Should Australia Welcome the Increasing Foreign Investments from China - Literature review Example

Running header: should Australia welcome the increasing foreign investments from china? Student’s name: Instructor’s name: Subject code: Date of submission: Should Australia welcome the increasing foreign investments from China? Australia’s economic success greatly depends on its being a player in the global economy. Foreign direct investments (FDI) have played a great role in increasing the country’s competitiveness in the global market and creating jobs for the citizens as well as providing access to advanced technology hence leading to improved productivity (Conley, 2009). Through FDI, Australia has also been able to access capital necessary for extracting its natural resources and also accessed other markets in the global economy. Over the years, global capital has been used to develop many Australian industries. However, foreign investments from china have been on the increase of late hence raising concern among Australians with some advocating for more Chinese investments while others argue that Australia does not need the increasing Chinese investments (Kelly, 2010). This paper aims at discussing the benefits that Australia will get by welcoming the increasing Chinese foreign investments as well as the dangers that would accrue from this. Some of the benefits to be discussed include acquisition of foreign capital, new technology as well as preservation of jobs that would otherwise have been lost owing to the recent global economic crisis. The paper will also analyze the claim that increased Chinese investments in Australia will lead to Chinese domination of Australian market owing to the fact that most of the Chinese firms are government owned. Finally, the paper will explain the reasons why I think that Australia needs to welcome the increasing Chinese investments. Australia should welcome the increasing foreign investments from china owing to the fact that foreign capital plays a key role in the economic development of Australia. According to Lowe (2009), this is the reason why the government has continuously advocated for economic reforms by coming up with legislations that allow for more foreign investments in areas that include insurance as well as mineral and energy sectors. China is particularly interested in investing in the mineral and energy sector and hence acts as a source of external financing in the sector (Hawke, 1989). Furthermore the increasing foreign investment from china will play a key role in economic development not only in adding to domestic capital but also as an important source of technology as well as global best practices. It is for this reason that the government should focus on the real barriers to Chinese increasing foreign investments. In fact, there is need to increase foreign investments from china especially in the form of foreign direct investment owing to the fact that the investments will initiate technology spillovers, assist in human capital formation, contribute to international trade integration, assist in creating a much more competitive business environment, enhance enterprise development, lead to increased total factor productivity and most importantly lead to improved efficiency of resource use. Australian companies will also benefit from the increasing Chinese foreign investments by consolidating around their areas of core competence by tying up with the Chinese companies to acquire new technologies, management expertise as well as access to foreign markets. The cost benefits accruing with such a relationship will in turn position Australia as a preferred destination for foreign investments and sourcing for global markets. The Australian public policy ought to be focused on the maximization of the benefits achieved by encouraging the involvement of Chinese firms by encouraging diversity and competition between Chinese and Australian banks as well as between the banks and other financial institutions. It is through this way that Australia will be able to rip maximally from the increasing Chinese foreign investments (Griffiths and Wesley 2010). Welcoming the increasing Chinese foreign investments into Australia will be a great step towards enabling Australia to fully exploit its natural resources especially in the energy and mineral sector which is where china has a major interest in (Lee, 2010). Following the rapid expansion in the Chinese economy, the demand for mineral and energy resources in china has raised sharply. Australia on the other hand has a lot of minerals and energy resources that the Chinese firms require. They also have the technology required for efficient extraction of such minerals (Colin, 2006). Therefore, by bringing in foreign investment from china, Australia will not only be assured of the much required capital but also of the vast market that china offers. This implies that the Australian firms that enter into agreement for capital injection with Chinese firms will not only be acquiring a stronger capital base but also will be better positioned to compete with their competitors in the global market due to the existence of a ready market that china avails. This can be proved by the Chinese policy for mineral procurement abroad. This is the so called the Three 30 percents strategy for minerals procurement abroad. In the strategy, china aims at sourcing 30 percent of its needs from foreign mines where Chinese equity interests have been acquired, another 30 percent from long term supply contracts while another 30 percent will be sourced from commodities markets. Australia