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Analysing international construction 379Construction Management and Economics ( June 2003) 21, 379–391
Construction Management and EconomicsISSN 0144-6193 print/ISSN 1446-433X online © 2003 Taylor & Francis Ltd
http://www.tandf.co.uk/journalsDOI: 10.1080/0144619032000049746
*Author for correspondence. E-mail: [email protected]
Introduction
The quest to develop concepts representing the essentialfactors that contribute to the competitiveness of businessenterprises is an old one. Cho and Moon (2001) give agood review of works on competitiveness strategy fromthe work of Adam Smith. Authors have also soughtframeworks to apply in analysing the factors for successin international business, including construction. Momayaand Selby (1998, p. 641) note: ‘Whereas models toanalyse factors shaping industry competitiveness exist(Porter, 1980, 1985, 1986, 1990), there is no compre-hensive model to evaluate the competitiveness of anindustry such as construction’. They observe: ‘Attemptsto examine specific problems in isolation without anintegrated approach cannot solve strategic problems’(1998, pp. 641–2). Oz (2001) applied Porter’s diamondframework to analyse the international operations ofTurkish contractors. The framework suggests that fourinter-related and interacting attributes of a countryinfluence the competitiveness of its firms: ‘factor condi-tions’, ‘demand conditions’, ‘related and supportingindustries’ and ‘context for firm strategy and rivalry’.‘Government’ action and ‘chance’ indirectly influencethe four determinants.
Frameworks for analysing international construction
GEORGE OFORI*
Department of Building, National University of Singapore, 4 Architecture Drive, Singapore 117566
Received 3 December 2001; accepted 16 October 2002
The international construction market is subject to many dynamic influences that can lead to changes in thevolume, mix and distribution of demand and sources of competitiveness. The international constructionfirm faces several problems: physical, technological, financial, legal, socio-cultural and political. It isimportant that factors that contribute to the success of firms in this market are clearly understood. Thispaper considers relevant aspects of international construction. The international performance ofconstruction firms in middle- and low-income countries is compared. The applicability of various analyticalframeworks to international construction is then examined. Finally, the implications for future research areconsidered.
Keywords: Overseas construction, competitiveness, conceptual frameworks, research agenda
Authors have applied Porter’s diamond concept andother frameworks to analyse competitiveness in inter-national construction. Some pertinent questions are:what factors influence a firm’s success in internationalconstruction? How best can these factors be analysed? IsPorter’s diamond concept an appropriate framework forthis analysis? What adjustments should be made to theconcept to make it suitable for analysing internationalconstruction?
Objectives of this paper
International construction is an important topic espe-cially in this era of globalization (Raftery et al., 1998;Bon and Crosthwaite, 2000). It has positive andadverse implications for construction industries in allcountries (Ofori, 2000). The objectives of this paper areto:
• discuss relevant aspects of internationalconstruction;
• analyse and compare the performance of construc-tion firms from middle-income and low-incomecountries;
• examine the applicability of various analyticalframeworks to international construction; and
• consider implications for research.
Ofori380
Use of Porter’s diamond framework to analyseinternational construction
As noted above, Oz (2001) analysed the internationaloperations of Turkish contractors using Porter’sdiamond framework; Table 1 summarizes Oz’s analysis.Oz (2001) outlined the historical development of theTurkish international construction industry. Turkishcompanies featured among the top international contrac-tors in annual Engineering News-Record (ENR) surveys;Sozen (1994) also reviewed the performance of suchfirms. Undertaking projects ranging from housing tobridges and tunnels in the Middle East and former Sovietstates, they had won US$42 billion of work abroad andrepatriated US$15 billion to Turkey.
The internationalization of Turkish firms startedduring a depressed home market owing to the 1974economic embargo due to the Cyprus crisis and a globalrecession resulting from escalating oil prices, which ledto a construction boom in the Middle East and Africa.The home construction market has been unstable: anexpansion in the early 1980s was soon followed by adecline. The firms’ overseas activities were given a fillipby government-to-government economic protocols withLibya (1975) and Russia (1984).
Oz noted that previous authors attributed the competi-tiveness of Turkish contractors to lower labour costs andgeographical and cultural proximity to their markets(Strassman and Wells (1988, p. 18) added that Turkishcontractors had a religious advantage in the Middle East
Table 1 Porter’s diamond framework and Turkish international construction firms (prepared from Oz, 2000)
Framework component
Factor conditions
Demand conditions
Related and supportingindustries
Context for firm strategyand rivalry
Chance events
Role of governments
Strengths
Low wages of Turkish workers and ease ofcommunication among them; high quality ofeducation.
Internationally competitive constructionmaterials cluster.
Good track record in housing, hotels andinfrastructure, which are in demand inoverseas markets of Turkish firms.
Rising quality of work.Strong supplementary industries to construction
firms.
Highly competitive domestic industry. Turkishfirms compete among themselves overseas.
Extensive diversification among constructionfirms.
Entrepreneurial, risk-taking skills of contractors;good managerial and communication skills;ability to deal with bureaucracy.
Accumulated past record of good performanceand good relationships.
1970s construction boom in Middle East andAfrica.
