Foreign Investment

The New Zealand Initiative have published two pieces on foreign investment: “New Zealand’s Global Links: Foreign Ownership and the Status of New Zealand’s Net International Investment” and “Capital Doldrums: How Globalisation is Bypassing New Zealand“.

They are both excellent pieces of research that provide some interesting facts, including the conclusion that both inward and outward foreign direct investment flows have stagnated since about 1995.

There is also discussion of how New Zealand is actually quite strict when it comes to permitting foreign investment. We are actually one of the more restrictive countries in the OECD.

It doesn’t need to be this way. Bryan Caplan wrote about anti-foreign bias in The Myth of the Rational Voter, and it is a good phrase that describes how people under-estimate the benefits of interaction with foreigners.

Populism and economic ignorance go hand in hand. It is very good politics to criticise foreign investment. But how many people who complain about “foreigners buying everything up” are beneficiaries of globalisation in terms of how much utility they can obtain?

The prices of almost all goods and services that can be traded across borders easily are going down. The Reserve Bank thinks that most inflation pressure will come from non-tradable goods and services.

This makes sense – but a lot of New Zealanders are hesitant to accept how much they benefit from foreign investment. Overseas capital is basically a free lunch – in exchange for a lot of benefits that accrue to the host economy, profits and interest flow overseas.

New Zealand firms benefit from this when they invest overseas – and in the race to keep skilled people here and offer them opportunities – we can’t let anything stand in the way of making inward capital investment difficult.

Non-economists do not understand that investment needs to increase by several orders of magnitude to catch up to Australia and the countries policymakers dream about catching up to. It’s easier to get $1 billion from overseas investment than for New Zealand households and firms to stump up $1 billion in retained earnings/savings!

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