Foreign Investment in Australian Food and Fibre The Effect on Exports and Outbound Foreign Investment A report for the Rural Industries Research and Development Corporation by Wondu Holdings Pty Ltd

August 2000 RIRDC Publication No 00/113 RIRDC Project No WHP-3A

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© 2000 Rural Industries Research and Development Corporation. All rights reserved. ISBN 0 642 58143 6 ISSN 1440-6845 Foreign Investment in Australian Food and Fibre: The effect on Exports and Outbound Foreign Investment Publication No. 00/113 Project No. WHP-3A The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report. This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Publications Manager on phone 02 6272 3186. Researcher Contact Details David Michael Wondu Holdings Pty Limited PO Box 1217 BONDI JUNCTION NSW 2022 Phone: 02 9369 2735 Fax: 02 9369 2737 Email: wonduhdgs@yahoo.co.uk

RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604 Phone: 02 6272 4539 Fax: 02 6272 5877 Email: rirdc@rirdc.gov.au. Website: http://www.rirdc.gov.au Published in August. 2000 Printed on environmentally friendly paper by Canprint

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Foreword This study is about the effect of foreign ownership on exports of Australian food and fibre. The report examines the relative performance of foreign and Australian owned food manufacturing, food retailing and TCF and Leather firms. The study shows, and contrary to conventional thinking, that foreign owned firms are more export oriented than locally owned firms. This is attributed to better labour productivity which is clearly a critical success factor in international markets. In contrast to trade performance, however, foreign owned firms appear to be constrained from engaging in offshore investment. Yet it is foreign direct investment that is growing strongly in this increasingly globalised food economy. The study results improve our understanding of the role of foreign owned firms in the Australian food and fibre supply chains. There are, however, quite serious data limitations about foreign investment and this is an area where we favour some improvement, particularly in view of the important role of foreign investment in the Australian food sector.. We do not, for example, have much understanding of the relationship between foreign investment and exports. Are they substitutes or complements or maybe there is no relationship at all. This project was funded from RIRDC Core Funds which are provided by the Federal Government and is an addition to RIRDC’s diverse range of over 500 research publications. It forms part of our Global Competitiveness R&D program, which aims to identify important impediments to the development of a globally competitive Australian agricultural sector and support research that will lead to options and strategies that will remove these impediments. Most of our publications are available for viewing, downloading or purchasing online through our website: • downloads at www.rirdc.gov.au/reports/Index.htm • purchases at www.rirdc.gov.au/eshop Peter Core Managing Director Rural Industries Research and Development Corporation

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Acknowledgements This report was completed with input from the consultancy division of the Australian Bureau of Statistics and the Australian National University Social Science Data Archives in the Research School of Social Sciences which manages the Australian Workplace Industrial Relations Survey. We also received responses from food manufacturers to our own survey on exports and foreign investments. Adrian Kirby carried out our statistical analyses on the databases and this was often a complex task in dealing with data bases that would not be described as user friendly. In addition, we were assisted with the valuable comments of a Steering Committee with significant experience in industry and corporate and government policy development. While the Steering Committee provide valuable comments about various discussion topics the report is the responsibility of the authors and the views expressed in it do not necessarily reflect those of each or any of the Steering Committee members. David Michael Project Manager

Disclaimer All care has been taken in the conduct of preparing this report but the evaluation relies to a large extent on data supplied by surveys undertaken by the Australian Bureau of Statistics and the Australian Workplace Industrial Relations Survey which are both subject to sampling and non-sampling errors which may be higher than normally expected because of the complex nature of foreign investment and the classification of diversified firms to particular industry groups. That said, the data is probably the best available in Australia though we do not express an opinion about or responsibility for the accuracy of this information. As part of the study and to check the validity of official data we distributed a survey to a small group of foreign and locally owned food manufacturers but the response rate was low and this data was used only in case study material which is for illustrative purposes only. We also gathered information from various annual reports of public companies and rely upon, but do not express an opinion about or responsibility for the accuracy of that information.

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Contents

FOREIGN INVESTMENT IN AUSTRALIAN FOOD AND FIBRE ..............................................I

FOREWORD ...........................................................................................................................III

ACKNOWLEDGEMENTS ...................................................................................................... IV

DISCLAIMER ......................................................................................................................... IV

EXECUTIVE SUMMARY........................................................................................................ VI

1. INTRODUCTION ..........................................................................................................1 1.1 Background, relevance and potential benefits............................................................................ 1 1.2 Research Strategies and Methodology....................................................................................... 3 1.3 Outline of the Report................................................................................................................... 3

2. REVIEW OF THE LITERATURE..................................................................................4 2.1 Motives for Foreign Investment .................................................................................................. 4 2.2 Efficiency and Flow-on Effects of MNEs..................................................................................... 5 2.3 Measuring Competitiveness ....................................................................................................... 7 2.4 Exports and FDI: Substitutes or Complements?......................................................................... 7

3. OBJECTIVES ...............................................................................................................9

4. METHODOLOGY .......................................................................................................10 4.1. Binary Logistics Regression ..................................................................................................... 10 4.2. Export Market Share [XMS]: ..................................................................................................... 12 4.3. Balassa's (1987) Index of Revealed Comparative Advantage [XRCA] .................................... 12 4.4 Porter Model of Revealed Competitive Advantage................................................................... 13 4.5 Dunning-Adapted Net Competitive Advantage: ....................................................................... 13

5. DETAILED RESULTS ................................................................................................15 5.1 World FDI.................................................................................................................................. 15 5.2 Australian FDI Generally........................................................................................................... 16 5.3 Australian FDI in Food and Fibre.............................................................................................. 19 5.4 Trade Market Shares ................................................................................................................ 22 5.5 Structure and Conduct by Local and Foreign Forms................................................................ 23 5.6 Case Studies ............................................................................................................................ 25

6. DISCUSSION .............................................................................................................28

7. IMPLICATIONS FOR CORPORATE AND GOVERNMENT POLICY.........................30

8. CONCLUSIONS AND RECOMMENDATIONS ..........................................................33

9. REFERENCES ...........................................................................................................34

10. APPENDICES ............................................................................................................37 Appendix 1: Survey Distributed to Food Manufacturers ........................................................... 37 Appendix 2: Detailed Statistical Analysis.................................................................................. 39 Appendix 3: Summary Data extracted from AWIR ................................................................... 47

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Executive Summary The aim of this study was to test the notion that foreign ownership has no significant effect on export orientation of food and fibre manufacturing firms operating in Australia. The study was then extended to food retailers in the context of foreign direct investment being as much an indicator of international competitiveness as exports. Over 50% of equity in the Australian food manufacturing and food retailing industries is accounted for by foreign direct investment.

1997-980

102030405060

Food Reta ilingFood ManufacturingTCF & L

[% of equity owned by foreign firm s]ES TIMA TED FOREIGN OW NERS HIP: F OOD AND TCF : AUS TRALIA : 1997-98

The inbound stock of foreign direct investment [FDI] in Australian food manufacturing accounts for about 23% of inbound foreign investment in the manufacturing sector.

1991-92 1994-95 1997-980

2000400060008000

1000012000

Food ManufacturingTCF & LeatherFood Retailing

[$A millions]STOCK OF INBOUND FOREIGN DIRECT INVESTMENT: AUSTRALIA

We expected the export performance of foreign and locally owned firms would be similar. Instead, we found that foreign owned firms [with more than 50% foreign ownership] are more likely to be export oriented than wholly or predominantly owned Australian firms. Food manufacturers that have more than 50% foreign ownership are 4 times more likely to have some export sales than Australian owned firms. Textile, clothing and footwear manufacturers that have more than 50% foreign ownership are 9 times more likely to have some export sales than Australian owned firms. The data for this study was extracted from the 1995 Australian Workplace Industrial Relations

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6000

8000

10000

12000

[$A millions]STOCK OF INBOUND & OUTBOUND FDI: AUSTRALIA: FOOD MANUFACTURING

database, which was compiled from a cross sectional survey of Australian industry. The data for this study came from the responses of 40 food manufacturers [17 of which are foreign owned], 45 TCF manufacturers [19 foreign owned] and 83 food retailers [8 foreign owned]. The increased export orientation of foreign owned firms appears to be due to one or more of three important management and work practices: • Relatively lower unit labour costs. If unit labour costs are more than 40% of total costs then the

firm is 70% less likely to have some export sales. Nearly 60% of foreign owned food manufacturers had labour costs that were less than 20% of total costs, compared to 30% of Australian owned firms.

• Recent [within 2 years] introduction of new technology. Firms with exports were at least 4 times more likely to have introduced new technology in the last 2 years. Foreign owned firms had a slight edge over local firms in terms of introducing new technology.

• Major reorganisation of the workplace within the last 2 years. Over 75% of foreign owned food manufacturers had restructured their workplace, compared to under 40% of Australian owned firms. Restructuring improves labour productivity.

There are, however, some Australian owned firms that perform just as well as foreign affiliates. For example, with wine manufacturer, BRL Hardy, exports accounted for almost 40% of revenue in 1998. Although foreign ownership is associated with increased export orientation it is also associated with decreased outbound foreign investment. Less than 20% of foreign owned food manufacturers have overseas subsidiaries or workplaces controlled by them compared to nearly 60% of Australian owned food manufacturers, suggesting organisational control of foreign affiliates is centralised, but not their trading practices. This does not mean foreign owned firms do not have dealings with overseas affiliates [indeed, they most likely do have], but simply that they do not control them. The relatively low number of overseas subsidiaries or workplaces controlled by foreign owned businesses gives rise to relatively low outbound foreign direct investment [FDI] from Australia, in food manufacturing in particular. And because FDI is increasing at a significantly faster rate than exports, albeit from a lower base, this may give rise to concerns about Australia’s future position, control and linkages to an increasingly globalised food industry. Nevertheless, it is important to recognise that some foreign owned firms have more control than others and do have enough independence to invest offshore, perhaps because of licensing arrangements with parent companies. The growing gap between inbound and outbound FDI in Australian food manufacturing contributes significantly to an overall net imbalance in favour of inbound FDI in Australian manufacturing.

M j it A t Wh ll f i0

20406080

100

[% of firms with offshore workplaces]

Offshore Investment

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In contrast to food manufacturing, Australian owned food retailers are relatively more competitive against foreign owned firms. Most Australian owned food retailers have relatively low labour costs [less than 20% of total costs], have recently introduced new technology and have recently reorganised their workplaces. This has enabled over 30% of Australian owned food retailers to establish workplaces overseas and lay the foundations for significant and competitive supply chains with direct linkages to Australia. Nevertheless, new entrants from offshore with different merchandising and store lay-out structures are likely to present new challenges for retailers in the Australian domestic market. A globally competitive food and fibre firm is likely to feature either or both significant exports and outbound FDI. In turn, this will reflect high labour productivity; readiness to introduce new technology; willingness to reorganise workplaces; and sufficient independence to establish and control overseas workplaces. This type of firm, foreign or locally owned, offers the best prospects for raw material suppliers to gain access to global markets. The results of this study have implications for both corporate and government policies. For Australian owned companies to become more export oriented and globally competitive they need to take notice and learn how foreign firms introduce labour saving work practices, new technology and reorganise workplaces. We recognise, however, that foreign owned firms have better access to and potentially lower costs of capital than local firms because they tend to be larger, more diverse and more established. For foreign owned companies to bring more value and linkages from global markets to Australia, they need more independence and discretion at their Australian offices to establish offshore subsidiaries and workplaces. That said, the development and preservation of product brands and transfer of new technology is a complex matter that underpins corporate value and there is a natural tendency to centralise control of many of these activities. In this study, however, we have observed certain multi-national enterprise [MNE] corporate structures that appear to offer more benefits and global linkages to Australia than others. For example, Coca-Cola Amatil through its licensing arrangements with the Coca-Cola Company has significant autonomy to operate from Australia in Asia. The nature of the product and the parent’s product range and the geographic and cultural similarities of the region appear to underpin this autonomy. This and other models could be examined in more detail in further research. For government policy the issues relate to foreign ownership and competition and trade development programs. More generally, however, in the first place it is the overall mix of both micro and macro-economic policies that sets the environment which induces a company to locate in a particular country. Taxation, inflation, exchange rate management, sovereign risk, access to infrastructure and access to skills all contribute to this environment. Specific policies on foreign investment, competition and trade then have impact on industry structure and conduct of firms. The results of this study indicate foreign

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ownership restrictions would serve only to diminish exports and encourage uncompetitive work practices, encourage prolonged use of old technology and accommodate unadjusted work places. Government programs that promote bilateral trade may also benefit from improved understanding of the differences between foreign and locally owned practices, performance and food chains. An ‘export to Asia’ program might, for instance, achieve more for the Australian economy and producers of raw materials by adding an ‘invest-offshore-but-source from Australia’ program. This approach may achieve better linkages with competitive global food supply chains. In regard to the lack of outbound foreign investment by foreign owned firms in Australia, particularly in food manufacturing, this is an issue that the ACCC might examine in more detail, on a case-by-case basis, to see what the implications are for more competitive food supply chains. Increased globalisation of food manufacturing and distribution and concentration of ownership of global food supply chains may result in reduced access to global food markets. Conversely, increased competition between food supply chains and specifically between providers of outbound FDI is likely to improve market access for Australian producers of raw materials. At first glance there is market access and competition between food manufacturers and most practices pass the reasonable monitoring and behavioural tests put forward by foreign investment and competition regulations. But inside the firms there are internal structures that are not well understood in terms of governance, control, history or even why they exist at all. MNEs, statutory marketing authorities and cooperatives are rather complex institutions with widespread effects on industry structure. In a deregulated market it may be the company or cooperative constitution that has more effect on market structure and conduct of the firms in it than competition regulations. Finally, we draw attention to the lack of quality, scope and content of public data on foreign ownership and performance at an industry level. It is well below that which is available from the US and contributes to a less informed Australian industry and policy development process. There is a case for better data even if surveys by, for instance, the Australian Bureau of Statistics, were done less frequently at say intervals of 3 years. The AWIR survey which is done at 5-year intervals is an important and unique source of data. It should be continued and ideally enhanced with more information about export relationships, outbound investment and control of foreign owned companies.

