Capital Markets: Five myths about foreign investment

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Foreign Investment is set to once again be a political football at the upcoming election - Bryce Wilkinson punctures the myths.

MYTH 1: Foreign investment means loss of control

Parliament remains the supreme law-making body, inwards foreign investment must comply with New Zealand laws, and foreigners don't get to vote. Land use and business activity is extensively regulated in New Zealand, for overseas and local investors alike. In 2004, Treasury identified seven statutes that regulated land use in New Zealand and nine more that regulated corporate governance and business behaviour. Of course, Parliament exercises its power to enter into international agreements, including trade and investment agreements that commit it to abiding by the terms of those agreements. But these are the actions of a sovereign state seeking to make it easier for its citizens to trade and invest.

MYTH 2: Selling assets to foreigners means losing an income stream forever - sheer madness

This concern ignores the vendor's ability to invest the proceeds elsewhere. The consideration received by the vendor must adequately compensate for the loss of the earnings stream; otherwise the transaction would not occur. For example, it makes sense to sell a house, to a foreigner or anyone else, when it no longer adequately suits one's purpose. One can use the proceeds to buy a more suitable house. The same is true for investments in business assets.

MYTH 3: Allowing inwards foreign investment will see foreign firms buy up our innovative ideas, patents and products and reap the profits from selling to the rest of the world - we will miss out.

It would be uncommercial for a New Zealand vendor to sell such assets other than through a competitive process. A competitive sale process confronts potential bidders with the value others see in the asset being sold, greatly reducing the likelihood of the asset being sold too cheaply. Indeed, research indicates it is more likely that the winning bidder will turn out to have paid too much rather than too little - the so-called winner's curse.

MYTH 4: Incoming foreign investment drives up the exchange rate, wrecking our export industries and our import-competing firms.

Foreign investment has been a path to prosperity for many countries, including China today. It has played an important role in New Zealand's economic development, without wrecking industries. Despite open capital markets, New Zealand's goods and services exports have exceeded imports for 20 of the past 25 years. Foreign direct investment in Singapore is seven times higher per capita than in New Zealand and Singapore's industries remain very competitive.

MYTH 5: The more houses foreigners buy the fewer there will be for NZers to live in.

This fear is misplaced on two counts. First, more houses are being built each year, and the industry is capable of building many more houses a year if demand materialises. Second, foreigners who buy homes and rent them out are not depriving New Zealanders of the chance to live in those homes. Surges in immigration can put pressure on house prices in the short term, but this is not a foreign investment issue, it it is an immigration issue.

• Bryce Wilkinson is Senior Research Fellow at The New Zealand Initiative.