Let's say the Australian branch of a US company is very profitable. What happens to these profits?Replace Australia with New Zealand in the above quote and the argument applies just as well to us. Profits don't go overseas, as New Zealand dollars are only useful in New Zealand so they have to come back.
First, the profits might stay in Australia to expand the business of the US company, creating more jobs and extra economic activity here. Even ardent nationalists would find it hard to argue against this.
If the parent company however decided to transfer the profits from its Australian branch to America, it would soon find out that Australian dollars are pretty useless outside Australia and change them into US dollars.
But what happens to the Australian dollars? Since Australian dollars don't buy anything abroad, they will return to Australia to buy Australian goods and services. Maybe a US company will use them to buy Australian minerals. Perhaps US tourists will come here to spend their holidays. Or the US might import Australian-made cars.
In any case, Australian dollar profits transferred abroad return to Australia sooner rather than later because outside Australia, our dollars are just printed paper that will not get you a cup of coffee.
This is where the 'Australian-owned' argument falls to pieces. For Australia's wealth and prosperity, it does not matter where the profits from Australian businesses end up. All that matters for the Australian economy is that Australia remains a place where business transactions take place – irrespective of who owns the business.
Wednesday, 6 July 2011
Sending profits abroad is a good thing
At the CIS website, Oliver Marc Hartwich makes the point that the idea that sending profits overseas is somehow bad for the local economy is "just a protectionist fallacy". He writes,