Costs And Benefits Of Foreign Direct Investment For New Zealand

New Zealand - Report

1.0 Introduction

Throughout the production of this report I will aim to explain an analysis of the costs and benefits of foreign direct investment for New Zealand both in theoretical and empirical terms. When it comes to defining FDI different countries may define it differently and because of this it is arbitrary, but foreign direct investment can be described as:

"Foreign Direct Investment is the purchase by the investors or corporations of one country of non-financial assets in another country. This involves a flow of capital from one country to another to build a factory, purchase a business or buy real estate." (http://www.afsc.org/trade-matters/learn-about/glossary.htm).

In New Zealand foreign direct investment plays a pivotal part in the country's economy growth, this is shown by the fact that over the past two decades the flow of F.D.I in New Zealand has increased substantially and that FDI stocks have risen from around NZ$ 300 million in 1981 (pre-economic reforms) to NZ$49.3 billion for the year ending March 2001, this will be looked at in more detail in section 1.2. "Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the world's developing countries. More than ever, countries at all levels of development seek to leverage FDI for development" .

2.0 Multinational Enterprises

A Multinational can be defined as the following:

"A firm, usually a corporation that operates in two or more countries. In practice the term is used interchangeably with Multinational Corporation".

(http://www-personal.umich.edu/~alandear/glossary/m.html)

The phenomenon of multinationals is not entirely recent as you can go back to before World War I and see that American firms had factories in foreign countries, but it became far more common after World War II and today it may be difficult to find a major company that does not have an affiliate in other countries. New Zealand's G.D.P has fluctuated fairly dramatically over the previous 5 years. The country's current account deficit widened from 4.7% of GDP in March 1995 and then peaked at 7.1% in June 1997. It then shrank to 4.9% in June 1998 before increasing again to 8% (7.4% if the one off purchase of a Navy frigate is excluded) in December 1999. With the level of G.D.P being above that of 5% it may lead to an increase in the countries inflation rates.

3.0 Foreign Direct Investment in New Zealand

The graph below shows the F.D.I flows in New Zealand between

1989 - 2002 in millions of New Zealand dollars:

The Graph above shows that after a period of growing inflows that F.D.I in New Zealand in the fiscal year ending 31st March 2002, is down to the levels of that of the late 1980's, the graph does show that the F.D.I outflows exceed the inflows, but these levels still remain low. The graph also shows that over the previous 14 years in all but 3 of these years foreign direct investment has been above zero. The reason for this may be that in the relevant years the FDI flows and stocks sore quite a large decrease to the previous years. FDI flows consist of the increase in reinvested earnings plus the net increase in funds received from the foreign direct investor.

FDI flows with a negative sign (reverse flows) indicate that at least one of the components in the above definition is negative and not offset by positive amounts of the remaining components . For example the inward FDI flows between 1985-1995 was 1,889,000 and in 1999 the flows had dropped to 1,412,000 so as you can see quite a steep decline. Apart from these 3 years there is no real trend that can highlight any lack of consistency among the flows, but if you were to compare the FDI flows of New Zealand's trading partners such as Australia, Japan and the UK the flows is considerably less. As well as the decrease in flows there was as decrease in the FDI stocks, in 1995 as a percentage of gross domestic product the stocks stood at 25,574, while in 2000 in had been reduced to 23,116. During this period there was also a reduction in the flow of outward stocks, 1995 sore them stand at 7,630 as a percentage of gross domestic product, while in 2000 they had decreased to 7,229 again quite a significant drop. In 2001 though the FDI inflows in the New Zealand economy had a very sharp increase compared to that of previous years, this rise is quite abnormal as if so far unaccounted for.

Throughout the history of foreign direct investment in New Zealand there has been 3 main cycles, in 1840 foreign direct investment was aimed at expanding the current production levels of the country, from 1938 up until 1984 F.D.I was geared towards the domestic market with foreign firms operating in an extremely protected environment and the third cycle which is past 1984 is when F.D.I became dominated by the sale of state-owned assets, due to this most foreign direct investment has been focused on the domestic economy.

The following table shows how heavily the New Zealand economy relies on foreign direct investment, this table was taken from www.unctad.org

The above graph shows foreign direct investment in investment capital formation, the left hand section of the graph compares the Tran nationality index of host economies (%) in 1997 of the developed countries in the world, while the right hand section shows exactly the same but for the developing countries of the world. As you can clearly see New Zealand is a developed country and compared to all the other developed countries New Zealand officially ranks highest in terms of the relative "significance" of foreign direct investment in an economy, with New Zealand currently having 31.3% of foreign direct investment in the country's economy In terms of significance it is measured by an index which incorporates FDI inflows as a percentage of gross fixed capital formation; FDI inward stock as a percentage of GDP; value added of foreign affiliates as a percentage of GDP; and employment of foreign affiliates as a percentage of total employment . When comparing New Zealand's FDI to its major trading partners such as Australia, United Kingdom and China you can see that the amount of Foreign Direct Investment in the Australian economy is half of that of New Zealand's