International construction projects are plagued with political risk, and international construction enterprises (ICEs) must manage this risk to survive. However, little attention has been devoted to political risk management strategies in international construction projects. To fill this research gap, a total of 27 possible strategies were identified through a comprehensive literature review and validated by a pilot survey with 10 international experts. Appraisals of these 27 strategies by relevant professionals were collected using questionnaires, 155 of which were returned. Exploratory factor analysis was conducted to explore the interrelationships among these 27 strategies. The results show that all of the 27 strategies are important for political risk management in international construction projects. Moreover, these 27 strategies were clustered into six components, namely, (1) making correct decisions, (2) conducting favorable negotiations, (3) completing full preparations, (4) shaping a good environment, (5) reducing unnecessary mistakes, and (6) obtaining a reasonable response. The 6 components can be regarded as 6 typical management techniques that contribute to political risk management in the preproject phase, project implementation phase, and postevent phases. The findings may help practitioners gain an in-depth understanding of political risk management strategies in international construction projects and provide a useful reference for ICEs to manage political risks when venturing outside their home countries.
With the rapid development of economic globalization, the global construction market has thrived in the past decade [
However, opportunities are always accompanied by risks, and ICEs will be exposed to new risks when venturing outside their home countries [
Given the increasingly complex business environment, political risks should not be ignored by ICEs when they approach global markets [
Much of the extant literature has focused on political risks in international general business [
Hence, political risk management in international construction projects should be conducted jointly at both the project and firm levels by considering the various types of risk and linking risk management strategies to the enterprise’s objectives. Successful political risk management should be based on sufficient resources and information as important components of the decision-making process are continually improved and enhanced [
This study focuses on the political risk inherent in international construction projects and aims at identifying the strategies available for ICEs to manage political risk. The specific objectives of this study are to (1) identify possible risk management strategies that can address political risks in international construction projects, (2) evaluate the importance of the strategies, and (3) explore the interrelationships among those strategies and their practical applications in international construction projects.
Because less attention has been devoted to political risk management in international construction projects, this paper can enrich the understanding of risk management in the field of international construction. Furthermore, this study may help practitioners clearly understand political risk management strategies in international construction projects and provide guidance for ICEs regarding how to address political risk when venturing outside their home countries.
Political risk management has been a popular topic in the field of international business (e.g., foreign direct investment, trade in goods, and international joint ventures). Several strategies have been proposed to address political risks, such as investing only in safe environments, increasing the required return, adapting to particular business environment conditions, sharing risks with other firms [
Previous studies regarding risk management in construction projects have covered a wide variety of areas, such as overall risk management [
Several studies have been conducted to identify political risk events [
Based on an overview of the literature on political risk and risk management, a total of 27 possible risk management strategies were identified and were coded as S01 to S27 (Table
Political risk management strategies.
Strategy | Reference | ||||||||
---|---|---|---|---|---|---|---|---|---|
[ |
[ |
[ |
[ |
[ |
[ |
[ |
[ |
[ | |
S01: making a higher tender offer | X | — | — | — | — | — | — | X | — |
S02: conducting market research | X | X | — | X | X | — | X | X | — |
S03: buying risk insurance | X | — | — | X | X | — | X | — | X |
S04: adopting optimal contracts | — | — | X | — | — | X | — | — | X |
S05: implementing a localization strategy | X | X | — | X | — | — | X | — | X |
S06: avoiding misconduct | X | X | — | X | — | — | X | — | X |
S07: adopting closed management of the construction site | X | — | — | X | X | — | X | X | — |
S08: supporting environmental protection | X | — | — | — | — | — | — | — | — |
S09: abiding by the traditional local culture | X | X | — | X | — | — | — | — | — |
S10: making contingency plans | X | — | — | — | X | — | X | X | X |
S11: obtaining the corresponding guarantee | — | — | — | X | — | X | X | — | X |
S12: implementing an emergency plan | X | — | — | — | X | — | X | X | X |
S13: forming joint ventures with local contractors | X | — | X | X | — | — | — | — | X |
S14: conducting a postresponse assessment | X | — | — | — | X | — | X | — | — |
S15: sending staff to training programs | X | — | — | — | — | — | — | — | X |
S16: settling disputes through renegotiation | — | — | X | X | — | — | — | — | X |
S17: choosing suitable projects | — | — | — | X | — | X | — | — | X |
S18: building proper relations with host governments | — | X | X | X | — | — | X | — | — |
S19: maintaining good relations with powerful groups | — | X | X | X | — | X | X | — | X |
S20: creating links with local business | X | X | X | X | — | X | X | — | X |
S21: changing the operation strategies | — | — | X | — | — | X | X | X | — |
S22: controlling core and critical technology | — | X | — | — | — | X | — | X | X |
S23: choosing a suitable entry mode | X | — | — | X | — | X | X | X | X |
S24: employing capable local partners | X | X | X | X | — | X | — | — | X |
S25: building up reputation | X | — | — | X | — | — | X | — | — |
S26: allocating extra funds | — | — | X | — | X | — | X | — | — |
S27: maintaining good relations with the public | — | X | X | — | — | X | X | — | X |
A pilot survey was performed with 10 experts to verify the comprehensiveness of the preliminary strategies. These experts included (1) four professors (one each from Australia, Hong Kong, Singapore, and South Africa) engaged in research on business management and risk management, (2) two professors (one each from the United States and China) engaged in research on project management, and (3) four senior managers (one each from China Communications Construction Group Limited, Power Construction Corporation of China, China State Construction Engineering Corporation, and China Railway Group Limited). All the 10 experts had more than 20 years of work experience in their field. In their suggestion, no strategies were added or deleted; instead, descriptions of some strategies were added to ensure accuracy in understanding and to avoid ambiguity. For example, “S01, making a higher tender offer” refers to the premium for the retained political risks of an ICE.
