australians as foreign investors: australian investment in singapore and malaysian manufacturing...

AUSTRALIANS AS FOREIGN INVESTORS: AUSTRALIAN INVESTMENT I N SINGAPORE AND

MALAYSIAN MANUFACTURING INDUSTRIES"

HELEN HUGHES

Australian National University

1

Singapore and Malaysia together account for the largest single block of Australian investment in manufacturing in developing countries, although the total amount is small compared with Australian investment in New Zealand or the United Kingdom.' Investment, like trade, is growing most rapidly

'This paper is based on interviews with executives of Australian domiciled firms interested in Singapore and Malaysia as actual or potential manufacturing venues, with the executives of manufacturing firms in Singapore and Malaysia which are associated with Australian companies, with other businessmen in Australia, Singapore and Malaysia interested in trading and manufacturing links between the two areas, and with Singapore, Malaysian and Australian government and other public officials. To all these I am greatly indebted for the unstinting and patient way in which they answered my questions and questionnaires, for their ideas. their courtesy and their hospitality. I have also bencfited from discussions with Professor R. Hirono, of Seikei University, who is working on the problenis of Japanese investment in Singapore manufacturing, with the economists of the Economic Research Centre of the University of Singapore, and with my colleagues in the School of Pacific Studies at the Australian National University.

1The following figures show the annual outflow of direct invcstnient from Australia (in $A million) by principal countries of destination. This investment, of course, is by no means all in manufacturing.

~

United New USA and Total Annual Year Kingdom Zealand Canada Other Outflow

1955-56 1956-57 1957-58 1958-59 1959-60 1960- 6 1 1961-62 1962-63 1963-64 1964-65

3 2 6 3 1

-2

-13 -15

- -

4 -1 11 6 - 15

11 6 21 -1 9

7 -1 4 7 1 3 9 -1 9

13 - -4 16 1 3 15 -1 16

- 17 23 23 32 11 11 15 8 7

15 ~~ ~~

Source: Commonwealth Bureau of Census and Statistics, AnnuaZ Bulletin of Oversea

In 1964-65, the only year for which figures could be obtained, $Al,SSS,OOO went to South East Asia, which includes Burma, Cambodia, Indonesia, Laos, the Philippines, South Vietnam, Thailand, Malaysia and Singapore. (Letter from J. P. O'Neill, Acting Commonwealth Statistician, October 7, 1965. )

lnvestinent in Australia, 1984-85, p. 20.

57

58 AUSTRALIAN ECONOMIC PAPERS TUNE between developed countries. Australian capital is quantitatively of little importance to Singapore and Malaysia, being much smaller than investment from the United Kingdom, Japan, the United States, Hong Kong and Taiwan.2 Australian industrial investment in Singapore and Malaysia is nevertheless the largest we have made in any developing area, and the experience of Australian firms which have, or have not, succeeded in establishing associated or subsidiary manufacturing enterprises in Singapore and Malaysia illustrates the problems Australia faces in investing in manufacturing in developing countries.

I1

By the time Malaya and Singapore had overcome the difficulties of post- war reconstruction and Communist insurrection, and had become indepen- dent states, three large manufacturing subsidiaries of Australian firms were established in Singapore. Two had already operated there before the war, and the third chose Singapore in the early post-war years because it offered the greatest advantages of location within the area without appearing to have any major drawbacks in trading with Malaya, other countries of South-East Asia, or even farther afield (for example, in Africa and the Middle East). By December 1966, at least 56 other Australian firms had shown a serious interest in manufacturing in Singapore and Malaysia; 30 firms had actually invested in 39 industrial enterprises, and some of those which have so far made only exploratory moves may yet do SO.^

2At the end of 1965 the Australian share of foreign paid up capital invested in firms with pioneer status in Singapore and Malaysia was less than five per cent. These were the only reliable figures of foreign investment in manufacturing available in Singapore and Malaysia; they confirmed the impression gathered in interviews of the relative unimportance of Australian investment in Singapore and Malaysian manufacturing.

3 A list of 59 Australian-domiciled firms which had established subsidiary or associated enterprises in Singapore and Malaysia or had made enquiries either in Australia, or Singapore or Malaysia about doing so, was drawn up as a result of a search ranging from a systematic study of Australian business news to a no less assiduous attendance at the Pebble Bar of the Hotel Singapura. The survey was conducted in two stages. A leading executive of each firm was interviewed in Australia to establish the nature of the firm, the reasons for interest in Singapore or Malaysia, whether investment was undertaken or not, and what, if any, were the results. Of the 59 firms identified, 53 have been contacted since June 1966 and 52 were interviewed. They all answered the questions put to them, although, of course, not all were able to answer the questions equally fully. The second part of the survey was carried out in Singapore and Malaysia in October 1966. The local managers of 31 of the 39 enterprises established were asked in a personal interview about the course of development of their factories. A number of questions asked in Australia was repeated for the local point of view. Where relevant, the Singapore and Malaysian enterprises also filled in a questionnaire with figures of their investment, output and employment since 1945. Of the remaining eight enterprises, four did not have local managers who would have warranted an interview and four enterprises had failed.

