Inward Foreign Direct Investment and Economic Performance: Explaining the Paradox of New Zealand Peter Enderwick

1. Inward Foreign Direct Investment and Economic Performance: Explaining the Paradox of New ZealandPeter Enderwick

2. Introduction • Nature of the paradox • Contrary experience of Singapore, Ireland, Mauritius • IFDI plays a central role in the goal of returning NZ to the top half of OECD

3. Introduction • Intention to explain why IFDI has not had the expected growth impact in NZ • Coverage • IFDI and growth • NZ experience with IFDI • Simple schematic model • Key implications of the model • Conclusions

4. FDI and Economic Growth • Majority of studies find a positive association • Growth theory highlights the likely impacts: • demonstration effects • competition effects • labour mobility • linkages

5. FDI and Economic Growth • Studies indicate IFDI is necessary but not sufficient • benefit from liberal investment climate • magnitude of the technology gap • supportive policy • policy influences the investment climate • intervention to facilitate FDI attraction, upgrading and promotion of linkages

6. NZ’s Experience with IFDI • Three distinct cycles of IFDI • 1840s open E-O economy IFDI expanded production • 1938-1984 IFDI in inefficient, protected manufacturing sector • 1984 sale of former SOE assets • Inflows of FDI slowed significantly in late 1990s.

8. Of NZ’s top 200 companies, 83 are foreign-owned

9. Transnationality Index • This composite index combines measures of a country’s dependence on FDI and its use of these resources. • 1999 NZ had a TI of 28.1 much higher than the average for all 74 countries surveyed.

10. Transnationality Index • NZ is much closer to the average on the two measures that relate to use of FDI resources. • Suggests that while NZ is highly dependent on IFDI, it does not utilise those resources to the fullest extent.

11. NZ’s Performance • NZ’s comparative economic performance has not been strong. 1974 NZ was 6th ranked of OECD countries, by 2002 was 20th. • OECD incomes are on average 22% higher than NZ. • Productivity growth has also been poor.

12. NZ’s Performance • WEF International competitiveness ranking • 1998 13 • 1999 13 • 2000 20 • 2001 10 • 2002 16

13. Forms of FDI • Research suggests that the quantity of FDI must be considered in terms of both its form and the recipient environment. • Vast majority of FDI in recent years been through M&As. • Half of the greenfield investment gone into property • Most IFDI focuses on the domestic economy (results in low level of exports as % GDP)

14. Policy Focus • CONCEPTUAL: • Explanations based on size/location cannot explain: • how other small countries are prosperous • why NZ was wealthy in earlier periods • Combination of size/location would suggest problems in attracting IFDI not its performance

15. Policy Focus • EMPIRICAL • Evidence from numerous studies of the importance of policy • Evidence from NZ surveys of foreign investors

16. Collective competitive goods Level and forms of locational advantage New Zealand’s economic performance Existing level and structure of FDI Government policies towards business Government policy towards FDI Expenditure on welfare and adjustment processes Policy consistency and synergy Figure 1 Inward Investment and New Zealand’s Economic Performance

17. Modelling the Impact of IFDI • Figure 1 highlights the importance of policy • Policy towards IFDI best described as passive. • Business and economic development not been prioritised. • Problems of policy inconsistency and lack of synergy. • MMP appears to have compounded these problems.

18. Modelling the Impact of IFDI • Global economy raises tensions between the need for investment in collective competitive goods (infrastructure, R&D, education) and welfare/adjustment. • Both are necessary and compete for scarce resources, the policy issue is the appropriate balance.

19. Modelling the Impact of IFDI • Performance of the existing stock of foreign firms is also important. 1999 accounted for 15.8% of employment and 22.4% of va. • Impact of this sector depends on: • motives for investment • attractiveness of the NZ environment (incentives for upgrading) • mechanisms encouraging spillovers

20. Key Implications • Two elements to inward investment: the stock of FDI and flow of new FDI. • Explanation focuses on five failures: • Policy balance • Policy inconsistency • Policy pragmatism • Insufficient investment in competitive assets • Constraints on firm size and growth

21. in New Zealand Impacted by: Inappropriate expenditures Impacted by: Constraints Impacted by: Uncertainties Policy balance (1) Policy inconsistency (2) Pragmatic intervention (3) Insufficient and inappropriate expenditures (4) Constraints on firm growth and development (5) Level, structure and dynamism of IFDI Domestic conditions for growth and development Conditions for maximizing the IDP process Slow rates of growth Figure 2 Policy Impacts and FDI Outcomes in New Zealand

22. Policy Uncertainties • 1. Policy Balance • Globalisation has limited discretionary economic power • Response has combined economic liberalisation and social regulation • Opaque notion of the ‘Third Way’ • Has raised compliance costs • Many of the problems result from a lack of clear policy intentions

23. Policy Uncertainties • 2. Policy Inconsistencies • Problem of inconsistent implementation of policies • Two sources of inconsistency: • Political institutions in NZ; • MMP

24. Policy Uncertainties • Naïve Political Institutional Structure • NZ lacks: • written constitution • multi-cameral parliament • federal structure • assertive constitutional court • binding referendum system • Result is high rates of policy change, reversal and inconsistency.

25. Policy Uncertainties • Inconsistency compounded by MMP: • more coalition governments • increased the importance of Parliament • select committee processes become more important • affected cabinet and ministerial responsibility • assertiveness of minor parties

26. Policy Uncertainties • Policy inconsistency also existed under FPP: • breaking of election promises • policy not in the interests of the entire community • MMP brings different problems - lack of accountability e.g. list MPs allegiance is to their parties

27. Policy Uncertainties • 3. Policy Pragmatism • Individual interventions • Reflect the highly centralised political decision-making structure • In NZ has involved: • restrictions (logging, gold mining) • ad hoc rescues (airlines, railways?) • superior understanding of desires (the arts, America’s Cup)

28. Policy Uncertainties • Policy pragmatism is highly destabilising, shows disregard for property rights. • Policy uncertainty reflects: • introduction of MMP • demise of effective political competition • policy trade-offs resulting from globalisation • addressing minority party concerns

29. Structural Weaknesses • With regard to IFDI NZ suffers two structural weaknesses: • 1. Insufficient investment in collective competitive goods; • 2. Constraints on firm growth and development.

30. Under-investment in collective competitive goods • Government expenditure on welfare crowds out other investments • Results in problems in critical areas of infrastructure e.g. energy, roading, transport • Room for improvement in areas of education and R&D • Need to obtain agglomeration economies in Auckland

31. Constraints on firm growth • Maximising the contribution of IFDI requires a dynamic domestic firm sector • High rates of entrepreneurship • But are small, domestic focus, high failure rates lifestyle choices • Apparent barriers to growth (capital, management, market size, lack of scale) • underdevelopment of clusters

32. Constraints on firm growth • Ineffectiveness of spillover processes apparent from figures on OFDI

34. Conclusions • Policy weaknesses are key to NZ paradox with respect to INFDI and growth. • Question the transformation approach based on NZ’s location and size. • Fallacy of the BCG analysis • Need for stable, credible economic growth strategy. Need to increase certainty • NZ investment climate seen in relative terms e.g. Australia