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Mallard: Foreign investment in NZ

21 June 2006

Hon Trevor Mallard - Foreign investment in NZ - partnering not plundering

Speech to the Hugo Group's Foreign Investor Dialogue, InterContinental Wellington, New Zealand

In my capacity as Minister of Economic Development, and chair of the Economic Transformation group of ministers, I am going to offer you some perspectives on how foreign direct investment is placed on the Labour-led government's continuing agenda to transform New Zealand into a high value, innovative and export-led economy.

This government is one of the most open and welcoming of foreign direct investment in the world, and there are fewer fetters on what foreign owners can do post entry than almost anywhere, consistent with them meeting the good citizen obligations of all firms. I would also note that New Zealand has been rated as the easiest country in which to do business in the latest World Bank survey.

Our approach to foreign direct investment is not just a matter of political philosophy, but an integral part of our economic development and economic transformation agenda.

Foreign direct investment sits inside our economic development programme for two vital reasons.

First, it is consistent with our commitment to encourage directors to take risks - we see this as totally necessary if we are to drive this economy forward.

We cannot expect private individuals – New Zealanders as well as foreigners – to commit long term to this country’s prosperity if they are at risk of having their assets stranded or devalued by government intervention.

In this context, the ability of an owner to exit an asset at the best realisable price means that they have to be able to sell to a bidder from offshore.

I want to be clear here however that this is certainly not a licence to plunder. Of course there will be iconic or strategic assets that any government must protect, and we are not about to open the vaults of our national treasures to the highest bidder.

But within the bounds of reasonable commercial development, if we want people to take the risks and commit the energy, they must be able to cash in on both.

Secondly, in a small economy, a long way from the large populations and high incomes of the world and with stretched capital markets, sometimes it’s nice to have a well-connected friend.

We have tended to welcome foreign direct investment on the basis that it brings access to markets, managerial capability, technological sophistication, distribution channels and all that sort of stuff that fills in our own capability gaps and leverages off our inherent strengths.

At this point, I am going to diverge from the conventional and to start to question at least the dividend that we – as New Zealanders – have got from this second presumed benefit of foreign direct investment.

Don’t get me wrong. I am not denigrating the value of past foreign direct investment. I am questioning if we – and when I say we I mean both of us, New Zealand and our foreign partners – have actually focussed on what we can do together, and more importantly how we can do it better.

There is a real question around whether we are hollowed out, whether we are too much a branch manager's economy.

My theme today is that it's been a relationship of mutual convenience. It is now time to think about foreign direct investment as a relationship of mutual advantage.

To be candid, inward investment has never been motivated by the desire to do the best for New Zealand, and we are mugs if we think it ever could or should have been.

The risk is that if foreign investors have come here to secure a raw material resource supply, or to serve a portion of their global market, the spin-offs to New Zealand will be limited.

I am generalising here, but New Zealand’s inherent advantage is not just our resource endowment.

Our largest and most valuable asset is our capacity to innovate.

We are a nation of ideas people and problem solvers. We have backed that over many decades by heavy public investment in science and research capability, and in a number of key areas – animal and plant sciences, food processing, biotechnology, geological resource and hazards management to name but a few – we have world class facilities.

What I'm saying is that we have invested in intellectual property - but it is not there to plunder. We have invested in capability that is there to partner.

In trying to find real-life examples of foreign direct investment in New Zealand that has helped catalyse growth and expansion here - I have to admit, we have struggled - which is a good point to note in itself.

One good example is that of Auckland boat manufacturer Rayglass Boats - which produces Legend fibreglass runabouts, and rigid hulled inflatables that are exported to more than 17 countries, with exports making up 60 percent of the company sales. Rayglass was the preferred supplier of boats used for the chase, umpire and crowd control during the last two America's Cup regattas.

In order to further its expansion, this company recognised it needed to partner another company so it could penetrate the global market and open up new distribution channels and markets.

