unforeseen conditions and costs on global projects ... · overall, the dissertation offers new data...
TRANSCRIPT
UNFORESEEN CONDITIONS AND COSTS ON GLOBAL PROJECTS: LEARNING TO COPE WITH UNFAMILIAR INSTITUTIONS, EMBEDDEDNESS AND EMERGENT
UNCERTAINTY
A DISSERTATION
SUBMITTED TO THE DEPARTMENT OF
CIVIL AND ENVIRONMENTAL ENGINEERING
AND THE COMMITTEE ON GRADUATE STUDIES
OF STANFORD UNIVERSITY
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
Ryan James Orr September 2005
ii
© COPYRIGHT BY RYAN J. ORR 2005 ALL RIGHTS RESERVED
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Certifications
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in
scope and quality as a dissertation for the degree of Doctor of Philosophy.
_______________________________
Professor Raymond E. Levitt, Principal Adviser
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in
scope and quality as a dissertation for the degree of Doctor of Philosophy.
_______________________________
Professor Douglass C. North
I certify that I have read this dissertation and that, in my opinion, it is fully adequate in
scope and quality as a dissertation for the degree of Doctor of Philosophy.
_______________________________
Professor W. Richard Scott
Approved for the University Committee on Graduate Studies.
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Executive Summary
This dissertation describes a multi-disciplinary, multi-method inquiry into the unforeseen
costs encountered by firms entering foreign markets to participate on building and
infrastructure projects.
The first contribution is a generic narrative model, based on an inductive analysis of 23
vignettes. It describes how �institutional exceptions��misjudgments, misunderstandings
and conflicts�arise when entrants fail to understand unfamiliar institutions; how
institutional exceptions lead to �unforeseen transaction costs� including time, money,
relational and reputational costs; and how entrants adaptively curb these costs as they
acquire relevant local knowledge, re-script mental models and adapt plans and tactics.
The second contribution is a quantitative analysis of data collected about the number,
nature and strength of dyadic entrant-host entity relations on nine large Asian
infrastructure projects. The analysis verifies the significance of relational friction,
conflict, and unforeseen costs, which generally tend to increase as institutional
differences and interdependencies increase, and decrease as entrant managers gain local
experience and entrant firms develop recurring relations with local entities.
The third contribution concerns strategies to minimize unforeseen costs on projects in
alien markets. The analysis draws on interview data from four types of entrants �
general contractors, developers, systems contractors and project consultants. The findings
indicate that with increasing embeddedness in an alien market context, firms face greater
levels of emergent uncertainty. This affects their strategic decisions such as entry mode,
staffing and centralization of control. These findings reconfirm Chandler�s classic
theorem that a firm�s strategy and structure need to be aligned with its environment; and
they articulate the concept of �general internationalization knowledge.� We find that this
general internationalization knowledge informs three distinct strategies of entrant firms:
increasing the supply of local knowledge, decreasing the demand for local knowledge,
and reducing the impact of a local knowledge deficit. These strategies refute the myth
that entrant performance is tied to climbing a �country learning curve�, but, instead imply
that dodging the need to learn and avoiding the costs of not learning can be equally
effective internationalization strategies for some firms.
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Overall, the dissertation offers new data and a fresh conceptual map enabling scholars
and managers to foresee the differences and similarities across alien markets; to identify
embeddedness, emergent uncertainty, unforeseen transaction costs and the performance
ramifications thereof; and to craft intelligent internationalization strategies.
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Acknowledgements
This dissertation could never have been completed without the preparation, guidance, and
encouragement of many family members, friends, colleagues, informants, and advisors.
First, I want to thank the family members who were involved in preparing me for this
intellectual journey. There are too many to list by name, but I especially want to thank
my mother and father, brother and sister, grandparents, aunts and uncles, and now, new
extended family. My faithful Andrea deserves much praise: putting up with my late
nights at the office and offering lucid versions of my convoluted arguments.
Next, I want to recognize the crucial role that my globally-minded friends have played
in readying me to study foreign markets, cultures, and civilizations. The leaders of the
Global Association of Culture and Peace in Korea, who taught me to appreciate the value
of sports and arts in promoting peace, love, and global unity�Jung Seok, John Yang, and
Chloe Jung. All of my friends from the Ritsumeikan-UBC Exchange program, many of
whom journeyed with me in Thailand, Korea, Japan, and China, and who were
exceedingly patient with my feeble attempts to learn their language�Takeshi Kunimi,
Yoko Mizuma, Tomo Nakai, Takumi Ozawa, Koji Tsuchikura, and Miho Yamada.
