A new report commissioned by business lobby group Business New Zealand slams NZ’s restrictions on Foreign Direct Investment (FDI).
The report, by the New Zealand Institute of Economic Research (NZIER), finds the restrictions, along with high corporate taxes and insufficient research and development, are obstacles to investment here.
It also says the most efficient companies get less support in NZ than they should.
The report aims to look at the impact of investment conditions on the NZ economy as a whole. On the question of overseas investment, the NZIER is blunt.
“New Zealand has the most restrictive FDI policy in the OECD,” the NZIER study says.
“New Zealand’s inward FDI as a percent of GDP has remained relatively constant (since 2005) whereas the OECD average has been increasing.”
The NZIER report quotes OECD studies that show FDI in NZ is generally lower than other counties anyway, and this shortfall is a barrier to both trade and the diffusion of technology and knowledge.
It says the benefits of investment need to be promoted and require “alignment with government objectives with clear policy tools and measures to achieve this.”
The NZIER document also has strong words to say about NZ’s corporate tax rates.
Not only are they higher than in most comparable countries, but they are out of kilter with income tax, and this has contributed to more investment in property and housing.
“The most recent OECD survey of New Zealand recommended reducing corporate taxes as a percentage of GDP from 5.1% to the OECD average of 3.1%,” the NZIER says.
“The joint aims of this tax cut would be to increase business investment and enhance the attractiveness of New Zealand for international investment.”
Offset lower corporate tax with a CGT
The report added the fiscal impact of lower corporate taxes could be offset by a capital gains tax. (Business NZ CEO Kirk Hope was one of three members of the Tax Working Group in 2019 with a minority view against implementing a comprehensive capital gains tax system).
The report has several good things to say about NZ alongside its criticism, saying this country is largely corruption free.
In addition, measures of human capital such as education and training are largely in line with the OECD average. However NZ workers earn less than the OECD average and work slightly longer hours.
In addition, NZ’s geographical isolation puts a burden on infrastructure and this problem is exacerbated by thin capital markets.
The report has a lot to say about so-called “frontier firms”. These are companies with the highest level of productivity in a country. They don't just help overcome NZ’s geographical isolation, but also provide an example to help small firms to catch up.
In NZ, frontier firms make up 8% of the time worked on business activities, but provide 29% of the value-added output. Yet they still lag well behind their overseas counterparts, with productivity levels half those of frontier firms in five Northern European countries.
The NZIER report brings this problem back to a lack of investment.
“International literature has suggested that limited access to capital can hinder firms' ability to invest in research and development, upgrade technology, and expand their operations,” the study says.
And it goes on to say that attracting more high quality FDI would help to fix this.
The report notes NZ has strong and reliable public institutions and robust competition policies. But it also says NZ has many problems as well and bringing investment levels closer to developed world norms would help fix many of them.
15 Comments
Its always an interesting subject; what's better off, a country without foreign investment but more ownership, or a country with foreign investment, that shows strong GDP and 'productivity' growth, but with the lion's share of the benefit going to foreign investors.
Ireland makes a good case for why just moving indicators may not be a good measure. On paper, they now have a very high GDP per capita, and high productivity, but this is all off the back of being a tax haven for multinationals in Europe to flock to. It doesnt look like the average Irish citizen is significantly better off for this, but the international businesses washing money through Ireland are much better off. So there's growth and increasing prosperity in Ireland, but it's not really Irish prosperity and growth.
Wonder if non residents buying residential properties is classified as foreign investment.
"The NZIER document also has strong words to say about NZ’s corporate tax rates. Not only are they higher than in most comparable countries, but they are out of kilter with income tax, and this has contributed to more investment in property and housing."
Maybe the Greens should ponder on this.
New Zealand’s inward FDI as a percent of GDP has remained relatively constant (since 2005)
FDI in industries other than financial services have not grown in dollar terms since 2005 actually (declined as a % of GDP).
Retained earnings of Aussie-owned banks and insurance companies in NZ are classified as "inward FDI" and has grown, pulling up NZ's entire FDI stock as a % of GDP.
Shows how FDI isn't the sign of success some globalists make it out to be.
Possible future state - “Business NZ felt that the best corporate tax rate was one that maximised value for shareholders and improved flexibility - they suggested 0% tax as a starting point, ideally supported with corporate welfare and generous kickbacks if possible.”
Lol, NZ real estate is already at the bottom of the swamp because all the cheap money sloshing around the global economy looked for a dumb place to come to rest, but yeh we need more of the same, that'll solve the problem. The chart on average corporate tax rates isn't as important as 'how' the tax is actually gathered (if at all). There should be a chart for the number of legal loopholes and corruption available in each jurisdiction too.
Its time we acknowledge that Aotearoa is just a bigger Pacific island nation than Samoa that sells kiwifruit instead of coconuts and performs Maori hakas to tourists instead of fire dancing. She'll be right. We'll be getting foreign aid from the UN to pay the welfare bill soon. Perhaps we can also claim that we're sinking due to climate change and get some more cash that way. Thanks Aunty Helen and Cindy!
If you want to actually invest in business then fine. Doing so just to invest in housing and farms is a bridge to nowhere fast for average kiwi"s. We should be just like Raro and Bali and ban mass land and housing purchase by overseas money.
Bring in a land tax with a much higher rate for overseas owners, and those whose tax structure is locate offshore.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.