The Performance Record of Australian Manufacturing


Research Paper 22 1999-2000

Michael Emmery
Economics, Commerce and Industrial Relations Group

Greg Baker
Statistics Group
6 June 2000

Contents

Major Issues
Introduction
Structural Change

Inter-industry Structural Change
High-technology Industries
Information industries
Biotechnology
Intra-industry Structural Adjustment

Efficient Resource Use, Innovation and Financial Performance

Training
Technological Innovation
Productivity Growth
Labour Productivity
Multifactor Productivity
Financial Performance

Growth and Trade Performance

Manufacturing Sector Growth
Manufacturing Employment
Manufacturing Investment
Trade in Manufactures

Discussion and Conclusions

Structural Change
Strengths
Investment
Exports
Productivity Growth
Threats/Opportunities
R&D and Innovation
Education and Training
Venture Capital
Trade Liberalisation and Manufacturing Performance

Endnotes

Tables

Table 1: Manufacturers' Sales and Trade Performance
Table 2: R&D Intensity in High and Medium to High-Technology Manufacturing Industries OECD and Australia
Table 3: Value Added and Employment in High and Medium to High-Technology Manufacturing Industries Australia
Table 4: Employer Training Expenditure July to September
Table 5: Apprentices and Trainees in the Tradepersons and Related Workers Occupation Category
Table 6: Manufacturing Sector: Expenditure on Technological Innovation by Type of Innovation Activity:1993-94 and 1996-97.
Table 7: Multifactor Productivity for Manufacturing and All Industries: Australia and OECD

Figures

Figure 1: Industry Composition by Value Added
Figure 2: Industry Composition by Employment
Figure 3: Business Expenditure on Research and Development
Figure 4: Labour Productivity: Indexes of Gross Product Per Hour Worked
Figure 5: Market Sector Multifactor Productivity
Figure 6: Profit Margin
Figure 7: Return on Net Worth
Figure 8: Investment Ratio
Figure 9: Manufacturing and Economic Growth
Figure 10: Manufacturing as Per Cent of Gross Domestic Product
Figure 11: Employment in Manufacturing and Total Employment
Figure 12: Employment in Manufacturing as a Per Cent of Total Employment
Figure 13: Protection Does Not Prevent Job Loss
Figure 14: Gross Fixed Capital Formation
Figure 15: Gross Fixed Capital Formation: Manufacturing as a Per Cent of Total
Figure 16: Exports of Simply and Elaborately Transformed Manufactures
Figure 17: Export Propensity and Import Penetration

Glossary

ABS

Australian Bureau of Statistics

ANTA

Australian National Training Authority

AVCAL

Australian Venture Capital Association Limited

BERD

Business Expenditure on Research and Development

CSIRO

Commonwealth Scientific and Industrial Research Organisation

CRC

Cooperative Research Centre

ETM

Elaborately Transformed Manufactures

GDP

Gross Domestic Product

IRS

Information and Research Services (of the Parliamentary Library)

IT&T

Information Technology and Telecommunications

MFP

Multifactor Productivity

NASDAQ

National Association of Securities Dealers Automated Quotations

OECD

Organisation for Economic Co-operation and Development

PMV

Passenger Motor Vehicles

PDF

Pooled Development Fund

R&D

Research and Development

TCF&L

Textiles, Clothing, Footwear and Leatherwear

Major Issues

The following review of the long-run performance of the Australian manufacturing sector tracks some major changes in the economic and policy environment in which the sector operates. Two earlier research papers in this series have examined the evolution of Australian Federal industry policy and the history of the trade liberalisation process.

This paper presents a wide range of performance indicators, and offers some subjective views, on how manufacturing industries have responded to a much more open trading environment and to other measures to encourage structural change and greater innovation and efficiency. Particular attention is paid to the evidence of increased trade orientation and the improved productivity performance of Australian manufacturing. The available evidence on the uptake of research and development (R&D) and innovation, training and venture capital is examined as these aspects are seen as critical to the continuance of strong productivity performance in manufacturing.

Over the past three decades, the growth in the manufacturing sector has been far slower than in the rest of the economy and there has been no growth in manufacturing employment. However there are signs that the benefits of trade liberalisation and other economic policy reforms, and the associated gains in efficiency and international competitiveness, are starting to be reflected in the performance of the manufacturing sector. These include the strong growth in productivity and in exports of elaborately transformed manufactures (ETM), and also the sustained growth in investment in the sector. The ability of Australian manufacturers to retain or find new export markets during the recent crisis in South-East Asia is a further indicator of the competitiveness and robust nature of the sector.

The evidence sugggests that Australian manufacturing is becoming much more trade oriented, with upward trends in both its export propensity (that is the share of output exported) and in import penetration (that is the share of total Australian supply met by imports). This reflects an increased maturity in the manufacturing sector with increased specialisation in those areas where Australia has a comparative advantage. It indicates the extent to which Australian firms are developing global outlooks and strategies, and are sourcing out of, or selling into, various overseas locations.

The strong growth in the share of ETM in total exports is a clear signal of the increasing maturity and the increasing competitiveness of Australian manufacturing. It reflects a reducing dependence on exports of simply transformed rural and mineral products. ETMs involve a higher level of value-adding activity in the local economy and are also likely to involve greater linkages and spin-off benefits to other activities, both within and outside the manufacturing sector.

Another very positive indicator is strong productivity growth. It appears manufacturing productivity accelerated sharply in the 1990s to levels far above that achieved in the non-manufacturing sector of the Australian economy and also far above the average productivity growth in the manufacturing sectors of Organisation for Economic Co-operation and Development (OECD) countries.

It is also of interest that smaller industrial countries, including Australia, New Zealand, Norway, Denmark and Sweden, have achieved much stronger productivity growth in the 1990s. The reverse appears to have occurred in countries such as Germany, France, Italy, United Kingdom and Japan. The exception is the United States where the world's largest and most technologically advanced economy has achieved booming productivity growth. Overall the recent period has clearly favoured the smaller and less industrially mature countries in terms of productivity growth.

The exposure of Australian industry to greater international competition, together with shifts in demand and in production processes to more technology and knowledge-intensive goods and services, poses threats to some traditional aspects of manufacturing. But at the same time, it generates new opportunities. To capitalise on these opportunities and strengthen Australia's future international competitiveness, it is argued that priority needs to be given to improving Australia's performance in research and development (R&D) and innovation; education and training; and venture capital.

The OECD has produced a scoreboard which benchmarks the performance of developed countries with respect to the uptake of knowledge-based activities. This study shows Australia has many of the fundamentals to perform well in technology and innovation due to its above average performance in computer use, science and engineering graduates, basic research and research by government and higher education. But these fundamentals are not being translated into business performance with Australia recording below OECD average investment in knowledge-based industries and services and low business expenditure on R&D, innovation and venture capital.

The picture regarding investment in manufacturing is complex. A potentially negative aspect is the fact that average profit margins in manufacturing have declined significantly through the 1990s. The positive aspect is that this easing in profitability does not appear to have been translated into an easing in the investment rate in manufacturing. However there remains uncertainty as to the adequacy of investment in productive capacity to meet a sustained period of future growth.

The Australian manufacturing sector continues to be dominated by resource-based industries and the machinery and equipment industry which together account for 70 per cent of the value added in manufacturing. Trade liberalisation has led to major structural changes within certain industries such as textiles, clothing and footwear and passenger motor vehicles but it does not appear to have changed the dominant position of the above industries.

An expected benefit of trade liberalisation is that it would encourage greater flexibility and structural change and attract resources into the high-technology and knowledge-based industries that are facing above average market growth. However, Australia's performance in this range of industries does not appear strong. Using OECD definitions of high-technology and medium to high-technology industries, this industry group accounted for about one quarter of Australian manufacturing activity and appears to have recorded a slower growth rate than the lower technology industry group. However it must be recognised that the industry composition of Australian manufacturing is different from the OECD norm due to the importance of Australia's rural and mineral processing industries. These industries are generally classified as low or medium to low-technology industries, but it is just these areas where Australia has invested a lot of its R&D and innovation efforts and where it is most likely that world best technology and practices are being employed.

The information technology and communications industry has recorded strong growth but remains a relatively small industry in Australia. The greater part of the industry's output is in the form of telecommunication services and computer services rather than manufactured products. A substantial share of equipment and other manufactures are sourced overseas and frequently require very high production volumes and global markets to support competitive production.

This industry, however, has already demonstrated its capacity for well above average growth in both domestic and export markets. It provides great opportunities for innovation, for niche production and marketing and for strengthening the links between R&D and industry in Australia.

Overall trade liberalisation and related reforms appear to have had a beneficial impact on the performance of manufacturing industry. The dominant share of manufacturing activity in Australia is now internationally competitive and is able to seek the opportunities and rewards from global trading. The negative influences that dominated past thinking-the inward-looking economic policy stance, the protection of Australian jobs from cheap Asian competition, the extreme reliance on unprocessed rural and mineral imports-have been largely dispelled.

This performance record should be further strengthened by recent reforms in the labour and taxation (particularly capital gains tax) regimes. Australians have long bemoaned the loss of local innovations to overseas interests and the associated loss of manufacturing opportunities. The Government has taken a number of initiatives to counter this loss and to increase the attractiveness of Australia to venture capitalists. Of particular importance are the reforms to capital gains taxation, including the exemption from capital gains tax of investments of venture capital in Australia by non-resident tax exempt pension funds. These changes, together with moves to extend the Innovation Investment Fund and the Pooled Development Funds programs, should provide a great opportunity to improve the performance of Australian industry with respect to business R&D and innovation activity.

In the medium to longer term, the development of stronger and more effective links between industry and the utilisation of R&D and innovation, education and training and venture capital appear critical in the search for further improvements to the performance record of Australian manufacturing. Commonwealth and State governments, together with industry, education and research bodies will need to work more closely together to achieve the desired strengthening of performance in these areas.

