Impacts of Global Finance and Investments on Australia - Essay Example

Impacts of Global Finance and Investments on Australia (Name) (Course) (Institution) (Instructor’s name) (Date) Introduction In the contemporary world, one of the major policy goals of every government is to generate and capture profits through investment liberalization and global finance. This is achieved through a comprehensive policy concerning complimentary regional, multilateral and bilateral engagement. Global investment flows are divided into financial derivatives, direct, portfolio, reserve assets and other investments. Under the global standards, direct investments correspond to capital invested by an investor in a business enterprise in another nation, which gives the investor a considerable influence over the major policies of the venture. This essay will focus on the impacts of global finance and investment on Australia. Background of Investment in Australia The United States, United Kingdom, Japan and Germany are the major foreign investors in Australia currently, though such countries as India, China, and the Asian states are some of the emerging new investors. This can be evidenced at the end of 2008 statistics whereby China investment stock in Australia was ranked 15th with the USA and UK having fifty times more of that stock (Buiter, 2006). Over the last two decades, there has been an increase in growth in global flows of foreign direct investment (FDI) and global finance. This growth highly reflects the international relaxation of investment and trade controls, jointly with advancements in communication and transport, information technologies, and the emergence of international production chains. Global capital flows have been affected adversely by the global financial crises. As per the OECD estimates, foreign direct investments outflows and inflows of member countries fell by nineteen percent and 35 percent respectively while inflows to and outflows from Australia increased by 7 percent and 113 percent respectively. Despite FDI from other countries, Australia also invests in other nations, which reveal that the country has gone global. Australia’s international investment position In this section, we discuss Australian investment and trends in foreign investment in the country. Australian investment overseas is the total amount of stock, in terms of foreign financial assets possessed by residents of Australia and monetary transactions that lead to an increase or decrease of the stock. ABS data regarding the international investment position of Australia is often compiled according to the required international statistical standards propagated by the International Monetary Standards and the OECD. This data is used as a measure of the authentic cross-border transactions and the amount of foreign investment possessed at a particular period of time (Australian Bureau of Statistics, 2001). Foreign investment levels The ABS statistics illustrate that Australia was in possession of $1,927.7 billion foreign stock investment stock in December 2009. Compared to the previous year, the country had witnessed an increase of approximately $124.6 billion in its foreign investment levels. On the other hand, the total amount of stock Australia invests overseas, at the end of December 2009, was estimated at $1,159.1 billion, an increase of about $69.8 billion compared to the previous year (Reserve Bank of Australia, 2006). Foreign direct investment levels by country The most important foreign direct investment partners to Australia are the United States, Japan, the United Kingdom, New Zealand and other members of the European Union. The largest source of inward foreign direct investment to Australia is the United States. It is also Australia’s most important foreign direct investment destination abroad. Approximately 25% of all foreign direct investment in Australia sourced from the United States, while 43% of the Australian foreign direct investment goes to the United States. About 15% of the investment originates from the United Kingdom and Australian direct investment in the United Kingdom is approximately 23%. Japanese foreign investment to Australia is $36 billion and Australia direct investment in Japan on the other hand is very low. Australian investment in New Zealand is $34 billion while New Zealand foreign direct investment in Australia is $5 billion. Other members of the European Union, excluding the United Kingdom, foreign direct investment in Australia are $73 billion, while the Australian foreign direct investment to other members of the European Union is $20 (Australian Bureau of Statistics, 2005). Impacts of Global finance and investment Global investments both inward and outward are essential for Australians international engagement with the rest of the world and are vital to the country’s progress and prosperity. In this case, inward investment refers to the practice by which other countries invest their stock in Australia whereas outward investment refers to the outflow of Australian stock to other countries. Global investment has affected Australia positively and has resulted to growth and development in the country. One of the major impacts of global investment is creation of employment opportunities for both the Australian citizens and non-citizens. According to a study carried out by the Access economics regarding the relationship between Foreign Direct Investment and employment, the study found out that most of the foreign owned companies in the country contributed to about 14 % of employment. This is equivalent to about 1.3 million job opportunities (Buiter, 2006). This also had important contributions to the country’s output and export levels. Creation of employment is vital to a country as it helps in revenue generation through taxation. Since history, Australia has been depending on inward foreign direct investment to counter domestic savings and domestic investment levels. Foreign investments add on local savings thus improving economic growth and levels of employment hence improving people’s wellbeing. Additionally, foreign direct investment plays an essential responsibility in making Australian industry to be globally competitive, hence contributing to the growth of export industry, aiding access to modern technologies, funding new and risky innovations, and opening avenues for global networking and integration. According to Buiter (2006), outward foreign direct investment makes it possible for Australian firms and companies to expand outside their potential constraints compelled by the inadequate scope