International construction enterprises (ICEs) have been plagued with political risks in the global market. To ensure the success of political risk management, it is necessary to comprehend the political risks in international construction projects. This study aims at exploring the political risk paths in international construction projects. The preliminary political risk factors and paths were proposed from the literature review. A survey questionnaire was developed to collect political risk cases faced by Chinese construction enterprises (CCEs) performing international construction projects, and 264 valid cases were received and analyzed for this study. Adopting the confirmatory factor analysis (CFA) method, 6 macrofactors (“sociopolitical stability” (A), “legal and regulatory” (B), “social safety” (C), “economy performance” (D), “attitude towards foreigners” (E), and “international environment” (F)) and 2 microfactors (“low exposure” (G) and “capability of enterprises” (H)) were identified. Moreover, the results of path analysis illustrated that 7 factors (A, B, C, D, E, G, and H) had the significant direct negative effect on “risk consequences” and 3 factors (A, D, and F) had the indirect negative effect on “risk consequences.” The findings from this study help practitioners gain an in-depth understanding of political risks in international construction projects and provide a useful reference for ICEs to manage political risks when venturing outside their home countries.
As China joined World Trade Organization (WTO) and the local construction market has reached the saturation point, many well-known Chinese construction enterprises (CCEs) began to carry out construction works in overseas projects [
However, despite the tremendous opportunities, CCEs have also witnessed a dramatic increase in political risks around the world, particularly in developing countries [
With consideration of the negative and significant impact of political risks on international construction projects, how to effectively manage political risks has become a hot issue for international construction business [
It should be noted that the political risks ICEs confronted in the global market are obviously different from that of traditional multinational enterprises. Exporting goods and services are the main business of ICEs. Due to the lack of capital investment, ICEs do not have the exposures that arising from establishment and maintenance of a production facility [
Nonetheless, the existing literature mainly focused on the political risks arising from international general business (e.g., foreign direct investment, trade in goods, and international joint ventures) of traditional multinational enterprises and paid less attention on the political risks residing in international construction business. Since international construction business and international general business have different political risks [
As less attention has been paid to political risk management in the international construction business, this study can contribute to the existing body of knowledge. Furthermore, when ICEs venture outside their home countries, the findings from this study can assist ICEs by providing a reference in clearly understanding the political risk arising from the international construction business as well as their relative relationships represented by risk paths.
The definitions of political risk can be mainly split into two groups [
Risk factors can be defined as variables influencing risk increase or decrease [
In this study, a total of 29 political risk factors and 3 political risk consequences were identified from a comprehensive review of the relevant literature. To verify the comprehensiveness of the identified risk factors and consequences, a pilot survey was performed with a few experts to collect their opinions on the preliminary list of the risk factors and consequences. These experts were (1) five Chinese professors who focused on international project management and political risk management and (2) five senior managers who came from five CCEs (China Communications Construction Group Limited, Power Construction Corporation of China, China State Construction Engineering Corporation, and China Railway Group Limited). All of the 10 experts had more than 20 years of work experience. Based on the pilot survey, the 29 political risk factors and 3 political risk consequences were divided into nine groups (i.e., Groups A to I) (Table
Political risk factors and consequences in international construction projects.
