WELLINGTON, New Zealand — Standing by his desk in New Zealand's distinctive round Parliament building, known locally as the Beehive, Prime Minister John Key proudly brandished an ornately engraved sword. It was used, he said, by Frodo Baggins, the protagonist of the "Lord of the Rings" trilogy, and in the films it possesses magical powers that cause it to glow blue in the presence of goblins.
"This was given to me by the president of the United States," said Mr. Key, marveling that President Obama's official gift to New Zealand was, after all, a New Zealand product.
In Mr. Key's spare blond-wood office — with no goblins in sight — the sword looked decidedly unmagical. But it served as a reminder that in New Zealand, the business of running a country goes hand in hand with the business of making movies.
For better or worse, Mr. Key's government has taken extreme measures that have linked its fortunes to some of Hollywood's biggest pictures, making this country of 4.4 million people, slightly more than the city of Los Angeles, a grand experiment in the fusion of film and government.
That union has been on enthusiastic display here in recent weeks as "The Hobbit: An Unexpected Journey," the first of three related movies by the director Peter Jackson , approached its world premiere on Wednesday in Wellington (and on Dec. 14 in the United States). Anticipation in New Zealand has been building, and there are signs everywhere of the film's integration into Kiwi life — from the giant replica of the movie's Gollum creature suspended over the waiting area at Wellington Airport to the gift shops that are expanding to meet anticipated demand for Hobbit merchandise (elf ears, $14).
But the path to this moment has been filled with controversy. Two years ago, when a dispute with unions threatened to derail the "Hobbit" movies — endangering several thousand jobs and a commitment of some $500 million by Warner Brothers — Mr. Key persuaded the Parliament to rewrite its national labor laws.
It was a breathtaking solution, even in a world accustomed to generous public support of movie projects, and a substantial incentive package was included: the government agreed to contribute $99 million in production costs and add $10 million to the studio's marketing budget. And its tourism office will spend about $8 million in its current fiscal year, and probably more in the future, as part of a promotional campaign with Time Warner that is marketing the country as a film-friendly fantasyland.
For a tiny nation like New Zealand, where plans to cut $35 million from the education budget set off national outrage earlier this year (and a backtrack from the government), the "Hobbit" concessions were difficult for many to swallow, especially since the country had already provided some $150 million in support for the three "Lord of the Rings" movies.
Now, even amid the excitement of the "Hobbit" opening, skepticism about the government's film-centric strategy remains. And recently it has become entangled with new suspicions: that Mr. Key's government is taking cues from America's powerful film industry in handling a request by United States officials for the extradition of Kim Dotcom, the mogul whose given name was Kim Schmitz, so he can face charges of pirating copyrighted material.
New Zealand's political scene erupted in September, as Mr. Key publicly apologized to Mr. Dotcom for what turned out to be illegal spying on him by the country's Government Communications Security Bureau. The Waikato Times, a provincial paper, taunted Mr. Key, accusing him of making New Zealand the "51st state," while others suggested that a whirlwind trip by Mr. Key to Los Angeles in early October was somehow tied to the Dotcom case.
"No studio executive raised it with me," Mr. Key said in an interview last month. He spoke the day after a private dinner where he lobbied executives from Disney, Warner Brothers, Fox and other companies for still more New Zealand film work, with Mr. Jackson, a New Zealander, joining by video link.
Mr. Key has been sharply criticized for cozying up to Mr. Jackson in what some consider unseemly ways. Last year, a month before elections in which he and his National Party were fighting to keep control of the government, Mr. Key skipped an appointment with Queen Elizabeth II in Australia to visit the Hobbiton set. He also interviewed Mr. Jackson on a radio show, prompting an outcry from the opposition.
Pro-union forces remain predictably outraged. Phil Darkins, a vice president of Actors Equity in New Zealand, calls his country the "only Western democracy on the planet where professional performers have virtually no rights," and his group has continued to seek an overall agreement with producers.
Mr. Darkins, in a recent e-mail, also objected to immigration law changes that allow foreign film workers into the country for brief periods without review by local worker groups, calling it "a virtual open-door policy."
The opposition Labour Party, while backing the government's support for the film industry, has chafed at what it views as the "Warner Brothers-specific" concessions made by Mr. Key.
"We wouldn't move the crossbar for any individual company," said Trevor Mallard, a Labour leader, in an interview in Wellington last June.
And even as the "Hobbit" films, years in the making, approached their debut, Mr. Key could not predict when a next major film would follow.
"It's too early to say," he said.
