By Oliver Hartwich*
New Zealand affords itself the luxury of treating overseas investment as a privilege rather than as a necessary and desirable means of better integrating ourselves with the world, so as to make the most of what it has to offer.
That blinkered attitude permeates our regulatory regime, which the Organisation of Economic Co-operation and Development assesses to be more restrictive than the regimes of 47 other countries out of a total of 53 countries.
Before international investors can deploy their capital they must find out if their planned investment concerns assets deemed sensitive.
Prior approval is required for such investments and the definition of a sensitive asset is very broad indeed.
For example, every parcel of non-urban land greater than 5 hectares is deemed to be sensitive, no matter how swampy, erosion prone, or barren, and perhaps 99% of New Zealand’s land cover is non-urban.
If their planned investment is deemed to be in a sensitive asset we absurdly subject foreign investors to tests of character, relevant business experience and acumen and financial commitment.
These are not tests that politicians are known for applying to themselves when investing taxpayers’ money, and neither are they tests that apply to local investors.
Regardless, one would have thought that the intention to invest real money buying the asset in question was in itself proof of financial commitment.
As the Treasury has repeatedly pointed out, if the concern is with how the asset might be used, then this is a use question, not an ownership question, and all overseas investors must comply with exactly the same rules and regulations that apply to any asset use in New Zealand anyway.
Harming New Zealand
Our regime is at its most absurd when the investment is in so-called sensitive land and the investor does not intend to live in New Zealand indefinitely. In this case, the law requires the relevant minister or ministers to be satisfied that the overseas investment will benefit New Zealand. The catch is that the primary benefit – the sale proceeds to a New Zealand vendor, are not counted as a benefit. Yet, if securing that benefit was not the prime reason for selling, what was?
This regime is not only bureaucratic overkill; it actually harms New Zealand.
The world’s best companies and innovators do not have to invest in New Zealand. If we put hurdles in their way, they can simply shrug their shoulders and invest elsewhere. That makes our international links weaker, our assets worth less, and our country more of a global backwater. This is the core message of our newly released report Open for Business – Removing the barriers to international investment.
In very limited, particular cases there may be good reasons to be careful about foreign investment, but reasons based on emotional, anti-foreigner sentiment do not make the cut.
After all, most New Zealanders are the descendants of immigrants.
National security issues are widely regarded internationally as a good reason, yet New Zealand’s regulatory regime has little or nothing to do with national security.
Reciprocity is a further reason for why the Overseas Investment Act needs to be reformed. Few would want to see New Zealanders treated unfairly when trying to buy a property or business overseas, so why do the same at home?
We are hypocritically applying double-standards when we believe we should be freely able to invest overseas, yet put obstacles in foreign investors’ ways.
As we highlighted in our previous report Capital Doldrums, New Zealand also stands out unfavourably internationally for the slump in its ranking for investment attractiveness.
A threat to living standards
A regime that is hostile to investment is a threat to New Zealanders’ future living standards.
Our standard of living depends on being competitive in world markets for goods and capital. We can exploit economies of scale through world trade, and we can maintain competitiveness and improve productivity if we continually tap into the technology and expertise of the world’s best firms. If we do that well, New Zealanders can enjoy the best the world has to offer and great job prospects – without emigrating.
Certainly, there is no case for gloom. We rank very highly on some measures of international competitiveness, and we are still attracting overseas investors. A Treasury working paper has estimated that imported capital between 1996 and 2006 cumulatively raised our incomes by $2,600 per worker and wealth per capita by $14,000 in 2007 prices.
Nevertheless, we need to excel in policy settings across the board if we are to offset the disadvantages of size and distance.
In our new report, we examine New Zealand’s regime in considerable depth, drawing heavily on Treasury’s far-ranging review of the regime’s shortcomings and policy options in 2009–10. The picture that emerges from their and our research is a disturbing anti-investment bias in our legislation – without actually offering any good public policy reasons for its main features.
After more than two years of research on this issue, our conclusion is this: New Zealand’s regime represents a muddled, overly bureaucratic response to an ill-identified problem.
We believe that the starting presumption for a fit-for-purpose regime should be that asset transactions between a willing buyer and a willing seller should proceed unless there is a good public interest reason otherwise.
If an otherwise legitimate transaction is to be stopped for the benefit of the public at large, the costs of achieving that benefit should not fall unfairly or unduly on the asset owner. This means respecting the would-be vendor’s property rights and addressing the issue of compensation, if appropriate.
We believe that the onus of proof for keeping our highly regulated FDI regime is on those who want to keep it.
If other countries can do well with much lower levels of regulation, we are also capable of doing the same.
This means that we should be treating domestic and foreign direct investors the same – and we should be treating foreign investors in the same way we wish to be treated as investors abroad.
New Zealand should be open for business. We need to remove the barriers to foreign investors. We have nothing to lose from such openness but much to gain.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative. The Initiative’s new report Open for Business – Removing the barriers to international investment is available at www.nzinitiative.org.nz.