I also want to thank the many innovative surveyors, equipment operators, engineers,
managers, and executives who mentored me in the planning, construction, and
management of large engineering projects, when I worked with 360networks (on a trans-
continental fiber optic link), Ledcor Industries (on the Mount Polley Mine), Monad
Contractors (on the Huckleberry Mine), Barrick Gold (on the Goldstrike Mine), and
Newmont Mining (on the Rain Mine)�Scott Ansel, Kerry Bjornson, Bill Bolle, George
Desmarais, Rick Hardy, Dan Harmening, Wayne Helsel, Ron Humphries, Nate Hillman,
Ian Morris, Jack Peterson, and Ron Stevenson.
In addition, there are a great many students, staff, and faculty who have provided
assistance, inspiration, and guidance since I arrived at Stanford in September of 2002.
The researchers at the Center for Integrated Facilities Engineering with whom I have
enjoyed many research-related conversations�Dr. Martin Fischer, Dr. Renate Fruchter,
Dr. John Haymaker, and Dr. John Kunz. The students who took time to read and review
early drafts of the several chapters of this dissertation�John Chachere, Doug
MacKinnon, and Somik Raha. My fellow PhD students in the Collaboratory for Research
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on Global Projects�Dana Gavrieli, Tamaki Horii, Peggy Ho, Rahinah Ibrahim, Ashwin
Mahalingam, and John Taylor. The students in the Center for Integrated Facilities
Engineering�Mauricio Toledo, Claudio Morgues, Arto Kiviniemi, and Ju Gao. The
Management Science and Engineering students with whom I recall many pleasurable
discussions�Chris Bingham, Sandy Kory, Hernan Gouet, Chris Han, and Michael
Helms. And my friends in the Stanford Canadian Club�Mike Ananny, Mohammed
Badi, Michael Dolphin, Steve McBride, Andrew Nigrinis, Jeff Shragge, and Eric Straver.
I also owe a debt of gratitude to more than 100 industry informants at firms like Air
Products, Aker-Kverner, Arup, Barrick Gold, Bechtel, Bombardier, Boston Consulting,
CitiBank, Coudert Brothers LLP, General Electric, IFC, Newmont Mining, Export-
Import Bank, Fluor, Haliburton, JBIC, Obayashi, Skanska, Svendala, Takenaka, Trammel
Crow, USAID, World Bank, and Washington Construction. For reasons of
confidentiality, I cannot list these persons by name, but they know who they are, and I
thank them deeply for answering my persistent questions, providing access to live
projects, reviewing my drafts, and offering many �off the record� insights.
Finally, I want to thank my PhD committee and faculty advisors: Dr. W. Richard
Scott, for schooling me in the theory of institutions and organizations and for his
consistent, careful, and cogent reviews of my early drafts; Dr. Douglass North for
inspiring me with his powerful, practical, and historically-grounded theories of
institutions and economic change, and for connecting me with the scholars at the Ronald
Coase Institute; Dr. Kathy Eisenhardt for providing an extremely beneficial review of
Chapter I, and for leaving many excellent grounded-theory papers as stepping stones in
the literature; Dr. Steve Barley for teaching me his ethnographic-semantic approach to
data collection and analysis. And most notably, I want to thank my principal advisor,
mentor, and friend, Dr. Raymond Levitt, whose weekly advising sessions, late night
emails, and thoughtful insights were a source of unflagging encouragement; and whose
exceptional integrity, work ethic, and wisdom were a fountainhead of inspiration.
