10 May 2004 Media Note

Budget 2004

Enhancing investment promotion & attraction capability

Investment New Zealand will receive additional funding of $6.632 million in 2004/05 and out-years to, amongst other things:

- Complete its offshore network;

- Increase New Zealand-based personnel to support the expanded offshore network, add sector expertise and build stronger relationships with existing foreign investors;

- Develop and implement a comprehensive marketing campaign, supported by high-quality research and marketing material targeted at strategically important investors;

- Extend the Visiting Investor Programme to allow visits by technical and advisory personnel and marketing material targeted at strategic foreign investors; and

- Administer an expanded and enhanced Strategic Investment Fund (refer to separate initiative).

In addition, the Ministry of Foreign Affairs and Trade will receive $250,000 a year to provide support to Investment NZ operations offshore

Expanding Investment New Zealand's investment promotion and attraction capability is expected to contribute to a significant increase in the level and quality of foreign direct investment in New Zealand. Additional FDI will improve New Zealanders' living standards by growing the economy through adding to the capital stock, creating new and better quality jobs, and increased productivity e.g. through technology transfers or enhancing global distribution channels for New Zealand companies.

Rationale

New Zealand needs to attract more and better quality foreign direct investment (FDI). The key to this is having an overall business environment that is conducive to new investment, but "good fundamentals" alone are not sufficient for attracting more and better quality investment to a small open economy like New Zealand. That is because:

- Without promoting itself, New Zealand can expect to have a very low profile among international investors and this is likely to impede flows of investment to New Zealand from overseas;

- Investors only value the benefits that accrue to them. They do not consider the potentially significant benefits that may accrue to New Zealand businesses, employees and consumers, which can lead to under-investment;

- Increasingly, we face active competition for new investment from investment promotion agencies in other countries.

The above suggests a clear role for government to:

- lift the profile of New Zealand and, in particular, international investors' awareness of investment opportunities within New Zealand;

- in the face of competition from other countries, provide an information service to prospective investors to help them make investment decisions;

- facilitate investments into New Zealand by smoothing out the investment process, particularly government processes; and

- attract investment with desirable characteristics through guaranteed access to government services and, where necessary, incentives that are closely aligned with the generation of spillover benefits.

How does the initiative contribute to GIF objectives?

FDI contributes to economic growth by adding to the capital stock, creating new and better quality jobs, and increased productivity. Most important is the contribution to increased productivity, including through:

- Better use of resources for production. For example output by workers could increase as a result of new technology brought to a local enterprise by a foreign investor. In turn this could lead to higher wages, reduced costs or higher quality intermediate goods, and lower costs or better quality products for consumers.

- Spillover benefits from foreign firms to local firms. For example foreign investors can bring to local firms better international distribution channels.

- Improved domestic market competition. A foreign entrant may increase competition in the domestic market, eventually leading to higher productivity, lower prices, and more efficient resource allocation within the economy.

How does the initiative contribute to achieving the Government's key goals?

Increased high-quality investment has the potential to lead to new and better quality jobs, improve New Zealanders skills, and raise standards of living for all New Zealanders through higher wages and lower costs to consumers.

Links to other initiatives/rest of GIF package

This initiative is complemented by the initiative to Expand and Enhance the Strategic Investment Fund.

Funding

Additional funding of $6.632 million for Investment New Zealand in 2004/2005 and out-years represents an increase of more than 50 per cent over current funding.

Additional funding of $250,000 for MFAT's investment promotion work fund represents an increase of more than 80 per cent over current funding.

$million (GST inclusive where applicable) 2004/05 2005/06 2006/07 2007/08 Out-years

Operating - new 6.882 6.882 6.882 6.882 6,882

Operating - redistributed Nil Nil Nil Nil Nil

Capital - new 374 Nil Nil Nil Nil

Capital - redistributed Nil Nil Nil Nil Nil

Total 7.256 6.882 6.882 6.882 6.882

Questions and Answers

Why do we need FDI?

FDI provides significant benefits for New Zealand businesses, employees and consumers through:

- Creating more jobs and increasing the skills and experience of New Zealand's workforce due to the recruitment and training of employees by the foreign company;

- Better infrastructure and business networks;

- Development of linkages with foreign-owned firms operating in New Zealand, which can lead to:

- improved distribution channels and international market opportunities, creating opportunities for New Zealand-based suppliers and employees;

- new ideas, skills and technologies that lead to new and better quality products and services and, ultimately, productivity improvements; and

- the potential to outsource low value-added parts of the business to firms with genuine scale economies.

