Capital xenophobes

Two polls this week confirm that Australians take a largely negative view of foreign direct investment. On Monday, an Essential Media poll reported that only 25% of respondents agreed with the proposition that Chinese investment in mining companies should be welcomed because it helps our economy and provides jobs. Yesterday’s Newspoll, as reported in The Australian, found a small majority against any foreign company being allowed to acquire shares in Australian mineral companies.

As Tom Switzer’s recent paper on attitudes to foreign investment showed, there is nothing new in these attitudes. There also seems to be a particularly xenophobic flavour to some opposition. The Lowy Institute found stronger opposition to investment from Asian countries than from the UK or US.

While there are some political concerns in this as well as ethnic – state-owned companies raise slightly different issues to privately owned companies, particularly when the state involved is not democratic – ethnic or cultural factors do seem to influence attitudes. Japanese investment is strongly opposed along with that from undemocratic countries such as China.

Years ago, Wolfgang Kasper criticised controls on foreign direct investment as ‘capital xenophobia’, an argument that Stephen Kirchner recently updated in a CIS paper. As Stephen points out, foreign direct investment has benefits not associated with other forms of investment, as it is

typically accompanied by the transfer of technology, improved management techniques, intellectual property rights and other forms of intangible capital, all of which may yield productivity gains and spillover benefits, in addition to the direct contribution made by FDI to the expansion of the domestic capital stock.

This is one of those areas in which I think politicians are right to ignore the specifics of public opinion in favour of achieving broader aims. It’s not at all clear that domestic ownership brings real benefits and there are clear opportunity costs in not permitting foreign investment. Restrictions on foreign ownership are likely to reduce Australian living standards, for which governments will be politically suffer more in the long run than from short-term disapproval when foreign companies take control of Australian companies.

30 thoughts on “Capital xenophobes

  1. One of the interesting things about the Australian survey is that there are also fairly large gender and age differences. Perhaps women and old people enjoy being poor and xenophobic, or perhaps they simply have the highest level of ignorance. It would be interesting to know why there are these differences.

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  2. I see from the Newspoll you linked to in your previous post that Coalition voters are even more opposed to FDI than Labor voters, although perhaps the Nats account for this.

    Taken literally, the response to one of the Newspoll questions implies the majority think that even foreign portfolio investment, not just direct investment, should be banned.

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  3. Conrad – The old I would expect, but the gender gap was striking. I did not comment on it in the post because I need to do some more research before risking the feminist terror I may bring on myself in speculating on causes:)

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  4. Some shameless self-promotion here. I presented a paper at the same conference Tom spoke at. My slides are here. I have subsequently written up those slides into a paper, but can’t find an online version.

    One of the points I make is this

    Many Australians view selling Australian assets to foreigners as ‘selling the farm’. This view seems to suggest that Australian entrepreneurship is a non-renewable resource and that it has already been used up. The notion that Australian entrepreneurs will continue to develop new business ideas that are valuable in the global market does not enter into this type of argument. This is consistent with Caplan’s pessimism bias. Of course, this argument overlooks the fact that foreigners pay for the Australian assets that they purchase. A related idea could be that foreign buyers systematically underpay for the assets that they purchase. This could be related to a cultural cringe argument that suggests that Australians are overawed by foreign investors and will not charge full price for their assets.

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  5. So, by extension, Stephen, Sinclair and Andrew, you’d have no problem with the Chinese Communist Party buying up all of our mines?

    Grateful also for guidance on the transfers of tangible and intangible capital likely under this scenario.

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  6. Jeremy – I don’t think mining has any inherent security implications.

    On the advantages of FDI relative to portfolio investment, I prefer clear rules rather than ad hoc assessments of each proposal (essentially, a rule of law rather than discretionary approach). It is sufficient that the rules in general generate the desired outcomes, even if some particular cases do not.

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  7. I have less of a problem with direct foreign investment (and therefore control) if it is from countries that are open to the same.

    Many countries won’t allow non-citizens to own property.

    China (amongst others) in not an open country, they also have somewhat rubbery ownership laws. They accept foreign money and technology, but will not allow control.

    The Chinese investments into resource companies are not purely commercial decisions, they are for National Strategic interest and subsidized by state run banks.

    We already have one Super-power that uses its military to protect its “interests”, including economic ones.

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  8. The only non-security concern about foreigners buying up mining companies must arise from either (1) systematic under-payment for the assets as noted by Sinc, but even so, why would the average non-shareholding citizen care?; (2) Under-pricing of the relevant commodity to associated entities, but as Stephen has noted on his blog, this is just an internal transfer between the relevant entities; or (3) ‘hoarding’ of the resource in a non-profit-maximising manner, thereby foregoing local jobs and taxes, etc.

