International Journal of Construction Management Civil Engineering

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Civil Engineering Consultants from Developing Countries: An Exploration of Malaysian Firms a

Abdul-Rashid Abdul-Aziz & Yuk-Hui Law

b

a

School of Housing Building and Planning, Universiti Sains Malaysia, 11800 Minden Penang, West Malaysia, Malaysia. Email: b

School of Housing Building and Planning, Universiti Sains Malaysia, 11800 Minden Penang, West Malaysia, Malaysia. Email: Published online: 10 Feb 2014.

To cite this article: Abdul-Rashid Abdul-Aziz & Yuk-Hui Law (2012) Civil Engineering Consultants from Developing Countries: An Exploration of Malaysian Firms, International Journal of Construction Management, 12:2, 1-21, DOI: 10.1080/15623599.2012.10773187 To link to this article: http://dx.doi.org/10.1080/15623599.2012.10773187

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The International Journal of Construction Management (2012) Vol. 12 No.2, 1-21

CIVIL ENGINEERING CONSULTANTS FROM DEVELOPING COUNTRIES: AN EXPLORATION OF MALAYSIAN FIRMS Abdul-Rashid ABDUL-AZIZ1 and Yuk-Hui LAW2

Downloaded by [Universiti Sains Malaysia] at 23:20 03 September 2014

School of Housing Building and Planning, Universiti Sains Malaysia, 11800 Minden Penang, West Malaysia, Malaysia. 1 Email: [email protected] 2 Email: [email protected]

Abstract Studies on civil engineering consultants from developing nations making an impact overseas are lacking. Research was conducted to explore the internationalisation of Malaysian civil engineering consultants. The mixed method combining a postal questionnaire survey and interviews was adopted. The sampled firms varied in terms of age, size and legal status. They have serviced countries in Asia, the Middle East, Australasia, Africa, and North and Central America. Their overseas ventures were driven by diverse motives, the two most influential being top management decision and unexpected opportunities. Patronage from clients and consultants provided the main source of work. Adopted market presence modes for initial entry and subsequent presence phases ranged from low-cost low-risk piggybacking to high-cost high-risk sole venture companies. Political stability and law and order were the two most considered locational factors. They possessed an array of firm-specific and homecountry specific competitive advantages which enabled them to make an impact overseas. Keywords Civil engineering services, Malaysia and internationalisation.

INTRODUCTION Back in the late 1980s, Rimmer (1987) questioned why civil engineering consultants from developing economies had not broken into the ‘western club.’ More than 10 years later, Murray and Mavrokefalos (2000) note that opportunities were available for engineering and design consultants from developing countries to make inroads globally. Almost two decades after Rimmer (1987) made his comment, Bradley (2005) laments that the international market is no longer the preserve of a handful of foreign firms traditionally domiciling in old colonial powers. He claims that indigenous firms in many developing countries have already become competent in many areas to the extent that some compete for jobs overseas. The annual statistics of top 200 international design firms for 2010 compiled by the Engineering News Record illustrates their progression: 25 (12.5 %) of the firms were from developing countries, the majority (14) from China followed by Egypt (5) and the rest (i.e. Lebanon, Kuwait, India, Serbia, Jordan and Turkey) one each. Overseas work is essential for established civil engineering consultancy firms and nations as reflected from various reports and studies in the U.S. (Lieberman 2004), U.K. (Thorn et al.

2 Abdul-Aziz and Law


1998), Germany (Scheuer 2003) and Australia (Industry Science Resources 2000). The erosion of their dominance has certainly been of concern to them. Meanwhile, developing economies such as India (Prasad 2007) and the Philippines (DTI Philippines 2001) are keen to have an ever larger slice of the international market. While the trend points to consultants from developing countries making inroads overseas, little is known as to how they managed to do so. It was with this in mind that a study was conducted to look into the international diversification of civil engineering consultancy firms based in Malaysia. Firm internationalisation is a complex process. To fully appreciate the internationalisation complexities, multiples aspects should really be examined concurrently. Under the rubric of exporting construction professional services, Jewell (2010) came up with a framework which incorporates finance, competencies, ownership, intra-organisational coordination, locational representation and business organisational culture. Cheah and Garvin (2004) in their study of corporate strategy in construction have likewise produced a multi-perspective conceptual model. This study also adopts the same approach by posing five research questions: 1. 2. 3. 4. 5.

