Publications
Executive Summary
The world is setting its sails to capture the winds of growth blowing from
Asia. For most multinational corporations (MNCs), Asia will be a major
investment priority in the 1990s. Australia is also changing tack. After a
decade of turning investment attention away from the fast growing economies to
our near north, in the early 1990s there are some signs of a reawakening of
Australian interest in investing in South-East Asia. In the year to end-June
1992, Australian investment in South-East Asia surged by more than 25 per
cent, but it is difficult to gauge whether the trend will continue into the
1990s. Certainly, anecdotal information conveys an impression that Australian
investment in South-East Asia is growing and that official data may
underestimate its extent. Australia has spent a decade restructuring and
improving international competitiveness. The sails are trimmed to maximise the
opportunities regional growth offers, but Australia needs to invest as well as
to export in order to take full advantage of that growth.
South-East Asia is but one destination that Australian firms should
consider in formulating their investment strategies. In some cases,
concentrating activities at home may be the most appropriate strategy. In
other cases, competitive advantage will be improved by placing some activities
offshore. In the 1990s, new and exciting potential targets, such as in China
and possibly India, will need to be factored into Australian firms'
considerations. And South-East Asia is certainly a part of the international
economy worthy of serious commercial consideration. In the 1980s, South-East
Asia turned in some of the world's highest growth performances and, although
growth is expected to be slower in the 1990s, the region is expected to
continue to grow at rates faster than the rest of the world. In the first
three years of the 1990s, for example, real economic growth in the ASEAN
countries has averaged over 6.5 per cent per year. Information on the profits
of Japanese affiliates abroad indicates that for 1991, a year of world
recession, Asia was the only part of the world where profits did not fall.
The continued restructuring in North-East Asian economies and consequent
relocation of activities to more competitive industrialising economies will
ensure a continuation of the investment and export-led growth of the 1980s.
Growth is likely to be at a slower pace, in different industries, and with
investment flows affected by increased competition from other potential
industrial locations, particularly in China. Moreover, that growth pattern
will increasingly be transferred to Indo-China, in a bid to utilise resources
and cheap labour supplies there.
Australia needs a strategic approach to investing in South-East Asia. The
first part of that strategy must be better information. Firms can only make
the best commercial choices between investment options if they have the best
information on opportunities, competitors, how to operate in different
environments, difficulties and risks. Information is also important in
formulating either exit strategies or expansion strategies for the future. The
poor experience of some Australian firms in South-East Asia in earlier decades
is perhaps the most convincing evidence of the need to consider the best
available information before undertaking investment.
The second part of the strategy must be better networking among firms.
While many forms of investment can create wealth for Australia, in order also
to drive exports and create jobs, it is important to develop investment with
strong backward linkages to Australian products and services. In the absence
of large vertically integrated, multifaceted conglomerates, Australian firms
need to network and cooperate, both within industries and across industries,
in order to maximise the trade benefits of offshore investment activities. The
resource limitations of smaller Australian firms also indicates a need to
network and cooperate, including by alliances with international firms. It is
interesting to note that offshore investment itself provides an 'in' to
networks that are, in turn, the source of much commercial information and
opportunity. Australia's slow acceptance of the change and growth in the
region to our near north may have been because of our past failures to invest
in the region, and resultant lack of up-to-date information on developments
there.
The third part of the strategy must be finetuning and promoting
Australian's advantages as an investment partner, particularly in terms of
workforce skills and technology development. If Australia does not develop the
advantages it has relative to South-East Asia, then high value-added export
spin-offs from any investment will not be maximised.