Opportunities in former Soviet countries in1990s.
Geographical proximity and cultural andreligious ties to ‘promising’ markets.
Occasional government support, such as taxincentives and rebates in early 1980sencouraged firms to go abroad.
Trade agreement with Russian Federation.
Weaknesses
Lack of on-the-job training for middle-levelpersonnel; bureaucratic problems intransferring Turkish workers abroad.
Financial problems leading to inability tooffer financial packages.
Stagnant domestic market recently.
Weak competitive position of Turkishdesign consultancy firms. Lack of designcapacity among Turkish contractors.
Family owned companies lacking formalorganization. Extensive multi-levelsubcontracting of work contributes tothis.
Iran–Iraq war; Iraq’s invasion of Kuwait;payment problems in Libya after USembargo.
Stagnation in Russian Federation.Massive destruction of 1999 earthquake
dented image of industry.Bureaucratic obstacles to aspects of construc-
tion including payment for work done.Government’s economic and financial
policies including high interest rates, non-availability of export credit.
Lack of government support for overseasmarket development.
Lack of coherent government policy for theindustry.
Inadequate building regulations andineffective implementation.
Analysing international construction 381
and North Africa, and ‘were able to benefit from . . .preferential or protectionist policies by a number ofMiddle Eastern governments’.) However, Oz found thatthese firms’ success abroad was also due to the fiercedomestic rivalry that forced firms to upgrade theiroperations and the favourable entrepreneurial climate.Oz (2001, p. 142) concluded:
Turkish contractors achieved their success despiteeconomic and political instability and without notablegovernment support. This has become possible,thanks to the self-reinforcing systemic advantageTurkish contractors created and sustained over theyears. . . . This rationale . . . helps us understand why itis Turkish contractors that have succeeded in interna-tional markets rather than contractors from manyother developing countries, which can also make useof the cheap labour and geographic and culturalproximity to some promising markets.
Oz found the following problems of Turkish internationalcontractors: financial and administrative difficulties; lackof a coherent government construction policy; and excessivebureaucracy. Oz urged the formation of a governmentbody ‘to address … specific problems of the constructionindustry’ (2001, p. 142) and action to deal with financingproblems, improve practical education, improve designconsultants’ performance and tendering systems, andinstitute arrangements for leadership succession in firms.
Whereas Oz’s paper covers the Turkish situation welland its findings are mostly in line with conclusions in theliterature on international construction, the pointsdiscussed in the paper can be further expanded if oneputs the Turkish situation in context by discussing inter-national construction and its relevant aspects, comparesthe performance of Turkish contractors with those ofcountries at similar levels of development and considersanalytical approaches other than Porter’s diamondframework. This paper seeks to accomplish these.
The next section considers the problems facing firmsparticipating in the international construction marketand factors influencing competitiveness in this market.This discussion will establish the importance of a suitableanalytical framework for international construction.
International construction
Features, problems and trends of internationalconstruction
Bon and Crosthwaite (2000) estimate that the globalconstruction market is over US$3000 billion annually.Authors suggest that the definition of an internationalconstruction project as one undertaken by an enterpriseoutside its home-country (for example, ‘firms from onecountry building under contract in another’ by Strassman
and Wells, 1988, p. 2) is out of date, and that thedefinition must now include projects in a home-countryinvolving foreign firms as competitors (West, 1992;Momaya and Selby, 1998). According to Drewer (2001),US$800–1000 billion of the global construction outputis undertaken by the ‘international construction system’comprising firms operating throughout the world. Howeasy is it for construction firms to win and undertakeprojects overseas? Who are the major players in theinternational market? What are the pre-requisites forsuccess?
Owing to the location specificity of constructed items,the construction industry is ‘local’ by nature (Hillebrandt,2000) in terms of the climatic, regulatory, political andsocial conditions that affect it, as well as the necessaryapproaches to the procurement of resources, and logis-tics. This gives competitive advantages to home-countryfirms over foreign contractors including (Flanagan,1994; Linder, 1994): language; knowledge of appropri-ate methods and procedures considering cultures,practices and climate; knowledge of laws, regulations,policies and administrative system; established clientbase and track record; political and economic policywhich may offer preferences; and existing networks ofstrategic allies, suppliers and subcontractors. Huovinenand Kiiras (1994, p. 441) refer to ‘an extremely hard wall’of a targeted foreign construction market which makes‘the local building market more difficult to enter thanwalls surrounding most consumer and industrial goodsmarkets’.
The risks and problems normally encountered onconstruction projects are exacerbated by the internationaldimension (Yates et al., 1991). Problems and risksrelevant to international construction include: politicalinstability (Wang et al., 1999); economic and financialinstability (Kapila and Hendrickson, 2001); pricediscrimination in favour of local contractors (UNCTC,1989); exclusion of foreign firms from some types ofwork (Ofori, 1996); requirement to subcontract part ofthe work to, or form joint ventures with, home-countryfirms (Rashid, 1990); higher levels of taxes and othercharges for foreign contractors (UNCTC, 1989); currencyrestrictions (Wang et al., 1999); low and variable qualityof local labour; and challenges of project logistics.
