The internationalisation of the Australian economy

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Research examining the internationalisation of the Australian economy has focussed primarily on macroeconomic aggregates such as the levels of imports and exports and the growing importance of these in the Australian GDP (e.g. see Snape et al., 1993; Athukorala, 1995; Pomfret, 1995). Relatively little attention has been given to the internationalisation of the economy through offshore production by Australian firms or through production within Australia by foreign multinationals, the exceptions being the McKinsey and Company (1993), Yetton Davis and Swan (1991), Department of Industry, Science and Technology (1994) and Bureau of Industry Economics (1995). This section will propose a range of research questions which might give some direction for scholarly activity in this area.

The dynamic nature of internationalisation, and associated financing methods such as FDI, calls for research that is responsive to the longitudinal character of internationalisation as a development process through time. While it is valuable to study individual events, a more complete picture is supplied when the whole development of a firm from the time of its founding to the present time is examined (Melin, 1992). Hence, a rich, broadly focussed study that results from careful examination of a few organisations over a long period of time may be superior to statistically rigorous but narrowly focussed studies (Huff and Reger, 1987).

Stages model of internationalisation, including those of Vahlne and Johanson, Vernon, and evolutionary models of international structure, including those of Stopford and Wells, Franko and Bartlett and Goshal, are based on surveys of manufacturing firms. The internationalisation of service firms and firms that combine goods and services needs more attention (Lovelock and Yip, 1996). This observation is highly relevant for Australian scholars as the majority of Australian FDI abroad has been directed to service firms (ABS, 1997).

Research should give attention to new patterns of internationalisation, including that of 'born global' firms. Have McKinsey's 'born global' firms performed as well as those Australian firms that have pursued more traditional, sequential entry methods? Have services firms followed the same pattern? Do Australian firms move more quickly through the exporting stage, or even skip the exporting stage, more rapidly than firms from other countries? If so, do geographic, structural or historical factors explain the difference?

Research should give more attention to the acquisition mode. Firms with what organisational patterns are more likely to acquire existing firms? In what stage of internationalisation is acquisition more likely? Such research should not assume that such decisions are always rational. It may be that irrational factors are important at times. For example, it might be that the rush to acquire businesses in Europe prior to 1992 and to acquire companies in Asia in the mid-1990s reflected a bandwagon effect with firms developing strategies to legitimise their investments after the decision has been made (Hellgren and Melin, 1991).

Research might also give attention to a broader range of entry modes beyond exporting, licensing and FDI. Strategic alliances with local or other foreign firms may involve no transfer of funds. Alliances are another entry mode option which deliver similar strategic advantages to joint ventures but have received little attention in the literature beyond those firms whose home country is either the US or Japan (Yoon et al., 1996; Tse et al., 1997). Studies of structure and coordination of MNCs have been characterised by cross-sectoral approaches and findings expressed in static models (Melin, 1992). How and why do control and coordination mechanisms change over time and how do these changes interplay with strategic actions? Have Australian firms altered their international organisational structures over time? If so, have they followed the US pattern incorporating international divisions, the European pattern that does so to a lesser degree, some other pattern, or none at all?

Changes in the structures of MNCs might have policy implications for Australian governments. Does Australia have less to offer MNCs which have moved to a global strategy than it does to MNCs in the 'multidomestic' stage? Do the foreign firms bring fewer benefits to the Australian economy? All subsidiaries require marketing, local R&D, accounting and other services. In a global strategy more of these services are provided in a uniform manner from the parent or from regional centres, possibly by subsidiaries of other multinational corporations which enjoy a global relationship with the MNC. This may imply a reduction in linkages with purely local Australian firms. A stronger central role by the parent might diminish the capacity for Australia to benefit from the establishment of regional headquarters, a priority for the government in the past (Department of Industry, Science and Technology, 1994). Further, if the organisational structure of MNCs reflects their region of origin, and different structures leave host countries with differing levels of externalities, then government policies designed to benefit from FDI inflow would be strengthened if they were attuned to this fact.

