The role of vocational education and training in attracting foreign investment from multinational companies

This study examines the role of the Australian vocational education and training (VET) sector in attracting investment by multinational corporations. It also considers what changes to the VET system and the Australian economy could improve Australia's attractiveness for investment.

• Multinational corporations are increasingly significant in the global economy and in individual national development. This is due to the predominant role that multinational corporations play in technology development and transfer, and in the international trade of goods and services and financial transactions. However, multinational corporations do not necessarily bring benefits, particularly if the investment simply reflects changes in ownership.
• The survey results and the broader literature review found that decisions relating to investment by multinational corporations depend upon a multiplicity of factors. The case studies show that the quality of the domestic VET-skilled workforce is ranked equal third in importance out of 15 factors in the decision to locate the investment in Australia. However, only four of the 12 multinational corporations studied evaluated the local labour market and training system as part of the investment location decision-making process. The most important factors are proximity to customers and quality of infrastructure.
• The study also found that the skills of the local workforce are sufficiently developed to use the overseas-designed production technologies and overseas-designed products on which the local multinational corporation subsidiaries are particularly dependent. However, most of the firms experienced shortages of VET-skilled workers, and these are reported to adversely affect firm performance. Firms use a range of measures to redress their recruitment difficulties, including training their existing workforce, using labour hire and offering higher wages.
• Almost all the case study multinational corporations provided training through external providers to their employees, often in management and leadership. Three of the 12 firms in the sample 'found it necessary to assist or require external training suppliers to improve their performance'.
• Multinational corporation subsidiaries have a marked effect on their local suppliers, requiring improvements in product/service delivery times, quality and price. Many of the subsidiaries assist their suppliers to achieve these improvements through technology transfer and training.
• To attract more foreign investment in Australia, survey respondents suggest better overseas publicity of the current Australian VET system, and improving the literacy, numeracy and production knowledge of lower-level manufacturing workers.

The purpose of this research is to identify both the role of the existing stock of vocational education and training (VET) skills and the quality of training provided by the VET sector in attracting multinational corporation investment into Australia. Secondly, the research attempts to identify the impact of multinational corporations on the labour market and on local suppliers to these corporations.Finally, the study suggests improvements to the VET skills and training system and other aspects of the economy which could improve the attractiveness of Australia to multinational corporations.

There is a very considerable international literature on the factors which determine investments by multinational corporations and the economic impacts of these investments on national and regional economies. This literature is largely silent, however, on the role of vocational skills and training in attracting foreign direct investment from multinational corporations and the impact these investments have on the VET-skilled workforce.

This study seeks to redress this deficiency through the collection of original data from those multinational corporations which have recently made initial investments or have significantly expanded existing investments. However, the findings should be regarded as preliminary, as the study is one of the first undertaken in Australia, and the survey (more properly regarded as a number of case studies) was limited to 12 firms. The firms surveyed were selected from industries in which multinational corporation investments are concentrated, and which are particularly intensive in their employment of VET-skilled occupations. These industries are mining; manufacturing; telecommunications; electricity, gas and water; and information technology. The results, therefore, should not be extrapolated to the population of multinational corporations in Australia. On the other hand, the survey results have considerable 'face validity', as they are consistent with the findings of other Australian and overseas studies.

Multinational corporations play an extremely important role in the growth of developed and, increasingly, of developing economies. One-third of global trade is intra-firm trade; that is, exports and imports among affiliates of multinational corporations. These corporations are dominant in industries in which research, innovation, marketing, capital intensity and economies of scale are critical aspects of competitive advantage.

Numerous benefits for countries have been identified arising from inflows of foreign direct investment. On the 'demand side', multinational corporations can provide access to global markets for the products of a particular country or region. They are especially important in strengthening the 'supply side' through the introduction of advanced technologies, quality systems and management practices. Other supply-side effects include training of the local workforce directly employed by the multinational corporation and the transfer of technologies and skills to local domestic suppliers of multinational corporations. These 'backward linkages' with domestic suppliers are crucial to the overall upgrading of an economy's workforce skills and technical capacities.