1967 AUSTRALIANS AS FOREIGN INVESTORS 59

Increasing Australian business interest in Singapore and Malaysia was part of the general growth in awareness of the economic importance of our geographical propinquity to Asia. Cajoled by the Department of Trade’s contention that trading with Asia was important, tempted by its export incentives, and often influenced by their own vision of political responsibility as well as by hopes of profit, some Australian manufacturers began to think of selling their products to South East Asia and then of manufacturing them there. Singapore and Malaysia, where English was the language of business and government, seemed the most favourable area to investigate, although Hong Kong, the Philippines, Thailand and Indonesia also came into most of the investors’ field of enquiry.4 Only Hong Kong could match Singapore and Malaysia in the quality of public services and administration, but while Hong Kong was rapidly becoming developed industrially, Aus- tralian businessmen found severe competition from local manufacturers, high land prices, and an uncomfortable proximity to China. Singapore and Malaysia placed fewer restrictions on the foreign ownership of business enterprises than the Philippines or Indonesia; they were among the first Asian countries to guarantee the free repatriation of profits to foreigners; from 1959 and 1958, respectively, they offered additional attractions in pioneer status with tax holidays; there was easy access to land on industrial estates; and they promised import licensing and tariff protection.

When the People’s Action Party was elected to power in Singapore in 1959 several Australian firms already interested in the area became doubtful about investing in Singapore. The labour unrest which followed appeared to threaten life as well as property, and factories which might be established seemed in danger of being nationalized. Some firms abandoned their interest altogether. Others switched their investigations to Malaya, which then seemed more favourable to foreign investment. Within a short time, however, Singapore’s Prime Minister, Lee Kuan Yew, was able to change the political climate so that Singapore again became attractive for foreign investment. With the establishment of the Economic Development Board in 1961, potential investors received more effective assistance than they could hope for anywhere else in Asia, and probably in the developing world. When Malaysia was formed in 1963, investment in industry seemed even more encouraging, because the prospects of a long hoped-for common market implied that manufacturers could contemplate production in

4 The 52 firms interviewed were highly involved in foreign trade and investment. Forty-three regularly sold their manufactured products abroad, and of the nine which did not, four made products wliicli do not lend themselves to long-distance tranqport. Forty had subsidiary or associated manufacturing enterprises abroad, and 16 had subsidiary or associated manufacturing enterprises in developing countries other than Singapore and Malaysia.

60 AUSTRALIAN ECONOMIC PAPERS JUNE Singapore, Kuala Lumpur or any other Malayhian centre within a tariff protected market of some ten million people. The Australian Department of Trade put the weight of its encouragement for manufacturing in Asia behind Malaysia.

The immediate effects of Malaysia’s formation were, however, inauspicious. Firms about to take advantage of pioneer status had to wait while Singapore and Kuala Lumpur worked on a mutually acceptable framework for the encouragement of industry. Confrontation reduced Singapore’s direct and entrepot trade with Indonesia (although a trickle remained even in 1964 and 1965) and, even more seriously, weakened business confidence, particularly in Singapore. At the very time when trade adjustment and a more realistic evaluation of the effects of confrontation were overcoming this crisis, the split between Singapore and Malaysia precipitated another.

Australian firms attempting to set up manufacturing enterprises during this period naturally encountered repeated delays in dealing with government departments and local associates, and their own sense of caution was underlined by the Department of Trade’s pessimistic evaluation of the area’s predicament. When confrontation finally ceased in mid-1966, easing the economic climate in this respect, potential manufacturers found themselves operating in a new framework. A common market for the area, although still highly desirable on economic grounds, seemed quite unlikely, at least in the time of the current generation of leaders. Malaysia still hopes to pursue a policy of industrialization which will rely heavily on its domestic markets, while rubber, tin and other primary products earn the necessary foreign exchange, but Singapore’s future clearly lies in the much more difficult tasks of an entrepot manufacturing economy.

I11

Chance has played a part in turning Australian manufacturers’ eyes towards direct investment in Singapore and Malaysia, but in the main manufacturing investment has followed the export of manufactured products from Australia. Australian exports of manufactured goods to Singapore and Malaysia have grown from $A5.2 million in 1948-49 to $A29.4 million in 1964-65, but it is doubtful whether the total volume of exports has ever been commensurate with the market opportunities that Singapore and Malaysia offered. Even now, the volume and range of products are small, and a mere handful of firms is involved. The rate of growth of Australia’s manufactured exports to Singapore and Malaysia (see Chart I ) has, until recently, tended to vary inversely with the rate of growth of national expenditure in Australia. Most exporters sought Singapore and Malaysian markets only when times were poor in Australia, dropping their endeavours in boom

1967 AUSTRALIANS AS FOREIGN INVESTORS 61

C H A R T I

AUSTRALIAN EXPORTS OF MANUFACTURES TO SINGAPORE

AUSTRALIAN GROSS EXPENDITURE, 1948-49 TO 1964-65 AND MALAYSIA RELATED TO

40 -

Gross expenditure ($m.)

Exports ($ thousands).

8 -

I I I I I I I I 1950-51 1954-55 1958-59 1962-63

years to concentrate on supplying the more profitable and more easily served Australian market. Sometimes they even failed to supply firm orders.5 They thus lost markets which they had already developed, damaged their commercial reputation and brought Australian products generally into disrepute. Australian exporters were for the most part slow to adapt their trade marks, packaging and labelling to the needs of multilingual Singapore and Malaya in the early post-war years, when these markets were wide open, and some have not yet recognized the marketing needs of the area. But even the firms which have made such mistakes have been exceptional, for most Australian firms did not even try to export while domestic pastures were lush. In time exporters from other countries, notably Japan, Germany and the United States, joined and, to some extent, replaced traditional British suppliers, making the Singapore and h4alaysian market one of the most keenly priced in the world. Prices in Singapore and Malaysia tend to reflect the marginal costs of production of highly indus- trialized and economically advanced countries minus the direct and indirect benefits of government assistance. ( Australian traders also enjoy some forms

6 Three Singapore and one Kuala Lumpur importing agents gave seven examplm, which they regarded as typical, of Australian firms’ failures to fill orders when Australian demand was high. When checked, all were found to be correct.

