Comprehensive and progressive FDI liberalisation

Published in Insights, The New Zealand Initiative’s newsletter, 17 November 2017

Signing the Trans-Pacific Partnership, the new government passed its first test on the international stage. If only all policy issues could be solved by just adding the words ‘comprehensive and progressive’ to their names.

The TPP, or now the CPTPP (it just rolls off the tongue), is a major step for trade. It will help New Zealand exporters as it opens markets hitherto hard to reach. The CPTPP will create growth, jobs and opportunities.

But as we are celebrating this milestone in trade policy, it is worth reminding ourselves that agreements like the CPTPP are not enough. To thrive in the global economy, we must become more welcoming to international investors.

The good news about such a liberalisation of foreign direct investment (FDI) is that we can do it ourselves without international negotiations. The bad news is there is little political will for it.

We have had a lot of political theatre on foreign investors in the housing market. New Zealand was, until now, relatively open to foreign housing investment. But in general, we are now the most closed economy in the developed world for foreign direct investment. That is a concern because it cuts us off from international value chains.

In the OECD’s latest FDI Restrictiveness Index, New Zealand came out last. No other advanced economy is as challenging to navigate for international investors as New Zealand. Only some developing economies are worse than New Zealand.

Of all economies surveyed by the OECD, only the Philippines, Saudi Arabia, Myanmar, China, Indonesia and Jordan are more restrictive for FDI than New Zealand.

APEC host Vietnam is the world’s most impressive case study for what FDI liberalisation can achieve. In 1997, Vietnam had the most restrictive FDI regime of all 45 countries measured by the OECD. Today, it has one of the most liberal.

The results speak for themselves. Vietnam’s stock of inwards FDI rocketed from 39% to 56% of GDP over twenty years. This was a major reason why Vietnam more than doubled its real GDP per capita over this period.

Meanwhile, New Zealand’s FDI ratio fell from 45% to 39%, and we only increased per capita GDP by a feeble 33%.

We should not be content for other countries to beat us on attracting investment. If we do not liberalise our FDI regime, New Zealanders will miss out.

Perhaps we should have a comprehensive and progressive review of the Overseas Investment Act?