1 April 2011
Kali Sanyal
Economics Section
Contents
Introduction
This note reports recent changes in Australia’s foreign investment policy as released by the Foreign Investment Review Board (FIRB) in January 2011. It also explores trends in global foreign direct investment (FDI) as covered in the United Nations Conference on Trade and Development (UNCTAD) 2010 World Investment Report (released on 22 July 2010). Lastly, this Background Note analyses the dynamics of two way investments between Australia and its investment partners during the past eight years, based on data released by the Australian Bureau of Statistics (ABS) on 30 July 2010.
According to the foreign investment policy published by the Treasurer and governed by the FIRB, a foreign person must apply for approval to invest in an Australian business (including a piece of rural land having the characteristics of a commercial holding) if the foreign investment results in an interest of 15 per cent or more in an Australian business which is valued above a threshold of $231 million (or $1 005 million for US investors on 1 January 2011).[1] All foreign investment proposals are scrutinised by the FIRB against national interest criteria on a case-by-case basis.
The 2010 World Investment Report (WIR2010) published by the United Nations Conference on Trade and Development (UNCTAD) in July 2010, indicates a slowing of global inflows of foreign direct investment , with a decline of 37 per cent in 2009 from the previous year and 47 per cent from the peak in 2007 (Figure 1).[2] According to a report in The Economist:
All components of FDI declined in 2009 and are now recovering slowly. According to figures for 35 mainly rich countries, most of the fall can be attributed to a decline in mergers and acquisitions (M&As), which contracted by 34 per cent compared with a 15 per cent fall in the number of Greenfield FDI projects. Reinvested earnings started to rise in mid-2009, driven by improved corporate profits. The disruption in FDI flows has not stopped the trend of globalised production. The share of GDP attributed to foreign companies reached an historic high of 11 per cent last year, when 80 million people worked for multinational companies.[3]
The UNCTAD report points out that the share of Australia’s global FDI inflows slightly decreased to 2.0 per cent in 2009, as a consequence of the GFC, from 2.6 per cent in 2008 and from 2.2 per cent in 2007.
The experience of other similar developed countries was somewhat mixed. The EU countries’ share of global FDI inflows plummeted to 32.5 per cent in 2009 from 44.0 per cent in 2007. The US witnessed its share fall to 11.7 per cent in 2009 from 12.7 per cent in 2007, after reaching a peak share of 18.3 per cent in 2008. China, however, managed to escape unscathed with its share growing from 7.2 per cent in 2007 to 13.9 per cent in 2009 (Figure 2).
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Figure 1: Global FDI inflows, US$ billion
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Figure 2: Australia’s share of global FDI inflows (%)
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Source: UNCTAD, World Investment Report, various years, Annex 2 Tables
Australia has received on average US$26 billion of FDI inflows each year since 2001 (except in 2005 due to the News Corp headquarters relocation to the United States). In 2009, Australia received FDI inflows of US$23 billion, a 52 per cent decline from the peak of US$47 billion in 2008 (Figure 3). This decline may be attributed to factors such as stymied capital raisings by companies offshore driven by the global credit crunch, or the domestic investment market appearing unattractive. As a corollary of this development, foreign companies undertook US$22.3 billion worth of cross border mergers and acquisitions (M&As) in Australia in 2009 (down from US$33.5 billion in 2008), a contraction of 33 per cent. In 2009, Australian companies’ investment in overseas M&As fell to a negative US$3 billion (down from a positive US$18.5 billion in 2008) as the attractiveness for overseas assets appeared to diminish for Australian companies (Figure 4).[4]
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Figure 3: FDI inflows in Australia, US$ billion
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Figure 4: Cross border M&As, inward and outward, US$ billion
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Source: UNCTAD, World Investment Report, various years, Annex 2 tables
After years of persistent growth, the stock of inward foreign direct investment relative to Australia’s gross domestic product (GDP) levelled off to 34 per cent in 2009 after peaking in 2007 at 41 per cent (Figure 5).
Interestingly though, the ratio of the outward stock to GDP jumped to 35 per cent in 2009, from 23 per cent in 2008. This is a surprising result given the turmoil in the world economy. The turmoil opened up an opportunity for Australia for net income gains from foreign investment. The accumulation of outward FDI stock appears to be supported mostly by new investments, rather than M&As.
