australian manufacturing in the global economy

Unclassified DSTI/IND(2012)20/FINAL Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 05-May-2015 ___________________________________________________________________________________________

English - Or. English DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INNOVATION COMMITTEE ON INDUSTRY, INNOVATION AND ENTREPRENEURSHIP

AUSTRALIAN MANUFACTURING IN THE GLOBAL ECONOMY Study for the Australian Government, Department of Industry, Innovation, Science, Research and Tertiary Education

JT03375623

Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

DSTI/IN

D(2012)20/FIN

AL

Unclassified

English - O

r. English

DSTI/IND(2012)20/FINAL

2

FOREWORD

The Australian government has provided financial support in 2012 and 2013 to the OECD Secretariat in order to deepen and move forward the work on structural change within manufacturing and services in Australia and other OECD economies. This work has contributed to the work of the CIIE PWB 2013-2014 (activity 3.1. The future of manufacturing – towards a new approach to structural change) and has resulted in this report, as well as a related report "Australian Services in the Global Economy".

An earlier version of this report 'Australian Manufacturing in the Global Economy' was submitted to Delegates of the CIIE, for information, at its meeting on 25-26 October 2012. A revised version of the document was submitted for declassification to the CIIE by written procedure in February 2015.

The report was prepared by the Structural Policy Division of the OECD Directorate for Science under the direction of Koen De Backer who is also the main author. Isabelle Desnoyers-James, Laurent Moussiegt and Alexander Ragoussis significantly contributed to the report.

The report has benefitted from comments and inputs provided by the Department of Industry, Innovation, Science, Research and Tertiary Education of the Australian Government.

© OECD/OCDE, 2015

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for commercial use and translation rights should be submitted to [email protected].


3

TABLE OF CONTENTS

FOREWORD ............................................................................................................................................... 2 EXECUTIVE SUMMARY ......................................................................................................................... 4 INTRODUCTION ....................................................................................................................................... 6 CHAPTER 1 MANUFACTURING IN THE GLOBAL ECONOMY ........................................................ 8

1.1 The importance of manufacturing in OECD economies .................................................................... 8 1.2 Structural trends in global manufacturing ........................................................................................ 14

1.2.1 A long term trend of de-industrialisation of OECD economies ................................................ 14 1.2.2 Increasing competition from emerging economies .................................................................... 16 1.2.3 The emergence of global value chains (GVCs) ......................................................................... 19 1.2.4 The shifting demand towards Asia ............................................................................................ 23 1.2.5 Innovation and knowledge as source of competitiveness .......................................................... 26 1.2.6 The blurring of manufacturing and services .............................................................................. 28 1.2.7 New growth opportunities in manufacturing… also for developed economies ......................... 30 1.2.8 A broader trend of back-shoring on the horizon? ...................................................................... 31

CHAPTER 2 AUSTRALIAN MANUFACTURING IN INTERNATIONAL PERSPECTIVE .............. 34 2.1 A snapshot of manufacturing in Australia. ....................................................................................... 34 2.2 Structural change and the mining boom ........................................................................................... 39 2.3 Drivers of manufacturing performance ............................................................................................ 43

2.3.1 Productivity ............................................................................................................................... 43 2.3.2 Labour costs ............................................................................................................................... 46 2.3.3 Scale (dis)advantages ................................................................................................................. 48 2.3.4 International orientation ............................................................................................................. 50

CHAPTER 3 AUSTRALIAN MANUFACTURING AMID GLOBAL COMPETITION ....................... 61 3.1 Australian manufactures on international markets ........................................................................... 63

3.1.1 Sectoral and geographical structure of merchandise exports by Australia ................................ 63 3.1.2 Australia’s manufactures export growth .................................................................................... 66 3.1.3 International competitiveness of Australian manufacturers ...................................................... 71 3.1.4 International competitiveness: price or quality? ........................................................................ 74

3.2 Australian manufacturing in GVCs .................................................................................................. 76 3.3 International competition on Australia’s domestic market .............................................................. 78

CONCLUSIONS AND POLICY MESSAGES ......................................................................................... 81 NOTES ....................................................................................................................................................... 85 ANNEX 1 ADDITIONAL FIGURES ....................................................................................................... 90 ANNEX 2 ADDITIONAL TABLES ......................................................................................................... 96 ANNEX 3 TECHNOLOGY INTENSIVE CLASSIFICATION IN MANUFACTURING .................... 102 (based on International Standard Industrial Classification ...................................................................... 102


4

EXECUTIVE SUMMARY

The Australian economy has greatly benefitted from the economic rise of Asia as illustrated by strong economic growth, low unemployment, rising purchasing power, etc. but not all sectors are faring equally well. The growing demand for commodities, fuelled by the rapid urbanisation and industrialisation of Asian countries (especially China and India) has pushed up world prices of mining products, resulting in increased terms of trade for Australia. While mining and related activities are expanding, the accompanying appreciation of the Australian dollar has put increased pressure on other traded sectors like manufacturing. The current mining boom negatively impacts on Australian manufacturing’s competitiveness as exports have become more expensive while imports in Australian markets have become cheaper.

The worsening performance of Australian manufacturing in recent years is however not only due to the current mining boom. Just like other OECD economies, the Australian economy is characterised by a long-term trend of deindustrialisation reflected in a falling importance of manufacturing in value added and employment. In addition, globalisation is drastically changing the outlook of global manufacturing with emerging countries gaining market share not only in more traditional manufacturing industries but increasingly also in higher technology industries. The growing domestic demand in these countries as well as lower (labour) costs are important drivers of the ongoing shift in global manufacturing. Nevertheless, manufacturing in OECD countries including in Australia, is not a sector in decline: manufacturing output and value added continued to grow strongly up to the Global Financial Crisis of 2007/2008 which severely impacted manufacturing demand and production across OECD countries.

As the demand for Australian commodities is expected to remain high in the near future, Australian manufacturing will need to adapt to the shifting comparative advantage of Australia. More than 50% of Australia’s exports in 2010 concerned primary goods (agriculture and mining) while manufacturing was a net importer representing 30% of Australian exports and 70% of its imports. The international competitiveness of Australian manufacturing is concentrated in a small number of industries directly dependent on Australia’s natural resources (‘non-ferrous metals’, ‘food, beverages and tobacco’ and ‘wood’); in addition, there are some signs of growing competitiveness in ‘pharmaceuticals’ and ‘scientific instruments’.

But the economic emergence of Asia also creates important opportunities for Australian manufacturing. Australia is well positioned to benefit from the emergence of large consumer markets in Asia not only for Australian commodities but increasingly also for manufactured products from Australia. In addition, Australian manufacturing could benefit more from the relative proximity of large Global Value Chains in Asia. If managed well, Australian manufacturers could greatly benefit from the new growth opportunities that are (relatively) nearby. The observation is however that while fast growing Asian markets have become increasingly important in Australia’s export portfolio, Australian manufacturers miss out on sizeable opportunities. The growth in Australian exports of manufactured goods has not kept up with the market growth in most Asian countries.

The shift of the economic centre eastward will significantly decrease Australia’s traditional disadvantage of remoteness from international markets which, in combination with Australia’s small domestic market, has resulted in important scale disadvantages, relatively low productivity, a low degree of internationalisation and limited integration into GVCs for Australian manufacturing. Manufacturing in Australia has heavily suffered from the ‘tyranny of distance’; high transport and trade costs reduce trade and limit the opportunities for Australia to specialise in the activities where it possesses a comparative advantage. Distance from world markets also limits the country’s exposure to competition and makes international producers less competitive in Australian markets.


5

While these structural weaknesses have limited the role of manufacturing in the Australian economy as well as in global manufacturing since long, recent developments have triggered a (further) loss of competitiveness of Australian manufacturing. First, the slump in productivity growth since 2001 has widened Australia’s long-standing productivity gap with other manufacturing countries even further. Second, Australian manufacturing increasingly suffers from a cost disadvantage not only with respect to emerging countries, but more and more also with other OECD countries. Only part of this is explained by the negative effects of the current mining boom through the stronger Australian dollar.

Confronted with growing competition in global manufacturing, including from emerging economies, Australian manufacturers need to develop other competitive advantages to compensate for the high-cost environment they operate in. Similar to other OECD manufacturing, the long-term productivity and competitiveness of Australian manufacturing will be increasingly based on innovation, targeted at new products/processes/services for (new) niche markets and based on factors beyond cost efficiency. Investments in intangible assets (brand equity, design, organizational capital, business models, etc.) allow manufacturing firms to compete less on costs alone and more on ‘quality’, for example on specific product characteristics like reliability, sustainability, differentiation, brand image, that motivate customers to pay a higher price.

The development of sustainable firm-level capabilities through investment in human capital (skills development) and collaboration with external partners (research organisations, universities, suppliers, customers, etc.) is crucial for this. Nowadays, Australian manufacturing shows a mixed account on innovation, which seems to be strongly focused on cost efficiency and adaptation of products and process to the domestic market. Another point of attention is the only moderate score of Australian manufacturing on management skills since effective management has become increasingly important for the development of innovation capabilities in firms.

Innovation should help Australian manufacturing to broaden the number of international competitive industries; some higher technology industries in ICT and medical technologies are developing but are still limited in size. Adding more advanced activities on top of existing resource-based activities may be one way to develop new competitive strengths while nurturing the resource-based strengths of Australian manufacturing. Notwithstanding large R&D investments in resource based manufacturing in Australia, other resource-intensive countries seem to have been more successful in developing high technology activities to complement their advantage in resource-intensive industries.

As the business sector is the first responsible for firm performance, it has a paramount role to play in addressing the weaknesses, reinforcing existing and developing further strengths of Australian manufacturing. Government should focus on enabling and creating the necessary conditions through a supportive public policy: reducing regulatory barriers, supporting the development of capabilities, investing in infrastructure, etc. Such efforts should not only be targeted at manufacturing but also include services sectors given the strong linkages between manufacturing and services.

Manufacturing still has an important role to play in Australia, even if the country does not have the same strong manufacturing tradition than e.g. Germany and the United States. Manufacturing is high on the policy agenda in most OECD economies as it contributes to a balanced economy and is an important source of innovation, productivity and international trade. A broader discussion/consultation on the future of manufacturing in Australia should help to identify the strategic directions that have the greatest chance to bring success for Australia in global manufacturing. The resulting re-balancing of the economy will also be important for Australia in preparation for a time beyond the current mining boom.


6

INTRODUCTION

The discussion on the role of manufacturing for national economies has been high on the policy agenda for many decades. In recent years, globalisation has drastically changed the outlook for global manufacturing as emerging countries have gained important market shares, first in more traditional manufacturing industries but increasingly also in higher technology industries. At the same time, OECD economies are going through an important process of de-industrialisation reflected in a declining share of manufacturing in overall economic activity. It would be wrong to conclude however that manufacturing is a sector in decline in the OECD area; while manufacturing jobs have declined in most OECD countries – very significantly in some countries like the United States and the United Kingdom, the output of the manufacturing industry has continued to grow because of strong rising productivity and efficiency. There is still a growing demand for manufactured products of OECD countries but concerns recur about the future of manufacturing in OECD economies. Directly linked to that is the question whether the decline in manufacturing will threaten technological progress and innovation and the long-term future of OECD countries.

The Global Financial Crisis of 2007/2008 seems to have again revived the manufacturing debate as some countries with a strong financial services sector were severely affected by the crisis, whereas some countries with strong and internationalised manufacturing sectors have experienced more limited impacts from the crisis. Some interpret this as evidence of the importance of producing physical things for national economies, although there also examples of countries with a large share of manufacturing in the economy that are nevertheless performing badly in economic terms.

The debate on a (new type of) ‘industrial policy’ in a growing number of countries is also related to these issues, in particular the current policy discussion on ‘making things instead of making ideas’11 that is picking up in some OECD countries. Production fragmentation has led to a division of labour where OECD countries have become increasingly specialised in upstream activities like R&D, design, innovation, etc. while some emerging countries have become more specialised in manufacturing and assembly activities. The final result of this ongoing global restructuring process might also be that OECD countries merely produce ideas, concepts and services and not any longer the physical goods. The fear is that the loss of certain manufacturing/assembly activities while seeking to maintain innovative, R&D, and higher value added activities, may result in a subsequent loss of innovative capabilities in the longer-term; hence, the question on the need for a new “industrial policy” to support manufacturing.

The future of manufacturing is also increasingly discussed in Australia, although Australia does not have the same manufacturing tradition as other major OECD economies like the United States, Germany or Japan. Following the liberalisation of the Australian economy during the past decades, Australian manufacturers have been confronted with rising import competition and sizeable offshoring of (certain) manufacturing activities. But the discussion about manufacturing in Australia has recently also been motivated by the boom in natural resources worldwide. The growing demand for commodities fuelled by the rapid urbanisation and industrialisation of Asian countries (especially China and India) has pushed up world prices of mining products. This has significantly increased the terms of trade of Australia in recent years given Australia’s abundance of mineral resources such as uranium, iron ore, bauxite, etc.

The Australian economy has benefitted widely from this ‘external shock’ as reflected in recent figures on economic growth, rising purchasing power, low unemployment, etc. But shocks typically set in motion structural changes which in this case affect especially the traded sectors in Australia like manufacturing. The strong appreciation of the Australian dollar has made Australian exports more expensive while imports in the Australian markets have become cheaper, hence negatively impacting competitiveness of


7

manufacturing in Australia. The expansion of the mining sector can also be expected to draw resources away from other sectors including manufacturing. While financial resources for the much needed investments can also be internationally sourced, other productive resources like e.g. human capital may become increasingly scarce if this recent boom continues. As terms of trade for Australia are generally expected to remain at historically high levels for an extended period, tough times are expected for manufacturing in Australia.

The economic emergence of Asia however does not create only new challenges but also important opportunities for Australian manufacturing. Because of Australia’s remoteness, manufacturing has traditionally suffered from the so-called ‘tyranny of distance’ directly making the production and exports of Australian manufactures less competitive. The emergence of large consumer markets in China, India, Indonesia, etc. makes Australia a less remote location for production and has contributed to rapidly growing demand for manufactured products. If managed well, Australian manufacturers could greatly benefit from these new and large growth opportunities that are (relatively) nearby.

The shift of the economic centre eastwards has the potential to revamp Australia economically. Not only does the renewed demand for commodities redress the view of the Australian economy being a resource-based economy, but the growing (consumer) markets in Asia will also help Australia in defeating its remoteness-disadvantage. Manufacturing in Australia can be expected to go through another round of structural adjustment, after the profound changes following the economic reform since the 1970s. While the mining expansion risks to further shrink manufacturing in Australia in the coming years, its future does not have to be bleak as sometimes depicted.

This report aims to give a detailed update of the status of Australian manufacturing from an international perspective. It describes the place Australia currently occupies in global manufacturing and benchmarks Australian manufacturing internationally. Chapter 1 starts in describing the trends taking place in global manufacturing and how this may impact manufacturing industries across different countries (OECD as well as emerging economies). Demand and supply forces reshaping manufacturing are discussed in some detail.

Chapter 2 compares Australian manufacturing with manufacturing industries in other countries along different dimensions. The actual performance of the sector as well as the drivers of this performance are internationally benchmarked and explicitly related to the trends taking place in global manufacturing. This chapter provides a first status report on the strengths and weaknesses of Australian manufacturing.

Chapter 3 analyses the performance of Australian manufacturing on international markets in more detail. The export performance of Australian manufacturers as well as their integration into global value chains is assessed to get more insights in strong and weak points of Australian manufacturing. Also the manufacturing performance on the Australian domestic market is discussed as this market has become increasingly open during the past decades.

The report closes with the formulation of a number of policy implications for the future of manufacturing in Australia. Rather than an identification of specific activities or industries in manufacturing to be targeted, a number of policy issues are discussed which directly emerge from the analysis of Australian manufacturing in an international/global perspective.


8

CHAPTER 1 MANUFACTURING IN THE GLOBAL ECONOMY

1.1 The importance of manufacturing in OECD economies2

There is no widespread consensus on the role of manufacturing for the long-term future of OECD economies; likewise, policy makers and researchers do not agree on whether specific policies are needed to safeguard the viability of this sector. A long list of arguments has been put forward based on a number of stylised facts about manufacturing as a whole against other sectors of the economy. These arguments do however not equally hold for every country (developed, emerging and developing) nor for every sector under this broad heading. Furthermore, the contribution of manufacturing to national economies has also largely been demonstrated to vary over time depending on countries’ development. Taking these caveats into account, the overall message is that manufacturing continues to play a large and central role in national economies, because of its direct but especially indirect contributions.

Manufacturing still represents an important part of the economic activity in OECD economies, notwithstanding its direct contribution has been declining over time (see below). Manufacturing roughly accounted for 15 to 25% of the value added and employment created in the OECD area in 2009. Manufacturing occupies a large role in Eastern European economies reflecting the industrialisation process of these countries in the past decade (largely linked to the joining of these countries to the European Union). Manufacturing is also still important in high-cost OECD countries like Germany, Finland, Sweden and Switzerland as well as in counties like Japan and more recently Korea and Turkey (Figures 1.1 and 1.2). Manufacturing shares in employment and value added are significantly lower for Australia.

Figure 1.1: Share of manufacturing in total employment, OECD countries, 1980-2009

Source: OECD Structural Analysis Database (STAN).

0

5

10

15

20

25

30

35

% 2009 1995 1980


9

Figure 1.2: Share of manufacturing in total value added, OECD countries, 1980-2009


But the importance of manufacturing is broader than its direct contributions in terms of value added and jobs as manufacturing affects economic performance in national economies more widely and profoundly:

Manufacturing is an important driver of productivity growth.

Empirical evidence clearly shows that productivity growth in manufacturing during the past two decades was larger than in business services and in the total economy; this observation was valid for most OECD countries but the productivity performance of Australian manufacturing was smaller (Figure 1.3). The manufacturing sector continues to make an important contribution to aggregate productivity growth, also in OECD countries where manufacturing has declined in terms of employment and value added (i.e. the process of de-industrialisation, see below). A loss of manufacturing thus could directly impact on economic growth of countries as productivity is considered to be the basis for long-term economic growth and high per capita income.3

Manufacturing’s ability to achieve rapid productivity growth has been argued to be the reason for the falling employment in manufacturing as fewer people are needed to produce the same level of output. But in theory, higher productivity in a competitive market also results in lower prices, boosting demand and motivating manufacturers to hire extra workers. The missing link in the current juncture is on the demand side. In general, high rates of productivity growth are associated with lower manufacturing employment when demand for manufactured products slows down; and this has been the case for some countries recently4 (McKinsey Global Institute, 2012).

Because of higher productivity, manufacturing is able to pay higher wages also for workers who would otherwise earn less. Controlling for differences in education and job characteristics, Helper et al.

0

5

10

15

20

25

30

35% 2009 1995 1980


10

(2012) seem to show that low-wage workers benefitted the most from US manufacturing jobs. But the pay-premium for low skilled workers in manufacturing seems to have decreased over time (Romer, 2012).

Figure 1.3: Productivity growth in manufacturing, business services and total economy, individual OECD countries, 1990-2009

(Average annual growth rate of multi-factor productivity, in per cent)

Note: data for Australia are provisional Source: OECD Productivity Database. Manufacturing is a major source of innovation.

Manufacturing is believed to determine countries’ abilities to develop new technologies, as well as

countries’ absorptive capacities to assimilate foreign knowledge5. The majority of investments in Research and Development (R&D) are undertaken in manufacturing: 60% or more of business R&D investments are made by manufacturing firms in several OECD countries (Figure 1.2). Nevertheless, the share of manufacturing in R&D has declined over time due to a variety of factors, such as growing R&D in certain services sectors, the outsourcing of R&D to specialised laboratories that are classified in the services sector, as well as better measurement of R&D in services. Empirical evidence also indicates that manufacturing companies are more active in innovation particularly through the introduction of new products and/or processes, although the difference with the services sector is small in some countries (including Australia); services are more active in marketing and organisational innovations (Figure 1.5).

Overall, manufacturing is seen as an important driver of innovation and technological change in the economy; a large part of innovation in services is also closely linked to developments in manufacturing. The loss of manufacturing activities could set a chain reaction in motion which may erode innovation activities and the so-called ‘industrial commons’ (a foundation of shared knowledge and capabilities within an industry) because of important co-location effects between manufacturing/production on the one hand and R&D and service activities on the other hand (Pisano and Shih, 2009). Manufacturing is part of a

0

1

2

3

4

5

6

7

8%

Manufacturing Business services Total economy


11

complex innovation process and ceding it might result in a certain loss of R&D and design capabilities in the longer term.

Figure 1.4: Share of manufacturing in total business R&D, OECD countries, 2000 and 2010

(in percentage)

Source: OECD Science, Technology and Industry Scoreboard 2011

Figure 1.5: Innovation active firms in manufacturing and services, 2006-2008

(in percentage of all firms in manufacturing and services)

Source: OECD Science, Technology and Industry Scoreboard 2011.

0

20

40

60

80

100%

2000 2010

0

10

20

30

40

50

60

70

80

90

100

% Manufacturing Services


12

Manufacturing accounts for the majority of international trade

Manufactured goods make up the majority of exports (two thirds or more in most OECD countries) suggesting that a country’ ability to export cannot be maintained without a manufacturing sector (Figure 1.6). Exceptions are resource rich countries like Australia and Norway where primary products account for the largest share of exports. In this sense, manufacturing is making a large contribution to the opening of national economies and their integration in the global economy. The foreign income received from manufactured exports is used to pay for imports; manufacturing is hence considered to be essential for reducing (maintaining) trade deficits (surpluses) of countries6.

(Some) services are much more difficult to trade as they cannot be stored; many still require face-to-face contact between producers and consumers; and they are highly sensitive to cultural and language differences. While trade in services is rapidly growing, it still represents only a small fraction of trade in manufactured goods.7,8 Exports of services in engineering, design, etc. often follow from specific manufacturing activities, hence the tradability of these services is very closely linked to manufacturing.

Figure 1.6: Share of manufacturing in total exports, OECD countries, 2010

(In percent)

Source: OECD Bilateral Trade Database and IMF Balance of Payments.

Manufacturing demand stays high because of its economy-wide linkages

Notwithstanding its decreasing share in most OECD countries, manufacturing’s importance for the whole economy remains large as manufacturing provides important inputs to other sectors of the economy and satisfies a broad range of final and intermediate demands. The share of manufacturing in total demand (i.e. final and intermediate demand) is much higher than in value added (in current prices) and employment (see below); in large OECD manufacturing economies manufacturing still accounts for around one-third of

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Agriculture Mining and Quarrying Manufacturing Waste Confidential and Unallocated Services


13

total domestic demand (Figure 1.7). Smaller countries represent somewhat lower shares, while also in resource-rich countries like Australia the share of manufacturing in domestic demand is lower. Rapidly industrialising countries like China and India show higher shares.

Figure 1.7: Share of manufacturing in total demand, OECD countries, China and India, 1995, 2000 and 2005

(In percent)

Source: OECD Input-Output Database

These arguments are not really questioned at the opposite spectrum of discussion, but proponents of the services sector indicate that services have dramatically changed over time and certain categories are increasingly displaying the manufacturing characteristics discussed above. Services sectors, it is argued can be as productive - if not more productive - than manufacturing. Likewise trade in services is on the rise using various modes of supply, hence market openness is progressively less dependent on goods production. Innovation, in particular marketing and organisational innovation, is becoming more prominent in services.

In addition, distinguishing between manufacturing and services is becoming increasingly difficult. Manufactured products are more and more sold with add-on services and draw a large part of their value from these embodied services (see below). This calls first and foremost for an integrated view on manufacturing and services as very complementary sectors in national economies; targeted policies should not work against this complementarity. Furthermore, it is argued that de-industrialisation is largely a natural process characterising the development of (all) countries; trying to stop and even reverse this is economically undesirable (by slowing down manufacturing productivity) and/or unrealistic (by boosting manufacturing’s share in final demand.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%%

1995 2000 2005


14

1.2 Structural trends in global manufacturing

Demand and supply forces have been dramatically reshaping the outlook of global manufacturing; these forces have been playing out for decades and will continue to unfold over the decades ahead. Globalisation has resulted in an increasing number of firms, countries and other economic actors taking part in today’s global economy that have become increasingly connected across borders. Technological progress has altered the dynamics in manufacturing and created numerous opportunities for companies and countries to innovate. Economic advancement in emerging countries due to manufacturing is quickly changing the comparative advantage of these countries and affecting the global location of manufacturing.

In discussing the future of manufacturing, a number of structural changes will be described in more detail. These trends are changing the nature, structure and organisation as well as the geography of manufacturing on a global scale and have important consequences for individual countries.

