Entry into International Construction Markets - Literature review Example

Entry into International Construction Markets Grade (April 27, Entry into International Construction Markets Introduction This research seeks to establish what some of the entry strategies into the international construction markets are. The entry into international construction markets can be a major challenge for most construction companies, owing to the differences in the construction standards and requirements within different international construction markets (Brown, Dev & Zhou, 2003). The selection of inappropriate entry strategy into an international construction market can lead to numerous negative consequences for a construction company (Brouthers, 2002). The selection of an entry mode is therefore the most important decision for any international construction company, owing to the fact that it is the appropriateness of the entry mode that determines the future chances of success for a company (Chen, 2005). The focus for this research was to identify the existing different modes of entry into the international construction markets for companies, and thus enhance the selection decision-making for construction companies. To realize this objective, interviews were held with the management and strategists of major international construction companies. Out of the interviews, three major entry modes into the international construction market were identified. These major entry modes that are applied by construction companies to gain entry into the international construction markets include strategic alliances, joint venture on projects and representative office/department. Therefore, this report seeks to discuss each of these entry strategies into the international construction markets for construction companies, with a view to elaborating on the merits and limitations that are associated with each of the strategies. This way, the report will become useful for construction companies to be able to ponder, evaluate and make a decision on which would be the most appropriate mode of entry into the international construction markets. Literature Review The entry of a construction company into an international construction markets is comparatively challenging to the entry of other companies such as the retail, import and export or trade companies. This is most especially due to the fact that obtaining the licensing for undertaking construction projects in a foreign jurisdiction may not be easier, since the company requires understanding the geography of the international market appropriately (Brown, Dev & Zhou, 2003). In addition, the construction company seeking licensing to enter a foreign construction market also requires being highly understanding of the different costing, tendering and procurement procedures of the international markets where the company seeks to serve (Brouthers, 2002). The construction company seeking entry into an international construction markets also requires being cognizant of the cultural diversity and cultural influence towards the work ethics of the market in which it serves, as a way of being able to incorporate these cultures into its working process. Simply put therefore, any construction company seeking entry into an international construction market must demonstration strong ethnocentric or polycentric orientations towards the different host countries (Girmscheid & Brockmann, 2008). The cultural orientation requirement, coupled with the licensing requirement therefore influence the process that a construction company seeking entry into the international market is required to undergo. Further, these requirements also determine the nature of organizational structure that such a company is required to adapt for its affiliates, departments or subsidiaries running in the foreign markets. This is because, for a company to be able to adapt and demonstrate ethnocentricity or the polycentric cultural behavior that is demanded of the construction companies working in a foreign market, the company must first be decentralized. Secondly, the company is also required to adapt an organizational structure that has many top managers of the affiliates, subsidiaries or joint ventures hired from among the locals in the foreign market, so they can be able to easily integrate the desirable cultural orientations into the management and operations of the affiliates (Brouthers, 2002). The challenges and difficulties faced by construction companies in their attempt to gain entry into foreign markets is further compounded by the fact that such companies must now establish the channels of coordinating international activities (Miller & Lessard, 2000). This therefore requires that a construction company seeking entry into an international construction markets opens an overseas department in each of the foreign markets where it targets to operate, or to acquirer or partner with another local company that is based in the foreign market, to be able to effectively operate in the foreign market. Most importantly however, while the other international companies that operate in different sectors can be able to operate in foreign markets without the need to open a department, affiliate, subsidiary or even an office, the case is different for a construction company. This is because, it is required that a construction company must have its local base in the region, country or jurisdiction in which it is undertaking the construction projects, for the purposes of storage and maintenance of machinery and equipments (Brown, Dev & Zhou, 2003). What this means therefore, is that a construction company seeking entry into international construction markets must be prepared to establish a physical presence in the foreign markets. This requirement does not only increase the costs and expenses associated with the entry of construction companies into international construction markets, but also the logistical requirements. Therefore, the ability for construction companies to work in foreign environments and build networks in a score of different cultures becomes the main competence for an international or multinational construction company (Girmscheid & Brockmann, 2008). Through the capacity to establish and adapt an ethnocentric or a polycentric cultural competency and behavior, a construction company seeking entry into international construction markets is