ARTICLE IN PRESS Building and Environment 40 (2005) 135–141 www.elsevier.com/locate/buildenv The globalisation of the construction industry—a review A.B. Ngowi, E. Pienaar, A. Talukhaba, J. Mbachu School of Construction Economics and Management, University of the Witwatersrand, P.O.Box 3, WITS 2050, South Africa Received 12 May 2004; accepted 21 May 2004 Abstract The recent advances in transport and communication coupled with the protocols of the World Trade Organisation (WTO) have given access to markets that were previously insulated. The process that has come to be known as ‘‘globalisation’’ and is conceptualised as a situation where political borders become increasingly more irrelevant, economic interdependencies are heightened, and national differences are accentuated due to dissimilarities in societal cultures and central issues of business, is not new though. As railways and steamships lowered transport costs and Europe moved towards free trade during the late 19th Century, a dramatic convergence in commodity prices took place. Labour flows were considerably higher than usual, and millions of immigrants made their way from the old to the new world. These immigrants took with them their knowledge of construction that they employed in their new settlements, either as a hybrid with the local construction knowledge or supplanting the latter altogether. In this sense, the globalisation of construction had begun albeit unintentionally. Over the years, however, the construction industry has become well organised in similar ways to any other industry and WTO protocols have enabled firms to participate in cross-border markets unhindered. In principle, the unhindered access to international markets makes economic sense, but the reality is that only a few firms, particularly those based in advanced industrialised countries (AICs) can take full advantage of the open market. However, as globalisation is now an inescapable fact, firms based in both the newly industrialised countries (NICs) and least developed countries (LDCs) should adopt strategies that could enable them benefit from the open market. To enable comprehensive exploration of possible strategies that small firms in developing countries could adopt to benefit from the open construction market, this paper reviews the history of the globalisation of the construction industry and its current status. It concludes by pointing out the avenues that could be pursued by firms based in LCDs to benefit from the open construction market. r 2004 Elsevier Ltd. All rights reserved. Keywords: Globalisation; Construction industry; WTO; International construction 1. Historical background In the ancient world construction relied on the environmental resources of land, climate and collective local skills to create shelter forms which reflected a precise and detailed knowledge of local climatic conditions on one hand, and on the other, a reasonable Corresponding author. Department of Civil Engineering, University of Botswana, Goborone, Private Bag 0061, Botswana. Fax: 267-352309. E-mail address: Ngowiab@mopipi.up.bw (A.B. Ngowi). 0360-1323/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.buildenv.2004.05.008 understanding of the performance characteristics of the construction materials available. The first shelters and settlements were constructed from stone, mud and materials collected in the forests, and provided protection against cold, wind, rain and other weather elements. The methods used to construct these shelters using the said materials grew out of countless experiments and accidents and the experience of generations of constructors who continued to use what worked and rejected what did not. Construction in the early communities was an activity in which all members of the community participated. People participated in all ARTICLE IN PRESS 136 A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 stages, from planning to production and were able to integrate their values and themselves to reflect their cultures. A common feature of the early communities was the conquests in which communities attacked one another and the members of the defeated communities were taken as prisoners by the conquerors. Often the conquerors controlled the economic activities of the defeated communities and used the resulting finances supplemented with their own to supplant the infrastructure of the latter by imposing their own type. The history of Europe is rife with this phenomenon. Buildings in the Early Greek settlements around the Mediterranean, for instance, were made up of mud using timber framing and later, temples and theatres were built from marble. However, the Romans, who established the Roman Empire that influenced not only the ways of constructing, but also the whole culture of the people, conquered these settlements. The Roman Empire headquartered in Rome extended from what is now Great Britain to the Middle East, and at its peak, around the 2nd–1st Century BC, it had a population of 60–100 million people [1]. Romans developed remarkable infrastructure and most of their buildings were based on stone and marble. During the Roman Empire the world’s first major publication on architecture and construction that dealt with building materials, the style and design of building types, the construction process, building physics, astronomy and building machines was written by Marcus Vitruvius Pollo [1]. Among other details, Vitruvius described the hypocaust, the heating