CHAPTER 9

An open door? Foreign investment and multinational companies

Simon Ville

Foreign multinational enterprise is a large and powerful institution in most contemporary societies. Yet, for good or bad, these enterprises evoke strong emotions. The privacy intrusions of Facebook or the national security concerns over state-owned foreign firms are contemporary cases in point. In Australia in 2016, foreign firms accounted for over a third of the top 2000 businesses and owned in excess of A$1 trillion of assets.¹ How they exercise their authority remains contentious for government, business and consumers. Government concerns focus on their economic and financial effects, particularly on policy directions and tax yields. More recently, national security considerations have come to the fore when multinationals have been owned or influenced by foreign governments. The impact of multinationals on competition and prices has raised concerns among domestic firms and consumers. On the positive side of the ledger, many countries have viewed multinationals as a vehicle for accelerated economic growth when they bring innovation, employment and new products.

Multinationals have a long history in Australia: at least 200 foreign firms had set up here by 1870, there were an estimated 466 operating in 1914, and around 1360 by 2010. The long sweep of history enables us to examine from hindsight many of the current debates about the nature and impact of multinationals. These include an appreciation of their diversity by origins, sector and organisational form, along with understanding their contribution to innovation and economic growth and their effects on competition in several industries. The history of multinational investment in Australia reveals some surprising patterns and trends; for example, rather than always assuming control of key industries, they sometimes faced stiff competition from local firms and indeed other multinationals. Nor have they all been large global organisations. Governments would do well to recognise these questions of diversity and contestability when designing policies targeting the broad-ranging effects of foreign firms in Australia.

The origins and idea of a multinational enterprise

The term ‘multinational enterprise’ only originated in the 1960s, coined by US scholars interested in the rapid global growth of large-scale American firms after the Second World War.² As one writer recently noted, ‘Economists, during the 1960s, fashioned the idea of “multinational enterprise”, without realising how long it had existed as a form of business.’³ However, business historians began to undertake research projects which showed that similar organisations could be traced back at least to the second half of the nineteenth century. Arguably, the multinational dates back a good deal further, with the rise of international trading companies from Europe in the sixteenth and seventeenth centuries, such as the English East India Company. But these companies mostly traded under the protected conditions of a monopoly charter granted by their national government in return for providing political and military influence in regions not formally colonised.⁴

Multinationals are a diverse group of businesses. They are normally defined as firms that control income-generating assets in more than one country; for example, factories for manufacturers, equipment for transport and communications firms, or skilled labour in services. While factories are a clear example, the operation of a modest sales office or servicing centre may also count as income-generating in the absence of local production in the host economy.

A second defining issue is where control of the enterprise lies. This is straightforward in the case of a fully owned foreign subsidiary, but often firms are only partly owned by a foreign entity, and the ownership threshold that is defined as control – commonly known as foreign direct investment – has varied across time. Today, an overseas entity only has to own 10 per cent of the equity of the domestic firm for the latter to be deemed a multinational.⁵ A contractual relationship with a local firm in the host country – for example, a licence to manufacture the foreign company’s products – presents another grey area. The term ‘migrating multinationals’ refers to firms that shift their domicility to minimise regulatory barriers or political risks, such as asset seizures by a national government.⁶ Nor is effective control solely associated with the location of the investment. Some local subsidiaries have a greater say over operations and strategy than do others and this balance of power can shift over time. For instance, many early British multinationals ceded much of their original power to local boards and managers in Australia because of the problems they had in making and enforcing decisions at a time of slow and irregular communications. This began to change from the 1870s with the arrival of the oceanic cable.

History presents further challenges in understanding the multinational. Often, we have insufficient information on investment or effective control to decide unequivocally if a firm was a multinational. Instead, we resort to structural definitions such as where the company’s head office was located. This has been the approach to the study of multinationals in Australia before 1914, where investment data and archival evidence are both limited. The historical relationship between two nations also raises questions about a firm’s domicility. Were British firms in the Australian colonies before Federation merely extending their activities into other British territories? However, most writers have argued that the interests of these firms were distinct from those of their host nation, particularly after the beginnings of self-government in the Australian colonies from the 1850s.

