Adam Smith explained how the division of labour is limited by the extent of the market. When we have more people with whom to trade, we can all better specialise in our areas of comparative advantage. The gains from this kind of specialisation are limited by the extent to which we ban foreign specialists from helping us out.

Debates around whether foreign direct investment should be allowed usually focus on whether it’s right that foreigners might trade small green pieces of paper for productive New Zealand assets. That these assets, often farmland or infrastructure, are hardly likely to be carved out and floated off to places far away gets less attention. But even less attention is paid to the losses in productivity-enhancing foreign expertise when we make it too hard for foreigners to invest here. Some expertise you can only get when the expert has an ownership stake.

Paul Walker at the Anti-Dismal Blog points us to work by Farid Toubal and co-authors showing that, in French data, foreign investors are particularly likely to buy up currently underperforming domestic French assets: firms that just aren’t working right. Targets of foreign acquisition typically experienced substantial productivity decline in the years prior to acquisition. The foreign buyers then use their expertise to set things right, increase productivity, and reap some of the gains.

Christchurch City Council is buying back outstanding external shares of the Lyttelton Port of Christchurch; I hope this precedes its sale to a professional international port management company. In 2006, Port Otago craftily blocked its Lyttelton competitor’s attempt to gain foreign management expertise by buying a blocking stake. If this month’s full share takeover announcement is a precursor to a renewed attempt to gain that kind of expertise, we have to hope that any sale will not meet the same fate as the blocked partial sale of Auckland Airport. There seems little chance of Christchurch’s balancing its books without at least partial asset sales. But, unless those sales can increase the firm’s productivity, they don’t help all that much: the Council’s balance sheet doesn’t much improve unless a buyer is willing to pay more for the asset than it’s currently worth to Council. And that can’t happen unless the new buyer can increase productivity. Let’s hope our restrictive FDI regime doesn’t stymie the Christchurch rebuild.

The default presumption should be that foreign investment is allowed unless a very good case is made showing why a particular acquisition would do more harm than good.