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COMPARATIVE OVERSEAS STRATEGIES: PERSPECTIVES OF THE JAPANESE ENGINEERING AND CONSTRUCTION INDUSTRY by TAKASHI WASHIMI Bachelor of Engineering Tohoku University, Japan, 1985 Submitted to the Department of Civil and Environmental Engineering in Partial Fulfillment of the Requirement for the Degree of MASTER OF SCIENCE IN CIVIL AND ENVIRONMENTAL ENGINEERING at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY May 1994 © 1994 Takashi Washimi All rights reserved The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author , Departmentf Civil and Environmental Engineering Certified by Fred Moavenzadeh Department of Civil and Environmental Engineering Thesis Supervisor Accepted by .._~.,,~-f C·l~ ~ ~ ~ tuVOWHJI IVI. U Ila I I Chairm;l. DeartmentaCommtte on Graduate Studies Eng. I I Lt9B i/i I ...... Ll~f'94)~c tk COMPARATIVE OVERSEAS STRATEGIES: PERSPECTIVES OF THE JAPANESE ENGINEERING AND CONSTRUCTION INDUSTRY by Takashi Washimi Submitted to the Department of Civil and Environmental Engineering on May 6, 1994 in partial fulfillment of the requirements for the Degree of Master of Science in Civil and Environmental Engineering Abstract Even though globalization is a core strategy of most major Japanese engineering and construction (E&C) firms, they have made a weak appearance in the international construction market. Few firms have seriously attempted to globalize, largely due to their lack of a strong incentive to advance in the international market. Today, however, circumstances are changing. Japan has become the largest construction market in the world and has received considerable attention from foreign countries. Foreign governments, especially the United 3tates, have begun to press the Japanese government to open its construction market to foreign firms. As a result, the Japanese construction market has become exposed for the first time to internal internationalization. The purpose of this study is to assess overseas strategies which have been taken by Japanese E&C firms. However, the Japanese unique contractual system and public construction policy make the assessment difficult. The study found that while competition determines the strategies of international E&C firms, Japanese firms are determined by designation in the area of public works. It is competition that determines the strategies of international E&C firms. The nature of this competition is controlled by the contractual system of a market, while the contractual system is influenced by the construction policy of a country. Therefore, in order to study Japanese E&C firms' overseas strategies, this thesis will also examine the Japanese domestic contractual system, its construction policy and the resulting strategies of Japanese firms. Thesis Supervisor: Fred Moavenzadeh Title: Director, Henry L. Pierce Laboratory George Macomber Professor of Construction Management Acknowledgements I remember the dinner many years ago when, my father said that he learned much more at MIT, where he studied chemical engineering in the 1950s, than at the University of Tokyo, where he was later granted his Ph.D. degree, I decided then to come to study at MIT someday. At that time, however, I had no concrete plan for studying abroad as I had to finish my Japanese college education first. As I expected, two years at MIT was epoch-making in my life, having spent them with many inspiring people: Fred Moavenzadeh, my thesis supervisor, was generous with his criticism and helpful suggestions, Rick Nelson and Matt Steele, my best friends, shared with me their American life, Bill Hunter and Curtis Johnson, my father's friends, took care of our life in Cambridge, Nita Regnier, my editor, taught me how to write correct English, and to many other friends I have to bow. This study has also greatly benefitted from the comments of people who love construction: Charlie Helliwell, Takeshi Monden, Katsuhiko Watanabe, Yasuteru Matsumoto, Noboru Deura, Hitoshi Nakayama, Shigeru Yasu, Takeshi Yamada, Atsushi Takeuchi, and Masatoshi Kano. Not only financial support but also generous encouragement from Kajima Corporation has helped me complete my study at MIT, I am particularly grateful to my bosses, Takashi Yamashiro, Yoichi Nojiri, Yasushi Uebori, Kuniaki Monma, Hideki Muraki, Takashi Takano, and Yoshiyuki Shibata, who allowed me a leave of absence from important duties for two years. I should also express appreciation for Shigeru Kuranishi and Tetsuro Osa, both professors of Tohoku University, who have inspired me to continuous study. Finally, my greatest debts are to my family. My parents, Koichi and Yoko, have always encouraged me and given appropriate and timely advice. Although my wife, Hiromi and our son, Sho have exhibited extraordinary patience through the countless late nights and