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Shed the ideological baggage
Barry Ferguson
March 18, 2009
THE future of manufacturing is again being debated. The impending closure of the Pacific Brands manufacturing plants in Australia and putting Drivetrain Systems International, Albury, in the hands of administrators are of particular significance. Each has been a long-term player in Australian manufacturing, along with Nylex, which is in the hands of administrators. With these companies and many other manufacturers under threat in Australia, the questions of should and could anything be done need to be asked again.

We have a small, fragmented and an essentially unattractive market for world companies. Our economy is broad in scope, reflecting distance from our historically important markets, but equally shallow, reflecting the small size of our economy.

These natural disadvantages have had two major consequences for the development of our corporate base. One is that local companies are unlikely to emerge from domestic markets match-hardened with the experience to be globally competitive. The other is that foreign direct investment is commonly limited to the investment required to service the local market.

These natural disadvantages have been strongly reinforced by a national lack of understanding among politicians and public servants of the challenges of world competition at the corporate level. The root cause of this ignorance is the prevailing ideology of unfettered free markets among public servants on the government benches around Australia.

This ideology pervades political and budget processes – ministries are occupied by junior ministers and associated government industry development functions are resourced at insignificant levels.

This ideological bias has been reinforced by the uncritical adoption of the writings of Professor Michael Porter on global competitiveness. His writings appear to have little relevance for a small, broadly based economy such as Australia’s.

A long list of missed opportunities in Australia’s industrial development can be cited by those who criticise governments for lack of involvement. The list usually focuses on the processing of our natural resources and agricultural commodities, but should also include the lack of value adding to our intellectual property.

Why aren’t we, for example, a location for major pharmaceutical manufacturing plants, given our strong local biotechnology industry? And why haven’t we used emerging market opportunities in clean energy technology to build the foundations of globally competitive manufacturing capabilities?

These are opportunities most unlikely to have been missed by governments in other developed countries. The natural disadvantages, the lenses through which we see policy options, and a third factor, a passive attitude to foreign investment, have all played their part.

Former treasurer Peter Costello unwittingly made the general case for a more active foreign investment policy when he outlined the reasons for rejecting Royal Dutch Shell’s $10 billion bid for Woodside in 2001. As he so rightly noted, there is no automatic coincidence of corporate and national interests. (At the time, Shell had competing natural gas interests in Oman, Brunei, Russia, and Malaysia.)

Of course, the same issue arises with any foreign direct investment in Australia. All too often after cursory examination by the Foreign Investment Review Board the opportunity to create additional value is given up at the federal level and not pursued at the state level.

Extra benefits might be negotiated in the form of additional onshore and offshore training for local staff, technology transfer and local supply chain development and additional business functions.

We need to shed our ideological baggage, develop a model for industry development, and adopt an evidence-based and pragmatic approach to industry development in Australia. We need especially to shed the view inherent in the dominant supply-side-driven approaches (innovation, efficiency, technology, skills, competition) that the world is waiting for us if only we can become more innovative, more skilled, move up the value-adding chain, and become more competitive. Australia’s focus must shift dramatically to the demand side.

The appropriate application of a demand-side focus would see existing exporters, potential exporters, import-competing manufacturers, and global supply chain participants, all encouraged to develop new customer-driven export opportunities. We need to discard the industry-by-industry approach and support any company that meets a set of basic export-interest criteria. Properly supported to win new and more business, the companies themselves will undertake much of the training, R&D and efficiency improvement programs that absorb so much of the present financial support available to industry. Customers will drive change in companies far more effectively than government incentives ever will.

What would this mean for manufacturing? Manufacturing would most certainly be a net beneficiary of a more aggressive national approach to industry development. Arguably it has been particularly disadvantaged by governments’ laissez-faire approach as foreign governments have heavily supported manufacturing to promote industrialisation. It would also benefit from a more active foreign investment policy. But there would and should be winners and losers at the individual industry level as the playing field for access to industry assistance levelled out.

Manufacturing can have a future in Australia and would benefit from a new national approach to industry development. The interesting additional question is whether this should be only as part of our broader industrial landscape or whether manufacturing has some particular intrinsic merit justifying preferential treatment.

Barry Ferguson is a former senior Victorian public servant.

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