Global Dreaming | BTalk Australia

(17min 28) We like to think of our major capital cities as having a lot to offer multinational companies. Are we dreaming?

In “Global Connections: a study of multinational companies in Sydney” Michael Enright concludes that our role is little more than a branch office providing sales to the local market.

In today’s BTalk Australia Phil Dobbie asks Professor Enright why we are not taking on wider global roles. What can be done to change the situation?

What do you think? Add your ideas in the Talkback section at the end of this post.

See also: Capital Xenophobia | BTalk Australia

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• Transcription:

Phil Dobbie: Hello, I’m Phil Dobbie and welcome to BTalk Australia. Today: just how global are our global cities?

Here in Australia, we like to think of our major capital cities as being global cities with much to offer global multinationals. But, how international are we really? Well, Professor Michael Enright from Enright, Scott & Associates has been looking into this in a report for the Australian Business Foundation. I should also say he’s a professor of business administration at the University of Hong Kong. Now, I might be cutting to the chase quickly here, Michael, but for most large multinationals, it seems we’re little more than a sales arm. Are we?

Michael Enright: I think it’s safe to say that Australia, in terms of how global Melbourne or Adelaide is, shall we say, it’s more than aspiration than a reality at this point for most major multinational companies.

Dobbie: Now is that because we’re, because we’re fairly geographically isolated, that people feel as though “I’ve got to be here” but they really only want to be here to sell to us?

Enright: For the most part, yes, in that multinationals come into an economy usually not to make things but to sell things. So, naturally most of the companies that are here are interested in selling into the market. And, they’ll tend to locate their most senior management activities close to, or in, the largest market. So, in Asia Pacific the proximity that a Hong Kong provides to the North Asia Pacific markets, the proximity of that Singapore provides, give those two certain advantages in terms of some of senior activities. But, having said that, the results of our work here indicate that there are other issues at play. In general, in order for Australia-based entities to be introduced into the global networks of the multinationals that are already here, what the companies are telling us is that the Australian operations really need to up their game almost across the board to be able to operate globally, at least through their networks.

Dobbie: In what way?

Enright: In terms of strategic thinking, in terms of ability to analyse and understand customers, markets, and rapidly moving market segmentation, in terms of a wide range of skills and capabilities. For example, only around ten to 12 percent of the foreign multinationals in our sample report are using Australia-based professional service providers for activities outside of Australia. Similarly only about ten to 12 percent of the companies in our sample assign to their own Australian operations any more than say in Australia or in Australian or New Zealand mandate. So, in terms of the capabilities and the ability of both Australian companies and even the Australian operations of the foreign multinationals to take on more global roles, we’re talking about having to up the game almost across the board.

Dobbie: Is there a difference between companies that are headquartered overseas who have got an operation in Australia and a local team versus those that have placed their own teams in Australia? Imagine for example the team that was based overseas and has been “exported out” to Oz, are they less likely to rely on local networking and more likely to be relying on the business that they’re part of?

Enright: Yes, absolutely. But in large part what we are finding is that the foreign multinationals that are operating in Australia do find sufficient skills and capabilities in Australia to deal with the Australian market. And in fact, we find around the Asia Pacific that the senior management ranks and the senior professional service ranks all around Asia Pacific are populated by Australians. But this has not turned into the Australian operations taking on wider region or global roles in most cases. So, they’re are networks there but they have not yet been exploited to the extent that they might be.

Dobbie: I would’ve thought that there would be potential for us to play a greater role in research and development. Are we missing a big opportunity here? I mean, we’ve got an educated workforce. We’ve got a world-class standard of education, I would’ve thought, and we’d be well placed perhaps if we were involving our universities in some industries as well. Are we missing the boat a bit?

