When Squire Sanders & Dempsey became the latest international law firm to enter the Australian legal market last month, the move had as much to do with Asia as it did Perth's booming energy and resources sector. Given the strong trade flows between Perth and Asia, where the firm already has offices in Tokyo, Beijing, Shanghai and Hong Kong, the move to merge with the majority of Minter Ellison's Perth arm was fuelled by a desire not only to tap into one of the G20's best-performing economies but to use it as a platform to bolster its Asian practice.

"The fit was good," says Squire Sanders chair and global chief executive James Maiwurm. "We wanted to strengthen our regional focus in Asia-Pacific and Western Australia is a logical priority because of its strong resources and energy sectors."

The same logic has seen a raft of international firms launch offices Down Under in recent years. The trend was kicked off when Norton Rose left-footed rivals two years ago by announcing a surprise takeover of Deacons, which went live in January 2010. While there was griping about Deacons' mid-tier status, there is little doubt that the move contributed to a reappraisal of the opportunities for foreign firms in Australia. In January 2011, DLA Piper announced it was moving to a full merger with its longtime 'best friend' firm DLA Phillips Fox, giving both firms huge local scale.

Arguably as influential were the moves of top-tier transactional advisers, in particular Allen & Overy (A&O), which launched in Sydney and Perth in April 2010 after hiring a 17-partner team drawn primarily from Australian leader Clayton Utz.

In many ways this strategy is more interesting to leading City and US law firms uneasy about the prospect of largescale unions with domestic firms. The A&O deal was touted – and is regarded to be delivering – a credible means of securing high-end international work from Australia and better reach into Asia. A&O's arch rival Clifford Chance (CC) followed a similar path, launching locally in May this year through a tie-up with local firms Cochrane Lishman Carson Luscombe and Chang Pistilli & Simmons. The deal, securing two of the few highly-rated commercial boutiques in Australia, has been viewed as a very promising acquisition for CC and one that limits City rivals' options to enter the market with a similar move (though the upwardly mobile Gilbert + Tobin has attracted the attention of some foreign firms).

john-weber-minter-ellisonStill, views vary greatly over the scale an international firm needs to be credible locally. Minter Ellison chief executive John Weber (pictured) comments: "CC and A&O adopted one method – effectively a brand play with smaller boutique offices – while other new entrants such as Norton Rose and DLA went the other way, announcing themselves as major players almost immediately.

"It depends on the firm's focus at the end of the day, but with 15-20 partners CC and A&O might struggle to service clients across the entire country as well as in multiple jurisdictions."

But then many international law firms are currently less concerned about domestic coverage and far more focused on how an Australian presence can help drive wider Asia strategies. Indeed, there is no doubt that the emergence of the wider Asian region as an economic force of enormous strategic importance is what has transformed Australia from the Cinderella of the global legal market to a hot date.

Furthermore, Australia itself has withstood the global financial crisis better than most Western economies, buoyed by a comparatively robust financial sector and high demand for natural resources, particularly from Asia. According to the Department of Foreign Affairs and Trade, the country's earnings from energy and minerals exports went up by an estimated 31% in 2010-11 to A$182bn (£115bn), with the top exports – iron-ore and coal – both exceeding A$40bn (£25bn). China was Australia's largest export market, accounting for 22.6% of the country's total exports, followed by Japan, Korea and India. DLA Piper Asia-Pacific managing partner Alastair Da Costa comments: "Australia has become an integral part of the Asia-Pacific region, fuelling much of Asia's growth while, at the same time, being hugely reliant on Asian demand for its resources."

Such trends have dramatically changed attitudes towards the local legal market. After all, foreign law firms had been flirting with a major tie-up in the local market for 15 years – CC and Linklaters had previously courted Mallesons Stephen Jaques. But despite the strong Anglo-Australian cultural ties and widespread admiration for the polished training and commercial attitude of Australian lawyers, deals always floundered on obvious hurdles. Chief among these are the low profitability of local firms – roughly half the equivalent UK practices – and the challenges of competing with huge domestic practices in what remains a mid-size economy. There is also a relative lack of progress Australian firms have made in expanding into Asia.

