-
1
Email: [email protected]
Partnerships in the Internationalization Strategy of Portuguese
Construction Companies
Duarte Alves Ribeiro Pereira de Sousa1
Department of Civil Engineering, Instituto Superior Técnico,
Technical University of Lisbon, Portugal
July 2012
Abstract: Nowadays the international operations of Portuguese
construction companies are essential
to their survival, due to the crisis affecting the whole
country, and more specifically the construction
market. Local partnerships are an important aspect of the
internationalization strategy of the
Portuguese construction companies, and may be essential to the
success of its international
operations. As such, this study seeks to identify the factors
that characterize the management of the
formation and operation stages of local partnerships made by
Portuguese construction companies in
international markets. As a result, it was possible to realize
the importance of local partnerships in the
internationalization strategy of the Portuguese construction
companies, and it was also possible to
identify the entry modes in international markets used by these
companies, the characteristics that
define the local partnerships of these companies, and also the
motives, selection criteria, risks and
success factors that influence the management of these same
partnerships.
Keywords: Local partnerships; Entry modes; Selection criteria;
Motivations; Risks; Success factors.
Introduction
In recent years, construction companies are having more and more
difficulties in gaining work
in their home markets due to globalization, which causes an
increase in competition caused by the
entry of foreign companies in their markets (Sillars and
Kangari, 2004). However this situation also
has its positive side, since the opening of international
markets due to globalization offers new
opportunities for construction companies to internationalize.
For example, in developing countries new
infrastructures are required and foreign companies with the
capacity to build them are welcome
(Gunhan and Arditi, 2005). The international expansion allows
construction companies to have more markets in which to
operate, reduce risk through geographical diversification, seize
opportunities in new growing markets
— potentially more lucrative — in order to prevent negative
cycles in their internal market, manage
available resources in a more competitive and efficient way, and
use their specific knowledge and
technology for competitive advantage in less evolved markets
(Gunhan and Arditi, 2005). According to the study "O Poder da
Construção em Portugal", conducted by Deloitte and
ANEOP (2009), the viability of the largest Portuguese
construction companies depends on the
success of its international operations. Indeed, most of the
major Portuguese companies already is or
is about to be in international markets in the short or medium
term. This trend is due to the crisis that
has affected not only the Portuguese construction market, but
also the entire national economy, and
has culminated in the IMF intervention in Portugal. Thus the
internationalization is an unavoidable
issue for the Portuguese construction sector.
Furthermore, partnerships with local companies can provide
knowledge about the local market
and access to the partner’s network, reduce the risk of the
internationalization process through the
help given by that same partner, and give more credibility to
the foreign company (Sillars and Kangari,
-
2
2004). As such, local partnerships appear to be an interesting
management tool in this increasingly
global world. In fact about 50% of Portuguese construction
companies believe that the entry into new
international markets should be done using local partnerships
(Deloitte and ANEOP, 2009).
Therefore, the main goal of this study is to identify the
factors that characterize the
management of the formation and operation stages of local
partnerships made by Portuguese
construction companies in international markets, i.e., the entry
modes into these markets, the defining
characteristics of these local partnerships, the motivations
that lead to the adoption of these local
partnerships, the selection criteria that determine the choice
of local partners, the risks that threaten
the operation of such partnerships, and the factors that lead
them to success.
Figure 1 shows the relationship between the life cycle of local
partnerships and the issues
under study.
Figure 1 - Life cycle diagram of local partnerships
Literature Review
The development of the international operations of Portuguese
companies was due to a
combination of problems of the internal market (e.g. prolonged
economic crisis, small size of the
market due to Portugal’s territorial size, excessive installed
capacity, and decrease of margins in the
construction sector due to high competition) and the
opportunities offered by international markets
(e.g. significant investments in infrastructure and real estate,
and the favorable economic evolution of
target markets). In fact, Portuguese construction companies took
advantage of a favorable
international situation — while their internal market was in
crisis — in order to gain construction works
in foreign markets with less competition and therefore with
higher margins, thus being able to face the
internal situation and the financing of the construction
activity. The importance of international
operations for companies in the Portuguese construction sector
has grown significantly since the
beginning of the last decade, especially in recent years as some
of the Portuguese construction
companies already have more than half of its turnover from
international activities. These
internationalization processes have been directed primarily to
Africa, especially to the PALOP and
more specifically to Angola, because of the cultural proximity
and technical supremacy that
Portuguese companies have in these markets (Deloitte and ANEOP,
2009).