Major players in the market
Contractors from a few developed countries dominate theinternational construction market. Table 2 shows resultsof an analysis of the top 30 ENR international contrac-tors during 1990–99. Fifty-eight contractors were listedat least once in this group during the period; the highestnumber (14) were American, followed by Japanese,French, British and German. However, as shown bythe GDP per capita figures, some firms from outside
Ofori382
developed countries have been strong participants inthe market; five firms from middle-income Korea andlow-income China were among the 30 top internationalconstruction firms in 1990–99.
The number of international firms from middle-income and developing countries (such as Brazil, China,Cyprus, Korea and Turkey) has been increasing. Asnoted above, it is suggested that their firm-specificadvantages include access to inexpensive, highly skilledlabour proficient in available technology and/or closegeographical, cultural and language proximity to theirmarkets (Kim, 1988; Strassman and Wells, 1988;Rashid, 1990). Some authors highlight the support fromtheir governments including credits, export guarantees,preferential taxes and other export developmentincentives (Kim, 1988; Quak, 1990).
The next section compares the performance ofcontractors from middle- and low-income countries thatare predicted to have an increasing share of the globalmarket.
Performance of firms from middle- andlow-income countries
The role of construction firms from low- to middle-income countries in the international construction mar-ket is not well covered in the literature. Oz claims thatamong companies from ‘developing countries’, Turkishfirms have been uniquely competitive. The data in Table 3compare the performance of Turkish international con-tractors with their counterparts from middle-income andlow-income countries (as shown by the GNP per capitadata) among the top 225 ENR contractors in 1990–99.These countries are described by the World Bank (2000)as ‘developing countries’.
Table 3 shows that 42 Chinese contractors were listedat least once in the ENR top 225 during 1990–99,
compared with 20 from Korea, 16 from Turkey, fivefrom Brazil and four each from Mexico, Hong Kong andTaiwan. Three Chinese contractors were on the listthroughout the 10 years, compared with two each fromBrazil, Korea and Turkey. The highest ranked firm wasHyundai Engineering and Construction of Korea, at 12thposition in 1997. China State Construction & Engineer-ing Corporation was 20th in 1999; and Oderbrecht ofBrazil, 21st in 1997. The highest ranking attained by aTurkish firm was ENKA Construction & Ind. Co.’s64th (in 1994). ENR measured firms’ performance bycontracts awarded in 1990–93 and turnover in 1994–99.Korean firms realized the highest volume, followed bythe Chinese, Brazilians, Greeks and Turkish. On thisevidence, Oz’s claim of a uniquely competitive Turkishinternational construction industry does not hold;instead, these companies have been outperformed bythose from countries at similar or lower levels ofeconomic development.
Prerequisites for competitiveness
What features must a construction firm possess in orderto succeed in the international market? The literaturesuggests that for foreign firms to break down local com-panies’ advantages and overcome problems of interna-tional construction, there must be some imperfection inmarkets for goods or factors of production, or interfer-ence in competition by governments or firms, whichseparates markets (Kindleberger, 1969). The typicallylarge, complex and one-off nature of construction projectsmeans privileged access to key inputs, in particular,skilled labour and capital, are crucial. The UnitedNations Centre for Transnational Corporations(UNCTC) (1989) observes that technical knowledgerather than capital investment is the most importantbarrier to entry and competitiveness in internationalconstruction. Linder (1994) suggests that access to the
Table 2 Contractors from different countries listed in the top ENR 30 list 1990–99(Sources: ENR, 1991–2000; World Bank, 2000)
Country
USAJapanFranceUKGermanyItalyKoreaSwedenNetherlandsChinaOthersTotal
GNP per capita (1999) US$
30 60032 23023 48022 64025 35019 710
849025 04024 320
780––
Number of contractors
149865432223
58
Percentage
24.115.513.810.38.66.95.23.43.43.45.2
100.0
Analysing international construction
383
Highest ranking firm, rank (and year)
Benito Roggio e Hijos SA 174 (1999)Mannai Engineering Co. 220 (1992)Construtura Norberto Oderbrecht SA
21 (1997)China State Construction & Engineering
Corporation, 20 (1999)Joannu & Paraskevaides Ltd 36 (1998)Santos CMI Construction Inc 187
(1999)The Arab Contractors – Osman Ahmed
Osman 99 (1999)Consolidated Contractors International
Co. SAL 21 (1995 & 1999)Paul Y.ITC Construction Holdings, 54
(1999)Indian Railway Construction Co. Ltd,
147 (1999)Soleh Boneh International Ltd 89
(1992)Hyundai Engineering & Construction
Co., 12 (1997)Arabian Construction Co. 129 (1999)Pilecon Engineering Berhad, 180 (1993)Empresas ICA SA de CV 58 (1998)Engineering Equipment Inc., 139 (1993)Joannu & Paraskevaides (Overseas) Ltd
45 (1999)IPCO Corporation, 112 (1996)Murray & Roberts Contractors 45 (1998)Retired-Services Engineering. Agency,
89 (1998)ENKA Construction and Ind. Co. Inc.
64 (1994)National Petroleum Construction Co.
