A recent PhD study undertaken at the University of Western Australia has outlined the link between foreign direct investment in China by OECD countries and higher trade volumes.
A recent PhD study undertaken at the University of Western Australia has outlined the link between foreign direct investment in China by OECD countries and higher trade volumes.
But growing Australia’s relatively small level of FDI in China is still impeded by regulations in the country, according to experts, as discussions continue on a bilateral free trade agreement.
Presenting at a PhD conference this week, UWA PhD student Owen Ho’s study into the relationship between FDI and trade among China and member countries of the OECD examines bilateral trade data in the period from 1986 to 2003.
For companies engaged in FDI or contemplating a presence in China, the paper confirms that a good trade relationship usually follows from strong investment ties.
Of the 18 OECD countries included in the paper, 16 displayed a positive relationship between FDI and imports, according to Mr Ho.
Notably, the evidence is stronger in more recent times, suggesting that China’s openness to the world economy is improving bilateral trade.
As a member of the OECD, Australia’s relationship with China as a trading partner has grown significantly in recent times. Last week it became the nation’s largest supplier of goods, overtaking the US for the first time.
China has become one of Australia’s largest bilateral trading partners, growing from just 5 per cent of all bilateral trade value in 1996-97 to 13.3 per cent in 2004-05.
China is also rising in importance to Western Australia, with the state’s exports to the country worth $4.39 billion in the year to June 2004, lifting it from third to second in the trade destination standings in three years.
However, the latest figures on Australian FDI in China put the nation’s investment at around $3 billion, which is just 1.2 per cent of Australia’s total $243 billion FDI abroad.
And with negotiations on a free trade agreement with China currently under way, WA’s fortunes are tipped to become further aligned with that of the Asian giant.
But according to HSBC chief economist, Australia and New Zealand, John Edwards, there remain many issues to be addressed for Australian companies on the matter of investment in any FTA with China.
Of particular interest to WA, he said, was the possibility of an FTA with China that included a standardisation and transparency of provincial-level mining authority powers, which could inhibit investment from the sector.
Mr Edwards said the traditional notion of foreign investment in China related to the establishing of manufacturing plants to take advantage of cheaper labour; however this did not necessarily apply to Australia, as the sector did not enjoy prominence in the economy.
“Australia has a globally competitive advantage in the provision of mining services, and this is where we can gain most,” he said.
The usual requirement for a local majority partner was also a hindrance, Mr Edwards said.
While acknowledging that a local Chinese partner could often be beneficial to doing business in the region, Mr Edwards said it was a far different proposition that one be required.
A second round of FTA talks with China took place in August, with FDI discussed at the preliminary stage, according to a Department of Foreign Affairs and Trade spokesman.