1.2.1 A long term trend of de-industrialisation of OECD economies

The gradually declining importance of manufacturing in OECD economies is not an idiosyncratic phenomenon, but a rather common feature of the development path of most countries. Agriculture typically accounts for the bulk of GDP and employment in the initial stages of economic development, as is still the case in many developing countries. In later stages, its share in total value added and employment declines and the manufacturing sector grows as economies industrialise (like e.g. in China and India). In recent decades, many OECD economies have experienced a decline in the share of manufacturing in overall employment, with a concurrent rise in the share of services due among others to the growing consumer demand for services.9, 10

The share of manufacturing in total employment and value added has significantly decreased in G7 countries as well as in Australia over the period 1970-2010 as is shown in Figure 1.8; yet the magnitude of the change depends on the data one is looking at. A steady decline of manufacturing appears to be most prominent in terms of employment, explaining why the de-industrialisation debate in OECD countries often focuses on the loss of manufacturing employment. The share of manufacturing in value added seems to be relatively more volatile, as in some countries for some years even an increase is observed. Nevertheless, a long-term declining trend is also clearly visible for value added.

The declining share of manufacturing in value added is to some extent also due to price effects. Since much of the manufacturing sector is characterised by relatively high productivity growth (see above), prices of manufacturing products tend to increase only little over time and may even fall. This contrasts with the experience of many parts of the services sector, where productivity growth has been slower and prices tend to go up more strongly over time. Manufacturing products have become relatively cheap and therefore account for a smaller proportion of the economy than they did before (Pilat et al., 2006). This also explains why the share of manufacturing in total value added in constant prices has fallen much less over time; in some countries like the United States, Canada and Japan, this share shows a remarkably stable pattern (Figure 1.8).


15

Figure 1.8: Share of manufacturing in total employment and value added (current and constant prices), G7 countries and Australia, 1970-2010

EMPLOYMENT

VALUE ADDED, CURRENT PRICES

VALUE ADDED, CONSTANT PRICES

Note Germany = West Germany before 1991: Source: OECD Structural Analysis Database (STAN).

0

5

10

15

20

25

30

35

40

1970 1975 1980 1985 1990 1995 2000 2005

%

Germany

United States

ItalyJapan

United Kingdom

France

Canada

Australia

0

5

10

15

20

25

30

35

40

1970 1975 1980 1985 1990 1995 2000 2005

%

Germany

United States

Italy Japan

United Kingdom

France

Canada

Australia

0

5

10

15

20

25

30

35

40

1970 1975 1980 1985 1990 1995 2000 2005

%

Germany

United States

Canada

Italy

France

United Kingdom

Japan

Australia


16

It should be stressed that de-industrialisation describes in essence the declining importance of manufacturing in national economies relative to other industries (in most cases: services). But it would be wrong to conclude that manufacturing is a sector in decline in the OECD area; while it is true that manufacturing employment has fallen, the output of the manufacturing industry has continued to grow because of the strong productivity growth in manufacturing. Value added (in constant prices) has significantly increased in G7 countries as well as in Australia over the period 1991-2010, which illustrates the large and growing demand for products manufactured by these countries11 (Figure 1.9). The Global Financial Crisis of 2007/2008 abruptly stopped this growth process and a considerable drop in value added is observed in all G7 countries; Australia fared a bit better, but nevertheless the (international) demand for Australian manufactured products has also fallen in most recent years.

Figure 1.9: Index of manufacturing value added (in constant prices), G7 countries and Australia, 1991-2010

(1991 = 100)


1.2.2 Increasing competition from emerging economies

OECD countries jointly still dominated global manufacturing in 2010 but their share is rapidly declining: the OECD area accounted for about 60% of world-wide manufacturing in 2010 compared to 80% in 2002 (Figure 1.10). Manufacturing has grown rapidly in non-OECD countries, in the first place China which accounted for 19% of world manufacturing value added in 2010 and has become the largest manufacturer in the world. Asia and Latin America account for most of emerging country’s manufacturing but growth in Asia was four to five times faster than Latin America during the last decade. The share of Asian countries excluding China was about 12% in 2010, while South/Central America accounted for about 5.6% of global manufacturing; Africa accounted for only 1.6% of manufacturing value added in 2010.

Figure1.11 shows manufacturing growth in non-OECD economies in more detail for value added, employment and exports with the growth performance of China clearly standing out. The large shift of manufacturing to emerging countries is partly due to the relocation of industries from developed countries within global value chains; the growing domestic demand in these countries is another important driver (see below). Emerging countries have become very attractive for more labour intensive activities, as their labour costs are a fraction of these of more developed economies (Pilat et al. 2006). Although labour costs

80

100

120

140

160

180

200

1991 1994 1997 2000 2003 2006 2009

Germany

United StatesCanada

United KingdomJapan Italy

Australia

France


17

account for only a fraction of total production costs (with considerable differences across industries), it is one of the main factors that drive the location choices of firms.12 A recent study (Hepburn, 2011) documents that emerging regions have increased their share in value added especially in more traditional industries like Food and Beverages, Textiles and Apparel, Leather and Footwear, Paper, etc.

Figure 1.10: Share in world manufacturing value added, 2010

(In percentage of world manufacturing value added)

Source: United Nations Statistics Division.

OECD EU, 21.9

China, 18.9

United States, 18.2

Other Asia & Oceania, 9.5

Japan, 10.7

Other OECD, 10.4

South & Central America, 5.6

Other Europe, 3.1 Africa, 1.6


18

Figure 1.11: Share of major emerging regions in world manufacturing

(In percentage of world manufacturing)

VALUE ADDED

EMPLOYMENT

0

2

4

6

8

10

12

14

16

18

20

East Asia excl. China

China South Asia South East Asia

Latin America excl. Mexico

Mexico Middle East and North

Africa

Sub-Saharan Africa excl. South Africa

South Africa

% 1990 2000 2010

0

5

10

15

20

25

30

35

40





Africa


South Africa

% 1990 2000 2009


19

EXPORTS

Note: East Asia excl. China includes China - Hong Kong Special Administrative Region, China - Macao Special Administrative Region, Mongolia, Republic of Korea and Chinese Taipei; South Asia includes India, Iran (Islamic Republic of), Nepal, Pakistan, and Sri Lanka; South East Asia includes Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam; Latin America excl. Mexico includes Argentina, Bolivia (Plurinational State of), Brazil, Chile, Colombia, Ecuador, Peru, Suriname, Uruguay, Venezuela (Bolivarian Republic of), Costa Rica, Guatemala, Honduras and Panama; Middle East and North Africa includes Algeria, Egypt, Morocco, Tunisia, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, Syrian Arab Republic and Turkey; Sub-Saharan Africa excl. South Africa includes Botswana, Cameroon, Eritrea, Ethiopia, Gabon, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Niger, Senegal, Swaziland, Uganda, United Rep of Tanzania and Zimbabwe Source: United Nations Statistics Division.

1.2.3 The emergence of global value chains (GVCs)

International production, trade and investment are increasingly organised within so-called global value chains (GVCs) as the past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc. Different stages of the production process are increasingly located across different economies: intermediate inputs like parts and components are produced in one country and then exported to other countries for further processing and/or assembly in final products. In the process of international fragmentation, many (multinational) firms have often offshored the most labour intensive activities (like e.g. assembly) towards emerging countries often in search for lower costs and higher efficiency. At the same time, the search for lower costs is not the only factor driving the growth of production in emerging markets; the search for new markets characterized by rapid growth has also been an important driver.

A single final good is nowadays often processed in many countries with sequential stages in the value chain being performed in the location most suited to the activity. Correspondingly, value added is being added in different countries throughout the production process and countries just like firms become increasingly specialised in specific functions within GVCs. International trade nowadays increasingly happens across different production stages within industries and even within (multinational) enterprises as intermediate goods, finished goods as well as related services are exported and imported between affiliates of the same firms located in different countries.

0

2

4

6

8

10

12





Africa


South Africa

% 2000 2007 2010


20

The expansion of GVCs also means that national economies no longer rely exclusively on domestic resources to produce goods and services and export these to the rest of world (Sturgeon and Gereffi, 2009). Imports have become increasingly important for exports; the import content of exports has increased in almost all countries in recent decades (Figure 1.12). The degree of participation in GVCs depends on the size of each country and patterns of specialization. Smaller economies tend to have higher shares of imports embodied in their exports; larger countries have a larger availability and wider variety of domestically sourced intermediate goods making them less reliant on imports of intermediates. Also countries with substantial natural resources such as Australia have lower ratios of import contents in exports as mining activities require less intermediate goods in the production process (De Backer and Yamano, 2012).

International fragmentation is far more developed in manufacturing than in services; though important differences exist across industries. The degree of vertical specialisation is found to be particularly large in basic industries that are heavily using primary goods like cokes and refined petroleum, basic metals, chemicals, and rubber and plastics. Fragmentation is also large in a second group of high-technology industries for modular products. Parts and components are often produced in one country before they are exported to another country where the assembly is taking place. This international division of labour is found in industries like electrical machinery, radio/television and communication equipment, office, accounting and computing machinery but also motor vehicles (Figure 1.13)

Figure 1.12: Import content of exports by country, 1995 and 2005

(In percentage of total exports)

Note: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. Source: De Backer and Yamano (2012).

0%

10%

20%

30%

40%

50%

60%

70%1995 2005


21

Figure 1.13: Import content of exports by industry, 1995 and 2005

(In percentage of total exports)

Source: De Backer and Yamano (2012).

The strong manufacturing growth of Southeast Asia and China in particular is closely related to the emergence of GVCs (though it is not the only factor, as discussed above). Products are often designed and conceived in developed countries, manufactured in emerging countries like China with inputs sourced from other third countries. Figure 1.14 shows how China imports large volumes of intermediates from Europe, Japan and other OECD economies to produce (often in so-called ‘export processing zones’) final goods for export. Especially in higher technology industries such as ICT products, China’s strong export performance is to a large extent based on the assembly of intermediates imported from other countries.

But manufacturing/assembly often constitutes only a small part of the value added: several case studies (like e.g. Apple’s iPod and iPhone) have shown that Chinese activities only represent a small part of the total product value. Aggregate results show that the share of foreign value added in total Chinese manufactured exports is about 50% (Koopman et al., 2008). China has recently been undertaking major efforts to increase its value added in global products and move beyond pure assembly activities.

0%

10%

20%

30%

40%

50%

60%

70%OECD average 1995 OECD average 2005


22

Figure 1.14: Import content of exports for selected economies and regions, 2005

(By economy/region or origin of imports, USD millions, at current prices)

Source: Science, Technology and Industry Scoreboard, (OECD, 2011)

Box 1: The regional character of GVCs

GVCs have largely contributed to the increasingly global character of manufacturing, but nevertheless a strong regional focus still remains (see Figure). Countries source intermediates and incorporate them in their exports to a larger degree from neighbouring countries which is likely related to the importance of distance and trade costs for vertical trade. The import content of exports of European countries is heavily based on other European countries: in most countries around three quarters of the intermediates embodied in exports are sourced from around Europe (see figures below). Within the NAFTA region, Canada and Mexico are heavily oriented towards the other NAFTA countries: more than 50% of the imported intermediates embodied in their exports originate in the NAFTA zone.

Also in Asia, the majority of the intermediates embodied in exports are sourced from within the region. Previous research has shown that a triangular trade pattern has emerged in this region, in which parts and components are produced by more developed countries like Japan, and Korea and then exported to emerging countries like e.g. China and recently increasingly also to other countries like Vietnam and Cambodia where the assembly of the different intermediates into finished products is takes place. The assembled final products and intermediates are then exported back to Japan, Korea, etc. as firms re-import a growing part of the production they relocate. Assembled products from China are also exported to other developed countries/regions such as Europe and the United States where they may undergo in addition some smaller changes (packaging, marketing, etc.) and hence appear in the vertical trade of these countries.


23

Import content of exports with partner countries, 2005

European countries

Other countries

Source: De Backer and Yamano (2012).

1.2.4 The shifting demand towards Asia

Asia has become an important supply centre for manufacturing goods due to the emergence of GVCs and the relocation of manufacturing activities by (multinational) firms from developed countries towards emerging countries. Emerging countries have attracted large inflows of foreign direct investment (FDI) during the past decade especially in production (Figure 1.15). FDI flows to China and the rest of South-East Asia have leapt from an average of about USD 50 billion a year in 1995-1999 to about USD 150 billion a year in 2005-2009.

0%

10%

20%

30%

40%

50%

60%

70%

From Europe From NAFTA From East Asia From Other Asia From RoW

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

From Europe From NAFTA From East Asia From Other Asia From RoW


24

Figure 1.15: Outward FDI flows from EU, Japan and the United States to BRICS13 countries, yearly average 2003-2009

(USD billion at current exchange rates)

Source: Science, Technology and Industry Scoreboard (OECD, 2011).

The attractiveness of countries like China, India and Brazil is however not only determined by lower labour costs, but also by their large and rapidly growing home markets. China and India in particular, the two most populated countries in the world, are expected to quickly become important markets for manufacturing products as they experience fast economic advancements as reflected in their high GDP growth rates. Global consumer demand has so far been concentrated in (rich) OECD economies but a new middle class14 is projected to emerge in Asia and particularly in China and India (Figure 1.16). While the size of the middle class could globally increase from 1.8 billion people to 3.2 billion by 2020 and to 4.9 billion by 2030, almost 85% of this growth is expected to come from Asia. In 2000, Asia (excluding Japan) only accounted for 10% of the global middle class spending but this could reach 40% by 2040 to climb to almost 60% in the long-term (Kharas, 2010).


25

Figure 1.16: The global middle class, by country, 2000-2050

Source: The emerging middle-class in developing countries (Kharas, 2010, OECD Development Centre Working paper).

The emergence of new growth centres will significantly shift the world’s centre of economic gravity eastwards (Quah, 2011). Kharas (2010) estimated the global economic centre of gravity in 1965 to be located in Spain in the middle of the then 3 largest economic concentrations in Europe, the United States and Japan (Figure 1.17). Since then, the economic centre is moving to the Southeast very close to an axis connecting Washington DC and Beijing (shown in orange on the map). India, China, Indonesia and Vietnam are expected to pull the centre of economic gravity in the world further to the East.

Figure 1.17: Economic centre of gravity, 2000-2050

(GDP at current prices)

Source: The emerging middle-class in developing countries (Kharas, 2010, OECD Development Centre Working paper).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

2000 2012 2024 2036 2048

Others EU United States Japan Other Asia India China


26

1.2.5 Innovation and knowledge as source of competitiveness

Because of enhanced competition by emerging countries, innovation has become crucial for the long-term competitiveness of OECD manufacturing. Innovation through the introduction of a new or significantly improved products, process or method, has always been an important driver of growth in most OECD countries; yet more so in the current competitive global environment. Innovation and knowledge increasingly determine the creation and growth of value added and employment in manufacturing; and multi-factor productivity growth is also closely linked to innovation and improvements in efficiency (OECD, 2010)

Global innovation in manufacturing has traditionally been dominated by OECD countries; responsible for the majority of world R&D investments. But the global R&D landscape is changing as non-OECD economies increasingly invest large amounts in R&D and knowledge. Emerging economies account for a sharply growing share of global R&D investments; China’s R&D investment growth is outpacing that of several OECD countries and is expected to accelerate (World Economic Forum, 2012). Other BRIICS15 countries like India and Russia have set-up large research programmes.

R&D investments are an important element but not the sole driver of innovation as complementary assets such as software, human capital and appropriate organisational structures are needed to make innovation successful. Human capital has been singled out as the most critical resource for manufacturing competitiveness in the future; talent-driven innovation will be increasingly determined by the ‘quality and availability of a country’s workers, scientists, researchers, engineers and teachers – who collectively have the capacity to continuously innovate and, simultaneously, improve production efficiency’ (2010 Global Manufacturing Competitiveness Index, Deloitte Touche Tohmatsu). The competition for talent intensifies since manufacturing companies in several countries increasingly face talent shortages and they are often not able to attract enough workers from the limited pool of human capital. Reversely, the large pools of engineering graduates in emerging countries, combined with the above mentioned large R&D investments allow these countries to rapidly strengthen their innovation capabilities.

Innovation is closely related to the broad accumulation of so-called intangible (or knowledge-based) assets, which are typically categorised as computerised information, innovative property (including R&D) and economic competencies (including firm-specific capital and organizational capital). Intangible investments have become increasingly important over time reflecting the growing knowledge economy of OECD countries; recent World Bank research shows that intangible capital is the largest component of wealth at all levels of income but increasingly so in upper-middle and higher income countries (Canuto and Cavallari, 2012). In the United States and the United Kingdom intangible investments are larger than tangible investments such as equipment, material, buildings, etc. (Figure 1.18). Investments in brand equity, design, organizational capital, business models etc. allow OECD manufacturers, typically operating in high cost environments, to compete on other aspects than costs.

The growing of the so-called ‘knowledge manufacturing’ is also reflected in the changing industrial structure of OECD countries towards higher technology intensive industries; most OECD countries (one exception is Australia, see below) show an export specialisation in high and medium-high technology manufacturing industries16 (Figure 1.19). The international reallocation of resources accompanying globalisation has resulted in emerging economies accounting for a larger share of more labour-intensive traditional industries. Remaining activities in low and medium-low manufacturing industries in OECD countries are often not that ‘traditional’ as they have to be very innovative (beyond R&D) and differentiate their output in order to stay competitive in the global markets. This specialisation pattern - developed countries in higher technology and emerging countries in lower technology – is however not static, as emerging countries, in particular China, are becoming more important exporters of high technology products.17


27

Figure 1.18: Investment in fixed and intangible assets, OECD countries, 2006

(As a percentage of GDP)


Figure 1.19: Share of high and medium-high technology industries in manufacturing exports, 2009

(As a percentage of total manufacturing exports)

Source: OECD Structural Analysis Database (STAN)

0

5

10

15

20

25

30

%Machinery and equipment Software and databasesR&D and other intellectual property products Brand equity, firm-specific human capital, organisational capital

0

10

20

30

40

50

60

70

80

90

100% High technology Medium-high technology


28

1.2.6 The blurring of manufacturing and services

The character of manufacturing is profoundly changing and the distinction between manufacturing and services has become increasingly blurred. Manufacturing is nowadays much broader than the production of goods and includes several service-related activities in upstream as well as downstream stages. Modern manufacturing includes a wide range of different activities and makes ‘more than only things’.18 As GVCs increasingly allow for the unbundling of business functions and pure production activities are increasingly located to emerging economies, manufacturers in OECD countries rely more on complementary non-production functions to create value.

A large part of the future growth in manufacturing is expected to come from so-called ‘manu-services’ which involves combining advanced manufacturing with a range of different services (Sissons, 2011). Manufacturing products are not longer only physical assets but increasingly include services content; likewise manufacturing companies no longer sell only goods but instead sell bundles including design, development, marketing, warranties and after-sales care. A company like Rolls Royce for example does not only sell cars but ‘solutions, outcomes or experiences’ to better meet the needs of customers and to differentiate from competitors. Xerox has restructured itself to a ‘document solution’ company, offering technology advanced printers systems but also services like document managing and consulting; in fact, services represent around 40% of Xerox’s turnover and are expected to contribute to 50% in the next years (Benedettini et al., 2010).

This process is directly related to the growing knowledge intensity of manufacturing industries as intangible assets transform the determinants of competitive success. A growing number of manufactured products owe a large part of their success to services attached to the product, like for example a range of applications linked to Apple’s iPhone. In the automotive sector, the cost of developing new vehicles is increasingly dominated by software services, while high-end vehicles rely on millions of lines of computer code and advanced on-board processors (Nolan, 2012).

A corollary of the above is a much broader definition of a manufacturing job which is no longer associated only with the pure production process (fabrication, assembly, etc.). An increasing part of the employees in manufacturing are employed in occupations that can be considered as services-related, such as management, business, finance and legal professionals. In 2008, on average, the share of services-related occupations in manufacturing in the OECD area had reached about 35%; following an upward trend in almost all countries (Figure 1.20).


29

Figure 1.20: Services-related occupations in manufacturing, 2000 and 2008

(As a percentage of all employees in manufacturing)

Note: Services related occupations are defined as ISCO-88 major groups: 1) Legislators, senior officials and managers; 2) Professionals; 3) Technicians and associate professionals; 4) Clerks and 5) Service workers and shop and market sales workers. Source: Science, Technology and Industry Scoreboard (OECD, 2011).

The manufacturing and services is further reinforced by the increasingly complex interactions between manufacturing and services industries, including outsourcing from manufacturing to services firms, as well as the use of intermediate inputs from independent service providers that had not been previously integrated in the final good producing firm or industry. Services industries make important contributions to manufactured products deliveries of intermediate inputs: the contribution of services value added needed to satisfy demand for manufactured products varies between 15 and 30% and this percentage has increased over time (Figure 1.21).

0

10

20

30

40

50

60

% 2000


30

Figure 1.21: Services sector value-added embodied in manufacturing output, 1995 and 2005

(As a percentage of total value added of manufactured goods in final demand)


1.2.7 New growth opportunities in manufacturing… also for developed economies

As there is increasing competition from emerging economies, manufacturers in developed economies continuously search for new growth opportunities. ‘Green manufacturing’ is generally believed to have a large growth potential in developed economies through innovation in new products, services, activities, business models, etc. As the demand and the cost of energy will increase with future population growth and industrialisation, green growth and increased resource efficiency will become only more important. As such, environmentally sustainable products may not only help addressing the global challenges of reducing energy consumption and producing clean energy, but also contribute to the competitiveness of developed economies in manufacturing based on innovation. Likewise, green manufacturing is expected to create a considerable number of new jobs.

A survey of the Economist Intelligence Unit among senior executives in US manufacturing predicted the highest growth for green technology and energy for the coming years. Recent estimates for the United States indicate that the ‘clean economy’ (i.e. the production of goods or services with an environmental benefit) is nearly three times as manufacturing-dependent as the overall economy; several technologies and products critical to the clean economy are highly manufacturing intensive (Muro et al., 2011). A large part of the jobs in electric vehicle technologies, water-efficient products, energy-saving consumer products, solar and wind energy products, etc. are indeed in manufacturing (Helper et al., 2012). Environmental goods constitute an important and growing part of the developed economies’ exports (World Bank, 2012).

Technical progress in information and communication technologies (ICT) has dramatically transformed the manufacturing industry during the past decades as it has allowed companies to slice up their value chains and relocate specific activities geographically. Further technological advancements in ICT are predicted to lead to an increasing digitalisation of manufacturing over time which would gradually alter the outlook of (parts of) manufacturing in the future: not only the way goods are made but also where19 (The Economist, 2012).

0

10

20

30

40

% 1995


31

Digital manufacturing through e.g. clever software in combination with the emergence of novel materials and new production techniques (e.g. nanotechnology) is expected to reshape production processes in manufacturing. While mass-produced products will continue to be manufactured according to more traditional - albeit more automated and flexible - methods, new ways of manufacturing will increasingly result in smarter products as well as smarter production processes (World Economic Forum, 2012). Digital technology will particularly lower the cost of producing smaller batches of a wider variety; hence as scale economies decrease, ‘manufacturing on-demand’ is expected to become (more) economically feasible. Additive manufacturing such as 3-D printing for example builds products from successive layers of material and allows better for products tailored to individual customers’ needs.

Labour costs will overall be less important in these new products and production processes; hence curbing the need for offshoring of manufacturing activities to low labour cost regions. This would especially create growth opportunities for high technology manufacturing20 in developed economies; it is not sure however that this would directly result in large numbers of extra jobs given the small importance of labour (costs) in the total production process. Furthermore, given the high technology intensity, most of these jobs would be concentrated at the high skill end.

1.2.8 A broader trend of back-shoring on the horizon?

Will the offshoring of manufacturing to emerging countries slow down and will the growth of GVCs be turned back to developed economies? A number of companies (especially in the United States) have been reported to increasingly consider bringing activities they offshored to China back to the United States. Analysis by the Boston Consulting Group (2011) estimated that this trend of ‘back-shoring’ (also called ‘on-shoring’ or ‘re-shoring’) could lead to a revival or ‘renaissance’ of the manufacturing industry in the United States.21 Several reasons have been put forward to justify the interest in back-shoring for manufacturing companies.

A first explanation (the most important according to Boston Consulting Group) is the changing cost structure of production in emerging countries. While market size and growth remain the most important location factors international investment, lower (labour) cost have been an important motivation for the offshoring of certain activities (OECD, 2011). Countries like China have witnessed average hourly wage increases of 15-20% per year which have been eroding their cost advantage in labour-intensive activities; also other countries like India, Indonesia, the Philippines, etc. experienced salary increases following the growth of the middle classes (see above). The average hourly wage in emerging economies was estimated to be around 2% of the US average in 2000 and is expected to rise to 9% in 2015 (Figure 1.22 - World Economic Forum). As productivity differences narrow, and labour shares of total production costs shrink, savings from offshoring become much smaller. Companies try to respond to these rising labour costs by increasingly automating factories in emerging countries, relocating production to other emerging countries where labour costs are still low and/or eventually back-shoring specific activities.


32

Figure 1.22: Average hourly wages in developing countries

Source: Deloitte analysis, Economist Intelligence Unit data ; published in World Economic Forum (2012).

