Competing for large-scale infrastructure projects in the emerging Asian markets: Factors of success

Marjorie A. Lyles and H. Kevin Steensma

Competing for Large-Scale Infrastructure Projects in the Emerging Asian Markets: Factors of Success

This paper aims to provide some general guidance and factors of success for those interested in the burgeoning Asian infrastructure sector. What separates successful foreign contractors from those that flounder? This investigation is based on interviews with managers, directojs and other executives from American construction and engineering firms that have bad an established and successful presence in the region for at least 10 years. Also interviewed were representatives from government and local firms. The two groups typically play a vital role in the prosperity of the foreign contractor. Three general success themes emerged from our investigation: the growing competitive role of knowledge transfer, the use of local firm networks for managing government entities and the importance of adapting firm risk orientation to the host country’s legal and cultural environment. The authors provide an overview of the challenges facing these emerging economies as well as the cballenges to firms wishing to gain entry. The concept of a “triple alliance” between foreign firms, government constituencies and local entities is used as a framework for analysis.

Marjorie A. Lyles is professor of management at Indiana University Graduate School of Business. H. Kevin Steensma is a visiting professor at Indiana University Graduate School of Business.

Fall 1996

A boom in infrastructure development is currently reshaping many of the emerging economies of Asia as they prepare to compete in the 21st century. Rocky islands are being leveled in preparation for airports, mountains are being smoothed to make room for freeways, and miles of cables are criss-crossing terrain to facilitate communication and power transmission. For instance, Indonesia has recently commissioned five million telephone lines to be built by a consortium of firms, including AT&T, Bell Atlantic and other firms from Britain, Australia and France. South Korea is currently building 30 new power plants valued at over $50 billion, as well as a new airport for another $5 billion. And 120 million Chinese are waiting just for electricity. Indeed, the Asian Development Bank has estimated that the emerging economies of Asia alone will spend $1 trillion by the year 2000 on energy, telecommunications and transportation.’ Table 1 provides a breakdown of the estimated infrastructure expenditures within this region. The transformation in infrastructure within these emerging economies offers vast opportunities to those U.S. construction and engineering firms that wish to establish themselves in this domain. Large American multinationals, including G.E., Westinghouse and AT&T, as well as smaller design shops like Black & Veatch and Stone & Webster, are attempting to reap the benefits of this growing market. These developing markets, howevel; present unique challenges not typically found in the more comfortable confines of established economies. The aim of this paper is to provide some general guidance and factors of

success for those interested in the burgeoning Asian infrastructure sector. What separates successful foreign contractors from those that flounder? Why are some firms proficient at gaining a foothold, while others fail to do so? This investigation is based on interviews with project managers, managing directors and other executives from American construction and engineering firms that have been successful in these countries. These American firms have all had an established presence in the region for a minimum of 10 years. Also interviewed were representatives from government and local firms. These two groups typically play a vital role in the prosperity of the foreign contractor. Three general success themes emerged from our investigation: The growing competitive knowledge transfer;

l

role of

The use of local firm networks for managing government entities; and l

The importance of adapting firm risk orientation to the host country’s legal and cultural environment. l

One of the key challenges in our research was the uniqueness of the countries of this region. One engineering firm executive, with extensive experience in the region, made the following reflection: “Each country in Southeast Asia is completely different. The politics are different in terms of who does what and what is the enabling part of the government, who are the dominant family and holders of power.” Indeed, a common mistake of many firms entering these new markets is to assume that geographically adjacent countries function in a similar fashion. An erroneous tendency is 65