system used in the public baths and the houses of important officials and wealthy citizens. Invented in the 1st Century BC, the hypocaust consisted of a suspended floor supported by columns, and heated by hot gases produced by a furnace at one end and vented by a chimney on the other [1]. It could be said that the Romans ushered in a magnificent chapter in architecture and construction, which stagnated for several centuries after the collapse of the Roman Empire, which was marked by the fall of Rome in 476. Construction knowledge during this period was passed on from one generation to another through participation in the construction activities. The period that followed the collapse of the Roman Empire was known as the Medieaval Age (476–1492) and although it was characterised by less construction activities, it witnessed the construction of magnificent cathedrals and other marvels such as those of Pisa. Construction activities became more organised during this period, particularly the felling of trees, the quarrying of stone, the firing of bricks/tiles and burning of lime for cathedrals and other buildings. One of the most important developments of the construction activities brought about by the social stability of the Middle Ages was craft training and education, which consequently raised the status of the craftsmen. Building construction became a major industry [2,3] and as in other sectors, a structured approach to construction developed in the formation of guilds. Craft guilds were European occupational associations for the protection and regulation of artisans working in a specific branch of a trade. Their characteristics were much alike throughout Europe. The guilds were hierarchical bodies, usually divided into the three categories of masters, journeymen and apprentices. The master mason was totally committed to the building on which he was engaged. He not only designed it and led its construction, but in many cases he even lived on the site [4]. The Medieaval Age was followed by ‘‘Renaissance’’ during which there was renewal in architecture, building and science and was signified by the introduction of another ambitious and comprehensive publication: four books on architecture by the Italian Andrea Palladio, published in 1570. This created a new style of Palladianism. However, this period saw the erosion of the traditional medieaval monopoly of the construction guilds as the result of the introduction of new construction methods. Decrees and acts abolished craft (guild) associations and eventually, the demise of the guilds resulted in the introduction of professional designers and contractors. In general terms, this period marked the evolution of construction from uncoordinated activities to an organised industry. 2. Industrialisation of construction The 18th Century gave birth to the industrial revolution, which ushered in great industrial developments. Apparently, construction did not innovate significantly during this period, but the 19th Century saw great strides in the development of construction materials, particularly cast iron, wrought iron and later steel that enabled new structures such as railways, bridges, and building frames; glass used for steel-framed buildings with large glazed envelopes; Portland cement and with it concrete and later reinforced concrete structures. Later in the 19th Century, a new industrial sector producing building equipment (elevators, boilers, radiators, pipes and sanitary appliances) emerged. The large number of building materials resulting from the industrial revolution coupled with the demand for new housing in Europe resulting from the World Wars I and II, particularly the latter, provided a base for the development of more efficient construction technologies. This necessitated a leap from the traditional labourintensive methods to modern ones, and this process has been referred to as the industrialisation of construction [5]. Different definitions of construction industrialisation have been put forward. Blachère [6] and Sarja and Hannus [7] defined industrialisation as being mechanization, and added that it is also characterised by the ARTICLE IN PRESS A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 technology of construction and not the product. Sebestyèn [8] considers that the industrialisation of construction comprises the introduction of new technologies, such as prefabrication, or of modern in situ processes, such as the various uses of slip-forms for chimneys, bunkers and silos, and the use of modern framework (‘‘tunnel’’ shutters, etc.) and pre-stressing methods. Furthermore, industrialisation is also characterised by modern design methods that use scientific knowledge about structures, building physics, fire, and computer technologies. One form of industrialisation is prefabrication, which is based on the industrial manufacture of building components off-site or near the site. Timber was (and still is) a basic material, but the pre-cutting of stones has also been practiced, and nowadays prefabrication can take place with all structural material: timber, steel, aluminium, concrete and polymers. Prefabrication has been successfully employed in the manufacturing of houses and multi-storey industrial buildings, which have come to be known as portal houses, mobile homes, manufactured housing, system building, etc. With the appearance of concrete, prefabrication received a new impetus, not only in housing—but also for civil engineering