Enright: It’s quite interesting there. The companies that are in our sample report to us that in terms of doing research and development in Australia that Australia actually ranks on par with Japan, with China, with the big economies in the region as a place to do research and development. Having said that, they actually report that the research and development that’s actually carried out in Australia tends not to be that important in terms of contributing to the corporation as a whole. And, in many ways the focus on research and development are quite natural and to a certain extent mixes the picture at least in terms of the companies and their activities in Sydney. The activities that they’re placing in Sydney that they think are important are not research and development activities. They’re corporate coordination activities. They’re central management functions. It’s marketing, sales functions. And these functions are actually quite high value for the companies involved. What it may suggest is that the opportunity that may be missed is not so much in research and development but rather in management coordination, marketing and sales, which, you’ll also have to remember are quite high value activities and also draw quite extensively on a well-educated employment base.

Dobbie: A couple of months ago I spoke to economist Steven Kirschner who was concerned about the amount of foreign investment in Australia, particularly because of uncertain regulations in this part of the world. Could it be that companies are worried about investing capital resources into Australia or acquiring a business or setting up a joint venture, which would mean we’d have a bigger role with these multinationals because the multinationals are concerned about the regulations in this part of the world?

Enright: Actually, Australia is viewed favourably from a regulatory standpoint compared to many other of the markets in Asia Pacific. There are some sectors, obviously, the resource sector and the real estate sector where the regulations are considered more stringent. But, in large part, companies will deal with the regulations in place if there’s sufficient reason either in terms of source of supply or in terms of markets that are available. So, it’s an issue, yes, but as a determining issue: in some sectors, perhaps; in most sectors, no.

Dobbie: So, it’s largely administration. Isn’t that really that what you’re talking about? It’s sales marketing and administration functions, a lot of which could be delivered globally if the right IT infrastructure is put into place. And I guess that’s another element that Australia could grab the expertise for a lot of businesses as well.

Enright: Yes. What we actually find is that in the IT space roughly half of the multinationals in our survey actually report using no Australian providers of IT services in their operations. And only about ten percent report using Australian IT service providers in operations outside of Australia. The plus side is that there’s a ten percent that that can be built upon. I think the other aspect is because of location one does have to think about what activities are not as location-sensitive as other activities. And they’re like things like back office processing, software development, things that can be put over the wire. Again, it’s not so much Australia has an advantage per se, but it has less of a disadvantage particularly when dealing with some of the places that are the large markets or close to the larger markets.

Dobbie: You’ve mentioned Asia Pacific a few times. You haven’t mentioned Europe or North America that much. Is there a difference in the functions we take for multinationals that are headquartered in Asia versus those that are based out of the US or Europe? How much does culture influence the results?

Enright: The vast majority of the companies in our data set are North American or European. In essence, we are trying to look for companies from relatively far off locations. The reason for that is that by their nature the companies from Europe, North America, when they’re making a decision to invest in Australia are doing so very specifically. And they’re going to place very specific activities in Australia based on some hardnosed decision making. Whereas, often you’ll see Australian companies, by their nature, will do all or most of their activities in Australia. And some other companies from the region may choose to, you know, spill out, but if you look at the dominant sources of foreign investment globally, it is still North America, Europe, and Japan. We still don’t see companies from Southeast Asia, for example, thinking about using Australia as their springboard into global markets. They’re far more likely to do that out of the Singapore and companies from Northeast Asia are far more likely to do that out of Hong Kong than out of Australia. So, there are cultural issues. There are geographic issues. There are different tendencies for funds inside the region versus outside the region. But, in this particular work, we’ve been focusing on largely the Australian operations of companies from pretty far afield in terms of their corporate headquarters.

Dobbie: So, we’ve identified the situation as it is currently. We’ve sort of touched on what we think the answer is: in part, it’s to say offer us some of the smarts for the business. Isn’t it really? We don’t have a market and there’s not a lot of point in putting your production capabilities here, your R&D. You probably want to have that close to your point of production. Let’s give you a bit of the smart thinking, some of the marketing and some of the sales and some of the managerial capabilities. If we want to do that, how do we step further down that road? What should the government be doing something, for example?