not only prepared for business in the international market, but also at ease in the foreign jurisdictions. It is also most important for a construction company seeking to gain entry into international construction markets to ensure that it does not only adapt the polycentric cultural behavior, but that it also mirrors a global outlook (Brown, Dev & Zhou, 2003). This is essential because construction companies working in the international construction markets do not have to adhere to any culture, since such companies operate on the basis of prevailing projects. This simply means that international construction companies are not permanent to any jurisdiction, and they may keep transferring their operation from one foreign market to the other, based on the availability of the construction projects. The lack of a polycentric behavior and global outlook for a construction company seeking entry into international construction markets means that the company will need to change the management, organizational structure and the workforce at every stage of shifting to a different foreign jurisdiction (Chen, 2005). Thus, to avoid these changes, it is only necessary that companies seeking entry into international construction markets manifest and adapt a global outlook from the very onset. It is the ethnocentricity, polycentric and global outlook requirement for any construction company seeking entry into the international construction markets, which raises the need for such companies to strategies well on the mode of entry appropriate for entering into the international markets. (Brouthers, 2002) Based on different competencies, costs, and financial capacity for a construction company seeking to enter into international construction markets, the company can choose to go on its own, or it can seek partnerships. Establishing presence in an international market can be very costly for a construction company (Brown, Dev & Zhou, 2003). Thus, seeking partnerships with the local companies with origins in the foreign market can be an appropriate move for small companies that do not have the financial capacity to establish their presence in the foreign markets. Nevertheless, it is only based on the nature of the construction company, its preference and financial capability, that a company can determine the suitable mode of entry into the international market. Discussion Market entry mode refers to the institutional arrangement that allows an organization enter its products, technology, human resources and other managerial aspects into a given market (Chen, 2005). The entry strategy for a construction company does not only entail a legal framework formulation but also a functional structure development, which will enhance the chances of a company gaining entry and surviving in a foreign market. The general setting, legal and functional framework formulation process, as well as the cost implications, can cause a construction company opt for one or more of the following modes of entry into the international construction markets: Strategic Alliance Strategic alliance refers to the log-term inter-corporate association between two construction companies, contractors and their partners, without the need to form an affiliate (Chen, 2005). Strategic alliance as a mode of entry into the international construction markets for a construction company therefore means that a construction company may partner with another company, government or contractor in a foreign jurisdiction through a process of trust and mutual respect for the business needs of each party (Brown, Dev & Zhou, 2003). Therefore, a construction company seeking to gain entry into international construction markets can form strategic alliances with other contractors, construction companies and firms from its country or from another country. The strategic alliance mode of entry into international construction markets requires that companies agree through a process of mutual respect and understanding to share resources, manpower and technologies necessary for the exploitation of an international construction project for a long period of time (Chen, 2005). In this respect, strategic alliance does not require any establishment of partnerships, affiliates or subsidiaries, but cooperation of the companies through a group of projects they might secure in different jurisdictions. The major advantage associated with strategic alliance as a method of entry into international construction markets for construction companies is that it enables the companies to reduce the costs associated with single-entity entry into foreign markets (Chen, 2005). Additionally, strategic alliance is advantageous as a mode of entry into the foreign market, since it easily allows the construction companies to adapt a global outlook, thus enhancing global mobility for such companies. Further, strategic alliance allows the construction companies seeking entry into international construction markets to reduce investment risks, while at the same time share technology, human resources and other requisite resources for construction project implementation. The overall effect is that strategic alliance improves efficiency of resource use, enhances the chances of the construction companies to enter into different international markets, and leverages the associated risks (Girmscheid & Brockmann, 2008). Additionally, through strategic alliance, companies are able to react quickly to market changes. However, the limitation associated with strategic alliance as a method of entry into international construction markets for construction markets is that negotiating the formation of strategic alliance can be both difficult and tedious. Secondly, a strategic alliance is an entry mode that is purely based on trust and mutual benefit, meaning that the breach of trust and mutual respect by any party can cause a major failure of the other parties to the alliance (Brown, Dev & Zhou, 2003). Further, a strategic alliance does not lead to work implementation, but only facilitates entry into the foreign markets, and thus the strategic alliance parties must further devise their subsequent operational procedures. Joint Venture (JV) Project It is becoming increasingly difficult for construction companies to gain entry and operate in the international construction markets, without having some assistance. Joint venture on a project, also referred