Another explanation for the trend towards back-shoring is that there are certain hidden costs, which have not been taken fully into account in the offshoring decision (Porter and Rivkin, 2012); often too much focus is put on labour cost savings while additional costs for establishing production processes overseas are underestimated. A 2011 study by Ernst & Young showed that more than one third of US manufacturers experienced higher than expected total costs of entering high growth markets like China, India and Brazil. Indirect costs might become unexpectedly high because of additional needs for monitoring and training, travel and personnel costs, transportation costs, higher obsolescence and inventory costs, or unanticipated loss of intellectual property. Products manufactured in emerging countries but destined to the home market might then be produced at higher ‘total landed costs’.

Third, back-shoring is inscribed in firms’ strategies to better balance cost savings and risk dispersion in GVCs. Natural disasters like the recent Japanese earthquake/tsunami and the floods in Thailand have given rise to global disruptions of GVCs and have halted the worldwide supply of products and intermediates in several industries. In order to diversify the risks inherent in their supply chains, companies increasingly consider alternative GVCs for the same product. In addition to GVCs in low cost countries, companies set-up (often shorter) GVCs in higher cost countries close to their major markets. Supply chains have become more complex and extensive which often means extra risk which is not always visible and hence less controllable by firms. Just-In-Time models, lean structures and the absence of redundancy make that a breakdown in one part of the chain may quickly have detrimental effects throughout the value/supply chain.

One specific category of increased risk in GVCs is exchange rate risk as the international fragmentation of activities exposes companies to currency volatility. Companies increasingly consider establishing a cost base where products are sold as a hedge against volatile currencies. Nevertheless, the impact of a currency appreciation/depreciation is complex within GVCs as local currency depreciations will make exports of final goods cheaper but also make imported components more expensive. Other things being equal, it can be expected that the lower the domestic content in a country’s exports, the


33

smaller the effect of an appreciation of that country’s currency on the trade volume will be22 (Koopman et al. 2008).

A fourth reason to bring manufacturing activities back home is the larger operational flexibility it offers for companies. The organisation in long and complex GVCs across different countries directly limits companies in adjusting the production process to market signals. Negative shocks to final demand are not always easily incorporated in GVCs’ scheduled production runs; the Global Financial Crisis of 2007/2008 demonstrated how a slowdown in downstream activities transforms into an amplified reduction in the demand for inputs that are located upstream. Furthermore, specific needs of customers can be more rapidly taken into account and lead to shorter lead times as developers, engineers, manufacturing and operating staff are closely located to each other (see also discussion on ‘manufacturing on-demand’ above). Physical distance often leads to less efficient cooperation and coordination between the different production stages.

Despite back-shoring’s growing appeal, there is no consensus on how big this has/will become. It is expected that offshoring to emerging countries will stay an important strategy in manufacturing notwithstanding that (labour) costs are on the rise in these countries. This is also because emerging countries offer large and fast growing markets for manufactured products given the rising middle class (as discussed above). Back-shoring to developed economies might become more prevalent in technological and quality products characterized by fast product cycles where feedback from the market is important; it is not clear if this will result in large numbers of extra jobs in manufacturing at home. The mass production of labour-intensive, commoditised products will most likely stay concentrated in emerging economies where production costs including of labour are lower.


34

CHAPTER 2 AUSTRALIAN MANUFACTURING IN INTERNATIONAL PERSPECTIVE

This section benchmarks Australian manufacturing against manufacturing industries in other major OECD countries and emerging economies, by relating the performance and structural characteristics of manufacturing in Australia to the broader trends in global manufacturing described in the previous section. The current process of structural change within the Australian economy and the impact on manufacturing especially in light of the recent mining boom is a central part of the analysis. Australia is compared in particular to Canada and Norway as countries richly endowed with natural resources, as well as to important manufacturing countries like Germany and the United States. The following analysis focuses on a number of key indicators and determinants without describing Australian manufacturing industry in full detail. Based on this analysis, some observations are put forward regarding the future of manufacturing in Australia.

2.1 A snapshot of manufacturing in Australia.

A number of key indicators illustrate the position of manufacturing in the Australian economy (Table 2.1). In 2011, manufacturing in Australia created 107 billion AUD of gross value added and accounted as such for 8% of Australia’s GDP; sales turnover in manufacturing amounted to AUD 366 billion. Australian manufacturing represented in 2011 10% of total private investments in Australia (i.e. AUD 12 billion) and employed 7.9% of the Australian labour force (i.e. 953 000 persons).

The world share (in terms of value added) of Australian manufacturing varied around 1% during the past decades (Figure 2.1). The shares of historically strong industrial producers such as the United States, Italy, Germany have gradually fallen over the last twenty years while China, Brazil, Russia have expanded rapidly. China has recently overtaken the United States as the largest manufacturing country in terms of value added (see also above).

Table 2.1: Key indicators on manufacturing in Australia

Note: a) November 2011; b) December 2011 Source: Australian Bureau of Statistics (ABS)

Manufacturing Total economy Share Key indicatorsGross Value Added versus GDP (million AUD) 107,634 1,318,960 8.2%Private New Capital Expenditure (million AUD) 12,343 119,741 10.3%Employed persons versus Labour Force (thousands) (a) 953.5 12,085.4 7.9%Profits (million AUD in current prices) (b) 3,994 49,299 8.1%Sales (million AUD current prices) 366,441Sales (million AUD chain volume) 355,420Inventories (book value in million AUD; current prices) 49,982 144,481Inventories (book value in million AUD; chain volume) 47,565 144,089


35

Figure 2.1: Share of total world manufacturing value added

(In percentage of total world manufacturing value added)

Source: United Nations Statistical Division, National Accounts Main Aggregates Database, March 2012.

The analyses in Part 1 on the importance of OECD manufacturing in productivity growth, innovation, exports and total demand suggested already the smaller, albeit still important, role of manufacturing in Australia. Comparing the structure of the Australian economy with those of other major OECD economies points to an overall smaller size of manufacturing in Australia (Figure 2.2; see Figure A.2.1 and A.2.2 in Annex 1 for more detailed results). While de-industrialisation results in a decreasing importance of manufacturing in all countries,23 Australian manufacturing is becoming increasingly squeezed between a large and growing services sector on the one hand and a fast expanding mining industry on the other.

The value added and employment shares of Australian manufacturing are below the average shares in G7 countries; services account for the majority of the value added (both in nominal and real terms) and employment created in Australia and G7 countries. A similar observation emerges when analysing investments with lower and decreasing shares for Australian manufacturing in gross fixed capital formation (GFCF). The recent downward trend is directly linked to the growing capital investments in the mining industry as production capacity is added in huge quantities to match the higher demand and prices of natural resources.

The weight of manufacturing in Australia as opposed to G7 countries is especially different in terms of exports and R&D investments. Manufacturing in Australia accounts for a significantly smaller share of total exports of goods compared to G7 countries. The recent mining boom explains partly this falling export share of manufacturing as exports of mining commodities have rapidly grown (in volumes and prices) in recent years. The limited contribution of manufacturing to total R&D investments in Australia is related to the smaller share of manufacturing in business R&D investments (BERD) and to the relatively smaller share of business R&D in gross domestic expenditure on R&D (GERD). Services and mining are responsible for a large part of the business investments, while a large share of GERD in Australia is performed in higher education and government institutions (OECD, 2011).

0

5

10

15

20

25

30

% 1990 2000 2010


36

Figure 2.2: Contribution of manufacturing to total R&D (GERD), exports of goods, value added, employment and gross fixed capital formation (GFCF), 1990-2010

(In percentage of totals)

AUSTRALIA G7 COUNTRIES1

Note:1): Japan excluded in GFCF Source: OECD Structural Analysis Database (STAN), OECD Main Indicators on Science and Technology (MSTI), OECD Bilateral Trade Database (BTD); Australian Bureau of Statistics (ABS) for data on Australia.

Manufacturing activities in Australia are to a large extent linked to its abundant natural endowments: the largest manufacturing industries are i) food, beverages and tobacco products; ii) the treatment of mining output (petroleum, metal industries etc.) and iii) wood and paper products (Figure 2.3). Other important industries in terms of employment (but also value added) are ‘Machinery and equipment’ and ‘Transport equipment’. This sectoral composition looks rather similar to other countries rich in natural resources like Canada and Norway; differences are somewhat larger with major manufacturing countries like Germany and the United States.

0

10

20

30

40

50

60

70

80

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% R&D Exports Value added Employment GFCF

0

10

20

30

40

50

60

70

80

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% R&D Exports Value added Employment GFCF


37

Figure 2.3: The industrial composition of manufacturing, Australia, Canada, Germany, Norway and the United States, 2009

(In percentage of manufacturing employment)

Source: OECD Structural Analysis Database (STAN); Australian Bureau of Statistics (ABS) for data on Australia.

The manufacturing landscape in Australia has significantly changed over time following the gradual liberalisation of the Australian economy. The post-Second World War era was characterised by restrictive regulation focusing on shielding domestic producers from foreign competition through tariffs, quotas, price controls and production subsidies to protect import-competing firms (Lippoldt and Sztajerowska, 2012). The mid-1970s was the turning point for the economy when deregulation started in addition to floating the Australian dollar. Important programs of economic reform have since led to sustained reductions in effective rates of assistance for manufacturing and agriculture (Figure 2.4). Estimates by the Productivity Commission (2011) show that the effective rate of assistance for manufacturing as a whole fell from around 35% in 1970-71 to 4.4% in 2009-10.24

Tariff assistance in particular has declined during the past 30 years, while budgetary assistance (tax concessions and outlays such as subsidies, grants, loans, credits, etc.) to industry has more than doubled in real terms since the 1960s (Productivity Commission, (2011). The highest measured effective rates of assistance are recorded in manufacturing, particularly the automotive industry, and textiles clothing and footwear industries. These two industries absorb the largest share of the estimated budgetary assistance;

Food, beverages and

tobacco products, 22.5

Textile, clothing, leather,

footwear, 4.4Wood, 4.9

Paper and printing, 7.1

Petroleum and coal products,

0.8

Chemical and rubber

products, 8.0

Non-metallic mineral

products, 3.7

Metal products, 15.2

Transport equipment, 8.0

Machinery and

equipment, 12.6

Furniture and other

manufacturing, 6.3

0

5

10

15

20

25

Food, beverages and tobacco

Textiles, leather and footwear

Wood

Paper, printing and publishing

Chemical, rubber and plastics products

Non-metallic mineral products

Basic metals and fabricated metal

products

Machinery and equipment

Transport equipment

Manufacturing n.e.c. and recycling

Australia Canada Norway

Food, beverages and

tobacco products, 12.0

Textile, clothing, leather,

footwear, 2.3Wood, 1.9



6.4

Chemical and rubber

products, 8.0

Non-metallic mineral

products, 16.0

Metal products, 4.0

Transport equipment,

11.3

Machinery and equipment, 5.5

Furniture and other

manufacturing, 5.4

Food, beverages and

tobacco products, 12.9 Textile,

clothing, leather,

footwear, 3.8

Wood, 3.0



0.9Chemical and rubber

products, 11.0Non-metallic mineral

products, 3.1

Metal products, 13.1

Transport equipment,

10.5

Machinery and equipment,

19.5

Furniture and other

manufacturing, 8.1

GERMANY UNITED STATES

AUSTRALIA AUSTRALIA, CANADA AND NORWAY


38

nevertheless, reductions in tariff assistance have also resulted in decreasing effective rates of assistance in these two industries.

Figure 2.4: Effective rate of industry assistance by industry, Australia

(In percent)

Note The effective rate of assistance is defined as the net assistance received per dollar of value added; Overlapping observations arise from revisions to industry input and output measures used to estimate effective rates. Source: Productivity Commission (2011)

The liberalisation of the Australian economy during the past decades has resulted in profound structural changes, particularly within Australian manufacturing in the decline of high cost manufacturing and the rise of elaborately transformed manufacturers (Productivity Commission, 2003). Overall, during the past decade Australia has witnessed job losses in manufacturing, especially in the ‘Textile, Clothing and Footwear’ cluster as well in ‘Petroleum and coal products’, ‘Furniture and other manufacturing’ and ‘Chemicals’ (Figure 2.5). Manufacturing activity has expanded in ‘Food, beverages and tobacco’, ‘Machinery and equipment’ and slightly less in the ‘Wood’ industry. Manufacturing employment has fallen less in Australia than in countries like Germany and the United States over the period 1999-2009; especially this last country has witnessed a sharp decrease in employment in its manufacturing industries.25

0

5

10

15

20

25

30

35

40

%

Manufacturing Agriculture

Agriculture 4.7Mining 0.2Manufacturing 4.4 Food, beverages and tobacco 3.2 Textile, clothing and footwear 12.7 Wood and paper products 4.7 Pinting, publishing and media 1.5 Petroleum, coal and chemicals 3.7 Non-metallic mineral products 2.6 Metal products 4.4 Motor vehicles and parts 11.1 Other transport equipment 2.0 Other machinery and equipment 3.5 Other manufacturing 5.1


39

Figure 2.5: Employment growth in manufacturing, Australia, Germany and the United States, 1999-2009

(Percentage growth rate)

Source: OECD Structural Analysis Database (STAN); Australian Bureau of Statistics (ABS) for data on Australia

2.2 Structural change and the mining boom

The structure of the Australian economy26 has over time gradually moved away from agriculture and manufacturing towards services and more recently also (back) towards mining. The huge demand in Asia for commodities used in steel and energy production since the beginning of the 21st century has triggered a strong expansion of the Australian mining industry (coal, iron ore, liquefied natural gas; Connolly and Orsmond, 2011). The recent boom in commodity prices has increasingly raised concerns on the possible effects of the mining boom on other parts of the economy like manufacturing and has stimulated once more interest in the issue of the so-called ‘Dutch disease’.27

The sharp increase in Australia’s terms-of-trade accompanying the current mining boom has led to a large appreciation of the Australian dollar (Figure 2.6). This was impossible in previous mining booms as Australia had a fixed (nominal) exchange rate; combined with a central wage setting system. The adjustment of terms-of-trade happened then via an increase in domestic inflation, thereby affecting the Australian economy in a disruptive way (Banks, 2011). Greater flexibility in foreign exchange, labour and product markets allows Australia to better capture benefits from the current boom while cushioning the economy against excessive imbalances and the risk of overheating (Lippoldt and Sztajerowska, 2012).

-80

-60

-40

-20

0

20%

Australia Germany United States


40

Box 2: The natural resources curse and the Dutch disease

Rich and fast growing economies like Norway, Canada, Sweden, Finland, Australia and New Zealand show that the abundance of natural resources (oil, gas, minerals, etc) can be a blessing. Counter-intuitive at first glance, the idea that natural resources might also have adverse effects on the competitiveness of other sectors is now also accepted; to the extent that it has been argued that large endowments may actually become more of a curse, leading to slow economic growth and redistributive struggles (Canuto and Cavallari, 2012). The term ‘Dutch disease’ has been used for describing the Dutch experience following the discovery of a large natural gas field; the resulting real appreciation of the Dutch currency (following the increase in real income, i.e. the expenditure effect) combined with the enhanced competition for production factors like labour and capital (i.e. the resource movement effects) that resulted in a decline of the Dutch manufacturing industry. This shift away from manufacturing has been argued to be detrimental to long term economic performance as competitive manufacturing industries do not return as quickly or as easily as they left, in periods when natural resources begin to run out or if there is a downturn in prices. The existence of a recourse curse or Dutch disease is still a controversial issue; while there is relatively robust evidence that terms of trade increases cause real exchange rate appreciation, the evidence on the shrinking of the manufacturing is, at best, mixed (Brahmbhatt et al., 2010). Also the empirical evidence on the negative impact on long term economic growth is inconclusive; some studies like Sachs and Warner (1995, 2001) estimated a negative growth impact of natural resource intensity, while others (Lederman and Maloney, 2007) don’t find a negative impact of natural capital abundance. Recent World Bank research, using new direct measures of natural capital show no clear pattern between GDP per capita and shares of natural capital of countries (see Figure). Econometric analysis, taking into account other categories of capital (intangible and tangible), fails to qualify natural resources as a curse or a blessing (Canuto and Cavalleri, 2012). The eventual effect is assumed to depend on particular determinants at the national level: studies seem to indicate that Dutch disease effects are more likely to arise under specific conditions such as weak institutions or a poor educational system, often the case in developing countries (Coudert et al., 2008). Likewise Brahmbhatt et al. (2010) show how weak governance and poor economic policies might drive the misallocation and mismanagement of resources, as they shift out of productive activities into unproductive rent-seeking activity.

Natural capital (NCP) and GDP per capita

Source: (Canuto and Cavalleri, 2012).


41

The high exchange rate reduces export revenue for domestic producers (as prices are typically set on world markets) while rendering imports cheaper for consumers; hurting thereby the competitiveness of internationally exposed industries like manufacturing.28 In addition, production factors like capital and labour might be bid away from manufacturing to the mining sector, following the higher commodity prices and mining industry profits (Connolly and Orsmond, 2011), or to services as a result of the revenue brought in by the resource boom.29 These negative effects may be dampened to some extent as higher terms-of-trade increases gross domestic income boosting demand also for (domestic) manufacturing products.

Because of the production links with the rest of the economy, the growing mining activity is also expected to benefit other industries, from construction to services as well as parts of the manufacturing sector. Arguments have been put forward that resource sectors in advanced countries are highly skilled and generate their own spillovers and, as such, often create new opportunities in other parts of the economy (Australian Government, 2011). Input-output data for Australia show that services are expected to benefit the most of the expansion of the mining industry: backward linkages are estimated to be 5 times larger for services compared to manufacturing.

Figure 2.6: Terms of trade and nominal effective exchange rate, Australia

Source: OECD Economic Outlook Database

Empirical evidence suggests that the current resources boom has indeed accelerated the process of structural change in the Australian economy (Figure 2.7). An index of structural change capturing changes between large sectors and along different dimensions (value added in current and constant prices, employment and investment)30 shows that the rate of structural change has increased in the Australian economy since 2003,31 especially in terms of value added in current prices (reflecting the rising commodity prices) and investments. The evidence seems less clear for value added in constant prices and employment which reflects to some extent the large time lags between investment and actual production, as well as the low labour intensity of the mining sector (Connolly and Lewis, 2010).

Similar observations emerge when comparing Australia with other natural-resource intensive countries like Canada and Norway. All three countries benefit from the current resources boom and structural change in their national economies has accelerated to some extent, most prominently in investments and value added in current prices but less in value added in constant prices and employment (see Figure A.2.3 in Annex 1).

60

80

100

120

140

160

180

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Terms of Trade (2005=100) Nominal Effective Exchange Rate (2005=100)


42

Figure 2.7: Structural change in the Australian economy

Structural change Index (Finger-Kreinin dissimilarity index)

Source: OECD Economics Department.

An important contraction of manufacturing activity has been observed in Australia since the beginning of the mining boom, but it would be wrong to classify this completely as the negative impact of the resources boom on manufacturing. Structural change is a broader process going beyond temporal booms in mining and oil industries, even in countries richly endowed with natural resources. The decline in the Canadian manufacturing industry for example is considered coming merely from a standard long-term de-industrialisation trend that is unrelated to oil exports (Bayoumi and Mühleisen, 2006). Likewise, de-industrialisation and the mining boom work both in the same direction in affecting manufacturing employment in Australia.32

In addition, the Global Financial Crisis of 2007/2008 seems to have dramatically impacted manufacturing activity. The contraction of manufacturing, illustrated by falling growth rates of value added and investments, occurred rather simultaneously across Australia, Canada and Norway (two other resource-rich countries) and Germany and the United States (two major manufacturing countries). The break in the series seems to be concentrated around 2007/2008 clearly pointing to the Global Financial Crisis as the main reason for the downturn in global manufacturing; the fact that investments are hit the hardest across countries confirms this conclusions (Figure 2.8).

Also the size of the contraction seems not too different across countries (including natural resource-rich and resource-poor countries) further lending support to the (preliminary) conclusion that the negative impact of the current mining boom on Australian manufacturing seems up to 2010 rather weak.33 Manufacturing value added (both in current and constant terms) decreased relatively less in Australia, reflecting the fact that the Australian economy was relatively less affected by the 2007/2008 global crisis.

The duration and strength of a possible effect on Australian manufacturing is directly dependent on the length of time over which the exchange rate level will stay high. It is generally expected that the terms of trade for Australia remain at historically high levels for an extended period following the rapid industrialisation and urbanisation of Asia (Australian Government, 2011). The effects of the current mining boom might become more permanent in Australia and reflect a longer term change in Australia’s comparative advantage. Nevertheless, there is also reason to believe that terms-of-trade will not improve by more over the next years. Large investments in the mining sector are expected to expand supply and

0

2

4

6

8

10

12

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Value added (current prices) Value added (constant prices)

0

2

4

6

8

10

12

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Employment Investments


43

ease the demand surplus for mining products, thereby lowering terms of trade and the effective exchange rate to some extent.

Figure 2.8: Value added (current and constant prices), investments and employment, manufacturing, Australia, Canada, Germany, Norway and the United States, 1991-2010

1991 = 100


2.3 Drivers of manufacturing performance34

2.3.1 Productivity

Productivity growth in Australia was a major success story during the 1990s, as the Australian economy reported record-high growth rates in both labour and multi-factor productivity (Figure 2.9). Major regulatory reforms and gradual liberalisation accounted for much of that improvement; Australian productivity during that period accelerated faster than in most other OECD countries.35 From 2001 onwards Australia’s productivity growth slumped however with zero to negative growth in multi-factor productivity in most recent years. Several reasons have been put forward for the falling productivity growth in the 2000s including more temporary factors: the effect of drought on agriculture output, the effect of the dramatic increase in commodity prices on mining inputs and outputs (e.g. more extraction of lower quality deposits), the slowdown in productivity-enhancing reforms, rising profitability allowing less-

50

100

150

200

250

300

1991 1994 1997 2000 2003 2006 2009

Australia Canada Germany

Norway United States

50

100

150

200

250

1991 1994 1997 2000 2003 2006 2009



VALUE ADDED, CURRENTPRICES VALUE ADDED, CONSTANTPRICES

INVESTMENTS EMPLOYMENT

0

50

100

150

200

250

300

350

1991 1994 1997 2000 2003 2006 2009



50

100

150

1991 1994 1997 2000 2003 2006 2009




44

efficient firms to remain in business (Productivity Commission, 2010; Dolman, 2009; Eslake, 2011). Part of the productivity slump can be related to the current mining boom as Australia’s productivity performance is broadly in line with other resource-rich countries like Canada and Norway.

Figure 2.9: Labour and multi-factor productivity, Australia 1990-2010

(Annual percentage growth)

Source: OECD Productivity Database.

Interestingly, the strong productivity catch-up of Australia at the economy-wide level during the 1990s did not extend to the manufacturing industry. The productivity gap with the United States which is traditionally considered as being at the productivity frontier has gradually widened over time. While the labour productivity level of Australian manufacturing was estimated to be at 84% of the US level in 1980, this figure fell to 77% in 1990, 62% in 2000 and even 53% in 2005. The Productivity Commission (2010) attributed that downward trend to manufacturers overall using more inputs to achieve the same outcomes. It can be expected that the recent crisis has aggravated the productivity problem as manufacturing output growth fell in absolute terms while input of capital and labour increased further. Manufacturing is estimated to have contributed most to the recent slump in multi-factor productivity growth at the national level (Parham, 2012).

Figure 2.10 presents multi-factor productivity growth for individual manufacturing industries for Australia, Germany and the United States during the periods 1990-2000 and 2000-2007 (see Figure A.2.4 in Annex 1 for similar graphs on labour productivity). The results clearly show the overall lower productivity growth in Australia compared to the United States but also Germany; Australian manufacturing reported negative multi-factor productivity growth in several industries during both periods. Multi-factor productivity seems to have decreased especially in more traditional industries like textiles but also in food, beverages and tobacco. Germany and the United States on the contrary reported positive productivity growth in these industries. The comparisons for another large industry in Australia, the metal industry, are more favourable for Australia with stronger multi-factor productivity growth in the period 2000-2007.

-2

-1

0

1

2

3

4

5

Multi-factor productivity Labour productivity


45

Figure 2.10: Growth in multi-factor productivity in manufacturing industries

(Annual percentage growth)

AUSTRALIA

GERMANY

-18-16-14-12-10

-8-6-4-202468

101214%

1990-2000 2000-2007

-18-16-14-12-10

-8-6-4-202468

101214%

1991-2000 2000-2007


46

UNITED STATES

Source: EUKLEMS.

2.3.2 Labour costs

The increasing importance of emerging economies has drastically changed the competitive conditions in global manufacturing as these countries are able to compete with labour costs which are only a fraction of those in developed economies. Australia is positioned at the high-cost end and the stronger Australian dollar renders labour even more expensive for manufacturers. Manufacturing labour costs are still lower in Australia than in Norway, Switzerland or Germany, but have increased by 6% yearly during the period 1997-2010 (Figure 2.11). Together with Norway, Australia has witnessed the strongest growth in hourly compensation costs (expressed in USD) in manufacturing. Estimates by the US Bureau of Labor Statistics indicate that this strong increase is for more than 70% due to the appreciation of the Australian dollar.

