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Feature Article - Foreign ownership of equity in Australian Enterprise Groups
TABLE A. OWNERSHIP OF EQUITY(a) IN AUSTRALIAN ENTERPRISE GROUPS ($A million)
(a) Includes units in trusts. (b) Book values. (c) These estimated market values are considered to be of poor quality. They should be used cautiously. See Section 4 of this article for further details. (d) These series differ from those shown in Table 21 of 5232.0 for the four quarters of 1989-90 due to the reclassification of some holdings from private corporate trading enterprises to banks.
Source: Australian National Accounts, Financial Accounts September quarter 1989 to June quarter 1991 (5232.0)
3. Analysis of results
The value of equity on issue by Australian enterprise groups at 30 June 1991 stood at $290,981 million. Of this total, 73 per cent was shares or equivalent equity interests issued by private corporate trading enterprises (see Section 4 below regarding qualifications pertaining to these data). Lesser amounts were issued by banks (14% of the total), non-bank deposit taking institutions (4%) and other financial institutions (4%).
Of the total equity on issue at 30 June 1991, non-residents held equity valued at $101,867 million (35%), and residents held $189,114 million (65%).
Foreign ownership of equity grew steadily over the period shown in the tables, from 31 per cent at 30 June 1989 to 35 per cent at 30 June 1991. Of the $18,876 million increase in the total value of equities on issue between 30 June 1989 and 30 June 1991, $11,166 million (or 59%) was due to transactions (new issues) and the remaining $7,710 million, due to price movements and other changes. In comparison, equity held by non-residents rose $17,091 million, of which $15,059 million (or 88%) was due to transactions and $2,032 million was due to price movements and other changes.
When analysed by sector, it can be seen that equity held by non-residents in private corporate trading enterprises rose steadily over the period, from 36 per cent at 30 June 1989 to 41 per cent at 30 June 1991.
While the value of non-residents’ equity in banks also rose steadily, it remained relatively flat as a proportion of the total equity issued by banks. The dip in percentage foreign ownership in 1989-90 reflects the build-up of cross shareholdings between Australian banks in the same year. These positions appear to have been largely unwound between 30 June and 30 September 1990, as bank holdings of bank shares fell back between those dates.
Non-resident equity holdings in non-bank deposit taking institutions remained fairly constant in dollar terms, but rose as a proportion of the amount on issue, from 20 per cent at 31 December 1989 to 27 per cent at 30 June 1991. This was due to the decrease in the level of equity on issue by these institutions. This fall may have been due in part to enterprises formerly belonging to this sector becoming banks (eg. Challenge Bank, Metway Bank and Town and Country Bank) and others becoming insolvent.
The estimates of equity issued by life offices and superannuation funds shown in Table A above only include shares in Australian incorporated companies and net equity of foreign incorporated companies in their Australian branches. They do not include policyholders’ claims on the technical reserves of life offices and pension funds. Foreign ownership of equity in these enterprises has declined, as a proportion of their total equity on issue, from 81 per cent at 30 June 1989 to 76 per cent at 30 June 1991.
The other financial institutions sector largely comprises general insurers. Foreign ownership of equity in these enterprises has remained around 23 per cent (using annual averages) over the period.
4. Problems with the data that may impact on the analysis
The estimated market value of equity issued by some sectors is considered to be of poor quality. In particular, estimates of the market value of the amount issued by private corporate trading enterprises are considered poor because they are largely built up from counterpart and other information obtained from ABS Surveys of Foreign Investment and Balance Sheet Information. This sector covers equity issued by both listed and unlisted private corporate trading enterprises, of which there are over half a million. Alternative information sources and methodologies for deriving these estimates are being investigated.
In terms of the analysis undertaken here, errors in the estimated market value of equity on issue will impact on the accuracy of estimates of the proportion of that equity owned by non-residents.