structures such as bridges. However, the process has also received criticism as observed by Russell [9] ‘‘seen as panacea, whether by architect, administrator or politician, the building systems idea is of little value’’. Indeed, the idea of ‘‘prefabrication’’ itself fell into disrepute in the UK, although this was not the case in many other countries, such as the USA, France or in Scandinavia. In a nutshell, prefabrication has always been a technique used on sites with difficult local characteristics. As long as the late 19th Century, the British were sending prefabricated housing to Australia and Africa, and in the 1830s, the Manning ‘‘Portable Colonial Cottage for Emigrants’’ which could be assembled in hours, was being produced and shipped to sites around the world [8]. Furthermore, at the beginning of the 20th Century, British and American bridge-building firms were despatching thousands of tons of pre-assembled bridge sections to Africa [10]. Another form of industrialisation is mechanization, which is an important factor in the technical advancement of construction. The steam engine could find only a restricted application in building, but the invention of the internal combustion engine (both petrol and oil) and the electric motor changed this [11]. At first, the working parts of such construction machines as excavators, scrapers, graders and bulldozers were driven by ropes, which have now been replaced by mechanical, hydraulic, pneumatic or electronic means, as well as a combination of these. Construction machinery of different sizes and capacities has been developed for different jobs. For several categories of very large construction, or in work such as open mining, machines of a unique size and 137 capacity have been designed. All the major industrialised countries (AICs) have an industrial sector producing construction machines. Heavy machinery for the construction industry such as excavators and tower crane are manufactured by companies like Caterpillar, Deere, Komatsu, etc. Some of these firms also produce large machines for agriculture and mining. After substantial progress in the use of machines, the construction industry has begun work on the introduction of robots. Robots are being applied to an increasing number of construction processes, e.g., excavation and moving; slip-form processes; and tunnelling and underwater work. The capability to produce construction machinery has given the AICs a competitive advantage in the global market as this forms one of the four key sectors of the construction industry (contracting, consulting, production of construction materials, and manufacturing of construction machinery). 3. International construction The extensive projects in housing, industry, transport and city development that followed the advent of modern construction materials formed the background of what emerged as modern construction industry. However, most building construction remained in the hands of small and medium-sized local contractors, whereas civil engineering projects required much largerscale operations and hence formed a launching pad for international construction. International construction is broadly defined as where a company, resident in one country, performs work in another country, and has traditionally implied companies from AICs carrying out work in NICs and/or LCDs. Railway construction in Great Britain was another important launching pad for the emergence of large international contractors. During the early railway era, British railway engineers dominated design and execution [10]. The first British railway contractors were mostly self-taught practical men who learned by experience. The success of their initial contracts gave them a significant edge over others in competitions for subsequent assignments. When the railway fever subsided in Great Britain in the end of 1840s, British contractors sought and won contracts abroad. The first major international construction company was built up by Pearson in Great Britain at about the turn of the century [8]. Mr. Pearson accepted a 1 million acre oil drilling concession in Mexico as part of payment for his services and this was an early example of diversification, which has become common among large construction companies. During 1959–1969, the construction of Suez Canal was an international project of great proportions. In the USA, the internationalisation of contractors began somewhat later because there were ARTICLE IN PRESS 138 A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 plenty of domestic civil engineering projects, which nevertheless provided valuable expertise, allowing US contractors successfully to penetrate the world market. It is important to note that besides construction of buildings, the massive railway and highway construction as well as dams and irrigation projects in the USA enabled the participating contractors to gain immense strength. Firms such as Warren, Bechtel, Fluor, Kellogg and other large US contractors acquired experience in the construction of highways and oil extraction and petrochemical plants, and became well placed to handle complex projects, not only in construction, but also in industrial engineering [8]. This capability has given US firms great competitive advantage in the international construction market. The appearance of international contractors was the first move in the globalisation of construction. 