Factors influencing Malaysian construction firms in venturing into international market

2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 Factors Influencing Malaysian Construction Firms in Venturing into International Market Che Maznah Mat Isa, Nur Kamaliah Mustafa, Hamidah Mohd Saman, Siti Rashidah Mohd Nasir and Che Khairil Izam Che Ibrahim, Lecturers, Faculty of Civil Engineering, UiTM, Malaysia Abstract-- A tremendous demand of development worldwide has gained interest of Malaysian construction firms to venture into international construction domain. Identifying and analyzing major determinants of the firm’s internal and external factors are crucial in order to ease the complexity in global market expansion. This paper identifies the relative importance of the strengths, weaknesses, opportunities and threats (SWOT’s) related to the internationalization of Malaysian contractors. Responses were received from thirty one (31) Class A and Grade 7 Malaysian construction firms registered with CIDB Malaysia in 2010. The findings reveal that “good track record”, “specialist expertise” and “international network” were the most influential strength factors for the firms to effectively compete in international market. However, “shortage of financial resources” as well as “material and labor resources” contributed to the weaknesses in exploring international market. The study also reveals that “opening up new market”, “technological advancement” and “beneficiary international agreements” offered huge opportunities in overseas market. Nevertheless, factors such as “bribery in the host country”, “increase of interest rate” and “lack of awareness” were perceived as the threats due to difficulties in dealing with moral problems, financial risks and unfamiliar environment within the host country. Finally, this study is of relevance to Malaysian construction firms as it systematically highlights the internal and external factors those may affect their performance in international market. These findings may assist them to make necessary preparatory works by enhancing the strengths, reducing the weaknesses, seizing the opportunities and facing the threats in international market, as these elements are consistently changing. Index Terms— International market, Malaysian construction firms, SWOT factors I. INTRODUCTION G oing international can be viewed as a process of foreign market entry decisions through which a firm moves from operating solely in its domestic place to international markets. Many Malaysian contractors those involved in completing Malaysia’s mega projects were found to have developed the competencies and capabilities required to expand their business internationally. Nowadays, Malaysia’s competitive and saturated construction market has led many domestic firms to venture into international market. With fewer projects available locally, the bigger construction firms are C. M. Mat Isa, is a senior lecturer with the Faculty of Civil Engineering, Universiti Teknologi MARA, Shah Alam, 40450 Selangor (e-mail: chema982@salam.edu.my) S.R. Mohd Nasir is a senior lecturer with the Faculty of Civil Engineering, Universiti Teknologi MARA, Shah Alam, 40450 Selangor H.Mohd Saman is an Assoc. Professor with the Faculty of Civil Engineering, Universiti Teknologi MARA, Shah Alam, 40450 Selangor N. K. Mustafa and C.K Che Ibrahim are lecturers with the Faculty of Civil Engineering, Universiti Teknologi MARA, Shah Alam, 40450 Selangor. 978-1-4673-0654-6/12/$31.00 ©2012 IEEE penetrating international construction market. Taking advantage of global opportunities allows the Malaysian construction industry to reduce the effects of domestic market conditions and have better control over its own development. The demand was particularly buoyant in the international market especially in the developing countries, has attracted several Malaysian contractors to expand their business abroad. Globalization has provided an enormous demand and opportunities of the development worldwide, and since then it has brought many Malaysian contractors to expand their businesses into international market. According to the official statistic from Malaysia Construction Industry Development Board (CIDB) by year 2010, the numbers of international contracts awarded to Malaysian contractors have significantly increased from 25 projects in 2000 up to 652 projects with values about RM92.138 mil in 2010. There were 109 Malaysian contractors bid on projects in international market in 49 countries worldwide, mainly in developing countries such as Middle East and South Asia due to availability of construction market demand (CIDB, 2010). Internationalization channels the flow of information and resource allocation, bringing people, organizations and countries closer (Wong, 2007). However, construction firms that shift or diversify towards a global marketplace face greater risks than the domestic market. Globalization creates business environments which impose the political, financial, cultural