Peru is the host country for APEC deliberations this year, culminating in the APEC Economic Leaders’ Meeting in late November. As part of these deliberations, our APEC Study Centre represented Australia at the APEC Study Centre Consortium Conference convened in Arequipa, Peru, 5-6 May. At the conference Dr Andreas Chai delivered a paper co-authored with Professor Tony Makin on “Prioritising Increased Foreign Investment within APEC”.

The paper argues that APEC’s development goals would be well served by encouraging greater foreign investment within the region because in general, official restrictions which limit the purchase by foreigners of domestic assets impose an overall cost on the economy to the extent that they needlessly deprive the economy of much needed capital for development.

Economists have argued for centuries that free trade in goods and services improves economic welfare, a view reflected in the APEC motto “Advancing Free Trade for Asia-Pacific Prosperity.” A corollary is that trade restrictions, especially in the form of tariffs and quotas on imports, reduce economic welfare because they impose additional direct costs on consumers and indirect costs on exporters.

Foreign investment is also a form of international trade – in assets and saving. However, promotion of increased foreign investment within APEC is not nearly as strong as advocacy of freer trade in goods and services.

Yet, increased foreign investment can conceivably play as important a role in economic development as increased international trade in goods and services because permitting greater capital mobility allows investment to occur in places where capital can be used more productively.

At the microeconomic level foreign direct investment in particular should be welcome because it delivers productivity gains via technology transfer, international management practices and product development and can spur greater domestic competition and imitative behaviour by existing locally-owned firms.

At the macroeconomic level, foreign capital inflow in aggregate improves economic welfare to the extent that it frees the nation from the constraint of its own saving level. As the above theory suggests, without foreign capital inflow, the level of long-term interest rates would also be higher, as the economy would then be totally reliant on domestic sources of funds to finance its investment requirements.

Article by Tony Makin, Director, APEC Study Centre, and Professor, Griffith Business School.