-18-16-14-12-10

-8-6-4-202468

101214%

1990-2000 2000-2007


47

Figure 2.11: Hourly compensation costs (in USD) in manufacturing, 1997 and 2010

(United States = 100)

Note: Compensation costs relate to all employees in manufacturing and include (1) direct pay, (2) employer social insurance expenditures and (3) labor-related taxes (see table 1). Direct pay includes all payments made directly to the worker, before payroll deductions of any kind, consisting of pay for time worked and directly-paid benefits. Social insurance expenditures refer to the value of social contributions (legally required as well as private and contractual) incurred by employers in order to secure entitlement to social benefits for their employees; these contributions often provide delayed, future income and benefits to employees. Labor-related taxes refer to taxes on payrolls or employment (or reductions to reflect subsidies), even if they do not finance programs that directly benefit workers. Source: US Bureau of Labor Statistics.

High labour costs in absolute terms are not necessarily problematic; labour costs should be examined relative to a country’s level of productivity in the manufacturing sector. High labour costs can only be sustained if they coincide with a high level of productivity; low labour cost countries typically have low labour productivity. The recent fall in productivity growth in Australian manufacturing has resulted in rising unit labour costs (ULCs, i.e. labour costs per unit of product) from 2004 onwards, even abstracting from the negative impact of the appreciating Australian dollar (Figure 2.12). While labour costs only account for a fraction of total manufacturing costs in developed economies,36 the evidence indicates that Australian manufacturing suffers from a cost disadvantage not only with respect to emerging countries, but now also increasingly with other OECD countries. The high exchange rate of the Australian dollar in combination with domestic cost negatively affects the international competitiveness of Australian manufacturing. It is clear that Australian manufacturers will need to further develop other competitive advantages (innovation, knowledge, branding, etc.) to compensate for the high cost environment they operate in.

0

20

40

60

80

100

120

140

160

180

1997 2010


48

Figure 2.12 Unit Labour Costs (ULC) in manufacturing, 1995-2010

(2005 = 100)

Note: ULCs are calculated as Total Labour costs dived by real output (both expressed in national currency); hence changes in the exchange rate are not reflected in these results Source: OECD Labour Costs Database.

2.3.3 Scale (dis)advantages

Previous research has shown that considerable advantages to scale exist in manufacturing industries; examples are chemicals and pharmaceuticals, motor vehicles, etc. (Antweiler and Trefler, 2002). Operating in a small remote economy, Australian manufacturers suffer from important scale disadvantages, especially in ‘chemicals, rubber and plastics’ and ‘transport equipment (Figure 2.13). This means that Australian manufacturers do not produce at the minimum efficient scale leading to higher unit costs for manufactured products in Australia. A 2007 report by the Productivity Commission (Dolman et al., 2007) similarly reported that firms employing less than 10 persons were found to play only a little role in US manufacturing but accounted for almost one-quarter of Australian industry.

The large distance to markets also prevents firms in some industries in Australia from achieving the same economies of scale as those of their competitors in Europe or North America (Battersby, 2006). Long distances hamper Australia’s access to foreign consumers as well as providers of capital equipment and intermediate goods, thereby negatively affecting the realisation of scale economies and hence manufacturing productivity.37 But Australia lacks ‘deep’ markets for its manufacturing products not only because of its large ‘external’ distance to world markets but also because of its smaller and fragmented home market (Australian Treasury, 2008; OECD, 2008). With a population of 22 million dispersed across a large country, ‘internal’ distances between fragmented regional markets are also significant in Australia.

70

80

90

100

110

120

130

Australia Germany United States G7 OECD - Total


49

Figure 2.13: Average scale in manufacturing, Australia, Germany and United States, 2008

(Average number of persons engaged per manufacturing enterprise)

Note: number of employees instead of numbers of persons engaged for United States Source: OECD Structural Analysis Database (STAN); Australian Bureau of Statistics (ABS) for data on Australia

0

20

40

60

80

100

120

Australia Germany United States (2006)267


50

Box 3: Australia and the ‘tyranny of distance’

Geoffrey Blainey was the first to coin the phrase ‘the tyranny of distance’ for the name of his book published in 1966 explaining how the economic performance of Australia has been influenced by its remoteness from economic activity in the rest of the world. Blaine described how the distance of Australia from important centres of economic activity as well as the dispersal of population within Australia retarded the flow of commodities and people. Traditional growth theory has largely neglected geographic distance and the influence of neighbouring countries as it relies essentially on national characteristics (i.e. factor endowments and technological progress). But distance can affect productivity and income levels through various channels, including trade, foreign investment and technology diffusion. Large transport and trade costs typically reduce trade, thereby limiting the opportunities for countries to specialise in the activities where they possess a comparative advantage. Distance from world markets also limits the exposure to competition and the diffusion of knowledge. The evidence on the impact of remoteness on economic activity is large. The OECD (2008) found that the distance from Australia (which stood out as the most remote OECD country based on 5 indicators: population density, distance to markets, market potential, market access and access to suppliers) to world markets contributed to lowering Australia’s GDP per capita by 10.6% on average between 2000 and 2004 relative to the average OECD country. Battersby (2006) reported that the Australia’s vast and remote geography may explain 45% of the difference in labour productivity between the United States and Australia. Redding and Venables (2004) showed that market and supplier access explain up to a third of variation in per capita income differences. Nevertheless, Australia and New Zealand traditionally challenged the ‘tyranny of distance’ as they punched above their weight’ (Leamer, 2007) and did better than the predicted norm given their degree of remoteness (Withers, 2007). On the other hand, the same trade costs that weigh on exports make international producers less competitive in Australian markets. Remoteness increases the natural protection afforded to industries and high transport costs render imported goods and services less competitive allowing thereby inefficient firms (which have not fully realised economies of scale) to exist profitably. High import barriers for specific manufacturing industries in the past only added to that natural protection, multiplying failures in the Australian market. Arguments have been put forward that the tyranny has been defeated as economic distances have become smaller during the past decades because of major technological progress in logistics (e.g. shipping technology such as containerisation) and communication. The OECD (2008)38 however found, maybe surprisingly, that the distance to world markets reduces trade to a similar extent today as it did in 1970. Using new transport costs data, evidence was reported that real average international transport costs for Australia and New Zealand more than doubled between 1973 and 2006. In the case of maritime transport (which is important for Australia), it may be that rising fuel costs and increasing port and airport charges have offset the gains from technological innovations39. These weight-based measures of real cost of transport (using an unchanged weight/value ratio over time) probably underestimate the decline in ad valorem transport costs Hummels (2007) reported that the weight/value ratio of traded goods has significantly fallen over time as many goods are now relatively light. Consequently, transports costs might have decreased relative to the value of the transported goods (OECD, 2008). Irrespective of the changes in transport costs, Australia will benefit from the emergence of large (consumer) markets in Asia and its overall economic distance will decrease40. As the global economic centre is shifting to the East, the distance of Australia to these new world markets will still be significant but smaller than to markets in Europe and the United States. While in the 1950s about 15% of world GDP was located within 10 000 kilometers of Australia, in 2010 about one-third of world GDP fell within the 10,000km range. And if emerging Asia keeps growing, that figure could be almost as high as two-thirds of world GDP by 2050 (Thirlwell, 2012).

2.3.4 International orientation

The large distance from world markets contributes to a large extent to the more limited degree of internationalisation of the Australian economy and its lower participation in GVCs. As already discussed, large economic distances result in high trade costs (in the same way as tariffs do) which hamper the global integration of Australia. Blum and Leamer (2000) estimated that exporting a good to a country 1 500 kilometres away is on average equivalent to an import tariff between 7 and 17%.


51

The trade/GDP ratio is typically lower in Australia than in other OECD economies, both for import penetration ratios (i.e. the share of the domestic market served by imports) and export shares (i.e. the part of production that is exported) across countries. Figure 2.14 shows that Australia ranks among the OECD countries with the lowest import penetration ratios and export shares. The export share of Australian manufacturing is strikingly low in international perspective, exceeding only those of Japan and the United States.41

Interestingly, the wedge between export shares and import penetration in Australia is more pronounced than in other OECD countries. This distinct stylised fact was already reported in the 1980’s and 1990s (Oliveira Martins, 1993; Clark et al., 1996) and is probably due to several factors: the composition of exports (large Australian exports in agricultural and mining products, and higher imports of manufactured products), scale (Australian exports suffer from a significant scale disadvantage making exports more expensive, see above), geography (differences between origins of imports and destinations of exports), etc. Over the last years, this difference between import penetration and export shares for Australian manufacturing has widened further, as import penetration has grown much more than the share of production which is exported (Department of Innovation, Industry, Science and Research, 2011). One explanation for this is related to structural reforms in the 1980s and 1990s that have liberalized and opened the Australian market to foreign producers. More recently, the increased terms-of-trade and the corresponding appreciation of the Australian dollar have led to strong income growth as well as lower import prices adding to the attractiveness of foreign products (in particular luxury goods) in Australia.

Figure 2.14: Import penetration ratio1 and export share2 in manufacturing, Australia and other major OECD countries, 2009

Note: 1) import penetration defined as imports in percentage of domestic apparent consumption 2) export share defined as exports in percentage of production Source: OECD Structural Analysis Database (STAN); Australian Bureau of Statistics (ABS) for data on Australia

In order to overcome (some of) the large trade costs, foreign companies have set up subsidiaries in Australia to serve the local market, while reversely Australian companies have located subsidiaries abroad to serve foreign markets. Foreign companies bring important benefits to host countries, such as technology and knowledge, human capital, increased competition, etc. (OECD, 2008). Economic distance has limited

0

10

20

30

40

50

60

% Import penetration Export share of production


52

the growth of trade but seems less a constraint on investment; Australia’s share of world trade and world production is around 1% while inward and more recently also outward FDI42 has been several times larger43 (McCredie, 2007).

Figure 2.15 indicates that Australia has attracted a significant amount of foreign direct investment (FDI) compared to major OECD economies. Australia has attracted a lot of FDI over time especially in different sectors including services and mining (with some mergers and takeovers of Australian firms by foreign groups); one fifth of its inward FDI stock in 2010 (almost AUD 90 billion) was in manufacturing industries. Some of the recent investments in Australia serve as export platforms and are probably related to Australia’s relative proximity to Asia; in addition, investment in Australia benefits from a stable and growing market in Australia, efficient institutions, English as business language, etc.

Australia has become an important international investor abroad during the last decade. Again the proportion of manufacturing in total outward FDI of Australia is smaller than in other sectors; illustrating the important investments activities of Australian services firms (and to lesser extent mining firms). Just like in international trade (see below), Asia has become increasingly important for Australian outward investment, attracting almost 10% of the outward FDI stock of Australia in 2010. Likewise, outward investments flows from Australia have significantly grown during the last decade with increasingly more investments going to Asia; in particular China, India, Indonesia, etc.

Figure 2.15: Inward and outward FDI positions, 2010

(In percentage of GDP)

Source: OECD International Investments Database and OECD National Accounts database.

The integration of Australia into GVCs likewise is less pronounced than in other countries. As production process are dispersed geographically with one stage in one country producing inputs for a subsequent stage in another country, intermediates trade within the same industry has become more important. Indices on intra-industry trade, for total goods as well as intermediates separately, point to a lower and decreasing integration of Australia into production networks organised on a global scale (Figure 2.16).

0102030405060708090

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

Inw

ard

Out

war

d

United Kingdom

(2009)

Australia Canada Germany (2009)

Turkey France United States

Italy Korea Japan

Total FDI Manufacturing


53

Figure 2.16: Intra-industry trade in manufacturing, 1995 and 2010

(Grubel-Lloyd index)

Note: Intra-industry trade is calculated as the Grubel-Lloyd index:

100 * [ 1 – (∑(EXPOi - IMPOi) / (∑(EXPOi + IMPOi))] This index varies between 0 and 100. If a country exports and imports roughly equal quantities of a certain product, the

index value is high. Whereas if trade is mainly one-way (whether exporting or importing), the index value is low. OECD (2005) discusses the limitations of this index.

Source: OECD Bilateral Trade by End-Use Database.

d) Innovation and knowledge

The last decades witnessed a shift in specialisation in OECD economies towards higher technology and knowledge manufacturing industries, following the growing competition from emerging economies in more traditional labour-intensive sectors. In addition, OECD manufacturers increasingly compete on the basis of innovation and knowledge to compensate the high cost environment they are operating in; the previous analysis has shown that Australia has also become a high cost country for manufacturing during the past decade.

Australian manufacturing is still strongly oriented towards lower and medium technology production; resource-based industries undertake typically smaller R&D investments and hence are typically classified as lower technology industries (OECD, 2010). Compared to other major OECD economies, the value added created in Australian manufacturing originates largely from lower technology intensive activities, while only a smaller fraction comes from high technology industries (Figure 2.17). Other resource-intensive countries like Norway and Canada, but especially Finland and Sweden seem to have been successful in developing high technology activities to complement their advantage in resource-intensive industries.44

0

10

20

30

40

50

60

70

80

90

100

All goods, 2010 Intermediate goods, 2010 All goods, 1995 Intermediate goods, 1995%


54

Figure 2.17: Value added in manufacturing, by technological intensity classes, 2008


This lower technology specialisation of Australian manufacturing explains to a large extent the overall lower business R&D-intensity and lower patent propensity of manufacturing in Australia compared to other major OECD countries (see Figures A.2.5 and A.2.6 in Annex 1). Aggregate figures on innovation performance should thus be interpreted with care since they are heavily dependent on the structure of countries’ industrial production.

It is noteworthy that a significant amount of R&D is also performed in low-technology industries, particularly in resource-based economies. OECD countries can remain competitive in specific segments in lower technology industries when they are able to compensate for their higher (labour) costs by successfully innovating. The international fragmentation of production allows countries and firms to specialise in higher value added, knowledge intensive segments, also within lower technology industries.

Australia invests indeed heavily in R&D in lower technology industries which most likely contributes to the strong economic performance and specialisation of manufacturing in these industries (Figure 2.18). Especially in medium-low technology industries such as ‘Basic metals and fabricated metal products’, but also in low technology industries like e.g. ‘Food and beverages’, Australia shows a very high R&D intensity. The picture is quite different in higher technology industries, with Australia only investing a fraction of what other major OECD economies are investing in R&D in these industries.

0%

20%

40%

60%

80%

100%

High-technology Medium-high technologyMedium-low technology Low-technology


55

Figure 2.18: Business R&D intensity, by technological intensity classes, 2007

(Business R&D investments in percentage of value added)

Source: OECD Structural Analysis Database (STAN)

As discussed in Part 1, R&D investments are only one source for innovation and knowledge generation; non-technological forms of innovation like e.g. marketing and organizational innovation which are less related to R&D, have become increasingly important, especially in countries whose industrial specialisation and structure limit the scope for technology based R&D activities. Manufacturing firms in Australia are to a large degree active in non-technological innovation, in particular marketing and organisational innovation (exclusively or in combination with product/process improvements; Figure 2.19). Australian manufacturing scores relatively well in international comparisons based on this broad definition of innovation; a large number of innovative firms are active in more traditional industries like food and metal (Smith, 2007). A large part of the innovation efforts are targeted at modifying and adopting products and processes for the Australian domestic market; Australian firms introducing product innovations that are new to international and domestic markets are less numerous compared to other countries (Department of Innovation, Industry, Science and Research, 2011).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Japan France (2006)

Canada (2006)

Australia (2005)

Germany United States

Korea United Kingdom

Mexico Italy

% Medium-low technology Low technology

0

5

10

15

20

25

30

35

40

United States

France (2006)

Canada (2006)

Japan United Kingdom

Korea (2006)

Germany Australia (2005)

Italy Mexico

% High-technology Medium-high technology


56

Figure 2.19: Innovation strategies in the manufacturing industry, 2006-2008

(As a percentage of all manufacturing firms)

Source: OECD Science, Technology and Industry Scoreboard 2011 and Measuring Innovation: A New perspective (OECD, 2010).

Product and process innovation are not always based on R&D (Figure 2.20): figures on innovation and the R&D status for Australia show that almost two thirds of product innovators are not undertaking R&D themselves. The same observation emerges when analyzing the link between R&D and process innovation. These results underline that innovation performance is much broader than only investing in R&D, especially in the case of Australian manufacturing. As discussed in Part 1, innovation is increasingly based on the broad accumulation of so-called ‘intangible assets’: computerised information, innovative property (including R&D) and economic competencies (including firm-specific capital and organizational capital). A recent report by the Productivity Commission estimated the intangible capital stock for the total economy and concluded that Australia had a ratio of intangible investment to output that is around mid-range of the estimates for other countries. Australia has a lower ratio than Finland, the United States, the United Kingdom, France, Germany and Japan, but a higher ratio than Canada, the Netherlands, Italy and Spain (Barnes and McClure, 2009).

0

20

40

60

80

100

%Product or process innovation only Product or process & marketing or organisational innovation Marketing or organisational innovation only


57

Figure 2.20: Product and process innovators by R&D status, total economy, 2006-2008

(As a percentage of product and process innovators)

Note: data refer to manufacturing only for Korea and Russian Federation Source: OECD Science, Technology and Industry Scoreboard 2011.0

Collaboration is one way to pursue innovation without undertaking R&D; research has shown that firms that collaborate on innovation spend more on innovation than those that do not, suggesting that collaboration is likely to be undertaken to extend the scope of a project or to complement firms’ competencies more than to save costs. Confronted with increasing global competition and rising innovation costs, companies can no longer survive on their own innovation efforts but look increasingly for new, more open, modes of innovation by collaborating with external partners, whether suppliers, customers or universities.

In most countries collaboration in innovation with foreign partners is at least as important as domestic cooperation; while in Australia innovating firms work almost exclusively with national innovation partners (Figure 2.21). Part of this national collaboration is with government research organisations and higher education institutions which occupy a relatively strong position within the Australian innovation system. There are some indications that SMEs, which dominate Australian manufacturing, collaborate less in innovation (compared to larger firms) both on a national and international level.

Economic distance is assumed not only to impact the international trade (and investment) position of countries but also to hamper the international collaboration in innovation, as establishing networks over large distances is sometimes very costly.45 Technology flows (i.e. payments for R&D services and receipts from patents and licenses) reflect a rather low level of internationalisation of knowledge for Australia (OECD, 2011). Because of knowledge being tacit and difficult to codify, knowledge spillovers decline with distance even in a world with enormous communication possibilities. The use of knowledge for technology development beyond formally contracted parties declines by half on average for every 1 200 kilometers (Keller, 2002). Economic distance impedes a successful transition to more knowledge manufacturing; Australian firms will hence have to make more efforts to tap into international ideas and technologies or access specific skills and competencies abroad.

0

10

20

30

40

50

60

70

80

90

100

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Pro

duct

Pro

cess

Korea (2005-07)

Finland France United Kingdom

South Africa

(2005-07)

Italy Russian Federation

New Zealand

(2008-09)

Australia (2006-07)

United States

Brazil

R&D active firms Firms without R&D


58

Figure 2.21: National and international collaboration in innovation, total economy, 2006-2008

(As a percentage of innovating firms)


e) Human capital and management

Human capital plays a key role in innovation and more broadly in the creation of knowledge within manufacturing; high-level skills in manufacturing workforces are important building blocks for the development of sustainable firm capabilities. Notwithstanding a relatively high share of the Australian adult population with tertiary education (37% versus 30% as the OECD average) and immigrants that are relatively highly educated (in comparison to other OECD countries), Australian manufacturing seems relatively unsuccessful in attracting this human capital. Data by the Productivity Commission (2007) indicated that employees in Australian manufacturing have on average significantly lower educational attainment than their peers in the United States (13% had a bachelor degree or higher versus 22% in the United States).

Australian manufacturing employs a relatively small but growing number of Human Resources in Science and Technology (HRST)46 compared with other major OECD economies which is again likely to be related to its industrial structure (Figure 2.22). Looking more closely at the number of researchers (i.e. professionals engaged in the conception and creation of new knowledge, products, processes, methods and systems and directly involved in the management of projects) gives similar insights: manufacturing in Australia scores relatively weakly from an international perspective with only 1 per thousand employees being a researcher (Figure 2.23).

0

5

10

15

20

25

30

35

40%

National only International


59

Figure 2.22: Number of HRST employees in manufacturing, 2008

(As a percentage of all employees)

Source: OECD Skills by Industry Database.

Figure 2.23: Researchers in manufacturing and services, 2009

(Per thousands employment in industry)


High performance (in manufacturing) is however not only based on HRST and researchers, especially in more resource-based economies; previous research has shown that management is increasingly important for the development of innovation capabilities in firms. Better management capabilities have been demonstrated to positively affect productivity performance (Bloom et al., 2007). An international

-5

0

5

10

15

20

25

30

35

France Germany Italy United Kingdom

United States

Australia Canada Turkey Japan

% Average annual growth rate 1998-2008

0

2

4

6

8

10

12

14

‰ Manufacturing Services Other sectors


60

study by the Australian government showed that management performance in Australian manufacturing is rated as moderately above average when benchmarked on people, operations and performance (Figure 2.24). More in detail, significant differences were found between SMEs and large firms (in particular MNEs) as well as across industries. In addition, the educational attainment of Australian managers in manufacturing was lower compared to their peers in other countries (Australian Government, Department of Innovation, Industry, Science and Research, 2009)

Figure 2.24: Overall management performance, 2009

Source: Australian Government, Department of Innovation, Industry, Science and Research. Report ‘Management matters in Australia: Just how productive are we? (2009).

2.5

2.6

2.7

2.8

2.9

3

3.1

3.2

3.3

3.4


61

CHAPTER 3 AUSTRALIAN MANUFACTURING AMID GLOBAL COMPETITION

This section discusses the performance of Australian manufacturing on international markets, first by analyzing the export performance of Australian manufacturers from a sectoral and geographical perspective (what is exported and where?). The international competitiveness of Australian manufacturing is assessed along different dimensions to get more insights into the challenges that Australian manufacturers are facing on international markets. The export performance in most recent years is studied in particular to determine if and to what extent Australian manufacturing has been affected by the mining boom and the associated appreciation of the Australian dollar. In addition, the international (import) competition on the domestic market is also touched upon.

Within these analyses, specific attention is devoted to Asia, as the shift of global manufacturing towards that region offers large and new opportunities for Australian manufacturing. The results aim to shed light on whether Australian manufacturers are capturing these opportunities and aims to identify challenges and barriers they are confronted with. As global manufacturing is increasingly organised within GVCs, a discussion on the integration of Australian manufacturing in GVCs complements the analysis.

This competitiveness analysis focuses on Australian exports of goods; in particular on manufactured goods. It should however be kept in mind that Australia has become an important exporter of services in past years, for example in education, travel (tourism and business), etc. Trade in services accounted for 19.6% of Australia’s total trade in goods and services; services exports grew by an average of 6.5% per annum between 2005 and 2010.47


62

Box 4: The OECD Bilateral Trade Database by Industry and End-Use

Export and import data come from the new OECD STAN Bilateral Trade Database by Industry and End-use category (BTDIxE), where values of imports and exports of goods are broken down by industrial sector and by end-use category at the same time. This data source has been used throughout this section (except for the data on price and quality) in order to assure consistency. This new database builds further on the OECD STAN Bilateral Trade Database (BTD) which has been regularly published since the mid-1990s and presents trade values broken down by the 3rd Revision of the International Standard Industrial Classification (ISIC Rev.3). Using the Broad Economic Categories classification of the United Nations Statistics Division (UNSD) allows a distinction between the end-use (intermediate, final, capital, etc.) of traded goods. This information enables a better analysis of the integration of countries into GVCs. The OECD Bilateral Trade Database by Industry and End-Use Category (BTDIxE) is derived from OECD’s International Trade by Commodities Statistics database (ITCS) and UNSD’s Comtrade database, where values and quantities of imports and exports of all commodities (i.e. merchandise trade) are compiled by partner country and according to product classifications. In ITCS and Comtrade data are classified by reporting, or declaring, country (i.e. the country supplying the information), by partner country (i.e. origin of imports and destination of exports) and by product (currently reported according to HS Rev.3, 2007).

To compile the bilateral trade database by industry and end-use category, each traded product within a Harmonised System (HS) code from ITCS and Comtrade was assigned to a single ISIC Rev.3 industry and a single end-use category. Thus, eight sets of conversion keys were produced using correspondence tables developed internally by the OECD’s Directorate for Science, Technology and Industry based on the correspondence tables published by UNSD. In particular, trade flows are divided into 58 economic activities and 9 categories of goods including the three main end-use categories: capital, intermediate inputs and consumption. In this first version of BTDIxE, estimates of imports and exports are presented for 65 reporters: (i.e. the 34 OECD member countries in 2011 and 30 non-member economies and the Total World) as well as 67 partners (all 34 OECD countries, 30 non-member economies, 2 ‘residual partners’ the ‘Rest of world’ and ‘unspecified’ as well as a world total). The reporter ‘Total World’ is calculated by aggregating the trade flows of all BTDIxE reporters; this estimated reporter World in BTDIxE covers approximately 95% of total reported world trade. Data are expressed in current price US dollars and broadly cover the time-period 1988-2010.

