Empirical Analysis of Host-Country Effects in the International Construction Market: An Industry-Level Approach

Abstract

The international construction market has significantly grown in the past decades, and it has created new opportunities for engineering and construction firms to expand their businesses into foreign countries. However, this market is primarily riskier than the domestic market because of differences of political, economic, social, cultural, and business environments. Because firms are profit-seeking entities, it is vital for them to explicitly understand those risks in both macrodimensions and microdimensions such as country level and project level, and they must be well prepared to assess and mitigate those risks to successfully gain the anticipated profits. The goal of this paper is to empirically analyze the host-country effects (i.e., macrolevel risks) on the profitability of international engineering and construction projects. A total of 2,821 projects completed by Korean engineering and construction firms from 1993 to 2012 were analyzed using the variance-component model. The results show that (1) host-country effects contribute to the profitability of projects indirectly (interaction with firm capabilities) rather than directly (independently); (2) host-country effects are more evident in booming periods than in recession or transition periods; (3) host-country effects are greater in less-developed countries than in developed countries; and (4) host-country effects are more significant for large firms than for small-medium firms. The findings of this paper are also significant in that they provide a data-driven strategic guidance for top managements of international firms, particularly for their country diversification planning and country portfolio management. The process and methodology used in this paper is repeatable, and it can be directly adopted by international firms in the construction industry for a macrolevel-risk analysis of their future international projects.