Introduction

This paper provides an overview of how well the Australian manufacturing sector has performed over the last 20 years or so. The Information and Research Services (IRS) of the Parliamentary Library has undertaken a broad review of Australian manufacturing and the policy environment in which it operates. This is the last of three papers produced by IRS outlining the findings of this review. The first paper outlines the current status of industry policy and speculates as to where it might go from here in the light of current and expected pressures for change.(1) The second paper provides a historical setting to the industry policy debate.(2) It outlines the history of trade liberalisation, both in Australia and overseas, and the major changes that have occurred in the application of both tariffs and budgetary assistance measures.

Australia has gone a long way to open up its manufacturing industries to international competition, to facilitate structural change in key high-cost industries and, to a lesser extent, to generate innovation and efficiency gains. Economists have long argued these policy reforms should improve the performance of the manufacturing sector and yield benefits to Australian industry, to Australian consumers and to the broader community. Industry and governments were slower to accept the trade liberalisation process but there is now very wide support by both industry and government for Australia pursuing an open-trade policy.

The aim of this paper is to review the available evidence on the performance of the manufacturing sector as a whole and to make an assessment of whether performance, or some aspects of performance, are consistent with the claimed benefits from industry policy and related reforms.

The performance indicators examined fall into three broad groups. The first group of indicators relates to changes in the product-mix and structure of Australian manufacturing. It covers both inter-industry and intra-industry structural change. With respect to inter-industry change, the hypothesis is that a more liberal trading environment will encourage the transfer of resources from the mature, slow growth industries to the newer, high growth industries, in particular the knowledge-based industries. It is also hypothesised that it will encourage intra-industry changes in the degree of firm and product specialisation within industries and hence in the gains from economies of scale and scope. The latter evidence is not readily available for most manufacturing industries but a brief review is provided of the major rationalisation that has occurred in the motor vehicle industry to illustrate this aspect.

The second group provides indicators of efficiency in resource use, innovation and financial performance. It shows trends in labour productivity, total factor productivity, training expenditure, R&D and financial performance indicators such as profit ratio and return on funds. The hypothesis in this case is that individual manufacturing enterprises facing an increasingly competitive international trading environment will improve efficiency in resource use and management and strive harder for innovation and world best practice.

The third group measures the overall performance of the manufacturing sector in terms of growth, employment, investment, export performance and contribution to total domestic supplies. The hypothesis is that positive structural change, together with improved resource use efficiency, will improve the overall growth performance of Australian manufacturing, in both domestic and export markets.

Wherever possible, the above performance indicators are presented for the total manufacturing sector and for the Australian economy so as to provide a broad indicator of how manufacturing has performed relative to the rest of the economy.  

This is not an empirical study aimed at measuring the relationship between industry policy reforms and manufacturing performance. This cause and effect relationship is not one that can be compressed into a few simple measures. There are many, and sometimes conflicting, aspects to industry policy change and there are many, and sometimes conflicting, indicators of industry performance. There may be long time lags, possibly decades, between policy changes like trade liberalisation and its full impact on structural change and industry performance. Finally, parallel reforms have occurred in macroeconomic, microeconomic and competition policies in the past two decades which it is anticipated will have improved the competitiveness and performance of Australian manufacturing.

The greater part of this paper provides factual material on the performance of the manufacturing sector. The authors have added subjective assessments of those aspects of manufacturing which are performing well and those aspects not performing so well. These assessments are relevant to the setting of priorities for industry policy and should be read in conjunction with the September 1999 paper Industry Policy in Australia.(3)

Structural Change

There is a complex array of social, environmental and economic considerations that bear on what industries may be considered more or less desirable and what pattern of industries the community would like to see emerging over time. However, it is likely that there would be some consensus on the desirability of Australian manufacturing keeping abreast of global developments-of fully participating in the opportunities provided by what has been termed the 'new economy'. This term is being used to reflect the much broader and enduring developments in the knowledge economy and not just the recent surge in Internet activity.

Australians would like to see manufacturing industries performing well in those industries whose products are achieving above average growth in consumer demand; in those industries which are knowledge-intensive and provide challenging employment opportunities and a good working environment; in those industries at the cutting edge of innovation and world best practice; and in those industries with above average growth in profits and share prices.

Conversely we would like to see the restructuring and reduction in the 'rust bucket' industries with slow growth, poor working conditions, poor employment prospects and adverse environmental aspects.

It is anticipated that a more liberal trading environment will facilitate structural change by providing the incentives and opportunities for greater change from the older industries, technologies and workplace relations to the newer industries, technologies and workplace relations. But it is recognised that there will be great differences between industries in the speed of adjustment depending in part on the life of assets, management attitudes, competition and government industry policies.

This section examines the available evidence on structural change in Australian manufacturing and in particular, the emergence of the knowledge-intensive industries.

Inter-Industry Structural Change

Figures 1 and 2 show changes in the industry composition of the manufacturing sector over the last 14 years, measured in terms of shares of value added(4) and shares of total employment. One immediate feature is the continuing importance of the resource-based industries. Food, beverage and tobacco manufacturing; metal product manufacture; and petroleum, coal and chemical products together accounted for 50 per cent of manufacturing value added in 1998-99 and 42 per cent of employment. Growth in these resource-based manufacturing industries was generally higher in constant price terms than that for other manufacturing activities and hence the increase in their importance in the manufacturing sector.

Figure 1: Industry Composition by Value Added

Figure 1: Industry Composition by Value Added

Source: Australian Bureau of Statistics, Australian National Accounts, ABS Catalogue 5206.0.

Figure 2: Industry Composition by Employment

Figure 2: Industry Composition by Employment

Source: Australian Bureau of Statistics, Labour Force Australia, ABS Catalogue 6203.0.

Individually, the largest of the broad manufacturing industries was machinery and equipment manufacturing which accounted for 20.5 per cent of manufacturing production in 1998-99 and a similar share of the manufacturing workforce. Machinery and equipment increased its contribution to manufacturing value added but reduced its contribution to employment over the past 14 years.

The main sectors which suffered declines in their contributions to manufacturing value added and employment were textiles, clothing, footwear and leather (TCF&L) and wood and paper products.

Table 1: Manufacturers' Sales and Trade Performance

 

Manufacturers' sales (a)

Exports (b)

Imports (b)

Trade balance (c)

Australian market (d)

Export propensity (e)

Import penetration (f)

$ billion

$ billion

$ billion

$ billion

$ billion

Per cent

Per cent

Food, beverage and tobacco manufacturing

1997-98

46.3

12.2

3.8

8.4

37.9

26.3

10

1998-99

47.0

11.7

4.2

7.5

39.5

24.9

11

Textile, clothing, footwear and leather manufacturing

1997-98

8.9

3.0

6.0

-3.0

11.9

33.7

50

1998-99

9.1

2.5

6.4

-3.9

13.0

27.5

49

Wood and paper product manufacturing

1997-98

13.7

1.2

2.8

-1.6

15.3

8.8

18

1998-99

13.5

1.2

3.0

-1.8

15.3

8.9

20

Printing, publishing and recorded media

1997-98

11.0

0.5

1.9

-1.4

12.4

4.5

15

1998-99

11.0

0.5

2.1

-1.6

12.6

4.5

17

Petroleum, coal, chemical and associated product manufacturing

1997-98

36.0

5.6

13.8

-8.2

44.2

15.6

31

1998-99

35.7

5.6

15.0

-9.4

45.1

15.7

33

Non-metallic mineral product manufacturing

1997-98

9.4

0.4

1.2

-0.8

10.2

4.3

12

1998-99

10.9

0.3

1.3

-1.0

11.9

2.8

11

Metal product manufacturing

1997-98

29.7

16.9

7.3

9.6

20.1

56.9

36

1998-99

30.1

17.2

7.7

9.5

20.6

57.1

37

Machinery and equipment manufacturing

1997-98

38.8

12.7

46.1

-33.4

72.2

32.7

64

1998-99

41.2

12.2

50.0

-37.8

79.0

29.6

63

Other manufacturing

1997-98

6.8

0.7

2.8

-2.1

8.9

10.3

31

1998-99

7.0

0.7

2.8

-2.1

9.1

10.0

31

Total

1997-98

200.6

53.3

85.7

-32.4

233.1

26.6

37

1998-99

205.6

51.9

92.5

-40.6

246.2

25.2

38

(a) Includes exports by manufacturers.

(b) Commodity exports and imports classified to the industry of origin.

(c) Exports minus imports.

(d) Manufacturers' sales minus exports plus imports.

(e) Exports/Manufacturers' sales.

(f) Imports as a percentage of the estimated total Australian market.

Source: Australian Bureau of Statistics, Manufacturing Australia, ABS Catalogue 8225.0.

The trade performance of the key manufacturing industries is shown in Table 1. Only two industries-food, beverages and tobacco; and metal products-have a positive trade balance, i.e. a greater value of exports than imports. The export performance of these two industries has contributed to their above average growth performance as reflected in their rising shares of value added in Figure 1.

The increased export performance of Australian manufacturing has been shared by a number of industries with food, beverage and tobacco; metal products; machinery and equipment; and TCF&L industries now all exporting a quarter or more of their sales. Export propensity has been boosted by government sectoral policies aimed at improved competitiveness and export orientation in the TCF&L, passenger motor vehicle (PMV) and shipbuilding industries.

The import scene is dominated by machinery and equipment which account for over half of total manufacturing imports. Within this category, office and automatic data processing machines; telecommunications and sound recording equipment; electrical equipment, apparatus and appliances; motor vehicles and other transport equipment all have recorded rapid import growth over the last decade.

High-Technology Industries

The definition of what are 'high technology industries' is obviously open to debate and what may be viewed as 'high technology' activities in one country may be viewed as medium or low technology in other countries. However a useful starting point is to look at the classification used by the OECD to separate manufacturing industries into high-technology, medium to high-technology, medium to low-technology and low-technology industries. This classification is based on R&D intensity which is measured as business enterprise R&D as a percentage of value added. The OECD identifies the ten industries shown in Table 2 as being high-technology or medium to high-technology industries.

It is obvious from Table 2 that Australia does not meet the OECD norm for having a strong technology-intensive manufacturing sector. The R&D intensity in total manufacturing in Australia at 3.6 per cent is only about one-half the OECD average. R&D in aircraft and office and computing equipment is a fraction of the R&D intensity for the OECD group. Even in the relatively mature motor vehicles, electrical machinery and chemicals industries, the R&D intensity in Australia was well below the OECD average.