and legal risks (Gunhan and Arditi, 2005). Some of the determinants that influence the international market entry strategies in term of choices of market, entry mode and entry timing are the firms’ internal and external factors. Numerous studies were carried out related to the opportunities, threats, risks and challenges in international market (Gunhan and Arditi, 2005; Di Marco et al., 2010; and Lee et al., 2011). According to Dikmen and Birgonul (2004), determination of the firm’s strengths and weaknesses and matching them with the market opportunities and threats is a critical strategic decision that requires extensive environmental scanning. Fig.1. Conceptual Framework in Determining Malaysian Internal and External Firm’s Factors to Venture into International Construction Market Figure 1 depicts the intention of this paper which is to identify and analyze the relative importance of SWOT factors of Malaysian firms in the international construction market. 168 2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 II. LITERATURE REVIEW Previously, Gunhan and Arditi (2005) has investigated United States contractors on their strengths, opportunities and threats in international market and it was understood that assessing those factors associated with global market are crucial to achieve sustainable business growth. Following to that, Han et al. (2010) investigated the critical issues and successful strategies obtained by global contractors to sustain their growth in international market, concluding that the uncertainty and aggressive changes of global construction can cause serious threats to the international players. Han et al. (2010) also suggested that they must possess complementary skills and adopt excellent strategies to encounter the challenges in rapidly changing market environment. Fig. 2. SWOT attributes for Chinese international contractors (Zhao et al., 2009) Therefore, thorough assessment of international market environment and firm’s capabilities must be done prior to their decisions to enter the competitive and high risk global market. Based on the study by Zhao et al. (2009), SWOT analysis was used to assess the Chinese contractors’ abilities, capabilities and also to assess international market environment. Some of the SWOT attributes used by Zhao et al. (2009) in their study are as follows: market competition; economic, social and political environment; management, financial and technological abilities; and, cost and resources differences. The findings revealed that Chinese government played an important role by holding a strong support and promotion to the international Chinese contractors. The study found that the strengths of Chinese contractors were from the low costs of workforce, materials, machinery and equipment, and specialty expertise even though they are lack of R&D capacity and commitment, inadequate design capacity, lack of highly skilled labor and low productivity, weak financing capacity, lack of familiarity with the local system, and language disadvantage. Ling and Gui (2009), suggested for the foreign contractors to grab the opportunities in Chinese market by offering their strengths in distinguished product and services thus complementing the local Chinese contractors those were behind in design and technical capability, project management skills and financial capacity together with lack of experience in international project. Hence, recommendations were made to foreign contractors based on SWOT analysis carried out on the Chinese consulting firms operating in China. Nonetheless, the nature and complexity of international business environment is very uncertain and different from one country to another. A study by Ling et al. (2009) on Vietnamese firms shows that they lagged behind foreign firms in financial capacity, experience in complex projects, knowledge in advanced design and construction technology, and management ability. Another study carried out by Chen and Orr (2009) on Chinese contractors in Africa revealed that the needs for good infrastructure, availability of financing sources and availability of natural resources are among the top opportunities. Therefore, various complex variables that can affect the performance of construction firms need to be considered in managing and reducing the risks associated with international market (Gunhan and Arditi, 2005). International contractors must acquire a superior strategy in order to endure the increasing dynamics and uncertainties in today’s construction industry. Based on the review of previous studies, foreign construction firms have taken different strategies in order to penetrate into foreign market (Lu, 2010; Venegas and Alarcon, 1997). The complexity and uncertainty of international business entails into higher risk with its external and internal barriers to enter the foreign market. As supported by Lu (2010), SWOT analysis has become a popular method to assist strategic planning in various businesses including construction. Therefore, SWOT