This week, The New Zealand Initiative releases its third and final report in the foreign direct investment (FDI) series, Open for Business: Removing the barriers to foreign investment.

The report focuses on New Zealand's policies towards inwards overseas investment, the centrepiece of which is the Overseas Investment Act 2005 (OIA).

The main finding of the third report is that New Zealand's OIA is strongly biased against overseas investment, particularly in regard to absentee ownership of 'sensitive' land.

The bias is evident from the Act's stated purpose which is "to acknowledge that it is a privilege for an overseas person to own or control sensitive New Zealand assets". Potential overseas investors must meet strict pre-purchase criteria, and comply with potentially onerous conditions that would not be required from a New Zealand investor.

Open for Business marks the end of more than two years of research into the contentious topic of overseas investment. The first report, New Zealand's Global Links, emphasised New Zealand's reliance on international capital since colonial times and that the country's high net international debt position is largely a legacy issue of governments gone by.

The second report, Capital Doldrums, emphasised the benefits host countries can hope to gain from attracting foreign capital whilst identifying grounds for concern about New Zealand's ongoing ability to attract it. New Zealand stands out in various international measures for the restrictiveness of its regime and the decline in a measure of its attractiveness as an investment destination. 

The Organisation for Economic Co-operation and Development's (OECD's) 2013 Regulatory Restrictiveness Index considered New Zealand's regime to be the seventh most restrictive of 58 countries.

Unfortunately, attitudes towards FDI in New Zealand have long been ambivalent, to the detriment of both the economy and the living standards of the greater population. All three reports stress the desirability of stronger international linkages, with respect to both trade and FDI, if New Zealanders are to prosper in a competitive world.

It has become overwhelmingly evident in public policy debates over the past few decades that New Zealand needs to greatly improve government policy settings if it is to offset the productivity-reducing effects of having a geographically isolated location and small home market.

Lower productivity, of course, entails lower material living standards. Lower productivity also means that other desirable things, like better quality housing, health care and a cleaner environment are less affordable. Recently, the New Zealand Productivity Commission released a working paper estimating that New Zealand's (multi-factor) productivity was around 27 per cent lower than the average for 20 member countries of the OECD.Ad FeedbackIn fact, the Productivity Commission estimated that between 60 per cent and 80 per cent of the productivity gap could be due to remoteness and low investment in innovation.

So, New Zealand could certainly benefit from attracting more productivity-enhancing FDI and fostering stronger trade relations.

By far, the most effective method of attracting more investment would be to eliminate, or at least revise, the worst of the domestic policy settings for regulating incoming investment.

There are a multitude of aspects in the OIA that stand out for all the wrong reasons, a number of which are particularly preposterous.

The first of these involves the Act's definition of 'sensitive assets' which is so broad that it includes any non-urban land over 5 hectares. It also includes any potential investment of 25 per cent in a business asset worth more than $100 million, although this threshold is higher for all Australian investors.

Secondly, the Act requires any overseas person wishing to invest in sensitive land to either be: ordinarily resident in New Zealand, intending to live in New Zealand indefinitely, or, satisfy relevant government ministers that their investment will 'benefit' New Zealand.

Thirdly, relevant ministers have full discretion to assign whatever weights they like in deliberating applications to invest. The corollary of this is that tomorrow's weights can be different from today's weights depending on who is in government and what their priorities are.

Fourthly, in considering whether the investment may benefit New Zealand, the Act excludes the gain to the New Zealand vendor of the sale - what is clearly the most tangible and identifiable benefit of the investment.

Decisions that are fundamentally arbitrary potentially lack predictability through time and lend themselves to political wheeler-dealing. This is not good for investment, it is not good for New Zealand's international reputation and it is not good for the value of New Zealanders' land.

One puzzle is why our Act is necessary given all our other laws controlling land use and business acquisitions. Overseas investors are subject to our domestic laws and regulations. Furthermore, they cannot take 'sensitive assets' with them should they decide to divest. Better identification of the gaps in existing laws which the Act needs to remedy could go some way to making our investment procedures far less onerous and bureaucratic.

Unfortunately, popular opinion and policy concerns are still overwhelmingly preoccupied with concerns of a loss of control (especially land) and marked by emotive, albeit, largely ungrounded fears of FDI. Reasoned debate rather than emotional responses is necessary if New Zealand is to make the most of its international links. 

Source: Making New Zealand more open for business