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New Zealand hit by decline in foreign direct investment

Monday 8th September 2003

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New Zealand is one of the countries most affected by a significant downturn in the past year in global foreign direct investment flows.

The World Investment Report 2003 - EFDI Policies for Development: National and International Perspectives¹ has just been released by the UNCTAD in Geneva. The yearly report is an source of information on trends in foreign direct investment and policy related matters.

This year¹s report focuses on ensuring that international trade and investment agreements do not unduly constrain domestic policy initiatives.

The report highlights the continuing fall in global FDI flows, down by more than 40% in 2001, and a further 21% in 2002 to US$651 billion. Last year's total $651 billion was just half the record volume of 2000.

The decline was broad-based: 108 of 195 economies saw lower volumes in 2002 than in 2001.
Driving the decline in FDI flows in 2001-2002 ­ the most significant downturn of the past three decades ­was a combination of macroeconomic factors (weak economic growth or slump in economic activity linked to the business cycles in many parts of the world, especially the developed countries, tumbling stock markets), microeconomic factors (low corporate
profits, financial restructuring) and institutional factors (the winding down of privatisation, a loss of confidence in the wake of corporate scandals and the demise of some large corporations).

Despite this decline, FDI is playing a more significant role in the world economy. The world stock of FDI reached US$7 trillion in 2002, up more than 14 fold since 1980, and this stock is the basis of international production by some 64,000 Transnational corporations that now control 870,000 foreign affiliates. World FDI stock generated sales by foreign affiliates of around
US$18 trillion, compared with global exports of US$8 trillion.

"The downturn in FDI levels has important implications for New Zealand," says Waikato Management School Professor Peter Enderwick, who is responsible for the launch of the report in New Zealand.

"First, New Zealand is one of the 30 economies most adversely affected by the decline in FDI, experiencing a fall of more than US$1.5 billion over 2001.

"Second, the decline has encouraged greater competition in the attraction of FDI and an increasing number of countries are adopting targeting strategies where the focus is less on simply the quantity of FDI, and more on the compatibility of that investment with domestic growth and development goals.

"Third, this competition also puts pressure on countries to improve their business environments in an attempt to make themselves more attractive to FDI."

Enderwick indicates the halt to privatisation, government intervention in key industries, infrastructure constraints and uncertainty over property rights have been factors in discouraging FDI in New Zealand.

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