By Alex Tarrant

New Zealand needs to turn around a lack of investment abroad to help correct the economy's external imbalances, Finance Minister Bill English says.

Speaking to a Victoria University-Peking University Conference on Contemporary China, English said that while New Zealand was a recipient of foreign investment in line with the OECD average, New Zealanders invested overseas at well below average rates.

English told media after his speech that the gap between New Zealand's outward and inward foreign investment was "one of the things that creates an imbalance between New Zealand and the rest of the world."

The government wanted more New Zealand businesses to follow the lead of the Super Fund and KiwiSaver funds which were investing in overseas equity markets, he said.

Current account deficit dominated by income deficit

New Zealand's current account deficit - the shortfall between its earnings from the rest of the world and what the rest of the world earns from New Zealand - has been dominated by an income deficit as foreign investment in New Zealand earns more than New Zealand investment abroad.

The latest figures from Statistics New Zealand for the year to March 2012 show the country's NZ$9.74 billion current account deficit over the year was dominated by a NZ$10.77 billion income deficit.

To show how much the income deficit dominates New Zealand's transfers with the rest of the world, in the year to March 2012 it combined with a NZ$2.74 billion goods surplus, a NZ$1.25 billion services deficit, and  a NZ$0.46 billion current transfers deficit to give that current account deficit.

Encouraging signs

Despite the low level of New Zealand investment abroad, there were some encouraging recent examples of New Zealand firms investing overseas, particularly in China, English said.

"Fonterra has significant plans to increase the number of farms in China, a roughly NZ$50 million investment per farm. High-tech firm Rakon opened a US$35 million factory in Chengdu last year," he said.

"Real estate firm Richina has substantial holdings in both the commercial and residential sectors in China, with operations in both New Zealand and China. It also has plans to distribute a wide range of branded consumer products from different Kiwi suppliers."

FDI good for NZ

Despite bemoaning the lack of New Zealand investment abroad, English used the majority of his speech reiterating the benefits of foreign direct investment into New Zealand.

He used examples like Australian investment supporting the emergence of New Zealand's wine industry since the 1980s, and Japanese investment in the 1990s which helped introduce more value-added production and efficiency to the forestry industry.

"As a small country, we naturally rely on FDI to help us achieve economies of scale, and for access to ideas and consumer markets. We do not have the large stock of capital which older and wealthier countries have," English said.

Foreign direct investment had benefits for New Zealand in three broad areas: First, as a source of capital to supplement New Zealand’s domestic savings; Second, as a driver of growth in wages, employment and output; And third, for the transmission of technology, skills and know-how to New Zealand and for improving connections to valuable international markets.

New Zealand simply did not save enough to cover its investment needs, hence the current account deficit.

"Foreign investment can bring benefits that foreign borrowing does not. These benefits can be of particular value to a small economy, and include: FDI provides a stronger buffer against economic shock because investment comes without the fixed interest payments of debt; FDI produces transfers of technology and know-how, and provides access to international markets," English said.

"In 2008, Treasury concluded that foreign capital flows into New Zealand lifted incomes by around NZ$3,800 per worker between 1996 and 2006 in today’s prices, and lifted wealth by NZ$16,000 per person," he said.

"Foreign investors in New Zealand do take out some profits, but between 2006 and 2011 they have also reinvested about 25 per cent of their returns on equity back into New Zealand.

"New Zealanders interact with foreign-owned businesses every day. Over half of the companies larger than NZ$100 million in New Zealand have majority foreign ownership. Many of these companies are a familiar part of our national landscape, and provide Kiwis with a huge range of products and services. They are also among our largest employers. A recent study showed about a quarter of Aucklanders work for foreign owned companies," English said.

FDI, inward or outward, did not necessarily mean acquisition of full ownership by foreigners. In many cases it could take the form of a joint venture or partnership between New Zealand and foreign owners.

"And FDI is not a one shot deal. Businesses built up under foreign ownership can move or return to New Zealand ownership," English said, using the example of Shell petrol stations being bought by Z Energy (half owned by the Super Fund and Infratil.

If New Zealand could not access foreign investment the cost of capital would increase, constraining businesses’ ability to grow. That would reduce employment opportunities and household incomes, English said.

"Treasury has estimated that a permanent one percentage point change in interest rates (say, from 5 per cent to 6 per cent) would lower the level of GDP by about 2 per cent over a period of time. New Zealand’s standard of living would be lower without access to foreign investment," he said.

"FDI can have its costs. The quality of foreign investment matters, and New Zealanders care that investment goes to productive capital, and that it supports jobs and higher incomes. But fears of foreign ownership are frequently overstated. While it is true that the returns from foreign financing contribute to New Zealand’s current account deficit, it’s also important to consider the bigger picture," English said.

The outcome for the economy was positive overall when foreign capital raised worker productivity and national income increased by more than the return on the investment, he said.