Foreign Investment: Strength through adversity
Foreign investment in Australia grew strongly in 2022, despite the challenging global economic climate.
Recently released ABS data shows that the stock of foreign investment in Australia increased by $433 billion (10.4%) to $4.60 trillion in 2022. This is well above the 2.5% average growth rate achieved during the pandemic and exceeds the pre-pandemic trend of 6.6%. Australian investment abroad also increased, rising by $351 billion (10.4%) to $3.74 trillion.
Foreign investment brings many economic benefits to Australia. It supplements domestic investment, providing capital for new and existing projects with associated growth and employment opportunities. In addition, by building connections between markets, foreign investment supports trade and encourages productivity growth.
Foreign investment consists of Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). FPI is investment in financial assets (shares and bonds) that don’t offer the investor any control over the operation of an enterprise. Meanwhile, FDI represents investment to establish a lasting interest or a significant degree of influence (for example, establishing a business or acquiring more than 10% of an enterprise).
Both FPI and FDI into Australia performed strongly in 2022. FPI investment continued its upward trend with an inflow of $159 billion, but arguably the real boon came from the rebound in FDI which returned close to 2018 highs with inflows of $89 billion, following a marked drop off during the pandemic.
Mining continues to have the highest level of direct inward investment with total FDI stocks in the sector totalling $359 billion; however, inflows into the sector have been modest lately. Instead, service sectors like Finance, Wholesale and Retail and IT have seen the largest FDI inflows in recent years.
Chart 1: Top five industries for inward FDI transactions, yearly average 2020-2022 ($ billion).
Source: ABS International Investment Position Data
The strong performance of foreign investment somewhat goes against the narrative that we are entering an era of deglobalisation amidst increased geopolitical tensions and the economic shocks of recent years. Digging into the ABS data though, we can see that most of the growth in foreign investment in 2022 came from geopolitically aligned countries.
The US remains our largest source of foreign investment and its investment stock in Australia increased by $43 billion (4.1%) in 2022. Meanwhile, the UK is now a close second following a $285 billion (39.5%) increase in its Australian investment holdings in 2022. This increase was likely supported by the signing of the Australia-UK FTA in December 2021, while certain transactions in cybersecurity and energy sectors are linked to the AUKUS security package announced in September 2021.
China’s already low level of investment in Australia fell by $6.3 billion (6.9%) in 2022, as Chinese investors faced an uncertain climate amidst stricter investment screening in Australia. China now accounts for less than 2% of Australia’s stock of foreign investment, while disinvestment transactions involving China totalled $12.2 billion in 2022.
Chart 2: Stock of foreign investment in Australia ($ billion)
Source: ABS International Investment Position Data
Weak economic conditions, alongside a rising wave of policies around the world that look to boost domestic production and “friend shore” key supply chains, cloud the outlook for foreign investment. This should not spell an end to globalisation though. Given our domestic challenges it will remain as important as ever that Australia is an open and attractive destination for foreign capital.
This blog was co-authored by Andrew Crossley, Senior Economist at Deloitte Access Economics.