AUSTRALIAN ECONOMIC PAPERS JUNE 62 of government assistance, but lack others, particularly cheap long-term credit facilities. ) In this situation the smallness of Australia’s domestic markets is a handicap. Many Australian industries are rendered internation- ally uncompetitive because domestic production is not large enough to allow full advantage to be taken of economies of scale or of technological advances. The reason is partly that the total domestic market is too small and partly that it has been carved into too great a number of production units by indiscriminate invitation to foreign capital to invest in Australia, coupled with more or less made-to-measure tariffs. In the latter situation, very high intra-marginal profits do sometimes enable Australian subsidiaries of foreign firms to subsidize exports at rates as great as or even greater than those of their parent companies which produce on a more economic scale, but firms in more competitive conditions cannot afford to do so. Locally owned monopolistic enterprises can similarly afford to subsidize their export prices. Two manufacturers intend to establish subsidiaries in Singapore and Malaysia to take advantage of Australian raw materials marketed there at a much lower price than in Australia. One of these firms confidently looks forward to better delivery schedules as well. But such cases are exceptions, for in capital intensive industries which price their goods in international markets according to principles of discriminating monopoly the comparative advantage lies with industries operating from a large domestic market.

The Singapore and Malaysian markets have become more quality conscious as they have become more competitive, and Australian exporters, long nurtured behind tariff walls, have sometimes found that they could not compete in quality either.

Because shipping freight rates are usually higher between Australia and Singapore or Port Swettenham than between these ports and London, Rotterdam, Tokyo and New York, Australia derives little advantage from its geographical closeness. Australian exporters, moreover, still frequently display a cavalier attitude to shipping, failing to negotiate particular product rates and paying little attention to documentation and labelling.

The long-term upward trend in the sales of Australian manufactured goods to Singapore and Malaysia has, however, been accompanied by improving trading practices. Some of the larger Australian exporters, like those of Germany and Japan, allocate export quotas to Singapore and Malaysia, or at least to South-East Asia, thus avoiding the collapse of exports when internal prosperity threatens to swallow up the entire domestic production. But the narrow range of products exported and Australian firms’ very small share in the distribution network still make it very difficult for Australian manufacturers to isolate manufacturing opportunities in Singapore and Malaysia. This is especially true of products for which there is a naturally protected market, and which for this reason have not been

1967 AUSTRALIANS AS FOREIGN INVESTORS 63 previously imported. Fifty of the 52 firms interviewed made their own investigations in Singapore and Malaysia. They were assisted by Australians already working there, and in particular by the South East Asia Develop- ment Corporation which has actively encouraged Australian investment in the area. Trade Commissioners were thought to have been very helpful by all 36 firms which contacted them, and in Singapore the Economic Develop- ment Board was found valuable by all 37 of the firms which sought its advice. Six firms producing for new markets which they had not previously explored by exports found market penetration very difficult. Trading practices were new to them and in two of these cases established marketing “in-groups’’ impeded sales.

The process of industrialization itself, the attractions of pioneer status, and particularly the prospects of tariff protection have stimulated the interest of Australian exporters in import sulxtitution industries in Singapore and Malaysia. Three primary-product processing enterprises have been established to counteract the threat of a rapidly growing market passing to competitors. These firms were concerned with primary products which were simultaneously losing markets in other industrializing countries.

Two small firms have gone into Singapore to take advantage of low wages to produce labour intensive products; one is producing for the Singapore and Malaysian market and the other is importing its Singapore- made goods into Australia instead of buying them, as in the past, from Hong Kong and China. This type of industry is much favoured by the Singapore Development Board, which hopes to see Singapore importing semi-finished products from Australia to hand-finish them for the Singapore market and for export, and particularly for export back to Australia. At first sight at least, however, the number of products which lends itself to this sort of treatment is depressingly small, and it is likely to decrease as wage rates rise in Singapore with increased living standards. Singapore places much hope on substantial tariff reductions by Australia, but this prospect seems even poorer.

Not all Australian firms have been motivated by purely commercial considerations. For two small manufacturers who had designed their products a desire to show that Australian goods are equal to any in the world was as important in leading to investment in manufacturing as it was in establishing exports in the first place. Most of the firms interviewed were seriously concerned to “do something for Asia” because “they are our neighbours” and “whether you like it or not we have got to live with them. Anyway what’s good for them is good for us.” All but two firms were to some degree influenced by the Department of Trade’s attitudes and policies, and young executives appeared to be much more influenced by the Australian

64 AUSTRALIAN ECONOMIC PAPERS JUNE

government than those close to retirement. In all but two cases the Depart- ment had a remarkably favourable image as a responsible, imaginative and efficient government agency-although some of the firms added “as government departments go” as a rider. The Australian Trade Commissioner service in Singapore and Malaysia similarly came in for much favourable comment.

Firms which have started operations in recent years, some of which are nevertheless already showing profits, were unanimous that a much greater effort was needed to begin manufacturing in Singapore and Malaysia than to extend Australian activities by the extent necessary to bring in the same amount of additional profit. Only in three cases (two firms processing primary products and one extending the market for a raw material) were there no easier alternatives to manufacturing abroad; for all other manufacturers, the higher risks and difFiculties of investing in manufacturing abroad rather than in investing at home were offset by considerations of national interest.

