Steps to offshore investment

Businesses now find foreign direct investment accounts for as much revenue as direct exports, but what is foreign direct investment and what does it entail for an exporter?

Offshore investment has an increasing role in generating Australian revenue, found the latest Global Readiness index, conducted by the Export Finance and Insurance Corporation (EFIC). In fact, offshore investment earnings by Australia’s top 100 international companies (by revenue) are on par with exports by Australian-owned entities, according to an analysis by EFIC and The Diplomat, based on figures provided by the Australian Bureau of Statistics.

“There's no doubt there's a trend to offshore investment as opposed to just traditional exports,” says Andrew Skinner, head of trade services at HSBC Australia. “It's a trend that has accelerated in the last two-to-three years and I can't see it going away.”

Sunil Aranha, head of business development at EFIC, says it’s no surprise that Australian businesses have chosen to expand overseas, capitalising on new markets by setting up physical operations: “The only way they can grow is either by acquiring offices or companies that are existing where they already have the customer database. They can take their intellectual property and service that,” he explains.

Understanding Offshore Investment
Offshore investment, also known as foreign direct investment, is a financial commitment designed to promote a long-term interest in an organisation external to the economy of the investor. There are different types of offshore investments, and most of them don’t involve the Cayman Islands.

Many exporters will be familiar with the type of offshore investment that occurs when expanding Australian operations overseas. This may involve setting up an office in an international location, or even purchasing a factory or farm. Although you invest in your company, it’s also considered an offshore investment because the taxes that you pay in that location go towards local infrastructure, as well as providing local jobs. The profits made, however, are yours and count as Australian revenue.

Other types of offshore investment may include the purchase of a foreign entity, whether that’s buying a stake in another company, entering into public-private partnerships or investing in utilities, such as electricity suppliers. Any stake held in a foreign organisation designed to give the Australian investor a return is an offshore investment.

The difference between exporting and offshore investment is a case of where and when you earn money from the business. With exports, for example commodities, the general idea is that you grow or make it here, then ship it off to its destination and you make money from selling the product. With investments, you commit money to a business that you hope will be productive, thus the returns are likely to come from management fees or dividends, which is a longer-term view.

“The invoicing sale may not be done by the Australian company but by your foreign entity, but you still own it and you still get dividends—you are effectively earning money from that source of revenue,” explains Aranha. “If you don’t get back your earnings, then you take it through management fees. Either way there’s benefit to Australia because you make an investment in a productive thing and the money comes back. It’s far more strategic than if you send something out of Australia and you get paid three months later. If you’re putting up a factory in China, it’ll take you three years but it’s a long term generator of earnings for Australia.”