Indeed, this lack of Asian progress in retrospect looks a huge strategy misstep on the part of leading Australian firms, greatly weakening their bargaining power. Even firms like Mallesons and Blake Dawson, having stepped up their international growth in recent years, have come nowhere near the level of foreign expansion taken for granted among equivalent City law firms.

Such calculations raise thorny issues for Australia's 'big six' leaders: Mallesons, Clayton Utz, Blake Dawson, Freehills, Allens Arthur Robinson and Minter Ellison. Their model of building full-service, multi-office practices has given them commanding positions in the national market but has had only limited success at asserting the group on the global stage.

For all the statements of confidence in the wake of the sudden influx of foreign firms, there is no doubt the market has been hugely stirred up and some observers see domestic leaders as being torn over how to position themselves now that foreign competition is suddenly a pressing reality.

Nowhere is this dramatic shift more evident than in the case of Blake Dawson. Having reportedly held discussions with a number of foreign firms, including Herbert Smith, the firm is on the verge of agreeing a tie-up with Ashurst. The proposed terms of the deal, which look set to face a vote at the end of the month, have raised some eyebrows. The deal would see Blake Dawson's well-regarded 13-partner Asia network in Shanghai, Papua New Guinea, Singapore and Tokyo merge with Ashurst's Asian network. This would leave the firm's 180-partner domestic practice to enter a joint venture with the City firm, which would rebrand under the Ashurst name.

The deal envisages that there will be a vote on a full tie-up subject to Blake Dawson hitting certain profitability targets. This is seen by observers as a clear sign that the firm is considering substantially narrowing its practice to raise profitability and more closely align itself with the practice of an international law firm.

It seems a surprisingly defensive stance for Blake Dawson and is seen as further evidence that the top-tier firm has come under pressure in recent years. The question in the minds of many local lawyers is whether Blake Dawson's peers will elect to go down a similar path and tie-up with larger foreign law firms or attempt to forge their own position in the international market.

Perhaps the most intriguing alternative for such firms would be to either form joint ventures or full mergers with sizeable Asian players. There are already some indications of this approach, with Allens Arthur in 2010 unveiling a 'co-operative alliance' with leading Japanese firm Nagashima Ohno & Tsunematsu. Even more significant, it emerged earlier this year that Mallesons is in discussions with China's largest law firm, King & Wood, to form a joint venture.

While it is unclear how effectively Australian law firms can combine culturally with large Asian law firms or if the restrictive Bar rules in many Asian states would hamper real integration, the prospect of such unions could potentially shift the dynamic in the wider region against the currently dominant UK and US law firms.

However, securing such an outcome would be a steep challenge for Australian firms, which have neither the financial muscle of US and UK rivals nor key clients used to following them around the world. Incoming Norton Rose Australia managing partner Wayne Spanner, who will take over the helm of the firm's Australian practice in January, sounds a note of caution about the country's national firms. "We clearly expect to see more international firms opening in Australia and the big six in Australia will find themselves in an increasingly difficult position as clients increasingly demand multijurisdictional reach from their legal service providers.

"The national firms won't survive in their current form. They will be forced to globalise their own practices and we will see a variety of different models but, fundamentally, it's the clients who are demanding a change to the way legal services are provided and some practices, as a result, will fare better through that process than others."

Freehills chief executive Gavin Bell argues his firm is well positioned to meet the international challenges. "We take the recent entrants seriously but at this point it is also true that they are made up of the same partners we were competing with previously under a new banner."

And despite clear unease regarding the threat of foreign firms, Australian firms remain broadly optimistic about the country's future. Allens Arthur chief executive Michael Rose says: "What happens in the global markets definitely has an effect on firms in Australia because our clients are active in those markets. Having said that, the Australian economy continues to travel well."

Queensland and Western Australia may be the country's fastest-growing economies, but Sydney and Melbourne are its main economic centres, where the country's financial institutions remain relatively strong.

Meanwhile, the Australian economy continues to plough on and the outlook remains positive in spite of the uncertainty in the global markets. Strong investment, largely associated with the mining boom, continues to underpin growth, as the economy is expected to grow by more than 3% this year.

DLA Piper Australia managing partner Tony Holland summarises the country's appeal: "If you follow the money, then you have to be in Asia and Australia is an integral piece of that puzzle. It's that simple."