NZ economy stifled by FDI rules

Bryce Wilkinson
Dr Oliver Hartwich

New Zealand’s relative attractiveness as an investment destination has slumped in the last 10-15 years according to Capital Doldrums: How Globalisation is Bypassing New Zealand, a report released by The New Zealand Initiative.

Done well, foreign direct investment (FDI) creates jobs, usefully supplements domestic savings and further enhances the host country’s competitiveness by introducing leading-edge technologies, management expertise and access to overseas markets and expertise.

New Zealand succeeded in attracting a great deal of FDI from the late 1980s to the mid-1990s, but FDI stock has since stagnated as a percentage of GDP, while continuing to surge upwards in many countries, including Australia, the UK, Hong Kong and Singapore, the report says

In 2000, the UN Conference on Trade and Development (UNCTAD) ranked New Zealand 73rd in the world for its ability to attract foreign direct investment; by 2011 that ranking had slumped to 146th.  
This compares very unfavourably with Australia’s 24th ranking and the UK’s 29th ranking. Hong Kong and Singapore have consistently ranked in the top five during this period.  Per capita Australia had attracted 45% more FDI than New Zealand by 2012.

“New Zealand is not excelling in its policy settings towards foreign investment,” The New Zealand Initiative executive director Oliver Hartwich says.

“While purporting to welcome foreign direct investment, our Overseas Investment Act actually tells investors that they are privileged if we allow them to invest in sensitive land, broadly defined.”  
The effects of New Zealand’s poor FDI regulatory settings include:

  • The signals New Zealand has given to overseas investors in the Crafar Farms and Auckland airport cases have not enhanced our image as a capital destination.   
  • The OOECD has assessed New Zealand’s regulatory regime for FDI to be one of the most restrictive in the world.
  • The New Zealand Treasury considers that there is credible anecdotal evidence that our regime is having a chilling effect on FDI.
  • Tellingly, outstanding Swedish retailer IKEA operates in Australia and Singapore, but not in New Zealand.
  • New Zealand tax rates applying to investors and savers are not as competitive as they could be, partly because government spending is far higher than it needs to be."

Clearly, given our small market size, if we are serious about getting New Zealanders’ income per capita back into the top half of the OECD, closing the income gap with Australia, or just holding our own in the world, we need to be serious about being internationally competitive for investors as well as for imports and exports,” says Dr Bryce Wilkinson, a senior research fellow at The New Zealand Initiative, who co-authored the report with Khyaati Acharya.

This report is the second of three that aims to promote public debate about New Zealand’s global links, including the contentious issues of foreign ownership and net external indebtedness.  The next report will focus on policy recommendations. 

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I don't buy the argument. Why is it that so much DFI in New Zealand has to involve the buying of farms, forests etc, but not the building of or the establishment of new factories and businesses that turn out products and services for export, such as that done by the Swiss multinational ABB in Napier?

Is land - farming, forestry and tourism - all we are to foreigner investors? Is that it, is that all we have to offer? Is that all they have to offer us, low skilled low-tech jobs in industries that we already do ourselves? Where's the value added economic benefit in that for us?

Why was it that the Irish were making Viagra for the world and not New Zealand? Why didn't Pfizer build its factory here? Glaxo started in New Zealand. Where is it now? A reflection of its crumbling ruin in Bunnythorpe no doubt.

If the argument is that the FDI rules aren't working because foreigners can't buy land in New Zealand as they use to, then I have to tell you, that's a very weak argument. We have the right to expect and demand a more sophisticated level of foreign investment into this country than the farms, forests, or the buying up of pre-existing businesses for the sole purpose of exporting their profits offshore, than we have in the past. New Zealand has to move out of the missionary position when dealing with foreign investment. The penny's got to drop.

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... A simple cost benefit analysis framework shows that any permanent government response to concerns about foreign ownership of land will impose a wide range of costs on all parts of the New Zealand economy, primarily through higher borrowing costs and the risk of retaliatory action by other governments. It is unlikely that any ‘feel good’ factor associated with limiting foreign investment will compensate New Zealanders for the ‘feel bad’ consequences of a lower standard of living. - See more at: http://nzier.org.nz/publications/in-defence-of-foreign-investment#sthash...

Taiwan announced stricter rules for investment projects by Chinese companies as President Ma Ying-jeou seeks to overcome lawmaker resistance to legislation that would boost economic ties with China. In new rules effective today, the Ministry of Economic Affairs’ Investment Commission, which vets proposals for China investments, said it won’t approve transactions deemed politically sensitive and will now require more Chinese-invested companies to report financial information, according to a commission statement yesterday. The new restrictions come as lawmakers prepare to consider a trade accord signed between Taiwan and China in June that would open up as many as 80 sectors, including banking, brokerages and e-commerce. ...
http://www.bloomberg.com/news/2013-11-13/taiwan-says-it-strengthened-rul...