Finally, a central issue for Australian researchers is: how 'internationalised' have Australian firms become? The lack of a systematic measure of internationalisation has meant that researchers have not been able to develop a widely accepted measure of internationalisation. It is therefore difficult to assess the extent of internationalisation of firms or to get accurate pictures of how internationalisation takes place (Makhija et al., 1997). Researchers have used various definitions of internationalisation. At the level of the firm various scholars have focussed on single variables to measure degree of internationalisation (Sullivan, 1994). These include foreign subsidiaries' sales as a percentage of total sales (Stopford and Dunning, 1983), foreign assets as a percentage of total assets (Daniels and Bracker, 1989) and the number of foreign subsidiaries (Stopford and Wells, 1972). More recent works have used composite measures. Morrison and Roth (1992), for example, used the level of international trade, intensity of international competition, worldwide product standardisation and the presence of competitors in all key international markets as their 'dimensions' of globalisation.

Reference to internationalisation theories suggests that the degree of internationalisation might be seen from three perspectives: performance (what goes on overseas, Vernon, [1971]), structural (what resources are overseas, Stopford and Wells, [1972]) and attitudinal (what is top management's international orientation, Perlmutter, [1969]). From this approach it follows that trade theory and the theory of FDI may be considered within the same theoretical context [Ramazzotti and Schiattarella, 1989]. This is further confirmed by the new approach that emphasises firm-level sources of comparative advantage and international competitiveness. Thus, in addition to the more conventional explanations based on industry-and country-level factor endowments, the inter-firm gaps in technological capabilities, and the duration and effectiveness of the learning process may determine a competitive edge internationally

Moreover, these intermediate forms of internationalisation cannot be regarded as second best entrepreneurial choices, but actual first best options depending on the specific firm's and market's characteristics. In this perspective, the choice of the preferred 'stage' of internationalisation takes in a 'strategic' dimension. 3 However, the 'strategic' choice of international expansion of a Small and Medium-size Enterprise (SME) is crucially different from that of a large corporation. This reflects the different capabilities to influence and cope with a complex external environment characterised by asymmetric information, different risk propensities, and different opportunities to exploit economies of scale and scope. Sometimes these capabilities are available in-house, but often they need to be purchased from outside. It is well known that a large corporation is often capable of internalising these capabilities. In contrast, a SME will have to rely on real and financial services purchased from the market, and these services will be more varied and complex the more 'developed' the 'stage' of internationalisation. For these reasons, and due to the high transaction costs involved in the process, ceteris paribus, SMEs are expected to confine their activities to the simpler stages of internationalisation

The aim of this chapter is twofold. First, we describe the forms that foreign involvement of Italian enterprises has taken in Latin America on the basis of some recent and new empirical evidence. Second, we explore, at a theoretical level, the possibility that belonging to an Industrial District (ID) may improve the internationalisation perspectives of SMEs.

EVIDENCE ON INTERNATIONAL EXPANSION OF ITALIAN FIRMS IN LATIN AMERICA

Two recent studies analyse the forms of productive involvement chosen by a sample of Italian SMEs in Latin America, and their sources of competitive strength and weakness [Carisano, 1994; Pietrobelli, 1994b]. 4 The population from which the evidence was drawn was made of 1000 firms belonging to the 23 export consortia dealing with Latin America and associated with the National Federation of Export Consortia (Federexport). These firms were reached by a postal questionnaire, and 126 firms responded. From them, only the SMEs having some relationship in 1989 with Latin America were selected, to generate a sample of 30 enterprises well representative of the universe. 5 The main results of these studies were the following:

(i) the sample firms show a good attitude towards the international market, with an export propensity of over 40 per cent of their overall sales. However, the empirical evidence shows only a relatively 'easy' stage of foreign involvement, confined to exporting. FDI is virtually non-existent, and only ten per cent of the sample firms set up some kind of agreement with local producers, mostly of a commercial nature. 6 Over 50 per cent of total exports go to the nearer and more accessible markets of the European Community (EC), 23.7 per cent to other industrial countries, and 11.4 per cent to Latin America. Latin America is by far the most important market among the Less Developed Countries (LDCs) broadly defined to include non-OECD countries. Exports are concentrated in intermediate and investment goods, mainly in machinery and metal working, rubber and plastic products. This is consistent with what one would expect on the basis of country endowments (and the ensuing international specialisation). 7

