Michael Cullen Address to OIC's November Meeting
Tuesday 13 November 2001
Address to OIC’s November Meeting
The Cathedral Room, The Auckland Club, 34 Shortland Street, Auckland
Thank you for inviting me to speak with you today, it is a great pleasure to be here with the people who are instrumental in bringing valued foreign investment to New Zealand.
New Zealand’s economic and social well-being depends on our ability to trade with the rest of the world. Over the years, international investment has played a vital role in the development of our economy and quality overseas investment is still critical if we are to meet our long term growth targets and lift New Zealand’s economic performance back into the top half of the OECD.
The government has a clear vision of the New Zealand we want to help create.
We want to encourage overseas investors to create new business here which reward excellence and enterprise and build on the special qualities unique to New Zealand: our environment, our cultures and the Kiwi lifestyle which is the envy of the rest of the world.
We want to help New Zealand companies develop their export potential.
We want an economy that is less vulnerable to the vagaries and the long term decline of commodity based production and trade.
We want to move to a more focused and sophisticated trade in our goods and services.
We want to tap into that famous kiwi ingenuity to turn great ideas into great New Zealand business ventures.
We see the New Zealand of the future as an export orientated economy with more global companies operating from a New Zealand base and developing strong clusters around them.
While some factors remain outside the influence of government - an obvious example is the effects on the global economy of the September 11 terrorist attacks - there are still many things a government can do to promote economic growth.
The Labour Alliance Government is nearing the end of our first two years in office. Already we have made a great deal of progress putting into place the building blocks for a 21st century economy.
We are co-ordinating interlocking policies relating to innovation, talent and skills, investment and business growth, excellence in education, science and research and development.
The government can encourage investor confidence by providing a stable and sound broad financial environment and adopting partnerships for growth between government agencies, communities and private business.
Last year the government was subject to a certain degree of criticism from the international community about an alleged change in our foreign investment stance. I will not go into the political mongering that was behind the charges, nor the effect they had on our reputation overseas - but I will, once more, briefly outline the government’s position on overseas investment.
The damaging rumours were fed by a number of events, albeit unrelated ones. The first was the Sealord decision that involved ownership of a large amount of valuable fish quota.
There is no doubt in my mind that any government of New Zealand, no matter what its political colours, would have reached the same decision.
The investment proposal was reworked, and a revised application was approved. The arrangement that eventually went ahead gave much more certainty of net national benefits emerging, and I think were of greater commercial value to all of those involved in the transaction.
The second factor that caused some confusion among overseas investors and the market was the arms-length role of the Commerce Commission and its decision regarding Shell’s application to buy Fletcher Energy’s New Zealand exploration and production assets.
But that is now history and I believe New Zealand’s international reputation has been restored as overseas investors are getting the message that this government is actually taking a far more proactive approach to encouraging FDI to New Zealand than any other previous administration.
In the two years since we took office, the Overseas Investment Commission has approved 440 applications with a total net investment value of $4.5billion.
We are, however, more interested in attracting the sort of investment that is in our interests as a nation. Over the past decade or so, I believe the quality of some of the overseas investment in New Zealand was less than optimal. New Zealand sold off infrastructure and existing businesses rather than encouraging new greeenfield investment with the accompanying growth of income, employment and tax revenue.
And we are not just offering words to quality investors; we are doing a great deal to improve the investment environment:
- the telecommunications Bill will promote competition in markets for the long term benefit of consumers and investment in the industry;
- we have introduced a takeovers code to protect smaller investor, and;
- we have tightened up on insider trading;
- we have strengthened New Zealand’s capital markets by allowing the Government Superannuation Fund to invest in the share market, and;
- we established a venture capital investment fund to finance business start-ups, focussing particularly on technology and high value-added products and services, in partnership with private sector venture capital;
- a new scheme provides export credit guarantees to support exporting firms with growth potential. It involves the Government working with the private sector to provide underwriting services for exporters who need finance between shipping an export order and being paid for delivery.
The government has acknowledged the importance of international investment with the establishment of Investment New Zealand which works to build closer relationships with global investors and to actively assist them with investment opportunities here.
Investment New Zealand uses its domestic and global networks to win, retain and grow productive international direct investment in New Zealand.
Its strategy in North America received a major boost with the appointment of a Director of Investment based in New York. The team continues to come up with innovative and smart ideas, such as the establishment of a virtual team of colleagues in the North American offices of Trade New Zealand, the formation of a North American Advisory Board and joining as a foundation member of the Australia New Zealand America Technology Network.
Investment New Zealand focuses on sectors with high growth and wealth creation potential and in source countries with high prospects; North America and Australia ranking first, followed by Western Europe and East Asia.