107 (1998)Technoconsult Ingenieros Consultores
SA 182(1990)
Table 3 Firms from middle-income and developing countries among top 225 ENR contractors, 1990–99 (Sources: ENR, 1991, 1992, 1993b, 1994b, 1995, 1996a,1997c, 1998b, 1999b, 2000b; World Bank, 2000)
Country
ArgentinaBahrainBrazil
China
CyprusEcuador
Egypt
Greece
Hong Kong
India
Israel
Korea
LebanonMalaysiaMexicoPhilippinesSaudi Arabia
SingaporeSouth AfricaTaiwan
Turkey
United Arab Emirates
Venezuela
GNP per capita,1999 (US$)
7600n.a.4420
780
‘Middle income’1310
1400
11770
23520
450
‘High income’
8490
3700340044001020
‘Middle income’
296103160n.a.
2900
n.a.
3670
No. offirms
2 1 5
42
3 1
1
1
1
7
1
20
2 1 4 2 1
4 2 4
16
2
2
Contracts awarded1990–93 (US$m)
181
4260
5437
279016
0
4211
0
89
535
8820
8034
236176
0
5640
734
4089
276
48
No of firms onlist throughout
1990–99
002
3
10
0
1
0
0
0
2
00000
001
2
0
0
Period for whicha firm was on list
(years)
41
10
10
101
2
10
6
7
9
10
53571
46
10
10
6
2
Revenue1994–99(US$m)
1180
8488
25203
3634
258
7778
1509
284
840
26874
384 37
107846
707
39422701086
6119
697
0
Ofori384
most efficient means of production, cheapest and bestbuilding materials, and engineering knowledge thatmay not have been proprietary but had not yet beenappropriated by others were instrumental in the earlyinternational success of European and US contractors.
Like other business enterprises, construction companieschoose overseas markets where they have competitiveadvantage, based on firm and national advantages(Seymour, 1987; UNCTC, 1989). Firm-specific advan-tages include: the firm’s name, which embodies itsreputation, experience and expertise, and firm size,which relates to its resources. Nationality advantagesinclude: national currency; geographical proximity tomarket(s); historical, political, language, cultural andeconomic relationships between the home and hostcountries; foreign direct investment by home-countryenterprises; and strengths of inter-sectoral linkageswithin the home country’s economy.
From the above discussion, the internationalizingcontractor must possess certain prerequisites. Theseinclude the firm’s track record, corporate knowledge,communication structures, resources and risk managementcapability. Some authors categorize the key factors con-tributing to competitiveness in international constructioninto: human resources and their management; technology;and government’s incentives and disincentives. Manage-rial expertise is considered the most important becauseof the peculiarities and problems of overseas projects.Other authors note that this calls for flatter organizationsimplying less bureaucracy, time and confusion, enablingthe firm to move quickly into new markets (Centre forStrategic Studies in Construction, 1989; Flanagan,1994).
What challenges will the international constructionmarket pose in future, and what will firms need toaddress them? These issues are now considered.
International construction in future
Many forecasts indicate that more construction will berequired around the world to meet the basic needs of theworld’s growing population and enhance the quality oflife (Flanagan, 1994). Industrial and other commercialfacilities will be increasingly complex owing to advancingtechnology that will influence the nature and internalenvironment of productive facilities (Hassan et al.,1998). The new technologies will also facilitateefficiency and productivity drives at all stages of theconstruction process (Bennett, 1991; Technology SurveyTask Force, 1994). In particular, information technol-ogy (IT) will continue to significantly influence theindustry’s products and operations (Ballard, 2002; denOtter and Prins, 2002) and facilitate further decentrali-zation and geographical dispersion of work (Mitropoulosand Tatum, 2000; Johnson et al., 2002).
Whereas Drewer (2001) estimates that construction indeveloped countries accounts for about 80% of totalglobal output, Hassan et al. (1998) predict that the shareof demand for large projects will increasingly move awayfrom Europe towards the Asia-Pacific, Africa and SouthAmerica, leading to increases in the political, commer-cial and logistical risks for European firms. The futuremarket will be more competitive, involving firms fromChina, South America, South-East Asia and Africa. Bonand Crosthwaite (2000, 2001) also found that China,Germany, Vietnam, Malaysia, India and Russia wouldhave the fastest growing construction markets in themedium-term. In the next 25 years, Western Europe andNorth America would become substantial importers ofconstruction services, and Asia a substantial exporter.However, construction firms from Western Europe andNorth America would continue to have competitiveadvantage in highly specialized construction services.
The International Construction Task Force of theConstruction Industry Institute (1993) highlighted thefollowing future determinants of success in internationalconstruction: leadership (vision); social acceptability(environmental consciousness, industry and governmentco-operation); cost effectiveness (efficient resourceallocation); innovation (accelerating rate of invention,shortening product cycles, growing worldwide technicaland scientific competence); and organizational effective-ness (flexible structures, teamwork). Hassan et al. (1998)note that clients will demand a change in cost focus fromcapital expenditure to total life cycle costs, as well asquality, and reduction of project timescales. Flanagan(1994) suggests that in 1995–2005, the main issues ininternational construction will be: speed in innovationand delivery; flexibility in delivery mix; environmentalconsciousness; human resource development and deploy-ment; automation and information; joint ventures,alliances and partnering; and financial engineering. Itis predicted that the trend towards diversification ofservices by major contractors will continue, and thatsome of them will offer an integrated, one-stop service,becoming ‘worldwide system organizers’ which co-ordinatethe work of firms from different sectors or countries(Bennett, 1994).