What are the motives for venturing broad? How are overseas work secured? What market entry modes are adopted? What locational aspects are considered before entering foreign markets? What competitive advantages enable them to capture overseas work?

The importance of this research is given credence by trade agreements Malaysia has committed itself to, potentially influencing every Malaysian civil engineering consultant in Malaysia. In December 2005 all 10 ASEAN Ministers of Trade at the 11th ASEAN Summit signed the Mutual Recognition Agreement with the spirit of ensuring freer circulation of professional civil engineers within the ASEAN region. Under the ASEAN Framework Agreement on Services (AFAS) signed in December 1995, there will be free flow of services within the ASEAN region. There are also bilateral trade agreements which Malaysia has signed with countries such as Japan, New Zealand, Korea, India, to name a few, with more in the future. Finally there is the stalled General Agreement of Trade in Services which is being championed by the World Trade Organisation. Following the definition of trade in services by the World Trade Organisation as enshrined in the General Agreement of Trade in Services (GATS), international activities of civil engineering firms covers any one of the following activities: (1) the physical movement of firms’ personnel to foreign locations to render services; (2) the movement of information such as engineering drawings from Malaysia to foreign locations either digitally or physically; and (3) the establishment of branches in a foreign location. Movement of people can be itinerant as in project-based arrangements or more permanent as in maintaining foreign branches. Movement of information can be in the form of offshore outsourcing or communication between parent companies and foreign branches.

3 Civil Engineering Consultants from Developing Countries: An Exploration of Malaysian Firms


LITERATURE REVIEW Empirical studies on the internationalisation of civil engineering consultancy firms are strikingly lacking. For that reason, the present study relied on literature on professional services, services and manufacturing industries in that order. Professional services possess certain characteristics which influence firm internationalisation unlike other economic activities. Thakor and Kumar (2000) note of the large amount of expertise required, the quality of services rendered which cannot be easily assessed by the lay-person and the importance of referrals in developing a client-base. Other common features include process and people orientation, intensive face-to-face interaction, high customisation, relatively few transactions with clients but requiring relative long contact time, and application of considerable judgment in meeting client needs (Silvestro et al. 1992). Services industries in general have additional traits which also influence firm internationalisation, the most notable being intangibility, inseparability between production and consumption and perishability (Knight 1999). Generally however, literature on internationalisation of the services industry still lags behind manufacturing (Netland and Alfines 2007), resulting in lack of sound theoretical bases (Knight 1999, Lommelen and Matthyssens, 2005). As a last resort, in parts the literature review referred to the manufacturing sector. The same sequence was also adapted by Ling (2005), Segal-Horn and Dean (2007), Freeman and Sandwell (2008), to name a few. Motivation to internationalise can come from top management decision, unexpected opportunities and government assistance. Internationalisation can also stem from the desire to sustain firm growth, increase firm profit, enhance reputation, exploit firm resources, counteract business cycles, respond to clients’ demand and imitate competitor. Cavusgil et al. (1979) associate internationalisation to top management’s final say, although Homlund and Kock (1998) did not find this to be the case. The act of internationalising or otherwise is a managerial issue (Segal-Horn and Dean 2007); despite motivating conditions, top management may still decide against internationalising because of perceived internal limitations (Cort et al. 2007, Perks and Hughes 2008). Conversely pro-export top management may choose to ignore the complexities of internationalisation in their enthusiasm to expand abroad (Axinn, 1988). Internationalisation may also stem from unexpected opportunities (Freeman and Sandwell 2008) – to accept or otherwise is only based on whether these opportunities fit into the existing activity and resource structure (Axelsson and Johanson, 1992). Firms which rely entirely on unexpected opportunities are labelled reactive exporters (Westhead et al. 2001, Shaw and Darroch 2004). Many governments around the world assist local firms to export their products and services (Winsted and Patterson 1998). Ling (2005) found that the motive of foreign architectural, engineering and construction firms for entering China was to sustain firm growth. Internationalisation may be the only option to sustain firm growth in small domestic markets (Coviello and Martin 1999). According to Leonidou et al. (2007), most studies rank profit seeking as the greatest motive to exporting. Firms may also enter foreign markets to enhance their reputation (Ling 2005). To exploit firm resources is another potential motive for expanding overseas (Winsted and Patterson 1998). Firms are able to counteract business cycles by diversifying into different foreign markets since business cycles occur at dissimilar times and intensities (Crosthwaite 1998, Albaum et al. 2004). Netland and Alfnes (2007) found