IV The nature of the parent firm was one of the most important factors

in a firm’s decision to invest and in its degree of success. The geographical distribution of the 52 firms interviewed was not unexpected. One was situated in Adelaide, two were in Brisbane and four in Perth, where the West Australian Government’s Department of Industrial Development had tried to encourage this type of activity, 20 had their head offices in Mel- bourne and 25 were in Sydney. In size, by their number of employees, they varied from 18 to more than 45,000, but it was most significant that only 18 of the firms had more than 1,000 employees.6 Appeals to national prestige appear to have more effect on the small than on the large firms. A small firm also tends to be the one more hardly pressed by local competition in Australia, and therefore in spite of its relative lack of resources, the one which chases profit opportunities harder. The lack of interest from really large, and even from middle sized, companies which have the resources for

6 Distribution of firms interviewed by number of employees. Number of Firms

Less than 100 . . . . . . . . . . . . . . . . . 9 100 to 500 . . . . . . . . . . . . . . . . . . 18 500 to 1,000 . . . . . . . . . . . . . . . . . . 7 1,000 to 5,000 . . . . . . . . . . . . . . . . . . 10 5,000 to 10,000 . . . . . . . . . . . . . 4 More than 10,000 ............ 3 Does not apply ............ 1

Total ............ 52 -

1967 AUSTRALIANS AS FOREIGN INVESTORS 65 the complexities of international investment suggests that Singapore and Malaysia will not find it easy to attract a great deal of investment for industrial development from Au~tralia.~

Seventeen of the companies were locally owned proprietary companies, three were proprietary subsidiaries of foreign companies, 28 were locally owned public companies and three were foreign owned public companies.8 Foreign owned companies which own a significant share of the assets of Australian manufacturing were thus poorly represented in the overall sample, and only three had actually invested in Singapore and Malaysia. The Australian branch of one of these companies was responsible for the South East Asian area, but in another case a great deal of persuasion and pressure by the Australian executives had becn needed to obtain permission to enter tlie South East Asian market. There was coiisiderable evidence that formal franchise limitations as well as parent company attitudes, admittedly with some exceptions, tended to prevent a substantial export on which manufacturing investment might be based. To tlie extent that Australia has a derived economy, the limitations on its potential investment abroad are very real.

Fourteen out of the 18 firms which decided not to go ahead with investment projects made their decision because the Singapore or Malaysian markets and possible export opportunities did not promise an economic level of operation. Five of these firms reached this decision only after the division between Singapore and Malaysia fragmented an already small market, and in two cases it was due to the expected effects of confrontation on Singapore’s economy. One company, in its field fairly large by Australian standards, felt that it could not spare a capable executive for an oversea venture. Another found all its available capital resources committed in expansion in Australia, and, being very much a family concern, did not wish to go to the capital market for a “risky project” such as investment abroad. In the main, however, firms did not regard the lack of capital or executive staff as an impediment. Political uncertainties also did not seem to worry the firms once they had committed themselves to a serious interest,9 although the fact that most of the planned investment was

7 J. J. Puthucheary, Ownership and Control in the Malayan Economy (Singapore: Eastern Universities Press, 1960). pp. xxi-xxii, strongly argues, on rather different premises, that Singapore and Malaysia should not rely on foreign investment for development. See also E. L. Wheelwright, Industrialization in hlalaysia ( Melbourne: Melbourne Univcrsity Press, 1965), pp. 117 and 126.

8 In one case company classification did not apply. 9 Australian businessmen apparently take a calmer view of political dangers than their

American counterparts. See M. von Neumann Whitman, The United States Guaranty Program and Pritjate Foreign Investment (Princeton University Press, 1959), pp. 54 and 55.


in the first instance small and could be amortized in a short time was undoubtedly important. It was therefore not surprising that the Australian Government’s political insurance scheme had evoked little interest.

The success of the subsidiary or associated enterprise is difficult to judge, because few have been operating long enough to make profit evaluation meaningful. Of those which have, however, a few are doing extremely well and some firms are showing a better return on capital invested in Singapore or Malaysia than on their comparable Australian investment. In two cases this has been due to tax holidays, and difficulties will arise when these cease to apply-although neither factory is likely to close down. For some companies high profits are the result of genuine comparative advantage. On the other hand, four enterprises have failed, and others may yet do so.

Although the number of enterprises studied in Singapore and Malaysia was small, a few factors stand out as contributing to the manufacturing ventures’ success. For goods sold under brand names, the establishment of the brand by exporting the product initially from Australia has been very important in a highly brand-conscious market. A number of reasons have been adduced for the importance of brands in Singapore and Malaysia, with the substitution of locally made and imported inferior goods for inter- nationally marketed and branded goods as the most important one, but there seems to be a much simpler explanation. The multi-racial, multilingual nature of Singapore and Malaysian societies limits the impact of literacy and renders brands more important than would otherwise be the case. The establishment of a brand, and what is more, a brand which lends itself to easy recognition and unambiguous interpretation in a score of languages was something which successful manufacturers had borne in mind. The use of Australian packaging and brand devices has often been unwise, but was sometimes still in use because the man on the spot could not persuade his head office in Australia that his market was different from the Australian one.

