Inward investments perspective

The aim of the article:

· To determine the factors influencing the operations of international (predominantly European) construction companies in foreign markets with a focus on the Russian market.

The objectives of the article:

· To survey the contemporary theory of internationalization and its application to construction industry

· To study the internationalization process of European construction companies and their entry decisions towards Russian market

· To reveal the factors of success in the internationalization process of large construction enterprises entering Russia

Structure of the article:

· contemporary approaches to internationalization

· the methodology and explanation of the strategic management concepts related to the research (with focus to the case study approach)

· the results of the research

 

· Contemporary approaches to internationalization

· Literature review: the research in the field of entry strategy has fragmentary terminology, problem identification etc. As a result, there are a lot of different paradigms and theories. The main focus of the research is coherence between the foreign market and the specific factors of the enterprise.

Nevertheless the foreign market entry decision making is very important and used in this article. There are three different decision rules for entering (acc. to Root):

1. Naïve rule (the same entry mode for all foreign operations

2. Pragmatic rule (a workable entry mode for each target market)

3. Strategy rule (the “right” entry mode for each target market) Definition of “right” is complicated

· Alternatives the study of international decision making process

There are a lot of theories with the names and short descriptions. To my mind, it is pointless to have them in the summary.

· Internationalization preconditions in the construction. Contractors and developers usually create a joint venture or establish wholly owned subsidiaries to internationalize their operations.

· Research Methodology

o The research approach

This research has been based on the study of the environmental impact and of the adjustment to the internationalization process. The research applied a variety approaches: conceptual analysis approach (to develop conceptual systems to study the transition process); decision-making methodology approach (to study internal processes); Operation analysis approach (the base of the empirical part of the study)

o The main objective of the study: to find out how foreign construction enterprises entering Russian market adjust to the local environment, how they respond to the internationalization attempts of Russian firms, what factors affect and explain their results

o Scope of the study. The focus of the study was internationalization process of Russian construction industry. Constr. Industry is highly integrated with the narrow set of the related markets; therefore, contracting, construction material, and construction machinery industries were also studied.

o Research approaches and research methods. The study combines several research methods. The research framework is based on the industrial organization perspective (perspective for the enterprise to position itself in the industry) and the network perspective (analysis of the organizational-environment interaction and operational structure of internationalizing companies). Study focused both on the region and the enterprises to find out the effects of the development in the business environment on the behavior of a construction enterprise. There are 6 companies, selected for the analysis: Caterpillar, Knauf, Konecranes, Nokian Tyres, Otis, YIT).

· The research of Internationalization process of the Russian construction market

o Russian construction market (see YIT case. It is absolutely the same). As a result of the analysis can be derived that Russia tends to be an extremely dynamic and volatile market about which West knows little. There is much room for growth. Therefore, a lot of large foreign companies are now also working in the Russian market.

o Russian construction industry internationalization preconditions. Porters 5 forces:

§ Rivalry of existing firms – the most significant driver of competition

§ No buyers power – unsatisfied demand for housing

§ Weak threat of new entrants – high barriers

§ No substitutes for housing

§ Suppliers power is not significant for large construction company

o There are 4 the most efficient action types as motives of internalization (and response to the inward FDI) in Russian construction companies:

§ Product action – I in new product development (LEK) - not lead to int-tion

§ Pricing action – Price cuts, discounts (LenSpecSMU) – not lead to int-tion

§ Marketing action – marketing campaigns (Stroimontazh) – can precede

§ Capacity/output action – changes in company’s capacity (M-Industria) – in most cases leaded to internationalization of the Russian constr. firms

o FDI –based entry to the Russian construction market. The FDI is expected to bring wealth of benefits to the local economy: fresh inputs of capital and knowledge. The development of the relations between EU and Russia has affected the constr. Industry. The investment climate is getting better, competition is becoming fairer and entrepreneurial culture is improving on Russia. Management has become more professional.=> the Russian construction market is one of the major destinations for investment. EU companies (especially German) in Russian constr. industry deal mostly in markets of construction materials and constr. Instruments. Beginning with export à massive exporting à decision to develop their own production (Brownfield and Greenfield strategies)

Models of FDI in Russia:

§ Foreign company invests money and seeks transparent projects

§ Foreign company enters Russian market with its own project and management and organizes network with local contractors

§ International construction group searches for optimal entry mode to enter Russian market

Special attention to the standardization of construction and management processes

o Construction related MNEs’ success factors on the Russian market. 6 companies, were selected for the analysis: Caterpillar, Knauf, Konecranes, Nokian Tyres, Otis, YIT).

Major factors of MNEs’ success in Russia in the last decade:

1) the right choice of mode and time of entry to the Russian market,

2) quality of production (including perceived quality defined by the brand of the country of MNE origin),

3) marketing activity with the strong focus on the communication to customers.

Key success factors of the companies:

1) the strategy of establishing of own production facilities

2) FDI oriented to the local market

3) Early entry to the Russian market

o Strategies leading to the rise of construction related MNE’s competitiveness in Russia

· Discussion

o Basic factors in the adjustment to internationalization.

§ The main objective of the Russian companies is physical growth

§ They mostly have a functional structure

§ Skills of the management is rather high

§ Marketing is weak

§ Organizational structure in most cases is defender type

And again the main factors of success (see above)

o Effects of the financial crisis in Russian construction. In Russia, the impact has been less significant than in other CIS countries => healthy growth figures in 2007 and the first half of 2008. <= Many Russian developers have not had to rely on borrowings at all, moreover, there are a lot of projects, financed form the state coffers.

o Recommendations. This study has indicated that the internationalization process in Russian construction industry has proceeded slowly and unevenly both at the business environment and at the enterprise level.

§ the operations performance of the construction enterprises is related to the share of competitive segment of the market. à increase the competitive share of the market ß develop and enforce the public tendering and pricing systems. New quality standards and norms which reflect the present and future requirements of customers would also increase competition.

§ Marketing resources seemed to be at a satisfactory level in many of the Russian companies. Their weaknesses are pricing methods, bidding systems and communication in terms of internal information sharing and customers feedback.

§ Strategic alliances, joint ventures, and other forms of cooperation would promote both the change process in Russian companies and the success of foreign firms.

o Conclusion

§ The tendency of rising demand for housing à The construction companies should not lose such opportunities to satisfy this demand ß Additional investments should be made; Financial resources could be received from other businesses or with the help of banks’ credits.

§ The crisis revealed the opportunity for those firms who will decide to invest in the plots and in the projects frozen by other players.

§ It is usually easier for big and well known construction companies to develop internationally. At the same time, their complicated organizational structure leads to slower decision-making process. à Restructuring and foreign (emerging) markets entry is recommended for such companies.

§ The construction companies of emerging economies countries should explore new foreign markets to insure themselves from political and economic risks in the countries of origin and to increase profitability.