to as project consortium, can be a very effective method for construction companies to gain entry into the international construction markets (Chen, 2005). Under the joint venture for projects, companies come together and invest in a construction project together, in terms of the resources, technology and the human resource requirement, in return for reaping joint benefits. The responsibilities and profits from a joint venture project are assigned to each party according to a contract (Brown, Dev & Zhou, 2003). The joint venture project mode of entry into international construction markets can also take the form of integrated structure, where the construction companies may second workforce, resources and technology into a project that is implemented by the single constituted team, as opposed to each party accomplishing certain responsibilities on its own (Miller & Lessard, 2000). The major advantage associated with joint venture project mode of entry into international construction markets for construction companies is that it enables the companies to pool resources together. This effectively reduces the costs required for each construction company to invest in the exploitation of a construction project. Additionally, the joint venture mode of entry into international construction markets enables the parties to the joint venture share in the risks of investment (Chen, 2005). Thus, a joint venture for project mode of entry into the foreign markets for construction companies can be especially important for small construction companies with a limited financial capacity. Further, the process of establishing a joint venture can be very simple for the construction companies seeking to partner in this manner. However, the major limitation associated with joint venture on projects as a mode of entry into the foreign market is the fact that it is increasingly difficult to identify a company in the foreign jurisdiction, which a construction company can partner with effectively (Brown, Dev & Zhou, 2003). Thus, identifying such a partner in the international markets to establish a joint venture with can be very tedious and time-consuming for a construction company. The other notable limitation of adopting joint venture for projects as the method of international construction markets entry for a construction company is that the companies involved still maintain their original identity, meaning that it is difficult o adapt a polycentric and global outlook for such companies (Brouthers, 2002). Representative Company/Department/Office The Representative Office (RO), also known as the representative branch or department is a mode of entry into the international construction markets, which entails a form of direct foreign investment (FDI) by a company in a foreign jurisdiction (Chen, 2005). It is a major strategy for construction companies to establish a formal presence in a host country, and then get acquainted with the conditions of the market, while also seeking investment opportunities. The major objective for the establishment of a representative office, department or company is not to make profit per se, but rather to act as a representative of the parent company’s interests in the foreign jurisdiction (Brown, Dev & Zhou, 2003). Thus, the representative office can be involved in business communications, company promotions, contract administration and negotiations, as well as market research in the foreign jurisdiction, while the parent company executes the construction projects and contracts (Brouthers, 2002). The major advantage associated with representative office/ department as a mode of entry into the international construction markets is its flexibility, simplicity and low associated costs (Girmscheid & Brockmann, 2008). Additionally, closing a representative office, department or branch is relatively easy, compared to closing a joint venture, affiliate company or subsidiary. Further, the representative office, department or company offers the advantage of avoiding the legal issues associated with capital requirements and local participation rules, which are required for subsidiaries, joint ventures and affiliates, but not for representative office or departments (Brown, Dev & Zhou, 2003). However, the major limitation associated with representative office or department is that; the regulatory and start-up costs can be expensive for a construction company, yet such costs do not directly return profits. Conclusion The entry into international construction markets for construction companies is relatively hard and challenging compared to other forms of businesses. In addition to the high costs associated with entry into the foreign markets for construction companies, the companies are required to establish a physical presence base in the jurisdictions where they implement construction projects. Further, the construction companies find entry into the international construction markets hard, since they have to adhere to the legal requirements of tendering and procurement, as well as adapt the global outlook and ethnocentricity or polycentric cultural behaviors, if they are to perform effectively in the foreign jurisdictions. Construction companies apply three major strategies of entry into the international construction markets. The companies can adapt strategic alliances, joint venture on projects or representative office/department. Each of these modes of entry into the foreign markets is suitable for different nature of companies, while also having their own merits and limitations. Thus, it is incumbent upon the construction companies to select the most appropriate entry strategy into the international construction markets, based on their size, financial capacity and organizational structure. References Brouthers, K. D. (2002). Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 33(2), 203-221. Brown, J. R., Dev, C. S., and Zhou, Z. (2003). Broadening the foreign market entry mode decision: separating ownership and control. Journal of International Business Studies (34), 473-488. Chen, C. (2005). Entry Strategies for International Construction Markets. The Pennsylvania State University. Girmscheid, G. & Brockmann, C. (2008). Global players in the world’s construction market. Switzerland:ETH Zürich, Zürich. Miller, R. & Lessard D. (2000). The strategic management of large scale engineering projects. MIT, Boston Read More