Australian exports of goods in this database amounted to USD 211 830 billion in 2010, of which USD 74 390 billion in manufacturing industries. One point of attention specifically for Australia concerns the unallocated or confidential trade, i.e. trade which is not allocated to any regular (HS or SITC) product codes and/or not recorded by partner country, due to confidentiality or other reasons such as incomplete or ambiguous information. In the source database ITCS, values under this item stem from the category “commodities not specified according to kind” (for products) and from “other areas not elsewhere specified” (for partners). The share of unallocated or confidential trade in total trade varies across reporters and is often likely to be concentrated in certain groups of products (or industries), partners and sometimes certain years.

Export data from Australia are especially affected by this problem, although the quality of the data has improved over time at least for unallocated or confidential products. In 2000, 19% of Australian merchandise exports could not be classified to specific industries. This figure fell to 5% in 2010. The share of unspecified partners increased however from 2% in 2000 to 12% in 2010. The increase in mining exports is likely to play a role in it, but the problem requires some caution in interpreting evolutions over time also for manufacturing products.

The OECD-DSTISTI working paper ‘Compilation of Bilateral Trade Database by industry and End-Use category’ includes more details on the database. [http://www.oecd-ilibrary.org/science-and-technology/compilation-of-bilateral-trade-database-by-industry-and-end-use-category_5k9h6vx2z07f-en]


63

3.1 Australian manufactures on international markets

3.1.1 Sectoral and geographical structure of merchandise exports by Australia

The de-industrialisation in developed OECD economies has been accompanied by diminishing market shares in terms of exports. Declining export shares are reported for major manufacturing economies like the United States, Japan, France and to a lesser extent Germany (Figure 3.1). Australia is no exception, as the share of Australian manufacturing in world exports has contracted over the past fifteen years from 0.75% to 0.63%48; Australian manufacturing exports are concentrated in lower technology intensive industries (Figure 3.2). The growing importance of emerging economies in exports is strongly driven by the performance of China which has become world’s largest exporter of manufactured products. But other emerging economies like India, Thailand, the Russian Federation, Turkey and Brazil have also expanded their manufacturing activities over the last decade.

Australia’s small and declining share in world exports of manufactured goods stands in sharp contrast with the country’s shares in world exports of basic commodities: mining and primary goods exports from Australia represented respectively about 3% and 11% of world exports in 2010 (Figure 3.2). The share of mining of metal ores, mining of coal and lignite, extraction of petroleum have increased by factors between two and six following the recent mining boom. The share of primary goods has fluctuated considerably during the period 1996-2010, but the 2010 share is at about the same level as in 1996. The structure of Australia’s export (of goods) portfolio clearly illustrates this growing specialisation towards mining products (see Figure A.3.1 in Annex 1). Mining is responsible for about 55% of total goods exports from Australia; manufacturing for 35%;% and primary products (agriculture, hunting, forestry, etc.) for about 5%.49

Figure 3.1: Export market shares in manufacturing, 1996 and 2010

(In percentage of world exports)

Source: OECD Bilateral Trade Database.

0123456789

1011121314

2010 1996%


64

Figure 3.2: Australia’s export market shares in all goods and in manufacturing, 1996-2010



An issue that has drawn a lot of attention in Australia is whether this explosive growth in mining exports has come at the expense of Australia’s exports of manufactured goods. The weight of Australian manufacturing exports has not changed much since 2005 (i.e. the start of the mining boom) at least until 2010; its world share in manufacturing remained stable at 0.63%50 (Figure 3.3). Furthermore, other major manufacturing OECD countries, with the exception of Korea, have lost substantial market shares during the same period which is most likely explained by the rapid emergence of new competitors (China in the first place). Canada, another country benefitting from the current resources boom, has also lost a large market shares on international markets, although the Canadian dollar appreciated less than the Australian dollar. Of course, these aggregate data not control for all different forces at play (of which currency appreciation is only one).

0123456789

101112

1996 1998 2000 2002 2004 2006 2008 2010

Mining and quarrying Agriculture

All goods Total manufacturing%

00.20.40.60.8

11.21.41.61.8

1996 1998 2000 2002 2004 2006 2008 2010

Medium-low tech. Low technology

Total manufacturing Medium-high tech.

High technology

%


65

Figure 3.3: Export market shares of selected countries, manufacturing goods, 2003-2010


Source: OECD Bilateral Trade Database

The geographical composition of Australian exports shows that growing mining exports are mainly (by more than 90%) destined to the Asian region; nevertheless an important restructuring has taken place among destinations within Asia (Figure 3.4). Fast industrialising countries like China and India are gaining importance at the expense of de-industrialising Japan: the share of mining exports shipped to Japan has fallen from 45.4% to 23%, while the share to China grew from 5.5% to 40.2% in 2010. Korea is another important market for Australian mining products, with a share of 12% that has largely remained stable between 1995 and 2010.

The Asian region is also the largest export market for Australian manufactures, but less important compared to mining products: about 54% of manufactured goods exported from Australia were destined to Asia in 2010 as opposed to 90% in mining. While some geographical re-orientation is also taking place here (larger shares again for China and India), the process seems less intense compared to mining products. Table A.3.1 in Annex 2 presents the destination markets for the largest export industries in Australia clearly shows the importance of the growing Asian market.

The emerging economies in Asia are large markets for Australian basic commodities, not only in mining but also for primary products. More than half of Australian agriculture exports go to the Asian region; with China accounting for almost 25% of the total figure. The United States, and to a lesser extent also Europe, remain particularly important export markets for manufactured goods; the United States for example in iron and steel, machinery and equipment, and food, beverages and tobacco.

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010

Germany

United States

Japan

France

Korea

Canada

Australia

Norway

New Zealand


66

Figure 3.4: Geographical structure of Australia’s mining and manufacturing exports, 1996 and 2010

(In percentage of total exports of Australia)

Manufacturing

Mining


3.1.2 Australia’s manufactures export growth

Australia’s merchandise exports increased from USD 54 billion in 1995 to USD 221 billion in 2010, largely driven by rising exports of mining products as indicated above. Mining exports grew from USD 10 billion in 1995 to USD 115 billion in 2010 due to both larger volumes and higher prices. Growth in manufacturing exports was more limited (from USD 30 billion in 1995 to USD 74 billion in 2010). Given that growth in world exports was much higher, this resulted in a loss of market share of Australia in manufacturing exports.

Export growth typically happens along the intensive margin (i.e. through the growth of existing trade flows) and along the extensive margin (i.e. through new trade flows: new products and/or new geographical destinations) 51. For most OECD countries, the largest contribution to export growth comes from the intensive margin (see Beltramello et al. 2012) while the extensive margin is significantly more important for emerging economies. Australian manufacturing stands in between; 50% of export growth between 1995 and 2010 was accounted for by changes in the extensive margin, well above that of historically large manufacturing countries such as Japan, Germany, or the United States (Figure 3.5). This clearly suggests that Australian manufacturers have been relatively successful in launching new combinations of products and destinations in their product portfolio during the period 1995-2010.


67

A large part of the growing Australian exports, both along the extensive and the intensive margin, go to the Asian market. The share of new product/partner linkages with Asian countries accounted for almost half of the variation along the extensive margin between 1995 and 2010, which indicates that Australian manufacturers were successful in developing new activities targeted at Asian markets; relatively more so than other manufacturing countries. China and India were the most important markets for these new export activities. Asia also ranks highly along the intensive margin, as 40% of the larger exports of existing product/market combinations are directed to the region; China and India are here slightly less important.

Figure 3.5: Australia’s manufactures export growth: intensive and extensive margin, 1995-2010

(In percentage of export growth)

Note: Other Asian countries are: Brunei, Cambodia, Myanmar, Hong Kong (China), Indonesia, Japan, Korea, Laos, Malaysia, Philippines, Singapore, Thailand, Viet Nam. Intra-area trade is included. Source: Calculations based on OECD Bilateral Trade Database.

0

25

50

75

100

Net extensive of which: China+India of which: Other AsiaIntensive of which: China+India of which: Other Asia

%


68

Box 5: Further explaining Australia’s manufactures export growth - decomposing the intensive margin

An additional “shift and share” analysis sheds more light into the dynamics of Australia’s export performance; does Australia’s export growth (along the intensive margin) derive from its specialisation in products for which world demand is high (sectoral component); from an orientation towards (Asian) markets where demand for imports is high relative to world demand (geographical component); or is it the result of pure export competitiveness (or lack thereof) of Australian manufacturers52. Results were calculated for the periods 1995-2005 and 2005-2010 in order to analyse the most recent developments (see Figure). This shows foremost that Australian manufacturers, like their counterparts in all other developed OECD countries, have experienced a significant loss of ‘pure’ export competitiveness, while emerging economies have become more competitive.

The sectoral effect or industry mix for Australia is positive during the two considered periods, indicating that Australia is exporting more products for which world demand is growing. The greater importance of this sectoral effect during the most recent period (2005-2010) reflects in particular growth in mining-related manufactures exports. The geographical component or market mix contributed negatively to Australia’s export growth in the period 1995-2005, indicating that Australia did not export (a lot) to growing markets then. In the most recent period 2005-2010, Australia’s manufacturing export growth was however unaffected by this geographical mix, suggesting that Australia has restructured its export portfolio geographically over the years (e.g. within Asia and away from slower growing markets in Japan and Korea to fast growing markets in China, India, Indonesia, Malaysia, etc.). The lack of a positive geographical effect for Australia clearly indicates at the same time that Australian manufacturers could do better in tapping into growth markets. Other OECD manufacturers (Germany, France, Italy, Japan and Korea) target growth markets much better as reflected in positive geographical effects.

Contribution of structural and performance effects to export growth in manufacturing

2005-2010


69

1995-2005

Source: Calculations based on OECD Bilateral Trade Database.

Following this aggregate analysis, a growth-share matrix53 for Australia’s manufactured exports was

developed to provide more detailed insights on the position of Australian manufacturers in specific markets and/or industries.54 The aim is to better understand the strengths and weaknesses of Australian manufacturers across different markets and industries, in order to better identify possible opportunities for producers in international markets.

Figure 3.6 shows, at the level of total manufacturing, the relative market share of Australia by destinations (i.e. the share of the foreign market that is served by Australian exports) on the horizontal axis, while the vertical axis presents market growth in individual economies (calculated as the growth in world imports destined to that country during 2005-2010). The size of the balls is proportional to the size of the market economies (proxied by the value of world imports into that market). The results again clearly underline the importance of Asian economies in the export portfolio of Australian manufacturers, i.e. most Asian economies are positioned in the upper right quadrant. Economies like Indonesia, China, India, etc. account for above-average shares in Australia’s manufacturing exports and have grown by more than the world average. Australian manufacturers should thus be in a favourable position to capture future growth in these markets, some of which e.g. China, Singapore, India and Korea are also already large in absolute terms.

In other growing markets like for example Brazil, Argentina, Cambodia, etc. Australia seems to be in a much weaker position. Many European countries are featuring in the lower left quadrant indicating that they are growing less rapidly than the world market while also being less important for Australian manufacturing. New Zealand is at the lower right quadrant and therefore – not surprisingly - a very important due to proximity but slowly growing for Australian manufacturing exports.


70

Figure 3.6: The export portfolio of Australian manufacturing - growth-share matrix 2005-2010


In order to assess whether Australian manufacturers do capture growth opportunities in different markets, Figure 3.7 relates import growth in individual economies during 2005-2010 on the vertical axis – just like in Figure 3.6 – to the growth of exports from Australia to these economies. Economies positioned to the left point to ‘missed’ opportunities as the growth of Australian exports there has not followed growth in the market. The results indicate that this is the case for a large number of economies, including the majority of Asian partners. Only in few markets, most of them (still) relatively small for manufacturing exports in 2010, Australian export growth did follow or exceed total market growth. While the results in Figure 3.6 overall indicate a rather good positioning of the export portfolio of Australian manufacturing – with a strong position in fast growing markets - results in Figure 3.7 show that Australian manufacturers do not fully capture the offered growth opportunities.

The above analyses can also be made at the level of individual manufacturing industries in order to identify opportunities across international markets in specific industries. Data for selected countries are presented in Tables A.3.2 and A.3.3 in Annex 2.

Brazil

Indonesia

Russia

ChileArgentina

IndiaCambodiaSlovak Republic China

Saudi ArabiaAlbaniaPoland

Czech Rep.Moldova

Thailand

Romania KoreaSingaporeTurkeySouth AfricaHong KongNeth.

MalaysiaGermany

Switz.Norway

Mex.Isr

Chinese TaipeiCyp.SerbiaBul.

Slov.Lith. SwedenHung. Fra JapanCanadaItalyAustriaPort.

B&HBelg

Est.LatviaPhilippinesLux. United States

Den.United Kingdom

Malta N-Z (19.2)Greece

FinlandSpain

Croatia

Ireland-20

0

20

40

60

80

100

120

140

160

0 0.5 1 1.5 2 2.5

Gro

wth

of i

mpo

rts fr

om th

e W

orld

200

5-20

10 (

%)

Market share of Australia (%)

Market size

Average Australian market share for all countries (0.6%)

Market size

Average growth of imports from the World 2005-10 (36%)


71

Figure 3.7: The export portfolio of Australian manufacturing – market growth versus Australia’s exports, 2005-2010


3.1.3 International competitiveness of Australian manufacturers

The previous discussion was largely centred around Australia’s market shares across industries and economies; but in which industries are Australian manufacturers successfully competing on international markets? The comparative advantage of Australia is, in line with results reported above, largely concentrated in primary products and mining goods (Figure 3.8). Indices of revealed comparative advantage (RCA > 1)55 point to the clear supremacy of mining industries in terms of competitiveness (mining of metal ores, mining of coal and lignite) over all other exporting industries in Australia. The competitiveness of Australian mining was already established fifteen years ago, but was situated in different types of activities like extraction of crude petroleum and gas at the time.

Australian manufacturing stands out as overall being less competitive with international competitiveness concentrated in a very limited number of industries. The most internationally competitive industries are the non-ferrous metal industries (a medium-low technology industry), i.e. downstream industries active in processing mining output, such as the treatment of non-ferrous metals, or refined petroleum, coke and lignite. In addition, two low technology industries – food, beverages and tobacco, and wood products – also show RCA indices above 1. While Australia has significantly strengthened its

Brazil

Indonesia

Russia

Chile

Argentina (563)IndiaCambodia Slovak Rep.

ChinaSaudi Arabia

AlbaniaPoland

Czech Rep MoldovaThailandRomaniaKoreaSing.Turkey

S. AfricaHKNld

MalaysiaGermany

SwitzerlandNorway MexIsr TaipeiCyp

Serbia

BulgariaSlovenia

LithuaniaSwe Hun

FranceJpn

CanadaItaly

AustriaPortugal

Bosnia & HerzegovinaBelgiumEstoniaLatviaPhilippines Luxembourg

USADenmark

UKNZFinGreeceSpain

Croatia

Ireland-20

0

20

40

60

80

100

120

140

160

-100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 220

Gro

wth

of i

mpo

rts fr

om th

e W

orld

200

5-20

10 (

%)

Growth of imports from Australia 2005-2010 (%)

184.1360836Market size


72

international competitiveness over the longer period 1996 and 2010, more recent years have witnessed loss of competitiveness of Australian manufacturing in these industries.

Australian manufacturing shows also competitiveness in the high technology industry of pharmaceuticals which is most likely related to the important activities of foreign MNEs in Australia. Recently, also another high technology industry, scientific instruments, has shown important gains in international competitiveness.

Table A.3.4 in Annex 2 presents the main competitors in the industries where Australia is internationally most competitive. The results clearly reflect the evolving landscape in world manufacturing with competition for Australian exporters emerging from all regions: while some manufacturing industries are (still) dominated by US and European producers, other industries reflect the rapid emergence of China and other countries like India, Indonesia, etc. Japan and Korea are still important producers in industries like iron and steel and machinery and equipment. Important competitors for Australia in mining industries are the United States, Russia and China; in agriculture mainly the United States and Europe.

Relating the international competitiveness of Australian manufacturing to evidence on the ‘tyranny of distance’, shows that Australia is clearly specialised in industries for which distance-related costs are important and where they might decrease international trade (Figure 3.9) As discussed above, Australia’s remoteness is already weighing heavily upon its export activity: high distance-related costs56 make shipments overseas considerably costlier and hence may potentially erode the competitive advantages of producers.57 Elasticities of trade to distance give an indication of the extent to which exports diminish with remoteness in each industry; they are negative as larger distances act as higher barriers to trade.58


73

Figure 3.8: International competitiveness of Australia, goods exports, 1996 and 2010

(RCA index )

ALL GOODS

MANUFACTURING GOODS


2.1 2.2 0.8

1.9

7.3

26.1

1.7

23.3

0.4 0.4 0

5

10

15

20

25

30

2010 1996

0123456789

1011

2010 2005 1996


74

Figure 3.9: International competitiveness, export market growth and economic distance

Note: the size of the circles indicates the export value Source: OECD Bilateral Trade Database and Miroudot and Ragoussis (2009).

Both the large export industries of metal products (including non-ferrous metals) and food, beverages and tobacco show high (negative) elasticities of trade to distance, and hence one would expect that ceteris paribus Australian manufacturers would be less competitive in these industries.59 But competitiveness is clearly more than only trade costs and distance; instead, the close linkages of these industries to natural resources (agriculture as well as mining) have allowed Australian manufacturers to greatly overcome this disadvantage60. Analysing this from a dynamic perspective, there seems to be some tendency, albeit not very strong, that manufacturing exports in industries less affected by distance exhibit on average higher growth rates over the last fifteen years. This observation might signal that ‘the weightless economy’ (i.e. products and industries characterised by very large value/weight ratios making remoteness a smaller constraint) is becoming more important in the export portfolio of Australian manufacturers. Nevertheless, the close link between manufacturing exports and natural resources is not expected to change in the medium run.

3.1.4 International competitiveness: price or quality?

Australian manufacturers are increasingly operating from a high-cost domestic environment (see above) which forces them to compete on other aspects than costs alone. Higher ‘quality’ could compensate to some extent for higher production costs, larger transportation costs, etc. and preserve competitiveness in global markets (relative to lower priced products). ‘Quality’ should be interpreted rather broadly as referring to all specific product characteristics (reliability, sustainability, differentiation, brand image, etc.) that motivate customers to pay a higher price for the product.61 But does Australian manufacturing compete mainly on price by exporting cheaper products, or on higher quality for which it can also demand a higher price?

By not only taking into account the product/industry dimension but also the quality of the exported products, more detailed insights can be obtained into the source of Australian competitiveness on

Rubber and plastic

Motor vehicles

Wood

Textiles and wearing apparel

Food

Metal products

Other manufacturing

Chemical products

Refined petroleum

Office machinery

& computers

Mechanical products

Communication equipments

Medical, precision and

optical instruments

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

-1.3 -1.2 -1.1 -1 -0.9 -0.8 -0.7 -0.6

Rev

eale

d co

mpa

rativ

e ad

vant

age

2010

Distance elasticity of exports

Rubber and plastic

Motor vehicles

Wood

Textiles and wearing apparel

Food

Metal products

Other manufacturing

Chemical productsRefined

petroleum

Office machinery and

computers

Mechanical products

Communication equipments

Medical, precision and

optical instruments

-6

-4

-2

0

2

4

6

8

10

12

-1.4 -1.2 -1 -0.8 -0.6A

vera

ge a

nnua

l gr

owth

rat

e o

f exp

orts

199

5-20

10 (

%)

Distance elasticity of exports


75

international markets. Unit values defined as the values of exports/imports divided by the quantities shipped are typically used to assess the quality of exported/imported products (see e.g. Fontagné et al., 2006). The distribution of free-on-board (fob, i.e. net of transportation costs) unit values across traded goods allows a decomposition of bilateral trade flows of countries into three broad quality ranges: high, medium, and low quality. The methodology relies on a calculated world unit value for each HS-6 product defined as the median of the unit values of all bilateral transactions.62

Some caution is however warranted in interpreting unit values as indicators of quality, especially in the case of Australia. Differences in unit values may not only reflect quality, but also differences in production costs or exchange rate changes; it is clear that the appreciation of the Australian dollar in recent years will most likely influence the analysis. Moreover, theoretical models predict different relationships between distance of export markets and export unit values. Empirical studies tend to show that exporters charge higher (fob) unit values to more distant countries and that average prices are higher in more remote countries (Martin, 2010). This would mean that Australia’s remoteness would directly result in higher average unit prices for manufacturing exports of Australia compared to other countries, which could be due higher quality per se but also due to higher mark-ups, or the use of more expensive packaging needed for more distant markets. Dependent on who (consumers or producers) bears the transportation costs, this will directly impact the competitiveness of Australian manufacturers in international markets.

Figure 3.10 indicates that on average Australian manufactured exports are concentrated in the mid-range price segment, especially in the large export categories of medium-low and low technology products. High-priced exports are slightly less important in Australia’s export portfolio compared to other major manufacturing producers like Germany and the United States. This suggests then that Australian manufacturers, compared to their German and US counterparts, are less successful in ‘quality’ competition, but it is clear that more detailed analysis is needed to confirm this conclusion. Low-priced and low-quality exports are overall less important in developed OECD countries, while emerging countries like China export relatively more in these categories63 (see also De Backer and Moussiegt, 2011). Figure A.3.2 in Annex 1 presents the results for individual manufacturing industries, ranked by the RCA-index.

Figure 3.10: Manufacturing exports by quality/price and technology class, 2010

Source: Calculations based on CEPII BACI database.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Low price Medium price High price

Australia Germany United States China


76

3.2 Australian manufacturing in GVCs

The discussion on GVCs in global manufacturing (see Chapter 1) had already indicated that integration into GVCs has overall been rather slow for Australian manufacturers. The remoteness of Australia is a natural explanation for this stylised fact as the spatial organisation of production across borders is strongly dependent on the proximity between the locations of subsequent production stages. Transportation of intermediate goods which are typically characterised by lower values/weight ratios,64 to and from Australia is both costly and time-consuming. This disadvantage of economic distance (see also above) is not compensated by low labour costs and/or the presence of fast growing domestic markets which emerging economies in Asia can offer.

Most industries in Australian manufacturing are only weakly involved in GVCs (Figure 3.11); a proxy for GVC participation has been calculated as the sum of foreign value added in Australia’s exports (in % of total exports of Australia)65 and Australia’s value added incorporated in other countries’ exports (in % of exports by these other countries). Participation in GVCs does not exceed 40% in most industries and stems mainly from the value that is created in Australia which is then exported to be included in exports by other countries. Australia largely produces intermediates within international production networks and is hence merely positioned in the upstream stages of GVCs. An index of ‘Distance to final demand’66 clearly shows large values for most industries in manufacturing and - not surprisingly – mining (Figure 3.12). Mining in particular is the most obvious upstream activity of Australia in GVCs as the country’s exports in that industry are extensively used as inputs for steel production in China, Japan and Korea. The distance to final demand is smaller in agriculture and especially ‘Food, beverages and tobacco’ as most producers in this industry sell directly to final consumers.

Figure 3.11: Participation in GVCs, agriculture, mining and manufacturing in Australia, 1995 and 2009

(In percent)

Source: Calculations based on World Input-Output Database (WIOD); see Miroudot and De Backer (2012) for information on the calculation of the index.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 1995


77

Figure 3.12: Distance to final demand, agriculture, mining and manufacturing in Australia, 1995 and 2009

(Index)

Note: The index takes the value of 1 if all production is sold to final consumers Source: Calculations based on World Input-Output Database (WIOD); see Miroudot and De Backer (2012) for information on the calculation of the index.

Following the increasing importance of GVCs, exports of some countries are to a large extent made up of imports of intermediate inputs from abroad; export competitiveness can accordingly be very dependent on activities in other countries (Beltramello et al., 2012). The overall smaller participation into GVCs and the positioning in the upstream stages of GVCs suggest that the competitiveness of Australian manufacturing is largely based on domestic activities. This is indeed the case for the industry ‘Food, beverages and tobacco’, as export competitiveness does not seem to be built on large imports of intermediates. The same applies, maybe surprisingly given the large presence of foreign MNEs, for the pharmaceutical industry (Figure 3.13).

The other important export industry for Australia, ‘Non-ferrous metals’, shows a somewhat different profile as its international competitiveness seems to some extent associated with sizeable imports of intermediates. The fact that Australia’s competitiveness in that industry completely derives from the production of intermediates (illustrated by the dark shaded ball for this industry) indicates that the county’s producers are targeting upstream or midstream stages of GVCs in this industry. A similar observation emerges for the wood industry.

The relative proximity of large GVCs in Asia creates important opportunities for Australian manufacturing because of smaller economic distances. But it should be noted that Asian countries display strong complementarities across industries which is both the cause for, and a consequence of their deep economic integration within GVCs (WTO and IDE-JETRO, 2011). Successful integration within these elaborated GVCs requires then a careful assessment of the structural diversity and complementarity between manufacturing in Australia and Asia, which could leverage the development of new competitive activities in Australia. This calls for follow-up work on a more detailed level of analysis, e.g. the product level in order to indentify how Australian exports (intermediate, final and capital goods) can be

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 1995


78

successfully incorporated in the GVCs in Asia. A direct matching of import and export products of Australia with import/export flows of the different Asian countries is a first step in this.

