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New Zealand's current situation

How open?

0
Number of business-only foreign investment applications declined since 1984
Source: Overseas Investment Office

No formal barriers exist to debt and portfolio investment, and formal barriers to FDI are low. Investment screening only occurs for purchases involving significant business assets, sensitive land, or fishing quota. No business-only applications have been declined since 1984 and, from 2002 to 2008, 33 applications involving sensitive land were declined (3.5%). Nonetheless, New Zealand does not always compare favourably with comparator countries, as summarised in Table 1.

Restrictions to foreign ownership apply in certain sectors. Some restrictions apply in telecommunications and air transportation. For example, foreign ownership in Telecom can only go above 49.9% with the approval of the Minister of Finance. Foreign-owned banks are required to be locally incorporated.

Almost no incentives are available for FDI. Investment NZ works with offshore investors and New Zealand businesses to facilitate investment. Small amounts of funding are available to conduct feasibility studies of possible investments and pre-investment site visits.

33
Number of foreign investment applications involving sensitive land declined from 2002-2008
Source: Overseas Investment Office

International agreements tend to focus on protecting investors rather than market access. Agreements through the WTO and bilateral FTAs tend to focus on investor protection mechanisms such as national treatment (treating foreign firms equally as domestic firms) and avenues to resolve disputes, such as expropriation claims, between investors and states, rather than liberalising market access (by increasing screening thresholds, for example). Non-binding agreements between OECD countries and APEC promote general liberalisation of capital flows.

How well connected?

New Zealand is highly dependent on foreign capital. New Zealand is among the most indebted in OECD, with a net international investment position of -87% of GDP. FDI makes up 34% of the total stock of foreign investment in New Zealand, with the remainder portfolio and other investment (predominantly made up of debt).[61]

The stock of FDI is quite high compared internationally. The stock of FDI is 53% of GDP, higher than Australia and the UK, but lower than Ireland. Explanations for the high level include the large-scale privatisations of the late 1980s and early 1990s, long-standing international confidence in the New Zealand economy, and relatively low saving rates.

About half FDI comes from Australia. 54% of the stock of FDI is from Australia, with the next highest the US (12%) and the Netherlands (5%).

‘Greenfield' investment is about average. When adjusted for population size, the number of greenfield projects in New Zealand is around the OECD average.

Apparently less ‘footloose' FDI comes to New Zealand. Most major industries have FDI, but a larger share occurs in sectors servicing the domestic market (e.g. banking, retail/wholesale, communications/media) as opposed to ‘footloose' FDI (e.g. manufacturing or research), suggesting largely market-seeking FDI rather than efficiency-seeking FDI.

Outward direct investment - % of GDP, 2005
Outward direct investment - % of GDP, 2005.
Source:  OECD

FDI occurs mainly in large firms. Around 24% of firms with more than 100 FTEs have majority foreign-ownership, compared with around 13% for firms with 50-100 FTEs.

ODI is among the lowest in the OECD. Direct investment overseas makes up 15% of all outward investment, or 12% of GDP. This level of ODI is about the half the OECD average. The main destinations for investment abroad are Australia, USA, and the UK. Over half (55%) of New Zealand’s ODI is in Australia.

Potential adverse consequences

High external indebtedness can contribute to macroeconomic risk. High indebtedness can contribute to a higher cost of capital and a macroeconomic risk of a sudden change in sentiment. The best policy response is likely to be to encourage domestic saving rather than restricting foreign ownership. Policies that support saving include financial literacy, low capital taxation, saving schemes, and saving incentives.

Concern about ‘profits going offshore' has a weak economic basis. Greater foreign ownership increases the gap between GDP (economic activity that occurs in New Zealand) and GNI (income accrued to New Zealanders).[62] However, the gap does not matter in itself; rather, the question is whether the gap results in lower long-term real incomes. For the reasons discussed above, foreign investment brings a number of benefits that are much more likely to increase long-term real incomes.

Firms ‘not acting in New Zealand's best interest' seems unlikely to be a foreign-ownership specific problem. The proposition is that foreign ownership could result in business decisions that are detrimental to New Zealand, compared with decisions a domestically-owned firm would make. In relation to longer-term growth strategies, it seems hard to see why foreign owners would not take profitable opportunities that domestic owners would, yet are not prepared to sell to domestic owners who can see such opportunities. There may be a narrow set of specific cases where some restrictions could be desirable - the requirement of local incorporation for banks perhaps provides a good example.[63]

24%
Proportion of New Zealand firms with 100+ FTEs that have majority foreign ownership
Source: Statistics New Zealand

Foreign ownership probably does increase the chances of relocation. Some evidence suggests foreign ownership will, over time, make a company more likely to relocate offshore.[64] Whether this is good or bad for New Zealand depends on what replaces the activity: are the resources reallocated to lower value activities or lost offshore, or is the expertise gained used in new higher value activities onshore? Navman perhaps represents an example of the latter, where an innovative business is sold, but some of the expertise (in the form of human capital) has remained in New Zealand. The first set of policy responses would focus on the general business environment and removing any biases that may incentivise relocation offshore (such as double taxation of dividends for offshore shareholders). Beyond that, policy responses should target activities or skills, rather than particular firms.

Land is important to the Kiwi psyche, but targeting usage is likely to be more effective. Concerns over land ownership seem more likely to be related to the use of the land, such as restricting walking access, rather than ownership per se. These concerns seem to be valid regardless of the nationality of the owner: there is no reason to think foreign owners would be any ‘worse' at (say) allowing walking access than domestic owners. Therefore the most effective policy response would be to focus on (say) walking access directly and across the board.

Security concerns are best addressed through international standards and guidelines. The proposition is made that foreign investment may have ulterior motives that could jeopardise national interests, such as acting non-commercially to achieve state-motivated objectives. International standards for money laundering and counter terrorism and international best-practice guidelines for sovereign wealth funds are the first-best policy response.

Notes

  • [61]Data in this and the next two paragraphs is from Statistics New Zealand (2008c).
  • [62]New Zealand is among the groups of countries where the level of GNI is somewhat lower than GDP, but it does not significantly change the relative ranking when compared with other OECD countries. The difference between New Zealand’s GDP and GNI growth over the last twenty years is very small.
  • [63]The argument was that Australian banks wouldn’t necessarily act in New Zealand’s best interests in the event of a financial crisis: parent banks could drain liquidity in a crisis situation to meet demands at the core.
  • [64]Sweet and Nash (2007) investigated location decisions, and found a number of factors that can influence such decisions, including centre of business gravity, global supply chains, and distance-sensitive market data. Foreign ownership was also found as one potential factor.
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