NZ economy stifled by FDI rules

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 146^th.  
This compares very unfavourably with Australia’s 24th ranking and the UK’s 29^th 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.