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1. Introduction This is a study of the effect of foreign ownership on exports and outbound foreign investment by food and fibre enterprises operating in Australia. Foreign direct investment [FDI] has been a significant source of capital for development of the Australian food industry and, with a current book value in excess of $11billion, it accounts for almost 25% of total asset values for the sector and over 50% of the estimated net worth of the sector1. Outbound FDI in the food industry is around $5b. The aim of the study is to improve information and understanding of foreign and locally owned supply chains and the effect of foreign ownership on the competitiveness of Australian trade in food and fibre products. The output is intended to facilitate more informed public policy development and help in corporate strategy formation by both foreign affiliates and locally owned firms.

1.1 Background, relevance and potential benefits Foreign investment policy and strategy for both governments and companies has emerged as a key issue in the context of increasingly competitive and globalised production, technology and markets. And simultaneously there is growing consumer interest in the impact of globalised operations on labour markets and environmental conditions.2

Foreign investment policy is cited in some surveys as an important determinant of international competitiveness. For instance, both the Global Competitiveness Report and the World Competitiveness Yearbook 3 include barriers to foreign investment as a factor in estimating the overall level of competitiveness for over 45 countries. In 1999 Australia was ranked 12th, placing it in the top one-third of all countries in terms of competitiveness, but in terms of ease of access for investment by foreigners it has been consistently ranked in the bottom half of all countries in the World Competitiveness Yearbook4. Nevertheless, this perspective is not shared universally by all foreign investors.Virgin Airlines, for instance, reported recently that ‘...Foreign Investment Review Board approval was a breeze and the granting of an air operators certificate from the Civil Aviation Safety Authority a formality...’5 Local entrepreneur and Australian owned product champion, Dick Smith, implies through his promotions that acquiring ownership of Australian food manufacturing has been too easy for foreigners, though his activities suggest their presence creates also the opportunity for local manufacturers to appeal to the fervour of nationalistic pride in locally owned products. Minor political parties often offer more restrictive policies on foreign ownership out of concern about growing ownership of local firms. Of greater importance to Australia is how well foreign owned companies behave and perform when

1 Australian Bureau of Statistics [Cat. 8225] estimates the net worth of the Australian food, beverage and tobacco

manufacturing industry to be $21.5billion and the inward stock of FDI in this industry to be $11.1billion.

2 Refer, for instance, to ANo short cuts on the path to free trade’, Australian Financial Review, 11-12 December 1999, p9

3 IMD, 1999 The World Competitiveness Yearbook, Lausanne, Switzerland. The Yearbook is based on a survey of 4160 business executives in 47 countries and uses a range of statistical indicators which are consolidated to form the ranking of countries.

4 One reason for foreigners holding a perception that investment in local firms by foreigners is not that easy in Australia could be due to the screening mechanism which requires information to be reported before making certain investments when they are to be held by foreigners.

5 ‘Virgin project reaches the point of no return’, Australian Financial Review, 11-12 December 1999, p12

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they do get access. Do they export or confine their operations to the domestic market? How much control rests with foreign affiliates operating in the Australian market and how much of their earnings are transferred to foreign parents and retained in Australia for on-going investment? Do the foreign affiliates based in Australia have discretion to invest directly in foreign third markets or is this left to the control of the head office market? These are important issues to understand in evaluating the impact of foreign investment on local raw material supply chains for food and fibre products. The more efficient and competitive food and fibre manufacturers and service enterprises are the greater is both the share of the retail dollar flowing to Australian raw material producers and the share of local and world food and fibre product markets held by local manufacturers. In the domestic market the relatively inelastic supply of raw materials [a consequence of natural, institutional6 and technical entry barriers] typically facilitates improved share in the retail dollar for producers, providing there is an efficient local manufacturing presence. In regards to outbound foreign investment in food and fibre enterprises the effects on local raw material suppliers are less clear though it seems reasonable to accept the Michael Porter [1990] notion that outbound foreign investment is just as much a sign of success and efficiency as growth in exports, irrespective of whether or not it is foreign or locally owned. Because of home linkages with raw material suppliers it seems reasonable to expect local producers of raw materials could benefit by having foreign investment in third countries sourced from Australian based firms [either locally owned or foreign affiliates] than by foreign based firms directly or foreign affiliates in other countries7. This matter is examined more closely in the study.

Reductions in trade barriers have made it easier for multi-national-enterprises 8 [MNEs] to export to countries such as Australia where tariffs have been reduced significantly over the past decade and this has stimulated trade in goods and services. But foreign direct investment has also increased significantly, particularly between the USA and Canada, Western Europe and Japan [Centre for International Economics (CIE) 1998]. Between 1978 and 1991 exports of manufactured food products from France, Germany, Italy, the Netherlands, Portugal and UK grew by 177%, but over the same period foreign direct investment grew by 320% [Traill and da Silva 1996]. Foreign production of food by US owned MNE food manufacturers is now estimated to be four times the value of US exports of manufactured food [Handy and Henderson, 1994], adding weight to the notion that international trade today is closely linked to foreign investment. In Australia, over the 10 years ended June 1997 exports increased at a compound growth rate of 8.5%/year while outbound foreign direct and portfolio investment [ie. in financial assets such as securities] increased by 9.5% and 17.5% respectively. The practices and behaviour of MNEs, which are typically the main source of foreign investment, have public competition policy implications because of their globalised linkages, which may lead to increased entry barriers [Caves 1984]. In this context there are potentially complex effects in that the

6 Institutional barriers include traditionally the presence of statutory marketing authorities. The small size of Australian owned firms, cooperatives in particular, may also limit the responsiveness of supply.

7 E. Allaro, Chairman of the Australian Food Council and Chairman of Unifoods, indicated in an address [Asian Food Market Opportunities & Challenges] to Outlook 98 Agriculture that 90% of ingredients for Australian food manufacturing are sourced from Australian agriculture.

8 Multi-national Enterprises [‘Transnational Corporations’] are defined here as international corporations with global production, processing and distribution capacity. An Australian company can be a MNE if it has a global presence. About 3% of the top 100 MNEs are Australian owned [United Nations Conference on Trade and Development, 1997]. Most Australian MNEs are in mining [e.g. BHP and CRA]. In the food industry a number of foreign owned MNEs have subsidiary operations in Australia

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welfare of the MNE host country may be enhanced by encouraging the MNE to increase barriers to entering its markets when they operate in foreign locations9. But this outcome has the potential to diminish welfare in the foreign country, hence, the potential for conflict among nations if the MNE extracts abnormal rents through the foreign affiliate. Some of the recent [December 1999] demonstrations against the World Trade Organisation in Seattle appear to reflect these concerns. This is another reason for examining the performance of foreign viz. locally owned firms. We would expect, however, that a competitive market would encourage sourcing to take place through the most competitive supply chains. The 1998 study by the CIE for RIRDC estimated that only 4% of every dollar of output generated in the Australian economy is remitted overseas to foreign investors and most earnings are retained here for further investment. Whether or not this is high or low depends largely on the resources involved. We examine here whether or not the performance of foreign owned firms in food and fibre manufacturing is significantly different to Australian owned firms. 1.2 Research Strategies and Methodology This study builds conceptually on a research methodology used by Michael Porter at Harvard University, US and Professor Bruce Traill at Reading University, UK to measure the revealed competitive advantage of firms. Competitive advantage in these industry based studies was revealed by measuring and comparing the relative amount of revenue realised from exports and outbound foreign investment. Here, we extend this logic by segregating the participants and measuring the performance of domestic and foreign owned firms to see if they are different. 1.3 Outline of the Report In the next section of the report there is a review of the literature on the subject where a few writers such as Caves have written extensively on the theory and practices of MNEs. We find that public data limitations have constrained empirical research in the area. In Sections 3 and 4 there is a more detailed description of the objectives of the study and the methodology used. Sections 5 and 6 contain the detailed results and a discussion about the findings. In Section 7 we examine the implications for foreign investment and competition policy before identifying conclusions and some recommendations for future research and policy development. Annex 1 shows a survey that was sent to 25 food manufacturers but because the response rate was too low we were unable to use much of the data from this survey, other than through enhancement of several case studies that we conducted to examine some key issues. Annex 2 contains the more detailed statistical analyses of the AWIR survey and Annex 3 shows the summary data extracted from the AWIR database.

9 For instance, a foreign owned firm could be encouraged to centralise sourcing decisions to preserve linkages with

local suppliers of raw materials in the MNEs home market.

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2. Review of the Literature Although there is an extensive body of research into foreign investment and the behaviour of MNEs in global markets there are surprisingly few studies about their performance at a sectoral level, particularly in Australia over the last decade. And there is even less information about the impact of foreign owned global supply chains on local suppliers of raw materials. Sheridan (1975)10 in a study of 61 USA and UK foreign affiliated firms operating in Australia over the period 1950-1975, found that foreign manufacturing firms outperformed similar Australian firms in both growth and profitability. Their superior performance was seen to be due to better management and a capacity and willingness to restructure acquired local firms. Ultimately, the participation of foreign firms was seen to improve firm and industry efficiency. Sheridan found, however, that the extent of foreign ownership in firms did not affect performance. Majority foreign owned firms did not perform noticeably better that foreign affiliates with minority shares, suggesting a little bit of ownership could go a long way. This result is at odds with more recent research by Boardman et.al. (1997) indicating that the concentrated ownership of foreign affiliates helps explain their better performance [refer to section 2.1 below]. Parry (1978), in a cross-sectional study of Australian manufacturing firms operating in 1972-73, found that foreign ownership was inversely related to profitability and allocative efficiency though the results were not statistically significant. Foreign firms devoted more resources to R&D and labour skill improvements but they also tended to invest in low labour and high capital intensity enterprises and structures. More recently (1998), Bora concluded that majority foreign and fully foreign owned manufacturing firms were more productive (measured by value added/employee), more export oriented and less focussed on the local market than their Australian counterparts. Edwards and Buckley (1998) found that the main motive for Australian owned firms in establishing a foreign subsidiary in the UK was to gain access to a market that was somewhat similar to Australia. Wholly owned foreign subsidiaries were seen to be a preferred structure for entering a foreign market because of the increased control offered, compared to alternative structures such as joint ventures and franchises.

2.1 Motives for Foreign Investment Studies of foreign investment usually attribute the superior performance of an MNE to one or more of the following factors:

(a.) Economies of scale

(b.) Improved control and accountability

(c.) Willingness to innovate and change structures and practices

(d.) Intellectual property acquired from research and development resources

10 This study encountered severe data problems, particularly in dealing with different international accounting

standards and changes in company structure over time.

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(e.) Marketing and advertising resources and skills

(f.) Human resource skills

Caves (1992) argued that foreign investment and the presence or absence of MNEs was explained largely by relative transaction costs which would govern whether or not a company would engage in international trade of its products and services or set up or acquire its own factory in another country to produce the same or similar goods and services. MNEs operate in international markets to capture rents or abnormal returns to some proprietary asset [eg. a brand name] or skill [skills in food technology or in managing large companies] that has been acquired by the parent and these advantages are reflected typically in high productivity of foreign subsidiaries. Cost advantages arise from location drivers and internalization differences. Internalization advantages emerge when transaction costs associated with managing a single organisation across several countries are lower than the transaction costs of multiple owners. A number of studies (Shapiro 1982) suggest companies do not immediately engage in international investment according to strict financial investment criteria or according to a pre-defined optimal global structure. Instead, they tend to go through a sequential process of exporting, setting up a foreign sales subsidiary, perhaps followed by licensing and eventually acquiring a local firm or setting up a new operation. Caves would argue that the delayed response reflects merely a gradual decline in transaction costs as the structure and experience evolves over time. Initially, local ownership would be perceived as having significant costs and risks, but over time these costs are reduced with the accumulation of knowledge and experience in foreign markets. Edwards and Buckley found that the primary motive for establishing an offshore production facility was to improve access to markets. This result again supports the idea that FDI is a lower cost method of gaining market access than exports. Another explanation for superior economic and financial performance of MNEs is that it is due to agency cost differences (Boardman, A.E., Shapiro, D.M. and Vining, A.R, 1997). The essence of the agency argument is that as the number of shareholders increases and the more diffuse the ownership structure becomes, then the more difficult and costly it is for shareholders to monitor the agent or manager. A concentrated ownership structure facilitates control because the monitoring shareholder can capture the benefits fully and therefore has a greater incentive to enforce high standards of management. Boardman et.al found that, at least with US subsidiaries, increased concentration of ownership or full ownership does facilitate control and improve performance. 2.2 Efficiency and Flow-on Effects of MNEs The effect of the relatively high productivity of a MNE on sectoral efficiency is complicated by the responsiveness of competitors. Initially, the technical efficiency of the sector may decline with a large number of firms sitting below the production frontier that has been set by the MNE. Fecher and Perelman (1992), in a sectoral study of OECD industrial enterprises, found empirical evidence that R&D and the spillover effects of R&D11 do lead to a short-term decline in technical efficiency, but the effect on growth in productivity is generally positive because of the outward shift in the production possibility curve. Increased import and export competition also improves growth in productivity and therefore it would appear that the potential efficiency effects offered by an MNE can only be realised if there is effective competition in the market(s) in which they operate. The CIE (1998) also argued generally that increased competition would improve productivity where MNEs are active.