analysis is considered as a suitable and practical tool to assess Malaysian firms to viably formulate their strategic planning in international ventures. The aim of this paper is primarily to rank the relative importance of the factors influencing internationalization process based on Malaysian construction firms those had gained experience in international market. III. METHODOLOGY The method adopted in this study was by administering the survey questionnaires. The questionnaires with cover letter were sent with self-addressed and prepaid enveloped to the respondents. They were requested to return the questionnaires within 3 weeks-time from the date of the letter posted. The cover letter explained the objectives and the relevancy of the study, and assured the respondents’ confidentiality. A contact number was also provided in case clarifications are needed. A. Sample Selection Ninety five (95) numbers of contractors with Grade 7 and Class A firms were selected based on the list provided by the CIDB of Malaysia. They were involved in international projects under various sectors such as buildings, infrastructures, and branches of engineering, mechanical and electrical, power transmission and plant, and oil and gas. B. Questionnaires Design The questions were divided into two parts: Part 1 GeneralApplicable to firms those have had experience in international construction market. The questions were on their contracting experience, types of contracting activities, entry strategies in terms of entry modes, entry timing and market selection in penetrating the foreign construction market. Part 2 Influencing Factors - The questions enquired their opinions on the influential factors in term of the firm’s strength and weakness, awareness regarding the opportunities 169 2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 and inherent threats in the international market. TABLE I FACTORS RELATED TO THE STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS OF MALAYSIAN CONSTRUCTION FIRMS IN THE INTERNATIONAL CONSTRUCTION MARKET discussion viewed is based on the first three factors that reached the highest ranking. Nevertheless, other factors also have some influence which might be vital to the success of the Malaysian firms’ venturing into international market. A. Key Factors Related to Strengths of Malaysian Construction Firms Associated with International Construction TABLE II RELATIVE IMPORTANCE INDEX (RII) ON AGREEMENT FOR FACTORS RELATED TO THE STRENGTHS OF MALAYSIAN CONSTRUCTION FIRMS IN THE INTERNATIONAL CONSTRUCTION MARKET Table I shows the matrix of SWOT factors to be analysed and the matrix was included in the questionnaires. The matrix was derived from literature review which parts of them are discussed in the earlier section. C. Respondents In total, 31 responses were received, giving a response rate of 32.6 per cent. All respondents were from the construction firms with experience in the international market. There were 64 non response with six (6) questionnaires returned back, which may indicate that the firms have moved or no longer involved in any overseas contracts. Despite the fact that the response rate is quite small, it remains representative because more than fifty per cent (50% - 17 out of 31) of the respondents were from the experienced and considerable large firm size and have been successful in international construction market, namely Malaysian Resource Corporation Berhad (MRCB), UEM Builders Berhad, Gamuda Engineering Berhad, Sunway Construction Berhad, IJM Construction Sdn Bhd, Bumi Highway Sdn Bhd, ESC Project Sdn Bhd, Bina Puri Sdn. Bhd and Bumi Highway Ventures Berhad. These firms are well known as experts in their contracting business and have gained recognition in domestic market and have reflected in the high scores in the domestic construction market index. Their involvement in the international market has contributed significantly to the major determinants of the firms’ internal and external factors. This further ensures the reliability and validity of the survey results. D. Data Analysis This part of questionnaire required the respondents to evaluate the influence of the given internal and external factors on internationalization of their firms by stating the level of agreement with a five point scale (1: Strongly Disagree; 2: Disagree; 3: Neutral; 4: Agree; and 5: Strongly Agree). The mean of responses were then translated into Relative Importance Index (RII) reflecting the factors related to the strengths, weaknesses, opportunities and threats, and then were ranked accordingly. IV. RESULTS AND DISCUSSIONS The following results are critically analysed and discussed based on opinions and views from the respondents and supported by the literature reviews done earlier. The Table II shows the ranking of key factors related to strengths of Malaysian construction firms in international market. Results show that Factor S8,”Track record” came out as the most significant strength with the highest RII value of 0.871 followed by Factor S1, “Specialist expertise” (0.843) and Factor S7, “International network” (0.836). 