Entry Modes
Foreign market entry mode is an institutional arrangement for
organizing and conducting
international business transactions, thus allowing the entry of
the company’s resources in the foreign
market, including their services, knowledge, skills and
technologies (Chen and Messner, 2009).
In this study four different entry modes were considered: branch
office, acquisition, joint
venture company and joint venture project. Branch office
includes the establishment of a subsidiary or
-
3
a branch office in a foreign country, through which the company
pursues its business objectives.
Subsidiaries or branch offices can be made through a new
establishment, or an acquisition, which led
to the inclusion of this second entry mode. The joint venture
company, on the other hand, is a
company owned jointly by the partners, who have to contribute
with money, facilities, equipment,
materials, intellectual property, land and manpower to the new
company. Finally, the joint venture
project is the implementation of a project by two or more
partner companies linked by a joint venture
contract, which defines the division of responsibilities and
profits between the partners (Chen and
Messner, 2009).
Chen (2008) also made the distinction between permanent and
mobile entry modes. The
permanent entry modes imply that the company holds at least a
part of the capital of an organization
with long-term strategic direction for the development of the
construction business in the foreign
country, conducting activities to support that business (Chen,
2008). In a mobile entry mode,
companies seek construction works in international markets,
having their base established in their
home country. Then, if they get the job, they move their
resources to the foreign country, they execute
the project, and in the end they return to their home country,
unless there is another project in the
same country (Chen and Messner, 2011).
Local Partnerships
Glaister and Buckley (1996) define partnership as a form of
collaboration between companies
in a given economic space and time in order to achieve mutually
defined goals. Joint ventures are a
form of partnership because they comply with these criteria.
There are two types of joint ventures,
equity joint ventures and non-equity joint ventures. The former
occur when two or more legally
separate bodies form a jointly owned entity in which they invest
and engage in various decision-
making activities, hoping to get dividends from the company’s
activity (Mohamed, 2003). On the other
hand, non-equity joint ventures are contractual agreements
between partner companies to cooperate
in an economic activity, but they do not involve the creation of
a new firm (Glaister and Buckley, 1996).
Joint ventures can also be classified in two categories:
integrated and non-integrated. In the
case of non-integrated joint ventures, each partner has to plan
and execute a part of the work, and is responsible for the profit
or loss made on that part of the project. This type of joint
venture allow each
partner to work on what he is more specialized, but may result
in conflicts due to unequal divisions of
labor. In integrated joint ventures, work and responsibilities
are assumed jointly by both partners, thus
maximizing the resources of each partner (Norwood and Mansfield,
1999).
Motivations, Selection criteria, Risks and Success factors
International construction companies are faced with many
challenges when seeking to enter a
new market, including difficulties in the transfer of management
methods and company values to the
local staff, or in relations with hand labor, suppliers and
governmental entities. These difficulties,
associated with its risks and costs, can lead to joint ventures
with local partners in order to facilitate
the integration of international contractors in the destination
market, even when the local government
does not require the formation of these partnerships (Fisher and
Ranasinghe, 2001).
Moreover, choosing the right partner is a very important aspect
for the success of
partnerships. When partners have missions, goals, resources and
complementary capabilities,
partnerships are more likely to succeed (Glaister and Buckley,
1997). According to Glaister and
Buckley (1997), task-related criteria and partner-related
criteria should be distinguished. Task-related
criteria are associated with the operational skills and
resources necessary for the partnership’s
competitive success. In contrast, partner-related criteria refer
to the variables that only become
relevant because there is another company involved in the
process.
Besides, international construction markets involve greater
risks than domestic markets,
namely political risks and economic risks (Ling et al. in 2005).
In addition to those risks, partnerships
themselves also entail technical and financial risks. Bing et
al. (1999) categorized these risks
according to three distinct groups: internal, external and
project-specific. Internal risks are specific to
partnerships since they involve different entities that may
enter in conflict as the operations take place.
Apart from that, project-specific risks are due to unexpected
events that occur during the construction
-
4
period, and lead to the increase of time and cost of projects,
or even to quality defects. Lastly, the
external risk group includes the risks that arise from specific
problems of the construction market
where the partnership operates, e.g. the political and legal
system, economic and industrial conditions,
society and the physical environment.
