Overseas Direct InvestmentANALYSIS & INSIGHTS

Overseas Direct Investment ANALYSIS & INSIGHTS 21

What is overseas direct investment (ODI)?ODI refers to investment by Australian companies in business operations overseas.

This can take the form of a new or ‘green field’ investment, expansion of an existing facility or an acquisition or joint venture.

ODI excludes passive investments, such as minority shareholdings where there is no participation in the management of the foreign enterprise, and portfolio investments.

Why companies undertake ODIFor many successful exporters, it is a natural next step to establish a presence in an overseas market where it has strong sales.

The exporter may need to develop a local sales and marketing operation to win more customers; build a warehouse to make finished goods more readily available; or manufacture goods locally to become cost competitive or avoid tariff barriers.

Alternatively, businesses may seek to acquire additional capabilities or scale by acquisition of an existing operation, brand, IP or technology. A higher profile, with local operations, can open up new opportunities, such as for regional supply chain business and business or government tenders.

Companies may also want to improve the availability of support operations, such as business processing or customer service operations.

About the ODI researchExport Finance & Insurance Corporation (EFIC) recently commissioned the research in order to gain a better understanding of the trends and issues involved with ODI.

The objectives were:

• To determine the scale of activity and profile participants in this business segment

• To understand the drivers for making productive overseas investments and the obstacles involved

• To receive qualitative feedback from companies who have either established overseas facilities or failed in their attempt to do so

• To gain an understanding of the number of businesses planning overseas investment

The survey was conducted by leading finance research house, East & Partners. Small-to-medium enterprises (turnover in the range of $10-100 million) were 87% of respondents. The balance was larger companies with annual turnover of between $100 million and $250 million.

Over 2,200 companies were identified as SME exporters, with 485 of those found to have experience of overseas direct investment (ODI). The survey covered a range of industries. The largest segment was Business Services. This segment covers a range of activities including education, engineering, architectural, technical, computer, legal, accounting, marketing and business services, such as advertising, market research, business management and administration, employment and security services.

Overseas Direct Investment ANALYSIS & INSIGHTS 21

Overseas investor profileMost companies are experienced exporters, even if export income is still a relatively modest percentage of their revenue (13%). The data shows that more SMEs are looking to invest overseas in the next 18 months.

BUSINESS SERVICES (37%)

WHOLESALE (7%)

FINANCE AND INSURANCE (8%)

MINING (10%)

OTHER SERVICES (10%)

MANUFACTURING (11%)

OTHER (17%)

24%

37%

5%

21%

13%

2,200

Exporters identified

485

ODI activity

210Planning

177Existing

Failed98

Average number of years companies have

been exporting

7

Research coverageThe research was conducted in all states with the numbers of companies in each state closely reflecting the distribution of population.

growingODI activity is

Where are companies investing?Many SMEs still feel comfortable taking their first ODI steps in English-speaking markets. However one-third of companies are now investing in Asia.

of SMEs invest in an existing export market

88%

ASIA

33%

NEW ZEALAND

37% OTHER

13%

WESTERN EUROPE

51% NORTH AMERICA

27%

LATIN AMERICA

10%

Overseas Direct Investment ANALYSIS & INSIGHTS 43

Average number of Facilities per company

1.7

10%

Cut costs

Increased sales

20% 30% 40% 50%

Become part/take control of GSC

Acquire IP technology

Acquire local partner

Proximity to buyers/suppliers

Warehousing facility

57%

Service/process facilities

37%

Sales & marketingoperation

67%

Manufacturing

10% Companies invested in new

facilities

OUT OF 10

8

What is driving ODI?For SMEs the key drivers are growing sales, remaining competitive on costs and moving closer to buyers and suppliers.

What types of facilities are companies investing in?The two largest categorises are sales and marketing operations and warehousing/distribution capacity. Both are clearly aimed at supporting sales growth.

How are the investments structured?Most SMEs opt for wholly owned operations. This likely reflects that most investments are not of a scale to attract or need a strong local business partner. Larger companies (with turnover of $100-150m) by contrast had a strong preference (65%) for a local partner.

WHOLLY OWNED (54%)

MAJORITY OWNED - WITH AUSTRALIAN PARTNER (2%)

OTHER (9%)

DIRECTLY OWNED BY COMPANY’S SHAREHOLDER(S) (17%)

MAJORITY OWNED - WITH LOCAL PARTNER (18%)

Overseas Direct Investment ANALYSIS & INSIGHTS 43

How big are these investments and how are they funded?On average, SMEs have $5.2m invested in overseas operations. They tend to be conservative in their funding by choice or necessity, with 15% having no debt at all, while those that have debt retain, on average, 60% equity funding.

Percentage debt funded

40%Average investment

$5.2mAverage employment

in ODI facility

27

Obtaining finance

58%

IP protection

22%

Finding the right partner

21%

Recruiting

12%

Local compliance/approvals

8%

What were the major barriers faced?Obtaining finance was the single-largest barrier faced by SMEs and this is reflected in a small percentage being able to fund their ODI from their Australian bank. Both results contrast with larger companies ($100-250m) where access to funding was, as expected, significantly less challenging (only cited by 8% as a major barrier).