Figure 3.13: Export competitiveness and import intensity, Australia, 2010

(RCA indices)

Note: The vertical axis represents the index of revealed comparative advantage (RCA) of total exports; the horizontal axis represents the index of revealed comparative advantage (RCA) of imports of intermediates and is calculated as RCA(M)int-i,c = (Mint-i,c/Mint-i,

world)/(Mint-total, c /Mint-total, world) where Mint-i,c and Xint-i, world are respectively the imported intermediates of industry i by country c and the world, while Xint-total, c. and Xint-total, world refer to total intermediates imported by country c and the world. Source: Calculations based on OECD Bilateral Trade Database.

3.3 International competition on Australia’s domestic market

Australian manufacturers do not only compete on international markets but also increasingly on their home market. Manufactured goods traditionally represent the largest category of imports for Australia resulting in a sizeable manufacturing trade deficit for Australia. Overall, Australia illustrates very well the traditional theory of comparative advantage and one-way trade as it mainly exports primary products (agriculture and mining) while it imports manufactured products; two-way trade is much smaller and is concentrated in manufacturing and services (Figure 3.14).

Non-ferrous metals (10.1)

Food, beverages, tobacco

Wood

Pharmaceuticals

Coke, refined petroleumInstruments

Paper, printing, publ.Other machinery, n.e.c.

Iron & steel

Fabricated metal products

Chemicals

Aircraft, spacecraftMotor vehicles

Other manuf. Rubber & plasticsElectrical machinery

Other transport

Computers Non-metallic mineral prod.

TextilesRadio, TV, comm.

equipment

0

0.5

1

1.5

2

2.5

3

3.5

0 0.5 1 1.5 2

RCA

total

exp

orts

RCA imported intermediates

Total exports value Exports of intermediates


79

Figure 3.14: Sectoral distribution of Australia’s export and imports, 2010

(In percent)

Source: OECD Bilateral Trade Database and IMF Balance of Payments.

The Australian domestic market for manufactured products has been rather closed in the past because of high import barriers, in addition to high transport costs which render imported goods and services less competitive. While remoteness still acts as a natural barrier for foreign sales in the Australian market, regulatory reforms in the 1980s have opened the domestic market to international competition. Furthermore, the appreciation of the Australian dollar has made imports cheaper for Australian customers. The result has been a growing import penetration (i.e. imports as a share of domestic sales) in manufacturing industries (Figure 3.15). Unsurprisingly, import penetration is higher in industries where Australian producers are less competitive in international markets such as machinery, transport equipment and the textile industry.

A closer look at import shares by partner country reveals that overall China and other emerging Asian economies dominate imports of manufactures into Australia, with a very strong presence in medium-low and low technology products (see Table A.3.5 in Annex 2). European and American manufacturers score overall better in high-technology products. Although the high market share of China in these products (electronics) is maybe striking; this result is most likely related to the assembly activities in China within the related GVCs. Parts and components are imported by China from other countries, and assembled in final products which are then exported to world markets.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

exports imports

Agriculture Mining Manufacturing Services


80

Figure 3.15: Import penetration, manufacturing industries, Australia, 2005-2010

(Average 2005-2010)

Note: Import penetration defined as imports in percentage of domestic apparent consumption Source: Australian Bureau of Statistics.

0

10

20

30

40

50

60

70

80%


81

CONCLUSIONS AND POLICY MESSAGES

The economic emergence of Asia (especially China and India) is strongly benefitting the Australian economy; the accompanying process of structural change has however resulted in a two-speed economy in which traded sectors like manufacturing are under increasing pressure. The growing demand for commodities fuelled by the rapid urbanisation and industrialisation of

Asian countries (especially China and India) has pushed up world prices of mining products; this ‘external shock’ has strongly increased Australia’s terms of trade and has, among other factors, contributed to increased wealth, strong economic growth, rising purchasing power, as well as low levels of unemployment for Australia;

The strong appreciation of the Australian dollar is central to the structural adjustment of the Australian economy to the external shock of increased prices for natural resources; it prevents the economy from overheating as was the case during previous resources booms;

The recent economic performance has been strongly uneven between sectors with especially the mining industry and related sectors driving aggregate growth; the strong appreciation of the Australian dollar has made Australian exports more expensive while imports in Australian markets have become cheaper, hence negatively impacting the competitiveness of Australia’s manufacturing sector.

The contraction of Australian manufacturing in recent years is not solely related to the current mining boom; structural change within Australia has resulted in a declining importance of manufacturing over the past decades. A long-term trend of de-industrialisation characterises all developed OECD economies resulting in

falling shares of manufacturing in total employment and value added; this does not mean however that manufacturing is a sector in decline: up to 2009, the output of OECD manufacturing (including Australian manufacturing) continued to grow and the share of manufacturing in value added in constant prices has remained relatively stable (reflecting the limited price increases of manufactured goods relative to services).

The drop in manufacturing activity (in absolute terms) in most recent years can be primarily explained by the Global Financial Crisis (GCF) of 2007/2008 which had a major impact on global manufacturing.

The resources boom has accelerated the process of structural change in the Australian economy; its impact works largely in the same direction as the long-term trend of de-industrialisation and the GCF’s impact on Australian manufacturing; data up to 2010 do not support the conclusion that the mining boom has dramatically impacted on Australian manufacturing.

The projection that Australia’s terms of trade will remain at historically high levels for an extended period will most likely affect the competitiveness of Australian manufacturing in the future as the impact of high exchange rates may become permanent and may grow the longer the appreciation lasts.

Australian manufacturing has been suffering for years from a number of structural weaknesses which have limited its role in the Australian economy as well as at the global level. Manufacturing plays a small but still important role in Australia compared to other large and

medium-sized OECD countries, often lagging behind mining and services; the frequently lauded contributions of manufacturing to national economies (in terms of productivity, innovation, international trade and economy-wide linkages) are also somewhat smaller in Australia.

Because of the importance of primary industries, Australia still has the image of being primarily a resource-based economy; Australian manufacturing is relatively small in the global context.

Australian manufacturing suffers heavily from the ‘tyranny of distance’ as relatively high transport and trade costs reduce trade and limit the opportunities for Australia to specialise in the activities where it possesses a comparative advantage; remoteness has directly resulted in important scale


82

disadvantages for Australia in all manufacturing industries; these scale disadvantages are especially pronounced in chemicals, rubber and plastics and transport equipment;

In addition, remoteness hampers the internationalisation of Australian manufacturers and their integration in GVCs; nevertheless, Australian manufacturing has become more internationally open (especially through imports, inward and outward investment).

Distance from world markets also limits the country’s exposure to competition and makes international producers less competitive in Australian markets. High import barriers in the past only added to that natural protection and allowed inefficient firms to exist. Major economic reforms have led to the gradual liberalisation of the Australian economy and to rising import penetration in Australian manufacturing.

Recent developments have triggered a (further) loss of competitiveness of Australian manufacturing; this stresses the urgent need for Australian manufacturers to compete differently, i.e. strongly based on innovation, as competition in global manufacturing will only grow While Australia’s remoteness has resulted in a long-term productivity disadvantage, the slump in

productivity growth since 2001 has widened the gap with other manufacturing countries further; Australian manufacturing has reported zero to negative growth in multi-factor productivity in most recent years reflecting the strong growth in inputs relative to manufacturing output.

Some emerging economies, China in the first place, have become important players in global manufacturing and have attracted important manufacturing activities; the growing domestic demand in these countries as well as lower (labour) costs are important drivers of the ongoing shift in global manufacturing.

Australian manufacturing increasingly suffers from a cost disadvantage not only with respect to emerging countries, but more and more also with other OECD countries; part of this is explained by the strong Australian dollar.

Australian manufacturers will need to (further) develop other competitive advantages to compensate for the high-cost environment they operate in; just like in the rest of the OECD, the long-term productivity and competitiveness of Australian manufacturing is increasingly based on innovation, targeted at new products/processes/services for new niche markets and going beyond cost efficiency;

Firm-level capabilities in innovation heavily depend on human capital (skills development) and collaboration with external partners (research organisations, universities, suppliers, customers, etc.).

Australian manufacturing shows a mixed account on innovation and knowledge performance broadly defined; human capital in particular is identified as a possible bottleneck for the future. Investments in intangible assets (brand equity, design, organizational capital, business models,

etc.) allow manufacturing firms to compete on other aspects than costs alone; Australia’s intangible investment is around the average within the OECD.

Australian manufacturing is characterised by a relatively low business R&D intensity, a strong focus on process instead of product innovation, low emphasis to ‘new-to-the market’ innovation (i.e. more adaptation to the domestic market) and a significantly lower international collaboration in innovation; the strong resource-based orientation of Australian manufacturing and, again, Australia’s remoteness contribute to this performance;

On the other hand, Australian manufacturers are very active in marketing, organizational and non-technological innovation; and invest more in R&D in lower-technology industries;

While the level of skills in the Australian workforce is high by standard measures and immigrants are relatively highly educated, Australian manufacturing does not seem successful in attracting this human capital; the share of researchers and human resources in science and technology is very low compared to other manufacturing OECD countries;


83

Management is crucial for the development of innovation capabilities within firms; management performance in Australian manufacturing is rated as moderately above average compared with other OECD countries when benchmarked on people, operations and performance.

The specialisation of Australian manufacturing is closely linked to Australia’s abundance of natural resources; more broadly, Australia’s comparative advantage is concentrated in the production/exports of primary goods (agriculture and mining) while it imports especially manufactured products. More than 50% of Australia’s merchandise exports in 2010 concerned primary goods (agriculture

and mining) due to the increased demand for Australian commodities (e.g. metal ore, coal, etc.); manufacturing represented 30% of Australian exports, but 70% of imports.

The international competitiveness of Australian manufacturing is concentrated in a small number of industries; Australian manufacturers are strongly competitive in industries directly dependent on Australia’s natural resources (‘Non-ferrous metals’, ‘Food, beverages and tobacco’ and ‘Wood’); in addition, the competitiveness of ‘Pharmaceuticals’ and ‘Scientific instruments’ appears to be growing.

While the total export market share has remained stable during 2005-2010 (i.e. since the start of the mining boom), Australian manufacturing has lost competitiveness in its two most important export industries (‘Non-ferrous metals’, ‘Food, beverages and tobacco’).

Australia’s natural resources are a major source of competitiveness and have helped Australian manufacturers to challenge the ‘tyranny of distance’: Australian manufacturing is internationally competitive particularly in resource-intensive industries where Australia’s remoteness is a major disadvantage; more recently ‘the weightless economy’ (i.e. products and industries characterised by very large value to weight ratios, that make remoteness a more limited constraint) have become more important in the export portfolio of Australian manufacturing.

Australian manufacturers seem, compared to their German and US counterparts, less successful in ‘quality’ competition (i.e. in specific product characteristics like e.g. reliability, sustainability, differentiation, brand image, etc. that motivate customers to pay a higher price), which could potentially compensate for Australia’s high-cost environment.

Australia finds itself well-positioned to benefit from the growing demand in Asian markets; Australian manufacturers have been rather successful in developing new export activities and expanding current exports to Asia but nevertheless could do (much) better in tapping into these growth markets. The emergence of large consumer markets in Asia makes Australia a less remote location for

production and has contributed to rapidly growing demand for manufactured products; the shift of the economic centre eastward will significantly decrease Australia’s traditional disadvantage of remoteness and can be expected to positively affect the demand for manufactured goods from Australia.

Asia is the largest export market for Australian manufactures where a clear re-orientation of exports from slow growing countries (e.g. Japan) to fast growing countries (especially India and China) within the region is taking place; Asia accounts for almost half of the export growth along the intensive (i.e. growth of existing trade flows) as well as the extensive margin (i.e. new trade flows: new products and/or new geographical destinations).

Although fast growing Asian markets occupy a central position in Australia’s export portfolio, Australian manufacturers appear to miss out on important opportunities; the growth in Australian exports has not kept up with the market growth in most Asian countries.

Australia’s participation in global value chains (GVCs) is rather limited and concentrated in the upstream stages of production; Australian manufacturing can probably do more to better benefit from the relative proximity of large GVCs in Asia based on a careful assessment of the structural diversity and complementarity between manufacturing in Australia and Asia (given that Asian countries display strong complementarities across industries among themselves).


84

The changes in global manufacturing create important challenges but also increased opportunities for Australian manufacturing; the business sector has a paramount role to play in addressing the weaknesses, reinforcing existing and developing further strengths of Australian manufacturing but will benefit from supportive public policy.

• As the demand for Australian commodities is expected to remain high in the near future, Australian manufacturing will need to adapt to the shifting comparative advantage of Australia; in addition, competitive conditions within global manufacturing change rapidly and profoundly, further stressing the importance of structural adjustment and flexibility.

Innovation and knowledge are crucial to compensate for the strength of the Australian dollar; more broadly, successful innovation will also be key to reversing the current productivity slump and to build long-term competitiveness for Australian manufacturing; companies will need to enhance their capabilities to remain/become internationally competitive while government policies should address the shortcomings of Australia’s innovation performance.

Australian manufacturing would benefit from the broadening of the number of internationally competitive industries; some higher technology industries in ICT and medical technologies are growing in strength but are still limited in size; adding more advanced activities on top of existing resource-based activities might be another way to develop new competitive activities while nurturing the resource-based strengths of Australian manufacturing; other resource-intensive countries seem to have been more successful in developing high technology activities that complement their advantage in resource-intensive industries.

The emergence of Asia creates huge opportunities for Australian manufacturing if captured effectively; Australian manufacturers will have to devote greater efforts (to tap into international ideas and technologies, access specific skills and competencies abroad) targeted at this region; the recent initiatives by the Australian government to conclude agreements with major trading partners in the region such as China and India supports this development; nevertheless, the risk of becoming overly dependent on one country or region should be born in mind.

Manufacturing is still important for OECD economies; a broader discussion/consultation on the future of manufacturing in Australia should help to identify the strategic directions that have the greatest chance to bring success for Australia in global manufacturing. Manufacturing still has an important role to play in OECD economies because of its importance

for innovation, productivity and exports and its economy-wide linkages with other sectors; a balanced economy with a strong manufacturing sector has proven to be instrumental in creating long term prosperity; re-balancing will also be important for Australia in preparation for a time beyond the current the mining boom.

Certain manufacturing activities in Australia can be expected to decline (including through offshoring) in the process of structural adjustment, hence the need for government policies to address the inevitable adjustment costs;

Notwithstanding the strong performance of the Australian economy, there is an urgent need for planning for the future; a broad discussion and consultation among stakeholders (business sector, research sector, government, etc.) should identify the strategic directions for manufacturing in Australia; innovation will have to play a key role in this, in particular to develop new growth opportunities in green manufacturing, energy, etc;

The discussion of the long-term future of Australian manufacturing should explicitly take into account the strong linkages between manufacturing and services; a narrow definition of manufacturing will ignore the important interplay between these sectors;

The various stakeholders have different roles to play in the future of manufacturing with the business sector being the first responsible for firm performance and government responsible for improving the necessary business conditions (e.g. in reducing regulatory barriers, supporting the development of capabilities, etc.).


85

NOTES

1 The discussion on ‘Made in America/Japan, etc.’ includes similar arguments.

2 This section builds further on the analysis developed in Pilat et al. (2006) ‘The changing nature of manufacturing in OECD economies’.

3 Nobel laureate Krugman (1990) famously put it as ‘Productivity isn’t everything, but in the long run it is almost everything’.

4 Nevertheless, discussion has recently emerged on the productivity – employment puzzle in US manufacturing. Nordhaus (2005) and Helper et al. (2012) suggest that major losses of manufacturing jobs are very difficult to attribute to productivity gains. Most of the reported productivity in US manufacturing is actually offshoring and quality improvements in computers and hence it is particularly the lack of productivity growth that explains the huge job losses in US manufacturing.

5 The higher productivity growth of manufacturing is directly linked to higher R&D investments and innovation in manufacturing.

6 Manufacturing also accounts for the majority of imports and some countries run trade deficits in manufacturing (like e.g. the United States and the United Kingdom) while others (e.g. Germany) run manufacturing trade surpluses.

7 Services trade might however be underestimated as the quality of statistics of international trade in goods is higher than this of services trade statistics.

8 International trade is however only one of the 4 modes of international engagement in services, next to: residents of one country consuming services in foreign markets, commercial presence and movement of personnel.

9 Formally, because of non-unitary income elasticity of services (and higher than manufactured products) but also demographic factors: the growing labour participation of women (resulting e.g. in the growth of personal services) and the ageing of society (resulting e.g. in the growth of health care services).

10 This is also due to a statistical artefact as many in-house service activities have been outsourced by manufacturing companies like e.g. cleaning, transport, etc. (Pilat et al, 2006; Rowthorn and Ramaswamy, 1998; The Economist, 2011).

11 Demand for manufacturing products however has grown only slowly in advanced economies; in contrast manufacturing demand has grown strongly in emerging economies (OECD, 2010).

12 Labour costs should however be examined relative to a country’s level of productivity in the manufacturing sector. High labour costs can only be supported if they coincide with a high level of labour productivity; conversely, countries with low levels of labour costs typically have low levels of labour productivity.

13 BRICS: Brazil, the Russian Federation, India, China and South Africa

14 The global middle class is defined as all those living in households with daily per capita incomes of between USD 10 and USD 100 in PPP terms (Kharas, 2010).

15 BRIICS: Brazil, the Russian Federation, India, Indonesia, China and South Africa.


86

16 See Annex 3 for the OECD classification (based on direct R&D and R&D embodied in intermediate and

capital goods) of manufacturing industries in high technology, medium-high technology, medium-low technology and low technology intensive industries (Hatzichronoglou, 1997).

17 This is to a large extent related to China being a large manufacturing centre within GVCs; however, as discussed above, these manufacturing activities often consist of pure assembly activities of imported intermediates for exports and do not necessarily yield high value for local manufacturers.

18 In fact, due to offshoring many manufacturing companies in OECD countries are relatively more involved in design, development, etc. than in the actual physical manufacturing/assembly activities. Hence the call in some countries for ‘Making things instead of ideas’ (see above).

19 ‘… a third industrial revolution is under way now; manufacturing is going global…’ (The Economist, 2012).

20 This high tech manufacturing would not be limited to higher technology intensive industries, but could also happen in more traditional industries (like e.g. embedded software on advanced computer chips in clothing).

21 Boston Consulting Group estimates that in areas such as transport, computers, fabricated metals and machinery, 10-30% of the goods that the United States now imports from China could be made at home by 2020, boosting American output by USD 20-55 billion a year.

22 Evenett and Francois (2010) argue that given the growing imports of Chinese parts and components into US final products, an appreciation of the Chinese currency will positively affect the US exports to China but reduce the US competitiveness elsewhere.

23 Nevertheless, except for employment, manufacturing reports consistently rising figures for value added, exports, investments and R&D investments, but other sectors are growing faster resulting in a decreasing importance of manufacturing in national economies (see discussion above).

24 Internationally comparable evidence on industry assistance is not available.

25 During the period 1970-1990, Australian manufacturing reported much larger losses in employment than manufacturing in other countries, partially due to the increasing import penetration in the Australian market (Marceau et al, 1997).

26 Especially in terms of value added in current prices (see above)

27 The potential effects of a resources boom on other parts of the economy was first described by Australian economist Bob Gregory (1976) and was later formalised in trade models such as Corden and Neary (1982).

28 Data by the Australian Bureau of Statistics (ABS) show an increasing share of Australian merchandise exports invoiced in foreign currency (especially USD); while this keeps exports competitive, the appreciating AUD will nevertheless negatively impact the profitability of Australian manufacturing (as less AUD is received).

29 Notice that the shift of labour from the lagging to the booming sector could be negligible, since mining generally employs few people. The so-called ‘expenditure effect’ of the revenue brought in by the resource boom increases demand for labour in services, outpacing substantially the corresponding growth in manufacturing. This shift from the lagging to the non-tradable sectors (often called indirect-deindustrialization) accounts for the largest drain of resources away from manufacturing (see Corden and Neary, 1982).


87

30 One index to describe structural change often used in the economic literature and which proves to be

flexible for comparisons among different distributions over time and across countries, is the Finger-Kreinin dissimilarity index (Finger and Kreinin, 1979). This index ranges between zero and one (indicating maximum dissimilarity) and measures how much a given distribution of sectors (market services, mining, manufacturing, construction, etc.) differs from a chosen benchmark and changes over time. Its formula is as follows:

𝑆𝑆𝑆𝑡 =12� �𝑠𝑗𝑡 − 𝑠𝑗𝑡−5�

𝑗

where 𝑠𝑗𝑡 denote the 5-year average share of sector 𝑗 in year 𝑡.

31 Battelino (2012) dates the start of the current boom from around 2005.

32 Banks (2011) reports that manufacturing’ share in total employment has fallen by 1.4 percentage points since 2007, which is 0.5 percentage points larger than the long term average rate.

33 The aggregate evidence does not confirm the studies which have modelled the likely impacts of the recent terms of trade improvement on the Australian economy, like e.g. the Monash Multi-Regional Forecasting model; see OECD (2012) for a discussion. It should be kept in mind however that the analysis presented above goes only up to 2010; the Australian dollar has further appreciated in 2011 with possible impacts that are not captured in the presented aggregate evidence.

34 These factors directly determine the speed and size of structural change (see also Pilat et al., 2006).

35 International comparisons of productivity have to be interpreted with care as they might be subject to differences in scope and statistical methods across countries, cyclical movement and noise in the data, as well as unmeasured changes in volume, quantity and quality of outputs and inputs. Growth comparisons are on average ‘better’ than level comparisons, if only because of the adjustment of price differences across countries.

36 Because of the offshoring of labour-intensive activities to emerging countries, capital deepening and automation, etc.

37 Distance is assumed to play a less important role in services, because of the technological progress particularly in ICT which has rendered the delivery of certain services from a distance very easy.

38 Frankel (1997) was the first to note this; other papers followed.

39 OECD (2008) reports however that measured price indices for ocean shipping may not adequately reflect improvement in the service provided, for instance time savings brought about by containerisation.

40 While the cost represented by Australia’s remoteness from major market as measured by per capita GDP was estimated at more than 10% in 2005, that handicap could drop by 3 percentage points by 2050.

41 The lower global integration of these two countries is explained especially by their large domestic markets (particularly in terms of export share).

42 As no data are available on Multinational Enterprises (MNEs) for Australia, data on FDI stocks have been used. FDI is however a merely financial concept which does not necessarily represent economic activities of multinational firms (in terms of turnover, employment, etc.).

43 Ample theoretical as well as empirical research in the international business literature has shown how large transportation favours international investment above international trade.


88

44 See Annex 3 for the OECD classification (based on direct R&D and R&D embodied in intermediate and

capital goods) of manufacturing industries in high technology, medium-high technology, medium-low technology and low technology intensive industries (Hatzichronoglou, 1997).

45 Also other S&T indicators point to the limited international collaboration in innovation for Australia: R&D funds from abroad, domestic ownership of foreign inventions, foreign ownership of domestic inventions, etc. (see OECD Science, Technology and Industry Scoreboard 2011).

46 Human resources in science and technology (HRST) are defined according to the Canberra Manual (OECD and Eurostat, 1995) as persons having graduated at the tertiary level of education or employed in a science and technology occupation for which a high qualification is normally required and the innovation potential is high. HRST occupations include professionals, technicians and associate professionals (see OECD Science, Technology and Innovation Scoreboard, 2011).

47 Just like for manufacturing, there is a growing discussion on the possible impact of the high Australian dollar on Australia’s trade in services.

48 Australian manufacturing shows a gradually declining export market share over the period 1996-2010, except from a significant drop in 1998, which is likely to be related to the Asian crisis.

49 Confidential and unallocated exports are the remaining 5%.

50 While aggregate data do not seem to offer a lot of evidence for claims that the appreciation of the Australian dollar has negatively impacted manufacturing exports, previous research has nevertheless highlighted the important influence of the exchange rate on Australian manufactures exports (Norman, 2006; Dvornak et al., 2005).

51 The definition of the extensive margin adopted in this report consists of new combinations of old products to old destinations (i.e. an existing product exported to an existing market but not for the product in question), old products to new destinations, new products to new destinations and new products to old destinations. The intensive margin involves growing exports of an existing combination of old products to old destinations.

52 The key intuition behind “shift-share” analysis is that a country’s export growth does not occur in a vacuum but in a global trade context. Hence, export growth is affected by several variables, notably the growth of world trade itself, the country’s mix of trading partners as well as the bundle of products it exports. All these factors that contribute to a country’s export growth can be broken down and analysed individually. The residual term, capturing the variation that is not explained by those variables, can then be interpreted as a pure indicator of the export competitiveness of a country. See for more info Beltramello et al. (2012).

53 Similar to the Growth-Share Matrix of the Boston Consulting Group, which was developed to guide companies in their investment decisions on specific product-market combinations.