Finally, in view of partnership’s success certain requirements
must be met along the whole life
cycle of that partnership. In their study about joint ventures
in international markets, Bing and Tiong
(1999) divided the success factors according the stage of joint
venture’s life cycle to which they apply:
formation phase or operation phase.
Research Methodology
In order to accomplish the proposed objectives, a set of entry
modes, characteristics,
motivations, selection criteria, risks and success factors, that
apply to the management of local
partnerships of Portuguese construction companies in
international markets, were selected based on
the literature review.
Then a survey was developed based on the selected factors, and
with the help of this survey a
series of face to face interviews were made with top managers of
some of the largest Portuguese
construction companies operating in international markets, in
order to collect the view of these
stakeholders about the management of local partnerships. This
path was chosen because the subject
under study is recent and hasn’t been much explored in Portugal,
which requires a more detailed and
qualitative information that can only be obtained through the
described methodology.
Construction companies with headquarters in Lisbon, in order to
facilitate the realization of the
face to face interviews, and solid international activity were
selected. Based on this selection and the
available contacts, thirteen 45 minutes interviews were
conducted. During these interviews a 5 point
likert scale was used to evaluate the selected factors.
Then a statistical analysis of the results was made using IBM
SPSS Statistics. This software
was also used to calculate Spearman’s ρ correlation
coefficients, Cramer's V association coefficients
and Kruskal-Wallis and Mann-Whitney U hypothesis tests. For the
statistical analysis performed in this
study, a type I error (p) equal to 0.05 was defined. Therefore
for values of sig. < p = 0.05 the
alternative hypothesis are considered statistically
significant.
Finally the obtained data were discussed, and conclusions were
drawn out based on this
discussion.
Data Analysis
For 54% of the companies represented in this study, the
international turnover represents 20-
39% of total the turnover in 2010. Moreover the average
international experience of these companies
is 26 years, the minimum drops to 4 years, the maximum rises to
64, reflecting a high dispersion of
values.
With regard to the country where the Portuguese companies
started their internationalization it
was concluded that 69% of these companies chose Angola, 85%
chose a PALOP, and 92% chose a
former Portuguese colony.
Regarding the geographical areas where Portuguese construction
companies are currently
developing their internationalization processes, it was noted
that all the companies of the study are in
a PALOP, and that 46% of the companies are in North Africa.
Entry modes
It was found that 69% of the Portuguese companies represented in
this study seek to enter
permanently into international markets, while the other 31%
utilize both entry mode types, permanent
and mobile. It should be noted that none of the companies
contemplates solely mobile entry modes
into foreign markets.
Concerning these companies’ entry modes, it was observed that
the establishment of a branch
office is used by 85% of companies, and the creation of a joint
venture company is often adopted,
-
5
since 77% of the respondents said their companies are using it.
Meanwhile, the other two entry modes
are used by fewer companies.
Local Partnerships
Firstly, it was found that all the companies represented in this
study already had local partners
in some of their operations in foreign markets, and that they
consider local partnerships a valid
strategy that will continue to be used in the future in some of
their international operations.
About the functions normally carried out by the local partners
of Portuguese construction
companies, it was noticed that the partners of all the companies
had the mission of establishing
contacts with local authorities. It was also noted that 85% of
the companies asked their partners to
also conduct contacts with customers, and 77% also trust their
partners with the responsibility of
establishing contacts with local suppliers and subcontractors.
Meanwhile, with regard to support in the
construction activities themselves, just over half of the
interviewees believed that their partners should
have this function.
Regarding the types of partnership preferentially adopted by the
Portuguese construction
companies, it was found that 62% of the companies represented in
this study usually choose to adopt
equity joint ventures, while the other 48% prefer non-equity
joint ventures.
Concerning the operation mode preferred in their local
partnerships, it was found that 85% of
the companies represented in this study ideally adopt integrated
joint venture, in which both partners
share risks and liabilities, while the remaining 15% prefer to
adopt non-integrated joint ventures.
Continuing the analysis of the characteristics of the local
partnerships of Portuguese
construction companies, it was also observed that almost all of
the investigated companies seek a
majority position in their local partnerships in foreign
markets.
Finally regarding the preferred duration for their local
partnerships, it should be noted that 69%
of the investigated companies seek to establish long term
partnerships.
