Foreign Direct Investment: country comparison

University Degree Business and Administrative studies

Foreign Direct Investment – Australia and Venezuela

Australia and Venezuela are both resource rich ex-colonies with distinctive positions on foreign direct investment (FDI). Australia is a developed, pro-globalisation nation embracing economic liberalism. Australia endeavours to attract productive FDI to support sustainable industry growth and development. That is, FDI that creates or safeguards jobs and access to overseas markets, introduces new technologies or management skills to Australia, and produces goods or services for export or the Australian market. By contrast, Venezuela’s foreign investment policy, though seemingly open, is underpinned by a general dislike for transnational corporations (TNC’s) and is subject to sporadic adjustments. In the last two decades Venezuela has attempted to revitalise their volatile economy by liberalising FDI policy. Reforms in the 1990’s placed Venezuela among the most promising of emerging markets. However political upheavals between socialists and economic liberals, coups, strikes, alleged corruption, and a track record of unpredicted policy changes have dampened investor optimism. These setbacks, coupled with a high degree of government intervention and expropriation by the current Chávez Administration, have held the economy down. This essay will discuss and compare Australian and Venezuelan foreign investment policies as embodied in law, exploring these policies practical function in each nation as well as their evolution over the last two decades.

FDI in dates back to the country's time as a and later of the British Crown to its position as a strong ally of the in the to its engagement with as a power in its own right. (Islam & Hossain, 2006). Australia’s current FDI policy, as expounded in the Foreign Acquisitions and Takeovers Act 1975 (FATA), conveys a strong welcome to foreign investors, provided their activities align with national interest (Comlaw, 2005). The investment credit to the capital account funds Australia’s growth and has helped pay off external debt (FDI, 2007). In the past two decades The Australian government has taken numerous steps to improve the business environment for foreign investors, recognising the contribution FDI makes to the development of Australian industry, economic growth and employment. These include reform of the industrial relations system, minimal government interference, liberalisation of both the exchange and financial markets, trade liberalisation and the breakdown of barriers to FDI (PRS, 2005a).

The Foreign Investment Review Board (FIRB) is a non-statutory body responsible for the regulating and screening of potential foreign investors. Proposals of acquisition over A$5m, Greenfield proposals over A$10m and acquisition of urban land are screened (FIRB, 2007). However, 98% of all proposals since 1998 have been approved (Invest Australia, 2007). While FATA applies to most sectors, including forestry, agriculture, fishing, resource processing, oil and gas, mining, manufacturing, non-bank financial institutions and tourism, there are some strategic or politically sensitive sectors offering foreign enterprise only a limited minority stake or subjecting proposals to rigorous scrutiny (FRIB, 2007). Such industries include real estate, banking, civil aviation, shipping, media, broadcasting and telecommunications (Invest Australia, 2007). For example, the Broadcasting Services Act 1992 states foreign persons may not exercise direct control over a television license in the form of a 15% share or higher and for newspapers ownership may not exceed 25% (PRS, 2005a)

Australia offers no direct federal tax incentives for foreign investment. Foreign and domestic investors are treated alike. Research and development is rewarded tax concessions, supported by the National Procurement Development Program and provided grants and loans on the grounds that the product has promising commercial and export potential (UNCTAD, 2007d). For example, the Pharmaceutical sector receives 30 cents for every dollar spent on research and development (PRS, 2005a). Explicit adherence to intellectual property and trademark law ranks Australia in the top 10 best intellectual property regimes in the world (Invest Australia, 2007). Australia boasts a system of international best practice, being members of international intellectual property treaties such as TRIPS Agreement, the Paris Convention and the Patent Cooperation Treaty (WTO, 2007a).

Abundance of natural resources alone make Venezuela an attractive host country for multi-national firms dealing in petroleum, natural gas, hydroelectric power, iron ore, coal, bauxite and gold (WTO, 2007b). Venezuela’s enormous potential was somewhat realised under the reform-based leadership of President Carlos Andres Perez, when Venezuela enjoyed the highest annual income per capita in Latin America (Mann, 1992). When Perez stepped into power in 1989, the country was suffering the debilitating effects of political patronage, corruption, and poor economic management. Perez oversaw major decentralization of the Venezuelan government and dictatorial control diminished (Diaz-Cayeros, 2006). Free market measures were implemented under the foreign investment code “Executive Decree 2095”, including elimination or reduction of certain subsidies and price controls, lowering the corporate tax rate from 50% to 30% and average tariffs from 35% in 1988 to 13.5% in 1991 (US Department of State, 1994). These improvements attracted FDI of US$6.3billion dollars in 1991, almost double the US$3.6billion FDI inflow in 1990 (UNCTAD, 2007e). The early 90’s marked a number of joint ventures and strategic alliances between Venezuela and foreign owned enterprises such as Mitsubishi and British Petroleum (Hill, 2007). While global enterprise benefited from Venezuela’s abundant natural resources such as oil, aluminium, gas and mining, Venezuela gained managerial knowledge, technological skills brought in by international companies and the capital required to fully exploit their natural resources (Martinez, 1992).