that the most cited motive in service literature is to respond to clients’ demand. Tepstra and Yu (1988) found that American advertising agencies follow their competitors abroad as a defensive measure. Overseas work can be secured through various means: networks with various parties, international tenders and international competitions, proactive marketing, trade delegations, international trade fairs, offshore outsourcing, and affiliate or sister companies. Networks with other customers, distributors, governments and other entities can assist the firm to secure fresh or additional work (Sharma and Johanson 1987). Due to established relationship and trust, clients may prefer service firms from home to meet their overseas requirements (Segal-Horn and Dean 2007). The construction and services firms sampled by Westhead et al. (2001) were ‘pulled’ into internationalising by their pre-established client linkages. Projects can be secured through international tenders and international competitions (Welch 2005; Segal-Horn and Dean 2007). Coviello and Martin (1999) found engineering consultancy firms in New Zealand actively looked for opportunities on their own in foreign markets. Many governments organise trade delegations aimed at assisting firms to begin and develop exports (Leonidou et al. 2007). Participating in international trade fairs can facilitate foreign market expansion (Dekimpe et al. 1997). Knowledge process outsourcing is commonly done by civil engineering firms (DTI Philippines 2001, Prasad 2007) for cost savings or strategic reasons (Doh 2005). Contrary to Rugman and Verbeke (2008), outsourcing demonstrates firms in certain services sector are able to exploit flexibility in the value chain, hence adding to variability in modes of market entry. Referrals through third parties, including affiliate or sister companies, are an important source of overseas orders (Hinttu et al. 2004). Firms can adopt various modes to enter foreign markets: joint venture companies, sole venture companies and joint ventures projects. Foreign firms can make their presence felt in foreign markets by establishing joint venture (Terpstra and Yu 1988) or sole venture (Freeman and Sandwell 2008) companies. Alternatively they can adopt the more transient joint venture projects mode (Sillars and Kangari 2004) of ‘piggybacking’ on another firm (Terpstra and Yu 1988, Westhead et al. 2001). Westhead et al. (2001) note that overseas presence can be transient when orders from networks are one-off. Locational factors can influence the decision of firms to enter host markets. They include market size, market growth, political environment, language and cultural similarities, geographical proximity, direct air connection, domestic and foreign competition, professional qualification, visa requirements, capital requirements, business interaction between home and host countries, law and order, financial freedom, foreign direct investment (FDI) laws and regulations. Size and growth of host market were found to be major decision areas for New Zealand-based international civil engineering consulting firms (Coviello and Martin 1999). Political environment can influence market entry behaviour (Kwon and Konopa 1993, Crosthwaite 1998). Johanson and Vahle (1977) argue that firms initially target ‘psychically close’ markets (i.e. markets having similar culture and language) to gain experience before venturing to ‘psychically distant’ markets. Clark et al. (1996) theorise that this is especially true for contact-based or people-centred services. Indeed Westhead et al. (2001) found that their sampled construction and services

