Foreign Direct Investment

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty could put significant downward pressure on global FDI in 2022. The 2021 growth momentum is unlikely to be sustained. Indeed, world flows in the second quarter of 2022, the latest data available, were down 31% from the first quarter and 7% less than the quarterly average of 2021 (UNCTAD Global Investment Trends Monitor, October 2022). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession. Expectations for the full year are for a marked slowdown.

After an economic slowdown, FDI flows to Australia have been strong thanks to the energy sector. According to the World Investment Report 2022 published by UNCTAD, following the Covid-19 pandemic, FDI inflows halved to USD 16.72 billion in 2020 from USD 39.4 billion in 2019, as a result of low cross-border sales targeting chemicals and the financial sector. In 2021, total FDI inflows amounted to USD 25.08 billion. Australia was the 14th largest economy in the world in terms of FDI inflows in 2021, with FDI stocks reaching USD 770.25 billion (UNCTAD, 2023). In the first half of 2022 inflows were already reaching 45.93 billion USD (OECD FDI In Figures, October 2022).

The main investing countries in Australia are the United States, the United Kingdom, Belgium, Japan, Hong Kong, Singapore, the Netherlands, Luxembourg, China, and New Zealand. These investments are mainly oriented towards the mining sector, manufacturing, finance and insurance, real estate and trade. While Australia’s resources sector, which has traditionally been attractive for foreign investment, continues to receive investor interest,  the services sector is now receiving greater attention.

The country is ranked 11th on the AT Kearney Foreign Direct Investment Confidence Index 2022 on the most attractive economy for foreign investment.

Australia is one of the most open to foreign direct investment among OECD member states, with FDI representing over a third of GDP. FDI through both majority and minority ownership supports 1 in 10 jobs in Australia (DFTA, 2022). That is thanks to its economic liberalism, stability, transparency of its legal system and strong economic growth over the last 25 years, which compensate for the narrowness of its market and its geographic isolation. The business environment is attractive, and the trading environment is conducive considering the strategic positioning of the economy within the Asia-Pacific region and the political links that it has with the United States. Australia recently introduced a series of changes to its foreign investment framework by simplifying the existing regulation. The new legislation is designed to ensure that foreign investment is appropriately assessed, and that national interest factors are properly considered.  Australia is also involved in mega trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. The government supports a case-by-case approach to considering foreign investment proposals, and in case proposals are found to be contrary to the national interest they can be either rejected or asked to be modified. This flexible approach is preferred to hard and fast rules, because the government believes that rigid laws that prohibit a class of investments can stop valuable investments. For that reason, they believe their approach maximises investment flows and protects Australia’s interests.

The latest United NationsAsia-Pacific Trade and Investment Trends Report provides additional information on FDI in Australia and Asia-Pacific in 2022 and 2023.