A further concern relates to valuation. While both financial accounts and international investment statistics (from which the rest of the world data are sourced) are on a market value basis in principle, collection and estimation methods differ between the two sets of statistics. In the financial accounts, estimates of the value of equity issued are derived largely from balance sheet information and therefore are closer to a net worth or net asset value basis. In international investment statistics, shares in listed companies are valued at their traded price. Where recent transactions prices are not available, in the case of shares in unlisted companies for example, a close approximation to market value is sought. The most common proxy used is net asset value and respondents are asked to value assets at market prices. Because of the differences in the methodologies used, it is possible that there could be more variability in the market value estimates of equity held by the rest of the world than in the estimated market value of the equity on issue, thus causing some variation in the foreign ownership series derived from these data.
5. Relationship with other foreign participation measures
There are no international standards for defining foreign participation and no standard international practice for measuring foreign participation. In Australia’s case, a number of foreign participation concepts and a variety of measures have been adopted in past studies in this field. In the studies conducted by the ABS during the 1980s the main concepts used were foreign ownership, foreign control and degree of foreign influence.
Foreign ownership statistics provided a measure of the beneficial equity interest held by non-residents (individuals and companies) in enterprises in Australia. Foreign control statistics provided a measure of the potential control, through ownership of voting shares, that non-residents may have over the key policy decisions of enterprises in Australia. Foreign influence statistics provided a measure of the potential influence, through ownership of voting shares, that non-residents may have on decision making within enterprises in Australia without regard to whether the influence was sufficient to control the enterprise.
Generally, earlier measures of foreign participation were derived by applying the ownership, control or influence characteristics of each of the units involved in the industry/activity being studied to certain data collected in respect of those units. The characteristics of each unit were determined by examining the ownership of equity in the legal entities to which the units belonged to determine the proportion owned by non-residents and where potential control lay. Information about the ownership of equity was generally obtained from the ABS Survey of Shareholdings, conducted on an irregular basis specifically for foreign participation purposes. The most recent Survey of Shareholdings was conducted in respect of 30 June 1987.
To measure the aggregate levels of foreign (and Australian) ownership in a particular industry, amounts reported for selected data items (such as value added, premiums received, assets, employment and capital expenditure) for each statistical unit were apportioned between foreign and Australian ownership in proportion to the percentages of foreign and Australian ownership in that unit. Data on each item were then aggregated for all units to obtain totals of foreign and Australian ownership. Measures based on different data items could vary significantly within a particular industry.
To measure the levels of control in an industry (or economic activity), the total amounts reported for the selected data items for each statistical unit were allocated to the control category (foreign controlled, joint foreign and Australian controlled, naturalised or naturalising or Australian controlled) of that unit. Data for each item were then aggregated for all units to obtain totals for the industry (or economic activity) attributable to each of the four control categories listed above.
The degree of foreign influence was measured by the strength of the chain of ownership links connecting the major foreign investor to the relevant enterprise engaged in the activity being studied. To measure the levels of foreign influence, each statistical unit was classified to a particular "degree of influence" category (eg. under 10 %, 10 % to 50 % and 50 % and over) and the whole of the amount reported for the selected data items were allocated to that category.
Table B below compares selected results of earlier foreign participation studies with estimates of foreign ownership of equity in Australian enterprise groups at 30 June 1989, 1990 and 1991, derived from the financial accounts. To the extent possible, the comparison is made between studies of the same or similar sector. However, in the case of private corporate trading enterprises, no foreign participation studies have been conducted that cover this entire sector so the results of studies conducted in respect of two of the more significant industries in this sector are shown.
TABLE B. COMPARISON OF MEASURES OF FOREIGN OWNERSHIP
n.a. not available, (a) Ownership measure used is value added. (b) Ownership measure used is assets at 30 June. (c) Ownership measure used is equity at 30 June. (d) For the reasons discussed in Section 5 of this article, it is not valid to compare the two sets of results for Life Office and Superannuation funds.