The historical development of multinational enterprise in Australia

The scholarly study of multinationals in Australia has grown in recent years.⁷ The earliest multinationals reached Australian shores in the 1820s, less than 40 years after colonial settlement in 1788.⁸ The Australian Agricultural Company (AAC) (1824) and the Van Diemen’s Land Company (1825) – the earliest – were land settlement companies. In the following decades, finance companies began to arrive, including commercial banks, mortgage banks, trust companies and insurers. In the wake of the Victorian gold rush, mining companies arrived in huge numbers from the 1850s; many were speculative and few survived long. Among the few successes was the highly adaptive Port Phillip and Colonial Mining Company, based in Clunes in Victoria, which shifted from alluvial to quartz mining, then to specialising in the crushing and treating of quartz for other firms. The company also became an investor in other successful mines.

Most early multinationals operated only in Australia. Contrary to modern conceptions of a multinational that expands overseas from a strong domestic base, they had few operations in their country of origin, Britain, and rarely settled in other host nations. This type of firm was identified as a form of multinational by US business historian Mira Wilkins in the 1980s who termed it the free-standing company. Since they were British-owned and overall strategy resided with British promoters, Wilkins deemed them multinationals.⁹

In the final decades of the nineteenth century, multi-nationals arrived from a broader range of nations and settled into a more diverse set of industries. In line with Australia’s expanding economic and strategic global perspective beyond the boundaries of empire, new firms arrived from North America and Continental Europe, particularly from the United States, Germany and France. The appearance of American enterprises affirms the evidence provided by other historians of a tilt towards closer relations between the two nations.¹⁰ Concepts of economic and social modernity were associated with the developing global leadership of the US and challenged the dominance of imperial Britain.¹¹

The challenge to British leadership focused on the new capital-intensive and science-based industries of the second industrial revolution – branded, packaged products; mass-produced light machinery; electrical equipment; industrial chemicals and metals.¹² Firms such as General Electric, Siemens, Kodak, NCR, United Typewriter, Remington and Singer supplied the market for goods such as electrical equipment, typewriters, cameras and sewing machines. They were different in character from firms of the mid-nineteenth century. Many were global manufacturers who would survive well into the twentieth century and some into the twenty-first. General Electric was an emerging modern American multinational. By the First World War, it manufactured in the major markets of Canada, France, England, Japan and Germany. In nations with smaller markets, such as Australia, South Africa and Mexico, it conducted the sale and distribution of its imported products.¹³

General Electric was typical of most foreign manufacturers in Australia before 1914, in limiting its activities to branches that distributed the imports of the company’s products manufactured overseas and provided after-sales servicing and repairs. However, in 1905, newly merged Nestlé and Anglo-Swiss Milk Company Australasia acquired production facilities in Australia including farms, creameries and butter factories in Victoria and Queensland.¹⁴ Schweppes was one of the earliest overseas firms to manufacture in Australia, with factories in Sydney from 1877 and Melbourne from 1885.¹⁵

A very different form of multinational – one rarely identified in the literature – also became evident by the late nineteenth century. By the 1890s wool was increasingly sold in Australia before overseas shipment. Representatives of overseas, primarily European, wool manufacturers began to establish offices in Sydney and Melbourne to participate in the wool auctions. The heterogeneous nature of fine merino wool with many grades and measures of quality encouraged buyers to attend the auctions in person. By the 1920s wool precincts had developed in the main Australian centres and included the modest offices of many overseas wool buyers and brokers, some located inside the city’s wool exchange. Forty-two firms had Melbourne offices by 1927, particularly those representing the Flemish textile manufacturers of Roubaix and Tourcoing. Despite their apparently diminutive size, several buyers set up offices across the wool-producing and textile-manufacturing nations. For French wool buyers Masurel Fils, their William Street branch in Melbourne formed part of a global network of buying offices in Sydney, Durban, Port Elizabeth, East London, Buenos Aires and Montevideo. Wool purchased in these centres was then shipped to manufacturing districts in Britain and Continental Europe.¹⁶

