David Hargreaves is not impressed with the Government's new 'investment attraction strategy'

David Hargreaves is not impressed with the Government's new 'investment attraction strategy'

By David Hargreaves

Another week, another Government strategy.

It is always difficult to work out how seriously the launching of yet another Crown-led, 'into-the-future' style vision document should be taken.

Mr Sceptical here has long-since been of the view that Ministers actually gauge the success of these strategy documents by the number of photo-opportunities they provide for the Minister in question. Minister talking to local government officials. Minister opening new resource centre. Minister hanging upside down from a bungy chord, etc, etc.

But I choose to take anything sponsored by the Minister of Everything Steven Joyce relatively seriously since he is this Government's No1 go-to guy. Things he pushes tend to happen.

So, what then to make of the new NZ Investment Attraction Strategy, apart from the achingly obvious need for a more snappy title?

As Interest.co has previously reported, here and here, the new (at this stage draft) strategy has these three aims:

  • The attraction of high-quality foreign direct investment in areas of competitiveness for New Zealand;
  • The attraction of overseas investment in research and development, especially encouraging multinational corporations to locate their R&D activity in New Zealand; and
  • Expanding New Zealand’s pool of smart capital by attracting individual investors and entrepreneurs to New Zealand. 

More specifically the targets within those aims (in same order as above) are:

  • Facilitating investments with a potential direct economic impact of $5 billion over three years;
  • Attracting at least 10 new international companies to do research and development work here over the next five years; and
  • Increasing the amount of capital investor and entrepreneur migrants bring to NZ from $3.5 billion to $7 billion over three years.

I don't have much to say about the first target, since it looks pretty nebulous both in terms of how you might go about achieving it and, crucially, how the success of the aim/target might actually be measured. Consider those economic impact reports that are furnished whenever feel-good expenditure such as that on the recent cricket world cup is incurred. These reports always leave the question in my mind as to just how the ascribed benefits can be directly sheeted back to the event in question. Did 30,000 people buying popcorn on this day really pump $12 million into the economy? Wouldn't have a clue. Such things come back to the perennial "how long is a piece of string" question.

Courting the rich

Okay, leaping in quixotic fashion to the third aim/target, attracting wealthy investors, I have to say I'm extremely dubious of this particular strategy. The theory sounds good. Get Johnny Foreigner-Moneybags to come here and then set up a business, which will thrive and employ multitudes of Kiwis.

I confess, I'm not sure what qualitative work has been done in following up on high net worth individuals (well, we know what Kim Dotcom's been doing, but he's just one) and what they do with their money once they are let into the country. But it seems to me that it is a bit of a leap in faith to think that someone who has built up a successful business in another country will then move here and pump large amounts of what they earned previously into a new venture in this country. And be able to succeed.

The other point is, just because someone's rich, doesn't mean they are entrepreneurial. A lot of wealth and businesses are inherited. There's nothing to say that someone who owns a large business offshore is going to be able to successfully start one here, because their business overseas might be going well despite them, not because of them!

It seems more likely to me that the preferred course of action for any of these high worth individuals that might be attracted here would be to pump money into existing assets - and yes, that means particularly property - and to hold these as passive investments, IE not generating a heck of a lot of a value for the economy. Plus, there's always the question around how much of the money made by such individuals actually stays here, and how much might end up back in the investors' country of origin.

National shows its colours

Transplanting rich people here is undoubtedly a quintessentially National Party way of doing things, but I would need to see compelling proof that such a strategy wouldn't just lead to such negatives as even more pressure on Auckland property prices and leaving Kiwis out in the cold.

It is very much a top-down strategy. It implies the kind of flawed, 'trickle down' thinking that was espoused (ironically by the Labour Party) in the 1980s. The reality is that the rich are very good at holding on to their money - not at spreading the love. There's no reason to think that transplanting a load more squillionaires into Parnell would see the wealth shared out.

Surely, if there is a real benefit to be found in using migration, it would be in identifying talent, not money. How about if you were able to bring in a load of early-twenties versions of Trade Me founder Sam Morgan? Yes, people with big ideas. In the modern economy businesses can go from being worth nothing to billions in next-to-no time. Imagine if we could harbour creation of another handful of Trade Me-type successes? How good would that be?

The real trick would be how to identify these people with great ideas. But, look, we can do whatever we want with our immigration policies. Why not have a very pro-active interview and screening process and attempt to identify (preferably young people) who are possessed of real entrepreneurial flair? I think there would be far more merit in such an approach.

NZ, the R&D surrogate

Okay, hopping back to aim/target number two, because this is the one I wanted to finish on, this just seems, frankly, bizarre.

Figures compiled by the OECD suggest that as a nation we are not exactly a star when it comes to spending on research and development. Apparently our levels of Government contribution are pretty good, but we lag in business spending.