Sources: Foreign Ownership and Control of the Manufacturing industry, Australia 1986-87 (5322.0), Foreign Ownership and Control of the Mining Industry Australia 1984-85 (5317.0), Foreign Ownership and Control of the Banking Industry, Australia June 1986 (5347.0), Foreign Ownership and Control of Registered Financial Corporations, Australia June 1986 (5334.0), Foreign Ownership and Control of the Life insurance Industry, Australia 1983-84 (5311.0), Foreign Ownership and Control of the General Insurance Industry Australia 1983-84 (5309.0), Australian National Accounts, Financial Accounts, Australia September quarter 1989 to June quarter 1991 (5232.0).It is also important to note that in earlier studies of foreign ownership, ownership of equity was applied to other variables to provide a measure of ownership, whereas, in financial accounts data, ownership of equity itself is the measure used. For example, foreign ownership of items such as value added or assets were used to calculate foreign ownership in earlier studies. These are different types of measures; they are only comparable where a fixed relationship exists between equity and the other variables. The Technical Note at the end of this article provides further detail, illustrating the relationship between the current and earlier measures.
By and large, the estimates of foreign ownership obtained using the financial accounts data are in the same “ball park" as those from earlier foreign participation studies of the same (or similar) industry (with the exception of those for life insurance offices and superannuation funds). The differences arise for a variety of reasons. The most obvious are the different measures used between the current and earlier estimates, different scope of the industry/sectors being compared and changes affecting the level of foreign ownership in enterprises over time (such as births and deaths and transactions in equity).
In the case of private corporate trading enterprises, it is difficult to draw a close link between the results of earlier studies and those derived from the financial accounts because no foreign participation studies were conducted that covered this entire sector and the results of the earlier studies of selected industries were in respect of different time periods or dates. While the results of studies of the manufacturing and mining industries are shown in Table B, they by no means cover the whole sector. In addition, the measure of foreign participation used for these two industries was value added as opposed to equity (the latter being the measure obtainable from the financial accounts).
The bank, non-bank deposit taking institutions and other financial enterprises sectors, for which data from the financial accounts are shown, correspond exactly or very closely in scope with those covered by earlier studies shown in Table B. However, for these earlier studies, the variable used to reflect foreign ownership was assets, rather than equity. However, if enterprises within a sector are similarly geared, regardless of the degree of foreign ownership, then these measures should give similar results (since the difference between assets and equity measured on a net asset value basis, is liabilities).
At 30 June 1986, non-residents owned an estimated 21 per cent of bank assets. This compares with ownership of around 18 per cent of equity in banks at 30 June 1991. This difference is due to the combination of both the use of a different measure at each date and changes that might have affected foreign ownership between the two dates. An examination of bank balance sheet data supplied in the ABS Survey of Balance Sheet Information indicates that banks with significant foreign ownership and Australian owned banks are similarly geared. However, there were changes in the banking sector between 30 June 1986 and 30 June 1991 that may have impacted on the degree of foreign ownership, including the establishment of new, largely Australian owned banks and new share issues by existing banks.
The estimates of foreign ownership of equity in non-bank deposit taking institutions are compared with results of earlier studies in respect of registered financial corporations. At 30 June 1986, non-residents owned an estimated 38 per cent of the assets of non-bank deposit taking institutions. This compares with ownership of around 27 per cent of equity in this sector at 30 June 1991. Like banks, the differences in foreign ownership between the earlier studies and the current estimates are due to the combination of both the different measures used and changes that might have affected foreign ownership over time. The changes that have occurred between 30 June 1986 and 30 June 1991 that may have impacted on the degree of foreign ownership of non-bank deposit taking institutions include the collapse of enterprises in this sector and the reclassification of others from non-banks to banks.
Because the earlier studies of foreign participation in life insurance offices and superannuation funds took account of the technical reserves of mutual life insurers (which are owned by their policy holders), whereas the measures derived from the financial accounts do not, it is not valid to compare the two sets of results. The technical reserves of mutual life insurers are very large relative to the equity on issue by life offices and superannuation funds, and, as these reserves are attributed entirely to households, the inclusion of these reserves along with equity would have the effect of substantially reducing the proportion of foreign ownership in this sector.
