Impact of Globalisation on Construction Industry

In his book “The Lexus and the Olive tree” Thomas Friedman (2000) described the world as becoming an increasingly interwoven place, and whether you are a company or a country, your threats and opportunities increasingly derive from who you are connected to. Furthermore, it defined globalisation as “….a web-like structure ….. An inexorable integration of markets, nation-states and technologies to a degree never witnessed before- in a way that is enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper and cheaper than ever before”.

Globalisation aided by an increased availability of cheap accessible information and technology has broken down to a far greater extent the walls of protectionism and trade barriers making it easier for someone in a remote city of Brazzaville (Congo) to carryout business transactions like buying and selling of shares in the world stock market, engage in joint venture enterprise, carryout international procurement, import and export goods and services from all over the world without leaving the sitting room.

This integration of markets and economies with the aid of information and technology described in many writings as globalisation or free market economy has created a huge opportunity for business and investments worldwide. These investments on the other hand creates interdependency on individuals, companies and nation-states’ performance and high economic risks which has had disastrous effects all over the world like the Latin American debt crisis in the late 1980s, the Southeast Asian recession of the late 90s and the recent world economic recession.

This presentation will explain what globalisation means for everybody from the ordinary man in the street to the CEO of a local company and up to a country’s economic and political stability.

Section 2 will define globalisation, its features and what it means to everyone, it will also explore the standing of the construction industry in the world’s economy. Section 3 will discuss the impact and challenges of globalisation on the construction and engineering industry aided by a brief imaginary scenario.

Aim

To discuss the impact of globalisation on construction companies and their products, services and projects.

Section 2

Understanding globalisation

Discussions of globalisation are currently dominating the intellectual and public discourse. It could mean different things to different people hence the multiple definitions attached to it. While some view it as an evil trend towards dehumanization and economic domination others view it as a multifaceted phenomenon that pauses challenges and offers opportunities (Mahgoub, 2004). The French and other continental europeans for example see globalisation as a new form of imperialism (from the US) or as a new stage of capitalism in the age of electronics (Intriligator, 2004).

Intriligator (2004) described it as major increases in worldwide trade and exchanges in an increasingly open, integrated, and borderless international economy, not only in traditional international trade in goods and services, but also in exchanges of currencies; in capital movements; in technology transfer; in people moving through international travel and migration; and in international flow of information and ideas. Finally, Yeung (2009) considers globalisation as “necessarily an integrating set of tendencies that operate on the global scale and intensify connections and flows across territorial borders and regions” citing what it calls the ruthless penetration of global cultures epitomized by McDonalds, Hollywood movies, MTV, and internet as an example.

Govindarajan and Gupta (2000) defined what globalisation could mean to three different level of aggregation:

To the entire world, globalisation refers to the aggregate level of economic interdependence among the various countries examplified by the fact that the total asset size of cross-border mergers and acquisitions grew by 15.5 per cent in 1996, 45.2 per cent in 1997 and 73.9 per cent in 1998 (UNCTAD, 1999)

To a specific country, globalisation refers to the extent of the interlinkages between that particular country’s economy and the rest of the world measured through exports and imports as a ratio of GDP, inward and outward flow of both foreign direct investment and portfolio investment, and inward and outward flows of royalty payments associated with technology transfer.

To a specific industry, globalisation refers to the degree to which, within that industry, a company’s competitive position within one country is interdependent with its competitive position in another country measured by the extent of cross-border trade within the industry as a ratio of total worlwide production, extent of cross-border investment as a ratio of total capital invested in that industry, and proportion of industry revenue accounted for by players competing in all major regions of the world.

Pre-history

But of all the different definitions and interpretations surrounding globalisation, one thing is sure; globalisation is not a new thing. Some economists and historians has suggested that present day globalisation is little more than a return to the world economy of the late 19th and early 20th century, of the century from the congress of Vienna in 1815, the period 1870 to 1913 and from the outbreak of world war 1 in 1914 to the fall of the Berlin wall in 1989 (Intriligator, 2004, Friedman, 2000, Hutton, 2008). At that time borders were relatively open and there were substantial international capital flows and migrations of people, when the major nations of Europe depended critically on international trade as part of the colonial system (Friedman, 2000, Intriligator, 2004).

