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At any other time, Friday’s decision by treasurer Joe Hockey to reject Archer Daniels Midland’s (ADM) A$3.4 billion takeover bid for GrainCorp might have been just another controversial foreign investment decision.

Indeed, were it not for a <a href="https://www.businessspectator.com.au/news/2013/11/5/politics/graincorp-bid-splits-coalition" target="_blank">widely</a> <a href="https://www.smh.com.au/federal-politics/political-news/graincorp-takeover-failure-stirs-fury-among-some-liberals-20131129-2yh7x" target="_blank">reported</a> split in the Coalition over the proposal, the decision may not have made it out of the business section of the national press.
However, inserted within the <a href="https://theconversation.com/hockey-kills-graincorp-takeover-by-adm-experts-react-20941" target="_blank">ADM-GrainCorp decision</a> was a never-before-seen rationale for rejecting a foreign investment: the tenor of community attitudes and level of popular support. This seemingly minor caveat may radically change the way in which foreign investment reviews are conducted by the Coalition government in coming years.
Australia’s foreign investment framework
Debate about Australia’s foreign investment policy was catalysed in 2008, with the highly contentious “<a href="https://www.ft.com/intl/cms/s/0/a51f903e-d09f-11dc-953a-0000779fd2ac" target="_parent">dawn raid</a>” by Chinalco on Rio Tinto.
Since then, an ongoing series of high-profile foreign investment deals has attracted both intense public and regulatory scrutiny: these include the takeover of <a href="https://www.smh.com.au/national/doubts-over-oz-decision-20090331-9i9t" target="_blank">OzMinerals by China’s Minmetals</a>; the acquisition of Felix Resources by <a href="https://www.bloomberg.com/news/2013-11-13/australian-regulator-said-to-tell-yanzhou-to-cut-yancoal-stake" target="_blank">Chinese state-owned Yanzhou Coal</a>; the failed <a href="https://www.theaustralian.com.au/business/wayne-swan-sinks-84bn-asx-takeover-by-singapore/story-e6frg8zx-1226034348911" target="_blank">Singapore Stock Exchange bid</a> for the Australian Stock Exchange, SAB Miller’s <a href="https://www.ft.com/intl/cms/s/0/0dee9878-173a-11e1-b00e-00144feabdc0" target="_blank">acquisition of Fosters</a>, and the current takeover bid of <a href="https://www.theaustralian.com.au/business/companies/saputo-matches-murray-goulburn-bid-for-warrnambool-cheese-butter/story-fn91v9q3-1226761417207" target="_blank">Warrnambool Cheese &amp; Butter</a> by Canadian dairy group Saputo.
Australian foreign investment policy presumes in favour of foreign investment, and generally does not enforce local ownership requirements. However, investments in a small minority of cases are screened by the Treasurer to ensure they are consistent with the national interest.
This screening process is conducted by the Foreign Investment Review Board (FIRB), and <a href="https://firb.gov.au/content/_downloads/AFIP_2013.pdf">must be undertaken</a> if an investment: a) is from a foreign government investor; b) is a business investment over 15% of the targeted firm and valued at over $248 million; c) is in real estate; or d) is in a defined set of “sensitive” sectors (such as banking, airlines, airports, shipping, media and telecommunications). All other foreign investment applications receive automatic approval.
Reviewed applications are subject to a six-point “national interest test”, administered by the FIRB. This considers:
<ul>
<li>
Impacts on national security
</li>
<li>
Impacts on competition
</li>
<li>
Impacts on Australian government policies
</li>
<li>
Impacts on the Australian economy and community
</li>
<li>
The character of the investor
</li>
<li>
[For state-owned enterprises] The commercial orientation of the investor
</li>
</ul>
Following its enquiries, the FIRB makes a (confidential) report to the treasurer, who may either approve, reject or conditionally approve the investment.
The overwhelming number of screened foreign investments are approved. Over the five years to 2011-12, 38,590 applications were approved (valued at A$860 billion), while only 63 were rejected. The bulk of these were in the real estate sector, and prior to the GrainCorp decision only two major business proposals had been recently rejected: the 2001 <a href="https://www.abc.net.au/pm/stories/s281616.htm" target="_blank">Shell takeover over Woodside Petroleum</a>, and the Singapore Stock Exchange’s 2011 <a href="https://www.smh.com.au/business/singapore-finally-walks-from-asx-bid-20110408-1d6o4" target="_blank">bid for the ASX</a>.
GrainCorp: a new populist precedent?
Friday’s decision is significant because it may set a new precedent for how foreign investment is screened. It would appear the ADM-Graincorp decision is implicitly adding a new, seventh criteria to the FIRB’s national interest test: community attitudes and popular support.
In explaining his decision, Treasurer Joe Hockey <a href="https://jbh.ministers.treasury.gov.au/media-release/026-2013/" target="_blank">outlined two reasons</a> for rejecting the proposal: that there is limited competition in the grains handling industry (presently dominated by GrainCorp), and that there was a “high level of concern from stakeholders and the broader community”. He also argued that “allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally”.
