Asia tops in investment partnership with New Zealand

But India does not feature on the list

An extract of Asia New Zealand Report

The importance of foreign investment goes beyond its role in financing New Zealand’s persistent current account deficit with the rest of the world.

Foreign investment inflows take a variety of forms, including debt raised by our banks and companies on offshore markets, foreign purchases of stocks and bonds, and foreign direct investment (FDI).

FDI is defined as a foreign acquisition of a ‘substantial’ interest in a local company, with ‘substantial’ generally set at ownership of 10% or more of the company’s equity, sufficient to exercise influence over the company.

It can occur through a foreign investor either buying into an existing company or establishing a wholly or partly owned new company.

FDI is a particularly important category of investment.

Positive effects

A recent large-scale econometric study that investigated the relationship between openness to foreign investment flows and economic growth concluded that FDI was the only type of foreign capital inflow associated with significant positive effects on growth.

At first glance, the idea that FDI has positive effects might be surprising.

A core tenet of scholarship in international business is that foreign-owned companies face ‘liabilities of foreignness’ – the costs and risks that come simply from being an outsider,

and thus less familiar with local customs, laws and regulatory practices than local firms.

Add to this the potential for a backlash against foreign-owned companies (think of all the ‘100% Kiwi-owned’ signs around the country), and you might wonder how foreign ownership could bring long-term benefits.

The potential for such benefits arises not so much from the financial inflow associated with FDI (after all, if it were just about the money, FDI would not be much different from debt), but from the other things that some foreign investors bring: access to technology, management expertise, knowledge of foreign markets and links to partnerships and collaborations abroad.

Potential for FDI

It is these things that create the potential for FDI to raise productivity, increase exports and yield other positive spill-overs for the host country.

Foreign investment, like migration, often generates political controversy and can trigger a range of concerns in the host country. Recent high-profile sales (and attempted sales that failed to go through) of New Zealand companies to investors from Asian countries have attracted criticism.

Apparently in response, the government has laid out a case for welcoming foreign investment. According to a government survey, 3816 firms in New Zealand were foreign-investment controlled as of February 2016.

This was only 0.7% of all firms, but these firms accounted for around 13% of the total national employee count. In an earlier survey of 515 New Zealand-based firms with significant foreign ownership, over half stated that they had provided advice or help to local partners, such as help with technology, skill development, export market knowledge or information on suppliers and contacts.

Poignant Questions

This Report does not attempt to arbitrate among contending views or arrive at generalisable conclusions about the effects of FDI. Instead, the first part of this Report provides some answers to three questions: Who invests in New Zealand? Where in New Zealand are their investments located? In what activities and business sectors do they invest?

The focus is on the role of investors from Asian countries because their investments have been very much in the limelight in recent years.

The Report aims is to provide a better understanding of the potential benefits of investment in New Zealand from Asian sources.

This is important, as investment from Asia provides an opportunity to improve our trading and cultural ties with a region where economic growth has been higher than in our traditional export markets of Europe and North America.

Asian partnership grows

These trends are set to continue, with economic growth in ‘emerging and developing Asia’ projected to be more than twice as rapid in the next two years as growth in Europe and the United States.

These differential growth rates mean that New Zealand’s economic growth increasingly depends on the reorientation of our international connections towards increased exchanges with Asia.

Six out of our top 10 trading partners are now in Asia.

Asia also accounts for much inward migration to New Zealand, with China, India, the Philippines, South Korea and Pakistan in the top 10 countries of migrant origin.

The terms on which we develop trade connections with Asia depend very much on the quality of the partnerships we forge through investment and personal interactions.

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