Entry Strategies for International Construction Markets

ENTRY STRATEGIES FOR INTERNATIONAL CONSTRUCTION MARKETS

Chuan Chen

Technical Report No.50

December 2005

Computer Integrated Construction Research Program The Pennsylvania State University ©Copyright University Park, PA, 16802 USA

The thesis of Chuan Chen was reviewed and approved* by the following:

John I. Messner Assistant Professor of Architectural Engineering Thesis Advisor Chair of Committee

Ann E. Echols Assistant Professor of Management and Organization

Michael J. Horman Assistant Professor of Architectural Engineering

David R. Riley Associate Professor of Architectural Engineering

H. Randolph Thomas Professor of Civil Engineering

Richard A. Behr Professor of Architectural Engineering Head of the Department of Architectural Engineering

*Signatures are on file in the Graduate School

iii ABSTRACT

An entry mode is an institutional arrangement that makes possible the entry of a company’s services, technology, human skills, management or other resources into a foreign country. Selecting an inappropriate entry mode can lead to significant negative consequences. Entry mode selection is therefore one of the most critical decisions in international construction. The purpose of this research was to understand various entry modes and improve the selection decision for international construction companies.

Comparative case studies identified and defined 10 basic entry modes utilized in the international construction arena: 1) strategic alliance, 2) local agent, 3) licensing, 4) joint venture company, 5) sole venture company, 6) branch office / company, 7) representative office, 8) joint venture project, 9) sole venture project, and 10) BOT / equity project. Basic entry modes can be combined or sequenced throughout the entry into a single geographic market. These entry modes can be classified into a dichotomy: permanent entry (joint venture company, sole venture company, branch office / company, and representative office) versus mobile entry (joint venture project, sole venture project, and BOT / equity project), which differ primarily in investment risk exposure, resource commitment, and flexibility.

Complementary business and economic theories suggested 13 home country specific, home-host country specific, host country specific, and entrant specific factors that can influence the selection between permanent entry and mobile entry. Hypotheses were developed centering on these factors, e.g., with other conditions being equal, contractors are less likely to use permanent entry modes for a target market with a high competitive intensity. Binary logistic regression analysis of empirical data was used to test these hypotheses. The results were interpreted and analyzed. In addition, the regression analysis, together with a two sample t-test, provided a descriptive as well as normative statistical model for selecting superior entry modes to penetrate target foreign construction markets.

iv TABLE OF CONTENTS

LIST OF FIGURES ...... x

LIST OF TABLES ...... xiii

ACKNOWLEDGEMENTS ...... xv

CHAPTER 1 INTRODUCTION...... 1

1.1 Background...... 1 1.2 Problem Statement...... 2 1.3 Research Objectives...... 4 1.4 Research Methodology ...... 5 1.5 Scope...... 5 1.6 Relevance...... 8 1.7 Reader’s Guide ...... 8

CHAPTER 2 RESEARCH METHODOLOGY...... 10

2.1 Introduction...... 10 2.2 Research Process ...... 12 2.2.1 Define Research Questions...... 13 2.2.2 Entry Mode Definition ...... 15 2.2.3 Entry Mode Selection...... 15 2.3 Research Techniques ...... 16 2.3.1 Data Collection...... 16 2.3.2 Case Study...... 17 2.3.3 Survey...... 19 2.3.4 Statistic Analysis ...... 20 2.4 Summary...... 20

CHAPTER 3 LITERATURE REVIEW...... 23

3.1 Entry as a Strategic Issue...... 24 3.1.1 Strategic Planning and Management: a Construction Perspective ...... 24 3.1.2 Internationalization Process...... 31 3.1.3 Entry Barriers ...... 33 3.1.4 Entry Timing ...... 34 3.1.5 Market Selection...... 35 3.1.6 Entry Mode Selection...... 38 3.2 Entry as an Organizational Issue ...... 41

3.3 Entry for International Construction Markets...... 42 3.3.1 International Project Go / No-Go Decision...... 42 3.3.2 Internationalization of Construction Firms ...... 46 3.3.3 Some Entry Modes Examined in International Construction Literature...... 47 3.3.4 International Construction Market Structure, Trends, and Future ...... 51 3.3.5 Other Related Topics in International Construction...... 52 3.4 Concluding Remarks ...... 54 3.5 Summary...... 55

CHAPTER 4 AN OVERVIEW OF THE INTERNATIONAL CONSTRUCTION MARKET ENTRY...... 57

4.1 A General Review of the Hisotry of International Construction...... 57 4.1.1 Pre-World War II period ...... 57 4.1.2 Post-World War II Period until 1992...... 59 4.1.3 The Past Decade: an Empirical Analysis...... 63 4.1.3.1 Major Forces in the Global Construction Market ...... 64 4.1.3.2 Major Construction Markets ...... 65 4.1.3.3 Firm Market Share by Regions ...... 69 4.2 Comments on the Chronological Review...... 70 4.3 The Increasing Popularity of Permanent Entry ...... 71 4.4 Voices from the Industry during the Past Two Decades: A New Trend ...... 72 4.5 An Empirical Investigation of the Mobile Versus Permanent Entry Dichotomy ...... 77 4.6 Summary...... 83

CHAPTER 5 ENTRY MODE DEFINITION ...... 84

5.1 Methodology...... 84 5.2 Basic Entry Modes for International Construction Markets...... 88 5.2.1 Strategic Alliance (SA)...... 88 5.2.2 BOT / Equity Project...... 91 5.2.3 Joint Venture (JV) Project ...... 94 5.2.4 Representative Office (RO)...... 96 5.2.5 Licensing ...... 98 5.2.6 Local Agent (LA) ...... 99 5.2.7 Joint Venture (JV) Company...... 100 5.2.8 Sole Venture (SV) Company...... 103 5.2.9 Branch Office / Company (BO) ...... 104 5.3 Evaluation of the Entry Modes...... 106

5.4 Transferability and Compatibility of Entry Modes ...... 109 5.5 Entry Mode-Country Relationship (Applicability)...... 110 5.6 Summary...... 112

CHAPTER 6 RELATIONSHIPS BETWEEN MARKET ENTRY MODES ...113

6.1 Classifying Entry Modes by Setting Characteristics ...... 113 6.2 A Synthesis of Setting Characteristics of Entry Modes...... 119 6.3 Different Effects of Entry Modes ...... 121 6.3.1 Risk Exposure...... 122 6.3.2 Control...... 123 6.3.3 Resource Commitment ...... 124 6.3.4 Flexibility ...... 125 6.4 A Synthesis of Different Effects...... 125 6.5 An Investigation of Different Effects of Entry Modes ...... 127 6.6 Entry Mode Combination and Sequencing...... 129 6.7 A Review of the Mobile versus Permanent Entry Dichotomy ...... 133 6.8 Summary...... 134

CHAPTER 7 THEORY DEVELOPMENT ...... 136

7.1 Review of Related Theories...... 136 7.1.1 Transaction Cost Economics ...... 136 7.1.2 Stage Models of Entry...... 138 7.1.3 Ownership Location Internalization (OLI) Paradigm ...... 139 7.1.4 Organizational Capability...... 140 7.1.5 Bargaining Power ...... 141 7.1.6 Institutional / Cultural Theory...... 142 7.2 A Synthesis of Different Theories from Process Perspective...... 143 7.3 Hypotheses Development ...... 148 7.3.1 Home Country Factors ...... 149 7.3.1.1 Home Market Attractiveness...... 150 7.3.1.2 Long Term Orientation...... 151 7.3.1.3 Uncertainty Avoidance...... 152 7.3.2 Home Country-Host Country Factors ...... 153 7.3.2.1 Trade Link...... 153 7.3.2.2 Cultural Distance...... 154 7.3.2.3 Colonial Link...... 155 7.3.2.4 Language proximity ...... 156 7.3.3 Host Country Factors...... 157 7.3.3.1 Host Market Attractiveness...... 157

vii

7.3.3.2 Investment Risk...... 158 7.3.3.3 Entry Restriction ...... 159 7.3.3.4 Competitive Intensity ...... 160 7.3.4 Firm Factors...... 161 7.3.4.1 Firm Size ...... 161 7.3.4.2 Multinational Experience ...... 162 7.4 Interaction Effects...... 163 7.5 A Synthesis of Influencing Factors...... 164 7.6 Summary...... 165

CHAPTER 8 THEORY TESTING...... 166

8.1 Methodology...... 166 8.1.1 Sample ...... 166 8.1.2 Analytical Approach...... 168 8.2 Measurement of Variables...... 169 8.2.1 Measurement of the Dependent Variable...... 169 8.2.2 Measurement of Independent Variables...... 171 8.2.2.1 Home Country Market Attractiveness and Host Country Market Attractiveness ...... 171 8.2.2.2 Long-term Orientation, Uncertainty Avoidance, and Cultural Distance...... 172 8.2.2.3 Trade Link...... 173 8.2.2.4 Colonial Link and Language Proximity ...... 173 8.2.2.5 Investment Risk...... 174 8.2.2.6 Entry Restriction ...... 174 8.2.2.7 Competitive Intensity ...... 176 8.2.2.8 Firm Size ...... 177 8.2.2.9 Multinational Experience ...... 177 8.2.2.10 Fit ...... 178 8.2.3 Control Variable – Home Country Economic Level ...... 178 8.3 Results...... 178 8.3.1 Logistic Regression ...... 179 8.3.1.1 Main Effects ...... 182 8.3.1.2 Interaction Effects ...... 187 8.3.2 T Test...... 190 8.4 Conclusions and Managerial / Future Research Implications ...... 192 8.5 Summary...... 194

CHAPTER 9 CONCLUSIONS...... 195

viii

9.1 Summary of the Research...... 195 9.1.1 Characterization of the Global Construction Market Trend from a Market Entry Perspective ...... 196 9.1.2 Development of a Taxonomy of Entry Modes for the Global Construction Market...... 196 9.1.3 Differentiation of Entry Modes ...... 197 9.1.4 Identification of Factors Influencing Entry Mode Selection...... 198 9.1.5 Hypothesis Testing and Model Development for Entry Mode Selection...... 199 9.2 Contributions of the Research ...... 200 9.2.1 A Taxonomy of Entry Modes for International Construction Markets...... 200 9.2.2 Influencing Factors for Entry Mode Selection in International Construction ...... 201 9.2.3 A Descriptive and Normative Model for Entry Mode Selection in International Construction...... 201 9.2.4 Innovation in Research Methodology for Construction Management ...... 202 9.3 Limitations of the Research...... 202 9.3.1 Selection between Two Groups of Entry Modes...... 202 9.3.2 Limited Factors Included in the Model ...... 203 9.3.3 Data Accessibility...... 203 9.4 Future Research ...... 204 9.4.1 Market Selection...... 204 9.4.2 Selection between Basic Entry Modes ...... 204 9.4.3 Principles for Combining Different Entry Modes...... 205 9.4.4 The Culture of International Contractors ...... 205 9.4.5 The Application of Organizational Capability in Entry Mode Selection...... 205 9.5 Summary...... 206

Bibliography ...... 207

Appendix A Cultural Index Scores for Countries (Hofstede 2001)...... 222

Appendix B Investment Risk Ratings ...... 224

Appendix C Lingual, Colonial, and Distance Relationships between Countries ...... 227

Appendix D Trade Link between Countries (Partial)...... 229

ix Appendix E Number of Top International Contractors in Each Market (1992-2001) ...... 231

Appendix F Entry Restriction ...... 233

Appendix G Construction Spending (1996 – 2000)...... 235

Appendix H Revenue of International Contractors (Partial)...... 237

Appendix I Entry Times of International Contractors (1992 – 2001, Partial) ...... 239

Appendix J World Bank Country Groups by Income ...... 241

Appendix K Permanent Entries of International Contractors (Partial) ...... 244

Appendix L ENR Country Group by Region...... 246

Appendix M Market Entries of Selected International Contractors (Part of the Matrix for the Year 2001)...... 249

Appendix N ENR Top 225 International Construction Firms (Year 2001) ...... 251

Appendix O Survey Questionnaire ...... 257

Appendix P How The Top International Contractors Shared the Global Market (Partial)...... 263

Appendix Q Contractors Investigated for Entry Mode Selection...... 265

Appendix R Legal and Technical Constraints against Market Entry ...... 269

Appendix S Cultural Distances between Selected Markets ...... 285

Appendix T Selected Case Studies ...... 290

T.1 Strategic Alliance ...... 291 T.2 BOT Project...... 295 T.3 Joint Venture Project...... 296 T.4 Representative Office...... 297 T.5 Licensing ...... 298 T.6 Local Agent...... 299 T.7 Joint Venture Company...... 307 T.8 Sole Venture Company ...... 309 T.9 Branch Office ...... 310

x LIST OF FIGURES

Figure 1.1: The Elements of an International Market Entry Strategy (Source: Root 1987) ...... 6

Figure 2.1: Various Research Paradoxes and Typologies Used in Construction ...... 10

Figure 2.2: Research Process ...... 13

Figure 2.3: The Structure of the Main Knowledge Body of Statistics...... 22

Figure 3.1: The Framework for Contextual Issues for International Market Entry ...... 24

Figure 3.2: A holistic Strategic Planning Methodology for Construction Firms (Source: Alarcon and Ashley 1992) ...... 29

Figure 3.3: Different Schools of Strategies (Source: Cheah 2002) ...... 31

Figure 3.4: Phases in Global Marketing Evolution (Source: Douglas and Craig 1995)...... 32

Figure 3.5: The Basic Mechanism of Internationalization – State And Change Aspects (Source: Johanson 1977)...... 33

Figure 3.6: Decision Framework for Global Market Entry (Source: Levy and Yoon 1995) ...... 37

Figure 3.7: A Hierarchical Model of Choice of Entry Modes (Source: Pan and Tse 2000) ...... 38

Figure 3.8: Evolution of A Manufacturer’s Decision on Entry Mode (Source: Root 1987) ...... 39

Figure 3.9: A Schematic Representation of Entry Choice Factors (Source: Agarwal and Ramaswami 1992)...... 40

Figure 3.10: Interaction between Corporate Strategy and Organization ...... 41

Figure 3.11: Entry Decision Process for International Projects (Source: Han 1999) ...... 44

Figure 3.12: Project Evaluation Process Model (Source: Messner 1994) ...... 45

Figure 4.1: Distribution Of International Contractors’ Revenue (2001) ...... 65

Figure 4.2: International Construction Market Segmentation 1992-2001 ...... 66

Figure 4.3: Volume of International Revenue by Geographic Region ...... 67

Figure 4.4: Internal Market Attractiveness Based on Volume of Internal Trade Instances ...... 68

Figure 4.5: External Market Attractiveness Based on Volume of Internal Trade Instances ...... 69

Figure 4.6: Volume of Top 225 Contractor Markets in the Global Market...... 70

Figure 4.7: The Value Chain of Construction Projects (Source: Miles 1995)...... 76

Figure 4.8: Comparison Between Mobile Entry And Permanent Entry...... 76

Figure 4.9: Chronology of Permanent Entry...... 79

Figure 4.10: Chronology of Mobile Entry (1980-2001) ...... 80

Figure 4.11: Distribution of Time Lag between Permanent Residence Establishment and First Business Implementation...... 81

Figure 4.12: Distribution of Testing Time from Fist Project and Establishment of Permanent Residence...... 82

Figure 5.1: Content Analysis Tool for Each Case Study ...... 87

Figure 5.2: Relationship Mapping for Strategic Alliance...... 91

Figure 5.3: Relationship Mapping for BOT / Equity Project...... 93

Figure 5.4: Relationship Mapping for Joint Venture Project...... 96

Figure 5.5: Relationship Mapping for Representative Office...... 98

Figure 5.6: Relationship Mapping for Joint Venture Company...... 102

Figure 5.7: Relationship Mapping for Sole Venture Company ...... 104

Figure 5.8: Relationship Mapping for Branch Office / Company ...... 106

Figure 5.9: Transferability and Compatibility of Each Entry Mode...... 109

xii

Figure 6.1: Grouping Entry Modes Regarding Cooperative v. Competitive...... 115

Figure 6.2: Grouping Entry Modes Regarding Hierarchical Level ...... 115

Figure 6.3: Grouping Entry Modes Regarding Contractual v. Investment...... 116

Figure 6.4: Grouping Entry Modes Regarding Ownership...... 116

Figure 6.5: Grouping Entry Modes Regarding Supportive v. Principle ...... 117

Figure 6.6: Grouping Entry Modes Regarding Market v. Hierarchy...... 118

Figure 6.7: Grouping Entry Modes Regarding Mobile v. Permanent...... 118

Figure 6.8: Grouping Entry Modes Regarding Mobile v. Permanent (Used for Mode Selection)...... 119

Figure 6.9: Grouping Entry Modes with Multiple Dimensions...... 121

Figure 6.10: Relationships between Effects...... 126

Figure 6.11: Evolution of Entry Modes in International Construction...... 131

Figure 6.12: Relationship between Permanent Entry and Mobile Entry ...... 134

Figure 7.1: A Synthesis of Different Theories from a Process Perspective...... 146

Figure 7.2: Contingency Relationships between Factors and Entry Mode Selection ...... 149

Figure 8.1: Relationships between Independent and Dependent Factors ...... 169

Figure 8.2: Interaction Effects: Entry Restriction by Home Market Growth ...... 188

Figure 8.3: Interaction Effects: Entry Restriction by Cultural Distance...... 189

Figure 8.4: Interaction Effects: Entry Restriction by Investment Risk...... 190

Figure T.1: The Contractual Arrangement of the Shanghai Dachang Water Plant Project...... 295

xiii LIST OF TABLES

Table 3.1: Triggers to Each Stage of Internationalization (Source: Douglas and Craig 1995) ...... 32

Table 3.2: Responses in Organization Structure at Different Stages in the Evolution of a Global Enterprise (Source: Root 1987) ...... 42

Table 4.1: Regional And Time Distribution of Leading International Contractors (1992-2001) ...... 64

Table 4.2: Contractors Investigated for Mobile Entry Versus Permanent Entry...... 78

Table 5.1: Database...... 86

Table 5.2: Respondent Particulars ...... 107

Table 5.3: Entry Mode Evaluation...... 107

Table 5.4: Applicability of Entry Modes for Selected Markets...... 111

Table 6.1: The Taxonomy of Entry Modes for International Construction Markets..114

Table 6.2: A Synthesis of Setting Characteristics of Entry Modes...... 120

Table 6.3: Difference Between Entry Modes Regarding Control and Contractual Risk Exposure...... 128

Table 6.4: Difference between Entry Modes Regarding Resource Commitment, Investment Risk Exposure, and Flexibility...... 128

Table 6.5: Dataset for Investigating Combination and Sequencing of Entry Modes ...... 130

Table 6.6: Combination of Entry Modes ...... 132

Table 7.1: Difference between Transaction Cost Economics and Organizational Capability (Source: Madhok 1997) ...... 140

Table 7.2: Differences and Complements between Different Theories...... 147

Table 7.3: Cultural Dimension Scores (0 = Low, 100 = High) ...... 151

Table 7.4: The Hypotheses (Main Effects)...... 164

xiv

Table 8.1: Contractors’ Original Regions...... 167

Table 8.2: Regional Distribution of Sampled Markets ...... 168

Table 8.3: Scale to Measure Legal Barriers...... 175

Table 8.4: Correlation Matrix ...... 180

Table 8.5: Determinants of Entry Mode Selection: Binary Logistic Test (n=1998: Mobile entry = 867; Permanent entry = 1131) ...... 181

Table 8.6: Testing Results...... 183

Table 9.1: Definitions of Entry Modes for International Construction Markets ...... 197

Table 9.2: Results of Hypothesis Testing ...... 200

xv ACKNOWLEDGEMENTS

I would like to thank my thesis committee for their encouragement, advice, and feedback throughout this research. I am extremely grateful to my advisor, Dr. John Messner, for his motivation, direction, support, patience, and friendship. I have learned much from him not just about methods and skills in academic research, but also about the United States and attitudes about career and family. His mentorship will continue to stimulate me to resolve challenges ahead. I am indebted to Dr. Ann Echols, for her stimulation, advice, patience, and inputs. She showed me a discipline that is worthy of long term exploration of its application to the construction industry. I would like to thank Dr. Randolph Thomas, for his selflessness in imparting to me his research experience and philosophy which I will benefit from throughout my academic career. I would like to thank Dr. David Riley and Dr. Michel Horman for their varying perspectives on this research as well their encouragement, support, and friendship.

I would like to thank all of my previous teachers, professors, friends, and classmates for their encouragement and guidance. It is their joint efforts that enable me to pursue this terminal degree. I am especially thankful to a teacher at my elementary school who first encouraged me to pursue a doctorate more than ten years ago.

I am grateful to my parents for their unconditional support in every way throughout these years. Even in the small town in China cut off from the rest of the world, they planted some beautiful dreams in my heart and encouraged me to pursue them. I thank my sister Ying Chen and my brother-in-law Zuohua Yue for their love and encouragement. I am especially thankful to my wife, Zirui Qiu, for her love, support, patience, and cooking skills over the years since we got married. She made the long and difficult doctorate pursuit process vital and happy. She is my wonderful companion with whom to challenge the future. Thank you, Zirui!

xvi I am leaving Happy Valley, my fifth hometown back for China, but I will remain in the academic circle. I look forward to the chance to apply what I have learned here to contribute to the construction discipline and industry of my motherland.

Thank you!

Chuan Chen (“Victor”)

CHAPTER 1

INTRODUCTION

1.1 Background

The international construction sector is an important part of the global economy. Mawhinney (2001) defined international construction as construction projects where one company, resident in one country, performs construction works in another country. This simple definition, consistent with other definitions (Gibson et al. 2003; U.S. Department of Commerce 1984), underpins the scope of activities investigated in this research.

Through international projects, contractors can achieve opportunities for growth that may be unavailable in their domestic market, and capitalize on expertise and experience gained from long involvement in a type of construction or some sophisticated technology (Ashley and Boner 1987). To the contractors’ country of origin (home country), the benefits from international construction can be grouped into six categories: 1) expatriation of profits from foreign projects; 2) exports of equipment and materials as a direct result of foreign project work; 3) exports of services (such as insurance, transportation, and financing) as a direct result of foreign project work; 4) repatriation of personal income in the foreign projects; 5) follow-up procurement of home country goods and services resulting from the continued operation and maintenance of foreign projects; and 6) employment of home country nationals both in home and host countries (U.S. Department of Commerce 1984). The host country can have projects completed when it does not have the required expertise or resources, obtain technology transfer, benefit from increased competition in domestic markets for quality and efficiency improvement, and sometimes, obtain partial or entire financing for the project.

2 Han and Diekmann (2001) summarized four globalization factors in the last decade that may expand opportunities for contractors in international construction markets: 1) all signatory countries to the GATT [now, WTO] system opening their domestic markets; 2) the development of regional Free Trade Blocs; 3) establishment of world standards; and 4) rapid developments in telecommunication, travel and other related industries.

However, it is not easy to make the best of the opportunities in international construction markets. Working in an international setting often requires a much wider view of the project’s context than with domestic projects where project expertise is often disconnected from other aspects of the business; and international projects manifest more types of risks than domestic projects (CII 2003; Han and Diekmann 2001; Mawhinney 2001). To survive and grow in the international construction arena, a contractor cannot afford poor decisions in assigning their limited resources to diminishing markets, while avoiding the attractive ones. In crafting effective entry strategies, contractors must, first and foremost, evaluate market attractiveness and accessibility systematically and objectively, however in the construction management knowledge body there is no systematic tool or method available for this purpose. The decision to enter a new foreign market is of critical importance for the company’s profit making ability and sustainable growth. To domestic market oriented contractors, it is also important to understand the foreign competitors’ entry decision to protect their competitive position in the domestic construction market for growth and survival in a world of global competition.

1.2 Problem Statement

The construction sector is project-based (Messner 1994). This fundamental feature determines that the entry decision is substantially centering on ‘Go / No-Go’ or ‘Bid / No-Bid’ decisions for a specific project in the targeted new market (Han and Diekmann 2001). Ashley and Boner (1987) observed that:

“Multinational contractor operations abroad are project specific; offices and key personnel are mobilized and set up prior to construction and are usually closed and withdrawn following project conclusion. When involved in multiple projects in one country over a prolonged period of time, the project office may acquire a greater degree of permanence and at some point can become recognized as a branch office of the firm. It rarely, however, develops the kind of permanence exhibited by a wholly owned subsidiary of a typical multinational enterprise.”

Entries in the international construction sector are more often triggered on a contingent basis than in other international trade sectors like manufacturing. Long term presence and increasing commitment are frequently dependent on market performance rather than strategic vision and goals. However, new changes in the 1990s started to drive a tendency of market entries aiming at a more sustainable and permanent presence in new markets, including: 1) The continuous prosperousness of some construction markets in developed economies, like that of the United States. Sustainable presence in these markets can be profitable. 2) The continuous increase in demand within some construction markets in developing economies, e.g., China and the Czech Republic. Early entry and establishment of permanent residence to exploit the growth are strategically important. 3) The dwindling size of some construction markets in export-oriented economies, like Europe and Japan. Contractors have little choice but to turn to foreign markets for survival and growth. 4) The emergence of innovative investment type entry modes, like mergers and acquisitions. 5) Increasing size of global construction players. Frequent cross border mergers or acquisitions make very large international construction firms, who place more emphasis on entry issues on a corporate level.

4 Market entry has increasingly become a strategic and corporate-level decision. These market entry strategies guide lower level ‘Go / No-Go’ or ‘Bid / No-Bid’ decisions centering on specific projects within a market.

As more and more construction firms enter foreign markets, several questions of interest to both academicians and practitioners will be increasingly asked including: “How do construction firms enter individual foreign markets?” and “How does this entry behavior vary across different types of firms and different entry situations in the construction sector?”. The answers to these and other related questions in the area of international construction are not clear. The existing knowledge of entry modes in firms has been accumulated mostly in the context of the manufacturing industry. Given that construction has distinct characteristics which make a wholesale transfer of concepts and theories serving the manufacturing industry unrealistic, there is a need for adapting this knowledge, and for developing new concepts and frameworks to meet the unique nature of the construction industry.

1.3 Research Objectives

The goal of this research is to develop a systematic taxonomy of entry modes specific to international construction markets along with a model for entry mode selection. To realize this goal, the following objectives need to be accomplished: 1) To understand the history, status quo, and trends in the global construction market from an entry perspective; 2) To define a taxonomy of market entry modes that construction companies use to enter selected international markets prior to attaining business sustainability within the markets; and 3) To develop a market-entry mode selection model for construction companies to achieve optimal entry performance.

5 1.4 Research Methodology

This research applies theories and techniques previously developed and supported in general international business fields; analyzes data from multiple sources; and elicits opinions from seasoned leaders in the international construction industry, through the following research steps: 1) Review literature in strategic management, international business, and international construction to identify knowledge gaps and relevant theory; 2) Review the history and current trends in the global construction market to identify the importance of entry related strategic decisions; 3) Define entry modes for international construction markets through comparative case studies; 4) Differentiate and group entry modes according to their differences and similarities in setting and effects, and identify permanent entry versus mobile entry as the dichotomical selection problem for further research; 5) Develop hypotheses about entry mode selection through theoretical reasoning and capitalizing on findings from previous research in international business; and 6) Collect data and use binary logistic regression analysis to test hypotheses as well as develop a model for selection between permanent entry and mobile entry modes. A more detailed description of this research process is provided in Chapter 2.

1.5 Scope

An international market entry strategy is a comprehensive plan which sets forth the objectives, goals, resources, and policies that will guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets (Root 1987). Market entry strategies require decisions on (Root 1987): 1) the choice of a target market; 2) the objectives and goals in the target market; 3) the

6 choice of an entry mode to penetrate the target country; 4) the marketing plan to penetrate the target market; and 5) the control system to monitor performance in the target market (see Figure 1.1). In some literature (Brouthers 1995; Buckley and Casson 1998; Taylor et al. 2000; Tse et al. 1997), entry strategy and entry mode are interchangeably used. In general business literature, the mainstream research on market entry strategies focuses on two issues: 1) market selection and 2) entry mode selection. This may be because these two questions are most important and difficult. The scope of this research specifically focuses on entry mode selection.

Figure 1.1: The Elements of an International Market Entry Strategy (Source: Root 1987)

Market can be defined by different dimensions, such as geographic location, size, client, product, and service. From an entry strategy perspective, market entry decision issues normally center on cross-border activities. For example, in Root’s theory market is focused on country (Root 1987). This research focuses on geographic markets and therefore, if not specifically indicated otherwise, “market” is identical to “country”.

According to Drewer (2001), the international construction system is made up of four segments: 1) design consultancy, 2) construction, 3) labor trade, and 4) material production. Among the four, design service is the most mobile in crossing country borders and leaping entry and exit barriers. The labor market depends upon construction markets to a great extent, and is normally traveling in a single direction from developing

7 countries to developed economies. Cross-border material transactions are also dependant on construction and quite similar to common goods trade. International construction activities attract more extensive attention from different economies, and they also face more challenges. The scope of this research emphasizes the construction segment. However, since many contractors also provide design services, especially in industrial and petroleum projects or projects delivered under a design-build or turnkey delivery system, design consultancies are also addressed in this research when they are combined with the construction services for a project.

The foundation of the construction industry has been the focus of the debate to whether it is production (Newcombe 1976) or service delivery (Fleming 1988; Hillebrandt 1984). This question is important since the perspective from which one looks at the industry defines its markets, and consequently the strategic processes which are used to govern and direct the construction organization (Langford and Male 2001). The latest mainstream viewpoint is that construction is a hybrid industry of both product and service components (Langford and Male 2001; Maloney 2002; Warf 1991). “…In the construction industry over the last twenty years, …there is a strong differentiation between contractors who provide management services and contractors who undertake to build the physical product. …Large firms providing management contracting and project management services may be regarded as part of the service industry, whereas those providing resources which are used to construct the building might be better described as manufacturing–style organizations.” (Langford and Male 2001)

This research emphasizes the higher level of service featured activities that large international contractors frequently undertake.

Except for the above mentioned restrictions, the entry mode taxonomy and entry mode selection model developed in this research are generic tools that can help contractors select superior entry modes to penetrate potential economies (either developing countries or developed countries) and provide services to different types of owners (e.g., local private, home private, local public, or international organization).

8 1.6 Relevance

With the entry mode taxonomy and entry mode selection model developed in this research, contractors who have already developed a presence in international markets can review and adjust the portfolio of their overseas business and entry strategies under implementation.

These tools are especially useful for contractors who are just beginning to explore overseas business opportunities or for global players who are expanding geographically to new markets to choose entry modes from scratch.

Economies are becoming more global and companies can no longer count on having domestic markets protected by tariffs and other import barriers since foreign competitors can always find ways to leap such barriers. Contractors remaining at home, when threatened by new entrants from abroad, can also gain insights from this research for developing their competitive or cooperative strategies regarding market entrants.

Although this research is focused on the contractors’ perspective, government policy makers can obtain important information from the results when forming or reforming regulations and policies to encourage or control entry of foreign contractors, or encourage local contractors to expand their business overseas.

1.7 Reader’s Guide

Chapter 1 provided an overview of this thesis, identified the problems and scope of the thesis, and presented the research methodology used. Chapter 2 details the research methodology and techniques used to achieve the objectives. Chapter 3 reports the major findings from literature in disciplines of international business, strategic management, and international construction in relation to international market entry. Chapter 4 reviews the internationalization process of the global construction market, and identifies the

9 current trends in market entry and entry mode selection. Chapter 5 provides a comparative analysis of case studies to define and characterize basic entry modes for international construction markets, and evaluates the taxonomy with a survey of practitioners. The feasibility of each entry mode regarding selected major construction markets is also investigated. Chapter 6 examines the setting characteristics and effects of each entry mode and groups them according to these dimensions. How different basic entry modes can be combined or sequenced is also empirically investigated. Chapter 7 reviews multiple schools of theories to build hypotheses which associate internal and external factors to entry mode selection. In Chapter 8, the hypotheses are tested with binary logistic regression analysis and a model is developed for entry mode selection. Chapter 9 concludes the thesis with a summarization of major findings and contributions of the research, as well as the identification of topics for future research. The appendices at the end of this thesis include qualitative and quantitative data to support this research along with the survey instrument.

CHAPTER 2

RESEARCH METHODOLOGY

This chapter first generally introduces research methods (Section 2.1), and then presents the methodology selected to achieve the purpose of this research (Section 2.2). Research techniques used in the research process are detailed in Section 2.3.

2.1 Introduction

A research methodology sets out and justifies the techniques adopted for the collection, analysis, and interpretation of data. Numerous and diverse research strategies have been practiced in construction related areas (see Figure 2.1).

Figure 2.1: Various Research Paradoxes and Typologies Used in Construction

11 Research can be quantitative or qualitative (Fellows and Liu 1997). Quantitative approaches seek to gather factual data and to study relationships between facts, and how such facts and relationships accord with theories and the findings of any previously executed research documented in the literature. Qualitative approaches seek to gain insights and to understand people’s perceptions of the ‘world’ – whether as individuals or groups. Qualitative research is typically a precursor to quantitative research.

Research can be exploratory, hypothesis testing, or problem solving (Phillips and Pugh 2000). Exploratory research is involved in tackling a new problem, issue, or topic. In this research, the idea cannot be formulated very clearly at the outset and one of the aims is to develop new theories. Hypothesis testing research pursues the limits of previously proposed generalizations. This is a basic research activity and one that proceeds along easily recognizable lines. Hypothesis testing research is more likely to take place in a structured environment with clear methodologies and measurement criteria. Third, problem-solving research is one where a problem from practice is identified and all intellectual resources are brought to bear upon the solution. Here, the problem has to be defined and the method of solution has to be discovered.

More paradoxes and typologies than those listed in Figure 2.1 can be found in general or construction management-related literature. Nevertheless, each type of study performs a particular function and should be selected according to the nature of the issues or questions to be addressed; the extent of existing knowledge and previous research; the resources and time available; and the availability of suitably experienced staff to implement the design (Hakin 2000).

This research involves multiple objectives. Some of them involve qualitative questions (e.g., the definition of entry modes), while others are more quantitative (e.g., the development of the entry mode selection model). Therefore, this research uses a hybrid approach of both quantitative and qualitative components. Entry strategy for international construction markets is still a new issue in the construction management

12 research field (refer to Chapter 3), so this research primarily takes an exploratory approach. However, since some theories can be borrowed from general business and economics to approach entry mode selection issues in the construction industry, a hypothesis testing approach is used.

2.2 Research Process

Based on the previous review of research methods and methodologies in general, and especially those utilized by previous successfully implemented research in the construction management field, together with thorough consideration of the purpose and constraints involved in this specific research topic, the following research process was developed (see Figure 2.2).

Research objective definition

Literature review Archival analysis (Chapter 3) (Chapter 4) Task 1: Defining research questions Market entry issues (Chapter 4)

Comparative case studies Industry survey (Chapter 5) (Chapter 5)

Task 2: Basic entry mode definitions Defining entry (Chapter 5) modes

Differentiating entry modes (Chapter 6)

Hypothesis building (Chapter 7)

Task 3: Hypothesis testing (Chapter 8) Selecting entry modes

Result interpretation (Chapter 8)

Figure 2.2: Research Process

2.2.1 Task 1: Define Research Questions

The goal and scope of this research necessitate input from multiple fields, and those emphasized in this specific research are international construction, strategic management, (global) marketing strategy, and international business. Each of these fields has a large body of literature. To command the mainstream of each field, this research

14 began with an extensive literature review. A large number of academic journals, industry journals, books, reports, proceedings, theses, laws and regulations, newspapers, and web pages were reviewed, documented, analyzed, synthesized, and compared. The literature review is also a source of data and information for the other research activities. Anecdotal information was documented for later comparative case studies to define entry modes. It should be noted that the literature review process was a concurrent activity throughout the entire research process. The latest findings or information in related areas were continuously monitored to incorporate new ideas or avoid potential overlap.

One of the conclusions from the literature review was that entry mode selection is an important and extensively studied strategic issue in international business but it received very little attention in international construction research. This led to the following questions: 1) Is entry mode selection a critical issue in construction? 2) If it is important, are the findings about entry mode selection in general business equally applicable in the construction industry, so no specific research is needed? To address these questions, this research reviews the globalization process of the construction industry, studies the current status / trends empirically, and analyzes comments from industry leaders regarding international market entry. It is found that entry mode selection is also a very important issue in international construction industry. By assuming that, as a specific industry, construction has characteristics that necessitate findings about entry mode selection from other industries to be adapted to apply in this industry, two research questions were proposed: 1) What are the entry modes that international contractors use to enter selected overseas markets? 2) What are the internal and external factors influencing entry mode selection and how do they influence the selection? In other words, this research addresses two basic issues: entry mode definition and entry mode selection.

15 2.2.2 Task 2: Entry Mode Definition

The study started with existing taxonomies of entry modes in general international business, and then cases regarding each entry mode from international construction practices were sought. Special cases that involve patterns of entry that did not match any well defined entry modes in general business were also examined. In total, over 90 cases were collected that jointly show the structure, formation process, merits and demerits for a taxonomy of entry modes specifically for international construction markets. These entry modes were further analyzed in terms of their setting characteristics (e.g., cooperative or competitive, permanent investment or contractual based) and their effects (e.g., risk, control, and flexibility). Based on their similarities and differences in terms of these setting characteristics and effects, they were grouped. One grouping scheme provides a dichotomy of permanent entry versus mobile entry. This dichotomy was identified as a critical selection issue for the following research step.

2.2.3 Task 3: Entry Mode Selection

The hypothesis testing method was used for entry mode selection. Theories that may potentially influence the selection between permanent entry and mobile entry were examined and streamlined to identify factors that can influence the selection. Hypotheses centering on these factors were developed. Multiple sources of data were collected to test the hypotheses and develop a model using the binary logistic regression technique. This model that describes under what scenarios contractors will choose which entry mode is further analyzed to check if it is a normative model with a t-test. A normative model means that if contractors use the entry mode suggested by the model, better performance can be achieved. The data collection and binary logistic regression analysis are introduced in Section 2.3. Based on the results of the hypothesis testing and model building, managerial implications were developed.

16 2.3 Research Techniques

Major techniques involved in the above research process are described in this section.

2.3.1 Data Collection

Empirical research into market entry strategies within the construction industry is limited. A major challenge in performing this type of research is the “data gap”. Data on international construction companies and country markets are frequently insufficient and sometimes suspicious since: 1) Countries use different national accounting systems; 2) Many transactions can escape official statistics, especially private sector transactions; 3) It is difficulty to determine the time of revenue; 4) Local subcontracting makes revenue figures uncertain; 5) It is difficult to decide sample size; and 6) Low response rate / delay occurs in data collection survey.

For example, the following problems exist with data from the popular Engineering News Record (ENR) top international contractor data: 1) Much of the ENR data is obtained by annual self-reporting surveys completed by participating firms. Definitional problems and the self-interests of the firms to appear in the best possible light may in some case convey misleading information relating to individual firm rankings (U.S. Department of Commerce 1984). 2) ENR consolidates subsidiary data with data of the subsidiary’s parent company, even though the subsidiary may dominate the business of the parent company and be located in a country other than that of the parent company (U.S. Department of Commerce 1984).

17 3) Only the Top 225 international and global contractors are reported. 4) ENR data focuses on revenue with no profit figures provided. 5) ENR systematically overstates the aggregate volume of construction activity by double-counting the subcontracts already accounted for by main contracts awarded to other large firms (Linder 1994). This leads to an upward bias. Even though these problems exist, the ENR data on international construction is clearly the best of its kind available and useful for capturing trends over time and relative distributions among firms and countries (Linder 1994; U.S. Department of Commerce 1984).

A multi-source strategy is used to bridge the data gap. More reliable conclusions are expected by using comprehensive data sources and the complementation between different data sources. Types of data that are used in this research include: 1) Country specific data (e.g., national cultural scoring by Hofstede); 2) Industry-based data (e.g., construction spending of each country reported by ENR); 3) Firm specific data (e.g., international revenue of leading construction firms reported by ENR); and 4) Specific survey-based data (see Section 2.3.3).

2.3.2 Case Study

A case study encourages an in-depth investigation of particular instances within the research subject (Fellows and Liu 1997). The method is very useful in research areas where (1) the research question addresses ‘how’ or ‘why’; (2) there is little control of the events; and (3) the focus of the study is on contemporary events (Yin 2003). Case study research may combine a variety of data collection methods of ethnography, action research, interviews, and scrutiny of documentation (Fellows and Liu 1997). The sampled

18 cases for investigation must be representative to the manifestation or instance of the research subject.

Jensen and Rodgers (2001) set forth five types of cases studies: 1) snapshot case studies; 2) longitudinal case studies, 3) pre-post case studies, 4) patchwork cases studies (combination of preceding case studies methods), and 5) comparative case studies. Among them, comparative case studies examine a set of multiple cases studies of multiple research entities for the purpose of cross-unit comparison. Case studies are not representative of entire populations, and their conclusions are generalized to a theory. Because of this, case selection should be theory-driven: the cases must represent dimensions of certain theory. Case studies can be used either for theory testing (pattern matching) or theory building (explanation building).

In this research, to establish a taxonomy of entry modes specifically for the global construction industry, existing definitions and taxonomies of market entry modes pertaining to general international business are the “theories” to be tested. The research begins with reviewing entry modes defined in the general business discipline and find representative cases from international construction to match them, and also try to collect cases that involve patterns that existing entry modes do not match well and define them as entry modes unique to the construction industry. The cases supporting a certain entry mode or pattern are further compared with each other to define and characterize each entry mode in the context of international construction. Some entry modes may not exist in international construction (they are not matched by any cases collected in this research), and they are therefore rejected from the taxonomy. Through this method, a taxonomy of market entry modes specific to the international construction sector is developed.

Data for case studies in this research mainly come from analysis of documentation including books, industry journals, academic journals, newspapers, and contractors’ web

19 sites. These cases are about leading international contractors’ market entry related actions and decisions.

2.3.3 Survey

A survey is used to evaluate specific attitudes or behaviors. It typically involves designing and administering a questionnaire (Bordens and Abbott 1996).

There are two types of questionnaire items, open-ended and restricted (or close-ended) items. The former allows the participant to provide a response in his or her own words, while the later provides alternatives in a logical order, e.g., a rating scale. The questions must be organized into a coherent, visually pleasing format. Most questionnaires include questions designed to assess the characteristics of the participants (or demographics) that can be used as predictor variables to determine whether participant characteristics correlate with, or predict response to, other questions in the survey. Reliability of the questionnaire must be assured by methods such as repeated testing and split half test.

After developing the questionnaire, the researcher can choose to mail it to subjects (mail survey), telephone participants to ask the questions directly (telephone survey), or conduct face-to-face interviews (structured interview survey). Without a questionnaire, unstructured interview surveys can be conducted, which in comparison with a structured interview survey, is more flexible, but not as easy to summarize and analyze (Bordens and Abbott 1996). Proper sampling is a crucial aspect of a sound survey research methodology. Regardless of the administration method, the sample should be representative of the population of interest. Sampling technique can be chosen from simple random sampling, stratified sampling, proportionate sampling, systematic sampling, and cluster sampling, among others.

20 2.3.4 Statistic Analysis

Statistic analysis is widely used in hypothesis testing research. The structure of the main knowledge body of statistics is depicted in Figure 2.3. This research, based on theoretical reasoning, develops a set of hypotheses centering on different independent variables regarding their impacts on entry mode selection. The categorical nature of the dependent variable (permanent entry versus mobile entry) and the hypothesized relationships indicate that binary (or binomial) logistic regression analysis is an appropriate analytical technique (highlighted in Figure 2.3).

Binary logistic regression is used when the dependent variable is a dichotomy and the independent variables are of any type. Logistic regression can be used to predict a dependent variable on the basis of independents; determine the percent of variance in the dependent variable explained by the independents; rank the relative importance of independents; and assess interaction effects. Logistic regression is a robust process since: 1) It does not assume a linear relationship between the dependent variable and the independent variables; 2) The dependent variable need not be normally distributed; 3) The dependent variable need not be homoscedastic for each level of the independents; 4) It does not require that the independents be an interval; and 5) It does not require that the independents be unbounded. But like Ordinary Least Squares (OLS) regression, it requires no perfect multicollinearity. It also needs a large of sample size.

2.4 Summary

A methodology utilizing both exploratory and hypothesis testing approaches was designed for this research. Comparative case studies are used to define entry modes and

21 develop a market entry mode taxonomy specifically for international construction. Binary logistic regression is used to analyze a large sample of data of different sources to test hypotheses developed with extensive theoretical reasoning and develop a model for entry mode selection.

Figure 2.3: The Structure of the Main Knowledge Body of Statistics

CHAPTER 3

LITERATURE REVIEW

Day (1986) suggests that there are two major managerial decisions to make when considering market entry: 1) the timing of market entry (e.g., being a pioneer; being a fast follower or an early entrant; or being a late entrant), and 2) the mode of the market entry (e.g., internal development, acquisition, or joint venture). In addition to these two key decision areas, Karakaya and Stahl (1991) claimed that one must consider the type and magnitude of barriers to market entry and plan a strategy to deal with these barriers as well as to create barriers to entry for competition once in the market. Root (1987) contended that market entry strategies require five decisions: 1) the choice of a target market; 2) the objectives and goals in the target market; 3) the choice of an entry mode to penetrate the target country; 4) the marketing plan to penetrate the target market; and 5) the control system to monitor performance in the target market. In fact most literature on international market entry focuses on four issues: 1) entry barriers; 2) market selection; 3) entry timing; and 4) entry mode selection. In addition to examining international market entry as a strategic issue, some research focuses on the organizational aspect. The major concepts involved in international market entry and the interrelationships between them is depicted in Figure 3.1

Figure 3.1: The Framework for Contextual Issues for International Market Entry

3.1 Entry as a Strategic Issue

Market entry is a corporate level issue, and entry strategy is the strategic issue with the most far-reaching ramifications for all levels of strategy (Yip 1982). This section reviews the general literature about strategy from a construction industry perspective.

3.1.1 Strategic Planning and Management: a Construction Perspective

According to Betts and Ofori (1992), the long term survival of most large organizations depends upon effective strategic management. The history of strategy and strategic management can be traced back to ancient Greece (Chinowsky and Meredith 2000). However, research by the academic community has occurred primarily in the past four decades (Cheah 2002), and this discipline centering on ‘strategy’ has not been

25 evolving into a consistent and well structured knowledge body. There are many apparent disagreements among leading theorists in the field of strategy (Price and Newson 2003). De Wit and Meyer (1998) stated that “there are strongly differing opinions on most of the key issues within the field and the disagreements run so deep that even a common definition of the term strategy is illusive.” One major reason is that the strategy discipline was developed by borrowing from different quantitative or qualitative disciplines, including economics (especially industrial economics), finance, psychology, sociology, and military arts (Cheah 2002; Chinowsky and Meredith 2000).

Effective strategic management is especially important for construction organizations, which have to provide increasingly complex projects within a highly turbulent and competitive business environment (Price and Newson 2003). However, literature on strategic management is limited in the context of civil and architectural engineering, which has a project management tradition (Chinowsky and Meredith 2000; Messner 1994). Observing that the project management concept is the central focus for researchers, practitioners, and academic programs, Chinowsky and Meredith (2000) believed the lack of strategic management knowledge constitutes a knowledge gap between project level perspectives and corporate level responsibilities within the civil engineering industry.

Literature on strategy and strategic management in the construction domain can be roughly classified in the following categories.

What is strategy? It is important to examine the definitions of basic concepts so as to provide understanding and meaning to the subject matter so that a frame of reference may be formulated where further discussions can be carried out (Low 1996). This is especially necessary regarding strategy, since there is no single, concise, and universally accepted definition of strategy (De Wit and Meyer 1998; Junnonen 1998; Langford and Male 2001; Mintzberg et al. 1998).

Strategy has been viewed as an idea that sets in place a path that responds to multiple internal and external influences (Porter 1979; Hamel and Prahalad 1989; Collis and Montgomery 1991). Hofer & Schendel (1978) used a resource based approach and define a strategy as the alignment of an organization’s resources with the environmental conditions with which it has to deal. Vasconcellos (1999) went back to the origins of strategy as a concept within military warfare and differentiated between strategy (where to compete) and tactics (how to compete). Within this perspective there are three types of strategic decisions concerned with where to compete: In which geographic area does a company wish to compete and / or operate? In which industry(s) in a geographical area does a company wish to compete and / or operate? and In which segment(s) within an industry in a geographical area does a company wish to compete and / or operate?

In the construction context, Warszawski (1996) proposed that strategies are long range plans, methods, and approaches that a company adopts in order to reach its goals in a competitive environment. Some important features of strategic decisions are that they are taken at the highest level of the firm and involve long range organizational commitment and investment of resources. Chinowsky and Meredith (2000) defined strategy as the underlying concept that responds to, or anticipates, industry conditions for the purpose of developing long term plans. Price and Newson (2003), after reviewing the definitions proposed by De Wit and Meyer (1998), Quinn (1980), and Johnson and Scholes (2002), contended that the definition most favored by construction industry representatives is the one by Johnson and Scholes (2002), that strategy is “the direction and scope of an organization over the long term, which achieves advantage for the organization through its configuration of resources within a changing environment, to meet the needs of markets and to fulfill stakeholder expectation.”

There are three levels of strategies (Hunger and Wheelen 2001):

27 “Corporate strategy describes a company’s overall direction in terms of its general attitude toward growth and the management of its various businesses and product lines. Corporate strategy is composed of directional strategy, portfolio analysis, and parenting strategy. Business strategy usually occurs at the business unit or product level, and emphasizes improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business suit. Business strategies are composed of competitive and cooperative strategies. Functional strategy is the approach taken by a functional area, such as marketing or research and development, to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.”

These three levels of strategy are reasonably distinct, particularly because of the usual organizational split between them (Yip 1982). These three classes of strategy can be further characterized as competitive or noncompetitive (Yip 1982).

Strategic planning process Strategic planning and strategic management are, in many cases, interchangeably used in the business domain. However, Chinowsky (2001) and Chinowsky and Meredith (2000) emphasized the difference and contended that strategic management provides the environment that encourages the development of strategic concepts (or strategies), while strategic planning provides specific instructions for approaching, executing, and evaluating the development of strategic concepts. The strategic planning process is analysis based, which means it is a process combined by subjective judgment and objective analysis. Nevertheless, all these ‘deliberate’ processes can be conceptualized in a four step generic process: goal definition, strategy identification, strategy selection, and strategy implementation. Some analysis tools were created and some of them have been accepted as norms (e.g., SWOT analysis).

Warszawski (1996) proposed a five step strategic planning process specifically focused on construction companies:

28 1) Examine the company’s mission – the scope of its activities and objectives; 2) Survey the environment of the company – exterior parameters and constraints set by the environment; 3) Survey the company – internal parameters and decision variables; 4) Develop alternative strategies; and 5) Select the preferred strategy.

Alarcon and Ashley (1992; 1996) proposed a holistic strategic planning methodology for construction firms (see Figure 3.2 ). It incorporates a conceptual model which is a simplified model of the variables and interactions present in the analysis of strategic decisions in the construction industry, and a mathematical model designed to predict the impact of strategic decisions by integrating export knowledge and assessment of the strategic planning team. Strategies for long term company development such as marketing programs to emerging markets, systems to implement total quality management, etc., and different combinations of strategies, can be evaluated using criteria selected by company management.

It seems that the strategic planning process proposed in the civil and architectural fields shares a ‘deliberate’ characteristic. However, some strategic theorists argue that strategies cannot be comprehended by the sequential dividing of activities, but are formed in a continuous and iterative process of social interactions involving various activities and actors (Mintzberg 1978; Mintzberg 1988; Mintzberg and Walewski 1985; Mintzberg and Waters 1982). This view was agreed to by Junnonen (1998) from a construction industry view point.

MODULE 1.ENTRY INITIAL MOTIVATION OTHER EXPERIENCES ANALYSIS BASIC STRATEGIC CONCEPTS DEFINITION PRELIMINARY INTERNAL ANALYSIS CULTURE PHILOSOPHY HUMAN RESOURCE MANAGEMENT ORGANIZATIONAL CLIMATE PRELIMINARY EXTERNAL ANALYSIS PRELIMINARY CONCLUSIONS DECISION-MAKING METHODOLOGICAL APPROACH ANALYSIS

MODULE 2. FORMULATION MISSION, OBJECTIVES AND GOALS MISSION DEVELOPMENT STRATEGIC OBJECTIVES SELECTION STRATEGIC DECISION-MAKING STRUCTURE PRELIMINARY ASSESSMENT OF FUTURE CONCEPTUAL MODELING DEVELOPMENT SCENARIOS CAUSAL QUALITATIVE ANALYSIS EXTERNAL FACTORS DEFINITION INTERNAL DRIVERS DEFINITION PROCESSES DEFINITION OBJECTIVES DEFINITION STRATEGIES MATHEMATICAL MODELING STRATEGIC DECISION ANALYSIS INTERNAL ANALYSIS CROSS IMPACT ASSESSMENT STRATEGIES EVALUATION EXTERNAL ANALYSIS STRATEGIES MODELING STRATEGY ALTERNATIVES EVALUATION SET STRATEGY PRIORITIES STRATEGY ALTERNATIVES MODELING IMPLEMENTATION PROGRAM AND SELECTION IMPLEMENTATION PROGRAMS MODELING EVALUATION STRATEGY FORMULATION

MODULE 3. IMPLEMENTATION STRATEGIC PLAN DEVELOPMENT GLOBAL IMPLEMENTATION PLANS DEVELOPMENT ANNUAL STRATEGIC PLANS DEVELOPMENT ANNUAL IMPLEMENTATION PLAN DEVELOPMENT CONTROL AND FOLLOWING PLANS DEVELOPMENT

Figure 3.2: A Holistic Strategic Planning Methodology for Construction Firms (Source: Alarcon and Ashley 1992)

Although there may be a large number of strategic alternatives involved in strategy identification, some grand or generic strategies have been typified, like those of Pierce (1980) (concentrated growth, market development, product development, innovation, horizontal integration, vertical integration, opening of joint venture, concentric diversification, conglomerate diversification, retrenchment, divestiture, and liquidation), those of Vesper (1979) (multiplication, monopolization, specialization, and liquidation), and those of Porter (1980) (cost leadership, differentiation, and focus). Among them, Porter’s model may be the most extensively referred. Warszawski (1996) proposed that construction companies can 1) obtain cost leadership by standardization of products, training of personnel, tight control, careful selection of suppliers, technological advance, and incentive programs; 2) obtain differentiation by higher standard of product,

30 higher quality of product, faster project completion, more extensive service to clients; and 3) obtain focus by focusing on certain types of projects, certain geographical areas, or certain types of clients. In practice, many construction organizations are driven to adopt cost leadership strategies by construction’s traditional tendering procurement processes, however the adoption of best value and / or partnering criteria for procuring construction work by some clients (e.g., UK public sector) has enabled many construction organizations to make better use of differentiation strategies (Price and Newson 2003).

