Up until 2012, Australia’s inward investment fortunes were running high and its economy avoided the worst of the slow growth witnessed elsewhere in the world. With increased demand for iron ore and coal from China (now its largest trading partner), Australia’s GDP growth was enviable compared with other developed world economies, remaining in a band between 1.5% and 2.5%.
But in 2012, its FDI took a nosedive. According to the UN Conference on Trade and Development (Unctad) World Investment Report 2013, Australia's FDI inflows fell almost 13% from about $65.3bn in 2011 to $57bn in 2012. In its report, Unctad ranks the top prospective host economies according to multinational corporations’ views of the future success of countries as FDI destinations. In 2013, Australia dropped to 13th place from sixth place the year before.
Greenfield data from fDi Markets shows that Australia's highest number of projects over a 10-year period was 320 in 2010 but that in 2013 the number had dropped 20% to 255.
Part of the cause for the decline in FDI stems from the fact that the boom in Australia’s mining and natural resources sector, which had shielded the country’s economy from the worst of the financial storms, is beginning to tail off.
As China’s growth has slowed from more than 10% in 2010 to 7.8% in 2012 (and is predicted to stay at that level for 2013), demand in those sectors has abated and Australia is now in a period of adjustment. Some argue that the country's controversial tax on carbon dioxide emissions, which came into law in 2012 but which has now been scrapped, could also have taken its toll.
According to Unctad statistics, mergers and acquisitions in Australia’s mining industry averaged $16bn over the period 2008 to 2011, but fell to $11bn in 2012. And in 2013 it did not look any better, with some key projects put on hold such as a proposed expansion of the Olympic Dam, a copper and uranium mine owned by BHP Billiton. The mine’s future is now uncertain, with the company blaming poor prices and increased costs.
But this decline in foreign investment is more of a move from a period of intense, high-capital investment to a period of production and consolidation, according to David Cochrane, partner at Ernst & Young in Australia. He says: “Yes we have had a dip in FDI and we don’t know where that is going. But it is likely that the dip may be caused by FDI mining reductions as we move from capital investment to production.”
But many of the elements that made Australia attractive in the past are still there. HRS is a UK-headquartered company selling sophisticated heat transfer products and processes to various industrial sectors, not only to mining but also textiles and parts of the food industry, and is about to open an office in Melbourne. Chris Little, managing director of HRS Australia and New Zealand, says Australia is “on the side of the world where things are really happening… [with] really significant growth. The intention is that our area of influence will also include the rest of Oceania and the Pacific Islands.”
Certero is a UK-headquartered independent software vendor, selling software products and services internationally. When looking to expand into the Asian market, Australia was its choice of location, despite the fact that Australia’s market size is small for Certero in comparison with the UK or North America. John Lunt, managing director and co-founder of Certero, says Australia is a springboard into other parts of Asia. “The longer term strategy is to… drive business growth via the wider Asia region,” he says.
Mr Lunt’s motivation for investing in Australia rather than other parts of Asia is because of the connection between the UK and Australia through the Commonwealth and other common elements. “It appeared logical to us [to focus] on the countries which had an association through the Commonwealth… The laws and governance are very similar to the UK.”
FDI projects such as Certero’s form part of Australia’s ‘new economy’ as opposed to its mining economy. The new economy’s sectors such as software and IT and business services have seen steady FDI growth in the past decade. In IT, for instance, fDi Markets reports there were 27 greenfield projects in Australia in 2003 and 87 projects in 2013.
Another sector hitting the headlines is agribusiness and advanced agricultural companies. There has been huge interest in dairy firm Warrnambool Cheese and Butter, which makes Sungold milk products and sells stocks of skimmed milk powder used in formula milk and baking. Three different buyers had vied for ownership over a number of months until Canadian company, Saputo, recently won the bid. Interest stemmed from the significance of Warrnambool’s export sales into the Asian market from Australia.
Ernst & Young’s Mr Cochrane believes that Australia’s recent fall in FDI is a hiatus and that economic indicators demonstrate a sound economy going forward. “The Australian economy is still strong. Our GDP growth rate is currently about 2.6% to 2.7% and that is good. The expectation is that by 2015 it will be back up to our usual average of about 3%. Interest rates are low and will remain low. And remember that FDI remains on a healthy high, even if not as high as before.”
Many within the Australian business community are also encouraged by the new government that came to power in September 2013. Tony Abbott, the new prime minister and leader of a Liberal-National coalition, declared from day one that: “Australia is under new management and Australia is once again open for business.”
While there have been criticisms of Mr Abbott's first 100 days in power, 2014 will demonstrate whether his declaration is realised.