FACTORS LEADING TO OFFSHORE MANUFACTURE OFAUSTRALIAN INVENTIONS:

THE CASE OF THE ORBITAL COMBUSTION PROCESS ENGINE

By Karen Jane ManleyB. Com, B. Ec (Hons)

This thesis is presented for the degree of Doctor of Philosophy

Institute for Science and Technology PolicyMurdoch UniversityWestern Australia

1994

Declaration

I declare that this thesis is my own account of my own research and contains, as itsmain content, work which has not previously been submitted for a degree at anytertiary educational institution.

~~Karen Manley

Abstract

This thesis focuses on the factors which lead to off-shore manufacture of

Australian inventions. It establishes this phenomenon as a problem, both in

terms of its incidence in the post-war period, and in the strategic importance ofinnovative activity to economic growth. The thesis utilises a case study

approach and concentrates on the experiences of one company, the 9rb~~

Engine Corporation (Orbital). In 1989 Ralph Sarich, inventor of the Orbital

Combustion Process (OCP) engine and founder of Orbital, signed an agreement

with the Michigan state government to manufacture the engine in the United

States of America (USA), in preference to several alternative sites in Australiaand overseas. This occurred in the context of Orbital actively pursuingassistance from the Australian government to secure local production. The

research question is: Why did Orbital decide to manufacture its engine invention off­shore? A multi-disciplinary approach to this question is adopted. Threedifferent conceptual frameworks are employed: industrial organisation theory,

market failure theory and policy network theory. The analysis is not structured

around a pre-existing hypothesis; instead, the aim is to generate potential

explanations for more rigorous testing by subsequent researchers.

The thesis concludes that, in terms of industrial organisation theory, thedecision to manufacture OCP engines off-shore was a function of the poorquality of the Australian industrial context and the failure by those seeking

assistance from the Commonw~althgovernment to stress Orbital's status as an

exemplary enterprise in Australian industry. Market failure theory indicatedthat offshore production of the OCP engine was made more likely by the

suboptimal operation of the price mechanism, the neglect of market failure

arguments by those supporting local production of the engine and 'government

failure'. Policy network theory explained Orbital's decision as the result of:ineffective employment of negotiation tactics by proponents of the engine'sdomestic manufacture; and the chaotic nature of negotiations which allowed

certain personal and ideological prejudices to dominate the issue resolutionprocess.

It is shown that some or all of these explanations underlie a number of other

examples where Australian inventions have been manufactured offshore. In

commenting on policy implications, the thesis points to the economic potentialof the Orbital invention and the value of interventionist industry policy. The

thesis identifies a number of actions which might be taken to lower the

incidence of foreign manufacture of Australian inventions. Further research is

necessary to determine the relative importance of the various factors which areidentified as leading to offshore production. In addition, there remains aparticularly crucial need to improve the social efficiency of existing cost-benefittechniques employed by government policy-makers and commercial analysts.

Table Of Contents

Acknowledgm.ent:s iList of Abbreviations iiList of Figures ivList of Tables v

Chapter 1: Introduction 1

1.1 Approach to th.e Research Question 21.2 Significance of th.e Research Question 61.3 Structure of the Thesis 8

Chapter 2: The Foreign Manufacture of Domestic inventions •...••••.••.•.......•..12

2.1 futroduction 132.2 QPSX Communications Ltd 182.3 Eagle Aircraft international. 222.4 Telectronics Pty Limited 252.5 Strarch futernational Ltd 272.6 Solartronics futernational Ltd 292.7 Analysis and Conclusions 35

Chapter 3: The Story of Ralph Sarich and the Orbital Corporation.•....•.•..••••.46

Chapter 4: The OCP Engine Invention and its Commercialisation ............•..61

4.1 Technical Features 624.1.1 Technical Ifistory 624.1.2 Operating Characteristics .- 644.1.3 Production Characteristics 684.1.4 Performance Characteristics 724.1.5 Competitive Advances 74

4.2 Commercial Status 804.2.1 Financial Performance 804.2.2 The OCP Manufacturing Facility 844.2.3 The Decision to Locate th.e OCP Plant in Michigan and the