Motivations
Table 1 - Rank order of motivations
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Utilize partner’s experience and knowledge about the local
market
4.15 0.90 0 0 4 3 6
2 Meet existing government requirements
3.77 1.09 1 0 3 6 3
3 Risk sharing 3.54 1.13 0 3 3 4 3
4 Increase of size and financial and productive capacity to
participate in bigger projects
3.46 0.97 0 3 2 7 1
5 Decrease of entry costs 3.08 1.04 1 3 3 6 0
6 Gain access to partner’s resources and expertise
3.00 1.16 0 7 0 5 1
7 Increase of market share 2.69 1.11 1 6 3 2 1
8 Decrease of market competition 2.62 1.04 1 6 4 1 1
9 Technology transfer 2.23 1.01 3 6 2 2 0
10 Share research and development costs
2.23 1.01 2 8 2 0 1
The reason deemed most important by respondents, with an average
of 4.15, is "utilize
partner’s experience and knowledge about the local market".
Nonetheless, there are three other
reasons which are quite relevant: "meet existing government
requirements" with an average of 3.77,
-
6
"risk sharing" with 3.54, and "increase of size and financial
and productive capacity to participate in
bigger projects" with 3.46.
Selection Criteria
Table 2 - Rank order of partner-related selection criteria
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Reputation 4.46 0.52 0 0 0 7 6
2 Credibility with clients 4.23 0.73 0 0 2 6 5
3 Objectives compatibility 4.00 1.08 1 0 1 7 4
4 Credibility in banking 3.85 0.80 0 1 2 8 2
5 Financial capacity 3.77 1.24 1 1 2 5 4
6 Referral by business associates 3.69 0.75 0 1 3 8 1
7 Previous successful experiences with the partner
3.23 1.30 2 2 1 7 1
8 Culture similarities 3.00 0.91 1 2 6 4 0
9 Domestic and international workload 2.69 1.11 2 4 3 4 0
10 Similarity in size 2.00 0.82 4 5 4 0 0
11 International experience 1.85 1.07 7 2 3 1 0
It was found that the partner-related selection criteria
"reputation" is the most important with an
average of 4.46. Besides, the criteria "credibility with
clients" and “objectives compatibility" also
received very high scores.
Table 3 - Rank order of task-related selection criteria
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Knowledge about local market and culture
4.62 0.51 0 0 0 5 8
2 Influence over local authorities 4.46 0.66 0 0 1 5 7
3 Good relations with costumers 4.38 0.51 0 0 0 8 5
4 Relationship with the local community 4.23 0.60 0 0 1 8 4
5 Possession of licenses 3.31 1.03 0 3 5 3 2
6 Resources and skills necessary to achieve the project
3.08 0.86 0 3 7 2 1
7 Necessary size to complete the project
3.08 1.04 1 3 3 6 0
8 Experience from similar projects 2.77 1.01 2 2 6 3 0
With regard to task-related selection criteria, it was observed
that there are four criteria
standing out clearly from the other: "knowledge about local
market and culture" with an average of
4.62, "influence over local authorities” with 4.46, "good
relations with customers" with 4.38, and
"relationship with the local community" with 4.23.
-
7
Risks
Table 4 - Rank order of internal risks
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Partner’s financial problems 4.08 0.64 0 0 2 8 3
2 Cultural differences between partners 3.69 0.48 0 0 4 9 0
3 Disagreement or gaps in contract terms
3.69 1.03 0 2 3 5 3
4 Mistrust between partners 3.62 1.26 1 2 1 6 3
5 Loss of control or excessive interdependence
3.54 0.88 0 2 3 7 1
6 Disagreement over work distribution 3.08 0.76 0 3 6 4 0
7 Disagreement on allocation of staff positions
3.08 1.04 0 5 3 4 1
8 Interference of the parent companies of both partners
3.00 1.00 1 3 4 5 0
9 Unwanted leaks of information, knowledge, or technology
2.69 1.03 1 6 2 4 0
10 Interference between partner’s working methods
2.62 0.87 1 5 5 2 0
Beginning with the internal risks in partnerships with local
partners, it was observed that the
risk "partner’s financial problems" appears isolated at the top
of the standings with an average of 4.08.
Then three risk factors appear very close to each other,
"cultural differences between partners" with an
average of 3.69, "disagreement or gaps in contract terms" with
3.69 too, and "mistrust between
partners" with 3.62.