Strategies for competitiveness in international con-struction in future have been proposed. Kong (1994)observes that construction firms will have to adoptlong-term strategies, reposition themselves, readapt theirresources and experiences, and re-orientate and retraintheir personnel. International firms interviewed by theMarket Analysis Task Force of the European Construc-tion Institute (1991) ranked the sources of future com-petitive advantage as: project finance; reduced projecttimescales; technical expertise, experience and reputation;willingness to carry risks; ability to procure globally;management and re-use of information; political backing;
Analysing international construction 385
corporate infrastructure; ability to provide project funding;ability to form partnerships or alliances with firms withskills in construction or other areas such as finance,design and operation; and ability to adopt companystructures to work in multi-firm, multi-cultural andmulti-discipline networks.
The International Construction Task Force (1993)advises companies to: identify compatible values andphilosophy; sustain long-term relationships; take equityin projects; provide additional services; establish globalpartners and alliances; develop environmental respon-siveness; develop new technologies; utilize informationtechnology; and educate their personnel to work in a newclient–contractor environment. Several authors, such asthe Market Analysis Task Force (1991) and Pietroforte(1997), identify the ability to form alliances as a futuresuccess factor of international construction. Otherauthors, including Raftery et al. (1997) and Winch(2000), highlight the increasing importance of build-operate-transfer and other finance-led initiatives ininternational construction, and urge firms to developappropriate strategies.
The next section considers theoretical frameworksused by various authors to analyse international construc-tion, and to identify factors which contribute towardsgiving firms competitive advantage in this market.
Frameworks for analysing success ininternational construction
Assessment and extension of Porter’s diamondframework
Porter’s diamond framework which was applied by Oz(2001) has its supporters and critics. Supporters cited byOz included Dunning (1992), who highlighted itscontribution to knowledge of the factors of success oftransnational firms, and Grant (1991), who lauds itssimplicity and breadth of application. Ofori (1994) notesthat the framework has been integrated into the main-stream of knowledge on business management, and usedby governments such as those of Malaysia, New Zealandand Singapore to develop strategies for enhancing nationalcompetitiveness. Oz also mentions critics including vanden Bosch and van Prooijen (1992), who suggest thatculture should have been incorporated, and Stopford andStrange (1991), who noted that governments play a moreimportant role (see also Betts and Ofori, 1994).
Whereas various shortcomings of Porter’s diamond arepointed out in the literature (see also Betts and Ofori,1994), the discussion here focuses on the internationaldimension. Authors have questioned the ability of thefeatures of a firm’s home country and market to explainits international competitiveness. Weiss (1993) uses data
from Austria to test Porter’s diamond concept and suggeststhat the public sector, in the form of governmentregulations and others, dominates against firm structureand strategy and market demand. Austria’s strategiclocation also enables it to upgrade and intensify itseconomic activities with respect to Eastern Europe.
Dunning (1991, 1993) points out that the diamondframework underestimates the importance of multina-tional enterprises that account for 35–40% of globaltrade and should have included an international businessdimension. In the era of globalization, interdependenciesand networking among countries and enterprises, gov-ernments and firms have had to consider their strategiesand policies at this level. Dunning (1993) points to themerger or acquisition of firms in order to sustain theacquiring firm’s competitive advantage. He suggeststhat, for European Union members, national diamondsshould be replaced by supranational ones. With theadaptation of the diamond to include multinationalactivity as a third exogenous variable (in addition to‘government’ and ‘chance’), the Dunning–Porter frame-work was developed. Rajneesh (1993) suggests that thisalternative framework is static, and proposes the additionof technology and the process of its accumulation asother factors.
Several authors, including Rugman (1991), suggestthat Porter’s diamond underplays the importance offoreign direct investment both into, and out of, thecountry. Thus, it is argued that the diamond concept isnot applicable to small, open economies with small localmarkets. These countries may also be influenced byforeign governments’ control over trade and investment(Dunning, 1991; Rugman, 1991). Daly (1993) suggeststhat the diamond model should be modified to includeforeign exchange rates.
Hodgetts (1993) notes that Mexico’s economic growthhas depended on its linking into the US market. Thus,Mexico can link its diamond to that of the US, and thissupports the so-called ‘double diamond’ proposed bysuch authors as Rugman (1992) and Rugman and d’Cruz(1993). The latter suggest that the Canadian diamondshould be considered jointly with the US one, as a ‘NorthAmerican diamond’ (p. 17) would explain Canada’sinternational experience better. Moon et al. (1998)offered the ‘generalized double diamond’ model whichincorporates ‘multinational activities’ (p. 135) andgovernment ‘as an important variable which influencesthe four determinants of the diamond model’ (p. 148).They tested the proposed model with data from Koreaand Singapore.