The Link Between Economic Growth and Infrastructure

to treat all countries within the same region as monolithic, with similar ways of doing business. For instance, consider the greater Chinese region, including China, Hong Kong and Taiwan. Religion, legal codes, historical context, customs and accepted practices all differ across these emerging economies. One cannot immediately presume that the “recipe” for success in one country will readily transfer to another, even if it is in the same geographic locale. Microsoft, for one, has recently discovered this obstacle. In preparing a version of Windows for mainland China, the company simply adapted fonts made in Taiwan. They ignored sensitive linguistic and political differences, leading Beijing officials to ultimately reject the adapted product. While not discounting certain idiosyncratic differences, we have found the three general success themes listed above to be typically important across the spectrum of emerging Asian nations. The importance and overall generalizability of these factors can be attribured ro the developing nature of these somewhat fragile economies. These countries share a

66

number of common features, challenges and goals, such as a limited local skill base, heavy-handed government influence in the economy, an often overwhelming bureaucracy and a desire to enhance their status in the global economy. We will proceed with a brief overview of the challenges facing these emerging economies of Asia, as well as the challenges to U.S. firms wishing to gain entry. The concept of a “triple alliance” between foreign firms, government constituencies and local entities will be introduced and then used as a foundation for the three themes of success.

Based upon overall economic growth, many of the Asian emerging economies appear to be well on the road to achieving developed-country status. For instance, Korea has recently experienced an annual growth rate of 9.9 percent. Driven by high exports, the East Asian economies overall have grown by an average of 7.7 percent since 1986.2 However, as attractive as these growth rates may be, the sustained economic prosperity of these economies are being threatened by the inadequate infrastructure often found there. India, for one, continues to experience electricity blackouts, prompting immediate plans to develop new power plants.3 Energy needs are growing exponentially, many airports are being overwhelmed, and traffic jams are paralyzing major cities from Beijing to Jakarta. The recent bridge, pipeline and department store disasters in Korea are further indications of the troubled state of the region’s infrastructure. The general lack of dependable power, telecommunications and transportation will very likely limit continued economic expansion. Moreover, these emerging economies are now finding themselves in direct competition with each other for the foreign investment that is fueling their continued development. In China and India, for example, competition for foreign investment remains keen as they both are able to offer large markets, low-cost labor and regional access to surrounding markets as multinational firms maintain some degree of freedom in choosing where they might establish a regional beachhead. The comparative condition of a country’s infrastructure is becomThe Columbia Journal

of World Business

ing increasingly influential when decisions are made by potential foreign investors. Multinational firms desire a reliable infrastructure to gain full benefit from the exposure to new markets. At the national level, a dependable infrastructure provides an alternative competitive advantage, as the low-cost labor advantage slowly slips away from these developing economies in their quest for fully industrialized status. The spoils of foreign investment within these regions may ultimately go to those countries that are supportive in terms of stable transportation, power and communications. Taiwan, for one, has recently experienced a shrinking volume of foreign investment, in part due to the overextension of its current infrastructure.4 Indeed, many of these emerging economies are now facing a perennial catch-22. To continue to enhance their status in world markets and transform themselves into more skill-based economies, they will need to improve their transportation systems, power sources and communication networks. The creation of such infrastructure, however, requires an already strong capital base, as well as the technical and managerial knowhow typically found within more developed economies. Thus, these developing economies are in need of more sophisticated skills to generate a future economy based upon those very same skills.

Opportunities and Challenges for American Firms It is this vacuum between the existing skill base of these emerging economies and that which is needed for continued economic expansion that is ultimately creating opportunity for those American engineering and construction firms willing to face the challenge of working in these often uncertain environments. These economies are being forced to adopt more open-door policies toward foreign contractors and suppliers. While this skill gap provides tremendous opportunity for American firms, today’s global environment is also extremely competitive. Firms from the United States, Japan, Europe and Australia are all vying for these potentially lucrative contracts and entry to this market. Firms that are competing with U.S. interests include ABB Asea Brown Boveri and Siemens of Germany, Japan’s NEC, Hitachi and Toshiba, as well as Alcatel Alsthom from France, to name a few. American construction and engineering firms, however, perceive themselves as facing certain legal and ethical constraints that others are not necessarily compelled to recognize. An American executive vice president based at an overseas office makes the following assessment: One of the things that U.S. firms run up against is the fact that this is not a level playing field. Because of the ethics that American businesses have to have, it is very difficult for them to match what companies from other countries are doing.