Different schools of strategic theories Whether the strategic planning process is a rational and linear process as introduced above, was criticized by other strategic theorists like De Wit and Meyer (1998). They contended that strategies are instead formed incrementally through experimentation. Several ‘paradoxes’ were therefore raised about different opinions regarding strategy formation including: logical (rational) versus creative (generative) strategies; intended (deliberate) versus realized (emergent) strategies; revolutionary versus transformational strategies; strategic fit versus strategic stretch; and strategy versus organizational effectiveness. Price and Newson (2003) discussed the implications of these paradoxes from a construction perspective. Also, several of these paradoxes form dimensions to differentiate different schools of strategic theories.

De Wit and Meyer (1998) introduced the three interactive dimensions of strategy that can be recognized in every real life strategic problem situation: strategy process, strategy content, and strategy context. Whittington (2001) integrated two dimensions of strategy content and strategy process to map distinct schools of thoughts on strategy (see Figure 3.3). This taxonomy was adopted and enhanced by Cheah (2002). In Figure 3.3, the vertical axis examines the degree of variation of strategic content, and the horizontal axis considers whether such content is derived from deliberate planning, calculation and formulation, or simply as an emerging product of accidents, chance, and social and organizational inertia (Cheah 2002).

Outcome

Figure 3.3: Different Schools of Strategies (Source: Cheah 2000)

3.1.2 Internationalization Process

In comparison with formulating strategies for domestic markets, the international marketing strategy development involves different sets of factors of culture, international trade, language, and legal system. Strategy formation in international markets involves a number of key parameters which vary depending on the phase of internationalization.

Douglas and Craig (1995) divided a firm’s gradual involvement in international markets into three phases: 1) initial foreign market entry; 2) local or national market expansion; and 3) global rationalization (see Figure 3.4 ). Prior to the firm’s entry into international markets, the domestic market is the focal point of strategy development and defines the boundaries of operations. A variety of triggers may drive the firm to enter international market (see Table 3.1 ). The key decisions at initial entry include: 1) the choice of countries to enter; 2) the timing of entry; and 3) how operations are to be conducted in these countries (entry mode). These decisions are crucial, because they entail commitments to locations and to other firms that are difficult to change in the short term and set the pattern for future market development. Once the firm has established

32 operations in the foreign market, attention shifts to developing local market potential triggered by some factors (see Table 3.1 ). From this point forward, the decisions become an adoption of a nationally and then globally oriented approach to strategy planning and development and extend beyond the focus of this research.

Figure 3.4: Phases in Global Marketing Evolution (Source: Douglas and Craig 1995)

Table 3.1: Triggers to Each Stage of Internationalization (Source: Douglas and Craig 1995) Initial market entry Local market expansion 1. Saturation of domestic market 1. Local market growth 2. Movement of customers into foreign markets 2. Meeting local competition 3. Diversification of risk 3. Local management initiative and motivation 4. Sourcing opportunities in foreign markets 4. Desire to utilize local assets more effectively 5. Entry of foreign competition in home market 5. Natural market boundaries 6. Desire to keep abreast of technological changes 7. Government incentives to export 8. Advances in communications technology and marketing infrastructure

Consistent with the model of Douglas and Craig (1995), Root (1987) indicated that entry strategy is “a comprehensive plan that will guide a company’s international business operations over a future period long enough to achieve sustainable growth in world markets.” For most companies, the time horizon is from three to five years.

Johanson and Vahlane (1977) agreed with several previous studies of international business that internationalization of the firms is a process in which the firms gradually increase their international involvement, and they also believed that all decisions in this process – decisions to start exporting to a country, to establish export channels, to start a selling subsidiary, and so forth – have some common characteristics. They therefore proposed a conceptual model to explain the same basic mechanism in all steps as depicted in Figure 3.5. The main structure of the model is the distinction between the state (market knowledge and market commitment) and change aspects (commitment decisions and current activities) in the individual foreign country. The model indicates the market knowledge and market commitment affect both commitment decisions and the way current activities are performed and vice versa.

Figure 3.5: The Basic Mechanism of Internationalization – State And Change Aspects (Source: Johanson and Vahlane 1977)

3.1.3 Entry Barriers

From an industry organization researcher’s viewpoint, Porter (1980) described entry barriers as features of an industry that give incumbents inherent advantages over potential entrants. Barriers to entry result in fewer entries and therefore above average profitability on behalf of incumbents (Yip 1982). Porter (1980) proposed six major entry barriers, which are 1) cost advantages of incumbents; 2) product differentiation of incumbents; 3) capital requirements; 4) customer switching costs; 5) access to distribution channels; and 6) government policy.

Similarly, but in a more broad sense, Shepherd (1979) defined barriers to entry as anything that decreases the likelihood, scope, or speed of the potential competitors coming into the market. Barriers include all manners of specific devices, such as patents, mineral rights and franchises, as well as more general economic barriers. Based on Shepherd’s definition, Karakaya and Stahl (1991) identified 25 market entry barriers, which are further grouped into two categories: 1) competitor-activated or controllable barriers to entry; and 2) environmental or uncontrollable barriers to entry. Karakaya and Stahl (1991) also identified the following barriers to entry in international markets that differ from those in domestic markets: Cultural differences (i.e., the social system); Language; Access to distribution channels; Customer switching costs; Government policy (i.e., taxes, licensing requirements); Product adaptation; Stability of the currency exchange rate; Expected local and global competition; Changes required in promotional activities; Nationalism; Political environment; Economic environment; Corruption; and Cost advantages held by local companies.

3.1.4 Entry Timing

The issue of entry timing has received very limited attention in international business research (Rivoli and Salorio 1996). Early entry involves both advantages and

35 disadvantages (Isobe et al. 2000). For example, early movers have a quasi monopoly and therefore capture higher economic rents than in a competitive marketplace (von Hippel 1988): they can easily acquire scarce assets like locally available input factors and geographic space; and they can develop a unique local buyer network (Lieberman and Montgomery 1988). However late entrants can gain advantages over an early mover when they possess capabilities to acquire the same technology at a lower cost; use superior technology to produce better or cheaper products; capture shifts in consumers’ tastes more quickly; and make more intensive investments than early movers (Lieberman and Montgomery 1988).

In an international market context, studies suggest that early movers tend to have higher failure rates compared to early followers because the latter benefit from the experience of the former (Mitchell et al. 1994; Shaver et al. 1997; Yan 1998). But the prevalent view has been that early movers enjoy enduring advantages over the late entrants (Pan and Chi 1999). Some studies on China (Isobe et al. 2000; Luo 1999; Pan and Chi 1999) report that early entrants attain high performance.

3.1.5 Market Selection

International market selection has been defined as the process of establishing criteria for selecting markets (countries), investigating market potentials, classifying them according to the agreed criteria, and selecting which markets should be addressed first compared to those suitable for later development (Kumar 1994). Selecting new markets is often largely understood as an information-processing and optimizing problem (Andersen and Strandskov 1998).

Multiple market selection models have been proposed in the literature (Papadopoulos and Denis 1988), and can be classified into two categories: general and context-specific (applicable to specific industries, categorist of companies and / or

36 business situations). Most models view the market selection process as composed of three stages (Koch 2001): Screening: At this stage, macro-level indicators are used to screen out countries that do not meet the objectives of the firms (Kumar 1994) or criteria like market size, growth rate, basic fit between customer preferences and the existing product line, and competitive rivalry (Johansson 1997). Identification (or in-depth screening): At this stage, industry-level factors like market size and growth, level of competition, entry barriers and market segments are investigated to assess industry attractiveness of each short-listed country. (Final) selection: At this stage, firm-specific factors like profitability and product compatibility with the exiting portfolio are investigated to select the markets to enter.

Levy and Yoon (1995) proposed an information processing model in Figure 3.6 for a firm's globalizing decision, which relates the major evaluation criteria required for an ultimate Go vs. No Go decision. It contains principal categories for analysis deemed essential by both practitioners and researchers in international business (Jain 1990; Root 1987): (1) the company's strategic intention; (2) assess market opportunity; (3) estimate payback risk; and (4) discern synergistic effects. One characteristic of this model is that it changes the market selection issue into a Go / No-go decision regarding individual markets.

Growth of global market Entry Competitive global entry pressure Strategic Long term corporate commitment intention Financial resources Resource availability Capacity utilization Expected GDP level sales GDP growth rate Market potential Competition opportunity Expected Production cost advantage profit Entry/No-Entry potential Decision Marketing cost advantage Non Political risk economic Social risk Payback risk risk Foreign exchange rate Economic risk Trade balance R&D/engineering synergy Product Manufacturing synergy synergy Synergy Logistics synergy effects Global Management experience business synery Marketing experience Figure 3.6: Decision Framework for Global Market Entry (Source: Levy and Yoon 1995)

Andersen and Strandskov (1998) argued that traditional market selection approaches emphasized universal and normative guidelines and have excluded the idiosyncrasies of decision makers and the complexity of contingent decision-making. They therefore proposed a model for mapping managerial decision-making based on the means-end theory.

38 3.1.6 Entry Mode Selection

Foreign market entry mode is an institutional arrangement for organizing and conducting international business transactions (Andersen 1997). There are many entry modes available, but the four most common modes of foreign market entry are exporting, licensing, joint venture, and sole venture (Agarwal and Ramaswami 1992). As suggested by Kumar and Subramaniam (1997), a natural hierarchy exists among the various modes of entry, although this hierarchy takes different forms in different studies. Figure 3.7 depicts a hierarchical model proposed by Pan and Tse (2000).

Choice of entry modes

Non-Equity Modes Equity Modes

Contractual Wholly owned Export Equity joint venture agreements subsidiary

Direct export Licensing Minority EJV Greenfield

Indirect export R&D contracts 50% EJV Acquisition

Others Alliances Majority EJV Others

Others

Figure 3.7: A Hierarchical Model of Choice of Entry Modes (Source: Pan and Tse 2000)

Since entry modes involve great resource commitments, and change of them will cause considerable loss of time and money, entry mode selection is a very important strategic decision (Agarwal and Ramaswami 1992) and has been a topic of strong interest and considerable inquiry in the international business and marketing literature (Brown et al. 2003; Tse et al. 1997). The primary objective of these studies is to identify and evaluate the factors that determine the best entry mode, which aligns the entrants’

39 strengths and weaknesses with the local market’s environment as well as with the firm’s structural and strategic characteristics (Brown et al. 2003).

Most past studies on foreign market entry selection can be classified into three approaches: 1) Gradual incremental involvement approach, which contends that when the firm first enters an overseas market, a low resource commitment mode such as export is desirable. As the firm acquires more knowledge and experience in that overseas market, modes with higher levels of resource commitment, risk, control and profit return will be pursued, e.g., sole venture (see Figure 3.8);

Figure 3.8: Evolution of A Manufacturer’s Decision on Entry Mode (Source: Root 1987)

2) Transaction cost approach, which prescribes cross-border activities according to the economic rationale that firms will minimize all costs associated with the entire value-added chain (from production to consumption of goods) by internalizing those activities that they can perform at a lower cost, but subcontracting those activities externally if other providers have a cost advantage (Pan and Tse 2000); and

3) Eclectic framework approach, which was proposed by Dunning (1980; 1988). It proposes that cross-border business activities are influenced by three types of factors: location specific factors; ownership specific factors; and internalization specific factors (see Figure 3.9 ). While many scholars argued that ownership and internalization factors share some similarities with the transaction cost perspective (Tse et al. 1997), Dunning emphasized that location-specific factors are becoming more significant in affecting a firm’s international operations. Other eclectic frameworks include those proposed by Kim and Hwang (1992) and Tse et al. (1997).

Figure 3.9: A Schematic Representation of Entry Choice Factors (Source: Agarwal and Ramaswami 1992)

Recently, a number of studies focused on the impact of some strategic factors upon entry mode decisions from a competitive advantage perspective (Brown et al. 2003). For example, Bradley and Gannon (2000) studied how a firm’s market concentration / diversification strategy affects the choice of foreign market entry mode; Kim and Hwang (1992) examined how global concentration, global synergies, and global strategic motivations influence its market entry mode selection. Brown et al. (2003) indicated that previous research on the foreign market entry mode decision has centered on the production and distribution functions, and this question in the service industry has been neglected.

41 3.2 Entry as an Organizational Issue

The relationship between entry strategy and the entrant organization is not an emphasis in this research, but this issue is so important that a mention of it is of great value to pinpoint valuable topics for future research as well as draw a comprehensive picture of the concepts, ideas, and theories that cover the scope of this research.

Cheah (2002) proposed a conceptual model (see Figure 3.10) depicting the interaction between corporate strategy and firm organization. He contended that within corporate strategy and organization, there are distinctive components anchoring each of the two areas and driving the interaction between them. His research implies that there should be a two way interaction between entry strategy and international enterprise organization.

Figure 3.10: Interaction between Corporate Strategy and Organization (Source: Cheah 2000)

Root (1987) specifically addressed this issue in the foreign market entry decision, and contended that as an enterprise becomes more international, its organization structure also evolves in response to shifts in international strategies (see Table 3.2 ). However, Root (1987) recognized that normally a company’s organization most lags behind its strategy.

42 Table 3.2: Responses in Organization Structure at Different Stages in the Evolution of a Global Enterprise (Source: Root 1987) Stage International strategy Organization response 1None. None, or built-in export department. 2Enter foreign markets with direct exports. Full-function export department or division. 3Enter some foreign markets with investment inInternational division. local production; enter other markets with noninvestment modes. 4Serve markets throughout the world from Modified international division, global multiple country sources, as guided by a global organization, or mixed organization structure. strategy

3.3 Entry for International Construction Markets

This section applies the framework in Figure 3.1 to examine the international construction management literature to: 1) structure the findings in the international construction market entry context; 2) evaluate the progress of entry related research in the construction management domain; and 3) identify gaps between the general management and construction management literature.

3.3.1 International Project Go / No-Go Decision

Han (1999) indicated that market entry decisions consist of three sequentially related stages: 1) which countries are more favorable or less risky to do business in? 2) within a candidate country, which potential candidate projects should be selected to evaluate in more detail? and 3) finally, whether to “go or not to go” on a specific project opportunity? (see Figure 3.11). This sequential process neglects the entry mode decision issue. This may be explained by the project-based nature of the construction industry (Messner 1994). Ashley and Boner (Ashley and Boner 1987) observed that: “Multinational contractor operations abroad are project –specific; offices and key personnel are mobilized and set up prior to construction and are usually closed and withdrawn following project conclusion. When involved in multiple projects in one country over a prolonged period of

43 time, the project office may acquire a greater degree of permanence and at some point can become recognized as a branch office of the firm. It rarely, however, develops the kind of permanence exhibited by a wholly owned subsidiary of a typical multinational enterprise.”

According to Ofori (1996), “…owning to perceived poor economic prospects in the host countries (and hence, lack of continuity of work) and / or unstable political environments, international contractors largely adopt ad hoc approaches to their operations in developing countries. They enter these countries to undertake projects, and withdraw after completing them. …” This fundamental feature determines that the entry decision is substantially centering on ‘Go / No-Go’ or ‘Bid / No-Bid’ decisions for a specific project in the targeted new market (Ahmad 1990; Han and Diekmann 2001; Messner 1994).

Pick a specific country

Identify country risks and evaluate them

Satisfy the min. No Abandon: Seek other level goal country opportunities

Yes

Enter this country

No-Go: Wait for other potential projects Investigate candidate projects opportunities No

Evaluate each project Yes Decision options to decide Go/No-Go are improvable?

Yes

Satisfy the min. No Develop alternative level goal decision options

Figure 3.11: Entry Decision Process for International Projects (Source: Han 1999)

Messner (1994) presented an exploratory investigation into the project evaluation decision made by construction companies pursuing international projects. He developed the Organization Based Information Architecture (OBIA), which incorporates five generic categories of information needed to effectively evaluate a project. These categories are organizations, commitments, processes, environments, and facilities, each of which is further decomposed. In addition, Messner proposed a Project Evaluation Process Model of five main activities: 1) assess project feasibility; 2) determine ability to

45 perform; 3) assess competitive advantages; 4) determine project risks; and 5) select projects to pursue (see Figure 3.12). Both tools developed by Messner are qualitative.

Potential Management projects information

Feasibility study Organizational Assess project resources feasibility

Performance assessment Determine ability to perform

Competitive Assess advantages competitive advantages

Project Determine project risks risks

Projects Select projects to to pursue pursue

Organization management Figure 3.12: Project Evaluation Process Model (Source: Messner 1994)

Han (1999) used the Cross-Impact Analysis (CIA) method as an uncertainty reasoning tool for assessing risks involved in international project evaluation, and developed a risk-based Go / No-Go decision model. The model includes a total of 32 variables belonging to one of the following five groups: 1) Country conditions, such as political conditions and economic conditions; 2) The contractor’s decision strategies, i.e., controllable variables such as resources and owner relationship; 3) Intermediate variables, i.e., uncontrollable variables impacted by either the country conditions or the decision strategies, such as currency exchange rate and need for work; 4) Successor variables, i.e., variables reflecting the likely outcomes of the project, such as project cost uncertainty and possibility of future work; and

46 5) Outcome variables, by which the Go / No-Go decision is made. They are project profitability, other benefits to a firm, and overall project outcome.

3.3.2 Internationalization of Construction Firms

Crosthwaite (1998) empirically studied the internationalization of British construction companies during the period of 1990-1996 with an emphasis on location characteristics of these overseas business activities. He reported that the major share of their overseas activities was conducted within developed, rather than developing, regions and the reason was that developed countries provide a more secure environment and involve less corruption.

Low and Jiang (2003) focused on the internationalization of Chinese construction companies. They proposed an index system comprising of the following 5 factors to identify the top ten “truly global” contractors: 1) Ratio of international revenue over total revenue; 2) International business distribution; 3) Overseas management structure; 4) Involvement in specialized field; and 5) Overall index of internationalization.

The study of Ofori (1996) provided viewpoints of host country governments and local construction companies to investigate the internationalization of foreign construction companies in association with the economic development of the host country. It provided a conceptual model of suitable approaches that international and local construction enterprises, and government, should adopt at various stages of development of host countries’ construction industries to achieve mutual benefits. One implication of the model is that foreign construction enterprises should take a long –term

47 view and consider, in their export strategies, the construction industry development objectives of host countries.

It is important to note that none of the research studies proposed a generic internationalization process in an individual overseas market from contractors’ viewpoint.

3.3.3 Entry Modes Examined in International Construction Literature

Although a comprehensive set of international market entry modes were not proposed by any existing research, some entry modes were investigated by researchers in the international construction domain, though sometimes not specifically from a market entry perspective.

Strategic alliance Badger and Mulligan (1995) defined an alliance as “a long-term association with a nonaffiliated organization, used to further the common interests of the members.” Partners of international alliances cover a variety of candidates; they can be governments, clients, suppliers, engineering, financial institutions, subcontractors / specialty contractors, designers, and others. Badger and Mulligan (1995) indicated that many construction firms think it is almost impossible to penetrate new geographical markets without forming alliances, because forming alliances with the right firm can open the door to these markets, and it also makes the transition into new markets much easier.

Sillars and Kangari (1997) proposed a definition in a more broad sense where alliances are strategic associations formed to further a common business interest, where risk is shared (not shifted among partners) jointly. Although the research of Sillars and Kangari (1997) focused on marketing consortiums and short-term joint ventures in the Japanese construction industry, they recognized that in general industry, alliances have four types:

48 1) Ad hoc pool, characterized as the alliance requiring the least amount of resource input; 2) Consortium, characterized as alliances with expectations of long-term relationships with parent resource input, but without a strong expectation for resource output; 3) Short-term joint venture, characterized as alliances with significant resource input and expectation to return resources (profit) to the parents; 4) Full-blown joint venture, characterized as alliances with significant resource input and with output remaining with and reinvested in, the joint venture (Lorange and Roos 1992). This general typology distinguishes alliances in terms of the alliance structure and duration, and is consistent with the definition of Sillars and Kangari (1997).

Joint Venture (JV) A Joint Venture (JV) occurs when two or more legally separate bodies form a jointly owned entry in which they invest and engage in various decision-making activities (Geringer 1991). A JV is termed International JV where at least one of the parties (or parents) is based outside the country where the venture is taking place (Geringer 1991). Bing et al. (1999) proposed a three stage lifecycle of a International Construction Joint Venture (ICJV): 1) Start-up, the period from initial contracts between parent companies to JV start-up, including negotiation and a signing agreement; 2) Operation, the period of construction work being implemented; and 3) Dismantle, the period when most construction tasks have been completed, the project is in the clean-up stage, and the participants start negotiating the ending matters. ICJVs can take one of three legal forms: 1) corporation; 2) partnership; or 3) contractual / consortium.

Construction organizations have extensively used international JVs as a vehicle to enter new construction markets around the world (Mohamed 2003). For example, in many countries of East Asia, foreign construction companies are encouraged to enter the local market in the form of a joint venture (JV) with local entity (Bing and Tiong 1999).

Previous research regarding ICJVs center on risk analysis and management (e.g., Bing and Tiong 1999; Bing et al. 1999; He 1992; Kwok et al. 2000; Lim and Liu 2001; Shen et al. 2001) and venture formation (e.g., Cushman 1986; Reszka and Edwards 1997).

Build-Operate-Transfer (BOT) International construction and contracting firms worldwide are increasingly asked either to offer financing packages or to take equity in the projects (Tiong and Yeo 1993). BOT provides a vehicle for an international contractor to pursue such projects.

The acronym BOT stands for “Build, Operate, and Transfer” or sometimes “Build, Own, and Transfer”, under which the private sector enters infrastructure development, an activity that has historically been the preserve of the public sector. Typically, the government grants a concession to a private sector entity, a bidding consortium or project company. In turn, the concessionaire obtains the necessary capital; designs and constructs the infrastructure; and operates it for a certain period of time (generally 10 to 30 years) in order to pay off the debt and earn a reasonable rate of return from the operational revenue. The concessionaire then transfers ownership of the infrastructure to the government free of charge or at an agreed price.

BOT is not a rigidly defined set of rules. In fact, BOT projects have different characteristics and structures (Tiong 1990). Its key elements can be flexibly adjusted or repackaged to a certain extent depending on the specifics of the project, sector, or country. For this reason, BOT has many variants including BOO (Build-Own-Operate), BOR (Build-Operate-Renewal), BOOT (Build-Own-Operate-Transfer), BT (Build-Transfer), DBFO (Design-Build-Finance-Operate), among many others. “BOT” is often taken as the general designation of all these acronyms (Huang 1995; Li 1998; United Nations Industrial Development Organization 1996; World Bank 1994).

50 Many developing countries encourage foreign contractors’ participation in their infrastructure development projects through BOT methods, e.g., the Philippines, Malaysia, Thailand, Vietnam, China, Turkey, and India. Several multilateral organizations are also actively promoting the application of BOT, e.g., the World Bank, ADB, and UNIDO.

Previous research on BOT centers on 1) BOT viability (Cho 1999; Huang 1995; Li 1998); 2) BOT risk management (Lam and Chow 1999; Li 1998; Tiong 1990; Wang 2000; Yaworsky 1994); and 3) BOT project financing (Lu 2000; Saunders 1998).

Mergers and Acquisitions (M&As) Carrilo (2001) indicated that M&As are used within the construction context to accelerate growth, reduce the effects of the construction cycle, enter into new markets, and spread risk. Carrilo also reported that during the last decade, M&As were recognized as the preferred vehicle for expansion into the global construction market.

There is disagreement on the definition of the terms ‘mergers’ and ‘acquisitions’ and they are loosely and interchangeably used by most companies (Bengtsson 1992). They are jointly used to indicate a change in company ownership without alluding to the conditions of the transaction. In her research on M&As in the construction industry, Carrilo (2001) defined M&As as the friendly amalgamation of two or more companies.

Valence (2003) reviewed recent M&As activity in the international construction industry and found a significant increase in the use of M&As since 1996. Most of these M&As are European contractors expanding into the American and Asian markets, while US contractors have not been active in this entry method.

Other modes Low and Jiang (2003) indicated that most Chinese international construction companies took the following overseas management patterns:

51 1) Local agent; 2) Representative office or liaison office; 3) Subsidiaries; 4) Joint-venture company; or 5) Branch company (solely owned).

3.3.4 International Construction Market Structure, Trends, and Future

The global construction market is a rapidly changing, increasingly competitive environment (Carrillo 2001). It also exhibits a high oligopolistic market structure in which a few large firms from industrialized countries are responsible for a vast majority of contracts (Ofori 1996; Warf 1991). The past ten years saw the decline of the US share of the market (U.S. Department of Commerce 1984) and the emergence of firms from European and developing countries (Ofori 1996; Warf 1991), however US construction firms as a whole still received larger quantities of foreign awards than their rivals elsewhere (Warf 1991). Raftery et al. (1998) reported that one trend in the Asian construction markets is the increased foreign participation in domestic construction. He (1992) observed from archival research that the major international construction markets are moving from the developing world to the developed countries in Western Europe, Asia Pacific and North America.

Warf (1991) observed the changes of international construction contracts distribution from 1979 through 1988 and explained the changes to the changing fortunes of the petrochemical industry; regulatory and trade restriction relaxation in many industrialized nations; and progressive integration of the Western European markets. Han and Diekmann (2001) summarized four globalization factors in the last decade that may expand opportunities for contractors in international construction markets: 1) all signatory countries to the GATT (now, WTO) systematically opening their domestic markets; 2) the development of regional Free Trade Blocs; 3) the establishment of world

52 standards; and 4) rapid developments in telecommunication, travel and other related industries.

Bon (2000) reported the analysis results of an annual attitude / opinion worldwide survey from 1992 through 1999 regarding the relationship between construction and economic development, and the future of international construction. Agreement and disagreement between the assertions and respondent rankings were analyzed. Some of his conclusions include: Future growth markets are to be located in Newly Industrializing Countries (NICs); Asia is predicted to be the principle future market; The markets of South America and East and Central Europe, while considerably smaller, are markets where future growth is expected; North America is to be a potential future growth market; and China and cities within China are of particular interest.

3.3.5 Other Related Topics in International Construction

Risk in international market entry Ashley and Bonner (1987) examined the issue of political risk identification, measurement, and management. An influence diagram based model was developed to model the impacts of quick, unexpected changes in the political environment upon principal cash–flow elements of international construction projects. The political source variables in the model include: nature of firm’s operation; firm’s relationship to government; firm’s relationship to local power groups; involvement of local business interests; regional and external factors; influence of (independent) power groups; nationalist attitude towards a firm; project desirability; and government policy.

53 He (1992) focused on the economic risks involved in international construction projects. Risk factors identified from multiple sources were placed into a hierarchy of three levels: 1) macro risks; 2) medium risks; and 3) micro risks. An Analytic Hierarchy Process (AHP) based computerized risk assessment model was then developed.

Other major research on risk centering on the Go / No-Go issue (Han and Diekmann 2001), joint ventures (Bing and Tiong 1999; Bing et al. 1999; Cushman 1986; Lim and Liu 2001; Reszka and Edwards 1997; Shen et al. 2001), and BOT (Cho 1999; Huang 1995; Lam and Chow 1999; Li 1998; Lu 2000; Saunders 1998; Tiong 1990; Wang 2000; Yaworsky 1994) were introduced in previous sections.

Ownership advantage in international market entry Applying the eclectic framework of Dunning (i.e. ownership, location, and internalization) with an emphasis on ownership to the international construction industry, Cuervo and Low (2003) focused on answering two questions: 1) What ownership advantage [/disadvantage] factors do managers with international experience working in Singapore transnational construction corporations (STCCs) consider as the most significant factors in engaging in foreign value-added construction related activities in their major international construction market? And 2) How do the ownership factors vary in significance according to the firm specific contextual variables (e.g. age, size)? Through evaluation by surveying ASEAN and Non-ASEAN contractors, the most important ownership advantage factors were found as: 1) information, knowledge, technology and R&D capability; 2) the firm’s name and reputation; and 3) management and organization capability. Different perceptions of the importance of these factors were analyzed regarding different contextual variables (e.g., age, size, and number of permanent offices overseas).

54 3.4 Concluding Remarks

The following points are observed from the literature review:

1) Most international market entry issues are covered within strategic management and international business literature. There are no clear distinctions between the two disciplines, and in fact, the market entry decision is a typical case that illustrates the existence of overlap among them. In general, market selection, entry timing, market selection, and entry mode selection are often discussed in international business publications, while entry barriers tend to be examined in strategic management literature. Although there are close and complicated interrelationships between these four major issues (market selection, entry timing, entry mode selection, and entry barriers) in market entry, there has been little general research that aims to integrate them. The interaction between entry strategies and corporate organization structure also lacks attention.

2) Most international market entry literature focuses on the production sector, especially the manufacturing industry. The service sector receives very little attention from the academic research community, which does not match the increasingly important role of the service sector in international trade, not to speak of the international construction industry. Industry specific research is therefore necessary for the international construction industry. The large amount of literature in general business provides a starting point, however there are no perfect theories that this research can directly borrow to fulfill the objectives of this research. A digestion of general business theories and previous findings, and adaptation of them to the international construction industry are therefore critical in this research.

3) The project tradition of construction management is clearly reflected in the international construction literature. Most of the tools and methods developed focus on decisions on a project level, like project Go / No-Go decision support tools by Han (1999) and Messner (1994), and project risk assessment tools by Ashley and Boner

55 (1987) and He (1992). The entry decision process suggested by Han (1999) is a good example (see Figure 3.11): a construction firm first makes a country selection and then goes directly to the project level Go / No-Go decision – skipping the important decisions about entry mode on the corporate level. This does not reflect reality, especially in current days when innovative entry modes like joint ventures subsidiary and Mergers & Acquisitions keep emerging.

4) Chinowsky and Meredith (2000) discussed the project tradition in the construction management field and proposed the importance of strategic management research and education in the engineering and construction industry. In the international construction area, research on market entry strategies is especially limited. There is no specific research on issues like internationalization of individual construction firms, entry barriers, entry timing, entry mode section, market selection, and interaction between organization and entry strategy, though some of these topics have been addressed in a limited fashion in other research. It is important and necessary to bridge this knowledge gap.

5) A hierarchy of entry modes for international construction markets has not been proposed, while the propositions in general business cannot be directly used. The construction industry is a service industry, so some entry modes in the manufacturing do not apply, like export (Root 1987). In addition, because the construction industry is project based, it involves some unique contractual entry modes, such as BOT approaches. Therefore entry modes for international construction markets need to be specifically defined.

3.5 Summary

This chapter introduced the primary knowledge and findings in international business and strategy management in association with international market entry and then

56 reported previous related findings in international construction. Based on the literature review, remarks about the importance of this research and some specific points to be addressed in this research were developed.

CHAPTER 4

AN OVERVIEW OF THE INTERNATIONAL CONSTRUCTION MARKET ENTRY

This chapter reviews the globalization process of the construction industry (Section 4.1 and 4.2), and identifies a trend of the industry to use various and innovative entry modes to penetrate fluctuating overseas markets (Section 4.3 through 4.5). These entry modes can be classified into a dichotomy of permanent entry versus non-permanent entry.

4.1 A General Review of the History of International Construction

The history of modern globalization of the construction industry can be traced back to the end of the 1840s when British contractors first expanded their business abroad (Linder 1994). Here the history is briefly presented in three stages: pre-World War II, post-World War II, and the past decade (1992-2001). The timeline and major historical event records come from Linder (1994), Warf (1991), and Wells (1996).

4.1.1 Pre-World War II period

For faster and cheaper transportation of commodities and mass production and consumption, British overseas construction activities had to precede large-scale direct investments overseas by British manufacturing firms. Some large British railway construction firms rose during the early railway era and built railways overseas. By the latter half of the 1850s, French, German, and Belgian companies had begun building railways all over Europe (Linder 1994). Driven by the competition, some British 58 contractors expanded their business to “frontiers of economic civilization” like Eastern Europe, Russia, Algeria, India, Canada, Australia, Argentina, and South Africa. The international economic crisis of 1866 terminated the ascendancy of British railway builders and it was another two decades until they reemerged as international leaders (Linder 1994). The crisis of 1866 conferred greater power on banks, and by increasing competition from European and US contracting firms, caused the decline of the independent colonial railway constructors. Construction firms relied heavily on their respective national governments to receive profitable contracts.

Despite its preeminence, British firms did not monopolize the colonial or imperialist construction markets. French and German construction firms competed with British firms for international railway, bridge, harbor, and canal building contracts. For example, Gustave Eiffel’s French construction-engineering firm built bridges between 1867 and 1889 in Portugal, Russia, Greece, Egypt, Indochina, and South America (Linder 1994). German construction firms also occupied key positions in laying the groundwork for the exploitation of Germany’s formal colonies. Between 1895 and the end of World War I, the largest German firm, Holzmann, performed 35% of its total of one billion marks worth of construction abroad (Linder 1994).

International orders secured the survival of some European construction firms during the Great Depression (1930s), many of which participated in the massive industrial and infrastructure works of the Soviet First (1928–1932) and Second (1933–1937) Five-Year Plan (Linder 1994).

Around the turn of the nineteenth century, some European contractors entered the U.S. market including Holzmann. World War I ultimately put an end to these foreign contractors’ activities in the U.S. market for many years. In a more wide range, World War I marked an interruption in the globalization of construction, especially in Europe and the Near East.

59 The great domestic construction demand in the United States throughout the nineteenth century made external expansion unnecessary. More over, the major colonial powers (Britain, France, and Germany) made penetration of their colonial markets difficult. Nevertheless, US contractors finished some projects in Latin America and Asia. Towards the turn of the century, US firms made significant progress in construction exports to countries like Korea, China, and Japan.

World War I (1914-1919) transformed the U.S. into a country of capital export. This significantly increased U.S. contractors’ capability to secure projects overseas. By the time of World War II, U.S. construction firms had developed a considerable volume of overseas operations, however, overseas projects still accounted for a small percentage of the average annual volume of aggregate U.S. construction.

The depression of the 1930s, when there were many governmental projects (e.g., Hoover Dam), strengthened some US contractors like Bechtel and Morrison-Knudsens (Washington Group International). U.S. construction firms had acquired the expertise and capital equipment from the leading roles played by the US domestic oil industry. A major breakthrough towards the creation of a world construction market occurred with the exploitation of petroleum resources in Venezuela and the Middle East. Since US oil companies were also preeminent internationally, US contractors (e.g., Fluor) were able to gain favorable access to overseas projects.

4.1.2 Post-World War II Period until 1992

US firms performed half of World War II (1939-1945) military construction projects valued at $2.4 billion in countries of the British commonwealth, and also were active in military projects in Latin America (Linder 1994). The US government provided favorable conditions to ensure they obtained the technology, accumulated capital, and established the governmental and private economic contracts necessary to go global. The

60 US construction firms developed into a world power by participating in the reconstruction of Europe, and acquired projects requiring the most advanced technology they monopolized. US funding privileged access in many other countries in the Middle East, Asia, and Africa.

The modern globalization of the construction industry was underway with the international economic boom in 1950s and 1960s. US firms took advantage of the prosperousness of the petroleum and chemical industries and drew upon US domestic industrial leadership in these sectors. US firms achieved a dominant position in these burgeoning world markets. For example, US firms accounted for almost two thirds of the value of world export contracts for chemical, oil, and gas plants from 1960 to 1966 (Linder 1994). In contrast, Western European firms achieved their greatest successes in building petrochemical plants in the Soviet Union and Eastern Europe, where US firms did not compete for political reasons, and infrastructure projects in their respective nation-state’s (former) colonial empires. Whereas US firms secured more than one-third of the contracts (by value) of all plants in Western Europe during this period, non-US firms accounted for less than one percent of the contract value of plants in the US.

At the early postwar period, European and Japanese construction firms remained busy with domestic reconstruction projects. Once-dominant British firms were not able to speculate in overseas construction work due to a lack of capital resources. Nevertheless European firms gradually re-expanded globally in a way shaped by the postwar political-economic forces changed by the War. By the 1960s, the largest construction firms in Britain and Germany were already clearly integrated into the world market. Although they were most competitive in the traditional building and civil engineering infrastructure projects that required a limited transfer of advanced technology, they closed the technology gap. The reduction of US government financing for construction in the Third World lessened the US companies’ competitiveness. This period towards the creation of an international construction market, despite increasing entrants, was still characterized by lower degree of competition than in other sectors like manufacturing.

61 Japanese construction firms did not perform any overseas works except for projects for reparation and economic cooperation programs. With the end of the domestic building boom in the mid-1960s, large Japanese firms felt pressure to enter the world market (Linder 1994).

The construction activities in the Middle East made the intense decade-long impulses for the modern globalization of the construction industry. The enormous increase in revenue enabled the Organization of Petroleum Exporting Countries (OPEC) to implement unprecedented industrial development programs. This gave rise to numerous projects for contractors from US, Europe, and Japan, as well as South Korea, a (former) Third World country. Korean firms succeeded in the Middle East by underbidding Western firms by 20 to 30 percent by using cheaper labor (Linder 1994).

The OPEC boom came to an end with the onset of the world depression and the decline in oil prices at the beginning of the 1980s. The world construction market was further constricted by the implementation of national economic plans in some Third World countries. The recession forced many leading global players to reduce their staff, e.g., Bechtel discharged 22,000 of its 44,000 professionals in the mid-1980s (Linder 1994). In the absence of new contracts in the Middle East, some European firms began buying their way into the US market (e.g., Bilfinger + Berger and Filipp Holzmann) starting at the end of the 1970s. European firms have also acquired construction firms in other countries as well, e.g, within Europe and in Australia. Cross-border construction within the European Community (EC) was still limited during the 1980s because of heterogeneous building standards and construction methods, alien labor regulations and legal systems. Firms wishing to exploit patents or industrialized building methods were said to prefer licensing arrangements to establishing subsidiaries. As late as 1984, for example, the EC accounted for only two percent of the value of new British overseas contracts (Linder 1994). However these figures significantly increased for the 1992 free barrier trade agreement. By 1991, Europe accounted for 44 percent of new contract value; the EC alone surpassed all of the Middle East, Africa, Asia, and Latin America (Linder

62 1994). Interpenetration has also spread to realism between the First World and the so called Newly Industrializing Countries (like Singapore). These pressures for new markets also raised dispute between countries like that between the US and Japan. To be more competitive in the global market, domestic centralization of capital occurred, and so were diversification into other sectors and assumption of financial interest in their own projects (e.g., equity projects and BOT).

Large international construction firms competed for one another’s domestic markets (first world interpenetration) for the fact that their domestic construction markets are by far the world’s largest. For example, from the 1970s, Japanese construction firms followed Japanese manufacturing, trade, and service corporations and began constructing the latter’s factories and offices abroad, especially in the US. This interpenetration within construction mirrors the general “inter-triad” multinational corporate investment among the US, Japan, and the EC, which has become the most dynamic aspect of the world economy since the 1980s.

The large capital-intensive infrastructure projects in the Third World, which were prerequisites for the development of profitable industrial investments but not in themselves attractive to investors, came during the 1950s and 1960s to be financed in a large party by the International Bank of Reconstruction and Development (IBRD, or the World Bank) (Linder 1994). The bulk of IBRD’s loans financed the construction in the Third World of dams, power stations, highways, and ports by First World firms, making it possible for large European and US construction firms to be “Building a Better World-At a Profit”. However, basically, international development aid was a means of penetration of the Third World and a kind of subsidy to US construction firms. From 1947 to 1955, most of World Bank disbursements ($1 billion) were spent in the United States for capital equipment and services, more than the US share of IBRD financing (Linder 1994). More regional multilateral financing organizations like the African Development Bank, American Development Bank, and Asian Development Bank were

63 established and they launched a series of mega infrastructure projects in their respective regions.

The prospect of numerous large and very profitable projects in the Third World drove US, Western European, and Japanese construction firms into a phase of intense competition, which led in turn to the intercession of individual national governments to create the best possible conditions for their firms. For example, the US Export-Import Bank could make loans to private borrowers, both foreign buyers and US suppliers of construction equipment and services (Linder 1994). Nevertheless, US contractors still complained that the support they received from their government was inadequate in comparison with what their competitors had.

The transnational centralization of capital in the “highly oligopolistic” international construction industry, the competitive interpenetration of the domestic markets in the advanced capitalist countries, and the “development of a world market for all types of construction materials all testify to the emergence of a world market in construction.

4.1.3 The Past Decade: an Empirical Analysis

Because the data about the global construction market for recent years is readily available, this section reports an empirical analysis mainly from a geographic market entry perspective. The data involved in this analysis mainly comes from the ENR Top 225 International Construction Firms ranking lists and contractors’ revenue distribution from 1992 through 2001 (see Appendix E, H, I, L, M, N, and P).

64 4.1.3.1 Major Forces in the Global Construction Market

From 1992 to 2001, there were 522 different contractors that were included for at least one year in the ENR Top 225 International Construction Firms. Their regional and time distribution is summarized in Table 4.1 Table 4.1: Regional And Time Distribution of Leading International Contractors (1992-2001) Nationality of Contractors North Latin Middle Asia/ North Central/ Europe Total America America East Australia Africa South Africa 1~3 119 7 85 11 55 0 1 278 4~7 42 2 47 4 45 1 1 142

Years 8~10 27 1 34 6 34 0 0 102 Total 188 10 166 21 134 1 2 522 Mean 3.6 3.7 4.3 5.0 4.8 4.0 5.0 4.2

The following observations can be drawn from this table: 1) The regions where most international contractors come from are North America, Europe, and Asia / Pacific. However, the ranking of the three source regions in terms of average duration within a specific market (Asia / Pacific, Europe, and North America) and that in terms of quantity of contractors (North America, Europe, and Asia / Pacific) are opposite. 2) More than half of the listed contractors have their presence in overseas markets for less than 3 years. This indicates that either it may be difficult to sustain business in overseas markets or contractors may prefer a mobile entry approach. North American contractors tend to lack a continuous presence (119 out of 188 contractors had a presence for less than 3 years in overseas markets).

These contractors, however, vary in scale of their overseas business. Figure 4.1 shows the histogram of the international revenue of those top 225 international construction firms for the year 2001. The “oligopolistic” characteristic of the global market (Warf 1991) is obvious: there are a few very large global construction players

65 who account for a large fraction of the market, while the rest of the market is shared by numerous medium- and small-sized contractors.

150

100

50 Number of contractors

0 5000 10000 International revenue (Million US$)

Figure 4.1: Distribution Of International Contractors’ Revenue (2001)

4.1.3.2 Major Construction Markets

The global construction market can be conceptually segmented either by sector (e.g., building, transport, and power) or geographic region (e.g., Asia, North America, and Europe). Figure 4.2 depicts the change of size (in million US$) of different sectoral market segments including industry / petroleum, transportation, general building, power, manufacturing, water / sewer waste, and hazardous waste from 1992 through 2001. It can be seen that industry / petroleum, transportation, and general building are significantly larger than the other four segments. Also transportation and general building segments are stably increasing while industry / petroleum features significant fluctuations.

International construction market segmentation 1992-2001 (by value)

80000

$ mil. 70000

60000

50000

40000

30000

20000

10000 Industriali/Petro. Transportation 0 Building 1992 Power 1993 1994 Manufacturing 1995 1996 Water/SWR. Waste 1997 1998 Hazardous Waste 1999 Year 2000 2001 Figure 4.2: International Construction Market Segmentation 1992-2001

Because this research defines market from a geographic location (specifically, country) perspective, the following analyses will focus on trends of markets in terms of regions or countries. It must be noted that the data examined includes business carried out by contractors from the same region. It is argued that in the same region, the socioeconomic distances, as well as trade barriers, between countries are more easily addressed by contractors from the same region. Therefore, there is a need to investigate the intra- and inter- regional market size respectively. In this research, general market size means the size of regional markets open to contractors from any region (e.g., Chinese contractors’ entry into the US, or Canadian contractors’ entry into the US). Inter-regional market size is the market size that is open only to contractors from different regions (e.g., Chinese contractors’ entry into the US). Intra-regional market size is the size of a market only open to contractors from the same region (e.g., Chinese

67 contractors’ entry into the US). For a specific region, the general market size is the sum of the inter-regional market size and intra-regional market size.

It is also important to note that because ENR changed its measurement method in 1994, it is meaningful to only look at the period from 1994 through 2001 in Figure 4.4 through 4.10.

General Market Size

The change of general market size for each region is depicted in Figure 4.3.

Market Attractiveness (General) 60,000.0 180,000.0 North America 160,000.0 50,000.0 140,000.0 Latin America 40,000.0 120,000.0 Europe 100,000.0 30,000.0 Middle Eas t 80,000.0

US$ Mil Ais a/Aus tralia 20,000.0 60,000.0 40,000.0 Africa 10,000.0 20,000.0 Total 0.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year

Figure 4.3: The Trend of General Market Size (1992-2001)

The following observations can be drawn from the figure: 1) In recent years, North America, Europe, and Asian / Australia are the largest regional markets. 2) The increasing trend of Asian / Australian market stopped in 1997, and then it was followed by a continuous reduction in size. This may reflect the influences of the Asian Financial Crisis in 1997. 3) The size of European markets has been very stable for the past years. 4) The North American markets have been increasing since 1997. 5) The global market size remained stable.

Intra- regional market size

The change of intra- regional market sizes for North America, Europe, and Asia / Australia are shown in Figure 4.4.

Internal Market Attractiveness 30,000.0 60,000.0

25,000.0 50,000.0 North America 20,000.0 40,000.0 Europe 15,000.0 30,000.0

US$ Mil Ais a/Aus tralia 10,000.0 20,000.0

5,000.0 10,000.0 Total

0.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Figure 4.4: The Trend of Intra-regional Market Size (1992-2001)

The following observations can be drawn from the Figure 4.4: 1) It is apparent that the Europe and Asia / Australia Markets are by far the most attractive areas for contractors from the same region. 2) The intra-geographic trade was increasing before 1997 in the European Market in terms of volume. Followed the peak in 1997, there was a slight downturn followed by a varying amount of trade. The same trend occurred in the Asia / Australia Market, except that the fluctuations were more dramatic.

Inter-regional Market Size

The change of inter- regional market sizes for North America, Europe, and Asia / Australia are shown in Figure 4.5.

External Market Attractiveness 40,000.0 80,000.0 35,000.0 70,000.0 30,000.0 60,000.0 North America 25,000.0 50,000.0 Europe 20,000.0 40,000.0 Aisa/Australia

US$ Mil 15,000.0 30,000.0 Total 10,000.0 20,000.0 5,000.0 10,000.0 0.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Figure 4.5: The Trend of Inter-regional Market Size (1992-2001)

The following observations can be drawn from the figure: 1) When only inter-regional trade is considered, the North America Market seems very attractive. It surpassed the Asia / Pacific market in 2000 and 2001. 2) The European market became less attractive when considering inter-regional trade. 3) The downside trend of the Asia / Australia Market since 1998 / 1999 is the same as that in terms of intra-regional trade.

4.1.3.3 Firm Market Share by Regions

Another important method for analyzing the market data is to investigate the trends of how different companies share the global market. Figure 4.6 shows the change of quantity of work performed by international construction companies from different regions.

Global Market 80,000.0 180,000.0 70,000.0 160,000.0 140,000.0 60,000.0 North America 120,000.0 50,000.0 Europe 100,000.0 40,000.0 Asia/Australia 80,000.0 US$ Mil 30,000.0 60,000.0 All other 20,000.0 40,000.0 Total 10,000.0 20,000.0 0.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year Figure 4.6: The Sharing of the Global Market (1992-2001)

It can be seen from the figure that European contractors have the largest share in the global construction market. Since 1994, North America and Asia / Australia based contractors had similar shares of the market. Asian / Australian contractors had a continuous increase of their share in global markets before 1997, but after 1997, their international revenue decreased. North America contractors’ total international revenue reached its peak around 1999.

4.2 Comments on the Chronological Review

The above chronological review of the globalization process of the construction industry crystallized the rises and falls, as well as changes in distribution of major forces in the global market. European contractors, led by British firms, first dominated the construction market, and then they were replaced by US contractors who grew in their domestic market and were supported by the US’s status of credit export after World War I to go overseas. They grew significantly during World War II which opened the traditional colonial markets of European competitors. The postwar reconstruction program and economic, political, and technical preeminence of US firms further enhanced the position of the US contractors. European contractors received some recovery from global projects where US firms did not compete for political reasons and gradual technology improvement. The Japanese contractors initially focused on their

71 large and closed domestic market. Korean contractors grew with the cooperative work with the US Corps of Engineers.

The OPEC boom in the Middle East attracted contractors from all over the world, and created a real global construction market. The downturn of this huge market ten years later pushed major global players to find new markets elsewhere. The past one to two decades saw the interpenetration of these firms within the First World, between the First World and Newly Industrialized Countries, and within the same regions. Emerging markets in Asia as well new entrants from this region make market entries become even more frequent and disorderly in direction. A much wider global market has formed.

To accommodate the changes in the global construction market, new methods like BOT, strategic alliances, and local subsidiaries through M&As keep emerging and some of them have become common forms for market entry. Where to go and how to enter target markets therefore become two important strategic decisions under concurrent global market conditions. This research focuses on the second decision.

4.3 The Increasing Popularity of Permanent Entry

Market entry in the project based construction industry was believed for a long time to be a tide like activity; e.g., contractors based in their home country headquarters bid opportunistically for projects in overseas markets, once win it, mobilize people, materials, and equipment to the host country project site, work on the project, and withdraw back to home country once the project is done and there is no new project in the host market. Ashley and Boner (1987) echoed those of many researchers (e.g., (Abdul-Aziz 1995):

“Multinational contractor operations abroad are project –specific; offices and key personnel are mobilized and set up prior to construction and are usually closed and withdrawn following project conclusion. When

72 involved in multiple projects in one country over a prolonged period of time, the project office may acquire a greater degree of permanence and at some point can become recognized as a branch office of the firm. It rarely, however, develops the kind of permanence exhibited by a wholly owned subsidiary of a typical multinational enterprise.”

Although those who summarized the above market entry characteristics like Ashley and Boner (1987) did not deny the existence of a phenomenon that there are entrants who establish and localize (in terms of staff, technique, and marketing) a permanent presence in overseas markets, the style of mobile entry however, was believed to be the mainstream of the international construction market entry strategies, at least, before the 1980s. However, the new trend for contractors to use more permanent entry strategies for international construction markets that started recently deserve more and more attention.

4.4 Voices from the Industry during the Past Two Decades: A New Trend

The following citations from ENR are all about how construction firms entered foreign markets. They are listed chronologically to illustrate a trend of the increasing use of permanent entry modes for international construction markets:

“Strategies [to combat increased competition from third-world construction firms] will include, according to Bernard Huvelen, financial vice president of SGE, Rungis, France, developing subsidiaries with local capabilities and focusing on high-technology projects” (ENR 1981).

“Nicolas Bouygues, Director of International affairs: “You must be American to work in North America,” he says, explaining why his firm is looking for a U.S. acquisition or partnership” (ENR 1982).

“John Metzner, commercial manager of Costain International, Inc., London: There is a growing tendency to go local; companies are setting up

73 regional offices to keep their eyes on prospective work, bid and manage projects” (ENR 1982).

“Shinobu Yano, managing director of OCAJI: fiscal year 1988 was a turning point for Japanese builders working overseas, because of the acceleration of world wide localization. The tendency was particularly noticeable in the U.S, according to Yano. OCAJI figures show that early half of the US work reported by its member in 1988 was won by local subsidiaries, compared with 29% in 1987 and 27% in 1986. The recent agreement that will give Tobishima Corp. an 8% stake in a major U.S. contractor, George A. Fuller Co., will push the percentage even higher in 1989” (ENR 1989).

“Lindemann Holzmann: “Going overseas with a lot of expatriates is no longer competitive, even though there are still big projects which have to be done this way.” …This particularly is true in less sophisticated markets where aid remains a key to major contracts” (ENR 1990).

“Eugene McGovern CEO, Bovis international Ltd., London: “We take the philosophical position that we do not want to be an expatriate organization in [these] countries” (ENR 1990).

“Hisashi Tsukamto, general manager of Kajima Corp. Tokyo, “Construction know-how varies from country to country,” so Kajima has progressively localized its overseas operations” (ENR 1991).

“Stephen P. Darnell, Vice President, FMI, Management Consultants, Denver: “The word in our industry is that consolidation and globalization through foreign investment will play a major role” in doing business. A decade a go, there was virtually no foreign ownership of U.S. construction firms. Today, 15 of the largest 100 contractors on ENR’s Top 400 list are totally or partially owned by foreign investors. FMI estimates that more than 50% of these investments are controlled by European companies, led by the British with 30%. France, Germany and Finland also are big investors with a total of 26%. Japanese firms control 13%. The trend likely will continue as the market becomes globalized” (ENR 1991).

