This report is the second of three that aims to promote public debate about New Zealand’s global links, including the contentious issues of foreign ownership and net external indebtedness.
Openness to the rest of the world through trade and capital is key to the prosperity of nations.
Merchandise world trade has grown much faster than world GDP since 1980, but not as fast as global foreign direct investment (FDI). The global inwards stock of FDI rose from 6% of world GDP in 1980 to 32% in 2012.
Outwards FDI brings access to markets, technologies and resources, and improves home firms’ competitiveness. Inwards FDI enhances the host country’s competitiveness by bringing foreign capital, technologies, management expertise, and access to overseas markets.
The potential for significant net benefits from FDI are implicit in the determined efforts of most governments in the world to compete for FDI, often through tax preferences and subsidies.
The enormous growth of global economic integration through trade and FDI has been facilitated by the growth in the number and size of firms operating across national borders. Worldwide, the 800,000 or so foreign affiliates of Transnational Corporations (TNCs) employ 72 million people, supply 33% of the world’s exports, and produce 9.2% of world GDP.
Such TNCs are not charities. The scale of their economic contribution to host country economies depends on the quality of the host country's economic institutions and policies. While there is overwhelming empirical evidence that host economies can experience significant positive effects from FDI, actually doing so is not a forgone conclusion.
New Zealand has become more open to trade and capital since 1980, but it is far from being a market leader in FDI.
In 2012, 80 out of 198 countries had attracted a higher stock of inwards FDI as a percentage of GDP than New Zealand. New Zealand looks more attractive on a US dollars per capita basis, with only 34 of 206 countries having attracted a greater inwards FDI stock in 2012. Per capita, Australia had attracted 45% more inwards FDI than New Zealand by 2012.
In 2012, 62 out of 197 countries had a higher stock of outwards FDI as a percentage of GDP than New Zealand, but only 40 out of 200 countries had a greater outwards FDI stock in US dollars per capita. Australia had invested 4.3 times more in US dollars per capita offshore than New Zealand.
Our economy integrated rapidly with the rest of the world between the mid-1980s and the mid-1990s when government opened up its capital markets, reduced trade protectionism, and increased the scope for private investment through privatisation. But, since the mid-1990s New Zealand has been left behind in the continuing international growth in cross-border investment. Both inwards and outwards stocks of FDI as a percentage of GDP have stagnated since 1995, in sharp contrast to the global trend.