Foreign direct investment (FDI) is a key driver for growth in any economy. Economists contend that such activities confer national comparative advantages, transfer skills and technologies, unlock new finance avenues and spur overall growth.
Over the past couple of years, direct investment into the resource and real estate sectors have constituted the chief sources of capital inflow. These trends, alongside the consolidation of many free trade agreements with countries such as the US, New Zealand, and more recently, Korea, Japan and China, should strengthen the Australian economy.
However, December 2015 saw the covert implementation of a restrictive new foreign investment regime by the Foreign Investment Review Board (FIRB). Since then, Australian government authorities have continuously proposed and imposed additional hurdles for foreign investors to overcome before allowing investments in the nation.
Such developments inevitably evoke the question; if foreign investment is supposedly economically efficient, then why are legislative regimes making it increasingly difficult for foreigners to invest in the Australian economy?
By way of context, FIRB’s reformed foreign investment laws extend widely to agriculture, business and residential real estate. It also imposes fees of up to $100,000 for most foreign investor applications, harsher penalties for non-compliance and the widening of the Treasurer’s discretion to approve or disapprove investment proposals.
Further examination of the new rules is necessary to understand the complex and controversial changes. FIRB has now imposed a dramatically lower monetary threshold for foreign investment in agricultural land from $252 million down to $15 million. Whilst free-trade partners such as Chile, New Zealand and the US are exempt from this requirement – being allowed a threshold of $1094 million – investments from China, Japan and Korea are subject to the $15 million barrier. Regarding real estate, the effect of new provisions mean that foreign investors will only be allowed to purchase Australian property if doing so will increase the housing supply. These examples are merely a glimpse of the mountain of hurdles now imposed on foreign investors.
And it gets worse. Late last month the Australian Government introduced what some have called a “parallel, but more draconian” tax compliance system for foreign investors. This involves foreign investors fulfilling more conditions, providing more notifications, filing more reports and being subject to more discretionary scrutiny and penalties for non-compliance. Unfortunately, these increased burdens and restrictions are likely to deter much needed foreign investment.
So what has driven this legislative upheaval?
Are there justifiable reasons behind the new framework? Or are more disturbing political motives coming into play?
The policy rationale
FIRB maintains that recent reforms aim to protect the ‘national interest’. National interest is a nebulous concept. It vaguely incorporates notions of security, competition, tax policy, investor character and the impact on the economy and the community. FIRB acknowledges that foreign investment is important to grow the economy and provide jobs. However, they contend that initiatives such as the restricted residential investment are to suppress house prices and prevent an over-demand of established housing stock. Conversely, no economic explanations are provided for the differing treatment of foreign investors in the agricultural investment sector.
Interestingly however, recent market analyses find no reason for FDI to be reduced. In fact, the Treasury Department’s January 2016 working paper, Foreign Investment into Australia, revealed that by international standards, levels of direct foreign investment into Australia are currently low. Moreover, a parliamentary inquiry into foreign investment in 2014 concluded that there was no solid evidence foreign investors were driving up property prices at all. On the contrary, the inquiry concluded that overseas buyers actually helped to lower house prices because investment was boosting the economy, providing jobs and driving the construction of new homes to increase housing supply.
A disturbing political motive?
Controversially, some commentators have criticised the framework as ‘protectionist’ and have even gone as far as to characterise the regime as xenophobic. 
Some speculate that rising growth of Chinese FDI into Australia is an important factor behind the recent changes. Undoubtedly, in recent years, the rising Chinese middle class has had their eye on Australian property. Last year, China poured as much as $12.4 billion into the property sector – more than double the amount it invested in mining. Many stakeholders pinpoint the catalyst for recent reforms as the Treasurer’s forced sale of a $39 million property illegally acquired by Chinese billionaire, Xu Jiayin, in early 2015. Whilst it is fair that the regimes aim to stop illegal activity, there have been no subsequent identified cases of further illegal purchases.
So does this single incident alone really warrant the dramatic legislative overhaul?
