“Takeover: Foreign Investment and the Australian Psyche”

[This is the title of a well-known Australian journalist’s recently published book, which provides a useful platform for comparing the law and politics of foreign investment regulation in other Asia-Pacific countries. The following is an un-footnoted version of the first part of my paper for a special issue of the NZBLQ, following the lively “FDI Roundtable” hosted in June 2015 by Amokura Kawharu at the University of Auckland.]
1. Introduction
According to the FDI (Foreign Direct Investment) Regulatory Restrictiveness Index compiled by the Organisation for Economic Co-operation and Development (OECD), Australia scored 0.13 overall in 2014 compared to an average of 0.10 across 55 countries (including all OECD and G20 countries) and the OECD average of 0.07. In terms of significant world economies, this places Australia in a group with somewhat above-average restrictiveness towards FDI, including also Korea (0.14), Canada (0.17) and Russia (0.18). Another group is even more restrictive, including China (0.42), Indonesia (0.34), India (0.26) and – intriguingly – New Zealand (0.24). At the other extreme are major economies with more permissive regulatory regimes: the Netherlands (0.01), Japan (0.05), the United Kingdom (0.06) and the United States (0.09).
The FDI Index is based on:
• foreign equity limitations;
• screening or approval mechanisms;
• restrictions on the employment of foreigners as key personnel; and
• operational restrictions (eg on capital repatriation or land ownership);
and the OECD acknowledges that: “is not a full measure of a country’s investment climate. A range of other factors come into play, including how FDI rules are implemented. Entry barriers can also arise for other reasons, including state ownership in key sectors”. Indeed, a detailed academic study shows that the screening mechanisms are conceptually similar in China and Australia, but now applied in a much more liberal manner in Australia.
Index data since 1997 shows how restrictiveness has gradually diminished, as in other OECD countries. But it is revealing to outline (in Part 2. below) the longer-term historical evolution of Australia’s regulatory controls and broader public debates over FDI. This analysis usefully sets the scene for a close analysis of a topical issue nowadays: treaty-based investor-state arbitration (Part 3 [omitted below, but discussed generally elsewhere on this Blog]). Some parallels and contrasts can then be drawn with New Zealand, its close trade and investment partner (Part 4 [omitted – but further elaborated here, also comparing Korea]).