Cartwright (1993) tested Porter’s model using NewZealand data, and concluded, among other things, thatfirms may receive the same stimuli and learning proc-esses from competitive pressures and customer require-ments from their overseas activities as the diamond
Ofori386
suggests that they receive from their home markets.Thus, he proposed ‘the multiple linked diamond’ whichextends Porter’s ‘home-based’ diamond to include fivevariables: capture of offshore factor creation; linkage torelated and supporting industries in the offshore environ-ment; access to demanding customers and rivalry inoffshore markets; and the extent to which the industryhas international goals and structures.
In the above discussion, the relevance and strength ofPorter’s framework was recognized by the authors whoused it as a starting point, including those who proposedamendments and additions to it. The main suggestionsare that Porter’s model should be extended to accountfor the international dimension, and that diamondslinking the economies of major trading partners betterexplain today’s business situation than Porter’s singlediamond. These proposals will be considered later. Inthe next section, other analytical frameworks applied tointernational construction are discussed.
Application of other analytical models tointernational construction
Apart from Oz (2000), several authors have appliedPorter’s diamond framework to aspects of construction.Betts and Ofori (1992) use it to provide a framework forstrategic planning by construction enterprises. Ofori(1994) uses it to guide the formulation of a programmefor developing Singapore’s construction industry. Bettsand Ofori (1994) examine how professional institutionscan use the framework to formulate strategic plans forcompetitive advantage.
Some authors analysing competitiveness in interna-tional construction consider other concepts in additionto, or instead of, Porter’s diamond framework. Yateset al. (1991) used Porter’s (1979) five forces model toanalyse the US construction industry in the context offuture international competition. The model is based onthe interrelated forces of: threat of new entrants; powerof suppliers; power of buyers; threat of substitute prod-ucts; and jockeying for position amongst industry mem-bers. They highlighted the strengths and weaknessesof US firms with respect to the global market, andproposed appropriate courses of action. Huovinen andKiiras (1994) developed their ‘spearhead strategy’ for aEuropean construction firm to break into a new marketin a neighbouring country by analysing several frame-works: the classic product-market matrix for strategyformation proposed by Ansoff (1965); the competitiveforces framework of Porter (1980) and differentiatingstrategy of Porter (1985); the core competences conceptof Prahalad and Hamel (1990); and the reengineeringidea of Hammer and Champy (1993).
In his work on international construction, Seymour(1987) reviews multi-national enterprise (MNE) theory
including: behavioural models, which focus on themotivations of, and decision-making by, management,exemplified by the work of Aharoni (1966); industrialorganization theory, which argues that the MNEpossesses features enabling it to overcome entry barriersinto foreign markets and giving it comparative advan-tages, exemplified by Kindleberger (1969) and Hymer(1976); the internalization theory of business enterprisesapplied to the MNE by such authors as Buckley andCasson (1976); and general theories such as Dunning’s(1977) eclectic approach. From these, Seymour (1987)applies Dunning’s eclectic paradigm to internationalconstruction and concludes that although it had beendeveloped for the study of multinational manufacturing,‘the eclectic framework provides a comprehensive andflexible method for analysing the international construc-tion industry despite industry specific characteristics’(p. 264).
The eclectic paradigm is widely applied in the litera-ture on international business. Dunning (2000, p. 163)claims that:
For more than two decades, the eclectic . . . paradigmhas remained the dominant analytical framework foraccommodating a variety of operationally testableeconomic theories of the determinants of foreigndirect investment . . . and the foreign activities ofmultinational enterprises.
The eclectic paradigm suggests that the extent andcomposition of a company’s foreign production is basedon three sets of interdependent variables:
• ownership: competitive advantages of the companywhich are specific to its ownership;
• location: the locational attractions of alternativecountries or regions for undertaking the value-addingactivities of multi-national enterprises; and
• internalization: the alternative ways in which firmsmay organize the creation and exploitation oftheir core competencies, given the locationalattractions of different countries or regions.
Dunning (2000, p. 167) reviews, tests and confirms therobustness of the eclectic paradigm in the context of theknowledge-based economy, integration of internationaleconomic and financial activity, liberalization of cross-border markets and flotation of major currencies, andemergence of several new countries as important newplayers on the global economic stage. He also uses theeclectic paradigm to explain, and provide an umbrellafor, the major MNE theories. He concludes that theconcept needs ‘an add-on dynamic component . . . and anextension of its constituent parts to embrace both assetaugmenting and alliance related cross-border ventures’(2000, p. 184). Similarly, after applying the paradigmto international construction, Seymour (1987, p. 264)
Analysing international construction 387
noted that ‘the eclectic approach . . . [would] be moreacceptable if dynamic considerations were included’.
Thus, there is no perfect framework for analysingcompetitiveness, nor is any one sufficient in itself for allsectors. After presenting eight typologies of organiza-tional strategies relevant to construction companies,Segev and Gray (1994, p. 32) advised:
Remember, the creators of these typologies consideredgeneric situations. They did not tailor them specificallyto your firm or industry. Thus, you cannot expectthat one of the typologies will match your situationexactly. More likely, you will find that several of thetypologies come close to emphasizing some of yourconcerns. If this is the case, we recommend that youevaluate your business unit in terms of two or threetypologies.