11 R&D spillover reflects the fact that the benefits from some R&D expenditures cannot be fully appropriated by

the initiator. Competitors can free ride on the expenditure.

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Caves and Barton (1990) concluded that when production is concentrated in the hands of few firms, inefficiency can appear through the survival of inefficient plants; collusive bargaining among oligopolies; and reduced innovation. Concerns about these inefficiencies are generally tempered by an assumption that a few large firms have the capacity to expend relatively large amounts on R&D, which would be expected to increase growth in productivity. But in the study by Fecher and Perelman an anomaly was found in respect of a negative impact of R&D and R&D spillover expenditure on the productivity of the food sector in the OECD. They found increased expenditure on R&D at home and in foreign countries in the food sector was observed to lead to an unexpected decline in productivity. This data covered the period 1971 to 1986 and may not hold true for now. One explanation for the food anomaly is that the R&D expenditure for food is biased towards brand development and imaging, which would increase prices, rather than improve productivity and reduce costs. The food industry is a relatively intensive user of advertising services and this would suggest it expends relatively high amounts on market research which is not the typical productivity increasing research activity such as process technology and mechanical and industrial engineering. Aitken, Hansen and Harrison (1997) found in a panel data study of Mexican manufacturing plants that MNEs create positive spillover effects on exports through their global trading and investment networks. They found local firms with an export strategy would be more successful if they locate in areas where MNE activity is already concentrated. That is, MNEs have a catalytic effect on the export performance of domestic firms. These results have implications for export enhancement programs, the success of which would appear to be enhanced if exporters follow the paths of MNEs in similar industries, rather than simply pursue a ‘greenfields’ approach. Foreign owned firms may provide a conduit for the transfer of information about markets and technology and a natural channel through which domestic firms can distribute goods and services or at least monitor and track. Most studies agree that the presence or absence of MNEs is affected significantly by a combination of industry structure, taxation, competition and foreign investment policy. There is widespread evidence that MNEs tend to be attracted to industries where there is high concentration [Parry 1978] but there is uncertainty about whether or not MNEs contribute to concentration of industry. And even if there is increased concentration from MNE activity the full effects on efficiency are unclear. Caves (1992) found that technical efficiency in Australia increases with industry plant size and with increased regional concentration, but decreases with protection from international competition [both natural and regulatory] and with extreme levels of concentration. There is a somewhat unique industry environment in Australia with the threat of a confluence of negative competitive forces operating in some industries. Small size, natural and regulatory protection and industry concentration are the basic drivers of this environment. Caves (1984) found the four-firm concentration ratio for Australian manufacturing industries to be at least 78% higher than their US equivalents. Industry concentration for the Australian food industry is relatively higher than for the manufacturing sector as a whole [Bureau of Industry Economics 1996]. The largest 20 Australian food enterprises account for 8% of establishments, 38% of employment, 44% of wages, 45% of turnover and 47% of value added. In comparison the top 20 general manufacturers account for 3% of establishments, 15% of employment, 20% of wages, 28% of turnover and 23% of value added. Australian food retailing is also highly concentrated with the 4 largest food retailers, two of which are foreign owned, accounting for over 90% of the market ( Food Industry Yearbook 1999). The level of concentration in Australian food retailing is much higher than Europe where typically the top 5 food retailers account for 60% or less of the market (Moody 1998). Moreover, in Europe, the least concentrated food retailing market, Spain (16% market share for the top 5 retailers), features the

7

highest level of foreign ownership. We may have to wait to see if the concentration in the Spanish market leads, as most studies would predict, to rationalisation of capacity and concentration of ownership. The Bureau of Industry Economics [1996] found from a survey of firms operating in the Australian food industry that increased competition leads to increased exports but, while the data was collected in the survey, there is no report in this study of whether or not there was any difference between foreign and locally owned firms in export performance. Bora [1998], using the 1995 Australian Workplace and Industrial Relations Survey data, found that majority foreign owned manufacturing companies operating in Australia are more export oriented and more aware of and responsive to import competition than Australian owned firms, but there was no analysis in this study of sectoral differences within manufacturing. 2.3 Measuring Competitiveness Traill and da Silva (1996) examined ways in which the competitiveness of industries could be measured to evaluate the effect of foreign ownership on it. In view of the widely accepted theory that increased competition enhances efficiency and productivity there is a natural interest in empirical evidence to support it. Sectoral and industry measures of competitiveness tend to be based around product or trade performance but there is increasing effort to widen the scope to include foreign investment. As noted by Traill et al, Porter (1990) concluded that successful industries could be identified by the presence of substantial exports to a diversified group of countries and significant outbound FDI, the latter coming from either foreign owned affiliates or the home base. Porter argued that foreign ownership was irrelevant provided the local company had enough strategic, technical and creative control to export or set up its own foreign subsidiaries. Vachani (1999) found, however, that the parents of foreign firms tend generally to retain most control over R&D and finance and less control over marketing and selection of personnel. The extent to which outbound FDI captures the true foreign investment and exposure of a company is confounded by measurement problems in dealing with licensing, patents, trade secrets, franchising, joint ventures, strategic alliances, partnerships, sponsorships and sub-contractors. One way of capturing all the effects of these measurements may be through the identification of brand values and their underlying value in various markets but these are not generally published by many companies and particularly at a segment level. Official estimates of outbound FDI capture only the equity held in foreign firms and although it has limited scope in revealing the full extent of foreign investment it is the best available and still provides the basis for a comparison between segments of interest such as foreign and locally owned firms. 2.4 Exports and FDI: Substitutes or Complements?

8

International trade theory suggests the export of capital to fund FDI leads ultimately to an expansion of production in the host country and contraction of exports normally sent to the host country before the investment took place (Caves 1982). That is FDI substitutes for exports. In a case study of five US food manufacturers (Overend, C., Connor, J.M. and Salin,V 1997) covering 16 years from 1978-93 it was found that increased FDI tended to be associated with increased exports for companies with low levels of FDI [that is, a complementary relationship for firms with a small global presence], but once the company has between 15 and 30 foreign subsidiaries it tends to rely more on local production. Chart 2.1 shows the export and FDI relationship for Heinz and Co, which was typical of 4 out of 5, firms in that case study. Heinz shows a typically progressive movement through a complementary phase where exports and FDI run together and then the relationship tapers off and declines as the number of subsidiaries increases and the organisation takes on a global structure. A 1999 report by the UN indicated there was little difference between the export performance of foreign and locally owned manufacturing companies in six developed economies that were studied. When export orientation is low it tends to be low for both foreign and locally owned firms, suggesting general economic or market factors outweigh the specific influences of firms. For Canada, however, foreign affiliates tend to be more export oriented than locally owned companies [Chart 2.2]. But then to some extent US domestic firms tend to be more export oriented than foreign affiliates in that country. The difference may reflect, in part, the presence of a large number of US owned firms that are in the top 500 MNEs. These results raise questions about the correct specification and correlation12 between independent variables. It is possible that it is the presence of MNEs that provides a better explanation for export performance and ownership is less relevant.

12 The presence of any fixed relation between ‘independent’ variables is called multicollinearity (Rao and Miller

1971).

No. of overseas subsidiaries23

2425

2627

2829

3031

3233

3435

36

0

2000

4000

6000

8000

10000

12000

Heinz & Co.

[Source: Overend, Connor & Salin]Chart 2.1: Response of Exports to FDI: Heinz & Co.

Canada 1993Finland 1994

France 1992Japan 1995

Sweden 1994US 1996

0

10

20

30

40

50

60

Foreign affiliatesDomestic firms

[manufacturing - latest year available]

Chart 2.2: Export-FDI Relationship

9

3. Objectives This is a study of the effect of foreign ownership on exports and outward FDI by food and fibre industrial enterprises operating in Australia. While the initial scope extended through food manufacturing and the textile, clothing, footwear and leather industries, an early examination of foreign investment flows and trade prompted more attention to food manufacturing and to add food retailing, whilst giving less attention to TCF and Leather which attracts little inward FDI or outward FDI. [Refer to Table 5.4 below]. The study aimed to improve information and understanding about foreign and locally owned supply chains and the effect of foreign ownership on Australian trade and investment in food and fibre products. The output is intended to facilitate more informed public policy development, improved government support programs and also aid in the formation of corporate strategy for both foreign and locally owned firms. Events surrounding the recent global trade conference demonstrate there is a need for improved information about the practices and impact of foreign investment on the competitive environment and domestic economies. Their widespread presence in concentrated industries and interest in acquiring local firms in concentrated markets accentuate concerns about MNEs. Some research (Caves 1982) shows a global welfare dilemma may exist if the host country of the MNEs maximises its own welfare by each and every means including encouraging the MNE to exploit its position of market power. In these circumstances there may be an extraction of rents from the foreign market and a redistribution towards the MNE home base. Evidence that MNEs do actually exploit their market power is at best inconclusive. For instance, the CIE estimate that at least in Australia only about 4% of the revenue earned by a foreign owned company is distributed back to the parent company appears not to be excessive in the context of benefits. The rest stays in the country in the form of payments for labour, retained earnings for further investment, taxation and payments for other goods and services. This estimate does not, however, consider transfer-pricing mechanisms for shifting resources between affiliates and head office. Sheridan (1975) reported evidence of transfer pricing in Australia through overcharging of fees and royalties paid by foreign affiliates to parents, but did not have any evidence of how important it was at that time. There are also strategic planning and managerial issues to be examined in the context of improving management practices and behaviour of not just foreign, but also locally owned firms. The main reason that firms become globally oriented is that they are very efficient in terms of cost or brand development or market specialisation. Improved understanding of the source of these cost advantage can be expected to improve local knowledge about how to compete in global markets. As suppliers of raw materials for food manufacturers and retailers, agricultural producers are also interested in the efficiency of the supply chains beyond the farm gate. Having well developed and diverse distribution channels, irrespective of their ownership can improve access to international markets.

10

4. Methodology Rarely has a term in public discourse gone so directly from obscurity to meaningless without an intervening period of coherence [Wall Street Journal, July 2, 1992 ... cited in Silva 2000] [Responding to confusion about what competitiveness actually means.]

The study hypothesis to be tested is that foreign ownership has no significant effect on either exports or the external investment orientation of food and fibre enterprises operating in Australia. Export orientation is measured typically by expressing exports as a percentage of turnover and outbound investment as a proportion of asset values or firm equity. The Australian Workplace Industrial Relations database is the only source of official information that collects integrated information about export and investment performance by ownership. The survey from which it is derived is conducted at 5-year intervals by the Department of Employment, Workplace Relations and Small Business, the first of which was undertaken in 1990. We use in this study the data from the 1995 survey. Foreign ownership in the AWIR survey is classified in a more detailed and more qualitative way than foreign investment surveys conducted by the Australian Bureau of Statistics13. There are five possible categories of ownership in the AWIR survey: • Wholly Australian owned. • Predominantly Australian owned (51% or more, but less than 100% Australian ownership) • Jointly owned, 50% each of foreign and Australian. • Predominantly foreign owned (51% or more, but less than 100% foreign ownership) • Wholly foreign owned. There were 40 [of which 17 were more than 50% foreign owned] food manufacturing respondents; 40 TCF and Leather [of which 19 were more than 50% foreign owned]; and 83 food retailers [of which 8 were more than 50% foreign owned]. Clearly, the small sample size presents some problems in terms of reliability and therefore the results need to be treated with caution. Where low sample numbers were encountered for segments of interest we checked to see if there was any consistency of the results when segments were added to derive a larger sub-sample. To check the reality of the data we also examined financial statements and annual reports from several foreign and locally owned firms. In addition, a survey was sent to 20 Australian and foreign owned food manufacturers [Annex 1]. While the survey response was unsatisfactory the data and the financial and annual reports have provide useful information to check the reality of both AWIR and ABS data as well as understand the different corporate strategies and structures of foreign and locally owned firms. 4.1. Binary Logistics Regression For this study we were most interested in the trade and investment orientation of the foreign and

13 ABS surveys of International Investment base foreign direct investment on a detailed examination of direct investment transactions between resident and non-resident entities at the subsidiary, associate and branch level. A direct investment relationship is established when a direct investor resident in one country holds 10% or more of the ordinary shares or voting stock of an enterprise resident in another country. When the direct investment level is below 10%, but above zero, then it is categorised as portfolio investment.[Refer to ABS, Survey of International Investment: Explanatory Notes to accompany Form 80].