2. The Law and Politics of Foreign Investment Regulation
Australia has long demonstrated an ambivalent attitude towards foreign direct investment (FDI). David Uren’s recent book highlights how a liberal regime mostly prevailed before World War II, including large-scale investments from the United Kingdom such as the Vestey family’s vast farm in the Northern Territory (pp 147-8). From the 1950s through to 1970s, FDI from the United States expanded but attracted increasing public concern (pp 62-72), in a protectionist era characterized by high tariffs on imports.
A political turning point involved a takeover bid in 1972 by the American conglomerate IT&T (then the eighth-largest corporation in the world) for the small manufacturer of an iconic Australian fast food, the Chiko Roll (pp 83-6). The Labor Party government voted in that year, led by Gough Whitlam until his controversial dismissal by the Governor-General in 1975, followed through electoral commitments to restrict FDI. The Foreign Acquisitions and Takeovers Act 1975 (Cth) allowed the federal Treasurer to limit FDI in the “national interest”, and foreign investment in resource projects was limited to 50 percent (pp 101-6). This regime was retained after a new government was formed by Malcolm Fraser, leading the Liberal Party in coalition with the rural Country Party. Indeed, the Fraser government extended the 50 percent rule to investments in farming, forestry and fishing, with Treasurer Phillip Lynch remarking in 1976 (cited at p 106):
“In past decades of high immigration, and rapid industrial development, there was a general presumption that all foreign investment should be welcomed. This is no longer the case. The Australian community quite properly demands that government today take a more discriminating and mature attitude towards foreign investment”.
Public concern also grew about Japanese investment in resources, the cattle industry and real estate (pp 1-3, 149-51, 157-8), although this diminished after Japan’s “bubble economy” collapsed in 1990. The Hawke-Keating Labor governments (1983-96) liberalised the Australian economy and parts of the foreign investment regime, including almost all additional formal limits to foreign ownership in resource investments. However, the 1975 Act remained, along with a Foreign Investment Review Board (FIRB) to “advise” the Treasurer on whether to limit FDI proposals in the national interest.
Opposition leader and shadow Treasurer, John Howard, proposed abolishing the FIRB in the lead-up to the 1987 election. However, after gaining power in 1996 and leading Liberal Party led governments in coalition with the National Party until 2007, Howard retained the FIRB and the existing FDI regime, except for removing the requirement that uranium mining be controlled by Australians. Indeed, in 2011 the Treasurer Peter Costello blocked a bid by Shell to take over Woodside (operator of the North West Shelf gas project), against the backdrop of the Liberal Party losing a state election in Western Australia. (pp 110-11)
Nonetheless, cross-border investment flows grew strongly from the 1980s, as local capital and currency markets were liberalized and share markets boomed at home (pp 90-91):
“Foreign investment poured into the country, doubling its share of the economy. Investment by Australian companies abroad soared even more remarkably, rising from 5 percent of GDP before the float [of the dollar in 1983] to 35 percent by the end of the 1990s. The combined value of investments by Australian companies exceeded the foreign investment in Australia” (p 142).
Beginning in 1988, with the People’s Republic of China, Australia began concluding Bilateral Investment Treaties (BITs) particularly with developing economies and/or countries whose protections for investors might not reach international standards. After a further round of multilateral trade and investment liberalisation under the World Trade Organization looked increasingly unlikely from around 2000, the Howard Government also began negotiating Free Trade Agreements (FTAs) including investment chapters, both protecting and liberalizing investment on a preferential basis.
The FTAs with Singapore (signed on 17 February 2003) and Thailand (5 July 2004) were with smaller economies, but from 2002 Howard committed to negotiating an FTA with the US (eventually signed on 18 May 2004). By 2001, Australia’s FDI stock in the US was higher than the latter’s FDI in Australia. The then US Trade Representative, Robert Zoellick, envisaged greater investment flows as the biggest potential benefit from the FTA (pp 80-81). He sought exemptions for US investors from the FIRB process, but instead ultimately achieved a much higher threshold before applications were subject to review ($800m, instead of $50m). One study estimated that there was $73b more investment in Australian between 2005 and 2010 than would otherwise have been expected (p 13), although the impact of this FTA on bilateral trade flows remains hotly contested.
Labor Governments under Kevin Rudd and Julia Gillard (2007-2013) retained a generally favourable stance towards inbound foreign investment. Treasurer Wayne Swan, for example, resisted calls to block a Chinese acquisition of Australia’s largest cotton farm in 2012 (pp 152-3): Cubbie Station, which otherwise risked insolvency. However, he rejected the application by the Singapore Stock Exchange to acquire the Australian Securities Exchange (pp 204-5). This was partly on the grounds of economic nationalism (that the acquisition would impede the goal of positioning Sydney as a regional financial centre) and partly out of concern about Australia losing sovereignty over regulatory control (especially in financial crises). Swan also arguably delayed a decision on a bid by a large US investor for Graincorp (made in October 2012). That decision was left to a new Treasurer, Joe Hockey, after the Liberal-led Coalition under Tony Abbott regained power in the general election of 7 September 2013 (pp 216-7).
Hockey eventually rejected the application, under pressure from the National Party within the Coalition. The Party had also pressed for new FDI restrictions to be introduced, reviving longstanding concerns in Australia’s rural community about foreign investors, including now State-Owned Enterprises (SOEs) and other government-linked companies from China and other capital-exporting countries. From 2015, the Coalition Government made good on its election commitments by requiring FIRB review of investments in rural land exceeding $15m, and of “agribusiness” investments exceeding $55m, albeit with higher thresholds remaining for investors from certain FTA partners due to commitments made under early treaties. The Australian government has maintained a particular interest in FDI proposals by investors linked to foreign governments (pp 196-201) – requiring FIRB approval irrespective of FDI value, and assessing the commercial nature of the investor’s activities when assessing the “national interest”.
Overall, both major parties – Labor and Liberal – have maintained a liberal stance towards inbound FDI despite enactment of the Foreign Acquisitions and Takeovers Act 1975 (Cth). FIRB, composed mainly of businesspeople assisted by a secretariat of Treasury officials, mostly recommends approval of FDI proposals and successive Treasurers are have rarely rejected them or exercised their wide statutory discretion to imposes conditions on the inbound investments. However, the Labor Party faces considerable opposition from its left factions, and especially the Australian Greens Party (with which the Gillard Government, for example, was in coalition over 2011-13). The Liberal Party also faces concerns from some political conservatives and its National Party partner. By contrast: “The radical free trader perspective – the voice of John Hewson [Opposition leader of the Liberal Party, 1990-4], who once called for abolition of the … Act – no longer finds expression in mainstream politics” (p 217). Uren therefore concludes that the bipartisan political centre remains unstable, noting (p 209):
“There were 160 speeches and parliamentary interventions referring to foreign investment in the parliamentary debates of the Abbott Government’s first year”.

Author: Luke Nottage

Prof Luke Nottage (BCA, LLB, PhD VUW, LLM LLD Kyoto) is founding co-director of the Australian Network for Japanese Law (ANJeL), Associate Director (Japan) of the Centre for Asian and Pacific Law at the University of Sydney (CAPLUS), and Professor of Comparative and Transnational Business Law at Sydney Law School. He specialises in international dispute resolution, foreign investment law, contract and consumer (product safety) law.