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Future outlook

Competition for capital will continue. Global financial flows have risen significantly in recent decades, and countries have become more open to foreign investment, creating increased competition for internationally mobile capital. In the short term, the financial crisis will squeeze the availability of capital, but longer term competitive pressures are unlikely to abate.

Capital will increasingly come from Asia. The large current account surpluses run by some Asian economies in recent years means that an increasing portion of global capital will come from Asia, particularly China.

General policy lessons

Policies that can be made unilaterally

Keep investment screening to a minimum, if at all. As a first best, New Zealand should not screen investment based solely on the fact that the investor is not a New Zealand citizen. Screening is not the best way to address concerns about foreign investment. As a second best, any screening regime should be as low cost as possible and provide certainty and predictability to investors.

Undertake limited promotion, but avoid direct incentives. Promotion offshore can raise the profile of New Zealand as an investment destination. The costs of direct incentives for FDI are, however, likely to outweigh any benefits.

Create a generally attractive business environment. An important part of investment decisions is the quality of the general business environment. There may be specific aspects that more directly affect the attractiveness to internationally mobile capital, such as taxation.

Lean against macroeconomic risk by encouraging saving. Use policies to encourage domestic saving and keep Crown debt at prudent levels.

Policies that require international engagement and agreement

Promote free capital flows in international forums. Use New Zealand's engagements with countries through forums such as APEC to encourage liberalisation over time.

Reduce additional costs of capital flows, such as trans-Tasman mutual recognition of tax imputation credits, and double tax agreements.

Figure 3: Summary of the main factors and policy settings that influence FDI
Figure 3: Summary of the main factors and policy settings that influence FDI.

Policy settings are organised by the different aspects that influence investment. Offshore, investment can be attracted through promotion or incentives. Attractiveness will be influenced by international agreements and country risk premium. Investment screening can add costs to the investment process. The most important factor that influences investment is the general attractiveness of the domestic business environment in creating high-quality investment opportunities. Trans-Tasman agreements play a particular role given the close economic relationship.

Table 1 – Indicators of openness to foreign investment: comparison with other countries
Index Ranking Criteria
OECD: FDI Regulatory Restrictiveness Index 29th out of 43 countries (2007) Equity, operational and screening restrictions on foreign investment.
Index of Economic Freedom: Investment Freedom 18th out of 157 countries (2008) The free flow of capital, especially foreign capital.
World Competitiveness Yearbook: International Investment 49th out of 55 countries (2008) Quantitative and qualitative information including stocks and flows of FDI, and perceptions of threats of the relocation of production, research and development and services abroad.
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