This paper takes the stance that New Zealand needs to forge closer ties with Asia-Pacific region and that in order to do so New Zealand should actively seek to harness the connections and know-how that Foreign Direct Investment (FDI) might provide. This should ideally include using FDI to to grow high value export and outward direct investment business in the region. FDI is also well placed to manage large infrastructure projects within New Zealand. With those ideals in mind, this paper discusses FDI regimes, which subject different forms of FDI to regulatory treatment in order to achieve optimal policy outcomes. There are two broadly different types of FDI in New Zealand:
(a) FDI in New Zealand’s natural resources where New Zealand has a competitive advantage (for example forestry, fisheries and agriculture)
(b) FDI in other sectors where New Zealand does not have a naturally competitive advantage
The paper places regulatory treatment of FDI on a continuum that ranges from prohibiting FDI to encouraging and incentivising it. On the prohibitive side, blunt instruments such as legislation can be used to regulate FDI. The only general material restriction for FDI in New Zealand is the imposition of character test where there is the acquisition of sensitive land or fishing quotas. On the encouraging and incentivising end of the spectrum regulation is less effective and more sophisticated instruments are required to create the desired FDI environment. In New Zealand, most FDI falls towards the encouraging and incentivising end of the continuum.
The paper proposes that FDI regimes concern the implementation of a ‘meta-norm’, a policy objective that informs the development and operation of instruments, actions and policies in other areas. In New Zealand the paper argues there is no meta-norm and as FDI is a policy area that has become highly politicised which has made it difficult for any government to adopt a coherent, sensible and consistent FDI policy. New Zealand therefore needs to look to the bigger picture and consider (i) the forms of FDI that are desirable, (ii) the sectors that are key priorities for FDI and (iii) the form of FDI that can best be incentivised or encouraged in order to achieve a broader and more integrated strategy which will open up international opportunities.
Unique features to New Zealand that drive FDI policy include New Zealand’s small size (which limits its domestic capital) and its geographical isolation (making it hard to penetrate foreign markets). Such limitations are overcome potentially if foreign capital can supplement New Zealand’s domestic markets and also build bridges to foreign markets. A tougher limitation to FDI is the strong attachment to land ownership in New Zealand. This was illustrated in the Crafar Farms debate.
The Crafar Farms debate concerned the screening rules that permitted FDI from China in New Zealand farmland. The debate over these screening rules failed to acknowledge that National Benefit Test in the Overseas Investment Act (OIA) can identify spill over benefits through conditions imposed on foreign acquisition of land that fall outside the ambit of the OIA. Furthermore it highlighted the need to design and implement strategies to attract FDI in land. Such strategies may include the diffusion of the debate by reframing it as a discussion of land aggregation rules and ways to transition into an epoch of corporate farm ownership, and harder measures such as altering the regulatory framework so that foreigners do not buy the land but by the right to exploit land.
The benefits of spill overs are hard to predict resulting in uncertainty as to how to create the best policies that reap the most benefits from FDI. Effective regulation of FDI therefore requires a process of trial and error coupled with skilled political management.