Enright: It’s a matter of what both firms and governments can do. For firms, one of the things that comes quite clearly through our research is that Australian firms, on average, are not taking advantage of the presence of major multinationals here to use or those multinationals in order to help them internationalise. In other words, they’re not getting access to the international networks that the multinationals could afford them. And, in order to do that they have to up their game in terms of their ability to think strategically and understand international markets, etc. From a government standpoint, there are a number of implications. One is if we think about investment promotion activities, our research indicates that the activities that companies are most likely to put particularly in Australian cities are the management-oriented activities. If you’re going to promote, one argument says let’s promote what the companies want to put here. You know, go after what the customer wants to buy rather than what the seller wants to sell. In terms of government investments and skills and capabilities, well, research and development sounds good. And I’m not saying that those are not appropriate investments. In order to access the networks of the multinationals one really has to be thinking more in terms of management skills, marketing skills, multicultural skills, the ability to operate in multiple markets from Australia. And, in terms of branding exercises that do go on in Australia in general and in the particular cities and states, it’s got to be truth in advertising. As I said before, global Australia, global Sydney, global Melbourne, may sound good. But, if it doesn’t ring true to the people at the other end of the message then it’s not going to be helpful.

Dobbie: Yep, well, it’s a reality we are sort of tucked away at the end of the world. Your point about networking with multinationals, local businesses networking with multinationals — that’s hard, isn’t it? Because as we mentioned earlier, a lot of these multinationals, they tend to work on their own, sort of, internal networks more than looking out at the geographic localities.

Enright: They do. But, increasingly, major multinationals are scanning the world. They’re scanning the world for skills, capabilities, new product ideas, new service ideas. And, if Australia is a place where they can find them they will come they will seek them out here. Again, much more so than in the past when multinationals, if it wasn’t invented in the home market, it had no place. That’s changing rapidly. There is a much greater ability to be plugged into from an information coordination communication standpoint today. So, the disadvantage of distance is still there but it’s not as great as it used to be. And, yes, this is a trend that’s playing in Australia’s favour. Another thing I should mention is that for Sydney (we focused our study mostly on what companies are doing in Sydney), the operations of the multinationals in our survey are considered significantly more important to the companies involved than were the Sydney operations of multinationals that we surveyed ten years ago in a similar study. So, the trend’s a positive one. But, there’s still a lot of work that can be done.

Dobbie: Right. I say we keep changing. Sydney is such a different city to what it was ten years ago, that’s for sure. But the world is very different this year as well. Will the economic crisis mean the situation could take a step back? I mean, if we’re a sales arm and sales are down, we could be the first branch office to see the chop. Couldn’t that be true for a lot of companies?

Enright: I would say that, again, because the operations here are generally selling into the Australian market it means that they will rise and fall with the Australian market. That means that companies may downsize if they see their Australian prospects affected. But, on the other hand, as long as they exist in Australia, as long as they stay positive prospects, they’re only likely to chop so far. Having said that, the other danger, because operations, particularly some of the management operations, may be viewed as somewhat more peripheral, there is a danger that what we’ll see is some major Western companies retrench in Australia as they retrench other places in the world — to sort of batten down the hatches and survive at home. So, we could see some instances of companies that have good business here winding down or downsizing more to serve their global needs than their needs in the specific Australian market. This is not a place where any particular location is winning by the way. We don’t see any particular location winning out of the current global crisis. We see every country in every part of the world paying a price for it.

Dobbie: Although if you’re headquartered in North America and you’re retrench a load of workers is in Australia you can’t hear them scream quite so much. Can you? Maybe that’s what you’re saying.

Enright: That’s true. But again, there is a natural tendency to pull back towards home base when in some cases major companies will be facing questions of survival over the next year or two.

Dobbie: That’s for sure. Michael, thank you very much for your time today.

Enright: You’re welcome.