An Economic Engine
Nowhere is filmmaking big enough to move a national economy. But in New Zealand, add movies to another business — tourism — and there is potential for transformative economic growth.
That's the strategy Mr. Key's government has pursued. The making of feature films and television shows generated only about $1.1 billion in revenue last year, well under 1 percent of a gross domestic product of roughly $160 billion. About 17 percent of movie and television revenue is directly subsidized by the national government, which spent nearly $200 million to support movies last year.
But tourism is an economic sector 20 times the size of the country's movie and television production business. And as other countries, notably China, have moved into some of New Zealand's core dairy industry, the Kiwis, a particularly inventive people, have focused more on the vacation market.
The thinking: Movies may draw visitors who are not up to the rigors of bungee-jumping, zorbing (which involves rolling downhill inside a plastic ball) or other rigorous outdoor sports that are tourism mainstays.
In an unusual arrangement, Mr. Key, a former currency trader with Merrill Lynch who did graduate work at Harvard, retains a portfolio as his government's tourism minister. Scratching for solutions to the 2010 crisis with unions over "The Hobbit," he settled on a policy that would, in effect, use much of the tourism budget to re-brand the country as Middle-earth, hoping to lure visitors to locations where Mr. Jackson has shot and is shooting his films.
Still, it's a sizable gamble considering the potential pitfalls. There is no guarantee that moviegoers will embrace the "Hobbit" films with the same fervor as the "Rings" trilogy. Those films had combined worldwide ticket sales of about $3 billion (in 2012 dollars, after adjusting for inflation). Warner and its New Line Cinema unit, both of which declined to comment for this article, have high hopes for the movies, which also have backing from MGM.
Other big questions remain, starting with Mr. Jackson's decision to shoot the films at 48 frames a second, twice the usual rate, in search of new visual heights; early reaction to the result has been sharply mixed. Then there is the capricious nature of the filmmaking business, which has become increasingly mobile and will quickly flee to the national or local government offering the best incentives.
Exchange rates play a sizable part in the bidding process. Favorable rates were one reason Mr. Jackson and his partners were able to build New Zealand into a crossroads for special effects and postproduction work, the kind of business that George Lucas once cornered in Northern California. "Avatar," "Marvel's The Avengers," "The Adventures of Tintin" and "Prometheus" are among the many films that have crossed through Mr. Jackson's Wellington-based effects shop, Weta Digital, on their way to theaters.
But recently a stronger New Zealand dollar, which currently trades for about 82 cents in United States currency, has eroded its cost advantage for North American companies, something that other countries are trying to exploit. Northern Ireland now claims to be the "new New Zealand," while Serbia says it is "New Zealand, but cheaper," notes Gisella Carr, the chief executive of Film New Zealand, an industry group that scours the globe for film work.
Hollywood is also looking to China, where an aggressive government and its allied companies are building expensive movie facilities and offering access to a vast market in exchange for a stake in American studio pictures.
New Zealand does have language in its favor, since the crews speak English. It also has a "just do it" approach that endears it to studios. "We're not afraid," said Tim Coddington, an Auckland-based producer who worked on the "Chronicles of Narnia" fantasies in New Zealand. Still, for Mr. Key and others, the primary challenge remains linked tightly to Mr. Jackson: how do you build a significant and enduring economic sector from a local business dominated by one man?
"Peter Jackson might make movies for the next 50 years, or he might not," said Mr. Key. "You can't base an industry solely on one person. That's a very vulnerable business strategy."
The Native Son
Inside one of four soundstages at his Stone Street Studios, located near Wellington Airport, Peter Jackson stood among several dozen extras and delivered a pep talk. It was mid-June, and the scene involved villagers headed to battle. "Hold those weapons like you plan to use them," he commanded.
A disheveled, soft-spoken 51-year-old, he is accustomed to being in the thick of things. If Mr. Lucas and his "Star Wars"-born effects companies developed an outsize presence in Marin County in California, Mr. Jackson in many ways dominates a whole country.
When he decided to use 12 hilly acres of a remote sheep farm as his "Hobbit" village, a New Zealand army convoy arrived the next morning to build a series of access roads to the site. "We couldn't believe it," said Russell Alexander, an owner of the farmland. "This guy has command of our army?"
Smaller filmmakers say the priority given to big productions like Mr. Jackson's has hurt the independent community. In Auckland, where an independent film culture once thrived, Mr. Jackson is acidly referred to by less-favored members of the industry as "Sir Peter," emphasizing the honorific he received in 2010.