Associated Role of Government. 85

Chapter 5: Organisational Issues and Location of the OrbitalManufacturing Facility 95

5.1 The Organisational Context Surrounding Orbital's Activities 965.1.1 The National fudustrial Structure 985.1.2 .Jl1e Car industry 102

[}.).2.1 The Global Car fudustry 1025.1.2.2 The National Car fudustry 108

5.1.2.3 'Competitive Diamond' Features of the NationalCar Industry 110

5.1.2.4 The National Car industry's Response to JapaneseProduction Methods 116

5.1.2.5 The National Car industry's Response toEnvironmental Concerns 120

5.1.3 The National Innovation System 1215.1.4 The National Economic Policy Environment 1305.1.5 The National Business Recipe 133

5.2 Orbital's Organisational Approach to its Activities 1385.2.1 The Role of Information 1395.2.2 Orbital's Business Strategy: Networking Behaviour l445.2.3 Orbital's Business Strategy: Learning Behaviour 1485.2.4 Orbital's Business Strategy: Innovation Process

Management 1545.3 Conclusions 164

Chapter 6: Market Failure and Location of the OrbitalManufacturing Facility 166

6.1 Introduction 1676.2 Defining Market Failure Concepts 169

6.2.1 Externalities 1696.2.2 Uncertainty/Risk 1726.2.3 Market Power 175

6.3 The Significance of Market Failure Theory for Industry Policy 1786.3.1 The International Context. 1786.3.2 Cost/Benefit Analysis and the Extent of Market Failure 1806.3.3 The Prescriptive Efficacy of Market Failure Theory 1826.3.4 Government Failure 183·6.3.5 Market Failure Theory and Economic Rationalism in

Australian Politics 1846.4 Market Failures Associated with the Proposed Australian OCP

Engine Manufacturing Facility 1866.4.1 Externalities and the Orbital Project: Industry Benefits 1876.4.2 Uncertainty/Risk and the Orbital Project: Capital Markets 1916.4.3 Market Power and the Orbital Project: Trade

Considerations 1956.5 The Impact of Market Failures Associated With the Orbital

Project on the Desirability and Feasibility of Domestic Location 2006.6 The Status of Market Failure Arguments in Decision Making

Regarding the Location of the OCP Manufacturing Facility 2056.6.1 The Absence of Explicit Market Failure Justifications

Employed by Parties to the Orbital Outcome 2066.6.2 The Role of Government Failure 214

6.7 Conclusions 218

Chapter 7: Policy Networks and Location of the OrbitalManufacturing Facility 219

7.1 Introduction 2207.2 Conceptual Background 221

7.2.1 The Features of Policy Network Theory 2227.2.2 Policy Communities and Issue Networks 224

7.3 The Analytical Framework 2257.4 Policy Network Analysis of the Orbital Decision 233

7.4.1 Network Members and their Interrelationships 2337.4.2 Network Analysis: Patterns of Power and Influence 240

7.4.2.1 Operating Ideology 2417.4.2.2 State Capacity and Business Mobilisation 2467.4.2.3 Network Integration 2497.4.2.4 Network Behavioural Features 257

7.5 Conclusions 261

Chapter 8: Conelusians 266

8.1 Summary of Research Results 2678.2 The Extent of Retained Benefit 2728.3 The Extent of Lost Opportunity 2758.4 Capital Issues 2768.5 Some Final Comments 278

Appendix A List of Interv'iewees 284Appendix B Australian Inventions Manufactured Overseas: Persons,

Organisations and Literature Consulted.•••••...•.....••••......••..••••...•287Appendix C Fundamental Principles of Four-strokes, Two-strokes

and Rotary- Engines 288Appendix D Organisational Concepts Informing Discussion in Chapter

5....••...•.......•..........•...................................................•......•.•....••.........••.290Appendix E History of Government Involvement in the

Automotive Sector :. 292Appendix F Orbital's Adoption of Advanced Technologies.•......•......•...•......•294Appendix G Defining the Sources of Market FaiIure.•...........•.....••......•...........•297Appendix H Types of Policy Networks Identified in the

Literature 300Appendix I A Short Survey of the Sources of Funds Available to

Small, Start-Up, High-Technology Companies 301

References 306

Acknowledgments

The assistance of the Orbital Engine Corporation has been very valuable to me

during the course of my research. In particular, I would like to thank Ralph Sarich,John Beech, Ken Johnsen and Steve Hill. Similarly, my thanks are due to the many

government and industry representatives interviewed over the last 5 years.

