Finance Minister Bill English asked the Treasury to investigate why foreign-owned firms earn higher returns on equity here than New Zealand-owned firms and was told that they invest in the best assets and bring skills and knowledge.
In advice released today, the Treasury said a higher return on equity was just one difference between foreign and domestic owned firms.
There is also evidence to show that foreign-owned firms have higher productivity and better management practices. Also, one study found that the labour productivity of US firms operating in the UK was 26% higher than local counterparts.
A 2002 survey-based study of New Zealand business practices and performance found that foreign-owned businesses outperformed New Zealand firms in most areas of the survey.
Addressing the issue of higher returns on equity, the Treasury said there could be several causes of disparity.
Foreign firms may invest in the best performing local firms if they have greater resources to buy them and are better at identifying them. They also have a lower cost of capital.
Multinational firms may bring new knowledge, technology or ways of operating to the recipient firm that increases productivity and returns.
This supported the case for reducing barriers to foreign direct investment.
"Our initial view is that the most plausible explanations are the ability of foreign investors to invest into the best performing local firms and the productivity improving techniques they bring as multinational firms," the Treasury said.
The report notes foreigners can invest because they have a specific advantage or "specific rent" in the recipient country that allows higher returns but this is not likely to be significant.
"The existence of location-specific rents might be used as an argument against reducing corporate tax rates on the grounds that reducing taxes would simply mean higher returns for those foreign owners.
"However, even if location specific rents are being earned, this is only one factor that could influence the setting of corporate tax rates."
Location-specific rents that may occur in certain sectors such as mining, can be addressed with targeted interventions such as royalty regimes.