Why exporting matters

This article first appeared May 19, 2009.

Why does South Australia need to export? For the same reasons as it is important for Australia to export. There are both macroeconomic reasons and microeconomic reasons.

In macroeconomic terms, increased exports help us pay for our imports as our economy grows. Exports, also growth prospects for the state and for the nation, and creating export industries, helps assist the workers by providing high quality jobs with good career prospects.

Australia is a small country with a limited domestic market, so exporting is the only way in which we can grow and take advantage of economies of scale. And this is especially important for a state like South Australia that has a relatively low population.

There are also microeconomic reasons why SA needs to export. By exporting overseas we compete with the best companies in the world and are therefore driven to be innovative and use the most modern technology and management practices.

It is like playing “away games” in sport. Only the very best teams win on the road as well as when they have the security of their home ground. This enables firms to increase productivity and therefore raise living standards for Australians overall. Like SA’s great sporting teams winning grand finals, SA exporters strive for excellence in international markets.

The main rationale for trade is what economists call “comparative advantage”. It is argued that if we specialise in what we are good at and trade with another nation for what they are good at, then both nations will ultimately benefit. These mutual benefits are termed “gains from trade” by economists.

There are also competitiveness reasons for exporting. As we have to compete with more firms in the global market we are likely to strive for the best business practices, most innovative techniques, best use of technology and so on.

It’s a bit like the Adelaide Crows and Port Adelaide joining the AFL. Competition helps raise skill levels and intensity. By playing in the AFL, South Australian footballers compete with the best and ultimately standards improve. Similarly, the Victorian teams benefit from SA’s entry as they are also forced to lift their game. Like the AFL, competing more widely through exporting ultimately raises skills, standards and innovation.

Another economic reason for exporting is knowledge transfer from “learning by doing”. Economists argue that the development of knowledge drives modern economies. This is known as “endogenous growth theory”, which has both microeconomic and macroeconomic elements.

If SA firms are exporting they are more likely to be exposed to international trends in technology, product design, consumer behaviour and so on. As exporters benefit from “learning by doing” their knowledge and access to technology will potentially “spillover” to the rest of the economy. This will lift the competitive performance of all firms and improve the efficiency of the Australian microeconomy.

International evidence also shows that exporters help the long-term survival of firms in the economy. This is because they enjoy faster sales and employment growth than non-exporters enabling a higher rate of survival and contributing to overall allocative efficiency in the economy.

Diversification of sales across international borders spreads risk especially if demand patterns differ across borders. So exporting can therefore boost an individual firm’s performance but also benefit other firms and the performance of the Australian and the SA economy as a whole.

There also non-economic reasons for exporting. There are also non-economic reasons why exports are good for Australia and for South Australia. Exports create closer links between SA and the rest of the world. They help create personal as well as business relationships between Australians and people overseas. By doing so they can assist Australia’s international relations.

Similarly they create opportunities for Australians to work and live overseas and learn about other cultures. This broadens Australia’s skill base, educational experience and cultural diversity. In many ways, South Australia led the way for Australia in the 1970s with then premier Don Dunstan developing the ties with south east Asia through Adelaide’s links to Penang.

Exports also enable the world to learn more about South Australia. The most obvious example of this is tourism, but cultural exports also play an important role. The Adelaide Festival is a classic example of cultural exports helping forge international links between SA and the rest of the world.

Exports can also assist economic self-sufficiency for disadvantaged groups in the community. For instance, Aboriginal cultural exports are important to the state’s indigenous communities. Exports can also help Australia’s rural and regional areas that may not have shared in the gains from Australia’s improved economic performance. Exports can therefore assist regional balance and social cohesion in the community as a whole.

Exporters demonstrate some key characteristics when compared to non-exporters. For instance, exporters tend to perform better as employers when labour market outcomes are assessed.

In terms of wages and salaries, exporters, on average, pay better than non-exporters. According to the ABS data, exporters pay their workers 60% higher wages and they also provide a safer work environment, more training and better job security to their staff than do non-exporters.

Exporters tend to be more innovative than non-exporters. They are more likely to introduce new goods or services or use advanced management techniques than non-exporters. According to Austrade research, nearly half of all exporters planned to introduce a new good or service compared to only 15% of non-exporters. They also invest more in technology and use advanced business techniques than non-exporters.

However, it is not just about boosting exports alone. We can’t have exports without imports. Exports and imports together can raise economic welfare. It should also be remembered too that many exporters use imported components. We also can’t ignore foreign direct investment, which contributes to export growth. Foreign investment also assists employment and many foreign owned firms’ pay well compared to domestic firms.

So, in conclusion, the bottom line is that SA needs exports and we need more SA businesses to be exporters. As shown in Austrade research, exporting not only helps the economy but it also has positive effects on the South Australian community as well. So let’s help exporters continue to advance South Australia.

Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist.