Foreign investment is the flow of funds across borders to acquire assets — building a factory, buying shares, or lending. Because Australia's national investment has long exceeded national saving, the country relies on a steady inflow of foreign capital, which is recorded in the financial account of the balance of payments.
Two types of foreign investment
Foreign direct investment (FDI) gives the investor a lasting interest and influence (conventionally a stake of 10% or more) — for example a multinational building or buying a controlling share of an Australian business. It tends to be longer-term and less volatile. Portfolio investment is the purchase of shares and debt securities without control; it is more liquid and more volatile, and can reverse quickly.
The link to the current account
The diagram below shows the feedback loop: capital inflow funds investment now, but the returns on that investment — interest and dividends paid to foreign owners — flow back out later as a primary income debit in the current account.
Benefits and costs
Benefits: access to capital beyond domestic saving, funding for productive investment and infrastructure, technology and management transfer (especially via FDI), jobs and higher output. Costs: rising foreign liabilities and the income outflows that service them, potential loss of control of strategic assets, and exposure to sudden reversals of volatile portfolio flows.
The international investment position
The international investment position (IIP) is the stock measure: foreign assets minus foreign liabilities. Australia is a net debtor — its foreign liabilities exceed its foreign assets — which is the accumulated counterpart of years of net capital inflow.
Reason through the loop together with a concrete sequence.
Classify and discuss
For each, decide FDI or portfolio, and whether it is likely to be stable or volatile: (a) a pension fund buying A$50m of Australian government bonds; (b) a global carmaker acquiring 60% of an Australian parts manufacturer; (c) a hedge fund buying and selling ASX-listed shares within weeks.
1. Define foreign investment and distinguish between foreign direct investment and portfolio investment, giving one example of each.
2. Explain the link between an inflow of foreign investment and the current account, referring to both the financial account and the primary income balance.
3. Outline two benefits and two costs of foreign investment for Australia.
4. Define the international investment position and explain what it means to say Australia is a net debtor.
5. "Foreign investment is the price Australia pays for investing more than it saves." Discuss whether this is a problem.