11

locally owned respondent groups. This was measured with the responses to a question which asked whether or not the firm was ‘domestic only [100% sold on the Australian market]; domestic, with some exports; or ‘primarily export’. Investment orientation was measured with the responses to a question which asked whether or not the firm had ‘workplaces overseas’. To measure the significance of the observed responses we used binary logistic regression and generalised linear model regression to do the analyses [Further details in Annex 2]. Binary logistics regression was used to perform logistics regression on binary response variables. A binary variable has only two possible values, such as market orientation being indicated by the presence or absence of ‘domestic with some exports’. A model with one or more independent variables is fit, using an iterative re-weighted least squares algorithm to obtain maximum likelihood estimates of the parameter of interest. Small numbers of responses meant we sometimes had to pool the data, raising the potential for mis-specification of the independent variable but improving the predictability of the model. Recognising the differences between the ABS and AWIR data collection methods we also examined ABS industry data on foreign investment in food and textile production in Australia to see if these results were consistent with the AWIR results. It is not, however, an easy task to obtain reliable quantitative data on foreign investment in Australia at the ANZSIC two digit level. We commissioned ABS to extract this data as it is not published. The idea behind measuring the relative export and foreign investment performance of foreign and locally owned firms is that Australian producers of raw materials and the Australian economy generally are likely to benefit more by having firms based in Australia [either foreign or locally owned] which are capable of either exporting or investing in foreign markets. Either of these outcomes creates the potential for supply chain linkages back to Australian producers of raw materials and access to offshore markets. For those firms or groups of firms that do not export or invest offshore there is then the question of why and how might their trading and external investment performance be improved. Although there is an increasingly diverse and complex array of foreign investment vehicles [licensing, franchising, joint ventures, partnerships, strategic alliances, supply chain groups etc] the ultimate effect of these arrangements is expressed typically in the form of exports, imports and/or foreign investment. Concepts of competitiveness are not as clearly defined as the static Ricardian model of comparative advantage which dealt largely at a country level with comparative costs and comparative access to natural resources including land and labour, without much attention to product differentiation, branding and globalisation.14 In contrast, competitiveness has been discussed more in a micro economic environment where firms and governments are in a position to influence their destiny through cost advantages, differentiated products, skilled labour, education and training, infrastructure and/or focus on niche markets. Nevertheless, both comparative advantage and competitive advantage15 deal with relative differences in costs to explain relative positions of advantage for either a nation or industry or firm. Indexes of competitiveness in international transactions were reviewed by Traill and da Silva (1996), following the work by of Dunning16 and Porter17. Some of the measures are described below. The

14 Refer, for instance, to Heller (1973) for a more detailed description of comparative advantage.

15 Refer to Porter (1985), Competitive Advantage: Creating and Sustaining Superior Performance, p1

16 Dunning, J.H. 91993) Internationalising Porter’s Diamond. Management International Review, Vol 2

12

main problem in using these indexes is access to reliable and consistent data. The following measures, as reported by Traill et.al. have been used in various studies as indicators of competitiveness. 4.2. Export Market Share [XMS]:

XMS = 100 * (Xi / X Iw)

Where Xi is the value of national [eg. Australian] exports from industry ‘i’ [eg. Food and beverages] and X Iw is the value of world exports from industry ‘i’. This measure implies essentially that increased share of export markets signifies increased competitiveness. There are several problems with this measure. It ignores the basic principles of comparative advantage in that it does not deal with relative market shares within a country. A firm from a small country, for instance, may have a small share of a world market but relative to other exporters from that small country the share may be large. The second problem is that this measure ignores foreign investment. A firm with a relatively low level of exports but a significant global presence with subsidiaries in many countries could perform poorly on the measure even though it may be clearly a highly competitive and efficient firm. The best that can be said about his index is that the data is available for various food, beverage and fibre product groups using SITIC classifications and global data published by the UN. This index could be used to examine performance at a sectoral level but public data from, for instance, ABS would not be available to allow any deeper examination of differences in export market shares between domestic and foreign firms. 4.3. Balassa's (1987)18 Index of Revealed Comparative Advantage [XRCA]

BIRCA = 100*(Xi / X Iw) / (X/ X w)

Where X is the value of national exports of all industries from one country and X w is the value of total world exports in all industries. A value greater than 100 indicates a revealed comparative advantage in that product or industry. This index improves on the simple measure of market share by making an adjustment for the relative size of the local economy. It again, however, ignores foreign investment and is therefore a very partial indicator of competitiveness. The data for this model is also available for various industry groups using SITIC classifications and published by the UN but again data from ABS would not be available to allow any deeper examination of differences between domestic and foreign firms.

17 Porter, M.E. (1990) The Competitive Advantage of Nations, MacMillan, London

18 Balassa,B. (1987) Comparative Advantage, Trade Policy and Economic Development, Harvester Wheatsheaf, NY

13

4.4 Porter Model of Revealed Competitive Advantage Our interest in this study was to identify the impact of inbound foreign investment on exports and outbound foreign investment. We were interested in the effects of outbound foreign investment because the purchase of a foreign asset may generate dividends and also provide simultaneous access to a distribution channel not available through traditional export paths. Porter incorporated output from outbound FDI in an extended model, called the Porter-Adapted Index of Revealed Comparative Advantage.

PAICA = 100* [(Xij + IPOij) / (X Ic + IPOic)]/ [(X+ IPO) / (Xw + IPOw)]

where Xij and IPOij represent, respectively, exports and output from foreign investment at the firm level and X Ic and IPOic represent the same data at a group or industry sector level. This model gives equal weight to exports and output from outbound foreign investment to measure competitiveness. The allocation of equal weights raises questions about the level of repatriated returns to the home country. If only 4% of output from foreign affiliates is returned to the home country the measure may overstate the importance of outbound foreign investment. Data on the output of firms making foreign investment is not generally available from public sources. 4.5 Dunning-Adapted Net Competitive Advantage:

DNCA = 100* [(Xi + IPOi) - (Mi + IPIi)]/ [(Yi+ IPOi - IPIi)

where IPI is the value of output produced by inbound FDI, M is the value of imports and Y is the value of domestic production. Essentially, the presence of imports and in-bound foreign investment decreases the index value. Like PAICA, exports and outbound foreign investment are given equal weight In this study the basic principles of the Porter model are accepted, but in a more conceptual framework with export and FDI estimates as general indicators of competitiveness. Our main interest was in examining differences between foreign and locally owned firms. Instead of relying on precise quantitative estimates of indexes and debates about how they were calculated we make the general observation that the level of exports and outbound foreign investment reveal broadly the competitiveness of an industry. Conversely, imports and inbound investment reveal generally some deficiencies in competitiveness. In many respects the AWIR database, despite its qualitative nature, provides more insights than would be revealed from any of the above models because it includes a number of potentially interesting causal variables. It is one thing to measure competitiveness but the second and more relevant issue is to understand what affects it. Despite the conceptually appealing nature of Porter’s and Dunning’s model there are serious questions about these measures when applied in a case context. For example, Lion Nathan Limited is a New Zealand owned brewing company19 that generates over 60% of its revenue from investments in subsidiary Australian brewing companies which each have major shares of the Australian market. Exports and imports are negligible. Under Dunning’s model the inbound FDI by Lion Nathan shows up as a significant and dominant negative effect on the index, and being a New Zealand company its outbound investment in other countries is made direct from New Zealand not Australia, all of which indicates there is no competitive advantage in Australian brewing firms. But it is in the Australian

19 While Lion Nathan shows up as a foreign company in Australia it is also foreign owned in NZ where it had, until

recently, its head office. Its major shareholder is Kerin, a Japanese brewing company that holds about 46% of the stock. New Zealand shareholders account for about 15% of the stock and Australian residents about 15%.

14

brewing subsidiaries where most of the value of Lion Nathan resides. Dunning’s model does not appear to work that well in these circumstances. On the other hand the Dunning model would appear to have significant potential in examining the effectiveness of industry schemes such as that applying to the TCF and Leather industries over the last decade where firms have been encouraged to relocate labour intensive activities in low labour cost countries, bring them back to Australia to add more value and then export the finished product with relatively high added value.

15

5. Detailed Results Deficiencies in the content and quality of data have been encountered in a number of studies about FDI, particularly when examining the situation outside the US or Canada. The US and Canada seem to have been more motivated to improve the quality of their data about the activities of MNEs perhaps because of the presence of a relatively large number of active MNEs with head offices in North America. For instance, 30 of the top 100 MNEs in 1995 were US owned compared to 3 Australian owned [UNCTAD 1997]. Nevertheless, the number of foreign affiliates located in Australia is over 2,500 compared to less than 1,000 parent corporations with head office in Australia, suggesting foreign enterprise activity is an important factor in the economy and one for which there could be benefits from having better quality data. 5.1 World FDI Over the past decade the world stock of FDI has experienced a compound growth rate of about 13%/year, with the services [48 % share] and manufacturing [42.5% share] sectors accounting for the major shares. [Chart 5.1]. From 1996 through to 1998, however, there has been a significant increase in the growth rate which was 34%/year over 1997 and 1998. Inbound FDI flow is now equivalent to about 6 % of world export values. Starting from a low base, global growth of foreign direct investment in agricultural production has been above 18%/year for the past decade but it still

accounts for less than 1% of world wide FDI. Although growth in FDI in food manufacturing and the TCF and Leather industries has been less than for manufacturing as a whole it also has been around 10% [Chart 5.2] and is about double the growth rates in exports from these industries. Nevertheless, the relatively lower growth rate of these industries means their share of the total FDI market has declined over the past decade.

1988 19970

500,0001,000,0001,500,0002,000,0002,500,000

All Industries ManufacturingServices Prim ary

[$US mil lions]

Chart 5.1: World Fo reign Direct Inv es tm ent : 1988 t o 1997

1988 19970

20000

4000060000

80000100000

Food Beverages & TobaccoTextile, clothing and leatherAgriculture, hunting, forestry & fishing

[$US million]

Chart 5.2: World FDI in Selected Fo od & Fibre Indu stries

Source: Data from World Investment Report, 1999, UNCTAD

Source: Data from World Investment Report, 1999, UNCTAD

16

5.2 Australian FDI Generally Over the past decade the inbound stock of FDI for Australia as a whole increased by about 50% and the outbound stock by about 70% [Table 5.1a and b; and Table 5.2a and b]. That is, the foreign assets held by Australian based companies has been growing more rapidly than foreign liabilities which is the equity held by foreign companies in Australian businesses. Nevertheless, the value of inbound FDI still exceeds the value of outbound FDI by almost 75%. [Chart 5.3].

1991-92 1994-95 1997-980

20,00040,00060,00080,000

100,000120,000140,000160,000

[$A millions]

Chart 5.3: Australian FDI Stock Movements

Source: ABS, Balance of Payments and International Investment Position, Cat. 5363.0

17

Table 5.1: Foreign Direct Investment in Australia Inward Flows and Stocks [$A millions] [a] Flows

Industry Destination 1991-92 ‘92-93 ‘93-94 ‘94-95 ‘95-96 ‘96-97 ‘97-98

Agriculture, Forestry & Fishing

-511 20 -69 88 -10 -39 41

Mining 498 -301 456 1396 319 883 3072 Manufacturing 3027 2126 2168 2100 3176 370 2492 Electricity, Gas and Water Supply -1 0 -1 1 3391 932 1079 Construction 82 72 -168 196 -98 714 -227 Wholesale Trade -20 454 389 852 1364 647 79 Retail Trade 396 254 109 -614 -16 114 265 Accommodation, Cafes & Restaurants 155 -49 60 81 158 55 366 Transport and Storage 92 849 158 259 213 2980 584 Communication Services 434 156 63 30 312 24 n.p. Finance and Insurance 1534 1701 1038 1520 2572 1250 -801 Property & Business Services 460 263 533 -73 731 284 -295 Government Administration & Defence

Education -1 0 -1 0 0 Health and Community Services

0 4 0 18 n.p. 2 n.p.

Cultural & Recreational Services 13 16 -7 -3 291 -358 -52 Personal & Other Services 3 -106 3 3 -3 -14 n.p. Unallocated 1024 3187 175 1656 n.p. 2641 2611 Total 7183 8647 4907 7509 12802 10486 9117

[b] Stocks

Agriculture, Forestry & Fishing

736 759 793 746 619 603 742

Mining 17641 18534 19673 20425 19849 21298 23600Manufacturing 31478 36490 40771 41498 44684 43964 48785Electricity, Gas and Water Supply n.p. n.p. n.p. n.p. 4055 5947 7989 Construction 608 804 627 813 1454 3267 2493 Wholesale Trade 12910 13169 14190 16178 17521 17280 17081Retail Trade 3809 3930 3442 2804 2765 2886 2986 Accommodation, Cafes & Restaurants 2153 2391 2951 3050 3185 2921 3373 Transport and Storage 1002 1831 1834 2099 2433 5000 5533 Communication Services n.p. n.p. n.p. n.p. n.p. n.p. n.p. Finance and Insurance 13682 12260 14688 15313 18529 26296 25254Property & Business Services 16543 15532 15605 17870 19075 18295 17874Government Administration & Defence

Education n.p. n.p. n.p. 6 6 Health and Community Services

n.p. n.p. n.p. n.p. n.p. n.p. n.p.