5


Civil Engineering Consultants from Developing Countries: An Exploration of Malaysian Firms

firms were impacted by ‘psychic distance’. Shawn and Darroch (2004) and Leonidou et al. (2007) found firms venture to geographically close countries initially before expanding further, although Terpstra and Yu (1988) found this finding was not supported by U.S. advertising agencies. Direct air connection from home to host country diminishes the hardship arising from geographical distance (Bel and Fageda 2008). Despite the advent of modern communication technologies which allow realtime interaction among networked business communities, face-to-face communication is still important for professional services to avoid misunderstanding of non-verbal cues (Freeman and Sandwell 2008). Hence travelling to meet up with clients overseas is necessary. Domestic (Sullivan and Bauerschmidt 1990) and foreign (Gorecki 1976) competition in host countries is another influential factor. Professional qualification (Winsted and Patterson 1998), visa requirements (Bradley 2002) and capital requirements (Karakaya and Stahl 1989) of host countries can act as market entry barriers. Terpstra and Yu (1988) found that U.S. business presence in a country had significant and positive impact on U.S. advertising agencies’ presence in the host country. A country without law and order can place the foreign firms’ personnel and assets at risk (Jeannet and Hennesssey 2001). Firms would like to be assured that they have the financial freedom to repatriate profits home (Kouznetsov 2008). The overall foreign direct investment laws and regulations may influence locational choice (Leonidou et al. 2007, Freeman and Sandwell 2008). Firms need to have competitive assets in order to face competitors in host countries. Those commonly cited by scholars include good reputation, skilled workforce, service quality, pricing, innovation, customer relationship, quality standard certification and finance. Good reputation is a key asset that can be turned into a sustainable competitive advantage (Ling 2005). Having a skilled workforce has been attributed to the firm’s international success (Holmlund and Kock 1998). Service quality is especially important for service firms because of the inability of the consumer to evaluate the service quality prior to consumption, and even after consumption (Bateson 1992). Competitive price-oriented strategy is commonly adopted by many exporting firms as a means to attract a large number of foreign customers (Cort et al. 2007). Innovation has been associated with international success (Kuivalainen et al. 2006). Sharma and Johanson (1987) emphasise the importance of customer relationships for the success of technical consultancy firms abroad. In regions like the European Union, it is almost imperative that foreign companies be ISO compliant (Erel and Ghosh 1997). Shaw and Darroch (2004) found limited financial resources to be the biggest barrier to internationalisation. Home-country specific advantages can ease the passage for firms into foreign market. They include national leadership, multicultural or multiracial society, well developed and competitive industry, rapid economic development, home country image, memberships of economic groupings and professional qualification. Political leaders of nations can prompt firm internationalisation by providing motivation and trade assistance (Awil and Abdul-Aziz 2005). Common ethnicity between the home and host countries can help bridge cultural differences or ‘psychic distance’ (Welch et al. 2001). A well developed and competitive domestic industry helps drive internationalisation (Porter 1990). Liu et al. (2005) found that there is a correlation between the level of economic development and outward foreign direct investment. La et al. (2005) found that intangibility of engineering services forces clients to rely


on the exporter’s country of origin image to assess prospective quality. Being members of economic and even political groupings can influence the direction and extent of firm internationalisation (Plummer 2006). Countries which sign mutual recognition agreements for professional qualifications facilitate reciprocal market entry (Zampetti 2000).