    Only the third has any substance, and presumably would be motivated by some kind of political or commercial strategy. But are there any examples of this sort of thing ever actually happenning?

    I think underlying these views is the belief that valuable natural resources will be exploited optimally by local interests, notwithstanding the chronic shortfall of domestic savings. This reflects a huge misunderstanding of Australia’s external position. As Stephen says, this could mean that people are against foreign portfolio investment in general. If people thought a 45 cent Aussie dollar was bad, I suspect a ban on all (Asian) foreign investment could lead to a dollar worth about half that.

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  9. Hmmm, age-old communication problems are making themselves apparent.

    I just want a yes/no answer to the first question, and a simple list for the second. Two highly-intelligent people have as yet been unable to oblige.

    I’m not being frivolous. I am seeking answers, because I consider myself a classical liberal but I have serious reservations about Chinese investment, and I’m trying to work out why it makes me uneasy.

    The first question goes to whether foreign investment is always and everywhere an unambiguously ‘good thing’. This is what is implied in Andrew’s, Sinclair’s and Stephen’s writings.

    The second seeks to draw out exactly what the claimed benefits of foreign investment will be in this case.

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  10. M — I’m not sure how what is going on in China is really related to the their foreign investment, especially when it benefits Australia. If the Chinese want to come up with money that helps us, should we really care about weird things that go on in China (or indeed, will them investing in Australia help open up their markets too)? It seems to me the worst outcome is that government interests will try and push the resources companies they buy to over-supply the market, which, given the amount of resources China will needs in the future, I imagine is essentially impossible.
    .
    As for the Chinese military — I can’t see why people worry about this. You can see that by all their recent adventures into dodgy places (Burma, Africa, ..) where they could no doubt find an excuse or two to try and help “stabilize” the place in the same sort of way the US brings “democracy” to places. Despite this, all they have done to secure resources is simply buy off all of the governments involved. Given the huge pile of US dollars they have, this is surely the cheapest and most logical way to get these things — they not only get the resources easily, but they get rid of some of their US dollars as well.

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  11. The first question goes to whether foreign investment is always and everywhere an unambiguously ‘good thing’.

    Yes. I’m sure a whole bunch of counter-examples will produced and used to put me on the spot, but generally yes.

    The second seeks to draw out exactly what the claimed benefits of foreign investment will be in this case.

    Private citizens are free to choose to sell their assets at the highest price to the highest bidder on the open market. All other benefits are incidental.

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  12. Sinclair,

    If foreign investment can mean foreign ownership, are you saying that you would see no problems if all our major companies were foreign owned?

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  13. Thankyou Sinclair. I won’t try to put you on the spot, I just want to draw out your views and their implications. Thems the breaks when you’re a public intellectual.

    Your second answer is not what I was looking for. Andrew’s post listed a number of consequences of foreign investment which can be considered ‘positive externalities’ or ‘spillovers’. Your answer considers only private benefits. Following on from the list presented, I wanted to know what positive externalities might arise from Chinese Communist Party businesses buying Australian mines.

    I have to get back to work now, I’m sorry. I’ll try to get back to you later today or tomorrow. But I appreciate the answers.

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  14. I am not a big fan of externality arguments. The best type of argument for engaging with the PRC (or anyone else) is that it expands the size of the market and promotes economic growth. Adam Smith’s famous theorem is that the division of labour is limited by the extent of the market. Having government impose limits on trading partners limits the size of the market.

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  15. More Chinese FDI would serve as a significant discipline on Chinese behaviour towards Australia. If they were discovered to be acting in a hostile way, they would risk the Australian government expropriating some or all of their stock of FDI as punishment. In many ways, it is the Chinese taking the more significant political and strategic risk.

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  16. Yes. It acts as a significant discipline on all their behaviour. One of the more amusing arguments for SWFs is that they expose the parent government to more political risk than their investment activities. Imagine the next pro-Tibet rally being held outside the Rio Tinto HQ 🙂

    More seriously, at same point the returns from their investment portfolio will swamp their willingness to oppress their citizens etc. But that is not something Rio shareholders should worry about.

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  17. “More Chinese FDI would serve as a significant discipline on Chinese behaviour towards Australia. If they were discovered to be acting in a hostile way, they would risk the Australian government expropriating some or all of their stock of FDI as punishment. In many ways, it is the Chinese taking the more significant political and strategic risk.”

    I suspect that any Australian government threat to act in any way against the interests of China is not credible. And I suspect that the Chinese know this.

    I also think that the Chinese army’s trying to listen in to PM Rudd’s phone and email accounts is a hostile act. Pending decisions about foreign investment don’t appear to have deterred them a jot.

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  18. “I am not a big fan of externality arguments.”

    Any reason? And what does this mean for Stephen and Andrew’s citing externalities as a reason to support foreign investment? Would we be right to dismiss these arguments too?