Cultural & Recreational Services 116 188 226 285 942 623 597 Personal & Other Services 129 n.p. 140 170 n.p. n.p. 200 Unallocated n.p. n.p. n.p. n.p. n.p. n.p. n.p. Total 104929 114297 119306 123409 136394 150759 157786Source: Australian Burea of Statistics, various publications Table 5.2: Foreign Direct Investment in Australia

Outward Flows and Stocks a

18

[$A millions] [a] Flows

Industry Destination 1991-92 ‘92-93 ‘93-94 ‘94-95 ‘95-96 ‘96-97 97-98

Agriculture, Forestry & Fishing 0 n.p 1 -3 n.p. -16 n.p. Mining -309 -298 -99 413 -1277 -899 278 Manufacturing -1421 -967 -3500 -1831 -3958 -863 -3536 Electricity, Gas and Water Supply 0 n.p. -3 -3 n.p. -2 n.p. Construction -41 -78 -23 145 -87 -250 -35 Wholesale Trade -14 -272 -306 55 -250 175 4 Retail Trade 199 -216 642 -547 -86 -12 n.p. Accommodation, Cafes & Restaurants 7 -2 3 5 -63 -58 n.p. Transport and Storage -188 -46 -349 -96 -125 86 -214 Communication Services -1 0 0 -360 -95 -18 n.p. Finance and Insurance -176 -2416 -685 -477 -947 -2908 -1715 Property & Business Services -25 83 -414 78 -600 -45 98 Government Administration & Defence Education Health and Community Services -2 -3 -6 -3 -6 n.p. 0 Cultural & Recreational Services 12 -17 -8 0 19 72 n.p. Personal & Other Services 0 0 0 -7 0 n.p. 0 Unallocated -1190 -2144 837 -797 -469 -975 -1520 Total -4739 -6345 -3910 -3428 -7955 -5718 -6392

[b] Stocks

Agriculture, Forestry & Fishing n.p. -15 -27 -11 -11 -38 -70 Mining -3722 -4051 -3666 -4216 -5016 -8697 -8885 Manufacturing -25997 -29329 -31033 -35749 -37063 -38621 -46043 Electricity, Gas and Water Supply -6 n.p. n.p. n.p. n.p. n.p. n.p. Construction -1127 -1068 -742 -1082 -871 -1479 -1523 Wholesale Trade n.p. -2497 -2288 -2307 -2204 -1439 -1256 Retail Trade n.p. n.p. n.p. n.p. n.p. n.p. n.p. Accommodation, Cafes & Restaurants -76 -75 -79 -92 -41 n.p. n.p. Transport and Storage -1802 -2051 -2394 -2709 -2303 -2041 -3194 Communication Services -2 -8 -7 -403 -473 n.p. n.p. Finance and Insurance -11309 -12298 -12904 -13418 -13761 -19304 -23800 Property & Business Services -1188 -431 -1068 -1151 -1890 -2406 -2796 Government Administration & Defence n.p. Education n.p. n.p. Health and Community Services -21 n.p. n.p. -48 -56 n.p. n.p. Cultural & Recreational Services n.p. n.p. n.p. 35 n.p. n.p. n.p. Personal & Other Services n.p. n.p. n.p. n.p. n.p. n.p. n.p. Unallocated n.p. n.p. n.p. n.p. n.p. -439 -641 Total -4634 -52697 -54674 -62356 -64939 -76795 -90552

Source: Australian Burea of Statistics, various publications a.) Sign convention for foreign liabilties [that is, inbound FDI] is that any transaction increase [decrease] is shown as a positive [negative] entry without a sign. For foreign assets [that is, outbound FDI] any transaction increase [decrease] is 'shown with a negative [positive, without] sign.

The relatively higher growth in Australian outbound FDI has been led by the mining and finance and insurance sub-sectors. These two sectors also host a significant share [31%] of Australia’s inbound FDI. Inbound FDI is now equivalent to about 7% of national export values.

19

5.3 Australian FDI in Food and Fibre The extent of foreign ownership in the Australian food supply chain and TCF and leather industries is shown in Table 5.3. Inward FDI represents about 26% of the total value of assets employed in food manufacturing and about 27% of the total value of assets employed in manufacturing as a whole. For the TCF & L industries inward FDI is relatively less important and accounts for about 12% of total asset values. Food manufacturing is a major host for foreign investment though the relative intensity [% foreign ownership] of foreign ownership is in line with that for manufacturing as a whole. Foreign ownership accounts for about 14% of Australian food retailing assets which, although relatively low compared to manufacturing is high compared to the whole of the retail sector.

TABLE 5.3: LEVEL OF FOREIGN ASSET OWNERSHIP: AUSTRALIA: SELECTED SECTORS AND INDUSTRIES: 1997 [$A millions]

Total Assets

Inward FDI Stock

% Foreign Ownership

Agricultural Production

137,070

742

0.5

Food Beverages & Tobacco Manufacturing

43,031

11,071

26

Textile Clothing, Footwear & Leather Manufacturing

6,546

763

12

All Manufacturing

183,992

48,785

27

Food Retailing

12,837

1,775

14

All Retailing

47,787

2,986

6

All Industries

2,233,386

157,786

7

Source: Derived from Australian Bureau of Statistics, Business Operations and Industry Performance, Cat. 8140.0, 1996-97 and detailed FDI consultancy commissioned by Wondu Holdings from ABS for the study.

As a proportion of equity, foreign ownership assumes more significance for the Australian food manufacturing and food retail industries and overall accounts for in excess of 50% of the equity [Chart 5.4]. A large part of the foreign ownership of food retailing is due to the dominant share of foreign owned firms in takeaway food enterprises.

20

Source: Australian Bureau of Statistics, Business Operations and Industry Performance, Cat. 8140.0, 1996-97 and detailed FDI consultancy commissioned by Wondu Holdings from ABS for the study. For outbound FDI there is relatively less food investment, which accounts for about 10% of the total stock of outbound FDI in Australian manufacturing [Table 5.4b]. This share of outbound manufacturing FDI held by the food, beverages and tobacco sub-sectors has fallen from 15% at the start of the decade. [Chart 5.5].

Source: Australian Bureau of Statistics, Source : Balance of Payments and International Investment Position, and detailed FDI consultancy commissioned from ABS for the study.

TABLE 5.4 [a]: FOREIGN DIRECT INVESTMENT TRANSACTIONS : SELECTED FOOD AND TCF CATEGORIES : AUSTRALIA : 1991-92-1997-98 ] [$A millions]

1997-980

102030405060

Food RetailingFood ManufacturingTCF & L

[% of equity owned by foreign firms]CHART 5.4: ESTIMATED FOREIGN OWNERSHIP: FOOD AND TCF: AUSTRALIA:

1991-92 1994-95 1995-960

10000

20000

30000

40000

50000

Outward FDI in FoodOutward FDI in Total Manufacturing

[$A million]Chart 5.5: Outward FDI: Food and Total Manufacturing: Australia

21

Industry 1991-92 1994-95 1997-98

Inward Outward Inward Outward Inward Outward

Food, beverages & tobacco 981 36 115 -120 338 -324

Textile, clothing, footwear & leather

8 np 80 np 59 np

Food retailing -109 np -314 np 167 np

All Manufacturing 3027 -1421 2100 -1831 2492 -3536

Source: Australian Bureau of Statistics np: not for publication Note Sign Convention: For foreign liabilities [i.e.inward moves] any transaction increase (decrease) is shown as positive (negative) or without a sign. For foreign assets [i.e outward moves] any transaction increase (decrease) in assets is shown with a negative (positive) sign.

TABLE 5.4 [a]: FOREIGN DIRECT INVESTMENT LEVELS : SELECTED FOOD AND TCF CATEGORIES : AUSTRALIA : 1991-92-1997-98 ] [$A millions]

Industry 1991-92 1994-95 1997-98

Inward Outward Inward Outward Inward Outward

Food, beverages & tobacco 8405 -4119 11095 -3581 11071 -4867

Textile, clothing, footwear & leather

528 -77 681 np 763 -9

Food retailing 1813 np 1485 np 1775 np

All Manufacturing 31478 -25997 41498 -35749 48785 -46043

TABLE 5.4 [a]: FOREIGN DIRECT INVESTMENT BALANCE : SELECTED FOOD AND TCF CATEGORIES : AUSTRALIA : 1991-92-1997-98 ] [$A millions]

Industry 1991-92 1994-95 1997-98

Food, beverages & tobacco 4286

7514 6204

Textile, clothing, footwear & leather

451 na 754

Food retailing np np np

All Manufacturing 5481 5749 2742

Although the value of inbound FDI stocks for the manufacturing sector as a whole exceeds outward FDI the gap is narrowing and in 1997-98 the net level of FDI was a deficit of $2.7b [that is, inbound FDI exceeded outbound FDI by $2.7b]. For the manufacturing sector as a whole the inbound stock level has increased by about 40% compared to a 55% increase in the outbound stock level. For the

22

retail sector as a whole the inbound stock of FDI has decreased by about 25% compared to an unknown change in outbound FDI.

There is very little foreign investment, either inbound or outbound, in agricultural, forestry and fishing production.

The trend in the net level of international investment [that is, outbound FDI less inbound FDI] for the Australian manufacturing sector has improved over the past decade and Australia appears to be headed towards being a net foreign investor in manufacturing. For the food, beverages and tobacco sub-sector, however, net foreign investment has declined as outbound FDI has not kept pace with inbound flows.[Chart 5.6] Source : Australian Bureau of Statistics, Balance of Payments and International Investment Position, Catalogue No. 5363.0

Data on outbound FDI in food retailing is unfortunately not available from ABS because of confidentiality constraints, but it is a potentially important area of interest because of the quite different size and ownership structure of the food retailing and food manufacturing sectors. For instance, a 1999 survey by Fortune magazine of the Top 500 companies in the world identifies two Australian food retailers as world leaders but no Australian food manufacturers. 5.4 Trade Market Shares In a study of trade performance over the period 1989-90 to 1995-96, Silva (2000) found the Australian food-manufacturing sector performed relatively better in preserving its share of the domestic market than it did in penetrating export markets. Over this period imports increased their share of the Australian market slightly from 6.4% to 7.6%. Over the same period export orientation [% of total turnover exported] also increased from 23% to 27%, but on closer examination it was found the share of the top 10 export markets declined from 7.4% in 1990 to 6.1% in 1996.20 Within the food sector there were significant differences in performance ranging from meat [share declining from 16.8% to

20 The top 10 markets for Australian food exports are Japan, USA, UK, New Zealand, Republic of South Korea, Malaysia, Taiwan, Hong Kong, Philippines and Singapore. Over the period 1980 to 1996 this group accounted for more than 70% of Australian processed food exports.

1991-92 1994-95 1997-980

10000200003000040000500006000070000

FoodAll ManufacturingAUSTRALIA as a whole

[$A million]Chart 5.6: Net Foreign Investment : Australia: 1991-92-

23

9.9%] through to prepared feeds such as hay [ share increasing from 6.7% to 10.8%], but overall growth in exports of minimally processed foods exceeded that of more processed foods. Silva found evidence that Australian food exporters managed to switch their attention to relatively faster growing markets in the top 10 but this still was not enough to preserve its overall share in the group.

5.5 Structure and Conduct by Local and Foreign Forms UN Database

UNCTAD have compiled estimates of the effect of FDI on sales and export orientation of foreign affiliates. Two independent models were developed: 1.) Relationship between inbound FDI and Sales

Using a global and aggregated database of sales and inbound foreign investment stocks held by MNEs from France, Germany, Italy, Japan and the UK, UNCTAD found over the period 1982-1995 a significant positive relationship between the level of FDI stock and total sales by foreign affiliates. Sales by foreign affiliates [$USb] = 757 + 2.61 FDI inbound stock levels

2.) Relationship between inbound FDI and Exports

Using a global and aggregated database of exports and foreign investment stocks held by MNEs from Japan and the US, UNCTAD found over the period 1982-1995 a significant positive relationship between the level of FDI stock and exports by foreign affiliates. More specifically: Exports by foreign affiliates [USb] = 261 + 0.52 FDI inbound stock levels.

From these two relationships it can be deduced that the export orientation [exports/sales] of foreign affiliates varies from over 30% at low levels of FDI to around 20% at high levels. These estimates suggest the export orientation of foreign affiliates is about the same or slightly higher than that of the economy as a whole.

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AWIR Database

In this study we examined the AWIR database for information about differences in export orientation between foreign and locally owned firms [Chart 5.7]. Regression analyses was used to identify the significance of relationships and Annex 2 describes these tests in more detail. Although low response numbers limit the reliability of the estimated relationships there is a consistent message across the food, TCF and Leather industries and manufacturing generally. For all industries and the sector, firms that have more than 50% foreign ownership are more likely [about 3+ times more likely] to have some export sales and/or be primarily export oriented than wholly Australian owned firms.