But there were important exceptions to the above rule. The three Australian industries which did stand out in terms of having an R&D intensity comparable with the OECD average were pharmaceutical, scientific instruments and non-electrical machinery.

The size and growth in these industries in Australia is shown in Table 3. The 'high-technology' and 'medium to high-technology' industries, as defined by the OECD, together contributed 26 per cent of value added and 23 per cent of employment in Australian manufacturing in 1997-98. The 'high-technology' industries, of which the largest is medicinal and pharmaceutical product, contributed only 4.6 per cent of total manufacturing value added. The much larger industries of motor vehicles and parts, chemicals and industrial machinery and equipment are in the 'medium to high-technology' group-these three industries account for 17 per cent of value added in Australian manufacturing.

Table 2: R&D Intensity(a) in High and Medium to High-Technology Manufacturing Industries(b) OECD and Australia

 

OECD

Australia

 

1988
%

1994
%

1988
%

1994
%

High-technology industries

 

 

 

 

Aircraft

44.8

34.1

1.7

1.4

Office and computing equipment

30.3

29.6

6.4

5.2

Pharmaceutical

19.7

22.0

14.9

23.4

Radio, TV and communications equipment

19.8

17.1

-

-

Medium to high-technology industries

 

 

 

 

Scientific instruments

9.6

16.2

13.4

13.7

Motor vehicles

11.3

12.2

5.5

5.9

Electrical machinery

7.7

8.7

2.4

2.8

Chemicals

8.1

8.8

3.7

4.6

Other transport equipment

7.2

6.0

1.5

67.9

Non-electrical machinery

4.3

5.5

5.4

4.9

Total manufacturing

6.6

6.6

2.5

3.6

(a) R&D Intensity is defined as business enterprise R&D as a percentage of value added.

(b) The OECD source document classifies the above manufacturing industries as being either 'high technology' or 'medium to high-technology' industries. R&D Intensities for 'medium to low' and 'low' technology industries are available in the source document but not reproduced here.

Source: OECD, Science, Technology and Industry Outlook, 1998, pp.241 and 282.

With respect to growth trends, it is not possible to track the movement in value added in these industries (due to definitional changes) and we have included in Table 3 the change in employment over the last eight years as a crude indicator of growth. The figures show a strong growth in employment in only two industries-computer and business machines and medicinal and pharmaceutical product. Most of the other industries listed in the table recorded substantial declines in employment. Overall between 1990 and 1998, employment in total manufacturing fell by 7.0 per cent but there was an even greater decline of 12.7 per cent in employment in the 'high-technology' and 'medium to high-technology' industries.

The above analysis is not encouraging. It suggests that the strong growth in technology-intensive industries has been confined to a relatively small and narrow area while the 'high' and 'medium to high-technology' industries as a group have achieved a lower growth rate than the 'medium-low' and 'low-technology' industries. Most of Australia's rural and mineral processing industries fall into the latter category.

Care is needed, however, not to read too much gloom into these figures as they describe only part of the technology story. The above analysis identifies the technology-intensive industries in Australian manufacturing. It excludes Australia's rural and mining processing industries but these do not fall within the definition of technology-intensive industries.

As Australia has invested a lot of its R&D and innovation efforts in these industries, this is where it is most likely that world best technology and practices are being employed. In addition, an examination of some areas of technology-intensive activity in Australia, particularly in the information and telecommunications industries, indicates that the predominant share of growth in this area has occurred in the services industries rather than in manufacturing industries.

Table 3: Value Added and Employment in High and Medium to High-Technology Manufacturing Industries Australia

 

ANZIC code

Value added
1997-98
$m

Employment at 30 June 1998
No.

% change in Employment 1998 to 1990

High-technology industries

Aircraft

2824

718

12 569

-14.9

Computer and business machine

2841

190

2 965

100.0

Medicinal and pharmaceutical product

2543

1 521

12 500

33.0

Telecommunication, broadcasting and transceiving equipment

2842

757

6 583

-33.3

Total high technology industries

 

3 186

34 617

-2.8

Medium to high-technology industries

Professional and scientific equipment n.e.c.

2839

220

3 801

-30.9

Motor vehicle and parts

281

5 078

55 515

-26.6

Electrical equipment and appliance

284

1 637

20 572

-11.6

Basic chemical

253

1 856

12 968

-17.2

Other chemical product

254

(excl. 2543)

2 106

19 718

-10.9

Other transport equipment

282
(excl. 2824)

1 009

16 481

0.6

Industrial machinery and equipment

286

2 881

53 529

-2.0

Total medium to high technology industries

 

14 787

182 584

-14.4

All manufacturing industry

21-29

68 718

953 725

-7.0

Source: ABS, Manufacturing Industry ABS Catalogue 8221.0

The following section provides a brief picture of the size and growth in two knowledge-intensive sectors of the Australian economy-the information technology and telecommunications industry and biotechnology.

Information Industries

Australia's manufacturing industries are active participants in the information technology revolution, both as users and producers. Business use of information technology is critical to innovation and competitiveness. Domestic production allows participation in what clearly appear to be the 'growth industries' of the future, both in Australia and overseas. Information technology is regarded as a key enabling technology which plays a vital role in the development of other industries. It is a key driver in the restructuring of output towards a more knowledge-intensive, ideas-based economy. It provides an opportunity, and a challenge, to restructure Australia's manufacturing industry to give less emphasis to slow growth industries like steel, TCF and PMV and give more emphasis to faster growth knowledge intensive industries. In addition to better growth prospects, the latter industries have advantages in terms of less adverse environmental impacts, higher rewards for education and training skills and a better occupational and workplace relations environment.

There are definitional and other problems in quantifying information industry production and markets. The Information Industries Taskforce, chaired by Professor Goldsworthy, estimated the information sector had an Australian market of about $67 billion and exports exceeded $4 billion in 1995. It expected the Australian domestic information industries market would continue to grow at around 13 per cent a year.(5)

The Department of Industry, Science and Resources reports that in 1995-96, revenue from domestic production of information technology and telecommunications (IT&T) goods and services totalled $32 billion. The main components were telecommunication services ($18 billion) and computer services ($8 billion). It confirms the rapid growth in domestic production of IT&T goods and services, with 1995-96 figures representing an increase of 18 per cent per year since 1992-93.(6) It is noted that the major component of the Australian IT&T industry is the provision of services and that a substantial share of equipment and other manufactures' requirements are met by imports.

An important qualification is that the recorded growth in the local IT&T industry may have been exaggerated by the growth in outsourcing by both the government and private sectors. This would lead to some IT&T activity being classified before outsourcing as part of the activity of the user industry, be it steel or banking or government and then after outsourcing, as a part of the IT&T industry.

Both exports and imports of IT&T goods and services are growing at very high rates, reflecting rapid orientation towards global markets. Exports of selected IT&T goods and services totalled $4.3 billion in 1998 compared with imports of these items of $11.6 billion. The latter figure represents about 10 per cent of total imports of goods and services. The resulting deficit in trade in IT&T goods and services was a large $7.3 billion.

The IT&T specialist businesses employed 204 000 people at June 1996, and employment in the industry is expected to continue to grow at approximately six per cent a year. This suggests the IT&T industry accounts for about 2.8 per cent of employment in Australia in 1999.

E-commerce, in particular the use of the Internet to conduct business transactions and communication, is seen as a key driver in the knowledge-based economy. The number of business web sites in Australia doubled between 1996 and 1998 and Internet based commerce in Australia is predicted to grow from $61 million in 1997 to $1.3 billion in 2001.(7)

Even with the spectacular growth predicted, it seems unlikely that e-commerce will in itself become a major component of total economic activity in Australia. The importance of e-commerce lies in the potential it provides to other industries to increase productivity and lower production costs, to streamline movement through the value added chain and facilitate access to global markets. A simulation of these potential benefits using the Monash model indicates that Gross Domestic Product (GDP) may be higher by around 2.7 per cent in 2007 if Australia adopts greater use of e-commerce than if it does not.(8)

Biotechnology

The Australian biotechnology industry is small by international standards but is in a growth phase. It has alliances with larger multinational companies and has recorded a growing number of internationally significant success stories.

A 1999 report by Ernst & Young and the Department of Industry, Science and Resources revealed the Australian biotechnology industry comprises:

  • 20 core biotechnology companies publicly listed on stock exchanges. This group of companies has total revenues of approximately $730 million of which 43 per cent came from exports, and
  • an estimated 100 privately held and unlisted core biotechnology companies. This group has total revenues of approximately $235 million with 53 per cent sourced from exports.(9)

The industry is supported by a high quality science base and a highly educated labour pool. It has alliances with a number of major international pharmaceutical and agribusiness companies. On the research side, it has strong links with the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and a number of key universities, Cooperative Research Centres (CRCs) and hospitals.

However there is a limited supply of risk capital for long-term development initiatives and few companies are able to support sustained losses. The rate of company formation in the Australian industry has been erratic over time indicating the sensitivity of the young industry to fluctuations in business conditions.

Intra-Industry Structural Adjustment

Another important indicator of the performance of certain manufacturing industries in Australia is the extent to which they have been able to rationalise the number of producers, the number of production plants, the number of models produced and also make greater use of shared components. This was most important in the manufacture of motor vehicles and 'whitegoods' where economies of scale are critical to efficient production and the Australian industry was historically very fragmented relative to overseas producers.

The progress, and some of the problems, in achieving a major rationalisation of a key manufacturing industry in Australia is well illustrated by developments in the local passenger motor vehicle industry.

In 1985, there were five manufacturers at eight plants around Australia, producing 13 passenger motor vehicle models. The 'Button car plan' was introduced in that year with the aim of forcing rationalisation of the local industry by gradually reducing assistance. The Government's aim was that by 1992 the industry would consist of no more than three manufacturers producing no more than six models. Important rationalisation has occurred-there are now four manufacturers producing six model lines-but not to the extent or in the time frame envisaged in the Button plan.(10)

Average annual plant production runs for locally manufactured passenger motor vehicles have increased from 48 000 units in 1985 to over 81 000 units in 1996. Two of the current models (the Falcon and Commodore) are produced in plants that have production runs of over 100 000 units. By comparison, Japanese and United States car manufacturers typically produce models at volumes of between 130 000 and 150 000 cars per annum, with some production volumes being twice as much again.(11)

The rationalisation process has been accompanied by a 50 per cent increase in productivity and sustained real export growth of 14 per cent a year. Current local production is about 350 000 vehicles and in 1999, exports accounted for 73 000 cars. There is also strong growth in automotive components and design and engineering services, with total automotive exports from Australia in 1999 valued at $3.2 billion.

