Dr. Chris D’Souza
The foundation of prosperity and economic expansion in most countries has been foreign investment. It has sparked enterprises, jobs, and the dissemination of new ideas, skills, and technology for ages.
But many developed countries, including Australia, are now tightening its foreign investment restrictions in the face of escalating geopolitical concerns. The continuing The Ukraine-Russia conflict; the Israel-Palestine-Lebanon-Iran conflict, and as I write this article, the dramatic fall of the Assad Regime in Syria.
In the guise of national security, nations like Singapore, Germany, Canada, the United States, and Britain have been building more and more obstacles to international investment.
The perception of China’s increasing hegemony is the main reason for the tightening. Fears and uneasiness have been exacerbated by China’s expanding economic and political strength as well as its growing sense of entitlement under President Xi Jinping. America is the country where this is most apparent.
Real or not, these worries have been made worse by China’s support of Russia in its conflict with Ukraine, its exploitation of foreign investment to increase its political clout with countries in the Pacific and Africa, and its aggressive territorial claims in the South China Sea and over Taiwan, a self-governing island.
Concerns over strategic risk have also been raised by China’s use of its economic might as the second-biggest economy in the world to penalise countries with which it has come into conflict. Trade restrictions were levied by China on $20 billion worth of Australian exports following an increase in political tensions during the administration of the previous Australian government.
Western countries are now focusing on China’s leadership in fields like artificial intelligence and the technology enabling the switch to green energy. These domains are becoming more and more important for maintaining economic sovereignty. It is feared that if one nation dominates, it may grant that country undue power and influence over others.
The Canadian government announced recently that it will be closely monitoring foreign investments in its video game industry as well as its space technology and artificial intelligence industries. The latter, according to the Canadian government, was vulnerable to “hostile state-sponsored or state-influenced actors” who would use the games to disseminate false information.
Canada has imposed restrictions on foreign investment in its vital mining sector. Vital minerals like lithium, cobalt, and nickel are utilised in the creation of green energy systems, which range from solar panels to electric vehicle batteries.
Another country that has imposed restrictions on investment in vital industries such as artificial intelligence and semiconductors is Germany. Last year, the German government published a strategic paper outlining its intention to “de-risk,” or lessen, its reliance on China. The government paper gave China a harsh evaluation. It stated, “China has changed.” “This and China’s political decisions require us to adjust how we approach China.”
US President Joe Biden directed the Committee on Foreign Investment in the United States (CFIUS) to examine transactions in 2022 that could expose supply chains and personal data to risk or provide adversaries with access to vital technologies. A plan to grant CFIUS more authority to subpoena data from foreign businesses pursuing investments or acquisitions was put up in May 2024. It is almost certain that President-elect Donald Trump will tighten restrictions against China.
Five-Eyes and the Australian Perception
The United States, Canada, the United Kingdom, Australia, and New Zealand form the Five Eyes intelligence alliance. It has been noted in legal and security circles that there seems to be a growing level of coordination among the Five Eyes group of countries on choices about foreign investment with the goal of guaranteeing the security of global supply chains.
Safeguarding supply routes for a coalition of Western nations might potentially have additional implications for investment regulations. For instance, a foreign corporation may be prevented from acquiring an Australian mining owner that possesses a product considered vital to national security interests and is located in Africa or South America. even if Australia is not where the mine is located.
Australia’s laws governing foreign investment have been reinforced in recent times, especially with regard to investments that target industries that could be a threat to national security. Similar to Canada, these industries include critical minerals, telecommunications companies, defence companies, and ports and electricity grids.
In the realm of intellectual property, Australia possesses a comparative advantage. Australia’s leadership in quantum computing and the invention of the Cochlear implant and Wi-Fi technology in a CSIRO lab serve as examples of this. In Australia, protecting intellectual property could help maintain employment and stop the brain drain out of the nation.
Australia’s Federal Government Treasurer, Jim Chalmers, has hinted that the government’s plans to “strengthen” foreign investment regulations with a further explanation of the contentious Future Made in Australia Act whereby projects will be screened “more effectively” and that legislation will be “streamlined” to allow for “investment that is in our national economic and security interest.” Chalmers’s reference to “streamlining” may be Australia’s way of closer aligning its foreign investment interests with those of its Five Eyes partners. This might take the form of expedited procedures for “trusted investors” who have already had purchases authorised (Hyland, 2024).
Lack of Transparency – A Global Issue
The Foreign Investment Review Board (FIRB) of Australia provides advice to the Treasury regarding foreign investment proposals; however, it does not reveal the criteria it uses to determine proposals or the restrictions it places on deals. Interestingly, Professor Allan Fels, the former chair of the Australian Competition and Consumer Commission (ACCC), is worried that by regulating foreign investment in a way that is not adequately transparent and accountable, the Treasury may not be appropriately enforcing the restrictions it places on foreign investment (Hyland, 2024).
It’s unclear how Treasurer Chalmers hopes to “strengthen” Australia’s foreign investment regulations, let alone how such transparency improvements would fit into that plan. However, he is not alone. The watchdogs of foreign investment in other nations make equally ambiguous decisions.
Although tightening restrictions pertaining to foreign investment is not exclusive to Australia, dealmakers and businesspeople around the globe are closely monitoring any changes, as many of them think Australia’s laws are already quite strong.
It is very likely that the Future Made in Australia Act will include stricter requirements for foreign organisations looking to buy Australian businesses; including requirements imposing on foreign firms to continue operating manufacturing or research and development centres in Australia.
This could result in higher acquisition costs for international businesses, a key area for management accountants to be concerned about.
References:
Hyland, Anne (2024), “Treasurer Jim Chalmers wants stronger foreign investment rules. What does that mean?”, The Age, Business, April 27, p.3.