What differentiates this era from the past era of globalisation is the sheer number of people and countries involved and the intensity driven by several unprecedented developments like:

Technological advances

Technological advances has lowered significantly the cost of everything from transportation, communication, data processing, information storage and retrieval and human resources development. Tools like internet and mobile phones has enhanced the way countries and industries relate to each other bringing everybody closer. It has also contributed to rural developments by empowering emerging nations to shop around in the international arena for partners, investors and best financial deals for their respective projects thereby reducing the level of under-developments and poverty and at the same time providing substantial potential opportunities for MNCs and investors from the developed nations. Many companies locate different parts of their production, research and marketing units in different countries but still bring them together through videoconferencing, internet and emails

Trade liberalization:

the 1946 General Agreement on Tariffs and Trade (GATT) adopted by many nations has been the key to a series of reductions in the tariffs levied on manufactured goods thereby opening different markets and fostering trade around the world. The agreement which later evolved into the World Trade Organisation (WTO) has been accredited to the rapid developement of the BRIC nations(Brazil, Russia, India and China) whose manufactured products like heavy machineries, technology transfers and consumer goods are being sold worlwide bringing-in lots of foreign reserves and an increase in their Gross Domestic Production (GDP) and an advantageous trade surplus to some countries like China. Also successive rounds of multilateral trade negotiations, together with regional arrangements such as the European Union,the North American Free Trade Agreement, and the Australia-New Zealand Closer Economic Relations agreement, have been major forces for international liberalization (Hufbauer and Warren, 1999)

Economic liberalization

The gradual elimination of restrictions on Foreign Direct Investments put in place after WWII liberalised international capital movements. Foreign Direct Investments (FDI) means the amount of investment a company from country A can make in country B. These investments could be in the form of acquisitions, joint ventures, management and consultancy, technological transfer or simply building a production unit in a foreign country. The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, exploding from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999. FDI into developed countries in 2004 rose to $636 billion, from $481 billion in 1998 (source: UNCTAD cited by Jeffery P. Graham, 2005). It has been made possible by the elimination of restrictions by the receiving countries, cheaper and easier access to information technology and low global communication costs.

Others

Other factors like:

• immigration which has witnessed lesser restriction due to lower travelling costs
• economic shifts in balance and government’s policies
• industrial revolution
• better construction material and equipment
• convergence of ideology experienced at the end of the cold war with the survival of capitalism over socialism
• social welfare reforms
• contributed a lot in differentiating the era of globalisation we live in now to the era before WW 1 & II and have seen the construction and engineering sector experience a radical growth as never seen before.

Construction and engineering

The construction industry today is a global industry which according to Krisen Moodley et al, (2008) means the operation of contractors and consultants across international markets, in a globalized context with supply chains, specialists, plant and equipment sourced across the world. This section will identify the place of the construction industry in a global environment.

Global construction industry.

The global construction industry consists of the procurement of new projects, increasing commitment for the provision of services, equipment, components, materials, maintenance, finance, operations and research development (Krisen Moodley, 2008). Private sector participation is actively sought in the whole gamut of project phases-financing, construction, operation, etc. especially in major capital-intensive infrastructure projects. The design and consultancy services traded are knowledge-based and high value-added, with the materials most frequently traded as either resource-specific or technology-dependent (Drewer, 1990).

Globalisation pressures have created more opportunities for contractors to enter international construction market which are valued at approximately $3.4 trillion out of which, only 3.4% of its potential volume ($116 billion) is actually open to a fully international competitive market and being done by multinational foreign firms (Seung H. Han et al, 2005). As examples, in Dubai, the consultants, contractors, labour, technology, materials and equipment are sourced from across the world, while the iconic Wembley stadium in London had an Australian contractor, multinational designers, Dutch steel contractors, American security specialists and a range of international materials suppliers (Krisen Moodley, 2008). Major projects like the Suez Canal in 1959-1969, the Panama Canal in 1900-1914, the New Hong Kong Airport, the Channel Tunnel and the Three Gorges Dam in China were carried out by contractors and consultants from different countries.

Migration of the construction industry’s major players was prompted by international trade and the quest by countries with sufficient non construction resources to satisfy their construction requirements. The oil rich countries of the Middle East were major promoters of this trend during the 1970s and 1980s although it actually started centuries ago during the era of industrialisation. One form of industrialisation then was prefabrication, which is based on the industrial manufacture of building components off-site or near the site. As long as the late 19th century, the British were sending prefabricated housing to Australia and Africa, and in 1830s, the manning “portable Colonial Cottage for Emigrants” was being produced and shipped to sites around the world (A.B.Ngowi, 2005).

Globalisation and construction

Earlier success in trade liberalization sparked an expansion of trade and FDI, increasing the demand for cross-border capital flows. This has increased the pressure for liberalization of capital markets, forcing more and more countries to open their capital accounts which in turn led to liberalization of Foreign Direct Investments and privatization tournaments (Dieter Ernst, 2002) providing Global corporations with a greater range of choices for market entry and better access to external resources and capabilities.