Efficient Resource Use, Innovation and Financial Performance

Training

A criticism of industry protection is that it tends to stifle innovation and training. There is less pressure on entrepreneurs, managers and workers to seek the attainment of world best practice, and in particular, to continuously seek to keep up to date with developments in best practice through training and innovation. Consequently the marked reduction in manufacturing protection over the past 30 years and the associated opening up of much of Australian manufacturing to world competition, would be expected to have stimulated a greater flow of resources into innovation and training.

The available information on this hypothesis is not conclusive. The Australian Bureau of Statistics (ABS) has undertaken several surveys to fill some information gaps in this area but care is needed in interpreting these data, particularly as it is available only for short time periods and is somewhat dated. 

Table 4: Employer Training Expenditure(a) July to September

   

1989

1990

1993

1996

A

Training Expenditure As % Of Gross Wages And Salaries

Manufacturing

All industries

 2.2

 2.2

 2.1

2.6

 2.6

 2.9

 2.2

2.5

B

Training expenditure per employee

Manufacturing

 All industries

$142

$133

$149

$163

$204

$192

$194

$185

C

Training time. Hours per employee

Manufacturing 

All industries

6.5

5.7

 6.7

 5.9

 6.5

5.6

 5.4

4.9

(a) Includes in-house and external training expenditure. Note the figures indicate expenditure in three months of each year. Training expenditure per employee is shown in current prices and some of the increase over time is likely to reflect increases in the cost of training.

Source: ABS, Employer Training Expenditure, Australia, Cat. No. 6353.0 (several issues)

Data are available on employer training expenditure between 1989 and 1996 (Table 4). The three measures of training expenditure indicate the level of expenditure in manufacturing was very similar to that in all industries. There was considerable variation within manufacturing industry with the lowest levels of training expenditure being recorded in TCF&L and in printing, publishing and recorded media. There was no clear trend in training expenditure over the 1989 to 1996 period but the drop in expenditure between 1993 and 1996 is clearly of concern and requires close monitoring. The increase in training expenditure recorded in 1993 and the subsequent decline in 1996 likely reflects in part the operation of the Training Guarantee Levy which was effective from 1 July 1990 to its suspension on 30 June 1994.

The National Centre for Vocational Educational Research notes the overall reduction in training commitment between 1993 and 1996 and observes:

The decline in training may reflect an unwillingness of employers in an uncertain environment to commit to longer term training, especially with a workforce that is increasingly less permanently employed.(12)

The ABS has discontinued the three yearly survey of employer training expenditure used to provide the data in Table 4 which means that there has been no aggregate measure of this critical performance indicator since 1996.

A partial indicator of the level of training for industry is the number of apprentices and trainees in training for tradepersons positions (Table 5).

Table 5: Apprentices and Trainees in the Tradepersons and Related Workers Occupation Category

Commencements

Number in training

1995

41 530

124 020

1996

40 970

126 450

1997

40 180

126 780

1998

43 080

126 530

Source: National Centre for Vocational Education Research, Australian Apprentices & Trainees Statistics: Trends 1995 to 1998.

The figures indicate that tradeperson apprenticeships have been on a plateau in recent years with the only glimmer of hope being the rise in commencements in 1998.

A further study by the National Centre for Vocational Education Research provides estimates of the number in training for manufacturing industry by identifying the occupations most closely linked to this industry. The results for the years 1995 to 1998 show no growth in the number of mechanical and fabrication engineering tradepersons in training over this period. However there was substantial growth in the number of persons in training for the occupation groups 'intermediate machine operators' and 'process workers'.(13)

Overall there is considerable uncertainty as to trends in industry training and certainly no clear evidence that the movement to a more competitive manufacturing industry structure is being supported by enhanced efforts in the area of vocational training.

Industry and education institutions have emphasised the importance of vocational training and its key role in the restructuring of Australian industry towards a greater emphasis on the knowledge-based industries and knowledge-intensive production processes. A recent study commissioned by the Australian Industry Group and titled Training to Compete The Training Needs of Industry raises many industry concerns about the adequacy of existing skill and training mechanisms. The study undertaken by the Allen Consulting Group surveyed over 350 companies. The results highlight the changing skill requirements of industry and the challenges this poses for the education and training system.(14)

The companies surveyed foreshadow a move to higher skills at all occupational levels. They acknowledged the strengths and recent improvements to the education and training system and gave strong support for multi-skilling and competency-based training.

However companies consider the formal education and training system to be under-performing in critical areas. They regard the school system as inadequately preparing young people for work, the university sector as needing to enhance the practical business focus of graduates and the vocational education and training sector as overly complex, confusing and difficult to access.

The study indicated that an increasing premium is being placed on generic skills, both 'hard' (notably information technology skills) and 'soft' (e.g. problem-solving, team skills, willingness and ability to adapt) to be developed prior to recruitment. Also there is a growing emphasis on recruitment as the means to obtain generic, technical and personal attribute skills. Many companies see the traditional apprenticeship system as no longer meeting the requirements of their businesses and are calling for reforms to the apprenticeship system to incorporate new levels and forms of flexibility and relevance to the enterprise.

The study identifies a number of areas where changes to the training system are needed. It highlights the need for our training culture to be strengthened and linked to other key drivers of growth, most importantly innovation. This will require enhancing the linkages between industry and schools, training providers in the vocational education and training system and universities.

The need for stronger linkages between industry and the Vocational Education and Training sector (primarily the Technical and Further Education institutes) has been long recognised. The Australian National Training Authority (ANTA) was established as a Statutory Authority following a Heads of Government agreement to develop an industry focussed, national system of vocational education and training. It became operational in 1994. The objectives of ANTA include:

  • close interaction between industry and vocational education and training providers to ensure that training meets industry's needs, and
  • improved cross sectoral links between schools, higher education and vocational education and training.(15)

The Allen Consulting Group study referred to above suggests that within industry, there remains a widespread belief that reforms in vocational education and training need to progress a lot further if it is to meet the future skill needs of industry. It is recognised, however, that all parties-government, industry, suppliers of education and training and individuals-must share the responsibility for progressing the reform process to meet the training needs of industry.

Commentators have noted some apparent inconsistencies in the arguments put by industry for training reforms. They note that considerable headway has been made in involving business in the training process and increasing emphasis has been given to the development of 'hard' generic skills. This shift in emphasis may be occurring to some extent at the expense of less development of the 'soft' skills which may be better promoted by a broader education approach. Also it is noted that the increasing emphasis on recruitment, including skilled immigrants, to meet industry's skill requirements may not be consistent with business making a strong commitment to support reform in the domestic training process.

Technological Innovation

The ABS has undertaken two surveys, in 1993-94 and 1996-97, of technological innovation in Australian manufacturing. The results with respect to expenditure on innovation, classified by type of innovation activity, are summarised in Table 6. 

Table 6: Manufacturing Sector: Expenditure on Technological Innovation by Type of Innovation Activity:1993-94 and 1996-97.

Type of innovation activity

Expenditure ($'000)

1993-94

1996-97

Research and development

1 810

1 985

Acquisition of technology developed by others (eg patents, trademarks)

214

174

Training and further education related to introduction of innovations

189

138

Expenditure on tooling-up, industrial engineering and start-up

2 547

1 140

Marketing of new or improved products

393

421

Other

 

84

Total expenditure

5 153

3 941

Average ($'000/employee)

8

4

Source: Australian Bureau of Statistics Cat. No. 8116.0

The results show a surprising 24 per cent drop in expenditure on innovation by the manufacturing sector between 1993-94 and 1996-97, with this decline being totally accounted for by the drop in expenditure on tooling up, industrial engineering and start-up. The ABS provides no explanation for this sharp downturn.

In 1996-97, R&D accounted for 50 per cent of innovation expenditure and tooling-up, etc. for 29 per cent. Expenditure on the purchase of outside technology and on training was a small proportion of the total and declined over the three years to 1996-97.

The survey results show that the level of expenditure on innovation is strongly and positively correlated with the size of enterprise. Manufacturing businesses with 500 or more employees accounted for 45 per cent of total innovation expenditure. Establishments of this size contribute only about 20 per cent of the value added in Australian manufacturing.

The OECD recently produced a scoreboard benchmarking the performance of developed countries with respect to the uptake of knowledge-based activities.(16) While the information is somewhat dated, Australia's performance, relative to other OECD countries, highlights some interesting strengths and weaknesses about technology and innovation uptake in this country.

Australia was ranked above the OECD average with respect to the following performance indicators:

  • household personal computer penetration rates
  • cellular mobile subscribers per 100 inhabitants
  • flow of graduates in science and engineering as percentage of total employment
  • basic research as percentage of GDP
  • R&D expenditure by government and higher education as percentage of GDP, and
  • tax subsidy per dollar of R&D.

The reverse applied with Australia performing below the OECD average in relation to the following aspects:

  • investment in knowledge (defined as public spending on education, R&D and investment in software) as a percentage of GDP
  • knowledge-based industries and services as a percentage of business sector value added
  • business R&D as percentage of industry domestic product
  • business expenditure on innovation as a percentage of total sales, and
  • investment in venture capital as a percentage of GDP.

A broad picture about Australia's performance can be deduced from the above comparisons. Australia has many of the fundamentals for average or above average performance in technology and innovation from its computer use, science and engineering graduates, basic research and research by government and higher education. But these fundamentals are not being translated into business performance with below OECD average investment in knowledge-based industries and services and low business expenditure on R&D, innovation and venture capital.

The Government has acted to improve the availability of venture capital funds in Australia. It has increased the Budget allocation to the Innovation Investment Fund(17) and increased the attractiveness of Pooled Development Funds (PDFs)(18) to investors, in particular by allowing Australian superannuation funds and similar overseas pension funds to own up to 100 per cent of the shares in a PDF.

