Foreign investment and domestic jobs have been inextricably linked since Australia’s convict days. Austrade’s Chief Economist Tim Harcourt explains.
This year marks the 200th anniversary of Lachlan Macquarie, the influential early Governor of New South Wales, sometimes called the ‘father of Australia.’
In fact, the early 18th century, is sometimes called ‘the Age of Macquarie’, as the reforming governor attempted to get the colony’s institutions right through the establishment of key public buildings, its own currency and making convicts and ex-convicts (the ‘emancipists’) stakeholders in the new society. Naturally, relations with indigenous Australians were important but as we know, fraught with tragedy.
As part of his vision, Macquarie put a lot of focus on infrastructure and was keen to foster innovation and entrepreneurship. In some instances, the very colony of New South Wales (and Van Diemen’s Land, later renamed Tasmania), could be called Australia’s first public-private partnership.
But one thing is for sure: as a small, geographically isolated place, the young colony was reliant on foreign investment, and Macquarie knew it. In fact, as a small exporting nation with low rates of saving, Australia has always been reliant on foreign investment for its economic development.
In their seminal work Australia in the Global Economy the economic historians David Meredith and Barry Dyster take us through Australia’s history of trade and investment, with a recurring theme of openness leading to growth and prosperity. The authors show how in the 19th and early 20th century it was Britain who provided nearly all our foreign investment, as we moved from the colonies to federation. British investors funded the infrastructure as we built up an export base based on wool and gold (our original ‘rocks and crops’).
While the investment scene was nearly all Britain (or British Empire at least), some other players were also investing in Australia. For example there was interest from Germany, when in 1872 the Siemens company supplied the porcelain insulators that were used in the Overland Telegraph line between Darwin and Adelaide. They were the forerunners of some of the big German companies we know of today on the Australian landscape, such as Bosch in manufacturing, Deutsche Bank in finance and Hochtief (owners of Thiess and Leighton Holdings) in the construction sector.
In the Second World War, just as Prime Minister John Curtin famously ‘looked to America’ strategically in the war effort, Australian industry also looked to America in terms of foreign investment. American multinationals become major players in manufacturing in post-war reconstruction and in the resurging minerals industry in Australia.
In the 1970s and 1980s, Japan became a major player in Australia. After the economic pact was signed in 1957, only 12 years after the end of the war, Australia’s commodities helped fuel Japan’s post-war industrialisation miracle, and eventually the trade links lead to Japanese investment as Tokyo realised how important resource security was to the nation’s economic development.
In today’s world, foreign investment to Australia is still led by the US, UK, Germany and Japan, but we are also seeing some new players on the scene such as China, India, the ASEAN states and some of the emerging nations. Of course, China and India receive a lot of profile, but they are still relatively small players compared to the OECD nations. For example, even at the end of 2008, the stock of Chinese investment in Australia was ranked 15th, with the UK and the USA having over 50 times that level here.
So what’s the bottom line? Foreign investment, from convict times to today is beneficial to our economy. It helps us build infrastructure, helps us develop our export industries and assists in technology transfer to lock in our future prosperity. We can’t rely only on domestic savings to fund investment. As the Treasurer Wayne Swan pointed out recently, if we were to do so, we could expect “business investment to fall by about 25 percent, output initially by three percent and employment would be around 200,000 jobs lower.”
Foreign investment is critical for job creation. In fact, a study by Access economics on the effect of Foreign Direct Investment (FDI) on jobs found that a majority of foreign-owned firms in Australia accounted for 14 percent of employment (equivalent to around 1.3 million jobs) and made significant contributions to output (value added), exports and R&D expenditure. These findings have been replicated in developing economies – particularly in China.
Of course, investment is a two-way street and Australia’s outward investment has become important in demonstrating our skills and capacity in Asia and around the globe. Take financial services, for instance. Macquarie Bank is so well known globally that maybe 200 years on, it’s the age of Macquarie again (the bank even adopted Lachlan Macquarie’s holey dollar as its corporate symbol!).
ANZ has also spelt out its vision to become Asia’s regional bank, and is putting its resources into action everywhere from India to Indonesia, and the strength of our superannuation industry shows that Australia’s financial services sector is very important regionally and globally.
In short, international investment — both outward and inward — is part and parcel of Australia’s global engagement with the world and the key to our nation’s prosperity and progress.
Tim Harcourt is Chief Economist of the Australian Trade Commission (Austrade) and the author of The Airport Economist.