Okay, I’m irked enough by the blithering nonsense put out by various capitalist media folks to mention this.
Dr Cullen (Labour government Finance Minister) slapped a few spontaneous regulations on the Overseas Investment Act (which Labour had recently liberalised!) to effectively prevent a majority stake in Auckland International Airport (AIA) being sold to a Canadian pension fund.
No biggie, right? Except most of the economic commentators in NZ seem to have been bitten by a rabid dog, because they’ve started frothing at the mouth and barking incoherently… terrified at the prospect of ‘scaring off Foreign Direct Investment (FDI)’.
Keith Ng at Public Address has a nice summary, and conveniently lampoons the main complaint – that scaring off FDI will somehow worsen NZ’s trade deficit. Debunked by the fact that most of our national trade deficit is caused by foreign investors repatriating their dividends back home so they can spend ’em.
So, what are the effects of scaring off FDI, and are they real or illusory?
- Worsen NZ trade deficit – If FDI drops NZ will be better off, not worse. Most of NZ’s current account deficit is caused by FDI ($3,255m out of $3,628m); lower FDI, and the profits vanishing back offshore from Kiwi businesses gets lowered.
- Make NZ businesses vulnerable to capital flight – If FDI lowers, the NZ economy is less susceptible to sudden withdrawal of FDI. Of course, Cullen’s announcement itself may trigger a shock collapse of FDI, but there is no sign of that so far…
- Loss of foreign investor confidence in NZ – this is the same as above.
- Lowers capital available to NZ businesses – Not really. While it is theoretically possible for a foreign investor to pack suitcases of NZ $100 bills and take them to Canada or elsewhere, they can’t use them until they change the NZ$ into the local currency. Which requires them to sell those NZ$ to someone else, who then has all those dollars available that they can only invest in NZ. That is, you can physically take the NZ currency out of NZ, but there is no demand or use for NZ currency anywhere except in NZ. For Investor A to sell their NZ currency (or investment in a NZ company), they have to find Investor B willing to buy, and then Investor B has NZ currency or shares only investable in NZ. The capital in each and every NZ firm stays the same (subject to share floats or buybacks), no matter who the owners are, or where they live.
- Loses NZ jobs – A variation on the ‘lowers capital’ argument. Fails for the same reason – for 1 investor to pull out their investment, they have to sell to another investor, so the capital to keep the business running is still there, so the job remains.
- Cuts NZ productivity (which cuts jobs…) – Yawn, as above. The argument is that FDI is required to improve productivity, but it again fails because an FDI withdrawal requires someone else to buy the investment (possibly at a lower price).
- Loses technical or business expertise – I haven’t seen anyone make this criticism of Cullen’s actions, but they should have, as it’s one of the only valid criticisms! Foreign investors may bring specialised technical or business expertise to a NZ firm that it cannot get in NZ, or just make contacts overseas that help open export market opportunities. A genuine point in favour of FDI. Sadly for the capitalist media cranks, not a criticism valid for this particular investment (in Auckland Airport), as Airports don’t export products overseas (well, people, but they don’t sell those…hopefully), and AIA has been very successful technically and in its business operatons (which ironically, is why the Canadian pension fund wants to invest in it).
- Raise NZ interest rates – Interest rates will go up because foreign investors will see NZ as riskier due to Cullen’s actions, so will demand higher returns. Except most of the FDI investment in NZ seems to be share purchases, not loans to NZ firms or the NZ government. So if an investor feels their investment is risky, they can sell the share, which may cause a share price drop (or even a share price collapse), but that doesn’t stop the firm from trading (unless it already had a bad credit positoin, which is exposed by the share price collapse, which may not be a bad thing – catch them beofre they trade further into debt). So FDI cannot change NZ interest rates unless a large part of that FDI is in the forms of loans to NZ, which it does not appear to be.
So, while I am neutral about FDI in general (government should only regulate if required to do so for economic or social reasons), the reality is that FDI exists almost solely to allow capitalists to maximise their profits in whichever country has companies offering the best return. And their scare tactic arguments have virtually no truth behind them, as seen above.
Consequently, government’s should tightly restrict FDI, with foreign investors required to fill in a bit of paperwork to show how their investment brings technical or business expertise, opens up export markets for the NZ company, or gives the NZ firm capital (in the form of loans) that they cannot raise locally. Failure to show good reason, and you can either reject the FDI, or slap a large tax on it (say 50% or more). Now that’ll scare the capitalist horses 😉
After all, it is that last point that was the original purpose of FDI – to raise capital from someone overseas when everyone at home thought your business was too risky to invest in. Yet now most FDI is simply swapping shares, which adds nothing to the firm whose shares are being traded.
Here endeth the lesson. Capitalist media take note.
Square Drive 