of the country’s domestic market. Market expansion and open access to resources, technology and the expertise in other markets, enables Australian firms and companies to become more competitive and efficient in the global markets. The other impact of outward foreign direct investment is stimulating demand for goods and services supplied by both component and input suppliers. Since the European settlement, in every ten years, Australia has had a deficit in the current account for nine years. Now that the deficit in the current account corresponds to the difference between the national investment and national savings, this historical situation depicts that the country, has for a long time, more investment opportunities compared to domestic savings. Therefore, by operating deficits on the current account to take advantage of these opportunities, the country has attained a higher living standard. Australia has also accrued a huge net international liability rank as a result of these deficits, and an equivalent deficit on the net income balance. As a result, there has been an increase in revenue flow to the country’s economy. Outward foreign direct investment has been an important opportunity for Australia to demonstrate its skills and capacity to Asia and other countries of the globe. For instance, considering the financial services, the country’s Macquarie Bank, is a popular bank in the whole world, with its corporate symbol being the Lanchlan Macquarie’s holey dollar. On the other hand, ANZ bank has spelt out its idea of becoming a regional bank in Asia and is exploiting its resources in various countries such as India and Indonesia (Battellino, 2002). The power of Australia’s superannuation industry implies that the country’s financial services sector is significant both regionally and globally. Australia considers foreign investment as a significant booster of its domestic savings. For instance, Wayne Swan, a treasurer, highlights that the country cannot depend on domestic savings only to fund investments and if the country could do so, there would be fall in business investment by approximately 25 percent, employment rates by about 200,000 opportunities lower and output by 3 percent (Australian Bureau of Statistics, 2001). Global investment has also led to increased government provision of public services such as infrastructure. Infrastructural development has also been a result of other foreign countries investment. Good transport and communication networks and information technologies are essential for any business enterprise to succeed as they create an enabling environment for the business ventures. Therefore, it is the role of every government to provide such an environment in order to attract foreign investors. Through inward foreign investment, the government is able to add to its revenues through taxation, which is a major source of funding for public services provision. Global finance Donor institutions such the World Bank and the Internal Monetary Fund often provide financial assistance to countries considering their national capabilities. They do this through an objective mechanism that evaluates the eligibility for financial aid based on an objective criterion that is fair and prioritizes the world’s most vulnerable countries, especially the developing countries to enable them respond to upcoming technological, scientific and economic developments. However, the objective criteria determining national capabilities have to determine the amount of financial resources a country is expected to contribute considering its current economic realities. This is aimed at ensuring that future global financial and investment flows continue being efficient, adequate and sustainable. It is also required that global financial flows should be supported by strong, transparent data based on global mutual methodologies (Reserve Bank of Australia, 2006). Therefore, before determining the amount of funding for a certain country, these elements have to be considered first. For instance, Article 11.5 of the Convention provides that post 2012 aid for mitigation and adaptation will not only be presided over by the priorities and decisions of the COP, but also may be offered and accessed through regional, bilateral and other multilateral channels. For instance, Australia’s $150 million International Climate Change Adaptation Initiative offers financial aid to the vulnerable Timor Leste and pacific islands to enable them take actions and respond to climate change (Australian Bureau of Statistics, 2005). Conclusion In today’s competitive global environment, each country’s aim is to generate profits for its economy. To enable this, countries have entered into global partnerships and agreements, allowing other countries around the world to invest in any of the country in their partnership. In this study, we discussed how both inward and outward foreign direct investment and global finance affect Australia. Both inward and outward foreign direct investment contributes to a country’s general growth and development. This is achieved through creation of employment, which improves people’s wellbeing and adds to the country revenues through taxation improving economic growth, increase in outputs and exports, improvement in transport and communication networks and information technology. In addition, Australia has been able to go global, and this has enabled its firms and companies to become more competitive and efficient in the international markets and has also allowed its financial services to expand in other nations. Global finance from such institutions such as the World Bank and the International Monetary Fund amongst others has contributed greatly to the wellbeing of the country. Thus, a country cannot depend wholly on domestic savings to fund investments and if the country could do so, there would be a drastic fall in development. References Australian Bureau of Statistics, 2001. ‘Measuring Australia’s foreign currency exposure’, Balance of payments and international investment position, cat. No. 5302.0, December quarter, pp 11-16. Australian Bureau of Statistics, 2005. Foreign currency exposure, cat. No. 5308.0, released 22 November. Battellino, R., 2002. ‘Why do so many Australia borrowers issue bonds offshore?’ Reserve Bank of Australia Bulletin, December, pp 19-24. Buiter, W., 2006. ‘Dark matter or cold fusion?’ Goldman Sachs Global Economics Paper, no. 136, January. Reserve Bank of Australia, 2006. ‘The growth in Australia’s foreign assets and liabilities’, Reserve Bank of Australia Bulletin, April, pp 1- 8. Read More