I've got to say, at first flush this proposed initiative by the Government looks like a rather cute scheme to get our business spending on R&D figures looking better. But where would be the real benefits to the country?

You invite multi-national companies into the country to do R&D here. Okay, there is an employment kick-back and the potential of Kiwis learning new skills. But there's nothing in the draft proposals that suggest New Zealand would get even a small share of the intellectual property that's ultimately created. No, it appears this would  be sucked out of the country just as soon as the multi-national is good and ready.

It's like being a surrogate mother. This country goes through the difficult gestation period and then the 'child' is handed over for someone else to raise, nourish and grow.

It's all IP

The new economy is all about intellectual property, surely.

So, Is this new strategy really how we want to sell ourselves as a country? "Here, you come and develop ways of making yourselves very rich in our country and then you can clear off when you've finished using us." Bad plan.

We need to be creating that intellectual property ourselves, for ourselves. And if the Government can't think of ways in which it can encourage that, it would be better off butting out altogether.

So, that's this week's strategy. I give the Government about 1.5 out of 10 for this effort.

As a country we are still looking for a broad strategy that clearly defines an identity and a place in the world for New Zealand moving into the future. We need one. Badly.

Regrettably, the search goes on...

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Though a govt report but behind it, it is all garbage recycled some many times from private consultants -- KPMG, Delloit, EY, PwC etc. I may miss some local ones.

Though is called a strategy report, there is nothing on how to achieve otherwise NZ's econ rank among OECD countries would not decline consistently.

AUS and NZ are called LUCKY countries so may be better to keep it that way.

Do you know of any documented efforts to measure the success of previous strategies?

Like - what has been the net-success of the High Net Worth Migrant Visa scheme

Remember Dong Hua Liu whose claim to fame was the proprietorship of a cement factory in China - has he applied that know-how and skill here in NZ - what has he contributed since arriving here in NZ? - any exports? - how many locals has he employed? - a net plus - or a net negative

I think he was on the Fox-Hunt list from the police department in China.

Wish he would start a cement factory in NZ and challenge our present supply duopoly that charges ridiculous prices for cement.

but would that help? Or would it make it a three horse town with phat prices, or just crash the entire value out of that market until we have low quality product and a fight for wage/yield in that market.

Surely rather than importing talent if effort was made so that there was a space and resources in NZ for a NZ company to grow in that space (which it should if the margins are good) then at least any devaluation would return to NZ and any cartel profits also get spent back into NZ.
If we encourage such NZ funded and owned business growth it wouldn't be long before every politician and mayor would be proudly towing around their favourite concrete mixer ;)

Same old lazy cargo cult mentality. Always waiting for someone else to solve our problems for us rather than taking responsibility for our selves. In this lazy process we give the cream to others and accept the crumbs.

Exactly! I heard a few local economists making fun of the Melanesian people for their "delusional" hope that the American's will be back delivering prosperity to the islands from the sky, but how are we better?

How do we reverse it though?

What room is there to move?

We need consumers who can afford to buy the product (available disposable - and our disposable-to-debt ratio is already going unpleasantly).
We need businesses that can pay those consumers and pay down their debts - and consumers who aren't willing to hock up consumable rubbish (or pay too much for internet and electricity ;) )

But that's a catch-22. Where is the money coming from to pay those employees, without the pay how can consumers get real disposable income (without going further into debt*). How do we increase disposable while reducing costs to businesses - no point spending it from government if it has to be borrowed and then clawed back through taxes.

IMO reduce the most basic cost of survival (as opposed to "living"). That means some services that are beyond our means may have to move to a pay-per-view model.
And it seems like credit limits might have to be put into place to decrease the inflation effect from private invented money especially for luxuries (in order to reduce the "low credit" ability for low income people to over-bid their demand position - ie it allows luxury prices to be higher than the current money and economic position allows, creating higher demand than NZ can afford to pay. Dropping the low credit means luxury prices either must reduce margin or deal with the lower volume that NZ can currently afford with it's debt level.) Otherwise known as budgetting yourself a set allowance.

* which means the current technique of recovering capital from property, by someone else going deeper into debt, must _not_ be the source of boom funding.

I agree cowboy, but we can't rely upon the conventional financial system nor corporate management to reverse the course, because the very core of their operational models is rotten to the core.

The Basel Accord banking system rules completely distort people's investment decision because it skews investment towards property investment. At the heart of the Basel Accord are bank capital risk weightings which are basically rules which shape banks' capital allocation. They determine how much capital bank's must hold in reserve to back a specific proportion of its asset portfolio (loans). Real Estate loans are preferred by banks, because the the Basel Accord considers them to be of less risk than business loans for example and therefore a bank is allowed to hold half the capital in reserve.

