Hon Trevor Mallard
Minister for Economic Development

30 August 2007 Speech Notes
Embargoed until: 1.00pm

Offshore investment partnerships and kiwi firms

Speech by Economic Development Minister Trevor Mallard to the Wellington Diplomatic Club, Duxton Hotel, Wellington.

Thank you for the opportunity to talk to you today. I want to share some thoughts with you about the government’s new approach to supporting international investment with an eye on growing New Zealand firms through an international partnerships approach that will deliver wider benefits to the New Zealand economy.

Before I do that however, I need to make it absolutely clear that I am talking about how we facilitate international investment through agencies such as Investment New Zealand.

Nothing in my comments has anything to do with the regulation of international investment through the processes outlined in the Overseas Investment Act. Specifically, nothing in this speech should imply any view whatsoever on the decision I may be called on to make in relation to Auckland International Airport Ltd. There are strict statutory requirements that guide that decision, not matters of policy.

The Labour-led government is determined to transform this economy into one that is both innovative and sustainable, and one that generates higher incomes for New Zealanders. Part of that transformation will come from developing the skills of our people. Part of it will come from a better use of our natural resources. Part will come from a more efficient organisation of production. Part will be driven by the excellence of our science and the inventiveness of our technicians.

But the one thing that enables and liberates all of those creative forces is investment.

It is a fact, though, that even with the New Zealand Superannuation Fund and KiwiSaver, our private savings rates are low, and this limits our capacity to invest. It is also a fact that our domestic economy is small and cannot generate the scale economies to support sustained, large scale investment.

What this means is that on the one hand, we need to accept that we are, at least for the immediate future, somewhat dependent of foreign capital. And on the other, we need to think about using outward investment as one method to expand the market base we serve, and to strengthen and grow our kiwi firms through the international connections and expertise that such outward investment can bring.

This thinking underpins a major change in the government’s approach to international investment that I am announcing today. It means that we must now start to think of how we support firms to make outward foreign investment and not only inwards foreign direct investment. It means thinking about such investments as strategic international partnerships that will benefit New Zealand firms.

Government policies on foreign investment have changed quite materially in recent years.

Traditionally, we had an approvals approach to foreign investment. Investment policy was in effect a screen. Inward investors had to get approval for investments of a certain type and above a certain value. That regime has evolved over time, and nothing I am announcing today will change the regulatory approach currently enshrined in the Overseas Investment Act. Rather, this announcement relates to government support to assist our firms to better connect to international markets and expertise through both inwards and outwards investments.

In 2000, the government decided that it would take a more active role in attracting inward investment. The logic was that this would be accompanied by new technologies, create new opportunities for existing New Zealand businesses, open up new market opportunities, and bring in foreign expertise, all associated with the process of internationalisation.

Investment New Zealand (INZ) was established, and it was authorised to undertake a variety of inward investment attraction functions, ranging from assisted visits by potential investors through to grants and loan guarantees.

We have now reviewed Investment New Zealand’s programmes, as we planned to do, in order to refine its best aspects, and cut or change what didn’t work. Like most reviews, the evaluation finds some good, some bad, and some indifferent results.

The review did find that Investment New Zealand made a difference. Over four years from 2002, it was involved with 19 investments with a combined value of $502 million, of which $155 million would not have occurred without its intervention.

Because a programme like this builds momentum over time, Investment New Zealand activity could have initiated projects that are still in the pipeline, and future results may well flow from, and be attributable to, spending that took place during the review period.

On the down side, the project was expensive. We spent around $60 million to leverage the extra inward investment. It is almost impossible to measure precisely what sort of tax and business multipliers the extra investment generated for the greater public good, but the advice from those who conducted the review was that it is unlikely that additional public benefit from the extra net $155 million inward foreign direct investment would exceed the costs of getting it.

Returning to the review of Investment New Zealand: it found that only four of the 19 success cases were associated with high-growth, New Zealand domiciled companies seeking strategic investment partners.

The remaining 15 cases involved foreign investors seeking to establish or extend their interests in the New Zealand economy. All were of a "brownfields" type: the purchase of existing production assets.