A recent survey found that foreign managers rate the corruption in Indonesia, India and China at over three Fall 1996

times the level of their home country.S Many of these countries lack a reliable legal system for recourse. Yet, rather than dwelling on this competitive handicap, successful U.S. firms have sought out alternative means to gain competitive advantages. They continue to search for ways in which their firms can mitigate these constraints by offering services that others either cannot or are not willing to offer. In essence, they look beyond these legal and ethical limitations and work within the system of the foreign host. The business environment within this emerging Asian region offers a high level of collaborative complexity in terms of the intensity of the relationships between multiple stakeholders. Such relationships are not typically formed overnight but take considerable time to evolve. This often requires the foreign firm to establish a presence through a local office as a display of commitment even prior to any actual business dealings. As explained by one managing director of an American engineering subsidiary: You do business in Southeast Asia based on relationships. The only way you are going to get on a bidders list is through developing these relationships. You have to meet the right people, socialize with the right people and, over a period of time, develop their trust and confidence. If they have an opportunity, they will then come to you. This is different from the United States. You cannot simply fly in on an airplane, meet with people and fly home expecting anything good to come of it.

Any display of commitment by headquarters back home can also 67

each triad member varies across countries and industries and over time, as needs change. Currently, the domestic political forces of Asia hold extensive power through their control over access to relatively large and untapped markets demanding Western products. This power is tempered only by their reliance on the multinational firms for foreign investment. Thus, to be a significant player in major infrastructure projects within these developing regions, the foreign firm must be competent in managing this triple alliance. A breakdown in relations between any of the three will greatly hamper a firm’s efforts.

make the difference between establishing a mutually beneficial relationship or missing out on opportunities. One Malaysian official relayed to us the importance of a recent visit by Jack Welch in securing a lucrative contract by General Electric. This visit by the CEO provided a signal of commitment and displayed how consequential this region was to this large multinational firm. These relationships can be divided into a triple alliance between the domestic political forces (state elite), local firms and multinational firms (see Figure 1).6 Naturally, each party to this triad maintains its own interests and uses its relationship with the other triad members to further its own goals. While at times these goals may diverge, a symbiotic relationship exists, as each member’s success ultimately depends upon the actions of the others. The bargaining power of

Factors of Success Extensive research has been conducted in the strategic management field, suggesting that idiosyncratic dif-

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ferences in skills and capabilities across firms influence a firm’s level of performance relative to others in the industry.7 This “resource-based view” of the firm suggests that a competitive advantage, leading to above normal returns, can be gained either through controlling valuable resources or by possessing capabilities that other competitors do not have. A firm can then be viewed as a composition of competencies or skills, as opposed to artificially determined divisions and business units. Researchers Gary Hamel and C.K. Prahalad have challenged managers to identify and exploit the firm’s “core comperencies.“* Essentially, core competencies define the identity of the organization: “what we are good at.” Successful firms, in turn, are able to match “what they are good at” with the needs of the marketplace. These competencies are typically intangible and difficult to imitate. Indeed, if these competencies were easy to copy, they would not provide a sustainable competitive advantage, since other firms would readily follow suit and ultimately reduce their competitive value. Applying these concepts to the infrastructure sector, we have found that not all firms are equally capable of managing the triple alliance between themselves, government entities and local firms in these emerging Asian economies. Successful firms have guided this triple alliance in a fashion that other firms are either unable or unwilling to do. To the extent that some firms are better able to foster these relationships in ways that cannot be readily duplicated, sustainable competitive advantage and continued success can be achieved. The following recurring themes suggest how successful firms have differentiThe Columbia Journal of World Business