The creation of good distribution, and, if necessary, good servicing channels is equally important. The firm which has been exporting its products is at an advantage unless a local partner can organize marketing quickly and efficiently for a new enterprise. There appear to be no hard and fast rules for choosing distribution channels. Six enterprises did all their own selling, and for another 13 direct distribution was the obvious and successful choice for at least some of their products. Twenty used an agent to cover the whole of Singapore and Malaysia, or had a number of agents. One enterprise had to close down its selling subsidiary, but another operated one successfully. Twelve enterprises found that a combination of various sales methods may be best. For some products, the British agency houses

1967 AUSTRAL1 4NS AS FOREIGN INVESTORS 67

were felt to provide the best distribution network; for ot!iers, indigenous, predominantly Chinese, agents were increasingly important. Agency houses were said to have a broad coverage and good general resources, but individual merchants who liandled fewer goods under closer personal control were thought sometimes to be better able to devote attention to a product for wliicli there was a long-term future. The merchants' activities were expanding while the agency houses were themselves going into manufacturing and to some extent moving out of Singapore and h4alaysia. The days when being a European was a mark of having adequate resources and being commercially and publicly acceptable were not yet gone, but they were numbered.

In establishing a manufacturing enterprise in Singapore and Malaysia, Australian firms found themselves beset by both a shortage and a surplus of lnhour. The area as a whole was very short of managerial and supervisory stal€ from foremen upwards, and there was a great deal of turnover, with managers moving from one firm to another. To an outsider the situation seems to differ only in degree from that in Australia, but with the small total number of experienced men that degree of difference is obviously very important. It is, of course, a situation in wliich enterprises with Australian participation have gained as well as lost managerial stail. Technically trained mcn were easier to find, although they too lacked expericnce. In some professions the supply was greatly in excess of demand. An Rustr a 1' ian manager in the Kuala Lumpur area found his advertisement for an accountant drew 400 replies; the choice was "a real stah in the dark". When it came to selecting labour for the factory floor tlie situation was even more difficult. Fully trained men were extremely scarce; most firms employed men who had some experience in an allied production field and did the rest of tlie training themselves, unless they could steal men trained by their competitors. The 31 enterprises interviewed had sent 1 4 key men to Australia for training during the last five years. There were plenty of unskilled workmen, but many problems in employing them. The most common way of avoiding a flood of applications was to choose men from among the construction workers who built a plant, and to rely upon the employees to bring along relatives and friends when more hands were needed. In some cases trade union agreements limited hiring to men supplied by the union, and, although the firm did not have to hire all the men presented, managers felt that this was a serious limitation on their choice of labour. Even greater difficulties occurred when a firm wished to sack an indifferent worker, because in a unionized plant, once a man had been hired as a permanent worker entitled to fringe benefits in addition to the base wage rate, the firm had to prove that he was redundant before dismissing him, and he then had to be paid severance pay.


Management of labour in the factory naturally presented problems to which Australian managers were not accustomed. Demarcation disputes did not disappear when trade unions were replaced by industrial unions. Mat- ters of dignity and face had to be considered and these were compounded by strong racial differences. Because industrial relations were still, particularly in Malaysia, in their infancy, personal relationships were very important, and, while some Australian managers were able to fit into this situation as well as indigenous employers, others have found it a relief when a union was formed in their plant. They could deal with the union rather than the men and rely on it to keep discipline in the factory. The issues which were likely to arise in Singapore and Malaysian factories more frequently than in Australian industry were absenteeism, poor time-keeping, unwillingness to work overtime and untidiness in the work place. All were clearly problems of an industrializing society, and the methods of dealing with them reflected this. One firm found that a free coffee urn ensured punctuality in the mornings, while another avoided absenteeism by taking the men on a Sunday picnic when it sensed that they were getting restless. Overall, labour relations were more delicate and complex than in Australia, and Australian trade unionists would no doubt be surprised to hear that “you can’t push the men as hard as you can in Australia”.

Although bad labour relations had forced only one factory to close down, productivity was reduced, particularly in the early years when other labour costs also were high-certainly higher than most Australian managers had anticipated. Fringe benefits were considerable, representing between ten per cent and 40 per cent of base wage rates for the eight enterprises which were able to make an estimate. Thus although the base wage rates were about a quarter of comparable Australian rates, total wage rates were a higher proportion of Australian wage rates. Labour cost per man per day was often a higher proportion again, ranging from a third to a half of Australian labour cost, because labour productivity was often lower than in Australia.

Managers found that considerable unemployment imposed a pressure to find jobs for extra men and they frequently employed a greater number of workers than they would need in Australia for this reason alone. Labour productivity was, however, also thought to be lower than in Australia by 14 of the 20 enterprises which were able to make a direct comparison. This seemed to be partly a matter of climate. People could not perform as well in tropical conditions as in temperate ones, and air-conditioning costs were said to be too high to make its use possible. But to some extent, as one manager was careful to point out, employing more men was due to the difference in the scale of production. Singapore and Malaysian plants tended to be smaller than their Australian counterparts, and the labour force had to

1967 AUSTRALIANS AS FOREIGN INVESTORS 69 be greater per unit of output to achieve the same flexibility of production. Singapore and Malaysian workers were of slighter build than Australians, and they could not be expected to do the same amount of physical labour. One firm found that whereas a labourer could shift three 56-pound cases a minute in Australia, two men were required to do this in Singapore. Mechanization and inccntive payments tended to reduce the importance of this factor and of climate, and familiarity with factory conditions improved productivity fairly rapidly. Three firms claimed that output per man did not differ greatly from that in Australia, one found it better than in the United Kingdom, and two thought it higher than in Australia. In one operation exactly comparable in size and degree of mechanization, a Singapore factory used fewer man hours per unit of output than its Australian counter- part. All these were well established enterprises. Most managers found local workers very adaptable to given tasks, though reluctant to act freely on their own initiative. (There was much discussion of the particular aptitudes of the various races, but there were as many exceptions as there were rules.) Where productivity is lagging a long way behind after several years of operation and the cause is not climate, size of enterprise or the need for hcavy manual labour, the management should be improving its factory organization to raise labour productivity.

