They’re Thinking Big Again: What Is Wrong with Too Much Foreign Investment?

Listener 23 March 2002

Keywords Business & Finance; Growth & Innovation

When you choose a target, make sure it cannot distort your real objectives. Consider the man desperate to diet, who decided at New Years not to eat between meals. He kept strictly to his resolution. By the end of February he was eating his May 23rd dinner.

The Government has made a similar mistake when it said it aimed to return New Zealand to the top half of the OECD in GDP per capita terms. GDP (Gross Domestic Product) measures the total market production in a country, but the income from its production has to be shared between those who live there and the foreign investors who make investments in the country. The share that the locals receive is called ‘National Income’. (Clue: Domestic = ‘inside a country’s boundaries’; National = ‘of a country’s people’. The ‘gross’ refers to the inclusion of depreciation in the total.) In New Zealand National Income is about 93.5 percent of Domestic Production. In Ireland, with its substantially greater foreign investment and debt, the figure is closer to 84.0 percent. While Irish GDP per capita is greater than Britain’s, its National Income per head is less.

(There will be readers – and politicians – who would favour a broader goal that the economist’s National Income, which does not cover non-market activities, including non-material ones, nor the manner in which any prosperity is distributed. I am sympathetic to their concerns, but there is no internationally agreed quality measure which could be used as a target instead.)

The absurdity of the GDP based target, was nicely illustrated by the Boston Consulting Group’s report Building the Future: Using Foreign Direct Investment to Help Fuel New Zealand’s Economic Prosperity, released with the prime minister’s speech which opened parliament. The report is not a carefully thought through economic analysis, but more a public relations effort to get us to adopt a strategy of increasing FDI.

(The companion New Zealand Talent Initiative” by LEK consultants, is also spin. It advocates developing Auckland as ‘New Zealand’s global life style city’ but fails to define what it means. One is left wondering whether they hope that Auckland will catch up to Wellington’s arts, or Christchurch’s ambience, or perhaps they mean Bangkok’s congestion and Chicago’s crime. But at least they recognise Auckland. My copy of the FDI report has a cover map which omits the top third of the North Island.)

The Boston Group want to increase FDI from its current level of $4 billion in 2001 to near $11 billion in 2011. Unfortunately the report does not define what it means by FDI, for it is an even more tricky concept that GDP. For instance some of the data seems to include existing New Zealand firms sold off to foreigners, although behind the razzamatazz the report is primarily concerned with new (greenfield) businesses or significant extensions to existing ones.

I would have liked to have discussed the impact of the proposal on the economy, but the report’s economics is so vague it is not possible. I doubt the writers even thought about the effect of their proposed enormous increase in foreign investment spending. It is possible that the rest of the economy (that is New Zealander’s investment and consumption) would have to be held back to make possible this ‘Think Big’ FDI investment surge from the $4b to $11b a year.

So while the report claims that the FDI will add to GDP, it does not address whether it will add to National Income, or the prosperity of New Zealanders. Indeed the ominous recommendation that the taxpayer should spend money attracting (read that as ‘subsidising’) FDI could mean that New Zealanders may be worse off, if the additional growth in production and more goes to foreigners.

Nothing in this column implies that New Zealand should be opposed to all foreign direct investment. It can be a valuable element of a growth strategy, enabling the country to have technologies, expertise and overseas markets which would otherwise be inaccessible. New Zealand would be much poorer had our European migrants not also brought with them capital and technology. But our prosperity today is the consequence of what we did here with our initiative and our savings. Foreign investment has its place, but ultimately our prosperity depends on us.

We need to be cautious about foreign businesses whose only reason for coming here is the subsidies and tax incentives. We need to be selective about those we assist, expecting them to bring to something which will add to our prosperity. As numerous examples throughout the world show, that does not always happen. The report’s proposed Investment Promotion Agency could be especially dangerous if its remit is as enthusiastic and uncritical as the report’s.

Neither this report nor the ‘Talent’ one have been adopted as government policy. My guess is that by the time the professional economists and other officials have gone through them systematically and rigorously, our FDI and migration strategies will be somewhat more sober than spin. And the resulting policies will probably be more clearly in the interests of New Zealanders.

2002-07-15 16:57:45