"The Accord can be summarised in a couple of pages. In essence, it states that for every $100 of loans, a bank should have at least $8 of capital, of which at least $4 must be permanent equity. Because loans secured over residential property were seen to be less risky than other loans, they only had to have 50% as much capital. Loans to banks from OECD countries were seen to be less risky still, so they only had to have 20% as much capital, and loans to governments denominated in their local currency 0%."
http://www.rbnz.govt.nz/research_and_publications/speeches/2001/0104984....

An Oxford University study comes to the conclusion that the Basel Accord itself partly responsible for the occurance of the Global Financial Crisis and I think they make a good case.

"According to conventional wisdom, the Basel II Accord – a set of capital adequacy standards for
international banks drawn up by a committee of G-10 supervisors – is essential if we are to avoid
another financial crisis. This paper argues that this conclusion is false: Basel II is not the solution to the crisis, but instead an underlying cause of it...Basel II’s failure, I argue, lies in regulatory cap
ture, ‘de facto control of the state and its regulatory agencies by the ‘regulated’ interests, enabling these interests to transfer wealth to themselves at the expense of society’. Large international banks were able to systematically manipulate outcomes in Basel II’s regulatory process to their advantage, at the expense of their smaller and emerging market competitors and, above all, systemic financial stability...The Committee’s focus expanded in 1980s, as American regulators looked for a way to share the regulatory burden imposed on its banks after the Latin American Debt Crisis of 1982. To prevent future bailouts of American banks, the United States Congress had pushed domestic regulatory agencies to enforce a capital measurement system that required a fixed proportion of capital to be held against all exposures on banks’ balance sheets. American banks subsequently complained that they faced a competitive disadvantage relative to less regulated foreign banks, in particular . "
http://www.globaleconomicgovernance.org/sites/geg/files/Lall_GEG%20WP%20...

Furthermore after the Federal Reserve chairman Paul Volcker deliberately sabotaged the United States economy, which then had cascading effects upon the wider global economy by hiking interest rates and increasing reserve ratios on commercial banks. It was never about reducing inflation, because the primary benefactors of high inflation rates were the American oil companies, Arab Sheiks, and Wall Street (What is now Saudi Aramco was still then 40% owned by Exxon-Mobil). Guess who also were the primary benefactors of high interest rates, but those who held billions of Petrodollars?

In fact in 1979 Paul Volcker flatly stated, ""We have argued here that asymmetric prudential oversight tends to follow asymmetric hegemonic power, in a world in which recurring financial crises set up market-entry and wealth-enhancing opportunities for financial firms headquartered in nations with hegemonic capacity. And recurrent financial crises combined with a loss of regulatory discipline lead, in the end, to a systemic breakdown beyond the rescue capacity of even the greatest monetary hegemon."[15] and "A controlled disintegration in the world economy is a legitimate object for the 1980s."[16]

http://www.ny.frb.org/research/quarterly_review/1978v3/v3n4article1.pdf
http://econospeak.blogspot.co.nz/2011/08/crisis-of-global-economy-was-it...

It was this climate of high interest rates which convinced American corporate executives that finance would perhaps be a more profitable enterprise than their core commercial activities, that of producing the products and goods demanded by consumers, and employed American workers who received generous benefits and reasonable pay for their efforts. This provided extremely pernicious for American workers, because as the focus moved from production to management of financial assets, a newly activist shareholder movement, especially mutual and pension fund owners demanded greater returns on their investment to preserve the wealth they held. Given that corporate accounting considers workers to be a variable cost which reduces ROI if not strictly controlled, they were the first casualties of "restructuring" and "downsizing" if sales and ROI dropped. The perversity is magnified when one considers inventory is considered an asset, interchangeably with cash. The result is finished and even unfinished goods are considered just as valuable as cash from real sales. Naturally and conveniently executive pay, salaries, and marketing were considered fixed overhead costs, so they were the last things to be addressed.

"Krippner is careful with definitions, and she’s interested in financialization – or as she puts it, “the growing importance of financial profits in the economy.” She first establishes that this is a real trend. Financialization is not just the rise of the mega-banks, or private equity firms, but the increasing importance of financial profits to non-financial firms. Ford and GM in 2006 made more money on auto lending than making cars, which is an example of financialization. It’s a clear trend, and one she establishes persuasively. Not only did American financial corporations take in 40% of all aggregate profits in 2006, but finance is a critical profit source for many other firms like GE."
http://www.nakedcapitalism.com/2014/02/matt-stoller-greta-krippners-capi...

"Without any direct link, all that could be measured with great confidence was the direct, easy to correlate part of the job: labor. It did not take much of a mathematician to figure out that, if all you really care about is the cost of performing one operation to a part, and you were allowed to make money by doing that single operation as cheaply as possible and then calling the partially complete product an asset, it would be cheaper to make them a bunch at a time.