Grouping | Factors | References |
---|---|---|
A: sociopolitical stability | A1: government unity | [ |
A2: factional conflicts | [ | |
A3: religious and ethnic tensions | [ | |
|
||
B: legal and regulatory | B1: poor enforcement mechanisms | [ |
B2: policy uncertainty | [ | |
B3: unfairness of judicial process | [ | |
B4: price controls | [ | |
B5: speediness of judicial process | [ | |
|
||
C: social safety | C1: crime | [ |
C2: terrorism | [ | |
C3: violent demonstrations | [ | |
C4: armed conflicts | [ | |
C5: kidnapping or extortion | [ | |
|
||
D: economy performance | D1: inflation | [ |
D2: unemployment | [ | |
D3: exchange rate volatility | [ | |
D4: recession | [ | |
|
||
E: attitude towards foreigners | E1: hostility to foreigners | [ |
E2: confiscation or expropriation | [ | |
E3: discrimination against foreign companies | [ | |
|
||
F: international interactive relations | F1: external conflicts | [ |
F2: international economic crisis | [ | |
F3: external interferences | [ | |
|
||
G: low exposure | G1: low attribute exposure | [ |
G2: low strategy exposure | [ | |
G3: low transaction exposure | [ | |
|
||
H: capability of enterprises | H1: core competitive capacity | [ |
H2: relative bargain capacity | [ | |
H3: integrate adaptive capacity | [ | |
|
||
I: risk consequences | I1: profits | [ |
I2: stability and sustainability | [ | |
I3: safety | [ |
Some studies have discussed the relationships among political risk factors. For example, Annett deemed that government instability can result in poor legislation and regulation and thereby increase the political risk [
Hypotheses of the political risk paths.
To verify whether the 18 proposed political risk paths are significant in international construction projects, a structured questionnaire was developed to collect the political risk cases from CCEs performing international construction projects. The questionnaires were composed of three parts: (1) the basic data of respondents (firm, work experience, title, and location); (2) the data related to the characteristics of the respondents’ firms and projects they participated in G1–G3 and H1–H3; and (3) the data associated with the political risk cases (risk events, date, and I1–I3).
According to the previous study, the aforementioned factors can be measured by a list of observed indicators [
To collect political risk cases, all the Chinese practitioners who have experience in overseas construction business were considered as the target of the survey. By reviewing the websites, reports and publications of CCEs, economic counsellor’s office of the Chinese Embassy, Chinese construction management research sector, and alumni association, a list of selected practitioners was developed, which contains 1000 senior managers, project managers, and project engineers.
From December 2015 to March 2016, a total of 1000 questionnaires were disseminated to the selected practitioners and 264 valid responses were received, representing a response rate of 26.4%. A valid response refers to the questionnaire that includes one political risk case, and all the questions were completed and appropriately filled out. As indicated in Table
Profile of the respondents.
Characteristics | Categorization |
|
% |
---|---|---|---|
Enterprise scale | ENR top 250 | 178 | 67.4 |
Others | 86 | 32.6 | |
|
|||
Job title | Senior manager | 52 | 19.7 |
Project manager | 164 | 62.1 | |
Project engineer | 48 | 18.2 | |
|
|||
Work experience | 5–10 | 89 | 33.7 |
11–15 | 79 | 30.0 | |
16–20 | 68 | 25.8 | |
Over 20 years | 28 | 10.6 | |
|
|||
Location | Asia | 113 | 42.8 |
Oceania | 13 | 4.9 | |
Africa | 101 | 38.3 | |
Europe | 6 | 2.3 | |
North America | 5 | 1.9 | |
South America | 26 | 9.8 |
Apart from the data collected from the questionnaire, the matched data on the factors in groups A to H were collected from various secondary sources—the country report from the Chinese Ministry of Commerce (F2 and F3), the operational risk model from the Economist Intelligence Unit (EIU) (A2, B1–B5, C1–C5, D1–D4, and E1–E3), and the International Country Risk Guide (ICRG) from the PRS Group (A1, A3, and F1). All data with different dimensions were converted to the scale of 0 to 1.
Structural equation modeling (SEM) is a multivariate statistical analysis method that has been widely used to analyze the structural relationship between measured variables and latent constructs [
In view of the aforementioned advantages, the SEM technology was applied to test the hypotheses of this study. First, CFA was conducted with the measurement model to test whether the nine groups can be measured by the 29 political risk factors and 3 political risk consequences. In the measurement model, the 29 political risk factors and 3 political risk consequences were viewed as 32 observed variables and the nine groups were viewed as the nine latent variables. After the measurement model was reliable and valid with a good goodness of fit, the path analysis was conducted with the structural model to test the hypothesized relationships among the nine latent variables.