<a href="https://www.smh.com.au/business/grain-of-doubt-over-national-interest-case-20131129-2yh6n" target="_blank">Several</a> <a href="https://www.smh.com.au/federal-politics/political-opinion/graincorp-decision-joe-hockey-caught-between-national-and-nationals-interest-20131129-2yfw2" target="_blank">analysts</a> <a href="https://www.businessspectator.com.au/article/2013/11/29/politics/hockey-fails-leadership-test-graincorp" target="_blank">have</a> <a href="https://www.businessspectator.com.au/article/2013/11/29/economy/adms-rejection-goes-against-grain-logic" target="_blank">argued</a> the competition policy rationale is relatively weak. The Australian Competition and Consumer Commission (ACCC) had already <a href="https://www.accc.gov.au/media-release/accc-to-not-oppose-archer-daniels-midland-acquisition-of-graincorp" target="_blank">approved the deal</a> in June on the grounds it would be unlikely to substantially lessen competition, and ADM had made <a href="https://www.theaustralian.com.au/business/latest/adm-ups-graincorp-spending-promises/story-e6frg90f-1226769989671" target="_blank">significant commitments</a> to improve bottlenecks in the grain handling chain.
Thus, it would seem political concerns have loomed large. One consideration appears to be opposition from the Nationals, who had <a href="https://theconversation.com/big-win-for-nats-as-hockey-rejects-graincorp-bid-20948" target="_blank">campaigned</a> <a href="https://www.watoday.com.au/federal-politics/political-news/graincorp-takeover-failure-stirs-fury-among-some-liberals-20131129-2yh7x" target="_blank">hard</a> against the application being approved. But another was widespread community opposition to the deal, with Hockey instructing the FIRB to consider the <a href="https://jbh.ministers.treasury.gov.au/media-release/026-2013/" target="_blank">“wider ramifications”</a> of the deal – including public attitudes – mid-way through the assessment process.
Until now, community attitudes have not been part of the FIRB’s national interest test. While “community concerns” are considered, these are defined in economic terms – a fair return to the community, opportunities for Australian participation, the interests of employees.
The FIRB has not assessed whether an investment is considered “popular”, or how it will influence community attitudes to foreign investment more broadly. Moreover, no recent decision by the treasurer – whether approval, rejection, or conditional approval – has made reference to public sentiments. Until now.
The implications of community attitudes
The ADM-GrainCorp case is of course a single decision, and it is not clear whether this will be a one-off, or will be followed by the Coalition government in future cases. But it raises questions over how community attitudes should be assessed, and whether the FIRB even has the capability to assess them.
Community attitudes are a nebulous and difficult to measure concept. For example: if the majority of the country supports an agricultural investment, but a majority of rural residents oppose it, whose views should dominate? Moreover, the economic policy-focussed FIRB has no experience in assessing community mood, nor the resources or capabilities to do so at present.
Whether this would be a robust test, or simply a “get out of jail free” card that allows the Treasurer to reject controversial cases, remains to be seen.
Secondly, it would significantly reduce legal certainty for foreign investors in Australia. At present, there is a clear set of national interest guidelines, which have been applied in a transparent and consistent manner. A foreign investor will have a good idea as to whether their proposal ticks the boxes before committing, and can be confident the goalposts will not be moved part-way through the process.
Introducing volatile and contested community attitudes into the process may deter investors out of fear their proposals will be decided at the whim of populist politics.
Third, it will “politicise” the foreign investment assessment process. Rather than approving investments based on their economic merits, popular attitudes will also become a key criterion. A number of worrying outcomes may result.
Investment proposals could become an issue for party politics, determined more by the electoral fortunes of the government of the day rather than sound policy criteria. A business’s competitors may try and sabotage a deal by stirring up community opposition, transforming the FIRB process into a politically-contested commercial battleground. Vested interests with something to lose may also use popularity arguments to sink deals, even when they bring net national benefits.
If the example set in the ADM-GrainCorp decision becomes common practice, Australia’s supposedly <a href="https://www.theaustralian.com.au/opinion/columnists/coalition-steadies-the-ship-of-state-as-shaky-labor-hogs-the-headlines/story-e6frg75f-1226718001935" target="_blank">“open for business”</a> approach to foreign investment may change radically.