A more general incentive to investment in venture capital projects will come from the lowering of capital gains tax as part of the New Business Tax System. Of particular importance is the Government's announcement to exempt from capital gains tax, investments in venture capital projects in Australia by non-resident tax exempt pension funds.

United States pension funds are the most important global backers of venture capital funds. But in 1998 only 12 per cent of venture capital in Australia came from foreign investors. The Australian Venture Capital Association estimates that up to $4 billion in United States funds might flow into Australia if capital gains tax is removed.(19) Hence the impact of the business tax review on future venture capital flows and their utilisation will be critical to the performance of Australian industry with respect to business R&D and innovation activity.

Another indicator of access to venture capital is the listing of technology companies on the National Association of Securities Dealers Automated Quotations (NASDAQ). This operates in conjunction with the New York stock exchange and is recognised as a global centre for the listing of technology company shares. However the process of listing on NASDAQ is extremely rigorous and expensive and only a handful of Australian technology companies have listed on it to date. The representation of Australian companies on NASDAQ is poor by global standards but an increasing number of successful Australian companies are in the process, or planning to, list on NASDAQ.(20)

Business Research and Development.

Business expenditure on research and development (BERD), expressed as a percentage of gross product, recorded a strong upward trend from 1991-92 to 1995-96 but has declined in the subsequent two years and a further substantial fall is expected to have occurred in 1998-99 (Figure 3). R&D activity in manufacturing is more than double the rate in all industries reflecting the low level of R&D in many service activities. The downturn in BERD since 1995-96 occurred in both the manufacturing and the all industries series.

There has been considerable debate about reasons for the observed downturn in BERD in Australia since 1995-96. It is noted that this represents a widening of the already large deficit between BERD in Australia and that in most other OECD countries. In 1997-98, the BERD/GDP ratio in Australia stood at 0.72 per cent compared with ratios of between 1 and 2 per cent in Korea, Japan, United States, Finland, Germany, France, Denmark, United Kingdom, Netherlands and Canada. Moreover this ratio increased in most of these countries in the preceding two years in contrast to the decline in Australia.(21)

Figure 3: Business Expenditure on Research and Development

Figure 3: Business Expenditure on Research and Development

All industries R & D is equal to total business expenditure as defined by ABS.
All industries gross product comprises mining; manufacturing; electricity, gas and water supply; construction; wholesale trade; retail trade; accommodation, cafes and restaurants; transport and storage; communication services; finance and insurance; and property and business services.
Sources: Australian Bureau of Statistics, Research and Experimental Development, Businesses, ABS Catalogue 8104.0. and Australian Bureau of Statistics, Australian System of National Accounts 1998-99, ABS Catalogue 5204.0.

Many commentators have identified the lowering of the R&D tax concession in 1996 from 150 to 125 per cent as the major cause of the decline in Australian BERD. In subsequent years, the Government has increased some other measures of direct assistance to business R&D but it has retained the lower 125 per cent general tax deduction rate. Industry representatives argue that the reduction in the tax concession from 150 to 125 per cent (which effectively reduced the Government subsidy on R&D from 18 cents on every R&D dollar to nine cents) has greatly reduced the general business incentive to undertake R&D. The Business Council of Australia estimated from a 1998 survey that R&D spending was one-third or $1.5 billion lower than it would have been if the previous rate of growth had been maintained. This suggests that R&D is much more sensitive to tax concession assistance than earlier studies indicated.(22)

The Minister for Industry, Science and Resources, Senator Minchin, has responded that the removal of tax rorts, in particular those associated with the company syndication scheme, was a key factor in the lower BERD figures and that subsequent eligible R&D will be of better quality and more clearly focused on commercial outcomes.(23)

The R&D tax concession has come under further scrutiny in the context of the Ralph Review of Business Taxation. The Review did not recommend any change to the 125 per cent concession but the Government's decision to reduce the company tax rate from 36 to 30 per cent will lead to a further reduction in the effective R&D subsidy from 9 cents to 7.5 cents in the dollar.

A recent House of Representatives Standing Committee Report on Australia's R&D concluded that the decrease in BERD from an already low base ought to be cause for concern. The Committee recommended that the Government determine an appropriate policy response to the reduction in BERD from 1996-97 onwards.(24) It also noted that the National Innovation Summit hosted in February 2000 by the Government and the Business Council of Australia would be an appropriate time to revisit this issue. No changes to the Government's policy on R&D have been announced.

The 2000-01 Budget Papers indicate a recent increase in the uptake of the R&D tax concession. Revenue foregone for the concession increased by 14 per cent in 1999-2000 to $553 million and is expected to increase by 8.5 per cent to $600 million in 2000-2001. This compares with the peak outlay on this concession of $902 million in 1995-96 prior to the reduction in the concession rate from 150 to 125 per cent.(25)

Productivity Growth

Growth in productivity is one of the most important measures of industry performance. It is defined as increases in the ratio of outputs to inputs and hence provides a measure of the capacity of individuals, firms, industries or entire economies to transform inputs into outputs. Higher productivity means more goods and services are being produced with the same commitment of resources and effort. Productivity gains are the chief source of rising per capita incomes in the long run. Productivity growth has accounted for just under one half of the growth in output in Australia over the past three decades. 

The main sources of productivity growth are: 

  • new knowledge, or technology broadly defined, that introduces new production methods that are more effective in transforming inputs into outputs 
  • better organisation of production within firms and between industries that can improve productivity even within the boundaries of existing knowledge, and
  • incidental effects, including economies of scale and the restructuring of industries by elimination of the least efficient producers.

Trade liberalisation and other microeconomic reforms are expected to contribute to economic growth, primarily via productivity growth. These reforms are particularly targeted at the better organisation of production within firms and between industries and also provide competitive pressures for firms to adopt new knowledge and for marginal firms to quit their current activities.

The available evidence on productivity growth in Australian industry is summarised below. Several aspects of these measures should be kept in mind. Productivity growth is measured as a residual-the amount of output growth that remains after allowance for the contribution of growth in labour and capital inputs. This procedure has the disadvantage that any errors in the measurement of output and inputs will be reflected in the productivity estimates.

It is emphasised that the measures presented refer to productivity growth and not to absolute levels of productivity. These measures are derived as a ratio of an index of output growth to an index of input growth. Consequently the industry or country with the highest productivity growth may not be the most efficient or world best practice producer; it may instead reflect a relatively faster catch-up to a country/industry with a higher absolute productivity level.  

Labour Productivity

Figure 4 shows movements in labour productivity in manufacturing and in all industries between 1985-86 and 1998-99. It is noted that these are partial productivity figures. They reflect general (multifactor) productivity growth plus the gains from providing the workforce with more capital to work with (capital deepening).

Figure 4: Labour Productivity: Indexes of Gross Product Per Hour Worked

Figure 4: Labour Productivity: Indexes of Gross Product Per Hour Worked

Source: Australian Bureau of Statistics, Australian National Accounts, ABS Catalogue 5204.0.
Indexes of chain volume measures of gross product per hour worked. Reference year is 1997-98 = 100.0.

Labour productivity in Australian manufacturing has grown rapidly since 1985-86, with an average annual growth rate of 2.9 per cent up to 1998-99. Productivity growth in manufacturing far outstripped that achieved for all industries in the period up to 1993-94 but growth rates in the two areas have been similar in the subsequent period to 1998-99. The reasons for the strong growth in labour productivity are similar to those applying to multifactor productivity and are discussed in the following section.

Multifactor Productivity

Multifactor productivity (MFP)-sometimes called Total Factor Productivity-is the preferred measure of productivity growth. It measures the growth in the ratio of output to inputs of both labour and capital. The ABS publishes annual Australian National Accounts MFP figures for the market sector of the economy (Figure 5) but does not provide a corresponding series for the manufacturing sector.

Figure 5 highlights three broad phases in the growth in MFP in the market sector of the Australian economy.(26) The first is a period of moderate growth from 1964-65 up to 1981-82 (with an average compound growth rate of 1.2 per cent), followed by a period of very slow growth up to 1993-94 (average growth rate of 0.5 per cent). The third and most recent phase from 1993-94 to 1998-99, with an average growth rate of 1.7 per cent, saw a return to the high growth rates achieved in the late 1960s and early 1970s.

Figure 5: Market Sector Multifactor Productivity

Figure 5: Market Sector Multifactor Productivity

Source: Australian Bureau of Statistics, Australian System of National Accounts, ABS Catalogue 5204.0.

Productivity growth is related to the business cycle and the strong growth in MFP since 1993-94 reflects in part the boost to productivity from the take up of capacity that was idle in the 1991 recession. However studies by the Industry Commission(27) and the Reserve Bank(28) indicate that the recent strong growth in productivity is more than that related to recovery from the recession; they point to an increase in the underlying rate of productivity growth. The Reserve Bank associated this faster productivity growth with:

extensive changes in the economy over the past decade-including a structural fall in the inflation rate; productivity-enhancing changes in the labour market; corporatisation and privatisation of public sector enterprises; and substantial falls in the barriers to international trade.(29)

Analysts of the strong economic growth in the United States have pointed to the apparent link between rapid developments in digital and information technology and higher productivity growth. Dean Parham from the Productivity Commission notes that new technologies are unlikely to be a key contributor to the recent strong growth in MFP in Australia. He notes the contribution to productivity growth in Australia from the policy reforms referred to above in the Reserve Bank quote and also points to the better utilisation of the capital stock in Australia:

Technological change is also a factor in productivity growth [in Australia]. But any surge in this area is more likely to be due to the introduction of existing technologies rather than a raft of new advances.

There has been a turnaround in capital productivity which suggests we are making better investment decisions and using buildings, plant, machinery and equipment to much better effect.(30)

The manufacturing sector is expected to have made a major contribution to the acceleration in the 1990s in the growth in MFP in the Australian economy. Generally there is more scope for productivity gains in manufacturing (and agriculture and mining) than in the service industries and historical series compiled by the Productivity Commission (Table 7) show that MFP growth in manufacturing has been consistently higher than in all industries in Australia. In addition, the same source shows a strong acceleration in manufacturing MFP in the period 1989-94 to a growth rate of approximately double that achieved in the preceding two decades.

