineralsandenergy(Drysdale,1970).Atthetime,Japaneseend-usershadlittlecapacitytoinvestinthehugeprojectsoverseasthatwereneededtoserviceprocurementoftheresourcestofuelJapan‘srapidindustrialisation(Crawford,Okitaetal,1978).ThiswastheerainwhichtheemergenceofthehugeindependentsuppliersofresourcestoJapanandeventuallytotherestofEastAsialaidthefoundationsforthestrengthandcompetitivenessoftheAustralianmineralsindustryandAustralia‘sleadingmineralscompanies.Theybecameleadingworldsuppliersofawholerangeofproducts,includingironore,coal,bauxite,alumina,aluminium,copper,nickel,naturalgasanduraniumtotheinternationalmarket(Drysdale,1988).ChinaandIndiaofferopportunityonascalethatalreadydwarfsestablishedmarketsinJapanandtherestofAsiafortheexpansionofresourcesuppliesfromAustralia,andahugegrowthintheAustralianindustry.Asinthepast,realisingtheopportunitywilldependnotonlyongearingupinvestmentfromAustralianandforeignfirmswhoarealreadysignificantplayersintheinternationalresourcebusinessbutwillencourageand*Weareindebtedtoalargenumberofpeopleforinformation,adviceandassistanceinthepreparationofthispaper.ShiroArmstrongandDarienWilliamsprovidedresearchassistanceattheEastAsiaBureauofEconomicResearch(EABER)asdidClaireHollwegattheSchoolofEconomicsatAdelaideUniversityandtheydeserveourspecialthanks.LigangSong,RossGarnautandcolleaguesintheCrawfordSchool‘sChinaForumseminarseriesprovidedcommentsonearlierdraftsofthepaperandasummaryoftheargumentthatwaspresentedtotheseminar.Weare,ofcourse,aloneresponsibleforwhateverdeficienciesremain.2requirealargeinjectionofadditionalcapitalfromnewinvestors,bothforeignanddomestic(Albanese,2008;Kloppers,2008).Australiahasperhapsthemostefficientminingsectorintheworld.Thisisimportantlyduetoitsopennesstoforeigninvestorcompetitionandparticipation,becausethatbringswithit,andfosters,thetechnology,managementknow-howandmarketlinksthatareessentialingredientsinthedevelopmentofaworldclass,internationallycompetitiveindustry.Australia,therefore,hasalongrecord,andastrongpolicyregime,characterisedbyopennesstowardsforeigninvestmentinitsresourceindustries,despitethefactthat,byonemeasure,AustraliaisrankedamongthemostrestrictiveamongOECDcountriesinitstreatmentofFDImoregenerally(Stoeckel,2008;Kearney,2007)1.Therewassomeretreatfromopennesstoinvestmentintheresourcesectorthatcreateduncertaintiesabouttheresourceinvestmentclimateduringthelastglobalresourceboomduringthe1970s(McKern,1976;Caves,1978;Hanratty,1996).Thechangeinpolicytonewasencouragedbyabigshiftintherelativepriceofresourcegoodsinthoseyearsandreflectedtheemergenceofameasureofresourcesnationalism.Althoughtheperiodofretreatwasrelativelyshort-lived,consumerssoughtalternativesupplieselsewhereand,asmarketseased,Australianpolicytowardsforeigninvestmentintheresourceandenergysectoropeneduponceagain.Thoughintheearlystagesofindustrialisation,ChinaandIndiaarebothalreadysourcesofsubstantialinternationalcapital(McKinsey,2008).Theyareactivecandidatesforgrowinginvestmentin