The case for attracting foreign investment

Dr Bryce Wilkinson
NZ Herald
10 August, 2023

New Zealand’s current legislative approach to overseas investment is a mess.

It is a mess because it does not focus on what is important – facilitating strong connections to the rest of the world while protecting New Zealand’s sovereignty.

New Zealand’s prosperity depends on its ability to access overseas markets, technologies, knowhow, and capital. We must compete for export markets and capital, and not just with Australia.

At the same time, governments must guard against threats of a public interest nature. Investments in New Zealand that are directly or indirectly under the control of potentially hostile governments are a concern. The debate overseas about allowing the Chinese firm Huawei to supply central technology for telecommunication networks illustrates that aspect.

Instead, our legal regime panders far too much to prejudice.

Of course, anti-foreigner prejudice will always exist. Different cultures likely have different social norms. That is true within a country too, but people can prefer the devil they know. Regardless of government, local communities will develop their own social norms.

But as the great US economist, Thomas Sowell wrote, prejudice is cheap, but discrimination based on prejudice is costly. Not to take the best offer because of prejudice hurts both parties.

The central proposition in this article is that the law should not discriminate between overseas and domestic investors. Both should be subject to the same New Zealand laws.

Undue legal discrimination is a threat to New Zealanders’ wellbeing. It needs to be kept in check.

But our law does discriminate unduly. The ban in 2018 on most foreigners buying existing houses in New Zealand illustrates this.

The government declared that it would not let New Zealanders be outbid by wealthier foreign buyers. Instead, it allowed them to be outbid by wealthier New Zealanders. A good part of a younger generation does not thank it for this.

This prejudiced measure did nothing to address the real problems – of absurdly high land values because of an artificial shortage of land for housing, and a Reserve Bank that preferred to be too loose rather than too tight with monetary policy.

Furthermore, the means of implementing the ban was absurd. It deemed all residential land to be ‘sensitive’. That designation invoked restrictive discriminatory measures. But to call all residential land sensitive makes that concept meaningless.

Moreover, the case for preventing a foreign buyer of land, lobsters, or linen from outbidding New Zealand buyers looks at only one side of the coin. The New Zealand seller who exports to the highest bidder, or accepts the highest bid for an asset, represents the other side of the coin.

Other things being equal, selling to the highest bidder makes sense, foreigner or not.

Of course, sellers should be free to sell to someone offering a lower price. That choice is a basic ownership right. The problem instead is with the case for a law that deprives a property owner of that right. A genuine national interest justification is a candidate for such a case, but our law is not based on such a case.

Nor is this issue a partisan one of workers-versus-capitalists. Capital and labour have a common interest in higher rewards through productivity.

Workers earn higher wages when their employer wraps more capital resources around  them. They can move more dirt with a bulldozer than with a shovel.

Overseas investment is a source of capital at a globally competitive cost. Productivity growth is the central source of sustainable income growth.

A 2008 New Zealand Treasury working paper explained how access to international capital increases prosperity. It even estimated that in New Zealand overseas borrowing between 1996 and 2006 had produced an average cumulative gain of $2,600 per worker and lifted New Zealanders’ national wealth by $14,000 per head in 2007 prices.

The fear of losing control makes no sense. Foreigners must comply with the law of the land, and Parliament determines the statute book. Immigration laws aim to keep out undesirable people, be they overseas investors or not.

Far from promoting strong connections with the rest of the world, our regime is centred on an absurd conceit – that overseas investors are privileged if we allow them to invest here.

We need them more than they need us. The rest of the world can afford to pass us by, but we must compete. We must be able to access markets and proprietary technologies. Overseas investors can help us do both.

Instead, of competing we arguably have the least competitive regime of the mainly prosperous 38-member countries of Paris-based OECD. Its secretariat assesses our regime to be the most restrictive of all these countries.

Other countries have been much more successful than New Zealand in attracting foreign capital, and many of them have become much more prosperous than us in a single lifetime.

Ireland is a case in point. We have much in common with its people institutions, language and culture. We should be willing to learn from its success.

Back in 1979, Ireland’s national income per capita was 22% below New Zealand’s. By 2021 Ireland’s was 68% higher. By 2021, Ireland had accumulated over 14 times more foreign direct investment per capita than New Zealand. In Ireland, even local councils seek foreign investors.

Ireland’s education system is much more geared than ours to teach the skills in technology that innovative high-tech firms want to employ. Its tax rates on foreign investment are much lower and it puts much more effort into attracting investment. Its regime is much less restrictive on the OECD’s measure.

None of this should be read as suggesting that openness to foreign investment is a silver bullet. It is not. But the stronger our connections with the rest of the world, the greater our capacity to make the most of what the world can offer.

We should be willing to learn from countries that have done a better job of attracting wealth-enhancing foreign investment.

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