(ii) The main obstacles to exports are related to the complex customs and administrative procedures, and to the scarce information on foreign markets. 8 The more export success depends on 'non-price' factors, such as product and firm reliability, trade marks, good product and process technology, the more valuable is information on the market and for the characteristics of demand. However, price-based competitiveness is especially relevant for exports to Latin America and East Asia, while exports to the US and Japan rely on technology and product quality to a greater extent. Thus, specialised real services could be more beneficial for the latter markets. Additional obstacles are related to the fragmented sale and distribution network. 9 Efficient production is often not sufficient to ensure stable export competitiveness in the absence of adequate distribution networks. The small firm size and the lack of economies of scale and scope represent a clear obstacle in this sense. The firms often emphasised the inadequacy of Italian public policies to specifically support with financial and real services distribution and sales in overseas markets. In contrast, the presence of large Italian companies in Latin America is much more extended and takes various forms. Becchetti [1994], in an analysis focused on the experiences of IRI and ENI (the two largest state-owned conglomerates), shows that these firms have been much more active in Latin America than the SMEs, both in the form of FDI, and interfirm agreements and exports. Contrary to the evidence for SMEs, the main obstacles to large firms' international expansion have been of a financial nature, related to the foreign debt crisis and to the macroeconomic instability in the region. In fact, these large corporations have had the capabilities in-house to operate in the 'imperfect' South American markets, characterised by limited and asymmetric information.

Furthermore, there is evidence that belonging to a 'group' led by a large corporation has been a critical condition to set up international agreements of various kinds. This is shown by Vitali [1994], on the basis of evidence concerning the agreements between Italian and Latin American firms during 1987-90 in the clothing and food industries. Out of 26 agreements, nine were signed by enterprises that are part of the Benetton group, five of the Stefanel group, and all the others by firms of other industrial groups (for example, Ellesse, IRI, Zegna, Tachella, Armani).

SUPPORT POLICIES FOR SMES FOREIGN INVOLVEMENT: CASE ARGENTINA

In recent years, Italian foreign aid policies have had two related sets of objectives: the promotion of international collaboration in production, especially through international joint ventures, and the use of development co-operation as a strategic tool of foreign economic policy [Cortellese and Pietrobelli, 1993].

However, the explicit target of supporting the joint ventures between Italian and LDCs' firms has not been reached. Article No.7 of the law regulating development cooperation (L.49/1987), provides specific support for the setting up of international joint ventures, but it has been applied only in very few circumstances, and the financial incentives offered have not been sufficient to boost the active involvement of the Italian partners.

Within this context, the innovative mechanism of the 'Treaty of Privileged Relationship' between Italy and other newly-industrialising Latin American countries was introduced [Angori, 1995]. The first of these treaties was signed by the Italian government with Argentina in 1987 (Tratado de Relaci'n Asociativa Particular entre Argentina e Italia), followed by others with Brazil and Venezuela [Pietrobelli, 1990]. However, it is acknowledged that the results have generally been very limited and far below expectations. 10 A central weakness, that has been detected by an empirical assessment of the results and the procedures of the Treaty with Argentina, is the excessive emphasis on financial aspects, with a general neglect of the need for real production-related services [Pietrobelli and Cortellese, 1994].

A survey based on a sample of 400 enterprises in Argentina usefully highlights the different expectations of and obstacles to Italian and local partners [Feinstein, 1994]. Major obstacles have been the complex bureaucratic procedures and the lack of an established relationship between the partners. Argentina's enterprises expected to gain easier access to new product and process technologies, and modern equipment, while offering the Italian partners low labour costs, raw materials, and a quick access to the regional market and to the Mercosur. However, the small size of Argentina's partners, their limited technical and marketing capabilities, and their limited access to credit, have all contributed to the establishment of only very few successful joint ventures. Financial support proved insufficient to ensure their success.

The experience of the Italy-Argentina Treaty prompts several interesting considerations, especially on the methodology employed. Thus, when assessing the interest of a SME to set up a joint venture in a developing country, one has to particularly take into consideration the environment of origin, as well as its capacity to introduce technological changes and its sources of competitive advantage.