RESEARCH METHOD Winsted and Patterson (1998) used postal questionnaires to obtain data regarding the internationalisation of the American Consulting Engineers Council members whereas Coviello and Martin (1999) used the qualitative case study approach on engineering consultants from New Zealand. Following Hurmerinta-Peltomaki and Nummela (2006), the quantitative and qualitative research approaches were combined for the study so that the limitations of each were compensated by the strengths of the other. Quantitative methods have been criticised for lack of depth and understanding while the qualitative methods for being anecdotal and difficult to generalise. The mixed method enables findings from multiple sources to be tested for convergence while at the same time enabling a fuller picture of the subject matter to be uncovered (Greene 2008). For the study, postal questionnaires were used to collected quantitative data while desk research and follow-up interviews to collect qualitative data. The former enabled many geographically dispersed firms to be approached simultaneously. Iterative interviews enabled verification of questionnaire scaled responses to be made. Secondary data and in depth interviews in particular also enabled rich data to be obtained pertaining to the variables and their inter-connectedness, thereby providing insights to the complexities of internationalisation. The narration, together with secondary material, was subsequently tested for convergence with the questionnaire responses. Mixed method provides greater validity of results (Johnson and Turner 2003). Using informant interviews to check for inferences made from survey is particularly appropriate for low survey sample population (Brewer and Hunter 1989). Coviello and Jones (2004) and Rialp et al. (2005) have made the plea for the mixed method to be used by international business scholars. Netland and Alfines’s (2007) survey of articles published between 1999 and 2005 in seven leading journals is telling: of the 31 articles related to service exports, only one adopted the mixed method. The questionnaire was designed based on the literature review. The five-point Likert Scale was mainly used to elicit data from respondents. A pilot test was conducted with the cooperation of the Professional Services Development Cooperation (PSDCD). The PSDC was created to promote the export of Malaysia’s services sector, professional civil engineering consultancy included. PSDC co-opted the honorary secretary of the Association of Consulting Engineers Malaysia (ACEM) to scrutinise for about an hour the draft questionnaire in the presence of the researchers. As there was no readily available information regarding which firms that had gone abroad, the questionnaires were posted to all 979 firms registered with the Board of Engineers Malaysia (BEM). No civil engineering firm can practise without first registering with BEM. 73 questionnaires were returned, out of which 19 from firms which had gone overseas. From the researchers’ past experience and as borne from this study, participants in Malaysia’s construction industry are generally apathetic towards



academic research. As the questionnaire survey proceeded, enquiries to various sources revealed 62 firms had international exposure. These firms which did not return the questionnaires were reminded to do so, but to no avail. The eventual response rate was 31% (i.e. 19 out of 62). Returned questionnaires from firms which had no international experience were excluded from the study. With such small sample, a cautionary note that the results be treated with circumspection is appropriate (Karagozoglu and Lindell 1998). Yet high citations by scholars of certain studies (e.g. Bell et al. 2004; Spence and Crick 2006) with low response rates have shown that they have a place in the international business research realm. Interviews were conducted with six respondents who indicated in the returned questionnaires their willingness to be interviewed. Apart from validating the scaled responses in the returned questionnaires, the interviews sought elaborations from the interviewees. The firms they represented varied in terms of legal status, age (the youngest was eight and the oldest 46 years old) and size (the smallest had 20 staff and the largest 130). The sessions lasted up to an hour. Prior to the interviews, desk research was conducted on these firms. Secondary data were obtained mainly from their websites. The interviews helped shed light on the complexities of firm internationalisation. The transcripts from the interviews were content analysed. Data was summarised, coded according to the variables, analysed to detect patterns as well as anomalies so that valid inferences can be made. As mentioned earlier, they were also triangulated with the quantitative data to determine convergence.

FINDINGS AND DISCUSSIONS Table 1: Profile of Sampled Firms Aspect Firm age 1-6 year 7-12 years 13-18 years ≥19 years Firm size 1 - 10 employees 11 - 20 employees 21 - 50 employees > 50 employees Legal status Individual proprietorship Private limited company Partnership

Number

Percentage

2 7 3 7

11 37 16 36

6 6 2 5

32 32 11 25

2 15 2

11 78 11

Table 1 shows that the sampled firms varied in terms of age, size and legal status. The smallest firm had 2 staff while the largest 130. The youngest firm was two years old and the oldest was 46 years old. Together they had serviced 36 different countries, the most frequent being Indonesia (42%), followed by Brunei and U.A.E (both 32%) (See Table 2). Incidentally although less frequent, they had also serviced the developed


markets of the U.S.A., Canada, Australia and New Zealand. Overall, they have covered Asia, Middle East, Australasia, Africa, and North and Central America. Table 2: Countries that the Sampled Firms Had Serviced