Today with the aid of globalised economy, technological advancements, free market and cultural harmonization, more construction firms are shifting their strategies towards achieving global market shares through joint ventures, acquisitions and FDI bringing in exchange, technological advances associated with formidable construction technology, enhanced management systems for scheduling, material tracking, subcontractors organisation, and financial capability which enable them to obtain good and low interest finance from major financiers, added Raftery et al, (1998).

Institutional, legal and economic reforms that aided the globalisation of the construction and engineering industry include: unified levy system as well as business tax, consumption tax and VAT, economic liberalization, relaxation in foreign equity (allowed up to 100%) in many countries, end to the non-discrimantion for domestic and foreign companies in bidding for public works, deregulation and liberalization measures in housing market especially the abolition of price controls and land use intensity controls, privatization programmes and employment of foreign labour and 100% equity in Build Operate and Transfer concessions (Raftery et al, 1998) amongst others.

Section 3

Discussion

If cash, commodity and creativity are the key ingredients needed for a country to succeed in the changing global economy, as described by Lyons (2010), what does the construction and Engineering need to succed in this leaderless globalisation system?. The global finance maret from where the industry obtains financing for its activities is so interdependent that it poses a huge threat and opportunity to the industry. A brief ilustration could be helpful in explaining this interdependence and its effects.

Case scenario

The Salisbury sports club, home of Zimbabwean cricket team in Harare, constructed by the British colonial masters in the days of Rhodesia, once had a capacity of 26,000 people in 1956. 54 years later it can only take 10,000 so the government decides that the stadium capacity needs to be increased to 35,000 to reflect the current passion of cricket in the country. Zimbabwe with an inflation rate of over 900%, can neither afford to finance the project by itself or borrow from the international market and as such, its options are quite limited. It posted an open tender process invitation for the project on their website with preferred procurement method being FDBOT (Finance, Design, Operate and transfer) for a period between 25-30 years. One major obstacle apart from the economy, pointed out by contractors interested in the project is that there still exists restrictions on the ownership of land and public infrastructures in the country so the parliament in Harare had to remove these restrictions to attract foreign investors to their project.

Being a major project of over £300m, the winning consortia led by Arup Engineering was made up of Barclays bank investment banking (supported by Chinese investment fund, pension fund from canada and mutual fund from the US), Masuita electrical company from Japan and Usiminas Steel company from Brazil. With the restriction lifted and the contract signed, the project started with the major contractor Arup bringing in technological prowess, management know-how and the money. Local construction industries were used for their understanding of the area and provision of cheap labour while plants and equipments were supplied by a company from neighbouring South Africa.

10 months into the project, while the individual zimbabwean involved with the project was just about getting to reap the benefit of a steady job and income, the Thailandese government posted a glum economic expectation and insinuated doubt on the countries capacity to pay back loans from the world bank. This less than expected prediction sent a wave to the stock market in the asian region prompting investors to start dumping Thailandese bonds and taking their money to invest elsewhere. The question is: what has Thailand economy got to do with cricket stadium in Harare? Well, this massive sales made asian bonds as a whole lose almost 50 to 60% of their value which means that banks (including Barclays) and funds including (Pension funds from Canada) which invested in those bonds lost a considerable amount of their investment. But unconsciously, in a rush to put their money in a secured investment, the investors pushed the price of commodities up especially steel that rose from £250/tonne to £435/tonne.

It was’nt long before the stadium project in Harare grinded to a halt. Reasons being that Barclays is the red and are currently speaking with the Qatari Investment group for bailout which if it fails, they could end up being owned by the taxpayers, the pension fund has suffered huge losses and are restructuring their management and this new team are reviewing all investments, the doubled price of steel means that Usiminas cannot deliver at the contracted price and wishes to revise the terms of the contract, the delays meant that expected date for the inaguration of the stadium was delayed by what could be one year and brings with it a substantial loss of fund from patronisers, the government of Harare are helpless, they have no control over immediate or future event concerning the project.

Analysis

Although this is an imaginary scenario, it reflects what globalisation can bring to an industry like construction (expectations and pit falls) and how helpless the feeling can be when the table turns. All because of the interdependent global economy, trade and capital liberalization.

Challenges

Globalisation represents a major challenge and at the same time an unprecedented opportunity for the construction and engineering industry in terms of greater access to finance for concession projects etc, greater accessibility to FDI, greater specialization and division of labour on a world-wide level, greater opportunity for the local industry to acquire technological know-how and strategic positioning for the established company for a more competitive market.