The two world wars impeded the Australian operations of multinationals from enemy nations, particularly Germany. Under the terms of the Trading with the Enemy Act (1914) and the Enemy Contracts Annulment Act (1915), firms faced being suspended or brought under government control. Van der Eng has estimated that 45 firms were affected, which also included several Australian firms, for trading with the enemy. The diversity of ownership structures complicated the tasks of legislators. Siemens Brothers Dynamo Works, a joint subsidiary of Siemens Brothers & Co. Ltd in the UK and Siemens & Halske AG of Germany, was placed under a controller and continued operating until 1923. Another affected firm, Polack Tyre and Rubber Company in Melbourne, was a subsidiary of B. Polack AG in Germany but was incorporated in London.¹⁷

In the twentieth century, waves of multinationals arrived from the United States, Europe and Japan.¹⁸ However, the overriding trend has been the further broadening of the geographic origins of multinationals in Australia. Britain’s virtual monopoly of the multinational sector in the mid-nineteenth century had begun to diminish by 1914, with 12 other sender nations featuring. In the following century this diversification went much further. By 2010, multinationals based in Australia came from 70 nations spread across the globe (Table 1). The largest share, 30 per cent from the US, was much less than the UK dominance (70 per cent) a century earlier. Other major senders were mostly from Europe, with the exception of Japan. Several firms found their way from smaller and less developed economies – for example, Ethiopia, Pakistan, Jordan, New Caledonia and Bermuda. Diversity by size and industry was again notable.

Many American firms operated in Australia in the 1920s, some for the first time, others to extend their activities from pre-war sales to local production. They were largely market-oriented in their investment strategy, seeing the Australian market as wealthy and growing, with similar tastes to American consumers. Ford had operated a sales office from 1910 to coordinate the marketing and sales of its imports. It produced its first car in Australia, a Model T, in a former wool warehouse in Geelong in 1925, previously owned by British multinational wool broker Dalgety.¹⁹ By the end of 1926 Ford had plants in all mainland states. The same year, General Motors began assembly in Australia and merged in 1931 with Holden’s Motor Body Builders Ltd, its supplier of car bodies.²⁰ Component suppliers followed suit, particularly Goodyear Tyre and Rubber Company in 1927. American firms also led the development of electrical equipment, particularly Standard Telephones and Cables (1928) for telephones and Sunbeam (1934) for household appliances, and they established a strong presence in food and drink, metals, chemicals, pharmaceuticals and oil products.²¹

Continental European manufacturers also began to stake out a presence in consumer industries in Australia between the wars, with Philips from the Netherlands being one of the pioneers in 1933.²² It produced a wide range of electrical and telephony-related products, including incandescent lamps, radio sets, broadcasting equipment and radio components. A more substantial expansion of European firms in Australia occurred in the 1950s, with the arrival of automotive companies Volvo (1946), Volkswagen (1957), Fiat (1958), Daimler (Mercedes-Benz) (1958) and Renault (1959).²³ There was a further boom in European arrivals towards the end of the century; by 2010 they accounted for around a half of multinationals.

Several Japanese firms had arrived in Australia before Federation, particularly the trading companies Kanematsu and Mitsui. However, it was in the 1960s and 1970s that waves of Japanese multinationals began to arrive, encouraged by the complementary needs of the two economies and the signing of a commerce agreement in 1957. Toyota, NEC, Mitsubishi, Sumitomo, Sony, Fuji and Daikin led widespread investment in the Australian economy across consumer electronics, vehicles, construction and project development, as well as the production, processing and marketing of resources. Building on the knowledge and long experience held by the Japanese trading companies, along with the support of public institutions such as JETRO ( Japan External Trade Organization), Japanese multinationals arrived with a good understanding of the Australian market that contributed to the success of many of them.²⁴

TABLE 1Multinationals by country of origin, 1820–2010²⁵

sources For 1910, 1914: Simon Ville and David Merrett, International Business in Australia before World War One. Shaping a multinational economy, Palgrave, 2022, chs 4, 5. For 2010: Foreign Companies in Australia Yearbook 2010, Commercial Intelligence Service, London, 2010.

NB The eight firms in the Others row/1914 column were all joint ventures.

The effects of multinationals in Australia

The economic, social, political and cultural impact of multinationals on host nations is a highly contested topic. Opponents, for example, have alleged tax evasion practices by firms shifting costs between nations, and anti-competitive strategies made possible by their size and global reach. Supporters, however, point to the new innovations they bring to the host country along with additional employment from local production.