should therefore strive to take advantage of this policy and provide the necessary support required by the foreign investors from china in order to be able to tap from the vast market provided by china. This will not only make Chinese firms stronger but will also positively affect the Australian economy through increased foreign exchange hence resulting to a more favorable balance of trade (Nicholas,2004). Increased Chinese foreign investment in Australia will also play a great role in employment creation and also preservation of some of the already available jobs (Editorial, 2007). Although the percentage of the unemployed in Australia is relatively low compared to many other countries, the government definitely needs to do a lot in securing employment for the unemployed as well as preserving the jobs that are already available. An obvious way of doing this would be to encourage foreign investments which will provide the much required capital for job creation. According to McGillivray (1997), When the Chinese firms invest in Australia; they will obviously be required to source their labor requirements from Australia. This will in turn add to the number of jobs available to the Australians and hence reduce the rate of unemployment. Another effect of welcoming the increasing Chinese investment in Australia will be the preservation of the jobs that are already available to Australians. Following the recent global financial crisis, many of Australians small and medium mining companies have been driven to their knees since they were denied their normal credit facilities. The big Australian firms that perform very well in the stock exchange have also found themselves in hard times with shareholders. Some of these firms are nearly collapsing. Unlike the Australian firms, the Chinese firms were not as adversely affected by the crisis as their Australian counterparts. Therefore, welcoming Chinese investments in such companies will enable them to be back to their foot and hence be able to preserve the jobs that would otherwise be lost. One of the greatest recent decisions undertaken by the Australian government was approving the Chinese company Zhongijin Lingnan to obtain the greater part of stake in a thoroughly troubled Australian company Broken hill zinc and lead miner, Perilya. Were it not for the injection of the Chinese capital to the company, it was obvious that the company was going to be closed down and hence many jobs would have been lost. It would therefore be better to have Australian firms majorly owned by the Chinese than having those firms closed and the jobs they provide lost. Another major capital injection by Chinese firms likely to save a lot of jobs from being lost is the deal involving a china’s firm Chinalco and Rio Tinto. This is a 19.5 billion dollars minority stakes agreement in mines and convertible notes that represents the china’s greatest investment in an Australian company. Owing to the recent global economic crisis and Australia being effectively in recession, it would be prudent to encourage foreign investment and hence make efficient use of the available reproductive resources. Turning away foreign investment from China in the present economic scenario would unwise. For example according to Rio Tinto, the company risks having to cut nearly 2000 jobs in Australia if its cooperation with Chinese Chinalco is terminated. If Australia can welcome more of such deals from china; they will not only enable Australia to fully exploit its resources but also lead to jobs creation hence reducing unemployment (Leaver and Ungerer, 2010). Increasing Chinese foreign investments should not come as a surprise (Garnaut, 1989). The future success and prosperity of Australia heavily relies on continued access to global capital markets as well as generation of economic activity in Australia with the aid of foreign capital. Throughout its economic history, Australia’s major trading partners and sources of foreign direct investments (FDI) have been the largest economies in the world which includes the United Kingdom, Japan and the United States of America (Leaver, 2009). Today, china is the second largest economy worldwide in terms of purchasing power and also Australia’s largest trading partner. According to Neil (2009),Australian two way trade with China in 2008 was valued at 67.7 billion dollars china accounted for about 15 percent of Australian merchandise trade valued at 32.5 billion dollars while resource exports (minerals metals and fuels) exports accounted for 86 percent of Australia’s merchandise exports to china. FDIs flows between China and Australia have also been on the increase with china having invested 6.2 billion dollars in Australia while Australian investments in china totaled 5.2 billion dollars in 2007. The increasing FDIs flows are a reflection of the next phase of the development of bilateral economic partnership between china and Australia (Pietsch, and. He, 2010). It is for this reason that Australia needs to welcome the increasing foreign investment from china owing to the fact that it also have some interests in china which have also continued to increase. In other words, Australia can not block foreign investments from china and still expect to invest in china. In other words for countries to grow economically, they should be open to foreign investments and also invest in other nations depending on their needs i.e. Australia needs china just the same way china needs Australia (Keating,1992) Many of the Chinese firms investing in Australia are state owned enterprises. According to Gorgao (2003), the firms also