“Roberto Dias and Cesar A. Velosa de Castro, directors of Odebrecht, Braizl: There are few get-rich-quick avenues left in the business. He cautions contractors that expect to come into a country for “a quick windfall profit and then get out again.” Odebrecht’s approach on entering a new market is “patient establishment of a solid and enduring working relationship,” usually through local partnerships” (ENR 1994).

“Herbert Bodner, Chairman and chief executive of Bilfinger + Berger, Germany: A decade ago, it was still possible to function from headquarters in overseas markets, but the international business is becoming a more domestic business in other countries” (ENR 2000).

“Keith Clarke, chief executive of Kvaerner Construction Ltd., London: agrees that it is becoming more difficult to work from home. “We are decreasing the amount of projects we export from the U.K.,” he says. “We are more interested in being local in a number of areas.”” (ENR 2000).

“Sweden’s Skanska AB, is becoming increasingly local, largely through mergers and acquisitions. “Our strategy is to grow in regions and markets…where we see good opportunities for the future and where we see good companies [to acquire],” says Per Westlund, executive vice president” (ENR 2000).

“Hanno Bastlein, head of international work, Hochtief: like others, increasingly relies heavily on local partners and subsidiaries, handling only special projects form home. “Then it makes sense to move expatriates.”” (ENR 2001).

“Tyler, Balfour Beatty: For many firms, the days of routinely bidding foreign mega-projects from home are all but gone. Balfour Beatty, for example, still has a share in a Swiss Alpine tunnel, but “there are very, very few such projects.” Skanska has replaced opportunistic bidding with large international build-operate-transfer (BOT) jobs, and it is not alone” (ENR 2004).

These quotes from international construction industry leaders, presented in a chronological manner, reveal a significant tendency that permanent and localized foreign subsidiaries and partnerships are becoming more important institutional settings to access foreign markets, while temporary opportunistic bidding (or mobile entry) has gradually faded out with the decreasing number of mega-projects and globalization of the construction industry. Contractors tend to use foreign subsidiaries, sometimes complemented by headquarter participation and support, to penetrate selected markets to meet the changing conditions of international construction markets. However this does not mean that the project by project entry (mobile entry) is disappearing (as the analysis in Section 4.5 will indicate). The current status of the international construction arena is in fact a mix of these two generic market entry modes: permanent entry and mobile entry.

The difference between permanent entry and mobile entry in operation can be illustrated by adapting the value chain tool suggested by Porter (1980), which models the firm as a chain of value-creating activities. The value chain divides the operations of the firm into a series of discrete activities, which can be grouped into either primary activities and support activates. Miles (1995) adapted Porter’s model which is based on the operations of a manufacturing firm to suit the special conditions of the project based construction industry, and in his conceptualization the value chain for construction has two parts: 1) support activities and 2) project operations (see Figure 4.7). Support activities include ongoing firm infrastructure (e.g., corporate strategic planning and control), human resource management, technology development, and procurement; project operations include marketing and bidding, project specific planning, inbound logistics (e.g., project specific purchasing and subcontracting), operations (i.e., construction), and commissioning in the sequence of a typical project life cycle.

Margin Commission and bidding and Operations Marketing Planning logistics Inbound ing

Figure 4.7: The Generic Value Chain of Construction Projects (Source: Miles 1995)

In different entry modes, the activities are geographically located in different ways. In permanent entry, the entrant establishes a permanent organization (office or company) in the host market to carry out both (partial) support activities and discrete project operations; while in mobile entry, the entrant uses a temporary project office (sometimes, temporarily incorporated) as the unit to carry out both project operations and (partial) support activities in the host market (see Figure 4.8). In both generic entry modes, some support activities like human resource management and technology development can be carried out by the headquarter based in the home country.

Figure 4.8: Comparison Between Mobile Entry And Permanent Entry

This approach to differentiating between permanent entry and mobile entry by speculating whether there is a permanent organization in the host market carrying out support activities implies that entrants using permanent entry will keep their presence and

77 carry out support activities like human resource management, while entrants using mobile entry will pause their support activities, lay off their local employees, and leave the market.

Some other differences between permanent entry and mobile entry cannot be illustrated by the value chain tool. For example, in permanent entry, the entrants tend to localize staffing and marketing and focus on local projects. In mobile entry, more expatriates are sent overseas and large international projects (e.g., World Bank projects, projects invested by allied owners, or technically complicated projects that host country cannot complete) are targeted.

The following section, by using empirical data, will further investigate the differences between permanent entry and mobile entry.

4.5 An Empirical Investigation of the Mobile Versus Permanent Entry Dichotomy

In the database developed in this research, there are only 33 contractors (see Appendix K) who reported the exact time when they established subsidiary, branch or other modes of permanent entry for specific foreign markets. Although this limited data was not randomly chosen, it is still relatively representative of major international contractors in terms of firm size and geographic distribution (see Table 4.2), and can be used to show the trends regarding international construction market entry.

78 Table 4.2: Contractors Investigated for Mobile Entry Versus Permanent Entry Internatinal revenue Global revenue Highest ranking Company Code Country (average 1992-2001) (average 1992-2001) in 1992-2001 Besix 24 Belgium 409.68 692.86 49 Bilfinger 25 Germany 2360.16 4493.08 9 Bovis 29 UK 2905.89 3950.44 6 China Harbour 40 China 501.84 1763.75 39 Chiyoda 65 Japan 1497.90 2597.69 8 Clough 232 Australia 124.40 339.00 90 CSCEC 58 China 1060.92 4129.04 19 CTCI 78 Taiwan 43.14 309.22 125 Daewoo 79 Korea, South 615.46 2459.17 30 Daewoo Engineering 80 Korea, South 25.60 106.42 169 EEI 235 Philippines 21.73 109.60 139 Ferrovial 107 Spain 1502.00 3338.50 5 Foster Wheeler 95 USA 2324.80 3467.68 5 Fujita 1000 Japan #N/A #N/A #N/A Hchtief 115 Germany 3944.61 7314.59 1 Hyundai 117 Korea, South 1394.70 3917.66 12 Jacobs 124 USA 699.82 3928.56 23 JGC 125 Japan 1620.76 2306.31 14 Joannou 126 UK 670.03 670.03 27 Kajima 243 Japan 1373.00 11791.00 18 Kinden 129 Japan 136.26 4414.18 86 Leighton 134 Australia 435.40 1765.50 37 McConnell 139 Australia 213.60 278.65 77 Ohbayashi 148 Japan 1091.80 11975.64 18 POSCO 258 Korea, South 110.84 946.44 80 Shimizu 171 Japan 956.17 13569.52 25 SK 263 Korea, South 696.83 1504.30 33 Ssangyong 177 Korea, South 262.29 1291.14 61 Taikisha 183 Japan 440.89 2562.90 47 Takenaka 185 Japan 772.02 11224.41 33 Tractebel Engineering 207 Belgium 103.38 146.55 89 Wuyi 63 China 89.70 136.63 121 You one 2000Korea, South #N/A #N/A #N/A

From Figure 4.9, it is observed that the sampled construction firms have increased the use of permanent entry since World War II, and most permanent entries occurred in the 1980s and 1990s. This is consistent with the aftermath of the OPEC construction boom.

Number of permanent entry occurence 1900 1950 2000

Year

Figure 4.9: Chronology of Permanent Entry

The frequency of the use of mobile entry strategy has been very stable during the past two decades except 1980 and 1998 (see Figure 4.10). Some contractors may have entered certain foreign markets with mobile entry modes before 1980, but these entries are counted as if they happened in 1980 in data collection. That explains why there is a large entry number in 1980. A contractor with 61 overseas markets, Trectebel Engineering, was first included in the Top 225 International Construction Firms list in 1998 by ENR, making this year’s entry number look abnormal. Disregarding the problems encountered in data collection, it can be seen that there has been a relatively stable frequency of the use of mobile entry strategy for the past two decades.

100

0 Number of mobile entry occurence

1980 1990 2000 Year

Figure 4.10: Chronology of Mobile Entry (1980-2001)

Some contractors established permanent organization before they acquired some contracts in overseas markets. The established organization can facilitate marketing, but can not ensure work is performed immediately. This time lag between permanent residence and first work is distributed as in Figure 4.11 based on the dataset. It is a triangular distribution skewed to the left, indicating most contractors can acquire job shortly after they establish their residence. Because ENR survey respondents may just report significant revenue from overseas markets, the real lag time may be even shorter. However, in some extreme examples the lag time can be very long. For example, Fluor Daniel established a representative office in Indonesia in 1975 but acquired a significant project in 1987 (ENR 1987).

10 Frequency

-20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0

Time lag (years)

Figure 4.11: Distribution of Time Lag between Permanent Residence Establishment and First Business Implementation

Before establishment of permanent residence, some contractors may test an overseas market by pursuing projects on a contractual basis, or in some cases, entrants identify long term benefits for having a permanent residence after completing some projects on a contractual basis. This testing time is also a triangular distribution skewed to the right as shown in Figure 4.12 . This indicates that for many firms, this time is short.

20 Frequency

0 10 20 Testing time (years)

Figure 4.12: Distribution of Testing Time from the First Project and Establishment of Permanent Residence

With permanent entry, a contractor has an advantage to establish better local networks and gain more local knowledge and expertise than under mobile entry. Therefore permanent entry may lead to more local projects than mobile entry. This study measures this effect with an index, “continuity”, which is the number of years that a contractor had revenue from a specific market from 1992 through 2001. The highest value of continuity is 10, indicating that the contractor always had projects to work on during the ten years of study; the lowest value is 0, indicating that the contractor did not have work in the geographic during the ten years. A two sample t test was conducted to test the following hypotheses: H0: Permanent entry and mobile entry involve the same amount of continuity; H1: Permanent entry involves a larger continuity value than mobile entry.

83 Minitab is used to analyze the data developed in this research (see Appendix I and M), and the result is as follows: N Mean StDev SE Mean Mobile entry 896 4.85 4.56 0.15 Permanent entry 330 7.98 6.37 0.35 Difference = mu Mobile entry - mu Permanent entry Estimate for difference: -3.128 95% CI for difference: (-3.879, -2.377) T-Test of difference = 0 (vs not =): T-Value = -8.18 P-Value = 0.000 DF = 458

Because the P-value (0.000) is less than 0.05, we can reject H0 and conclude that contractors using permanent entry have a larger business continuity in the market than those using mobile entry. This however does not mean that permanent entry is superior to mobile entry (this issue will be analyzed in Chapter 8). Although continuity reflects business sustainability and possibly profitability to some extent, it cannot measure all different effects (e.g., risk exposure and flexibility). The different effects between permanent entry and mobile entry will be further discussed in Chapter 6.

4.6 Summary

A review of the globalization process of the construction market explained why in recent and current conditions market entry mode selection is a critical decision issue for both seasoned and future international construction firms to survive and grow. Both industry practitioners’ opinions and empirical data indicate that international contractors are faced with a dichotomical selection between permanent entry and mobile entry, two generic market entry modes differing significantly in operational characteristics. Their difference in business continuity was analyzed. This dichotomy as well as the lower level basic market entry modes within each will be further examined in the next chapter.

CHAPTER 5

ENTRY MODE DEFINITION

This chapter first introduces the methodology for entry mode definition (Section 5.1), and then defines and characterizes each basic entry mode (Section 5.2). The definitions are then evaluated by a survey (Section 5.3). Finally, these entry modes are examined regarding their compatibility (Section 5.4) and transferability (Section 5.4) among each other, and applicability regarding different geographic markets (Section 5.5).

5.1 Methodology

Entry mode is an institutional arrangement that makes possible the entry of a company’s products, technology, human skills, management or other resources into a foreign country (Root 1987) . An entry mode defines “how” an entrant enters a foreign market, by abstracting the pattern of institutional settings to support the entry process. It is not only a legal definition, but functional definition as well. For example, some contractors form a joint venture with local partners to purse targeted projects. This JV, legally a corporation or partnership where two or more parties contribute equity and share liabilities, can be different in function. It can be a temporary legal entity created just for one specific project (so called “contractual JV” or “consortium”) so that it is liquidated once the project is completed, or it can be a permanent organization so that even in short of work, the joint venture will retain its personnel and physical assets and keep pursuing new projects. This difference in either legal or functional dimension may depend upon the strategic perspective of the entrants regarding the target market and their internal and external environment at the time of entry.

85 It is not appropriate to create new definitions for entry modes for the construction industry unless there is no specific existing definition, since many modes are well understood and extensively cited by practitioners and academics in industries including construction. What has not been performed is to sort them on a general framework to suit the characteristics of the construction industry. The product of this effort, a taxonomy of international construction market entry modes, can provide a framework with which practitioners can comprehensively understand their strategic options available regarding “how to enter a selected market” and select the optimal mode.

The entry modes that have been examined in international business literature include wholly owned subsidiary / sole venture (new establishment or acquisition), equity joint venture (majority, equal, or minority), licensing / franchising, R&D contract, alliances / contractual joint venture, export (direct or indirect), contract management, international lease, counter trade, representative office, branch office / company and others (Agarwal and Ramaswami 1992; Andersen and Gatignon 1986; Erramilli and Rao 1990; Erramilli and Rao 1993; Luo 1999; Pan and Tse 2000). In some papers (e.g., Kogut and Singh 1988), Mergers & Acquisitions were taken as an entry mode, but in others (e.g., Pan and Tse 2000), it is regarded as a method to form an entry mode like equity joint venture. This research takes the perspective of the latter. Regarding each of these entry modes, cases were collected from the construction industry through interview surveys and literature reviews (e.g., academic journals, industry journals, books, and various news sources) (see Appendix T). Sometimes, no cases could be collected regarding certain entry modes because these entry modes either do not exist, like export (Root 1987) or are not common in the construction industry. Cases that involve patterns of entry that could not be matched by any well defined entry modes were also collected, like those cases about BOT / equity project and local agent. Some cases involved more than one entrant and / or mode. For example, when two firms form a strategic alliance as well as joint venture project to enter a foreign market, we count this case as four entry case studies. That is to say, each case only involves a single entrant entering an overseas market with a single entry mode. In this way 94 detailed and typical cases are

86 summarized in Table 5.1. They are classified into 9 categories corresponding to 9 basic entry modes. Table 5.1: Sampled Market Entry Cases for Entry Mode Definition Code Entry mode Description Code Entry mode Description SA01 Str. alliance Groundwater + Kruita -> Japan JV06 JV company Skanska + local firm -> Czech SA02 Str. alliance Bechtel + North West Water -> world JV07 JV company Skanska + local firm -> Germany SA03 Str. alliance Bechtel + North West Water -> world JV08 JV company Raytheon + local firm -> Middle East SA04 Str. alliance Fluor Daniel + Hitachi ->Japan JV09 JV company Bechtel + CITIC ->China SA05 Str. alliance Morrison Knudsen + SPT -> Russia JV10 JV company Taisei + CSCEC -> China SA06 Str. alliance Morrison Knudsen + SPT -> Western JV11 JV company Singapore firms -> Russia SA07 Str. alliance Bechtel + Pipe Line System -> world JV12 JV company Singapore firms -> Russia SA08 Str. alliance Bechtel + Pipe Line System -> world JV13 JV company China Harbor -> Singapore SA09 Str. alliance BEJK + DuPont -> USA JV14 JV company SMEC + local firms -> China SA10 Str. alliance BEJK + DuPont -> Outside USA JV15 JV company PG&E + Bechtel -> world SA11 Str. alliance Jacobs + Wimpey -> world JV16 JV company Turner + Steiner -> world SA12 Str. alliance Jacobs + Wimpey -> world JV17 JV company Turner + Steiner -> world SA13 Str. alliance Skanska + Coca-Cola -> world JV18 JV company BE&K + Polar -> Latvia SA14 Str. alliance Bovis Lend Lease + BP -> world JV19 JV company BE&K + Polar -> Latvia SA15 Str. alliance Bechtel + Wireless Facilities -> world SV01 SV company Bechtel -> Japan SA16 Str. alliance Fluor Daniel + AMEC ->world SV02 SV company Rust -> Hong Kong -> Mainland China SA17 Str. alliance Fluor Daniel + AMEC ->world SV03 SV company Rust -> Australia SA18 Str. alliance Bechtel + Korea ->Korea SV04 SV company China Harbor -> Singapore SA19 Str. alliance Beacon + Dioguardi -> USA SV05 SV company Black&Veatch + Thames -> world SA20 Str. alliance Beacon + Dioguardi -> Europe SV06 SV company Hochtief + Turner -> USA SA21 Str. alliance Fluor Daniel + Ohbayashi ->Japan SV07 SV company Skanska -> USA SA22 Str. alliance Parsons + Shimizu -> Japan SV08 SV company CSCEC -> USA PP01 BOT/Equity Bovis Lend Lease -> China SV09 SV company Shimizu -> Taiwan PP02 BOT/Equity Hopewell -> Mainland China SV10 SV company Kumagai Gumi -> Taiwan PP03 BOT/Equity PG&E+ Bechtel -> world SV11 SV company SembCorp -> Malaysia PP04 BOT/Equity PG&E+ Bechtel -> world RO01 Rep. office Fluor Daniel -> Indonesia PP05 BOT/Equity Hopewell -> India RO02 Rep. office Bechtel -> China PP06 BOT/Equity Rolls-Royce -> India RO03 Rep. office Shimizu -> Taiwan PP07 BOT/Equity Obrascon -> Argentina RO04 Rep. office Fujita -> Peru PP08 BOT/Equity China Road&Bridge -> Romania RO05 Rep. office SembCorp -> Middle East PP09 BOT/Equity Daewoo -> Laos RO06 Rep. office CTCI -> Malaysia PP10 BOT/Equity BE&K + Polar -> Latvia RO07 Rep. office Shimizu -> USA PP11 BOT/Equity BE&K + Polar -> Latvia RO08 Rep. office CSCEC -> Korea, South PA01 JV project Fluor Daniel + Duke -> Indonesia RO09 Rep. office Obayashi -> USA PA02 JV project Ohbayashi + subsidiary -> USA BO01 Branch office Austin -> Japan PA03 JV project Texas Engineers ->Thailand BO02 Branch office Shimizu -> Singapore PA04 JV project Maeda + local firm -> Taiwan BO03 Branch office CSCEC -> Thailand PA05 JV project Brown & Root -> world BO04 Branch office Shimizu -> Taiwan PA06 JV project Brown & Root -> Mexico BO05 Branch office Obrascon -> Argentina PA07 JV project Raytheon -> Middle East BO06 Branch office Hochtief -> Brazil PA08 JV project Bouygues + Blount -> Middle East BO07 Branch office CSCEC -> Korea, South PA09 JV project Bouygues + Blount -> Middle East BO08 Branch office SembCorp -> Eastern Europe JV01 JV company Black&Veatch + Tarmac -> world LS01 Licensing Daewoo -> Taiwan JV02 JV company Black&Veatch + Tarmac -> world LS02 Licensing Kumagai Gumi -> Hong Kong JV03 JV company Dragados + loca firm -> Middle East LS03 Licensing TSUKISHIMA KIKAI -> China JV04 JV company JGC + M.W.Kellogg -> Middle East LA01 Local agent BGP Inc. -> Indonesia JV05 JV company Dematteis + local firms -> China LA02 Local agent BGP Inc. -> Oman

Case descriptions have a uniform format: firm A (+ firm B) -> market C. Here “+” means formation of alliance or joint venture; “->” means entering; ( ) means possible

87 occurrence of a partner(s). Some entry cases have exactly the same description, because either 1) two companies formed a JV company, JV project, or strategic alliance to enter the same market (e.g., JV 01 and JV02); or 2) one company used more than one entry mode simultaneously (e.g., RO08 and BO07) or sequentially (e.g., JV13 and SV04).

Cases under the same category were compared to find the common and unique characteristics of each entry mode in accordance with the category in collaboration with definitions and characterizations reported from literature. To map and analyze the relationships between different entry modes and between different participants and entry modes, and show whether an entry mode involves immediate business / project implementation, a graphical tool (see Figure 5.1) for content analysis of cases was developed.

Figure 5.1: Content Analysis Tool for Each Case Study

88 The graphical tool (protocol) incorporates different entry participants, 9 basic entry modes, a symbol indicating whether a company is established through M&As, and a symbol indicating project implementation. The number in brackets indicates the number of the occurrence of 1) participants, 2) entry modes, and 3) project implementation individually by counting all the cases under the category corresponding to a specific entry mode. The number in the black box shows how many JVs or SVs are formed with Mergers & Acquisitions. The arrows between these factors indicate the real (in solid line) or potential (in dashed line) coexistence of linked factors in cases. For example, Figure 5.1 would describe the following case: a US based contractor formed a new JV company in Hong Kong with a local partner to secure infrastructure development projects in mainland China. Soon, this JV company signed a BOT concession agreement with a provincial government for a water supply project, and then established a new joint venture project company with one of the local state owned utility companies to implement the project. The dashed line means that the HK-based JV company can potentially implement any projects in HK or mainland China.

5.2 Basic Entry Modes for International Construction Markets

The general settings, formation process, merits and demerits, as well as possible variances under specific conditions for each basic entry mode are presented and discussed in this section.

5.2.1 Strategic Alliance (SA)

A strategic alliance is a long-term inter-corporate association without an affiliated organization based on trust and a mutual respect for each participant’s business needs, used to further the common interests of the members that can include customers (e.g., SA13), governments (e.g., SA18), suppliers (e.g., SA01), engineers (e.g., SA04), financial institutions, and other contractors (e.g., SA16). According to the position of

89 partners in the supply chain systems, a strategic alliance can be either horizontal when partners are on the same level (e.g., between contractors like SA11 and SA16), or vertical when partners are on different levels (e.g., between owner and contractor like SA09 and SA13). An entrant can form a strategic alliance with local firms (e.g., SA01, SA18, and SA22), firms from another country (e.g., SA7 and SA11), or firms from its own country (e.g., SA13 and SA16) (Tse et al. 1997).

Within a strategic alliance, firms agree to share resources, technology, profits, projects, and supplement each others’ needs for a long period of time. Unlike JV company, a strategic alliance does not involve an incorporated subsidiary, affiliate, or partnership; It is for a long term cooperation or a group of projects (e.g., SA14 and SA19), which is different from a joint venture project that is for a specific project(s). In general a strategic alliance can help entrants to reduce investment risks, share technology, improve efficiency, enhance global mobility, and strengthen global competitiveness (Tse et al. 1997). An alliance with a local partner can help to obtain the construction permit and get acquainted with local construction codes and market conditions like labor availability and competitor information (Badger and Mulligan 1995). The reasons for a foreign firm to form a strategic alliance with another foreign firm include risk sharing, resource pooling, asset protection, and the ability to react quickly to market changes (Tse et al. 1997). In SA19 and 20, Beacon and Dioguardi felt that a strategic alliance provided a means for medium-size construction firms to explore international projects while keep them private.

In general, there are four stages within the strategic alliance formulation process (Pietroforte 1996): 1) Capability study and validation. Mutual understanding is normally established in previous work cooperation experience (most cases in the database). Existence of complementary capabilities and recourses is an important condition to form strategic alliance.

90 2) Initiation. Companies that have had working cooperation may provide the initiatives to forma strategic alliance. Sometimes owners can issue a RFP for alliance partners (SA13); or a strategic alliance can be initiated by incumbent contractors (SA01). 3) Negotiating alliance conditions and sometimes documenting it in contract, agreement or memorandum of understanding (most cases). Simple and non exclusive agreements are used while oral contracts work in Asia and Europe. Measures are set to avoid overlap and competition. For example, in case SA11 and SA12, Wimpery’s marketing group will pursue European-based clients while Jacobs will pursue U.S.-based clients. In addition, a prospect reporting system was centralized to eliminate dual pursuits in SA11 and SA12. An alliance may be effective only for a fixed period of time (e.g., five year term in SA13). 4) Operating and enhancing the alliance. A task force, e.g., management committee, can be established to coordinate alliance activities.

However, Step 1) and 2) can be switched. In SA19 and 20, the two companies signed a strategic alliance agreement before they identified the complementation between them.

A strategic alliance does not directly lead to work implementation, but can facilitate potential projects or other entry modes (see Figure 5.2). A strategic alliance is always applied in connection with other entry modes like joint venture project (21 of 23 cases), Licensing (2 out of 23 cases), and joint venture company (2 out of 23 cases). SA is used to enter not only a specific country (12 out of 23 cases), but also a wide range of markets (11 out of 23 cases) or sometimes niche markets in a select group of markets (SA02, SA03, SA04, SA07, SA08, and SA15). Some strategic alliances between contractors (horizontal alliance) involve a mutual entry, that means each partner enters the other’s traditional markets under the alliance arrangement (Case SA2, SA4, SA5, SA6, SA7, and SA8). The arrows between participants and entry modes in Figure 5.2

91 mean that in many cases, the formation of a strategic alliance can trigger other entry modes like JV project, licensing, and BOT / equity projects.

Figure 5.2: Relationship Mapping for Strategic Alliance

5.2.2 BOT / Equity Project

International construction and contracting firms worldwide are increasingly asked either to offer financing packages or to take equity in projects (Tiong and Yeo 1993). A BOT or equity project provides a vehicle for an international contractor to pursue such projects. About 60% of contractors surveyed by ENR (1986) indicated that they had submitted one or more offers during 1985 which called for the bidder to arrange major

92 financing for the project, and 60% of these were successful in winning one or more such contract in 1986. These contracts were worth a total of about US$6 billion. An ENR paper in 1992 cited an industry veteran’s estimate that Bechtel, either directly or indirectly, helped secure financing on nearly 50% of its international work in 1991.

In a BOT project, typically, the government grants a concession to a private sector entity, a bidding consortium or project company. In turn, the concessionaire puts up the necessary capital, designs and constructs the infrastructure, and operates it for a certain period of time (generally 10 to 30 years) to pay off the debt and earn a reasonable rate of return from the operational revenue. The concessionaire then transfers ownership of the infrastructure to the government free of charge or at an agreed price. BOT is not a rigidly defined set of rules, but has different characteristics and structures (Tiong 1990). “BOT” or “Public Private Partnership (PPP)” is often taken as the general designation of many variants. Roughly speaking, Private Finance Initiative (PFI) can be a UK version of BOT or PPP. Whatever it is called, the BOT / PPP / PFI perspective emphasizes the combination of the complementary skills and resources of public agencies and private parties to achieve a win / win result. A traditional construction firm can be the concessionaire or just a partner of the project company in a BOT project. It is also the contractor responsible for facility construction, normally under a turn key contract. Therefore, the construction firm takes a dual role as both owner and contractor in such an arrangement. .Although becoming increasingly important in winning work, BOT projects involve high development costs and sometimes have to be managed for many years.

An equity project is not a well defined term, but represents an arrangement where a contractor is asked to take equity in the project bid, no matter whether the project is a privately funded or privatized public project under the BOT approach. For example, a contractor may take equity in a project which is mainly funded by a petroleum company and does not involve any concession grant from the local government. In this sense, an equity project is a broader concept than BOT from the perspective of international contractors.

In BOT / equity project, contractors’ funds mainly come from themselves, their own government, or commercial banks. Other sources of financing were barter and counter trade, development bank, and funds provides by the government of a third-country joint venture partner.

BOT / equity project is often linked with another entry mode, like joint venture project (7 out of 11 cases), which normally involves a project specific company with limited liability and legal person status (see Figure 5.3).

Figure 5.3: Relationship Mapping for BOT / Equity Project

94 5.2.3 Joint Venture (JV) Project

Nowadays, it is nearly impossible for contractors to do business overseas without assistance. Joint venture on a project basis, or sometimes called consortium, contractual joint venture, or contractual alliance is very common in international projects. It is a vehicle in which profits and other responsibilities are assigned to each party according to a contract. These do not necessarily accord with each partner’s percentage of the total investment. The partners also have the option of forming a limited liability entity or partnership with legal person status, similar to that of a JV company, but this entity only exists for this specific project. There are two types of JV project: the integrated and non-integrated (Sridharan 1994). In an integrated JV project, staff from different partners are seconded to the joint venture and a single project team is created. The partners take joint responsibility for the profit or loss made on the project. In a non-integrated JV project, partners are responsible for planning and executing their own portion of work as well as the profit and loss made from their portion of the work.

A JV project can ensure that the company has flexibility and mobility in the foreign market, and other advantages of a JV project include cost saving by using overseas partners’ infrastructure and liability limitation. They are sometimes mandated by local laws or owners. Despite the dismantle of some market barriers against establishing permanent local presence, Brown & Root kept using JV project to pursue and carry out projects in Mexico (PA06). However it is difficult to find the right partner who is technologically progressive and compatible with an entrant’s business purpose, and politically savvy locally. International contractors can form JV project with local firms (five out of 10 cases) or firms from the same region (e.g., in PA01, Fluor formed a JV project with two Japanese firms to pursue an Indonesian project) or other international contractors (e.g., in Case PA08, Bouygues from France formed a JV project with Blount from the US to pursue a project in the Middle East), or some or all of them (e.g., PA05) to carry out a project. Sometimes an international contractor can form a JV project with

95 its subsidiary in the same market. For example, in PA02, Obayashi and its US subsidiary (Obayashi America) formed a joint venture to carry out the Kudos Tunnel project.

The process to form a JV project can be very simple. In Case PA08, Blount was following a project, and then they received a call from Bouygues to ask them if Blount is interested in joining them, although the two companies did not have prior work experience together. Blount sent a person over and they worked out the agreement. With a JV agreement, Bouygues was the sponsor with 55% participation and was able to select senior project and site mangers from its personnel and adopt the hierarchy in accordance with Bouygues’ principles. Blount furnished their share of the supervisory staff. Heading the team would be a project manager, a Bouygues manager. The number two person in charge would be a Blount manager. The joint venture had a separate management board that met periodically – once a month for the first year or more often if necessary. The board, however, had equal representation, two people from each company. English was used on the job by management.

JV project and project partnering are different concepts, but they can be used together. In PA05, Brown & Root pioneered the partnering concept on its international projects based on a JV project. A facilitator, much like that used in partnering, will help build the team, set goals, and build trust. In an alliance relationship, the owner usually selects the program manager or engineering contactor. The owner and program manager select the other participants, and as others come on board, they sit in on evaluations of subsequent members. In this way, the organizations are totally integrated.

Figure 5.4 depicts the relationships between JV project and other entry modes. It shows that in most cases, a JV project can be independently used to implement overseas projects. Representative office and SV company could be integrated with a JV project (e.g., PA02).

Figure 5.4: Relationship Mapping for Joint Venture Project

5.2.4 Representative Office (RO)

Although technically not considered a form of Foreign Direct Investment (FDI), a representative office is a quick and relatively simple way to establish a formal presence in the host country and become acquainted with a target market. A representative office, although normally prohibited from engaging in direct, profit-making business activities, can do business communications, product promotion, market research, contract administration, and negotiations on behalf of their head office and other such non-commercial activities. The most apparent advantages the representative office has over other entry modes are its simplicity and flexibility. Closing a representative office is also relatively easy compared to terminating a joint venture. There may be minimum

97 capital requirements and local participation rules for a foreign invested subsidiary, but these are not applicable for a RO. However, regulatory and start-up costs can be expensive.

Flexibility of a RO is illustrated in Case RO02. In this case, the inflation of the early 1980s made Bechtel consolidate its four expatriate office in Beijing into one and gave him additional assignments outside the PRC. Bechtel also gave up the lease of a large house it had occupied in Beijing. Establishment of a representative office does not mean immediate work to be performed. In Case RO01, Fluor opened an office in Indonesia in 1975, but did not get a significant project until 1987. A representative office can not only facilitate the pursuit of business on a project basis (RO01) but also can be upgraded into a branch company (RO03) or subsidiary (RO06 and RO07). The case of SembCorp (RO05) demonstrates that a direct establishment of a RO may not be necessary. In this case, SembCorp obtained a representative office in the Middle East by acquiring a UK based company. Sometimes an international contractor has a representative office together with a branch company (RO08) or subsidiary (RO03 and RO09) in the same market. In this arrangement, the representative office which is independent from the local branches or subsidiaries is set to help the company headquarters to identify certain types of projects.

Figure 5.5 depicts the relationship between RO and other entry modes. It shows that RO can support JV projects and be transformed into a branch office or a SV company.

Figure 5.5: Relationship Mapping for Representative Office

5.2.5 Licensing

Licensing in this study means a mode that may include licensing, franchising, and technology transfer that involves a contract between parties in different countries on the licensee’s use of limited rights or resources such as patents, trademarks, trade names, technology, or managerial skills from the licensor. This allows the licensee to provide construction services in the host country similar to the one the licensor has already been providing in its home country. Licensing provides a method for profiting from a foreign market without committing sizable funds and taking excessive international construction risks. However, income from licensing can be lower than other modes of direct foreign market presence and quality control can be another major disadvantage where bad quality

99 can result in damages to a licensor’s trademark and reputation. Moreover, a foreign licensee can sometimes become a competitor of the licensor.

In Case LS02, a businessman in Hong Kong bought the regional trade name use right from Kumagai Gumi in 1973 and established Kumagai Gumi (Hong Kong). With the name of Kumagai Gumi, the company achieved great growth and became a prestigious construction firm in Hong Kong. At the same time, Kumagai Gumi (Japan) also had presence in Hong Kiong with a subsidiary and representative offices. To avoid competition, the two parties had an undocumented agreement on how to share the Hong Kong market. In 1996, the management of Kumagai Gumi (Hong Kong) believed that with the previous fast development, the company could now stop using the name of Kumagai Gumi and they changed the company name into Hong Kong Development. The new company also stopped paying Japanese headquarters the royalty fee for the trade name use, but the two parties can now compete in any area.

Licensing can also be implemented on a project basis. In Case LS03, Tsukishima Kikai included technology transfer in an integrated delivery package (technology transfer, design, procurement and construction) to win a project in China.

5.2.6 Local Agent (LA)

A significant portion of international trade is carried out through agents. The common use of local agents is also very common in international construction. Agents can provide principle information on local market conditions (social, legal, economic, political, and financial); contacts with local owners, governments, and suppliers / subcontractors; and assistance in visa application, permission application, driver’s license application, import / export, taxes, and logistics, property and equipment lease / purchasing, communication infrastructure, and bidding information.

100

The use of local agents may not be optional, but mandated in certain markets. For example, in Saudi Arabia, foreign construction firms are required to have local agents before biding for any projects except defense works. With the requirement to use local agents, the government can control, to some extent, the qualification of construction firms with foreign nationality.

In Case LA01, BGP (the “Principle”) signed an agent agreement with PT.Saripari Geosains (the “Agent”), a firm in Indonesia to carry out a project that was awarded to the PT. Saripari Geosains / BGP bidding consortium. The Agent agreed that the Principal shall be the only valid operator to perform the project. The Principal shall execute any related business to perform the project by (in) the name of the Agent and try its best to maintain the Agent’s reputation. The Agent shall be compensated for services, information and assistance provided to the Principal by way of a commission fee.

Local agent mode can be transferred into a JV company. In Case LA02, BGP, with the help of its market agent (Rees Oil & Gas Service LLC), won a project in Oman. To carry out the project, the company had to establish a local commercial presence in the form of a JV Company (local partner must have at least 30% equity; a Branch company can be registered, but it can only be allowed to conduct public projects). BGP then formed a joint venture with Rees Oil & Gas Service LLC to fulfill the legal requirements.

5.2.7 Joint Venture (JV) Company

A joint venture (JV) company occurs when two or more legally separate bodies form a jointly owned entity in which they invest and engage in various decision-making activities (Geringer 1991). A JV company is termed International JV company where at least one of the parties (or parents) is based outside the country where the venture is

101 taking place (Geringer and Hebert 1989). A JV company can take one of two legal forms: 1) corporation; and 2) partnership. Construction organizations have extensively used international JVs as a vehicle to enter new construction markets around the world (Mohamed 2003). A JV company can be further classified as majority JV, equal JV and minority JV according to the equity percentage of a specific partner. To set up a JV company, each partner contributes cash, facilities, equipment, materials, intellectual property rights, labor, or land-use rights.

Complementary capabilities and resources are normally the basis to form a JV company. In Case JV01, Black & Veatch provided design and its partner Tarmac provided construction to provide a single entity for public and private clients seeking turnkey construction services on all types of projects. A JV company can be formed 1) between contractors (e.g., in Case JV02, Dragados formed a JV company with a ship repair company in Qatar to expand into offshore work in the Middle East); 2) between contractor and owner (e.g., in Case JV11, China Harbor established a JV with its owner to achieve growth in Singapore); and 3) between small and medium size firms to form synergy to pursue overseas projects (e.g., in Case JV10, five Singapore-based firms formed a JV company in Singapore to pursue projects in the former Soviet Union and Eastern Europe).

Mergers & Acquisitions are a very common approach to establish JV companies. In Case JV03, JGC purchased 45% of the M.W. Kellogg Co. to enter new markets in the Middle East. As a well-known acquirer, Skanska entered Germany (JV05) and the Czech Republic (JV06) by acquiring partial equity in local firms.

To avoid potential competition between the partners and the new JV company, market split can be set. In Case JV16, Steiner and Turner formed an equal JV company to pursue international projects, but Turner and Steiner each would retain some international

102 markets outside the target market of the new firm. Turner would hold back projects in North America and Japan, while Steiner would keep projects in Switzerland and Germany.

Figure 5.6 shows that a JV company does not mean the firm cannot form a JV project with other local firms. In Case JV07, Raytheon formed a JV company with SMAS, a local firm, and then this company pursued a project by forming a JV project with another local firm.

Figure 5.6: Relationship Mapping for Joint Venture Company

103 5.2.8 Sole Venture (SV) Company

The sole venture subsidiary offers international contractors increased flexibility and control to set up and protect their own processes and procedures and expand as quickly as they wish. Although it can be established more quickly than a JV company which involves time consuming negotiation, the establishment of a SV subsidiary is still lengthy as well as complex and costly. To establish a SV company, an international contractor can either use green field investment (4 out of the 11 cases) or acquisition (7 out of the 11 cases) (see Figure 5.7). M&As are the quickest way to expand one’s investment in the target country and offer immediate access to resources.

Many MNEs use a SV company only after expanding into markets through other modes that have helped them accumulate enough host country experience. However, in the international construction market, it is common for a foreign company to establish a SV in a foreign market without any local experience even without M&As (e.g., Case SV04 and SV10). However, this feasibility does not always make sense. In Case SV04, China Harbor (Singapore) registered in Singapore as a SV company in 1985, but the first project was not obtained until 1992. In Case SV04, China Harbor, after completing several large projects in Singapore and establishing its name, restructured the SV into a majority JV company (81%) with a local client. The change proved successful for China Harbor’s growth in Singapore.

Figure 5.7 shows that a SV company can form JV project with local partners to pursue and implement projects. It can coexist with a representative office or branch office, or be transferred into a SV company. Mergers and Acquisitions are common for establishing a SV company.

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Figure 5.7: Relationship Mapping for Sole Venture Company

5.2.9 Branch Office / Company (BO)

In addition to a representative office, a branch office (BO), or sometimes referred to as a branch company, is another relatively simple means for a new entrant to establish or expand a presence in a target country. In some countries (e.g., China), only foreign investors engaged in very few specific industries (e.g., banking) may apply for branch registration. Most foreign investors in China usually start with a RO rather than a BO.

Branch office differs from representative office in that it can undertake business transactions in a host country, and also differs from a SV company in that it normally

105 does not have a legal person status so that the foreign parent company is liable if civil charges are brought against the branch. Tax implications also differ from a SV company. To shield the parent company from unlimited damage claims, foreign companies interested in establishing branches offices may designate an offshore subsidiary as the parent. To establish a branch company or office, the parent company normally needs to register with the host government.

Branch offices vary in the degree of localization. In Case BO08, SembCorp’s Moscow office is a self contained unit, managed and administered locally, and under the guidance of the head office. Where necessary, colleagues in Moscow can request the support of the head office staff to support the sales effort or offer technical advice and expertise. In Case BO04, Shimizu’s Taiwan office has 42 Japanese expatriates out of a total staff of 89.

A BO is regularly established from scratch, but also can be developed from other modes (see Figure 5.8). For example, in Case BO04, Shimizu changed its representative office established in 1986 into a branch office in 1993. A BO can be established indirectly through an M&A. For example, in Case BO08, SembCorp obtained a branch in Russia that was established in 1994 by acquiring its UK parent company in 2001.

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Figure 5.8: Relationship Mapping for Branch Office / Company

5.3 Evaluation of the Entry Modes

To confirm the existence of the defined entry modes for international construction markets and evaluate the comprehensiveness of this taxonomy of entry modes, a questionnaire survey (see Appendix O) of seasoned participants in international construction arena was performed. A total of 6 responses from practitioners with an average of 16.5 years of international construction work experience were obtained (see Table 5.2 for particular details).

107 Table 5.2: Respondent Particulars Company ENR International Entry decision Respondent Designation ranking (2004) experience (YRs) involvement 1Vice president Top 20 8 Yes 2Vice president Top 20 10 No 3Director Top 100 34 Yes 4Senior project managerTop 100 15 Yes 5International managerTop 150 12 Yes 6Senior project managerTop 150 20 Yes

The respondents were asked to measure the frequency of the listed entry modes based on their observation with a 3 point scale (0: I have never seen this mode; 1: I have seen it, but it is not commonly used; and 2: I have seen it commonly used). They were also asked to add other modes they could identify. The frequency of each mode is reported in Table 5.3 and no additional entry modes were proposed. It can be seen from the table that most entry modes are commonly used in the industry except licensing. However the non-zero score (0.67) for licensing confirms its existence.

Table 5.3: Entry Mode Evaluation

Statitics Code Entry Mode Categorical Overall Mean Rank Rank Inter-corporate level (contractual) entry modes Vertical Strategic alliance Mode 1 Alliance/network with owners 1.50 4 13 Mode 2 Alliance/network with suppliers/subcontractors 1.50 4 13 Horizontal Strategic alliance Mode 3 Alliance/network with local contractors 2.00 1 1 Mode 4 Alliance/network with regional contractors 2.00 1 1 Mode 5 Alliance/network with international contractors 1.83 3 6

Corporate level (investment) entry modes Cooperative entry modes* Mode 6 Minority (<50%) equity Joint venture newly established 1.67 2 10 Mode 7 Minority (<50%) equity Joint venture established by M&A 1.00 7 18 Mode 8 Equal (50%) equity Joint venture newly established 1.83 1 6 Mode 9 Equal (50%) equity Joint venture established by M&A 1.33 4 15 Mode 10 Majority (>50%) equity Joint venture newly established 1.67 2 10 Mode 11 Majority (>50%) equity Joint venture established by M&A 1.33 4 15 Mode 12Local agent 1.33 4 15 Mode 13Licensing 0.67 8 19 Competitive entry modes* Mode 14 Sole venture newly established 1.83 2 6 Mode 15 Sole venture established by M&A 1.60 4 12 Mode 16 Branch office/company 2.00 1 1 Mode 17 Representative/liaison office 1.83 2 6

Project level (contractual) entry modes Mode 18 Joint Venture project/Consortium 2.00 1 1 Mode 19 BOT/Equity project approach 2.00 1 1

108 It should be noted that there is another basic market entry mode, sole venture (SV) project, which has not been addressed in the above analysis and evaluation. It is the most simple and direct entry mode that does not involve any partners or special contractual arrangement for risk mitigation or know-how transfer, or any form of ongoing presence in the local market. No case studies were collected for it. In fact in the international business literature reviewed by this research, SV project was not specifically addressed as an entry mode. Maybe for the same reason, none of the respondents added it in the survey. SV project can conceptually be used as a base entry mode, so by comparing with it, the unique institutional arrangements of any of the other entry modes can be identified. SV project is therefore included as a basic market entry mode for further investigation in Chapters 7 and 8.

In the manufacturing industry, subcontracting is used as an entry mode where the entrant, located in its home country, contracts with a local manufacturer to process goods into finished goods that will be distributed into the local market. This definition is obviously different from what subcontracting means for the construction industry. One characteristic of the construction industry is that the construction product is attached to the construction site, so subcontracting with the above definition for manufacturing cannot be used to penetrate overseas construction markets. Subcontracting as defined in the construction industry cannot be taken as an entry mode either, because it is a term which defines the project delivery arrangement and is not related to the internal institutional settings of any contractor involved, no matter whether it is the main contractor or subcontractor under the subcontract.

Considering the complicated and changing global construction market, this study recognizes: 1) the possible existence of other entry modes that are either uncommon or out of the scrutiny of this limited research, and 2) the possible emergence of new entry modes in the future.

109 5.4 Transferability and Compatibility of Entry Modes

The matrix in Figure 5.9 shows the compatibility (degree to coexist with other entry modes) and transferability (degree to be changed into other entry modes) of the entry modes based on the previous analyses of individual basic entry modes (see Figures 5.1 through 5.8). It can be observed that:

Licensing Local agent Joint ventureproject Joint BOT/PPP/PFI Branch office Strategic alliance Strategic Representative office Joint venture company Sole venture company

Figure 5.9: Transferability and Compatibility of Each Entry Mode

1) Strategic alliance is the most compatible entry mode. It can coexist with most of the other entry modes. Other contractual entry modes can coexist with most of other entry modes (high compatibility). Most contractual entry modes normally cannot be changed to other entry modes (low transferability). 2) Representative office shows high transferability and compatibility. Other investment entry modes are less flexible, but are compatible with most of the other entry modes (high compatibility).

110 It must be noted that the matrix and the associated observations are however constrained by the representativeness of the database.

5.5 Entry Mode-Country Relationship (Applicability)

One critical question about these entry modes is related to their general applicability around the globe. To make a general taxonomy, the entry modes must be structured on a general basis. Therefore, 42 representative countries from different geographic regions were investigated for their legal constraints upon the entry modes. Regarding each country, their investment laws and regulations were reviewed. As most of the countries are WTO members, their WTO commitments were examined. The result is shown in Table 5.4 . It can be observed that except for a small number of countries (e.g., Malaysia, Thailand, Indonesia, India, Mexico, UAE, Kuwait, Pakistan, Oman, and Egypt) imposing strict constraints on equity ratio of foreign contribution, most entry modes can be applied in different markets. It is also noticed that China has not allowed branch office / company and Thailand has recently denied representative offices. BOT / equity projects are feasible in most of these countries. It is important to note that what is reported here is just applicability of these entry modes from a legal aspect. This does not mean the sampled countries support or encourage all legally feasible entry modes. To protect the local construction industry, the feasibility may be further constrained by other barriers and they will be discussed in Chapter 8.

111 Table 5.4: Applicability of Entry Modes for Selected Markets Construction Entry modes

Country Region % GDP $ Mil Representative office Branch office JV project/ company SV project/ company agent Local BOT Korea, South Asia/Pacific 15.4 68183.5 √√ √ √√N/A China Asia/Pacific 17.02 181324.45 √ ╳ √√√√ Malaysia Asia/Pacific 12.05 9514.92 √√√(≤70%) ╳ √√ Thailand Asia/Pacific 12.4 16053.29 ╳ √ √(≤49%) ╳ √√ Japan Asia/Pacific 13.87 617909.12 √√ √ √√ ? Singapore Asia/Pacific 18.67 17380.65 √√ √ √√√ Hong Kong Asia/Pacific 10.78 19711.12 √√ √ √√√ Vietnam Asia/Pacific 12.4 3691.11 √√ √ √√√ Phillipines Asia/Pacific 9.54 7425.65 √√ √ √√√ Indonesia Asia/Pacific 8.3 12109.53 √ ╳ √(≤49%) ╳ √√ India Asia/Pacific 12.28 60241.87 √ ╳ √(≤51%) ╳ √√ Australia Asia/Pacific 10.49 43300.62 √√ √ √√√ USA North America 8.234 819300 √√ √ √√√ Canada North America 10.18 65234.97 √√ √ √√√ Mexico Latin America 8.95 44633.65 √√√(≤49%) ╳ √√ Brazil Latin America 13.8 109124.74 √√ √ √√√ Chile Latin America 10.81 8650.27 √√ √ √√√ Argentina Latin America 10.6 30668.24 √√ √ √√√ Peru Latin America 15.2 9147.82 √√ √ √√√ Venezuela Latin America 10.7 11564.03 √√ √ √√N/A Poland East Europe 13.63 22060.56 √√ √ √√√ Russia East Europe 10.81 43415.01 √√ √ √√√ Romania East Europe 10.8 3669.84 √√ √ √√√ Czech East Europe 13.53 7718.46 √√ √ √√√ Finland West Europe 11.54 15285.42 √√ √ √√√ Germany West Europe 11.37 252681.54 √√ √ √√√ UK West Europe 7.72 109223.95 √√ √ √√√ Netherland West Europe 10.59 42295.4 √√ √ √√√ France West Europe 7.01 106666.96 √√ √ √√N/A Spain West Europe 14.76 86389.84 √√ √ √√N/A Belgium West Europe 11.1 29095.32 √√ √ √√N/A Israel Middle East 12.01 12153.88 √√ √ √√√ Oman Middle East 9.9 1663.2 √√√(≤70%) ╳ √√ Pakistan Middle East 8.1 5068.58 √ ╳ √(≤51%) ╳ √√ Saudi Arabia Middle East 16.96 23786.86 √√ √ √√√ U.A.E. Middle East 15.1 8275.25 √ ╳ √(≤49%) ╳ √√ Kuwait Middle East 16.8 5146.86 √√√(≤49%) ╳ √√ Turkey Middle East 12.97 25401.56 √√ √ √√√ Egypt Africa 13.1 12711.45 √√√(≤49%) ╳ √√ Gahna Africa 15 1217.4 √√ √ √√√ Nigeria Africa 8.4 3828.72 √√ √ √√√ South Africa Africa 7.18 9697.38 √√ √ √√√ Total 11.91 71014.83 41 37 42 33 42 36

112 5.6 Summary

9 basic entry modes have been defined in this Chapter. Comparative case studies were carried out to illustrate the use of these basic entry modes regarding their structures, formation processes, and merits and demerits. Another basic entry mode, sole venture project was added. Transferability and compatibility of each entry mode (except sole venture project) in relation to others were analyzed. Finally, the applicability of these entry modes was evaluated regarding 42 sampled markets.

113

CHAPTER 6

RELATIONSHIPS BETWEEN MARKET ENTRY MODES

Based on individual entry mode definitions reported in Chapter 5, this chapter focuses on the investigation of relationships between these entry modes. Entry modes are grouped based on their similarities and differences in setting characteristic (Section 6.1 and 6.2). Different entry modes are further differentiated in effects including risk exposure, return, control, resource commitment, and flexibility (Section 6.3 through 6.5). Based on data analysis, how different entry modes can be combined and sequenced for overseas markets is examined (Section 6.6). Finally, the mobile entry versus permanent entry dichotomy is investigated (Section 6.7).

6.1 Classifying Entry Modes by Setting Characteristics

The taxonomy of entry modes identified in the last chapter for international construction markets is shown in Table 6.1.

114 Table 6.1: The Taxonomy of Entry Modes for International Construction Markets Number Entry Modes 1Strategic alliance -Vertical alliance -Horizontal alliance -Local partner -Home partner -International partner 2Build-Operate-Transfer/equity project 3Joint venture project -Integrated -Nonintegrated 4Representative office 5 Licensing -Long term -Project based 6Local agent - Long term -Project based 7Joint venture company -Major -Equal -Minor -New establishment -Mergers & acquisitions 8Sole venture company -New establishment -Mergers & acquisitions 9Branch office/company 10 Sole venture project

There are multiple ways to group the basic entry modes according to their different and similar characteristics in institutional settings.

Depending on whether they involve competitive or cooperative relationship between entrants and other parties, market entry modes can be classified as either cooperative entry modes or competitive entry modes as shown in Figure 6.1. BOT / equity project is a cooperative entry mode because it is a partnership between the public and private sectors, and usually combined with JV project in practice.

115

Figure 6.1: Grouping Entry Modes Regarding Cooperative v. Competitive

Entry modes can be arranged on different organizational levels. Strategic alliance, long-term local agent, and trade name licensing involve collaborative contracts between firms. Therefore, these modes are on an inter-corporate level. SV company, JV company, representative office, and branch office / company are different forms of a firm or extension of firms. Therefore, they are on a corporate level. JV project, SV project, project-based local agent, BOT / equity project, and technology licensing are all related to the delivery of a specific project. Therefore, they are on a project level. All basic entry modes can be classified on these three levels as shown in Figure 6.2.

Figure 6.2: Grouping Entry Modes Regarding Hierarchical Level

Some entry modes are arranged based on contracts which define each partner’s equity and responsibilities. No corporate registration or legal entity is needed, but under certain legal requirements, a project based legal entity may be established. This corporation can become an “empty shell” once the project is finished (Abdul-Aziz 1995). The other entry modes involve long term investment in host market, and are called

116 investment entry modes. This approach of classification is shown in Figure 6.3. Strategic alliance is a special contractual entry mode in that it normally involves a contract, but it is not legally binding and can be in verbal form. A BOT / equity project is both 1) an investment mode as it involves large amounts of equity contribution and is for long time period, and 2) a contractual entry mode, as it is based on a concession agreement.

Figure 6.3: Grouping Entry Modes Regarding Contractual v. Investment

Entry modes can also be classified be the level of ownership. They are either partially owned or wholly owned by the entrant as shown in Figure 6.4. One mode to note is the strategic alliance where costs involved in the alliance is normally shared by partners. It is therefore conceptually reasonable to classify it into a partially owned entry mode. In licensing, ownership of firm title or technology completely belongs to an entrant for a specific market or project, so it can be conceptualized as a wholly owned entry mode. This grouping dimension, however, cannot apply to a local agent. BOT can be implemented by either a JV or SV project company, though JV is more common.

Figure 6.4: Grouping Entry Modes Regarding Ownership

117 Entry modes can be classified by whether they can only support other entry modes or they can be applied independently (see Figure 6.5). Among the basic entry modes, strategic alliance and local agent are supportive entry modes in the sense that they by themselves do not involve an actual penetration of the overseas markets. Instead, they must be used with other modes to pursue and implement projects. All other entry modes can be applied independently.