According to YIP et al (2006), companies with an established source of competitive advantage from its home or other existing country markets often finds it easier to increase global market share by adding new countries rather than by trying to increase share in existing countries. This gives them competitive edge in an increasingly globalised market open to stiff global competition. Competition stretched in all areas of the industry from products and services to quality of those products and services, cost, time and process innovation.

Scale

Although in a globalised construction market, there seems to be something for everyone, most projects are large scale construction which only the large technologically qualified contractors can carry out due to, sometimes added prequalification requirements in the bidding process, one which requires firms to demonstrate having secured certain amount of contracts with comparable magnitude and complexity which in turn, precludes medium-size operators or contractors.

Growth

That the industry has gone global does not mean fatter pockets. Although rationalization of production and the spread of technology including pressures for continual innovation globally will lead to increased productivity and efficiency it also drive costs down. Research has shown that profitability declines (fig.1) as companies begin to internationalise their business due to the difficulties of learning how to do so especially in different cultural setting. It gradually increases as the objective, of increasing market share, is achieved.

Protectionism

Concerns has risen as to the challenges globalisation poses to the construction and engineering sectors in emerging economies because of the divergence or polarisation of profits worldwide where bigger foreign industries backed by their governments and financial institutions witness a rapid growth while the locals industry play catch up. Globalisation to E & C means gradual erosion of barriers that hinder foreign companies from participating in local markets hence eliminating the distinction between local, regional and national markets. It means that international firms with capability continues to penetrate local markets leaving local consultants and contractors underdeveloped and in most areas out of the business. This might lead to protectionism or trade war as we are beginning to see with the currency war going on between the US and China.

Vulnerability

Also critics has underlined the perceived loss of sovereignty of national governments and political leaders due to the continuous influence of the investors (including MNCs’) and international financiers in state affairs in an effort to protect their respective interests. Mutual vulnerability due to the fragility and interdependence of the international economic system, and the distribution of wealth created through globalisation which has seen more nations grow faster than others. While globalisation has been spearheaded by the cross-border operations of transnational corporations, the spatial transfer of business and industrial practices is by no means unproblematic. There remain significant place-based institutional limits to the globalisation of business cultures; and economic practices. For example, while capital can be transferred almost effortless across space, labour remains highly place-bound and locally embedded (Yeung, 2009)

Finance and economy

Shift in economic balance brought by globalisation means different challenges for developed and emerging markets. While the developed-world are expected to cut back their fiscal deficit, emerging world are to maintain low debt-to-GDP ratios, their undervalued currencies, low-cost labour, high savings rate, exports and investment in infrastructure to sustain global uncertainties.

Globalisation has favoured construction industries from developed contries, constraining the involvement of lesser developed industries as they lack access to cheap financial markets and technology, making it difficult for them to compete. They can only show advantage perhaps in the area of labour deployment.

Regional instability

Globalisation has increased the risk of major regional and global instabilities due to the interdependence of economies. Its negative effect is devastating for the construction and engineering sector as witnessed by the recent global economic meltdown. Many countries like Spain, Italy, Portugal and Greece that sustained a major part of their economy on the construction industry suffered heavily and have been finding it hard to restructure their respective economies ever since. The scars of the negative effect of economic interdependence could still be seen in those countries and others in the middle east like Dubai where loads of buildings remain uncompleted and the completed ones remain empty because the banks cannot lend to buyers, buyers cannot buy houses, the builder cannot sell hence cannot pay either the borrowed loans or the building contractors.

Local contractors

In Spain for example the recent economic meltdown forced one third of local contractors to close down while the remaining ones are with a considerably reduced portfolio because of their interface with major international contractors and consultants with global reputation and work portfolio that simply went burst when their cash flow seized. Some fortunate international contractors and consultants including David Langdon had to be absorbed by bigger and more stable companies to remain in the business.

Impact on businesses

Competition

Globalisation forces down the price of construction services by reducing the ability of firms to obtain excess margins through competitive pressure. Also, in the face of a margin squeeze, firms seek to reduce cost through the use of best available technology these cost reductions are in turn passed on to consumers in the form of lower prices. Companies in developed markets suffering from slower economic conditions are looking even more urgently to emerging markets, where more robust economies, substantial oil revenues and major deficits in the existing infrastructure spell opportunity, thereby fostering competition . Additionally, certain mature markets also seek to recruit offshore and bring in talent to meet demand on domestic projects (Hook, 2008).

