Foreign Investment Flashcards
What is the concept and structure of Foreign Investment?
The transactions that involve changes in the levels of Australia’s foreign assets and liabilities.
Refers to the stock of financial assets in Aus owned by foreign residents and financial transactions in the BOP which increase/decrease this stock.
- FI flows are recorded in the financial account of the BOP.
- Made up of foreign direct investment and portfolio investment.
What are foreign assets?
Created when Australian residents lend money to foreign residents or purchase foreign assets - an outflow of money for Australia.
What are foreign liabilities?
Created when Australian residents borrow money from overseas or sell assets, such as shares to foreign residents - FI into Aus from an inflow of money.
What is the relationship between the CAB and foreign liabilities?
- Financial account records the flow of FI into/out of Australia.
When foreign residents invest in Aus; this increases our foreign liabilities.
When Aus residents invest overseas: this increases our foreign assets.
Aus for. Liabilities > for. assets = more foreign I flow into Aus. Mostly in the form of borrowing.
Acts as a servicing cost for the future (interest/dividends); some believe this is bad however consider the (I-S) gap:
- CAD shows high I and low S.
- Higher I will increase nationals capital stock.
- Expand Aus’s PPF (productive capacity) - provide future Y growth that will help service the CAD.
What are recent trends in Australia relating to foreign direct investment and foreign debt?
Foreign Debt - (2008-2018) net foreign debt increased from 51% to 57% of GDP. Reflects the accumulation of debt over time results in continued CAD’s.
Foreign Direct Investment -
What are the benefits/costs of foreign debt in Australia?
Costs:
- Aus credit rating may fall; future borrowing will be subjected to higher interest rates and fewer sums of money.
- High-interest payments lower SOL - more Y must be diverted from consumption.
- If TOT deteriorates; reduce X’Y - burden of debt increases.
- If AUD depreciates; increase currency size of the debt and increase interest payments.
- Growth rates of partners fall; decrease X’Y and increase burden of the debt.
Benefits:
- TOT could improve - AUD could appreciate - world interest rates could decline - world growth may increase.
- DEBT results in HIGHER RATE of ECONOMIC GROWTH/INVESTMENT = ECONOMY GAIN.
What are the Net foreign liabilities?
The difference between Australia’s foreign liabilities and foreign assets.
What are the two factors of foreign liabilities?
Foreign debt - the amount of money Aus residents (pub/priv) owe to the rest of the world.
- Private debt > Public debt.
- Private debt is more likely to result in increased investment - lead to increased future Y to service the debt.
- Aus foreign debt is most of the time serviced in a very short period of time - most of the time 1 - 5 years.
Foreign equity - the extent to which foreign residents own Aus assets.
Why should foreign liabilities not be expressed as a proportion of the GDP?
Foreign liabilities is a stock variable, whereas GDP is a flow variable.
- Should be measured relative to physical capital stock of the country.
- Indicating a proportion of cap. stock being funded by foreign residents - (Aus steady at 10%).
- Aus relies on FI not because the savings ratio is low but the investment ratio is high.
- Creates a savings gap filled by foreign savings.
What is Foreign Direct Investment?
When a foreign investor acquires >10% of an Aus enterprise share.
Pros: Sharing of tech, labour, innovation, etc.
Cons: If profits aren’t reinvested back into Aus - acting as an outflow for the Aus economy.
What s Portfolio Investment?
All other FI (not FDI) that is not a direct investment - purchasing <10% of a share hold - having no significant influence in the enterprise.
Pros: No significant proportion of the profits can be reinvested overseas - no danger of large outflow.
Cons: Fewer sharing of tech, labour, innovation, etc.
