Foreign Capital Inflows in Australia (Essay Sample)

Foreign Capital Inflows in Australia
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Introduction
Australia has been a recipient of net capital inflows from various countries like the US, United Kingdom, Belgium, and Japan for decades. Consequently, the receipt has enabled the country to attain significant economic growth, technology adoption n, and improved living standards. According to Eiteman et al. (2010), net capital inflows are the amount of money coming into a local country from other nations, especially foreign direct investment. Notably, countries formulate and implement favorable economic policies towards attracting net capital inflows. Multinational companies form a significant source of net capital inflows to many countries in form of foreign direct investment (Jacobs, 2021). Additionally, countries also realize net capital inflows through investment in financial portfolios such as equities, bonds, and stocks. Elaborately, when the financial instruments are issued, they are purchased by foreign investors as well as local residents, resulting in increased capital inflows. Moreover, Stulz (1999) asserts that countries obtain net cash inflow through borrowing from foreign lenders. Primarily, the borrowing is focused on settling balance of payment deficits, and hence facilitating economic growth factors.
Net Foreign Capital Inflows in Australia
Australia has made significant economic strides to become a mixed developed country in the post-war era. The economic growth and development have been propped by service sector, mining, construction, manufacturing, and agricultural industries (Eiteman et al., 2010). Additionally, skilled labor force, development of new markets, and high employment levels have also facilitated the country’s economic growth. In other words, the economy has not only attained a developed state but also being maintained by financing the growth factors. Significantly, the mixed economy has made remarkable economic prowess since the adoption of favorable policies towards foreign investments (World Bank, 2021). The policy framework was aimed at developing capital synergies, which in turn settled deficits in the balance of payments.
Consequently, the policy implementation enabled the Australian government to finance new and existing industries such as innovation, Research and Development, service, and mining industries. According to Eiteman et al. (2016), the capital synergy realized through foreign capital inflows facilitated infrastructural developments as well as creation of more employment opportunities. However, since the implementation of net foreign capital investments, the Australian economy has become dependent on net capital inflows, as illustrated in Table 1. In essence, foreign capital inflows have become a major driver of Australia’s economic propensity to growth.
Table 1: Dependency Ratio of Australia’s Foreign Direct Investment to GDP (Source: World Bank, 2019)
YearDependency Ratio2000-20012.8322002-20031.9262004- 2005-3.6192006- 20075.2092008- 20093.0922010- 20114.6942012- 20133.4262014- 20153.4562016-20173.5572018- 20192.900
Australian real gross domestic product has been influenced by the amount of net foreign domestic inflow. As illustrated in figure 1, the significant GDP growth between 2001 to 2008 was facilitated by capital synergy from net capital inflows. During the period, the Australian government was able to finance service, agriculture, and mining industries resulting in economic boom. According to the World Bank (2021), real GDP between 2008 to 2011 dropped due to the adoption of new foreign capital inflow policies. Notably, the Australian government introduced regulations to areas of investment hence limiting the number of foreign investors. From 2013 to 2019, there was gradually GDP growth due to increased FDI.
Figure 1: Trends in Australian Real GDP Growth (Source: World Bank, 2021)

Notably, Australia's economy is exposed to significant risks as a result of dependence on FDI. Significantly, the dependency creates room for volatility inflows risks, which are marked by financial crises and financial fluctuations. Additionally, World Bank (2021) asserts that net foreign capital inflows result in reduced completion in certain sectors, limiting return on scale. For instance, FDI dependence has reduced development of transport and communication infrastructures. Moreover, it is worth noting that reliance on net foreign capital inflows increases household debts.
Raising Capital in the US for an Australian Enterprise
Significantly, elimination of movement restrictions has facilitated capital accessibility in the global financial markets. However, capital movement across borders is associated with significant benefits and risks. Similarly, raising capital from the US to an Australian enterprise is attached to various benefits and risks (Jacobs, 2021). Notably, ease of capital acquisition is a significant benefit. Australia's economy is one of the largest markets characterized by increased diversification. The country’s strategic location also grants access to Latin American and hence increased foreign direct investments. Collectively, increased market access results in lowered inventory costs and removal of trade restrictions like tariffs (Stulz,1999). The enterprise stands to get debts and equities from the US because of Australia's growing economy.
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