Figure 5: FDI stock as a share of GDP (%)
Source: UNCTAD, Country fact sheet, Australia, World Investment Report, July 2010, http://www.unctad.org/Templates/Page.asp?intItemID=2441&lang=1, viewed 21 March 2011
The latest foreign investment figures released by the Australian Bureau of Statistics (ABS) indicate that the GFC did not reduce the stock of total foreign investment and FDI, but significantly reduced FDI inflows into Australia in 2009.[5] Overall, the stock of total foreign investment (which includes portfolio, FDI, financial derivatives and other investment) reached $1.9 trillion (up by 7.7 per cent), and the stock of FDI reached $436 billion (up by 10 per cent) in 2009 (Table A1 in Attachment). However, FDI inflows from source countries reduced to $36.7 billion, down by 34 per cent.
In 2009 the United States regained the position as the top source of the stock of total foreign investment in Australia (Figure 6, Table A2 in Attachment), overtaking the United Kingdom which topped the list briefly in 2008.
In 2009, the top sources of the stock of total foreign investment in Australia were:
- USA with 27 per cent of total foreign investment (A$514 billion, up by 16 per cent)
- UK with 26 per cent (A$499 billion, up by 26 per cent)
- Japan with 5.4 per cent (A$102 billion, up by 14 per cent)
- Netherlands with 2.3 per cent (A$43.4 billion, up by 44 per cent)
- Hong Kong with 3.3 per cent (A$43 billion, down by 22 per cent)
- Singapore with 2.1 per cent (A$40 billion, down by 7 per cent), and
- Germany with 2.0 per cent (A$31 billion, up by two per cent).
Since 2003, the USA has dominated Australia’s inward stock of total investment with a share of more than 25 per cent until 2007.
In 2009, the stock of FDI in Australia was $436 billion (Figure 7, Table A3 in Attachment). The top sources were:
- USA with 23 per cent (A$99 billion, down by 0.6 per cent)
- UK with 15 per cent (A$63billion, up by three per cent)
- Japan with 10 per cent (A$45 billion, up by 23 per cent)
- Netherlands with eight per cent (A$34 billion, up by 63 per cent), and
- Switzerland with four per cent (A$18 billion, down by 20 per cent).
The overall trend of FDI from the European and North American markets appears to be gradually softening, yielding to other emerging markets.
In 2009, total foreign investment inflows reached A$160 billion in 2009 (up by eight per cent) (Figure 8, Table A4 in Attachment). The top sources were:
- USA (A$94 billion)
- UK (A$34 billion)
- Netherlands (A$13 billion)
- Japan (A$11 billion)
- China (A$8 billion)
- Canada (A$3 billion)
- Belgium (A$2.5 billion), and
- Bermuda (A$1.5 billion).
The shares of the US and the UK dominate total capital inflows, with 59 per cent and 21 per cent respectively. It is interesting to note that total capital inflows from US companies indicate that they invested in Australia substantially through ‘other investment’ (A$41.7 billion), which may largely be attributed to reinvested earnings, rather than new inflows.[6]
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Figure 6: Stock of total investment from major partners in Australia, A$ billion
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Figure 7: Stock of FDI from major partners in Australia, A$ billion
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Source: ABS, International investment position, cat. no. 5352.0, op. cit.
Note: total investment includes portfolio, foreign direct investment (FDI), financial derivatives and other investment.
The sources of total foreign investment differ somewhat from the sources of FDI.
In 2009, Australia received A$36 billion in FDI inflows from partner countries, down by 34 per cent from the previous year (in Australian dollar terms) (Figure 9, Table A5 in Attachment). The top counties were:
- The Netherlands (A$12.3 billion)
- Japan (A$9.8 billion)
- China (A$5 billion)
- Singapore ($5 billion), and
- Canada (A$3 billion).
It is worth noting if one compares data from the ABS and data from the FIRB. it seems that ABS data may underreport Chinese investment. However, the ABS data relate to realised investment while the FIRB data relate to approved investment. Further, ABS data on foreign investment are mainly generated from sample surveys, and have a time lag. In the market though, there is a growing optimism (depending on the relationship of the stakeholders) about the future direction of Chinese investment in Australia, which seems to be accelerating mainly, but not exclusively, in the resources sector.
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Figure 8: Inflows of total investment by major partners in Australia, 2009
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Figure 9: FDI inflows from major partners in Australia, 2009
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Source: ABS, International investment position, cat. no. 5352.0, op. cit.
Note: total investment includes portfolio, foreign direct investment (FDI), financial derivatives and other investment.