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In 1999, former military officer and 1992 failed coup leader Hugo Rafael Chávez took presidency. His fiercely nationalist objective for Venezuela has resulted in a number of controversial reforms, receiving both criticism that his nationalist position has stalled the economy, and adulation for its socialist agenda (FDI, 2006). He was reelected in 2000 and 2006 despite grave opposition. Chávez has repeatedly said he welcomes FDI in Venezuela, referring to the 1999 Constitution that guarantees equal treatment for foreigners and Venezuelans alike, and the Law for the Promotion and Protection of Investment 1999 that guarantees international standards for investment policy (Guevera, 2004). The Law upholds the right for the repatriation of all capital and profits eliminates investment authorization barriers and offers stable tax and incentive systems (EIU, 2006). It saw the reopening of inactive oil fields and the liberalization of the telecommunications sector (WTO, 2007b). However, these directives have proved inconsistent with Chávez’s vision of socialism, and criticism of neo-liberal globalization and US Foreign Policy. The President is still allowed to intervene "under exceptional circumstances," or in accordance with "economic development plans". Intervention has included price controls, reservation of contracts and local content requirements. For example, government decree 1892 provides a 5 percent preference for bids from companies utilizing 20% local content. From 2000 onwards his government has shown hostility towards TNC’s. For example, armed military were sent to physically expropriate 32 oil fields, as well as mining and gas fields. In 2003, re-nationalization of major oil fields provoked a massive two-month strike, spiraling the economy into recession. The Hydrocarbons Law, effective in January 2002, discouraged FDI in the oil sector by guaranteeing the state oil company (PDVSA) a minimum 51% stake in all oil ventures, and increasing royalties paid by private enterprise to between 20% and 30%, compared with previous royalties of 1% to 16.7%. Under Chávez, high corporate tax and retroactive tax collection schemes have also discouraged FDI. In early 2007 Seniat, the Venezuelan tax agency declared that foreign oil companies owed $4 billion in back taxes through 200. Chávez uses the tax bills are used as leverage in negotiations with TNC’s, refusing to finalize new contracts until companies’ taxes are settled. For example, in the midst negotiations in which the government was seeking greater control over multibillion-dollar oil projects, ExxonMobil's Caracas headquarters were shut down for an alleged tax violation.

Venezuelan and Australian FDI policy and practice differ in many ways. At the resource level, Venezuela’s strength and dependency lies in natural resources, such as hydro electricity, natural gas and oil. The latter accounts for 80% of export earnings, one third of GDP and over half of government revenue. Australia’s abundance of raw materials, mining and agricultural produce is a determinant attribute for TNC’s, as well as financial services, which account for 7.8% of GDP. In 2006, for the fifth consecutive year, the World Competitiveness Yearbook ranked Australia as the world's most resilient economy. The country was also ranked sixth most competitive out of 61 countries. The same report rated Venezuela 60th on the list. On the strength of high growth, low inflation and low unemployment, Australia is in its 16th year of economic growth. Ian Macfarlane, Australia's minister for industry, tourism and resources states, "One of the secrets of the Australian economy is that it is so diverse. We have not fallen into the tech-wreck trap, putting all our eggs into the high-tech market”. In contrast, Venezuela has most of her eggs in the oil basket and is vulnerable to the rises and falls of global oil prices. During booms Chávez funnels much of the profit into immediate needs of healthcare, housing, and education for the poor. At the same time, far too little investment is put into long-term economic growth, leaving the economy stifled despite the country’s enormous potential. An example of one such regime is price controls on the food and agriculture sector since 2003 in order to feed the poor. Some prices are set so low that companies are obliged to sell at a loss. If they don't, they risk fines, temporary closure, expropriation or even imprisonment. In March 2007 the government temporarily closed 17 butchers' shops it accused of breaking price regulations.

Australia, with its transparent, simple bureaucratic procedures and strong economy is an easier nation to penetrate. Venezuelan administration and legal barriers are more complex as a result of inconsistent politics, adjustments to the constitution, the increasing the powers of the presidency, additions and rewrites of laws, risk of corruption and unpredictability. The Australian FIRB acts as an easy one-stop-shop for potential investors. Venezuela offers no such service. This lack of facilitation deters investors even more than Venezuelan hostility. Australia maintains a thorough anti-corruption policy and supports the OECD anti-bribery convention 1996. Venezuela has a significant problem in this area despite their own anti-corruption regulations. In January 2007 a National Assembly investigation began into 700 cases of alleged corruption and embezzlement, including accusations against the bank-deposit protection fund and a state agricultural development fund. Unsolicited expropriation of oil fields from TNC’s via armed military have been common in Venezuela. In Australia expropriation is in accordance with international law and appropriate compensation is paid.