Land ceilings: reining in land grabbers or dumbing down the debate?
GRAIN | 28 February 2013 | Against the grain
Over the last few years, governments, legislators and political elites in a number of countries have been trying to calm anger and debate over land grabbing by setting legal limits on foreign direct investment (FDI) in land. These limits take various forms. ...
New Zealand – large deals subject to review:
Any farmland purchase bigger that five hectares or worth more than NZ$ 100,000 (US$ 84,000) by a foreign investor must get clearance from the Overseas Investment Office. To get clearance, overseas investors have to meet various criteria, such as demonstrating relevant experience, good character and the value of the investment for New Zealand. This is not that hard to do, and approximately 10 percent of the country's farmland has already been sold off. With the recent rise in agribusiness investor interest from China and Gulf states in particular, there has been strong debate about how to control foreign investment in domestic farmland.
http://www.grain.org/article/entries/4655-land-ceilings-reining-in-land-... .

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I have read the report. Here is a mini-review.

This is a turgid analysis of foreign investment that covers mainly old ground. No new arguments or interesting discussion on foreign investment are presented. The authors rely on an exhaustive and exhausting array of mind-numbing statistics from credible sources, mainly the UN and OECD. Most readers will be well-challenged to wade through this collection of data in search of information.

Those readers in search of lively and concise arguments, even about foreign investment, will be sorely disappointed. The report appears to be written for bureaucrats and to support an ideological position of the New Zealand Initiative, a lobby group. General interest readers, and even readers with an interest in foreign investment, should avoid this tome, unless seeking a soporific.

The authors make a case that New Zealand has attracted less foreign investment since 1994 than other countries, particularly Singapore and Hong Kong, despite the fact that New Zealand has a high potential for attracting foreign investment relative to other countries. OK, no surprise and nothing new here.

The authors support another unsurprising and mundane assertion, that increased foreign investment will lead to increased economic performance. More old news.

The authors then assert that New Zealand's "policy settings" on foreign direct investment are wrong and if changed will lead to increased economic performance. By policy settings the authors apparently mean changing the Overseas Investment Act, the main piece of law governing foreign investment.

Inexplicably, the authors do not consider the possibility that even if the OIA was abolished and replaced with nothing - a totally unregulated regime - New Zealand may not attract any significant increase in foreign investment, certainly not compared to the likes of Singapore and Hong Kong.

Why might this be the case? Ummm, there's actually few choices for foreign investment in New Zealand that offer any real chance for meaningful return and that would link to improved economic performance. We have no significant opportunities for trans-national companies to invest here (low population, distance from market, mostly small existing NZ companies, etc), and our natural resources stock consists mainly of arable land, not minerals or energy.

That the authors do not make a case to show what foreign investments could be made here under an unregulated investment regime and how these investments would grow the economy is the biggest weakness in their report. It is the reason that most readers will be left more than a little unsatisfied after wading through interminable statistics and data.

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NZ's economy is based around land productivity and selling farms and airports is not bringing Hi tech investment into NZ. It also will not increase our incomes, just send more profit offshore. Our movie industry is a great example of where we need to direct investment. We have many hi-tech businesses that get sold off too early, and this is another place we need to work towards retaining the businesses in NZ.

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Does not help that NZTEs investment arm is clueless, foreign investors must be put off by them.

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NZ already has a high level of foreign ownership and a high level of borrowing from overseas compared to most other countries. For the past quarter of a century NZ has failed to balance the books in its trade with the rest of the world. The last thing we need is further erosion of what is left of kiwi-owned income generating assets. The "more FDI" solution is like the quacks that used to demand "bleeding the patient" for the already anaemic patient on the operating table.

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Why is it telling that IKEA are not here and how is having them here FDI? They are going to buy land to sell us some furniture made offshore. Thus decreasing the sales [& jobs] of locally made furniture or that sold by existing companies. How does this trumpeted FDI benefit the country and can anyone explain how the 'I' is an investment for anyone other than IKEA? They would not be investing in the country, they would be selling us stuff. I would assume that they simply can't make the financial model stack up - tough luck!

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Yep, we already know about the success of FDI in NZ. Take the plantation forests for example.....They were here before being sold offshore, so its not new investment. And the new owners aren't doing anything different/better with them than the previous NZ corporate owners were (CHH, FCL).

And now we've just read how little tax the TIMO's pay as a result of slick financial machinations. Ain't NZ winning big from that!

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Paralysis by analysis. Quoting a couple of very wealthy investors from offshore on the subject presents the bottom "...why would I invest in NZ when there are other much larger markets, closer to home as well, where I can get a much much bigger bang for my buck", or. "NZ investment provides nothing like the cash flow from other markets".

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