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Introduction to Foreign Investment

Economics (Year 12) - Foreign Investment

Christian Bien

What is Foreign Investment?

Foreign investment is defined as foreign capital inflows as a result of the sale of domestic assets (foreign equity) or borrowings from overseas residents (foreign debt). In other words, money from outside of Australia used to buy assets or provide loans.

What are the Types of Foreign Investment?

Direct Investment 

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. Direct investment is the second largest proportion of foreign investment accounting for around 24% of all foreign investment. (Source: DFAT) 

Portfolio Investment 

Portfolio investment is where an overseas resident invests less than 10% ownership stake in a domestic business. Portfolio investment tends to be highly speculative and volatile to changing market conditions and can include transactions such as an overseas resident purchasing less than 10% of shares in a company. Portfolio investment is the largest proportion of foreign investment accounting for around 54% of foreign investment. (Source: DFAT) 

Reserve Assets 

An investment that has been taken by the Reserve Bank or Australian Treasury using reserve assets. 

Financial Derivatives 

Financial derivatives are a form of foreign investment that is linked with a financial instrument or commodity prices, such as interest rate swaps. Financial derivatives are not important in the WACE syllabus.

Why Does Australia Rely on Foreign Investment?

Australia has a small population of around 25 million and hence does not produce enough savings to meet its investment needs. Australia is often described as 'resource rich but capital poor' which means Australia is rich with commodities but does not have savings required to finance projects to extract those commodities. As a result, Australia relies on other countries with surplus savings, such as Japan, to invest in Australia to develop large capital projects. Foreign investment helps finance Australia's investment - savings gap - that is the gap between Australia's investment needs and our actual level of savings.

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