The countries do share some similarities. For one, Australia and Venezuela’s inbound FDI far exceeds outbound FDI. National interest according to the government is the key driver for all FDI decisions in both nations. Like Venezuela, Australia has been reluctant to release natural resources to international firms despite welcoming appearances. For example, vigorous debate over Australia’s national security interests cause a A$10billion bid from Royal Dutch/Shell for Woodside Petroleum to be rejected, the belief being that Shell would neglect operations and not properly exploit the resource. Though corruption is rife and bureaucracy is deeper than in Australia, Venezuela also provides access for foreign firms to the legal system, enabling disputes settlement services and protection of real and intellectual property rights. The Seniat actively protects intellectual property rights, and has launched an anti-piracy and "zero tax evasion" campaigns. Venezuela’s Copyright Law 1993 is modern and comprehensive, but not as long-standing as Australia’s Copyright Act of 1968 or as enforceable as TRIPS, Australia’s international Trade-Related Aspects of Intellectual Property Rights agreement.

Australia and Venezuela both engage in international agreements. Both members of the World Trade Organization since January 1995, the nations concur to Trade-Related Investment Measures (TRIMS). This agreement outlaws local content requirements as a violation of GATT. However, Venezuela is not a signatory to the WTO Agreement on Government Procurement. Australia has supported WTO efforts to improve existing anti-dumping, subsidies and countervailing duties rules. Australia complies with the APEC foreign policy recommendations for national treatment and investment incentives and the OECD 1976 declaration concerning international investment and multinational enterprises. Australia has strong alliances with Thailand (TAFTA), Singapore (SAFTA) and CER with New Zealand. Venezuela has bilateral agreements for the promotion and protection of investment in ten European and South American Countries. Though Venezuela apposed the Free Trade of the Americas Agreement and pulled out of the Andean Community in April 2006, they signed a bilateral agreement with Cuba and Bolivia called the Bolivarian Alternative for the Americas (ALBA) along with bilateral cooperation agreements with Argentina, Brazil and Uruguay, and the MERCOSUR Council in July 2006. These agreements aim to create a common market between signatories and include policy to open up markets to foreign investors.

Australian and Venezuelan relations with the world’s largest and most influential economy, the United States, are poles apart. Australia’s Bilateral Tax Treaty 2001 and AUSFTA, the Australia-USA free trade agreement stipulate open FDI policy. AUSFTA contains comprehensive boundaries on government procurement and makes substantial commitments to liberalization. Venezuela is yet to come to a durable agreement with the USA despite the majority of foreign investors being American firms. With potential to produce 300 million barrels of oil a day for the next two centuries at least, Venezuela is a high stakes target for intervention by the Bush administration. Chavez’ motive of enforcing over-protective measures on foreign direct investment policy is birthed from a vigorous defense of Venezuela’s sovereignty and independence. Foreign firms do not possess the same socialist agendas as Venezuela does for itself. Venezuelan citizens voice serious concern that Venezuela could become another Iraq. Chávez, a close ally of the Anti-US Cuban President Fidel Castro, openly insults the US Government. For example, responding to criticisms by Bush that he was undermining democracy, Chávez publicly declared the US president was "more dangerous than a monkey with a razor blade...Who would be the greater fascist - Hitler or Bush? They might end up in a draw". Hostility towards the USA has indirectly affected other agreements as well, such as the Andean Community which Chávez abandoned when members Colombia and Peru signed FTA agreements with the USA.

Australian and Venezuelan FDI policy is driven by the desire to establish a sound foundation for improved domestic efficiency and productivity. These countries, though both resource rich, approach this goal in different ways due to their economic positions and contrasting political agendas over the past two decades. In formal terms, Venezuelan and Australian policy both stipulate the equal, non-discriminatory treatment of foreign and domestic firms, though Australia has the better reputation of enforcement and consistency. Australia’s growth strategy is focussed outward, displaying an international networking agenda, embracing globalisation and a universal foreign investment standard. Australia’s consistent growth and global economic influence puts them in strong position where FDI can be encouraged and maximized, but also monitored to align with national interest. The Venezuelan experience has not been so stable. Their fierce protection of rights and resources, as economically detrimental and internationally unacceptable as outsiders may perceive them, is justified in the eyes of Venezuelan government as a social responsibility to protect the sovereignty and independence of their developing nation.

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Foreign Direct Investment: country comparison

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