Where did the companies get funds from?The difficulties faced by SMEs are illustrated by looking at how successful they were in obtaining funds for ODI from their Australian bank, compared with larger companies. They had half the success rate. The expectations of SMEs planning ODI are lower still: only 19% expect to obtain funding from their Australian bank.

Percentage obtaining funds from their Australian bank

39%

78%SME

LARGER CORPORATES

Percentage of SMEs planning ODI who expect to obtain

funding from their Australian bank

19%

Overseas Direct Investment ANALYSIS & INSIGHTS 65

20%

None

Government export agencies

Austrade

Consultants

Personal networks

40% 60% 80% 100%

EXISTING ODI INVESTMENTS

FAILED ODI INVESTMENTS

Accountants

What sources of advice did companies use?Many companies relied on their personal networks: friends and business acquaintances. However, obtaining advice from professional advisers and export agencies appears to be closely correlated with success. This is not surprising given the myriad of legal, regulatory, compliance, tax and funding issues that need to be addressed.

What additional assistance do companies want?Companies most want assistance with market introductions and advice on business opportunities. Not surprisingly, given the primary ODI barrier for SMEs is obtaining finance, a key need is assistance to access funding.

Marketing Introduction 79% 100%

Business opportunities 67% 100%

Promotion

Networking opportunities

Access to funding 59% 100%

39% 100%

39% 100%

Global supply chain operations 11% 100%

Nothing or other 12% 100%

Overseas Direct Investment ANALYSIS & INSIGHTS 65

What are the chief reasons for failed overseas investment?The failure rate of SMEs engaging in ODI (98 of 275 firms) is high at 35%. The key reasons point to a need for improved access to information, advice and funding.

Research implications The findings from the research are clear on three critical issues:

• ODI needs to be carefully planned and executed Insufficient market knowledge and poor planning are the primary reasons for failed investments. It should be obvious that investing in a foreign country with (usually) a different language, culture, business practices, legal and regulatory environment needs a lot of careful planning. However it is not always being done adequately.

• Planning needs to involve specialist advisers The evidence is that those who seek assistance from professional organisations with these complex issues are twice as likely to be successful with their overseas investment as those who do not.

• Adequate finance needs to be available Access to finance is the single largest barrier faced by SMEs and inadequate funding one of the major causes of failed investment. It is a necessary condition for success.

Fortunately, there are organisations dedicated to assisting you overcome each of these challenges.

Austrade (Australian Trade Commission) provides information, advice and services to help Australian companies grow their business in international markets. With an extensive global network and local staff, Austrade can assist with market insights, business opportunities and connections.

Legal and accounting advice is available through mid-tier Australian firms (as well as the Big Four), most of which are affiliated with local practices in numerous overseas networks. This ensures that SMEs are able to access sound professional advice to structure investments properly from both an Australian legal, tax, business and audit point of view, as well as on requirements in the overseas markets.

EFIC (Export Finance and Insurance Corporation) recognises that SMEs will often have a funding need because supply of credit from Australian banks may be restricted due to the inherent business risks and security limitations associated with overseas investment. And overseas banks are usually reticent to support an unknown foreign company until it is well established in their country. Thus, EFIC funding support can make a real difference.

LACK OF MARKET KNOWLEDGE/POOR PLANNING (35%)

POOR PARTNER SELECTION (5%)

OTHER/NOT SURE (8%)

INADEQUATE FUNDING (23%)

POOR MANAGEMENT/EXECUTION (29%)

POOR PLANNING

35%

INADEQUATE FUNDING

23%

Who is EFIC?EFIC is a government-backed provider of financial solutions. We work directly with Australian business or their banks to finance viable business opportunities. These opportunities can include financing of export-related expansion overseas either to increase production or distribution capacity.

EFIC works alongside commercial banks to provide financial solutions for eligible customers when their bank is unable to provide all the support they need.

Could EFIC support my overseas investment?For EFIC to consider support, the investment must result in economic benefit to your business and, in turn, to Australia. Overseas direct investments include the establishment and operation of offshore manufacturing, distribution or services facilities that will result in increased Australian exports, market share or access to new markets or new supply chain opportunities.

Financial solutions for offshore expansionFor overseas expansion, EFIC specialises in solutions for working capital and longer-term finance by providing guarantees to Australian banks.

Minimum eligibility guidelines• You are an Australian-based company looking to establish, acquire or expand operations overseas

• Your bank is not able to provide all of the financial support required

• Your investment is for the purpose of facilitating business growth

• The overseas investment is well considered and will not put the viability of the existing business at serious risk if it fails

• You are profitable and financially stable

• The finance or guarantee requirement is at least $0.25m

Find out moreFor all enquiries, call EFIC on 1800 093 724 or email: info@efic.gov.au

Export Finance and Insurance CorporationLevel 10, Export House, 22 Pitt Street, Sydney NSW 2000

Enquiries 1800 093 724info@efic.gov.au | www.efic.gov.au