Capital Markets Report: Opening the door to investment

Dr Oliver Hartwich
NZ Herald
13 June, 2024

For over a decade, we at The New Zealand Initiative have been staunch advocates for liberalising New Zealand’s foreign direct investment (FDI) regime. Our consistent message has been that New Zealand needs an influx of foreign capital to accelerate economic growth, and that our current FDI rules are overly restrictive, acting as a significant deterrent to potential investors.

New Zealand’s restrictive approach to FDI is starkly evident in our consistently poor performance on the OECD’s FDI Restrictiveness Index. New Zealand ranks as the most restrictive country for FDI among all OECD nations, a dubious distinction we have held for far too long. This ranking underscores the urgent need for reform if we are to become a more attractive destination for global capital.

To underscore this point, in 2023 we took our members on a fact-finding mission to Ireland, a small island nation that has revolutionised its economy largely by embracing foreign investment. Ireland’s welcoming approach to FDI has been instrumental in transforming it from one of Europe’s poorest countries to one of its most prosperous. It is a powerful example of what is possible when a country wholeheartedly embraces global capital.

So, when New Zealand’s new government signalled its intention to reform our FDI rules in the coalition agreement between National and ACT, we were cautiously optimistic. The agreement promised to amend the Overseas Investment Act to limit ministerial discretion to matters of national security and streamline decision-making. This suggested a principled shift towards a more open and efficient FDI regime.

However, the high-level nature of the commitment left us uncertain about the scope and depth of the proposed reforms. Would this be a narrow tweak to the rules around ministerial decisions, or the start of a more comprehensive overhaul of how we regulate foreign investment? The devil, as always, would be in the detail.

The recent announcement by Associate Finance Minister David Seymour has significantly bolstered our optimism. His new ministerial directive letter to the Overseas Investment Office (OIO) is a meaningful stride in the right direction.

By instructing the OIO to adopt a risk-based approach to assessing FDI applications, with the vast majority of low-risk applications to be processed within half the current timeframes, the government is sending a clear signal that New Zealand is serious about attracting foreign investment.

Crucially, the directive enshrines the principle that New Zealand welcomes overseas investment. This represents a profound shift from the status quo, recognising that foreign capital is crucial to raising productivity and living standards for all New Zealanders. In many of the world’s most successful economies, this is how foreign investment is treated. For New Zealand, however, this is a novel approach.

Equally important is the move to eliminate duplication between agencies in assessing FDI applications. Until now, investors have often faced a labyrinthine process, with multiple government bodies assessing the same issues.

The new directive strips away this red tape, focusing the OIO’s assessments on the core benefits and risks rather than second-guessing other regulators. This change alone could significantly reduce the compliance burden for investors and make the process much more efficient and predictable.

The shift to a risk-based approach is also a game-changer. By targeting the OIO’s resources at the small minority of complex, high-risk investments, the vast majority of benign deals can be approved much more quickly.

This is how it should be. There is no justification for subjecting a run-of-the-mill commercial property deal or a small farm purchase to the same level of scrutiny as infrastructure projects with national security concerns. Streamlining the process for low-risk investments will free up the OIO to focus on the cases that truly warrant deeper examination.

These process improvements should make a real difference for investors considering New Zealand. Navigating our FDI rules has often been cited as a major pain point, with the time, cost and uncertainty involved deterring many potential deals. By providing a clearer, faster path for low-risk investments, the government is effectively rolling out the welcome mat for global capital.

But perhaps the most exciting aspect of Minister Seymour’s announcement is that it heralds the start of a deeper re-imagining of New Zealand’s FDI settings. The minister has outlined an even more ambitious reform process, beginning with this directive letter, but culminating in a full rewrite of the Overseas Investment Act itself. This opens the door to addressing some of the more fundamental issues with our current regime that we identified in our 2014 report Open for Business.

That report, written by Dr Bryce Wilkinson, laid out a suite of recommendations to modernise New Zealand’s FDI settings, including narrowing the definition of sensitive land, replacing the screening process with a notification regime, abolishing discriminatory tests for foreign investors, and better aligning our tax settings. While the Minister’s announcement is light on specifics, the fact that comprehensive legislative reform is on the agenda suggests these deeper changes are now genuinely in play.

Of course, we must be realistic. Liberalising FDI rules can be politically contentious, and public opinion may constrain how far and fast the government can move. The reforms may end up being more incremental than the wholesale shift we have long advocated. And some problematic features of the current system, such as the broad definition of sensitive land, may prove stubborn to change.

But the direction of travel is unmistakably positive. By signalling a clear welcome to foreign investment, slashing red tape for low-risk deals, and putting the Overseas Investment Act itself on the table for reform, the government has laid the groundwork for a more internationally competitive FDI regime. For the first time in a long time, it feels like New Zealand is truly starting to open for business.

As the government fleshes out the next stages of the reform, we at The New Zealand Initiative will be watching closely and continuing to make the case for ambition. The example of Ireland shows what is possible when a country embraces foreign investment. With the right reforms, New Zealand too can reap the benefits of deeper global integration, including stronger growth, higher productivity, and better jobs.

The government has opened the door to this brighter future. Now it is time to step through it boldly and make New Zealand a magnet for innovation and investment. If the government maintains its reformist zeal, this liberalisation of our FDI rules could be its most powerful economic legacy. We have waited a long time for this moment – and we cannot wait to see it happen.

To read the full article on the NZ Herald website, click here.

Stay in the loop: Subscribe to updates