There has been some debate about comments Tony Abbott made in China regarding Chinese investment into Australia.
An incoming Coalition government would welcome Chinese investment on the same basis that we welcome investment from other countries.
It would, of course, have to pass a national interest test and the scrutiny of the Foreign Investment Review Board.
The Board looks very carefully at sovereign investment but it does that for all countries, not just China.
Chinese investment is complicated by the prevalence of state-owned enterprises.
It would rarely be in Australia’s national interest to allow a foreign government or its agencies to control an Australian business.
That’s because we don’t support the nationalization of business by the Australian government, let alone by a foreign one.
In a policy sense I don’t think those comments are controversial – that position is more or less bipartisan policy in Australia. Perhaps Abbott was a bit rude saying it out aloud but there isn’t anything new there. Despite being well within mainstream policy, I think he is wrong. I wrote a paper published by the CIS Policy magazine a couple of years ago on this point. I thought I had posted it here, but I can’t find it so it must have been before one of our server crashes.
Foreign governments investing in Australia are cause for concern because government as a particular institution that should be viewed with some trepidation. While this argument is more or less true, some aspects are worth further investigation.
The first argument that should be debunked can be described as the Tom Clancy Debt of Honor argument. This 1994 novel tells the story of a clandestine war between Japan and the United States, a Japanese consortium (secretly representing the Japanese government) acquires an American bank and uses it to crash the stock market, thereby destroying US wealth. While it makes for great entertainment, it is not the case that SWFs exist to establish beachheads in foreign economies as a prelude to military conflict. The identity of SWFs, or their controlling shareholders, is not secret. Moreover, even if SWFs were national security risks, most economies already have procedures and institutions to manage those risks.
Part of the problem may be that SWFs often purchase well-known, iconic firms. This, however, is a well-known phenomenon in international investment. All foreign investors face an asymmetric information problem and when making investments in an economy, are more likely to invest in well-known firms. It’s not surprising that SWFs follow the same pattern. The political risk here is not for the domestic economy but for the foreign government. Ownership of a well-known firm provides a target for domestic protest against foreign governments. Protesters used to target embassies when protesting against foreign governments; they now also have corporate targets.
Unaccountable foreign governments
Foreign governments are unaccountable to the domestic electorate. This is always true—not just of foreign government but also of almost all foreign investors. But SWFs are accountable to domestic standards of governance, not foreign. All firms that operate within the domestic economy are bound by local laws and as long as firms obey them, they are no different from any other firm. The problem with government is the exercise of sovereign power. Foreign governments do not exercise sovereign power in the domestic economy; consequently, SWFs should be considered as any other category of foreign investor.
The challenge for the Australian government is not the identity of large foreign investors, government or private, but ensuring rigorous standards of corporate governance for firms listed on the ASX and preventing large controlling shareholders from looting a firm’s assets or expropriating firm value from minority shareholders. Given appropriate corporate governance standards, large controlling shareholders need not pose any investment threat or any other type of threat to Australia. With appropriate shareholder protection, all investment would be in the national interest.