Generally, the reliability and validity of the measurement model were measured by the following methods: the factor loadings ≥0.500, the composite reliability (CR) value ≥0.70, the average variance extracted (AVE) value ≥0.500, and correlation between any two groups ≤ the square root of the AVEs of them [
Before confirmatory factor analysis, the Cronbach alpha values of the nine groups were measured to test the data’s reliability. All of them had the Cronbach alpha values greater than 0.700, indicating the received data are sufficiently reliable [
In the progress of model measurement and modification, “speediness of judicial process” (B5) and “kidnapping or extortion” (C5) were removed due to their low values of factor loading. As shown in Tables
Measurement model evaluation.
Factors | Factor loading |
|
CR | AVE |
---|---|---|---|---|
A1 | 0.712 | 0.507 | ||
A2 | 0.751 | 0.564 | ||
A3 | 0.816 | 0.513 | ||
0.804 | 0.579 | |||
|
||||
B1 | 0.827 | 0.684 | ||
B2 | 0.752 | 0.566 | ||
B3 | 0.870 | 0.757 | ||
B4 | 0.781 | 0.610 | ||
0.883 | 0.654 | |||
|
||||
C1 | 0.813 | 0.564 | ||
C2 | 0.817 | 0.513 | ||
C3 | 0.903 | 0.815 | ||
C4 | 0.735 | 0.540 | ||
0.890 | 0.671 | |||
|
||||
D1 | 0.756 | 0.572 | ||
D2 | 0.846 | 0.716 | ||
D3 | 0.912 | 0.832 | ||
D4 | 0.887 | 0.787 | ||
0.914 | 0.726 | |||
|
||||
E1 | 0.774 | 0.599 | ||
E2 | 0.821 | 0.674 | ||
E3 | 0.843 | 0.711 | ||
0.854 | 0.661 | |||
|
||||
F1 | 0.825 | 0.681 | ||
F2 | 0.777 | 0.604 | ||
F3 | 0.756 | 0.572 | ||
0.829 | 0.619 | |||
|
||||
G1 | 0.855 | 0.731 | ||
G2 | 0.732 | 0.536 | ||
G3 | 0.821 | 0.674 | ||
0.846 | 0.647 | |||
|
||||
H1 | 0.811 | 0.658 | ||
H2 | 0.792 | 0.627 | ||
H3 | 0.866 | 0.750 | ||
0.863 | 0.678 | |||
|
||||
I1 | 0.783 | 0.613 | ||
I2 | 0.899 | 0.808 | ||
I3 | 0.836 | 0.699 | ||
0.878 | 0.707 |
Discriminant validity of the nine groups.
Grouping | A | B | C | D | E | F | G | H | I |
---|---|---|---|---|---|---|---|---|---|
A |
|
— | — | — | — | — | — | — | — |
B | 0.598 |
|
— | — | — | — | — | — | — |
C | 0.472 | 0.253 |
|
— | — | — | — | — | — |
D | 0.607 | 0.446 | 0.589 |
|
— | — | — | — | — |
E | 0.135 | 0.067 | 0.051 | 0.097 |
|
— | — | — | — |
F | 0.112 | 0.077 | 0.406 | 0.264 | 0.321 |
|
— | — | — |
G | 0.131 | 0.118 | 0.109 | 0.165 | 0.098 | 0.035 |
|
— | — |
H | 0.056 | 0.312 | 0.211 | 0.236 | 0.178 | 0.263 | 0.089 |
|
— |
I | −0.178 | −0.473 | −0.289 | −0.335 | −0.097 | −0.125 | −0.238 | −0.343 |
|
The hypothesized causal relationships among the nine groups were tested by the structural model. As shown in Table
Path coefficients and significance.
