Paper Presented at the International Trade Policy Conference, 5 and 6 December 1996

Globalisation and International Business

Presentation to the First Annual Australian Conference on

International Trade, Education and Research

by

Dr. Robin Stewardson

Chief Economist, BHP Company Limited

From a business point of view, globalisation is not just selling overseas, but operating overseas. That is, producing overseas. In this presentation, I want to look briefly at why companies operate overseas, and then at what the implications of that are for world trade and world business.

Companies decide to produce in countries other than their home country for two basic reasons:- to obtain access of preferred inputs and to obtain access to markets.

One of the desired inputs may be cheap labour. Much of the movement of Japanese manufacturing from Japan to other countries in Asia has been driven by the desire to obtain labour at lower wage rates than in Japan.

This has given rise to the so-called "flying geese" effect. Japanese companies moved first into Malaysia and Indonesia and their activities, added to the general development, pushed wage rates up in those countries. This prompted the Japanese firms to move on to greener pastures - Thailand and the Philippines, with the same effect. The latest move of the 'flying geese' has been to Vietnam and other Indo China countries.

The other main type of input driving overseas production is raw materials. Mining and petroleum companies have to go where the best mineral deposits are. Australia is fortunate that it is well endowed with mineral and petroleum resources, so Australian companies have not had to look overseas until relatively recently. But increasing competition has forced Australian and all other companies to search the world for the best deposits to develop, and Australian Governments have helped drive Australian companies away from home by legislation and regulation making life unnecessarily difficult for mining companies here. Much of BHP's globalisation has been driven by the need to find the best available mineral deposits to develop - copper in Chile and Peru, platinum in Zimbabwe, diamonds in Canada, oil and gas in the Irish Sea and Vietnam, and we've considered projects in places as remote as Bolivia and the frozen Barents Sea in the Arctic circle.

The other main driver forcing firms to produce overseas is the drive to sell in overseas markets, which often means producing in them. In the case of services, the point is fairly obvious. If you want to sell a service where production and delivery occur simultaneously or are closely connected, you have to produce the service in the market. Thus BHP's sales of Information Technology services and Engineering Services overseas in most cases oblige us to operate in those markets.

Less obvious perhaps is the fact that many manufactured products are best produced in the markets which they serve so that the producer can respond quickly and flexibly to the changing demand for particular varieties of his product. This is the reason why BHP Steel has roll forming plants in almost all Asian countries. Roll forming is the downstream end of our steel operations. The product can be required in a great variety of forms, and having production locally is virtually essential to service a market.

In the past trade barriers, particularly tariffs, have probably influenced global firms' investment inside protected target markets. Today, with most tariffs in most countries being reduced under WTO or other agreements, it would be a very foolish manufacturer who based his long term investment plans on the assumption of continuing tariff protection. In the short term however, changes in existing tariffs can affect bottom lines significantly, and the tariff reduction program and new announcements, while by and large not opposed by global companies, is keenly noted by them.

As I've already mentioned, the drivers for BHP's globalisation have been the need to access the best available mineral and petroleum deposits and the need to access markets by supplying them from local production.

Approximately two thirds of BHP's sales are outside Australia, and, more relevantly for today's discussion, one third of its production assets are overseas. We have production operations in 25 countries as well as representatives in more than 50. Our globalisation has been very rapid over the last decade. It really started in a big way with our acquisition of Utah in 1984, but our overseas assets have more than doubled since then. In 1981, less than 1% of BHP employees worked overseas; today 28% work overseas.

On the basis of those credentials, I'd like to try and draw out some of the implications of the globalisation of business.

The first implication, and one which is of particular relevance to this conference, is that globalised business is increasingly realising that it has a vested interest in free trade. If we want to sell all over the world, we must have access to markets. While there may be individual markets where global companies benefit from operating inside a tariff wall, most global companies increasingly realise that their overall interest lies in free access to markets, and that they can't have their cake and eat it - if they want access to markets world wide they must be on the side of free trade, not protection.

Similarly global businesses have a vested interest in supporting the reduction of barriers to investment in individual countries, for obvious reasons.

They also have an interest in countries moving towards harmonised technical standards and mutual recognition of quality measures. These things facilitate business, whereas totally different regulations and quality standards in different countries are an impediment and unnecessary cost to business, even though not a total barrier.

The second implication of the globalisation of business is that it increases competition in many countries. Most obviously this is by bringing competition from international companies into markets where there has been a limited number of local producers.

It is sometimes claimed conversely that, particularly where there are no local producers, very large international companies can push small countries into giving them unreasonably favourable conditions under which to operate. I don't think this is a valid general claim as a result of globalisation. For a start, global companies are not necessarily enormously large companies. It is not a pre-requisite of globalisation to be enormous and nor is it a result of globalisation that one necessarily attains enormous size. More importantly, it is the government of the country, however small, that has the power to make the regulations, and the only conditions under which the global company would be in a superior bargaining position would be where it faced no competition in wanting to operate the particular project in the particular country concerned, and where the country was desperate to have the project proceed. Certainly, it is very rarely our experience that we do not have competition from other local or global companies in seeking to develop a resource or a business project in any country.

Indeed, far from being in a dominant position, in some cases the global company, having invested in a developing country, is seen as a captive sitting duck that can be taxed more heavily whenever the country feels the need to augment its budget revenue. This is a fairly short term policy because global companies don't like this and are apt to look for countries that give them fairer treatment for their next investment. It is particularly the case in some formerly communist countries which have not yet fully grasped the concept that the private sector requires a profit to continue operating.

The third main implication of globalisation of business is that it inevitably raises standards internationally. This comes about in at least three ways.

One is that the very process of looking around to decide where to invest involves making international comparisons; that is, in benchmarking countries one against the other and identifying those countries with the most efficient conditions; for example the best infrastructure available to support the operations of the global company.

Secondly, global companies are increasingly coming to apply the same standards in all countries, including developing countries, that they apply at home. BHP's policy for example, is to apply the same ethical, safety, and environmental standards in all countries in which it operates as it applies in Australia, even though that policy may some times mean we lose the bidding for a project to some less scrupulous global companies that have not yet attained this state of virtue.

The third way in which standards are raised internationally is by technology transfer and spin off. Most directly this is transfer to local partners in projects, but it can also occur with other local companies associated with the global company's project.

The final implication of the globalisation of business which I want to mention is that it has meant an increased concentration on country risk analysis and concentration on mitigating and managing risks to a business project that arise, not from the inherent commercial aspects of the business, but from characteristics of the politics and the economics of the host country. This is a concept which we in BHP are giving considerable attention to, and particularly the economists in the company have a particular role to play in the identification of the country risks. I think to a small and modest extent this sort of examination by global businesses may be increasing the willingness of countries to adopt a path of economic reform as advocated by bodies such as the IMF and the World Bank. Certainly, whether or not the globalisation of business can take any credit for it, economic reform is being adopted by a very large number of countries in Asia, Latin America and even to some extent in Africa.

One additional point. Globalisation also means that companies must meet new challenges in understanding the different cultural, social and environmental values across nations. The strength of the relationships that we build in foreign countries is critical to success in global business but hopefully it also makes a small contribution to more general understanding internationally.

In summary, I think it can be fairly claimed that the globalisation of business is making a positive contribution to the push for free trade, as well as to increasing competition and raising standards internationally.

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