Figure 6.5: Grouping Entry Modes Regarding Supportive v. Principle

Williamson (1975; 1985) presented a conceptual framework that contrasted the market and the hierarchical firm as the two main transaction modes. According to the position in the continuum with market and hierarchy as two extremes, basic entry modes can be classified into three groups: hierarchy entry modes, quasi-hierarchy entry modes, and quasi-market entry modes (see Figure 6.6). There are, however, no market entry modes. This grouping dimension in fact reflects the internalization / market failure degree of basic entry modes.

118

Figure 6.6: Grouping Entry Modes Regarding Market v. Hierarchy

The dichotomy of permanent entry versus mobile entry splits basic entry modes as shown in Figure 6.7. The classification of an entry mode as mobile or permanent depends on its duration, degree of localization, and existence of an on-going organization to carry out support activities (see Figure 4.8 in Chapter 4). The BOT / equity project normally has a long duration and a high degree of localization. But, from an international contractors’ viewpoint, the participant in such a project does not have a permanent residence to support business growth, but usually aims to get the construction contract. Also, contractors can have the option to exit once the facility is completed. Therefore the BOT / equity project is defined as a mobile entry mode.

Figure 6.7: Grouping Entry Modes Regarding Mobile v. Permanent

The selection between mobile entry and permanent entry is critical in practice as discussed in Chapter 4, and the next two chapters will specifically address this selection issue. From a selection perspective, not all entry modes in Figure 6.7 need be considered. For example, the selection between the two supportive entry modes (strategic alliance and local agent) and others is not required. Since entrants will not face a selection

119 between strategic alliance and JV company, but may need to decide whether to use a strategic alliance to support a JV company. In addition, licensing is rare as indicated from the industry survey and data collection (see Chapter 5). To simplify the selection issue to be addressed in the next two chapters, this research will exclude licensing, strategic alliance, and local agent in the permanent entry versus mobile entry dichotomy (see Figure 6.8).

Entry modes

Mobile Permanent

SV project JV company JV project SV company BOT/Equity project Branch company/office Representative office

Figure 6.8: Grouping Entry Modes Regarding Mobile v. Permanent (Used for Mode Selection)

6.2 A Synthesis of Setting Characteristics of Entry Modes

The above analysis demonstrates that there are multiple dimensions of institutional settings that can be used to differentiate and classify entry modes. These dimensions and their grouping results are summarized in Table 6.2

120 Table 6.2: A Synthesis of Setting Characteristics of Entry Modes Cooperative Contractual Temporary Hierarchical Supportive Hierarchy versus versus Ownership versus levels versus main versus market competitive investment permanent BOT/Equity project Cooperative Project Either Either Main Temporary N/A Branch office/company Competitive Corporate Investment Whole Main Permanent Hierarchy Project based local agent Cooperative Inter-Corporate Contractual N/A Supportive Temporary Quasi-Market JV company Cooperative Corporate Investment Partial Main Permanent Quasi-Hierarchy Nonintegrated JV project Cooperative Project Contractual Partial Main Temporary Hierarchy Representative office Competitive Corporate Investment Whole Main Permanent N/A Strategic alliance Cooperative Inter-Corporate Contractual Partial Supportive Permanent N/A Long term local agent Cooperative Inter-Corporate Contractual N/A Supportive Either Quasi-Market SV company Competitive Corporate Investment Whole Main Permanent Hierarchy SV project Competitive Project Contractual Whole Main Temporary Hierarchy Project based licensing Cooperative Inter-Corporate Contractual Whole Main Temporary Quasi-Market Integrated JV project Cooperative Project Contractual Partial Main Temporary Quasi-Hierarchy Long term licensing Cooperative Inter-Corporate Contractual Whole Main Permanent Quasi-Market

With the defined dimensions, all basic entry modes have unique patterns except branch office / company and SV company. These two entry modes are in the same group for each of the dimensions. To differentiate between them, an additional dimension must be added. A distinctive dimension which differentiates these modes is nationality. A SV company has a local legal person status while a branch company is only an expansion of the headquarters based in the home country.

These dimensions can be integrated to show the relationships between entry modes more sophistically. A grouping method combining three dimensions (competitive versus cooperative, hierarchical level, and contractual versus investment) is shown in Figure 6.9.

121

Entry modes Cooperative modes Competitive modes Inter-corporate level (contractual)

- Strategic alliance Vertical alliance Horizontal alliance Local partner Home partner International partner - Local agent Long term - Licensing Long term

Corporate level (Investment modes): - JV company - SV company Major New establishment Equal M&As Minor - Branch office/company New establishment - Representative office M&As

Project level (contractual) - JV Project - SV project Integrated Nonintegrated - BOT/Equity project - Local agent Project based - Licensing Project based

Figure 6.9: Grouping Entry Modes with Multiple Dimensions

6.3 Different Effects of Entry Modes

The defined dimensions aid in the identification of each entry mode. However, when contractors select entry modes, they do not directly look at these dimensions. Instead, they investigate the strategic effects of different entry modes including the risk exposure, return, control, resource commitment, and flexibility. Some researchers contend that selection of entry modes should be based on trade-offs between risks and returns, and an entrant should choose the mode that provides the highest risk adjusted return (Agarwal and Ramaswami 1992; Luo 2001). In addition to return and risk,

122 behavioral evidence reveals that this selection is also determined by resource availability and control need (Cespedes 1988; Stopford and Wells 1972). This research suggests another effect of entry mode: flexibility. An international contractor should consider these five strategic effects (risk, return, control, resource, and flexibility) in a unified framework when they select an entry mode.

6.3.1 Risk Exposure

Managing risk is one of the primary objectives of firms operating internationally (Ghoshal 1987), however the strategic management field lacks a generally accepted definition of risk (Miller 1992). The label “risk” has commonly been assigned to factors either external or internal of the firm that have an impact on the risk experienced by the firm. In this sense, “risk” actually refers to the source of risk. Some common examples of risk referring to the sources of risk are terms such as “political risk” and “economic risk.” A firm’s strategy addresses the alignment of the organization to its uncertain environment. As such, organizational strategic choices determine a firm’s exposure to uncertain environmental and organizational components that impact firm performance. Therefore, the evaluation of the degree of risk exposure for each entry mode in the feasible set is very important to ensure desirable entry performance.

Two kinds of risk, investment risk and contractual risk, are relevant to market entry mode differentiation and selection. The investment risk in a host country reflects the uncertainty over the continuation of present economic and political conditions and government policies which are critical to the survival and profitability of a firm’s operations in that country (Agarwal and Ramaswami 1992). Examples of investment risk include the risk that a host government will obstruct the repatriation of profits and the control of foreign assets, and the risk of a breakdown in the international trade and investment policies of the government (Root 1987). Permanent entry modes, because

123 they are intended to be present in the host market for a long term, are subject to more investment risk than mobile entry modes.

Contractual risk reflects the uncertainty and cost of making and enforcing contracts in a foreign country (Agarwal and Ramaswami 1992). Examples of contractual risk include risk of dissipation of proprietary knowledge, and risk of deterioration in the quality of services if operated jointly with a host country partner of a licensee. As a type of contractual risk, dissemination risk refers to the risk that firm specific advantages in know-how will be expropriated by a licensing or joint venture partner (Hill and Kim 1988). The risk of dissemination of know-how is likely to be lowest of all in the case of a wholly owned subsidiary (Hill et al. 1990).

6.3.2 Control

Control refers to a firm’s need to influence systems, methods, and operational and strategic decisions in a foreign market (Andersen and Gatignon 1986). Control can also refer to the process by which one entity influences, to varying degree, the behavior and output of another entity through the use of power, authority and a wide range of bureaucratic, cultural and informal mechanism (Geringer and Hebert 1989). Control plays an important role in the capacity of a firm to achieve its goals. Control is desirable to improve a firm’s competitive position and maximize the returns on its assets and skills. The level of control is lowest in the case of licensing and highest in the case of a wholly owned subsidiary (Hill et al. 1990).

Geringer and Hebert (1989) operationalized control in an international joint venture along three dimensions: mechanisms (e.g., right of veto, representation in management bodies, and special agreements related to either technology or management), extent, and focus (i.e., parents may choose to exercise control over a relatively wider or narrower scope of the IJV’s activities).

124

Traditionally, control has been perceived by researchers as flowing from ownership (Erramilli 1991). Higher operational control results from having a greater ownership in the foreign venture. However, control can be exerted in multiple ways rather than be a strict and automatic consequence of ownership (Behrman 1970). Risks are also likely to be higher due to the assumption of responsibility for decision-making and a higher commitment of resources (Agarwal and Ramaswami 1992). With control a firm can coordinate actions, carry out strategies, revise strategies, and resolve the disputes that invariably arise when two parties to a contract pursue their own interests (Davidson 1983). The entrant can also use its control to obtain a larger share of the foreign enterprise’s profits.

To take control, the entrant must assume responsibility for decision making, responsibility a firm may be unwilling or unable to carry out in an uncertain foreign environment. Control also entails commitment of resources, including high equity contribution (ownership) and high overhead. This in turn reduces the firm’s ability to change its institutional arrangement. Thus, to assume control is also to assume some form of risk.

6.3.3 Resource Commitment

Resource refers to the financial and managerial capacity of a firm for serving a particular foreign market (Agarwal and Ramaswami 1992). Resource commitment means that assets are dedicated to a venture and cannot be redeployed to alternative uses without cost (loss of value). These assets may be tangible or intangible.

It is important to note that resource commitments constitute an exit barrier and serve to limit the strategic flexibility of the firm (Harrigan 1981). When resource commitments are extensive, the MNE cannot exit a foreign market without incurring

125 substantial sunk costs (Hill et al. 1990). Resource commitment increases the firm’s risk exposure, e.g., the possibility of losses due to currency changes (Davidson 1983).

6.3.4 Flexibility

Flexibility is an important construct to weigh any strategy. Harrigan (1985a) conceptualized strategic flexibility as a firm’s abilities to reposition themselves in a market, change their game plans or dismantle their current strategies when the market is no longer as attractive as it once was. Hambrick (1985) contended that the essence of strategy is the balance of focused, concerted commitments on the one hand and resource flexibility on the other. Because the strategic environment is always changing, no organization has enough knowledge to address all issues in advance.

From a geographic market entry perspective, flexibility means the adaptability of the entry mode to the changing environment of the local market. With highly flexible entry modes, firms can easily withdraw from a risky market or penetrate a market further depending on new developments. One reason that entry mode selection is critical is that a firm’s initial choice of a particular mode are difficult to change without considerable loss of time and money (Agarwal and Ramaswami 1992; Root 1987). High flexibility can therefore reduce loss and improve a contractor’s capability in mitigating risk. Therefore, the flexibility varies across different entry modes and is a very important dimension of consideration to optimize the selection.

6.4 A Synthesis of Different Effects

These effects are interrelated (see Figure 6.10). For example, firms entering an emerging market seek high returns while avoiding unaffordable risks. To achieve these returns and attenuate risks, they must maintain necessary control over their proprietary resources and offshore operations. As return attainment and risk reduction are also

126 determined by the liability of foreign partners, an entry mode that helps acquire country-specific knowledge from local firms is often chosen. To summarize, firms will opt for an entry mode which provides the maximum risk-adjusted net return and an appropriate level of flexibility by controlling their income-generating assets and acquiring new resources from other firms.

Figure 6.10: Relationships between Effects

However, the interactive and inseparable nature of the relationships between the above five effects implies that in general there is no single preeminent effect to allow for the prioritization of the basic entry modes. Each entry mode has a different composition regarding this effect paradigm, and so which effect(s) are relatively preeminent depends on the set of entry modes to select from (see Section 6.5). For example, when the selection is between JV company and SV company, control is the preeminent effect (Andersen and Gatignon 1986). On the other hand, entrants have different priorities regarding each effect because of their specific internal and external environment, as well as strategic perspective when planning market entry. For example, an entrant will emphasize control when it has high asset specificity and the possibility of opportunism is also high. Therefore, entry mode selection is a process composed of environmental screening and entry mode comparison which are linked with effect matching. Because there are multiple theories that explain different contingency relationships between decision factors and effect requirement (e.g., transaction cost economics proposes

127 entrants with high asset specificity use entry modes with high control at risk of opportunism), a synthesized theoretical perspective is necessary to address the entry mode selection decision. Therefore, in the next sections of this chapter, the difference between permanent entry and mobile entry in effects is investigated, and in Chapter 7, multiple business and economic theories are reviewed and combined to identify factors and develop hypotheses related to their impacts upon entry mode selection.

6.5 An Investigation of Different Effects of Entry Modes

Entry modes can be roughly ranked according to their control effect and contractual risks exposure effect as in Table 6.3. As an extension of the home country based head office, branch office and representative office are directly controlled by the head office, both operationally and strategically. SV company, SV project, and Nonintegrated JV project are all completely foreign owned. Without participation of local partners, entrants exert complete control and also avoid opportunism of partners. As quasi-hierarchy modes, JV company and integrated JV project involve partners, and therefore contractual risk increases. Local agent and licensing involve a business formed on the basis of a contract. Entrants cannot operationally influence their partners’ activities and therefore control is low. It is difficult to place strategic alliance anywhere in this list, as it is least contractually binding and a very loose cooperative relationship. Therefore, it is not shown in Table 6.3. A strategic alliance typically involves very little control and contractual risk exposure.

128 Table 6.3: Difference Between Entry Modes Regarding Control and Contractual Risk Exposure

Cooperative Competitive Hierarchy Branch office/company entry modes Representative office SV company SV project Nonintegrated JV project Quasi-hierarchy JV company Control

entry modes Integrated JV project Contractual risk Quasi-market Local agent entry modes Licensing

Mobile entry and permanent entry modes are different in three strategic effects: resource commitment, investment risk exposure, and flexibility (see Table 6.4). Permanent entry modes involve a partial or complete corporate infrastructure in the host country, so this, when other conditions are equal, adds to resource commitment and decreases flexibility. Because they involve long term presence on an ongoing basis, entrants are exposed to the investment environment of the host market. This again implies less flexibility than permanent entry modes.

Table 6.4: Difference between Entry Modes Regarding Resource Commitment, Investment Risk Exposure, and Flexibility Cooperative Competitive Permanent JV company Branch office/company entry modes Representative office SV company

Mobile JV project SV project Flexibility Invest. Risk Invest. entry modes BOT/Equity project Resource commit. Resource

Because this research focuses on the selection between mobile entry modes and permanent entry modes, their difference in resource commitment, investment risk exposure, and flexibility effects are critical in identifying influencing factors that will be discussed in Chapter 7.

129 6.6 Entry Mode Combination and Sequencing

It is not unusual for contractors to use mobile entry modes before they choose permanent entry modes. For example, in the dataset (a subset of data in Appendix K) analyzed in the Section 4.5 of Chapter 4 about 33 international contractor’s entry mode selection, out of 330 cases where permanent entry modes were used 124 involve entrants using temporary entry modes before for the same markets. However, most contractors stick to entry modes they first selected, or say, they selected their desirable entry mode at the first place rather than started with less risky or resource-committed modes. In the same dataset, there are 1187 cases including both mobile and permanent entry modes in total, and only these 124 cases (10.45%) involving a sequential use of mobile entry modes and then permanent entry modes for the same overseas markets.

To investigate the sequential relationships between basic entry modes, detailed cases were identified that provided information about which basic entry modes were used and how they were sequenced. 37 cases were identified (see Table 6.5) from the dataset (see Appendix K) based on the ability to find data related to the sequential nature of the entry mode utilization. Majority of them (31 our 37) involved only 2 different permanent entry modes. In comparison with other sectors (e.g., manufacturing), entry with a gradual increasing commitment is not common in the construction sector.

130

Table 6.5: Dataset for Investigating Combination and Sequencing of Entry Modes Entry Home JV Branch SV Entrant Host country Projects RO # country company company company 1Bilfinger BeGermany USA ●● 2Bilfinger BeGermany China ●● 3Black & Ve USA China ●● 4Bovid LendUK Belgium ●● 5China HarbChina Singapore ●● 6Chiyoda Japan Singapore ●● 7Clough Australia Indonesia ●● 8ConstrutoraBrazil Angola ●● 9ConstrutoraBrazil Argentina ●● 10 CTCI Taiwan Hong Kong ●● 11 CTCI Taiwan China ●● 12 CTCI Taiwan Malaysia ●● 13 Enelpower Italy U.A.E. ● 14 Enelpower Italy Brazil ●● 15 Gammon Hong Kong China ●● 16 HOCHTIEFGermany Brazil ●● 17 HOCHTIEFGermany Poland ●● 18 HOCHTIEFGermany Australia ● 19 JGC Japan Indonesia ● 20 Kajima Japan Singapore ●● 21 Kinden Japan HK ●● 22 Leighton Australia Singapore ●● 23 Leighton Australia Thailand ●● 24 Obayashi Japan USA ●● 25 SembCorp Singapore China ●● 26 Shimizu Japan USA ●● 27 Shimizu Japan China ●● 28 Shimizu Japan Taiwan ●●● 29 Taikisha Japan Singapore ●● 30 Taikisha Japan HK ●● 31 Taikisha Japan HK ●● 32 Takenaka Japan Malaysia ●● 33 Takenaka Japan Indonesia ●● 34 Takenaka Japan Singapore ●● 35 Takenaka Japan China ●● ● ● 36 TRACTEBEBelgium Poland ●● 37 Zublin Germany China ●● ● ●

There is not enough information about whether these entrants have ever used strategic alliances to support their entry activities, or enough details to judge what kind of contractual entry modes were used. Therefore only five modes were investigated: project based entry (JV project, SV project, or BOT / equity project), representative office, JV company, branch office, and SV company. It is also apparent that the contractors are not representative (majority of them are from Asia, especially Japan). Nevertheless, a map of

131 the progression of mode changes as depicted in Figure 6.11 indicates that any transfer from a less risky and recourse committed mode to a more risk and resource committed mode is practically possible except from a transfer from JV company to branch office / company.

Branch office/ company

risk SV

Investment company JV company

Representative office Projects Resource

Figure 6.11: Evolution of Entry Modes in International Construction

There is a special transfer from more risky entry mode to less risky one. In entry case 5, China Harbor had a SV company in Singapore before this subsidiary formed a JV with a local client. The change was to China Harbor’s interests because it achieved a much stronger client base at the cost of some degree of control.

To investigate how multiple basic entry modes can be combined simultaneously for target overseas market, 30 detailed cases were selected from the database (see Appendix K) as shown in Table 6.6. As can be seen from the table, either mobile entry modes or permanent entry modes can be combined with other entry modes. However, in Table 6.6, there is no combination between any mobile entry mode and permanent entry mode.

132 Table 6.6: Combination of Entry Modes Mobile entry Permanent entry Others modes modes

Description Case number Case JV project SV project project BOT/equity Representative office office/company Branch JV company SV company Strategic alliance agent Local Licensing 1Bechtel + North West Water -> world ●● ● 2Fluor Daniel + Hitachi ->Japan ●● 3Morrison Knudsen + Spet. -> former Soviet Union ●● 4Morrison Knudsen + Spet. -> Western world ●● 5Bechtel + Pipe Line System -> world ●● 6BEJK + DuPont -> USA ●● 7BEJK + DuPont -> Outside USA ●● 8Jacobs + Wimpey -> world ●● 9Skanska + Coca-Cola -> world ●● 10 Bovis Lend Lease + BP -> world ●● 11 Bechtel + Wireless Facilities -> world ●● 12 Fluor Daniel + AMEC ->world ●● 13 Bechtel + Korea ->Korea ●● 14 Beacon + Dioguardi -> USA ●● 15 Beacon + Dioguardi -> Europe ●● 16 Fluor Daniel + Ohbayashi ->Japan ●● 17 Parsons + Shimizu -> Japan ●● 18 Kumagai Gumi -> Hong Kong ●●● 19 TSUKISHIMA KIKAI -> China ●● 20 Ohbayashi + subsidiary -> US project ●● 21 Maeda + local firm -> Taiwan ●● 22 Bovis Lend Lease -> Dachang water plant ●● 23 Hopewell -> Shajiao B power plant ●● 24 Hopewell -> India power plant ●● 25 Daewoo -> Laos power plant ●● 26 Shimizu -> Taiwan ●● 27 Fujita -> Peru ●● 28 CSCEC -> Korea, South ●● 29 Obayashi -> USA ●● 30 Dematteis + local firms -> China ●●

There are various combinations of entry modes within the same group. In Case 3, Spet. formed strategic alliance with Morrison Knudsen to sell their patent construction technology to the Western World through licensing. BOT / equity projects are usually used with JV project as these projects are often large and complicated, and therefore need versatile and capable partners (Case 1, 21, 22, 23, 24, and 25). A representative office is often used with other permanent entry modes. In all cases involving a representative

133 office (Case 18, 20, 26, 27, 28, and 29), the representative offices are used to track large project opportunities on behalf of head offices. Once the project is granted, the head office may form a joint venture with its local SV company or branch office / company to implement the project.

6.7 A Review of the Mobile versus Permanent Entry Dichotomy

This research arbitrarily speculates the principle difference between permanent entry and mobile entry as whether the international contractor performs ongoing support activities for multiple project operations in an overseas market. Based on this definition, the distinction is clear: an entry mode is either mobile or permanent. However, some composite entry modes, a combination of more than one basic entry mode can be a hybrid of both permanent entry and mobile entry. For example when the head office forms a JV project with its overseas subsidiary to deliver a local project, some primary and support activities are carried out by the head office from the home country on a mobile basis, and the local subsidiary performs the rest of the primary and support activities on a permanent basis. Although this type of combination was not found in cases used in this research, it is theoretically feasible. A representative office, which is classified as a permanent entry mode in this research, normally conducts some support activities for projects and the rest are carried out by the head office. In this sense, representative office is also a hybrid entry mode. BOT / Equity project, which is classified as a mobile entry mode in this research, involves a long term presence in a foreign market. The project company, although focusing on the support and operation activities of the single project, can easily be involved in other responsibilities of the parent company in other projects in the same market. Therefore, in general, permanent entry and mobile entry are not completely separate, but are two extremes of a continuum. The relationships between permanent entry and mobile entry are depicted in Figure 6.12.

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Figure 6.12: The Relationship between Permanent Entry and Mobile Entry

Nevertheless, as indicated in the above analysis (see Table 6.5), composite entry modes that involve both permanent and mobile elements are not as common as those that can be clearly classified in the dichotomy. A sequential use of them (from a temporary entry mode to a permanent entry mode) is also not usual. A further investigation into the selection between these two groups of entry modes is therefore logical and meaningful. As Chapter 4 discussed, there is a trend of increasing use of permanent entry modes, but mobile entry is still very common. This means that mobile entry modes still have merits under current conditions in the global construction market. The coexistence of these two groups of entry modes calls for further investigation to find out under what conditions one type is preferred to the other.

These two generic entry modes or groups of basic entry modes differ in resource commitment, investment risk exposure, and flexibility. These differences constitute the basis to develop a model for the selection between them.

6.8 Summary

In this chapter, entry modes were examined regarding 7 setting characteristics and 5 strategic effects. The ability to combine or sequence these entry modes was also analyzed. Permanent entry modes and mobile entry modes were found to be different in investment risk exposure, resource commitment, and flexibility, as can be used as a basis

135 to distinguish between them. Entry modes from different groups (permanent versus mobile) were rarely combined or sequenced. Therefore, an investigation of selection between these two groups of entry modes is justified. The next two chapters will focus on the selection decision between these two groups of entry modes for entering a new international construction market.

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CHAPTER 7

THEORY DEVELOPMENT

This chapter identifies internal and external variables that may potentially influence international contractors’ selection between permanent entry and mobile entry, and theoretically proposes how they impact the selection (i.e., influence direction). Hypotheses are developed regarding these factors based on theoretical reasoning and previous research findings. For the hypotheses to be established on a sound theoretical basis, this chapter begins with a review of related schools of theories.

7.1 Review of Related Theories

The following theories have been applied in various studies to analyze entry mode selection. The premises, general concepts and ideas, and the method for their application to entry mode selection of each theory are introduced individually as follows. The relationships between different theories are also analyzed and synthesized.

7.1.1 Transaction Cost Economics

Transaction cost economics (TCE) evolved from the seminal work of Arrow (1969), Simon (1957) and Thompson (1967), and has been extensively used to explain market entry mode selection. The main premise of transaction cost economics is that firms can organize their interdependence through hierarchy and market. Because each mode differs in the method it uses to organize activities, each will be most efficient in organizing a particular type of transaction (Hennart 1989). The market entry mode an entrant chooses for a specific market is driven by a desire to minimize transaction costs.

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In the broadest sense these transaction costs include all costs, as well as outputs and inputs, associated with various aspects of the value-added chain from the production to the consumption of goods and services. They can be costs of monitoring, controlling and inspecting performance and product quality; establishing networks of suppliers and managing industrial relations; marketing the final product and post-sales activities; the movement of people and materials; the acquisitions and use of information; and the management of all kinds of risk (Dunning 1988).

If transaction costs are low, a rational firm will prefer its transactions to be governed by the market; however, if the transaction costs are too high, the firm will prefer an internal governance structure (e.g., a wholly owned subsidiary) (Luo 2001). The TCE approach begins with the assumption that markets are competitive. Thus, market failure is the primary antecedent to the firm’s decision to assume greater control (Erramilli and Rao 1993). From the transaction-cost perspective, the most important determinant of market failure is the presence of transaction-specific assets. Transaction-specific assets are non-deployable physical and human investments that are specialized and unique to a task. Asset specificity tends to create contracting hazards because of the impact of opportunism (Brouthers 2002). Opportunism results when a partner organization takes advantage of the other firm’s dependency through shirking, free-riding, or technology dissemination. To safeguard specific assets from potential opportunism problems, firms may utilize higher control governance structures, such as wholly owned modes of entry. Firms with less asset specific products or services may be less concerned with opportunism and safeguarding their technology and more concerned with mode efficiency. Transaction cost theory suggests that less integrated modes of entry provide more efficient organizational structures when there is a reduced threat from opportunism (Williamson 1985).

TCE does not imply that traditional foreign direction investment (FDI) is always superior to contracts (Hennart 1989). The reason is that hierarchical coordination has its

138 own costs. Therefore, internalization replaces one type of costs (market transaction costs) with another (internal organization costs). Hierarchy will be the most efficient method to organize the exchange when internal organization costs are lower than market transaction costs (Hennart 1982; Hennart 1986). The benefits of integration under market failure must be compared with the costs of integration (internal organization or bureaucratic costs), including investment in legal, administrative, and operating infrastructures. As such, control is assumed to carry a high price.

7.1.2 Stage Models of Entry

The “stages” models of entry suggest a sequential pattern of entry into foreign markets with a progressive deepening of commitment (Root 1987). This school of thoughts views business operation in an overseas market as inherently risky, because of the different political, cultural, and market systems to which the firm must adapt (Pan and Tse 2000).

When the firm first enters an overseas market, a low resource commitment mode such as export is desirable. As the firm acquires more knowledge and experience in that overseas market, it will assume a higher level of resource commitment with higher levels of risk, control, and profit return. Therefore, this perspective often prescribes gradual incremental involvement. It is the conceptual basis for modeling entry modes as a continuum of increasing levels of resource commitment, risk exposure, control, and profit potential from export to wholly owned subsidiaries (Chu and Andersen 1992).

This stage view also coexists with the internationalization process of MNEs (Lin 2000). Internationalization of a firm is a process in which the firm gradually increases their international involvement by acquiring, integrating and using the knowledge about foreign markets and operations. The outcomes of past history and international experience restrict the firm performing operations in different markets by themselves.

139 Each entry decision can not be explained in isolation from the internationalization process and experiential capabilities of a firm.

7.1.3 Ownership Location Internalization (OLI) Paradigm

Dunning (1988) integrates various strands of international business theories. His eclectic paradigm rests on three pillars of ownership specific factor, location-specific factors and internalization specific factors. Several empirical studies have attempted to directly or indirectly use the Dunning framework to explain choices between entry modes. They stipulated that the choice of entry mode during international expansion is influenced by three types of determinants: MNEs must possess superior assets and skills that can earn economic rents high enough to counter the higher cost of servicing international markets (the ownership advantages of the firm); MNEs interested in serving foreign markets are expected to be selective and favor entry into more attractive markets (the location advantages of the market); and lastly, low control entry modes are generally considered superior for certain transactions since they allow a firm to benefit from the scale economics of the market place while avoiding the bureaucratic disadvantages that accompany integration (the internalization advantages of integrating transactions within the firm).

While many scholars argue that ownership and internalization factors share some similarities with the transaction cost perspective, the second component of Dunning’s eclectic framework (location) clearly emphasizes the value of country-specific factors (Tse et al. 1997). Apart from ownership factors and internalization factors, Dunning emphasizes that location-specific factors are becoming more significant in affecting firm’s international operations, and that these factors have an increasing impact on the non-production related costs (i.e., the transaction costs). This perspective is important in today’s global competition where non-production costs are rising faster than production costs. Some studies (e.g. Hill et al. 1990; Tse et al. 1997) emphasize the influence of

140 location specific factors in differentiating equity and non-equity entry modes. Agarwal and Ramaswami (1992) examined the interaction effects of these factors.

7.1.4 Organizational Capability

In recent years, there has been increasing attention in the literature to the notion of firms competing primarily on the basis of capabilities (Madhok 1997), and the corresponding notion of entry mode choice for the purpose of optimal use and development of a firm’s capabilities.

The organizational capability (OC) perspective emphasizes effectiveness of capability transfer, not just concern for control as emphasized by TCE (Erramilli et al. 2002). The relative merits and demerits of the OC and TCE perspectives were examined by Kogut and Zander (1993) and Madhok (1997). The general conclusions by these authors are that the two perspectives complement each other. Researchers have recently stressed the need to complement the transaction costs or internalization explanations with the OC perspective (Lin 2000). Table 7.1 highlights some key differences in orientation between these two theories.

Table 7.1: Difference between Transaction Cost Economics and Organizational Capability (Source: Madhok 1997) TC/Internalization perspective OC perspective Unit of analysis Transaction Firm Primary area of focus Transaction characteristics Firm capabilities Key assumption Opportunism Bounded rationality Development and exploitation of Source of competitiveness Efficient management of transactions capabilities Primary orientation in the Cost minimization management of value management of know-how Key consideration to choice TC minimization; fit between transaction Contributions towards and demands of ownership form characteristics and form of governance placed on firm's capabilities Essentially dynamic; learning and Temproral orientation Essentially static and equilibrium-oriented capability building as developmental processes

141 The OC perspective starts from the premise that every firm is thought to be a bundle of resources and capabilities (Buckley and Casson 1976). Resources include all assets, organizational processes, firm attributes, information, and knowledge controlled by a firm that enables it to conceive and implement strategies efficiently and effectively (Barney 1991). Capabilities refer to a combination of resources that creates higher-order competencies (Madhok 1997). When a firm enters a foreign market, it must transfer the resources and capabilities to its foreign operations. Consequently, a firm should choose an entry mode that can best transfer its resources or capabilities from the home country operations to the host country operations without eroding their value. Transfer of a resource or capability need not be internalized unless the resource or capability being transferred is imperfectly imitable (Madhok 1997). Imperfect imitability results from embeddedness, i.e., when the capability is deeply embedded within organizational routines and becomes specific to a firm (Madhok 1997). The OC perspective suggests that internal modes are more effective than market modes to transfer imperfectly imitable capabilities (Madhok 1997). The OC approach argues that except embeddedness, firms can protect their resources and capabilities through legal means as well, that is through copyrights, trademarks, patents, and licensing.

7.1.5 Bargaining Power

Access to foreign markets is controlled by political actors at home and abroad, so the initial market entry decision must take into account political imperatives (Gomes-Casseres 1990). Bargaining power (BP) theory argues that the specific mode chosen by a MNE depends on the relative bargaining power of the firm and that of the host government (Luo 2001). BP assumes both parties are looking to negotiate an outcome that is in their long-term best interests (Kumar and Subramaniam 1997). The term bargaining power refers to a bargainer’s ability to set the parameters of the discussion, win accommodations from the other party, and skew the outcome of the negotiation to the desired ownership alternative. A primary source of the host

142 government’s power in the negotiations is its ability to control market access and to distribute or withdraw incentives for the investment project. On the other hand, much of the firms’ bargaining power stems from “ownership advantages” (Dunning 1980) that it possesses, such as the ability to employ people and contribute to the local economy.

Gomes-Casseres (1990) discusses the relationship between TCE and BP and contends that these two theories are not competing explanations of the same phenomenon, but address two distinct questions: the transaction cost model answers the question “what ownership structure does the firm want?” and the bargaining power model answers the question “what ownership structure can the firm get?”. He then conceptualizes the entry mode selection decision as a two step sequential process by integrating the two approaches: an MNE first deciding what it wants, and then seeking the host government’s agreement. The firms will make concessions on ownership based on their preference ranking.

7.1.6 Institutional / Cultural Theory

Institutions can be defined as relatively stable collections of practices and rules defining appropriate behavior for specific groups of actors in specific situations (March and Olsen 1998). They consist of informal (e.g., sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (e.g., constitutions, laws, property rights) (North 1990; North 1991). According to North (1990; 1991), the major roles of institutions in a society is to establish a stable (but not necessarily efficient) structure for political, economic, and social interaction. The difference between culture and institutions is not unambiguous and might sometimes become blurred. As theoretical constructs, culture and institutions represent separate scientific traditions which can be regarded as complementary to each other. Oliver (1997) believes that the construction industry is characterized by both intense institutional regulation and strong market competition.

143 North (1990) suggests that institutional theory must be combined with transaction cost theory because institutions provide the structure in which transactions occur. Institutions define the rules of the game and include laws and regulations of the host country. Transaction cost theory assumes the existence of institutional structures that support firm actions (Meyer 2001; Williamson 1985). In some countries, the institutional structure may create a situation where the transaction cost predicted mode choice may not be the preferred choice. Roberts and Greenwood (1997) suggests that firms may “face pressures to adopt designs that are within the subset of socio-politically legitimated designs” instead of adopting transaction costs based designs. For example, the institutional structure may provide barriers to entry such as legal restrictions on ownership. Thus, institutional theory tends to suggest that a firm’s ability to exploit or enhance its capabilities may vary across institutional contexts in different national environment. Institutions reduce transaction costs by reducing uncertainty and establishing a stable structure to facilitate interactions (Meyer 2001). However, a lack of knowledge of markets and of the functioning of a market economy can magnify transacting costs in the transition context.

7.2 A Synthesis of Different Theories from a Process Perspective

Transaction cost economics is by far the most extensively applied theory to explain entry mode selection. Some researchers (e.g., Andersen and Gatignon 1986) attempt to reconcile different entry mode explanations within a transaction cost framework. However, Hill et al. (1990) argue that transaction cost logic alone does not provide all of the answers, a more eclectic view of the factors that influence the entry decision is more useful. Also, with focus on control as the preeminent effect, transaction cost economics are useful only to differentiate ownership based entry modes, i.e., equity joint venture versus wholly owned venture. In the OLI paradigm, the internalization dimension is roughly the same as TCE except that the focus of internalization is on the market for know-how while that of TCE is on more micro-level transaction

144 characteristics like asset specificity (Madhok 1997; Teece 1986). Thus internalization can be considered to be the TCE of the multinational corporation (Madhok 1997; Rugman 1986). The OLI framework was originally formed to analyze MNEs. With additional two dimensions, OLI is a more comprehensive analysis framework than TCE in analyzing MNEs activities. The relationship between Organizational capability and TCE have been deeply examined by Madhok (1997) as shown in Table 7.1. These two theories, with very different origin and focus, often result in the same results regarding ownership and firm boundary. Bargaining power, as determined by ownership advantage, is not dependent on TCE but can be used after preliminary selection based on TCE, or other theories. This sequence can be generalized into another one in which when entrants have ranked entry modes in a feasible set with appropriate schools of theories (TCE, any other theory, or a combination of more than one theory), they use Bargaining power rationale to determine the final choice. Institutional theory emphasizes the importance of institutions in determining optimal or feasible entry modes. Applied in the conceptualized two step selection process, institutional theory provides nothing new but indicates the criticality of some institutional factors that enhance government’s bargaining power in constraining entrant’s choice. Institutional / cultural theory also provides an enhancement of TCE by shedding light on the institutional environment where transactions occur, and explains the bargaining power of governments in determining the feasible set of entry modes. The stage model sheds more light on the entrants’ know-how accumulation and changing perception of market risk so as to decide what mode to use.

The key assumption underlying most of existing research on international entry mode selection is that the best entry mode is the one that aligns the entrant’s strengths and weaknesses with the environment as well as with the firm’s organizational and strategic characteristics (Brown et al. 2003; Ekeledo and Sivakumar 1998; Hill et al. 1990). This view treats entry modes as strategic alternatives and change entry mode selection into a strategic planning process. Essentially, to meet opportunities and threats, entrants’ direct requirements upon entry modes are about what effects (i.e., control, return, resource commitment, risk exposure, and flexibility) each mode possesses, rather

145 than the modes themselves. These theories are applied to develop different contingency relationships between firm characteristics, business environment, and modes’ effects. For example, transaction cost economics, taking control as the preeminent effect, suggests that “the greater the combination of country risk and transaction-specificity of assets (e.g., proprietary content, poorly understood products, customization, product class immaturity), the higher the appropriate degree of control” (Andersen and Gatignon 1986). The organizational capability perspective also looks at the control effect according to the entrant’s know-how characteristics in relation to specific markets (Madhok 1997). Both theories are used to differentiate ownership based entry modes (e.g., wholly owned or partially owned). Other theories provide a more broad and flexible basis to link different mode effects with internal and external environment. However, bargaining power, stages model, and institutional theories tend to constrain preliminarily selected entry modes suggested by other theories rather than propose optimal entry modes.

From a process perspective, international market entry can be conceptualized as a course of activities that 1) involve entrants and other stakeholders including partners, competitors, and governments; 2) translates a certain amount of resources into sustainable financial and non-financial return; and 3) is controlled by multiple corporate, market, and country level factors. This process can be depicted with an IDEF0 model as shown in Figure 7.1.

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Market level factors

Country level Corporate factors level factors

Resources (e.g., cost and capability) Enter a new market Financial return

Non-financial return (e.g., reputation, skill) Entrant Competitors Local governments Partner(s) Figure 7.1: A Synthesis of Different Theories from a Process Perspective

Different theories take into consideration different factors and explain their interactions with entry mode selection. TCE and Internalization dimension (TCE / I) addresses resources (asset specificity), entrants (bounded rationality), partners (opportunism), market factors (small number), country factors (uncertainty / complexity), and return (transaction cost adjusted), and suggests entry modes involving minimum transaction cost. OC addresses resources (capabilities), entrants and partners (bounded rationality), and market and country factors (legal system), and suggests entry modes involving best capability exploitation and / or development. OL paradigm addresses resources (ownership advantage), market environment (location advantage), country environment (location advantage), entrant (ownership advantage), partners and competitors (location advantage), and government (location advantage), and suggests entry modes that best suit or utilize these advantages. Stage Model addresses resources (gradually increasing resource commitment), entrant (experience accumulation), and corporate factors (experience and modes previously used), and suggests entry mode that match entrant’s experience and risk perception. Bargaining power focuses on entrant / partners and government (bargainers), resources (bargaining power), market and country environment (bargaining power), and expected return at stack (bargaining power), and suggests entry modes as a result of compromise between the two sides. Institutional / cultural theory focuses on entrant, competitors, partners, and government (e.g., customs),

147 market environment (e.g., code), and country environment (e.g., country culture and legal system), and suggests entry modes that adapt to the “institutional field” (becoming isomorphic), meets the balance of bargaining power, or minimizes transaction cost. The relationships between these theories are summarized in Table 7.2. Table 7.2: Differences and Complements between Different Theories Theories Input Control Mechanism Output Perspective Entry modes Transaction cost Resources Market level factors Entrant and competitor Return Optimization Ownership entry economics/ Country level factors view modes Internalization Organizational Resources Market level factors Entrant and partners Optimization Ownership entry capability Country level factors view modes Ownership & Resources Market level factors Entrant, partners, Optimization General Location Country level factors competitors, and government view Stage model Resources Corporate factors Entrant Constraint General view Bargaining power Resources Market level factors Entrant, partners, and Return Constraint General Country level factors government view Institutional / Corporate level factors Entrant, competitors, Constraint General cultural theory Market level factors partners, and government view Country level factors

Table 7.2 indicates that 1) no theory alone incorporates every input of entry mode selection; 2) no theory alone differentiates among all entry modes; 3) there are overlaps and complements between these theories. It seems a combination of them provides a stronger and more comprehensive theoretical basis to explain entry mode selection.

The main purpose of this research is to distinguish between mobile entry and permanent entry based on their difference in resource commitment, investment risk exposure, and flexibility effects. TCE / I and OC are powerful for decision related to boundary, and therefore used in differentiating ownership / control entry modes (e.g., JV versus SV). Stages model has been empirically proved insignificant in entry mode selection for the construction industry (see Chapter 4). Future research will therefore focus on the integration of the OL paradigm, bargaining power, and institutional / cultural theories to differentiate between mobile entry and permanent entry.

148 7.3 Hypotheses Development

Because no single factor is likely to have a decisive influence on the entry mode for companies in general (although it may have for an individual company), it can only be said that such factors encourage or discourage a particular entry mode (Root 1987). In another word, entry mode selection is a multivariate decision problem.

A review of prior literature on foreign market entry modes and business practices of some international contractors led to the identification of thirteen factors which may influence the selection between permanent entry and mobile entry. These factors and their influences can be explained by the theories identified in the previous section. They include: 1) Home market attractiveness (bargaining power of firms) 2) Long term orientation (cultural characteristic) 3) Uncertainty avoidance (cultural characteristic) 4) Cultural distance (cultural characteristic and location advantage) 5) Trade link (location advantage) 6) Colonial link (location advantage, institutional characteristic) 7) Language proximity (location advantage and ownership advantage) 8) Host market attractiveness (location advantage) 9) Investment risk (location advantage) 10) Entry restriction (institutional characteristic / bargaining power of governments) 11) Competitive intensity (location advantage) 12) Firm size (ownership advantage / bargaining power of firms) 13) Multinational experience (ownership advantage / bargaining power of firms) They can be grouped into Home country factors, Home-Host country factors, Host country factors, or Entrant factors as show in Figure 7.2.

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Figure 7.2: Contingency Relationships between Factors and Entry Mode Selection

7.3.1 Home Country Factors

Home country factors can seldom be affected by management decision. They are external to the company and may be regarded as parameters of the entry mode decision (Root 1987). Long term orientation and uncertainty avoidance are two dimensions in Hofstede’s national culture framework. They are not treated as Entrant factors because these factors “affect the implicit models in people’s minds of what the act of organizing means” on the national level (Hofstede 1994).

150 7.3.1.1 Home Market Attractiveness

Market in the home country influences a company’s choice of entry mode (Kogut and Singh 1988; Root 1987). International business provides opportunities for contractors seeking to expand business and to cushion local and regional market fluctuations. To many construction firms, international revenue is an effective and necessary complementation to their domestic operation. If the domestic market is large and demand is stable, many firms will focus on the domestic market and become less interested in any forms of international business, like Japanese contractors focusing on their domestic market for a long period of time before their economic recession, or the withdraw from global markets like what American contractors have been doing in the past decade. In contrast, to contractors who have suffered from dwindling or sluggish domestic markets, it is important to have stable overseas revenue to offset their domestic business downturns. ENR (2004) cited from Mehmet Artun, deputy chairman and managing director of GAMA Industry Inc., “The economic crisis that hit Turkey four years ago caused a drastic decrease in the domestic investments. … This situation forced us to look for new countries to work in and to shift our resources more to the international market.” Since the European market became stagnant, European construction firms have been acquiring construction firms around the world.

Permanent entry modes feature more sustainable business compared with opportunistic project bidding (refer to Chapter 4), and can provide a better vehicle to sustain overseas revenue. Also, with permanent entry more resources can be transferred from dwindling or fluctuating domestic market to sustain global revenue.

It is therefore hypothesized that: H1: When other variables are held constant, construction firms that enjoy an attractive home country market are less likely to enter foreign markets with permanent entry modes.

151 7.3.1.2 Long Term Orientation

Hofstede (2001) proposed five dimensions of cross-cultural managerial differences to capture the relationship orientation of managers: power distance, uncertainty avoidance, individualism, masculinity, and long term. The scorings on these five dimensions of 10 sampled countries are shown in Table 7.3. Hofstede (2001) gave the definition of long term orientation as it “stands for the fostering of virtues oriented towards future rewards, in particular, perseverance and thrift. Its opposite pole, short term orientation, stands for the fostering of virtues related to the past and present, in particular, respect for tradition, preservation of face and fulfilling social obligations.”

Table 7.3: Cultural Dimension Scores (0 = Low, 100 = High) Power Uncertainty Orientation Individualism Masculinity Long-term Distance Avoidance Arab countries 80 68 38 53 France 68 86 71 43 Germany 35 65 67 66 31 Great Britain 35 35 89 66 25 Netherlands 38 63 80 14 44 Hong Kong 68 29 25 57 96 Indonesia 78 48 14 46 Japan 54 92 46 95 80 Brazil 69 76 38 49 65 Mexico 81 82 30 69 USA 40 46 91 62 29 West Africa 77 54 20 46 16

Localized permanent entry modes reflect the entrants’ long term orientation where construction firms patiently establish a localized organization, and cultivate enduring work relationships with local clients, suppliers, and subcontractors with an aim to become a local firm and benefit from the long term growth of the local market. Mobil entry, in contrast, with contractors based in the head office or an office in adjacent countries, focuses on obtaining opportunistic projects. The entrants may not have confidence in the sustainability of the local market and only focus on short term opportunities. They

152 therefore do not put a lot of resources into overseas markets and prefer modes of flexibility so that once there is instability in the market, or better business opportunity elsewhere, they can easily withdraw and move away.

It is therefore hypothesized that: H2: When other variables are held constant, contractors from countries with a long term orientation are more likely to use permanent entry modes to penetrate selected markets.

7.3.1.3 Uncertainty Avoidance

The research of Hofstede (2001) shows that managers from different countries differ substantially in uncertainty avoidance. In countries with a low score on uncertainty avoidance, where structures and rules are often less clear, unwritten, and imposed by tradition, people are less concerned with taking risk. In contrast, in countries with high uncertainty avoidance, people prefer structured situations and clear rules of behavior. A nation with strong uncertainty avoidance can be called rigid; one with weak uncertainty avoidance, flexible.

Pan and Tse (2000) contended that entrants whose host country has a high uncertainty avoidance score would be more cautious and try to minimize risk exposure. They are more inclined to specify their activities in the form of contracts and less willing to subject themselves to unpredictable outcomes as in the case of an equity mode. This proposition, however, neglects that an equity mode has a more structured organization than non-equity modes, but also confuses “uncertainty avoidance” with “risk avoidance”. Hofstede (2001) explains that: “More than toward an escape from risk, uncertainty avoidance leads to an escape from ambiguity. Uncertainty-avoiding cultures shun ambiguous situation. People in such cultures look for structure in their organizations, institutions, and relationships, which makes events clearly interpretable and predictable. Paradoxically, they are often prepared to engage in risky behavior in order to reduce ambiguity.”

153 Permanent entry involves a more rigid hierarchical organization that can also help develop more enduring local relationships than mobile entry that is based on a network of temporary contractual relationships within and outside the project based organization. Although subject to more investment risk, permanent entrants can accumulate more local market knowledge and reduce perceived uncertainty than temporary entrants.

It is therefore hypothesized that: H3: When other variables are held constant, contractors from countries with a high uncertainty avoidance are more likely to use permanent entry modes to penetrate selected overseas markets.

7.3.2 Home Country-Host Country Factors

Some factors that are specific to a pair of countries can determine which type of entry is preferred: permanent entry or mobile entry. These factors are grouped as Home country – Host country factors and include trade link, cultural distance, colonial link, and language proximity.

7.3.2.1 Trade Link

A longer diplomatic history can lead to a greater understanding between international contractors’ home country and host country. This would enable the entrant to set up its investment in the host market. Such understanding would foster efficient working relationships between the entrant and the local government (Tse et al. 1997). Accordingly, these firms would be more likely to adopt permanent entry modes.

Pan and Tse (2000) proposed that the flow of business between two countries is a direct indicator of the extent of interaction between the two countries. The higher the volume of bilateral business, the more knowledge firms have accumulated about the host country market, and the more confident they are in adopting permanent modes. Therefore,

154 the stronger the trade relationship is, the more possible that entrants will use permanent entry modes.

As part of international trade in service, international construction is constrained or supported by treaties like WTO, NAFTA, ASEAN, and EU. Countries within the same service trade organization have less barriers against the entries of contractors from other membership countries.

Therefore, it is hypothesized that: H4: When other variables are held constant, if the host market and home country have a close trade link, construction firms are more likely to use permanent entry modes to penetrate the host market.

7.3.2.2 Cultural Distance

Socio-cultural distance has been widely analyzed by researchers regarding entry mode selection (Erramilli et al. 2002; Erramilli and Rao 1993; Luo 2001). The cultural distance attempts to conceptualize and, to some degree, measure the cultural distance between countries and markets (Hallen and Wiedersheim-Paul 1979).

Kogut and Singh (1988) argue that the information acquisition activity will be proportional to the cultural distance between home and host countries. When management moves to a country that is culturally similar to the home country, it may already posses most of the information to operate in the market; however when entering a market with an unfamiliar foreign culture, it may have difficulty in imposing subjective judgment to determine how people should behave and evaluating hard-to-quantify inputs and result (Erramilli and Rao 1993; Gatignon and Anderson 1988). Therefore, more resource commitment is needed with high cultural distance between the home and host countries.

155 Project based entry does not require expatriates to understand local culture thoroughly. With well defined project goals and the mutual understanding of the possible conflicts between parties of a different nationality, people can bear the short term cultural difference. On a permanent basis, however, cultural distance becomes a more significant issue. The permanent organization must understand local culture very well to establish enduring cooperation with local parties, and internally manage relationships between local employees and expatriates.

It is therefore hypothesized that: H5: When other variables are held constant, a construction firm is more likely to use permanent entry modes to penetrate markets that have smaller cultural distance with the firm’s host country.

7.3.2.3 Colonial Link

Colonial linkage variables are often used by economists to measure similarities in political or legal institutions. In international construction, colonial link also indicates a traditional cross border trade. The internationalization process of the construction industry as reviewed in Chapter 4 indicated that in the original period of the global construction market, colonial countries were comfortable overseas markets, especially for European contractors. Therefore, this link often implies that the two countries have political and legal proximity and long term trade relationship in construction, and therefore the contractor can gain a location advantage.

Regarding these traditional, and legally and politically similar markets, entrants may have more confidence and be willing to commit more resources. That is, they may prefer permanent entry modes to mobile entry modes.

It is therefore hypothesized that:

156 H6: When other variables are held constant, a contractor is more likely to use permanent entry modes for markets which have a colonial link with the entrant’s home country.

7.3.2.4 Language proximity

Language is a very common barrier for companies marketing their products and services in international markets (Karakaya and Stahl 1991). Communication plays such an important role on construction sites where multiple organizations work together, that it is a significant location advantage for international contractors to know the local language (Ostler 1998). This brings a comfort factors into operating in a new territory (Ostler 1998).

In the global construction market, it is very common for contractors to do business in markets where the same or similar languages are spoken. For example, Spanish contractors pursue business in Latin America where Spanish is spoken, and Chinese contractors have a significant market share in Singapore and Hong Kong where Chinese is the common language. Speaking the local language, contractors not only tend to enter the market, but also establish permanent residence because they feel more comfortable in both marketing and project operations. Using permanent entry modes can also help them better exploit this location advantage.

It is therefore hypothesized: H7: When other variables are held constant, contractors are more likely to use permanent entry modes for selected overseas markets with language proximity.

157 7.3.3 Host Country Factors

Some host country specific factors can impact priorities between permanent entry and mobile entry. These factors are grouped as host country factors and include host market attractiveness, investment risk, entry restriction, and competitive intensity.

7.3.3.1 Host Market Attractiveness

Market attractiveness (size and growth) has been an important determinant of overseas investment. In large and fast growing markets, investment modes are expected to provide greater long term profitability to a firm, compared to contractual entry modes, through the opportunity to achieve economies of scale ad consequently lower marginal cost of production (Sabi 1988). Market growth in the host market affects expected net returns and firm growth during international expansion. This in turn affects resource commitments, strategic orientations, and the entry mode decision. In markets with high growth, firms prefer a long term presence (Agarwal and Ramaswami 1992). In contrast, MNEs may favor a mode of entry entailing less resource commitment when the sales growth of a target industry is declining (Luo 2001). With other things being equal, MNEs are expected to favor low resource commitment modes of entry when a host market is in its embryonic or declining state (Hill et al. 1990).

In emerging markets featuring high market growth, but with less attractive investment environment, another benefit offered by these target markets is the opportunity for higher returns (in excess of the risks taken) due to the presence of greater market imperfections for larger organizations who have the resources required to bear the risks associated with entering low potential markets (Lambkin 1988).

In the construction market, firms will commit more resources and intend to establish permanent entry modes to exploit the growth of the host country as a location advantage rather than enter on an opportunistic and contractual basis.

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It is therefore hypothesized that: H8: When other variables are held constant, construction entrants are more likely to use permanent entry modes for attractive overseas markets.

7.3.3.2 Investment Risk

The investment risk in a host country reflects the uncertainty over the continuation of present economic and political conditions and overall policies which are critical to the survival and profitability of a firm’s operations in that country. In countries with high investment risk, a firm would be better off not entering; but if it does, it may favor the use of non-investment options (Agarwal and Ramaswami 1992). Permanent entry modes are on-going processes, and therefore it is hard to forecast and insure against all the risks involved. Foreign firms have to manage these risks as they emerge. Foreign firms adopting mobile modes have a better chance to manage their risks since the duration is often shorter, making it easier to foresee the types and severity of risks.