Path | Coefficient |
|
Interpretation |
---|---|---|---|
F → A | 0.097 | 1.116 | Not supported |
F → C | 0.265 |
1.894 | Supported |
F → D | 0.278 |
1.713 | Supported |
F → E | 0.134 | 1.332 | Not supported |
D → A | 0.484 |
5.389 | Supported |
D → B | 0.567 |
6.258 | Supported |
D → C | 0.632 |
10.021 | Supported |
D → E | 0.175 | 1.602 | Not supported |
D → I | −0.248 |
1.753 | Supported |
A → B | 0.611 |
9.876 | Supported |
A → C | 0.445 |
6.214 | Supported |
A → E | 0.123 | 0.935 | Not supported |
A → I | −0.235 |
1.851 | Supported |
B → I | −0.373 |
4.712 | Supported |
C → I | −0.328 |
3.351 | Supported |
E → I | −0.246 |
2.393 | Supported |
G → I | −0.289 |
2.351 | Supported |
H → I | −0.257 |
1.989 | Supported |
“Sociopolitical stability” (A) was reflected by three factors with significant loading: “government stability” (A1), “factional conflicts” (A2), and “religious and ethnic tensions” (A3). The results showed that “sociopolitical stability” (A) had a positive effect on “legal and regulatory” (B) and “public safety” (C) and a negative effect on “risk consequences” (I). The finding was in line with the study maintaining that the poor performance of sociopolitical stability has both the directly and indirectly negative influence on international construction projects [
It is crucial for ICEs to evaluate the sociopolitical stability of the target market before they enter a country [
“Legal and regulatory” (B) was estimated by three factors with significant loading: “poor enforcement mechanisms” (B1), “policy uncertainty” (B2), “unfairness of judicial process” (B3), and “price controls” (B4). “Legal and regulatory” (B) had a significantly negative effect on “risk consequences” (I). ICEs operating in countries with the unsound legal and regulatory may suffer from the risks related to improper construction procedures, illegal bid activities, illegal interferences, breach of contracts, and frequent change of the law [
ICEs should act strictly according to the local law to avoid the unnecessary disputes caused by their own mistakes. Keeping good relationships with host governments and powerful groups are helpful for ICEs to obtain more support and benefits (e.g., convenient approval procedures, less government intervention, unblocked information and communication channels, and sufficient government guarantees) [
Four factors had high loadings on “social safety” (C): “crime” (C1), “terrorism” (C2), “violent demonstrations” (C3), and “armed conflicts” (C4). The results showed that “social safety” (C) had a remarkable negative influence on “risk consequences” (I). Security is essential for international business activities. An unsafe environment will bring tremendous threats to the personnel and property safety of international contractors [
Formulating emergency plan and providing staff for self-protection training are important for ICEs in an unsafe country [
“Economy performance” (D) contained four factors with significant loading: “inflation” (D1), “unemployment” (D2), “exchange rate volatility” (D3), and “recession” (D4). “Economy performance” (D) was identified as a critical political risk factor that had a positive effect on “sociopolitical stability” (A), “legal and regulatory” (B), and “public safety” (C) and a negative effect on “risk consequences” (I). Poor economic performance can cause not only macroeconomic risk but also social and political unrest, which in turn detrimentally affect the international construction projects [
Diversified investing in different countries can reduce firm risk [
“Attitude towards foreigners” (E) was estimated by three factors with strong loading: “hostility to foreigners” (E1), “confiscation or expropriation” (E2), and “discrimination against foreign companies” (E3). It is identified that “attitude towards foreigners” (E) had a significantly negative effect on “risk consequences” (I). Meanwhile, the relationships between “attitude towards foreigners” (E) and “economy performance” (D), “international environment” (F) and “sociopolitical stability” (A) were not remarkable. The reason is that “attitude towards foreigners” (E) can be treated as an independent factor in these political risk cases, which has no regular pattern within different social cultural systems. There will be more obstacles and threats (e.g., public opposition, riots, political interference, and unjust treatment) for ICEs in those countries with racism and xenophobia. Furthermore, the attitude of the government to foreigners has a strong relationship with foreign policymaking [
ICEs can preferentially access to the countries that have good relations with their home countries to seek more recognition and less opposition [
“International environment” (F) encompassed three factors with high loading: “external conflicts” (F1), “international economic crisis” (F2), and “external interferences” (F3). As shown in Figure
Networking of political risk paths.
ICEs should always pay close attention to the changes in the international situation and adjust their operation strategies and project plans accordingly. Furthermore, establishing strong business councils and associations would be helpful to improve enterprises’ existence ability.
