Chapter 7: Foreign investment

Benefits of F.I

IHEAD ▪ I = Increases AS and the economy's infrastructure because of the profit motive. ▪ H = Higher standard of living ▪ E = Enabled Australia to fund the savings/investment gap ▪ A = Achieving a higher capital/labour ratio ▪ D = evelopment in industries and resources

Contemporary statistics:

74% of FI is private 26% is public 51% of FI is portfolio 25% of FI is direct investment 24% of FI is another category Foreign debt accounts for 100% of liabilities as foreign equity is a positive ___ % Net goods and services + secondary income makes up for 10% of the CAD The primary income makes up for 90%

Cons of high debt

CIDV ▪ Credit rating: chance of a decreased credit rating from being unable to repay interest ▪ Interest payments increase: = lower standard of living because that money is used to repay interest ▪ Depreciation: a depreciation could result in a higher servicing cost ▪ Vulnerable to external shocks: if something were to happen and we cannot repay our debt

When is debt good?

Debt is not always bad. A debt is only bad if we borrowed the money for non-productive purposes.

Costs of F.I

Foreign debt AND Foreign ownership. ▪ The only valid argument is that of foreign ownership because foreign debt is good if the money which caused the debt was used for productive purposes. ▪ Foreign ownerships mean that government policies have less of an effect because foreign producers are in it for their own country/gain.

Foreign liabilities can be split into: Foreign Debt and equity

Foreign investment causes liabilities: we have to pay out in interest and dividends (out of current account) but foreign investment enters through the capital and financial account. FOREIGN DEBT: Money we owe to overseas due to their foreign investment or our borrowing FOREIGN EQUITY: the extent to which foreign investors own Australian assets ▪ Debt consists of all of Australia's foreign liabilities. this is because Australia's equity outweigh foreign equity and therefore net equity is at a current

Foreign investment and why it's good

Foreign investment: The cross boarder movement of finance due to the borrowing, buying and selling of assets. Why is it good? Investment is beneficial to the Australian economy due to the nature of our exports being commodities. It is also due to our savings and investment gap where we do not have sufficient savings to fund investment and therefore rely on foreign investment. <10% of the asset

Pros of high debt

PESS ▪ Private sector: owns most of our debt = productive investment in the economy ▪ Expanding Australian industries ▪ stabilisation of debt, making it easier to sustain repayments because GDP also increases as debt increases (debt grows as a portion of GDP) ▪ Servicing ratio has fallen = repayments have fallen too (more money from exports than we have to repay for interest)

The types of investment.

Portfolio investment: This type of investment is temporary and usually made by households. Foreign direct investment: Long term investment which is actually beneficial to the economy unlike portfolio investment. >10% of the asset Direct investment is motivated by the profit motive. The private sector tends to be more invested in the because they have invested a lot into the company Portfolio = 51% of foreign investment Direct = 25% of foreign investment Other = 24% of foreign investment

Public and private investment.

Public: government funded e.g aus post before it was sold private: privately funded, would be more productive to increase the private firm's revenue. Which is better? Private investment is better because it is driven by the profit motive. Because of the investment in the business, the investor will be more motivated to help the business grow. It does so by helping: ▪ more stable investment ▪ transfer of ideas ▪ technology Private = 74% of investment Public = 70% of investment

Relationship to BoP:

The reason that the CAD is so negative is due to our net incomes account being so negative due to our net foreign liabilities. We are paying out more than we earn. However it balances out in the BoP, capital and financial account. ▪ The CAD reflects the savings/investment gap (it is filled by foreign investment)

Pros of equity

▪ Productive investment: investing in company for better returns (FDI) Positive multiplier effect. Y(income) = E(expenditure) = O(output) ▪ As foreign investment goes up so does economic growth = standard of living goes up. ▪ money coming in : creating jobs ▪ investment

Cons of equity

▪ When money is borrowed for non-productive purposes ▪ Loss of control of domestic firms/businesses ▪ Loss of control over resources ▪ interest payments/dividends = leakage ▪ F.I = Higher standard of living = imports = leakage ▪ Portfolio investment is the destabilisation of businesses