5.2  Deepening FDI links with the global technological leaders

As shown in figure 1, the stock of in-bound FDI into New Zealand grew steadily between 1995 and 1998, before levelling off at above NZ$ 60 billion and then reduced to around NZ$ 53 billion in 2001, 2002 and 2003. FDI can be motivated by the availability of location bound resources or assets; by access to a growing local economy; or by the cost advantages from setting up a subsidiary to produce either for local sales or for export.

Figure 1 – Stock of inbound FDI, New Zealand

Source: Statistics New Zealand

Host countries associate FDI with many benefits: a larger capital stock, technology transfer, and more competitive markets. There may be knowledge spillovers if a local firm copies the technology used by the foreigner. Another spillover takes place if competition forces local firms to search for new, more efficient technologies. A transfer of technology is possible through the training of local employees, which may spillover as the employees move to other firms, or set up their own businesses. The empirical evidence suggests that there are spillovers from FDI. That is, FDI contributes to productivity and income growth in host countries beyond what would be triggered by additional domestic investment alone, but that these spillover effects appear to be small (Keller forthcoming). This result is not totally surprising. Multinational firms choose to operate through a fully-owned subsidiary rather than through joint ventures or technology licensing because FDI helps keep private the returns of technology internal to the multinational firm.

In deciding which countries should be the focus for deeper FDI relationships, the criteria are the closeness of the country to the global technological frontier, the size of the country, and the rate that technology diffuses from that country to New Zealand as proxied by distance and existing trade and FDI links. The size of the country is a factor because the largest OECD countries account for most of global R&D and they are the home of most multinational companies (MNCs). It is well known that the R&D of MNCs is concentrated in a few home countries, unlike their investment and production activities which are spread across the globe. Since domestic firms are likely to have better knowledge and access to domestic markets, a MNC that is entering a new market abroad must have some compensating advantages. It seems likely that the MNC will enjoy advantages derived from superior management skills and technology, economies of scale, and better access to international markets. Multinationals supply a package of needed resources including management experience, entrepreneurial abilities, and technology skills which can then be transferred to their local counterparts by means of training programmes and the process of learning by doing. The larger the FDI source country, the greater the diversity and specialisation of companies in that country. This greater diversity and specialisation increases the chances that a foreign investor will have the expertise to identify unnoticed and under-valued projects in New Zealand. This abundance of intangible capital in specialised industries in FDI source countries, which generates superior expertise in screening investments, enhances FDI flows and makes for a more efficient and sophisticated utilisation of capital in New Zealand.

Figure 2 – Stock of inbound FDI, New Zealand, by source-country

Source: Statistics New Zealand

As can be seen from figures 2 and 3, most of the inbound-FDI stock in New Zealand divides by source between Australia (37%), the UK (14%), the US (11%) and the Netherlands (10%). Slightly over a sixth of the stock of inbound FDI is not identified by Statistics New Zealand by source-country. Japan, the rest of APEC, and the rest of the EU, are all small direct investors into New Zealand.

Figure 3 – Total stock of FDI, New Zealand, by source-country

Source: Statistics New Zealand

Inbound FDI is highly internationalised by OECD standards (see figure 4). In the 1990s, compared to New Zealand, only Belgium and Ireland had a higher stock of inbound-FDI as a percentage of GDP. New Zealand’s FDI stock as a percentage of GDP is nearly twice that of Australia and Canada and three times the Nordic countries (see figure 4).

Figure 4 – Inward FDI positions in OECD countries, 1980s and 1990s

Figures 2 to 4 suggest that New Zealand is highly internationalised in terms of inbound FDI but much of that internationalisation does not involve connecting with the G7. New Zealand is highly connected with Australia in terms of FDI. Although there are many areas of R&D excellence in Australia, New Zealand should look to deepen its FDI relationships with source countries that are closer to the global technological frontier.

The obvious first choice for a deeper FDI relationship is the USA. The USA is at the leading edge of the global technological frontier and is a major trading partner and foreign investor. Another candidate for a deeper FDI relationship is the UK. The UK is a significant trade and FDI partner of New Zealand (see figures 2 and 3). Distance might count against FDI from the UK but the extensive and long-standing trade and FDI relationship offsets this disadvantage. Japan is another country that should be considered. Japan is a major trading partner but Japanese FDI into New Zealand is low (see figures 2 and 3). Language is a barrier to technological diffusion from Japan via FDI but on the other hand, Japan is much closer to New Zealand in terms of distance than are the members of the European Union. Japan accounts for a major share of global R&D and it is a large source country for outward-bound FDI and MNCs. The final country that should be a focus for a deeper FDI relationship is Australia. Australia does not rate as highly as the G7 countries as a source of technology. On the other hand, Australia is New Zealand’s largest trading and FDI partner. Those links should be consolidated.

The countries that should be horizon countries for FDI linkages are Taiwan, Singapore, Hong Kong, Korea and China. Singapore and Hong Kong are major global financial centres. All five countries currently have moderately sized FDI in New Zealand. However, over the next 10 to 20 years, all five of these countries will grow in importance in the global economy as major sources of outward FDI. New Zealand will need to deepen its FDI links and promotional efforts with these five horizon countries—these five major new global sources of FDI and MNC expertise—over the same time frame.