To further understand why and how foreign owned firms have a stronger export focus we examined the effect of new technology, firm size [as measured by the number of employee], labour costs and structural adjustment on market orientation. The summary results, which are shown in more detail in Annex 2, are as follows:

• For the manufacturing sector as a whole, firms with some exports were more likely to have introduced new technology in the last 2 years than firms with either domestic sales only or a primary export focus. But overall, foreign and locally owned firms had similar new technology investment activity. Over 75% of foreign owned food manufacturing firms introduced new technology in the last 2 years compared with 73% of Australian owned firms. The relatively low use of new technology by firms that are primarily export oriented is difficult to understand. It may be due to the commodity nature of the product or reduced level of processing undertaken by these firms or simply sampling error.

• Firms with some export sales tend to be larger firms though food and TCF and leather manufacturing firms that are focussed primarily on the export market tend to be of about the same size as domestically oriented firms. But foreign owned food-manufacturing firms tended to be larger than domestically owned firms.

• As labour costs increase the firm is less likely to be export oriented. If labour costs are greater than 40% of total costs then the business is 70% less likely to have some export sales. About 60% of foreign owned food manufacturers had labour costs accounting for less than 20% of total costs. In contrast, 30% of Australian food manufacturers had labour costs of less than 20%.

• Foreign owned firms tend to engage in major reorganisations of their work places. Over 75% of

Domestic OnlyJoint export-domestic

Primarily exportOther

02468

10

Wholly Australian OwnedPredominantly AustralianForeign owned [50% or more]

[% of firms focussing on this market]Chart 5.7: Export Or ientation: Australian Food Manufactur ing:1995

25

foreign owned food manufacturing firms had undertaken a major reorganisation within the last 2 years, compared to 39% of Australian owned firms.

• A much larger proportion of Australian owned firms have invested in and control offshore workplaces, compared to foreign owned firms. [Chart 5.8]

Interpretation of the AWIR statistics is complicated by correlation between the explanatory variables such as foreign ownership, work practices, firm size, technology, labour costs etc. Some Australian owned firms are as export oriented as foreign owned firms, suggesting improved work practices and better management are not tied to foreign ownership but some other factor such as skill or perhaps access to capital. Some foreign owned firms have sufficient independence to invest directly offshore, rather than through their parent company head-offices.

5.6 Case Studies Seven out of the top 10 [by revenue and profit] food manufacturing companies in Australia are foreign owned and their relatively large size helps explain some of the better export performance of foreign owned firms. 21 But size is not an essential or the only criteria for success. Innovation in product development and marketing may be just as important as size, raising the question of just how innovative are Australian owned viz foreign owned firms. We examined several local and foreign firms to improve our understanding of current management practices. • Restructuring to improve labour productivity : Heinz Wattie

With sales of around $1billion/year in Australia and New Zealand, this foreign owned company has recently completed a two year restructuring program that is expected to realise significant savings in labour costs [employee numbers down 10%] and improved productivity. About 50% of the savings are being re-invested in brand development. The benefits are being achieved through four fundamental changes: 1. Integrating their markets into one and organising operations along product instead of functional

lines. 2. Establishing dedicated manufacturing centres for each of four main product lines. 3. Establishing an integrated support facility for customer and technical services. 4. Enhancement of workforce skills and initiation of a cultural change to stimulate innovation and

improved labour productivity. The US parent, H.J. Heinz, is ranked as the 10th largest food company in the world with revenue of $US9.2b and profits of $US8.2b in 1998 (Fortune Magazine 1999). Founded in 1869 by Henry Heinz

21 Business Review Weekly, 12 November 1999, p141

Wholly Aust

Majority AustMajority foreign

Wholly foreign0

20406080

100

Food manufacturingTCF & LeatherFood retailing

[% of firms with offshore workplaces]

Chart 5.8: Offshore Investment

26

with one product, horseradish, the group expanded to A57 varieties@ in 1892 and 200+ some 100 years later. • Innovation: Chiquita South Pacific Brands

With revenue of over $200m after just two years of operations this Australian listed, foreign controlled [over 50% owned by US food group Chiquita International, the world’s largest distributor of bananas] group has introduced new packaging, strong branding and improved marketing to a market segment that was in a serious downward trend. Instead of price discounts for small sized fruit Chiquita has managed to define a niche market that pays a premium for the same sized fruit. Chiquita Brands International, the parent of the Australian subsidiary, is said to be the first company in the world to put a brand name on fresh fruit (Moskowitz et.al 1990).

• Brand Development: Lion Nathan

With head office in NZ, but with Japanese brewer Kirin the major shareholder [46%] ahead of NZ shareholders [15%], Lion Nathan is the fourth largest food manufacturer in Australia. Earnings from Lion Nathan’s Australian operation account for almost 90% of group earnings. About 4 cents in every dollar of revenue is distributed as a dividend to shareholders. Exports account for a relatively small, almost negligible share of turnover but outbound FDI [that is, outbound from NZ] accounts for almost 80% of total assets. Brands account for over 50% of asset values.

Lion Nathan pursue six major strategies to enhance and preserve their position as a globally competitive low cost business:

1. Strong focus and specialisation on brewing and three Asian Pacific markets [Australia, China and NZ].

2. Investment in brand development which is underpinned by significant advertising and promotion. 3. Innovation through boutique and low alcohol beer products. 4. Customer service. 5. Low cost through increased utilisation of capacity. 6. Skill development • Export Oriented, Australian Owned: BRL Hardy

Ranked as the 11th largest food manufacturer in Australia the company has revenue of around $500m/year with exports accounting for a 37% share. Outbound foreign investment represents about 12% of group assets. Brands, measured at book value, account for 2% of total asset values. In 1998 the company received the Austrade ‘agribusiness exporter of the year’ award after a 35% increase in export sales. • Outbound Investment Oriented, Foreign Owned : Coca-Cola Amatil

The largest food manufacturer in Australia, with revenue of $4.3 billion, profits of $200m and foreign affiliate assets in six countries accounting for over 75% of total assets, this largely foreign owned group structure is in sharp contrast to most foreign owned businesses based in Australia. The distinguishing structural features of this group are the 18 licensing agreements with the Coca-Cola Company, valued at $3.9 billion and accounting for 46% of total asset values. These agreements embody the value of brands and provide the vehicle through which significant independence is given to the group to operate in and develop the Asian region through offshore investments. Over 50% of trading profits are derived from offshore investments. Coca Cola Amatil provided for an Australian income tax expense of $116m in 1998, most of which is attributable to offshore earnings. Dividends paid represent about 4% of revenue.

27

Coca-Cola is the third largest beverage company in the world with revenue of $US18.8b and profits of $US3.5b in 1998 (Fortune Magazine). • Promising a World Class Food Company: Goodman Fielder

The second largest food manufacturer in Australia with revenue of $3.5 billion is engaged in a significant program of restructuring and acquisitions including offshore investments. Offshore investments, following the acquisition of Bunge Defiance, now account for over 30% of assets. Exports are estimated to account for less than 10% of total revenue. About 10% of total food sales in Australia and New Zealand involve all or part of products supplied by GFW. GFW is a market leader in most of its core businesses which include milling, baking, cereals and snacks, ingredients, poultry meats [now sold] and edible oils. Prior to its acquisition of Defiance Bunge the group exhibited the typical features of the average Australian food manufacturer ... fair export performance, some offshore investment and short of global linkages and networks. It remains to be seen whether the recent acquisitions and restructurings can create a global position. Despite the company’s leading market share in certain product categories several of these are in low growth segments.

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6. Discussion The results of this study support some of the research undertaken elsewhere showing that foreign investment generally is associated with increased exports. The better export competitiveness of foreign over locally owned firms appears to be due to a combination of factors with low unit labour costs the major influence. Their relatively lower labour costs imply that foreign owned firms are more capital intensive than the typical locally owned firm. Most foreign owned firms achieve structures where labour accounts for less than 20% of total costs, but for most Australian owned food manufacturers labour costs account for 20-40% of total costs. And their capacity and willingness to restructure their workplaces more frequently, at two year intervals or less appears to underpin labour productivity performance. They also tend to have larger workplaces and an inclination to introduce new technology though these two factors appear to have only a minor influence on their export performance. The above findings do not apply, however, to all firms. In over 30% of Australian owned firms labour costs account for less than 20% of total costs. Despite the significant level of foreign ownership in the Australian food manufacturing sector, and the relatively stronger export orientation of foreign owned firms, Australian manufactured food exports have not experienced significant growth, particularly in the more processed food products. The basic reasons for the average export performance of Australian owned food manufacturing relate to high labour costs themselves the consequence of unadjusted workplaces, small size and to some extent, use of old technology. Some of these problems may be due to lack of access to investment capital. Foreign owned firms, particularly the large MNEs, are often able to gain access to lower costs of equity capital and debt capital. Market access and marketing skills are also likely to underpin the better performance of foreign owned firms. While foreign ownership has contributed significantly to exports of food and fibre and manufactured products generally the same cannot be said of its contribution to outbound foreign investment, particularly in food manufacturing. For example, less than 20% of foreign owned food manufacturing firms have any overseas workplaces under their direct control. In contrast 60% of Australian owned food manufacturers have overseas workplaces or subsidiaries. These differences extend throughout the whole of Australian manufacturing. Only 5% of manufacturing firms with majority foreign or wholly foreign owned shareholders have workplaces overseas compared to over 50% of majority Australian or wholly Australian ownership. This result is not unexpected. Foreign affiliates tend to be controlled direct from head office, not indirectly through foreign offices. Nevertheless, there are exceptions where, for instance, regional licenses are allocated to operators in a particular country. For example, Coca-Cola Amatil, which is listed on both the Australian and London stock exchanges, operates via licensing arrangements with the Coca-Cola company in six countries in the Asia-Pacific region which report to the Australian office. They bring in taxable trading profits and market access to Asia. At issue is whether or not the high level of foreign ownership in Australian food manufacturing is a constraint on its global growth potential, which needs to be measured more broadly to include both trade and investment. Because FDI is growing more rapidly than exports and because the Australian food industry has a large foreign owned presence it seems to have a limited capacity to participate in that growth, without more foreign affiliates having more independence to engage in outbound foreign investment. There are exceptions. Referring again to Coca-Cola Amatil, they generate about 30 cents of revenue and 4 cents of trading profit from every dollar of assets owned offshore. Their offshore assets account for over 75% of total assets. For Australian producers of raw materials for food manufacturers there may be benefits in having more foreign owned firms based domestically with enough independence to invest either locally or offshore as it may enhance inter-firm linkages and access to alternative distribution channels. This is

29

an area where further research could be undertaken to examine linkages with and between outbound foreign investment and trade. We don’t have much information about the linkages from offshore investment in food manufacturing and food retailing back to Australian raw material suppliers. The US is the only country to collect data on these relationships and they identified six export channels: • multi-national parent companies exporting to affiliated persons/companies. • multi-national parent companies exporting to unaffiliated persons/companies. • affiliates of foreign companies exporting to affiliated persons/companies. • affiliates of foreign companies exporting to unaffiliated persons/companies. • uni-national firms exporting to affiliated persons/companies. • uni-national firms exporting to unaffiliated persons/companies. In the US, affiliates of foreign companies account for 22 % of total exports and US parent MNEs for 50percent. Just under half of US parent MNEs’ exports are to affiliated persons/companies. The AWIR data suggest affiliates of foreign companies account for a much greater share of Australian food exports, probably more than 50% and Australian parent MNEs much less than 50%. There is, therefore, much greater reliance on foreign affiliates in Australia than in the US, which hosts a number of parent MNEs engaged in food manufacturing. Moreover, judging from the US experience, exports from foreign affiliates in the US to their affiliates outside the US are a more important distribution channel than is the case in Australia. Inbound FDI plays an important role in developing an internationally competitive food industry in Australia. In particular, foreign owned firms appear to lead the industry in labour productivity. This competitive edge underpins their export competitiveness. But exploitation of this advantage appears to be constrained by corporate structures that limit their independence to invest offshore. The reality of this structure is that some important food distribution channels are not as free flowing as might otherwise be the case in a fully competitive market. The different structure, practices and characteristics of foreign viz. locally owned food-manufacturing firms raises questions about the efficiency of the general institutional environment facing food manufacturers in Australia. At first glance there is market access and competition between the participants and most practices pass the reasonable monitoring and behavioural tests put forward by foreign investment and competition regulations. But inside the firms there are, as Williamson (2000) puts it, internal structures that are not well understood in terms of governance, history or even why they exist at all. Statutory agricultural marketing regulations, even where they have been or are being dismantled, may have contributed to the growing position of foreign ownership in Australian food manufacturing. The selling power that accompanies statutory marketing stimulates the formation of equivalent buying power that might only be mobilised by a larger firm from offshore. Then, when deregulation happens, attempts to penetrate the previously protected marketing arena may be thwarted by the very best of ‘shark repellents and poison pills’.22 In the end we may be left with an Australian owned food manufacturer that underperforms in export markets relative to what might have been the case with a more open share registry with even just a minority foreign interest. In these circumstances the company or cooperative constitution underpins the final outcome and corporation law becomes relevant to helping create an efficient industry structure with conduct that facilitates survival of the most efficient firms.

22 ‘Shark repellents are clauses inserted in company or cooperative constitutions as a deterrent to a possible

takeover. They typically provide for certain shareholders to be given special voting rights in the event of a takeover. Some companies have clauses in their constitutions limiting foreign ownership (Dodd 1987).’Poison pills’ are similar to a ‘shark repellent’ in that they allow a block of shares to be allocated to a group of shareholders in the event of a takeover.