1. Track Record The findings show that the respondents’ firms that have ventured abroad have good track records by successfully completing the local and overseas projects. Through involvement and participation in these projects, they have gained useful experience, knowledge, skills, technology and expertise. This finding is supported by a study carried out by Gunhan and Arditi (2005) who have also found out that track record was the most important factor for the specialist and big scale project management firms. Hence, previous performance of past successes creates goodwill and provides motivational factor for entry strategies. 2. Specialist Expertise The next influencing factor affecting the firm’s capabilities in international market is “Specialist expertise”. The finding indicates the respondents’ views that to successfully operate in the international market or to be distinct from other foreign competitors they must acquire comprehensive and specific technical and management expertise and capabilities as shown in the study carried out by Ngowi et al. (2005). Expertise in terms of technology also enhances their capability when handling international projects. This finding is echoed by Zhao et al.(2009) where the Chinese contractors’ preferred to adopt more sophisticated technology and methodology that were easier to be transferred into international market. 3. International Network Most of the respondents agreed that a strong relationship with oversea partner in establishing connection in foreign countries is important in order to develop the strength of the company in overseas. According to Halpin and Huang (1995), most of the companies tend to seek an advice and guide through international network to ensure information availability and compatibility. Gunhan and Arditi (2005) 170 2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 stressed the importance of having international marketing network to secure their position and to get accurate information of forthcoming project, buyers, and potential competitors regarding the overseas market. However, the contractors must not rely on network alone based on the study by Abdul Aziz (2011) where the international success of the Malaysian contractors rests not only on the business networks but also their competitive assets. B. Key Factors Related to Weaknesses of Malaysian Construction Firms Associated with International Construction TABLE III RELATIVE IMPORTANCE INDEX (RII) ON AGREEMENT FOR FACTORS RELATED TO THE WEAKNESSES OF MALAYSIAN CONSTRUCTION FIRMS IN THE INTERNATIONAL CONSTRUCTION MARKET The ranking of RII values in Table III indicates “shortage of financial resources” and “shortage of labor and material resources” as major weaknesses for the Malaysian contractors with RII values of 0.871 and 0.800, respectively. 1. Shortage of Financial Resources The respondents believed that failure in providing sufficient financial resources significantly affect the company’s entry strategies in penetrating foreign market. This finding is in line with the study by Ling et al. (2009) where Vietnamese contractors lagged behind the competitors due to their weak financial capacity. Moreover, international business expansion would increase the cost of debt if there is no comprehensive strategic financial plan. Yee and Cheah (2006) stated that lacking in term of company’s asset liquidity and capital structure are interrelated to shortage of financial resources. Even for international Chinese contractors, shortage of working capital has been one of the major barriers to secure overseas project (Zhao et al., 2009). In the opinion of the authors, international projects are valuable in price and complex undertaking. Thus, shortage of financial can lead to the shortage of material resources, due to the increase cost of labor, material, equipment which is critical to project delivery. Hence, the construction firms must realize that they must have a comprehensive and strong financial package before participating in international market. As revealed by the previous studies (Zhao et al. (2009); Lu et al. (2009)), Chinese government played an important role in giving strong support and promotion, negotiating with host governments, implementing coherent policy, reducing bureaucratic obstacles and offering loans via the state-owned banks or letters of credit to the international Chinese contractors. From CIDB database (2010), it is noted that several Malaysian contractors have secured overseas job by executing the project using concession based on government to government (G to G) arrangement. It shows about 1 in 3 of the ongoing projects was procured through concessionaires as compared to 1 in 8 on the previously completed projects. This is one way to ease the financial burdens that have been faced by Malaysian construction companies in bidding the international project. 