This speech was originally delivered by Dr Jeffrey Wilson, Head of Research, at the inaugural Korea-Western Australia Business Forum on 23 August 2018 at The Westin Hotel, Perth.
You can download a copy of "Maturing the Korea-Australia Investment Relationship" report here.
I am here this morning to launch the Perth USAsia Centre’s most recent policy report, which is entitled Maturing the Korea-Australia Investment Relationship
. We were motivated by three purposes in developing and publishing this report:
- First, to draw attention to the growing importance of investment between Korea and Australia, as this is an often overlooked dimension of our bilateral relations
- Second, to analyse of how the investment relationship is performing, identifying its strengths, weaknesses and opportunities for growth
- And third, developing practical recommendation for both government and business to elevate the investment relationship to a new level of depth and maturity
Investment links are a comparatively recent addition to the Korea-Australia relationship. Since first establishing diplomatic ties, bilateral trade has undergone two major expansions, driven by the respective mining booms of the 1970s and mid-2000s. Yet corresponding investment linkages were slower to develop; and it has only been during the last decade that significant investment between and Australia and Korea has taken off. Bilateral capital flows have since averaged $1 billion in each direction; and bilateral investment stocks have doubled in the five years to 2016. The two economies have now become materially significant investment partners: with Korea the ninth largest foreign investor in Australia over the last decade, and Australia the sixth largest destination for Korean outbound FDI. For the first time in its five-decade history, investment is now a prominent feature of the Korea-Australia relationship.
This recent uptick in investment flows was driven by the strong complementarity between the two economies. Natural resources have proven especially important, with Korean investors deploying a ‘joint development model’ to participate in mineral and energy projects led by Australian firms during the recent mining boom. POSCO and KOGAS have been two of the most active Korean investors, participating in projects across the coal, iron ore, LNG and lithium sectors. Real estate is a more recent addition, with Korean institutional investors seeking positions in Australian commercial real estate to obtain stable, long-term returns from assets in secure markets. The recent growth of Korea’s funds management sector – driven by its rapidly ageing population and the corresponding growth in both private- and state-owned pension funds – has also played a role. As the Korean funds management sector seeks secure investment opportunities abroad, Australia’s stable business environment has seen it become an increasingly attractive market.
These economic drivers for Korea-Australia investment have been enabled by favourable domestic policy frameworks. Both government view international investment favourably, and maintain liberal policy settings design to protect foreign investors and encourage capital flows. They each have transparent and rules-based investment regimes, open capital accounts, and actively support outward and inward investment through Austrade and KOTRA. More generally, as consolidated democracies with strong rule-of-law and effective economic institutions, they both offer an attractive business environment for investors. This is reflected in the World Bank’s most recent Ease of Doing Business
survey, in which Korea ranked fourth and Australia fourteenth out of 190 countries. Australia and Korea offer some of the most investment-friendly regulatory environments of any economy in Asia.
Equally important are the international regulatory linkages between the two governments. The most important of these is the Korea-Australia Free Trade Agreement (or KAFTA), which entered into force in 2014. KAFTA is one of the highest-standard trade agreements that either government has signed. In addition to the ‘traditional’ suite of market access provision, it also contains a range of ‘WTO Plus’ measures covering investment, services, finance, e-commerce, telecommunications and intellectual property. These ambitious regulatory provisions further encourage bilateral investment, by harmonising differences in cross-border regulatory regimes that often impose transaction costs for foreign investors. KAFTA also reflects Korea and Australia’s shared interest, as advanced economies, in institutionalising rules which reflect the needs of modern knowledge- and service-based economies.
It is these three factors – economic complementarity, favourable domestic policy frameworks, and strong inter-governmental linkages – that have enabled the recent surge in Korea-Australia investment. But despite this growth, our analysis also identifies a range of weaknesses which could be strengthened:
- The investment relationship is heavily dependent on just two sectors. Mining and energy account for 83 percent of all Korean investment in Australia; and real estate another 11 percent. Despite clear opportunities across a diverse range of service and technology sectors, bilateral investment in industries beyond mining and real estate remains negligible.