    I’m not sure about the idea of ‘capital xenophobia’. It’s possible to be concerned about the strategic implications of Chinese and other investment in Australia without being a xenophobe, I think.

    [I’m enjoying this, by the way 🙂 ]

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  19. I would be happier with Japan investing in Australia than China, but many of the respondents see both Japan and China as “worse” than say, the US. This seems to me a clear case of xenophobia as Japan is clearly a model democracy and poses no political risk to Australia.

    I’m more torn on the question of Chinese investment but tend towards thinking it’s a good idea. What if the Taiwan conflict escalates and China is significantly invested in Australia, though? Does that mean Australia has to stay silent and isn’t able to side with Taiwan? What if we vocally oppose China when they are heavily invested here- won’t that hurt us?

    It is well and good to say that trade should be values free. But value-free trade isn’t really value-free. Trading with China sends the message “Australian being employed and profiting is all that matters”. That to me sounds like quite a nationalistic value. I guess it depends on how the discussion is framed, though. And whether trade with a non-democratic country promotes human rights or not.

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  20. Externality type arguments are usually some or other carrion call for government intervention. The arguments are usually specious and often ignore important mechanisms for conflict resolution in the case of negative externatlities, or in the case of positive externality confuse gains from trade with the externality. They also often revolve around misspecified property rights, or unspecified property rights, or worse, the person alleging the externatity doesn’t like the current specification.

    It is easy to imagine externalities but often the person making the argument doesn’t show that the externality persists in equilibrium (see Buchnanan and Stubblebine 1962 in Economica).

    What does this say about Andrew and Stephen? Nothing. Andrew has listed the standard accepted arguments in favour of FDI. These are reasons why FDI is a good thing. There are other arguments too.

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  21. “And whether trade with a non-democratic country promotes human rights or not.”
    .
    Shem — It certainly does so for China. Trying having a look at what the place was like 30 years ago and what it is now — These days the communist party even has to pretend to be nice when people die (as in the recent earthquakes), whereas before opening up to the world, they were of course one of the reasons people died there. Whilst Tibets (and Uighurs, and a few other groups Westerners don’t like so much), might think they are unlucky now, they’d be even unluckier if China wasn’t forced to talk to other nations. It also seems to me that the current policy of trading with many nations and the modernization it brings will inevitably spell the end for the communist party in everything but the name since middle-class people care a lot more about human rights and so on than poor peasants.

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  22. Sinclair, I would have thought that the standard arguments in favour of FDI listed by Andrew, in which he quotes from Stephen, are examples of externalities, especially given that ‘spillover effects’ is a layman’s term for externalities.

    Whether the arguments are specious or not, or driven by special interests, is not what is important. What is important is whether the externalities actually exist or not. As I read it, Andrew and Stephen are arguing that externalities do exist and are positive. Others are arguing that there are negative externalities (eg arising from passing control over our mineral deposits to a foreign government). What I’m trying to do is work out where the externalities are, and if they exist, where the overall balance lies.

    Anyway, thanks for your help. You’ve given me plenty of material to think about.

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  23. Asian investment esp. from China is counterproductive. Most asian investment goes into the property market and resource sector. These sort of investments produce short term growth just like Rudd’s failed stimulus measures but in the long term will create over inflated property prices and rents and profits generated by foreign companies will end up overseas. Thus our foreign debt will keep ballooning to a point where others lose their trust in the $AUD.

    Misguided sould like Rajat Soot think less asian investment will create a weak dollar but we keep accepting foreign inestment and our dollar isn’t stronger but weaker. Australia has accepted millions of asians on permanent and non-permanebt visas but these people help reduce our wages, increase inflation through higher house prices, rents, higher educational fees, higher utility costs, more congestion and also more foreign food and products as asians prefer to support their former homelands than Australia. This argument is whether globalisation is good or bad, the general public will increasing see their security and wealth diminshed due to too much asian influence. Lib/Lab have sold this country out for no economic gains, there is no real opposition to globalisation in Parliament so pls. go to http://www.australianprotectionist.net. A new Australian political party, we against globalisation.

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  24. Sorry. Correct address for APP is http://www.protectionist.net.

    We are losing our nation very quickly and it is every Australians duty to look after each other. Globalisation is looking after others while neglecting your own.

    It’s great to be an Aussie so sign up and become a member.

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  25. I would like to reply to Shem Bennett. He said, “Japan is a model democracy”……yeah right. Japan has had over 45 Govt.s since WW2 and is one of the most unstable democracies around. Japan’s Govt. debt is near 200% of GDP and has the fatsest greying population in the world. Japan is no threat as she was firmly beaten by the US and allies. I’m not worried about Japan but I still don’t want them owning big chunks of Australian industry. We should protect our industries and produce a brighter future for our children.

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