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Foreign investment: an agent for growth

Recent data from the ABS shows that the stock of foreign investment in Australia has increased each calendar year despite the pandemic, going from $3.92 trillion in 2019, to $4.04 trillion in 2020, and reaching $4.14 trillion in 2021. Over the past two years that’s annual growth of 2.7%, which is not bad at a time when in many respects Australia was closed off to the world – but a fair way from the 7.7% average growth seen in the two years before COVID-19.

The US remains our largest source of foreign investment, contributing almost a quarter of inbound funds. However, over the past two years, annual growth of US foreign investment into Australia was only 1.9%, much lower than the same measure in the two years prior to COVID-19 (5.1%). Similarly, the UK’s foreign investment in Australia (the third largest source of foreign investment) fell by an annual average of 0.4% since 2019, compared with 17.4% growth in the two years before the pandemic. This has caused the UK to fall from the second biggest foreign investor in Australia in 2019 to the third largest.

Despite political tensions, the level of China’s foreign investment in Australia has still risen by a healthy annual average of 6.7% in the past two years, but still below the average 11.3% growth in the two years pre-pandemic.

Source: Australian Bureau of Statistics (ABS) International Investment Position, Australia: Supplementary Statistics

Foreign investment consists of Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI).

FPI represents investment in Australia’s financial assets (that is, shares and bonds) and doesn’t offer the investor any control over the operation of the enterprise. The flow of FPI into Australia was declining year-on-year before COVID hit. However, Australia experienced an increase in its average annualFPI inflow of $19.2 billion over 2020 and 2021, as the world, and particularly the EU, entrusted the relatively stable Australian share and bond markets with their funds.

By contrast, the level of FDI, which represents foreign investment in Australian enterprises to establish a lasting interest and a significant degree of influence, has decreased over the past two years, with the value falling by an average of $11.7 billion per annum. Notably, Australia saw a net outflow of FDI from the US, and a dwindling FDI from China, over the past two years.

When considering the average annual change of FDI in Australian industries from 2019 to 2021, financial services received the largest amount of international funds, averaging $6.2 billion per year. On the other hand, mining and manufacturing experienced the greatest declines in the level of FDI from 2019 to 2021.

Source: Australian Bureau of Statistics (ABS) International Investment Position, Australia: Supplementary Statistics

While the stock of foreign investment in Australia has kept up over the COVID-19 period, it was FPI (rather than FDI) that allowed foreign investment to remain largely on trend, and there was a shift in FDI away from our traditional mining base.

With Australia fully open for business once again in 2022, a sustainable economic recovery will require a lift in overall business investment, and foreign investment will be an important component of this.

The economic importance of Australia’s connections to the rest of the world is explored further in the eighth edition of Deloitte’s Building the Lucky Country series -  Australia remade: a country fit for the age of disruption.