Table 7: Multifactor Productivity for Manufacturing and All Industries: Australia and OECD

Trend annual growth

1970-94

1973-83

1983-93

1989-94

Australia

Manufacturing

1.8

1.4

1.7

3.3

All industries

0.8

0.8

0.6

0.9

OECD

Manufacturing

1.6

n.a.

n.a.

0.4

All industries

1.0

n.a.

n.a.

0.6

Sources: Colin Clarke, Timothy Geer and Barry Underhill, The Changing of Australian Manufacturing, Productivity Commission Staff Information Paper, December 1996: p.107, and Industry Commission, Assessing Australia's Productivity Performance, Research Paper, September 1997, pp.142-3.

Table 7 also shows that in manufacturing, MFP growth in Australia in 1989-94 was nearly double its long term (1970-94) growth rate while the reverse situation occurred in the average growth in OECD countries. MFP in OECD manufacturing in the 1989-94 period was only one quarter of its long term growth rate.

Australia is not the only country to have experienced a strong serge in MFP in the 1990s. The OECD publish estimates of MFP in the business sector for member countries over the period 1960 to 1997. The figures show a marked decline in MFP in 1990-97 in the major and more mature manufacturing countries including Germany, France, Italy, United Kingdom and Japan, with the United States being the noted exception. Conversely there was a marked increase in MFP in the same period in Australia, New Zealand, Norway, Denmark and Sweden. The recent period has clearly favoured the smaller and less industrially mature countries in terms of productivity growth.

Financial Performance

Since 1990-91, the ABS has undertaken an Economic Activity Survey and published a range of financial performance measures for different industries. Some key indicators for the manufacturing sector and for all industries are presented in Figures 6, 7 and 8.

Figure 6: Profit Margin*

Figure 6: Profit Margin*

Source: Australian Bureau of Statistics, Business Operations and Industry Performance, ABS Catalogue 8140.0.

Financial returns in all sectors are influenced by the business cycle and this is reflected in the low profit ratio and return to net worth in the 1991-92 recession and the strong recovery in the next year. In the subsequent four years, there was a strong decline in both profit margins and return on net worth in the manufacturing sector which was not matched by similar declines in all industries. In 1992-93, the profit margin in manufacturing was above that in all industries; by 1997-98, the manufacturing profit had dropped to nearly one-third below that in all industries. The only redeeming feature for the manufacturing sector performance is that the declines in the profit margin and the return on net worth appear to have been arrested in the last year or two.

Figure 7: Return on Net Worth*

Figure 7: Return on Net Worth*

Source: Australian Bureau of Statistics, Business Operations and Industry Performance, ABS Catalogue 8140.0.

Figure 8: Investment Ratio*

Figure 8: Investment Ratio*

Source: Australian Bureau of Statistics, Business Operations and Industry Performance, ABS Catalogue 8140.0.

Return on net worth has been consistently higher in manufacturing than in all industries but the margin has been greatly diminished with the marked decline in manufacturing and a small rise in all industries.

The converse situation applied to the investment ratio which has been consistently higher in all industries than in manufacturing. The investment ratio in manufacturing has shown significant year-to-year fluctuations in the range of 15 to 20 per cent of gross product but no clear trend through the 1990s. There is no suggestion from these data that the declines in the profit margin and the return on net worth in manufacturing has been associated with a switching in investment from manufacturing to other industries.

On the other hand, there continues to be debate about the adequacy of past and present levels of investment to sustain the future potential growth in manufacturing. BIS Shrapnel, for example, in its long term forecasts of the Australian economy, has portrayed manufacturing investment as inadequate. It notes:

Despite reasonably strong investment since the early 1990s recession, manufacturing has still not invested enough in productive capacity ... The manufacturing sector still lacks the capacity to supply much more than two years of sustained growth in domestic demand and expanding export markets.(31)

BIS Shrapnel expects that the operation of these capacity constraints, together with a slow down in domestic demand, will reduce manufacturing growth early in the new decade. Over the five years to 2003-04, the forecast growth in manufacturing is 2.4 per cent per annum compared with the forecast growth rate in GDP of 3.3 per cent.(32)

Overall the above evidence on financial performance indicators for manufacturing appears consistent with the view that the strong wind-down in protection which commenced in 1988 and brought most tariff rates down to five per cent by 1996 was associated with a strong increase in both external and internal competition in Australian manufacturing which exerted a downward pressure on profit margins and return on net wealth in this sector. An optimistic sign is that this easing in profitability does not appear to have been translated into an easing in the investment rate in manufacturing, although there remains uncertainty as to the adequacy of investment in productive capacity for future growth requirements. 

Growth and Trade Performance

Manufacturing Sector Growth

The gross product of the manufacturing sector (in chain volume measures(33)) grew from $51 billion in 1974-75 to $73 billion in 1998-99, a total growth of 44 per cent. By comparison, the GDP for the whole economy more than doubled over this period and this resulted in the marked decline in the manufacturing sector's share of GDP-from 18.7 per cent in 1974-75 to 12.3 per cent in 1998-99 (Figures 9 and 10).

The long term decline in the contribution of manufacturing to economic growth is largely due to the growth in the services sector. Similar trends in the composition of economic output have occurred in most OECD countries, and over the last decade high manufacturing export growth countries such as Taiwan and Korea have also experienced a decline in the share of manufacturing in GDP.

Figure 9: Manufacturing and Economic Growth (Chain Volume Measures)

Figure 9: Manufacturing and Economic Growth (Chain Volume Measures)

Source: Australian Bureau of Statistics, National Income, Expenditure and Product, ABS Catalogue 5206.0.

Figure 10: Manufacturing as Per Cent of Gross Domestic Product

Figure 10: Manufacturing as Per Cent of Gross Domestic Product

Source: Australian Bureau of Statistics, National Income, Expenditure and Product, ABS Catalogue 5206.0.

Manufacturing Employment

Employment in the manufacturing sector has remained very stable in total at around 1.1 million persons over the past 15 years (Figure 11). It rose to 1.2 million in 1989 but in other years it has hovered around the 1.1 million mark. However there has been a gradual but steady decline in manufacturing employment over the last two years from 1 143 000 in August 1997 to 1 091 100 in November 1999, a total loss of 52 000 jobs.

Figure 11: Employment in Manufacturing and Total Employment

Figure 11: Employment in Manufacturing and Total Employment

Source: Australian Bureau of Statistics, Labour Force, ABS Catalogue 6203.0.

With the steady growth in total employment, the manufacturing share of the total has declined steadily from 17.4 per cent in November 1984 to 12.3 per cent in November 1999 (Figure 12).

Figure 12: Employment in Manufacturing as a Per Cent of Total Employment

Figure 12: Employment in Manufacturing as a Per Cent of Total Employment

Source: Australian Bureau of Statistics, Labour Force, ABS Catalogue 6203.0.

The creation of jobs, or the maintenance of existing jobs, has been one of the strongest traditional arguments for high tariff protection in certain industries. Recommendations by the Industry Commission for the phasing down of high tariffs were repeatedly met by claims from the protected industries that such action would put at threat all or most of the jobs in the affected industries. The fact that total manufacturing employment has remained stable through three decades of major trade liberalisation and structural change is a testimony to the capacity of the sector to adjust to large scale structural change.

Equally important is the evidence that the very high levels of assistance provided to the two most highly protected manufacturing industries-motor vehicles and parts and clothing and footwear-through the latter half of the 1970s and the 1980s did not prevent the steady decline in employment in these industries (Figure 13).

Figure 13: Protection Does Not Prevent Job Loss

Figure 13: Protection Does Not Prevent Job Loss

Source: Industry Commission, Annual Report 1996-97, p.6.

Note assistance is measured as the effective rate of assistance. Discontinuities in the assistance series reflect periodic rebasing of the estimates to account for changes in the structure of the manufacturing sector.

Manufacturing Investment

Investment (private gross fixed capital expenditure) in manufacturing has more than doubled since 1982-83 but its growth failed to keep pace with that in total private investment in all industries (Figures 14 and 15). The manufacturing share of total investment fell from over 20 per cent in the early 1960s to around 14 per cent in the 1970s and subsequently to slightly below 12 per cent for most of the 1990s.

Figure 14: Gross Fixed Capital Formation (Chain Volume Measures)

Figure 14: Gross Fixed Capital Formation (Chain Volume Measures)

Source: Australian Bureau of Statistics, National Income, Expenditure and Product, ABS Catalogue 5204.0.

It is noted that the growth in manufacturing investment has been stronger than the sector's corresponding growth in employment and output suggesting significant substitution of capital for labour. The relative strength of manufacturing investment is also reflected in the fact that since the mid-1980s manufacturing has retained a relatively constant share of about 12 per cent of all industries investment. However this share eased in 1997-98, and fell sharply in 1998-99 to 10.5 per cent, as manufacturing failed to keep pace with the strong investment growth in all industries.

Indicators of the attractiveness of the sector to investors in terms of profitability and return on funds are shown below.

Figure 15: Gross Fixed Capital Formation: Manufacturing as a Per Cent of Total

Figure 15: Gross Fixed Capital Formation: Manufacturing as a Per Cent of Total

Source: Australian Bureau of Statistics, National Income, Expenditure and Product, ABS Catalogue 5204.0.

Trade in Manufactures

Exports of manufactures have increased steadily since 1971-72 and there has been an acceleration in the growth rate in the last decade. The value of manufacturing exports, in current prices, in 1997-98 was three times the level achieved in 1987-88. Moreover the predominant share of this growth has been in ETMs (Figure 16). These now account for 70.2 per cent of the total, down from the peak of 72.5 per cent in 1996-97 but well above the 56.9 per cent share recorded in 1987-88.

Figure 16: Exports of Simply and Elaborately Transformed Manufactures

Figure 16: Exports of Simply and Elaborately Transformed Manufactures

Source: Department of Foreign Affairs and Trade, Exports of Primary and Manufactured Products Australia.