However, the literature finds that multinational corporation investment does not necessarily bring these benefits. Around 80% of multinational corporation investment is for the purpose of acquiring existing productive assets-mergers and acquisitions-not the development of completely new opportunities or so-called 'greenfield sites'. Mergers and acquisitions do not necessarily entail additional investment, technology transfer or expansion in employment.

The benefits of multinational corporation investment are also mediated by national policies intended to influence the behaviour of multinational corporation subsidiaries; for example, in the use of local inputs, workforce development, local research and development, technology transfer and exports. Government action is also crucial in influencing the 'absorptive capacity' of a national economy to attract and exploit foreign investment. The literature has identified the educational and skill levels of the workforce and the associated educational and scientific infrastructure as crucial in this absorptive capacity. Overall, a virtuous circle is evident, in that the higher the existing stock of education and skills in a country, the greater the preparedness of multinational corporations to invest in further skill upgrading.

Liberalisation of international capital flows, removing restrictions to foreign ownership, reduced transport costs and the information communications technology revolution have greatly increased the volume of multinational corporation investment and the mobility of this investment. The fact that multinational corporation plants are becoming increasingly 'footloose' means that the competitive advantages of countries are becoming increasingly important in the location of multinational corporation investments.

Among developed nations, Australia is especially dependent on foreign capital, and multinational corporations' share of Australian industry is one of the highest in Organisation for Economic Co-operation and Development (OECD) countries. Studies of multinational corporations in Australia find that, while they are, on average, larger and more innovation- and export-intensive than domestically owned firms, they are still heavily dependent on imported product design and production technologies. Compared with multinational corporation subsidiaries in other countries, the Australian branches are less export-intensive and less integrated into the global operations of the multinational corporation. This partly reflects the small size of the local market and the 'branch plant' status of these subsidiaries.

The survey confirms other findings that decisions relating to investment location made by multinational corporations depend upon a multiplicity of factors. The quality of the VET-skilled workforce is ranked equal third in importance (along with counter-attacking competitors in order to take market share) out of 15 location factors. The most important factors were proximity to markets and quality of infrastructure. These results have 'face' validity as they accord with the findings on location determinants in the broader literature on multinational corporations.

Three of the firms had evaluated the quality and availability of VET skills and the training system as part of the investment decision-making process.

Two of the firms found it necessary to adapt overseas products or processes to the skills of their local workforce. This suggests that, on the whole, the skills of the local workforce were sufficiently developed to use the overseas-designed production technologies and overseas-designed products on which the local multinational corporation subsidiaries are particularly dependent.

An important finding is that three-quarters of the case study firms over the last three years 'required Australian-based suppliers to upgrade their products and/or performance'. A wide range of changes were demanded of local suppliers by multinational corporation subsidiaries in areas of supply chain management, reduced price and improved product/service quality. Nearly half of the firms required three or more of the listed changes. It would appear that multinational corporations are quite 'demanding customers'. Just as significant, is that half of the firms assisted their suppliers to achieve these outcomes.

Half of the firms agreed with the statement that their 'company has had a significant effect on the local labour market in which it operates'. These effects included increasing labour demand, wages and training opportunities.

Three-quarters of the firms reported VET-skilled labour shortages. The effect of these shortages was to increase costs, restrain output, and delay the introduction of new products. The high proportion of firms reporting skill shortages, along with their descriptions of the adverse affects of such shortages, reinforces the concerns expressed elsewhere about inadequate training rates in many VET-skilled occupations.

To make the VET system more attractive to foreign investment, the survey respondents recommended better overseas publicity of the current training system and improvements to literacy, numeracy and production knowledge of lower-level workers in manufacturing. Shortage of VET skills is clearly an issue which needs to be addressed. It is important to note, however, that vocational skills and training is only one among a number of important factors in investment location. The respondents also identified a broad range of other issues relating to trade union influence, taxation, volatile and over-valued exchange rates, and inadequate government incentives to multinational corporations to locate in Australia.