- There is also very limited use of direct investment as a mode of entry. Of the $41 billion of two-way investment stocks, only eleven percent involve direct ownership stakes, with the remainder either portfolio mode or inter-corporate debt. This means there are limited opportunities for developing managerial connections, knowledge-sharing and/or technology transfer between Australian and Korean corporations.
- The aggregate volume of investment also arguably under-performs relative to expectations. Using Japan as a benchmark, our report statistically models what Korea-Australia investment would look like if it matched the performance of the Japan-Australia investment relationship. Our modelling suggests that Korean investment in Australia should be two-times higher using a country-shares methodology, and four-times higher based on a trade-to-investment methodology. Australia is clearly underperforming in attracting Korean investment relative to its potential.
Based on this analysis, we argue that now is the time to ‘mature’ the Korea-Australia investment relationship. While the volume of investment grew rapidly during the last decade, it remains concentrated in ‘traditional’ industries like natural resources, and many fruitful opportunities are being missed. More of the same pattern will not produce the growth needed to achieve its full potential; nor will it fully exploit the diverse complementarities between the Korean and Australian economies. For this reason, our report calls for the development of a more diversified and mature investment relationship, which builds on the previous successes in the resource sector to better integrate the economies across a range of modern industries.
For this maturation process to succeed, Australia and Korea will need to pioneer investment in a range of new sectors. Deep economic complementarity means there are many opportunities, and our report identified four areas which should be the focus of attention.
- One is resource-related technologies industries – particularly in renewable energy and energy storage – where combining Australian and Korean expertise offers major opportunities for improving both countries’ energy security.
- A second is agriculture, where the existing trade relationship can be leveraged to build investment partnerships. Korea already accounts for 14 percent of Australia’s agricultural exports, and as KAFTA progressively lowers trade barriers the scope for food security-augmenting investments will continue to grow.
- A third is financial services, which is a major growth sector for both economies. There are particular opportunities in the ‘fintech’ domain, where world-class capacity in banking and information technologies can be combined to produce new financial services products.
- A fourth is infrastructure, where Korea’s capacity in heavy engineering could be fruitfully combined with Australian skills in infrastructure financing and management. There is considerable scope for Australia-Korea partnerships to develop infrastructure in third-countries across the Indo-Pacific region.
Unlocking these opportunities, however, will require new approaches. The resource sector has been the pioneer of Australia-Korea investment, and during the last decade has established a much-needed foundation upon which a more diversified set investment ties can be built. However, neither Australian nor Korean businesses presently have much capacity, experience or knowledge of the other in the emerging industries that will drive the next stage of growth.
For this reason, governments and business will need to actively pursue a maturation agenda, through the development of new bilateral investment strategies targeted at these opportunity sectors.
Our report identifies a number of practicable steps both countries can take now:
- The most basic is to increase awareness and expertise amongst the corporate sector regarding bilateral investment opportunities, to ensure neither country ‘overlooks’ the other when investing abroad
- There is a need to develop the capacity of small- and medium-enterprises – which are the foundation of service and technology industries – to be “ready” to undertake foreign investment partnerships
- Intergovernmental cooperation should be accelerated, by activating KAFTA’s review and implementation mechanisms to open negotiations on further regulatory harmonisation efforts
- There is also scope to develop sectorally-focussed cooperation mechanisms in strategically important industries. These are especially pronounced in agriculture (leveraging the existing bilateral trade relationship) and infrastructure (by coordinating the governments’ contributions to existing global and regional infrastructure development platforms).
Finally, we argue that now is the right time to invest in the Korea-Australia investment relationship. The economic complementarity is there, the necessary policy frameworks are already in place, and the recent mining boom has provided a solid foundation for growth. Looking across the Indo-Pacific region, it would be hard to identify two more natural investment partners than Australia and Korea. It is now incumbent on governments and businesses in both countries to seize this opportunity, to build a mature and diverse investment relationship befitting the economic, political and commercial synergies between our two countries. We hope this report will help to advance a discussion, in both Australia and Korea, on the work which now needs to be done.