Costs

Globalisation allows construction and engineering firms to achieve economies of scale as they are increasingly liberated from the size constraints of their home markets. In technical terms, the demand elasticity coefficients facing individual firms increase with globalisation (Hufbauer and Warren, 1999). They will also need to lobby to lower barriers that protect their suppliers, so they can take advantage of the “law of one price” in input markets. If inputs remain high or suppliers are unreliable, firms will be forced to relocate to countries where purchased input prices are lower and quality higher, finalised Hufbauer and warren, (1999).

Procurement

Globalisation has changed the way procurement is done. Participation of foreign contractors in domestic markets in the 1970’s was as a result of pressure from donor agencies as a price for accepting their aid or funding, their projects. Today, advocates for “trade not aid” are thanking globalisation for creating opportunities for investment exemplified by the Chinese investment in infrastructure in Africa which according to McRae (2010) is much larger than all Western aid programmes put together- real trade not aid. FDI still remains the preferred method but other means in which foreign investors may acquire an effective voice in an enterprise rather than through FDI include subcontracting, management contracts, turnkey arrangements, franchising, leasing, licensing and production sharing (UNCTAD, 2002)

Commodities

Globalisation also have a huge impact on the factors of production which Bryan (2010) considers as where “the real integration of the world’s economy begins”. Bryan identified commodities, capital and labour as crucial towards understanding structural economic issues. On commodities it means that most natural resources and manufactured commodities like steel, aluminium, bauxite, crude oil, iron ore, with a global common price attached to it are expensive to producers in countries with weaker currencies. Simply put, commodity prices are too high in emerging-market countries which mean they use fewer commodities than they would and too low in developed-world countries which means they use more commodities than they should. Furthermore the fact that commodities prices are set in truly global markets where nations have little power over prices suggests that financial tension will build earlier and with greater volatility.

Growth and cooperation

Globalisation has brought growth to emerging countries that has invested substantially in the built environment; building and infrastructure; and has a huge dependency on imported construction services like the Asian countries. It brought huge profits as well to the contractors involved accounting for around 33% of their international earnings in 1996 (ENR, 1997). There is far more cooperation, consumer value changes, and the blurring of business borderlines in this global environment as global construction has to create and manage new forms of relationships with suppliers, producers, clients, financiers, governments and third sector groups (Moodley et al, 2008). The more usual arrangement for large projects now being for contractors, developers and financiers to form consortia in order to seize these players’ respective expertise, in addition to reducing project risks. This formation of strategic alliances would be an effective way of overcoming weakness or draw-backs that a firm may be exposed to in the increasingly competitive domestic or international setting (Raftery et al, 1998). For the local industry, it provides an opportunity to work with and comply with international standards, increase their efficiency and quality of work hence preparing them to be more competitive.

Domestic policies

Governments in a bid to attract increased foreign private sector equity into domestic construction markets are carrying out further institutional reforms, particularly in the banking and financial sectors and adopting certain measures like:

• Removing or relaxing barriers in the tax repatriation of profits
• Adopting a transaprent tax policy by way of granting equal tax treatment to foreign and local companies
• Adopting double taxation relief agreements with other countries
• Offering preferential interest rates for joint ventures where there is equity majority by local partners
• Entering bilateral agreements with foreign governments to guarantee safety of foreign investments
• Relaxed imposed ceilings on foreign equity on construction and development firms

These policies as described by raftery et al (1998) brings in advantages like the interaction of foreign and local partners complementing each other. while the domestic associates having better understanding of the local working conditions takes care of the sources of labour and materials, the foreign firms bring into the joint venture their higher expertise in finance, technology and management know-how, creating a healthier, robust environment for private sector investment.

Section 4

Conclusion

This paper analysed the origin of the new era of globalisation the world lives in today, defining what it means to different aggregations. Construction as an industry has contributed enormously to the world’s economic growth with its’ estimated value of US$4trillion but has suffered equally when the world economy went burst due to its global interface with the financiers of their worldwide activities. Globalisation brought far more cooperation, consumer value changes, and the blurring of business borderlines in this global environment as consultants, contractor, designers, financiers, governments, labour, material suppliers, technology suppliers, plant and equipment specialists all converge in a new form of relationship aimed at a better working environment towards delivering a common project.

Deregulations, affordable technology, trade liberalization and economic market policies has been the main drive for globalisation and the same vehicle has been responsible for driving many construction firms, especially from developed countries, through Foreign Direct Investments (FDI), joint ventures, acquisition etc into local and domestic construction markets both in developed and emerging countries. The impact has been huge from high profits and stronger multinationals to technological trans