Evcn when lallour was efficient, however, and labour costs therefore considerably lower than in Australia, mechanization frequently paid because of the savings of raw material and improved quality of products. Several firms were able to use some secondhand machinery, but three had care- fully investigated the possibility and rejected it. In economies exposed to some degree of outside competition the choice of techniques appears to be more limited than is generally supposed. Primitive techniques were said to make primitive products, to be costly in raw materials and not as cheap in labour rates per man day as wage rates alone would suggest. Servicing problems and poor supplies of spare parts were said to be associated with secondhand and labour intensive machinery and to lead to delays in production and hence to unexpectedly high production costs. One enterprise regretted that it had installed semi-automatic rather than fully automatic equipment and attributed some of its considerable production difficulties to this deckion. Conversely, the firms with the least factory problems had the most highly mechanized equipment.

Most Australian firms were in favour of some local participation in their enterprise in Singapore and Malaysia, although several preferred to see the venture firmly established before local investment and participation were sought. The failure of American firms to allow Australians to share in their Australian investments appeared to be the most important element in this feeling. Only five of the Singapore and Malaysian enterprises were


wholly owned by the Australian firm, although for the others the degree of local participation varied greatly from equal partnership to a nominal capital investment sought merely to satisfy Malaysian Government qualifica- tions for pioneer status. Fifteen joint ventures were genuine partnerships, although six of the “local” partners were other foreign firms. One enterprise was operated under licence by another foreign firm. In no case of a joint venture was the Australian firm primarily seeking capital. Outlets for goods and the availability of an established manufacturing plant were the two most desirable requirements in a local partner, but the latter was hard to find. There did not appear to be any correlation between the type of local investment, if any, and the degree of success of an enterprise.

The Singapore and Malaysian capital markets are highly speculatire and emotional-“there are times when you couldn’t sell gold bar for the price of copper”-but recent over-subscriptions to large oversea company share issues have shown that capital is readily available, at least for projects carry- ing well-known names. Banks lend more freely to industry than they do in Australia, generally on overdraft terms, and the South East Asian Development Corporation is very active in promoting joint venture finance. It is true that some of the local investors have a merchant’s rather than a manufacturer’s outlook and expect a quick turnover for their capital, but most are satisfied to wait for profits if prospects are good. Loans from the Economic Development Board and Malaysian Industrial Development Finance Limited are available at relatively low interest rates,1° and some Australian firms have taken advantage of this source of finance. Eighteen enterprises out of the 25 which had views on this subject preferred to use internal funds, first from the parent companies, and then from internal accumulation, and all of the 18 were able to do so for more than 50 per cent of their total invested capital. The second choice, given by three of these enterprises, and used by them for working capital, was overdraft.

Management appeared to be the most important factor in the degree and speed with which success was achieved by a subsidiary or associated enterprise, but two thirds of the 21 Australian managers interviewed in Singapore and Malaysia thought that their parent firms underrated the difficulties of managing factories abroad, and this criticism seemed in most cases to be valid.

The high cost of employing expatriate staff, the shortage of good executives in Australia, and the limitations on the employment of expatriates

loEuropean bank loan rates start at 7% per cent and Chinese banks have a minimum rate of 9.6 per cent monthly. The Economic Development Board and Malaysian Industrial Development Finance Limited lend money at 7 per cent for certain limited purposes, but Malaysian Industrial Development Finance Limited’s loans usually start at 7% per cent.

1967 AUSTRALIANS AS FOREIGN INVESTORS 71 which Malaysia imposes mean that, except in very large operations, after the initial construction period is over, the expatriate staff is reduced to one or perhaps two men. The business framework differs from that to which Australians are accustomed, and, although the majority of Australian managers appear to be versatile, it takes them time to become accustomed to the business habits and mores of their new environment, and some, poorly selected, utterly fail to do so. The manufacturing operation which they control in Singapore and Malaysia is often smaller in scale than the one which they know at Iiome, and this in itself presents them with problems, though ultimately their work in the purely manufacturing sense may be relatively simple. In most cases they must deal with all the other aTpects of business enterprise, with many of which they are not acquainted from their domestic experience: sales, cost accounting as well as other accounts, purchasing, and the ensuring of regular deliveries of components (which was difficult if they came from Australia), spare parts and servicing of plant, and labour relations. In Australia they could consult a colleague next door or ring head office, but abroad they tend to work long hours in an atmosphere of isolation. To Australian head offices oversea activities arc usually a minor concern, so that they are often slow in answering their letters and dealing with their problems.

Local boards usually lack experience in the manufacturing process and provide little help for the manager. Even when they meet frequently they tend merely to confirm his decisions. Even in joint enterprises, the centre of power generally rests in the hands of the local manager, and, if he is an Australian rather than a local partner, indirectly with the Australian firm. Two Australian firms on the other hand complained that their associates had got out of hand.

