Overview & Comments

Purpose and Method

This study aimed to provide an evaluation of the contributions made by foreign multinationals (foreign MNCs) to the Australian economy. Foreign MNCs include firms that integrate research, production and distribution across at least two countries but are headquartered outside Australia, as well as "multi-domestic firms" where the Australian subsidiary is simply a sales/marketing outlet controlled by head office.

The study was conducted during the first half of 2001 and was based on interviews with 30 foreign MNCs and a written survey of 56 smaller suppliers who had both foreign MNC and Australian customers. The key dimensions which were selected for examination were:

• The value chain, comprising suppliers, customers, and research and development (R&D).
• Clustering and local integration.
• Strategic alliances, joint ventures, mergers and acquisitions (M&As).
• Knowledge networks and global knowledge management.
• Decision-making and reporting within MNCs
• E-commerce.

Impact of Foreign Firms

Overall, we argue that the impacts of MNCs are positive, but there are a number of negative impacts. In summary, the negative impacts are as follows:

• Many sales and marketing MNCs have limited links to Australian firms and a restricted impact beyond direct employment and investment in infrastructure.
• There may be limited R&D and limited links with institutions in the national innovation system.
• Many MNC respondents were reducing manufacturing capacity and had restricted clustering with suppliers.

There are some areas where the impacts are not clear. These include:

• Strategic alliances, restricted by low levels of R&D and limited manufacturing in most sectors.
• The impact of e-commerce on relationships with suppliers and customers. At present MNCs' focus is on finding the right business model and on domestic experimentation with e-commerce projects.

There are positive impacts gained from MNCs that have a significant role in product and service development at regional or global level. In summary there are:

• Benefits in employment and exports from significant RHQs, although these benefits may not persist in the longer term.
• Significant and long term benefit through centres of excellence. These are integral to the global success of the foreign MNC. They require substantial investment and, once established, may be less subject to arbitrary decisions regarding their location. They may also have greater links with the national innovation system and may link Australia's research groups with global expertise. These links may in turn help the foreign subsidiary bid for further regional or global mandates.
• Benefits also accrue when the foreign MNC has sufficient access to internal knowledge flows, especially if they performed R&D in Australia.
• Transfer of knowledge and expertise from foreign MNCs to Australian suppliers.
• Training and skill development for Australian staff of MNCs, through international transfers and formal training programs.
• Testing of new products and services in Australia, providing opportunities for Australian suppliers to increase their technical capacity ahead of roll-out of these systems across the firm globally.

MNCs that had a regional or global mandate were much more likely to export, work with customers, transfer technology to customers and be in control of product development than local mandate firms. Thus, they are likely to have a greater positive impact on the economy as a whole.

Implications

It is crucial for Australia to access new technologies and management know-how in order to be internationally competitive. A "go-it-alone" strategy is not an option if Australians are to maintain their current high standard of living. The main implications are:

• Australia must refocus investment attraction in order to increase the size and depth of knowledge-intensive MNC activities. Policy should favour centres of excellence. The key sectors where a focused effort may provide dividends include ICT, pharmaceuticals/ biotechnology, food, education and health.
• Australia must promote a dual business culture to enhance its international competitiveness and promote itself as a site for testing new products and services;
• Australia should focus on expanding the number and significance of MNC centres of excellence, rather than on attracting RHQs. The Federal and State governments should also support Australian-based CEOs wishing to expand the range of products and services of their Australian operations.
• Australia should draw on MNCs for new skills and competencies and make it more attractive for expatriates to help to build Australian firms, by learning from the experience of other countries that have targeted the skills, personal networks and capital of their nationals located overseas
• Australia should capitalise on MNCs as demanding customers and standard setters. Australian suppliers must aggressively seek MNCs as customers, even though the short-term costs of product and service certification may be high. These developments can be mediated through the firms themselves, through industry associations or through MNCs seeking to build supplier competencies.

Table of Contents

1 Executive Summary

2 Context and Methodology

2.1 Introduction
2.2 Background
2.3 Why Foreign MNCs Are Important to Australia
2.4 Methodology
2.5 Limitations and Strengths of Study

3 Approaches to Measuring Host Economy Integration

3.1 Introduction
3.2 Value chain
3.3 Clustering and Local Integration
3.4 Strategic Alliances, Joint Ventures, Mergers and Acquisitions
3.5 Knowledge Networks and Global Knowledge Management
3.6 Decision-making and Reporting Within MNCs
3.7 The Impact of E-commerce
3.8 A Model for Measuring Integration

4 An Overview of Foreign MNCs in Australia

4.1 Introduction
4.2 Australia Has More Foreign Investment Inflows than Outflows
4.3 Net Inflows Create Jobs
4.4 US and UK Dominate as Sources of FDI
4.5 Service Sectors are Increasing in Importance
4.6 We Know Little About Relationships in the Value Chain
4.7 Reasons for Clustering are Unknown
4.8 Australia Has a Role in Global Alliances
4.9 Acquisitions Appear to Be Major Entry Mode
4.10 Foreign MNCs May Be Excluded from Global Knowledge Networks
4.11 Internal Competition within MNCs Influences Local Activities
4.12 E-Commerce Impacts on Relationships Between MNCs and SMEs is Unknown
4.13 Conclusions

5 Impact of Foreign Firms

5.1 Contribution To Building Australia's Capabilities And Critical Mass
5.2 Contribution To Australia's Global Reach
5.3 Contributions To Skills and Knowledge
5.4 Balance of Positive and Negative Impacts
5.5 Conclusions

6 Implications

6.1 Role of MNCs in the global and Australian economy
6.2 Refocus Investment Attraction
6.3 Leverage Australia's Business Culture Strengths
6.4 Create Regional and Global Centres of Excellence
6.5 Draw on MNCs for New Skills and Competencies
6.6 Capitalise on MNCs as Demanding Customers and Standard Setters
6.7 Conclusions
7 References

8 Appendices

Related Knowledge

• Friend or Foe: Report Launch (Presentation)
  Tue Jan 01 2002 | Dr Lyndal Thorburn, Innovation Dynamics Pty Ltd
• Globalisation - friend or foe? (Opinion)
  Mon Oct 16 2000 | Narelle Kennedy, Chief Executive, Australian Business Foundation

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