4. Globalisation of construction There are several ways in which construction firms enter the international market. Among them notable are: first, economic booms such as the one resulting from sale of oil. Oil-rich countries of the Middle East and North Africa, for instance, created substantial construction demand that brought in foreign firms. A second route to international construction market that is often used is bilateral and sometimes multilateral agreements, which set up protocols that enable firms of the participating countries to enter the markets of each other/ one another. A third important route to international construction market is through participation in large international projects, such as the Suez Canal in 1959–69, the Panama Canal in 1900–1914 and more recently, the New Hong Kong Airport, the Channel Tunnel and the Three Gorges Dam in China. A fourth route that is used to the international construction market is to carry out construction work for Multinational Corporations (MNCs). The growth of multinational operations in truly global operations has been an important factor in the internationalisation of construction. The lowering of trade barriers, the movement of funds and setting up of new operations globally have created a platform for interested construction companies to follow and exploit. When MNCs move out of their domestic markets it is reported that many continue to use their tried and tested suppliers, often the same construction company that built their last domestic project. At the same time the need for local knowledge is recognised and the multinationals are quick to form joint ventures with local partners, an acknowledged trend in globalisation [12]. Besides joint venturing, another successful strategy that has been used to penetrate into foreign markets is to buy a stake in a local company, particularly in countries where the government establishes strong barriers against foreign competition [13]. However, a study by Crosthwaite [14] established that large British contractors prefer joint venturing to foreign company acquisition. In any case, for a company to enter the international market, it must have acquired some important capabilities. Both theoretical and empirical studies have indicated that the competitive advantage that a firm creates to enter the international market is strongly influenced by the home environment [15–19]. Porter [16] offered a model, the ‘‘diamond’’ which aims to capture the major determinants on competitive advantage together with their interactions with each other. Porter finds that four attributes of the home country environment shape the context which allows firms to gain and sustain competitive advantage: factor conditions, demand conditions, related and supporting industries, and context for firm strategy and rivalry. Government and chance are two exogenous factors that in Porter’s view influence the functioning of these four major determinants. Porter [16] defines two distinctive factor conditions: basic (e.g. natural resources, climate, location, etc.) and advanced (e.g. communications infrastructure and highly educated personnel, etc.); and generalised factors, which are specific to an industry. Porter believes that basic and generalised factors are either inherited or easy to create, whereas advanced and specialised factors are more decisive and a sustainable basis for competitive advantage. Regarding ‘‘demand conditions’’ Porter [16] argues that home demand has a considerable influence on competitive advantage and he presents the compositions: the size and pattern of growth, and the internationalisation of home demand as three broad attributes of it. The existence of internationally ‘‘related and supporting industries’’ in a nation, according to Porter [16] is an important determinant of the creation and sustainability of competitive advantage. Their similarities may, for instance, foster technological spillover as well as joint research projects. The fourth broad determinant according to Porter [16] includes the strategies and structures of firms as well as the nature of domestic rivalry. He believes that there should be a good fit between the industry’s sources of competitive advantage plus its structure, and strategies, structures and practices favoured by the national environment. The existence of intense domestic rivalry, on the other hand, is of special importance, since for instance, it encourages firms in the industry to break the dependence on basic factor advantages. Finally, Porter [16] thinks that the roles played by the government and chance in the competitive development of an industry are important but indirect, mainly through influencing the four major determinants of competitive advantage. Although Porter’s [16] framework has been the subject of much criticism, e.g. [20–24], it has advanced our knowledge of why corporations domiciled in some ARTICLE IN PRESS A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 countries have been successful in penetrating foreign markets in some product areas but not in others, and also why some countries have been able to attract the participation of foreign owned firms in some value added activities but not in others [25]. Other researchers, e.g. [17,18,26] have specifically studied the factors that determine the entrance and positioning of construction firms in the international market. On studying nine large US and Japanese construction companies, Abdul-Aziz [17] determined the two prime concerns for ‘‘going global’’ are long-term profitability