The pilot survey was used to develop a structured questionnaire that comprised three sections: (1) a brief introduction of political risk and a description of some strategies; (2) questions to profile the company, work experience, title, and location of the respondents; and (3) questions to evaluate the importance of the 27 strategies using a five-point Likert scale where 5 = very high, 4 = high, 3 = medium, 2 = low, and 1 = very low.
Then, a list of selected experts was developed, and they included (1) 300 international academics who focus on related studies—their personal information was collected from their publications—and (2) 500 practitioners with extensive experience in international project management—drawn from 50 Chinese construction enterprises that were selected from the 2016 top 250 international contractors according to
From March to May 2017, the questionnaire was disseminated to these experts and a total of 158 responses were returned, of which three were incomplete or inappropriately filled out. The valid 155 responses represent a response rate of 19%. As indicated in Table
Profile of the respondents.
Characteristic | Categorization | Academia ( |
Practitioner ( |
Overall ( |
|||
---|---|---|---|---|---|---|---|
|
% |
|
% |
|
% | ||
Work experience | Over 20 years | 8 | 14 | 10 | 10 | 18 | 12 |
16–20 years | 15 | 27 | 12 | 12 | 27 | 17 | |
11–15 years | 17 | 30 | 28 | 28 | 45 | 29 | |
5–10 years | 16 | 29 | 49 | 49 | 65 | 42 | |
|
|||||||
Title | Professor | 22 | 39 | — | — | 22 | 14 |
Associate professor | 19 | 34 | — | — | 19 | 12 | |
Assistant professor/lecturer | 15 | 27 | — | — | 15 | 10 | |
Senior manager | — | — | 29 | 29 | 29 | 19 | |
Department manager | — | — | 28 | 28 | 28 | 18 | |
Project manager | — | — | 42 | 42 | 42 | 27 | |
|
|||||||
Location | China | 28 | 50 | 8 | 8 | 36 | 23 |
Asia (excl. China) | 14 | 25 | 38 | 38 | 52 | 34 | |
Africa | 2 | 4 | 26 | 26 | 28 | 18 | |
Europe | 5 | 9 | 9 | 9 | 14 | 9 | |
North America | 4 | 7 | 5 | 5 | 9 | 6 | |
South America | 0 | 0 | 8 | 8 | 8 | 5 | |
Australia | 3 | 5 | 5 | 5 | 8 | 5 |
The exploratory factor analysis has proven to be very useful for identifying the potential relationships between several sets of data and has frequently been employed in studies related to construction management [
A sample with 5-point Likert scale data used in exploratory factor analysis should meet two conditions: (1) the size of the valid sample must be greater than 100 or five times the number of items [
In this study, the number of valid questionnaires is 155, Cronbach’s alpha coefficient is 0.932 (>0.700, F statistic = 17.382, significance level = 0.000), the KMO index is 0.878 (≥0.500), and Bartlett’s test of sphericity (
Table
Ranking of the political risk management strategies.
