RICS COBRA April 2018 RICS HQ, London, UK

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1 RICS COBRA April 2018 RICS HQ, London, UK In association with

2 RICS COBRA 2018 The Construction, Building and Real Estate Research Conference of the Royal Institution of Chartered Surveyors Held in London, UK in association with University College London April 2018 RICS HQ, London, UK RICS, 2018 ISBN: ISSN: Royal Institution of Chartered Surveyors Parliament Square London SW1P 3AD United Kingdom The papers in this proceeding are intended for knowledge sharing, stimulate debate, and research findings only. This publication does not necessarily represent the views of RICS or University College London.

3 COBRA 2018 BUSINESS CONTINUITY OF INTERNATIONAL CONSTRUCTION FOR TOP CONTRACTORS Yao Yu 1, Chuan Chen 2, Hongjiang Li 3 1,2 Business School, Sichuan University, Wuhou District, Chengdu, China 3 PowerChina International Group Limited, Bejing, China ABSTRACT Due to the global economic, international construction projects became important for contractors. Especially large contractors expanded their business to global markets to seek new opportunities. Based on characteristics of projects, business continuity is essential for contractors long-term development strategy. This study builds a new measurement method of the business continuity for international construction to analyse the continuity level of different contractors or in different regional markets. Data is collected from Engineering News-Record (ENR) Top 225 reports from The host countries of contractors are grouped into North America, Europe, the Middle East, and the Asia-Pacific due to the fact that the most contractors were from these four regions, while the global markets are divided into the North American market, the Latin American market, the Caribbean market, the European market, the Middle East market, the Asia-Pacific market, the Northern African market and the central and southern African market. MANOVA model result shows that the continuity of contractors from different regions are significantly different. The findings of this paper could help international contractors to identify the continuity level of each markets and make suitable strategies and contribute to the body knowledge of contractor business continuity. Keywords: business continuity, construction, Engineering News-Record, international, contractors. INTRODUCTION Along with the world economic globalization, rapid traffic and communication facilitation, the barriers of international construction have been reduced. In the past decade, the international construction industry has been expanded rapidly. According to the 2015 Engineering News-Record (ENR) report, the top 250 international contractors in the world have completed a total US $ billion turnovers, increased US $ billion compared with International contractors are continually seeking to participate in overseas construction market, in order to circumvent the business cycle of home country, diversify operational risks, exploit competitive resources and take advantage of economic globalization (Gunhan and Arditi, 2005). According to the ENR, the international revenues of the top 225 contractors have been 1 yuyaoscu@126.com 2 chenchuanscu@126.com 3 scubscm@126.com

4 growing with 15.4% CAGR (Compound Annual Growth Rate) from 2003 to 2012 (Lee et al., 2015). China has published a national strategy The Belt and Road Initiative. Based on this initiative, an increasing number of Chinese construction companies has invested or will invest into the global market (Jia et al., 2016). There are a lot of opportunities for investment, construction, procurement because of the increasing demand of infrastructure projects around the world (Shen et al., 1996). However, compared to domestic construction, the risk of international projects is even higher. There are many unstable factors affecting the transnational projects, like financial environment, competitiveness, different regulation and political conditions. Therefore, it is difficult for foreign contractors to understand the different political and judicial systems, social and cultural environment, and eventually effect the profitability of international construction projects (Lee et al., 2015). Unlike other sectors, the construction industry is based on projects, which makes international contractors frequently make entryexit-re-entry decision, result in contractors discontinuous operation in the host country. There are many studies focused on the international construction projects. However, few has researched on the business continuity of international construction. This study is designed to analyze business continuity of international engineering and find out the continuity difference for contractors in different areas, to help international contractors make long term development strategy. LITERATURE REVIEW The Essence of Continuity Once the enterprise begins to internationalize, they always consider the sustainability at the same time (Welch and Luostarinen, 1988). Similarly, when firms enter the host country market, they consider the long-term survival and development. In fact, the decision to enter a foreign market is not a one-time choice, but a series of continuous decision (Guillén, 2003, Zhao and Decker, 2004). Some studies have examined the entry of multinationals into foreign markets through the evolution of entry patterns (Delios and Henisz, 2003, Guillén, 2003), while some other studies discussed the dynamics of continuous entry (Gao et al., 2008). For a foreign company, entering another market brings substantial outsider challenges, which increase the entry cost, reduce the operation profit, and restrict the core competitiveness. Moreover, it is difficult to collect and analyze the information for continuous entry due to the unfamiliar environment of host country (Delios and Henisz, 2003). Thus, in order to overcome the uncertainties and constrains from host country, companies need to acquire more knowledge and information of the target market (Johanson and Vahlne, 1990). The company can gain first-hand experience by previous entering and operation or collect second-hand information by using other methods (Delios and Beamish, 2001). Besides this, multinationals entering the host country also face environment dynamic changes. Audretsch et al. (2007) identified the entry and exit decisions as the result of supply-demand interactions. In each business environment, the company decides whether to establish new subsidiaries or exit the market based on evaluation the risk-benefit and external opportunity.

