How Much of New Zealand Has to Be Owned and Controlled by Foreigners?

 

CFCA has celebrated its years in their latest biannual publication, Foreign Control Watchdog, but it is worthwhile asking how successful they have been. Certainly they have kept their concerns in the public headlines and sometimes there have been wins; the government’s recent rejection of a Chinese company’s plan to purchase more New Zealand farms was no doubt a response to their focus-group polls, but their members were implicitly or explicitly influenced by the widespread public concern which CAFCA has encouraged.

Yet the record is that foreign ownership of New Zealand assets continues to grow (as a recent CTU bulletin reports). Some of that growth is inevitable. Once a country is exporting, the purchasers of the export products will want to secure their supplies by ‘vertical integration’ which involves their owning stages of production and processing before the actual crossing of the wharf. Fonterra and other New Zealand companies do that too.

There are also the needs of portfolio investors to diversify outside the local boundaries. The NZ Superannuation (Cullen) Fund holds a considerable part of its investments overseas, while some iwi invest outside their rohe. Similarly international investors may find it prudent to include some New Zealand investments in their portfolio, although it is rarely a controlling interest.

Many economists have sympathy with new ‘foreign direct investment’ which involves a business setting up in New Zealand. I am probably a little more cautious than the middle of the profession, seeing the merits of the argument applying most strongly to businesses which are in the tradeable sector – exporting or import substitution. The arguments are considerably weaker when it comes to domestic supply or purchasing of existing businesses.

These are international phenomenon, reflecting the capitalist world in which we live (like it or not). In principle the foreign ownership in New Zealand should net out against the foreign ownership of New Zealanders offshore.

However, a major reason why New Zealand foreign ownership rises is because we do not save enough. (Many households do not save at all.) Our total investments exceed the savings we have available to finance them. So we borrow offshore. Once upon a time that borrowing was done by the New Zealand government which then invested in some of New Zealand’s businesses. So such businesses were largely locally owned but there was an offset of heavy offshore debts of the New Zealand government. The international rules have changed and that strategy no longer works. Which means that as long as we want to invest more than we have saved, we have to borrow offshore.

There are many channels by which that borrowing flows in. A common one is a local business being sold to an offshore investor, with some of the proceeds being consumed or used to reduce foreign debt (which, in effect, was used to fund past consumption)..

In some respects, then, the Overseas Investment Commission simply prevents some assets going into foreign ownership but somewhere else in the economy other assets have to be sold off instead. As a result foreign investment in New Zealand will rise as long as we do not save enough ourselves.

How to increase domestic savings? The government running a budget surplus is one way. Under the Cullen regime some of the surplus was used for the public purchase of overseas-owned companies (such as Air New Zealand and Kiwirail); it was also used to fund the NZ Superannuation scheme which has invested in local businesses (including the petrol chain Zed). His successors have not been running a surplus.

The Cullen regime also introduced Kiwsaver which involves individuals – the private sector – contributing to a savings fund for their retirement. Some economists claim this has not increased private savings but diverted it from other sources. This may happen at first, to some degree, but the research shows that in the long run such schemes result in individuals increasing savings (and reducing consumption). Again this government has been less enthusiastic than its predecessor about the approach.

Kiwisaver funds, just like NZ Superannuation, will invest offshore as a part of their diversification strategy but they will also invest in New Zealand reducing the need to sell assets to foreigners.

However whatever we do, there will be some overseas ownership of New Zealand – although it could be less than today’s proportions. But ownership need not be the same thing as ‘control’. Your local corner store may be owned by its operator but her or his political influence is restricted.

Just how much political involvement should larger businesses have? That is a question we have been reluctant to pursue nationally, not least, I think, because our two major parties depend upon donations from businesses – both locally and foreign owned. Perhaps organisations like CAFCA – whose funding come from individual donations – should put more effort into getting more transparency into the ability of private money to influence our public life.

 

I have been off air while finishing a manuscript of a political economy of New Zealand’s history. I hope to be back regularly from now.