When investment risk is high, MNEs could do well to limit its exposure to such risk by restricting its resource commitments (Buckley and Casson 1998; Kim and Hwang 1992). Political risk may discourage FDI and encourage the use of arm’s length contracts instead. Root (1987) has identified four types of investment risk that have a significant impact on an MNE’s entry decision. They are general political risk (e.g., instability of political system), ownership / control risks (e.g., expropriation, intervention), operations risks (e.g., price control, local content requirements), and transfer risk (e.g., currency inconvertibility risk, remittance control). When these risks are high, the MNE might be well advised to limit its exposure to them by reducing this resource commitments and increasing its ability to exit from the market quickly without taking a substantial loss (“flexibility”), should the environment worsen (Hill et al. 1990). Although large MNEs are usually able to bear some risks, empirical evidence indicates that the willingness of MNEs to commit equity in a foreign market is inversely related to perceptions of

159 uncertainty of doing business there (Gatignon and Anderson 1988; Stopford and Wells 1972).

International construction is exposed to multiple types of risks. Its exposure to risks is similar to general businesses.

It is therefore hypothesized that: H9: When other variables are held constant, construction firms are more likely to use permanent entry modes for overseas markets of low investment risk.

7.3.3.3 Entry Restriction

Gomes-Casseres (1990) noticed that numerous research has ignored the effects of host government ownership restrictions on MNE choices. For example, such restriction can make an MNE form a joint venture even where transaction cost analysis would predict a wholly-owned subsidiary. Brouthers (2002) confirmed that in some countries, the institutional structure may create situation where the transaction cost predicted mode choice may not be the allowed choice.

This “preference-restriction-last choice” paradigm is overwhelmingly significant in the construction industry. To protect domestic construction market, barriers related to ownership requirements, permit systems, rating systems, and licensing systems that prevent permanent residence of foreign contractors are very common in a number of significant markets. These constraints can sometimes limit entrants only to projects which are normally funded by international organizations (e.g., World Bank, and regional development banks) and foreign governments, projects under special governmental treaty (USA-Japan public project program), and projects that domestic contractors are incapable of completing.

160 ENR (2004) cited comments from Hochtief that “entry is hampered by legal constraints and local market conditions…” For new entrants, they may have to use mobile entry modes even if they prefer permanent entry.

Therefore, it is hypothesized that: H10: When other variables are held constant, foreign contractors are less likely to use permanent entry modes for markets with high entry restriction.

7.3.3.4 Competitive Intensity

Industrial organization economics assumes that the increase in number of firms within an industry will boost competition, thus lessening the level of profitability and slowing down the average growth rate of an individual firm’s sales (Scherer and Ross, 1990). ENR (2004) introduced a case study about Balfour Beatty’s withdrawal from China to avoid the competition there.

Harrigan (1985b) argued that any reduction in strategic flexibility may be unwise when competition is volatile, which requires quick responses from the firm. In such markets, firms tend to be less profitable and therefore do not justify internal organization which involves heavy resource commitments. There is a substantial difference between resource commitments between permanent and mobile entry modes for international construction markets. This gives rise to different strategic flexibility of each type of entry mode. Because resource commitments limit a MNE’s ability to adapt to changing market circumstances without incurring substantial sunk costs, an MNE can be theorized to favor entry modes involving low resource commitments and high flexibility when competitive pressures in the host market are intense (Hill et al. 1990).

It is therefore hypothesized that:

161 H11: When other variables are held constant, construction firms are less likely to use permanent entry modes to penetrate overseas markets involving high competitive intensity

7.3.4 Firm Factors

Some factors that are specific to contractors can set a priority between permanent entry and mobile entry. These factors are grouped as entrant factors. They include firm size and multinational experience of the entrant.

7.3.4.1 Firm Size

Asset power is necessary for firms to engage in international expansion and compete in overseas markets. Resources are needed for absorbing the high costs of marketing, enforcing contracts, and achieving economies of scale. The size of the firm reflects its capability for absorption of these costs. In other words, the size of the firms is expected to be positively correlated with its propensity to enter foreign markets in general, and to choose equity entry modes in particular. While the preference for sole ventures is not surprising, the choice of joint ventures may be explained by the fact that a larger organization may be less concerned than a smaller organization with the potential possibility of exploitation by the host country partner (Doz 1988). Empirical evidence also confirms that larger firms prefer equity entry modes (Agarwal and Ramaswami 1992).

Unlike most other service industries, the construction industry is capital –intensive. In international projects, contractors are often required to make down payment and sometimes take project equity or help in acquiring project financing. This makes a threshold of asset power for construction firms to enter the worldwide market. Permanent presence requires more assets than short term construction projects as long term employees are kept, equipment is acquired and maintained, and in some countries,

162 high registration capital is required (e.g., US$ 30 million registration capital for a First Class construction firm in China).

It is therefore hypothesized that: H12: When other variables are held constant, a larger construction firm is more likely to choose permanent entry modes for overseas markets.

7.3.4.2 Multinational Experience

Experience is believed to be of great importance in entry mode selection. The experiential learning in the global expansion process does not reduce the cultural distance between home and host country, but certainly enhances the firm’s experience in operating a business in a given foreign market (Root 1987). Experiential learning endows the firms with a greater ability to detect the opportunities, reduces the uncertainties of going abroad and makes the international investor more willing to commit a larger amount of resources (Arora and Fosfuri 2000). In the accumulation process of knowledge and experience, firms may develop new capabilities to adapt the risky and competitive environment in an emerging market (Lin 2000).

The market knowledge and international experience of firms influences their ability and willingness to invest resources. Firms are initially risk averse when entering new markets, but as they acquire knowledge in a foreign market and gain more insight into market risk, competitive pressure, and returns, they become more confident and aggressive, manifesting into a willingness to commit more resources (Lin 2000). Firms without foreign market experience are likely to have greater problems in managing foreign operations. They have been observed to overstate the potential risks, while understating the potential returns of operating in a foreign market. This makes the choice of non-investment modes more probable for these firms (Agarwal and Ramaswami 1992).

163 The transfer of experience is relatively easy from country to country. The experience that the construction firms gain in the worldwide market can help them enter a specific market. In the construction industry, or the entire service sector, the gradual incremental model does not hold true (Erramilli and Rao 1993). In fact, it is observed that many construction firms establish sole ventures once they enter a strange market (Abdul-Aziz 1995). It appears that the general overseas experience does play a role when a firm enters a new market.

It is therefore hypothesized that: H13: When other variables are held constant, more experienced construction firms are more likely to use permanent entry modes for overseas markets.

7.4 Interaction Effects

From the perspective of entrants, most of the above factors provide rationale for choosing the optimal entry mode except that entry restriction imposes constraints upon an entrant’s preliminary selection based on all the other variables. Because of entry restriction, the preliminary selection result based on other factors may change. For example, with other factors held constant, the entrant may prefer permanent entry modes to mobile entry modes in an attractive market (Hypothesis 1). However, this degree of preference may vary under different magnitudes of entry restriction. As a result, when the local market involves many institutional constraints upon permanent entry modes and few upon mobile entry modes, the entrant may possibly choose a mobile entry mode.

To combine the different effects between entry restriction and other factors in influencing the selection between permanent entry and mobile entry, a two step decision process is proposed like that of Gomes-Casseres (1990): 1) an entrant first prioritizes between permanent entry and mobile entry based on factors excluding entry restriction,

164 and 2) it then re-ranks the two options with consideration of feasibility that is determined by entry restriction.

In statistical language, this means that the slope of the relationship between any factor except entry restriction and the independent variable depends on the value of entry restriction. Therefore the interaction effects between entry restriction and any other factor need to be examined.

7.5 A Synthesis of Influencing Factors

The entry mode selection influencing factors (predictors) and their associated hypotheses are summarized in Table 7.4. These hypotheses can be explained by the OLI paradigm, institutional / cultural theory, and bargaining power theory. As we have conceptualized the entry mode selection as a two step decision process where contractors first prioritize their entry modes according to optimization predictors (predictors excluding entry restriction), and then screen out infeasible entry modes according to the constraint predictor (entry restriction). The interaction effects in the table are used to combine the influences of predictors at different stages. Directions of each hypothesis are also indicated in the table, where “+” means the greater the predictors are, the more likely that an entrant will choose the entry mode, and “-“ means that the greater the predictors are, the less likely that an entrant will choose the entry mode.

165 Table 7.4: The Hypotheses (Main Effects) Entry mode Predictors Permanent Mobile Main effects Home market attractiveness -+ Long term orientation +- Uncertainty avoidance + - Cultural distance -+ Trade link +- Colonial link +- Language proximity + - Host market attractiveness + - Investment risk -+ Entry restriction - + Competitive intensity - + Firm size +- Multinational experience +-

7.6 Summary

This chapter first reviewed all related schools of theories that provide rationale for international market entry mode selection, and then identified 13 factors that can shed light on the dichotomical selection between permanent entry and mobile entry. Based on the applicable theories and previous research findings, hypotheses were proposed to explain how international construction firms make selection between permanent entry and mobile entry. Interaction effects between entry restriction and other predictors were proposed for exploration based on a conceptual two stage decision process. The next chapter will test these hypotheses and develop an entry mode selection model with empirical data.

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CHAPTER 8

THEORY TESTING

This chapter first introduces the methodology for theory testing (Section 8.1). It then proposes suitable measures for the dependent variable (entry mode) and the predictors identified in Chapter 7 (Section 8.2), collects data from multiple sources, and presents the results of a binary logistic regression analysis to test the hypotheses and develop an entry mode selection model for international construction markets (Section 8.3.1). Interaction effects are also incorporated into the model and analyzed. Whether the model is normative is explored with a t-test (Section 8.3.2). Finally, managerial implications are developed (Section 8.4).

8.1 Methodology

This section includes the sampling method and analytical approach for hypothesis testing.

8.1.1 Sample

The global construction market is dominated by a few large-sized contractors and many medium-sized contractors in terms of international revenue (see Chapter 4). Most of the active international contractors are captured in the annual ENR Top 225 International Construction Firms. For example, in 2001 ENR ranking the 225th largest international contractor (SECOR International Inc., USA) had an international revenue of only 1 million US dollars. It can therefore be concluded that ENR provides a sample of both large- and medium-sized international contractors.

167

This research used the rankings by ENR for the decade from 1992 through 2001 and found that there were 522 international contractors who were included in the ENR list for at least one of the years. However, not all these contractors reported the details of their entry modes. This research only obtained the entry mode details of 122 (see Appendix Q) out of the 522 contractors which were summarized in Appendix N. Most of them are based in North America, Europe, and especially Asia (see Appendix L) as summarized in Table 8.1. To account for regional difference in economic growth (for example, most developed countries are located in North America and Europe, and most developing countries are in Asia), this research controls for home country economic level as a control variable. Social, political, cultural, legal and other differences in regions have already been addressed by some home market factors and home-host market factors (for example, the countries in the same region usually share common languages and have less cultural distances between them while those from different regions do not).

Table 8.1: Contractors’ Original Regions Original regions Number of contractors North America 28 Latin America 1 Caribbean 0 Europe 27 Middle east 5 Asia/Pacific 59 North Africa 1 Central/South Africa 1 Total 122

ENR reports the presence of leading international contractors in approximately 150 countries each year. However, not all of these countries are included in this research, and sometimes it is difficult to collect the legal, political, economic, and industry indicators of some small countries. To focus the research, 42 markets (see Table 5.4 in Chapter 5) were selected to examine foreign contractors’ entry into them. These 42 countries are identical to those examined in Chapter 5 related to their legal requirements regarding various entry modes. The regional distribution of these countries and the

168 percentage of their construction spending over the total construction spending of each region are summarized in Table 8.2. It is obvious that these sampled countries constitute the majority of each regional market (except Africa) as well as the overall global construction market.

Table 8.2: Regional Distribution of Sampled Markets Number of Construction Construction Regions sampled spending of sampled spending of regions Percentage markets markets ($ mil) ($ mil) North America 2 736,888 736,888 100% Latin America 6 112,539 129,069 87% Europe 11 778,785 1,032,755 75% Middle east 7 62,373 78,214 80% Asia/Pacific 12 1,072,239 1,120,586 96% Africa 4 27,849 158,160 18% Total 42 2,790,673 3,255,673 86%

8.1.2 Analytical Approach

There are two models with associated hypotheses tested in this research: 1) a descriptive contingency model that correlates internal and external environmental factors to the entry mode group (permanent entry versus mobile entry) selected by the international contractor; and 2) a normative model that correlates entry mode selection to market entry performance (e.g., if a contractor selects an entry mode according to the suggestion of the contingency model, better performance can be achieved).

To test the first model with a binary categorical dependent variable, the binary logistic regression method was used. It is introduced and estimated for its suitability for this purpose in Section 8.1.2.1. A t-test was used to test whether there is significant correlation between the entry mode selection model and entry performance. One variable, Fit, is used to describe whether a contractor selected the entry mode suggested by the model. If the mode selected is the same as what the model suggests, Fit = 1; otherwise Fit

169 = 0. The t-test is applied to test if firms who choose the model-predicted modes can perform better on average than those who do not. The relationship between the variables and the analyses are depicted in Figure 8.1.

Figure 8.1: Relationships between Independent and Dependent Factors

8.2 Measurement of Variables

8.2.1 Measurement of the Dependent Variable

In the entry mode selection model, the dependent variable is the entry mode adopted by entrants. This is a binary categorical variable, which has two categories: mobile entry and permanent entry. The category of mobile entry includes JV project, SV project, and BOT / Equity project; the category of permanent entry includes Representative office, Branch office / company, SV company, and JV company (see Chapter 6).

There are two major data sources providing information about the selected 122 international contractors’ entry modes regarding the 42 selected markets:

170 1) ENR reports which countries each international contractor’s revenue comes from for every year (see Appendix M). This, however, does not tell which entry mode is used for each market. For example, ENR reported that Bechtel had revenue from China in 2000, but the operation can be based on either a permanent entry mode or a mobile entry mode; 2) Other resources like the website of each contractor, databases like Who Owns Whom, annual reports of public firms, and other information sources like Hoovers.com and industry journal articles identify in which countries a contractor has a permanent residence (see Appendix K). These sources tell whether an international contractor has used a permanent entry mode regarding a specific market. For example, both ENR’s website (www.enr.com) and an article from an industry journal indicated that Bechtel has a JV company in China that was founded in 1979.

By comparing Sources 1 and 2, it can be inferred whether an international contractor used permanent entry or mobile entry regarding a specific market: If Source 1 indicates that an Entrant A had revenue from Market B in any year, and Source 2 indicates Entrant A did not use any permanent entry mode for Market B, it can be concluded that Entrant A used a mobile entry mode for Market B (the data was only collected for revenue distributions for contractors from 1992 through 2001, so any mobile entry that occurred beyond this period may be missed); If Source 2 indicates that Entrant A used a permanent entry mode for Market B, then no matter whether Source 1 indicates Entrant A had revenue from Market B in any year, it can be concluded that entrant A used a permanent entry mode for Market B; and If neither Sources 1 nor 2 indicates entrant A had business transactions or presence in Market B, it can be concluded that Entrant A has not entered Market B.

Entry performance needs to be measured for the t-test. It is recognized that entry performance is a very broad concept (Brouthers 2002) and influenced by multiple factors other than entry mode selection (e.g., marketing). This research proposes average

171 international revenue from 1992 through 2001 as the measure for entry performance under the assumption that if a contractor keeps using the right entry modes for its overseas markets through a long period of time, it can gradually grow in terms of international revenue. It is acknowledged that this measure is not ideal, but it was selected as the most appropriate indicator based on data availability and is a limitation of this study.

8.2.2 Measurement of Independent Variables

The 13 independent variables (predictors) are measured in this section.

8.2.2.1 Home Country Market Attractiveness and Host Country Market Attractiveness

Market attractiveness is measured with two constructs: one is market size and the other is market growth. ENR (1998, 2000) reported the construction spending in US dollars of approximately 150 countries from 1996 through 2000 (see Appendix G). To obtain the data, ENR combined many sources including the International Monetary Fund, the Asian Development Bank, the Inter-American Development Bank, and the European Bank for Reconstruction and Development. Much of the data was based on specific studies or statistics on individual country’s construction spending. Where data was not available, estimates were made based on analyses of each country. Influences from countries’ currency fluctuation problem were adjusted based on 1996 (ENR 1998) or 1998 (ENR 2000) levels respectively. Unfortunately, the same data for other years in the past decades were not reported. In the two issues of ENR (November 30 / December 7, 1998 and December 4, 2000), the data for 1998 were duplicated. This provides a basis to adjust currency fluctuation for all years to a single year level. For this analysis, the data reported in ENR 2000 were adjusted to the 1996 level. Regarding each market, the mean

172 of these five years of construction spending is used as a measure of market size, and the average annual growth during the five years is used to measure market growth.

8.2.2.2 Long-term Orientation, Uncertainty Avoidance, and Cultural Distance

Hofstede (1980; 2001) conducted perhaps the most comprehensive study of how values in the workplace are influenced by culture. He not just proposed the concepts of power distance, uncertainty avoidance, individualism, masculinity, and long-term as five dimensions in his national culture paradigm, but also implemented extensive surveys to quantify different countries along these dimensions (see Appendix A). All dimensions are scored with a 0 (low) to 100 (high) scale. For long-term, high ranking score indicates the country prescribes to the values of long-term commitments and respect for tradition; for uncertainty avoidance, a high ranking score indicates the country has a low tolerance for uncertainty and ambiguity (Hofstede 2001). Recent replications of Hofstede’s original study found that there are no significant changes in these country scores (Hofstede 1994). Different from long-term orientation and uncertainty avoidance which are absolute values in association with specific countries, cultural distance measures the culture related difference between a pair of countries. For a given country-pair, the cultural distance is calculated as the arithmetic average of the deviations in Hofstede’s five dimensions, correcting for the overall variance of each of these four dimensions (Arora and Fosfuri 2000; Kogut and Singh 1988). The formula is as follows:

5 2 CD jk = ∑{()I ij − I ik /Vi }/ 4 i=1

Where Iij is the index for the ith cultural dimension and jth country, Vi is the variance of the index of the ith dimension, and CDjk is the cultural distance of the jth country from the kth country. The values of each cultural distance pair are shown in Appendix S.

173 8.2.2.3 Trade Link

In this research, trade link is measured with a dummy variable. If a pair of countries are both members of a bilateral or multilateral trade agreement / organization, the value of this dummy variable is 1, otherwise it is 0. The following trade agreements are believed to influence the entry mode selection decision of international contractors: EU: European Union NAFTA: North America Free Trade Agreement GCC: Gulf Cooperation Council ASEAN: Association of Southeast Asian Nations SADC: Southern African Development Community Japan-USA: 1988 Trade Act EU-USA: European Union - United States Annual Summits WTO (World Trade Organization) is not included in the list because all countries investigated in this research (see Table 5.4 in Chapter 5) are WTO members. Besides, the sector-specific commitments (“construction and related engineering”) of each WTO member country are considered in another variable: entry restriction. The values of the binary variable for each country pair are shown in Appendix D.

8.2.2.4 Colonial Link and Language Proximity

In this research colonial link is a relationship between two countries, independent of their level of development, in which one has governed the other over a long period of time and contributed to the current state of its institutions. It is measured with a dummy variable. If a pair of countries has a colonial link, the value of this dummy variable is 1; otherwise, it is 0. Language proximity is a relationship between two countries who share common languages. In this research, Language proximity is also measured with a dummy variable. If a pair of countries share at least a common official language, this dummy variable is 1, otherwise, it is 0.

174 A French based research institute on the international economy, Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) has built and made available a dataset providing useful data for empirical economic research including colonial link and language proximity (See Appendix C). The current version of the CEPII dataset contains information for 225 countries including all the 42 markets investigated in this research.

8.2.2.5 Investment Risk

Investment risk is a broad risk comprising of multiple macro level risks including political, economic, and legal risks. The annual credit risk ratings by the Institutional Investor from 1992 through 2001 are used to measure the investment risk in this research. The scores are based on ratings provided by 75 to 100 leading international banks. This risk rating score is on a 0 – 100 scale where 0 represents the least creditworthy countries and 100 represents the most creditworthy countries. Although the Institutional Investor credit ratings are based upon bankers’ opinions, previous studies have confirmed that this risk rating is a suitable comprehensive measurement of investment risk (Cosset and Roy 1991). Regarding each market, the mean of the scores for 1992 through 2001 is used as a measurement of the investment risk (see Appendix B).

8.2.2.6 Entry Restriction

There are basically two types of barriers that a host government can exert upon international contractors’ entry mode selection: legal barriers for entry modes, especially those related to ownership requirements; and “other barriers”. This research uses the scale in Table 8.3 to measure the strength of legal barriers of the selected 42 countries.

The information regarding these barriers comes from each country’s Sector-Specific Commitments for Construction and Related Engineering as a WTO

175 member country, and major laws and regulations about foreign investment (see Appendix R).

Table 8.3: Scale to Measure Legal Barriers Rating Condition 4 SV is not allowed, and neither is JV with foreign control; 3 SV is not allowed, but JV with foreign control is; 2 Some other entry mode(s) (except SV and JV company) are not allowed (e.g., BOT); 1 All entry modes are conditionally allowed (e.g., accessibility regarding project types or client types); 0 All entry modes are unconditionally allowed.

In the construction industry of many countries, other barriers can sometimes be stronger than legal barriers. In the construction industry, they include: Permit / approval system; Rating / qualification system; Mandated / institutional project share or size control (e.g., bidding discount for local bidders, traditional JV in practice); Strict registration capital requirement (e.g., large registration capital required that cannot be used throughout projects); Expatriation of profit / tax condition; and Mobility of resources (e.g., executive / management qualification, professional licensing system, labor / material / equipment import / export constraint). This research assumes that each of the above barriers has the same amount of effects in restricting a foreign contractors’ entry. The scoring is the sum of occurrences of the above items for a specific country, so it ranges from 0 (no other barriers) to 6 (strongest other barriers). The information about each country regarding these barriers comes from an investigation of each country’s construction systems (see Appendix R).

Similar to the calculation of cultural distance, the summated Entry restriction is measured as the arithmetic average of the deviation of each country from the most open market (0 for legal requirement and 0 for other barriers) in the two scores, correcting for the overall variance of each of these two dimensions. The formula is as follows:

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⎛ I 2 I 2 ⎞ ⎜ 1i 2i ⎟ RHGi = ⎜ + ⎟ / 2 ⎝ V1 V2 ⎠ 2 Where RHGi stands for the entry restriction value for Country i; I1i is the score of legal 2 barriers for Country i; I2i is the score of other barriers for Country i; V1 is the variance of legal barriers scores of all the 42 countries; and V2 is the variance of Other barriers scores of all the 42 countries. The RHG values for all selected country are shown in Appendix F.

8.2.2.7 Competitive Intensity

Competitive intensity is associated with the number of competitors pursuing projects in the market. In many markets, the segmentation of the construction market opening to overseas contractors is limited. The competition is even more fierce among leading contractors. There are 522 international contractors that have been included in at least 1 year of the ENR Top 225 International Construction Firms from 1992 through 2001. ENR also reports the geographic distribution of business of these contractors. Therefore, the number of these contractors in a specific market for a specific year is available to measure the market competitive intensity (see Appendix E). The formula used to calculate the index for competitive intensity is as follows:

2001 N CI j = ( ∑∑Eijk ) /10 k==1992i 1

Where CIj stands for the competitive intensity for Market j; Ejkj is a binary variable that is 1 when Contractor i had revenue from Market j in year k, and 0 when Contractor i had no revenue from Market j in year k (see Appendix M); N is the number of international construction firms that had revenue from Market j from 1992 through 2001 (522).

177 8.2.2.8 Firm Size

Firm size can be measured in multiple ways, e.g., employee number and quantity of asset. Global revenue (including both international and domestic revenue) is used in this research to measure firm size. ENR reports the global revenue for leading construction firms for each year. The average of the global revenues of each of the sampled 122 international construction firms from 1992 through 2001 is used as the measure of firm size (see Appendix N). The assumption is that in general, only large-sized firms can generate large revenue. This may not always hold true for the construction industry because some medium-sized contractors can generate large revenue when performing a mega project(s). However, with averaging the ups and downs of contractors’ global revenues, this variable will approximate the real size of the firms.

8.2.2.9 Multinational Experience

It is assumed that 1) the more overseas markets a contractor enters, the more multinational experience it has; and 2) the longer a contractor stays in overseas markets, the more multinational experience it gains. The formula used to calculate the index for multinational experience is as follows:

2001 M MEi = 1/( ∑∑Eijk ) k ==1992j 1

Where MEi is the multinational experience for Market i; Ejkj is a binary variable where it is 1 when Contractor i had revenue from Market j in Year k, and is 0 when Contractor i had no revenue from Market j in Year k (see Appendix M); and M is the number of markets included in ENR’s survey (165).

178 8.2.2.10 Fit

Fit is an independent variable used to test the hypothesis related to entry mode selection based on the model and entry performance. This is a dichotomous variable. It has a value of 1 if the binary logistic regression analysis correctly predicted a firm’s entry mode regarding a specific market, and 0 if the prediction is incorrect.

8.2.3 Control Variable – Home Country Economic Level

This research uses the World Bank’s classification schemes of economies (countries) to measure economic growth. This scheme has extensively been used in business and economics research. Economies are divided according to 2003 Gross National Income (GNI) per capita, calculated using the World Bank Atlas method. The groups are: 1) low income economy, $765 or less; 2) lower middle income economy, $766 - $3,035; 3) upper middle income economy, $3,036 - $9,385; and 4) high income economy, $9,386 or more (see Appendix J). The classification of the World Bank involves all its 184 member countries that include all of the 42 countries selected to investigate in this research. Because no international contractor sampled in this research is based in a low income economy, home country economic level is in fact a variable of three categories (lower middle income economy, upper middle income economy, and high income economy).

8.3 Results

Prior to performing the logistic regression analysis, a correlation test was prepared to investigate possible signs of multicollinearity. The existence of multicollinearity inflates the variances of the parameter estimates, which may result in a lack of statistical significance of individual independent variables while the overall model may be significant. In the worse situation, multicollinearity may also result in incorrect signs and

179 magnitudes of regression coefficient estimates, and therefore incorrect conclusions about relationships between independent and dependent variables. Table 8.4 reports the intercorrelations of the measures used in this study. It should be noted that the interval property is assumed to be met for dichotomous categorical variables including trade alliance (0 or 1), colonial link (0 or 1), language proximity (0 or 1), and home economy level (lower middle income, upper middle income, or high income economies). The result illustrates a paradox of statistical significance versus practical significance. It is not surprising to see that quite a few correlations are statistically significant because of the large sample size (1998 data points). However, only 4 correlation coefficients have a magnitude greater than 0.5 and none of them is greater than 0.8. Although it seems that collinearity may not be a serious problem, further multicollinearity diagnostics were conducted by calculating Variance Inflation Factors (VIFs) to confirm this (see Section 8.3.1).

8.3.1 Logistic Regression

A binary logistic regression analysis was performed with the data using SPSS 12 for Windows. Table 8.5 presents the results. There are 2 models developed in this study: Model 1 has a specification without interaction terms while Model 2 includes interaction terms. In Model 1, the Variance Inflation Factors (VIFs) for all predictors are less than 5.0, confirming that multicollinearity is not a serious problem. Including interaction terms in the model can drastically increase the level of multicollinearity. To reduce multicollinearity, all continuous independent variables were “mean centered” in developing Model 2 (Jaccard and Turrisi 2003).

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Table 8.4: Correlation Matrix experience Home country level economic Mode Home market size Home market growth Uncertainty avoidance Long term orientation Cultural distance Trade link Colonial link Language proximity Host market size Host market growth risk Investment Entry restriction Competitive intensity Firm size Multinational Pearson Correlation 1 Mode Sig. (2-tailed) Pearson Correlation -.126** 1 Home market size Sig. (2-tailed) 0 Pearson Correlation -0.037 -.083** 1 Home market growth Sig. (2-tailed) 0.097 0 Pearson Correlation .130** 0.017 -.718** 1 Uncertainty avoidance Sig. (2-tailed) 00.4570 Pearson Correlation .045* .160** -.118** .126** 1 Long term orientation Sig. (2-tailed) 0.046 0 0 0 Pearson Correlation .058** .122** 0.001 -0.023 .483** 1 Cultural distance Sig. (2-tailed) 0.009 0 0.954 0.299 0 Pearson Correlation -0.032 .066** .089** -.141** -.244** -.318** 1 Trade link Sig. (2-tailed) 0.149 0.003 0 0 0 0 Pearson Correlation 0.039 -0.002 .101** -.102** -.115** -.172** .220** 1 Colonial link Sig. (2-tailed) 0.078 0.938 0 0 0 0 0 Pearson Correlation .063** -.120** .228** -.207** -.075** -.156** 0.022 .282** 1 Language proximity Sig. (2-tailed) 0.005 0 0 0 0.001 0 0.326 0 Pearson Correlation 0.002 0.005 -.069** .069** .073** -.089** .360** .061** -.068** 1 Host market size Sig. (2-tailed) 0.938 0.823 0.002 0.002 0.001 0 0 0.006 0.002 Pearson Correlation 0.042 -0.019 0.034 -0.01 -.073** -.065** -.076** -0.002 0.011 -.116** 1 Host market growth Sig. (2-tailed) 0.058 0.394 0.123 0.655 0.001 0.004 0.001 0.919 0.621 0 Pearson Correlation 0.013 .052* -.064** 0.038 0.03 -.140** .514** .172** 0.041 .518** -.268** 1 Investment risk Sig. (2-tailed) 0.573 0.02 0.004 0.092 0.18 0 0 0 0.066 0 0 Pearson Correlation -.074** 0.026 -0.027 0.02 .101** .096** 0.002 0.015 -.058** .325** -.229** .137** 1 Entry restriction Sig. (2-tailed) 0.001 0.247 0.221 0.375 0 0 0.927 0.506 0.01 0 0 0 Competitive intensity Pearson Correlation .155** -0.004 -.075** .079** .153** .216** -.053* -.047* .066** .074** .098** .174** .071** 1 Sig. (2-tailed) 00.8540.0010 0 00.0180.0360.0030.0010 00.002 Pearson Correlation .120** .298** -.343** .231** .108** .076** -0.027 -0.012 -.135** 0.022 -.045* .065** 0.018 -0.029 1 Firm size Sig. (2-tailed) 000000.0010.2210.60400.3160.0420.0040.4320.202 Pearson Correlation .090** -.150** -.044* .111** .153** 0.006 -.061** -0.034 .046* 0.042 -0.021 -0.001 .047* .134** -.231** 1 Multinational experience Sig. (2-tailed) 000.05000.7970.0060.130.040.0610.3540.9650.03600 Pearson Correlation -0.019 .317** -.478** .268** -.485** -.253** .153** .092** -.080** 0.005 0.01 .048* -0.028 -0.026 .209** -0.03 1 Home country economic level Sig. (2-tailed) 0.388 0 0 0 0 0 0 0 0 0.826 0.671 0.031 0.215 0.24 0 0.129 Descriptive statistics Mean 1.5661 375767 0.024 64.237 46.625 2.7513 0.1562 0.0591 0.1151 81757 0.0423 57.542 4.1837 46.996 3456.3 0.019 3.769 Standard deviation 0.4957 278319 0.0453 22.957 35.543 1.7984 0.3631 0.2358 0.3192 159832 0.0534 21.516 3.2237 17.292 3751.3 0.031 0.629

** Correlation is significant at the 0.01 level * Correlation is significant at the 0.05 level

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Table 8.5: Determinants of Entry Mode Selection: Binary Logistic Test (n=1998: Mobile entry = 867; Permanent entry = 1131) Model 1 Model 2 Variables B S.E. VIFB S.E. Constant -1.155 *** 0.431 1.177 ***

Main effect Host country - specific factors Home market size -1.55E-06 *** 2.23E-07 1.620 -1.49E-06 *** 2.272E-07 Homemarket growth 10.729 *** 2.026 3.306 10.982 *** 2.073 Uncertainty avoidance 0.021 *** 0.003 2.187 0.022 *** 0.003 Long-term orientation 0.003 0.002 2.652 0.004 0.002 Host country - Home country factors Cultural distance 0.100 *** 0.034 1.566 0.084 ** 0.038 Trade link -0.151 0.174 1.712 -0.047 0.187 Colonial link -0.471 ** 0.228 1.185 -0.366 0.232 Language proximity -0.375 ** 0.169 1.226 -0.499 *** 0.179 Home country - specific factors Host market size 3.956E-07 4.05E-07 1.601 5.357E-07 4.9271E-07 Host market growth 0.665 0.985 1.196 0.104 1.078 Investment risk -0.002 0.003 1.960 0.003 0.004 Entry restriction -0.068 *** 0.017 1.210 -0.006 0.118 Competitive intensity 0.017 *** 0.003 1.210 0.016 *** 0.004 Firm - specific factors Firm size 0.000 *** 1.587E-05 1.325 1.32E-04 *** 1.623E-05 Multinationalexperience 5.710 *** 1.964 1.190 6.666 *** 2.165

Control variables Home country economic level -Upper middle income economy -0.674** 0.280 1.215 -0.650** 0.285 -High income economy 0.849 0.573 3.375 0.914 0.580

Interaction effects Entry restriction by Home market size -4.61E-08 7.8047E-08 Entry restriction by Home market growth 1.366 ** 0.637 Entry restriction by Uncertainty avoidance 0.002 * 0.001 Entry restriction by Long-term orientation -0.001 0.001 Entry restriction by Cultural distance 0.037 *** 0.011 Entry restriction by Trade link 0.026 0.065 Entry restriction by Colonial link -0.127 * 0.075 Entry restriction by Language proximity 0.070 0.083 Entry restriction by Host market size -2.36E-07 * 1.2433E-07 Entry restriction by Host market growth 0.292 0.459 Entry restriction by Investment risk 0.004 *** 0.002 Entry restriction by Competitive intensity 0.002 0.001 Entry restriction by Firm size -1.99E-06 5.6611E-06 Entry restriction by Multinational experience -0.511 0.688

-2 Log likelihood 2489.7 2451.8 P value 2.101E-42 1.762E-42 Cox & Snell R Square 0.115 0.132 Nagelkerke R Square 0.155 0.177 Hosmer and Lemeshow Test (p value) 0.376 0.172 Correct classification rate (%) 64.76% 65.02%

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Both models are significant since their p values are all very small and less than 0.001. In the goodness-of-fit test, the Hosmer and Lemeshow statistics of Model 1 and 2 (0.172 and 0.376 respectively) are larger than 0.05, indicating that there is insufficient evidence to claim that the two models do not fit the data adequately. It seems that Model 2 is moderately superior to Model 1 with an improved correct classification rate, higher Cox & Snell R Square, and Nagelkerke R Square. This indicates the value of incorporating the interaction terms in the model. One may argue that the explained variance increases very little by including the interaction terms, but the inclusion is not solely important for explaining the variance in the dependent variable, but also establishing the presence of the conditional relationship between the independent variables and the dependent variables. These conditional relationships will be analyzed in Section 8.2.1.2.

However, with the involvement of interaction terms, Model 2 cannot be used to interpret the main effects of the independent variables, because the relationship between an independent variable and the dependent variable now depends upon the value of the conditional independent variable (Jaccard and Turrisi 2003). Hence the following discussion about hypotheses (main effects) developed in Chapter 7 is based on Model 1 and the analysis regarding interaction effects and prediction is based on Model 2.

8.3.1.1 Main Effects

To test the 13 hypotheses developed in Chapter 7, 15 predictors were identified because two hypotheses (H1 and H8) involve two separate measures individually. Regarding each hypothesis, the regression result can either support the hypothesis or not. Results of testing the main effects are summarized in Table 8.6. It can be seen that among the 15 hypothesized relationships, 5 are fully supported, 8 are partially supported,

183 and only 2 are not supported. Also among these 15 predictors, 10 are found significant in influencing the selection between permanent entry and mobile entry. Table 8.6: Testing Results Result Number Hypotheses Predictors SignSignificance Support Home country - specific factors 1H1Home market size YesYesYes 2H1Home market growth NoYesPartiallyb 3H2Long-term orientation YesNoPartiallya 4H3Uncertainty avoidance YesYesYes Home country - Host country factors 5H4Trade link NoNoNo 6H5Cultural distance NoYesPartiallyb 7H6Colonial link NoYesPartiallyb 8H7Language proximity NoYesPartiallyb Host country - specific factors 9H8Host market size YesNoPartiallya 10 H8 Host market growth Yes No Partiallya 11 H9 Investment risk No No No 12 H10 Entry restriction Yes Yes Yes 13 H11 Competitive intensity No Yes Partiallyb Firm - specific factors 14 H12 Firm size Yes Yes Yes 15 H13 Multinational experience Yes Yes Yes

Note: Partiallya : Insignificant, but sign is consistent with hypothesis Partiallyb : Significant, but sign is inverse to hypothesis

The Beta value for the term “Home market size” is negative and significant, indicating that when the home construction market size is large, contractors tend to use mobile entry modes to penetrate overseas markets, supporting Hypothesis 1. The Beta value for the term “Home market growth” is positive and significant, indicating that when the home construction market grows rapidly, contractors will more probably use permanent entry modes for overseas markets. Though this factor is found significant, the direction is inverse to what is hypothesized (H2). This is partially because market growth was measured with the average of annual growths of construction spending from 1992 through 2001, so the accumulative impacts of market growth have already been partially counted in Home market size. On the other hand, in many countries with high domestic market growth, governments promote contractors to pursue overseas markets and to achieve sustainable foreign revenue income, like China and South Korea (Committee on

184 Foreign Affairs 1985). Under such situations, despite growing domestic markets, contractors try to establish permanent residence in overseas markets. Although the home government support is believed to be an important variable in determining foreign market entry mode decision, this study did not incorporate it in the model due to a lack of data sources.

The Beta value for the term “Uncertainty avoidance” is positive and significant, indicating that contractors from countries characterizing a preference to rules and norms tend to use permanent entry modes to penetrate overseas markets, supporting Hypothesis 3. The Beta value for the term “Long term” is positive, indicating that contractors from countries culturally characterizing long term orientation are more likely to use permanent entry modes than mobile entry modes to penetrate overseas market. However it is not statistically significant, partially supporting Hypothesis 4.

The Beta values for the four Home–Host market specific factors (cultural distance, trade link, colonial link, and language proximity) have directions inverse to what have been hypothesized based on various theories, though only three of them are statistically significant. This indicates that when contractors enter an unfamiliar, unknown, and psychologically remote market, they are more likely to use permanent entry modes. There are at least two reasons that may contribute to this seemingly striking phenomenon: 1) International contractors take an aggressive attitude toward unfamiliar business environments. To international contractors, permanent entry modes are a way to help them develop new capabilities. In an unfamiliar environment, contractors set up localized residence to get local status, accumulate local knowledge and establish enduring local networks, and develop other capabilities specifically for local operations. 2) International contractors conventionally tend to use mobile entry modes. When the environment is comfortable they would choose mobile entry modes with which they are more familiar.

185 This confirms that some general business theories may not hold true for the construction industry, and some mental and behavioral patterns unique to international contractors must be taken into consideration in explaining their selection of entry modes for international construction markets.

The three Host market specific factors (investment risk, host market size, and host market growth) were found statistically insignificant in Model 1. The result shows that contractors do not tend to determine entry mode based on investment risk, size, and growth of the host market when they select between permanent entry and mobile entry. Although investment risk is not significant regarding its main effect, it does play a role in selecting between permanent entry and mobile entry under different entry restriction. This can be explained in the analysis of interaction effects of Investment risk by entry restriction reported in the next section. Although permanent entry modes can lead to more projects in exploiting an overseas market and therefore more return, they also involve higher cost. The cost adjusted return may not justify the use of permanent entry. Nevertheless, the Beta signs for host market size and host market growth are the same as hypothesized, and this implies that permanent entry modes are moderately superior to mobile entry modes in exploiting an attractive market.

Entry restriction is a significant term with a negative Beta value, indicating that when the host market involves strong restrictive laws, policies, and practices, contractors are more likely to use mobile entry modes than permanent entry modes. This is consistent with Hypothesis 12. Entry restriction also interacts with other predictors in influencing contractors’ selection of entry modes, and the details of these interaction effects will be presented in the next section.

It was unexpected to find that contractors, when entering a market with intense competition, tend to use permanent entry modes instead of mobile entry modes. Though its direction is opposite to what was hypothesized in Hypothesis 13, this term is statistically significant in the model. There are possibly three reasons for this striking

186 phenomenon: 1) the measure used for competitive intensity in this study, the number of competitors, may not be appropriate. It is in fact another proxy of host market attractiveness, because more attractive markets have more contractors competing in it; 2) International contractors are aggressive and not afraid of competition which reflects the market situation in the concurrent “interpenetration” trend: firms who globalized during the Middle East oil boom have to compete against each other in a suddenly narrowed down but still very potential global market; and 3) In overseas markets, some contractors do not compete directly with other international contractors or local contractors, but look at some niche markets where they have competitive advantages. For example, Japanese contractors are good at tunneling, UK contractors are good at bridge building, and USA firms are good at petroleum process projects. Therefore, the competitive intensity in specific market segments is the concern of the international contractor, not the overall competitive intensity. Additional research is needed to further understand this relationship.

The Beta value for the term firm size is significant and positive. This means that contractors with a larger size are more likely to use permanent entry modes than contractual entry modes, supporting Hypothesis 14. Firm experience is a significant term with positive Beta value, indicating that when contractors have accumulated a lot of experience, they tend to use permanent entry modes to enter foreign markets. Hypothesis 15 is therefore supported. The two hypotheses developed based on the firm specific factors are therefore fully supported by the regression analysis.

The control variable, home country economic growth level is found statistically significant in the model. It means that the economy growth stage of the home country does play an important role in determining which entry modes are chosen by contractors. This factor is not a focus of this research, but further exploration is interesting and valuable.

187 8.3.1.2 Interaction Effects

This research assumes a two stage decision process for contractors to decide on their entry mode: a contractor first ranks entry modes based on the impacts of independent variables except entry barrier, and then with consideration of entry barrier, the most favorable and feasible entry mode is selected. The influences of entry barrier upon the joint effects of all independent variables can be individually addressed with the study of the interaction of entry barrier and each of the other independent variables. Including a product term, according to Friedrich (1982), is a "low-risk strategy" in that if the product term is significant the modeler keeps it in the model, otherwise one can drop the product term out of the model.

Interaction effects between entry restriction and other predictors were explored in Model 2 (see Table 8.5). The three interaction terms that are statistically significant below 0.05 level are analyzed, including: 1) Entry restriction by home market growth; 2) Entry restriction by cultural distance; and 3) Entry barrier by investment risk.

Figure 8.2 shows the interaction effects of entry restriction by home market growth. As can be seen, when home market growth is below a certain even point, contractors are less likely to use permanent entry modes in markets with stronger entry restriction, which is consistent with what was hypothesized (Hypothesis 1). However, for contractors from countries with market growth above this even point, they are more likely to use permanent entry modes in markets with strong entry restriction. This seems striking. If the previous explanation about the main effects of home market growth is correct, that is, home market growth is in fact a proximity of home government support, this phenomenon could be explained. For contractors from countries with little home government support, like American contractors, they tend to use contractual entry modes for markets that feature strong entry restriction. For those who have strong government support or export promotion, like Chinese and Korean contractors, they may use permanent entry modes to sustain overseas revenue. However most of these contractors

188 are new players in the global construction arena and a global deployment of residence has not been achieved yet. They usually have their permanent markets in adjacent countries or third world countries where entry restriction can be high. The differences in slope of the lines in Figure 8.2 also indicate that contractors have more consistent decisions regarding which entry mode to use for markets with less entry restriction, while more variable decisions for markets with stronger entry restriction.

2 1.8 1.6 1.4 Low 1.2 Medium 1 High 0.8 Oddsratio 0.6 0.4 0.2 0 M-S M+S Home market growth

Figure 8.2: Interaction Effects: Entry Restriction by Home Market Growth

Figure 8.3 shows the interaction effects of entry restriction by cultural distance. As can be seen, when cultural distance is below a certain even point, contractors are less likely to use permanent entry modes in markets with stronger entry restriction, which is consistent with what was hypothesized (Hypothesis 4). However, when Cultural distance is above this even point, they are more likely to use permanent entry modes in markets with stronger entry restriction. This indicates that when cultural distance is low enough, it is easy for contractors to understand the host market environment, and they do not need to use permanent entry modes to facilitate the learning process. Therefore they can choose between permanent entry and mobile entry according to entry restriction magnitude: when entry restriction is high, they use mobile entry; otherwise, they use permanent entry. However, when the cultural distance is high enough, permanent entry becomes more necessary to get acquainted with and adapt to local market and

189 contractors, therefore using permanent entry modes. Figure 8.3 also shows that the line for low Entry restriction is nearly flat while the line for high entry restriction is significantly sloped. This implies that international contractors emphasize the influence of cultural distance upon the selection between permanent entry and mobile entry regarding closed markets, but not regarding open markets.

1.6 1.4

1.2 Low 1 Medium 0.8 High

Odds ratio 0.6 0.4 0.2 0 M-S M+S Cultural distance

Figure 8.3: Interaction Effects: Entry Restriction by Cultural Distance

Figure 8.4 shows the interaction effects of entry restriction by investment risk. As can be seen, when Investment risk rating is below a certain even point, contractors are less likely to use permanent entry modes in markets with stronger entry restriction, which is consistent with what was hypothesized (Hypothesis 9). However, when Investment risk rating is above this even point, they are more likely to use permanent entry modes in markets with stronger entry restriction. It should be noted that the higher the investment risk rating, the less risky it is in that market. In risky and closed markets, contractors are more likely to use permanent entry modes. One reason could be that with permanent entry modes, entrants can enjoy the stable investment environment while having an entry barrier against potential entrants. Regarding an open and stable market, contractors may prefer mobile entry modes that they are accustomed to.

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1.6 1.4

1.2 Low 1 Medium 0.8 High 0.6 Odds ratio Odds 0.4 0.2 0 M-S M+S Investment risk

Figure 8.4: Interaction Effects: Entry Restriction by Investment Risk

It is interesting to note from this analysis that although the main effect of entry restriction is against permanent entry modes, it can in fact encourage the use of permanent entry modes under certain conditions.

8.3.2 T Test

The binary logistic regression model developed (the model discussed in this section is Model 2 if not specifically indicated otherwise) is a descriptive model, because it predicts entry modes based on the historical data about leading international contractors’ decisions. However, it is uncertain that if contractors select their entry modes as this model suggests, they can achieve better entry performance. In other words, it is unclear whether this is a “normative” model. The challenges to test whether this model is also a normative model include: 1) It is difficult to measure the performance of market entry. Many financial or non-financial indicators are dependent not only upon the entry mode selection, but also upon other actions and decision of entrants like those centering on marketing; 2) It is difficult to adjust for some inherently different effects between permanent entry and mobile entry. For example, permanent entry modes

191 normally involve high business continuity and therefore revenue, no matter whether they are the optimal choices regarding a specific market (see Chapter 4). 3) Very few firms reported their entry performance regarding specific markets.

This research suggests using international revenue as an indicator of market entry performance. The underlying assumption is that if an international contractor keeps using the right method to decide which entry modes to use for its overseas markets, in the long run it will achieve healthy global expansion and increasing international revenue. One may argue that it is profit rather than revenue that constitutes a more valid indicator of international business success. The rationale of this study is that “revenue only” based expansion is not sustainable and if the average of international revenue of leading contractors is used as the measure, it should be consistent with profit in most cases.

As mentioned above, permanent entry modes involve higher business continuity than mobile entry modes. Therefore, when a contractor tends to use permanent entry modes regardless of the decision environment, will it enjoy larger “averaged” international revenue? This research uses a one way t-test to explore this question. The null and alternative hypotheses are as follows: H0: Contractors using permanent entry modes obtain the same international revenue as those using mobile entry modes.

H1: Contractors using permanent entry modes obtain more international revenue than those using mobile entry modes.

With the assumption of equal variance, the p value is 0.148 > 0.05. We therefore cannot reject H0 or we can conclude that there is insufficient evidence to claim that contractors using permanent entry modes can obtain more international revenue than those using contractual entry modes. The result implies that if contractors keep using permanent entry modes for international markets regardless of their internal and external environment, they cannot sustain their growth in terms of international revenue.

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To test whether the regression model developed is normative, the following hypotheses were developed: H0: Contractors who select entry modes as the model suggests achieve the same amount of international revenue as those who do not.

H1: Contractors who select entry modes as the model suggests achieve more international revenue than those who do not.

The result from Model 2 was used to calculate the values of Fit. With equal variance assumed, the p value is 0.00 < 0.05. We therefore reject H0 and conclude that contractors who select entry modes as the model suggests can do better than those who do not.

This analysis, though at a risk of inadequate measurement of entry performance, demonstrates that the regression model developed in this research is not just a descriptive model (under what scenarios do the contractors select which entry modes), but also a normative one (if contractors’ selection is consistent with the model suggestion, they can achieve better performance).

8.4 Conclusions and Managerial / Future Research Implications

Theoretical reasoning in Chapter 7 and the performance based empirical testing contained in this chapter both confirm that no generic entry mode between permanent entry and mobile entry consistently outperforms the other. Which one is relatively better depends on multiple internal and external factors. One contribution of this study was to successfully develop two contingency statistical models that combine the effects of these factors in entry mode selection. Although this model can only distinguish between two groups of entry modes - mobile entry and permanent entry, it provides a starting point to develop selection frameworks for basic entry modes on a lower level. The regression models are significant and the goodness-of-fit tests show the models fit data well. The

193 t-test shows that the models are not just descriptive in the sense that it correctly depicts the real selection approaches of leading international contractors, but also normative in the sense that if contractors keep using entry modes as the model proposes, better global operation performance as measured by international revenue can be achieved.

Most of the factors identified in this research were found to be significant either by their main effects (home market size, home market growth, uncertainty avoidance, cultural distance, colonial link, language proximity, entry restriction, competitive intensity, firm size, and multinational experience) or interaction effects (investment risk and host market size). However, not all the hypotheses were fully supported. In fact, in some cases, the directions of impacts of the factors upon the dependent variable were found to be opposite to related hypotheses. The analysis confirmed that some hypotheses developed mainly based on general business and economic theories may not hold true for the construction industry. Characteristics of the construction industry and especially the unique behavior and decision patterns of the international contractors must be taken into consideration to explain their selection of market entry modes.

International contractors appear to be adventurous risk-takers and aggressive competitors. They traditionally prefer mobile entry modes, but will use permanent entry modes to gain local knowledge and establish local networks to surmount the unknowns and uncertainties in overseas markets that are quite different from their home countries. Since the models developed are also normative, this implies that these unique characteristics may explain the success of the sampled international contractors. In other words, international contractors should not try to avoid risk-taking, competition, and unfamiliar operational environments. Some capabilities can only be learned with permanent residence in overseas markets. Contractors cannot wait to develop all necessary in-house capabilities prior to using permanent entry modes to penetrate selected overseas markets. International expansion is a process not only for using their existing capabilities, but also to develop new capabilities. In this sense, the essence of organizational capability theory may be applicable in explaining international

194 contractors’ entry mode choices so as to compensate for some deficiencies of the OLI paradigm used in Chapter 7. However, the OC theory must be operationalized in a different way from previous research on international entry mode selection.

Because of some strong driving forces like home government promotion, globalization, and pressure to offset tight home markets, it appears that some international contractors may blindly and rashly use permanent entry modes even though this may involve more difficulty than they could face if they chose mobile entry. The difficulty is further amplified because these contractors are often inexperienced international contractors and they usually focus on a small fraction of the global market. These contractors are suggested to make more rational entry mode selection decisions based on the findings of this research (the models and affiliated hypotheses) and try to deploy their new market entries with a global perspective rather than a regional perspective. This point, again, confirms that entry mode selection and market selection are interrelated decisions.

8.5 Summary

This chapter measured the factors identified in Chapter 7, tested the hypotheses centering on the factors with empirical data, and developed two regression models for the selection between permanent entry and mobile entry. Testing results were interpreted and analyzed regarding the main effects. Interaction effects were also explored and found valuable to be incorporated in the model. Based on the testing and exploring results, implications for management and future research were discussed.

195 CHAPTER 9

CONCLUSIONS

The international construction industry keeps growing and many construction companies are continuously seeking new geographic markets to enter. Once they have identified a potential market, they are challenged with the decision on how to enter the market. This research focused on the market entry decision made by contractors that are expanding into a new country market. This decision can have a significant effect on the profitability of the company in the new market and will drive the more detailed project evaluation decision related to whether a company will pursue individual projects in the market.

There have been very limited studies in the construction industry focused on market entry. This research has shown that the construction industry differs from other industries when considering the market entry decision. Therefore, a taxonomy of entry modes specific to international construction markets was defined and a market entry mode selection model was developed to analyze how contractors enter new markets to achieve sustainable business growth.

9.1 A Summary of the Research Process and Findings

This research aimed to answer “How do construction firms enter individual foreign markets?” and “How does this entry behavior vary across different types of firms and different entry situations in the construction sector?”. The answers to these and other related questions in the area of international construction are not well defined. The existing knowledge of entry modes in firms has been accumulated mostly in the context of the manufacturing industry. The construction industry has distinct characteristics which make the wholesale transfer of concepts and theories serving the manufacturing 196 industry unrealistic. Therefore entry modes for international construction markets were defined, and the factors that influence the selection of entry modes were identified and evaluated.

This research characterized the global construction market trends from a geographic market entry perspective, developed a taxonomy of entry modes for international construction markets, differentiated these entry modes, identified internal and external factors influencing entry mode selection, and developed a descriptive and normative model for entry mode selection.

