David Merrett

The internationalization of Australian banks

Abstract Since the 19th century, Australian banking has seen high inward and some outward flows of FDI. However, from the 1980s, Australian banks greatly expanded the scale of their FDI, their geographic scope and the range of products that they offered. This recent outward flow of FDI was the result of a complex and inter-related set of factors, including a push from a small and crowded Australian market and the pull of foreign wholesale and retail markets, that liberalization of trade and investment in financial services had made accessible. A combination of what Rugman (Inside the Multinationals: The Economics of Internal Markets, 1981, Croom Helm, London and Columbia University Press, New York) calls country-specific advantages (CFAs) and firm-specific advantages (FSAs), strongly influenced the ability of Australian banks to become successful MNBs. As the nature of international banking altered from the 1960s onwards, this overturned earlier forms of internationalization by Australian banks. Now banks had to acquire and absorb new knowledge to be able to operate effectively in new product and geographic markets.

Capital Markets and Capital Formation in Australia 1890–1945

This survey article examines the interaction between the domestic capital markets and capital formation in Australia from the 1890s up to the end of World War II. The disenchantment of the City of London with Australian securities in the 1890s opened a window for the development of domestic capital markets. It was the demands of the government for funds, especially during both wars, that transformed the scale and character of local markets. Local deposit taking institutions and stock exchanges handled a sufficient volume of domestic savings to fund the lions share of both public and private sector capital formation.

The Development of Large Scale Enterprise in Australia, 1910–64

This essay explores the development of large scale enterprise in Australia, an economy in which resource industries were unusually important and with a very small domestic market. Using asset size as a yardstick, the authors construct a series of the 100 largest firms operating in the years 1910, 1930, 1952 and 1964. These lists allow the identification of firms by industry and whether they were foreign-owned. Cross-country comparisons are also made. Further, the authors discuss the more qualitative aspects of Australian large scale enterprise in the context of whether these firms approximated the competitive capitalism of the United States or the family capitalism of Britain. They concluded that Australian firms displayed little of the dynamism of the leading firms in the United States. Protectionist government policies explain part of this behavioural trait.

Industry Associations as Facilitators of Social Capital: the Establishment and Early Operations of the Melbourne Woolbrokers Association

Relocation of the selling of Australias wool clip from London to cities in Australia in the late nineteenth century led to the creation of wool selling industry associations, such as the Melbourne Woolbrokers Association (MWA). Highly successful in fostering competitive collaboration that improved market efficiency, the Association rested on the social capital brought to it and further developed by the participants, individuals with extensive connections in the pastoral, banking and transport industries. The collective social capital vested in the Association enabled the earning of economic rents, firstly from the high trust created through internal cohesion reinforced by formalised sanctions, and secondly from a capacity to span ‘structural holes’ between networks outside of the Association.

Work in the Financial Services Industry and Worker Monitoring: A Study of the Union Bank of Australia in the 1920s

This paper explores a part of the systems used by the British-owned Union Bank of Australia in managing its labour force in the 1920s. The particular concerns addressed here focus on the opportunities presented to workers to ‘cheat’ arising from the nature of the tasks undertaken, which meant that both output and effort were difficult to observe, and from the large amount of securities and cash in the branch. Workers could behave opportunistically. Workers discovered ‘cheating’ were subject to punishments ranging from prosecution in the courts, dismissal, demotion, delayed promotion and pay cuts. The Union Bank used a complex multi-layered system of checks to monitor the efforts made by workers and their honesty in handling cash and securities. The effectiveness of monitoring was increased by the organisation of work into small specialist departments whose supervisors possessed comprehensive knowledge of the tasks carried out by workers and the established norm of work rates.

Global Reach by Australian Banks: Correspondent Banking Networks, 1830–1960

This paper argues that the bulk of international funds transfers to and from Australia from the 1830s until the 1960s were handled through correspondent banking relationships rather than internalised by multinational banks. The pervasiveness and longevity of this market-based contractual mode is explained with reference to the theory of transaction costs, agency and contracting. An examination of the evolution and practice of correspondent relationships of Australian banks suggests that the intrinsic nature of the services being provided reduced agency costs. Despite asymmetries in information and bounded rationality, agents had little incentive or opportunity to cheat as contracts were easy to negotiate, write, monitor and enforce. Agents were bonded to principals by a number of mechanisms, the most important of which was protection of their reputation. The move by Australian banks to branch abroad after the 1960s cannot be explained by any systemic failure of agency arrangements in the correspondent net...

Australian Firms Abroad before 1970: Why So Few, Why Those, and Why There?

This article draws on the FDI literature to theorise about the likelihood that firms based in a small, highly protectionist and commodity exporting economy located in the south-west Pacific might become multinationals before 1970. It is argued that the scale, structure and geographic isolation of the Australian economy mitigated against large outflows of FDI relative to domestic investments and to GDP. While this contention holds at the macro level, hundreds of firms from the resources, services and manufacturing sectors have been identified as being multinationals. For the most part, their overseas investments were peripheral adjuncts to domestic business. Moreover, the overwhelming bulk of investment was concentrated in countries immediately adjacent to Australia, particularly New Zealand.

The Australian Bank Crashes of the 1890s Revisited

Financial crises occurred in many countries in the early 1890s, most of which were connected to international capital flows. Australia, a major importer of capital, had difficulty borrowing after the Baring crisis. This paper argues that the consequences of the banking crash in early 1893 were shaped by local factors. A fortuitous legislative change averted a calamity by allowing for reconstruction rather than liquidation of banks; economic activity was depressed as banks became more conservative lenders; and the reconstructions reduced the wealth of domestic bank creditors and shareholders. We conclude by noting that there was no targeted policy response in the short or medium term to prevent a recurrence of such an event.

Takeovers and Corporate Governance: Whose Interests Do Directors Serve?

Using internal records of board meetings, this research explores issues relating to the motivation of directors’ action during takeover negotiations. The records relate to a time period when regulation was low and directors had ample opportunity to engage in adverse selection and moral hazard. In such circumstances, it might be supposed that they would have sought to protect their own tenure rather than seek to maximize shareholder wealth by recommending acceptance of a bid. However, in the case study under examination the directors worked hard to maximize the bid price by auctioning the company despite having little equity exposure themselves. The directors also sought to protect the interests of the staff when negotiating with bidders. Intentionally this behaviour was not disclosed to the shareholders and, on occasion, threatened the success of the negotiations. The article concludes that the actions of the directors were motivated by strong reputational effects not widely recognized in the contemporary literature as being a force that powerfully drives corporate governance.

Sugar and Copper: Postcolonial Experiences of Australian Multinationals

Between 1973 and 2002, three of Australias largest multinational companies exited from postcolonial Fiji and Papua New Guinea. Although neither host government wished the companies to leave, the tensions that arose during the course of decolonization made their departure inevitable. Prior to independence, conflicts between Fijians and Indians and decisions about grants of land and mineral rights to foreign firms had been mediated by colonial administrators. After independence, these contentious issues were resolved through domestic political processes. Ultimately, the companies were unable to overcome the limitations of their shared administrative heritage, based on nationalistic chauvinism, that desensitized them to the importance of race relations and communal rights to land within their host countries.