There was a heavy concentration on wood processing acquisitions (49 per cent of the foreign direct investment) and on acquisitions by Malaysian based companies (37 per cent of the total).

It found that a strength of Investment New Zealand is its ability to pro-actively contact case clients before they decide on New Zealand as the final investment destination, providing facilitation services to save time and money, and creating access to assistance that the investor would not otherwise have had: opening doors and reducing barriers.

We are therefore going to fine tune the inward investment programme: stopping those programmes that have not been effective and focussing more on attracting high-quality rather that high-quantity investment.

Specifically, we will discontinue the major grants and loan guarantees element of the Strategic Investment Fund, and use those funds instead to support feasibility studies into proposals that will support economic transformation.

The Visiting Investor Programme has been better value for money and will continue.

Last year I talked about the need for inward foreign direct investment to leverage the potential of our domestic economy. I talked then of a model based on "partnering not plundering" and based on forming international relationships of mutual advantage

Today we have the next important step in this approach – and it has as a central focus our goal of building globally competitive Kiwi-owned firms

Instead of having to rely on achieving a global presence for the latest great product or process by selling it to a foreign firm with the right external presence and scale, we want to grow abroad and retain New Zealand ownership for the prosperity of communities around New Zealand.

Both onshore and offshore investments have merit, depending on the circumstances. Building New Zealand companies through expanding their offshore presence is also likely to be helped as the funds in KiwiSaver accounts and the New Zealand Superannuation Fund seek profitable avenues for investment.

To a certain extent the establishment of the government's Venture Investment Fund has already spurred this type of activity, with six local venture capital funds that over the last five years have collectively attracted $344 million of capital (around 23 per cent from government through NZVIF, 54 per cent from other New Zealand investors, the balance from offshore) destined primarily for investment into New Zealand companies with global aspirations.

So far 37 companies have received investment support through NZVIF investment. Of those companies 16 are already exporting. Many of these have established a physical presence in their key markets, for example Proacta, Zephyr and Right Hemisphere all in the US.

The message here is that internationalisation is not a threat, and in fact it can be a vehicle through which we reinforce and take advantage of our unique national identity and special attributes.

This now brings me to the second leg of the changes being announced today. We have very limited direct government support for the other direction of foreign investment. This is outwards foreign investment by New Zealand based and New Zealand owned firms.

Research done by government officials shows that our stock of inward foreign investment is similar, as a proportion of GDP, to those in other smaller developed economies. However, our stock of outward investment has declined and is now significantly below half of the OECD average.

This potentially has negative impacts on our balance of payments, and limits the ability of our companies to grow into sizeable firms that have big impacts and that are sustainable.

A key part of our economic transformation agenda is to grow these globally competitive firms. They will not grow within New Zealand because of our small market size.

To grow, they can export from a distance, form an alliance with an inshore distributor in a foreign country, or relocate some part of their activity offshore. This can be a part of the processing or marketing operations of the firm. Offshore location tends to require outwards investment if the firm is to retain control of that part of its operations.

Internationalisation through investment has both the highest risk and the highest cost, but potentially it also has the highest returns to New Zealand.

All of the business internationalisation strategies – exporting from a distance, forming alliances or investing offshore - are valid. However, government-funded business assistance to internationalisation is currently almost exclusively focussed on support for export market development.

A case in point is our investment support through NZVIF, which has undoubtedly contributed investment support for a number of New Zealand companies as they seek to enter global markets. This support is generally very early in the life of the company and there is not always the scale of capital and continued support these companies need as they face offshore market challenges.

If there is a gap in our support to the global expansion of our firms, it is the small scale and sometimes ineffectual support that government programmes offer outward investment activity.

In the Budget, we announced the first step in addressing this through the change to the international tax rules. The tax exemption for active income earned by New Zealand companies offshore will also effectively level the playing field, putting them on the same footing as competitors from elsewhere in the world.