9.1.1 Characterization of the Global Construction Market Trends from a Market Entry Perspective

The globalization process of the construction industry was reviewed with an emphasis on the past two decades. It was found that market entry activities have become very frequent since the oil boom and throughout the “interpenetration” era when contractors from developed countries penetrated each other’s home markets. The method of localized “permanent entry” has become more and more important for international contractors when pursuing overseas work in comparison with the traditionally dominant “mobile entry” method. Strategic decisions about international construction market entry were therefore found important to investigate in this study, with a focus on the selection between permanent market entry and mobile market entry.

9.1.2 Development of a Taxonomy of Entry Modes for the Global Construction Market

Ten basic entry modes were identified and defined through an analysis of literature and cases studies, regarding their structure; formation process; primary setting characteristics and possible variations; merits and demerits; transferability; and

197 compatibility. These basic entry modes include 1) strategic alliance, 2) local agent, 3) licensing, 4) joint venture company, 5) sole venture company, 6) branch office / company, 7) representative office, 8) joint venture project, 9) sole venture project, and 10) BOT / equity project (see Table 9.1). They were compiled into a unified structure based on their similarities and differences. The taxonomy was further validated by a survey of experienced practitioners in international construction.

Table 9.1: Definitions of Entry Modes for International Construction Markets Entry mode Definition A long-term inter-corporate association without an affiliated organization based on Strategic Alliance trust and a mutual respect for each participant’s business needs, used to further the common interests of the members (including the entrant). A contractual arrangement between the entrant (principle) and a local agent where Local Agent the agent provides principle information on local market conditions, contacts, and assistance to the entrant. A contractual arrangement between parties in different countries on the licensee’s Licensing use of limited rights or resources like patents, trademarks, trade names, technology, and managerial skills from the entrant (licensor). A permanent joint venture in which the entrant and other legally separate parties form Joint Venture Company a jointly owned entity in which they invest and engage in various decision-making activities. A permanent venture in the host country wholly owned by the entrant where profits Sole Venture Company and responsibilities are assigned exclusively to the entrant. A form of presence without a legal person status of the entrant in the host country Branch Office/Company that can carry out either profit-making or non profit-making business activities. An unincorporated formal presence in the host country to carry out non-commercial Representative Office activities like business communications, product promotion, market research, contract administration, and negotiations on behalf of the entrant's head office. A project specific joint venture in which profits and other responsibilities are assigned Joint Venture Project to the entrant and other parties according to a contract. A wholly owned project specific venture where both profits and responsibilities are Sole Venture Project assigned exclusively to the entrant. A project delivery method where the entrant (sponsor) finances, builds, and operates BOT/Equity Project an economic infrastructure in the host country, and then transfers the ownership back to the government at the end of the project term free of charge or at an agreed price.

9.1.3 Differentiation of Entry Modes

The basic entry modes differ in setting characteristics (e.g., cooperative versus competitive, hierarchical levels, contractual versus investment and ownership) and

198 strategic effects (return, control, risk exposure, resource commitment, and flexibility). However, there is no single dimension that can differentiate all basic entry modes. The dichotomy of permanent entry versus mobile entry was transformed into a binary selection between two groups of basic entry modes: permanent entry modes and mobile entry modes. Mobile entry modes include joint venture project, sole venture project, and BOT / equity project; permanent entry modes include joint venture company, sole venture company, branch office / company, and representative office. In general, permanent entry modes involve more resources and investment risk, but are less flexible than mobile entry modes.

9.1.4 Identification of Factors Influencing Entry Mode Selection

Six schools of theories were used to identify factors that could influence the selection between permanent entry and mobile entry and hypotheses were developed centering on these factors. They are: 1) transaction cost economics, 2) stage model of entry, 3) OLI paradigm, 4) organizational capability, 5) bargaining power, and 6) institutional / cultural theory. Among them, transaction cost economics, organizational capability, and stage model of entry were found to be of little value in distinguishing between permanent entry and mobile entry. The factors identified included 1) home market attractiveness, 2) long term orientation, 3) uncertainty avoidance, 4) cultural distance, 5) trade link, 6) colonial link, 7) language proximity, 8) host market attractiveness, 9) investment risk, 10) entry restriction, 11) competitive intensity, 12) firm size, and 13) multinational experience. Hypotheses regarding the influences of these factors upon the selection were developed based on applicable theories and previous related findings.

199 9.1.5 Hypothesis Testing and Model Development for Entry Mode Selection

Measures were proposed for the influencing factors, and quantitative and qualitative data was collected regarding these measures. A binary logistic regression analysis was applied to test the hypotheses (see Table 9.2) and develop a model (see Table 8.5) that describes under what internal and external conditions, international contractors tend to use which entry mode (permanent entry or mobile entry). With a t-test, this statistic model was also found to be a normative one in the sense that when a contractor keeps using the entry modes the model suggests, better performance can be achieved. Some of the hypotheses were not supported. This suggests that the unique characteristics of the international contractors and the global construction market must be considered in addition to general business and economics theories. This further confirms the uniqueness of international construction and that findings from other sectors like manufacturing or other service industries may not be immediately applicable to the construction sector.

200 Table 9.2: Results of Hypothesis Testing Hypotheses Testing result Entrants with an attractive home country market are less likely Yes, when market attractiveness is H1 to enter foreign market with permanent entry modes. meansured by market size Entrants from countries with long term orientation are more H2 Yes likely to use permanent entry modes. Entrants from countries with high uncertainty avoidance are H3 Partially more likely to use permanent entry modes. If the host market and home country have a close trade link, H4 Partially entrants are more likely to use permanent entry modes. Entrants are more likely to use permanent entry modes to H5 No penetrate countries with small cultural distance. Entrants are more likely to use permanent entry modes for H6 Partially markets with a colonial link with its home country. Entrants arel more likely to use permanent entry modes for H7 Partially markets with language proximity. Entrants are more likely to use permanent entry modes for H8 Partially attractive host markets. Entrants are more likely to use permanent entry modes for H9 No markets with less country risk. Entrants are more likely to use permanent entry modes for H10 Yes markets with less entry restriction. Entrants are more likely to use permanent entry modes for H11 Partially markets with less competitive intensity. Entrants of larger firm size are more likely to use permanent H12 Yes entry modes for foreign markets. Entrants of more international experience are more likely to H13 Yes use permanent entry modes for foreign markets.

9.2 Contributions of the Research

Based on theoretical reasoning and empirical data analysis, this research contributes to the international construction discipline in at least four aspects as discussed in the following sections.

9.2.1 A Taxonomy of Entry Modes for International Construction Markets

The construction sector is unique in the sense that entry modes used by international contractors can be different from practitioners in other sectors like manufacturing. For example, contractual entry modes are more commonly used and some entry modes like BOT / equity project that are common in the construction sector are rare

201 in other sectors. However the entry modes for international construction have only been investigated in previous research on a piecemeal basis. An effort to identify and define each entry mode, and then compile them into a holistic hierarchy has not been published. One contribution of this research was to develop such a taxonomy of entry modes for international construction markets. This taxonomy is not only new in the international construction area, but differs fundamentally from those taxonomies proposed in the general international business discipline. This taxonomy provides a systematic and comprehensive tool for international construction firms to conceptualize their entry related course of activities and identify alternative entry modes or combinations of multiple entry modes to access their targeted overseas markets.

9.2.2 Influencing Factors for Entry Mode Selection in International Construction

The theories that were used in previous research to address entry mode selection were re-examined to test their applicability in differentiating between permanent entry and mobile entry. This study integrated three applicable schools of theories, while most previous research in the general international business usually involve one or two theories. The extensive theoretical review and reasoning upon it ensure the relative comprehensiveness of the set of influencing factors to be included in the selection model.

9.2.3 A Descriptive and Normative Model for Entry Mode Selection in International Construction

The statistical model developed in this research aids in predicting under what scenarios contractors would select which type of generic entry mode (mobile versus permanent). This model is also normative meaning that when contractors use the entry mode suggested by the model, better performance can be achieved. This model can be used by contractors to identify a potential entry mode and aid policy makers to form or

202 reform their policies regarding international contractors’ involvement in the domestic market.

9.2.4 Innovation in Research Methodology for Construction Management

This study used a hypothesis testing approach which is common in disciplines such as international business and economics, but rare in construction management which traditionally prefers an exploratory approach. Although the construction management discipline is still young and lacks theories of itself, this research shows that hypothesis testing is feasible by borrowing from other related disciplines.

9.3 Limitations of the Research

This research has several limitations as discussed in the following subsections.

9.3.1 Selection between Two Groups of Entry Modes

This research focused on the development of a selection model for two groups of entry modes, or say, two generic entry modes: permanent entry and mobile entry. It did not distinguish between entry modes within a group. It is a very complicated issue to differentiate between all basic entry modes in the taxonomy developed in this research, because each pair of entry modes may be distinct in different ways (e.g., strategic effects) and therefore the selection is influenced by different sets of factors. However, this limitation identifies many valuable opportunities for future research (see Section 9.4.2).

203 9.3.2 Limited Factors Included in the Model

The selection model developed was statistically significant, and the prediction result based on the model is better than 0.5. This, however, does not mean that all influencing factors have been incorporated into this model. In fact, some potential factors, especially those about a specific firm’s capabilities and strategic direction, can significantly influence the entry mode selection decision. Due to data source constraints within this research, not all potential variables could be taken into consideration. In addition, all factors in the existing model come from theoretical reasoning, but as previous research indicated, some factors that are not supported by any theory can also play an important role in determining entry modes. Therefore, more factors could be included in the model to make a more robust and accurate model.

9.3.3 Data Accessibility

Qualitative and quantitative data collected from multiple sources were utilized to support this research. Most of the data was publicly available. However, some data that can best measure certain variables in the model was not publicly available. In such cases, less optimal data was used instead, or the variables could not be included in the model. For example, international revenue was used to measure entry performance, although profits regarding individual markets would be a better measure. These profit valueswere seldom reported by international contractors including pubic firms (they report their annual profit, but few breakdowns for individual markets). Some firm-specific variables, as discussed in Section 9.3.2, could not be included in the model for empirical analysis because of data access restriction.

204 9.4 Future Research

As a pioneer study on entry strategies for international construction markets, this study identified several topics that are worthy of future research.

9.4.1 Market Selection

Market selection is a critical topic in developing a comprehensive entry strategy. This study did not address the market selection decision. Market selection among several candidate countries can be transformed into an entry / no-entry decision regarding each market in the set of options. In this sense, some previous studies in construction management have addressed this topic, however a general framework has not been established to date for this fundamental issue in international construction.

9.4.2 Selection between Basic Entry Modes

With a similar methodology used in this study to address the selection between mobile entry and permanent entry, future research could differentiate basic entry modes within each group, e.g., between a sole venture company and a joint venture company, or between a sole venture project and a joint venture project. Different theories can be investigated. For example, transaction cost economics that was believed to be of limited use in selecting between permanent entry versus mobile entry may be applicable in differentiating between sole venture and joint venture entries. Accordingly, the operationalization can be very different and so would the selection model.

205 9.4.3 Principles for Combining and Sequencing Different Entry Modes

In practice, contractors need to decide not only which entry mode to use, but also how to combine and / or sequence different entry modes to enter and grow within an overseas market. A combination of different entry modes can avoid the shortcomings of an individual entry mode and integrate merits of multiple entry modes to optimize entry performance. Sequencing of different entry modes can meet the changing internal and external environments to achieve better performance than a single entry mode. It can therefore be very valuable to identify and evaluate the principles for combining and / or sequencing different entry modes.

9.4.4 The Culture of International Contractors

The testing results of Hypotheses 5, 6, 7, 8, 9, and 11 indicate that international contractors take an aggressive attitude toward foreign market entry. In an unfamiliar, risky, and competitive business environment, international contractors are likely not to use mobile entry modes that can help them avoid threats that their existing capabilities may not meet well, but instead choose permanent entry modes to enhance existing capabilities or develop new capabilities in order to achieve long term benefits. This unique culture is interesting and well worthy of further investigation.

9.4.5 The Application of Organizational Capability in Entry Mode Selection

The organizational capability (OC) perspective emphasizes effectiveness of capability transfer, exploitation, and development. Previous applications of OC in market entry mode selection focused on the relationship between the need of capability transfer and boundary configuration. This is why this theory was declared to be less useful in distinguishing between permanent entry and mobile entry in the theory building stage of this research. However, the empirical analysis in this study indicated that international

206 contractors take an aggressive attitude towards entry mode selection and tend to use permanent entry mode to facilitate new capability development where their ownership and location advantage may suggest the use of mobile entry. It would therefore be valuable and interesting to investigate the applicability of OC in this field of research and develop innovative methods to operationalize OC in the selection between permanent entry and mobile entry for international construction markets.

9.5 Concluding Remarks

Despite their importance to industry practices, both strategic management in construction and international construction are areas in the discipline of construction management that have received limited attention from the research community. This is particularly true for the study of entry strategies for international construction markets, since it is a hybrid of the two areas. This results into a threat that this study must face that there are many basic research questions which must be answered to establish a comprehensive theoretical framework regarding international construction market entry. These questions include why the market entry decision issue is important, what those entry modes are, and how to select optimal entry modes based on specific scenarios.

This research started with a review of the globalization process of the construction industry. Examined from a market entry perspective, opinions from industry practitioners and activities of leading international construction firms show a significant trend about market entry mode use: more innovative entry modes keep emerging and contractors face a selection primarily between mobile entry and permanent entry, a dichotomy defined by both setting characteristics and strategic effects (e.g., resource commitment). Case studies, in collaboration with review of previous related findings about market entry modes on a piecemeal basis, define a taxonomy of entry modes for international construction markets. Although the comprehensiveness of the taxonomy was validated with a survey, it is recognized that more innovative modes can emerge and then upgrade the taxonomy.

207 Theories and findings from other disciplines, primarily international business, were borrowed and examined to evaluate their applicability in explaining international contractors’ practices in entry mode selection. Analysis based on empirical data about leading international contractors’ market entry practices showed that some previous findings primarily from the manufacturing industry do not apply to the construction industry and the unique culture and behavioral patterns of the international contractors must be taken into consideration to explain their market entry mode selection. The selection model was evaluated in association with entry performance and it was found that if the entrant uses the entry mode suggested by the model, better performance can be achieved.

This research is just one of the limited pioneer efforts about entry strategies for international construction markets. Although it defined a taxonomy including ten basic entry modes, the selection model only addresses the selection between two groups of entry modes (i.e., permanent entry versus mobile entry). Further investigation is needed to establish a more systematic and practical framework for international construction market entry to help international contractors to improve their competence to be successful in the competitive international construction arena. This research not only provides fundamental findings to support future research, but also provides a feasible set of research strategies that future investigators can adopt to advance this important field of research.

208

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222

Appendix A

Cultural Index Scores for Countries (Hofstede 2001)

223

Power Uncertainty Country Individualism Masculinity Long-term distance avoidance Arab World 80.0 68.0 38.0 52.0 Argentina 49.0 86.0 46.0 56.0 Australia 36.0 51.0 90.0 61.0 31.0 Austria 11.0 70.0 55.0 79.0 Belgium 65.0 94.0 75.0 54.0 Brazil 69.0 76.0 38.0 49.0 65.0 Canada 39.0 48.0 80.0 52.0 23.0 Chile 63.0 86.0 23.0 28.0 China 80.0 40.0 20.0 66.0 118.0 Colombia 67.0 80.0 13.0 64.0 Costa Rica 35.0 86.0 15.0 21.0 Czech 57.0 74.0 58.0 57.0 Denmark 18.0 23.0 74.0 16.0 Russia & Romania 62.5 83.5 59.0 60.5 Ecuador 78.0 67.0 8.0 63.0 El Salvador 66.0 94.0 19.0 40.0 Finland 33.0 59.0 63.0 26.0 France 68.0 86.0 71.0 43.0 Germany 35.0 65.0 67.0 66.0 31.0 Greece 60.0 112.0 35.0 57.0 Guatemala 95.0 101.0 6.0 37.0 HK 68.0 29.0 25.0 57.0 96.0 Hungary 46.0 82.0 55.0 88.0 India 77.0 40.0 48.0 56.0 61.0 Indonesia 78.0 48.0 14.0 46.0 Iran 58.0 59.0 41.0 43.0 Ireland 28.0 35.0 70.0 68.0 Israel 13.0 81.0 54.0 47.0 Italy 50.0 75.0 76.0 70.0 Vietnam 89.0 48.3 37.5 43.8 Japan 54.0 92.0 46.0 95.0 80.0 Malaysia 104.0 36.0 26.0 50.0 Mexico 81.0 82.0 30.0 69.0 Netherlands 38.0 53.0 80.0 14.0 44.0 New Zealand 22.0 49.0 79.0 58.0 30.0 Norway 31.0 50.0 69.0 8.0 20.0 Pakistan 55.0 70.0 14.0 50.0 0.0 Panama 95.0 86.0 11.0 44.0 Peru 64.0 87.0 16.0 42.0 Philippines 94.0 44.0 32.0 64.0 19.0 Poland 68.0 93.0 60.0 64.0 Portugal 63.0 104.0 27.0 31.0 Singapore 74.0 8.0 20.0 48.0 48.0 South Africa 49.0 49.0 65.0 63.0 Korea, South 60.0 85.0 18.0 39.0 75.0 Spain 57.0 86.0 51.0 42.0 Sweden 31.0 29.0 71.0 5.0 33.0 Switzerland 34.0 58.0 68.0 70.0 Taiwan 58.0 69.0 17.0 45.0 87.0 Thailand 64.0 64.0 20.0 34.0 56.0 Turkey 66.0 85.0 37.0 45.0 UK 35.0 35.0 89.0 66.0 25.0 USA 40.0 46.0 91.0 62.0 29.0 Uruguay 61.0 100.0 36.0 38.0 Venezuela 81.0 76.0 12.0 73.0 West Africa 77.0 54.0 20.0 46.0 16.0 Mean 57.7 66.7 44.3 50.6 47.0 STDEV 21.7 23.2 25.0 18.3 30.5 Variance 472.5 537.9 626.4 334.0 929.5

224

Appendix B

Investment Risk Ratings

225

Country 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Syria 20.3 22.4 23.1 24.9 24.6 25 24.7 23 23.2 25 22 Turkey 43.7 45.3 45.6 40.7 40.4 40.8 37.8 36.9 39 43.7 33.1 UAE 56.8 57.9 59.9 60.5 60.8 60.8 61.4 62.5 62.4 67.6 66.5 Australia 66.7 67.9 68.9 70.9 71 72.2 73.7 74.3 78.3 79 83 Bangladesh 17.2 19.3 20 24.8 26.5 27.4 27.2 25 25.5 27.4 26.2 Brunei Myanmar 13.8 12.4 13.3 16.4 18.9 21.3 21.7 18.7 16.9 16.4 13.3 China 54.4 56.3 58 57.6 56.4 58 57.6 57.2 56.6 58.6 57.6 HK 65.8 65.6 66 67 65.4 64.9 62.9 61.8 60.8 67 66.5 India 37.6 38.6 40 44.2 45.8 46.3 46.5 44.5 45.3 47.7 48 Indonesia 50.6 51.1 51.7 51.9 51.8 51.6 49.9 27.9 28.3 25.1 21.6 Japan 91.4 91 91 91.9 91 91.3 90.8 85.5 86.9 87.2 85.9 Kazakhstan 15.8 17.7 18.7 19.2 20.9 26.4 27.9 30.2 32.4 35 Korea, South 68.4 68.6 69.5 72 71.4 64.4 52.7 58.8 62.4 62.7 Korea, North 5.7 7.3 6.5 6.5 5.8 5.1 7.8 6.8 10.8 8.8 Kyrgyzstan 17.6 18 16.8 Malaysia 62.6 63.9 66.6 68.6 68.4 67.5 64.5 51 54.9 58.9 55.3 Nepal 22.6 21.7 23.2 24.4 23.9 25.2 25.5 24.4 26.8 26.9 23.9 New Zealand 61.8 63.8 66.1 68.2 70.3 71.7 73.4 73.1 75.5 76.9 78.4 Papua New Gu 32.1 32.4 32.8 32.4 33 32.5 33.2 30.4 30.9 28 27.8 Philippines 25.7 27.1 30.5 35.4 38.1 42.3 43.3 43.3 45.7 43.1 42.4 Singapore 78.5 80.3 81.4 83 82.8 83.9 82.9 81.3 80.4 85.8 84.8 Sri Lanka 23.4 25.5 27.7 32.4 32.5 33.2 33.6 33.3 35.4 34.6 31.7 Taiwan 76.9 78.5 79 79.7 78.9 77.1 75.5 75.5 76.2 76.1 73 Tajikistan 12.9 12.3 12.6 Thailand 62.8 60 61.1 63.5 63.4 61.1 52.3 46.9 48.8 50.2 48.2 Turkmenistan 17.1 18 16.3 Uzbekistan 14.5 14.3 14.4 14.9 17.1 19.6 18.3 18 19.2 17 Vietnam 16.8 17.5 21.9 27.6 30.3 32.5 32.7 27.8 29.1 28.5 29.3 Laos 14.9 Mongolia 20.8 Algeria 33.1 28.2 26.3 23.5 21.5 23.2 25.1 25.2 27.7 31.6 30.9 Egypt 24.9 27.1 29.8 32.9 34 36.7 41.3 44.4 45.4 47.5 45.9 Ethiopia 7 8.5 10.6 13.5 14.7 16 17.5 16.2 15.9 15.2 14.3 Libya 28.9 28.6 29.4 30.5 29.9 28.7 28.3 28.1 31.6 31.4 32.3 Morocco 29.7 32.2 35.8 39 38.7 39.7 41.5 43.2 45.6 44.3 43.7 Sudan 5.6 7 6.1 6.1 6.6 10.4 7.6 7.6 7.9 10.1 9 Tunisia 38.7 38.8 42.9 43.3 44.8 46.3 48 50.3 49.7 51.9 51 Angola 14 13.7 10.7 10.9 12.5 12.5 12.5 11.5 12.6 12.6 12.7 Benin 16.8 15.1 15.5 16 17.3 16.3 17.3 17 17.8 Botswana 35.4 41.1 45.7 48.5 49.5 49.5 51.9 53.5 57 52.4 56.6 Burkina Faso 17.2 16.4 17.7 20.1 18.8 19.2 18.4 17.7 Burundi 9.6 12 10.8 Cameroon 21.9 21.9 19.7 19 18.5 18.1 18.5 18.1 18 16.2 17.1 Congo 13.7 15.2 15.5 14.8 14.2 14 6.8 6.1 7.1 9.1 Gabon 26.4 28 27.4 25.8 25.1 24.1 24.7 23.2 22.2 22.4 21.5 Ghana 24.2 27.1 29.2 29.2 30.6 31.4 29.5 31 27.2 24.6 Guinea 13.1 13.8 13.7 13.8 16.4 15.4 14.4 14.9 15.2 Kenya 25.9 24.7 22.8 24.9 26.9 27.9 26.7 24.1 26.6 24.4 20.8 Liberia 7 6 6 6.2 6.9 6.9 7 7.6 8.4 11 8 Malawi 16.7 16.2 17.4 18.8 19.8 19.8 20.1 20.4 19.5 19.1 18.2 Mozambique 7.4 8.4 10.3 12.6 13.1 14.9 16.1 17.9 19.2 18.7 19 Nigeria 21.2 20.3 18.6 17.5 14.8 14.8 15.2 16.8 18.3 18 17.8 Senegal 17.8 20 20.9 21.6 21.5 19.8 21.6 21.7 23.2 23.2 25.1 Sierra Leone 6.7 6.7 7.2 8.1 7.8 6.6 5.7 6.3 7.1 8.8 8.3 South Africa 39.3 39.8 38.9 42.5 46.3 46 46.5 45.8 45.2 50.6 49.9 Swaziland 19.7 22.2 26.3 28.5 30 31.8 33.1 28.5 29.7 28.6 28.7 Tanzania 12.5 12.9 13.9 15.5 17.7 18.1 19.3 18.3 19.1 20.1 20.5 Uganda 5.5 7.3 10.1 12.8 14.5 17.7 21.2 20.3 22.9 22.3 21.2 Congo DR 810.28.4 Zambia 9.8 11.7 13.1 14.6 15.7 16.1 17.5 16.1 15.1 16.1 15.1 Zimbabwe 28.3 27.7 27.9 30.7 32.2 32.3 33.6 26.5 24.1 16.2 11.3

Notice: Source_The Institutional Investor (March issue of each year (Pan Tse, 2000);

226

Notice: Source_The Institutional Investor (March issue of each year (Pan Tse, 2000); Only for countries Insititutional Investor investigated.

227

Appendix C

Lingual, Colonial, and Distance Relationships between Countries

(50 out of 50176 items are shown)

228

Country Country comlang_off colony distw ARUBA ARUBA 0 0 25.09 ARUBA AFGHANISTAN 0 0 13168 ARUBA ANGOLA 0 0 9587 ARUBA ANGUILLA 0 0 976.9 ARUBA ALBANIA 0 0 9092 ARUBA ANDORRA 1 0 7570 ARUBA NETHERLANDS ANTILLES 1 0 239.9 ARUBA UAE 0 0 12773 ARUBA ARGENTINA 1 0 5188 ARUBA ARMENIA 0 0 11107 ARUBA ANTIGUA AND BARBUDA 0 0 1011 ARUBA AUSTRALIA 0 0 15670 ARUBA AUSTRIA 0 0 8633 ARUBA AZERBAIJAN 0 0 11422 ARUBA BURUNDI 0 0 11139 ARUBA BELGIUM 1 0 7843 ARUBA BENIN 0 0 7916 ARUBA BURKINA FASO 0 0 7349 ARUBA BANGLADESH 0 0 15486 ARUBA BULGARIA 0 0 9471 ARUBA BAHRAIN 0 0 12297 ARUBA BAHAMAS 0 0 1635 ARUBA BOSNIA AND HERZEGOVINA 0 0 8888 ARUBA BELARUS 0 0 9418 ARUBA BELIZE 1 0 2062 ARUBA BERMUDA 0 0 2275 ARUBA BOLIVIA 1 0 3367 ARUBA BRAZIL 0 0 4432 ARUBA BARBADOS 0 0 1128 ARUBA BRUNEI 0 0 18043 ARUBA BHUTAN 0 0 15106 ARUBA BOTSWANA 0 0 11179 ARUBA CENTRAL AFRICAN REPUBLIC 0 0 9729 ARUBA CANADA 0 0 4316 ARUBA COCOS (KEELING) ISLANDS 0 0 . ARUBA SWITZERLAND 0 0 8074 ARUBA CHILE 1 0 5094 ARUBA CHINA 0 0 14591 ARUBA COTE D'IVOIRE 0 0 7194 ARUBA CAMEROON 0 0 8947 ARUBA CONGO 0 0 9477 ARUBA COOK ISLANDS 0 0 10478 ARUBA COLOMBIA 1 0 929.6 ARUBA COMOROS 0 0 12839 ARUBA CAPE VERDE 0 0 4962 ARUBA COSTA RICA 1 0 1572 ARUBA CUBA 1 0 1486 ARUBA CHRISTMAS ISLAND 0 0 . ARUBA CAYMAN ISLANDS 0 0 1437 ARUBA CYPRUS 0 0 10399

229

Appendix D

Trade Link between Countries (Partial)

230

r a o la s a y c a a a a e da ia e o ua m v dor an ur agu uay zuela li r g e na USA ua ag i rgentina Bo Brazil Chil Salvad Mexic ica Peru Cana A Colombia Ec Guy Panam Par Uru Sur Costa Ri EL Guatem Hond N Ven ea Gr Canada 1100000000000100000000 USA 1100000000000100000000 Argentina 0000000000000000000000 Bolivia 0000000000000000000000 Brazil 0000000000000000000000 Chile 0000000000000000000000 Colombia 0000000000000000000000 Costa Rica 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Ecuador 0000000000000000000000 EL Salvador 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Guatemala 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Guyana 0000000000000000000000 Honduras 0000000000000000000000 Mexico 1 1 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 Nicaragua 0000000000000000000000 Panama 0000000000000000000000 Paraguay 0000000000000000000000 Peru 0000000000000000000000 Uruguay 0000000000000000000000 Venezuela 0000000000000000000000 Suriname 0000000000000000000000 Greater Antilles 0000000000000000000000 Puerto Rico 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Cuba 0000000000000000000000 Lesser Antilles 0000000000000000000000 Albania 0000000000000000000000 Armenia 0000000000000000000000 Austria 0100000000000000000000 Azerbaijan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Belarus 0000000000000000000000 Belgium 0100000000000000000000 Bulgaria 0000000000000000000000 Czech 0000000000000000000000

231

Appendix E

Number of Top International Contractors in Each Market (1992-2001)

232

Country 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Canada 47 48 50 47 44 53 45 56 58 61 United States 65 69 69 65 61 57 63 45 55 46 Argentina 23 22 25 24 36 41 45 44 35 28 Bolivia 10 10 9 11 11 9 9 9 7 12 Brazil 27 28 23 21 34 34 43 40 36 51 Chile 29 31 31 29 33 42 40 33 25 24 Colombia 19 23 33 30 36 36 33 25 23 19 Costa Rica 6 7 8 7 3 5 5 5 4 10 Ecuador 13 16 19 16 22 13 18 13 13 12 EL Salvador 8 8 11 12 9 10 10 6 4 2 Guatemala 10 7 6 9 10 10 11 6 6 5 Guyana 5 6 2 2 3 2 4 2 2 0 Honduras 9 8 7 8 6 5 6 6 4 4 Mexico 50 59 54 50 51 51 48 51 54 54 Nicaragua 1 4 4 5 4 3 8 8 7 5 Panama 7 9 11 12 9 12 13 13 10 7 Paraguay 9 10 10 7 6 6 4 3 1 0 Peru 13 14 14 16 22 23 23 23 24 20 Uruguay 5 8 8 5 5 10 12 8 5 5 Venezuela 38 40 33 30 31 35 32 39 35 36 Suriname 0 0 0 0 0 0 0 0 0 4 Greater Antilles 14 16 22 21 23 26 24 28 34 19 Puerto Rico 18 19 18 19 20 26 28 27 26 30 Cuba 0 0 0 0 0 0 0 0 0 5 Lesser Antilles 17 21 13 12 18 13 17 22 28 29 Albania 1 2 2 2 2 3 4 3 6 6 Armenia 1 1 1 0 1 2 1 2 2 0 Austria 21 22 15 19 20 20 19 21 17 10 Azerbaijan 2 3 2 1 5 10 11 13 12 10 Belarus 7 9 5 4 5 4 2 0 0 0 Belgium 35 41 34 32 25 29 30 29 30 23 Bulgaria 4 4 3 7 3 3 7 7 9 10 Czech Republic 24 25 27 29 28 26 30 29 24 20 Denmark 18 20 22 22 26 23 25 16 16 12 Estonia 4 6 6 7 3 4 5 4 5 4 Finland 9 10 10 8 5 9 9 9 7 9 France 41 34 30 42 36 29 37 46 37 38 Georgia 1 1 1 2 0 8 3 5 5 2 Germany 46 58 65 62 57 52 55 53 47 45 Greece 22 22 23 17 24 23 21 21 24 23 Hungary 19 18 18 21 24 24 24 26 17 15 Ireland 15 17 17 20 20 19 20 25 19 23 Italy 20 27 23 21 22 25 37 39 36 36 Latvia 1 7 6 7 4 4 3 5 6 4 Lithuania 1 3 6 5 5 4 6 5 7 5 Moldova 1 2 1 0 0 0 2 0 0 2 Netherlands 26 34 33 33 30 30 31 34 27 26 Norway 15 17 19 17 18 23 19 19 14 12 Poland 22 31 30 35 39 35 39 43 32 26 Portugal 31 37 32 30 35 38 37 35 30 24

233

Appendix F

Entry Restriction

234

Country Legal barriers Other barriers Index Korea, South 1 3 4.58 China 2 4 8.60 Malaysia 3 2 3.82 Thailand 4 2 5.28 Japan 0 6 17.47 Singapore 0 2 1.94 Hong Kong 0 2 1.94 Vietnam 0 3 4.37 Philippines 1 3 4.58 Indonesia 4 3 7.71 India 3 2 3.82 Australia 0 1 0.49 USA 0 1 0.49 Canada 0 1 0.49 Mexico 4 2 5.28 Brazil 1 2 2.15 Chile 0 2 1.94 Argentina 0 2 1.94 Peru 0 2 1.94 Venezuela 0 2 1.94 Poland 0 1 0.49 Russia 0 1 0.49 Romania 0 1 0.49 Czech 0 1 0.49 Finland 1 3 4.58 Germany 0 3 4.37 United Kingdom 0 3 4.37 Netherlands 0 3 4.37 France 1 3 4.58 Spain 0 3 4.37 Belgium 0 3 4.37 Israel 1 4 7.97 Oman 3 1 2.36 Pakistan 3 3 6.25 Saudi Arabia 3 3 6.25 UAE 4 3 7.71 Kuwait 4 2 5.28 Turkey 1 2 2.15 Egypt 4 2 5.28 Nigeria 0 2 1.94 South Africa 0 2 1.94 Variance 2.40 1.03 3.92

235

Appendix G

Construction Spending (1996 – 2000)

236

Country 1996 1997 1998 1999 2000 Albania 248.30 247.90 220.70 253.83 289.52 Algeria 7,199.80 8,005.70 7,460.60 7,016.36 8,271.98 Angola 271.30 373.90 476.80 439.22 454.58 Argentina 30,252.90 36,984.70 41,644.80 38,059.61 35,999.42 Armenia 160.00 163.30 95.10 94.48 99.67 Australia 36,641.00 38,366.18 39,133.00 41,303.02 43,833.78 Austria 11,700.00 11,289.00 10,881.70 10,999.32 11,210.08 Azerbaijan 572.90 899.40 956.40 698.16 872.95 Bahamas, The 285.20 206.70 225.80 254.21 267.04 Bahrain 781.60 805.80 825.00 913.79 1,004.71 Bangladesh 3,168.50 2,909.00 3,081.70 3,230.97 3,488.08 Barbados 229.90 261.30 269.10 278.38 290.20 Belarus 2,159.10 1,971.40 1,872.90 1,570.62 1,584.40 Belgium 24,268.42 22,054.02 23,775.35 24,337.17 24,672.75 Belize 65.90 61.70 67.00 76.81 83.57 Benin 120.90 130.30 137.10 151.16 155.59 Bhutan 311.40 320.50 320.50 389.35 411.44 Bolivia 510.60 558.60 651.00 653.43 698.84 Bosnia and Herz 476.10 462.50 483.10 545.89 667.21 Botswana 90,541.00 98,357.20 102,094.77 116,034.20 115,301.10 Brazil 306.50 322.40 341.50 319.13 341.81 Bulgaria 809.80 765.20 769.90 858.66 942.19 Burkina Faso 216.50 241.20 260.70 248.63 256.02 Burundi 63.00 66.10 70.20 62.04 60.96 Cambodia 457.10 463.70 447.40 478.69 490.82 Cameroon 594.00 624.10 699.10 706.12 978.51 Canada 64,200.80 67,048.50 71,962.70 74,736.41 78,557.66 Cape Verde 105.80 109.30 110.80 126.36 132.76 Central African R 82.10 89.70 94.70 97.14 97.90 Chad 82.00 104.40 168.00 210.25 278.83 Chile 8,512.80 9,074.60 9,745.20 7,903.03 7,957.56 China 144,341.00 161,662.70 185,912.10 190,376.95 205,793.08 Colombia 9,316.10 9,293.80 9,552.50 9,004.71 9,368.54 Congo,Dem Rep 178.70 176.90 159.40 155.17 179.80 Congo, Rep. 1,117.60 1,053.90 1,022.30 682.26 682.33 Costa Rica 400.00 535.00 895.00 1,036.25 1,122.31 Cote D'ivoire 1,298.50 1,436.30 1,585.90 1,687.66 1,669.41 Croatia 1,836.10 2,000.30 2,142.00 2,123.90 2,176.72 Cyprus 1,355.10 1,219.50 1,196.80 1,138.85 1,203.26 Czech Republic 7,346.00 6,481.00 8,120.40 8,574.41 9,045.64 Denmark 20,407.77 18,459.65 19,297.04 18,269.51 19,272.94 Dominican repub 3,071.30 3,675.00 3,373.65 4,320.19 4,608.85 Ecuador 980.80 1,041.50 1,021.80 566.81 629.11 Egypt, Arab Rep 8,452.90 10,312.50 12,375.00 14,313.46 15,215.08 El Salvador 626.10 667.50 678.50 673.74 675.93 Eritrea 94.00 113.50 115.90 114.66 119.12 Estonia 601.30 669.80 712.80 588.56 728.25 Ethiopia 255.80 278.00 297.40 325.26 341.38 Finland 7,410.40 7,616.00 8,005.70 8,180.76 8,688.95 France 109,315.88 94,463.12 97,978.98 103,206.67 108,208.13

237

Appendix H

Revenue of International Contractors (Partial) 238

1992 1993 1994 1995 Firm International Global reven International Global reve nInternational Global revenInternational Global revenu Bechtel, San Francisco, Calif., UUSA $15,173 $23,657 $8,445 $14,850 $1,602 $6,553 $3,165 $7,407 The M.W. Kellogg Co. USA $10,358 $13,419 $7,132 $9,138 $938 $1,124 $965 $1,296 Kellogg Brown & Root USA $10,275 $13,718 $6,373 $9,503 $1,091 $2,621 $1,300 $2,743 Foster Wheeler Ltd., Clinton, N. USA $6,346 $8,794 $2,856 $5,841 $1,164 $1,704 $1,405 $2,133 ABB Lummus Global, Bloomfiel USA $6,285 $7,870 $2,738 $3,221 $784 $1,051 $887 $1,121 Fluor Corp., Aliso Viejo, Calif., UUSA $4,880 $22,946 $11,348 $25,294 $2,412 $6,638 $3,625 $7,501 Bouygues, Guyancourt, France France $2,933 $9,779 $3,142 $9,637 $3,169 $11,224 $3,891 $12,418 Philipp Holzmann AG Germany $2,732 $11,976 $3,684 $12,573 $2,311 $11,716 $2,775 $13,656 Morrison Knudsen Corp. USA $2,316 $4,887 $2,744 $5,030 $676 $2,516 $318 $1,707 GTM-Entrepose France $2,150 $5,292 $2,177 $5,371 $3,276 $7,948 $3,077 $8,047 Bilfinger Berger AG, Mannheim,Germany $2,028 $4,264 $1,220 $3,246 $1,949 $4,411 $2,676 $5,363 HBG Constructors Inc., LongmoUSA $1,895 $3,056 $1,540 $2,960 $1,941 $3,225 $2,040 $3,384 Fiatimpresit SPA Italy $1,887 $4,208 $1,811 $2,406 $1,614 $2,286 $2,758 $3,856 Mitsubishi Heavy Industries Ltd.Japan $1,857 $9,638 $2,935 $13,664 $4,320 $15,309 $5,725 $17,428 TECHNIP-COFLEXIP, Paris, Fr France $1,700 $1,870 $2,030 $2,100 $415 $439 $1,731 $1,781 Stone & Webster Engineers andUSA $1,671 $7,307 $2,225 $8,482 $66 $341 $34 $372 Bovis Lend Lease, London, U.K UK $1,325 $2,105 $4,855 $5,970 $1,613 $2,594 $1,436 $2,308 Ansaldo SPA Italy $1,310 $3,637 $1,823 $2,372 $1,512 $2,735 $1,618 $2,637 CEGELEC France $1,294 $2,942 $1,625 $3,166 $1,280 $3,068 $1,505 $3,424 Spie Batignolles France $1,285 $3,940 $970 $3,031 $1,177 $3,317 Consolidated Contractors Int'l CGreece $1,263 $1,263 $1,450 $1,450 $1,098 $1,098 $1,430 $1,430 JGC Corp., Yokohama, Japan Japan $1,262 $2,156 $2,241 $2,989 $1,871 $2,825 Hochtief, Essen, Germany Germany $1,182 $5,319 $2,260 $5,973 $2,319 $6,751 $214 $1,492 Hyundai Eng’g & Constr. Co. LtdKorea, Sou $1,152 $3,422 $1,112 $4,966 Snamprogetti SpA, Milan, Italy Italy $1,137 $1,649 $552 $778 $551 $725 $845 $1,030 Ballast Nedam N.V., Nieuwegei Netherland $1,074 $1,685 $1,448 $2,093 $930 $1,638 $825 $1,875 Shimizu Corp., Tokyo, Japan Japan $1,071 $17,653 $921 $13,727 $909 $17,914 $1,116 $15,250 Filippo Fochi SPA Italy $1,030 $1,270 $591 $691 Traflgar House Engrg. & Constr UK $1,007 $2,172 $736 $1,680 $6,795 $9,044 IRITECNA SPA Italy $1,005 $3,059 Nishimatsu Construction Co. LtdJapan $939 $7,055 $1,654 $6,429 $747 $6,923 $1,063 $6,750 Kajima Corp., Tokyo, Japan Japan $939 $15,477 $964 $12,196 $1,234 $13,276 Obayashi Corp., Tokyo, Japan Japan $918 $13,357 $927 $10,799 $1,006 $16,083 $935 $11,966 China Harbour Engineering Co. China $916 $2,368 $303 $1,901 $410 $1,990 $413 $1,526 ABB SAE Sadelmi SAP Italy $898 $1,157 $686 $846 $559 $761 $692 $822 239

Appendix I

Entry Times of International Contractors (1992 – 2001, Partial)

240 r e Canada United Stat Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador EL Salvado Guatemala Guyana Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela Suriname ABB Lummus Global, Bloomfield, N.J., U.S.A. 2 0 5 0 10 0 0 0 1 0 0 0 0 0 0 0 0 5 0 10 0 0 ACS-Actividades de Construction y Servicios SA, Mad r 0010010000000000000000 Aecon Group Inc., Toronto, Ont., Canada 2 2 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 J.S. Alberici Corp., St. Louis, Mo., U.S.A. 10 0 4 0 6 0 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 Alsim Alarko/Alarko Contracting Group, Gebze-Kocaeli 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 AMEC plc, London, U.K. 6 7 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 American Bridge Co., Coraopolis, Pa., U.S.A. 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 0 American Sports Products Group Inc., Leander, Texas , 1000101000000100000000 Arabian Construction Co., Beirut, Lebanon 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ARB Inc., Lake Forest, Calif., U.S.A. 1 0 1 1 0 3 5 0 5 0 0 0 0 3 0 0 0 3 0 0 0 0 Astaldi SpA, Rome, Italy 0 2 0 5 1 1 4 0 1 6 0 0 7 0 4 0 0 2 0 7 0 0 b e b ingg. group, Sesto San Giovanni, Italy 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 B.L. Harbert International LLC, Birmingham, Ala., U.S. A 10020090100000006000000 Balfour Beatty plc, London, U.K. 1 9 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 Ballast Nedam N.V., Nieuwegein, The Netherlands 7 4 6 0 10 4 0 0 0 0 4 3 0 2 1 0 0 1 4 1 1 0 Bauer Spezialtiefbau GmbH, Schrobenhausen, Germa n 3710130001000600010000 Bayindir Construction Inc., Ankara, Turkey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Baytur Construction and Contracting Co., Istanbul, Tur k 0000000000000000000000 BE&K Inc., Birmingham, Ala., U.S.A. 1 1 0 0 4 3 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 0 Bechtel, San Francisco, Calif., U.S.A. 10 0 7 0 10 9 6 2 1 0 0 2 0 9 0 0 0 9 0 9 0 0 Beijing Construction Engineering Co. Ltd., Beijing, Chi n 0000000000000000000000 Beijing Urban Construction Group Co. Ltd., Beijing, Ch i 0000000000000000000000 Bentini Group, Faenza, Italy 0 0 1 1 1 1 0 0 1 0 0 0 0 1 0 0 1 0 1 0 0 0 BESIX, Brussels, Belgium 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Bilfinger Berger AG, Mannheim, Germany 0 10 2 0 0 0 4 0 0 0 0 0 0 6 0 4 0 0 0 0 0 0 Bird Construction Co., Toronto, Ontario, Canada 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Black & Veatch, Kansas City, Mo., U.S.A. 4 1 7 1 2 2 3 0 0 2 6 0 0 5 0 1 0 1 0 6 0 0 Bouygues, Guyancourt, France 10 10 4 1 3 7 3 0 0 0 0 0 0 9 0 0 0 1 1 1 0 0 Bovis Lend Lease, London, U.K. 2 9 3 0 5 0 0 0 0 0 0 0 1 4 0 0 0 0 0 0 0 0 Caddell Construction Co. Inc., Montgomery, Ala., U.S. A 0000010000000000000000 CCC Group Inc., San Antonio, Texas, U.S.A. 3 0 0 0 0 0 2 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 CCI Telecom Inc., San Antonio, Texas, U.S.A. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0

241

Appendix J

World Bank Country Groups by Income

242

Low-income economies (61) Afghanistan Guinea-Bissau Pakistan Angola Haiti Papua New Guinea Bangladesh India Rwanda Benin Kenya Sao Tome and Principe Bhutan Korea, Dem Rep. Senegal Burkina Faso Kyrgyz Republic Sierra Leone Burundi Lao PDR Solomon Islands Cambodia Lesotho Somalia Cameroon Liberia Sudan Central African Republic Madagascar Tajikistan Chad Malawi Tanzania Comoros Mali Timor-Leste Congo, Dem. Rep Mauritania Togo Congo, Rep. Moldova Uganda Cote d'Ivoire Mongolia Uzbekistan Equatorial Guinea Mozambique Vietnam Eritrea Myanmar Yemen, Rep. Ethiopia Nepal Zambia Gambia, The Nicaragua Zimbabwe Ghana Niger Guinea Nigeria

Lower-middle-income economies (56) Albania Georgia Philippines Algeria Guatemala Romania Armenia Guyana Russian Federation Azerbaijan Honduras Samoa Belarus Indonesia Serbia and Montenegro Bolivia Iran, Islamic Rep. South Africa Bosnia and Herzegovina Iraq Sri Lanka Brazil Jamaica Suriname Bulgaria Jordan Swaziland Cape Verde Kazakhstan Syrian Arab Republic China Kiribati Thailand Colombia Macedonia, FYR Tonga Cuba Maldives Tunisia Djibouti Marshall Islands Turkey Dominican Republic Micronesia, Fed. Sts. Turkmenistan Ecuador Morocco Ukraine Egypt, Arab Rep. Namibia Vanuatu El Salvador Paraguay West Bank and Gaza Fiji Peru

243

Upper-middle-income economies (37) American Samoa Grenada Panama Antigua and Barbuda Hungary Poland Argentina Latvia Saudi Arabia Barbados Lebanon Seychelles Belize Libya Slovak Republic Botswana Lithuania St. Kitts and Nevis Chile Malaysia St. Lucia Costa Rica Mauritius St. Vincent and the Grenadines Croatia Mayotte Trinidad and Tobago Czech Republic Mexico Uruguay Dominica Northern Mariana Islands Venezuela, RB Estonia Oman Gabon Palau

High-income economies (54) Andorra Germany Netherlands Aruba Greece Netherlands Antilles Australia Greenland New Caledonia Austria Guam New Zealand Bahamas, The Hong Kong, China Norway Bahrain Iceland Portugal Belgium Ireland Puerto Rico Bermuda Isle of Man Qatar Brunei Israel San Marino Canada Italy Singapore Cayman Islands Japan Slovenia Channel Islands Korea, Rep. Spain Cyprus Kuwait Sweden Denmark Liechtenstein Switzerland Faeroe Islands Luxembourg United Arab Emirates Finland Macao, China United Kingdom France Malta United States French Polynesia Monaco Virgin Islands (U.S.)

