Brian Gaynor: Overseas investment a key part of our story

The overseas ownership of New Zealand was back in the headlines with the release of KPMG’s Foreign Direct Investment in New Zealand: Trends and Insights.

The report dispels a widely held belief that New Zealand is being gobbled up by Chinese buyers as Chinese interests accounted for only 14 per cent of the country’s overseas investments in the January 2013 to December 2014 period.

During that same period the United States, Canada, Europe and Australia accounted for 59 per cent of overseas investment, Asia 33 per cent and South America 1 per cent. The remaining 7 per cent did not disclose their origins.

Foreign investment has been a regular controversial issue in New Zealand, including in the 1970s when Bill Sutch published Takeover New Zealand.

Sutch, a former Secretary of the Department of Industry and Commerce who was accused of passing government information to a Soviet KGB agent, wrote that the book was about “the perverse and rapidly accelerating ownership and control by overseas interests of New Zealand manufacturing, servicing, finance and even land”.

Sutch inserted the following author’s note at the beginning of his book: “Changes in control and ownership of New Zealand land, finance and industry are now taking place so rapidly that although the statements made in the text of this book are as accurate as I have been able to make them, changes will inevitably have taken place between that date (December 1971) and the date of publication (a few months later).”

In hindsight, Sutch’s concerns were ill-founded.

The reality is that New Zealand has always been dependent on foreign investment and there was no justification for Sutch’s claim in the early 1970s that “New Zealand has been left far behind some of the former African and Asian colonies who are now much more in charge of the economic decisions in their countries than are the people of New Zealand in theirs”.

On the contrary, foreign investment – on balance – has made an important contribution to the country’s economic development.

Since 1840 New Zealand has been predominantly an export-oriented, outward-looking economy that has required capital to develop these activities.

The original capital contributors were the British-owned banks in New Zealand, UK-originated stock and station agents and British-owned mortgage companies. The early New Zealand banks mainly provided short-term funds while the British banks supplied long-term risk capital.

British investments, particularly by the Borthwick and Vestey families, played a major role in the meat industry. They established freezing works, had a big influence on shipping between New Zealand and the United Kingdom and were still involved in a number of NZX-listed meat companies until the 1980s.

Although these huge family companies, which also had extensive interests in Australia and South America, played an important role in the establishment and growth of the export meat industry they can be criticised for emphasising commodity exports rather than value-added consumer products.

However, the dairy industry, which was established on a co-operative basis with little foreign involvement, has also focused on commodities rather than value-added products.

The state became more involved in economic activity in the late 19th century in a number of areas, including land acquisition, the establishment of Government Life, State Insurance and the Post Office Savings Bank and infrastructure development. The latter includes the railways and telecommunications.

The New Zealand government owned and controlled the railway network whereas in many other countries the state provided subsidised loans to private companies to establish this transport system.

Foreign investment, mainly new greenfield operations, picked up dramatically in the 1920s as New Zealand’s population expanded and consumer demand increased.

For example, General Motors opened an assembly plant in Petone in 1926 and the Ford Motor Company followed in 1936.

A large number of foreign-owned firms were effectively turned into monopolies or oligopolies under the import licensing scheme and import substitution policies introduced from 1938 onwards.

Roderick Deane, who went on to become Deputy-Governor of the Reserve Bank and a highly regarded corporate leader, was very critical of the import substitution policies in his 544 page PhD thesis “Foreign Investment in New Zealand Manufacturing”, which was completed in 1967.

Deane concluded that over 25 per cent of New Zealand’s manufacturing output was controlled by these foreign-owned companies and a large number of these had been effectively gifted monopolistic or oligopolistic positions under the import licensing and substitution schemes.

These meant they were not subject to import competition and they could draw on the technical assistance of their parent company which made it extremely difficult for newly established domestic manufacturers to compete.

Older readers will remember that many of these overseas-controlled companies remained listed on the NZX until the 1980s. These included: Alcan New Zealand, Associated British Cables, Autocrat Sanyo, Dunlop New Zealand, Firestone NZ, ICI New Zealand, Ivon Watkins-Dow, James Hardie Impey, Repco New Zealand and Wormald International NZ to name a few.

New Zealand had no statutory regulations governing overseas investments until the Overseas Takeover Regulations Act (1964). This established the need for approval for shareholdings in excess of 25 per cent and for the purchase of farm land by foreign interests.

The general thrust of the 1964 legislation was that the government wanted foreign investors that would bring new technologies to New Zealand or agriculture investors that would contribute to the development of the rural sector.

There were major concerns about the large-scale purchases of forest plantations by Japanese investors in the 1980s and 1990s but the major issues at the time were the government’s privatisation programme and the sale of our leading banks to Australian interests.

This column has been highly critical of the government’s decision to sell a number of major state-owned enterprises, particularly Telecom and Bank of New Zealand, to overseas investors at extremely low prices.

Telecom, which was an unregulated monopoly, was a proverbial gold mine for its original United States investors and the Bank of New Zealand was sold to National Australia Bank at rock bottom prices.

State-owned assets were either sold as unregulated monopolies, at low prices or to inappropriate foreign/domestic joint ventures, particularly Tranz Rail as far as the latter is concerned.

The preferred way to sell state-owned assets is through a sharemarket float with priority given to domestic investors.

The latest concerns are that Asian investors, particularly the Chinese, are buying vast quantities of our farms, businesses and houses even though there is little evidence to support this.

However, we can expect more and more Asian investment because trade, immigration, tourism and foreign investment are closely linked.

In the 1800s and early 1900s Britain was our major export market, main source of migrants and provided most of the country’s foreign investment.

In the second half of last century Australia and the United States became more important as far as export markets and foreign investment was concerned.

In recent years China has become our main export market and six of our top 10 export destinations are Asian countries. In addition, Asians now represent 36 per cent of the country’s total migrants compared with 23 per cent from Europe and 21 per cent from Australia, while Asian tourism numbers are growing at a far faster rate than the overall market.

We should avoid adopting the negative Sutch approach to Asian investment because foreign investment from this area will inevitably grow as our trade with the region expands and migrant and tourist arrivals increase.

The best way to deal with the foreign investment issue is to adopt some clear guidelines, possibly in line with the provisions of the Overseas Takeover Regulations Act (1964).

These guidelines would encourage investments that introduce new technologies, particularly greenfield operations, and agriculture investments that will contribute to the development of the rural sector.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.