Table 5 - Rank order of project-specific risks
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Client’s cash flow problems 4.62 0.65 0 0 1 3 9
2 Restrictions on hiring foreign staff 3.77 1.36 2 0 1 6 4
3 Shortage of human resources with the
necessary qualifications 3.69 1.25 1 1 3 4 4
4 Excessive project alterations by the
client 3.38 0.96 0 2 6 3 2
5 Errors in the project 3.31 0.95 0 3 4 5 1
6 Work accidents 3.08 1.32 2 3 1 6 1
7 Shortage of competent and financially
stable subcontractors and suppliers 3.00 1.16 1 4 3 4 1
8 Shortage of equipment and materials
with the required quality 2.92 1.12 1 4 4 3 1
9 Partner’s technical incompetence 2.85 0.99 0 6 4 2 1
Continuing with project-specific risks, it appears that the
"client’s cash flow problems" is the
most important risk since it has an average score of 4.62.
Besides, the risks "restrictions on hiring
foreign staff" and "shortage of human resources with the
necessary qualifications" are also relevant,
as they have averaged 3.77 and 3.69 respectively.
-
8
Table 6 - Rank order of external risks
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Force majeure and social disorder 4.23 0.93 0 1 1 5 6
2 Security issues 4.23 0.73 0 0 2 6 5
3 Fluctuations in exchange, inflation
and interest rates 4.15 0.80 0 0 3 5 5
4 Inconsistency of policies, laws, rules
and regulations 4.08 0.86 0 1 1 7 4
5 Restrictions on profit repatriation 3.85 1.14 0 3 0 6 4
6 Import restrictions and local
protectionism 3.69 0.75 0 1 3 8 1
7 Bureaucratic difficulties and delays in
projects and licenses approvals 3.62 0.65 0 1 3 9 0
8 Corruption and bribery 3.38 0.87 0 2 5 5 1
9 Social, cultural and religious
differences 3.23 0.73 0 2 6 5 0
10 Shortages of water, gas and electricity 2.77 0.93 0 6 5 1
1
Finally, looking at the classification of external risks it’s
possible to note that four of them stand
out as the most important: "force majeure and social disorder"
with an average rating of 4.23, "security
issues" also with 4.23, "fluctuations in exchange, inflation and
interest rates" with 4.15, and
"inconsistency of policies, laws, rules and regulations" with
4.08.
Success Factors
Table 7 - Rank order of formation phase success factors
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Selection of a suitable partner 4.85 0.38 0 0 0 2 11
2 Development of a comprehensive,
simple and unambiguous agreement 4.62 0.65 0 0 1 3 9
3 Clear definition of responsibilities and
task planning 4.54 0.66 0 0 1 4 8
4
Establishment of a well-defined
organizational structure of
management and control
4.54 0.66 0 0 1 4 8
5 Hiring qualified and experienced staff 4.31 0.63 0 0 1 7 5
6 Fair distribution of risks and rewards 4.15 0.69 0 0 2 7 4
7 Setting goals and strategies for the
market 4.00 0.82 0 1 1 8 3
8 Development of a conflict resolution
system 3.85 1.07 0 2 2 5 4
9 Establishing long-term strategic
relationships 3.62 0.96 0 2 3 6 2
Looking at the classification of formation phase success
factors, it’s noticeable that the
success factor "selection of a suitable partner" stood out from
the rest with an average of 4.85.
-
9
However there are three other highly rated factors: "development
of a comprehensive, simple and
unambiguous agreement" with an average of 4.62, "clear
definition of responsibilities and task
planning" with an average rating of 4.54, and "establishment of
a well-defined organizational structure
of management and control" also with an average of 4.54.