Foreign ownership of equity in other financial enterprises (primarily general insurance companies) is estimated to have been around 21 to 22 per cent between 30 June 1989 and 30 June 1991. The study of foreign participation in the general insurance industry in 1983-84 estimated that 30 per cent of the assets of enterprises in this industry were foreign owned at 30 June 1984.
6. Advantages and disadvantages of each approach
The major advantages of the methodology for deriving estimates of foreign ownership from financial accounts data in the way described in this article are that:
The disadvantages are that:
To summarise, the financial accounts provide an inexpensive and easy means of monitoring levels of foreign ownership of equity in Australian enterprise groups across all sectors of the economy. However, for more detailed analysis of the impact of foreign ownership on specific industries/activities, an alternative methodology needs to be adopted.
By making use of the comprehensive information about the rest of the world sector from the international investment database, it is possible to supplement the information on foreign ownership derived from the financial accounts. Some examples are given below.
7. Regional analysis
It is possible to further disaggregate holdings of equity in Australian enterprise groups according to the country of residence of the holder using international investment statistics compiled on a financial accounts basis.
At 30 June 1991, UK residents owned $33,571 million of equity in Australian enterprise groups, accounting for 12 per cent of total equity on issue. This was followed by the USA with $27,487 million (or 9%), Japan with $9,457 million (or 3%) and New Zealand with $5,911 million (or 2%). Two years earlier, these proportions had stood at 12 per cent (UK), 8 per cent (USA), 2 per cent (Japan) and 1 per cent (New Zealand).
Data are also available to undertake this type of analysis by sector. For example, the proportion of the total equity of Australian banks on issue at 30 June 1991 attributable to residents of the UK was 6 per cent: 5 per cent was owned by residents of the USA; 3 per cent by New Zealand residents; and 2 per cent by residents of Japan.
8. Significant foreign influence
The concept of direct investment is broadly one of capital invested in an enterprise by an investor having a significant influence, either actually or potentially exercised, over the key policies of the enterprise (called a direct investment enterprise). Ownership of 10 per cent or more of the voting shares (or an equivalent equity interest) is regarded as indicative of significant influence by an investor.
TABLE C. FOREIGN EQUITY HOLDINGS BY DEGREE OF FOREIGN INFLUENCE
AND TYPE OF EQUITY (a) AT 30 JUNE 1991
- nil or rounded to zero. (a) The type of equity dissection in the table shows foreign direct investment equity holdings separate]y from foreign portfolio investment equity holdings. Direct investment equity holdings refer to holdings of direct investors; that is, investors who own 10 per cent or more of the voting shares of an enterprise. Portfolio investment equity holdings refer to holdings of all other investors, covering their holdings in both direct investment enterprise groups and other enterprise groups.
Source: International Investment Position, Australia, June quarter 1992 (5306.0)
Three enterprise group dissections are shown in Table C (above) and these can be associated with three different levels of foreign influence: foreign control; significant foreign influence but not necessarily foreign control; and other foreign influence. First, direct investment enterprise groups over 50 per cent owned by their direct foreign investors are groups in which there is significant foreign influence that is clearly sufficient to allow foreign control. Second, direct investment enterprise groups 10-50 per cent owned by their direct foreign investors are groups in which there is significant foreign influence but it is not necessarily sufficient to allow foreign control. Third, other enterprise groups are groups in which there are foreign equity interests that are not large enough to allow significant foreign influence, as no foreign investor holds 10 per cent or more of the equity. Analysis of data on equity issued by direct and other investment enterprise groups in Australia as a proportion of total equity on issue provides an indication of the amount of influence non-residents have as a result of their equity holdings.
Of the equity holdings of the rest of the world of $101,867 million at 30 June 1991, $75,640 million (or 74 per cent) was in the form of direct investment, with the remaining $26,227 million being portfolio investment. These amounts represented 26 per cent and 9 per cent respectively, of the total equity on issue. These proportions are up from 23 per cent and 8 per cent at 30 June 1989. These proportions vary significantly across sectors, as is evident from Table C.
