Internationalization Of Construction Management: Benefits, Types, And Motives

INTERNATIONALIZATION OF CONSTRUCTION MANAGEMENT: BENEFITS, TYPES, AND MOTIVES

Managing construction projects is inherently complex, but when these projects are located in foreign countries, the complexity intensifies. This is the main reason why a limited number of companies are ready to undertake this heightened risk. However, those who dare to expand their operations beyond their home country and manage to thrive can reap substantial rewards. One of the key advantages is diversification of revenue sources. In a 2020 report by ENR, among the top 250 global construction companies, only 73% reported earnings from their local operations, whereas 90% recorded profits from their international activities.

The International Construction industry encounters a unique issue where companies choose to incorporate in jurisdictions such as the Cayman Islands or the Bahamas for tax benefits, despite being based elsewhere. Moreover, the complexity increases as some businesses operate through a network of multiple national headquarters. A study conducted by the Institute on Taxation and Economic Policy in 2017 revealed that within the prior eight years, about 258 of the top Fortune 500 companies in the US paid an average tax rate of 21%, in contrast to the prevailing federal rate of 35%. Notably, eighteen significant companies, including General Electric, paid no taxes. By 2021, even though the federal tax rate was reduced to 21%, 379 out of the 500 companies had managed to reduce their tax liabilities to a mere 11%. The common strategy for lowering corporate tax is by transferring 'paper losses' from foreign subsidiaries to the parent company's balance sheet.

There are two fundamental characteristics of international construction that need to be grasped. First, there is a considerable variation between national and international construction sector breakdowns. The Construction industry in India is divided into several categories, including Commercial, Residential, Industrial, Infrastructure, Transportation, and Energy and Utility construction. In comparison, while 28% of international construction projects fall under the category of building construction, the majority are related to infrastructure. Notably, a third of these international projects are associated with transportation. The variation in the types of projects between domestic and international construction markets can be linked to the increased financial, engineering, and management challenges typically associated with executing large-scale infrastructure projects.

This leads to a second noteworthy point: only a select few construction firms possess the capability to execute complex infrastructure projects. The primary flow of this exchange tends to be from wealthier to less affluent nations. Economic growth relies on essential infrastructure such as factories, energy resources, ports, and roads, which commercial activity hinges on. This holds true for both developed and developing countries.

It might come as a surprise to know that while developed nations accounted for almost all the world's GDP in the post-war era, the situation has drastically changed. Nowadays, as much as half of the world's economic output is generated by developing or 'emerging' nations.

In pursuit of this, developing countries strive for infrastructure to kickstart and boost their economic growth, whereas developed nations continuously upgrade their infrastructure to keep up with their economic expansion. Generally, construction accounts for 5% to 15% of a nation's GDP, with the global construction market standing at the midpoint, contributing 10% to global output. Simply put, both developed and developing countries require and invest in intricate capital projects. However, the technology and financial capability needed to deliver such projects are primarily found in wealthier, more advanced nations.

This disparity between nations that need infrastructure and those that can supply it creates a state of imbalance. This imbalance subsequently results in offshoring. Consider the above diagram, which illustrates the dynamic at play. Quadrant A shows that developed nations both produce and utilize a large share of the world's primary capital construction. Sometimes, these countries can cater to their own demands, or they might form consortiums with other developed nations nearby. Quadrant B demonstrates that developing nations also have a considerable need for capital projects, but these are primarily delivered by companies from developed nations. Quadrant C, however, signifies that a smaller fraction of construction projects in developing countries are managed internally, while Quadrant D suggests that developing countries don't significantly contribute to the construction needs of developed nations.

There are two distinct types of construction firms in terms of branching out into foreign markets. The first type encompasses those firms that do not view borders as barriers and are willing to cross them to increase their market share and diversify their operations. These firms can be referred to as 'proactive internationalizers.' The second type includes those firms that are compelled to explore new markets when their local market enters a recession, and opportunities become scarce. These firms expand overseas out of necessity and can be termed 'reactive internationalizers.' Regardless of the approach, the decision to venture overseas is driven by business objectives.

Four primary motives inspire this transnationalism. The first is the desire to tap into new markets that may promise higher returns, despite the additional uncertainties, challenges, and risks. The second is to engage in unfamiliar projects to enhance and refine specific skills that boost competitive advantages domestically. The third reason is to buffer against domestic economic fluctuations by transitioning to foreign projects during economic downturns, thereby stabilizing cashflow impacts, enhancing asset utilization, and preserving employment levels. The final motivation is to pursue and seize funds being invested abroad, whether it's governmental or developmental aid or domestic firms or clients expanding overseas.

?