The final part of Australia's strategy must be further work on a range of
problems and remaining impediments (both in South-East Asian markets and at
home) to investing in the region. Further examination of the difficulties
Australian firms experience in obtaining finance for offshore trade and
investment activities is needed. Also, efforts need to be made to address a
range of legal and regulatory impediments inherent in South-East Asian
investment regimes. Work needs to continue on removing trade barriers in the
region, which may distort international investment decisions. A number of
recommendations in support of this strategic framework are suggested at the
end of Chapter 6 for consideration at the next Trade and Investment Forum of
the National Trade Strategy consultative process. Investment in the region
should be a more important component of Australia's trade strategies for the
region. It can lock us into regional production plans, drive exports and
promote access to the most cost-effective imported inputs and consumer goods.
During the second half of the 1980s, structural change and adoption of more
outward-looking policies both in Australia and South-East Asia saw new
complementarities emerging. Australian exporters were able to halt the decline
in market share that had continued for a decade and a half. In absolute terms,
during the 1980s, Australian exports to South-East Asia grew at an average
annual growth rate of 19 per cent per year compared to 11 per cent annual
average growth for exports overall.
Australian Direct Investment Abroad
Level, 30 June 1992
Source: ABS Catalogue No. 5305.0, 1991-92.
Trends in Australia's foreign direct investment (FDI) in South-East Asia
did not match growth in trade. The decade began with the ASEAN economies
having 39 per cent of Australia's FDI stock but ended with them reduced to a
minor share of less than 5 per cent. Official statistics show Australians
preferred to invest in other (mainly English-speaking) regions of the world.
Yet it was during the latter half of the 1980s that the main ASEAN economies
flourished. Ironically, Australian investors seemed to be among the least
interested in the profound economic transformations occurring so close to
home.
There has long been a debate in Australian government and business circles
as to whether Australian investment offshore is good for Australia as a way to
access overseas markets and encourage stronger export growth, or whether it
amounts to the exporting of Australian jobs. Preliminary examination of this
issue, such as that covered in the Economic Analytical Unit's recent report,
Australia's Business Challenge: South-East Asia in the 1990s, indicates that
investment offshore can be trade creating for the investing economy and that,
if accompanied by domestic restructuring, it is also job creating.
The impact of FDI on trade shows itself in three ways: export generating,
import generating and export displacement effects. The relationship of these
three varies with the type of investment. In addition, the impact of FDI in
the investing country is often to accelerate the process of restructuring and
relocation of industry as comparative advantages change. Acting in this way,
the effects are positive and contribute to a better allocation and utilisation
of resources. However, the quality of investment data and variations in
coverage and content of investment statistics across countries makes it
virtually impossible to utilise these data to establish and define
quantitatively the linkages between trade and investment. And it is simply the
case that different sorts of investment in different areas have different
implications for exports and imports.
Nevertheless, the Australian experience in investing in South-East Asia
appears to support the concept that offshore investment can drive trade. In
the Economic Analytical Unit's 1992 survey of Australian firms dealing with
South-East Asia, 90 per cent of those Australian investors who responded were
sourcing some inputs for their offshore operation from Australia and thus
driving Australian exports. However, only one-third were sourcing more than 50
per cent of their inputs from Australia; investment in some industries
obviously has the potential to be more trade creating than in others. The Unit
concluded that the net effect on Australia of such FDI may also depend to some
extent on the motives and objectives of the investing firms.
Overall, the trade effects of Australian FDI in South-East Asia have been
relatively weak. Australian FDI in South-East Asia has been small and FDI in
areas with strong backward linkages to drive further exports from Australia
has been fairly limited. Procurement by offshore affiliates traditionally
tends to be weighted towards the home economy and the experience of MNCs
indicates that industries which utilise input products produced competitively
by the parent or requiring the addition of support services are most trade
creating. Vertically integrated large companies come to this concept naturally
and can internalise it in company strategies. For industrial sectors and
economies with large numbers of smaller firms and a lower degree of vertical
integration, such as Australia, a more overarching strategic approach will be
required to achieve trade spin-offs. This is because the benefits may not
necessarily accrue to the investing company, but to other suppliers, thus
removing the commercial imperative to invest in the most export-creating way.