The second step, which I am announcing today, is a new focus on assisting firms to undertake outward investment. The change in policy required a Ministerial direction so that this focus becomes an explicit, not an incidental, part of the work of the relevant government agencies.

Before assistance is given, we need to be satisfied that there is a compelling logic behind spending public money to help private companies to grow offshore.

We know two things.

Firms go offshore to get closer to their suppliers, their technology allies and their markets, and to avoid tariffs and trade barriers. That’s fine, but in itself it doesn’t justify assistance from the taxpayer: if the companies get the benefits they should meet the cost.

Secondly, my advice from officials is that research shows that firms that engage in outward investment seem to be more productive than those that stay at home. Again, that is no justification for support: they may grow abroad because they are more productive, and not become more productive because they have gone offshore.

Of course not every foray into foreign markets is a success.

There are difficulties. Companies may not be well prepared and fully understand the challenges that they face. It can take time and money to select the right location for a foreign venture, to understand the nature of the competition that the business will face, and to get the right financial models in place. Local tax rules, local business conditions and local labour market and other regulatory rules can be different from those in New Zealand.

On the upside, we also have a high degree of confidence – gained from real world examples – that when firms do get established offshore they get a booster shot.

The boost comes from the stimulus of being in a more competitive marketplace, from exposure to new technologies and business techniques, and from access to expanded networks. This boost could have benefits to the wider New Zealand community through expanded activity, the transfer of technology and expertise, increased employment and tax payments from the globalising firm.

The big dividend that we are seeking, though, is the feedback loop that means that the globalising firm generates payoffs to other firms back in New Zealand.

The awareness of this additional spillover is growing, and Malaysia and the United Kingdom have recently launched specific programmes to capture the benefits.

We can and we will only justify tax-funded support for outward investment if we have reasonable confidence that there will be one of three types of net benefit for the wider New Zealand community.

The conditions are as follows.

The activity could introduce new technology, or new R&D activity, or an ability to commercialise innovations into the New Zealand economy.

It could establish new or enhanced linkages and networks between the host country and New Zealand that other New Zealand firms can directly leverage and create value from.

Finally the supported activity could create opportunities for other New Zealand firms to improve their position in international supply chains, distribution networks and markets in ways that contribute to improved productivity, sales and competitiveness.

Support in this context is assistance from the NZTE and INZ networks and programmes.

Cabinet has directed the Ministry of Economic Development, to consult with other relevant agencies and to come up with specific options for further supporting outward investment by New Zealand firms.

I am not going to try and second guess what the full list of options for supporting outward investment will be, or which ones we will select, but I do need to give you a bit of a flavour for what some may cover.

A lot of these options fall into the category of opening doors and lowering barriers, information is critical. NZTE could act as an information broker, helping New Zealand firms understand the challenges, assess their readiness to go offshore, assist them in making faster and better decisions on location, and help firms provide expertise on local tax and human resource laws.

We can also facilitate an aggregation of different firms to take advantage of market opportunities in a particular sphere: like farming support technologies, or in a particular market like Chile or China.

While we haven’t settled on a specific approach, I think that businesses should not expect a lot of support in the form of direct grants. These tend to spread resources thinly and limit the spillover of benefits. Assistance with feasibility studies, facilitation, provision of information and in-market assistance are more likely to result in net economic benefits being generated beyond the firm that is making the specific investment.

My final point on this topic is that selecting the best option will depend a lot on what the business community tells us it needs in order to invest and form strategic partnerships offshore. If business can identify the information and other establishment barriers that are holding it back, we will be in a much better position to get the best value from government support for this new area of economic development.

We are not reducing the amount of support that is given to business, but we are changing its focus and are determined to make sure that there is much better leverage from that support.

I look forward to a constructive engagement with the business community on how we can partner with offshore investors to make sure that we get the best possible returns for New Zealand business, their employees, and their communities.

And it may also be that diplomatic posts can also offer our officials examples of similar programmes and policy approaches that are underway in their home countries.

If New Zealand firms do not expand offshore – while retaining Kiwi ownership - then we will rapidly exhaust the domestic limits to growth.

Thank you.

ENDS

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