Rayglass ended up teaming up with United-States based Brunswick Corporation - the largest global manufacturer of marine leisure craft. Brunswick, interestingly for a large international corporate, took a minority shareholding - to ensure that Rayglass had the freedom and ability to expand more rapidly.

As well as providing an international marketing network, the partnership also gave the company improved research and development financing. Rayglass estimates the move increased its potential turnover eight-fold.

There is a lot of work going on in various international agencies about understanding the process of innovation and development. Past models of innovation have been somewhat linear: a scientist has a good idea, someone develops it, and an entrepreneur markets it.

The new thinking going on now sees innovation as a connected system with feedback loops. Instead of ideas looking for markets, we need to think of markets looking for solutions.

Here is where the foreign company fits in with our development interests. It is the firm in the foreign market that is closest to the commercial opportunity that needs a solution in order to capture that commercial opportunity. And that's where New Zealand companies can potentially fit in.

Let me give you an example. I co-chair the Food and Beverage Taskforce. We are told that the fastest growing segment of the food market in the developed world is in what are generally called functional foods.

These are foods that contribute to better health results: improved blood flows, better digestion, management of diabetes, improved eyesight, combating types of cancers, lower levels of cholesterol, improved gut health and all that sort of stuff.

What we have tended to do in the past is to simply assert that New Zealand food is clean and green and healthy, and therefore good for you.

That just doesn’t cut it any more.

We need to get deep into knowing and understanding just exactly what the food nutritional needs of consumers are, and then gear the science up to connecting and proving the functional solution.

That needs to be tested in a commercial setting, the intellectual property has to be protected, and the distribution systems need to be in place to deliver the value inherent in the idea.

It is the foreign partner that is often the only part of the innovation system that has the market presence and the scale and the distribution logistics that can leverage the mix of science, problem solving, environmental integrity and quality assurance and control that are delivered from the New Zealand end.

In this model of foreign engagement with, rather than necessarily investment in New Zealand, we are looking for foreign companies to do what we cannot do ourselves and seeking to retain the value associated with the contribution that we alone can add.

It’s a benefit-sharing model, but I have to say it is not yet the dominant model of foreign direct investment. It is emerging in some parts of the seafood sector and elsewhere, but it is likely to intensify in particular parts of the economy where our advantages are not readily relocatable overseas.

The reason is that if we are working with ideas that are not grounded here, they can quickly be captured and exported. Under this scenario we socialise the overhead costs of innovation, carry the risks and the losses of ventures that have not gone anywhere, but get very limited advantage from our successes. We become a perpetual incubator for the rest of the world, feeding our science into its modernisation.

I am an optimist with this one. As part of the process of fleshing out the details of our economic transformation agenda, the Ministry of Economic Development commissioned a report on the New Zealand innovation system.

The report - which is nearly final - includes the observation that innovation is a collaborative process and builds on the past. It is therefore cumulative, and in a small developed economy like our own it builds on our mature industries.

I am suggesting that there is a need for communication and the forming of links and alliances. The recent model of impersonal capital market flows is not really designed to seek out and find the opportunities for mutually beneficial partnerships in the way that the so-called "old boys" clubs probably did.

So we do need to think a little more expansively, and our institutions and firms should be more proactive in seeking out strategic partners that can cross the span between the commercial idea and the commercial opportunity.

In their turn, foreign firms need to be a bit more searching in recognising that we are more than a forest, farm and an ocean.

I do not rule out the possibility that we might need to improve the way in which we facilitate these connections and assist with developing partnerships. Of course it is ideal if parties with a mutual need find each other, but the real world is full of information gaps and communications failures and an agency might be needed in an intermediary role.

The world economy is changing. We have gone through the stage of globalisation under which free flowing capital sought out assets. In order to move to the next level, mature companies in mature markets need to seek out opportunities, and the best opportunities are those that are driven by a unique offering of a product or service that is underpinned by knowledge.

New Zealand has thin labour and capital markets but deep reserves of intellect and inventiveness. We are not going to give it away and it is so embedded in our systems that we cannot even sell it to the highest bidder.

You are welcome to partner us in leveraging it to our mutual advantage.


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