2. Shortage of Labor & Material Resources The “shortage of labor and material resources” for the projects is the next chosen weakness by the respondents. The authors view that failure to establish relationship with the suppliers within the host country contributed to the shortage of resources and can be detrimental to the firms’ performance. One of the major factors contributed to the rapid international Chinese contractors was an abundant supply of cheap and skilled manpower (Lu et al., 2009). Hence, inability of foreign companies to provide innovative employee attraction and retention packages can lead to the shortage of labor especially for the local employees. C. Key Factors Related to Opportunities of Malaysian Construction Company Associated to International Construction TABLE IV RELATIVE IMPORTANCE INDEX (RII) OF AGREEMENT FOR FACTORS RELATED TO THE OPPORTUNITIES OF MALAYSIAN CONSTRUCTION COMPANY IN INTERNATIONAL CONSTRUCTION MARKET Table IV shows the ranking of respondents’ opinion on the opportunities for in international market. “Opening up new markets”, “technological advancement” and “beneficiary international agreement” are the most prominent factors related to the opportunities with RII values of 0.828, 0.814 and 0.807, respectively. 1. Opening up new markets Openness of new market encourages Malaysian contractors to invest in other countries and attract financial institutions to provide loans for construction project in new market area (Gunhan and Arditi, 2005). As construction market is one of the major targets of trade liberalization, Lu et al. (2009) encouraged the Chinese contractors to expand in the new overseas market which provides tremendous opportunities. 2. Technological Advancement The next prominent factor related to the opportunities in the international construction is “technological advancement”. It is noticeable that construction firms may establish or learn about the technological innovation for overseas activities. Lu et al. (2009) found that the limited use of ICT by Chinese international contractors constrains them from achieving better performance in international market. Hence, by applying advanced ICT, Malaysian contractors can either integrate with local partner or as the contributive partners in order to increase 171 2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 their technological capability to achieve better performance. However, for continual improvement Malaysian construction firms must keep up with the emerging technology and participate in technology research and development. 3. Beneficiary International Agreements During the last decade, the world witnessed the dramatic expansion of opportunities for construction companies in international market (Han and Diekmann, 2001). One of the changes leading to the vast opportunities was the establishment of international agreements such as General Agreement on Tariffs and Trade (GATT) and development of regional Free Trade Blocs. Malaysian construction firms agreed that these agreements have provided huge opportunities in overseas market in term of elimination of discrimination against foreign countries and open procurement markets. In addition, these agreements were likely to increase the construction trade and realign the construction industry by encouraging the formation of alliances and joint ventures (Gross, 1991). D. Key Factors Related to Threats of Malaysian Construction Firms Associated with International Construction TABLE V RELATIVE IMPORTANCE INDEX (RII) OF AGREEMENT FOR FACTORS RELATED TO THE THREATS OF MALAYSIAN CONSTRUCTION COMPANY IN INTERNATIONAL CONSTRUCTION MARKET Table V shows the ranking of agreement by respondents on the factors related to threats in international market. These environmental factors such as “bribery in the host country”, “increase of interest rate”, and “lack of awareness” are perceived as threats to the Malaysian contractors reflected by RII values of 0.827, 0.814 and 0.812, respectively. 1. Bribery in the Host Country “Bribery” or corruption has been the problems since decades ago by extending as the barriers to entry in the international market expansion around the world (Karakaya and Stahl, 1991). Unfamiliarity and difficulty in dealing with the moral problem and environment within the host country can affect Malaysian contractors’ businesses. Habib and Zurawicki (2002) stated that foreign companies were unwilling to deal with the planning and operational pitfalls related to an environment within the host country with a different corruption level. Hence, Ling et al. (2009) suggested foreign firms to be attentive of corruption and develop contingency plans to control wasteful spending and also recommended the foreigners to undertake commercially viable private projects rather than government projects as there is less corruption in these projects. In addition, Zhao et al. (2009) pointed out that corruption particularly in developing countries is common due to instability of political risk. Bribery can be difficult to manage, risky and costly, but most importantly it is morally wrong. Hence, the Malaysian construction firms should take actions to fight and avoid corruption for their long-term interest in the oversea market. 