There seems to be a widely held view or suspicion in New Zealand that this country's real cost of capital is high, and that this obstructs investment and/or places New Zealand firms at a disadvantage to foreign competitors. Motivated by these concerns this paper examines the following questions:

• is the real cost of capital high in New Zealand by comparison with other countries?
• if it is high, what are the most plausible explanations for this? and
• what might be done to lower it?

The first two questions are concerned with 'high' in a relative sense, whereas the last question is consistent with 'high' in either a relative or absolute sense. To deal with the relative concerns, some foreign countries must be selected. Both Australia and the United States are selected for examination on the basis of being the most significant sources to New Zealand of foreign direct investment. This paper commences by estimating the cost of capital in each country, invoking widely used models and parameter estimates. The paper then considers whether the actual cost of capital may diverge from these calculations. In doing the latter, we consider two polar cases - one involving complete segmentation and the other complete integration of world equity markets. Explanations for these results are offered, followed by an inquiry into their policy implications.