act both as the producers of the mineral commodities and as the buyers of the same commodities for use back at home it is on these grounds that it has been argued that the increasing foreign investments from china should be discouraged and should not be welcomed in Australia. First the fact that the Chinese firms are state owned implies that the Chinese government may manipulate the enterprises to serve political ends rather than serving economic ends. The Chinese government may be out to gain control of all major sectors of the Australian economy and hence the investment ought to be checked and even discouraged at all costs. The fact that the firms are state owned means that they are prone to political manipulation which would make them not to be commercially viable hence watering down all the gains made by welcoming the investments in the first place (Howard, 1995). Furthermore if these investors are also going to be the consumers or posses enterprises that are the consumers of the goods produced by the entities in which the investments are made, the firms will acquire market knowledge of prices hence putting the producer entities at commercial disadvantage. In other words, there is fear of the producing entities being made to run at low profitability so as to sell the products to Chinese firms back at home at low prices. Firms that will be wholly owned by Chinese in Australia will also be able to repatriate huge profits back home at the expense of Australians. It is for this reason that the increasing Chinese investments in Australia should be discouraged. Furthermore, it has been argued that Chinese investment in Australia should be discouraged on the ground that Chinese government has put in place policies that limit Australian investments in china. In other words, Australia ought to only deal with China on the reciprocity criteria (John, 2008). Conclusion The major concern raised by those who feel that the increasing Chinese foreign investment in Australia are not welcome is the fact that the Chinese firms investing in Australia are state owned and may therefore serve a political end at the expense of economic ends. However, according to (Dyer and McGregor, 2008) it is the Australians who have the ultimate control of their own resources. Full control of such resources can never be handed over to foreign firms. The law is clear on the responsibility of businesses in exploiting the resources as far as they fulfill their tax obligations, protect the environment, support the local community as well as abide with the national laws. The government of Australia can withdraw the rights if need be or even deter future foreign investors in future as was done by the Queensland government by annulling all mineral rights. This means that there should be no fear of Chinese firms gaining control of major Australian resources (Keating, 2000). Australia definitely needs the Chinese investments in order to build its economy and create jobs for its people. The government should therefore give Australians the assurance that the Chinese investments can be depended on. The Australian investment policy should always be the one of encouraging people to invest in Australia in order for us to fully rip the benefits that results from such investments. References: Conley, T. (2009). The Vulnerable Country: Australia and the Global Economy, Sydney, University of New South Wales Press. (Chapter 5: The Shift to Asia). Lowe, P. (2009). “The Growth of Asia and Some Implications for Australia”, Reserve Bank Bulletin, November. http://www.rba.gov.au/publications/bulletin/2009/nov/pdf/bu-1109-6.pdf . Lee, J. (2010) “China Will Not be Tamed”, Business Spectator, 5 May. http://www.businessspectator.com.au/bs.nsf/Article/China-power-economic-west- foreign-relations-policy-pd20100506-579DV?OpenDocument&src=sph. Editorial (2007) “Great and Powerful – But is China Our Friend?” The Age, http://www.theage.com.au/news/editorial/great-and-powerful--but-is-china-our- friend/2007/06/17/1182018932029.html . Dyer, G. & McGregor, R. (2008) ‘china’s champions: why state ownership is no longer proving dead hand financial times, http://search.ft.com/ftArticle?queryText=mcgregor+chinalco&y=0&aje=true&x=0&id=0 80214000126&ct=0&page=2&nclick_check=1 . Garnaut, R. (1989). Australia and the Northeast Asian Ascendancy, Canberra, AGPS. Gorgao, P. (2003). “Australia’s Dilemma between Geography and History: How Consolidated is Engagement with Asia” International Relations of the Asia-Pacific, 3, pp. 179-196. Howard, J. 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Ungerer (2010) A Natural Power: Challenges for Australia’s Resources Diplomacy in Asia, ASPI, May. http://www.aspi.org.au/publications/publication_details.aspx?ContentID=252&pubtype= 5 John, P. (2008). Asia today. Australian economic journal, 3 (2), 69-78. Colin, M. (2006). Australia and China: Partners in Asia. Melbourne, MacMillan. Nicholas, T. (2004). Reorienting Australia –China relations. Sydney, Lighthouse publishers. Neil, K. (2009). Foreign direct investment: trends, Data availability, concepts, and recording practices Australian economic journal, 4(2), 58-71. Kelly, P. (2010) “The Biggest Game in Town”, The Australian, 10 April. http://www.theaustralian.com.au/news/opinion/the-biggest-game-in-town/story-e6frg6zo- 1225852009335. Griffiths, M. and M. Wesley (2010) “Taking Asia Seriously”, Australian Journal of Political Science, 45(1), pp. 13-28. Hawke, R. (1989) “Speech by the Prime Minister: Welcome Dinner for Delegates to the Ministerial Meeting on Asia Pacific Economic Cooperation”, Canberra, 5 November, p. 8. Read More