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Table of Contents
Certifications..................................................................................................................iii Executive Summary ....................................................................................................... iv Acknowledgements........................................................................................................ vi Table of Contents.........................................................................................................viii Table of Figures ...........................................................................................................xiii Table of Tables ............................................................................................................ xiv Introduction................................................................................................................... 1 OBSERVED PROBLEM ................................................................................................ 2 RESEARCH QUESTION ............................................................................................... 2 CONCEPTUAL OVERVIEW......................................................................................... 3 SCOPE DEFINITION..................................................................................................... 4 REFERENCES ............................................................................................................... 5 I Institutional Exceptions on Global Projects: Ignorance, Sensemaking and Response ........................................................................................................................ 7 INTRODUCTION .......................................................................................................... 7 BACKGROUND ............................................................................................................ 8
Gaps in the Literature.................................................................................................. 8 Institutions ................................................................................................................ 11
Regulative elements............................................................................................... 11 Normative elements............................................................................................... 12 Cultural-cognitive elements. .................................................................................. 12
METHODS................................................................................................................... 13 Method Selection ...................................................................................................... 13 Data Collection ......................................................................................................... 13
Data sources. ......................................................................................................... 13 Informants. ............................................................................................................ 13 Informant selection................................................................................................ 14 Starting-point of investigation. .............................................................................. 14 Interview questions................................................................................................ 14
Data Analysis ............................................................................................................ 15 Inductive philosophy. ............................................................................................ 15 Iterative analysis.................................................................................................... 15 Vignette selection. ................................................................................................. 16 Cross-vignette analysis matrix. .............................................................................. 16
Limitations................................................................................................................ 19 Isolation of institutional elements. ......................................................................... 19 One-sided perspective............................................................................................ 19 Oversimplification of process. ............................................................................... 20
FINDINGS.................................................................................................................... 20 Phase 1. Challenging Host Institutions....................................................................... 20
Institutional ignorance. .......................................................................................... 20
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Deviant act.............................................................................................................22 Outcome of ignorance. ...........................................................................................23
Phase 2. Making Sense of a Host�s Institutions ..........................................................25 Sensemaking..........................................................................................................26 Local knowledge search behavior. .........................................................................27 Outcome of sensemaking. ......................................................................................28
Phase 3. Responding to a Host�s Institutions ..............................................................30 Response................................................................................................................30 Response behavior. ................................................................................................32 Outcome of response..............................................................................................33
Toward A Generic Narrative Model...........................................................................34 How do institutional exceptions arise? ...................................................................34 How are institutional exceptions resolved?.............................................................36 How are costs manifested in this process?..............................................................36 How salient are these costs?...................................................................................36 Can these costs be avoided? ...................................................................................36
CONNECTIONS TO THEORY ....................................................................................37 Transaction Cost Economics......................................................................................37 Game Theoretic View of Institutions .........................................................................37 Sensemaking Theory..................................................................................................38 Theory on Self-Reference Frame and Ethnocentrism .................................................38 Descriptive Theory of Decision Making.....................................................................38 International Management Theory .............................................................................38 Internationalization Theory........................................................................................39 Cultural Globalization................................................................................................39
CONCLUSIONS...........................................................................................................39 Contributions to Knowledge ......................................................................................39 Agenda for Future Research.......................................................................................40 Contributions to Practice............................................................................................41
REFERENCES..............................................................................................................41 APPENDIX 1 ................................................................................................................48
1 Reporting Design Progress�By Whose Milestones, in Korea? ...............................48 2 �Spirit in the Waterfall� in Uganda. ........................................................................48 3 Failed Performance Incentives in China. .................................................................51 4 Sarcastic Comments by American Confuse Japanese. .............................................52 5 US Navy Encounters the Mafia in Albania. .............................................................53 6 Proforma Financial Templates Strain US-European Relations. ................................54 7 Ceremonial Beam Installation Causes Conflict in China..........................................55 8 Disagreements in a US-Israeli Joint Venture. ..........................................................56 9 No Bribes, No Contract: Canadians in Russia. ........................................................57 10 US-UK �Working Design Meetings� Don�t Work, in Korea. ................................58 11 Japanese Focuses on Technical Excellence; One-year Delay in USA. ...................59 12 Operable or inoperable windows?�A High-rise office tower in Berlin. ................61 13 Have Tea before you spark the Dynamite in Turkey. .............................................62 14 Responsibilities for �Shop Drawings� in Spain. ....................................................64 15 Japanese Misunderstanding of a US GMAX Contract. ..........................................66