To summarise, given the evidence that the Italian SMEs' internationalisation is only confined to exporting, and that they have experienced difficulties in undertaking a more complex international expansion, an alternative route needs to be taken. In view of these considerations, SMEs' international expansion may benefit from concepts and analyses that, especially in Italy, have contributed to a better understanding of the organisation and operation of these enterprises. To our present aim, the concept of the Industrial District and the evidence from some concrete historical examples may be useful and promising.

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Thirty years ago, the multinational was distinct from national organizations both in its geographical 'reach' and in the managerial complexity it confronted. Over time, the barriers to internationalization have fallen and the population of multinationals has mushroomed. Today there are few, if any, large commercial organizations that are entirely national in the scope of their operations - from supply chains to customers. Consequently, the distinction between multinational enterprise and 'big business' has effectively disappeared. And many new firms are 'born global', espe- cially in digital markets. For the purposes of organizational studies, the interest has shifted into what can more generally be called corporate strategy. How can one satisfactorily explain the causes of firms' long-run performance? My original proposition was that a clear 'fit' between strategy and the organizational struc- ture would produce superior returns. In the event, I could find no correlation at all.

Instead of being curious about the absence of support for what seemed to be an entirely reasonable proposition, I left it to others to ask why. Their emerging answers are discussed elsewhere in this book and so do not need to be repeated here. They all share the common theme that it is not structure per se that shapes performance but rather the informal structures - the underlying processes and the people. The field of strategy has moved a long way beyond the tenets of industrial economics. It is no longer held that industry structure is the prime determinant of firm performance: the variance of performance around the industry mean is simply too great. Besides, it is much less clear today than 30 years ago where the 'bound- aries' to an industry lie. US banks now channel less than 20 % of the nation's money flow, having given way to new competitors like supermarkets and pension fund managers. Similarly, competitors with similar strategies, structures, and resources will experience quite different outcomes. One has to look at the 'dominant logic' a management team has adopted to determine its business mode to gain some clues as to how resources are both created and allocated. My early work was done at a time when just a few multinationals were beginning to experiment with some form of a matrix organization. They were the multinationals at the extremes of complexity in the array of products, technologies, geographies, and cultures assembled to deliver returns to shareholders.

They faced the most severe managerial challenges. Since then many others have joined those pioneers. Indeed, Christopher Bartlett and Sumantra Ghoshal's 1989 'transnational' organization - a development of my early 'grid' model - was presumed to be the ideal goal for multi- industry players. More recent evidence, however, has shown that the ensuing complex- ities for firms like ABB acted to reduce margins and erode competitiveness over time. Even attempts to create a 'mental matrix' rather than a structural solution have lacked conviction. Yet, human ingenuity is unrestrained in the face of this challenge of complexity. In organizations that have been dubbed 'metanational', new approaches are visible to the old problem of managing the core asset of the firm - knowledge. Better ways to create and meld knowledge across internal boundaries may in turn inspire a whole new generation of organizational 'solutions' to the management of complexity. If the limits of both scale and complexity are pushed back, then perhaps we really will see the trillion-dollar corporation become a reality.

In addition to these internal process developments, complexity is also being addressed as managers choose different ways to draw a 'boundary' around the assets they plan to own. This is an age of outsourcing, indirect supply chain management, and, most notably, strategic alliances. One does not need to own an asset in order to control it, or at least gain benefit from its existence under someone else's ownership. Whereas the earlier debates about organization were to do with markets versus hierarchies, today we have to add the role of contracts. It is becoming commonplace for managers to talk about their 'asset ecologies' - those assets that help create value for them. Microsoft, it has been estimated, owns a mere four per cent of the assets that create its value. The rest of the value comes from contracts, such as those with IBM.

The consulting firm Accenture has recently estimated that strategic alliances of all types could contribute more than $25 trillion to the revenues of US firms by 2004. It also estimated that a substantial number of the Fortune 500 firms will have 40 % of their revenues and profits from alliances. Should this occur, many firms would have to modify quite seriously their approaches to organization. The dominant logic of organizing a hierarchy, albeit a flattening one, is quite different from that required to manage collaborative arrangements. Whereas many firms currently regard their alliances as exotic options at the periphery of their empires, tomorrow they will have to create alliance management capabilities as a central plank of their strategies. All these options may serve to add back new complexity for management until the governance provisions and 'logic' are sorted out clearly. How managers go about the task will provide a fruitful and challenging domain for future research.

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