5 In the international construction field, such entry-exit decision is more frequent. International contractors set up office and mobilize key personnel before construction activities and close the office and withdraw staff after the project closure. If there are multiple projects in a country, the project office will last for a long time, which can be considered as a branch. Traditional international contractors rarely establish a whollyowned subsidiary (Ashley and Bonner, 1987). Therefore, general business continuity evaluation method is not appropriate to the international projects. Traditional Continuity Indicators Previous studies always adopt financial indicators to evaluate the long-term continuity and sustainability for international construction area. However, this kind of methods have obvious deficiencies. Firstly, the income is unstable for international contractors. The ENR top 225 (250) contractors changed every year. Summarized the ENR list from , there are 686 international contractors were on the list, and most of them are from North America, Europe, Asia-Pacific and Middle East. Over the last 21 years, most contractors have only appeared on the list for 1-5 times, and only 79 contractors appeared more than 16 times. Construction industry is highly competitive and sensitive to the economic cycle, so the income for a contractor in each year is flexible. Due to the volatility of revenues and the change of contractors on the ENR list, it is ineffective to adopt financial indicators to evaluate the international construction continuity. Secondly, international contractors revenues are significantly different. In fact, about a half of the revenue for this industry is derived from the top 10% contractors, like the Pareto law. Income indicators only represent the top contractors, so it is not representative for small and medium companies. Furthermore, for companies adopting a pioneering strategy, their income is long term oriented so financial metrics are ineffective. Based on these characteristics, this study provided a new concept of business continuity for international contractors. Definition of Business Continuity for International Contractors Business continuity is a concept of business area, which refers to the strategic and tactical capabilities of the organization to respond to accidents and business disruptions while maintaining operations at an acceptable level (BCI, 2010). In this study, the continuity does not mean the business continuity management or internal organizational activities. This study develops the definition based on Korkmaz and Messner (2008), defining the business continuity as the degree of long-term continuous activities of international contractors in the international market. For typical successful business, growth and strong business continuity are main business objectives (Hofstede et al., 2002). There are three essential elements of business continuity in this study: contractors, national markets and time. Contractors are the core stakeholders of international construction, while national markets are the workplace, and time is continuous to measure the continuity. RESEARCH METHOD Data Collection The main data used in this study are from ENR. In every August, the ENR published a special issue to list the top 225 (250) international contractors based on international business revenues. Although the ENR data are relatively reliable and sufficient, there

6 are still some shortcomings. Firstly, ENR only published the spatial distribution data of top 225 largest international contractors. It is not easy for contractors to be ranked in the top 225 list every year. Only 32 contractors were in this list from If the contractor is not in the list, then its spatial distribution data is not available. Secondly, if some contractors refused to participate in the ENR survey, the data is also not available for that year. Moreover, even though some contractors ranked in the ENR 225, they may not publish their business spatial distribution information. In order to overcome these problems, this study also adopted data from other sources, such as official websites, annual reports, international organizations (World Bank, WOT, etc.), and national government websites. Sampling The annual revenues of international contractors are unstable. Table 1 summarized the times of contractors have appeared on the ENR top 225 list from Table 1. The times of Top 225(250) contractors in different areas Contractor Area North Americ a Latin Americ a Europ e Middl e East Asia Pacifi c North Afric a The times of Top 225(250 ) Central and souther n Africa Tota l More than 15 Total Averag e From , there were 686 contractors in the list. As shown in Table 1, more than a half contractors appeared on the top 225 list for only 1-5 times. The active international contractors come from North America, Europe, the Middle East and the Asia-Pacific. Though North American contractors are the most active, they prefer chasing short term profits rather than long-term market expansion. On the contrary, contractors from the Asia-Pacific region have more sustained existence. Only 32 contractors continuously appeared on the ENR 225 list during the 21 years. To comprehensive analyse the business continuity, this study selected contractors appeared more than 9 times (including 9), which not only guarantee a relatively large sample, but also has enough long term to analyse the continuity. The entire sample contains data from 179 contractors from about 30 countries and have business in 84 countries. Most of these contractors are from the United States, China, Italy, Turkey, Japan and South Korea. The nationality of these contractors is shown in Fig. 1.

7 Fig. 1. Nationality of top contractors with more than 9 times on the ENR No. of times being listed Canada United States Brazil Belgium Denmark France Germany Greece Ireland Italy Netherlands Norway Portugal Spain Sweden United Kingdom Yugoslavia FYR Macedonia Cyprus Israel Kuwait Lebanon Turkey U.A.E Australia China (P.R.C.) India Japan Korea, South Egypt Nationality of contractors Measurement of variables Because of the limitations of previous methods and the available data, this study provides a new measurement method to evaluate the continuity of international top contractors: Where means the business continuity of contractor i into country j; is a binary variable, and 1 indicates that contractor i has international construction business in country j and vice versa. is also a binary variable, and 1 indicates that contractor i reported its business spatial distribution in year n and vice versa. If, this means that the contractor i has international construction business in the country j in every year and this contractor was in the Top 225 and reported its spatial distribution information every year. From contractor view, it means they continuously has projects in this country. If, it means that the contractor i has international construction business in the country j, but not in every year. The greater value means the more years contractor i obtain international revenue in the country j, and this indicates strong business continuity in this study. If, this means that the contractor never obtain international revenue from country j. This study did not focus on this kind of conditions. Although this measurement method is not perfect, it is suitable to achieve the research objective and make full use of the available data. The following Fig. 2 illustrates the average continuity of sample contractors from different countries. It is obvious that the average continuity is not large in most countries. In China, Singapore, Malaysia and North America, the continuity is relatively high. The countries with the least business continuity are North Korea and Somalia.