On a more personal level, I would like to thank the following people for their

encouragement and inspiration:

Dennis Longstaff for his commitment to the importance of my work and hisemotional support over many years.

Liz Harman for her perception and motivation as my principal supervisor; and

particularly for taking on my supervision 'mid-stream'.

Peter Newman for his valuable contribution as co-supervisor.

Dora Marinova and John Phi1limore for their insightful intellectual input.

Doris Tyrrell, Keith Norris and Herb Thompson for getting me started and taking

an interest in my progress over the years.

Meg Jadlowkier for re-typing my work following the theft of the computer disks.

Finally, I feel indebted to those who organise, and participate in, the Inter­

University Collaborative PhD Program in Science and Technology Policy and

Socia-economic Progress.

i

List of Abbreviations

ABCABSAGLAGPSAlAAIDeAMCANSTOANUAOAPSAASEANASTECATGAustradebBCABHPBIEBScCAACAICBAccCDACEDACKDCSIRODEDTDIDDITAC

DSDECUEPAEPACEMDGESDETMFAPMFCAIFLVGIRDGMIC!DC

Australian Broadcasting CommissionAustralian Bureau of StatisticsAustralian Gas LightAustralian Government Publishing ServiceAutomotive Industry AssociationAustralian Industry Development CorporationAustralian Manufacturing CouncilAustralian Nuclear Science and Technology OrganisationAustralian National UniversityOrder of AustraliaAustralasian Political Studies AssociationAssociation of South-East Asian NationsAustralian Science and Technology CouncilAustralian Technology GroupAustralian Trade CommissionbillionBusiness Council of AustraliaBroken Hill Proprietary LimitedBureau of Industry EconomicsBachelor of ScienceCivil Aviation AuthorityConfederation of Australian IndustryCommonwealth Bank of Australiacubic capacityCommonwealth Development BankCommittee for Economic Development of AustraliaCompletely Knocked DownCommonwealth Scientific and Industrial Research OrganisationDepartment of Economic Development and Trade, WADepartment of Industry DevelopmentDepartment of Industry, Technology and Commerce(Commonwealth)Department of State Development (Western Australia)Electronic Control UnitEnvironmental Protection AuthorityEconomic Planning and Advisory CouncilExport Market Development GrantsEcologically Sustainable DevelopmentElaborately Transformed ManufacturesFederation of Automotive Product ManufacturersFederal Chamber of Automotive IndustriesFlexible Low VolumeGrants for Industrial Research and DevelopmentGeneral MotorsIndustry CommissionInter-departmental Committee

ii

ILDA!R&DIVFJASSAJELLPGmMERIWAMICMTIAN'LANDSNIEIRNlliNPDPNPVNSTAGNSWOCPOECOECDOPECOrbitalOWCPM&CPMVR&DR&D&CR&IRAPSS&TSASDDSEaSTLSITSW'LANDIDCTIDATNCUKULEVUSAUWAVic.WA

Industrial Land Development AuthorityIndustrial Research and DevelopmentInvitro FertilisationJournal of the Australian Society of Security Analysts,Journal of Economic LiteratureLiquid Petroleum GasmillionMineral's and Energy Research Institute of Western AustraliaManagement and Investment CompanyMetal Trades Industry AssociationNetherlandsNational Institute for Economic and Industrial ResearchNot Invented HereNational Procurement and Development ProgramNet Present ValueNational Science and Technology Analysis GroupNew South WalesOrbital Combustion ProcessOrbital Engine CompanyOrganisation for Economic Cooperation and DevelopmentOrganisation of Petroleum Exporting CountriesOrbital Engine Corporation LimitedOrbital Walbro CorporationPrime Minister and CabinetPassenger Motor VehiclesResearch and DevelopmentResearch and Development and CommercialisationRural and IndustriesRemote Area Power SupplyScience and TechnologySouth AustraliaSarich Design and·DevelopmentSocial and Economic ObjectiveSarich Technologies LimitedSarich Technologies TrustSwitzerlandTrade Development CouncilTechnology and Industry Development AuthorityTransnational CorporationUnited KingdomUltra Low Emissions VehicleUnited States of AmericaUniversity of Western AustraliaVictoriaWestern Australia