Strategy | Academia | Industry |
|
Overall | ||||
---|---|---|---|---|---|---|---|---|
Mean | Rank | Mean | Rank | Mean | Rank |
| ||
S01: making a higher tender offer | 3.99 | 11 | 4.00 | 11 | 0.906 | 4.00 | 11 | <0.001a |
S02: conducting market research | 4.45 | 3 | 4.20 | 5 | 0.282 | 4.29 | 3 | <0.001a |
S03: buying risk insurance | 4.03 | 10 | 4.06 | 9 | 0.697 | 4.05 | 10 | <0.001a |
S04: adopting optimal contracts | 4.12 | 6 | 4.23 | 3 | 0.261 | 4.19 | 6 | <0.001a |
S05: implementing a localization strategy | 4.42 | 4 | 4.06 | 10 | 0.197 | 4.19 | 7 | <0.001a |
S06: avoiding misconduct | 4.45 | 2 | 4.15 | 6 | 0.089 | 4.26 | 4 | <0.001a |
S07: adopting closed management of the construction site | 3.41 | 22 | 3.85 | 12 | 0.537 | 3.69 | 18 | <0.001a |
S08: supporting environmental protection | 3.75 | 14 | 3.82 | 15 | 0.831 | 3.80 | 14 | <0.001a |
S09: abiding by the traditional local culture | 3.90 | 13 | 3.81 | 16 | 0.863 | 3.84 | 13 | <0.001a |
S10: making contingency plans | 4.10 | 9 | 4.09 | 8 | 0.606 | 4.09 | 9 | <0.001a |
S11: obtaining the corresponding guarantee | 3.98 | 12 | 4.22 | 4 | 0.401 | 4.14 | 8 | <0.001a |
S12: implementing an emergency plan | 3.18 | 26 | 3.55 | 23 | 0.244 | 3.42 | 24 | <0.001a |
S13: forming joint ventures with local contractors | 3.58 | 16 | 3.77 | 18 | 0.182 | 3.70 | 17 | <0.001a |
S14: conducting a postresponse assessment | 3.16 | 27 | 3.41 | 26 | 0.537 | 3.32 | 26 | <0.001a |
S15: sending staff to training programs | 3.43 | 20 | 3.62 | 21 | 0.628 | 3.55 | 21 | <0.001a |
S16: settling disputes through renegotiation | 3.28 | 25 | 3.43 | 25 | 0.617 | 3.38 | 25 | <0.001a |
S17: choosing suitable projects | 4.54 | 1 | 4.32 | 2 | 0.439 | 4.40 | 1 | <0.001a |
S18: building proper relations with host governments | 4.12 | 7 | 4.42 | 1 | 0.223 | 4.31 | 2 | <0.001a |
S19: maintaining good relations with powerful groups | 3.52 | 17 | 3.85 | 13 | 0.537 | 3.73 | 15 | <0.001a |
S20: creating links with local business | 3.43 | 21 | 3.70 | 19 | 0.377 | 3.60 | 20 | <0.001a |
S21: changing the operation strategies | 3.36 | 24 | 3.22 | 27 | 0.236 | 3.27 | 27 | <0.001a |
S22: controlling core and critical technology | 4.10 | 8 | 3.80 | 17 | 0.301 | 3.91 | 12 | <0.001a |
S23: choosing a suitable entry mode | 4.37 | 5 | 4.14 | 7 | 0.439 | 4.22 | 5 | <0.001a |
S24: employing capable local partners | 3.66 | 15 | 3.66 | 20 | 0.725 | 3.66 | 19 | <0.001a |
S25: building up reputation | 3.47 | 19 | 3.47 | 24 | 0.912 | 3.47 | 23 | <0.001a |
S26: allocating extra funds | 3.39 | 23 | 3.59 | 22 | 0.275 | 3.52 | 22 | <0.001a |
S27: maintaining good relations with the public | 3.49 | 18 | 3.83 | 14 | 0.137 | 3.71 | 16 | <0.001a |
As illustrated in Table
Results of the exploratory factor analysis.