<hr>
Jeffrey Wilson is fellow of the Asia Research Centre at <a rel="nofollow" href="https://www.murdoch.edu.au/" target="_blank">Murdoch University</a>.
This article was originally published at <a href="https://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/foreign-investment-and-the-popularity-test-does-graincorp-set-a-new-precedent-20992" target="_blank">original article</a>.
<img width="1" src="https://counter.theconversation.edu.au/content/20992/count.gif" height="1" alt="The Conversation">
 
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jwilson-73uvCTKJtg

Does the government's rejection of GrainCorp set a new foreign investment precedent?

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Foreign investment has been a key issue in national policy debate. Surging levels of foreign investment have provided a fillip to the Australian economy during the <a target="_blank" href="https://www.rba.gov.au/publications/bulletin/2009/nov/pdf/bu-1109-1.pdf">global financial crisis</a>, and have been instrumental in <a target="_blank" href="https://www.propertyobserver.com.au/https://www.rba.gov.au/publications/bulletin/2013/mar/6">financing the resource boom</a>.
However, it has also caused a number of political controversies, particularly over the impact of Chinese <a target="_parent" href="https://www.tandfonline.com/doi/abs/10.1080/10357718.2011.563779#.UoVsrPlmh8E">state-owned enterprise</a> investments and the sensitive issue of foreign investment in <a target="_blank" href="https://theconversation.com/why-not-let-agriculture-benefit-from-foreign-investment-19433">agricultural land</a>. Such has been the attention that no fewer than <a target="_blank" href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed%20inquiries/2010-13/foreignacquisitionfarmland2011/index">three</a> <a target="_blank" href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed%20inquiries/2008-10/firb_09/index">Senate</a> <a target="_blank" href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Completed%20inquiries/2012-13/firb2011/index">inquiries</a> have been launched into foreign investment issues in recent years.
But a major finding of the <a href="https://www.murdoch.edu.au/Murdoch-Commission/">First Murdoch Commission</a> is that while Australia is relatively successful in attracting foreign investment overall, its investment ties with Asian partners remain relatively under-developed.
Commission of inquiry
Launched in early 2013 by Murdoch University, the First Murdoch Commission is an independent commission of inquiry into Western Australia and Australia’s role and relationship with the Asian region. Its final report, entitled <a target="_blank" href="https://www.murdoch.edu.au/Murdoch-Commission/Final-Report/">Western Australia and the evolving regional order: Challenges and opportunities</a> was launched in Perth this week by WA Premier Colin Barnett.
The First Murdoch Commission’s aim is to investigate how economic interdependence between Australia and Asia could bring mutual benefits to both parties during the coming “Asian Century”. Its report analyses a <a target="_blank" href="https://www.murdoch.edu.au/Murdoch-Commission/Our-themes/">range of issues</a> across the spectrum of Australia’s relations in the region, including the drivers of Asia’s rise, regional institution-building, trade and investment agreements, resource security, and engagement and diplomacy.
One of the key issues identified by the commission was the role of foreign investment, examining the potential benefits it may offer the Australian economy, and its role in supporting the development of economic ties with Asian partners. The Commission found that Australia is arguably not getting foreign investment from the right sources or into the right sectors to fully benefit from the economic opportunities that Asia offers.
Australia’s open door approach