ETMs involve a higher level of value-adding activity in the local economy and are also likely to involve greater linkages and spin-off benefits to other activities, both within and outside the manufacturing sector. The strong growth in elaborately transformed manufactures is a clear signal as to the increasing maturity and the increasing competitiveness of Australian manufacturing. It reflects a reducing dependence on exports of simply transformed rural and mineral products.

Accordingly concern has been expressed about the halt to the growth in ETMs which has been witnessed in the past 12 months. In 1998, exports of ETMs were 1.2 per cent lower than in the previous year with the main decline occurring in engineering products. This break in the strong growth in exports of ETMs likely reflects the impact of the East Asian crisis, and may extend into 1999, but it is not expected to represent a permanent set back to export growth in this area.

An examination of export propensity, that is the share of manufacturing output exported, indicates that this share has increased strongly, but from a low base by international standards. The export propensity increased from 15.1 per cent in 1984-85 to 26.4 per cent in 1997-98 but fell in the following year to 24.9 per cent (Figure 17).

Figure 17: Export Propensity and Import Penetration

Figure 17: Export Propensity and Import Penetration

Source: Australian Bureau of Statistics, Catalogue 5629.0, 5422.0 and 5410.0.

Import penetration in Australia's manufacturing sector, that is the share of total supplies to the domestic market provided by imports, has also increased strongly from about 26 per cent in 1984-85 to 37 per cent in 1998-99.

While there has been a strong growth in imports of manufactures, and this has been a concern from a balance of payments viewpoint, it is clear from Figure 17 that export propensity has been growing faster than import penetration and hence narrowing the trade imbalance in proportional terms. However in the last two years, the propensity to export manufactures has levelled out and the propensity to import has continued to grow which has cast some doubt as to the sustainability of the favourable trend witnessed over the preceding 12 years.

The upward trends in export propensity and import penetration confirm the increasing trade orientation of Australian manufacturing. It reflects an increased maturity in the manufacturing sector with increased specialisation in those areas where Australia has a comparative advantage. It indicates the extent to which Australian firms are developing global outlooks and strategies, and are sourcing out of, or selling into, various overseas locations.

Discussion and Conclusions

This paper presents an overview of the performance of Australian manufacturing industry. As might be expected, the resulting picture is a mixed one with manufacturing performing strongly in some respects and poorly in others. The historical perspective clearly points to major changes in the performance and the structure of the manufacturing sector over the past two decades.

In terms of its contribution to national income and total employment, the manufacturing sector has experienced a long period of declining importance. While Manufacturing Gross Product has increased at a slow to moderate rate, it has failed to keep pace with the much stronger growth in the services sector. The contribution of manufacturing to GDP has fallen from 19 per cent to just above 12 per cent over 25 years. Employment in manufacturing has recorded no growth in the long run and moved downwards in the last two years. The sector's contribution to total employment has fallen to just over 12 per cent.

The decline in the contribution of manufacturing to GDP and employment reflects a number of broad trends:

  • the slowdown in domestic demand for manufactures, associated with a slower population growth and an increasing share of spending being directed to services
  • the strong growth in imports of manufactures, which in part reflects shifts in consumer tastes (for example, to computers, electronics, small cars and 4WD vehicles) but also the lowering of trade barriers to imports
  • conversely the strong growth in exports of manufactures, particularly in elaborately transformed manufactures with a higher value added content, has partly compensated for the increasing share of imports in the domestic market, and
  • there also have been important changes on the supply side with an increasingly competitive trading environment leading to a strong growth in trade and productivity performance, increased capital and technology intensity in production and increased specialisation and contracting out, particularly to the services sector.

While there has been a long-run decline in the economic importance of the manufacturing sector, there have been important structural changes in the composition of industries and at the enterprise level which should provide the basis for stronger performance in the future in the manufacturing sector.

Structural Change

A key feature of the Australian manufacturing sector is the importance of the resource-based industries, with food, metal products and mineral and chemical products accounting for 50 per cent of value added. Machinery and equipment account for a further 20 per cent of the total. The main areas of growth have been within the above industries, with the main areas of decline being textiles, clothing and footwear and wood and paper products.

Export growth has occurred in food and metal products, but also in the textile, clothing and footwear and passenger motor vehicle industries with the support of Government sectoral policies. Import growth has been highest in data processing, telecommunications, sound recording, electrical equipment and in motor vehicles and other transport equipment.

An important aspect of structural change is the flexibility and capacity to move resources between industries and to direct new investment and innovation into the emerging and higher market growth industries. An expected benefit of trade liberalisation is that resource movement would become more flexible with the removal of protection incentives to retain resources in some of the mature, slow growth industries. The expected corollary would be an increased capacity to attract resources to the high-technology and knowledge-based industries which are facing above average growth in the markets for their products and services.

This paper has sought to indicate the importance of high and medium to high-technology manufacturing industries in Australia but the available information is somewhat dated and incomplete. For example, an OECD study shows that in terms of R&D intensity, Australian manufacturing was far below the OECD average in 1994. Australian industries with an R&D intensity comparable to the OECD average were pharmaceutical, scientific instruments and non-electrical machinery but our performance in office and computing equipment, motor vehicles, electrical machinery and chemicals was well below the OECD norm. Moreover in Australia, the high and medium to high-technology industries, as defined by the OECD, appear to have recorded a lower growth rate than the medium to low and low-technology industries.

However it would be wrong to read too much gloom into the above findings. It must be recognised that the industry composition of Australian manufacturing is different from the OECD norm due to the importance of Australia's rural and mineral processing industries. Most of these industries are classified as medium to low and low-technology industries but they are in fact the areas where Australia has invested a lot of its R&D and innovation efforts and where it is most likely that world best technology and practices are being employed.

The development of the information industries is of particular importance, due to the rapid growth in demand for the outputs of these industries and also to the role of information technology as an enabling factor in the development of other industries.

Information technology and telecommunications is still a relatively small industry in Australia, accounting for a little under three per cent of total employment. The greater part of the industry's output is in the form of telecommunication services and computer services rather than manufactured products. A substantial share of equipment and other manufactures are sourced overseas and frequently require very high production volumes and global markets to support competitive production.

This industry, however, has already demonstrated its capacity for well above average growth in both domestic and export markets. It provides great opportunities for innovation, for niche production and marketing and for strengthening the links between R&D and industry in Australia.

Within this changing industrial structure, what are the strengths and threats/weaknesses in the recent performance of the manufacturing sector in Australia?

Strengths

The greatest strength is that the dominant share of manufacturing activity in Australia is now internationally competitive. It is able to seek the opportunities and rewards from global trading. The negative influences that dominated past thinking-the inward-looking economic policy stance, the protection of Australian jobs from cheap Asian competition, the extreme reliance on unprocessed rural and mineral imports-have been largely dispelled.

Major reforms have been made in the macro and micro-economic policy environment in which Australian industry must operate. The manufacturing sector now should be entering a period of much greater certainty regarding government policies. The burdens of uncertainty and adjustment associated with major changes to the macroeconomic settings in the 1980s and the removal of trade barriers and other microeconomic reforms of the 1990s have been absorbed to a large extent. Important reforms are being implemented to ease the business tax burden and improve the flow of venture capital to innovative firms. Greater flexibility is being introduced into the labour market.

This more competitive environment, together with more stable and business-friendly policy settings, is reflected in generally favourable performance indicators for investment, exports and productivity in the manufacturing sector.

Investment

Investment in the manufacturing sector has achieved moderately strong growth since the sharp downturn in the 1991 recession. The share of manufacturing in all industry investment remained relatively constant at about 12 per cent although it fell well below this level in the last year 1998-99.

This appears to be quite a favourable outcome given that both the average profit margin and the return on net worth in the manufacturing sector have declined sharply since 1992-93, both in absolute terms and relative to the corresponding ratios for all industries. It seems reasonable to speculate that this decline in profitability in manufacturing was at least in part associated with the dismantling of tariff barriers and the strong increase in competitive pressures. An optimistic sign is that the easing in profitability does not appear to have been translated into an easing in the investment rate in manufacturing. However manufacturing investment tends to be cyclical in nature and some observers have questioned the adequacy of investment in productive capacity to meet future growth requirements.

Exports

There has been an acceleration in the growth of exports of manufactures in the last decade and elaborately transformed manufactures have accounted for the predominant share of this growth. The strong growth in elaborately transformed manufactures was interrupted in 1998-99 but this appears to be associated with the East Asian crisis and not to represent a permanent setback to export growth.

The share of manufacturing output exported has increased strongly from 15 per cent to about 25 per cent over the past 14 years. Imports of manufactures have recorded a corresponding strong growth and the share of domestic supplies of manufactures sourced from imports has increased from 26 per cent to 37 per cent over the same period. Thus Australia continues to have a substantial deficit in manufactures (excess of imports over exports) and this is of concern from a balance of payments viewpoint.

The upward trends in export propensity and import penetration confirm the increasing trade orientation of Australian manufacturing. It reflects an increased maturity in manufacturing with greater specialisation in those areas where Australia has a comparative advantage.

Productivity Growth

The market sector of the Australian economy experienced a very strong growth in multifactor productivity in the 1990s, following a period of very slow growth in the 1980s. Observers associate this faster productivity growth with extensive changes in the economy, and in particular those arising from the control of inflation, reduction in trade barriers and labour market and other microeconomic reforms.

Manufacturing appears to have made a major contribution to this acceleration in productivity growth in the market sector. While the available data are incomplete, it appears manufacturing productivity accelerated sharply in the 1990s to levels far above that achieved in the non-manufacturing sector of the Australian economy and also far above the average productivity growth in the manufacturing sectors of the OECD countries.

It is also of interest that the smaller, less industrially mature countries, including Australia, New Zealand, Norway, Denmark and Sweden, have achieved much stronger productivity growth in the 1990s. The reverse appears to have occurred in countries such as Germany, France, Italy, United Kingdom and Japan. The exception is the United States where the world's largest and most technologically advanced economy has achieved booming productivity growth.

Analysts of the strong economic growth in the United States have pointed to the apparent link between the revolution in digital and information technology use and higher productivity growth. Analysts of the Australian scene see technology change as a factor in productivity growth but consider that the main impetus to productivity growth has come from making better investment decisions and better use of existing technologies and capital stock rather than from a raft of new technological advances.

