Recent Articles |
Updated Mar 08, 2008
Australia may have struggled to develop global companies, but it has been
exposed to the global economy for decades. Most of the firms on The Diplomat
Foreign Company 100 are veterans of the local market. Just as Australia has a
large and persistent current account deficit, so has the activity of foreign
firms been long-term and intense.
Foreign companies bring with them an important diversity to Australia’s industry
base, which is heavily focused on mining and the finance industry. Australia’s
capital base is unusually skewed towards equities. According to consultants
McKinsey & Company, share ownership represents about two-fifths of Australia’s
capital stock, the second highest in the world behind Singapore. Yet the local
stock market is narrowly focused. Exclude shares in mining and energy, the
banking oligopoly, a handful of national “icons” such as Telstra and Qantas,
and the supermarket duopoly (Coles and Woolworths), and the pickings become
thin indeed.
To this extent, foreign firms have the effect of diversifying the national
industry “portfolio”, often in areas where the chance of local equivalents
emerging are minimal, such as automobiles, pharmaceuticals and information
technology. True, foreign multinationals have mostly targeted Australia as
little more than a captive market, but they have nevertheless brought in
business practices that have had a strong, often intangible effect, on local
enterprise.
They are not big employers although the number of jobs they create is far more
than just those who they directly employ. But national economic health is
increasingly bound up with its positioning in the global economic fabric rather
than how its national champions are faring. Not only is it no longer the case
that “what is good for General Motors is good for America” (just as well
considering the firm’s recent performance), it is increasingly the case that
“what is good for General Motors is good for China, or Eastern Europe”.
Assessments of globalisation are necessarily made from the viewpoint of the
nation state, yet globalisation is principally about transcending the nation
state.
Australia’s relative openness to foreign investment has done more than broaden
an otherwise narrow domestic industry base. It exposes the local economy to
global developments in innovation and competitive positioning. This is arguably
more important than any putative comparative advantages.
A useful, if loose, comparison can be made between Australia’s post-World War
II economic performance and countries in South America, such as Argentina and
Uruguay, which, in the middle of the twentieth century, exhibited similar
economic characteristics and standards of living. The South American countries
discouraged foreign firms from gaining access, using tactics like import
replacement. Although Australia only began reducing its tariffs in the 1980s,
it did allow high levels of foreign direct investment (with the accompanying
large current account deficit). The South American countries have since
struggled to modernise – although more recently the attitude to foreign
investment has been reversed. Australia has modernised, and maintained one of
the higher standards of living in the world.
A similar comparison can be drawn between China and India. Since 1990, China
has opened the doors to foreign investment, whereas India has only slowly
unwound its Nehru-inspired socialist protection of local industries. Since
then, China has experienced one of the most dramatic periods of economic growth
in world history, while India has merely sputtered into life – except in areas
like information technology, where it opened up to foreign investment.
» National economic health is increasingly bound up with its
positioning in the global economic fabric rather than how its national
champions are faring
While there are many factors driving variations in economic performance – not
least political upheaval – it is not hard to see why opening the door to
foreign firms is economically beneficial. There is no better way to learn about
global competition than to invite it in. Australian governments and local
companies may have been too passive in going to meet the challenge of
globalisation, especially in sectors such as food processing, an obvious place
to add value. But at least there is an understanding of the questions posed.
So where does Australia fit into the wider terrain of globalisation?
A picture can be sketched by looking at the global pattern in assets, which
reflect the history of investment and retained earnings, and comparative
revenues. 
According to last year’s United Nations Conference on Trade
and Development (UNCTAD) World Investment Report, the top 100 global
non-financial companies, ranked by foreign assets, are: motor vehicles (11),
pharmaceuticals (11), telecommunications companies (10), petroleum companies
(9), utilities like electricity, gas and water (8), mining and metals (8) and
electrical and electronic equipment (7).
This suggests that foreign firm activity in Australia is following the global
pattern in the automotive and petroleum industries. But in some industries,
including telecommunications, pharmaceuticals and electrical and electronic
equipment, foreign firms are under-represented. Foreign firm activity in
Australia in the food and beverage sector appears to be comparatively high (14
per cent of Australia’s top 100 foreign firms as compared with 4 per cent of
UNCTAD’s global 100).
If there is an area where Australia appears to have failed to gain a strategic
advantage, it is in allowing foreign firms to add value to Australian
agriculture.
European firms tend to be lacking amongst the top foreign firms in Australia.
One-quarter of the firms in top 100 in Australia are from the United States,
almost exactly mirroring UNCTAD’s global 100. One-fifth are from the United
Kingdom, about twice the level in the global 100. Japanese firms are slightly
over-presented when compared with global trends (14 compared with 9).
Absent are the Europeans. According to UNCTAD almost half of the top 100 global
firms are European, most notably Germany (14), France (15), and the Netherlands
(6). Yet European firms account for less than one-fifth of the top 100 foreign
firms in Australia, with only Germany (6), France (2) and the Netherlands (4)
having more than one.
Many of the top 100 foreign firms in Australia are the global corporations that
dominate world trade and foreign investment. It would be surprising if they
were not big players in Australia. One-quarter of the firms in The Diplomat
Foreign Company 100 global firms also appear in the Fortune top 100 global
firms (a ranking by sales volume). Just over half the firms in the Australian
top 100 are also in the top 500 global companies. Giants like General Electric,
Toyota, the petrol majors, finance behemoths like ING, Citigroup and AXA, and
information technology companies such as IBM and Hewlett-Packard have a
position in Australia that reflects their global reach.
Australia has proved a juicy investment destination for foreign firms. The
flight of capital to North Asia, that has so deeply affected South Asian
countries since the emergence of China, has not extended to Australia. One
reason is simply the size of the Australian economy, which is about 1.5 per
cent of the global economy, making it an attractive fringe market.
The Australian economy is also considered a useful test bed for new
technologies, especially as a proxy for the American market.
Yet perhaps the greater attraction is Australia’s low sovereign risk. Global
corporations typically give Australia the lowest country risk rating. The main
imponderable is the Australian dollar, which has swung in almost a 100 per cent
range over the last decade.
In theory, a higher Australian dollar could mean less foreign investment,
because assets are more expensive. But earnings are also higher, and investment
tends to rise when the dollar rises, says investment analyst Peter Carre, chief
executive of The Rein Foundation and former chief executive of Wilshire Global
Advisers. Australia is likely to remain an attractive destination for foreign
investment in the near future.