Some authors have modelled international constructionwithout particular reference to existing theoreticalframeworks. Hasegawa (1988) considered the interna-tional strategies of Japanese construction firms andidentified the following competitive forces: the level ofdomestic and international competition, and the threat ofnew entrants to the industry through diversification. Hecategorized the strategies adopted by Japanese contrac-tors exporting their services as: a transnational approach;new business development; being an integrated engineer-ing constructor; exploiting opportunities for total projectdevelopment; technology development; and exploitingfinancial strategies. Momaya and Selby (1998) quanti-fied the international competitiveness of the Canadianconstruction industry and compared it with those of itsJapanese and US counterparts. Their model had threecomponents:
• competitive assets: factor costs, human resources,industry infrastructure, technology, demandconditions and government;
• competitive processes: strategic management, for-mal planning, implementation, human resourcesdevelopment, R&D and synergies; and
• competitive performance: productivity, humanresources, quality/effectiveness, cost, financial,international and technological.
In the next section, the applicability of the diamondframework to international construction is assessed indetail.
Reconsidering Porter’s diamond framework withinternational construction
The above discussion shows that several frameworksmainly intended for application to manufacturing, havebeen utilized to analyse international construction. Manyof the frameworks were found to be good fits forinternational construction despite being criticized in the
business literature. Moreover, most of the authors inconstruction did not critically examine, or suggestrefinements to, the frameworks they applied. For exam-ple, government action appears to be more influential incompetitiveness in international construction than Porterallows. Seymour (1987), Rashid (1990) and Mawhinney(2001) highlight the support of some governments totheir international contractors, making a difference in thefirms’ competitiveness, including soliciting of projects bypoliticians; tied or targeted aid; soft loans for contrac-tors; market information and bidding data assistance;market development grants and tax concessions; andsuppliers’ credits and insurance support. Kim (1988)discusses how South Korea has used the export ofconstruction services as a key plank of national economicdevelopment policy. Finally, Oz’s analysis (Table 1)indicates the importance of government policy as theeconomic protocols with Libya and Russia generatedwork for Turkish firms.
Another important factor is culture, which, as noted byBosch and van Prooijen (1992), the diamond frameworkdoes not incorporate. Various authors including Bennett(1991), and Bremer and Kok (2000) draw links betweenthe strategies and practices of an industry and itscomponent companies, and the home country’s cultureand institutional arrangements. Moreover, culture has adirect influence on international construction projectsthat usually involve a number of firms and people fromdifferent countries (see Langford, 2000).
The applicability of Porter’s diamond framework tointernational construction is now discussed in detail byconsidering the component factors of the frameworkin the context of developments in the internationalconstruction market. Considering factor conditions, giventhe resource intensity of construction, privileged accessto key resources is a success factor. However, this doesnot necessarily imply that internationally competitivedomestic construction materials and equipment manu-facturing and supply sectors is crucial, as the absence ofsuch a domestic sector can be ameliorated by a firm’sability to procure materials and equipment inter-nationally. For a project overseas, given the bulkiness andtransportation costs of construction materials, a source ofgood quality inputs closer to the location of the projectmay be more advantageous than a source at home.
On demand conditions, several major internationalcontractors have gone overseas on the strength of astrong domestic track record. For example, in 1931–36,Six Companies Inc. – a joint venture by Bechtel, Kaiser,Morrison-Knudsen, Utah and others – built the BoulderDam, then the largest US federal government civilengineering project (Linder, 1994). Bechtel, Kaiser,Morrison-Knudsen and Utah also built the GrandCoulee Dam, the San Francisco-Oakland Bay Bridgeand oil pipelines. These projects enabled the firms to
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launch separate, as well as joint, international careers.However, construction firms can take advantage ofdemand conditions abroad. For example, Skanska ABhas entrenched itself in the US market. In 1994, its USsubsidiary, Skanska USA Inc., bought Beers Construc-tion Co., W. J. Barney Corporation and CPI Plants(ENR, 1994a). In 1996, Skanska USA Inc. purchasedSpectrum Group Ltd. (ENR, 1996b) and then BeaconConstruction Co. (ENR, 1996a, 1997a) (to gain accessto the Boston market). In 1998, Skanska AB acquiredTidewater Construction Corp., CDK Contracting Co.and Nielsens Inc. In 1999, Skanska purchased AlexJ. Etkin Inc (ENR, 1999a). Skanska has adopted a similarexpansionary approach in Europe. In 2000, it acquiredNorway’s Selmer ASA, making it Norway’s largestcontractor; and bid for control of Poland’s leadingconstruction group, Exbud SA, Kielce (ENR, 2000a).
Furthermore, the demands of foreign constructionclients can also influence firms to improve their produc-tivity and quality of work; this supports the suggestion byCartwright (1993). The formation of regional economicblocks (such as the European Union, Mercosur andSouthern African Development Community) is alsoeffectively linking national construction markets intoregional ones (Ellis, 1994; Ofori, 1994; Langford, 2000)with increasingly harmonized technical and procurementregulations. This lends support to Rugman and d’Cruz’s(1993) linkage of the US and Canadian diamonds.
