Finance key to more Australian companies going global

(To access the full EFIC Global Readiness index report, visit The National Report.)

(To access the full State Comparison Report, visit The State Report.)

Inadequate knowledge of overseas markets and lack of finance are the two biggest obstacles Australian companies face when seeking to expand overseas, according to EFIC’s Global Readiness index (GRi). EFIC’s GRi survey asked 463 Australian businesses about three key aspects of overseas expansion – the drivers, the obstacles and the sources and availability of funding. Companies taking part in the survey were able to benchmark themselves against their peers on these three measures. Offshore investment and revenue now rival onshore export capacity The GRi survey takes place against an interesting economic backdrop: while Australian businesses have been finding it hard this decade to increase exports – despite a booming world economy – they have had more success expanding their offshore operations. Australian export volumes grew by only 14 per cent in the seven years to end-2007, compared with 59 per cent in the previous seven years. Meanwhile, though, the pace of direct investment abroad by Australian businesses has been accelerating. So much so that Australian direct investment abroad now rivals foreign direct investment in Australia (Chart 1) – and sales by overseas branches, subsidiaries and joint ventures of Australian companies have now caught up with the value of Australian-owned goods and services exports (Chart 2)1.

Chart 1 Australian Investment Abroad v FDI in Australia

Chart 2 Goods/Services Exports  v Offshore Revenue Source: ABS Cat No 5496.0.55.001; 5368.0.55.006; The Diplomat “Global 100”

This move ‘beyond exporting’ is a truly transformational change in the way Australians conduct international business. In the past, when overseas trade and investment barriers were higher and the digital revolution hadn’t yet started, Australian companies of necessity had to look mainly to the national marketplace. Any overseas sales were made chiefly by exporting from Australian shores. But in today’s highly integrated world economy, companies increasingly target a world marketplace and are prepared to locate the different stages of their production and supply chains wherever the business benefit is greatest – and regardless of whether it is onshore or offshore. No longer is it the case that the Australian economy pays for its import needs mainly with exports; it is now just as likely to pay its way with earnings from offshore affiliates.  A connected world beckons This international outlook and modus operandi shows up strongly among GRi survey respondents. The number one driver for offshore expansion is to ‘increase revenues/expand market share’. Equal second was ‘take control of the supply chain’ and ‘decrease costs’. These results (see full listing in Chart 3) strongly suggest that Australian businesses primarily regard offshore expansion as a strategic path to market and revenue growth rather than a defensive ploy to protect what they already have. Can the barriers to international expansion be lowered? When it comes to barriers to international expansion, GRi survey respondents said that ‘lack of local business and market knowledge’ and ‘finance’ were their biggest concerns – 31 per cent the first, 29 per cent the second (see Chart 4). The importance of finance as a barrier was even more apparent among respondents currently planning their first steps offshore with fully 43 per cent nominating finance as the major barrier to their plans.

Chart 3 Major Contributing Factor in Decision to Establish Offshore Operations

Chart 4 Major Barriers to International Expansion

Can the barriers to international expansion be lowered so that Australian business can make even more sales than now? Or must these barriers be viewed as ‘given’, like the Himalayas? Fifty six per cent of respondents said that with better access to finance they would expand further and faster. But any business that has been denied finance would say that. This doesn’t necessarily mean that banks and capital markets are wrong in denying funds to such an investment if its profit outlook is poor. However, another survey response suggests that banks and capital markets may indeed be failing to finance at least a fringe of worthwhile offshore investments. This is the striking result that 73 per cent of respondents used retained earnings to finance their offshore expansion, yet only 35 per cent used a debt facility from an Australian financial institution, and only 7 per cent from a foreign institution (see Chart 5).

Chart 5 Sources of Finance for Exports and Offshore Facilities

Again, while 72 per cent of respondents reported that their working capital needs were satisfactorily met, only 49 per cent reported satisfaction when it came to long-term infrastructure finance. Arguably, if a greater amount of debt funding had been available, offshore expansion would have been greater, swifter and more profitable. Accelerated offshore expansion for SME’s requires innovative solutions for infrastructure finance The GRi survey and the broader trade and investment statistics suggest that Australian business is increasingly going global – and doing so in a positive, growth-oriented way. Yet with improved access to finance for worthwhile transactions, their global expansion plans could accelerate even further. Many Australian businesses are currently enjoying sound balance sheets and high levels of profitability. Well-positioned businesses with sound strategic plans are perhaps better placed than ever to move onto the global stage. The EFIC GRi survey results challenge both companies expanding offshore and the financial institutions that serve them – private and government alike – to work together to find more effective means to ensure that sound business plans for global expansion are rewarded with access to adequate and innovative financial solutions. To access the full EFIC Global Readiness index report, visit The National Report. The Diplomat magazine will feature findings from the report in its Global 100 special edition in April 2008.

Your Customised Global Readiness Benchmark Report As a survey respondent, you’ll receive a customised benchmark report enabling you to compare key aspects of your export and globalisation strategies with the business trends revealed by the aggregate results for your industry, as well as Australian businesses overall. To complete the survey and access your customised benchmark report, visit Benchmark your business.

¹ According to estimates contained in ABS Cat No 5496.0.55.001, 47.1% of Australian goods exports and 50.3% of Australian service exports greater than $1 million are attributable to Australian-owned entities. These proportions were applied to aggregate goods and services exports for 2006-07, to obtain an estimate of $102 billion for exports by Australian-owned entities. Offshore earnings are “in-country” earnings.