ated themselves in terms of managing this triad relationship. Knowledge Edge

Transfer as a Competitive

Consistent with the resourcebased view, Prahalad and Hamel also argue that long-term success is ultimately dependent upon the firm’s ability to develop and protect its core competencies. This becomes particularly critical when interacting and collaborating with other foreign and domestic firms. Collaboration has been described as a race to learn from the partners involved, and emphasis has been placed on the need to safeguard one’s proprietary knowledge and skills.9 American firms have been criticized in the past for being too open with their partners and for having little regard for the competitive implications in sharing one’s critical skills. Certain firms may have given away strategic competencies while getting little in return. This fear of bleeding technical skills and know-how to one’s business partners, however, may not necessarily be warranted in emerging economies, where local firms do not maintain an equal footing. Our research suggests that successful multinational engineering and construction firms have actually gained competitive advantage in emerging economies by being good teachers, as opposed to restricting and protecting knowledge flow. It is their ability and willingness to transfer knowledge, including technology and managerial skills, that have distinguished these firms from other foreign competitors. While state-ofthe-art technology and managerial competencies may help the firm secure an initial contract, it is their abilFall 1996

ity to transfer these skills that often leads to repeat contracts and a sustained market foothold. This expertise in knowledge transfer can create competitive advantage in two distinct fashions, each of which attends to the different nodes within the triple alliance. First, it may enhance one’s reputation within host government circles. Secondly, it allows for the creation of strong local networks, ultimately leading to a comparatively low cost position (see Figure 2). . Reputation Effects. Recent academic research has formalized the idea that a firm’s reputation is an intangible asset that can create a competitive advantage and separate successful firms from the pack.” Strategic decisions depend on the perceptions of those executives who make them, and “non-economic” considerations, such as reputation, play a

role. Competitive advantages accrue to firms that possess a more highly regarded status in the eyes of their key stakeholders. Yet the means by which multinational contractors and engineering firms establish a reputation within an emerging economy may differ from the methods used in the more comfortable domains of their home country. Many of the government entities within these emerging countries have made the connection between upgrading their domestic skill base and the future well-being of their economy.11 Technology and know-how are often equated with economic growth and, ultimately, national advancement. These government entities have come to value knowledge transfer and view it as a vital component in doing business with foreign multinationals.

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Due to the public nature of largescale infrastructure projects, as well as the heavy-handed government control over multinational firm activities that is typical in emerging economies, government entities play the decisive role in determining which firms will be involved in these projects. Thus, a strong reputation within such circles can readily transfer into awarded contracts. Moreover, these contracts may not necessarily go to the lowest bidder in these emerging economies, as is common within the open-bidding process of more developed economies. Contracts are typically “negotiated,” rather than issued through public bidding. There are other intangible considerations, including the openness of the foreign firm. For example, Westinghouse recently shocked its competition by sealing a $100 million joint venture with Shanghai Electric to manufacture steam turbines. The differentiating factor was its willingness to manufacture locally and to transfer technology.i2 Indeed, government entities are beginning to use a firm’s reputation for openness as a screening mechanism in their decision making. While it may often be easier, and cheaper, for foreign construction and engineering firms to limit the level of interaction and knowledge transfer to local firms, such a stance may be short-sighted. One manager of a large U.S. contractor sums up their recent accomplishments: The key to our success is our high usage of local content in terms of suppliers . . . this was sometimes painful and more costly in the short run when compared to using more familiar suppliers back home. However, it’s good for public relations and it

70

will pay off in the long run. We have built a reputation for developing

Managing Government Entities

lo-

cal suppliers, which is important for future contract potential. l Strong Local Networks. The second means by which knowledge transfer has proven to be effective is through the development of strong local networks. While forming local partnerships may be initially more costly, over time these partnerships allow for the creation of a low cost position in comparison to those firms that continue to rely on more familiar partners from their home country. Domestic labor from these emerging economies is typically of lower cost. The use of such low-cost labor will enhance the ability of the foreign firm to submit increasingly competitive bids and create higher margins. As evidenced from the comments of one engineering firm vice president,

If we cun find qualified local engineers and put them to work here, we can cut

our

costs rather drastically

and become more competitive.