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16 Meeting the Village Chieftain in Cameroon.......................................................... 67 17 Traditional Hiring Practices in Malaysia. .............................................................. 68 18 Village Protocols & Project Postponement in the Philippines................................ 70 19 Customary Building Material��Woodchip cement sideboard��in Japan............ 72 20 Contract Enforcement in Spain. ............................................................................ 73 21 Japanese �Tabi Shoes� Clash with US Safety Regulation...................................... 74 22 �Memoranda of understanding� in Vietnam (without the understanding). ............. 75 23 Canadian Regulations Catch US Firm Off-guard. ................................................. 77
II Measuring Relational Friction, Interorganizational Conflict and Unforeseen Transaction Costs on Global Projects ........................................................................ 79 INTRODUCTION ........................................................................................................ 79 THEORY & HYPOTHESES ........................................................................................ 81
Large Public Infrastructure Projects........................................................................... 81 Conflict Escalation and Unforeseen Transaction Costs .............................................. 82 Institutional Difference, Conflict Escalation, and Unforeseen Transaction Costs ....... 84 Interdependence, Conflict Escalation, and Unforeseen Transaction Costs.................. 85 Communication Volume, Conflict Escalation, and Unforeseen Transaction Costs ..... 87 Global Experience, Conflict Escalation, and Unforeseen Transaction Costs............... 87 Local Experience, Conflict Escalation, and Unforeseen Transaction Costs ................ 88 Recurring Relations, Conflict Escalation, and Unforeseen Transaction Costs ............ 89 Interfaces and Distinctive Characteristics .................................................................. 90
DATA & METHODS ................................................................................................... 91 Sample ...................................................................................................................... 91 Data Collection ......................................................................................................... 93 LISREL Analysis ...................................................................................................... 94 Constructs and Validity ............................................................................................. 97
Downstream constructs.......................................................................................... 97 Upstream constructs. ............................................................................................. 98 Construct validity. ................................................................................................. 99
RELATIONAL FRICTION, CONFLICT & UNFORESEEN DELAY........................ 100 RELATIONAL PROFILES ........................................................................................ 104 DISCUSSION............................................................................................................. 106
Answers to Research Questions............................................................................... 106 Salience. .............................................................................................................. 106 Antecedents......................................................................................................... 106 Moderators. ......................................................................................................... 106
Further Insights ....................................................................................................... 106 Non-significance of global experience. ................................................................ 107 Asymmetric effects of dependence. ..................................................................... 107 Communication volume....................................................................................... 107 One-time nature of relations. ............................................................................... 108 Procurement delay. .............................................................................................. 108 Political will. ....................................................................................................... 108 Informal coordination. ......................................................................................... 108 Anti-corruption units. .......................................................................................... 109
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Freelance expatriates............................................................................................110 Embeddedness in Social Relations and Institutions ..................................................110
Economics and embeddedness. ............................................................................110 International business and embeddedness.............................................................111
Limitations ..............................................................................................................112 One sided interviews............................................................................................112 Unforeseen delay metric. .....................................................................................112 Blurring of relational profiles. ..............................................................................112 Interconnected relations. ......................................................................................112 Reverse interpretation of findings. .......................................................................113 Competitive versus collaborative conflict.............................................................113 Non-linear escalation of conflict. .........................................................................113
CONCLUSION ...........................................................................................................114 Contributions to Science ..........................................................................................114 Contributions to Practice..........................................................................................114 Areas for Future Research........................................................................................115
REFERENCES............................................................................................................116 APPENDIX 1 ..............................................................................................................128 APPENDIX 2 ..............................................................................................................129 APPENDIX 3 ..............................................................................................................130 APPENDIX 4 ..............................................................................................................131 APPENDIX 5 ..............................................................................................................132 APPENDIX 6 ..............................................................................................................133 APPENDIX 7 ..............................................................................................................134 III Embeddedness, Emergent Uncertainty and Strategies to Succeed in Unfamiliar Markets ......................................................................................................................135 INTRODUCTION.......................................................................................................136 BACKGROUND.........................................................................................................138
Challenges in Foreign Markets.................................................................................138 Learning to Cope with Challenges in Foreign Markets.............................................140
METHODS .................................................................................................................143 Case Study Design...................................................................................................143 Research Setting ......................................................................................................144 Data Sources............................................................................................................144