These are not new questions. In Australia tax avoidance and the foreign acquisition of strategic assets have been regularly highlighted and remain important concerns today.²⁶ Others have argued that multinationals are a challenge to national sovereignty and that foreign values are shaping our belief systems.²⁷ It has also been argued, though, that the national interest is served by the new investment, ideas and employment which have been brought to Australia via multinational enterprises. Indeed, multinationals have long played an important role in introducing new technology, products and whole industries into Australia. Foreign firms have been responsible for a growing share of patents in Australia in the twentieth century, and their role in the introduction of broad spectrum and general purpose technologies has often been critical in such areas as electricity, motor vehicles, electronics, transport and communications, information technology and medical products. Brash’s study of the transfer of American managerial systems to Australia in the 1960s also points to positive outcomes in organisational innovations.²⁸

Measuring the effects of multinationals is far from trivial and depends heavily on conditions in the host nation. In less developed host nations where institutions and political power are unstable and infrastructure is weak, multinationals have often acted with disregard for the wellbeing of locals. Indeed, instability or power vacuums could benefit multinationals whose economic interests were assisted by, and in turn justified, imperial policy and the extension of empire. The annexation of Burma through three wars (1823–26, 1852–53 and 1885) was inextricably tied to the interests of British firms operating in the country. Firms such as the Bombay Burmah Trading Company sought access to the valuable resources of the Irrawaddy Valley, including teak and rice. Informal (‘residents’) and then formal (Federated Malay States) British control of the Malay Peninsula facilitated local rubber production by British traders like Harrisons & Crosfield and Guthries. Dunlop established plantations in Malaya in 1910.²⁹ American multinationals behaved with similar impunity in the Caribbean and Central and South America. As Mira Wilkins describes, the United States and Nicaragua Company (1903) ‘covered more than 10 million acres in northern Nicaragua, and included exclusive mining privileges and the right to build and to operate railroads, telephones, and the telegraph’.³⁰

Australia’s historical experience of multinationals was quite different and might be termed ‘contested multinationality’. Multinationals have had much less freedom of manoeuvre. In the private sector, the settler community was deeply embedded in business and economic activities. There was to be no ‘plantation economy’ controlled by multinationals, since pastoral and agricultural settlement spread across the country largely in the hands of small family farms.³¹ Nor were local industrial and service firms a pushover for their foreign counterparts. In industries such as banking, locals learned to emulate the competitive advantages of British firms.³² Where this was not possible in some of the industries of the second industrial revolution, locals adapted complementary business models, such as to become pharmacy distributors and retailers (Australian Pharmaceutical Industries and Sigma Pharmaceuticals) and vehicle distributors (Tarrant Engineering). Multinationals also faced competition from one another, particularly in periods of changing global leadership. In the late nineteenth century, a changing of the guard occurred as American and German firms challenged British leadership on many fronts. Australia was a significant battlefront – Britain’s strong imperial connections were challenged by American and German firms in pursuit of a growing, wealthy market and skilled workforce.

When British and American ‘meat packers’ arrived towards the end of the nineteenth century, their sphere of influence was constrained by each other, Australian competitors, a strong upstream community of livestock farmers, the state railway systems, and government inquiries. A 1914 royal commission listed 51 ‘principal’ firms in the meat export trade and concluded, ‘there is no evidence at present of an attempted restraint or monopoly’.³³ Another battleground among multinationals and local firms was the production of tobacco. In this case, though, the financial resources of the largest multinationals prevailed as the industry consolidated by acquiring local producers. Finally, in 1904 the two remaining giants, Imperial Tobacco from the UK and American Tobacco from the US, formed a holding company, which controlled the local industry.³⁴

Colonial governments had controlled several key areas of network infrastructure and supply chain connections, notably the railways, ports, postal services and utilities, on which businesses relied heavily. In the course of the twentieth century, policymakers sought to balance the benefits of the presence of foreign firms with restricting their freedom to act contrary to the national interest.³⁵ Until the 1960s, public policy was relatively receptive to foreign firms. However, there was a growing feeling that Australia was missing out on the benefits of multinationals, particularly technology transfer, export opportunities, and the downstream development of the natural resource industries. These concerns spurred policy changes to rein in multinationals and facilitate local participation in joint projects, culminating in the 1972 Foreign Companies (Takeovers) Act. This was the first peacetime legislation to limit foreign direct investment across all industries. The Foreign Investment Review Board was set up in 1976 to advise the federal government on company acquisitions by foreign firms. Policy swung back to receptiveness from the mid-1980s as part of the Hawke–Keating governments’ policies of stimulating economic growth through deregulation.