and balance of growth. He further identified three factors that determine the entrance of construction industries into the international market: technological advantages that are associated with possessing formidable construction technologies; sophisticated management systems for scheduling, material tracking, and organising subcontractors; and financing capability that enables a company to arrange for favourable project financing schedules from international financiers. Although these competitive advantages are not sustainable because they are not rare, difficult to copy and nonsubstitutable, they can give a firm a head start in the international market. A study on the implications of globalisation in the construction sector in Asia by Raftery et al. [18] determined that Japanese contractors are successful in the region, and their success can be attributed to their technological superiority, their financial capacity, their skill in forming strategic alliances, and their ability to foster long-term relationships with local political powers. Raftery et al. [18] went a long way in substantiating the three factors that were pointed out by Adul-Aziz [17], but added an important attribute of company-based research that is carried out by Japanese construction firms. The role of company-based research in advancing the technological frontiers of the Japanese construction industry has been elaborated by Fraser and Zarkada-Fraser [27]. According to them, Japanese construction companies dedicate an average of 0.5% of turnover into research that is divided into basic research; research into the societal impacts of construction activity; research into new processes aimed at improving efficiency, and research into new product development. It is not difficult to see how the outcomes of such research effort can enable a company to entrench itself in the international market. Some researchers have pointed out that the most important modes of competition in the construction industry include competing on quality of products/ services, competing on product/ service and process innovation, competing on cost [28,29], and competing on time [30]. Based on Porter’s [15,31] competitive positioning generic typology, Kale and Arditi [26] carried out an empirical study that determined, among others, that construction companies that outperform 139 their rivals adopt a hybrid mode of competition that place varying degrees of emphasis on more than one of the modes mentioned earlier. Indeed, once a firm establishes itself in the international market, opportunities based on other than its key capabilities may present themselves. It might not be in the interest of the firm if all such opportunities are brushed aside simply because the firm is positioning itself on a narrow scope. 5. Positioning in the globalised construction market The preceding section established that for a construction company to venture into the international market, it should first build capability based on the home country environment. Many writers have established the relationship between construction activity and economic development, e.g., [32–37]. Recent studies have gone further to show that despite construction spending per capita increasing as economic development proceeds, as countries pass from NIC to AIC status, construction spending fails to maintain its share of GDP and, therefore, declines in importance. This suggests that beyond a certain stage of development the construction sector does not keep pace with GDP growth and, therefore, makes a smaller contribution to economic growth. It appears, therefore, that the role of construction changes as economic development proceeds from LCD to AIC status. Construction demand can, therefore, be determined not only by investment and economic growth, but also by the stage of economic development of a particular economy [38]. Furthermore, while on one hand it has been established that a large portion of construction activity remains local, regional or national at all stages of development, on the other hand, the protocols of WTO are aimed at eliminating the distinction between national, regional and global by removing the barriers that hinder foreign companies from participating in local markets. All this indicates that it is only companies based in AIC and a few from NIC that can venture into the international construction market. As it has been pointed out earlier, globalisation is not a new phenomenon because this is not the first time we have experienced a truly global market. Bairoch and Kozul-Wright [39] point out that by many measures, the world economy was possibly even more integrated at the height of the gold standard in the late 19th Century than it is now. Other measures of global economic integration tell a similar story. Williamson [40] points out that as railways and steamships lowered transport costs and Europe moved toward free trade during the late 19th Century, a dramatic convergence in commodity prices took place. Labour flows were considerably higher then as well, as millions of immigrants made their way from the old world to the new. In the USA, for instance, ARTICLE IN PRESS 140 A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 immigration was responsible for 24 percent of the expansion of the labour force during the 40 years before World War I [40]. As for capital mobility, the share of net capital outflows in GNP was much higher in UK during the classical gold standard than it has