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Foreign Direct Investment

Economics (Year 12) - Foreign Investment

Christian Bien

Trends and Introduction to Foreign Direct Investment

Image Source: World Bank, Foreign Direct Investment (2019).

Foreign direct investment is where an overseas resident invests 10% or more ownership stake in a domestic business. Direct investment tends to be more long-term in nature. The above chart shows the changes in foreign direct investment as a % of GDP between 1970 and 2019. Below highlights the key changes in foreign direct investment.

Pre-GFC Boom

Net inflows of foreign direct investment increased sharply to 5% of GDP in the pre-GFC boom. The increase in foreign direct investment was most likely due to increases to finance capital projects in the commodities sector to capitalise on high commodity prices.

Global Financial Crisis

The GFC saw foreign direct investment fall from 5% of GDP to 3% of GDP (a decrease of 40%). This was due to a downturn in world economic growth and increased global uncertainty which decreased demand for Australian exports, in particular of commodities, reducing the need for investment in the commodities sector.

Mining Investment Boom

Net inflows of foreign direct investment increased from 3% of GDP to 4.7% of GDP (an increase of 57%). This was due to rapid Chinese growth following the GFC, increasing the demand for Australian commodity exports which encouraged foreign direct investment into the mining sector.

Mining Sector Boom

After the mining boom, foreign direct investment has been a slow downward trend, to which in 2015, foreign direct investment net inflows make up 2.9% of GDP.

High investment in the mining sector during the mining boom has increased output capacity of the commodities sector while commodity prices continue to fall, reducing the need for foreign direct investment in the mining sector.

Overall Trend

Foreign direct investment tends to follow the business cycle, increasing during periods of upswings and slowing during periods of downturns. Note: The graph shows net inflows of foreign direct investment, so foreign direct investment movements are also influenced by changes in Australian direct investment abroad.

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