8 Fig. 2. The average business continuity of different countries DATA ANLYSIS AND DISCUSSION Hypotheses As previous analysis, the major markets for international construction projects are North America, Europe, Asia-Pacific and the Middle East, and at the same time the vast majority of international contractors come from these four regions. Only four companies are outside these four regions among the 179 contractors, including two Brazilian and two Egyptian contractors. This study focused on whether contractors from these four regions have significant differences in business continuity across different regions (including North America, Latin America, the Caribbean, Europe, the Middle East, Asia Pacific, North Africa and the eight regional markets in south-central Africa). The average score of contractors business continuity for a specific region represents the business continuity level of this market. It is easy to understand that contractors have higher continuity in their own area due to the geographical advantages. The data is for 175 contractors from four regions into eight regional markets, including 36 contractors from North America has, 56 contractors from European, 12 contractors from middle east has, and 67 contractors from Asia-Pacific. At the same time, means the continuity of the North American market, the Latin American market, the Caribbean market, the European market, the Middle East market, the Asia-Pacific market, the northern African market and the central and southern African markets respectively. This study analyses the consistency of business continuity for contractors from different areas, and for contractors from different regions into different markets. The mathematical expressions of two hypotheses are as follows: H1:µ1i = µ2i = µ3i = µ4i, i =1, 2,8 H2:µ11 = µ12 = = µ18 = µ21 = µ22 = µ28 = µ31 = µ32 = µ38= µ41 = µ42 = µ48

9 Continuity differences between contractors The MANOVA was adopted to analyses the significance. It is necessary to check whether the data satisfied three important assumptions for this method: random sample independence, the same covariance structure and multidimensional normal distributions. Box test was used to check the covariance structure. The hypothesis is Ʃ1 = Ʃ2 = Ʃ3= Ʃ4. The result is as follows in Table 2: Table 2. Homogeneous Box s Test of Covariance Matrix Box's M(B) F df1 108 df Significance Box covariance matrix homogeneity test results show that p = 0.044> 0.01, so there is no sufficient reason to reject the null hypothesis. Thus we consider that each population has the same covariance matrix. At this point, the data satisfied MANOVA's assumptions. Multivariate test In order to test shown in Table 3:, MANOVA model is adopted and the multivariate test result is Table 3. The result of multivariate test Effect Value F Significance Intercept Pillai s track Wilks Lambda Hotelling s track Roy maximum Contractor Pillai s track Wilks Lambda Hotelling s track Roy maximum Note: α=0.05 The multivariate analysis used four test statistics, which are consistent with each other. In all test statistics, p<0.01, which means that there are sufficient reasons to reject the null hypothesis. The business continuity of contractors from different regions are significantly different. Univariate test The univariate test is to identify in which regional market the business continuity is significant different. The inter-subjective test provided by SPSS is as follows in Table 4: Table 4. The result of multivariate test Effect Mean Square F Significance Intercept C C

10 C C C C C C Contractor C C C C C C C C Note: α=0.05 As can be seen form Table 3, except for the C5, C7, all others have the test result with p<0.01. Therefore, the hypotheses that contractors have the same continuity in C1,C2, C3,C4,C6,C8 were rejected. On the contrary, for C5,C7, the assumption was accepted, so H2 is partly accepted. In other words, contractors from different countries have significant differences in continuity in the North American market, the Latin American market, the Caribbean market, the European market, the Asia-Pacific market, and the central and southern Africa, while the difference is not significantly different in the Middle East and North African markets. CONCLUSION Along with the world economic integration, more international contractors seek opportunities in the global market or keep expanding their international business. Construction industry is highly liquid and unstable because it is based on projects. Therefore, business continuity for international contractors is really different from other industries. This study focused on analyzing the continuity of top contractors from different areas into variable regional markets. A new measurement method of continuity was built, and the data from ENR Top 225 was adopted to analyze the distribution of international top contractors and global construction markets. The host countries of the top contractors were categorized into four regions, and the global markets were grouped into eight areas. MANOVA model was then used to check the hypotheses, and the result shows that the continuity of contractors from different regions are significantly different, especially in the North American market, the Latin American market, the Caribbean market, the European market, the Asia-Pacific market, and the central and southern Africa. Though this study has achieved the objective, it still has some limitations. More data should be collected to analyze the continuity. The result of this study is useful for international contractors to identify the global market and competitiveness, to make more reasonable development strategy. REFERENCE ASHLEY, D. B. & BONNER, J. J Political risks in international construction. Journal of Construction Engineering and Management, 113,

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