It stood to reason that spreading set-up costs over many parts was cheaper than having to set-up for just a few even if it meant making more parts than you needed for a long time. It also made sense, if you could make enough parts all at once, to just make them cheaply, and then sort out the bad ones later."
http://mutualist.blogspot.co.nz/2008/06/book-review-rebirth-of-american....

"In an amazing, but not really very surprising, article in the Economist we learn that the big companies are boosting headquarters staff – “Some 44% of the firms had increased the headcount at HQ, whereas only 28% trimmed.”...

Why? “Globalisation meant that the mother ship had more far-flung operations to oversee; new digital technology made it easier, in theory, to centralise control and oversight; and, starting with America’s Sarbanes-Oxley act in 2002, deregulation gave way to a growing regulatory burden, bringing with it a bigger head-office compliance operation.”

In other words, Chasing cheap labor to backwater, third world countries makes it pretty hard to keep track of things, they think solution is massive ERP which drives massive staff and massive waste, and the corruption level in these countries is off the charts making it really hard to be sure the money is under control making a bunch of auditors and accountants necessary.

Just how massive is the 100% non-value adding waste at corporate headquarters in these companies? At P&G – a train wreck of a company if there ever was one in terms of having no clue as to what adds value in the eyes of customers and what doesn’t - 25¢ out of every dollar they charge for soap goes to pay the utter waste of headquarters. A third of the price of a can of Coke or Pepsi goes down the headquarters rat hole. L’Oréal – the big cosmetics company flushes 20% of the moany you pay them down the corporate drain – which makes them twice as lean as competitor Estée Lauder, which squanders nearly 40¢ on the dollar on expenses customers are wholly unwilling to cover.

The amazing part is that these numbers don’t even include advertising, and a common trait among the companies that relegate the value creation part of the business to anywhere people will work for a handful of peanuts a day is a belief in hyping the brand – creating the illusion of value is more important than the actual value "
http://blog.idatix.com/manufacturing-leadership/the-high-cost-of-cheap-l...

Right down to local/regional level. An example, here in Taranaki an ugly bottleneck at the northern entry/exit to New Plymouth at the Waiwhakaiho bridge. A risk in fact for emergency services as the detour is well inland. So we locals sit around moaning and waiting for central government to cough up some $$ to fix it. Well if there's that much benefit to the local economy anyway, why not just get on and start the work and fund it locally? Its the curse of central government where we send tax dollars down to Wellington and then wait for them to decide when and how much to send back to us....

David,

On R&D, the New Zealand government are already doing what you describe. Basically giving wholly owned subsidiaries of multinational companies, very generous tax credits to do "research" that they'll likely be doing anyway and reaping a windfall through elaborate tax dodging schemes to boot..

"Government programmes are supposed to be there to help the less fortunate - a safety net for the needy. But there are always a few who think they can play the system and take the rest of us for mugs. Millions of dollars goes to waste on these buggers while kids go hungry. It's a bloody disgrace.

Chalkie reckons it's time we stopped pussyfooting around with these companies and gave them a short, sharp shock."
http://www.stuff.co.nz/business/opinion-analysis/63107486/red-ink-and--c...

Not that the lackwits in Labour are any better, the most imaginative economic policy that those clowns can come up with is to dish out even greater handouts to the corporates.

"Labour campaigned at the last election on reintroducing the R&D tax credits National removed when it came into office. National favoured grants because of concerns that tax breaks lead to firms claiming back existing R&D spending rather than promoting new investment. Robertson said today the party would look at taking its proposed 12.5 percent tax cuts even further to get a significant long-term economic shift towards high-paying jobs."
http://www.nbr.co.nz/article/labour-vows-return-tax-credits-rd-spending-...

The R&D they only really subsidise foreign country investments, not just tax relief but actual extras. NZ companies don't really get the look in, and the NZ R&D rules didn't used to count R&D if the business you operated _sold_ R&D services - like the property, internal research was an expense, but doing external R&D for others was a trading activity for Gross Profit/Revenue.

Why not just auction off a 100 residency permits to the higher bidder each month and put the business tax rate down to 15%, the same as GST? I mean, why play about with limp and pathetic half measures.

Go for the try line, if it doesn't work then just change it back again. Why are they so weak?

Why would they cut it down to 100 each month.

Also things work much cleaner if the business rate and the top tier personal income rate (and trusts) are all the same. No reason for shifting things about then.

Maybe. My point is to try things that are likely to work, rather than things that are unlikely to. You can fine tune them later if they work, or reverse them if they don't.

I am just fed up with the current love of half measures and the ineffective.

Oh wow. I love this idea. Watching them get utterly fleeced in auctions would be comical.

they already do that it's called bribes. ask donghua liu or john banks

Exactly. Bring it into the light. Establish what a residency permit is really worth, rather than selling them off cheap. This is bigger than than selling off the electricity generators.