Table 8 - Rank order of operation phase success factors
Factor Mean Standard deviation
Frequency
1 2 3 4 5
1 Commitment of top management and
all employees 4.77 0.44 0 0 0 3 10
2 Mutual trust between partners 4.77 0.44 0 0 0 3 10
3
Developing a climate of cooperation,
flexibility and openness between
partners
4.62 0.51 0 0 0 5 8
4 Adopting an attitude of seeking
mutual benefit 4.46 0.52 0 0 0 7 6
5 Regular evaluation of partnership
performance 4.23 0.73 0 0 2 6 5
6 Effective communication and
information sharing 4.23 0.44 0 0 0 10 3
7 Effective coordination between
partner’s tasks 4.08 0.86 0 1 1 7 4
8 Ability to deal with cultural, linguistic
and ethical differences 4.08 0.64 0 0 2 8 3
9 Share the necessary resources to
operate 3.62 0.77 0 1 4 7 1
10 Knowledge and expertise transfer
between partner 3.46 0.78 0 1 6 5 1
Finally, regarding the operation phase success factors of local
partnerships, it was observed
that the top four factors were evaluated only as "very
important" or "extremely important":
"commitment of top management and all employees" and "mutual
trust between the partners" with the
same average of 4.77, "developing a climate of cooperation,
flexibility and openness between
partners" which is the third most important success factor with
4.62, and "adopting an attitude of
seeking mutual benefit" ranked fourth with an average of
4.46.
Discussion
Firstly, it was concluded that local partnerships are part of
the strategic choices of
internationalization of all the companies represented in this
study. On another note, it was observed
that the main international destinations of these companies are
currently the PALOP, namely Angola,
due to the cultural proximity and technical supremacy that
Portuguese construction companies have in
these markets.
Entry modes
On the subject of entry modes, it was concluded that the opening
of a branch office and the
formation of a joint venture company are the preferred entry
modes, the first being adopted when the
company wishes to act alone in the market, and the second when
the enterprise wishes to have, or is
required to have a partner. Besides, it was discovered that
companies opt for permanent entries into
markets they consider strategic, supplemented by mobile entries
in other markets where good
-
10
business opportunities arise. For these mobile entries, the
joint venture project emerges as a viable
alternative.
Local Partnerships
Regarding the characteristics that define the local partnerships
of Portuguese construction
companies, it was found that most of these companies prefer
equity joint ventures instead of non-
equity joint ventures, although there are exceptions to these
preferences due to the specificities of
each market and the characteristics of available partners, which
may require the use of different
strategies than the one normally used by the company.
It was also concluded that most companies seek to establish
long-term partnerships, although
this intention is often abandoned because of the partner’s poor
performance. Furthermore, it was
found that equity joint ventures are more suited to these
long-term local partnerships, as they involve
the creation of a new company that allow a deeper connection
between the companies. Meanwhile,
non-equity joint ventures adapt better to partnerships with the
duration of the project, because in this
case the connection between the companies is only made through a
single contract.
Regarding each partner’s functions, it was concluded that
Portuguese construction
companies, particularly in African markets, have to provide the
technical know-how and resources
needed to implement the partnership’s projects, while local
partners essentially contribute with their
extensive knowledge of the local market, thus assuming the role
of contact with the authorities,
customers, suppliers and local subcontractors. Sometimes
companies also ask their partners to give
some support in construction activities, if they have the
necessary technical skills to constitute a valid
help in this field, which does not always happens in less
developed markets. Moreover, it was found
that companies that still prefer equity joint ventures tend not
to expect support from the local partner in
construction activities, as in this type of partnership — more
suited to the long-term — bureaucratic
functions are more important, while those who prefer non-equity
joint ventures typically expect this
support.
It was found as well that most companies prefer integrated joint
ventures, allowing them to
closely monitor the partner’s work and share risks and
responsibilities.
Finally, it was also concluded that the overwhelming majority of
companies try to always have
a majority position in their partnerships, in order to always
hold a high control over the partner and the
partnership in which both participate.
Motivations
Moving on to the motivations, in other words, the factors that
lead companies to adopt local
partnerships, it was concluded that companies opt for local
partnerships to gain access to the
knowledge and experience of the local partner about its market,
especially in unknown markets, thus
avoiding having to obtain this knowledge by more expensive means
like, for example, hiring a local
company that provides a thorough market investigation. The
partner's knowledge about the local
market range from knowledge about the culture and the political
and economic conditions, to
knowledge about the legal system and the contact networks with
subcontractors, suppliers, customers
and government entities, which are essential to a faster
integration into the local construction
environment, and help increase the chances of getting good
projects in a shorter period of time.
Another important motivation leading to the adoption of local
partnerships is the ability to share
the risk of entering into an unknown market, or simply the risk
of a major project.