Strategy | Communality | Item-to-total correlation | Component | |||||
---|---|---|---|---|---|---|---|---|
1 | 2 | 3 | 4 | 5 | 6 | |||
S23 | 0.640 | 0.590 | 0.676 | — | — | — | — | — |
S05 | 0.530 | 0.490 | 0.653 | — | — | — | — | — |
S17 | 0.575 | 0.572 | 0.617 | — | — | — | — | — |
S22 | 0.632 | 0.585 | 0.598 | — | — | — | — | — |
S18 | 0.565 | 0.482 | 0.541 | — | — | — | — | — |
S02 | 0.652 | 0.511 | 0.509 | — | — | — | — | — |
S06 | 0.730 | 0.579 | — | 0.683 | — | — | — | — |
S07 | 0.648 | 0.497 | — | 0.667 | — | — | — | — |
S24 | 0.667 | 0.612 | — | 0.617 | — | — | — | — |
S08 | 0.543 | 0.515 | — | 0.595 | — | — | — | — |
S09 | 0.621 | 0.611 | — | 0.509 | — | — | — | — |
S15 | 0.742 | 0.592 | — | — | 0.739 | — | — | — |
S26 | 0.679 | 0.516 | — | — | 0.670 | — | — | — |
S03 | 0.512 | 0.527 | — | — | 0.525 | — | — | — |
S10 | 0.479 | 0.542 | — | — | 0.507 | — | — | — |
S27 | 0.532 | 0.621 | — | — | — | 0.682 | — | — |
S25 | 0.697 | 0.629 | — | — | — | 0.672 | — | — |
S20 | 0.632 | 0.637 | — | — | — | 0.586 | — | — |
S19 | 0.581 | 0.589 | — | — | — | 0.547 | — | — |
S04 | 0.561 | 0.478 | — | — | — | — | 0.663 | — |
S01 | 0.548 | 0.551 | — | — | — | — | 0.567 | — |
S11 | 0.629 | 0.557 | — | — | — | — | 0.550 | — |
S16 | 0.611 | 0.538 | — | — | — | — | — | 0.631 |
S12 | 0.710 | 0.539 | — | — | — | — | — | 0.618 |
S21 | 0.579 | 0.571 | — | — | — | — | — | 0.522 |
S14 | 0.576 | 0.653 | — | — | — | — | — | 0. 502 |
Cronbach’s alpha | 0.857 | 0.832 | 0.811 | 0.767 | 0.743 | 0.758 | ||
Eigenvalues | 6.483 | 2.867 | 2.310 | 1.451 | 1.162 | 1.100 | ||
Variance (%) | 15.233 | 13.587 | 11.155 | 10.817 | 9.265 | 8.150 | ||
Cumulative variance (%) | 15.233 | 28.820 | 39.975 | 50.793 | 60.058 | 68.208 |
The Pearson correlation analysis (2 tailed) was applied to check the validity of the results of the exploratory factor analysis. The strategies clustered into a component should be significantly correlated [
Pearson correlations for component one.
S23 | S05 | S17 | S22 | S18 | S02 | |
---|---|---|---|---|---|---|
S23 | 1.000 | 0.602b | 0.477b | 0.467b | 0.564b | 0.581b |
S05 | — | 1.000 | 0.388a | 0.491b | 0.413b | 0.432b |
S17 | — | — | 1.000 | 0.306b | 0.625b | 0.589b |
S22 | — | — | — | 1.000 | 0.427a | 0.371b |
S18 | — | — | — | — | 1.000 | 0.689b |
S02 | — | — | — | — | — | 1.000 |
aCorrelation is significant at the
The connotation of each component is determined by the commonalities of the remaining measures it contains. On the basis of project management, risk management, and strategic management theories, the 6 components were renamed as follows: (1) making correct decisions (C1), (2) reducing unnecessary mistakes (C2), (3) completing full preparations (C3), (4) shaping a good environment (C4), (5) conducting favorable negotiations (C5), and (6) obtaining a reasonable response (C6).
As shown in Figure
Characteristics of the components.
In addition, the six components may be divided into groups with proactive, moderate, and passive characteristics. First, the components with a proactive characteristic (C1 and C4, which accounted for 26.040% of the total variance) are those utilized when making decisions or adapting to the local environment. Second, the components with a moderate characteristic (C2 and C3, which accounted for 24.742% of the total variance) are those applicable to a specific market or environment without specific risks. Third, the components with a passive characteristic (C6 and C5, which accounted for 19.420% of the total variance) are those related to specific risks. Compared to the passive strategies, the proactive and moderate strategies occupy more important positions in political risk management. In addition, ICEs are more likely to be resilient to political risks in the global market if they perform well with regard to the proactive strategies.
As shown in Figure
Application of the components.
This component explained the largest percentage of the total variance (15.233%) and contains six strategies: (1) conducting market research (S02), (2) choosing a suitable entry mode (S23), (3) choosing suitable projects (S17), (4) building proper relations with host governments (S18), (5) implementing a localization strategy (S05), and (6) controlling core and critical technology (S22). The average values of these six strategies (4.29, 4.21, 4.40, 4.31, 4.19, and 3.91, resp.) were relatively high, ranking 3rd, 5th, 1st, 2nd, 7th, and 12th, respectively, among the 27 strategies. All of them are strongly associated with decision-making activities, which can be observed as the most important part of political risk management.
