How foreign investment works

Act leader Jamie White explains how foreign investment works:

. . . The value of a business depends on its expected future profits. The seller of a company is in effect swapping the profits she would have got over future years for a lump sum she gets today. The lump sum (the purchase price) represents the present value of the future profits.
When a foreigner buys a New Zealand business, all the expected future profits of the business come into the country in the purchase price. When the actual future profits then go out to the new owner overseas, there is no net loss.
In fact, the transaction must involve a net gain for New Zealand. This is because, if the purchase price were exactly equal to the present value of the expected future profits, the Kiwi owner would have gained nothing from the transaction and would not have sold. The Kiwi seller must have valued the purchase price higher than the future earnings. So the transaction creates a net gain to New Zealand. . .
His comment was prompted by a speech from Labour leader David Cunliffe.
If Mr Cunliffe does not understand this, then he learnt little from his days at the Boston Consulting Group. If he does understand it but still peddles the popular myth of profits lost overseas, well, that is even worse. 
The worse option is the most likely one. Cunliffe should understand economics.
In ignoring what he knows he’s just pandering to prejudice in the hope it will win some votes.

2 Responses to How foreign investment works

  1. Andrei says:

    You’ve got to love double talk – this reminds me of Milo Minderbinder’s riff in Catch 22 on how selling eggs at a loss is profitable

  2. JC says:

    “The Kiwi seller must have valued the purchase price higher than the future earnings.”

    He’s probably talking about “Good Will” and a bunch of intangibles which make the business attractive to buy.

    JC

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