244

Appendix K

Permanent Entries of International Contractors (Partial)

(The Case of Shimizu)

245

Entrant Home country Host Country Year Entry mode Shimizu Japan USA 1962 Representatives Shimizu Japan USA 1974 Representative office Shimizu Japan USA 1981 Wholly owned subsidiary Shimizu Japan Canada Subsidiary Shimizu Japan Singapore 1973 Branch office Shimizu Japan Singapore 1998 asian branch company (headquarters) Shimizu Japan Singapore Subsidiary Shimizu Japan UK Wholly owned subsidiary Shimizu Japan Germany Wholly owned subsidiary Shimizu Japan Hungary Wholly owned subsidiary Shimizu Japan Czech Branch office/Wholly owned subsidiary Shimizu Japan Poland Wholly owned subsidiary Shimizu Japan Russia Wholly owned subsidiary Shimizu Japan Netherlands Subsidiary Shimizu Japan Belgium Subsidiary Shimizu Japan Zambia Branch office Shimizu Japan Mexico Wholly owned subsidiary Shimizu Japan Malaysia 1982 Branch office Shimizu Japan Malaysia 1981 JV Shimizu Japan Indonesia 1983 Branch office Shimizu Japan Indonesia JV Shimizu Japan Philippines 1989 Wholly owned subsidiary Shimizu Japan Thailand 1984 Joint venture (49%) Shimizu Japan Vietnam Branch office Shimizu Japan Bangladesh Branch office Shimizu Japan China 1985 Liaison office Shimizu Japan China 1998 Overseen by people at singapore Shimizu Japan China 2002 Increase crew to govern business in China Shimizu Japan China 2003 Wholly owned subsidiary Shimizu Japan HK 1976 Branch office Shimizu Japan HK 1978 Wholly owned subsidiary Shimizu Japan Taiwan 1986 Representative office Shimizu Japan Taiwan Subsidiary Shimizu Japan Taiwan 1989 Acquired wholly owned subsidiary Shimizu Japan Taiwan 1993 representative office changed to Branch office Shimizu Japan Brazil 1973 Wholly owned subsidiary Shimizu Japan Australia Subsidiary

246

Appendix L

ENR Country Group by Region

247

North America Canada United States

Latin America Argentina EL Salvador Paraguay Bolivia Guatemala Peru Brazil Guyana Uruguay Chile Honduras Venezuela Colombia Mexico Suriname Costa Rica Nicaragua Ecuador Panama

Caribbean Islands Greater Antilles Cuba Puerto Rico Lesser Antilles

Europe Albania Germany Russia Armenia Greece Slovakia Austria Hungary Spain Azerbaijan Ireland Sweden Belarus Italy Switzerland Belgium Latvia Ukraine Bulgaria Lithuania United Kingdom Czech Republic Moldova Yugoslavia Denmark Netherlands Bosnia & Herz. Estonia Norway Croatia Finland Poland FYR Macedonia France Portugal Slovenia Georgia Romania

Middle East Afghanistan Jordan Saudi Arabia Bahrain Kuwait Syria Cyprus Lebanon Turkey Iran Oman U.A.E Iraq Pakistan Yemen Israel Qatar

248

Asia/Pacific Australia Kazakhstan Sri Lanka Bangladesh Korea, South Taiwan Brunei Korea, North Tajikistan Myanmar Kyrgyzstan Thailand China (P.R.C.) Malaysia Turkmenistan Macau Nepal Uzbekistan Diego Garcia New Zealand Vietnam Hong Kong Pacific Islands Laos India Papua New Guinea Mongolia Indonesia Philippines Japan Singapore

North Africa Algeria Morocco Sub Sahara Egypt Niger Tunisia Ethiopia Somalia Libya Sudan

Central/South Africa Angola Guinea South Africa Benin Ivory Coast Swaziland Botswana Kenya Tanzania Burkina Faso Lesotho Uganda Burundi Liberia Congo DR (Zaire) Cameroon Malawi Zambia Cape Verde Isl. Mozambique Zimbabwe Congo Republic Nigeria Total (This database) Gabon Rwanda Number of entries Gambia Senegal Conentrate ratio Ghana Sierra Leone

249

Appendix M

Market Entries of Selected International Contractors (Part of the Matrix for the Year 2001)

250

North A Latin America Caribbean Island s s

Contractors Countries Canada United States Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador EL Salvador Guatemala Guyana Honduras Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela Suriname Greater Antille Puerto Rico Cuba Lesser Antilles Besix 0000000000000000000001000 Bilfinger 01000000000001010 0 0 0 0 0 0 0 0 Bovis 0110100000000000000000000 China Harbour 11001000000000000 0 0 1 0 0 0 0 0 Chiyoda 0100000000000000000100000 Clough 00000000000000000 0 0 0 0 0 0 0 0 CSCEC 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CTCI 0100000000000000000000000 Daewoo 0000000000000000000000000 Daewoo Engineering 00000000000000000 0 0 0 0 0 0 0 0 EEI 0000000000000000000000000 Ferrovial 1101010000000100000000000 Foster Wheeler 10000100000001000 0 0 1 0 0 1 0 0 Fujita 0000000000000000000000000 HOCHTIEF 1 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Hyundai 00010000000000000 0 0 0 0 0 0 0 0 Jacobs 1000010000000100010100100 JGC 0110100000000000000100000 Joannou 00000000000000000 0 0 0 0 0 0 0 0 Kajima 0000000000000000000000000 Kinden 01100000000000000 0 0 0 0 0 0 0 0 Leighton 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 McConnell 00000000000000000 0 0 0 0 0 0 0 0 Ohbayashi 1100000000000000000000000 POSCO 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Shimizu 1100100000000100000000000 SK 0000000000000000000000000 Ssangyong 00000000000000000 0 0 0 0 0 0 0 0 Taikisha 1110100000000100000000000 Takenaka 01001000000000000 0 0 0 0 0 0 0 0 TRACTEBEL ENGINEERING 00001000000000000 0 0 0 0 0 0 0 0 Wuyi 0000000000000000000000000 You one 0000000000000000000000000

251

Appendix N

ENR Top 225 International Construction Firms (Year 2001)

252

Revenue ($Mil) Segmentation (%)

Contractor Rank International Global Building Manuf Power Water Sewer/Waste Industrial/ Petroleum Transport Hazardous Waste Telecom 1Skanska AB 12,152.00 14,342.00 57 3 3 2 1 10 19 2Hochtief 9,516.00 11,682.00 64 5 1 1 7 13 5 3VINCI 6,030.00 15,378.00 14 5 2 12 57 4Bouygues 5,771.00 12,830.00 25 1 2 14 57 5halliburton KBR 4,462.00 5,858.00 1 71 1 6Bechtel 3,993.00 11,299.00 1 3 34 2 51 6 3 7Bovis Lend Lease 3,652.00 4,785.00 74 1 1 1 8AMEC plc 2,835.60 5,241.90 10 5 5 8 10 60 2 9TECHNIP-COFLEXIP 2,456.00 2,467.00 4 1 94 10 Bilfinger Berger AG 2,294.00 3,785.10 23 1 7 3 5 11 49 11 Fluor Corp. 2,266.70 7,194.30 3 7 62 10 12 Hyundai Eng'g & Constr. Co. 2,036.20 4,245.00 18 24 37 19 1 13 Grupo Ferrovial 1,419.00 4,240.00 30 7 13 50 14 Consolidated contractors Int 1,385.70 1,385.70 19 1 2 57 21 15 Kajima Corp. 1,295.00 12,171.00 36 29 1 2 20 12 16 Foster Wheeler Ltd. 1,281.00 2,184.00 36 60 3 17 ABB Lummus Global 1,208.10 1,401.20 100 18 Dgrupo Dragados 1,195.50 4,582.10 2 7 33 18 7 26 7 19 Balfour Beatty plc 1,183.00 4,050.00 14 1 2 2 2 78 1 20 PCL Construction Enterprises 1,146.00 2,074.00 56 4 1 20 17 21 IMPREGILO SpA 1,134.00 2,283.00 13 42 21 22 China State Constr. Engineer 1,093.50 5,815.80 72 1 2 1 4 20 1 23 Jacobs 1,056.80 2,435.50 4 6 1 81 4 3 24 STRABAG AG 1,052.00 2,974.00 38 2 1 4 37 25 JGC Corp. 1,051.00 1,521.00 100 26 Ballast Nedam N.V. 970.30 2,087.20 45 4 1 1 14 32 3 27 Joannou & Paraskevaides (O 909.70 909.70 51 1 3 9 31 28 Toyo Engineering Corp. 871.00 1,038.00 2 11 87 29 Construtora Odebrecht 843.00 1,327.00 9 31 26 3 2 28 30 EIFAGE 803.00 5,642.00 56 9 32 31 Shimizu corp. 793.50 9,893.70 58 34 1 5 1 32 Obayashi Corp. 752.00 9,972.00 47 29 1 1 1 21 33 Snamprogetti SpA 724.00 1,140.00 100 34 FCC Sa 707.10 4,632.90 9 16 17 58 35 Technint Compagnia Tecnica 695.00 1,051.00 3 32 63 1 36 Washington Group Internatio 691.50 3,589.00 9 25 29 13 3 37 Leighton Holdings Ltd. 691.00 2,197.00 40 15 20 38 Nishimatsu Construction Co. 618.20 3,745.70 21 3 2 2 4 69 39 Takenaka Corp. 609.00 8,803.00 22 45 4 26 40 Penta-Ocean Construction C 594.00 3,009.00 32 2 3 13 41 China Harbour Engineering C 589.10 2,225.70 4 47 2 11 42 Paul Y.-ITC Constr. Holdings 586.00 1,407.00 3 45 8 43 SKEC 576.00 1,476.00 100 44 McDermott International Inc. 521.70 984.30 100 45 Kumagai Gumi Co.Ltd. 497.00 5,396.00 14 4 15 25

253

46 Grinaker-LTA Ltd. 492.00 1,164.00 8 5 5 24 30 47 Taisei Corp. 476.00 11,297.00 49 14 3 8 23 48 Earth Tech 475.00 1,104.00 3 3 9 20 33 11 15 49 BeESIX 457.10 748.40 14 1 1 74 10 50 CNMEG 456.60 783.10 3 32 3 11 18 33 51 EllisDon Construction Inc. 440.80 668.40 46 12 42 52 Taikisha Ltd. 423.80 3.00 79 10 53 Chicago Bridge & iron Co. 417.00 1,082.00 10 90 54 Parsons 411.60 1,406.80 3 10 80 4 3 55 SACYR SA 408.10 1,046.50 2 98 56 NECSO Entrecanales Cubier 388.00 2,282.00 23 1 7 5 1 63 57 Shanghai Construction (Grou 379.50 2,491.30 100 58 Enelpower SpA 361.40 963.80 100 59 Peter Kiewit Sons' Inc. 353.90 3,850.40 36 2 2 19 1 60 Veidekke ASA 339.90 962.40 80 1 1 1 17 61 Daewoo E& C Co. Ltd. 328.00 2,343.00 9 3 5 55 28 62 Astaldi SpA 306.40 646.60 1 4 2 93 63 Heerema Fabrication Group 306.00 334.00 100 64 Tecnimont SpA 300.00 305.00 100 65 Zubllin 290.00 1,460.00 34 9 29 10 7 66 Obrascon Huarte Lain SA 289.20 1,859.80 16 84 67 Structure tone Inc. 284.00 1,985.00 54 46 68 China Civil Engineering Cons 277.40 286.30 47 4 2 46 69 Black & Veatch 268.80 1,430.10 7 32 27 28 4 1 70 Centex 267.80 6,284.90 100 71 Chiyoda Corp. 263.00 793.00 1 48 51 72 CMEC 250.70 384.70 49 4 12 34 73 China Railway Engineering C 249.20 4,781.80 8 92 74 China Road & Bridge corp. 243.40 1,389.10 51 5 44 75 J.A. Jones Inc. 221.00 2,861.90 36 15 34 15 76 Dongfang Electric corp. 217.20 217.20 100 77 Global Industries Inc. 214.10 406.10 100 78 Tekfen Constr. & Installation 196.60 337.70 7 5 78 4 79 The Kvaerner Group 193.50 909.70 12 81 80 Fortum Enginenering 185.00 190.00 100 81 Sumitomo Construction Co.L 184.70 2,032.20 28 13 10 1 14 27 5 82 Willbros Group Ihc. 182.70 331.10 100 83 Enka constr. & Industry Co.In 177.60 599.20 52 9 39 84 E. Pihl & son AS 171.10 270.50 27 10 7 10 47 85 Mcconnell Dowell Corp. Ltd. 165.00 211.00 16 50 33 86 the Arab Contractors O.A.O. 164.40 1,344.70 27 5 17 48 2 87 SKE Group 158.00 219.00 90 7 3 88 Solel boneh International ltd. 157.60 157.60 8 18 73 89 Tractebel Engineeirng 156.10 175.60 100 90 Chian Metallurgical Constr. (G 151.00 1,737.30 20 1 1 10 5 60 1 1 91 Bauer Spezialtiefbau GmbH 149.40 320.40 29 15 9 27 13 6 92 National petroleum constr. Co 147.00 296.00 100 93 Alberici Corp. 143.30 836.80 10 89 94 Arabian Construction Co. 139.20 162.20 75 23 1 95 ACS-Actividades de Construc 139.20 1,678.90 96 Construtora Andrade Gutierre 137.00 544.00 2 12 2 82 97 The Shaw Group Inc. 133.80 1,060.50 72 27

254

98 Ssangyong Eng'g & constr. C 132.00 1,100.00 72 1 25 99 China Petroleum Eng'g const 131.90 213.90 81 19 100 China Jangsu Int'l Econ9Tec 127.60 178.30 92 1 4 3 101 Tecnicas Reunidas Group 123.00 327.00 8 92 102 Contracting & Trading C.A.T. 121.60 143.70 3 26 26 46 103 Energoprojekt Group 121.30 165.20 63 18 2 17 104 Aecon Group Inc. 119.30 592.60 19 23 18 40 105 Ircon International ltd. 115.50 179.40 8 84 9 106 Kinden Corp. 112.00 3,531.00 38 24 3 18 13 3 107 Chian Int'l Water & eletric Co 109.90 174.40 9 10 44 7 9 11 108 per Aarsleff A/S 107.00 310.00 5 2 23 48 9 9 4 109 Bentini Group 100.30 107.50 23 27 50 110 CMC di Ravenna 100.00 261.00 16 18 40 26 111 Dick Corp. 99.00 1,095.00 55 27 5 112 Parsons Brinckerhoff Inc. 98.70 130.30 74 25 113 China National Chemical Eng 96.50 504.20 29 1 13 32 114 Prezioso SAS 93.70 175.70 2 11 4 5 62 11 5 115 Chian Railway Construction C 91.50 4,941.80 100 116 China National Overseas Eng 89.80 93.30 49 3 36 117 Contrck Internatioanl Inc. 87.10 87.10 52 37 2 6 1 2 118 TEKSER Constr. Industry and 86.10 99.50 48 52 119 Chian Natr'l Complete Plant I 85.40 85.40 27 44 8 21 120 China Wanbao Engineering C 83.50 99.90 12 39 13 121 China Wu Yi Corp. 80.80 131.20 100 122 Grandi Lavori Fincosit SpA 79.00 230.00 1 99 123 STFA Construction Group 76.20 133.90 11 26 3 56 3 124 VECO Corp. 74.70 239.70 97 3 125 Bayindir Construction Inc. 73.80 179.10 100 126 BE&K Inc. 73.80 1,344.00 100 127 Hanjin Heavy Ind. & Construc 72.80 675.80 1 99 128 China Nat'l Water Res.& Hyd 71.40 1,555.10 42 41 17 129 GAMA AS 70.80 244.30 7 29 64 130 Maeda Corp. 70.00 3,545.00 21 21 44 13 131 salini costruttori SpA 68.10 130.80 73 27 132 RSEA Engineering Corp. 64.00 752.40 21 33 46 133 China Shanghai SFECO 63.00 63.00 58 13 1 25 3 134 Intecsa-Uhde Industrial SA 62.10 158.40 100 135 fisher Development Inc. 62.00 519.00 100 136 Rizzani de Echer 58.40 175.70 62 38 137 todini 57.70 113.10 29 71 138 glavbolgarstroy 57.00 98.30 77 5 18 139 Harbin power eng'g Co. ltd. 55.50 96.40 100 140 Walbridge Aldinger 54.00 810.00 100 141 Zhejiang Constr. Eng'g Group 51.00 953.60 50 11 39 142 Tutor-Saliba Corp. 49.80 743.00 34 66 143 Great Lakes Dredge & Dock 48.80 318.80 100 144 CTCI Corp. 48.40 305.20 4 92 4 145 toda Corp. 47.00 4,254.00 49 36 4 11 146 Granit construction Stock co. 45.00 181.00 13 14 73 147 China Elec. Power Tech.Impo 44.20 302.00 7 31 57 6 148 Gemmo Impianti SpA 44.00 156.80 8 34 10 8 149 Italian-Thai Development PC 43.50 401.00 89

255

150 HBG constructor Inc. 41.00 442.00 12 88 151 The Austin Co. 39.70 451.20 83 17 152 B.L. Harbert International LLC 39.40 279.00 70 26 3 153 Dillingham constr. Holdings In 38.00 1,147.00 13 16 18 53 154 Baytur construction and Cont 37.40 82.40 36 54 10 155 Chna Huanqiu Chemical Eng 36.80 55.40 100 156 perini Corp. 36.00 1,553.00 72 28 157 wiemer & trachte AG 34.90 439.50 53 30 16 158 M.A. Mortenson co. 34.50 1,127.50 99 159 China Zhongyuan Engineerin 30.50 42.70 96 4 160 CH2M Hill Cos. Ltd. 30.20 530.10 39 36 16 2 7 161 Paragon Engineering Servide 30.00 30.00 100 162 MwH 28.90 211.40 45 55 163 The Facility Group 28.20 213.20 100 164 Bird construciotn c. 28.00 253.00 100 165 CiTIC International coop. c. L 27.40 27.80 82 166 Beijing Urban Construction G 26.30 1,916.30 100 167 Tetra Tech Inc. 24.00 222.60 100 168 American Bridge Co. 22.60 196.40 100 169 TSO-Travaux du Sud quest 21.00 66.70 100 170 The Stellar Group 20.90 402.70 100 171 ARB Inc. 20.00 340.00 100 172 CCC Group Inc. 19.70 143.50 61 39 173 Toro Inc. 19.00 403.00 100 174 Kietchell Corp. 18.70 363.00 25 75 175 American Sports Products G 18.40 165.30 100 176 Chian Shenyang Int''l Eco. & 18.30 20.50 89 5 6 177 Caddell Construction Co. Ltd 17.50 187.50 100 178 O'Brien & Gere Engineers Inc 16.70 45.00 16 15 3 64 2 179 Chna Huashi Enterprises Cor 16.70 637.80 58 7 35 180 Transtech Engineering corp. 16.50 51.00 34 66 181 Santos CMI Construction Inc 16.50 30.90 96 4 182 China Dalian Int'l Coop. (Gro 15.50 56.60 8 4 86 2 183 China tianjin Int'l Eco. & Tec. 15.20 29.40 45 10 45 184 China nat'l elec. Wire & Cabl 15.00 15.00 100 185 URS 15.00 120.00 100 186 Pomerleau 14.40 253.80 100 187 Zachry Construction Corp. 14.30 1,939.50 16 9 29 46 188 Beijing construction Engineer 13.30 1,216.90 99 1 189 Natchiq Inc. 11.90 410.60 100 190 China Power Eng'g consltg. ( 11.80 20.70 100 191 alsim Alarko/alarko contractin 11.50 83.60 51 49 192 China Tianchen Chemical En 11.10 21.10 100 193 quattrogemini Lt. 10.80 39.60 27 73 194 Kandenko co. Ltd. 10.70 3,684.30 22 69 9 195 North China Power eng'g (Be 10.20 12.00 100 196 william A 9.90 216.10 100 197 Day 7 Zimmermann 9.00 720.00 33 67 198 ICOM Engineering SpA 9.00 25.00 67 33 199 Holder Construction Co. 8.10 490.10 100 200 b e b ingg. Group 7.50 10.20 10 10 10 70 201 TIC Holdings Inc. 7.10 1,122.80 100

256

202 Chengda Chem. Eng'g corp. 7.10 12.90 203 the Beck Group 7.00 730.00 100 204 Vecellio & Grogan inc. 7.00 240.00 100 205 hensel Phelps Construction C 6.70 1,594.20 100 206 weeks Marine Inc. 6.70 239.00 1 99 207 Cives Corp. 6.00 216.00 50 50 208 Weston Solutions Inc. 5.10 105.10 100 209 Lechase Construction Servic 5.00 295.00 100 210 The Yates Cos. Inc. 3.80 1,015.90 100 211 conestoga-rovers & Asssocia 3.00 18.30 100 212 Matrix Service Co. 2.90 190.80 100 213 Hardin Construction C. LLc 2.70 641.00 100 214 HK Systems Inc. 2.70 220.00 100 215 Corrpro Cos. Inc. 2.60 16.70 4 10 12 9 3 32 11 216 Sheehan Pipe Line construct 2.50 109.70 100 217 Korea Power eng'g Co. Inc. 2.40 17.90 100 218 Cci Telecom Inc. 2.20 38.30 100 219 Frontier - Kemper Constructo 1.80 88.50 100 220 Stantec Inc. 1.70 3.50 100 221 Daewoo Engineering Co. 1.50 56.60 1 99 222 The Clark Construction Grou 1.10 2,605.70 4 96 223 Graycor Inc. 1.00 368.00 100 224 manhattan Construction Co. 1.00 631.00 100 225 Michels Corp. 1.00 342.90 225 SECOR internatioanl Inc. 1.00 6.00 100

257

Appendix O

Survey Questionnaire

258 INTERNATIONAL CONSTRUCTION MARKET ENTRY STRATEGY SURVEY

THE PENNSYLVANIA STATE UNIVERSITY

INTRODUCTION

The construction industry is increasingly globalized. With more options together with increasing competition, construction firms must carefully design or review their entry strategies for foreign market to survive and grow in the international construction arena.

This survey is part of an ongoing research project carried out at the Pennsylvania State University on entry strategies for international construction market, with the purpose to define entry modes that international construction firms commonly utilize, and identify the factors the firms evaluate to decide whether to enter a foreign market and the factors to select optimal entry mode (e.g. between joint venture and sole venture) to penetrate the selected market.

Please return the completed questionnaire by mail or fax to:

Victor Chen, Department of Architectural Engineering, Penn State University, 104 Engineering Unit “A”, University Park, PA16802-1416 Fax: (814)-863-4789 Phone: (814)-863-6786

DEFINITIONS

From the market entry viewpoint, international construction is defined as where one company of nationality of one country performs work in another country. Here the nationality is that of the headquarters.

Market is identical to country in this research.

Entry mode is an institutional arrangement for organizing and conducting international business transactions, e.g., wholly owned subsidiary, joint venture, and branch office.

Strategic alliance is a long-term association with a non-affiliated organization (not including joint venture firm or contractual joint venture as in some other research).

Agency is an entry mode where a foreign company uses a local company’s name to pursue and carry out construction works.

SECTION I: BACKGROUND INFORMATION

Name: Designation: Company:

Tel: E-mail:

How many years of international construction experience do you have?

Have you been involved in market entry decision issues? O Yes O No

How many countries does your company have business in?

Where are your major foreign business located (multiple choices)? O North America O Latin America O Europe O Middle East O North Africa O Central/South Africa O Asia/Pacific O Caribbean Islands

Would you agree if we acknowledge you in our report for your contribution and assistance in the survey? Personal name: O Yes O No Organization: O Yes O No

259 SECTION II: MARKET SELECTION FACTORS

Please evaluate the influences of the following factors upon foreign market Go/No-Go (or foreign market selection) decisions with a five point scale (1: not critical; 2: a little critical; 3: critical; 4: very critical; and 5: extremely critical). If there are other important factors not listed in the following table, please put them down and evaluate their influences.

Code Factors Degree of influence Country-Specific Factors C1 Country market potential 1 2 3 4 5 C2 Competitive significance of the market 1 2 3 4 5 C3 Anticipated noneconomic risk 1 2 3 4 5 C4 Anticipated economic risk 1 2 3 4 5 C5 Similarity of overseas market (cultural/religious) 1 2 3 4 5 C6 Proximity of overseas market 1 2 3 4 5 C7 Attitude and intervention of host government 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Industry-Specific Factors I1 Intensity of competition 1 2 3 4 5 I2 Expected profit potential 1 2 3 4 5 I3 Government licensing requirements 1 2 3 4 5 I4 Legal entity requirements 1 2 3 4 5 I5 Construction demand 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Firm-Specific Factors F1 Company strategic orientation/objectives 1 2 3 4 5 F2 Stage of internationalization 1 2 3 4 5 F3 Overseas market selection experience 1 2 3 4 5 F4 Company international competitiveness 1 2 3 4 5 F5 Own/accessible resources 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Project-Specific Factors (regarding initial project(s)) P1 Size of projects 1 2 3 4 5 P2 Type of projects (e.g., building, manufacturing) 1 2 3 4 5 P3 Technical complexity of projects 1 2 3 4 5 P4 Type of client (public vs private) 1 2 3 4 5 P5 Availability of funds for projects 1 2 3 4 5 P6 Contract types (e.g., lump sum, cost-plus) 1 2 3 4 5 P7 Experience of company in similar works 1 2 3 4 5 P8 Existence of strict time limitations 1 2 3 4 5 P9 Existence of strict quality requirements 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5

260 SECTION III: ENTRY MODE DEFINITION

Each entry mode can be defined as institutional setting on any of the three levels: 1) project level; 2) corporate level; and 3) inter-corporate level, though it is recognized that modes on different levels can be integrated for a specific entry. This section aims at identifying the frequency of occurring of different modes in the international construction practice. Please evaluate the frequency of each mode that you have observed in your industry career with a 3 point scale (0: I have never seen this mode; 1: I have seen it, but it is not commonly used; 2: I have seen it commonly used). If there are other entry modes not listed in the following table, please put them down and evaluate their frequency of occurring.

FREQUENCY Code ENTRY MODES OF OCCURRING Inter-corporate level (long-term) institutional setting Mode 1 Vertical alliance/network Mode 1.1 Alliance/network with owners 0 1 2 Mode 1.2 Alliance/network with suppliers/subcontractors 0 1 2 Mode 2 Horizontal alliance/network Mode 2.1 Alliance/network with local contractors 0 1 2 Mode 2.2 Alliance/network with regional contractors 0 1 2 Mode 2.3 Alliance/network with international contractors 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Corporate level (long-term) institutional setting Cooperative entry modes* Mode 3 Minority (<50%) equity Joint venture newly established 0 1 2 Mode 4 Minority (<50%) equity Joint venture established by acquisition 0 1 2 Mode 5 Equal (50%) equity Joint venture newly established 0 1 2 Mode 6 Equal (50%) equity Joint venture established by acquisition 0 1 2 Mode 7 Majority (>50%) equity Joint venture newly established 0 1 2 Mode 8 Majority (>50%) equity Joint venture established by acquisition 0 1 2 Mode 9 Agency 0 1 2 Mode 10 Licensing (of technology or company title to other companies) 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Competitive entry modes* Mode 11 Sole venture newly established 0 1 2 Mode 12 Sole venture established by acquisition 0 1 2 Mode 13 Branch office/company 0 1 2 Mode 14 Representative/liaison office 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Project level (short-term) institutional setting Mode 14 Contractual Joint Venture/Consortium 0 1 2 Mode 15 Project alliance/partnering 0 1 2 Mode 16 BOT/PPP/PFI approach 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2 Other mode? Please specify and evaluate its frequency 0 1 2

261 SECTION IV: ENTRY MODE SELECTION FACTORS

To select the optimal entry mode from feasible options to enter a specific foreign market, some factors must be taken into consideration. This research focuses on selection between 1) joint venture and 2) sole venture (including branch office/company) on corporate level. Please evaluate the influences of the following factors upon this selection with a five point scale (1: not critical; 2: a little critical; 3: critical; 4: very critical; and 5: extremely critical). If there are other important factors not listed in the following table, please put them down and evaluate their influences.

Code Factors Degree of influence Host Country-Specific Factors C1 Attitude and intervention of host government 1 2 3 4 5 C2 Property rights systems 1 2 3 4 5 C3 Anticipated noneconomic risk 2 2 3 4 5 C4 Anticipated economic risk 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Home country-Specific Factors C5 Promotion of export efforts of government 1 2 3 4 5 C6 Financing support of home country banks 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Home and host country-Specific Factors C7 Similarity of overseas market (cultural/religious) 1 2 3 4 5 C8 Trade relationship between two countries 1 2 3 4 5 C9 Diplomatic relationship between two countries 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Industry-Specific Factors I1 Market size growth 1 2 3 4 5 I2 Market barriers 1 2 3 4 5 I3 Intensity of competition 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Firm-Specific Factors F1 Knowledge protection 1 2 3 4 5 F2 Host country experience 1 2 3 4 5 F3 Company strategic orientation/objectives 1 2 3 4 5 F4 Superior management & organization 1 2 3 4 5 F5 Financing capacity 1 2 3 4 5 F6 Company size/resources 1 2 3 4 5 F7 Management risk attitude 1 2 3 4 5 F8 Profit targets 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5

262

Project-Specific Factors (regarding initial project(s)) P1 Size of projects 1 2 3 4 5 P2 Type of projects (e.g., building, manufacturing) 1 2 3 4 5 P3 Technical complexity of projects 1 2 3 4 5 P4 Type of client (public vs private) 1 2 3 4 5 P5 Availability of funds for projects 1 2 3 4 5 P6 Contract types (e.g., lump sum, cost-plus) 1 2 3 4 5 P7 Experience of company in similar works 1 2 3 4 5 P8 Existence of strict time limitations 1 2 3 4 5 P9 Existence of strict quality requirements 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5 Other factors? Please specify and evaluate. 1 2 3 4 5

SECTION V: COMMENTS

Do you have any comments regarding this research?

Would you like to be interviewed regarding this research? O Yes O No

Do you want a copy of this survey result? O Yes O No

Do you want a copy of the report based on the entire research? O Yes O No

263

Appendix P

How the Top International Contractors Shared the Global Market (Partial)

264

LATIN MIDDLE EAST ASIA AFRICA EUROPE U.S. CANADA AMERICA AMERICAN 1.351 3.3063 2.3624 5.5594 NA 5.1523 4.0436 CANADIAN 0.0472 0.0235 0 0.0013 0.0914 NA 0 JAPANESE 0.4259 5.6029 0.4566 0.3612 1.4561 0.0099 0.3553 CHINESE 0.808 3.8455 0.6541 0.378 0.1182 0.0053 0.1383 KOREAN 0.855 1.3887 0.372 0.0302 0 0 0.503 ALL OTHERS 0.7758 1.401 0.8632 0.4681 0.0827 0 0.4848 EUROPEAN 4.2758 6.4105 4.111 21.4507 19.9525 1.3795 5.1025 BRITISH 688.2 1445.6 234 1975.3 4211.5 129.5 100.3 GERMAN 115 1844.6 787.4 3469.9 6744.2 340 198.2 FRENCH 946.5 1559.2 1842.6 7545.4 2005 496 781 ITALIAN 1358.2 288.7 590.3 580.8 146.7 4.7 1075.3 DUTCH 58.1 221.5 16.3 871.5 5 5.4 98.5 OTHER 1109.8 1050.8 651 7007.8 6840.1 403.8 2849.1 ALL FIRMS 8.5387 21.9784 8.8193 28.2489 21.7009 6.547 10.6275

265

Appendix Q

Contractors Investigated for Entry Mode Selection

266

Number Firm name Home country 1Shimizu Japan 2Kumagai Gumi Japan 3Kajima Japan 4 Taisei Japan 5Obayashi Japan 6Ando Japan 7Hazama Japan 8Konoike Japan 9Maeda Japan 10 Nishimatsu Japan 11 Penta-Ocean Japan 12 Nissan Rinkai Japan 13 Sato Kigyo Japan 14 Takenaka Japan 15 Toa Japan 16 Toda Japan 17 Toyo Japan 18 Aoki Japan 19 Fujita Japan 20 Mitsui Japan 21 Sumitomo Japan 22 Takenaka Japan 23 JGC Japan 24 Chiyoda Japan 25 Kinden Japan 26 Hyundai Korea, South 27 LG Korea, South 28 POSCO Korea, South 29 Halla Korea, South 30 Samsung Korea, South 31 Daewoo Korea, South 32 Ssangyong Korea, South 33 Daewoo Engineering Korea, South 34 Jurong Engineering Singapore 35 IPCO Singapore 36 CSCEC China 37 China Harbour China 38 China Railway China 39 Shanghai China 40 CPECC China 41 Road & Bridge China 42 Sinohydro China 43 CWE China 44 Beijing China 45 CMEC China 46 Wuyi China 47 Railway construction China 48 CETIC China 49 Chengda China 50 CTCI Taiwan

267

Number Firm name Home country 51 RESA Taiwan 52 McConnell Dowell Australia 53 Leighton Australia 54 Clough Australia 55 HOCHTIEF Germany 56 TECHNIP France 57 Bilfinger Berger Germany 58 Amec PLC UK 59 Bovid Lend Lease UK 60 Ferrovial Spain 61 Snampgrotti Italy 62 Consolidated Contractors Greece 63 Construtora Norberto Odebrecht SA Brazil 64 Balfour Beatty UK 65 Joannou Paraskevaides UK 66 Impregilo S.p.A. Italy 67 Obrascon Huarte Lain Spain 68 Grinaker-Lta South Africa 69 Astaldi SPA Italy 70 Besix Belgium 71 Enka Turkey 72 Tecnicas Reunidas SA Spain 73 Necso Entrecanales Cubiertas Spain 74 TRACTEBEL ENGINEERING Belgium 75 Enelpower Italy 76 GAMA Turkey 77 Zublin Germany 78 E. Pihl & Son Denmark 79 Arabian Construciton Lebanon 80 National Petroleum Construction UAE 81 Rizzani De Eccher SPA Italy 82 Arab Contractors Egypt 83 SADE - CGTH France 84 Tefken Turkey 85 C.M.C. Di Italy 86 Kandenko Japan 87 Kaikisha Japan 88 Hanjin Korea, south 89 SKEC Korea, south 90 Daelim Industrial Korea, south 91 Skanska Sweden 92 Bechtel USA 93 KBR USA 94 Fluor Daniel USA 95 Foster Wheeler USA 96 Jacobs USA 97 ABB Lummus Global USA 98 Shaw Group (Stone and Webster) USA 99 Parsons USA 100 Washington Group International USA

268

Number Firm name Home country 101 Black & Veatch USA 102 Veco USA 103 Turner International USA 104 BE&K USA 105 Chicago Bridge & Iron USA 106 Earth Tech USA 107 Structure Tone USA 108 Walbridge Aldinger USA 109 Vinci France 110 Sandwell Canada 111 SNC-Lavalin Canada 112 UMA Canada 113 B.L. Harbert International LLC USA 114 Mott MacDonald USA 115 Corrpro Cos. Inc. USA 116 Austin USA 117 Stellar USA 118 ARB USA 119 Contrack USA 120 Holder USA 121 Heerema Fabrication Netherlands 122 Salini Italy

269

Appendix R

Legal and Technical Constraints against Market Entry

270

Market Market access National treatment Technical barriers to trade (TBT) Korea

WFO, JV, and BO are all allowed since 1996 None since 1996 Permit system (e.g., multiple types; 5 year term); Commercial Constraints on project sizes (according to permit type), presence local subcontracting (e.g., for over 1 billion $ project, 20% local subcontracting)/mandated project JV (e.g., for over 10 billion $ project, must venture with local contractors); As other services Management and technical staff are policy measures to reduce chances to take part in public allowed to enter temporarily Move of projects (e.g., articles in aligning project size); BO and national RO are not bounded by registration capital, for WFO, the persons capital should be at 50 million $).

China

BO is not allowed; acquisition is allowed. WFO business scope constraint (e.g. projects funded totally by foreign investments, foreign grants or Unbound (foreign company cannot directly Commercial Approval certificate system; Qualification certificate foreign investments and grants); In JV, foreign perform projects since 2002; registration presence system; Capital contribution (e.g. of the Chinese party contributor should be over 25%. RO is allowed; capital is the same as local firms) shall not be less than 25%); JV registration capital is still direct bidding of foreign company is not allowed high (e.g., 6 million US$ for class 1 JV); Only local track since 2002. record is accounted in assessing qualification.

Move of national None None persons Malaysia Only through a representative office, regional office; Commercial Malaysian-controlled corporation acting as an None Approval certificate system; Qualification certificate presence agent; In general, JV with aboriginals holds at least system (e.g., WFO cannot get class A certificate, 30% equity. therefore cannot bid for public projects over 10 million Move of RM); Work permit for managers and engineers is Work permit for managers and engineers is national required. required. persons Thailand

a) Foreign equity participation must not exceed 49 Labor import restriction; Expatriate number restriction per cent of the registered capital; and (e.g., with one expatriate, 4 local labors must be Commercial No limitations as long as foreign equity b) The number of foreign shareholders must be less employed for firms with registration capital over 100 presence participation does not exceed 49 per cent than half of the total number of shareholders of the million Thailand $, but 5 for those with registration capital company concerned. less than 100 million Thailand $.) 271

a) A natural person who stays in Thailand for not more than 90 days for the purpose of participating in business meetings or contacts, entering into contract to sell or purchase services, visiting of business establishments or other similar activities;b) A corporate transferee of the managerial or executive level or a specialist, Move of provided that such person has been employed by national None the company concerned outside Thailand for a persons period of not less than one year immediately preceding the date of his or her application for admission and has satisfied the criteria for management needs#1 stipulated by the Department of Employment. Temporary entry is limited to a one year period and may be extended for a further two terms of not more than one year each.

Japan

Permit system; Must register as a local legal entity Commercial Unbound Unbound in general company; Executive qualification requirement; presence Employment of at least 1 local manager; Qualification certificate system; Professional certificate system; Volume requirement of public projects open to foreign participation; JV is a practical norm; No labor Move of immigration; Only WTO nationality can enter; Traditional national Unbound in general Unbound in general practices; Strict constraint on construction materials persons import. Registration capital requirement (e.g. at least 30 million Yen).

Singapore

Qualification certificate system where foreign company Commercial None (WFO, branch, and RO are all allowed) None when locally register, can only get certificate G1 and F1, presence for above certificates, their home legal systems must be recognized by Singapore; licensing for special sectors like power and telecommunication; Engineering's licensing system (certain ratio of employees have Move of degrees from universities recognized by Singapore); national Unbound except intro-corporate transferees Unbound Foreign labor employment quota (5:1 foreign: local); persons Bidding advantage for ASEA member countries in public projects.

272

Hong Kong

Commercial None (WFO, JV, BO, RO, and foreign company are Certain ratio of local management/technique employees None presence all allowed) with recognized degree and local experience; foreign firms cannot bid for projects over 50 million HK$ public projects; Must be among a firm list to be qualified to bid for public projects; Normal registration capital Move of requirement, but no check is needed; Registration & national Detailed requirement None office are needed, but the foreign company can still be a persons foreign one (overseas company).

Vietnam

Commercial None (WFO, JV, BO, RO, and foreign company are Local participation or subcontracting is needed for public presence all allowed) projects; Foreign contributing in EJV must be at least 20%; Registration capital cannot be reduced through Move of operation; Local employment should be priotized; national contract based business is allowed. persons Philippines

WFO and JV subsidiary and BO are allowed. In Activities Expressly Reserved by Law to Citizens of the Philippines (i.e., foreign equity is limited to a minority share):The participation of foreign investors Access to Domestic Credit: A foreign firm, in the governing body of any corporation engaged in engaged in non-manufacturing activities activities expressly reserved to citizens of the availing it of peso borrowings, shall Local registration is needed; Minimum registration capital Philippines by law shall be limited to the observe, at the time of borrowing, the requirement, which cannot be reduced during project; proportionate share of foreign capital of such prescribed 50:50 debt-to-equity ratio. Commercial Special permit (project/consortium/company based) entities. All executive and managing officers must Foreign firms covered are: a) partnerships, presence requirement; Guarantees from parent company for a be citizens of the Philippines. Acquisition of Land: more than 40 per cent of whose capital is subsidiary; Permit system; Requirement of maximum All lands of the public domain are owned by the owned by non-Filipino citizens; and b) number of expatriates (e.g., 25% for pubic projects); State. Only citizens of the Philippines or corporations, more than 40 per cent of corporations or associations at least 60 per cent of whose total subscribed capital stock is whose capital is owned by such citizens may own owned by non-Filipino citizens. land other than public lands and acquire public lands through lease. Foreign investors may lease only private-owned lands.

273

Entry and Temporary Stay of Natural Persons Supplying Services: Non-resident aliens may be admitted to the Philippines for the supply of a Move of service after a determination of the non-availability national of a person in the Philippines who is competent, persons able and willing, at the time of application, to perform the services for which the alien is desired.#1 Indonesia

Commercial Presence of the foreign service provider(s) may be in the form of joint venture and/or representative office, unless mentioned a) Joint operation: 1. Registration fee otherwise. Joint venture should meet the following requirement 2. License for representative requirements: i) should be in the form of Limited office shall be valid for 3 years and can be Liability Enterprise (Perseroan Terbatas/PT), ii) extended 3. Registered foreign company not more than 49% of the capital share of the shall form a joint operation with local Commercial Limited Liability Enterprise (Perseroan partner(s) which is (are) member(s) of the presence Terbatas/PT), may be owned by foreign Indonesian Contractors Association having partner(s).a) Joint operation (kind of JV project): To qualification A. b) Joint venture: Local form a joint operation by establishing a partner(s) in joint venture shall be representative office; b) Joint venture: to establish a member(s) of the Indonesian Contractors joint venture company by fulfilling the requirements Association and having qualification A as specified in the Horizontal Measures and the Foreign Capital Investment Law.

Expatriate Charges: Any foreign natural persons supplying services are subject to charges levied by National, Provincial and Municipal Governments. Labor Laws and Subject to Indonesian Labor and Immigration Laws Regulations. Any expatriate employed by and Regulations, only directors, managers and a joint-venture enterprise, representatives Move of technical experts/advisors, unless mentioned office, and/or other types of juridical person national otherwise, are allowed with a maximum stay of two and/or an individual services provider must persons years subject to one year extension. Manager and hold a valid working permit issued by the technical experts (intra corporate transfer) are Ministry of Manpower. Immigration Laws allowed based on an economic needs test. and Regulations. Any expatriate must meet immigration requirements and procedures to enter the territory of the Republic of Indonesia.

274

India Commercial Only through incorporation with a foreign equity None presence ceiling of 51 per cent Move of N/A Some constraints (stay period) on intra-corporate national None transferees, professionals. persons Australia Commercial None None presence Move of N/A national Some constraint Some constraint persons USA

Commercial When parent company directly bid for local projects (this None None presence however is now preferred, registration is required; Local experience is preferred; some restriction for foreign contractor in public projects; Some loss of profit when transferred out of the US; Bonding/Insurance rating is Move of restricted for lack of local experience; Labor immigration national Some constraints None is strictly constrained. persons

Canada Commercial None presence Some constraints (e.g. Unbound, except as Move of indicated in the horizontal section. In addition, an national None in-state office must be maintained by all contractors persons in Michigan.) Mexico Foreign investment up to 49 per cent of the Commercial Firms from economic cooperation countries are allowed registered capital of enterprises (though WFO is in None presence in public projects; Registration as local company is fact allowed) necessary; BOT projects are few; Qualification Move of acknowledge by government owned enterprises in power national Unbound except some cases Unbound except some cases and petroleum. persons Brazil

275

Commercial Only 12% of profits can be remitted out of Brazil, and None 5 yrs after WTO entrance None presence extra will be taxed; Enterprise representative need permanent residence visa; Number and salary sum of expatriates cannot be over 1/3 of those of all employees; Move of Import/Export permit for all goods/products; Foreign national Unbound except some cases Unbound except some cases currency administration; persons Chile Commercial Not Specified (nearly none; seems negotiable) Not specified (some constraints) presence Move of Capital can be taken out one year after entry; national Some constraints Some constraints persons Argentina Commercial None None presence Move of Unbound except for some cases (qualified Unbound except for some cases (qualified national managers, executives, specialists) managers, executives, specialists) persons Peru Commercial Nearly none (BO, subsidiary are allowed) presence Move of national persons Venezuela Commercial None None presence Move of Unbound except for some cases (qualified Unbound except for some cases (qualified national managers, executives, specialists) managers, executives, specialists) persons Poland Commercial None None presence Move of national Unbound except some cases Unbound except some cases persons Russia Commercial In public projects, at least 30% must be done by local SV, JV, BO, RO, and direct bidding are all allowed None presence contractors when a foreign firm acts as GC.

276

Move of national Labor immigration constraint. persons Romania Commercial None None presence

Unbound, except for the entry and Unbound, except for the entry and temporary stay in Move of temporary stay in Romania of natural Romania of natural persons serving in management national persons serving in management and expert and expert jobs#2 necessary to operate the foreign persons jobs#3 necessary to operate the foreign investment investment

Czech Commercial Unbound (in fact, quite open) Unbound presence Local firms enjoy a 10% discount when bidding against Move of foreign firms; acquisition is encourages. national Unbound with exceptions Unbound with exceptions persons Finland

277

None. A foreigner carrying on a trade as a private entrepreneur or as a partner in a Finnish limited or general partnership needs a trade permit and has to be permanently resident in Finland. If a foreign organization intends to carry on a business or trade by establishing a branch in Finland, a trade permit is required. A permission to act as a founder of a limited company is required of a foreign organization or a private person, who is not a citizen of Finland. Treatment accorded to subsidiaries of third-country companies formed in accordance with the law of an EEA Member State and having their None. Acquisition of shares by foreign owners registered office, central administration or giving more than one third of the voting rights of a principal place of business within an EEA major Finnish company or a major business Member State may not be extended to undertaking (with more than 1000 employees or branches of agencies established in a EEA with a turnover exceeding 1000 million Finnish Member State by a third-country company. market or with a balance sheet total exceeding Treatment less favorable may be accorded 1000 million Finnish market) is subject to to subsidiaries of third-country companies Commercial confirmation by the Finnish authorities; the formed in accordance with the law of an presence confirmation may be denied only if an important EEA Member State and having only their national interest would be jeopardized. At least half registered office in the territory of an EEA of the ordinary and deputy members of the Board of Member State unless they show that they Directors have to be citizens of Finland and resident possess an effective and continuous link in Finland. The Managing Director of a limited with the economy of one of the EEA company has to be a Finnish citizen and resident in Member States. Acquisition and Finland. Company exemptions may, however, be Possession of Real Estate Non-residents granted. need a permit to acquire or rent real estate for more than two years intended for leisure-time dwelling or for recreational purposes. Åland Islands Restrictions on the right for natural persons who do not enjoy regional citizenship in Åland, and for legal persons, to acquire and hold real property on the Åland Islands without permission by the competent authorities of the islands. Restrictions on the right of establishment and the right to provide services by natural persons who do not enjoy regional citizenship in Åland, or by any legal person, without permission by the competent authorities of the Åland Islands.

278

Move of national Constraints with exceptions Constraints with exceptions persons Germany

Favorable conditions with EU community. Purchase of real estate by foreigners in the In all EC Member States services considered as Länder Berlin, Schleswig-Holstein and Approval (government agencies and Handwork Union) Commercial public utilities at a national or local level may be Saarland may be subject to authorization. and registration (EU members and other European presence subject to public monopolies or to exclusive rights After 1994 it is very likely that only Land countries with bilateral trade agreements with Germany granted to private operators. Berlin will continue to require such are excluded) required; Craft licensing system; Work authorization. permit; Labor immigration constraints (only 12 preunion countries are allowed to export labor to Germany). Move of national Unbound with exceptions None persons United

Kingdom

Favorable conditions with EU community. Purchase of real estate by foreigners in the In all EC Member States services considered as Länder Berlin, Schleswig-Holstein and Commercial public utilities at a national or local level may be Saarland may be subject to authorization. presence subject to public monopolies or to exclusive rights After 1994 it is very likely that only Land granted to private operators. Berlin will continue to require such authorization.

Move of national Unbound with exceptions None persons Netherlands

Move of national Unbound with exceptions None persons France

279

In all EC Member States services considered as public utilities at a national or local level may be subject to public monopolies or to exclusive rights granted to private operators. Foreign purchases exceeding 33,33 per cent of the shares of capital or voting rights in existing French enterprise, or 20 per cent in publicly quoted French companies, are subject to the following regulations: - Investments of less than 50 million FF in French enterprises with a turnover not exceeding 500 million FF are free, Favorable conditions with EU community. after a delay of 15 days following prior notification Purchase of real estate by foreigners in the and verification that these amounts are met; -after a Länder Berlin, Schleswig-Holstein and Commercial period of one month following prior notification, Saarland may be subject to authorization. presence authorization is tacitly granted for other investments After 1994 it is very likely that only Land

unless the Minister of Economic Affairs has, in Berlin will continue to require such exceptional circumstances, exercised its right to authorization. postpone the investment. Foreign participation in newly privatized companies may be limited to a variable amount, determined by the government of France on a case by case basis, of the equity offered to the public. For establishing in certain#4 commercial, industrial or artisanal activities, a specific authorization is needed if the managing director is not holder of a permanent residence permit. Move of national Unbound with exceptions None persons

Spain Market access National treatment Technical barriers to trade (TBT)

In all EC Member States services considered as public utilities at a national or local level may be Favorable conditions with EU community. subject to public monopolies or to exclusive rights Purchase of real estate by foreigners in the granted to private operators. Investment in Spain by Länder Berlin, Schleswig-Holstein and Commercial foreign government and foreign public entities Saarland may be subject to authorization. presence (which tends to imply, besides economic, also After 1994 it is very likely that only Land non-economic interests to entity’s part), directly or Berlin will continue to require such through companies or other entities controlled authorization. directly or indirectly by foreign governments, need prior authorization by the government.

280

Move of national Unbound with exceptions None persons Belgium

Favorable conditions with EU community. Purchase of real estate by foreigners in the In all EC Member States services considered as Länder Berlin, Schleswig-Holstein and Commercial public utilities at a national or local level may be Saarland may be subject to authorization. presence subject to public monopolies or to exclusive rights Project permits system (Urban planning and social After 1994 it is very likely that only Land granted to private operators. economy permit, environmental permit); Registration Berlin will continue to require such system; Qualification/grading system (8 grades). authorization.

Move of national Unbound with exceptions None persons Israel

Enactment also requires a foreign company that maintains in Israel a place of business or an office for registration or transfer of shares to register as a foreign company and pay the requisite fees. The Partnership Ordinance (New Version), 5735-1975 Commercial provides that a foreign partnership, i.e. one formed presence outside Israel, may only carry on business in Israel In fact entry is very difficult. if it is registered in the Israel register partnerships. In the case of a limited partnership, registration has to be sanctioned by the Minister of Justice who at his discretion may authorize or refuse registration.

Move of Unbound except for executives and national Unbound except for executives and managers managers persons Oman Medium Open

RO, BO (only for public projects and special private projects), and JV (up to 70% equity) are all allowed. Commercial Direct bidding is allowed for public international presence projects (but registration as a BO or JV is a must At 15% local employment ratio; upon receiving the project). Move of national persons Pakistan

281

Except in the case of representative offices where specifically provided for in this Schedule, Acquisition of real estate by non-Pakistani commitments under 'commercial presence' are entities and/or persons is subject to Commercial subject to incorporation in Pakistan with maximum authorization on a case-by-case basis presence foreign equity participation of fifty one per cent keeping into account the purpose and unless a different percentage is inscribed against a location of the undertaking. particular sector or subsector.

Unbound, except for measures concerning the entry Move of or temporary stay of natural persons up to a national maximum of fifty per cent in superior categories Unbound persons (namely, Executives and Specialists) in an undertaking.

Saudi Arabia SV and JV (since 2000), BO, RO, and direct Commercial bidding/business with local agency (still very presence High registration capital according to business scope and popular) are all allowed. project size; Qualification/grading system; 10-15% local Move of employment ratio; national persons U.A.E.

(i) Acquisition of land and real estate is not permitted to foreigners or to companies in which foreign nationals have a share holding. (ii) Foreign nationals or companies with foreign share holdings may be required to pay direct taxes on income Foreign company (foreign nationality, not locally Commercial presence will be through either (i) a derived from work or operations in the UAE, registered) can only bid for public international projects; Commercial representative office or (ii) an incorporation as a whereas local services suppliers or local local projects are for locally registered companies; presence company with maximum foreign equity participation UAE companies may not be required to pay qualification/grading system; Requirement of higher of 49% subject to UAE law. similar taxes keeping in view the provisions bonding for foreign companies; Equipment must be of paragraph (d) of Article XIV. (iii) locally acquired/rented if available; No advancements for Government subsidized services may only foreign companies (i.e. BO) except for JV project; Local be extended to UAE nationals. JV registration to get licensing (BO needs agency to get it). company has all advantages of a pure local company.

Move of Unbound except some cases (managers, national executives, etc.) persons Kuwait

282

Foreign commercial presence should be either through a Kuwaiti Agent working in the same field of services or related to it (official agency contract must be registered with the Ministry of Commerce and Industry). Or: through a partnership with the capital of Kuwaiti Company, in which Kuwaiti portion Commercial should be 51% at least, and the aggregate portion None presence of foreign capital should not exceed 49%; Employ 30% of his workforce with Nationals. Commercial Direct business with local agent can only take part in presence shall need prior written permission from public international projects; Qualification/grading system competent authorities, and shall be subject to for local companies including foreign-Kuwait JV; economic needs test and some other considerations.

Unbound except for measures concerning Unbound except for measures concerning the entry the categories of natural persons referred Move of and temporary stay of natural persons falling within to in the market access column Housing national the following categories: - Managers - Specialists and social programs and some aspects of persons and - Skilled technicians. Presence of foreign free health care are limited to Kuwaiti natural persons as self employers is not allowed. citizens. Turkey

283

For Construction Services, establishing ordinary partnership under Civil Code (whichis not a legal entity) excluding the ordinary partnership formed for international tenders in Turkey by the non-residents is subject to permission of the Ministry to which the Undersecretariat of Treasury and Foreign Trade (UTFT) is attached.All investment to be made within the range of $50,000 and $150,000,000 by non- residents (natural or juridical persons) through: 1) the establishment of incorporated or limited liability companies; 2) the purchase of shares 3) the opening of branches; 4) the creation of liaison offices, will be authorized by the General Commercial Directorate of Foreign Capital provided that such None presence activities are beneficial to the economic development of Turkey, are in the areas open to the Turkish private sector and do not entail a monopoly or special privilege. Foreign investment above $150 million requires the approval of the Council of Ministers. A new Decree removing this limitation is under preparation. The capital must be brought in as foreign exchange. Authorization is required for the investments by established foreign-owned enterprises or joint ventures in a new line of business and for participation or takeover of existing enterprises. For the investments in the same line of business, proposals are generally approved as a matter of course. Move of national None None persons Egypt Medium Open Medium

Commercial presence is only allowed for joint-venture companies; Foreign capital equity shall Commercial not exceed 49 per cent of the total capital required None presence Local contractors enjoy 15% discount in public projects; for the project; direct bidding with local agency is Number of expatriates cannot exceed 10% of total allowed. employee quantity; Move of national None None persons Ghana Commercial Foreign-owned enterprises including joint-venture None None presence enterprises with Ghanaians must satisfy minimum capital

284

outlay and foreign equity requirements as follows: wholly Automatic entry and work permit is granted to up to foreign-owned company requires a minimum equity 4 expatriate senior executives and specialized skill capital outlay of US$ 200,000. Joint-venture company personnel in accordance with relevant provisions in Move of should have a minimum foreign equity capital of at least the Investment Promotion Law. Approval is national None US$ 10,000 in cash or kind. Agency establishment required for any additional expatriate workers persons must have authority to negotiate and conclude contracts beyond the automatic level. Enterprises must also on behalf of foreign parent companies. provide for training in higher skills for Ghanaians to enable them to assume specialized roles.

Nigeria Commercial None None presence

Unbound, except for measures concerning Unbound, except for measures concerning entry entry and temporary stay of personnel and temporary stay of personnel employed in senior Move of employed in senior management and management and experts jobs for the national experts jobs for the implementation of implementation of foreign investment. Their persons foreign investment. Their employment shall employment shall be agreed upon by the service be agreed upon by the service providers providers and approved by the IDCC#1. and approved by the IDCC#1.

