Australia v NZ: Foreign investment and national interest

This isn't really an 'Australia v NZ' post, but this does follow on from a post on the foreign investment issue I have made before.

This article reports that the Australian government has very politely, quietly and discreetly 'suggested' that a bunch of Chinese companies that have lodged applications to investment in Australian resource companies withdrawal their applications, which they have done.

This is not an outright rejection of Chinese foreign investment in Australia but is to give the new Rudd government more time to consider 'the issue of national interest in terms of ownership of the Australian resources industry'.

Now I do not agree that national interest should determine who can and who cannot invest in an asset, in fact I fail to see how it is even in a nations interest who does or does not invest. It arguably benefits the people within a state if all successful business within that state (I use 'state' as it is a more geographically and politically precise term then 'nation') are owned by them, but what if they cannot afford to own and grow their businesses (like New Zealand) or, shocking as it might be, do not want to (as there may be more successful business overseas)? And who invests in the poorly performing or risky domestic businesses? Are these open to foreigners? What happens if the fortunes change?

Also, does the government of the state force those within its borders to invest in local business? And if not, why not? It would be in the national interest.

Why not throw away the facade of economic liberty and nationalise all domestic productive business and force everyone to invest in those businesses by collectivising the results of personal production to put back into those businesses? There does exist a precedent... Its been done before in the USSR and Mao's China.

It really should not matter, to the business or the 'national interest', where the investment money is coming from. If there is a willing seller and a willing buyer, the transaction should benefit both parties, the business and the state. I shall explain why:

• Seller: is paid the market value for their investment in the business, they can use this payment to invest else where (either domestically or internationally, both which will benefit the seller and state);
• Buyer: gains an investment in the business, and, leading up to the transaction, did not have expend what can be very significant money (due diligence, bidding, complying with securities legislation, etc) preparing for the transaction that may be lost through an uncertain regulatory / political risk (caused by uncertain investment rules, such as 'national interest' tests);
• The Business: benefits from having a stable price for its investments not affected by market uncertainty and will likely find it easier to raise further money at a better price;
• The State: benefits from having foreign investment in that its businesses can be appropriately funded and therefore grow and it frees up domestic resources to be invested in other domestic business or internationally (which will mean foreign income comes back).

Now, why having restrictions on investment (what ever the restrictions are) is bad for all these parties:

• Seller: will not get a true market price (read 'won't get as much', just look at AIAL's share price before and after the NZ government's 'strategic asset' intervention) as the price people are willing to pay is distorted by the restrictions on investment. Seller may also have a much more illiquid investment as the pool of purchaser's is reduced and others who can purchase despite the restrictions may find the investment less desirable as a result of the restrictions;
• Buyer: obviously cannot purchase if restricted and must invest in a less desirable asset;
• Business: finds it's value distorted from the true market value due to artificial restrictions on investment in it. Business may find it harder (or at least more expensive) to raise funds, as it's value is lower;
• State: who creates the restrictions, will find its citizens stuck investing in a business that they cannot transfer and more significantly the state (or at least those poor citizens who have been stuck investing in the business) is now shouldering all the risk in the business where some of that risk would have been spread overseas (the politicians should remember that investment does comes with risk and they should accept the blame and political cost when a business fails that has been subject to a foreign investment restriction). Of course the State does receive the political benefit of being seen to 'protect' a domestic asset; a benefit that flows from those citizens who do not invest.

The only time that I can see a national interest restriction on foreign investment being appropriate is where the foreign entity has a nefarious plan. That is they are only investing in order to damage the business. But why restrict such an examination to foreign entities? Such a prohibition should apply to everyone (and arguably does though the general company law (in both Australia and NZ) relating to directors duties. A nefarious shareholder is not going to be able to ruin a business, as the directors, even the directors appointed by the nefarious shareholder, would have to breach their directors duties in order to do so).

It is this that presumably the Australian government wants to consider further. Do the Chinese have a nefarious plan to drive down resource prices (damaging the businesses they are investing in) in order to benefit China? If they do not, what possible national interest consideration could mean that they should be denied investment?

Some, including BHP, will no doubt argue that the Chinese are not trying to drive down resource prices but are trying to prevent the BHP / Rio Tinto merger for fear that a combined BHP / Rio will be too powerful. But what is wrong with that? Surely it is the Chinese's prerogative to purchase a company to prevent a merger (the purchased companies directors still have a duty to act in the companies best interests), just as it is the current owner's prerogative whether or not to sell to the Chinese. To stop the merger, the Chinese will have to pay a premium to what BHP are offering (Chinalco paid more for its Rio purchase then BHP is offering, by about 16%), which will send more money to the current shareholders, increasing the money they can use to invest elsewhere.

Fortunately, and unlike the NZ government, the Rudd government is taking the time to get things correct procedurally and ensuring the rules will be consistent across the foreign investment landscape. So while I may not agree with the idea of a 'national interest' restriction on investment, at least it will not create an uncertain investment environment with regulatory / political risk.