weekends I have spent finishing this study, they were always cheerful and supportive. May 1994, Cambridge, Massachusetts 3 Table of Contents Page Title 1 Abstract 2 Acknowledgement 3 Table of Contents 4 List of Tables 8 List of Figures 11 List of Formulae 12 Chapter 1 Introduction 13 Chapter 2 Overview 18 2.1 The International Construction Market 18 2.1.1 The U.S. Market 30 2.1.2 The European Market 32 2.1.3 The Asian Market 34 2.1.4 The Middle Eastern Market 37 2.1.5 The African Market 38 2.1.6 The Japanese Market 38 2..2 Contractors 41 2.2.1 International Contractors 41 4 2.2.2 Learning Practices 49 2.3 The Japanese Engineering and 54 Construction Industry 2.3.1 Japanese E&C Firms in the International 54 Market 2.3.2 The Domestic Market as an International 61 Market 2.3.3 Japanese Construction Market Entry 63 Barriers 2.3.4 Foreign Contractors' Performance in the 73 Japanese Market Chapter 3 Globalization 78 3.1 The Concept of Global Strategy 78 3.1.1 Strategic Choices 79 3 1.2 The Process 81 3.2 International Trade 83 3.2.1 Emerging Trade Theory 83 3.2.2 International Trade and Multinational 83 Enterprises 3.3 Theoretical Framework 85 3.3.1 Value Chain 87 3.3.2 Competition 88 3.4 Theoretical Application of Globalization for 90 E&C Firms 3.4.1 Geographic Globalization 90 5 3.4.2 Internal Globalization 93 3.4.3 External Globalization 94 3.4.4 Other Factors for Globalization 95 3.4.5 Lessons Learnt from Sugimoto's 95 Empirical Study 3.5 Summary of the Chapter 97 Chapter 4 Case Studies 99 4.1 Introduction 99 4.2 General Contractors: Kajima Corporation 100 4.2.1 Historical Background 104 4.2.2 Operational Peculiarity 114 4.2.3 Contractual Practices 126 4.2.4 Empirical Studies of Contractual 151 Practices: Case Studies 4.2.5 Domestic Strategies 161 4.2.6 Overseas Strategies 184 4.2.7 BOT 205 4.2.8 U.S. Operations 223 4.2.9 The Iron Triangle: A case Study of the 239 U.S. Defence Industry 4.2.10 Summary of the Case Study 267 4.3 Engineering Contractors 271 4.3.1 Description 275 4.3.2 Overseas Strategies 292 6 4.3.3 U.S. Engineering Contractors 310 4.3.4 Summary of the Case Study 314 Chapter 5 Summary and Conclusion 316 5.1 Summary 316 5.2 Conclusion 318 Bibliography 320 7 List of Tables Page 1. World Construction Market 19 2. Headlines about "The Top International Contractors" in 26 ENR 3. Percentage of International Operations 28 4. Japanese Foreign Direct Investment 32 5. Growth Rate of European Construction Markets 33 6. Major Ongoing Projects in Asia 35 7. Macroeconomic Indicators in Africa 39 8. The Comparison of Social Capitals 40 9. U.S. Firms' Contract Amounts in the Japanese Market 41 10. Top International General Contractors 43 11. Top International Engineering Contractors 45 12. Top 100 International Contractors: Comparison of Scale 46 13. Largest U.S. International Contractors 49 14. Major Organizational Emulation Cases in Meiji Japan 53 15. Overseas Clients of Japanese Contractors 56 16. Divisions where Contracts were Awarded 59 17. Sharing of Projects by Responsible Branches 60 18. Criteria for Japanese Construction Business Licenses 66 19. Entry Barriers in Selected Countries 67 8 20. Construction Export-import Ratio 69 21. Cooperation between U.S. and Japanese Firms 73 22. Foreign Firms Granted Construction Business Licenses 74 in Japan 23. Performance of Foreign Contractors in the Japanese 76 Market 24. Basic Data of the Big Five 103 25. Kajima's Share in Selected Construction Fields 105 26. Contracts Awarded to Japanese Big Five in the 1960's 110 27. Number of Civil Engineers 111 28. Contracts of Heavy Civil Construction 112 29. Contracts of Building Construction 112 30. Income Structure of the Big Five 117 31. R&D Expenditure of the Big Five 118 32. Income Structure of Selected U.S. E&C Firms 119 33. Cost Structure by Types of Construction 125 34. Contract Procedures in Public Works 130 35. Bid Systems Adopted by Countries 134 36. Degree of General Contractors' Participation to 142 Construction Processes 37. Number of Qualified Contractors by Construction Type 164 in the Tokyo Metropolitan Government 38. KEC: Bid Results by State 235 39. KEC: Bid Results by Amount 236 9 40. KEC: Bid Results by Types of Work 237 41. The Genecons Official Political Contribution to the 243 Liberal Democratic Party 42. Government Sales as Percentage of Total Sales 249 43. Share of World Arms Export 250 44. Factors of Success and Failure in the International Plant 273 Construction Market 45. Engineering Related Contracts in Selected Firms 290 46. Basic Data of the Three Engineering Contractors 292 10 List of Figures Paae 1. International Contract Value Awarded to the ENR's Top 24 250 International Contractors 2. Share in the International E&C Market by Country 25 3. Market Segmentation in the International Market 27 4.

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