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Guest lecture

Inward FDI and economic performance: the New Zealand paradox

Event series: 

Summary notes from Professor Peter Enderwick,'s Guest Lecture presented at the Treasury on 20 May 2003.


Professor Peter Enderwick

School of Management, University of Waikato


Summary Notes

Enderwick's lecture was based on the following presumption. Small economies, like Singapore, the Republic of Ireland and Mauritius, have attracted large flows of inward foreign direct investment (IFDI), leading to faster economic growth. New Zealand has also had large inflows of foreign direct investment, but did not experience the same growth as these countries, hence the paradox. As evidence of New Zealand's poor economic performance, Enderwick cites the fall in New Zealand's ranking of OECD countries in terms of per capita income and growth and New Zealand's poor productivity performance.

Foreign direct investment has two kinds of effect; (i) direct effects (e.g. new investment creates new employment), and (ii) secondary effects in the form of spill overs. These spill overs, possibly the more important of the two effects, include demonstration and competition effects, effects on labour mobility and linkages.

According to Enderwick, inward foreign direct investment is a necessary, but not sufficient condition for growth. Also important are a "liberal investment climate", a "technology gap" that makes it worthwhile for foreign investors to invest in a country and "supportive policy".

Supportive policy is important for two reasons. First, policy can influence the investment climate, and second, policy interventions can facilitate attracting and promoting IFDI if they help overcome market failure (arising from asymmetric information, for example).

There have been three cycles in IFDI in New Zealand:

  • 1840: foreign direct investment was aimed at expanding production and highly export oriented;
  • 1938-84: foreign direct investment was mainly geared towards the domestic market with (foreign) firms operating in a highly protected environment;
  • past 1984: foreign direct investment was dominated by the sale of state-owned assets and according to Enderwick, most IFDI has focused on the domestic economy.

Foreign direct investment slowed during the 1990s in New Zealand and at the beginning of the millennium globally.

The combination of size and distance of the New Zealand economy may have been a factor in the slow-down of IFDI, but size and distance by themselves cannot explain the slow-down.

Surveys of foreign firms operating in New Zealand suggest policy related issues as a possible cause for the slow-down in IFDI. (Actually testing for causality is difficult.)

According to Enderwick, policy towards IFDI in New Zealand is best described as passive. According to Enderwick, business and economic development has not been a political priority. Policies are often inconsistent and there is a lack of synergies. These problems seem to have been compounded by the Mixed Member Proportional Representation (MMP) electoral system. High rates of policy change and reversal have led to inconsistencies.

Moreover, globalisation has raised tensions between the need for investment in collective competitive goods (like research and development, education and infrastructure) and welfare/adjustment. Policies in New Zealand need to reconsider the balance between the two and resources may need to be redistributed with more focus on investment.

According to Enderwick, policy in New Zealand is characterised by "pragmatism, reflected in the level of individual interventions by senior ministers and a highly centralised political decision-making structure that lacks political competition.

Last updated: 
Thursday, 25 October 2007