On related and supporting industries, for contractors,architectural and engineering consultants are ‘related’firms; the quality of service of these firms influences thesuccess of contractors. However, for internationalconstruction projects, the design team and the contractormay be based in different countries, and indeed, eachteam may comprise firms from a number of countries.The financial sector is a ‘supporting’ cluster for contrac-tors but a local financial sector may not necessarily offerdirect assistance to domestic contractors (a commongrievance of Singapore firms (Ofori, 1994)). In today’sextensively liberalized and globally competitive financialsector, firms can derive financial support overseas. Forexample, in 1993, Black & Veatch (US) arranged athree-year credit agreement with a consortium of ninebanks to help it to develop new business abroad. Two ofthe banks, Hong Kong and Shanghai Banking Corp. Ltdand Credit Lyonnais, were based overseas (ENR, 1993).
On context for firm strategy and rivalry, domestic com-petition builds up the capabilities of construction firms.However, as noted above in the case of Skanska in theUS, a construction company can benefit from the rivalryin an overseas market; this further supports Cartwright’s(1993) proposition. Moreover, contractors can tap into thegood managerial systems, strategies and competitivenessof successful foreign firms through joint ventures orstrategic alliances. For example, Luo et al. (2001)
discuss how foreign and local contractors can utilize jointventures to benefit from China’s huge potential. In 1994,North West Water Group PLC (UK) teamed up withBechtel Corporation (US) to exploit build–own–operateand other types of contracts in US, Mexico andSouth-East Asia (ENR, 1994c). Black & Veatch (US)and Ninham Shand (South Africa) sealed a strategicalliance to explore and exploit opportunities in Africa(International Construction, 1998b). Finally, Mexico’slargest engineering and construction company, BufeteIndustrial, entered into a strategic alliance with BenitoRoggio e Hijos of Argentina to undertake industrial andpower projects in the Mercosur region (InternationalConstruction, 1998a).
On chance, through project-related or long-term jointventures or alliances, the firm may take advantage of aforeign company’s chance events. In 1997, a consortiumconsisting of UK-based BOC holdings, Japan’s MarubeniCorporation, Canada’s Westcoast, Germany’s Linde,Mexico’s Empresas ICA and US-based Fluor Daniel/GTI won a $1 billion contract to build the world’s largestnitrogen plant in Mexico (International Construction,1997). In response to the envisaged substantial economicprospects in India, Fluor Daniel Inc.’s (US) Indiansubsidiary formed a joint venture with India’s TataTechnodyne to pursue EPC work (ENR, 1997b).
Finally, on the role of governments, whereas (asdiscussed above) some governments actively supporttheir construction industries by offering incentives anddevelopmental programmes, the contractor may takeadvantage of government support available to firms fromanother country (such as export credit insurance)through project-related or long-term joint ventures,alliances, mergers or acquisitions (see Rashid, 1990).
The discussion in this section supports the suggestionby Rugman (1991), Cartwright (1993) and Dunning(1993) that the diamond concept should be extended toinclude international business. Indeed, given the localnature of construction, the ‘multiple linked diamond’framework proposed by Cartwright (1993) appears to bea more suitable analytical concept for internationalconstruction than Porter’s single diamond or Hodgett’s(1993) ‘double diamond’ model.
Conclusions and research implications
International construction forms a significant proportionof the total global volume, and has implications forconstruction industries in all countries. It has manypeculiarities and problems, the impact of which willintensify in future. Industries and firms everywhere mustbe enabled to cope with its challenges. There is nosuitable framework for analysing the factors thatinfluence success in international construction. Such a
Analysing international construction 389
concept would guide strategy and policy formulation bycompanies and governments. Moreover, researchers canutilize it to propose improvements in the performance offirms and industries worldwide.
The study shows that in developing a model foranalysing international construction, it would be relevantto consider the four determinants in Porter’s diamond,as well as culture and institutional arrangements andgovernment’s influence. Chance would be an exogenousvariable. Each of these seven factors should have aninternational dimension. Thus, each company or industry’scompetitiveness would be depicted by a series of linked(national) diamonds.
Whereas the efforts to develop an analytical frameworkfor international construction may be based on anexisting model(s), the framework should recognize thedifference between international construction and multi-national manufacturing by encompassing the peculiarfeatures of construction in general and international con-struction projects in particular. First, the project-basednature of construction means that medium-term alliancesamong firms are possible. These give firms flexibility incapacity and capability, and may be among firms fromone or more countries. Second, the location specificity ofconstruction projects makes it necessary for firms tohave strong abilities in logistics and communications; todevelop means of shortening the learning curve andlimiting the costs of acquiring relevant local knowledge;and to hone their risk management abilities. Third, theconstruction process is fragmented and each projectinvolves several firms with different corporate objectivesand experiences, which may be from different countries,influenced by different cultures. Authors who applyexisting frameworks should highlight their weaknesses;assess their suitability for construction; and endeavour topropose improvements to the framework(s) to enhancetheir applicability to international construction. Finally,research that considers panels of countries in applyingor developing analytical frameworks would be morebeneficial than the single-country approaches common inconstruction.
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