Opinion: Why the Overseas Investment Office should be abolished

If you want to sell your farm to a foreigner, you must get permission from the Overseas Investment Office (OIO). They usually give it. Indeed, they decline only 1.5% of requests.

According to Stuart Nash, the new Labour MP for Napier, they should decline more, because allowing foreigners to take profits out of the country is a “dead end street."

Last week William Rolleston, president of the Federated Farmers expressed agreement with Mr Nash.  

Both are confused, as was David Cunliffe and many other politicians who peddled the same idea during the election campaign.

The value of a business depends on its expected future profits. The seller of a company is in effect swapping the profits he would have got over future years for a lump sum he gets today. The lump sum (the purchase price) represents the present value of the future profits.

When a foreigner buys a New Zealand business, all the expected future profits of the business come into the country in the purchase price. When the actual future profits then go out to the new owner overseas, there is no net loss.

In fact, the transaction must involve a net gain for New Zealand. By hypothesis, no New Zealander valued the future profits as high as the foreigner did. Otherwise the foreigner would not have been the highest bidder. So the amount any foreign purchaser pays for a farm or other business must exceed the present value of its future earnings to any New Zealander.

In other words, there must be a net gain to the country. And this gain is easily measured: it is the difference between what the foreigner paid and the highest bid from a Kiwi.

The economic confusion does not stop there. The Overseas Investment Act, which Mr Nash and Dr Rolleston wish to see enforced more rigorously, has a provision whose effect can only be to make New Zealand businesses less efficient. Specifically, it allows foreign purchases of a business on condition that the foreigner will increase the number of people employed by the firm.

But employment is a cost to New Zealand, not a benefit. This is obvious from the fact that you need to pay people to work. If working were a benefit, people would pay to do it.

The benefit provided by businesses are the goods and services they supply. The effort that goes into supplying them is the downside. People who can find ways of producing the same amount of stuff but with less labour enrich us.

Politicians and bureaucrats who demand that more labour go into any given level of output impoverish us.

The Overseas Investment Act also allows foreign ownership if the foreigner will sell more of the goods produced to other foreigners. This export condition is not as damaging as the inefficiency condition but it is bizarre nevertheless.

Trade is economically valuable, primarily because it allows for the division of labour and hence increases productivity. But it makes no difference if the trade crosses a national border.

Suppose the South Island seceded from New Zealand but that the pattern of trade within what was formerly New Zealand remained the same. Then the percentage of the output of both islands that is “exported” would instantly increase. But this fact would make no one in either island any better off.

In other words, national borders are economically irrelevant.

Unless, of course, politicians erect barriers at them, as Mr Nash wishes to do when it comes to investment by foreigners. And then they can only harm us.

Reconsider Mr Nash’s policy in the light of my imagined secession of the South Island from New Zealand. Then Mr Nash would take the view that South islanders would benefit if North Islanders were not allowed to buy farms or other “sensitive” assets in the South Island.

But if that would be true after the secession, why is it not already true? Why does Mr Nash not recommend barriers to investments that cross Cook Strait? Or why not prevent anyone from outside Napier investing in businesses there? After all, that would stop profits flowing out of Napier.

Mr Nash is right to complain about the OIO. But the problem is not a lack of zeal in enforcing the provisions of the Overseas Investment Act. The problem is its existence.

Jamie Whyte is leader of the ACT Party