Mr. Jackson, who grew up in the village of Pukerua Bay, played down his stature during an interview inside his modestly furnished office. "My business empire? That's an awfully grandiose term," he said in response to a question.
He disagreed with the notion that New Zealand's film industry rested squarely on his shoulders. "If I started to think like that my head would explode," he said. "I can't take responsibility for everyone's employment."
New Zealand was notably not kind to Mr. Jackson at the outset of his career. But little by little, he clawed his way forward, pouring his own money into his films and ultimately buying an old paint factory as a studio base when he was starting the "Rings" trilogy.
"It was mothballed, covered in dust, dark, dingy and cold," Mr. Jackson said of the complex. "We were going to be up to our eyeballs in debt if we bought it."
But as he toured the grounds with Fran Walsh, an Oscar-winning screenwriter and producer who is Mr. Jackson's partner in life and in business, an omen appeared. Someone had left behind an old paperback book — "The Lord of the Rings."
"We looked at each other and said, 'We'll take it,' " Mr. Jackson said.
The paint factory formed part of Stone Street Studios, which is laid out around a courtyard and includes departments like wardrobe and makeup and the four soundstages, two of them sophisticated enough to allow Mr. Jackson to construct a rushing river inside, as "Hobbit" scenes required.
A few blocks away is Weta Digital, which employs over a thousand graphic artists, technicians and support staff when operating at full tilt, and has taken over four buildings, one of which is a former ice cream factory. Sprawling a couple of streets away is Mr. Jackson's postproduction facility, complete with apartments, so directors never have to leave, and a lavishly decorated theater, a copy of one at the Hearst Castle in California.
Also nearby is the 300-employee Weta Workshop, which builds props, designs film-related merchandise and fills orders for privately commissioned "toys" for rich collectors — like a full-size working Panzer tank.
"It's all an endeavor to create sustainable work for us," said Richard Taylor, a five-time Oscar winner for visual effects, makeup and costumes who co-owns much of Mr. Jackson's moviemaking operation and runs Weta Workshop. "Our fortunes are dictated by the world's creative industries, and that puts us in a very nervous place a lot of the time."
The collection of companies now takes up so much square footage in Wellington's Miramar neighborhood that it has been given a nickname: Wellywood.
An Illusion's Staying Power
Whether movies are a matter of political life and death for Mr. Key remains open to debate. He strongly challenged the notion that he might have lost the 2011 election had "The Hobbit" been lost. "Definitely not," he said.
Things got tense for him during the campaign, however, after he interviewed Mr. Jackson in September 2011 on a radio talk show called "The PM's Hour." New Zealand's Electoral Commission declared that the interview violated laws barring broadcasters from providing a candidate with free publicity close to an election, but a full-blown scandal was averted when police officials decided in March not to prosecute the radio service. Still, Labour politicians were unappeased, and blamed Mr. Key. "It was a political stunt, and he should have taken responsibility for that," Labour's deputy leader, Grant Robertson, said in a statement.
Nor did Mr. Jackson's gilded image escape untarnished in the turmoil over the dealings with Warner. In June 2011, a periodic survey of the "most trusted" people in New Zealand found that Mr. Jackson had plunged 68 slots, to No. 74.
The question facing both Mr. Key and Mr. Jackson is whether overseas travelers will be attracted to a deliberate illusion that blurs the line between New Zealand and its films. It worked once before: the "Lord of the Rings" trilogy, featuring lavish photography of volcanoes, waterfalls and sharp-peaked mountain ranges, prompted a surge of visitors. "I don't mean to sound mercenary, but at this point, it's not about the films, it's about New Zealand," said Kevin Bowler, the chief executive of Tourism New Zealand.
As Mr. Bowler spoke in June, about two dozen workers at computer screens in an office overlooking the Wellington harbor were proliferating a Web and poster campaign. As "Lord of the Rings" tourism peaked in recent years, about 6 percent of international visitors to New Zealand, or roughly 150,000 people, cited the films as a reason for coming; 11,200 said it was their only reason. Given the movie world's increasing appetite for fantasy, however, Mr. Bowler predicted that the payoff from Mr. Jackson's new films would be larger.
Already, plans are in place to close streets in central Wellington for a day and a half to accommodate a throng of perhaps 100,000 expected to gather outside the premiere at the Embassy theater, which has been updated so that it can handle the film's high-speed format.
Mr. Jackson's staff at Weta, in the meantime, has been busy redecorating the country, including placing fanciful, Weta-designed "bandages" on the fuselage of Wellington's air ambulance.
Here in Wellington, Mr. Key explained, "Peter is a very, very big fish in quite a small tank."