Australia's business structure is not dominated by larger multifaceted firms
and so networking and strategic alliances among firms are so much more
important in realising the trade spin-offs from offshore investment.
It was acknowledged in Australia's Business Challenge that the reasons for
Australia's relative disinvestment in South-East Asia in the 1980s were
unlikely to be simple, but may have included lack of information about changes
in investment regimes in South-East Asia; lack of information about the growth
prospects of these economies, easier access for exports and resultant
decisions to base production outside ASEAN, effects of stories of companies'
bad experiences investing in ASEAN in the 1970s, strategic decisions by a few
big players to invest in Europe or the United States in anticipation of new
trading arrangements there, or the effects of the sale to non-Australian
interests of Australian companies with existing investments in South-East
Asia.
There is evidence to support the hypothesis that all of these issues have
had some validity. In addition, increased utilisation of international lenders
and financial centres has probably disguised some Australian investment as
being sourced from other countries. It would be difficult to argue in the
1990s, however, that there is a lack of information on the extent of growth in
South-East Asia. Similarly, the negative stories of bad company experiences in
the 1970s, no longer have the force they did in the 1980s. Managers have
accepted that time has moved on and the economies of South-East Asia,
especially the ASEAN group, have moved on with it.
Nevertheless, indications from the abovementioned survey conducted in 1992
and a subsequent survey conducted in 1993, are that there is still some
reticence on the part of the Australian business community about investing in
South-East Asia. Perceptions of poor profitability and difficulty in
repatriating profits are outdated or exaggerated. Recent Australian investment
experience in the region demonstrates the inaccuracy of these persistent
views. According to the survey, companies investing offshore were consistently
more profitable than those not doing so over the past four years. Most of the
companies investing in South-East Asia were not only profitable, but achieved
profitability within four years of setting up in those markets. More than
two-thirds of those investing companies were repatriating more than 75 per
cent of their profits. The perceptions of difficulties of different business
cultures in the region also appear to be exaggerated by those not investing in
the region: those involved in South-East Asian markets rarely rate them as any
more difficult than other international markets.
For those companies investing offshore, but not in South-East Asia, the
major reason cited was difficulty in obtaining finance. This suggests that the
Australian financial sector may have perceived South-East Asia as a riskier
destination for investment than other parts of the world. There is no evidence
that the international financial sector shared this view in recent times given
the level of investment funds made available to other international firms for
investment in South-East Asia. By implication, this suggests that at least
some Australian firms may be experiencing difficulties in accessing
international finance.
The other major impediment to Australian investment in South-East Asia
appears to be the fact that many Australian firms are subsidiaries or
franchises of foreign companies and are forbidden to invest in the region by
the parent company. This does not mean that Australia is not benefitting
economically from the presence of these subsidiaries, nor that MNCs are not
using these subsidiaries in Australia to pursue opportunities in the region,
but simply that many are not doing so via direct investment from the
subsidiary. As most MNCs move towards regional or global rather than
country-specific strategies, Australian subsidiaries will need to work hard,
and in most cases to innovate, to ensure they are factored into parent
companies' strategies for this part of the world. Many Australian subsidiaries
are already doing this successfully and operating in areas such as performing
regional headquarter functions because of Australia's comparative advantages
in relevant inputs such as skilled and managerial labour, business
infrastructure, telecommunications networks and office accomodation.
Companies which have investments in South-East Asia made their decisions
largely based on a desire to expand their international business network. A
comparison of the findings with a survey conducted a decade earlier indicates
that, whereas in the past Australian companies invested largely to protect
established markets, companies today are taking a longer term approach and are
seeking to establish a presence in areas where they expect continued rapid
growth. Also, companies are tending to develop wider strategies with a view to
positioning themselves to the greatest advantage in the world market. This is
a promising indicator of future trends. Perhaps Australia has indeed changed
tack and the wind will now begin to fill the sails.