In other words, 26 per cent of the total equity on issue at 30 June 1991 was held by non-residents who had significant influence in the issuing Australian enterprise. This influence in most cases was sufficient to provide control, as nearly all the equity held by those non-residents was in enterprises where they had a majority interest.
It can be seen in Table C, that, at 30 June 1991, enterprises with greater than 50 per cent direct foreign ownership accounted for $72,369 million or 96 per cent of the $75,640 million direct investment equity, and $73,656 million or 72 per cent of the $101,867 total foreign equity in Australian enterprise groups. At 30 June 1991, foreign equity in enterprises with greater than 50 per cent direct foreign ownership accounted for 25 per cent of the total equity on issue by Australian enterprise groups.
One could also compare characteristics of direct investment enterprise groups (DIEGs) (eg. equity outstanding, foreign borrowing and lending abroad) with those of non-DIEGs. Again, it would be possible to separate majority owned DIEGs (ie foreign controlled) from other DIEGs, as has been done in Table C and compare the characteristics of these enterprise groups with those of other DIEGs and non-DIEGs.
Taking this type of analysis one step further, it is also possible to relate equity in groups in which there is significant foreign ownership (ie. DIEGs) to information about the same entities from other collections. This approach is similar to that taken in earlier foreign participation studies, except that the influence and control characteristics are different and are obtained from international investment statistics rather than from surveys of shareholdings. DIEGs can be allocated to different categories of influence/control on the basis of their percentage foreign ownership. To measure the aggregate level of foreign influence/control in a particular industry/activity, data for each statistical unit in the host collection would be allocated to the influence/control category of that unit.
The ABS has plans to undertake a foreign participation study in respect of research and development expenditure using this methodology.
While few countries produce foreign participation statistics, the approach the ABS proposes for the study in respect of research and development is similar to that taken by the United States in their measurement of foreign participation.
9. For more information
The data used in these analyses are available from the International Investment Section of the ABS. For more information about the types of foreign participation analysis that can be undertaken or the availability of related unpublished statistics, contact Kevin Yeadon on Canberra (02) 6252 6255 or email <firstname.lastname@example.org>. For information about other ABS information and services, please contact the National Information Referral Service on 1300 135 070 or email <email@example.com>.
In earlier studies of foreign ownership, ownership of equity was applied to other variables to provide an overall measure of ownership, whereas using financial accounts data, ownership of equity itself is the measure used. In the earlier studies, the strength of ownership links was generally measured by reference to the number of voting shares beneficially held. Using the financial accounts, ownership is measured by reference to the marker value of shares held directly.
While in concept, equity ownership is the same in each case, in practice, the application of these equity ownership characteristics to different measures does lead to different results. This was shown in earlier studies and is further illustrated in the example below.
Assume an enterprise group in Australia consisting of a wholly foreign owned holding company (Company A) with two subsidiaries, one 51 per cent owned by A (Company B) and, the other 100 per cent owned by A (Company C). Companies B and C each have one manufacturing establishment. Assume also, that Companies B and C both have issued 100 million shares with a market value of $2.00 each. Thus the market value of each company is $200 million. As Company A holds 51 per cent of the shares in B and 100 percent of the shares in C, its market value is assumed to be $302 million. The total market value of A, B and C as a consolidated group, would be $400 million, of which, $302 million or 75.5 per cent is attributable to non-residents and $98 million or 24.5 per cent attributable to residents. These proportions would be the same if they were calculated using the number of shares instead of the market value of shares.
Foreign ownership, using value added as the measure, would have been calculated in earlier studies by applying the percentage beneficial foreign ownership of each enterprise to its value added and summing the results. Using the example above, this would give:
for Company B;
100% * 51% * value added of $20 million = $10.2 million
Total $20.2 million
Foreign ownership in terms of value added is therefore 67.3 per cent. This compares with foreign ownership of 75.5 per cent in terms of equity.
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