iii

List of Figures

Figure 1.1 Fields of Analysis 9Figure 4.1 The OCP 'X' Engine 65Figure 5.1 World Car Industry Performance 103Figure 5.2 Automotive Assembly Plants in Australia (1993) 111Figure 5.3 Expenditure on Basic Research, Applied Research and

Experimental Development (% of GDP) 124Figure 5.4 Comparison of Australian Manufacturing R&D/ GDP with

Ten Nations Adjusted for Industrial Structure 125Figure 5.5 Australian Manufacturing R&D Intensity Compared to OECD

Averages 126Figure 5.6 A Typical Linear Model of the Irmovation Process 156Figure 5.7 The Irmovation Process 157Figure 7.1 Orbital Negotiations: Institutional Participants 234Figure 8.1 Conceptual Approach to the Research Question 267Figure G.l Bator's Classification of Market Failures 297Figure G.2 Instances of Market Failure not highlighted in Bator (1958) 298

iv

List of Tables

Table 2.1 Sample of Australian Inventions Manufactured Overseas(1950s-1990s) 14-16

Table 2.2 Summary of Development Configurations 36Table 3.1 Sarich Story Chronology (to 1 July 1992) 48Table 3.2 Sarich Technologies: Company Structural Changes: 1969-1992 .51Table 4.1 Categorising OCP Patents and Patent Applications 69Table 4.2 Base-engine Emission Levels 73Table 4.3 Two-stroke Programs of Manufacturers not Licenced by Orbital 79Table 4.4 Licence-related Agreements Negotiated by Orbital 82Table 4.5 Total Engines Built 83Table 4.6 Orbital's Financial Performance 83Table 4.7 Government Assistance Provided to Orbital 1973 -1992 90Table 4.8 Government Assistance Provided to Orbital up to 1973 91Table 4.9 OEC Estimates of Returns for OCP Engine Assembly Plants in the

USA and Australia ($Am) 93Table 5.1 Problems Typically Encountered by Small Industrialised

Countries 97Table 5.2 International Comparison of the percentage of GDP accounted

for by Manufacturing (1987 or nearest year) 99Table 5.3 Share and Rank of Each Exporting Country in OECD Imports of

Highly R&D Intensive Products 100Table 5.4 Structure of the World Car Industry 104Table 5.5 Australian Automotive Industry: 1987 109Table 5.6 Quality Performance of International Assembly Plants (assembly

defects per 100 vehicles) 112Table 5.7 Scale of Operation of International Assembly Plants (daily

production rates) 113Table 5.8 Gross Expenditure on R&D 122Table 5.9 Source of R&D Funds as % of GDP (1990 or nearest year) 123Table 5.10 Types of Networking Relationships Maintained by Orbital.. 147Table 5.11 Engineers Employed by OrbitaL 149Table 5.12 Library Stocks Maintained by Orbital.. 150Table 5.13 Departments at Orbital.. 151Table 5.14 Exploratory Learning Activities Conducted by Orbital.. 155Table 5.15 Orbital's Labour Force 159Table 6.1 The Elements of Market Failure 170Table 6.2 The OCP Engine Manufacturing Opportunity: Studies Undertaken

Between 1987 and 1989 207Table 7.1 Policy Network Dimensions 227Table 8.1 Explanations for Orbital's Decision to Manufacture Off-Shore 268Table 8.2 The Analytical Frameworks 271

Table H.1 Types of policy networks identified in survey articles

1981-1992.300 300

v