Peter Lyons: The Janus face of foreign investment

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A syndicate of overseas' owners of land in Auckland approached a local building firm. They wanted to develop residential units on their land in a prime location. They also wanted to provide their own work force for the construction. They needed the services of the local building firm to oversee the project. They also needed assistance in navigating the Resource Management Act and local council bylaws.

This scenario may be hearsay. But It highlights several aspects of overseas' investment that New Zealanders cannot afford to be naive about.

Overseas investment in New Zealand is an issue fraught with controversy. Our economy was largely built using foreign capital. Those who support the ideology of free markets generally believe investment flows between countries are a positive thing.

Overseas' purchases of New Zealand assets such as farms, land, businesses and even housing provides capital that would otherwise not be available. Foreign investment in New Zealand may create more jobs, more output and higher incomes for New Zealanders. It may result in access to new technologies and better methods of production. It may provide easier access to export markets and distribution channels in other countries.
But it may not.

Foreign investment is not a single homogenous activity. There are various forms of overseas' investment in a country. Certain types of investment can be very beneficial to the host country. Other forms of investment may actually be harmful to the host country.

If Microsoft was to build a $500 million factory in Huntly this would send our political leaders into fits of rapture. The factory would create many local jobs. It would likely generate good incomes and numerous other spin off businesses throughout the local and wider economy. Economists call this a positive multiplier effect.

If a British investment fund started buying up New Zealand dairy farms and dairy factories and wanted to staff them with workers imported from low wage countries this should ring alarm bells.

There would be concerns about what value this investment adds to the New Zealand economy. There would also be concerns that the new owners may try to circumvent New Zealand labour laws such as the minimum wage, bargaining rights and health and safety requirements.

Some countries have a poor historical understanding of workers' rights. The only thing standing between our labour market and that of less developed countries is our legal frameworks. This includes laws regarding minimum wages, health and safety, bargaining rights for workers and restrictions on worker immigration.

If accurate data is ever collected on the level of foreign investment in the Auckland market of existing houses this may be cause for concern. This type of investment adds little in the way of new jobs or higher output or incomes for New Zealanders.

The benefit to local sellers who get a higher price for their house is offset by young kiwis taking on massive debts to buy their first house. If significant overseas' speculative investment is occurring this is an example of undesirable foreign investment.

If a Canadian pension fund makes a takeover offer for Auckland Airport the benefits to the New Zealand economy are uncertain. The existing shareholders may walk away with a nice capital gain. They may invest their windfall in new or existing businesses that may benefit the wider economy. On the flip side the profits of a firm with an entrenched monopoly and high market power now disappear overseas.

If a Norwegian oil company buys drilling rights to our coastal waters and discovers major oil reserves, the benefits to New Zealand may be limited. The government would gain royalties and there may be service jobs created in parts of New Zealand. If the oil rig crews were mainly foreigners then much of the wage bill will benefit other countries. The profits from the oil production would also accrue to overseas shareholders.

It is the task of the Overseas Investment Office to analyse the costs and benefits of significant foreign investments in New Zealand. In a globalised world with large scale capital flows we need to ensure it is well resourced and does its job properly. We also need to appreciate that the main reason overseas' buyers have the funds to buy our assets is because we spend more, as a nation, than what we earn in our dealings with the rest of the world.

Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics texts.