30

MNEs, like cooperatives, are also highly complex, often vertical, structures that are built, as Coase puts it, to minimise transaction costs for their shareholders. But it takes a great deal of faith in the forces of an unregulated market to accept that this will produce the most efficient industry structure unless there is effective external competition. Transaction costs may well be minimised by centralising all offshore investment to head office and this seems to be the most likely explanation for the low level of outbound FDI by foreign affiliates. So the challenge for Australia may well be to identify ways of reducing transaction costs for MNEs so that they are encouraged to engage in outbound FDI directly from their Australian affiliate offices. In this context, measures to enhance offshore investment and trade should probably be available to both foreign affiliates and locally owned firms. There are several corporate and government policy issues that might be considered in the context of measures to boost outbound FDI: 1. First, the liberalisation of trade and Australian efforts to promote it are no doubt constructive for

growth in exports but this is but one channel through which globalisation is being expressed. FDI is equally and perhaps even more important in years to come.

2. How can foreign owned firms be encouraged to engage in outbound FDI and exploit fully their cost competitiveness ? Should they be eligible for trade assistance measures now available only to local producers?

3. How can locally owned firms be encouraged to improve their labour productivity and capacity and inclination to regularly restructure to enhance their competitiveness? How can the expertise and competitiveness of MNEs be linked with locally owned firms ?

4. How can MNEs be encouraged to give their foreign affiliates more independence to invest offshore ? The results of this study show there are difference between MNEs in the level of autonomy granted to foreign affiliates suggesting there may be some basic preferred models.

Vachani (1999), in a study of US companies found that the extent of product and geographic diversification within an MNE affects the degree of autonomy it assigns to a foreign subsidiary. Subsidiaries with high levels of related product diversification are expected to assign less autonomy to subsidiaries because centralised control can coordinate activities between the related products at a lower cost than would be the case with various autonomous subsidiaries. This situation may apply to a number of Australian food manufacturers. In addition, where there is higher related international geographic diversification there is likely to be more subsidiary autonomy. The best illustration of this situation is provided by Coca-Cola Amatil, which has licenses covering five Asian Pacific countries. In the circumstances transaction costs can be reduced at a regional level through economies of scale, better communication between culturally similar and physically close countries and decentralised decision making. Finally, there is the issue of economies of scale and what some call the ‘pessimism of size’ problem (Sheridan). In this situation medium sized firms with good performance get taken over even though they are under no pressure to merge or adjust. Robinson provides the reason that ‘pessimism’ prevails when the firm is too small to obtain fully the advantages of scale in technology, marketing and general management but too large for existing markets, management capacity and access to capital for growth. The history of large foreign owned food manufacturing firms taking over certain high profile Australian brands seems to illustrate the point, but this is not clear that it is a problem. Even more ‘pessimistic’ would be a locally owned firm with nowhere to go.

7. Implications for Corporate and Government Policy Evidence that foreign owned firms are constrained from engaging in outbound foreign investment may

31

have implications for competition policy. For example, an acquisition (or merger) by a foreign owned firm of a locally owned firm may produce first round benefits for the economy from economies of scale, access to technology, restructuring and improved productivity of labour. The second round effect, however, may be a firm that is constrained by corporate head office policy from investing offshore. Instead the offshore subsidiary reports direct to head office. In turn, this could lead to reduced market access and competition in this important and growing distribution channel. For the economy generally it may lead to lower dividends from offshore. There is no easy policy response to this situation because the first round effects are likely to be significant and, judging by the data from this study, exports may well increase. At issue, however, is whether export activity and offshore dividends could be higher still if accompanied by more outbound foreign investment. Decisions about where to locate head offices and how much independence to give foreign based affiliates are affected by a complex set of variables including corporate history, geography, macro-economic settings [taxation, exchange rates and inflation in particular], infrastructure and access to other critical inputs and product branding policy. Again using the Lion Nathan case study, the highest corporate tax rate for this group is in Australia [36%] compared to New Zealand [33%] and China [33%]. It has, until now23, made no sense for this company to invest via its Australian subsidiaries in China. UK based Cadbury Schweppes faces a corporate tax rate of 31% in the UK and is in a similar position. The World Investment Report observes a close relationship between the R&D intensity of an activity and intra-firm trade. Increased R&D is associated with increased intra-firm trade. Food manufacturing is generally a non-intensive R&D activity.24 And given Silva’s conclusion that Australian trade in manufactured food products is mainly in the relatively unprocessed form [where R&D intensity is even lower], then it may well be that the lack of outbound FDI in the industry simply reflects the fact that there are no intra-firm trade benefits in it. Some issues that could be considered in more detail in the context of competition policy are the corporate structures used in the merged firm. Some structures [eg. licensing arrangements] can be designed to provide more independence than simple subsidiary relationships that are typically controlled from central head offices. The 1999 World Investment Report notes that ‘...production and trade in unprocessed and processed food products is highly concentrated and growing more so over time...’ MNEs dominate trade in oilseeds, grains and vegetable oils, bananas and pineapples. The reality of this increasingly concentrated structure is that competition policy and action in Australia will have a negligible effect on the global situation. It therefore becomes a matter of how best to work with it and encourage more independent control by foreign based affiliates. First, however, it might be useful to understand better the effect of independence on efficiency. There is no point in having independent foreign affiliates that cannot compete. This is an area where further research could be undertaken, to improve the level of understanding about what drives foreign investment decision-making. For Australian owned firms there appears to be scope for them to learn more about the better work practices and lower labour costs of foreign owned firms and to perhaps work with them more closely in offshore markets where Australian owned firms are unconstrained by corporate policy in some far away head office but limited by domestic work practices and high labour costs. Partnerships, joint ventures and strategic alliances appear to offer solutions. It is also possible that statutory marketing of

23 Changes to the Australian taxation system will see the corporate rate drop to 30%. It is therefore no surprise to observe Lion Nathan shifting its head office to Australia.

24 Most annual reports of food companies operating in Australia and which we have examined indicate expenditure on R&D accounts for not more than 1% of revenue.

32

agricultural commodities has had an adverse effect on exports by Australian food manufacturers, particularly those with close linkages to growers or captive supply arrangements. With increased deregulation of agricultural commodity markets it becomes important to ensure producers have access to the most efficient processing firms. These processors may be foreign or locally owned, cooperative or corporate structures. Actions that constrain the influence of the most efficient processors will serve ultimately to reduce returns to producers. In this context standards of corporate governance undertaken by both foreign and locally owned firms become relevant. Cooperative voting structures that stand in the way of mergers or acquisitions by corporations, foreign or locally owned, may ultimately block the emergence of a more efficient processing firm. In a similar vein producers are likely to be interested in knowing more about the corporate governance and buying practices of a firm proposing to acquire a traditional cooperative or corporate processor.

33

8. Conclusions and Recommendations This study observes that foreign owned food-manufacturing firms in Australia are more export oriented than domestically owned firms. This reflects differences in labour productivity, which in turn appears to be associated with economies of scale and a capacity and willingness to restructure work places. In contrast to trade, foreign owned firms are less involved with outbound foreign investment than domestically owned firms. This difference underpins a growing net deficit in FDI in the Australian food industry. That is, inbound FDI is growing more than outbound FDI. The reluctance of foreign affiliates to engage in outbound foreign investment reflects a perception that transaction costs for this type of activity are lower when centralised through the head office. The relationship between FDI and exports and imports in manufactured food products is unclear and difficult to examine in detail without better quality data and information about global distribution channels. For instance, we do not know much about the substitutability between exports and outbound FDI. It may be that foreign owned firms are exporting to their associates or other affiliates of their head offices. In which case the supply chains run back into Australia even though there is no direct outbound FDI from the foreign firm. There is a case for improved data on the foreign ownership subject so that the conduct of foreign and locally owned firms can be understood more clearly, along with global distribution channels. A major problem in obtaining better data is that foreign owned firms do not readily provide responses to private surveys which leaves the data procurement process firmly in the hands of official collectors such as ABS and the AWIR survey. Both surveys have a useful role though at the micro level, which we are interested in, it is the AWIR survey that has most to offer. Recommendation: It is suggested further research could be commissioned in the following areas: • An examination of the substitutability between exports and outbound FDI and differences between

foreign and locally owned firms and different food products. This would include an examination of differences between foreign and locally owned firms in processing intensity. We observed high labour productivity from foreign owned firms but this may simply reflect the level of processing undertaken by them.

• An examination of concentration and competition between global distribution channels for different food products and the implications for competition policy. This would include an examination of differences in the conduct of MNEs in their home and foreign markets. In addition, the effect of different corporate structures for MNEs on control and investment practices of affiliates could be identified. It would be useful to examine differences in corporate and cooperative constitutions to understand better the internal protection used by different institutional structures.

We also draw attention to the value of the AWIR survey in improving the level of understanding about foreign ownership of Australian industry and recommend the year 2000 survey be enhanced, particularly in those industries such as food manufacturing where there is a high level of foreign ownership.

34

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Anon( ) The Evolution of Advertising-Intensive Industries,.............

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Bora, B. (1998) ‘Characteristics and Behaviour of Multinationals in Australia’, Unpublished monograph, Flinders University, Sth Australia

Bresnahan,T.F. (1987) ‘Do Entry Conditions Vary across Markets?’, Brookings Papers on Economic Activity, 3: 833-871

Bureau of Industry Economics (1996) ‘Agri-food Case Study in Micro Reform - Impacts on the Firm’, AGPS, Canberra. Report No. 96/11

Business Review Weekly (1998) ‘Big Companies Slash Staff’, Vol. 20, 44, p108-160

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Caves, R.E. (1992) ‘Industrial Efficiency in Six Nations’, MIT Press, Cambridge

Caves, R.E. and Barton, D.R. (1990) ‘Efficiency in US Manufacturing Industries’, Cambridge MIT Press

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Dodd, P. (1987) ‘Corporate Control: What are the Issues?’, Address to the Centre for Independent Studies Conference on Takeovers and Corporate Control, Sydney, June p13-14

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37

10. Appendices Appendix 1: Survey Distributed to Food Manufacturers A. TURNOVER & TRADE [ Please insert the relevant numbers from your ANNUAL REPORT or use best estimates]. The data sought are from the perspective of your Australian business . That is, for foreign owned companies, the response to question 3 is to provide the data for foreign operations owned or controlled by the Australian subsidiary, not the home based holding company.

1997-98

1998-99

1

Value of Turnover from Operations

$A ................

$A .............

1.1

% of turnover exported

1.2

% of turnover sold on Australian market

2

Value of Imports into Australia

$A ...................

$A ...............

2.1

% of imports that are materials

2.2

% of imports that are capital goods

3

Output from Foreign Operations

$A ..................

$A ................

3.1

% output retained in foreign country

3.2

% repatriated to Australian Office

3.3

% Repatriated elsewhere

3.4

Number of foreign subsidiaries held by your Australian office

4

R&D Expenditure in Australia

$A ..................

$A .................

4.1

% of turnover expended on R&D

5

Advertising, Promotion and Selling Expenditure in Australia

$A ..................

$A .................

5.1

% of turnover expended on advertising, promotion and selling in Australia

6

Training and Skill Development

$A ..................

$A .................

6.1

% of turnover expended on training and skill development

7

Labour Costs

$A ..................

$A .................

7.1

% of turnover expended on labour costs, fully inclusive of all benefits

38

B. CONTROL

How centralised or decentralised is decision-making in your company for each of the following three activities? [please rate your control from 5, meaning fully centralised in the head office of your parent company, through to fully decentralised with decision control in the office of the subsidiary]

1. Strategic Planning Decisions [ tick one cell]

1

2

3

4

5

2. Advertising, Promotion and Selling Expenditure Decisions [ tick one cell]

1

2

3

4

5

3. Research and Development [ tick one cell]

1

2

3

4

5

C. ORGANISATIONAL STRUCTURE OF FOREIGN AFFILIATES

Australian Operation

Our Australian operation is best described as: [Tick one box only]

Level(%) of Australian ownership

Tick one box below

Wholly Australian Owned

100

Predominantly Australian Owned

51% or more but less than 100%

Equal Australian and Foreign Ownership

50%

Predominantly foreign owned

Less than 50% but more than zero

Wholly foreign owned

0%

39

Appendix 2: Detailed Statistical Analysis Using the AWIR database we investigated the relationship between export orientation and other variables such as the extent of foreign ownership, use of technology, firm size etc. The export orientation of respondents was measured by responses to the choice question of whether a firm was either: Domestic only;

Domestic, with some exports; or

Primarily export.

Two types of regression were used, binary logistic regression and generalised linear model regression, with values of 1, 2 and 3 assigned to the three choices for export orientation. To further simplify the interpretation of the responses only binary logistic regression is reported. Therefore, for example, ‘domestic with some export’ was compared to ‘domestic only’ and when there were sufficient responses ‘primarily export’ was compared to ‘domestic only’ as well. Problems with small numbers of responses were encountered and sometimes responses were pooled where practicable for particular questions.

Some responses are in continuous variable form, such as employee numbers, and in these circumstances we used generalised linear model regression.

