Professor Ang reviews the benefits and pitfalls of foreign direct investment by Chinese companies in NZ and by NZ firms in China

By Siah Hwee Ang*

Overseas direct investments (ODIs) are high on the agenda of China’s economic growth.

While foreign direct investments (FDIs) have been a key driver of China’s evolution in the last 30 years, ODI was, no doubt, a major part of China’s strategy in the last 10 years or so.

In fact, ODIs from China is predicted to exceed FDIs into China at some stage in the next few years.

For many countries, this is becoming a trend, as FDI in itself does not sustain a growing economy forever.

Benefits and costs of foreign direct investments

Most countries around the world adopt policies designed to both encourage and restrict FDI.

Host countries try to attract FDI by offering incentives and try to restrict FDI by dictating ownership restraints and requiring that foreign global multinational enterprises (MNEs) meet specific performance requirements.

FDI can make a positive contribution to a host country through capital injection, technology transfers, job opportunities, and management resources that would otherwise not be available.

By increasing consumer choice, FDI also increases the level of competition in the host market, driving down prices, thus increasing the economic welfare of consumers.

The costs of FDI to a host country include adverse effects on competition and balance of payments, and a perceived loss of national sovereignty. There is also concerns about the ability of local companies to compete with larger multinational companies.

On the flip side, ODIs are often deterred due to resource constraints and the lack of understanding of markets. It may also be the case that the home market is just too lucrative and provides sufficient growth for a company.

Nonetheless, ODIs provide huge growth potential and learning about markets.

NZ investments and Investments in NZ

According to UNCTAD, New Zealand’s FDIs totaled US$987 million in 2013. Total in the period 2008-2013 was US$11.44 billion.

In the period 2008-2013, the FDIs for China, Australia, South Korea and Singapore was US$687 billion, US$281 billion, US$61 billion and US$266 billion respectively.

ODIs for New Zealand was US$691 million in 2013, and the total for 2008-2013 was US$2.52 billion.

The figures for China, Australia, South Korea and Singapore in the same period were US$445 billion, US$83 billion, US$155 billion and US$130 billion respectively.

While comparing ourselves against these countries may seem like the comparison of apples with oranges, they are after all New Zealand’s free trade partners, so economies that we care about. Plus three of them are our largest trading partners, and Singapore is the only country which is ranked higher than New Zealand in the World Bank’s Doing Business Index.

What makes New Zealand stand out from this group though?

It’s the fact that our FDI is a long distance ahead of our ODI.

One way to interpret this is the fact that there is still substantial room for FDIs into the country, as a huge influx of FDI will often necessitate ODIs.

But this also begs the question: have we been slow in picking up FDIs?

If we are ranked highly in the Doing Business Index, surely it means that we are open to FDIs and thus we expect those to flow in more frequently. But yet, this is not the case.

This is an area worth putting our thinking cap on for.

The less risky option of exporting

Exporting is always a less risky option than ODI when it comes to entering foreign markets.

In fact, while exporting can be seen as a substitute for ODI, it is also the first step to markets and a predecessor to ODI, according to international growth models.

Thus, if we are assessing the internationalisation of an economy using only trade statistics, then we are missing something.

For example, in terms of exports to gross domestic product (GDP) ratio, New Zealand is near Chile and Hungary. Yet, New Zealand is way behind in terms of the ODIs to GDP ratio as compared to these economies.

So, shooting towards an improvement in export-GDP ratio must not come at the expense of increasing a lagging ODI-GDP ratio.

Both ratios need to move in tandem for more balanced economic development.

---------------------------------------------

Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here.