Firms Firm A

Firm B Firm C Firm D Firm E Firm F Firm G

Firm H Firm I Firm J Firm K Firm L Firm M Firm N Firm O Firm P Firm Q Firm R Firm S

Countries Nigeria, Thailand, Sri Lanka, Canada, Afghanistan, Saudi Arabia, Pakistan, Indonesia, Bangladesh. Antigua, Brunei, Cambodia, China, India, Myanmar, Nepal, Philippines, Singapore, Vietnam, USA. Maldives, Qatar, Bahrain, Brunei, Indonesia Indonesia, United Arab Emirates Qatar, India Vietnam United Arab Emirates Brunei, Singapore, Papua New Guinea, Indonesia, Vietnam, India, China, Pakistan, Sudan, Syria, Saudi Arabia, Laos, Solomon Islands Brunei, Vietnam, Sri Lanka, Sudan, Cambodia, Indonesia, Qatar Singapore, Bahrain, Australia, Saudi Arabia, United Arab Emirates, New Zealand, Indonesia, Qatar Yemen, United Arab Emirates, Brunei, Indonesia Tanzania, Mauritius, Brunei, United Arab Emirates Sri Lanka, Ghana, Laos, India, Vietnam India, United Arab Emirates, Cambodia, Sri Lanka, Papua New Guinea, China, Philippines, Laos Cuba, Indonesia Saudi Arabia Sudan Syria Philippines Thailand

Motives to Internationalise Table 3 shows that the sampled firms were driven by various internationalisation motives; the highest ranked being top management decision. Ultimately even with the most logical motive to internationalise, venturing overseas rests with top management’s decision, as highlighted by one veteran director interviewee of a large and established firm. He decided his firm should venture overseas because of recent domestic economic downturn. The firm had experienced economic downturns before, inexplicably however the most recent was the one that prompted him to act. One sampled firm was reaping the strategic move by its founder to internationalise in the mid-1970s. Espousing the vision to become the best in Asia, his successors had expanded the firm’s reach to 20 countries. Top management certainly required large doses of tenacity in the face of immediate setbacks. One managing director of another large firm said that his firm made attempts to penetrate U.A.E and Vietnam a decade ago but was unsuccessful. Undeterred, the firm still tried to expand overseas as reflected by a planned visit to Ghana together with a British firm in search of business opportunities there. Having the appropriate personality was also necessary in order to convince foreign clients and other consultants of their firms’ capabilities. “We have to sell our expertise more aggressively (than in Malaysia)”, said one director. “And not to acquiesce during meetings but make noisy complaints after



that”, he went on. The highest score given to top management decision gives credence to the centrality of entrepreneurship in firm internationalisation. The second highest ranked motive to internationalise was unexpected opportunities. One example was the successful involvement of one firm in Abu Dhabi, U.A.E., following a fortuitous trip there by one its directors with his architect friend. Even after more than three decades of being actively involved overseas, one sampled firm still received unexpected job commissions. To sustain firm growth was more important than to increase firm profit. “Even if we don’t grow any bigger, at least we are able to maintain so that the people have jobs,” said one sole proprietor. For oneoff overseas projects derived from pre-established networks, the imperative to maintain patronage even preceded the desire to make lucrative profits. Four interviewees pointed out however that overseas work brought higher profits margins than domestic work - as high as three times greater according to one of them. Table 3: Motive to Internationalise Variable Top management decision Right time, right opportunities To sustain firm growth To improve firm image Respond to client’s demand To increase firm profit To counter domestic business cycle Respond to M’sian government’s encouragement to go overseas Respond to competitors’ move To exploit firm resources Chi-Square 43.116 Asymp. Sig p=0.000, p