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

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


Introduction
Introduction Explaining the Paradox of New Zealand

  • 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


Introduction1
Introduction Explaining the Paradox of New Zealand

  • 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


Fdi and economic growth
FDI and Economic Growth Explaining the Paradox of New Zealand

  • Majority of studies find a positive association

  • Growth theory highlights the likely impacts:

    • demonstration effects

    • competition effects

    • labour mobility

    • linkages


Fdi and economic growth1
FDI and Economic Growth Explaining the Paradox of New Zealand

  • 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


Nz s experience with ifdi
NZ’s Experience with IFDI Explaining the Paradox of New Zealand

  • 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.


Of NZ’s top 200 companies, 83 are foreign-owned Explaining the Paradox of New Zealand


Transnationality index
Transnationality Index Explaining the Paradox of New Zealand

  • 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.


Transnationality index1
Transnationality Index Explaining the Paradox of New Zealand

  • 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.


Nz s performance
NZ’s Performance Explaining the Paradox of New Zealand

  • 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.


Nz s performance1
NZ’s Performance Explaining the Paradox of New Zealand

  • WEF International competitiveness ranking

  • 1998 13

  • 1999 13

  • 2000 20

  • 2001 10

  • 2002 16


Forms of fdi
Forms of FDI Explaining the Paradox of New Zealand

  • 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)


Policy focus
Policy Focus Explaining the Paradox of New Zealand

  • 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


Policy focus1
Policy Focus Explaining the Paradox of New Zealand

  • EMPIRICAL

  • Evidence from numerous studies of the importance of policy

  • Evidence from NZ surveys of foreign investors


Collective competitive goods Explaining the Paradox of New Zealand

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


Modelling the impact of ifdi
Modelling the Impact of IFDI Explaining the Paradox of New Zealand

  • 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.


Modelling the impact of ifdi1
Modelling the Impact of IFDI Explaining the Paradox of New Zealand

  • 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.


Modelling the impact of ifdi2
Modelling the Impact of IFDI Explaining the Paradox of New Zealand

  • 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


Key implications
Key Implications Explaining the Paradox of New Zealand

  • 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


in New Zealand Explaining the Paradox of 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


Policy uncertainties
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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


Policy uncertainties1
Policy Uncertainties Explaining the Paradox of New Zealand

  • 2. Policy Inconsistencies

    • Problem of inconsistent implementation of policies

    • Two sources of inconsistency:

      • Political institutions in NZ;

      • MMP


Policy uncertainties2
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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.


Policy uncertainties3
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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


Policy uncertainties4
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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


Policy uncertainties5
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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)


Policy uncertainties6
Policy Uncertainties Explaining the Paradox of New Zealand

  • 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


Structural weaknesses
Structural Weaknesses Explaining the Paradox of New Zealand

  • With regard to IFDI NZ suffers two structural weaknesses:

  • 1. Insufficient investment in collective competitive goods;

  • 2. Constraints on firm growth and development.


Under investment in collective competitive goods
Under-investment in collective competitive goods Explaining the Paradox of New Zealand

  • 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


Constraints on firm growth
Constraints on firm growth Explaining the Paradox of New Zealand

  • 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


Constraints on firm growth1
Constraints on firm growth Explaining the Paradox of New Zealand

  • Ineffectiveness of spillover processes apparent from figures on OFDI


Conclusions
Conclusions Explaining the Paradox of New Zealand

  • 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


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