- It adds to tax revenue and, through reductions in unemployment, is associated with lower government expenditure;

- Ultimately, new productive investment stimulates economic growth and contributes to higher living standards for New Zealanders.

How do you know this is value for money?

There is a sound rationale behind government involvement in investment promotion, attraction and facilitation (see above). And there are some real examples of where investment has led to positive outcomes for New Zealand. But evaluating the effectiveness of IPA work, and the contribution IPAs make to investment decisions, is problematic, as there are a number of different factors that influence investment decisions. Nevertheless, feedback received from INZ clients suggest that in many cases INZ assistance is a contributing factor to investment decisions.

The BCG Report "Building the Future" noted the need for more resources into New Zealand's FDI promotion activities, which are limited compared to other countries. Internationally, those Investment Promotion Authorities that have been most effective at attracting FDI into their respective countries (such as the Irish Development Agency, Invest Australia and Singapore's EDB) have more extensive offshore networks and spend more on promotional materials and incentives than New Zealand. This proposal is therefore relatively modest by international standards.

What have we got out of this sort of spending so far?

HITLAB, Navman & EDS are good working examples.

What other countries/IPAs are we competing with?

There are more than 2,500 IPAs operating globally.

Why not put effort into promoting New Zealand investment in New Zealand - instead of helping sell off New Zealand to foreign owners?

Investment New Zealand does not aim to "sell off" New Zealand businesses. It aims to grow New Zealand businesses in New Zealand, leading to jobs and a higher standard of living for New Zealanders, by facilitating partnerships between New Zealand companies and large international organisations where all parties believe it is in their mutual interest to do so.

Such partnerships are not always acquisitions. Brunswick's investment in Rayglass is an example. Another is the joint venture between Jack Links, a US-based meat company, and a New Zealander to form the Jack Links (NZ) operation.

What sort of activities will this money be spent on?

Investment New Zealand will use the new money to:

- Complete its offshore network;

- Increase New Zealand-based personnel to support the expanded offshore network, add sector expertise and build stronger relationships with existing foreign investors;

- Develop and implement a comprehensive marketing campaign, supported by high-quality research and marketing material targeted at strategically important investors;

- Extend the Visiting Investor Programme to allow visits by technical and advisory personnel as well as those responsible for investment decision-making; and

- Expand and enhance the Strategic Investment Fund (a separate Initiative).

How do you know this sort of policy works?

Active investment promotion and attraction activities, including the use of investment incentives, are standard practice in most developed countries. While there is clear evidence that certain types of FDI can generate significant economic benefits, evaluative evidence on the effectiveness of IPAs is sparse. As a result, the level of resources that New Zealand commits to this activity is relatively modest by international standards.

How will you measure the success of this initiative?

The evaluation of the initiative is scheduled to be completed by December 2006. An evaluation strategy is currently being completed.

Isn't this just favouritism for a few?

No, Investment New Zealand aims to attract and facilitate investment that benefits New Zealand. For example, incentives are generally only paid out once certain conditions (e.g. job creation) are met.

Why do we give cash grants to successful foreign companies?

The nature of investment is that there are both private and public benefits. Examples of public benefits include new jobs and higher wages, higher tax revenues, increased demand for local supply, and technology sharing partnerships.

As these benefits are not captured by investors, there is potential for under-investment. Investment incentives, including cash grants, are therefore aimed at increasing the quantity and quality of investment. Incentives are also made conditional on the occurrence of certain beneficial outcomes for New Zealand.

What sort of investors will qualify for support under the Strategic Investment Fund?

Strategic Investment Fund support is conditional on the nature of the investment, not on the identity of the investor. Both domestic and overseas investors are eligible.

In essence, the investment must generate significant economic benefits, although the nature of those benefits - and who benefits - will vary from case to case.

Have any of the Strategic Investment Fund criteria changed - is this more money for business as usual?

The criteria for the Strategic Investment Fund are currently being looked at.

How does Investment New Zealand facilitate investment?

INZ's investment facilitation activities are varied - a lot of the activity takes place in its offshore offices where most initial contacts with investors are made.

INZ's activities can include:

- Briefing investors on NZ's comparative advantages;

- Providing information to investors, such as suitable locations within NZ;

- Introductions to relevant local and central Government agencies as well as potential private sector business partners; and

- Enlisting help from other government agencies.

ENDS