South Africa Local borrowing by South African registered Commercial companies with a non-resident None presence shareholding of 25 per cent or more is limited Move of national Unbound with exceptions Unbound with exceptions persons

285

Appendix S

Cultural Distances between Selected Markets

286

Arab WoArgentinaAustralia Austria Belgium Brazil Canada Chile China* ColombiaCosta Ri Czech Denmark Arab World** 0.00 0.58 2.53 2.45 0.96 1.87 1.85 0.60 6.45 0.46 1.62 0.42 3.58 Argentina 0.58 0.00 1.83 0.98 0.49 2.05 1.37 0.64 7.52 0.64 1.01 0.15 3.10 Australia 2.53 1.83 0.00 1.48 1.66 2.42 0.11 3.59 6.16 3.68 3.98 1.26 1.84 Austria 2.45 0.98 1.48 0.00 1.91 3.73 1.33 2.79 8.88 2.21 2.45 1.11 2.79 Belgium 0.96 0.49 1.66 1.91 0.00 2.52 1.42 1.46 8.56 1.75 2.39 0.32 3.68 Brazil 1.87 2.05 2.42 3.73 2.52 0.00 2.21 2.13 2.05 2.16 2.88 2.05 5.09 Canada 1.85 1.37 0.11 1.33 1.42 2.21 0.00 2.70 6.17 2.95 3.04 0.86 1.24 Chile 0.60 0.64 3.59 2.79 1.46 2.13 2.70 0.00 7.53 0.61 0.38 0.95 3.70 China* 6.45 7.52 6.16 8.88 8.56 2.05 6.17 7.53 0.00 6.66 8.51 7.25 9.94 Colombia 0.46 0.64 3.68 2.21 1.75 2.16 2.95 0.61 6.66 0.00 1.23 0.94 4.94 Costa Rica 1.62 1.01 3.98 2.45 2.39 2.88 3.04 0.38 8.51 1.23 0.00 1.60 3.29 Czech 0.42 0.15 1.26 1.11 0.32 2.05 0.86 0.95 7.25 0.94 1.60 0.00 2.56 Denmark 3.58 3.10 1.84 2.79 3.68 5.09 1.24 3.70 9.94 4.94 3.29 2.56 0.00 Russia & Romania 0.45 0.16 1.56 1.35 0.18 2.07 1.21 1.00 7.48 0.91 1.80 0.06 3.32 Ecuador 0.43 1.14 4.11 2.95 2.31 2.32 3.27 0.86 6.27 0.13 1.70 1.28 5.12 El Salvador 0.58 0.57 3.89 2.72 1.41 2.12 3.06 0.10 7.50 0.34 0.59 0.97 4.63 Finland 1.52 0.92 1.26 1.47 1.34 2.95 0.70 1.37 8.44 2.35 1.30 0.76 0.74 France 0.69 0.49 1.65 2.14 0.09 2.31 1.26 1.08 8.17 1.63 1.99 0.27 3.05 Germany 1.71 0.91 0.32 0.79 1.23 1.51 0.31 2.36 5.26 2.17 2.59 0.71 2.35 Greece 1.00 0.39 3.51 2.14 0.83 2.40 3.01 0.71 8.39 0.68 1.27 0.84 5.45 Guatemala 1.08 1.82 6.17 5.16 2.54 2.83 5.15 0.69 8.00 0.85 1.76 2.23 7.23 HK 4.69 5.62 4.22 6.57 6.75 1.44 4.06 5.64 0.36 5.08 6.33 5.27 6.70 Hungary* 1.24 0.48 1.68 0.61 0.87 2.79 1.55 2.09 7.85 1.18 2.64 0.49 4.15 India 1.96 2.80 1.90 4.04 3.18 0.65 1.69 3.15 1.75 2.84 4.20 2.28 4.13 Indonesia 0.43 1.44 3.70 3.28 2.57 2.40 2.73 0.88 6.11 0.62 1.66 1.34 3.69 Iran 0.28 0.42 1.79 1.62 1.08 1.98 1.11 0.55 6.66 0.74 1.02 0.30 2.00 Ireland 2.15 1.59 0.73 0.79 2.15 3.80 0.50 3.23 8.11 2.88 3.34 1.11 1.25 Israel 2.09 0.62 1.64 0.49 1.42 3.24 1.27 1.63 9.15 2.07 1.15 0.89 2.01 Italy 1.15 0.52 0.85 0.88 0.36 2.74 0.73 2.06 8.13 1.83 2.74 0.23 2.81 Vietnam 0.23 1.37 2.89 3.43 1.77 2.29 2.07 1.08 6.29 1.06 2.27 0.96 3.30 Japan 4.05 3.38 3.17 3.84 3.83 1.22 3.56 4.88 2.68 3.71 5.60 3.52 8.25 Malaysia 0.74 2.52 4.24 4.86 3.09 3.05 3.31 1.98 6.27 1.55 3.48 2.00 4.67 Mexico 0.23 0.62 3.22 2.44 1.12 2.06 2.64 0.88 6.69 0.22 1.97 0.66 5.16 Netherlands 3.02 2.57 1.05 3.30 2.53 2.08 0.81 3.00 5.80 4.44 3.09 2.15 1.39 New Zealand 2.68 1.73 0.14 1.05 2.03 2.51 0.16 3.38 6.24 3.50 3.34 1.35 1.43 Norway 2.55 2.05 1.44 2.72 2.39 2.87 0.90 2.22 7.56 3.75 2.03 1.77 0.59 Pakistan 0.51 0.57 3.21 1.89 1.87 2.13 2.38 0.37 6.66 0.19 0.63 0.85 3.53 Panama 0.57 1.48 5.16 4.43 2.18 2.44 4.20 0.60 7.12 0.52 1.75 1.68 6.20 Peru 0.51 0.56 3.76 2.53 1.56 2.08 2.91 0.10 7.19 0.23 0.54 0.93 4.34 Philippines 0.56 1.87 2.93 3.67 2.39 1.70 2.33 1.89 4.30 1.16 3.28 1.42 4.51 Poland* 0.59 0.28 1.97 1.70 0.14 2.21 1.67 1.16 7.82 1.01 2.12 0.23 4.19 Portugal 0.91 0.64 3.97 2.94 1.24 2.32 3.17 0.15 8.29 0.79 0.57 1.09 4.66 Singapore 2.66 4.13 3.66 5.21 5.44 2.23 2.99 3.77 2.66 3.32 4.51 3.59 4.07 South Africa 0.92 0.75 0.75 0.95 1.04 2.66 0.41 1.93 7.20 1.69 2.47 0.33 1.66 Korea, South 2.91 2.89 3.95 4.75 3.90 0.32 3.61 2.45 2.12 2.69 2.79 3.25 6.31 Spain 0.47 0.12 1.91 1.59 0.36 1.98 1.37 0.43 7.66 0.87 0.94 0.18 2.83 Sweden 3.52 3.34 1.70 3.77 3.76 3.26 1.19 3.47 6.80 5.01 3.28 2.82 0.60 Switzerland 1.46 0.71 0.67 0.39 1.08 3.01 0.47 2.29 7.91 1.96 2.54 0.45 1.88 Taiwan 3.62 3.77 4.03 5.24 4.95 0.47 3.77 3.47 1.16 3.45 3.80 3.99 6.51 Thailand 1.72 2.12 3.05 3.91 3.16 0.34 2.49 1.55 2.41 1.84 1.97 2.23 4.31 Turkey 0.23 0.21 2.57 2.00 0.68 1.83 1.92 0.21 7.14 0.41 0.86 0.33 3.54 UK 2.77 2.27 0.14 1.59 2.26 3.10 0.20 4.15 6.54 4.00 4.54 1.55 1.60 USA 2.47 1.94 0.02 1.63 1.73 2.55 0.11 3.70 6.19 3.73 4.20 1.28 1.80 Uruguay 0.67 0.32 3.15 2.30 0.77 2.11 2.48 0.20 8.01 0.69 0.68 0.65 4.11 Venezuela 0.50 1.09 4.16 2.89 2.08 2.38 3.45 1.09 6.49 0.12 2.09 1.25 5.87 West Africa 0.35 1.20 2.98 3.04 2.15 1.39 2.19 0.77 4.66 0.59 1.56 1.11 3.60

287

Russia &Ecuador El SalvadFinland France GermanyGreece GuatemaHK Hungary*India Indonesi Iran Ireland 0.45 0.43 0.58 1.52 0.69 1.71 1.00 1.08 4.69 1.24 1.96 0.43 0.28 2.15 0.16 1.14 0.57 0.92 0.49 0.91 0.39 1.82 5.62 0.48 2.80 1.44 0.42 1.59 1.56 4.11 3.89 1.26 1.65 0.32 3.51 6.17 4.22 1.68 1.90 3.70 1.79 0.73 1.35 2.95 2.72 1.47 2.14 0.79 2.14 5.16 6.57 0.61 4.04 3.28 1.62 0.79 0.18 2.31 1.41 1.34 0.09 1.23 0.83 2.54 6.75 0.87 3.18 2.57 1.08 2.15 2.07 2.32 2.12 2.95 2.31 1.51 2.40 2.83 1.44 2.79 0.65 2.40 1.98 3.80 1.21 3.27 3.06 0.70 1.26 0.31 3.01 5.15 4.06 1.55 1.69 2.73 1.11 0.50 1.00 0.86 0.10 1.37 1.08 2.36 0.71 0.69 5.64 2.09 3.15 0.88 0.55 3.23 7.48 6.27 7.50 8.44 8.17 5.26 8.39 8.00 0.36 7.85 1.75 6.11 6.66 8.11 0.91 0.13 0.34 2.35 1.63 2.17 0.68 0.85 5.08 1.18 2.84 0.62 0.74 2.88 1.80 1.70 0.59 1.30 1.99 2.59 1.27 1.76 6.33 2.64 4.20 1.66 1.02 3.34 0.06 1.28 0.97 0.76 0.27 0.71 0.84 2.23 5.27 0.49 2.28 1.34 0.30 1.11 3.32 5.12 4.63 0.74 3.05 2.35 5.45 7.23 6.70 4.15 4.13 3.69 2.00 1.25 0.00 1.32 0.91 1.13 0.21 0.91 0.60 2.00 5.67 0.44 2.52 1.58 0.53 1.57 1.32 0.00 0.64 2.74 2.04 2.67 1.32 0.90 4.69 1.73 2.58 0.29 0.83 3.13 0.91 0.64 0.00 1.88 1.18 2.43 0.38 0.45 5.83 1.75 3.32 0.98 0.75 3.52 1.13 2.74 1.88 0.00 0.98 1.11 2.24 3.80 5.82 1.95 3.02 2.09 0.59 1.02 0.21 2.04 1.18 0.98 0.00 1.28 0.94 2.21 6.25 1.18 2.80 2.03 0.73 2.04 0.91 2.67 2.43 1.11 1.28 0.00 2.07 4.41 3.58 0.85 1.59 2.67 1.16 0.81 0.60 1.32 0.38 2.24 0.94 2.07 0.00 1.09 6.89 1.04 3.96 2.11 1.29 3.51 2.00 0.90 0.45 3.80 2.21 4.41 1.09 0.00 6.73 3.29 4.19 1.37 1.86 5.88 5.67 4.69 5.83 5.82 6.25 3.58 6.89 6.73 0.00 6.08 0.83 4.20 4.52 5.50 0.44 1.73 1.75 1.95 1.18 0.85 1.04 3.29 6.08 0.00 3.18 2.38 1.22 1.34 2.52 2.58 3.32 3.02 2.80 1.59 3.96 4.19 0.83 3.18 0.00 2.13 1.97 2.87 1.58 0.29 0.98 2.09 2.03 2.67 2.11 1.37 4.20 2.38 2.13 0.00 0.53 2.66 0.53 0.83 0.75 0.59 0.73 1.16 1.29 1.86 4.52 1.22 1.97 0.53 0.00 1.25 1.57 3.13 3.52 1.02 2.04 0.81 3.51 5.88 5.50 1.34 2.87 2.66 1.25 0.00 1.13 2.88 1.80 0.60 1.42 0.94 1.54 4.03 6.72 1.17 4.07 2.93 1.14 1.29 0.26 2.34 2.02 1.12 0.51 0.59 1.40 3.68 6.11 0.35 2.82 2.51 0.96 0.90 1.13 0.72 1.26 1.79 1.26 2.33 2.15 1.63 4.39 2.22 1.77 0.29 0.46 2.34 3.35 4.26 4.36 5.49 4.22 2.02 3.56 5.56 2.67 2.83 2.17 5.22 4.33 4.92 2.19 0.90 2.10 3.18 2.48 3.60 3.32 2.06 4.49 3.29 2.11 0.41 1.24 3.40 0.53 0.32 0.56 2.44 1.08 2.01 0.64 0.91 5.23 0.94 2.54 0.83 0.79 2.80 2.57 4.79 3.72 1.03 2.05 1.35 4.14 5.71 3.83 3.78 2.02 3.78 2.00 2.28 1.75 3.99 3.72 1.02 1.98 0.27 3.49 6.22 4.14 1.71 2.13 3.56 1.68 0.56 2.27 4.08 3.00 0.36 1.82 1.58 3.66 5.04 5.05 3.49 2.81 3.00 1.36 1.79 1.00 0.31 0.35 1.52 1.58 1.88 0.96 1.18 4.76 1.42 2.67 0.44 0.38 2.29 1.54 0.43 0.42 3.22 1.83 3.65 1.12 0.13 5.74 2.66 3.25 0.74 1.27 4.72 0.93 0.47 0.03 1.78 1.29 2.31 0.52 0.54 5.46 1.69 3.10 0.74 0.61 3.21 1.55 0.73 1.86 2.84 2.02 2.24 2.62 2.12 2.93 2.21 1.01 0.54 1.02 2.65 0.06 1.47 0.96 1.62 0.26 1.22 0.47 1.88 6.17 0.51 2.89 1.93 0.87 2.15 0.98 1.26 0.11 1.80 1.03 2.58 0.34 0.64 6.58 2.03 3.84 1.59 1.01 3.90 4.15 2.61 4.16 3.78 4.68 3.21 5.77 4.96 1.22 4.82 0.87 1.68 2.38 3.41 0.60 1.87 2.10 0.73 0.92 0.60 2.13 3.80 4.92 0.77 2.08 1.58 0.49 0.29 3.29 2.94 2.43 3.90 3.60 2.58 2.95 3.07 1.70 4.06 1.57 3.12 2.90 5.37 0.19 1.31 0.50 0.72 0.22 1.15 0.49 1.57 5.71 0.96 2.73 1.38 0.35 1.90 3.50 5.11 4.43 1.06 3.03 2.14 5.43 6.61 4.30 4.77 2.60 3.64 2.14 2.16 0.69 2.40 2.38 0.83 1.13 0.44 2.05 4.45 5.60 0.51 2.75 2.34 0.86 0.24 4.15 3.55 3.51 4.56 4.60 2.80 4.19 4.29 0.84 4.73 1.25 3.56 3.49 5.49 2.43 1.83 1.73 2.55 2.67 1.99 2.63 2.40 1.44 3.35 0.86 1.59 1.57 3.78 0.31 0.69 0.18 1.19 0.49 1.55 0.39 0.90 5.35 1.09 2.59 0.86 0.32 2.35 1.97 4.26 4.50 1.47 2.19 0.60 4.31 6.90 4.38 1.94 2.06 3.67 1.93 0.44 1.60 4.07 4.02 1.33 1.69 0.42 3.71 6.24 4.21 1.75 1.83 3.59 1.78 0.67 0.55 1.18 0.15 1.41 0.63 1.95 0.21 0.87 6.26 1.44 3.41 1.50 0.74 3.12 1.17 0.09 0.71 3.13 1.97 2.65 1.07 0.91 5.09 1.41 2.80 0.65 1.08 3.33 1.30 0.36 0.85 1.89 1.68 2.00 1.80 1.30 3.07 2.11 1.31 0.14 0.46 2.54

288

Israel Italy Vietnam Japan MalaysiaMexico Netherla New ZeaNorway Pakistan Panama Peru PhilippinePoland* 2.09 1.15 0.23 4.05 0.74 0.23 3.02 2.68 2.55 0.51 0.57 0.51 0.56 0.59 0.62 0.52 1.37 3.38 2.52 0.62 2.57 1.73 2.05 0.57 1.48 0.56 1.87 0.28 1.64 0.85 2.89 3.17 4.24 3.22 1.05 0.14 1.44 3.21 5.16 3.76 2.93 1.97 0.49 0.88 3.43 3.84 4.86 2.44 3.30 1.05 2.72 1.89 4.43 2.53 3.67 1.70 1.42 0.36 1.77 3.83 3.09 1.12 2.53 2.03 2.39 1.87 2.18 1.56 2.39 0.14 3.24 2.74 2.29 1.22 3.05 2.06 2.08 2.51 2.87 2.13 2.44 2.08 1.70 2.21 1.27 0.73 2.07 3.56 3.31 2.64 0.81 0.16 0.90 2.38 4.20 2.91 2.33 1.67 1.63 2.06 1.08 4.88 1.98 0.88 3.00 3.38 2.22 0.37 0.60 0.10 1.89 1.16 9.15 8.13 6.29 2.68 6.27 6.69 5.80 6.24 7.56 6.66 7.12 7.19 4.30 7.82 2.07 1.83 1.06 3.71 1.55 0.22 4.44 3.50 3.75 0.19 0.52 0.23 1.16 1.01 1.15 2.74 2.27 5.60 3.48 1.97 3.09 3.34 2.03 0.63 1.75 0.54 3.28 2.12 0.89 0.23 0.96 3.52 2.00 0.66 2.15 1.35 1.77 0.85 1.68 0.93 1.42 0.23 2.01 2.81 3.30 8.25 4.67 5.16 1.39 1.43 0.59 3.53 6.20 4.34 4.51 4.19 1.13 0.26 1.13 3.35 2.19 0.53 2.57 1.75 2.27 1.00 1.54 0.93 1.55 0.06 2.88 2.34 0.72 4.26 0.90 0.32 4.79 3.99 4.08 0.31 0.43 0.47 0.73 1.47 1.80 2.02 1.26 4.36 2.10 0.56 3.72 3.72 3.00 0.35 0.42 0.03 1.86 0.96 0.60 1.12 1.79 5.49 3.18 2.44 1.03 1.02 0.36 1.52 3.22 1.78 2.84 1.62 1.42 0.51 1.26 4.22 2.48 1.08 2.05 1.98 1.82 1.58 1.83 1.29 2.02 0.26 0.94 0.59 2.33 2.02 3.60 2.01 1.35 0.27 1.58 1.88 3.65 2.31 2.24 1.22 1.54 1.40 2.15 3.56 3.32 0.64 4.14 3.49 3.66 0.96 1.12 0.52 2.62 0.47 4.03 3.68 1.63 5.56 2.06 0.91 5.71 6.22 5.04 1.18 0.13 0.54 2.12 1.88 6.72 6.11 4.39 2.67 4.49 5.23 3.83 4.14 5.05 4.76 5.74 5.46 2.93 6.17 1.17 0.35 2.22 2.83 3.29 0.94 3.78 1.71 3.49 1.42 2.66 1.69 2.21 0.51 4.07 2.82 1.77 2.17 2.11 2.54 2.02 2.13 2.81 2.67 3.25 3.10 1.01 2.89 2.93 2.51 0.29 5.22 0.41 0.83 3.78 3.56 3.00 0.44 0.74 0.74 0.54 1.93 1.14 0.96 0.46 4.33 1.24 0.79 2.00 1.68 1.36 0.38 1.27 0.61 1.02 0.87 1.29 0.90 2.34 4.92 3.40 2.80 2.28 0.56 1.79 2.29 4.72 3.21 2.65 2.15 0.00 1.02 3.02 4.47 4.70 2.41 2.16 1.16 1.45 1.48 3.64 1.74 3.84 1.48 1.02 0.00 1.86 3.48 3.11 1.32 2.42 1.06 2.23 1.82 2.98 2.00 2.21 0.40 3.02 1.86 0.00 5.17 0.23 0.80 3.07 3.09 2.56 0.94 0.91 1.09 0.36 1.42 4.47 3.48 5.17 0.00 6.12 3.45 4.57 3.31 5.92 4.20 5.05 4.33 3.72 3.28 4.70 3.11 0.23 6.12 0.00 1.28 4.57 4.51 4.04 1.57 1.20 1.85 0.32 2.50 2.41 1.32 0.80 3.45 1.28 0.00 4.30 3.38 3.88 0.61 0.51 0.52 0.85 0.51 2.16 2.42 3.07 4.57 4.57 4.30 0.00 1.02 0.33 3.46 5.05 3.66 3.66 3.10 1.16 1.06 3.09 3.31 4.51 3.38 1.02 0.00 1.18 2.84 5.26 3.53 3.21 2.26 1.45 2.23 2.56 5.92 4.04 3.88 0.33 1.18 0.00 2.61 4.42 2.89 3.60 2.89 1.48 1.82 0.94 4.20 1.57 0.61 3.46 2.84 2.61 0.00 0.80 0.19 1.30 1.27 3.64 2.98 0.91 5.05 1.20 0.51 5.05 5.26 4.42 0.80 0.00 0.42 1.26 1.51 1.74 2.00 1.09 4.33 1.85 0.52 3.66 3.53 2.89 0.19 0.42 0.00 1.63 1.05 3.84 2.21 0.36 3.72 0.32 0.85 3.66 3.21 3.60 1.30 1.26 1.63 0.00 1.79 1.48 0.40 1.42 3.28 2.50 0.51 3.10 2.26 2.89 1.27 1.51 1.05 1.79 0.00 1.70 2.09 1.71 4.69 2.82 0.96 3.50 3.83 2.81 0.74 0.75 0.23 2.55 0.98 5.30 4.65 1.90 4.81 1.70 3.54 3.43 3.51 3.55 2.77 3.78 3.68 1.24 4.83 1.14 0.36 1.15 4.09 2.07 1.43 1.99 0.78 1.59 1.37 2.86 1.91 1.48 0.98 3.90 4.30 3.48 1.71 4.29 3.01 2.94 3.74 3.66 2.54 2.93 2.39 2.88 3.45 0.84 0.67 1.11 3.93 2.28 0.75 2.12 1.92 1.63 0.72 1.29 0.54 1.84 0.31 2.61 3.31 3.16 6.53 4.45 5.15 0.38 1.42 0.26 3.65 5.74 4.21 3.98 4.30 0.72 0.26 2.00 3.84 3.19 1.79 2.23 0.59 1.83 1.65 3.57 2.21 2.32 1.05 4.70 4.98 3.97 1.67 4.61 3.81 3.15 3.79 4.09 3.22 3.92 3.36 3.02 4.43 3.11 3.34 1.87 2.48 2.46 2.15 2.09 2.85 2.39 1.50 2.02 1.59 1.57 2.75 1.32 1.06 0.79 3.88 1.69 0.36 2.77 2.57 2.22 0.38 0.64 0.19 1.36 0.41 2.04 1.12 2.90 3.95 4.07 3.57 1.47 0.23 1.71 3.44 5.67 4.26 2.90 2.51 1.86 0.88 2.73 3.40 3.98 3.21 1.14 0.21 1.51 3.27 5.16 3.86 2.75 2.03 1.30 1.43 1.48 4.17 2.62 0.73 3.04 3.08 2.45 0.66 0.85 0.25 2.23 0.57 3.00 2.14 0.99 3.82 1.21 0.16 5.26 4.16 4.68 0.53 0.48 0.59 0.86 1.20 2.64 2.17 0.31 3.87 0.58 0.71 2.93 2.91 2.54 0.44 0.71 0.65 0.37 1.60

289

Portugal SingaporSouth Af Korea, S Spain Sweden SwitzerlaTaiwan Thailand Turkey UK USA Uruguay VenezueWest Afr 0.91 2.66 0.92 2.91 0.47 3.52 1.46 3.62 1.72 0.23 2.77 2.47 0.67 0.50 0.35 0.64 4.13 0.75 2.89 0.12 3.34 0.71 3.77 2.12 0.21 2.27 1.94 0.32 1.09 1.20 3.97 3.66 0.75 3.95 1.91 1.70 0.67 4.03 3.05 2.57 0.14 0.02 3.15 4.16 2.98 2.94 5.21 0.95 4.75 1.59 3.77 0.39 5.24 3.91 2.00 1.59 1.63 2.30 2.89 3.04 1.24 5.44 1.04 3.90 0.36 3.76 1.08 4.95 3.16 0.68 2.26 1.73 0.77 2.08 2.15 2.32 2.23 2.66 0.32 1.98 3.26 3.01 0.47 0.34 1.83 3.10 2.55 2.11 2.38 1.39 3.17 2.99 0.41 3.61 1.37 1.19 0.47 3.77 2.49 1.92 0.20 0.11 2.48 3.45 2.19 0.15 3.77 1.93 2.45 0.43 3.47 2.29 3.47 1.55 0.21 4.15 3.70 0.20 1.09 0.77 8.29 2.66 7.20 2.12 7.66 6.80 7.91 1.16 2.41 7.14 6.54 6.19 8.01 6.49 4.66 0.79 3.32 1.69 2.69 0.87 5.01 1.96 3.45 1.84 0.41 4.00 3.73 0.69 0.12 0.59 0.57 4.51 2.47 2.79 0.94 3.28 2.54 3.80 1.97 0.86 4.54 4.20 0.68 2.09 1.56 1.09 3.59 0.33 3.25 0.18 2.82 0.45 3.99 2.23 0.33 1.55 1.28 0.65 1.25 1.11 4.66 4.07 1.66 6.31 2.83 0.60 1.88 6.51 4.31 3.54 1.60 1.80 4.11 5.87 3.60 0.98 4.15 0.60 3.29 0.19 3.50 0.69 4.15 2.43 0.31 1.97 1.60 0.55 1.17 1.30 1.26 2.61 1.87 2.94 1.31 5.11 2.40 3.55 1.83 0.69 4.26 4.07 1.18 0.09 0.36 0.11 4.16 2.10 2.43 0.50 4.43 2.38 3.51 1.73 0.18 4.50 4.02 0.15 0.71 0.85 1.80 3.78 0.73 3.90 0.72 1.06 0.83 4.56 2.55 1.19 1.47 1.33 1.41 3.13 1.89 1.03 4.68 0.92 3.60 0.22 3.03 1.13 4.60 2.67 0.49 2.19 1.69 0.63 1.97 1.68 2.58 3.21 0.60 2.58 1.15 2.14 0.44 2.80 1.99 1.55 0.60 0.42 1.95 2.65 2.00 0.34 5.77 2.13 2.95 0.49 5.43 2.05 4.19 2.63 0.39 4.31 3.71 0.21 1.07 1.80 0.64 4.96 3.80 3.07 1.57 6.61 4.45 4.29 2.40 0.90 6.90 6.24 0.87 0.91 1.30 6.58 1.22 4.92 1.70 5.71 4.30 5.60 0.84 1.44 5.35 4.38 4.21 6.26 5.09 3.07 2.03 4.82 0.77 4.06 0.96 4.77 0.51 4.73 3.35 1.09 1.94 1.75 1.44 1.41 2.11 3.84 0.87 2.08 1.57 2.73 2.60 2.75 1.25 0.86 2.59 2.06 1.83 3.41 2.80 1.31 1.59 1.68 1.58 3.12 1.38 3.64 2.34 3.56 1.59 0.86 3.67 3.59 1.50 0.65 0.14 1.01 2.38 0.49 2.90 0.35 2.14 0.86 3.49 1.57 0.32 1.93 1.78 0.74 1.08 0.46 3.90 3.41 0.29 5.37 1.90 2.16 0.24 5.49 3.78 2.35 0.44 0.67 3.12 3.33 2.54 1.70 5.30 1.14 3.90 0.84 2.61 0.72 4.70 3.11 1.32 2.04 1.86 1.30 3.00 2.64 2.09 4.65 0.36 4.30 0.67 3.31 0.26 4.98 3.34 1.06 1.12 0.88 1.43 2.14 2.17 1.71 1.90 1.15 3.48 1.11 3.16 2.00 3.97 1.87 0.79 2.90 2.73 1.48 0.99 0.31 4.69 4.81 4.09 1.71 3.93 6.53 3.84 1.67 2.48 3.88 3.95 3.40 4.17 3.82 3.87 2.82 1.70 2.07 4.29 2.28 4.45 3.19 4.61 2.46 1.69 4.07 3.98 2.62 1.21 0.58 0.96 3.54 1.43 3.01 0.75 5.15 1.79 3.81 2.15 0.36 3.57 3.21 0.73 0.16 0.71 3.50 3.43 1.99 2.94 2.12 0.38 2.23 3.15 2.09 2.77 1.47 1.14 3.04 5.26 2.93 3.83 3.51 0.78 3.74 1.92 1.42 0.59 3.79 2.85 2.57 0.23 0.21 3.08 4.16 2.91 2.81 3.55 1.59 3.66 1.63 0.26 1.83 4.09 2.39 2.22 1.71 1.51 2.45 4.68 2.54 0.74 2.77 1.37 2.54 0.72 3.65 1.65 3.22 1.50 0.38 3.44 3.27 0.66 0.53 0.44 0.75 3.78 2.86 2.93 1.29 5.74 3.57 3.92 2.02 0.64 5.67 5.16 0.85 0.48 0.71 0.23 3.68 1.91 2.39 0.54 4.21 2.21 3.36 1.59 0.19 4.26 3.86 0.25 0.59 0.65 2.55 1.24 1.48 2.88 1.84 3.98 2.32 3.02 1.57 1.36 2.90 2.75 2.23 0.86 0.37 0.98 4.83 0.98 3.45 0.31 4.30 1.05 4.43 2.75 0.41 2.51 2.03 0.57 1.20 1.60 0.00 5.07 2.41 2.60 0.45 4.38 2.61 3.86 2.03 0.28 4.76 4.14 0.06 1.31 1.37 5.07 0.00 2.90 2.94 4.09 2.95 3.89 2.33 1.48 3.64 3.33 3.47 4.78 3.24 1.33 2.41 2.90 0.00 4.16 0.88 2.21 0.15 4.52 2.73 1.14 0.68 0.68 1.78 1.97 1.43 2.60 2.94 4.16 0.00 2.85 4.11 4.44 0.19 0.36 2.56 4.82 4.19 2.61 3.11 2.02 0.45 4.09 0.88 2.85 0.00 2.87 1.01 3.82 1.99 0.12 2.43 2.00 0.19 1.34 1.12 4.38 2.95 2.21 4.11 2.87 0.00 2.61 4.13 2.66 3.47 1.76 1.71 3.95 5.88 3.09 2.61 3.89 0.15 4.44 1.01 2.61 0.00 4.86 3.25 1.41 0.68 0.68 1.92 2.40 2.12 3.86 2.33 4.52 0.19 3.82 4.13 4.86 0.00 0.49 3.51 4.72 4.22 3.79 3.79 2.39 2.03 1.48 2.73 0.36 1.99 2.66 3.25 0.49 0.00 1.69 3.57 3.15 1.99 2.18 0.85 0.28 3.64 1.14 2.56 0.12 3.47 1.41 3.51 1.69 0.00 3.06 2.64 0.13 0.73 0.69 4.76 3.33 0.68 4.82 2.43 1.76 0.68 4.72 3.57 3.06 0.00 0.08 3.86 4.40 3.12 4.14 3.47 0.68 4.19 2.00 1.71 0.68 4.22 3.15 2.64 0.08 0.00 3.30 4.14 2.92 0.06 4.78 1.78 2.61 0.19 3.95 1.92 3.79 1.99 0.13 3.86 3.30 0.00 1.18 1.25 1.31 3.24 1.97 3.11 1.34 5.88 2.40 3.79 2.18 0.73 4.40 4.14 1.18 0.00 0.66 1.37 1.33 1.43 2.02 1.12 3.09 2.12 2.39 0.85 0.69 3.12 2.92 1.25 0.66 0.00

290

Appendix T

Selected Case Studies

291

T.1 Strategic Alliance (SA19 and SA20)

The international bridgehead agreement

Fratelli Dioguardi Beacon construction Company January 1992

Purpose The intention of this Agreement is to enhance the competitiveness and the profitability of each firm in its own country and to expand business opportunities for both firms internationally.

Local presence: Each firm will display its name and / or logo in the home office or other major, permanent location of the other firm in a prominent position visible to all visitors. In addition, each firm will be entitled to identify, on their letterheads and on other stationery and literature, their presence in the location of the other firm. Both firms will make arrangements to appropriately receive and transmit all calls and messages received.

Marketing Both firms will endeavor to find and develop business opportunities which capitalize on the joint capabilities of the two firms. In addition, each firm will assist the other in developing contracts with local firms, developing projects in the home country of the other, irrespective of whether or not this leads to opportunity for a joint venture.

292 Both firms undertake to publicize their collaboration to the fullest extent practicable in furtherment of the marketing of their services both jointly and as independent enterprises.

Consulting Upon request by either firm, the other will provide technical, managerial, and other information and consulting services requested subject to the following conditions: The receiving firm shall provide the supplying firm with a statement indicating how the information or services will be used. What the information or services supplied have direct commercial value and are utilized for projects in which the supplying firm does not participate in some way, the receiving firm will recompense the supplying firm the full value of such information or services. In such situations, both firms will agree, in writing, about the scope of the work involved and the budget and the schedule for such work.

Systems transfer Each firm will share with other all management and technical systems which it has developed, without restriction. Should either firm wish t incorporate such systems into its ongoing operations, it shall be free to do so provide that; All costs incurred by the supplying firm in assisting in such transfers be reimbursed. IN such situations, both firms, will agree, in writing, about the scope fo the work involved and the budge t and schedule for such work. The receiving firm shall not enter into any agreements with third parties for the further transfer of such systems without the express written permission of the supplying firm.

Joint ventures Wherever advantageous, both firms will enter into a joint venture to capitalize on their combined capabilities. In such situation, the firms will, together, develop a joint venture plan at the earliest practical point in time. Such joint venture plan will outline the scope of the project and a budge and schedule for its accomplishment as well as all necessary legal, financial, business, insurance, and other conditions required to properly control the enterprise in the best interests of both parties.

293 Coordination Upon the signing of this agreement, and on each anniversary thereof, both firms will prepare an inventory of special skills, capabilities, and relationships which wiled to inform their joint activities and programs. The principals of both firms shall meet every six months to review such activities and programs and to agree on strategy for collaboration for the upcoming 12 moth period. Such meetings will be held alternately in the home offices of each firm.

Cost accounting Except as otherwise set out in this Agreement, each firm will absorb its own costs in fulfilling its obligations. Notwithstanding the above, each firm will keep accounting records of such costs, including personnel costs, and will provide the other firm with such records every six months.

In situations where specific budgets are developed – such ass for joint ventures, consulting, and system transfer – each firm will provide a full accounting of its costs each and every moth for the duration of the project and a final account at the end of the project.

Costs will be the actual raw costs in the country where they are incurred and shall not contain any adjustments or markups to cover overhead or administrative expenses.

Currency and language All budgets will be developed in duplicate in the currency of the countries of both firms, using the published exchange rates a the time of preparing the budget. Costs will be recorded by each firm in its own currency. Revenues will be recorded in the currency of both countries using the published exchange rates at the time of receipt of the revenues. Both firms agree that they will – on the basis of the records outlined above – make adjustments to the final accounts and otherwise make arrangements to fairly share

294 any currency risk arising from changes in exchange rates on the basis of their contribution to the undertaking.

The primary language of communication shall be English. To the extent that translations are required, both shall share equally in such costs, provided that both parties agree in writing thereto for each instance.

Confidentiality Each firm will respect confidentiality of all information received from the other and undertake not to divulge any information identified as proprietary to third parties without the express written permission of the supplying firm.

Term This Agreement shall remain in effect for an initial term of one year from the date of signing. At the conclusions of this term, the Agreement will be reviewed in light of the results achieved and the interests of both firms.

Should there be a mutual interests in continuing the Agreement, it will be modified to incorporate any necessary changes and shall remain in effect for a further period of three years. Either firm shall have the right to terminate the Agreement a t the end of this period by giving written notice the other no later than 12 months before ht expiration date. Should no notice be given, the Agreement shall be automatically continued for the next three-year period.

Limits There is no obligation for either firm to involve the other in any project or endeavor which it is , or might become, engaged, either locally or internationally. Further more, both firms recognize that they are divisions of larger enterprises and have limited authority with regard to the actions of their sister division.

295 Nothing in the Agreement shall preclude either firm from entering into a joint venture with any other construction firm provided that such firm will inform the other when such joint venture is created beyond its national borders.

T.2 BOT Project (PP01)

Bovis Lend Lease entered China with a Build Operate Transfer project in 1995. The US$73 million project with a capacity of 400,000 m3/day is located in Dachang, Shanghai. The Shanghai project incorporates water treatment, intake facilities, and a pumping station. Bovis formed a 50:50 joint venture with Thames Water Overseas Ltd. to obtain this project on a negotiation basis. The concession term includes 2 years for construction and 20 years for operation. The contractual arrangement of this project is depicted in Figure T.1.

Shanghai Municipal Government Municipal Shanghai

Figure T.1: The Contractual Arrangement of the Shanghai Dachang Water Plant Project

Among these participants, both Thames Water Overseas Ltd. and Thames Water International Services are subsidiaries of Thames Water; Bovis Asia Pacific is a subsidiary of Bovis Construction; and the People’s Bank of China is the central bank of China. In the Shanghai Project, the Shanghai Municipal Government promulgated the Circular on Dachang Water Plant Administration, speculating the supply and off-take responsibilities of related utility companies, and gave the concessionaire a Letter of

296 Support to confirm its commitment and facilitate debt financing. In the Shanghai Project, the project company entered into a Best Endeavors Cooperative Agreement with the People’s Bank of China, the central bank. This provides the project company with access to the Shanghai Foreign Exchange Swap Centre and the China Foreign Exchange Trade System, reducing the consortiums’ foreign exchange and transfer risks.

A fixed rate of return tariff was used in the Shanghai project. The Shanghai government authority pays the Bovis-Thames company interest on the bank loan, repayment costs of the bank loan capital, repayment of the investors' equity and a return on equity at an undisclosed rate. In many early foreign privately financed infrastructure projects, including the Shanghai Project, disputes were raised to the Arbitration Institute of the Stockholm Chamber of Commerce as an intermediary. But this takes too long and is costly for many investors, and the decisions are not binding (Project & Trade Finance, 1994).

T.3 Joint Venture Project (PA08 and PA09)

The following case came from ENR: The joint venture between Blount and Bouygues came about without prior work experience together, although both companies were operating in the Mid-east.

“We were following the job,” says John A. Caddell, chairman and CEO of Blount’s international division, “and I guess the Bouygues people were too. About March or April of 1977, they called us and asked if we would be interested in joining them. We sent a person over and we worked out the job.” Caddell, the point man for the Blount side of the joint venture negotiations, is already looking for a start within 60 days. “The major hurdle,” he says, “is to get it organized, started and built. You take any schedule of 40 months and take $1.7 billion and spread it over that and you start talking about peaking at $75 million or more per month.”

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The organization is partly determined by the fact that it is a joint venture and partly by the fact that it has senior and junior partners. Bouygues’ 55% participation means, according to agreement, that it will select senior project and site managers from its personnel and “the hierarchy adopted will be in accordance with Bouygues’ principles.” Caddell agrees that the French partner will have seniority. “They are the sponsor,” he says. He point out that 45% partner Blount will “furnish their share of the supervisory people. together, we’ll have about 400 to 500 supervisors.” Heading the team will be a project manager, a Bouygues man,. The number Two man in charge will be a Blount man.

The joint venture will have a separate management board that will meet periodically – once a month for the first year or more often if necessary. The board, however, will have equal representation, two form each company. “We have joint ventured a lot in the past,” says Caddell, “but this is our first experience with a foreign firm. Because of the language we have to be little more careful. Everything else is pretty much the same.” In fact, language may be less of a problem. English will be used on the job by management. Correspondence with the owner will be in both English and Arabic.

T.4 Representative Office (RO02)

Bechtel entered China in 1979 when the country just opened its door. The establishment of residence led to immediate projects including a project development consulting for Daqing Petroleum in Heilongjiang. The following news from ENR (March 26, 1981) indicated some information about how a representative office:

Inflation and the unprecedented budget deficit that led the People’s Republic of China to postpone or cancel construction jobs have, in turn, led American Companies to

298 reduce their presence there. But the designers, contractors and equipment makers are far from ready to give up on that Far East market.

Typical of some of the moves being made by American firms, Bechtel Group, Inc., San Francisco, has opted not to renew the lease on the large house it has occupied in Beijing. It is taking less costly space. The company which had four employees in China, is reducing that number to one and is giving him additional assignments outside the PRC.

Other firms, including Caterpillar Tractor Co., Peoria, Ill., and M.W. Kellogg co., Houston, are making similar moves. A Kellogg spokesman notes that the firm’s work on 20 process plants is winding down. He agreed with a Bechtel official’s comment: “At east in the near term, there are very clear indications that the Chinese don’t intend to proceed with heavy construction. We are optimistic that the time will come when the PRC proceeds with some major infrastructure projects. That’s reason we are maintaining a presence.”

T.5 Licensing (LS02)

In 1973, a Hong Kong businessman, Mr. C. P. Yu obtained the regional operation right from the Japanese construction giant, Kumagi Gumi, and established Kumagai Gumi (Hong Kong) Limited. The new company soon became one of the most prestigious contractors in Hong Kong and was well known for adopting internationally advanced technology. It has solid track records in various civil and buildings work undertaken in both Hong Kong and Mainland China, including roads and highways, land reclamation, ports, water works, bridges, submerged tube tunnel, site formation, container terminals, power plants, apartment, government buildings and interior decoration. Hong Kong Construction has successfully completed various prominent projects such as Hong Kong's new International Airport Terminal at Chek Lap Kok, Lantau Fixed Crossing (Kap Shui Mun - Ma Wan Viaduct), Castle Peak A and B power stations at Tap Shek Kok,

299 Suspension Bridge across Mingiang River in Fuzhou and Shanghai's New International Expo Centre.

After the retirement of Mr. Yu in 1996, many aspects of the company changed. The new management decided to focus the business on building sector in Hong Kong and Mainland China and got rid of many other diversified businesses like power plant development. In addition, the management believed that it was time to eliminate the use of the title “Kumagi Gumi” and stop paying for the title royalty. Then the licensing agreement was terminated. The change of the licensing relationship also stopped an informal agreement between the prior firm and Japanese Kumagi Gumi. According to this agreement for market split, the Japanese licensor was responsible for pursuing large urban projects like tunnels and the Hong Kong licensee pursued urban projects like building and renovation. With denunciation of this agreement, the two companies became independent and this implied that they could now compete again each other.

T.6 Local Agent (LA01)

AGENCY AGREEMENT

This agreement is made on this _____ day of February 2003, in the spirit of mutual benefits and co-operation between:

BGP INCORPORATION Inc., China National Petroleum Corporation (“BGP” for short), a corporation incorporated company registered and existing under the laws of PR China, having its head office at No. 65 Fanyang Road, Zhuozhou, Hebei Province, PR China (hereinafter called the Principal),

And

300 PT.SARIPARI GEOSAINS, a company incorporated in accordance with the laws of the Republic of Indonesia, having its head office at Wisma BSG 9th Floor Jl Abdul Muis Jakarta, Indonesia (hereinafter called the Agent).

Whereas, PT. Saripari Geosains / BGP has been (is) the winner of the seismic survey project, CALTEX Duri 4D, owned by Indonesia PT CALTEX Pacific Indonesia (The client). Now therefore, for and in consideration of the terms and conditions herein set forth, the parties hereto agree as follows:

Article 1 SUBJECT OF AGREEMENT

1.1 The Agent agrees that the Principal shall be the only valid operator to perform the aforementioned project. The Principal shall execute any related business to perform the project by（in）the name of the Agent and try its best to maintain the Agent’s good reputation.

1.2 The Agent undertakes to act as full-time agent of the Principal for the aforementioned seismic data acquisition project including the consultant of the Principal’s Finance and any assistance if required.

1.3 The Agent shall be compensated for services, information and assistance provided to the Principal by way of a commission fee payable at the rate agreed upon in Article 5. ‘Commission and Payment’ and other relevant provisions.

1.4 This Agreement shall only be applied to the aforementioned seismic project (Duri 4D) which shall be sent in the name of the Agent, the Principal or both parties. If necessary, the Agent will be authorized to enter into a contractual agreement with the oil company on the Principal’s behalf subject to another written consent by the Principal.

Article 2 SPECIAL PROVISIONS

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2.1 This Agreement shall commence at the date and year hereinabove written.

2.2 The Agent shall perform its duties and obligations on the basis of this agreement.

2.3 Nothing in this Agreement shall be deemed to create a partnership or joint venture between the parties hereto.

2.4 This Agreement shall remain valid commencing on the date of signature of this Agreement and shall be only renewed with both parties’ prior written consent. However, any meetings, acts or communications etc. shall not be deemed as a factual agency relationship between two parties after expiration of this agreement.

2.5 This Agreement constitutes the entire agreement between the parties and shall supercede all documents, minutes of meetings, letters or notes which may be in existence at the date hereof, and all statements, representations and warranties which may have been made by or on behalf of either party. This Agreement shall be capable of amendment only by a statement in writing signed by a duly authorized representative of both parties.

Article 3 THE AGENT AGREES THAT

3.1 The Agent shall make every effort to supply the Principal with information and assistance to perform the aforementioned project.

3.2 The Agent shall ensure that proper formalities are carried out in compliance with the local laws and as requested by the Principal.

302 3.3 The Agent shall appoint Mr. Wang Liangku (the holder of passport No. ? issued by ? on ? date) or any authorized representative of the Principal as General Manager of PT. SARIPARI GEOSAINS, and appoint Mr. Liang Zhaoyang (the holder of passport No. ? issued by ? on ? date) or any authorized representative of the Principal as Chief Financial Controller to handle the Finance affairs of the company PT. SARIPARI GEOSAINS. The salary of those person people will be borne by the Principal.

3.4 The Agent shall appoint one qualified finance officer to assist Chief Financial Controller to handle the Finance affairs. The aforementioned qualified financial officer is an employee of the agent, his salary and other cost or expenses incurred will be borne by the Agent.

3.5 The Agent shall, at the request of the Principal, arrange the issue of to obtain all licenses and other Government permits and clearances required to enable the Principal to execute the project in the Territory. The costs incurred for obtaining such licenses and permits will be borne by the Principal.

3.6 The Agent shall arrange, at the request of the Principal, for appropriate visas, residence permits and other clearance necessary to enable the Principal’s staff and their families to enter the Territory for the execution of project. The costs incurred by Agent in this regard shall be borne by the Principal.

3.7 The Agent will make available office space and facilities in the Agent’s office and one vehicle, for the usage by the Principal’s personnel with free charge.

3.8 The Agent shall not, nor shall any business, firm, or affiliated company of the Agent represent or provide a competitive line of services in addition to the Principal’s line of services in this agreement, nor enter into any agreement with any person, firm or company carrying on any activity similar, or likely to compete with the principal in order that the Principal’s commercial, financial and other interests can be protected.

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3.9 The Agent shall not delegate any part of its authority to any third party without prior written consent of the Principal in the normal way of business.

3.10 The Agent shall not and shall ensure that its partners, employees and agents do not, whether during the continuance of this Agreement or at any time thereafter, disclose, divulge, make public or make use of, for whatever reason or purpose, any confidential information or knowledge regarding the business or affairs of the Principal in the event it is not in the interest of the Principal.

3.11 The Agent shall guarantee that he shall not claim any ownership of the Principal’s property and assist the Principal to import and export his properties in and out of Indonesia, either such properties are imported or exported by the name of the Principal, the Agent or the oil company.

Article 4 THE PRINCIPAL AGREES THAT

4.1 The Principal shall perform its liabilities with good faith and loyalty.

4.2 The Principal shall protect the Agent’s commercial, financial and other interests.

4.3 The Principal shall indemnify the Agent for acts lawfully performed and liabilities incurred in the execution of its authority under this Agreement.

4.4 The Principal shall not disclose any confidential information or documents regarding the Agent’s business.

304 4.5 The Principal shall provide the Agent with all reasonable assistance to fulfill this Agreement and inform the Agent timely on the projections to expand the Principal’s geophysical services.

4.6 The Principal shall pay the Agent commission as agreed upon in 5. COMMISSIONS AND PAYMENT.

Article 5 COMMISSION AND PAYMENT

5.1 The commission shall be （）percent ( %) of the net contract amount of the aforementioned project. The net contract amount means the total amount approved by the client or customer for all invoices submitted and approved for the project including mobilization and demobilization fees, and irrespective of any tax on income levied on the Principal by authoritative bodies within the territory.

5.2 Commission shall be paid to the Agent within 30 (thirty) days following the entry to the Principal’s account in the same order of payments as received by the Principal under the contract concluded.

Article 6 MODIFICATION AND ALTERATION

6.1 No modification, change, alteration or variation whatsoever to this Agreement shall be binding on the Parties hereto unless and until the same shall have been in writing and duly signed by the Parties.

Article 7 TERMINATION OF AGREEMENT

7.1 This Agreement can be terminated in any of the following cases:

305 a) Upon all the procedures are fully finalized after fulfillments to the Contacts resulted from the successes of the aforesaid project, including but not limited to demobilization of personnel, re-exports of the equipments etc. b) At any time thereafter by prior written consent in accordance with Clause 2.4. c) Upon insolvency or bankruptcy of any of the parties hereto. d) If either party hereto shall commit any breach of its obligations hereunder and fail to remedy such breach within thirty (30) days of receipt of the other party’s notice specifying such breach.

7.3 Upon termination of this Agreement, the Agent shall be compensated as per the stipulation contained herein or other agreement related thereof. The Principal shall never be held responsible for the Agent there from after the Principal has dissolved all the compensation due to the Agent in line with this Agency agreement.

Article 8. FORCE MAJEURE

8.1 Neither the Principal nor the Agent shall be liable for failure to perform part of this agreement other than the payment of money when the failure is due to flood, strikes, or other labour disputes, accidents, war riots, insurrection, acts of Government, Governmental regulations or other circumstances beyond the reasonable control of either party.

Article 9. DISPUTES SETTLEMENT

9.1 Any dispute or difference arising out of or in connection with this Agreement shall be first settled through reconciliation.

9.2 In case of failure to settle the dispute through reconciliation All disputes arising in connection with the Agreement shall be finally settled by Hongkong

306 International Arbitration Center (HKIAC) under the all its applicable rules and procedures by three arbitrators appointed in accordance with the said rules. The seat of arbitration shall be in Hongkong.The arbitration award shall be final and binding on the parties hereto and subject to no appeals, and shall deal with the questions of costs of arbitration and all matters related hereto.

9.3 This Agreement shall be governed by and construed in accordance with the laws for the time being in force in the Republic of Indonesia.

Article 10. NOTICES

All notices given pursuant hereto shall be deemed to have been properly given if sent by registered mail (airmail if the recipient is in another country), fax, or hand delivery to the address given below for the recipient and shall be deemed to have been duly given: a) in the case of letters sent by mail, on the sixth working day in the country of recipient after the date of despatch. b) in the case of fax, on the first working day in the country of recipient after the date of despatch. c) in the case of hand delivery during normal business hours, at the time and date certified by the person making the hand delivery.

Principal Agent BGP PT.SARIPARI GEOSAINS P.O. Box 11, Zhuozhou City Wisma BSG 9th Floor Hebei Province Jl Abdul Muis Jakarta 072750 P.R. China Republic of Indonesia

Tel: +86-10-81201849 Tel : +62-21-3505370

307 81201850 Fax: + 62-21-3505371 Fax: +86-10-69211392

IN WITNESS THEREOF, the parties hereto have duly executed this Agreement the day and the year hereinabove written.

Principal Agent

Signed by: ______Signed by ______

Title: ______Title: ______

Date: ______Date: ______

T.7 Joint Venture Company (JV13)

Zhenghua (Singapore) Pte Ltd., the second largest overseas subsidiary of China Harbor, was established in the Republic of Singapore in 1986. It provided marine construction services ranging from harbor building to sea piling. It was not until 1992 the first local project was granted to the company. In 1995 a project over 100 million Singapore dollars was granted by the Singapore Navy to construct a military base project. This signaled the emergence of Zhenghua in the competitive construction market of Singapore. The growth, however, was decelerated because of the global economic recession. Zhenghua managed to survive with diversification into other sectors like labor, shipping agency.

In furtherment of its localized operation, Zhenghua chose to establish joint venture with local companies. On January 1, 2002, Zhenghua formed a joint venture

308 company with Sembcorp Marine by contributing 81% equity. Sembcorp Marine is a prestigious local public company with strong governmental background. The cooperation between the two companies can be traced back to 1992 when Zhenghua implemented its first project in Singapore. The previous long term cooperation (owner – contractor) between the two companies formed the basis for the joint venture. Two chair positions were set with each side occupying one. The parent company SembCorp Marine would give preference to the joint venture in its contract procurement with proper rate of return. Management of SembCorp would also help in bidding for other projects in Singapore when necessary with their strong influences in local market. SembCorp planed to invest more than 2 billion Singapore dollars in building a new shipyard and the joint venture has started in preparation and planning. Because of the grant of this huge project, equity ration of SembCorp in the joint venture will increase from the current 19% to 35%. An immediate effect of the joint venture was that because of the interference of SembCorp Martine, one client who had owned payment to Zhenghua for a long time made its payment.

T.8 Sole Venture Company (SV08)

At the end of 1985, China State Construction Engineering Company (CSCEC) established a wholly owned subsidiary China Construction America in Delaware, the United States. From 1987 to 1989, China Construction America took part in a series of residential building development projects. However with the economic recession and other reasons, some of these property projects were not successful and the new company came into debt.

From 1996, the company changed its business model and focused on construction projects from Chinese investors and government. The first construction project was the renovation of the Military Officer Department building of Chinese Embassy. When the company heard that a Chinese manufacturer, Haier, would establish a factory in the US,

309 they provided free consulting services ranging from location choice, land ownership analysis, environmental policy analysis and local labor and material prices. They successfully got confidence from Haier and obtained the construction project and subsequently with an 11 month fast track delivery (from April 1999 to March 2000) of the 280,000 square feet facility with excellent performance, they demonstrated their professionalism in technology and management. This project was appraised by ENR as an excellent example of fast track project. In April 2001 China Construction America got the project to build the office building for Chinese Embassy in Vancouver. In August, the Chinese New York Consulate Apartments was finished on the 43rd Revenue in Manhattan, New York, and this projects was listed by New York Times as one of the five most beautiful buildings in Manhattan.

From 2001, the company started bidding for local public projects. For lack of knowledge of local markets and the conservation, bidding prices given were normally higher than successful bids. For example in the first bid, the price was 20% higher than the successful bid. However with accumulation of experience and knowledge, the bidding becomes more and more reasonable and approaching the successful bids. In the 10th project the company bided for, a primary school in South Carolina, the project was granted to China Construction America on September 23 2002. This was the first public project the company got in the United States. In November 2003, the company built the railway station on the 8th Revenue in New York. This project received the “Excellent Construction Project Prize” granted by “Big New York Building” journal in 2004.

In February 2005, the 240 million US dollars Hallam Garden Hotel project was granted to the company after severely competitive bidding with involvement of 6 international contractors. China Construction America got the bid with the second highest bid. Experience and prestige and the international procurement networks of the firms were believed to be the critical success factors for the bid winning.

310 T.9 Branch Office (BO04)

Shimizu established a representative office in Taiwan in 1986. In 1993 the representative was changed into a branch office with capital of NT$5,000,000. In 2000, the branch was expanded with capital of NT300,000,000. The employees of the branch are summarized as follows:

Japanese Staff 42 Construction dept. 11 Civil dept. 29 Energy Engineering dept. 2 Local Staff 47 Total 89

VITA

Chuan Chen is from Sichuan Province, People’s Republic of China. He received his bachelor’s degree in civil engineering from the Tsinghua University, Beijing, China with a major in construction engineering and management in 1999. From 1998 through 1999 he worked as an intern with UK-based Kvaerner Cleveland Bridge Ltd on the Jiangyin Yangtze River Highway Suspension Bridge Project, the fourth longest bridge in the world, with duties in contract administration.

Upon graduation from Tsinghua, Chuan went to the National University of Singapore for his Master of Engineering degree in Infrastructure Systems and Management. As a research scholar, he conducted research on infrastructure development with the Build-Operate-Transfer (BOT) method in China. He innovatively applied Interface Management concepts and theories to handle the complexity characteristic of BOT projects. Several papers were developed based on his thesis titled “Challenges and opportunities for BOT application in China”.

In 2002, Chuan received a research assistantship and Dean’s Fellowship from the Pennsylvania State University and started his Ph.D. pursuit in the Construction Management Option of the Architectural Engineering Department. In the summer of 2002, Chuan went back to Beijing to work as an intern with the Ministry of Construction of China. He took part in a minister initiated research project on comparative policy analysis. At Penn State, Chuan focused his research on market entry mode definition and selection for international construction. He worked as a teaching assistant for two graduate level courses, and also as an investigator in a Construction Industry Institute (CII) funded project (RT211), “Effective use of the global engineering work force”.