Other

multinationals are already doing this. For us to be competitive,

we are go-

ing to have to take that approach.

The ability of a firm to decrease its costs is dependent upon its ability to access local firms that are competent and to offer complementary skills. However, local talent with the requisite skills may not readily be found in these lesser developed countries. This typically requires extensive training and the transfer of knowledge over repeated exchanges. Again, the development of local partners can be viewed as an investment from which future returns may be gained.

The second success theme that provides these construction and engineering firms with a competitive advantage in these emerging economies is their ability to manage often diverse government entities. Governments are not unified bodies. Several different agencies, state governments and federal entities may be involved in monitoring and controlling large infrastructure projects, and each may have its own agenda and goals. The bureaucracy and politics of these emerging economies may be particularly overbearing and unpredictable, depending upon the country’s historical context. A U.S.-based consortium, led by Houston-based Enron, has recently discovered how volatile these political considerations can be. Its high-profile power project in Maharashtra, India, appears to be in jeopardy as rival political factions are attempting to scrap the project to gain their own political advantage.13 Indeed, an opposition party can readily appeal to nationalistic whims by claiming that the ruling party sold out to foreign contractors. Politics and business are often intermixed, as many of these Asian countries lack established rules regarding conflicts of interest. At times, the local political elite behave in their own interests. Those making decisions on behalf of the government may also have their own local business concerns that may benefit from the proposed project. Again, we see the triple alliance at work, as its members attempt to attain their own goals through the use of others. For instance, local firms can use political access to the government to defend their own market position. These politically connected firms may demand

The Columbia Journal of World Business

a piece of the action of any new largescale project. It is left to the political elite to balance the competing claims of nationalism and economic growth, while foreign firms risk getting caught in the fray. The following was suggested by one executive of a large U.S. multinational located abroad: Above all, when firms come out here, they need to be educated in politics and understand who is politically tied to whom. Major mistakes can be made by saying the wrong things to the wrong people and by not knowing their political affiliation and what company

they may be tied to.

Yet foreign firms may be taking significant risks by aligning themselves with particular government officials, as political change and turnover may render these connec-

Fall 1996

tions a disadvantage. For instance, in China, a purge against corruption has forced some key officials to resign and has even led to their execution. While the purge may be an attempt to topple political rivals, any foreign firm which has dealings with a targeted government official also comes under suspicion when that official comes under attack. Foreign firms in the infrastructure sector may not be immediately equipped with such knowledge of political agendas. However, the local partner network can be used as a buffer against the bureaucratic and political complexity of doing business in these economies. Successful American firms rely on their host country connections in dealing with local authorities (see Figure 3). One engineering executive, when asked

about the value of domestic partners, made this comment: It is more than just access to the market. It is deeper and more subtle than that. It is a sense of bow things work and specific knowledge ing local contractors,

regard-

suppliers and

vendors. It is a sense of bow to get along with local authorities,

bow to

act, bow to get things approved.

It may be difficult, however, to find local firms that possess a full range of political, technical and managerial skills. “. . . Often companies with political clout do not have the managerial expertise and vice versa,” explains one project manager from a large U.S. contractor. Successful U.S. firms have developed a portfolio of local partners that are differentiated in their strengths-technical, managerial and political. Certain firms add value to the relationship through their political ties and their ability to manage multiple political demands by other local firms and government entities. Indeed, partnerships are being formed for purely political rationale, outside of the technical scope of the specific project. A government will be reluctant to harm foreign concerns if a variety of local firms, having diverse political interests, are woven directly into the project. Thus, a firm’s existing partner network, and its ability to maintain and further develop this network, can be viewed as a distinct competency, capable of differentiating itself from the competition. This network allows the firm to manage effectively the triple alliance and to limit its risk in terms of political ties.