As a small open economy, Australia has relied upon foreign investment to build large-scale, capital-intensive industries. For most of its history, Australia has maintained an “open door” approach to foreign investors, and the Foreign Investment Review Board (FIRB) <a target="_blank" href="https://firb.gov.au/content/_downloads/AFIP_2013.pdf">screens</a> only a small minority of investments over certain size thresholds or in a handful of sensitive sectors. Practically all foreign investments are approved by the government, with only one business investment (the <a target="_blank" href="https://www.smh.com.au/business/swan-rejects-asx-takeover-20110405-1d25e">proposed takeover</a> of the ASX by the Singapore Stock Exchange) rejected in the last decade.
As a result, Australia has performed very well in attracting foreign investment. Australia presently hosts some A$2.2 trillion of foreign investment stocks, and its attractiveness as a site has <a target="_parent" href="https://www.propertyobserver.com.au/https://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0">steadily grown</a> in recent years, with annual inflows doubling from an average of A$71 billion per annum during 2001-05 to A$150 billion during 2006-2010.
<img style="font-size: 0.8em;" width="470" src="https://c479107.ssl.cf2.rackcdn.com/files/35560/width668/xmq8k8pn-1384828786.jpg">
Distribution of Australia’s inward FDI by source country. Source: The First Murdoch Commission
<figure><figcaption></figcaption></figure>However, the structure of Australia’s foreign investment patterns is arguably out of kilter with its broader economic relationships. At a country level, Australia’s investment ties with Asian partners remain poorly developed. Europe and the US are the major sources of foreign investment (accounting for 58% of current stocks), while Asian partners collectively account for 11%. This is despite the fact that <a target="_blank" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/A5FB33BD2E3CC68FCA257496001547A1?OpenDocument">67% of Australian exports</a> in 2012 were destined for Asian markets.
On a sectoral basis, the story is similar. One industry – banking and finance – accounts for just over half of foreign investment stocks, with mining accounting for a further 13%. In comparison, many other sectors underperform at attracting foreign investment, particularly manufacturing, agriculture and non-retail services. As these industries will be instrumental in diversifying Australia’s economies ties with Asia beyond resources in future years, this lack of foreign investment is a cause for concern.
The importance of foreign investment links
For a small country like Australia, foreign investment is important for promoting economic growth. Its main – and most discussed – contribution is for financing capital-intensive industries. Australian capital markets are relatively shallow, and companies in large-scale industries (such as mining, infrastructure and construction) often rely on overseas sources of capital to finance investment.
However, foreign investment can also offer several other benefits, which help integrate Australian businesses with partners in foreign countries. One is marketing channels, where foreign investors can help create new export opportunities by opening markets in their home countries to Australia. This is particularly evident in the <a target="_blank" href="https://www.sciencedirect.com/science/article/pii/S0301420712000128">Australian iron ore sector</a>, where many recent Chinese investments have come with “offtake agreements” that guarantee future sales in China to junior companies developing new mines.
A second benefit is technology transfer. Globally, the majority of private R&amp;D is undertaken by multinational corporations, who possess the necessary size, scale and technical capacity to develop new technologies. Hosting investment from these corporations allows an economy to access the technologies they hold, avoiding the need to pay onerous licensing fees. The clean energy industry is emerging as one area where Australia could <a target="_blank" href="https://www.austrade.gov.au/invest/opportunities-by-sector/clean-energy">especially benefit from foreign investment</a>, given its sizeable solar, wind and geothermal endowments.