Threats/Opportunities

Australian manufacturers, whether selling to the domestic market or to export markets, must now compete with suppliers from around the world. They face the opportunities provided by potential access to world product markets and access to world supplies of capital and technologies. But these opportunities can be realised only if Australian manufacturers can keep abreast of their competitors in the development of labour skills, innovation, utilisation of capital stock and capacity for change. Australian industry must be successful in the implementation of world's best practice, and in some areas, it must have the capacity to be a leader in the evolution of world's best practice.

Three critical areas in which the future capacity of Australian industry to be internationally competitive may be threatened are:

  • R&D and innovation
  • education and training, and
  • venture capital.

R&D and Innovation

Despite the recent strong growth in productivity in manufacturing, there does appear to be grounds for concern about the adequacy of the R&D and innovation effort and its capacity to support future growth in manufacturing and the inevitable switch to a greater emphasis on knowledge-based industries and production processes.

The facts about business expenditure on research and development (BERD) are as follows:

  • the BERD/GDP ratio in Australia has declined in the last three years
  • this contrasts with the much higher, and generally increasing, levels of the BERD/GDP ratio in a large number of OECD countries, and
  • the reduction in the R&D tax concession in 1996 has contributed to the slowdown in BERD and the pending reduction in the company tax rate will further reduce the effective R&D subsidy.

Looking at the broader issue of innovation in the Australian economy, there are a number of aspects of concern. Many of these are highlighted by a recent OECD study which produced a scoreboard benchmarking the performance of developed countries with respect to their uptake of knowledge-based activities. Australia was found to have many of the fundamentals necessary to achieve average or above OECD average performance in technology and innovation. These included above average performance with respect to personal computer penetration rates, flow of graduates into science and engineering, basic research as a percentage of GDP and R&D expenditure by government and higher education as a percentage of GDP. But these fundamentals are not being translated into business performance with Australia recording below the OECD average with respect to investment in knowledge and knowledge-intensive industries and services, business expenditure on R&D and innovation and investment in venture capital.

Another concern is that in the past, the larger firms have accounted for a disproportionately large share of business expenditure on technological innovation. However current thinking suggests that small and medium sized firms may have better growth prospects, particularly in more knowledge-based activities, due to their flexibility in labour and capital usage and their ability to service niche markets effectively. These smaller firms may incur difficulties in funding major R&D outlays and also in internalising the benefits of their R&D.

Education and Training

A criticism of industry protection is that it tends to stifle innovation and training. The available statistics on levels of industry training are difficult to interpret but there is no clear evidence that the movement to a more competitive manufacturing industry structure is being supported by enhanced efforts in the area of vocational training.

Business people acknowledge recent improvements in the education and training system and strongly support moves to multi-skilling and competency-based training. However, they still consider that the formal education and training system, at the school, vocational training and universities levels, is under-performing in its task of preparing people for employment in industry. In particular, the vocational education and training sector is seen as overly complex, confusing and difficult to access and the traditional apprenticeship system as being in need of major reforms.

It is recognised that all parties-government, industry, suppliers of education and training and individuals-must share the responsibility for progressing the reform process to meet the training needs of industry, and there is a need to further strengthen the links between these parties. There may also be a need for industry to acknowledge that some trade-offs may be necessary in meeting their demands. For example, business has placed an increasing emphasis on recruitment, including recruitment of skilled migrants, to meet its skill requirements which may conflict with business giving an increased commitment to the domestic training process.

Venture Capital

The inability of Australian firms to attract sufficient venture capital to support many high risk, but potentially very profitable, innovative projects has long been cited as a key reason for the loss of many Australian innovations to overseas interests and the associated loss of manufacturing opportunities.

The Australian Venture Capital Association (AVCAL) has described 1999 as a 'watershed' when the venture capital industry came of age in Australia. In 1999, seven new venture capital firms were formed and a record $812 million of development capital was raised in Australia. The corresponding figure for 1998 was $266 million and the previous peak was $409 million in 1997. AVCAL noted, however, that most investments were made at the expansion stage of a company's development and only a small proportion of the total went to early stage funds.(34)

The Government has taken a number of steps to increase the attractiveness of Australia to venture capitalists. It has increased the Budget allocation to the Innovation Investment Fund, increased the attractiveness of PDFs to investors and will lower capital gains taxes as part of the New Business Tax System. Of particular importance is the Government's announcement to exempt from capital gains tax venture capital investments in Australia by non-resident tax exempt pension funds. Hence the impact of the business tax review is expected to be critical to the performance of Australian industry with respect to business R&D and innovation activity.

Trade Liberalisation and Manufacturing Performance

The primary aim of this paper was to review the available evidence on the performance of the Australian manufacturing sector. A secondary aim was to make some subjective observations on whether the performance of the manufacturing sector, or some aspects of it, are consistent with the anticipated benefits from trade liberalisation and other industry and microeconomic reforms aimed at improving the competitiveness of Australian industry.

In the authors' view, the overall impact of trade liberalisation and related reforms has been beneficial in terms of improving the performance of the Australian manufacturing sector. The results have not been spectacular in terms of manufacturing production and employment but there are many indicators of positive change. A number of positive indicators with respect to investment, exports and productivity growth have been identified which collectively point to the emergence of a more mature and more flexible manufacturing sector. The capacity of the sector to sustain activity and diversify exports during the crisis in East Asia adds weight to the view of a more mature and flexible industry base.

Looking to the future, Australian industry will need to be more flexible and adaptive in utilising its labour skills, innovation and capital supplies and in changing its product mix and marketing strategies. The inputs which appear critical to future performance, and where Australia has not performed strongly in the past, include aspects of R&D and innovation, education and training and venture capital. Commonwealth and State governments, together with industry, education and research bodies will need to work more closely together to achieve the desired strengthening of performance in these areas.

The most important benefit from trade liberalisation and related reforms is that it removes the shackles of industry reliance on a very discretionary and distorting Government assistance regime. With parallel reforms in the labour and taxation regimes, new opportunities have been opened up for investors, managers and workers in Australian industry. It is expected that the benefits from these policy reforms will continue to generate improved performance records in Australian manufacturing in the medium to long run.

Endnotes

  1. Michael Emmery, 'Industry Policy in Australia', Research Paper no. 3, Department of the Parliamentary Library, Canberra, 1999.

  2. Michael Emmery, 'Australian Manufacturing: A Brief History of Industry Policy and Trade Liberalisation', Research Paper no. 7, Department of the Parliamentary Library, 1999.

  3. op. cit.

  4. Value added in manufacturing is the value added by manufacturing industries to the intermediate inputs used by those industries. It measures the contribution by manufacturing industries to gross domestic product.

  5. Information Industries Taskforce, The global information economy: the way ahead, Australia, July 1997.

  6. Industry, Science and Resources, 1999 Industry Outcomes and Outlook Statement, July 1999.

  7. NSW Department of State and Regional Development, First for Information Technology and Telecommunications, 1999.

  8. National Office for the Information Economy, E-Commerce-beyond 2000, November 1999.

  9. Ernst & Young and Industry, Science and Resources, Australian Biotechnology Report 1999, Commonwealth of Australia, 1999.

  10. Industry Commission, The Automotive Industry, Volume II: Appendices, p.C5.

  11. ibid., p.C6.

  12. Gerald Burke, 'Economic trends and outlooks', in Robinson and Kenyon, eds, The market for vocational education and training, National Centre for Vocational Education and Research, 1998.

  13. National Centre for Vocational Education and Research, Skills Supply to Trade Industries, Draft 16 September 1999.

  14. The Allen Consulting Group, Training to Compete. The Training Needs of Industry, Report to the Australian Industry Group, 1999.

  15. House of Representatives Standing Committee on Employment, Education and Training, Today's training Tomorrow's skills, July 1998.

  16. OECD Science, Technology and Industry Scoreboard 1999, Benchmarking Knowledge-Based Economies, Paris, 1999.

  17. The Innovation Investment Fund provides a Government contribution to equity funding to establish a number of venture capital funds which in turn invest in early stage financing for small technology-based firms and support commercialisation of their R&D.

  18. The Pooled Development Fund (PDF) Program is designed to develop the Australian market for patient equity capital, including venture capital, for growing small and medium sized enterprises. The Government provides substantial tax concessions to both PDFs and to investors in PDFs.

  19. Nick Tabakoff and Tony Featherstone, 'The Dumbing of Australia', Business Review Weekly, 2 July 1999, p. 55.

  20. ibid., p. 54 and John Kavanagh and Brad Howarth, 'Into the promised land', Business Review Weekly, 25 February 2000.

  21. Australian Bureau of Statistics, Cat. 8104.0, Research & Experimental Development Businesses 1997-98, p. 5.

  22. James Kirby, 'Lights go out in research labs', Business Review Weekly, 13 July 1998.

  23. Tim Colebatch, 'Australia no longer the clever country', The Age, 5 June 1999.

  24. Report by the House of Representatives Standing Committee on Industry, Science and Resources, The Effect of Certain Public Policy Changes on Australia's R&D, August 1999.

  25. Science and Technology Budget Statement 2000-01, Table 3.

  26. The 'market sector' is defined by the ABS as ANZSIC divisions A to K and P. It includes agriculture, mining, manufacturing and a number of service industries. It excludes property and business services, government, education, health and personal services.

  27. Industry Commission, Assessing Australia's Productivity Performance, Research Paper, September 1997.

  28. Reserve Bank of Australia, Semi-Annual Statement of Monetary Policy, May 1997.

  29. bid., p. 15.

  30. Dean Parham, 'Australia's economy grows up', Australian Financial Review, 30 June 1999.

  31. BIS Shrapnel, Australia Long Term Forecasts, 1999 to 2014, August 1999, p.188.

  32. ibid., p.186.

  33. The Australian Bureau of Statistics introduced chain volume measures for the measurement of GDP in 1998. It replaces the previous constant price estimates and is considered to provide better indicators of volume (i.e. real) growth. The chain volume measures will be rebased annually to reflect changes in prices in the previous financial year.

  34. Kirsty Needham, 'Venture fund aims for small investors', Australian Financial Review, 2 May 2000.


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