The policy implications for this spread of Australian business are many. But perhaps the most significant is that our major arms of government involved in international business development remain largely driven by export-oriented models of global engagement.
They pay little attention to globalisation, which is different from trade. Trade is exporting from Australia, globalisation is locating operations in other countries. Does it still serve Australian business when almost a third of Australian-owned global revenues are now derived from investments made by our globally integrated enterprises? A much higher proportion of these globalisation revenues are originating in the service industries than in export statistics. Given services make up 70 per cent of the Australian economy, it makes sense to put the national effort there.
EFIC’s GRI also found that over half of businesses investing offshore do so to facilitate exports through the establishment of sales and marketing offices. Moreover, there was strong evidence of increasing sophistication in company strategies with almost half establishing an offshore presence to service that market. And 32 per cent were doing so to service a third market, a clear shift toward exploiting the arbitrage advantages of globalisation.
These findings support the view that behind-the-border issues such as access to local finance, market and company data for acquisitions, in-country staff and skills, clarity in legal, tax and investment regimes are emerging as the next round of challenges in policy assistance. While the policy objectives will necessarily be ambiguous because globalisation supersedes the national interest, and policy is supposed to reflect the national interest, the phenomenon has become so powerful it is not something any government can afford to ignore.
The EFIC survey also found that protectionism was a negligible issue. Indeed, trade barriers are more significant for businesses that stay at home, those with no offshore facilities nor any plans to create them. With multilateral trade talks stalled, and FTAs long and controversial to negotiate, greater priority could be given to relatively straightforward bilateral investment treaties or BITs.
Roger Donnelly, chief economist at EFIC, says BITs offer a “method whereby governments can reduce the risks associated with developing market investments. They can offer a much more direct and easy path for dispute resolution.”
Australia has negotiated very few BITs by comparison with other OECD countries. For example, Germany has already established over 200. BITs would be of direct benefit to service firms seeking to charge their foreign growth through acquisition; they would be of equal benefit for the mining sector, with its increasingly global exploration and investment effort in the developing world; and would potentially help manage the increasingly aggressive reciprocal investment flows of sovereign wealth funds.
Austrade is currently undertaking an internal review. This should culminate in expanded globalisation services and performance indicators that encourage outward FDI. Or, a new parallel body to deal with globalisation should be established.
Witness instead the Swedish approach to globalisation and trade. It has the Swedish Trade Council which makes virtually no distinction between the value of exports and foreign investment, the National Board of Trade to focus on policy recommendations to the goverment, as well as Open Trade Gate Sweden, and the Invest in Sweden Agency for reciprocal investment flows. There is also Sida, the national development agency.
True, Sweden has been operating in global markets effectively for far longer than Australia but the quality of government infrastructure is more advanced. Information on the performance of Swedish firms in overseas markets and about those markets is more advanced than anything available in Australia. If governments are expected to stay away from using funds to support Australian businesses in their globalising – to avoid “picking winners” – they can still usefully invest in infrastructure to help facilitate it.
Another example is the Korea Institute for International Economic Policy (KIEP), a government funded think tank which monitors how international trade issues affect Korean companies.
The Institute has 148 staff, including 44 PhDs and 51 researchers, and collects real-time information on two major economies through its affiliates, the Korea Economics Institute of America in Washington D.C. and a KIEP office in Beijing.
KIEP has run a trilateral joint economic research project between China, Japan and Korea since 1999 and is currently working on a China-Japan-Korea free trade agreement.
Australia needs a similar body to work out how it can integrate itself more tightly into the Asian region and place Australian companies within the regional supply networks. Goals like these take years to accomplish and require a sustained intellectual effort to pick the right strategies and execute them successfully.
Australia’s small population makes it likely that the need to globalise will become more pressing. According to the EFIC survey, 84 per cent of businesses cited increasing the size of their market the major contributing factor in their decision to venture offshore. Only 24 per cent cited cost reduction as a major motive and this declined the larger the surveyed business. The Australian government should not be afraid to support companies investing offshore.