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Risk Orientation

The third challenge for U.S. contractors in managing the triadic relationship is to adapt their risk orientation to be consistent with the local legal setting (see Figure 4). Comparatively, the United States is a highly legalistic society, where lawsuits are commonplace for the slightest breach of contract. The atmosphere of litigation and the threat of lawsuit runs high. The home country legal context of the foreign multinational can bleed over and hence influence its behavior and decision making within these emerging economies. Firms often project their own experiences in the United States onto their dealings in other parts of the world. One American managing director who spent 12 years doing business various countries throughout Southeast Asia, com-

ments, “the people over here look at you funny when you have six attorneys in a meeting. They wonder why we need all those guys. I think there is more trust and a reasonable approach to damages over here.” Despite this, however, the penalties for contract breach may be no less stringent in the emerging Asian countries and often may appear to be more so. Legal agreements are often written in very precise terms, sufficient to cover many of the possible contingencies. The conflict resolution methods in these economies, however, may vary. In certain cultures, renegotiation in a nonhostile fashion is the norm when terms of a contract are not met. Arbitration and the legal system are not immediately called upon when things turn sour. It is often difficult for the headquarters of these American sub-

sidiaries to recognize differences in the legalistic environment between the United States and the emerging economies in which they are operating. The integration of cultural considerations into the calculus of risk assessment becomes troublesome. Therefore, focus is often placed on that which is tangible, such as the written contract itself. By maintaining a risk perspective consistent with the American way of doing business, U.S. firms may be passing up viable opportunities in these countries due to their unfounded fears of contract penalties. American contractors find it difficult to bid effectively against those firms that have acclimated their risk posture accordingly. One managing director describes the dilemma: Most American

contractors

by

themselves have neuer been able to bid well out here. They are not willing to accept the threat of penalties, even though these penalties have never been exercised. The problem often lies with the decision makers back home, as opposed to those executives in offices abroad who may have a better understanding of the local legal climate. There may be trust on a personal level, but the lawyers back home do not always go along with it. . . . our selling job is often with our own people.

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The Columbia Journal

of World Business

Competitive Sustainability of SuccessThemes Though foreign contracting and engineering firms may be able to generate initial competitive advantage through these success themes, are these advantages sustainable in the sense that they cannot be easily duplicated by the competition? What steps can be taken to enhance these competencies? Past studies have shown the difficulty in transferring technology within organizations. For example, one researcher found that 50 percent of the internal transfers that he studied experienced significant productivity problems, and 20 percent ended with complete failure.i4 These pitfalls are likely to be intensified when transferring know-how to other organizations from different countries and, in particular, to organizations of different developmental status. Indeed, foreign firms are not equally competent at transferring know-how to the local enterprises. The knowledge to be transferred is commonly tacit in nature, requiring “learning-by-doing” and a high level of interaction between the foreign firm and the local recipients. The challenges involved in transferring somewhat ambiguous knowledge lie beyond simple language barriers and often involve cultural constraints. For example, certain cultures are reluctant to ask questions for fear of being looked down upon. “If they run into a problem, they will just stop and not tell you . . . they lose face if they admit they do not know,” protests one construction executive. Other cultures are particularly risk averse and attempt to avoid any personal risk through consensus decision making. While this may be effective in reducing risk, it also Fall 1996

makes the transfer of certain management techniques problematic. High levels of interaction require the foreign firm to establish a trusting relationship with the local entities to facilitate the learning required for effective knowledge transfer. Thus, the multinational firm that is able to overcome these cultural barriers and create an environment receptive to learning and knowledge transfer will be at an advantage. The ability, then, to teach and efficiently transfer knowledge may itself be viewed as a core competency, one which can provide a sustainable competitive advantage over those multinationals that are less competent or not willing to do so. Certain firms possess the culture and have developed the programs necessary for effective transfer of knowledge while others either do not have the resources or remain unwilling. For example, Japanese multinationals have recently been criticized for not being forthright with their engineering expertise and have developed a reputation that may adversely affect them in their competition for government contracts.i5 Successful firms have pursued a number of ways to enhance their ability to transfer knowledge. Most of these involve integrating the local entity into their own firm. Explains one power industry project manager: We have always said in our proposals that we will use your people as much as possible in the development of the project. . . we integrate them in the organization. In the end, knowledge and experience are transferred. General Electric shares designs and processes and places personnel