2. Increase of Interest Rate Another factor that has drawn attention of Malaysian companies was high commission or “increase of interest rate” imposed by the bank and that they were having difficulties in paying these rates to the local banks. This may be caused by high transaction costs due to the cost of exchange. The contractors have to bear these costs every time they changed cash from one currency into another currency which would include the commission fee paid to foreign exchange dealers and bank charges for moving cash from one location to another (Kapila and Hendrickson, 2001). Increase of interest rates is usually caused by the increase of instability or risks in international construction environment. Hence, participation in international projects can be considered as a high risk business where the construction firms need to have a high capital base in order to obtain bank finance and be able to pay the rates imposed in the transaction process. 3. Lack of Awareness Results show that there was an obvious threat as a result of “lack of awareness” faced by Malaysian contractors in term of culture and foreign language. This may be caused by lack of country visit and poor understanding of international market environment, unfamiliarity with the foreign market systems in term of currency and sophistication of services, inability to establish relationship with the oversea contractors which can affect the dealing and negotiating process with foreign companies and authorities. Hence, Zhao et al. (2009) emphasized that it is crucial to understand the cultural, regulatory and legal system of foreign market’s work in order to have a strong knowledge and adequate information regarding local host country’s system. V. CONCLUSIONS International construction market provides huge potentials that attracted Malaysian contractors to expand their businesses. However, differences in the domestic market compared to the international market present the necessity for the contractors to reexamine their strengths, weaknesses, opportunities, and threats when entering global construction market. It is pointed out that as the firms internationalize, factors affecting the expansion must be taken into consideration before they can strategize and implement the action plans. On the whole, empirical findings on the relative importance of factors indicate that “track record”, “specialist expertise” and “international network” were the most important strengths; “shortage of financial and material resources” were the most considerable weaknesses; “opening up new market”, “technological advancement” and “beneficiary international agreements” were the most significant opportunities; and finally, “bribery”, “interest rate increase” and “lack of awareness” were the most important threats. The international construction market is huge but imposes challenges for Malaysian firms related to some major constraints such as environmental, social and economic risks. In essence, this study offers a valuable reference of 172 2012 International Conference on Innovation, Management and Technology Research (ICIMTR2012), Malacca, Malaysia : 21-22 May, 2012 practices that interested Malaysian construction firms can adapt as strategies and preparation before moving internationally. Moreover, the findings of this study can be adopted by the local construction firms that aim to position themselves in the global market as it considers a specific important spectrum of successful international Malaysian firms decision making based on their business ventures. market”, Journal of Management in Engineering, Vol. 25, No. 4, pp. 166-176, October 1, 2009. [18] W. 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Shen and T., “Strengths, Weaknesses, Opportunities, and Threats Analysis of Chinese construction companies in the global 173 Che Maznah Mat Isa was born in Jitra, Kedah, Malaysia. She graduated with a BSc. of Civil Engineering from the University of North Carolina at Charlotte, NC, United Stated and MSc. in Integrated Construction Project Management, Universiti Teknologi MARA, Shah Alam, Malaysia. Her employment experience as a lecturer started with the Federal Institute of Technology, Kuala Lumpur from 1991 until 1994, then continues with the Universiti Teknologi MARA since 1994 until now. She was a Project Manager with the Development Division, Universiti Teknologi MARA from 2002 to 2006 handling projects at various phases for university’s projects all over Malaysia. She is a Professional Engineer registered with Board of Engineers Malaysia and a Member of Institute of Engineers Malaysia since 2005. Her interests include international management for construction, project management and risk management. Currently, she is pursuing her PhD related to international construction market entry strategies.