Market research is a basic task for ICEs before they enter a country or contract a new project [
Three strategies are assigned to this component and account for 9.265% of the total variance: (1) adopting optimal contracts (S04), (2) making a higher tender offer (S01), and (3) obtaining the corresponding guarantee (S11). All of these strategies are strongly related to bidding and contract activities during the early stages of a project.
In the business negotiation stage, the first important issue for ICEs is to select internationally accepted standard contracts and exclude contractual clauses and conditions that are not practiced locally [
This component explained 11.155% of the total variance and contained four strategies: (1) making contingency plans (S10), (2) sending staff to training programs (S15), (3) allocating extra funds (S26), and (4) purchasing risk insurance (S03), ranking 9th, 21st, 22nd, and 10th, respectively, among the 27 strategies. The four strategies are related to the preparations for risk response and should be performed before the commencement of construction works.
It is sensible for ICEs to have a written contingency plan for potential political risk to protect their own interests and safety [
This component was responsible for 10.817% of the total variance and included four strategies: (1) maintaining good relations with powerful groups (S19), (2) maintaining good relations with the public (S27), (3) linking with local businesses (S20), and (4) building a reputation (S25). These four strategies can help enterprises create a good operating environment in a foreign land.
ICEs should maintain good relations with powerful groups (e.g., the media, labor unions, business coalitions, industry associations, consumer associations, and environmental protection groups) in host countries [
This component accounted for 13.587% of the total variance and consisted of five strategies: (1) avoiding misconduct (S06), (2) employing capable local partners (S24), (3) supporting environmental protection (S08), (4) abiding by the local culture (S09), and (5) adopting closed management of the construction site (S07). The strategies in this component are strongly related to the policy of reducing ICEs’ unnecessary mistakes in their operations.
Many cases have shown that political risk is closely linked to misconduct (e.g., bribery, legal violations, wages in arrears, dishonest acts, environmental pollution, and cultural conflicts) by ICEs during the project implementation phase [
Strategies clustered in this component are generally associated with risk response when a risk occurs, accounting for 10.155% of the total variance. This strategy contains four strategies: (1) implementing an emergency plan (S12), (2) settling disputes through renegotiation (S16), (3) changing the operation strategies (S21), and (4) conducting a postresponse assessment (S14).
Once political risk events arise, ICEs should immediately implement a risk emergency plan to reduce damage and better protect their security [
Political risk is a major problem encountered by ICEs in international construction projects. It is thus necessary to identify the strategies that can help ICEs address political risk. On the basis of a comprehensive literature review, 27 possible political risk management strategies were identified. The results of the questionnaire survey indicated that all the strategies were important for political risk management in international construction projects. Five strategies, including (1) choosing suitable projects (S17), (2) building proper relations with host governments (S18), (3) conducting market research (S02), (4) avoiding misconduct (S06), and (5) choosing a suitable entry mode (S23), were the most important strategies according to their average values.
Through the exploratory factor analysis, the 27 strategies were clustered into six components: (1) making correct decisions (C1), (2) reducing unnecessary mistakes (C2), (3) completing full preparations (C3), (4) shaping a good environment (C4), (5) conducting favorable negotiations (C5), and (6) obtaining a reasonable response (C6). The components (C1, C2, and C6) of the exposure decline dimension have higher contributions to political risk management than the components (C4, C3, and C5) of the capacity promotion dimension. In addition, components with a proactive characteristic (C1 and C4), components with a moderate characteristic (C2 and C3), and components with a passive characteristic (C5 and C6) can be ranked from the most to the least important for political risk management according to their cumulative variance.
Furthermore, the six components independently contribute to political risk management in three different phases. In the preproject phase, premanagement techniques (C1, C3, and C5) can help ICEs avoid or transfer unacceptable risks and improve quotes for the retained risk. In the project implementation phase, interim management techniques (C2 and C4) are conducive to reducing risk and promoting ICEs’ adaptation to the overseas construction market. In the postevent phase, postmanagement techniques (C6) are useful for ICEs to eliminate their actual risk and to accumulate experience with political risk management. The high cumulative variance of the premanagement strategies indicated that the main tasks of political risk management should be performed in the early stage of a project.
Compared to the respondents in the academic group, who were from different countries, all the respondents in the practitioner group were from Chinese construction enterprises, which is a limitation of this study. Nevertheless, the results of the independent-sample
The data from the 127 returned questionnaires used to support the findings of this study are available from the corresponding author upon request.
The authors declare that they have no conflicts of interest.
This study was supported by the National Natural Science Foundation of China (NSFC-71372199 and 71771052) and the Postgraduate Research and Practice Innovation Program of Jiangsu Province, China (KYCX17–0191).