The momentum for investment in Australia’s resources sector from China and India appears to have grown in recent years as is evident from the FIRB list of approved applications (Figure 10). It is however, worth remembering that the amount of approvals from the FIRB may not reflect actual investment, and definitely not long-term investment. This is because many foreign investments fall below the FIRB’s threshold. Further, those which are approved only reflect a plan, and are not necessarily realised.
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Figure 10: Foreign Investment Review Board approvals of applications by major countries, A$ billion
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Data source: Foreign Investment Review Board, Annual report, various years.
Figure 11 indicates that the stock of Australian outward FDI exceeded the inward stock of FDI in the country in 2009. This suggests that Australian investors may be increasingly confident of returns from overseas ventures. It is noteworthy that Australian mining companies, as well as big banks, are expanding overseas, due to paucity of demand locally.
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Figure 11: Inward and outward stock of FDI, Australia, US$ billion
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Data source: UNCTAD, World Investment Report 2010, Country Fact Sheet, Australia
The increase in outward FDI has been driven largely by growth in the finance and insurance sectors, reflecting the benefits of being physically located in overseas markets. The number one driver for offshore expansion is reportedly to increase revenues/expand market share, with taking control of the supply chain and decreasing costs coming equal second. The dominant barriers to international expansion are a lack of local business and market knowledge and access to finance.[7]
Table A1: Foreign investment overview (Value in A$ Million)*
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Category
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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2008
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2009
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Foreign Investment In Australia
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Stock of Total Foreign Investment in Australia
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856,704
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913,460
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996,098
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1,151,872
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1,240,311
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1,479,785
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1,680,294
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1,761,575
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1,897,670
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Change %
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6.6
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9.0
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15.6
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7.7
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19.3
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13.5
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4.8
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7.7
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Flow of Total Foreign Investment in Australia
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51,718
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77,228
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84,424
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83,394
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43,707
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173,128
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159,700
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147,538
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159,523
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Change %
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49.3
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9.3
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- 1.2
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- 47.6
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296.1
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- 7.8
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- 7.6
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8.1
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Stock of FDI in Australia
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218,301
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244,832
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260,699
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337,938
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297,641
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336,865
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396,852
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396,515
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436,059
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Change %
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12.2
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6.5
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29.6
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- 11.9
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13.2
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17.8
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- 0.1
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10.0
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Flow of FDI in Australia
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15,668
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26,868
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10,449
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54,559
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- 36,248
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35,870
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50,566
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56,012
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36,705
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Change %
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|
71.5
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- 61.1
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422.1
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- 166.4
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- 199.0
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41.0
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10.8
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- 34.5
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Australian Investment Overseas
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Stock of Australian Investment Abroad
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516,068
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524,375
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566,858
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673,110
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720,048
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897,449
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1,044,098
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1,056,458
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1,130,363
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Change %
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1.6
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8.1
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18.7
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7.0
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24.6
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16.3
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1.2
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7.0
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Flow of Australian Investment Abroad
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36,233
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47,383
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40,229
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28,714
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- 11,866
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118,460
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88,919
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92,653
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104,151
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Change %
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30.8
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- 15.1
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- 28.6
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- 141.3
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- 1,098.3
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- 24.9
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4.2
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12.4
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Stock of Australian FDI Abroad
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218,965
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206,995
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220,752
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266,374
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252,301
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299,456
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343,652
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300,848
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344,572
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Change %
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- 5.5
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6.6
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20.7
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- 5.3
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18.7
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14.8
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- 12.5
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14.5
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Flow of Australian FDI Abroad
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20,779
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12,969
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24,253
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11,380
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- 45,271
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28,381
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16,374
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40,229
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26,328
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Change %
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- 37.6
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87.0
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- 53.1
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- 497.8
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- 162.7
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- 42.3
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145.7
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- 34.6
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Source: ABS, International Investment Position, Supplementary Country Statistics 2009, Cat. No. 5352.0, 30 July 2010
Note: Total investment includes portfolio, FDI, Financial Derivatives and other investments.
Table A2: Stock of total foreign investment in Australia by source countries, A$ million
Table A3: Stock of FDI in Australia by source countries, A$ million
Table A4: Flow of total foreign investment in Australia by source countries, A$ million
Table A5: Flow of FDI in Australia by source countries, A$ million
Table A6: Stock of Australian total investment abroad, A$ million
Table A7: Flow of Australian total investment abroad, A$ million
Table A8: Stock of Australian FDI abroad, A$ million
Table A9: Flow of Australian FDI abroad, A$ million
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