within supplier facilities. They share as much as possible and are not necessarily concerned with the level of knowledge that is being transferred. Other efforts involve the relocation of locals back to the United States for hands-on training. Another engineering executive from a firm that has found ongoing success in some of these emerging economies explains: We take individuals from partners and clients back to the United States and put them in school for a couple of weeks. We then put them in a working environment and expose them to some of our other projects that we may be working on....this whole process may take six months.

Only after they have had this extensive training are they brought back to their country to work side by side with U.S. personnel. Likewise, not all foreign contractors have the ability, resources or willingness to develop the portfolio of partners and local entities that are able to buffer and manage the government bureaucracies. Doing so requires both patience and unique skills that not all firms may possess. For instance, Westinghouse created its own middlemen and political networks in mainland China. After securing contracts in the early 198Os, Westinghouse brought 800 Chinese engineers to the United States for training in advanced technology. These same engineers have gone on to prominence, both in local industry and government. Their recent success in the power industry within China can be partially attributed to the resulting relationships with politically connected local firms.l6 These relationships, however, began developing 10 years previously, and they require 73

a long-term perspective to justify the cost. One executive put it matter-offactly: It takes two or three years to develop relationships

and personal con-

tact on a daily basis. If you come over to Asia without a long-term commitment, you are throwing money down the drain.

Finally, the ability to assess contract risk accurately in a host country environment is not easily imitable, but rather is a skill that is learned through experience. The firm must contend with incomplete information regarding the actual stringency of contractual demands. Successful firms have learned the nuances of host country legalese and have come to differentiate truly risky deals from those that appear to be risky on paper. Moreover, they have developed comprehensive local legal expertise to guide corporate decision makers. Conclusion and Future Considerations The development of infrastructure within these emerging economies provides expansive opportunities for American engineering and construction firms. To achieve success in these markets, however, American firms must recognize and effectively manage the triple alliance between themselves and the host government and local firms. If there is a gap in their ability to manage this triad, firms may need to take measures to improve their status, or the attractiveness of the opportunity may need to be reassessed. We have presented three areas where successful firms have gained some advantage over the competition, who are either a’ot capable or not willing to pursue similar 74

strategies. Implementing these lessons is obviously difficult, and, for that reason, the ability to do so generates competitive advantage. Firms wishing to become involved in major infrastructure projects in these emerging markets may need to expand their definition of the marketplace to include the more broader needs of the country as a whole. These economies are in search of not only improved infrastructure, but also the developed skills and knowhow for their advancing economy. In the words of one Mercedes-Benz negotiator who recently assessed his company’s bargaining strategy for the Chinese market, “Let’s see what Asia needs” (italics added).” Thus, U.S. contractors and engineering firms must appraise not only their technical competencies, but also their ability and willingness to develop local firm networks, establish a positive reputation and effectively assess contract risk in unfamiliar domains. Achieving this, they will be better able to match what they have to offer with the needs and desires of the emerging economy. Our analysis raises some related concerns. Notably, might U.S. or other multinational firms be placing themselves at risk by too freely transferring their technology and managerial know-how? Will these local partners, at some point, become direct competitors? There is certainly some justification for these concerns. One only has to look to those Japanese firms that benefited so greatly from U.S. collaboration in the 60s and 70s and went on to become proficient competitors. Korea’s recent success in nuclear energy and telecommunications can be largely attributed to the acquisition of crucial technologies from the West and their