A1: Ownership status.

Due to the very low numbers in the categories for these responses we have pooled some categories for the analysis. For instance, ‘Australian owned’ and ‘predominantly Australian owned’ were consolidated into one group and ‘predominantly foreign owned’ and ‘foreign owned’ formed another group. For simplicity, the analyses were done in two sections, (1) ‘some exports’ vs ‘domestic only’ and ‘primarily export’ vs ‘domestic only’. These regressions have been done using binary logistic regression.

Ownership of Australian Food, Beverages & Tobacco Industries

As there are very few firms that are primarily export in this category we have only applied the model for ‘some export’ against ‘domestic only’. The numbers for that comparison are very low and consequently, the result is unreliable (Table A1).

(i) Firms that have more than 50% foreign ownership are 4.3 (95%CI, 0.4 to 41) times more likely to have some export sales than wholly or predominantly Australian owned companies, though this difference is not significant (P < 0.2).

40

Table A1 : Ownership structure, no of firms

Wholly

Australian owned

Predom.

Aust owned (51% or more)

Equally 50%

Aust and 50% foreign

owned

Predom. foreign

owned (51% or more)

Wholly foreign owned

Nature of

market

Domestic only

3

3

1

Domestic, some export

10

4

1 9

Primarily export

2

3

2

Ownership of Australian Textile, Clothing Footwear & Leather Industries

Due to the very low numbers in the categories for these tables we have pooled some categories for the analysis. ‘Australian owned’, ‘predominantly Australian owned’ and ‘joint ventures’ form a group and ‘predominantly foreign owned’ and ‘foreign owned’ form another group (Table A2). As there are very few firms that are ‘primarily export’ in this category, we have only done the model for some export against domestic only. The numbers for that comparison are very low and consequently, the comparison is also unreliable.

The results indicate firms that have more than 50% foreign ownership are 9 (95%CI, 1.0 to 77) times more likely to have some export sales than firms that are 50% or less Australian owned (P < 0.04).

Table A2: Ownership structure, no of firms

Wholly

Australian owned

Predom Aust owned (51%

or more)

Equally 50%

Aust and 50% foreign

owned

Predom foreign

owned (51% or more)

Wholly foreign owned

Nature of

market

Domestic only

23

1

Domestic, some export

22

1

1

8 Primarily

export

1

1

1

3

Ownership of All Australian Manufacturing

We have pooled ‘predominantly Australian owned’ and ‘joint venture’ into a single group and ‘predominantly foreign owned’ and ‘foreign owned’ into another group (Table A3). The results:

(i) Firms that have more than 50% foreign ownership are 3.2 (95%CI, 1.7 to 6.0) times more likely to have some export sales than wholly Australian owned companies (P < 0.001). There is no difference in the nature of the market for firms with less than 50% foreign ownership (P = 0.4).

(ii) Firms that have more than 50% foreign ownership are 8.6 (95%CI, 3.2 to 23) times more likely to

41

have primarily export sales than wholly Australian owned companies (P < 0.001). Similarly, firms with less than 50% foreign ownership are 4.9 (95%CI, 1.6 to 15) times more likely to have primarily export sales than wholly Australian owned companies (P = 0.006).

Table A3: Ownership structure, number of firms

Wholly

Australian owned

Predom Aust owned (51%

or more)

Equally 50%

Aust and 50% foreign

owned

Predom foreign

owned (51% or more)

Wholly foreign owned

Nature of

market

Domestic only

88

12

2

2

14

Domestic, some export

94

17

3

11

44 Primarily

export

9

6

1

8

6 Discussion

Due to the very low numbers of firms in the industry categories, the results from these analyses are unreliable. The results for the ‘all manufacturing’ analyses indicates that foreign owned companies are more likely to have some export sales than wholly Australian owned companies. This relationship exists in both the food and textile subgroups and therefore there is a quite consistent response across the sub and aggregated categories that increases our confidence in the reliability of the results, despite the small numbers.

A2. Introduction of new technology.

The relationship between the introduction of new technology and the nature of the market was investigated using logistic regression.

Technology in the Australian Food, Beverages & Tobacco Industries

The numbers of firms introducing/not introducing new technology was exactly the same for firms that were ‘domestic only’ and ‘primarily export’ (Table A4). The ‘primarily export’ category was excluded from the analysis.

The relationship between new technology and ‘nature of the market’ was not significant (P=0.16), but firms with some exports were 3.7 (95% confidence interval, .6 - 23.7) times more likely to have introduced new technology. The number of firms in these categories is very low.

Table A4: Food industries, numbers of firms.

Introduction of new technology

Yes

No Domestic only

4

3

Domestic, some export

20

4 Primarily export

4

3

42

Technology in the Australian TCF and Leather Industries

There were insufficient firms that were primarily export, so this category was excluded from the model (Table A5).

Table A5: Textile industries, numbers of firms

Introduction of new technology

Yes

No

Domestic only

9

15

Domestic, some

export

26

6

Primarily export

3

3

The relationship between new technology and ‘nature of the market’ was significant (P=0.001). Firms with some exports were 7 (95% confidence interval, 2 - 24) times more likely to have introduced new technology, than those firms that were domestic only.

Technology in the Australian Retail Industry

Table A6: Food retail, numbers of firms

Introduction of new technology

Yes

No Domestic only

47

27

Domestic, some export

2

Primarily export

It is not possible to fit a relationship to this data due to the limited numbers.

Technology in the Whole Australian Manufacturing Sector

Combining ‘all manufacturing’ industries together (Table A7), the relationship between new technology and ‘nature of the market’ was significant (P<0.001) when comparing ‘some export’ with ‘domestic only’, but not when comparing ‘primarily export’ with ‘domestic only’ (P = .5). Firms with ‘some exports’ were 2.5 (95% confidence interval, 1.5 - 4) times more likely to have introduced new technology, than those firms that were domestic only.

Table A7: All manufacturing, numbers of firms

Introduction of new technology

Yes

No Domestic only

59

5

Domestic, some export

121

48 Primarily export

17

13

The relationship between ‘the introduction of new technology’ and the ‘nature of the market’ is significant in all the categories except the food industries alone. Even in this sub-group where the numbers of firms are very low, the results are consistent with the textile industries and all

43

manufacturing. In each case, firms with some exports are more likely to have introduced new technology than either firms that are solely domestic or firms that are primarily export.

A3. Numbers of employees.

The relation between the number of employees and the ‘nature of the market’ was investigated using generalised linear model analysis of variance. For these analyses, the ‘number of employees’ was log transformed to meet the assumptions for this type of analysis (normality, heterogeneity of variance). If the effect of the nature of the market was significant in this analysis, then the means were compared using a Tukey’s test at the 5% level.

Employees in the Australian Food, Beverages & Tobacco Industries

There is no significant difference in the number of employees for firms with different market orientation (P= 0.28).

Table A8: Number of employees

Mean*

n

95% confidence interval*

Nature of market

lower

Upper

Domestic only

255

7

141

463

Domestic, some export

334

24

242

460

Primarily export

199

7

109

360

*retransformed from means from glm

Employees in the Australian TCF and Leather Industries

There is a highly significant difference between the mean number of employees for firms with different market orientation (‘nature of market’) (P=0.005). The number of firms that are ‘primarily export’ is very low, so comparisons of this mean with the others is not very reliable (Table A9). The average number of employees, in firms with some exports, is significantly higher than for firms that are domestic only.

Table A9: Number of employees

Mean*#

n

95% confidence interval*

Nature of market

lower

Upper

Domestic only

51a

24

141

463

Domestic, some export

100b

32

242

460

Primarily export

44ab

6

109

360 *retransformed from means from glm. # means followed by the same are different from each other (P=0.05)

Employees in the Whole Australian Manufacturing Sector

There is a highly significant difference between the mean number of employees for firms with different

44

sales structures (‘nature of market’) (P<0.001). The average number of employees, in firms that are domestic only is significantly lower than the average number of employees in both firms with some exports and firms that are primarily export (Table A10).

Table A10: Number employees

Mean*#

n

95% confidence interval*

Nature of market

lower

Upper

Domestic only

71a

118

58

85

Domestic, some export

138b

169

118

162

Primarily export

191b

30

131

278 *retransformed from means from glm

# means followed by the same are different from each other (P=0.05)

Again, the numbers of firms in some of the categories makes comparisons and inferences unreliable. Market orientation has no significant effect on the number of employees in the food industries, but in both textiles industries alone and all manufacturing industries, firms with ‘domestic sales only’ have significantly fewer employees than firms with exports.

A3. Labour costs as a percentage of the markets

Labour costs in the Australian Food, Beverages & Tobacco Industries

The numbers in this table are too small to model.

Table A11: Labour costs as a percentage, numbers of firms

Nature of the market

Domestic only

Domestic, some export

Primarily

export <20%

3

10

2

21% - 40%

3

10

2 41% - 60%

3

2

61% - 80%

1

>80%

1

45

Labour Costs in the Australian TCF and Leather Industries

Due to the low responses we created just two categories, _40% and >40% for the model (Table A12).

If labour costs are >40%, then the firm is 80% (95% confidence interval, 33% to 94%) less likely to have some exports rather than only domestic sales (P = 0.009). [An odds ratio of .2, gives us the odds of having some export sales compared with domestic only, so we convert this into a percentage reduction.]

Table A12: Labour costs as a percentage, numbers of firms

Nature of the market

Domestic only

Domestic, some

export

Primarily export

<20%

5

21% - 40%

10

19

3 41% - 60%

6

5

2

61% - 80%

7

2

1 >80%

1

Labour Costs in the Whole Australian Manufacturing Sector

Due to the low numbers in >80%, this category has been pooled with the previous category (Table A13).

As labour costs increase as a percentage, the less likely the firm is to have some exports rather than only domestic sales (Table A13). If labour costs are greater than 40%, then the firm is 70% less likely to have some export sales. [An odds ratio of .3, gives us the odds of having some export sales compared with domestic only, so we convert this into a percentage reduction.]

Table A13: Relationship between nature of the market and labour costs

Odds ratio

95%

Confidence Interval

p-value

Labour costs as a

percentage

<20%

1

21% - 40%

.6

.3 to 1.1

0.1 41% - 60%

.3

.2 to .7

0.006

>60%

.3

.1 to .8

0.02

46

Table A14: Labour costs as a percentage, numbers of firms

Nature of the market

Domestic only

Domestic, some

export

Primarily

export <20%

18

46

8

21% - 40%

59

88

8 41% - 60%

28

24

8

61% - 80%

11

10

3 >80%

2

1

Low numbers of firms in some of the categories, made it necessary to pool some of the cells for analysis. For both textile industries and all manufacturing, the likelihood of having some export sales decreases as labour costs increase above 40% of total costs.

47

Appendix 3: Summary Data extracted from AWIR The following tables show part only of the data extracted from the AWIR database. Further details are available from AWIR or from the author on approval from administrators of the AWIR database. Table 1 : Ownership structure (no. of firms)

Wholly Australian

owned

Predom Australian

owned Joint

Venture

Predom foreign owned

Wholly foreign owned Total

Industry Subset Size of organisation Foods, Drinks & Tobacco Large 1 1 2

Medium 7 10 3 11 31 Small 3 1 1 2 7

Textile, Clothing & footwear Large 1 1 Medium 8 1 1 4 14 Small 16 3 11 30

Food retailing Large 44 20 3 5 2 76 Medium 6 1 7 Small 2 2

All Manufacturing Large 5 4 1 1 11 Medium 66 34 4 15 41 160 Small 66 5 2 10 32 115

Table 1a: Number of Employees on payroll (total no. of employees)

Wholly Australian

owned

Predom Australian

owned Joint

Venture

Predom foreign owned

Wholly foreign owned Total

Industry Subset Size of organisation Foods, Drinks & Tobacco Large 46 283 . . . 329

Medium 2122 4673 . 1506 5543 13844 Small 460 33 . 145 99 737

Textile, Clothing & footwear Large 93 . . . . 93 Medium 1677 469 . 110 847 3103 Small 1415 . . 132 1254 2801

Food retailing Large 5557 3242 226 390 92 9671 Medium 367 . . 44 . 411 Small 121 . . . . 121

All Manufacturing Large 1451 892 . 1050 270 3663 Medium 15647 14731 1670 6997 14840 53885 Small 6468 451 99 1282 3989 12289

Table 1b: Number of Employees on payroll (mean no of employees±se)

Wholly Australian

owned

Predom Australian

owned Joint

Venture

Predom foreign owned

Wholly foreign owned Total

Industry Subset Size of organisation Foods, Drinks & Tobacco Large 46 283 . . . 165±118

Medium 303±61 467±129 . 502±113 504±63 447±50 Small 153±23 33 . 145 50±10 105±24

Textile, Clothing & footwear Large 93 . . . . 93 Medium 210±65 469 . 110 212±67 222±45 Small 88±18 . . 44±21 114±29 93±15

Food retailing Large 126±9 162±22 75±17 78±24 46±14 127±9 Medium 61±18 . . 44 . 59±16 Small 61±35 . . . . 61±35

All Manufacturing Large 290±149 223±94 . 1050 270 333±101 Medium 237±36 433±60 418±136 466±91 362±47 337±26 Small 98±11 90±44 50±25 128±38 125±16 107±8