This brief outline paints a fairly benign picture of the impact of multinationals in a strong host nation like Australia. Yet, multinationals with significant global reach possess a key strategic advantage over national governments because of their ability to shift resources among countries in response to policy or other changes. Although there are limits on the mobility of fixed capital investments, some multinationals have manipulated their intra-firm operations across borders to minimise tax liabilities; this is often referred to as transfer pricing. In recent decades, supra-national governmental efforts to counter this revenue loss have intensified. In 1998, the OECD launched the Harmful Tax Practices project, which identified policies in individual nations likely to abet tax avoidance and encouraged their removal.³⁶ Despite the progress made by this initiative, some companies continued to pay only small amounts of taxation. In 2013 the OECD renewed its efforts to curtail tax avoidance with the BEPS (Base erosion and profit shifting) project, which now has over 140 jurisdictions participating.³⁷

The most recent wave of multinationals arriving in Australia may present the greatest policy challenge. Sinosteel Australia established an office in Perth in 1991 as part of the Channar Mining Joint Venture agreement with Rio Tinto to mine iron ore in the Pilbara. This heralded the expansion of Chinese investment in Australia. Over the following decades, investments followed from other Chinese firms in mining, real estate and services.³⁸ Overall, Chinese investment has been modest compared with Japan and previous waves from the United States and Britain. China had been liberalising its economy for several decades, encouraging markets and private enterprise. The expansion of trade with China, as previously with Japan, has led to increased investment. However, the main difference with previous waves of multinationals has been the presence of several large State-Owned Enterprises (SOEs). Initially, this raised few concerns. In 2009 China experts Peter Drysdale and Christopher Findlay wrote: ‘Anxiety over the growth of foreign investment by China is as unfounded as it was … over the growth in foreign investment by Japan that accompanied the emergence of Japan as Australia’s major economic partner and a major supplier of capital to world markets.’³⁹

However, the connection of SOEs, and arguably other Chinese firms, to the ruling Communist Party in an era of Chinese economic and military expansion has raised strategic and security concerns in the last few years. In 2018, Australia was the first country to ban Chinese communications company Huawei on the grounds of national security because of its alleged connections to the Chinese government. Three years earlier a Chinese-owned firm had been awarded a 99-year lease on the Port of Darwin. Whether this lease should now be revoked remains a source of contention among the political parties on the eve of the 2022 federal election. While not a government-owned firm, the geo-strategic implications of Chinese ownership of the closest major Australian port, located directly southwards from China, are clear. The irony of that company’s name – Landbridge Group – may have attracted less notice.

Lessons from history: Balancing the scales of multinational effects

Australia has a long history of hosting foreign firms. Several policy-relevant messages arise from this experience. First, the impact of multinationals is heavily dependent on the nature of the host nation. In Australia, contrary to many natural resource-focused nations, the freedom of action of multinationals is constrained by countervailing forces – the roles of government, the actions of the private sector, and the competition of other multinationals. Secondly, multinational enterprise is a diverse and oft-changing institution, whether viewed by country of origin, industrial sector, organisational structure or size. Most firms are not large global manufacturers. Taken together, these two factors – contestability and diversity – suggest Australia can shape its policies towards multinationals with some latitude, but that those policies must be responsive to change, taking each case on its merits. On this basis, the Foreign Investment Review Board has been a significant advance on broad-based policies of much of the twentieth century, but questions remain about its ability to balance the economic benefits and security implications of new firms under foreign government influence. Australian participation in supranational initiatives in areas like taxation is also vital to counter the influence of the most powerful global corporations. In summary, the lessons of history focus on the need to balance good and bad in understanding the diverse impacts of multinationals and to avoid politicisation of either side of this ‘balance sheet’.