Luxon dreams of development

Foreign direct investment is great – but have you tried domestic investment?

Mr Luxon has announced he intends to hold an “investment summit” in March. The Government intends to bring “about 100 of the world’s most high-profile investors, business leaders and construction companies” and “actually introducing them to the investment opportunities that are here”. Infrastructure Minister Chris Bishop said the event would be a “showcasing of the pipeline of opportunities that will be coming over the forthcoming years”.

Great!...isn’t it? Mr Luxon claimed that foreign investment would “boost growth”. Mr Bishop claimed it would “help address our massive infrastructure gap”. We certainly could use help with both. We are in the worst recession outside of COVID since 1991. We have a $104bn infrastructure gap and its growing year after year. The government is committed to a fiscal strategy that means there is no money available to help either – so foreign money will have to fix it.

The key question we should always ask in economics is – does it work, and for whom? The actual evidence on FDI is very thin. One of the most cited studies on this from the US says “we find that FDI inflows do not exert an independent influence on economic growth”. A 2023 report from the World Bank states “Early work on FDI and growth shows that there is no statistically significant link between these two variables in the average country”.

Some studies show that FDI does deliver economic growth – especially in poorer countries and middle-income countries. New Zealand isn’t one of those. Studies of higher-income countries such as Spain “yield no evidence for FDI to stimulate economic growth”.

The reason for the confusion and mixed messages from the evidence is that growth can be helped by FDI, but it doesn’t cause growth itself. Making the best use of FDI is a function of what academics call the “absorptive capability” of a country. That capacity is measured in things like skills, infrastructure, natural resources, and workforces. Without these, the FDI doesn’t work well.

FDI also works best when it enmeshes with the existing local economy and its local supply and export chains. I grew up next to Hadrian Business Park in North Tyneside in the UK. In 1997 Siemens invested £1bn in a new plant to make semiconductors, creating more than a 1,000 jobs. Inside 15 months it was shut. It was then bought by Atmel. Then that closed. The site is now a car park.

Image of Siemens North Tyneside Plant – Source https://www.chipsetc.com/siemens-semiconductor.html

It closed because the firm had no reason to be there. No local expertise. No local skills base. No supply chain. In the economic development trade, we call these ‘cathedrals in the desert’.

If Mr. Luxon genuinely wants FDI to work (and I do too!) then holding a summit is about the least useful thing you could do. Investing in the skills of our workforce would lead to much better outcomes. Invest in infrastructure, particularly export infrastructure like rail and ports. Making sure that the energy system is fit for purpose. The things that allow foreign or domestic economic growth to flourish. These also have the benefit of helping New Zealanders along the way.

The decision of a foreign actor to invest in New Zealand is something over which we have little control. We do have much more control over whether or not we are helping people get training, or whether house prices are so high people can’t move to where there is work. These are the things governments can do. Yet Mr. Luxon’s government is reducing funding in those areas. It makes us all worse off too.

Holding a summit is a great idea if there are previously unknown opportunities to discuss. There are occasions when New Zealand does get left off maps. But global investment firms cumulatively worth trillions of dollars know we are here. Local investment firms do too. Neither of them is stupid, under-resourced, or keen to leave opportunities overlooked.

The only ‘new’ investment here would be opening up the New Zealand public sector to more public-private partnerships. New packages of investment where profits can be made for overseas firms from public infrastructure and public services. Prisons, schools, housing. Minister of Health Simeon Brown said in health care that “public private partnerships are something we could be looking more at”.

That’s something I think would worry many Kiwis. Firstly, PPP’s have gone badly in New Zealand – think Transmission Gully in Wellington. Secondly, the government can borrow more cheaply than the private sector can invest - something the Government’s own PPP guidance acknowledges. So the only reason to bring in private investment in this space would be to artificially make the government’s books look better in the short-run, at a giant cost for us all in the long-run.

Thirdly, profits from FDI end up overseas. The biggest banks in New Zealand are essentially a really large FDI project from Australia. We sent them $6.5bn in profit in return last year. How would you feel about that if it also applied to public services? Would you want the ability of New Zealand to deliver public services or public infrastructure to be function of profit or of need?

I would support a conference on investment opportunities in New Zealand. One that genuinely looked at why firms don’t invest. One that examined how we could improve our skills, health, housing, and infrastructure outcomes. One that said how do we pay for it, and who should shoulder those costs? One that examined how we will support all firms in Aotearoa to grow - both domestically and foreign-owned. It’s a wild idea but you could call it a “Budget”. And use the savings on the ‘invitation-only summit’ canapes and travel to pay for school meals. The returns are likely to be much better for our country.