To some exceptionally strong managers, this isolation from head office is a most satisfying challenge, and once the firm is well established the distance from head ofice is probably an advantage since Australian companies are prone to keep their domestic subsidiary and associated companies on a short rein. But where the manager is poorly chosen in the first place, and where he is inadequately equipped whether technically or commercially, trouble is inevitable. The survey findings suggested that Australian firms underestimated the diaculties of starting an enterprise abroad so that, thinking mainly in terms of the volume of output, they did not send out sufficiently experienced men. Some felt that they could not afford the high cost of a trainee on the spot in addition to the man in charge, and in Malaysia there were very real limitations on the employment of expatriate staff. In enterprises so afflicted managerial crises recurred. There are of course firms which are well run and have, in spite of the difficulties imposed

72 AUSTRALIAN ECONOMIC PAPERS JUNE by citizenship barriers in Singapore and Malaysia, trained a good succession of managerial staff. A few already include local citizens in top management positions, but management is certainly not the Australian investors’ strongest point.

V

In terms of investment and production, Australia’s contribution to manufacturing development in Singapore and Malaysia is quantitatively small, and, in view of its size in relation to the major industrial countries investing in the area, it will inevitably remain so. On the other hand, its geographic proximity and political interests should enable it to maintain a contribution that remains significant even in these terms, and may perhaps be more important than appears at first sight in the development of manufacturing skills.

Perhaps the greatest contribution of Australian managers has been their attitude to work. Like the old-fashioned small-scale indigenous employer, and frequently to an even greater extent, many have been happy to work in overalls side by side with the workers on the factory floor to get a plant into production, thus providing first-class instruction in industrial attitudes as well as technical skills. In one case a manager added night classes for his employees to such informal instruction. Where unduly great weight is placed on white collar and professional work and too little pride is associated with manual work, such attitudes seem to be extremely helpful in the industrialization process.

The virtues of the Australian firms are largely negative. Although three enterprises were established in Singapore or Malaysia to find a market for raw materials, in no case was there a formal agreement to tie the associated firm to Australian supplies. One of three stated, convincingly, that “we will buy in the cheapest market-we hope it will be Australia, but if it is not, that’s too b a d . The other 28 enterprises interviewed in Singapore and Malaysia were evenly divided between those which bought at least some of their raw material or components from Australia and those which bought principally on the world market. Only three had any restrictions on exports, and for all three restrictions were limited to a few areas. The older Singapore establishments stressed that their Australian head office strategy was to export from whichever base was most profitable in the light of all factors including taxation. Two enterprises exported between 65 per cent and 70 per cent of their output, and another eight exported at least 15 per cent of their output, About half either could not export because of the nature of their product or did not export because their products were not competitive in international markets.

1967 AUSTRALIANS AS FOREIGN INVESTORS 73 One of the most important contributions which Australian manufacturers

have made, and may make in the future, is their experience in what are relatively small scales of production for limited markets, an area in which other foreign investors-British, Japanese and American-are not particularly well versed.

Most of the firms which have established manufacturing enterprises claim that they have brought new techniques and processes to tlie area. To some extent this is true in all cases, but it is not always as true as it sounds. Some Australian investment has gone into products which are already amply supplied, often by other foreign producers, particularly where simple goods for a growing market are the attraction. Singapore and Malaysia have both faithfully accepted the admonishments that foreign investors need special incentives-tax holidays, chcap loans and access to industrial land-to find that these incentives alone were not enough to attract sufficient foreign capital to solve the problems of industria1ization.l’ Some Australian investors claimed that estates had drawbacks as well as advantages because of the amount of contact with Government officials involved, and several of the Australian firms have chosen to remain outside them. Since some industrial estates have been slow to develop, the economies of agglomeration were, and to some extent still are, slow to come. Industrial estates in any case tended to be a very mixed blessing. Their supply of public utilities was generally good, although three firms complained of the high cost of putting up electricity sub-stations. On the Jurong estate in Singapore transport difficulties meant that most employers had to make additional payments to cover the cost of their workers’ transport. Several firms complained of the bureaucratic delays associated with the estates, but the real drawback of the estates appears to arise from their very nature as showpieces. The juxtaposition of small scale workshops to large factories which made Japanese and Hong Kong industry efficient by interweaving small scale workshop sub-contracting with factory production is not possible to the same degree, because where labour might genuinely have been substituted for capital, difficulties of distance, time and communication could not be overcome.

Tax holidays proved to be valuable for firms able to move investment goods from Australia or other countries or even within the Singapore and Malaysia area at inflated prices to make up tlie basic investment quota for tax remissions, but few firms were able to do so. Twenty of the enterprises

11 This would appear to justify the International Bank of Reconstruction and Develop- ment Mission’s recommendations against special “pioneer” treatment and in favour of reasonable tariff protection instead. The International Bank for Reconstruction and Development, The Economic Deoelopinent of Malaya (Baltimore: Johns Hopkins Press, 1955), pp. 428-430 and 436-437.

74 AUSTRALIAN ECONOMIC PAPERS JUNE interviewed had pioneer status or had applied for it, but for most of the firms investing in the area, and for most of those thinking of investing, the advantages of tax holidays were peripheral to the main decision to invest. Two enterprises which had counted heavily on a tax holiday found themselves in difficulty when it ended. Firms which intended to expand activity by ploughing back profits found few gains, and those which wanted to remit untaxed profits back to the parent company were taxed in Aus- tralia. Three of the firms which had taken advantage of the tax holiday claimed that they would not do so again because too much contact with governments was involved, but statements of intention are notoriously inaccurate. In Malaysia two of the firms objected to the high share of indigenous capital needed to qualify for pioneer status, and several found the clauses designed to ensure a high employment of Malays impracticable. High depreciation rates were welcomed, but other advantages of pioneer status were thought to be minor. On the other hand, the Australian companies were in a sense footloose “investors abroad”, and since several other Asian countries which they had considered as potential manufacturing areas offered pioneer type concessions, Singapore and Malaysia probably cannot afford to ignore them.

