An intersection of international issues

This short article from the Australian newspaper on the car industry highlights a whole range of core international business issues.

Competitive advantage: “in industries such as carmaking, Australia could not compete with low-cost producers in Asia or with high-value-added manufacturers in Europe.” This is the typical generic business strategy choice set.

Comparative advantage: See above quote. It is not clear that Australia has any advantages to offer in acting as a location for car manufacture. Perhaps we would be better advised to focus on activities we are much better at doing (like mining, education, food prcoessing, and more complex manufacturing)? That is what trade theory tells us.

Foreign direct investment decisions: The firms that manufacture cars in Australia (Ford, GMH, Toyota) are all multinationals who made decisions to enter Australia several decades ago. Why did they come here? They were market seeking. Australia has rich consumers in need of private vehicles to travel across our vast distances.

Governments trying to affect trade: The article’s main revelation is the enormous subsidies offered by government to the car industry. These were introduced to compensate the big car companies when tarriff barriers began to fall in the mid 1970s (and more noticeably in the 1980s) and to stop them from fleeing to cheaper (or more efficient) production locations. The high tariff barriers had been the original reason why the multinationals had to manufacture here rather than import. The managers of the Australian subsidiaries have lobbied the government (at both Federal and State levels) for more and more funds, with the big threat being an exit from Australian production. This demonstrates an excellent grasp of our political system.

Strategic choices, logistics and configuration: The managers of the Australian subsidiaries are part of a bigger structure however, and are finding that their respective headquarters would rather adopt a more integrated strategy (as opposed to multidomestic), and undertake greater production elsewhere and import more final product into Australia. While market-seking is still a motivation, integration pressures are stronger, and efficiency seeking FDI is winning out. It remains to be seen what contribution the Australian subsidiaries will make within this value chain. Perhaps the only thing keeping them here is the location-boundedness and firm-specific nature of their assets (this issue is one I have written about in work with Elizabeth Maitland – see an early draft of this work here).

Globalisation: The pressures at play here are reflective of the typical globalisation pressures. Trade (i.e. importing cars into Australia from other subsidiaries) has become much easier for these firms due to reduced barriers (in terms of tarriffs, shipping costs, coordination and monitoring costs). It may mean that the efforts by the Australian governments are futile. We can also see big impacts of all this on Australian manufacturers of inputs for car production. Although they may not be multinationals they are still affected by the globalisation aspects (as their main buyer might exit, and they will then have to cut jobs etc).

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