Despite a modest budget, Investment New Zealand has had a very successful year and has achieved excellent results through a targeted strategy, the employment of sector specialist managers, the development of a clear brand position and the strong support of both Trade New Zealand and the Ministry of Foreign Affairs and Trade.
Part of its strategy is to literally fly potential investors to New Zealand so they can take a look at what we have to offer.
It’s about being proactive and cutting through red tape by fast tracking application and accessing the numerous agencies involved in setting up new business ventures.
It has been instrumental in creating over 400 jobs and exports worth $278 million through successful investment cases such as: New Zealand Yachts, Sovereign Yachts, Ericsson/Synergy, American Herbals and the attraction of significant film work to New Zealand.
New Zealand has failed to attract anything like our potential share of the international pool of foreign direct investment. Previous administrations created the level playing field but few came to play.
Now the playing field is being tilted - just as other nations have tilted theirs.
Government funding of $1.6 million helped attract the giant Swedish telecommunications company, Ericsson, in a joint venture in New Zealand with Synergy International. The venture will develop mobile phone Internet applications and is expected to create around 200 high skilled jobs.
Furthermore, a major new entrant like this to our information and communications sector will also act as a magnet for cluster formation by local companies. That’s all good news for the economy.
Over the next two decades plantation forests throughout the country will yield tens of millions of cubic metres of new radiata pine.
The question is, whether this “wall of wood” becomes a source of wealth through value added processing or if, as so often in the past, we end up exporting raw logs to other nations.
Forestry experts have long been saying we need to do something, yet for 20 years governments have done nothing.
New Zealand needs billions of dollars of investment to provide the infrastructure for the harvest and to develop the processing industries.
Recently my colleague Jim Anderton convened the Wood Processing Industry Steering Group. Its strategy sets out a structure to allow all stake holders to work together to deal with barriers to growth such as infrastructure, skills and planning, in order to encourage investors to take advantage of the tremendous opportunities on offer in our regions.
Trade and investment are increasingly interlinked in today’s global economy - UN research shows that at least 40 percent of world trade is now conducted via cross-border investment.
The government has led a number of successful trade and economic delegations to India, China, South America, Turkey, Singapore, Korea, and to Japan.
New Zealand is a strong advocate for open and fair trade. We have concluded two bilateral trade liberalisation agreements:
one with Australia and the other with Singapore. And we are currently negotiating with Hong Kong - and like Singapore’s, Hong Kong’s negotiation with us is the first time they have explored a bilateral trade agreement.
We are also seeking a number of other agreements and we are constantly exploring new markets. This week the Prime Minister is leading a business delegation to promote New Zealand’s commercial interests in Latin America.
There is growing support for a comprehensive trade agreement between the US and New Zealand and Australia.
New Zealand will continue to take a global approach to improving our market access through forums such as APEC and the WTO but we will also take up opportunities to develop bilateral agreements as they arise.
Finally, it seems timely to discuss some of the recommendations of the recent Tax Review regarding foreign investment.
The recommendations of greatest practical interest to the government are in the areas of international tax and entities and savings taxation as they have the potential to stimulate economic growth.
I will ask officials to incorporate consideration of them into our tax policy programme, although there are some design details and implementation issues to be worked through before any final decisions can be taken.
International taxation is especially pertinent, given the increased mobility of capital, individuals and businesses. Although tax is not the main driver of decisions on where to locate investment, it can exert some influence at the margin.
We need to keep our foreign investment laws under constant review as other jurisdictions are using tax rates to attract investment. For example, much of Asia offers a lower tax environment for non-residents than the 18 percent rate recommended by the review.
That said, I agree with the review’s comments that governments need to be cautious before they depart from the broad base, low rate approach to taxes, even when pursuing increases in international competitiveness.
The review has recommended reducing the tax burden on foreign investment into New Zealand, especially direct investment. It has also looked at ways of targeting new foreign investment.
I find this an interesting contrast to those who call for a wholesale cut in the company tax rate. As the review notes, the company tax rate can impact quite differently on residents and non-residents.
For residents who invest in New Zealand companies, reducing the company tax rate can have a limited effect, due to our imputation system: the reduction in company tax is simply offset by increased personal tax in the wash-up.
For non-residents, the impact can be much more immediate and far-reaching, since lower taxes on non-residents can lead to a lower cost of capital for all New Zealand firms.
Both the review and the government recognise that their proposals give rise to a number of issues that will require further work.
Thank you for your time today. In closing I would urge you to go back to your respective organisations, clients, and nations and remind them that New Zealand is a reformed, open and efficient economy with a future as a high-value trading nation. Tell them New Zealand is open and ready for business.