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Attracting foreign investment on better terms to fund welfare

By Shann Turnbull - posted Monday, 16 December 2013


Foreign ownership of Australian agricultural land, businesses and other activities constantly make news. Always neglected is a discussion on how foreign investment can be attracted on better terms.

In her 1956 seminal article on ‘Foreign investment and the growth of the firm’ Professor Penrose identified the costs and benefits of foreign investment. The article was required reading when I attended Harvard Business School five years later.

Penrose identified the open-ended cost of foreign investment arising from its “unlimited, unknown and uncontrollable foreign liabilities”. The benefits provided were “new techniques of production and management, entrepreneurial skill, new products, new ideas”. General Motors – Holden was used to illustrate how foreign liabilities can grow indefinitely while at the time increasing the current account deficit from dividend remittances.

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This makes it important to limit the: “unlimited, unknown and uncontrollable foreign liabilities”. Otherwise the economy could become burdened with a growing foreign currency deficit. Selling more assets to foreigners to earn more foreign currency creates a foreign currency deficit trap.

To obtain the benefits of foreign investment without open-ended foreign costs, Penrose reported how some Latin American countries had replaced foreign ownership “with some considerable success” by “hiring technical personnel and purchasing access to foreign technology”.

However, this approach would require a command economy of some sort that would not be acceptable in Australia. Today there is widespread acceptance of using markets for allocating resources. An alternative approach arises from understanding how modern business makes investment decisions in a way that did not exist in Australia half a century ago. 

Modern investment analysis discounts at a compounding rate the value of obtaining cash in the future because of the opportunity cost of not earning a return today. At equity discounts rates this reduces the Present Value of all possible profits after ten to twenty years to a small fraction of the initial investment cost. When the value of future cash is discounted again because of operating risks arising from competition, changes in technology and markets the expected future Present Value becomes trivial.

As a result only a relatively minor tax concession or other benefits can result in investors obtaining a bigger quicker less risky expected future value in return for agreeing to forgo all future earnings after ten to twenty years. In other words more investment can be attracted on the basis of eliminating all “unlimited, unknown and uncontrollable foreign liabilities” on a voluntary basis. The income generated from formerly foreign owned investments after twenty years could then contribute to creating a universal minimum income for pensioners and welfare recipients. As these beneficiaries consume rather than invest they do not discount the future value of money.  This would produce a substantial benefit for them and so the government.

Foreign investors could continue their operations and employment in Australia by creating “offspring” corporations financed by re-investing their profits. This would also provide the incentive to investors and executives to grow their business and its brand. To lock in this incentive foreign investors could be required to create a “stakeholder” class of shares that gradually took over the property rights of the investor shares over say 20 years. Executives and other stakeholders could be gifted a proportion of these shares in partnership with other beneficiaries be they stakeholders, pensioners and/or welfare recipients. Corporate joint ventures are created directly between the productive and welfare sectors of the economy. It also provides a way to localise ownership and control to connect businesses to their local communities and the environment to create a much more closely connected socially responsible form of capitalism.

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As all intellectual property rights have limited life the ownership transfer arrangement creates a more level investment playing field. Patents that lead to increase productivity and living standards typically have a life of twenty years. To create a level playing field between foreign and domestic investors, local investors could also be made eligible to form what could be described as Ownership Transfer Corporations (OTCs) or “Endowment Corporations”.

The cost to the government of providing the tax incentive to provide the incentive for investors to forgo long term uncertain profits may well become more than offset by increases in personnel taxes. This is because OTCs would obtain the incentive to distribute all their profits each year and grow their operations through establishing offspring firms. In this way the tax base would transfer from corporations to individuals who typically pay tax at a higher rate. In addition the government does not need to spend a much revenue funding welfare.

Local ownership and control of Australian business could increase substantially increase as around one third of it is foreign owned. This would democratise the ownership and control of business and significantly increase the income of citizens. Income distribution would be achieved through the private sector to reduce the size, alienation and cost of government. The need to increase superannuation contributions could be removed. A win-win situation is created for investors, businesses, their local communities, the government, the economy, stakeholders and citizens to generate additional incentives for attracting foreign investors.

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About the Author

Dr Shann Turnbull BSc (Melb); MBA (Harvard) is the Principal of the International Institute for Self-governance based in Sydney and a co-founding member of the Sustainable Money Working Group established in the UK. He is a founding life Fellow of the Australian Institute of Company Directors, Senior Fellow of the Financial Services Institute of Australasia, Fellow of the Governance Institute of Australia and Fellow of the Australian Institute of Management. He co-authored in 1975 the first course in the world to provide company directors an educational qualification and wrote Democratising the Wealth of Nations. His bibliography reveals he is a prolific author on reforming the theories and practices of capitalism.

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