The promise and threat of tariffs was much more effective in urging Australian firms to invest in Singapore and Malaysia. Parent firms felt that above all they needed a market, and being accustomed to a strongly protected one at home they were, probably more than the nationals of other countries, conscious of the advantages of protection for the manufacturer. Some have already benefited from tariffs, but three complained that promises of tariffs were slow to be fulfilled. In the last year or so, however, there appears to have been a remarkable change of opinion in favour of tariffs in Singapore and in Malaysia, particularly when employment is an issue. This is not to say that the traditional rubber, tin and entrepot traders’ arguments against tariffs on the grounds of rising living costs have been entirely overcome. In Singapore there is also an awareness of the problems of raising the cost and lowering the quality of intermediate products to final goods producers who may be potential exporters, but unemployment is becoming so serious that employment arguments tend to win over all others. Since capital as well as labour resources appear to be seriously underemployed these policies may not be as reckless as they may seem.

The problems of tariffs are, however, compounded by the nature of investment, and particularly of foreign investment. In many fields the brand products established in the area are those of large international oligopoly companies which often invest regardless of immediate and even medium term profit in order to keep up their brand’s share of their world market. Sometimes this makes economic sense in terms of selling associated products

1867 AUSTRALIANS AS FOREIGN I N V Y ~ S T O : ~ 75

which can still be imported, and in terms of advertising or selling costs, but more frequently profit motives come second to those of a company’s or its executives’ prestige.12 With made-to-measure tariffs dcsigned to keep the marginal producer in business, such firms have nothing to lose financially by fragmenting the already tragically divided Singapore-Malaysia market by small inefficient production units. For most Australian producers the sizes of the Singapore and Malaysian markets have been roughly equal, so that recent movcs towards discriminatory tarias between the two states and the abolition of Commonwealth preference have caused many production difficulties. Auytralian firms liavc only takcn part in this sort of oligopoly investment to a limited extent, and they are likely to bccomc the marginal producers as very big international companies come in. Some are already feeling the effects of acutc competition from overcrowded markets. One enterprise liad to cease takiiig orders, another claimed that it was working at 103 per cent of capacity and five others were working at full capacity, but six were working at 60 per cent to 70 per cent of capacity,*:3 and this was not unusual for the fields of production in which they operated. Where indigenous manufacturers were important competitors, low capacity was not accompanied by price fixing; one manager, accu5tomccl to an industry which can claim more than 100 years of restrictive practices in Australia, was frankly irritated by Singapore manufacturers’ inability to act together to fix their prices and restrict thcir outputs.

For Singapore and hfalaysia oversea investment does not appear to be altogetller an unmixed blessing. Both feel that they need foreign capital for the management and techniques which it brings. There is no longer much concern with potential balance-of-payments difIiculties. Both countries can see that, even with tariffs, foreign capital can be beneficial by raising employment levels, and even in Singapore, where the National Iron and Steel Corporation has become an example of a successful public enterprise competing without subsidy in a very tough market, it is felt that the resources for replacing foreign capital with public rmterprise are simply not available. It is realized, moreover, that to attract foreign capital, and this of course includes Australian capital, a free enterprise climate is

12 The consensus of stndies of United States dircct capital investment abroad indicates that motives for such investment are “complex and not sinjiularly ‘profit directed’ ”. J. N. Behrman, “Foreign Associates and Their Financing”, in R. F. Mikesell, U.S. Prioate and Gouernnient Inuestnient Abroad ( Eugene, Oregon: University of Oregon Books, 1962), p. 88. See also L. Gordon and E. L. Gromniers, Unifed Stnfes A4anu- factiiring I t ivesfment in Brazil: The Inipcict of Brazilian Governinent Policies 19-iF-1960 ( Boston: Graduate School of Business Administration, Harvnrd University, 1963 ), pp. 23-34.

13 Manufacturers were asked to regard the output that they could produce with their plant and equipment fully employed and appropriately manned, but with due regard to maintenance, as their full capacity.

76 AUSTRALIAN ECONOMIC PAPERS JUNE essential. Purely economic arguments suggest that, in view of the nature of foreign investment and the necessity for tariffs, monopolies might be more efficient production units than oligopolies, but Singapore particularly has a strongly socialist distrust of private monopoly. Pioneer-status regulations provide a tool for limiting excess capacity and escalating tariffs, but so far they have not been used, although there are indications that Government policies are now changing in this direction.

VI Few Singapore, Malaysian or Australian firms appear yet to have gained

very much in private benefits from Australian investment in the area. It is generally assumed that for Australia there are gains in the development of economic ties with South East Asian countries, and there appears to be some general contribution to Singapore’s and Malaysia’s industrial development, because Australian investors are not as restrictive as they might be, favour joint enterprises, do not make very great profits, and contribute to the expansion of industrial skills. This is to say that for all three countries social benefits exceed private benefits, but then this is generally so. Aus- tralian investment in the area cannot be said to be following an optimal path for any of the countries concerned; it seems, merely, to be the best that anyone can do at present.

australians as foreign investors: australian investment in singapore and malaysian manufacturing...

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