been since. One of the lessons to be learned from this earlier period of globalisation is the evidence that trade and migration had significant consequences for income distribution. According to Williamson [40] ‘‘Globalisation. . . accounted for more than half of the rising inequality in rich labour-scarce countries (e.g., USA and Australia) and for a little more than a quarter of the falling inequality in poor, labour-abundant countries (e.g., Sweden and Ireland) in the period before World War I’’. Williamson [40] concludes, ‘‘The inequality trends which globalisation produced are at least partly responsible for the interwar retreat from globalisation which appeared first in the rich industrial trading partners’’. What is different in today’s globalisation is that: First, restrictions on immigration were not as common during the 19th Century, and consequently labour’s international mobility was more comparable to that of capital. Consequently, the asymmetry between mobile capital (physical and human) and immobile ‘‘natural’’ labour, which characterises the present situation, is a relatively recent phenomenon. Second, there was little head-on international competition in identical or similar products/ services during the previous Century, and most trade consisted of the exchange of non-competing products, such as primary products for manufactured goods. Indeed, the percentage of trade in services, such as construction in the previous Century was comparatively very low. Third, governments had not yet been called on to perform social-welfare functions on a large scale, such as ensuring adequate levels of employment, establishing social safety nets, providing medical and social insurance, and caring for the poor. This shift in the perceived role of government is also a relatively recent transformation, one that makes life in and interdependent economy considerably more difficult for today’s policymakers. At any rate, the lesson from history seems to be that continued globalisation cannot be taken for granted. Although a large portion of construction activity has often been considered to remain local, regional or national, the prospects of unrestricted access to the markets of LCDs according to WTO protocols means that capable international firms will easily provide their services to this so-called ‘‘local activity’’ on the expense of the fledging local firms. If the consequences of such an eventuality are not managed wisely and creatively, the construction firms of these countries will remain underdeveloped and a retreat from openness becomes a distinct possibility. A research agenda is, therefore, to develop mechanisms that will ensure that entry of international firms into the construction market of LCDs is accompanied with development program for local firms. Among the research questions that need to be answered are:       What are the costs and benefits of globalisation to national construction industries? How can the benefits of globalisation be maximized and the adverse effects minimized for the benefit of both developing country firms and their foreign counterparts? What actions can the construction industries themselves take to benefit from globalisation? Could intra-industry diffusion of technologies and knowledge enhance the benefits of globalisation? How could the larger local contractors/consultants use the relevant know-how acquired from their foreign counterparts or other sources, to lead the way for the upgrading of local industry? How could the regional construction market be harmonized to enable free operation within the region and create a training ground/ launching pad to the global market? 6. Conclusions The paper has attempted to review the history of construction as a local activity originally meant to provide shelter to a global activity that is providing wide-ranging services. At the beginning the constructed products reflected the local environment and the culture of the inhabitants, but as time went by, people from distant communities and cultures took over existing built up areas mainly through acts of war. Often the conquerors supplanted the existing infrastructures by imposing their own. Over several centuries there were gradual improvements on the methods of construction and the materials employed. From an uncoordinated activity, construction became organised around guilds of artisans and later around professions, which resulted from change in the mode of training in construction skills and the construction methods employed. Major developments in construction took place as the result of the industrial revolution that ushered in new sophisticated construction material and means of transporting and handling them on site. The industrial revolution also resulted in the steam engine that made transport and other mechanisation processes easy. The demand in reliable means of transport led to establishment of construction firms that gained experience in the process and expand their services beyond the borders of their nations. These were the early stages of internationalisation of construction. With demand in housing and infrastructure that resulted from World Wars I and II, ARTICLE IN PRESS A.B. Ngowi et al. / Building and Environment 40 (2005) 135–141 many types of construction machinery were developed and some construction companies became so large that they had to operate in foreign markets in order to sustain their existence. 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