Third, foreign investment also helps promote integration in global value chains. These are industries in which products are not made in a single country, but stages of production are spread across multiple economies. Global value chains are common in the Asian region, and have become well developed in the textiles, electronics, consumer goods, food and automobile industries.
Foreign investment ties are important in connecting companies within global value chains. A key example is in the auto industry, where exports of the <a target="_blank" href="https://www.stuff.co.nz/southland-times/life-style/9372302/Aussie-Commodore-a-hit-in-the-US">VF Commodore</a> have taken off following a decision by General Motors to market the Australian-assembled vehicle as the Chevy SS in the US.
Recalibrating foreign investment ties
Given these benefits, it is clear that Australia can benefit from a recalibration of its foreign investment ties. Developing investment relationships in Asia would help more closely integrate the economy with increasingly important partners in the region, and create opportunities to diversify inward investment away from the financial and mining sectors. There are a number of strategies government could implement to this end.
First, Australia could better communicate its investment openness to partners in the region. While very few investment proposals are rejected by the FIRB, there remains a perception in the region – particularly in <a target="_blank" href="https://lowyinstitute.org/publications/chinese-perspectives-investing-australia">China</a> – that Australia is restricting foreign investment. More could be done, both by the Commonwealth Government and statutory bodies such as <a target="_blank" href="https://www.austrade.gov.au/Invest/default.aspx">Austrade</a>, to correct such misperceptions abroad.
In certain sectors, there is deep public antipathy towards foreign investment. This is especially true in agriculture, where foreign investment is often opposed as leading to a <a target="_blank" href="https://australianpolity.com/feature/guarding-food-security-in-the-national-interest">loss of national control</a> or being harmful to <a target="_blank" href="https://www.greens.org.au/land-ownership">food security</a>. However, recent research by the <a target="_blank" href="https://rirdc.infoservices.com.au/items/11-173">Rural Industries Research and Development Corporation</a> reveals that foreign investment in Australian agriculture is relatively low, and has a net positive impact on food security. Efforts to increase public awareness of the benefits of foreign investment in agriculture – especially in terms of technology transfer and marketing channels – may help reduce such community concerns.
Finally, Australia might also explore intergovernmental mechanisms to promote investment ties in the region. Free trade agreement negotiations – including bilateral deals with <a target="_blank" href="https://www.dfat.gov.au/fta/ajfta/">Japan</a>, <a target="_blank" href="https://www.dfat.gov.au/fta/acfta/">China</a> and <a target="_blank" href="https://www.dfat.gov.au/fta/akfta/">Korea</a>, as well as the regional <a target="_blank" href="https://www.dfat.gov.au/fta/tpp/">Trans-Pacific Partnership</a> – all presently have investment provisions on the agenda. If crafted well, these agreements may help promote regional interest in Australia as an investment location.
 
<hr>
 Jeffrey Wilson is fellow of the Asia Research Centre at <a href="https://www.murdoch.edu.au">Murdoch University</a>.
 
This article was originally published at <a href="https://theconversation.com">The Conversation</a>. Read the <a href="https://theconversation.com/why-australia-must-deepen-its-asian-investment-relationships-20264">original article</a>.
 
 
<img src="https://counter.theconversation.edu.au/content/20264/count.gif" alt="The Conversation" height="1" width="1">
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Jeffrey Wilson

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