On the other hand, the possibility of exploiting the partner’s
productive and financial capacities
to form a partnership with larger capacity, thus allowing the
implementation of larger projects, is also
an important motivation, particularly in developed markets where
there are companies that have
enough skills and know-how to become important assets.
It is also important to notice that not always the choice of
having a local partner is a voluntary
decision of firms, as with the three reasons mentioned above.
Sometimes the reasons for the adoption
of local partnerships are due to laws imposed by local
governments that require foreign companies to
meet certain requirements, including the obligation to operate
in the market with a local partner, in
order to protect it from foreign companies.
-
11
Selection Criteria
In the subject of selection criteria, in other words, the
factors determining the choice of local
partners, it was found that companies seek a partner suited for
the operational needs of the
partnership and their future projects. This means that selection
criteria are associated with the
functions that companies want their partners to assume, i.e.,
functions of contact with the local
government, customers, subcontractors and suppliers. As such,
companies try to select partners who
have influence over the authorities and who already have some of
the licenses required to the
partnership’s operations. Partners should also have a good
client portfolio with whom they maintain
good relationships in order to obtain good job opportunities
more easily. Besides, partners should also
have a good relationship with the local community in order to
keep the population satisfied with the
work performed in its territory, and have a thorough knowledge
of the local market and culture so they
can transmit it to the company.
Apart from that, companies seek a partner that also meets the
basic criteria, i.e. who has good
reputation within the local community and who is not only
credible in the eyes of customers but also
banks, in order to facilitate the integration of the company in
the market and the partnership’s
operation. Moreover partners should have compatible objectives
so that they both succeed beyond
any internal conflict. The selected partner should also be
financially healthy so as not to become a
burden to the company or even, in case of developed countries,
contribute to the partnership from a
financial point of view. Finally, potential partners should have
good references from a previous
successful experience with the company, or through information
provided by a business associate.
Risks
About risks, or the factors that threaten the operation of local
partnerships, it was concluded
that external risks are more threatening than project-specific
risks and internal risks. Thus, the external
factors that companies are more concerned about are the
unforeseen events that lead to social
disturbs or natural disasters, especially in less developed
countries; the security issues in the foreign
country, that may not only affect the construction site but the
workers as well; the economic risks due
to fluctuations in exchange, inflation and interest rates, which
can determine the financial return from
the international operations; the legal risks due to the
inconsistency of policies, laws, rules and
regulations; the local protectionism that leads to restrictions
on repatriation of profits and imports,
affecting foreign companies’ operations; the bureaucratic
difficulties in legal procedures and the delays
in projects and licenses approval coupled with the corruption
and bribery; and finally the social,
cultural and religious differences among expatriates and locals,
which can lead to interaction
difficulties and misunderstandings that may undermine the image
of the company and hamper its
operation in the foreign country.
The project-specific risks that constitute the biggest threat to
the operation of companies are
clients’ cash flow problems, as this lack of funding may
influence the progress of the project. Also, the
restrictions on hiring expatriates associated with the shortage
of human resources with the necessary
qualifications is another important aspect and can create a
shortfall of quality and productivity. Lastly,
errors in the projects can also constitute a threat. This may
occur because of the many changes to the
project by the client and may cause delays in work
execution.
Finally, the internal factors that constitute the greatest risk
are the partner’s financial problems.
This can become a burden for the company and influence the
financial health of the partnership.
Moreover, cultural differences between partners can cause
difficulties in understanding and
communication, and can create conflicts that eventually lead to
loss of trust between them, thus
impairing the functioning of the partnership. Furthermore,
disagreements or gaps in contract terms
may lead to the emergence of problems if the partnership goes
the wrong way. Finally, the loss of
control over the partnership or the creation of excessive
interdependence between the partners can be
problematic for the international growth strategy of the
company.
-
12
Success Factors
Lastly, the success factors are the factors that lead to
successful local partnerships. On the
formation stage of local partnerships it is critical to start by
selecting a suitable partner. From that point
on, it is necessary to establish a thorough, simple and clear
agreement between the parties, to define
the responsibilities of each partner, to plan and coordinate
each partner’s tasks, to define the
organizational structure of management and control of the
partnership, to hire experienced staff with
the appropriate qualifications to the needs of the partnership,
to define an appropriate and fair
distribution of risks and rewards between both parties, to
outline the goals and action strategies in the
foreign market, to develop a conflict resolution system, and to
establish long-term strategic
relationships.
