Rugby is not the only arena in which Australia is losing out to New Zealand. Australia also faces increased competition from across the Tasman in the race to secure scarce global capital. In sharp contrast to Australia’s foot-dragging ambivalence on foreign investment, New Zealand is putting out the welcome mat.

New Zealand’s National Party-led government is in the process of simplifying the country’s regulatory regime for foreign direct investment (FDI). In particular, it is greatly reducing the role of ministerial discretion in that process.

The New Zealand Finance Minister has delegated foreign investment decision-making powers to the Overseas Investment Office, which is expected to lead to a 40% reduction in the number of ministerial foreign investment decisions and reduce the time taken to assess foreign investment applications by up to two weeks.

A range of foreign investment transactions have now been exempted from New Zealand’s Overseas Investment Act, which is being reviewed with a view to further streamlining the process for foreign investment approvals. The current thresholds for screening foreign investment are to be reviewed and simplified, particularly in relation to land.

The government is also reviewing the former Labour government’s strategic asset test, introduced to block a Canadian pension fund bid for 40% of Auckland Airport in 2007. The former government made the bizarre argument that the investment brought no benefits to New Zealand.

Like Australia’s national interest test under the Foreign Acquisitions and Takeovers Act, the strategic asset test has never been properly defined and has become a source of considerable uncertainty for both foreign investors and the resident vendors of New Zealand assets.

The government is instead considering a new national interest test that would require the government to lay before parliament its reasons for rejecting a foreign investment application.

In Australia, by contrast, the Rudd government is increasingly micro-managing investment through the conditional approval of foreign direct investment applications. Many of these conditions are redundant, since they merely reiterate existing legal obligations that must be met by any business operating in Australia, regardless of ownership.

But some of the conditions imposed by the Treasurer have been absurdly prescriptive, ranging from governance arrangements to the levels of output and employment to be maintained at specific mining operations. These conditions are explicitly protectionist in intent, with Treasurer Wayne Swan stating that they are aimed at protecting local jobs.

Treasurer Swan is turning foreign investment policy into an arm of domestic industry and employment policy. The message to foreign investors is that any proposal to invest in Australia must not only run the gauntlet of ministerial approval, but comply with politically-determined ministerial directions not otherwise mandated by Australian law.

The Rudd government has even sought to micro-manage Australian investment in China through the conditions attached to Ansteel’s acquisition of an increased shareholding in Gindalbie Metals. Among other conditions, Ansteel must maintain agreed levels of Australian participation in a pellet plant in China's Liaoning Province.

The weaknesses of Australia’s Whitlam-era regulatory regime for foreign direct investment have been dramatically exposed by the upsurge of Chinese interest in the Australian resources sector. In particular, the enormous discretion afforded the Treasurer under the Foreign Acquisitions and Takeovers Act has created confusion and uncertainty because no one can predict how this discretion will be exercised in any given case.

The Rudd government’s attempts to articulate principles in relation to FDI by sovereign entities has if anything sown further confusion, expanding rather than circumscribing the scope of the minister’s discretion.

While the Stern Hu case will increase reservations about investment in Australia by Chinese state-owned firms, this only highlights the need for Australia’s regulation of FDI to be consistent with the rule of law. The Minmetals-OZ Minerals case showed that, like China, the Australian government is not above using bogus national security and national interest arguments to justify political interventions in the market for the ownership and control of Australian equity capital.

This can only add to foreign perceptions that FDI approvals in Australia are the outcome of a political process. These perceptions are likely to be as damaging for Australia as they have been for China.

Rather than reforming Australia’s failing regulatory framework for FDI, both the government and opposition have been indulging populist fears in relation to foreign investment. Shadow Treasurer Joe Hockey has even questioned foreign portfolio investment in Australian debt markets. This led the federal opposition to support an unworkable amendment to a government bill, which seeks to identify the nationality of the owners of Australian debt instruments. Without high levels of foreign participation in Australia’s debt markets, Australians could face dramatically higher interest rates.

Australia’s politicised regulatory framework for foreign direct investment, together with its high tax burden on capital, explains why its share of global FDI flows is much smaller than its share of global GDP.

New Zealand’s share of global FDI flows, by contrast, already exceeds its share of global GDP. That share is sure to increase following the New Zealand government’s reforms.

Foreign investors could be easily forgiven for passing over Australia in favour of New Zealand.

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and the author of Capital Xenophobia II.