54 Because of the problem of unspecified and confidential partners in Australian exports (see Box 4), imports (total and from Australia) in individual countries have been used to calculate the Australia’s market share and market growth rates in individual countries. Imports from Australia reported by importing country A are not necessarily the same as exports to country A reported by Australia, illustrating the larger problem of mirror statistics in international trade. For example, Australia’s market share in world exports of manufacturing is 0.63% versus 0.59% in world imports.

55 Empirical measures of comparative advantage go back to the seminal work of Balassa (1965): comparative advantage is expected to determine the structure of exports, hence the construction of export performance indices to ‘reveal’ the comparative advantage of countries:

RCAi,c = (Xi,c/Xi, world)/(Xtotal, c /Xtotal, world)


89

where Xi,c and Xi, world are respectively the exports of industry i by country c and the world, while Xtotal, c.

and Xtotal, world refer to total (manufacturing) exports by country c and the word. A value larger than 1 indicates that country c possesses a comparative advantage and is specialized in industry i, while a value smaller than 1 point to a comparative disadvantage.

56 Distance-related costs capture expenses directly affected by, but also indirectly associated with geographical distance. Remoteness increases expenses for shipments overseas, in addition to costs imposed by regulatory or cultural distance (that is, dissimilarity in market regulations, national business law, government policies, as well as languages, history, customs) that are highly correlated with geographical distance.

57 Trade in manufactures is naturally assumed to be more sensitive to distance than services trade, the latter not necessarily involving movement of people or materials.

58 Elasticities of trade to distance for each manufacturing industry were calculated using world bilateral trade data (Miroudot and Ragoussis, 2009).

59 This might be also the reason why Australia has challenged the ‘tyranny of distance’ as they punched above their weight’ (Leamer, 2006) and did better than the predicted norm given their degree of remoteness (Withers, 2007).

60 It is also interesting to observe that traditional industries which have been rather generously assisted by the Australian government such as the textile or automotive industries stand out as more sensitive to distance. Gaining international competitiveness as an objective for government support in these industries is thus likely to be less effective and efficient.

61 Products vary in quality; hence competition in foreign markets within industries is not homogeneous. The ‘new trade theory’ basically relies on the demand for variety by final customers: product variety and economies of scale give rise to large flows of intra-industry trade between similar countries. Countries specialise in the same products/industries but in different varieties which are sold internationally at the same price (Helpman and Krugman, 1985). In addition to this horizontal differentiation (i.e. product varieties of the same quality but with different characteristics valued by consumers), trade models have also discussed intra-industry trade in vertically differentiated goods, i.e. product varieties of different quality (Falvey, 1981; Falvey and Kierzkowski, 1987; Flam and Helpman 1987).

62 See De Backer and Moussiegt (2011) for more details on the methodology. The data used are from the BACI-database of the Centre d’Etudes Prospectives et d’Informations Internationals (CEPII).

63 Considerable policy attention has recently been devoted to the increasing competition of emerging countries, in particular China, in higher technology intensive industries. The exports of developed and emerging countries increasingly overlap, i.e. countries increasingly export the same products and are active in the same industries. However, when examining the quality of the exported products, it becomes clear that products exported by emerging and developed economies are not close substitutes. In general, emerging countries overall export lower quality/price products, and the differences in quality increase, the higher the technology intensity of industries. In lower technology industries, products exported by developed and emerging countries are somewhat similar (De Backer and Moussiegt, 2011).

64 Miroudot and Ragoussis (2009) compute also elasticities of vertical trade to distance and show that these are higher than the respective elasticities of trade in individual industries.

65 Similar (but not identical) to the import content of exports discussed above.

66 This index measures the upstreamness of countries in GVCs, i.e. how upstream countries are positioned in GVCs, e.g. by producing raw materials or intangibles involved at the beginning of the production process (research, design, etc.).


90

ANNEX 1 ADDITIONAL FIGURES


91

Figure A.2.1 Employment by industry, 2010

(in percentage of total employment)


Figure A.2.2 Value added by industry, 2010

(in percentage of total value added)


0%

20%

40%

60%

80%

100%Mining Manufacturing Construction Services Other

0%

20%

40%

60%

80%

100%

Mining Manufacturing Construction Services Other


92

Figure A.2.3 Structural change (value added in constant prices) Australia, Norway and Canada

Structural change Index in terms of employment (Finger-Kreinin dissimilarity index)

Source: OECD Economics Department.

Figure A.2.4 Growth in labour productivity, manufacturing, 2010

(percentage annual growth)

AUSTRALIA

0

2

4

6

8

10

12

1975 1980 1985 1990 1995 2000 2005 2010

Australia Norway Canada

-20

-15

-10

-5

0

5

10

15

20%

1990-2000 2000-2007


93

GERMANY

UNITED STATES

Source: EUKLEMS.

-20

-15

-10

-5

0

5

10

15

20%

1991-2000 2000-2007

-20

-15

-10

-5

0

5

10

15

20%

1990-2000 2000-2007


94

Figure A.2.5 R&D intensity in manufacturing, 2009

(Business R&D in percentage of manufacturing value added)

Source: OECD Analytical Business Enterprise Research and Development Database (ANBERD).

Figure A.2.6 Patent applications in manufacturing

(PCT filings, average 2007-2009)

Source: OECD Patent Statistics Database (PATSTAT).

0

2

4

6

8

10

12

14%


95

Figure A.3.1 Sectoral composition of Australia’s export of goods, 1995 and 2010

(in percentage of total goods exports)


Figure A.3.2 Manufacturing exports by quality/price and technology class, Australia, 2010

Source: Calculations based on CEPII BACI database

0%10%20%30%40%50%60%70%80%90%

100%

Low price Median price High price


96

ANNEX 2 ADDITIONAL TABLES


97

Table A.3.1: Australian exports by destination, for selected industries, 2010 and 1995

Source: OECD Bilateral Trade database 2012.

New Zealand Japan Korea China

Other SE Asia India

United States

United Kingdom Other EU

Rest of the

World

2010 57 116 27.0 0.0 17.0 10.3 64.1 3.3 2.6 0.0 0.0 1.9 0.81995 2 987 5.5 0.0 43.1 15.2 16.7 5.3 0.7 0.7 3.3 13.6 1.6

2010 39 530 18.7 0.0 35.2 12.7 12.3 9.2 16.0 0.1 1.5 7.7 5.31995 5 074 9.4 0.0 46.2 13.4 0.8 9.0 8.5 0.1 3.0 11.6 7.4

2010 27 623 13.0 0.8 7.4 7.2 7.4 27.2 22.5 1.9 22.4 1.7 1.61995 7 545 14.0 1.9 22.7 20.5 0.8 43.3 0.8 0.6 2.2 3.0 4.1

2010 18 323 8.6 0.8 8.9 22.8 15.9 36.1 8.9 2.4 0.0 0.0 4.11995 1 791 3.3 3.9 49.7 3.4 0.8 31.3 0.0 8.8 0.0 1.5 0.5

2010 14 912 7.0 7.2 19.2 6.4 9.3 20.2 0.5 13.3 4.4 3.1 16.41995 6 339 11.7 5.0 33.7 3.4 2.2 22.8 0.1 9.9 3.9 5.2 13.9

2010 11 546 5.5 1.7 8.4 3.5 22.3 29.4 3.6 0.8 0.3 4.5 25.61995 3 820 7.1 1.3 13.8 4.6 11.1 31.8 2.0 3.8 1.9 19.6 10.1

2010 4 108 1.9 12.3 1.9 1.2 8.6 20.7 1.8 11.8 2.3 5.9 33.51995 1 811 3.4 17.9 3.3 2.2 4.4 30.0 2.6 10.5 5.4 6.2 17.5

2010 3 679 1.7 10.2 3.5 10.6 8.6 29.4 0.7 8.9 3.0 9.9 15.31995 596 1.1 29.6 3.0 0.5 2.5 31.9 0.2 4.1 12.4 7.7 8.3

2010 3 391 1.6 9.8 37.9 4.3 7.6 30.6 1.8 0.6 0.0 2.8 4.61995 1 176 2.2 17.0 15.4 0.7 0.0 28.6 0.0 0.5 0.1 1.1 36.7

2010 2 613 1.2 13.7 5.2 2.2 4.4 9.8 1.2 31.2 9.2 12.8 10.41995 579 1.1 17.0 4.0 2.5 3.7 17.1 1.3 18.2 6.7 14.1 15.4

2010 1 294 0.6 10.6 1.3 10.0 0.9 24.0 0.3 22.8 1.1 7.4 21.61995 1 310 2.4 7.1 7.4 9.9 2.2 51.3 2.3 10.3 0.6 0.6 8.4

2010 1 120 0.5 2.5 66.0 0.8 12.3 13.2 0.2 1.8 0.2 1.1 1.81995 530 1.0 2.0 83.1 2.2 0.3 7.5 0.2 1.7 0.2 2.0 0.9

By country of destination (%)

Medical, Precision and Optical Instruments (ISIC 33)

Iron and Steel(ISIC 271)

Wood and Products of Wood and Cork(ISIC 20)

Industry Year

Value of exports

(USD million)

Share in total

exports (%)

Food products, Beverages and Tobacco (ISIC 15 to 16)

Agriculture, Hunting, Forestry and Fishing (ISIC 01 to 05)

Machinery and Equipment, not elsewhere classified (ISIC 29)

Pharmaceuticals(ISIC 2423)

Coke, Refined Petroleum Products and Nuclear Fuel (ISIC 23)

Mining of metal ores (ISIC 13)

Mining of coal and lignite; extraction of peat (ISIC 10)

Non-Ferrous Metals (ISIC 272)

Extraction of crude petroleum and natural gas (ISIC 11)


98

Table A.3.2: Growth-Share matrix, Australian manufacturing

Markets All

Industry

Share of Aus-tralia3

Market size2


Market size


Market size


Market size


Market size


Market size


Market size


Market size


Market size


Market size


Total Manufacturing 0.6 14.4 0.5 39.5 0.1 12.5 1.1 4.1 1.8 2.7 1.8 9.3 0.8 1.5 2.0 0.2 19.2 8.3 0.1 3.1 0.3 Food products, Beverages and Tobacco 2.4 10.7 3.3 50.3 0.4 8.4 6.1 7.1 6.9 2.0 11.9 4.4 4.5 1.0 2.4 0.4 42.8 8.3 0.2 3.1 1.8 Textiles, Textile Products, Leather and Footwear 0.1 20.4 0.0 44.3 0.1 9.4 0.3 6.6 0.1 1.8 0.4 3.9 0.4 0.4 1.1 0.3 7.1 8.9 0.0 2.3 0.1 Wood and Products of Wood and Cork 1.7 15.0 0.2 46.7 0.1 4.2 4.1 11.3 10.3 1.8 0.6 6.1 3.5 0.3 0.4 0.2 18.6 7.4 0.0 3.3 0.0 Pulp, Paper, Paper Products, Printing and Publish 0.4 10.7 0.4 49.9 0.1 7.8 0.9 2.8 0.2 1.9 0.5 7.2 0.5 1.3 0.4 0.5 39.4 10.2 0.1 4.3 0.1 Chemical, Rubber, Plastics and Fuel Products 0.4 12.0 0.3 43.6 0.1 11.4 1.0 4.1 1.4 2.9 1.4 8.0 0.4 1.6 0.8 0.2 18.7 8.1 0.1 2.6 0.3 Coke, Refined Petroleum Products and Nuclear F 0.7 13.4 0.0 36.3 0.1 19.7 1.1 5.1 3.3 3.9 2.9 5.1 1.0 1.3 1.1 0.3 12.8 5.3 0.0 1.9 0.7 Chemicals and Chemical Products 0.4 11.1 0.5 45.7 0.1 9.0 1.0 3.9 0.6 2.6 0.7 9.4 0.4 1.9 0.7 0.2 21.9 8.7 0.1 2.5 0.3 Chemicals excluding Pharmaceuticals 0.3 9.2 0.2 40.3 0.1 11.8 0.7 3.8 0.5 3.3 0.6 12.8 0.3 2.5 0.8 0.2 21.4 7.6 0.1 2.4 0.1 Pharmaceuticals 0.5 15.5 0.7 57.6 0.2 2.7 3.7 4.0 0.7 1.0 1.5 1.9 1.3 0.5 0.4 0.2 23.1 10.9 0.2 2.8 0.5 Rubber and Plastics Products 0.2 14.0 0.1 45.7 0.1 7.7 0.5 3.2 0.2 2.3 0.2 7.1 0.3 0.7 0.2 0.3 18.4 9.0 0.0 3.9 0.0 Other Non-Metallic Mineral Products 0.2 13.0 0.4 44.4 0.0 9.4 0.2 3.9 0.5 4.5 0.1 5.7 0.1 1.0 0.2 0.3 22.3 8.8 0.0 3.8 0.0 Basic Metals and Fabricated Metal Products 2.2 10.9 1.1 39.4 0.3 12.2 5.0 3.8 5.6 4.2 5.0 8.7 4.7 4.1 6.1 0.2 39.3 9.3 0.1 3.4 0.7 Basic Metals 2.8 10.2 1.5 36.7 0.5 13.6 5.9 4.0 7.1 4.8 6.0 10.1 5.5 5.2 6.5 0.1 50.9 8.6 0.2 3.3 0.9 Iron and Steel 0.6 8.8 1.2 42.7 0.1 12.2 1.2 2.5 0.9 6.5 2.1 7.2 0.1 2.2 0.3 0.1 27.2 8.9 0.0 3.0 0.3 Non-Ferrous Metals 4.7 11.2 1.7 31.9 0.9 14.6 9.0 5.2 9.5 3.4 12.1 12.4 8.0 7.6 7.9 0.1 70.9 8.4 0.3 3.4 1.3 Fabricated Metal Products 0.2 13.4 0.1 45.9 0.0 8.7 1.1 3.3 0.2 2.7 0.1 4.9 0.2 1.0 0.3 0.3 23.2 9.6 0.0 4.0 0.1 Machinery and Equipment 0.2 14.7 0.2 30.4 0.1 17.8 0.2 4.1 0.1 3.1 0.2 14.6 0.1 1.1 0.3 0.2 9.7 6.7 0.1 2.6 0.2 Machinery and Equipment, n.e.c. 0.3 13.8 0.3 35.2 0.1 11.5 0.7 3.2 0.1 3.7 0.2 11.0 0.4 1.6 0.4 0.3 9.3 7.4 0.1 3.9 0.3 Electrical and Optical Equipment 0.2 15.0 0.2 28.6 0.1 20.1 0.2 4.5 0.1 2.9 0.2 15.9 0.1 0.9 0.2 0.2 9.9 6.4 0.1 2.2 0.2 Office, Accounting and Computing Machinery 0.1 22.0 0.0 32.0 0.0 16.8 0.2 4.4 0.0 1.8 0.0 10.7 0.0 0.7 0.1 0.2 7.4 6.9 0.0 2.3 0.0 Electrical Machinery and Apparatus, n.e.c. 0.2 14.7 0.1 35.2 0.1 13.9 0.3 3.8 0.0 3.2 0.3 11.3 0.1 1.0 0.2 0.2 14.7 8.5 0.1 3.0 0.1 Radio, Television and Communication Equipme 0.1 12.6 0.1 23.2 0.1 27.0 0.1 4.5 0.0 3.2 0.0 18.6 0.0 1.0 0.2 0.1 3.7 5.1 0.1 1.6 0.1 Medical, Precision and Optical Instruments 0.5 14.2 1.1 32.0 0.5 11.7 0.4 5.3 0.5 3.3 0.3 19.5 0.1 0.9 0.6 0.2 16.3 6.8 0.4 2.6 0.7 Transport Equipment 0.2 17.4 0.2 47.8 0.1 5.3 0.5 1.9 0.2 1.3 1.3 5.5 0.1 0.7 0.2 0.3 12.8 11.1 0.1 5.5 0.0 Motor Vehicles, Trailers and Semi-Trailers 0.2 19.7 0.0 45.5 0.0 3.9 0.3 1.5 0.3 1.0 1.9 5.6 0.1 0.4 0.4 0.3 11.7 8.9 0.0 6.4 0.0 Other Transport Equipment 0.3 10.9 0.8 54.0 0.2 9.3 0.6 2.8 0.0 2.1 0.6 5.2 0.2 1.8 0.1 0.3 15.6 17.5 0.1 3.2 0.1 Building and Repairing of Ships and Boats 0.7 2.6 4.8 61.4 0.3 9.4 1.2 0.7 0.2 5.4 1.0 1.5 0.2 4.1 0.1 0.4 56.1 23.5 0.0 1.6 0.4 Aircraft and Spacecraft 0.3 13.7 0.5 51.1 0.2 9.9 0.5 3.2 0.0 1.6 0.1 6.5 0.0 1.4 0.1 0.3 1.8 14.9 0.1 3.7 0.0 Railroad and Transport Equipment, n.e.c 0.2 8.8 1.1 57.3 0.0 7.0 0.3 3.2 0.1 0.8 0.8 3.8 1.2 0.9 0.1 0.3 9.4 20.7 0.0 2.8 0.1 Manufacturing not elsewhere classified; Recycling 0.4 25.4 0.9 37.4 0.1 11.7 0.6 3.8 0.4 1.0 0.3 2.0 0.3 4.0 0.1 0.2 13.1 10.0 0.3 3.2 0.3 High Technology Industries 0.2 15.0 0.4 33.7 0.2 17.7 0.2 4.4 0.2 2.5 0.2 13.8 0.1 0.9 0.2 0.2 10.3 7.3 0.1 2.2 0.3 Medium-High Technology Industries 0.2 14.1 0.2 39.8 0.1 9.8 0.6 3.0 0.3 2.7 0.6 10.0 0.3 1.4 0.6 0.3 13.8 8.3 0.1 4.0 0.1 Medium-Low Technology Industries 1.3 12.0 0.5 40.4 0.2 13.4 2.8 4.0 3.8 3.9 3.5 7.1 3.1 2.6 4.8 0.2 25.7 8.5 0.1 3.0 0.5 Low-Technology Industries 1.0 16.8 1.0 45.7 0.2 9.1 2.2 6.0 3.5 1.7 4.8 4.2 2.0 1.4 0.7 0.3 28.4 9.0 0.1 3.0 0.7

1. South-East Asia: Chinese Taipei, Hong Kong (China), Indonesia, Malaysia, Philippines, Singapore, Thailand.2. Market size : share of country in World imports of gpods for specified industry,3. Share of Australia in imports of goods for specified industry.Source: OECD, bilateral trade database, June 2012.

Performance of Australia on importing markets, 2010

Germany CanadaUnited States EU27 SE Asia1 Japan Korea China India New Zealand


99

Table A.3.3: The export portfolio of Australian manufacturing – market growth versus Australia’s exports, 2005-2010

Country

Industry

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

From Aus-tralia

From the

World

Total Manufacturing 24 36 14 11 0 27 41 51 13 25 56 56 46 87 23 93 1 10 1 39 -6 23 Food products, Beverages and Tobacco 17 48 -7 29 -22 41 46 91 -9 16 61 61 127 139 89 93 52 61 -21 44 0 62 Textiles, Textile Products, Leather and Footwear -36 20 -70 5 -45 23 -27 5 -7 20 -41 51 -31 23 -11 26 -24 21 -4 34 -3 26 Wood and Products of Wood and Cork 31 -5 -48 -51 -19 7 60 4 32 2 -77 25 91 109 -20 149 -12 -3 -47 17 17 9 Pulp, Paper, Paper Products, Printing and 11 22 41 -5 8 16 31 55 101 25 -28 50 -8 86 31 31 -6 7 231 24 -28 16 Chemical, Rubber, Plastics and Fuel Products 45 51 33 23 5 41 78 85 54 51 230 80 17 92 205 72 -11 18 -41 53 -8 35 Coke, Refined Petroleum Products and Nuclear 47 71 -100 10 -15 60 159 151 48 43 399 130 -33 113 432 10 -54 16 -95 63 -34 90 Chemicals and Chemical Products 46 47 84 30 7 38 39 56 73 57 100 56 94 83 169 100 15 15 50 48 34 27 Chemicals excluding Pharmaceuticals 50 40 33 11 28 29 55 54 51 43 173 52 63 78 174 99 14 13 61 39 23 15 Pharmaceuticals 41 64 121 70 1 54 16 78 123 102 4 98 463 215 105 109 18 21 44 59 42 59 Rubber and Plastics Products 27 42 -19 22 99 32 46 53 47 44 -25 104 71 144 17 122 13 34 130 44 -28 28 Other Non-Metallic Mineral Products -13 23 -16 -18 -19 18 -14 55 -32 20 -38 69 -26 115 -23 95 3 11 -56 41 30 32 Basic Metals and Fabricated Metal Products 29 44 15 15 17 34 31 66 27 32 46 61 48 71 13 117 -5 5 425 56 -45 40 Basic Metals 29 46 18 21 17 34 30 68 27 33 47 52 47 68 13 116 -11 -6 643 52 -45 48 Iron and Steel 23 22 28 2 159 18 8 25 5 21 46 51 -71 -4 104 79 -44 -23 853 32 101 13 Non-Ferrous Metals 30 73 13 37 11 56 32 119 28 38 47 53 51 160 13 128 11 15 633 74 -51 92 Fabricated Metal Products 31 35 -19 4 6 28 69 60 19 30 -31 137 132 92 28 119 19 25 -1 40 -27 24 Machinery and Equipment 35 34 46 19 7 19 45 40 39 23 43 39 67 79 20 74 4 8 -22 27 109 22 Machinery and Equipment, not elsewhere 36 36 17 17 -1 18 53 62 -18 39 75 80 70 88 64 81 -3 3 -3 34 135 21 Electrical and Optical Equipment 35 34 61 20 10 20 38 36 73 19 28 26 63 77 -6 70 9 11 -25 25 84 22 Office, Accounting and Computing Machinery -9 6 1 12 -5 -11 2 12 26 -18 -15 31 -37 53 -8 14 -21 -4 -37 -9 -23 -2 Electrical Machinery and Apparatus, n.e.c. -5 42 34 24 -46 34 24 39 -64 28 92 33 -1 90 4 82 12 27 -72 36 10 34 Radio, Television and Communication 37 41 36 22 21 28 70 41 5 42 -28 26 113 78 -38 95 -23 0 -1 30 68 28 Medical, Precision and Optical Instruments 72 43 76 27 54 35 50 42 142 16 21 20 122 85 47 60 52 38 74 46 121 29 Transport Equipment -18 20 -42 -6 15 13 9 63 4 7 -27 105 -61 217 186 81 -22 -18 88 29 17 4 Motor Vehicles, Trailers and Semi-Trailers -35 13 -79 -8 -27 2 -7 65 22 8 -40 90 -74 276 333 184 -44 -20 -1 10 43 4 Other Transport Equipment 39 47 22 7 33 53 22 60 -68 4 641 128 634 115 35 49 165 -12 244 68 -35 7 Building and Repairing of Ships and Boats 69 84 63 -7 -17 102 327 105 -89 208 1843 195 173 119 -35 40 238 38 1125 316 33 23 Aircraft and Spacecraft 22 45 19 19 82 49 -17 59 -31 -5 1686 98 -40 102 345 44 3 -27 220 36 -69 7 Railroad and Transport Equipment, n.e.c. 41 28 -1 -30 61 30 134 26 -26 32 13 56 1236 237 -20 187 55 18 184 59 -28 -4 Manufacturing not elsewhere classified; Recycling 142 37 311 9 99 40 60 52 10 7 136 57 147 145 427 298 1 15 814 113 21 32 High Technology Industries 44 37 73 26 28 28 24 37 117 23 5 30 160 78 4 67 11 3 54 30 64 23 Medium-High Technology Industries 9 31 -18 5 -15 17 45 54 23 33 21 60 22 99 127 96 -12 -1 -37 29 77 13 Medium-Low Technology Industries 31 49 2 11 10 40 43 91 32 37 75 84 37 89 16 87 -11 16 -30 62 -42 43 Low-Technology Industries 18 30 14 5 -19 29 41 39 -1 15 47 54 83 78 60 135 21 30 41 46 1 34

1. South-East Asia: Chinese Taipei, Hong Kong (China), Indonesia, Malaysia, Philippines, Singapore, Thailand.Source: OECD, bilateral trade database, June 2012.