Then, in the operation phase of the partnership, it is
imperative that top management of both
partners and all of its employees become committed to the
success of the partnership, so that both
sides develop a climate of trust among all. On this basis it is
necessary to develop a climate of
cooperation, flexibility and openness between the partners, to
always seek solutions that benefit both
partners, to regularly evaluate the performance of the
partnership, to communicate through effective
channels and to share all relevant information, to coordinate
harmoniously individual tasks, to learn to
deal with cultural, ethical and linguistic differences, and to
share all the resources, knowledge and
skills required for the partnership’s operations.
Conclusions
As a conclusion, it was possible to understand that local
partnerships are part of the current
and future strategic options of the analyzed Portuguese
construction companies. Moreover,
concerning entry modes, it was concluded that the opening of a
branch office and the formation of a
joint venture company are the preferred entry modes, the first
being adopted when the company
wishes to operate alone in the market, and the second when the
company intends to have or is
required to have a partner. As for the characteristics that
define local partnerships, it was found that
most companies prefer long-term equity joint ventures in which
they have a majority position and an
integrated operation mode, so as to always hold a high control
over the partner whose main functions
are to contact with the authorities, customers, suppliers and
local subcontractors. Finally, it was
possible to identify the main motivations that lead Portuguese
construction companies to adopt local
partnerships in international markets, the selection criteria
that determine the choice of those local
partners, the risks that threaten the operation of these local
partnerships, as well as the factors that
lead to the success of these same partnerships.
It should be noted that given the sample’s small size, it is not
possible to extrapolate the
obtained results to the entire universe of Portuguese
construction companies with operations in
international markets. In addition to this factor, it is also
noted that the experiences reported in the
interviews end up focusing a lot in what is happening in African
markets, as these are the main
international destinations of Portuguese construction companies,
and despite the existence of other
international destinations, these end up not being taken into
account sometimes due to their lesser
importance compared to African markets.
However, the conclusions drawn out in this study allow
Portuguese construction companies to
realize the way to articulate local partnerships within their
internationalization strategies, and better
understand the factors that can influence the management of
their local partnerships in international
markets.
References
Bing, L.; et al. (1999). Risk management in international
construction joint ventures. Journal of
Construction Engineering and Management (125:4), 277-284.
-
13
Bing, L.; Tiong, R. (1999). Risk management model for
international construction joint ventures.
Journal of Construction Engineering and Management (125:5),
377-384.
Chen, C. (2008). Entry mode selection for international
construction markets: the influence of host
country related factors. Construction Management and Economics
(26:3), 303-314.
Chen, C.; Messner, J. (2009). Entry mode taxonomy for
international construction markets. Journal of
Management in Engineering (25:1), 3-11.
Chen, C.; Messner, J. (2011). Permanent versus mobile entry
decisions in international construction
markets: influence of home country and firm-related factors.
Journal of Management in Engineering
(27:1), 2-12.
Deloitte; ANEOP (2009). O poder da construção em Portugal:
impactos 2009/2010. Lisboa, Deloitte
Consultores, S.A.
Fisher, T.; Ranasinghe, M. (2001). Culture and foreign
companies’ choice of entry mode: the case of
the Singapore building and construction industry. Construction
Management and Economics (19),
343-353.
Glaister, K.; Buckley, P. (1996). Strategic motives for
international alliance formation. Journal of
Management Studies (33:3), 301-332.
Glaister, K.; Buckley, P. (1997). Task-related and
partner-related selection criteria in UK international
joint ventures. British Journal of Management (8), 199-222.
Gunhan, S.; Arditi, D. (2005). Factors affecting international
construction. Journal of Construction
Engineering and Management (131:3), 273-282.
Ling, F.; et al. (2005). Entry and business strategies used by
international architectural, engineering
and construction firms in China. Construction Management and
Economics (23), 509-520.
Mohamed, S. (2003). Performance in international construction
joint ventures: modeling perspective.
Journal of Construction Engineering and Management (129:6),
619-626.
Norwood, S.; Mansfield, N. (1999). Joint venture issues
concerning European and Asian construction
markets of the 1990's. International Journal of Project
Management (17:2), 89-93.
Sillars, D.; Kangari, R. (2004). Predicting organizational
success within a project-based joint venture
alliance. Journal of Construction Engineering and Management
(130:4), 500-508.