Three factors were strongly related to “low exposure” (G): “low attribute exposure” (G1), “low strategy exposure” (G2), and “low transaction-based exposure” (G3). “Low exposure” (G) was confirmed having a significantly negative effect on “risk consequences” (I). Attribute-based exposure would be related to the characteristics of projects and ICEs, such as longer duration, lower technical complexity and managerial complexity of projects, and misconduct of enterprises [
It is necessary for ICEs to reduce their risk exposure in high risk areas. The available strategies that help ICEs reduce risk exposure include: avoiding misconduct, choosing suitable entry mode and projects, allocating extra funds, and obtaining the corresponding guarantee.
Three factors were involved in “capability of enterprise” (H) with strong loadings: “core competitive capacity” (H1), “relative bargain capacity” (H2), and “integrate adaptive capacity” (H3). “Capability of enterprises” (H) had a significantly negative effect on “risk consequences” (I). A higher risk response capability of an ICE indicates that it has higher viability in an uncertain environment and is less likely to suffer damage arising from political risk [
The cultivation of capability is a long-term process for ICEs. Fortunately, ICEs can make up their own weakness and thereby improve their corresponding capabilities by choosing the right partners.
“Risk consequences” (I) was measured by three factors with high loading: “profits” (I1), “stability and sustainability” (I2), and “safety” (I3). As illustrated in Figure
While political risk is difficult to forecast and eliminate, it can be moderately addressed by reducing the risk exposure of the project system and improving the capability of enterprises. Successful political risk management is dependent on sufficient resources and information [
This study attempted to explore the political risk paths in international construction projects. Based on the 264 political risk cases collected from 30 CCEs performing international construction projects, a total of 8 political risk factors and 14 significant political risk paths were identified. Consistent with previous studies, the macrofactors (“sociopolitical stability” (A), “legal and regulatory” (B), “social safety” (C), “economy performance” (D), “attitude towards foreigners” (E), and “international environment” (F)) were associated with the external threats in the overseas construction market. The microfactors (“low exposure” (G) and “capability of enterprises” (H)) were related to the internal vulnerability project systems. Among the 8 factors, 7 (A, B, C, D, E, G, and H) had the directly negative effect on “risk consequences” (I) and 3 (A, D, and F) had the indirectly negative effect on “risk consequences.” Based on the understanding of the effects of these political risk factors, the coping strategies, for example, choosing a suitable entry mode, choosing suitable projects, maintaining good relations with powerful groups and host governments, diversification investing in different countries, obtaining the corresponding guarantee, buying risk insurance, adopting perfect contract, employing capable local partners, implementing a localization strategy, making contingency plans, sending staff to training programs, and allocating extra funds, were developed for ICEs to address the political risk in the global market.
The practical implications that can be drawn from this study are as follows: ICEs should be sensitive to those political risk factors and take them as the indicators for political risk assessment. Since political risk in international construction projects is not only influenced by the external threats, but also affected by the internal vulnerabilities, ICEs can moderately address political risk by reducing risk exposure of the project system and improving their capability. ICEs should realize that political risk at the project level can also affect enterprise’s objectives (e.g., financial, reputation, stability, survival, and development) and conduct political risk management practices at both the project and firm level and link risk management strategies to the enterprise’s objectives. ICEs should suit their political risk management strategies to different conditions in terms of locality, time, issue, and people involved.
The primary limitation of this study is that most of the political risk cases (in total 81.1%) were collected from the projects located in Africa and Asia, but relatively few were collected from other overseas markets. According to the ENR’s report, Africa and Asia have been the two largest overseas markets of CCEs in recent years. Therefore, the region distribution of the samples is consistent with the distribution of the projects performed by CCEs. Due to the inability to predict before the survey whether the practitioners would be willing to participate in the survey, the received political risk cases can be regarded as a nonprobabilistic sample, which has been recognized as the representative sample [
Further research would be conducted to examine the political risk management strategies in different enterprises and different countries to increase the practical validity.
The data of the 264 political risk cases 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 and KYLX16–0303).