Canada

Percentage growth of imports of goods 2005-2010, from the World and from Australia

China India New Zealand GermanyUnited StatesAll countries EU27 SE Asia1 Japan Korea


100

Table A.3.4: Export market shares1 by country, for selected industries, 2010 and 1996

Notes 1. Based on 60 available countries. 2. Revealed comparative advantages for manufacturing industries are calculated on the basis of total manufacturing industries, while agriculture and mining (and total manufacturing) are based on Grand total. Source: OECD STAN Bilateral database

Austra-lia Japan Korea China

Chi-nese Taipei

Hong Kong, China

Indone-sia

Singa-pore India

Saudi Arabia

United States

Cana-da Brazil Chile EU27

Nor-way

Swit-zer-land

Rus-sian

Fede-ration

South Africa

Other coun-tries

2010 100.0 1.0 1.6 5.7 3.5 11.7 2.0 3.0 1.2 2.6 1.6 1.9 9.5 2.9 1.5 0.5 37.4 1.0 1.4 3.0 0.5 7.81996 100.0 1.0 1.2 8.3 2.6 3.0 2.4 3.6 1.0 2.5 0.7 1.1 12.5 3.8 1.0 0.3 44.2 1.0 1.6 1.8 0.5 6.8

2010 5.5 2.1 3.3 0.2 0.3 3.8 0.2 0.7 3.3 0.3 2.8 0.2 18.7 5.4 7.0 1.3 35.2 1.3 0.1 1.3 0.9 13.81996 7.1 2.3 2.8 0.3 0.5 2.7 0.3 1.0 2.4 1.0 1.6 0.1 24.5 5.8 2.8 1.0 37.2 0.7 0.1 1.1 0.8 13.4

2010 18.7 26.1 41.0 0.0 0.0 2.3 0.0 0.0 19.2 0.0 0.1 0.0 10.2 6.3 0.0 0.0 5.3 0.0 0.0 9.5 5.7 0.31996 9.4 25.1 31.0 0.0 0.0 5.8 0.0 0.0 5.9 0.0 0.1 0.0 19.3 10.4 0.0 0.0 13.7 0.0 0.0 5.5 7.9 0.4

2010 8.6 1.7 2.6 0.0 0.0 0.3 0.0 0.0 3.4 0.0 0.0 27.1 0.9 9.3 2.3 0.0 9.4 10.6 0.0 24.9 0.0 9.01996 3.3 0.7 0.8 0.0 0.0 1.8 0.0 0.0 6.1 0.0 0.0 26.3 0.5 8.3 0.0 0.0 10.9 15.3 0.0 18.3 0.1 11.6

2010 27.0 23.3 36.6 0.0 0.1 0.3 0.0 0.0 5.2 0.0 4.3 0.0 3.4 3.6 19.7 10.2 4.7 0.1 0.0 1.4 6.2 4.11996 5.5 15.3 19.0 0.0 0.0 0.3 0.0 0.2 10.1 0.1 3.2 0.1 6.5 9.9 16.2 12.7 10.0 0.4 0.0 2.4 5.1 3.6

2010 35.1 0.4 0.6 6.1 3.9 13.2 2.3 3.3 0.8 2.8 1.7 0.5 9.5 2.3 1.1 0.4 39.7 0.4 1.6 1.5 0.4 7.81996 53.7 0.6 0.7 9.0 2.8 3.2 2.6 4.0 0.8 2.7 0.7 0.3 12.5 3.6 0.9 0.3 45.8 0.5 1.8 0.9 0.3 6.6

2010 7.0 3.3 2.1 0.6 0.6 4.8 0.3 0.7 3.0 0.9 1.7 0.3 8.5 2.9 5.4 1.0 49.1 0.7 1.0 0.8 0.5 14.91996 11.7 2.9 2.1 0.6 0.8 3.1 1.1 1.6 1.2 1.2 1.4 0.1 10.8 2.5 3.3 0.9 54.1 0.9 0.8 0.4 0.6 12.5

2010 0.5 2.0 1.2 0.1 0.1 12.3 0.2 0.4 3.2 0.1 0.2 0.0 5.8 9.0 2.1 2.0 46.4 0.4 0.7 4.8 0.4 10.51996 1.0 1.2 0.9 0.2 0.2 3.4 1.2 1.9 8.9 0.6 0.1 0.0 8.7 20.3 1.8 1.1 37.0 0.7 0.6 1.6 0.3 10.5

2010 1.6 0.9 0.5 2.0 5.2 3.3 2.3 0.1 0.7 9.1 5.9 3.9 10.3 3.3 0.5 0.0 34.1 1.4 0.1 11.8 0.3 5.21996 2.2 2.1 1.5 1.7 3.5 1.7 0.9 1.8 1.9 9.2 0.5 7.8 7.7 4.9 0.4 0.0 41.0 2.4 0.1 7.8 0.9 4.3

2010 1.7 1.2 0.7 1.0 0.3 2.9 0.1 0.4 0.2 1.5 1.5 0.0 9.5 1.2 0.4 0.0 66.8 0.3 10.7 0.1 0.0 2.41996 1.1 1.1 0.8 3.1 0.6 2.0 0.3 1.3 0.2 1.3 1.0 0.0 9.9 0.8 0.4 0.0 64.9 0.5 10.4 0.2 0.1 2.2

2010 0.6 0.5 0.3 10.9 6.4 10.3 2.9 0.5 0.5 0.7 2.8 0.3 4.5 1.8 2.3 0.1 42.0 0.4 0.5 5.0 2.0 6.01996 2.4 1.3 0.9 11.3 3.9 2.7 1.9 2.0 0.2 0.6 0.7 0.2 3.9 2.3 3.1 0.1 52.2 0.9 0.6 5.7 1.8 4.9

2010 13.0 10.1 6.4 5.0 2.7 4.4 1.7 3.9 1.9 1.6 2.0 0.1 7.8 7.7 1.5 6.6 28.2 1.8 1.8 4.2 2.8 8.01996 14.0 8.5 6.4 3.8 5.3 1.4 1.2 2.0 0.8 1.7 0.3 0.1 11.7 9.4 2.0 4.2 34.3 2.6 1.5 6.3 1.3 3.8

2010 1.9 0.5 0.3 10.2 3.2 12.3 1.4 1.2 0.3 2.0 0.6 0.1 11.9 1.7 0.7 0.1 44.9 0.5 2.0 0.4 0.4 5.41996 3.4 0.6 0.4 13.0 1.8 1.4 2.1 2.2 0.1 1.5 0.1 0.0 14.7 2.0 0.6 0.0 52.9 0.4 3.3 0.3 0.2 2.8

2010 1.2 0.8 0.5 8.1 7.3 11.0 4.7 4.1 0.1 2.2 0.3 0.0 14.7 1.1 0.2 0.0 34.0 0.3 5.7 0.3 0.1 5.21996 1.1 0.6 0.5 13.8 1.1 2.8 1.6 6.9 0.2 2.1 0.1 0.0 19.8 1.3 0.1 0.0 38.7 0.3 6.8 0.3 0.1 3.7

Grand total

Share in total Aus-tralian exports

(%)

Wood and Products of Wood and Cork(ISIC 20)

Machinery and Equipment, not elsewhere classified (ISIC 29)

Pharmaceuticals(ISIC 2423)

Coke, Refined Petroleum Products and Nuclear Fuel (ISIC 23)

Agriculture, Hunting, Forestry and Fishing (ISIC 01 to 05)

Medical, Precision and Optical Instruments (ISIC 33)

Mining of metal ores (ISIC 13)

Mining of coal and lignite; extraction of peat (ISIC 10)

Non-Ferrous Metals (ISIC 272)

Extraction of crude petroleum and natural gas (ISIC 11)

Food products, Beverages and Tobacco (ISIC 15 to 16)

Iron and Steel(ISIC 271)

Manufacturing industries(ISIC 15 to 37)

Industry Year

Aus- tralia's RCAs2

Exporting countries


101

Table A.3.5: Import shares by country and manufacturing industry, 2010

Source: OECD STAN Bilateral database

EU27 excl. UK

United Kingdom

Japan Korea New Zealand

United States

China Other Asia Rest of World

Total Manufacturing 17.4 3.1 9.6 3.7 2.9 12.4 20.9 19.5 10.3Food products, Beverages and Tobacco 24.7 3.4 0.7 0.7 18.0 10.0 6.7 21.8 13.9Textiles, Textile Products, Leather and Footwear 6.6 0.8 0.3 0.9 2.6 2.4 67.8 11.3 7.2Wood 16.7 0.2 0.0 0.1 22.6 6.3 16.8 28.1 8.9Pulp, Paper, Paper Products, Printing and Publishing 15.5 7.8 4.0 3.2 9.4 11.1 13.2 22.0 13.8Coke, Refined Petroleum Products and Nuclear Fuel 0.4 0.3 10.2 11.4 0.0 2.7 1.1 62.0 11.9Chemicals and Chemical Products 35.9 7.1 2.9 1.7 1.7 18.1 7.5 9.0 15.9Pharmaceuticals 53.8 10.5 1.2 0.0 1.0 17.7 1.7 3.9 10.1Rubber and Plastics Products 14.5 2.3 11.9 3.6 3.2 13.2 25.7 21.2 4.4Other Non-Metallic Mineral Products 18.3 1.6 3.9 1.4 1.1 6.5 36.1 19.5 11.5Basic Metals and Fabricated Metal Products 8.0 3.3 4.3 3.1 4.9 7.6 17.0 25.5 26.2Fabricated Metal Products 14.7 2.8 2.4 1.4 3.1 10.0 40.3 19.5 5.6Machinery and Equipment 17.6 2.6 7.2 2.7 1.3 17.6 29.2 15.6 6.1Medical, Precision and Optical Instruments 25.4 5.5 4.9 0.5 0.8 31.9 9.5 8.8 12.6Transport Equipment 19.5 2.9 32.7 8.2 0.4 10.2 3.9 16.7 5.4Motor Vehicles, Trailers and Semi-Trailers 19.1 2.7 36.7 9.5 0.3 6.7 2.2 18.0 4.8Other Transport Equipment 22.2 4.1 7.5 0.2 1.6 32.2 14.3 8.6 9.3High Technology Industries 21.2 4.2 4.1 2.3 0.6 16.0 29.8 15.0 6.8Medium-High Technology Industries 22.0 3.1 18.1 4.9 1.5 15.6 12.0 14.4 8.3Medium-Low Technology Industries 7.6 2.3 7.1 5.4 3.1 7.5 14.9 34.5 17.6Low-Technology Industries 14.5 2.6 1.2 1.0 8.8 6.8 36.1 18.7 10.2


102

ANNEX 3 TECHNOLOGY INTENSIVE CLASSIFICATION IN MANUFACTURING (based on International Standard Industrial Classification

(ISIC) - Revision. 3)

HIGH MEDIUM-HIGH Aircraft and Spacecraft (353) Electrical machinery and apparatus nec (31) Pharmaceuticals (2423) Motor vehicles , trailers and semi-trailers (34) Office, accounting and computing machinery (30) Chemicals excluding pharmaceuticals (24 less 2423) Radio, TV and communications equipment (32) Rail road equipment and transport equipment nec (352 + 359) Medical , precision and optical instruments (33) Machinery and equipment nec (29)

MEDIUM-LOW LOW Coke, refined petroleum products and nuclear fuel (23) Manufacturing nec ; Recycling (36-37) Rubber and plastic products (25) Wood and products of wood and cork (20) Other non-metallic mineral products (26) Pulp, paper, paper products , printing and publishing (21-22) Building and repairing of ships and boats (351) Food products, beverages and tobacco (15-16) Basic metals (27) Textiles, textile products , leather and footwear (17-19) Fabricated metal products , except machinery & equipment (28)


103

REFERENCES

Antweiler, W. and D. Trefler (2002), Increasing Returns and All That: A View from Trade. American Economic Review 92: 93-119.

Australian Government (2009), Management Matters in Australia: Just How Productive Are We? Findings from the Australian Management Practices and Productivity Global Benchmarking Project, Department of Innovation, Industry, Science and Research, Canberra.

Australian Government (2011), 2011‑12 Australian Government Budget - Budget Paper No. 1. Canberra.

Balassa, B. (1965), Trade Liberalisation and Revealed Comparative Advantage, The Manchester School, 33: 99-123.

Banks, G. (2011), Industry Assistance in a Patchwork Economy, Chairman's speech addressed to the Australian Chamber of Commerce and Industry (ACCI) Annual Dinner in Canberra on 23 November 2011.

Barnes, P. and A. McClure (2009), Investments in Intangible Assets and Australia’s Productivity Growth, Research Paper, Productivity Commission, Canberra

Battellino, R. (2010), Mining Booms and the Australian Economy, Speech addressed to the Sydney Institute, Sydney, February, 23 2010

Battersby, B. D. (2006), Does distance matter? The effect of Geographic Isolation on Productivity Levels. Treasury Working Paper No. 2006-03, Australian Treasury, Canberra.

Bayoumi, T. and M. Mühleisen (2006), Energy, the Exchange Rate and the Economy: Macroeconomic Benefits of Canada’s Oil Sands Production. IMF Working Paper 06/70, International Monetary Fund, Washington DC.

Beltramello, A., K. De Backer and L. Moussiegt (2012), The Export Performance of Countries within Global Value Chains (GVCs), OECD Science, Technology and Industry Working Paper 2012/2, OECD, Paris.

Benedettini, O., B. Clegg, M. Kafouros and A. Neely (2010), The Ten Myths of Manufacturing. What does the Future Hold for UK Manufacturing? Advanced Institute of Management Research, London

Blainey, G. (1966), Tyranny of Distance: How Distance Shaped Australia's History, Sun Books, Melbourne.

Bloom, N., S. Dargan, J. Dowdy and J. van Reenen (2007), Management Practice and Productivity: Whey They Matter, LSE Centre for Economic Performance and McKinsey & Co.


104

Boston Consulting Group (2011), Made in America, Again. Why Manufacturing Will Return to the US. The Boston Consulting Group, Boston.

Brahmbhatt, M., O. Canuto, and E. Vostroknutova (2010), Natural Resources and Development Strategy after the Crisis, in: Canuto and Giugale (eds.) ‘The Day after Tomorrow: A Handbook on the Future of Economic Policies in the Developing World’, The World Bank, Washington, DC.

Canuto, O. and M. Cavallari (2012), Natural Capital and the Resource Curse, Economic Premise No. 83. World Bank, Washington DC

Clark, C., T. Geer and B. Underhill (1996), The Changing of Australian Manufacturing, Industry Commission, Staff Information Paper, Canberra.

Connolly, E. and C. Lewis (2010), Structural Change in the Australian Economy, Reserve Bank of Australia Bulletin, September, Sydney.

Connolly, E. and D. Orsmond (2011), The Mining Industry: From Bust to Boom, Reserve Bank of Australia Annual Conference Volume, in: Gerard and Kearns (eds.) ‘The Australian Economy in the 2000s’, Reserve Bank of Australia, Sydney.

Corden, W. M., and J.P. Neary (1982), Booming Sector and De-Industrialisation in a Small Open Economy, Economic Journal, 92(368): 825-48.

Coudert, V., C. Couharde and V. Mignon (2008), Do Terms of Trade Drive Real Exchange Rates? Comparing Oil and Commodity Currencies, CEPII Working Paper, No. 2008-32, Paris.

De Backer, K. and N. Yamano (2012), International Comparative Evidence on Global Value Chains, OECD Science, Technology and Industry Working Papers 2012/3, OECD, Paris.

De Backer, K. and S. Miroudot (2012), Mapping Global Value Chains, Proceedings of the final World Input-Output Database Conference: Causes and consequences of globalization, Groningen, The Netherlands, April 24-26, 2012.

De Backer, K. and L. Moussiegt (2011), Export competition: price or quality? OECD Working Party on Globalisation of Industry Report (DSTI/IND/WPGI(2011)2), Paris.

Deloitte Touche Tohmatsu (2010), 2010 Global Manufacturing Competitiveness Index, Deloitte Touche Tohmatsu.

Dolman, B. (2009), What Happened to Australia’s Productivity Surge? Australian Economic Review, 42(3): 243-263.

Dolman, B., D. Parham and S. Zheng (2007), Can Australia Match US Productivity Performance? Productivity Commission Staff Working Paper, Productivity Commission, Canberra.

Dvornak N., M. Kohler and G. Menzies (2005), Australia’s Medium-Run Exchange Rate: a Macroeconomic Balance Approach, Economic Record, 81(253): 101–112.

Ernst & Young (2011), Trading places - The Emergence of New Patterns of International Trade, Growing Beyond, Ernst & Young and Oxford Economics.


105

Eslake, S. (2011), Productivity, Paper presented to the Reserve Bank of Australia Conference ‘The Australian Economy in the 2000s’, August, Sydney.

Evenett, S. J. and J. Francois (2010), Will Chinese Revaluation Create American Jobs?, Article at VoxEU.org, published on April, 23, 2012

Falvey, R.E. (1981), Commercial Policy and Intra-Industry trade, Journal of International Economics, 11: 495-511.

Falvey, R.E., and H. Kierzkowski (1987), Product Quality, Intra-Industry Trade and (Im)Perfect Competition in: Kierzkowski (eds.) ‘Protection and Competition in International trade: Essays in Honor of M. Cordon’, Basil Blackwell, Oxford & New York.

Finger, J. M. and M. E. Kreinin (1979), A Measure of ‘Export Eimilarity’ and its Possible Uses, Economic Journal, 89: 905-912.

Flam, H., and E. Helpman (1987), Vertical Product Differentiation and North-South Trade, American Economic Review, 77(5): 810-822.

Fontagné, L., M. Freudenberg, M., and G. Gaulier (2006), A Systematic Decomposition of World Trade into Horizontal and Vertical IIT, Review of World Economics (Weltwirtschaftliches Archiv), 142(3): 459-475.

Frankel, J. (1997), Regional Trading Blocks, Institute for International Economics, Washington, DC.

Gregory, R. G. (1976), Some Implications of the Growth of the Mineral Sector, The Australian Journal of Agricultural Economics, 20( 2): 71–91.

Hatzichronoglou, T. (1997), Revision of the HighTechnology Sector and Product Classification, OECD Science, Technology and Industry Working Papers 1997/2, OECD, Paris.

Helper, S., T. Krueger and H. Wial (2012), Why Does Manufacturing Matter? Which Manufacturing Matters? A Policy Framework., Metropolitan Policy Program at Brookings, Washington DC.

Helpman, E., and P. Krugman (1985), Market Structure and Foreign Trade, The MIT Press, Cambridge MA.

Hepburn, D. (2011), Mapping the World’s Changing Industrial landscape, Chatham Briefing Paper IE WIT BP 2011/01, www.chathamhouse.org.uk.

Hummels, D. (2007), Transportation Costs and International Trade in the Second Era of Globalisation., Journal of Economic Perspectives, 21(3): 131-154.

Keller, W. (2002), Geographic Location of International Technology Diffusion, American Economic Review, 92(1): 120-142

Kharas, H. (2010). The Emerging Middle Class in Developing Countries, OECD Development Centre Working Paper No. 285, OECD Publishing, Paris

Koopman, R., Z. Wang and S.J. Wei (2008), How Much of Chinese Exports Is Really Made in China? Assessing Domestic Value-Added When Processing Trade is Pervasive, NBER Working Paper 14109, National Bureau of Economic Research, Cambridge, MA.


106

Krugman, P. (1990), The Age of Diminished Expectations, MIT Press, Cambridge, MA.

Leamer, E. (2007), A Flat World, a Level Playing Field, a Small World after All, or None of the Above? A Review of Thomas Friedman’s ‘The world is flat’, Journal of Economic Literature, 45(1): 83-126.

Lederman, D., and W.F. Maloney (2007), Natural resources: neither curse nor destiny, The World Bank, Washington, DC and Stanford University Press, Stanford, CA.

Lippoldt, D. and M. Sztajerowska (2012), Trade, Employment and Structural Change: the Australian Experience, OECD Trade Committee Report (TAD/TC/WP(2012)1/FINAL), Paris

Marceau, J., K. Manley and D. Sicklen (1997), The High Road or the Low Road: Alternatives for Australia’s Future., Australian Business Foundation, Sydney.

Martin, J. (2010), Markups, Quality and Transport costs, CRES Working Paper 2010-17, Centre de Recherche en Economie et Statistique, Paris.

McCredie, A. (2007), Multinational Companies in Australia in ‘Competing from Australia’, CEDA Growth Paper No. 58, Melbourne

McKinsey Global Institute (2012), Trading Myths: Addressing Misconceptions About Trade, Jobs and Competitiveness, McKinsey & Company, Washington DC.

Miroudot, S. and A. Ragoussis (2009), Vertical Trade, Trade Costs and FDI, OECD Trade Policy Working Paper No. 89, OECD, Paris

Muro, M., J. Rothwell and D. Saha (2011), Sizing the Clean Economy: A National and Regional Green Jobs Assessment, Brookings Institution, Washington DC.

Nolan, A. (2012), New Sources of Growth: Intangible Assets, A New OECD Horizontal project, OECD CIIE paper (DSTI/IND/STP/ICCP(2011)2).

Nordhaus, W. (2005), The Sources of the Productivity Rebound and the Manufacturing Employment Puzzle, NBER Working Paper No. 11354, National Bureau of Economic Research, Cambridge, MA.

Norman, D. (2006), Modelling Manufactured Exports: Evidence from Australian States, RBA Research Discussion Paper 2006-01, Reserve Bank of Australia, Sydney.

OECD (2007), Science, Technology and Industry Scoreboard 2007, OECD Publishing, Paris.

OECD (2008), Economic geography and GDP per capita in ‘Economic policy reforms: Going for Growth’, OECD, Paris.

OECD (2008), Open Innovation in Global Networks, OECD Publishing, Paris.

OECD (2010), The OECD Innovation Strategy: Getting a Head Start on Tomorrow, OECD Publishing, Paris.

OECD (2010), Measuring Innovation: a New Perspective, OECD Publishing, Paris.

OECD (2010), Perspectives on Global Development 2010, OECD Publishing, Paris


107

OECD (2011), Science, Technology and Industry Scoreboard 2011, OECD Publishing, Paris.

OECD and Eurostat (1995), Manual on the Measurement of Human Resources Devoted to S&T - Canberra Manual, OECD Publishing, Paris.

Oliveira Martins, J. (1993), Market Structure, International Trade and Relative Wages, OECD Economics Department Working Paper No. 134, OECD, Paris

Parham, D. (2012), Australia's Productivity Growth Slump: Signs of Crisis, Adjustment or Both? Visiting Researcher Paper, Productivity Commission, Canberra

Pilat, D., A. Cimper, K. Olsen and C. Webb (2006), The Changing Nature of Manufacturing in OECD economies, Science Technology and Industry Working Paper 2006/9, OECD, Paris

Pisano, G., and W. Shih (2009), Restoring American Competitiveness, Harvard Business Review, July- August 2009.

Porter, M. E., J.W. Rivkin (2012), Prosperity at Risk. Findings of Harvard Business School's Survey on US Competitiveness, Harvard Business School, Cambridge, MA

Productivity Commission (2003), Trends in Australian Manufacturing, Research Paper, Productivity Commission, Canberra.

Productivity Commission (2010), Annual Report 2009-10, Annual Report Series, Productivity Commission, Canberra.

Productivity Commission (2011), Trade and Assistance Review 2009-10, Annual Report Series, Productivity Commission, Canberra.

Quah, D. (2011), The Global Economy’s Shifting Centre of Gravity, Global Policy, 2(1): 3–9.

Redding, S. and A. Venables (2004), Economic Geography and International Inequality, Journal of International Economics, 62 (1): 53-82.

Romer, C., (2012), Do Manufacturers Need Special Treatment, New York Times, Article published February 4, 2012

Rowthorn, R. and R. Ramaswamy (1998), Growth, Trade and Deindustrialisation, IMF Working Paper No 98/60

Sachs, J. D., and A.M. Warner (1995), Natural Resource Abundance and Economic Growth, NBER Working Paper 5398, National Bureau of Economic Research, Cambridge, MA.

Sachs, J. D. and A.M. Warner (2001), The Curse of Natural Resources, European Economic Review, 45(4–6): 827–38.

Sissons, A. (2011), More than Making Things: A New Future for Manufacturing in a Service Economy, A Knowledge Economy Programme Report, The Work Foundation, London

Smith, K. (2007), Innovation and Growth in Resource-Based Economies in ‘Competing from Australia’, CEDA Growth Paper No. 58, Melbourne


108

Sturgeon, T. J., and G. Gereffi (2009), Measuring Success in the Global Economy: International Trade, Industrial Upgrading and Business Function Outsourcing in Global Value Chains, Transnational Corporations, 18(2): 1-35.

The Australian Treasury (2008), Economic geography and economic performance in Australia, Economic Roundup Issue 3, Canberra.

The Economist (2011), Manufacturing, This House Believes that an Economy Cannot Succeed Without a Big Manufacturing Base, Economist Debates.

The Economist (2012), Manufacturing: The third industrial revolution, Article published on April 21, 2012.

Thirlwell, M. (2012), The Australian Century?, Article published in The Interpreter on May 18, 2012. Lowy Institute for International Policy, Sydney

Withers, G. (2007), Can distance be defeated? in ‘Competing from Australia’, CEDA Growth Paper No. 58, Melbourne

World Bank (2012), Inclusive Green Growth: The Path to Sustainable Development, World Bank Publishing, Washington

World Economic Forum (2012), The Future of Manufacturing: Opportunities to Drive Economic Growth. Report in collaboration with Deloitte Touche Tohmatsu Ltd., World Economic Forum, Geneva.

WTO and IDE-JETRO (2011), Trade Patterns and Global Value Chains in East Asia: From Trade in Goods to Trade in Tasks, World Trade Organization, Geneva.

australian manufacturing in the global economy

Documents