Where did our foreign investment go?

Khyaati Acharya is a research assistant at The New Zealand Initiative.
Khyaati Acharya is a research assistant at The New Zealand Initiative.

Foreign direct investment (FDI) is a contentious subject and there is no limit to the number of debates questioning the efficacy of inwards FDI to the economy. However, the link between investment, FDI and economic growth is well-established.

Openness to the rest of the world through trade and capital is key to economic growth, the prosperity of a nation and the improvement of living standards.

It allows the host country greater access to international markets, resources and technologies and can vastly improve the competitiveness of domestic firms.

Granted, our lack of market size, market growth, and remoteness are hurdles that our domestic economy must deal with.

But this should be seen as all the more reason to provide an attractive and stable investment climate in order to improve our abilities to compete and raise living standards.

So, to make it harder for foreign investors to invest productively in New Zealand is a damaging policy prescription - yet, this is precisely what New Zealand is doing.

Prominent New Zealand economist and businessman, Sir Roderick Deane, noted in 1970s that for years "there appeared to be a marked reluctance by successive governments to adopt a positive policy towards foreign investment' in New Zealand".

That changed in the mid-1980s to mid-1990s, when the Lange/Douglas reforms saw New Zealand open its capital markets considerably, reduce trade protectionism, remove exchange controls and significantly increase the scope for private investment. In the process, we integrated rapidly with the rest of the world.

The problem is, we have failed to maintain this momentum.

The latest report by The New Zealand Initiative, Capital Doldrums: How globalisation is bypassing New Zealand, shows that although our international connectedness through FDI flourished between the mid-1980s and 1990s, inwards FDI stocks relative to GDP have since stagnated.

Alarmingly, UNCTAD figures show that while global FDI flows have risen by 11 per cent from 2012 to US$1.46 trillion ($1.74 trillion), the highest level since the global financial crisis, New Zealand's inflows have dropped by 75 per cent to just US$500 million ($597 million).  This confirms that our domestic economy is simply no longer keeping up with the global pace in the international investment race.

In contrast, Singapore, a tiny island-country with very few natural resources and a population of just over five million, attracted inflows of US$56 billion ($67 billion) in 2013. Inwards investment in China totalled some US$127b, and India, an economy that continues to exceed Western growth rates, experienced a 17 per cent growth in inwards investment to US$28b.

Perhaps it is some consolation that New Zealand was not alone in this decline. UNCTAD data show that in 2013 Australia's FDI inflow also declined, but to a lesser degree, by 28 per cent to US$40b.

New Zealand's FDI competitiveness has declined markedly since the mid-1990s, particularly in comparison to Hong Kong and Singapore, who rank among the top-performing economies in their ability to attract inwards investment.

In 2012, 80 out of 198 countries had a higher stock of inwards FDI as a percentage of GDP than New Zealand. And although global FDI stocks grew by more than 20 per cent of GDP between 1995 and 2012, New Zealand's inwards FDI stock fell by 1.2 per cent of GDP and outwards stock rose by a paltry 6.4 per cent over the same period.

So, while global stocks in FDI continue to climb at a rapid pace and to extraordinary levels, New Zealand's inwards stocks, as a percentage of GDP, peaked over a decade ago.

Concurrent to this trend, our rank on various measures of an economy's attractiveness towards FDI have slipped dramatically over the past few years. New Zealand was ranked 146th in 2011 out of a total 186 countries on UNCTAD's FDI Attraction Index, which measures a country's ability to attract FDI. Bangladesh, Greece, Senegal and Swaziland all rank just ahead of us.

New Zealand's score on the OECD's FDI Regulatory Restrictiveness Index, which measures the extent to which a country's regulations discriminate against FDI, remains far above both the non-OECD and OECD averages, being placed as the seventh most restrictive OECD member.

New Zealand must make a concerted effort to create an environment that is more attractive for overseas investors.

FDI is a valuable element in international economic integration, and openness to inwards FDI fosters direct and stable links with other economies.

The benefits it can bring are too valuable an opportunity to ignore, especially if we want to promote a more competitive economy, improve living standards and achieve greater levels of economic growth.

Khyaati Acharya is a research assistant at The New Zealand Initiative.