adaptation.18 Indeed, a recent Indonesian pipeline project attracted more than 30 groups of firms bidding for the opportunity. Many of these groups were headed up by local firms who had previously partnered with larger American and European contractors. Sime Darby of Malaysia is another example of a firm that has gained expertise in developing and managing power projects and has now begun to bid independently on projects in Indonesia and China. Perhaps a more relevant question to be asked, however, is what are the consequences of not transferring know-how and not promoting the long-term interests of these emerging economies. The situation within the infrastructure sector in these regions represents a prisoner’s dilemma of sorts. If all foreign competitors were to limit their transfer of technology and managerial skills, perhaps the long-run gains of these multinational contractors would be maximized, as new competitors would not be created. Yet given the immediate gains and the relative bargaining power of these emerging countries due to their large markets, foreign contractors can be expected to deviate from any implicit agreement to limit knowhow transfer. As this is the case, others must follow suit to remain competitive. One prime example of this is China’s recent minivan deal with Mercedes-Benz, in which Chrysler was passed over because of its unwillingness to share key technologies. This entry to the Chinese market, and the increased favor Mercedes has earned in the eyes of the Chinese government, may ultimately provide Mercedes’s parent company, Daimler Benz, access to future high-speed train deals.19 Thus, while Chrysler forgoes gaining a part of the large The Columbia Journal

of World Business

Chinese market to maintain close control of its technology, the future value of the same technology in this region will ultimately decrease due to the willingness of its competitors to share their own know-how. Similarly, it can be argued that the future value of specific technology within the hy-

1 “Building the new Asia,” ber 28, 1994.

Business Week, Novem-

2 Economist, August 19, 1995, 67. 3 Economist, May 27, 1995, 60. 4 BusinessWeek, November

long-term benefits of such intangible assets as reputation, local firm networks and capable risk assessment as derived through the effective management of the triple alliance. Only then can the associated short-term costs possibly be justified.

8 C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review (May-June 1990): 79-91.

14 Craig Galbraith, “Transferring core manufacturing technologies in high tech firms,” California Management Review (Summer 1990): 56-70.

9 Gary Hamel, “Competition for competence and inter-partner learning within international strategic alliances,” Strategic Mamgement Journal (1991): 83-103.

15 “Building rhe new Asia.” See also Technology Transfer to Malaysia, United Nations Development Programme.

28, 1995,43.

5 “Hard graft in Asia,” EconomisT, May 27, 1995, 61. 6 Peter Evans, Dependent Development: The ANiance of Multinational, State, and Local Caprtal in Brazil (Princeton: Princeton University Press, 1978). 7 For example, B. Wernerfelt and C. Montgomery, “Tobin’s q and the importance of focus in firm performance,” American Economic Review (1988): 246-250. See also K. Cool and D. Schendel, “Performance differences among strategic groups,” Strategic Management Journal (1988): 207-224.

Fall 1996

percompetitive infrastructure arena may be limited. Rathel; on-going innovation will be required for technological advantage.20 Ultimately, the challenge to the American contractor attempting to gain a foothold in these emerging economies is to place a value on the

10 Keith Weigelt and Cohn Camerer, “Reputation and corporate strategy: A review of recent theory and applications,” Strategic ManagementJournal (1988): 443-454. See also Charles Fombrun and Mark Shanley, “What’s in a name? Reputation building and corporate strategy,” Academy of Management Journal (1990): 233-258. 11 Michael Porter, The Competirive Advantage Nations (New York: Free Press, 1990).

17 “How Mercedes trumped BusinessWeek, July 31, 1995.

Chrysler

18

BusinessWeek, July 31, 199.5,56-64.

19

“How Mercedes trumped

in China,”

of

12 BusinessWeek, July 17, 1995,66. 13 “Enron deal in India teeters on politics,” Street Journal, July 3, 1995, A4.

16 “No free lunches here,” Newsweek, February20, 1995, 39.

WaN

Chrysler in China.”

20 Richard D’Aveni, Hypercomperition (New York: The Free Press, 1994).

7.5