The timing of stringent reforms – coupled with their disproportionately negative effect on investments from specific countries (i.e. China) – implies that political motivations may be coming into play.
With Tourism Minister Richard Colbeck acknowledging that Australia needs around “a trillion dollars in foreign investment between now and 2050 to be globally competitive,” there seems to be more than an economic motive for raising foreign investment barriers. Notions of xenophobia have been echoed by Colbeck, who told the ABC he was “significantly concerned about the negative rhetoric” surrounding Chinese investment. Colbeck reveals that one million Chinese tourists visiting Australia annually were taking this negative message back home with them; and investors from Saudi Arabia and the United Arab Emirates were also questioning whether Australia genuinely welcomes foreign capital. Quite possibly, it may be the protectionist sentiments resonating in the community that have encouraged politicians to implement the FDI stifling legislation.
Whilst national interest and legality serve as worthy causes to tighten foreign investment regimes, there is no denying the possibility that there may be more undesirable and sinister political sensitivities driving legislative change. What remains to be seen is the impact these regimes will have on prospective FDI into Australia – and whether future reforms will be based on concrete economic justifications or biased political undertones.
 Uren, D. (2013, January 14). Economy benefits as foreign capital pours into resources, real estate. The Australian. Retrieved from http://www.theaustralian.com.au/business/opinion/economy-benefits-as-foreign-capital-pours-into-resources-real-estate/story-e6frg9qo-1226553125995
 Foreign Investment Review Board. (2015). Monetary thresholds. Retrieved from https://firb.gov.au/exemption-thresholds/monetary-thresholds/; Foreign Investment Review Board. (2015). Foreign Investment Reforms Factsheet: Agriculture. Retrieved from https://firb.gov.au/files/2015/09/FIRB_fact_sheet_agriculture.pdf
 Foreign Investment Review Board. (2015). Foreign Investment Reforms Factsheet: Residential real estate. Retrieved from https://firb.gov.au/files/2015/09/FIRB_fact_sheet_residential.pdf
 Konstantopoulos, M., Mansour, S., & Taylor, G. (2016, March 3). Foreign investment in Australia: Trends and insights from the Treasury. Retrieved from http://www.claytonutz.com/publications/edition/03_march_2016/20160303/foreign_investment_in_australia_trends_and_insights_from_the_treasury.page
 Foreign Investment Review Board. (2015). Foreign Investment Reforms Factsheet: Reform overview. Retrieved from https://firb.gov.au/files/2015/09/FIRB_fact_sheet_Foreign_investment_overview.pdf
 Law, J. (2015, May 9). Chinese property investment through the roof: What it really means. News.com.au. Retrieved from http://www.news.com.au/finance/real-estate/buying/chinese-property-investment-through-the-roof-what-it-really-means/news-story/ba6df0a7bcdcae773677d72a4545a41d
 McHugh, B. (2015, December 18). Research showing Australians not overly concerned with Chinese investment in agriculture at odds with Federal Government policy. ABC News. Retrieved from http://www.abc.net.au/news/2015-12-18/public-not-so-concerned-with-chinese-investment-in-farming/7040964
 Besser, L., Christodoulou, M., & Hichens, C. (2015, October 17). Selling the Australian property dream to the Chinese investor market. ABC News. Retrieved from http://www.abc.net.au/news/2015-10-12/selling-the-australian-property-dream-to-china/6841810
 Wait, T., & Wilson, D. (2015, August 31). Foreign buyers beware – Changes to the foreign investment regime introduced to Parliament. Retrieved from http://www.landers.com.au/publications/company-and-securities-law/foreign-buyers-beware-changes-to-the-foreign-investment-regime-introduced-to-parliament/
 Schwartz, D. (2016, March 2). Xenophobia jeopardising foreign investment in Australia, Tourism Minister warns. ABC News. Retrieved from http://www.abc.net.au/news/2016-03-02/xenophobia-jeopardising-foreign-investment-govt-minister-warns/7214670
The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.