Focus on projects. ................................................................................................144 Open-ended interviews. .......................................................................................145 Structured interviews. ..........................................................................................145 Administering the structured interviews. ..............................................................145
Data Analysis ..........................................................................................................145 CHALLENGES IN FOREIGN MARKETS.................................................................147
Embeddedness .........................................................................................................147 Embeddedness, by firm type. ...............................................................................149 Consequences of embeddedness...........................................................................152
Emergent Uncertainty..............................................................................................155 Emergent uncertainty, by firm type. .....................................................................158
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FIRM-SPECIFIC STRATEGIES TO COPE IN FOREIGN MARKETS ..................... 160 Firm-Specific Strategies .......................................................................................... 160
GENERAL STRATEGIES TO COPE IN FOREIGN MARKETS............................... 169 Increase the Supply of Local Knowledge................................................................. 169
Increase �starting knowledge.� ............................................................................ 169 Increase learning rate........................................................................................... 170 Increase learning period....................................................................................... 171
Decrease the Need for Local Knowledge ................................................................. 174 Reduce scope of work.......................................................................................... 174 Reduce embeddedness in local context. ............................................................... 174
Reduce the Impact of a Local Knowledge Deficit .................................................... 176 Prepare contingency plans. .................................................................................. 177 Cultivate adaptability........................................................................................... 177 Insure against uncertainties.................................................................................. 180
Towards a Model of Strategies to Succeed in Foreign Environments ....................... 180 Learning How to Circumvent the �Country Learning Curve� .................................. 181
CONCLUSION........................................................................................................... 183 Contribution to Science ........................................................................................... 183 Contribution to Practice........................................................................................... 184 Areas for Future Research ....................................................................................... 184
REFERENCES ........................................................................................................... 186 Conclusion ................................................................................................................. 193 CONTRIBUTIONS TO PRACTICE........................................................................... 194 CONTRIBUTIONS TO SCIENCE ............................................................................. 195 AREAS FOR FUTURE RESEARCH ......................................................................... 200
Describing Institutional Exceptions, Associated Costs and Resolutions ................... 200 Measuring Unforeseen Transaction Costs................................................................ 202 Expanding the Embeddedness Framework............................................................... 202 Other Potential Research Areas ............................................................................... 203
REFERENCES ........................................................................................................... 204
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Table of Figures
Introduction FIGURE 1. Conceptual Overview....................................................................................3 I FIGURE 1. A Generic Narrative Model.........................................................................35 II FIGURE 1. LISREL Structural Model of Hypothesized Relationsa ..............................101 III FIGURE 1. Strategies to Succeed in Foreign Environments.........................................181 Conclusion FIGURE 1. Conceptual Overview................................................................................197
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Table of Tables
I TABLE 1. Summary of Informants, Organizations and Projects Sampled...................... 17 TABLE 2. Condensed Vignette Summaries................................................................... 18 TABLE 3. Ignorance, Deviant Action and Outcomes .................................................... 21 TABLE 4. Sensemaking, Local Knowledge Search and Outcomes ................................ 26 TABLE 5. Response, Response Action and Outcomes .................................................. 31 II TABLE 1A. Sample Description � Projects................................................................... 92 TABLE 1B. Sample Description - Firms ....................................................................... 92 TABLE 1C. Sample Description - Informants & Relations............................................ 92 TABLE 2. The Constructs and Their Indicators............................................................. 95 TABLE 3. Summary of Model Results and Conclusions ............................................. 102 TABLE 4. Profile of Differences between 5 Types of Relations .................................. 105 III TABLE 1. Firm Descriptions ...................................................................................... 143 TABLE 2. Project Descriptions ................................................................................... 146 TABLE 3. Project Engagement Characteristics, by Firm Typea ................................... 146 TABLE 4. Overall Embeddednessa ............................................................................... 18 TABLE 5. Relative Embeddednessa ............................................................................ 149 TABLE 6. Examples of Emergent Uncertainty............................................................ 157 TABLE 7. Indicators of Embeddedness-Strategy-Structure Fit .................................... 168 TABLE 8. Strategies to Increase Supply of Local Knowledge ..................................... 172 TABLE 9. Strategies to Decrease the Need for Local Knowledge................................ 175 TABLE 10. Strategies to Reduce the Impact of a Local Knowledge Deficit................. 179 TABLE 11. Shortcomings of Extant Theory and Contribution of this Article .............. 184 Conclusion TABLE 1. Summary of Contribution........................................................................... 198
1
Introduction
-- In the Palace --
Brad Pitt: It�s an honor to meet you your holiness.
Dalai Lama, 14 yrs old: I want to build a movie house.
Brad Pitt: I�m proud to be of service your honor.
-- Several days later, breaking ground for the movie house --
Brad Pitt: What�s the problem? What is the problem here?
Construction Worker: Worms, worms. Please no more hurting worms. Please. In a past life, this innocent worm could have been your mother. Please no more hurting�
it is impossible� Please.
-- Several hours later, in the Palace --
Dalai Lama, 14 yrs old: See, Tibetans believe all living creatures were our mothers in a past life. So, we must show them respect and repay them with kindness. And never, never harm anything that lives. You can�t ask a devout people to disregard a Buddhist teaching.
Brad Pitt: I�m sorry, your honor, but we can�t possibly� <laughter> We can�t possibly rescue all the worms, especially if you want the theatre finished in this lifetime.
Dalai Lama, 14 yrs old: You have a clever mind, think of a solution. And in the meantime, you can explain to me what is an elevator.
�Seven Years in Tibet Directed by J.J. Annaud
2
OBSERVED PROBLEM
Entrant firms that participate on global projects report many unforeseen, unexpected,
uncertain, and unknown costs and conditions during planning, design, engineering, and
construction (eg. Chua, Wang & Tan, 2003). Global projects include industrial,
commercial, residential and infrastructure projects that assemble component parts and
organizational participants including financiers, vendors and contractors from around the
world (Chan & Tse, 2003; Levitt et. al., 2004).
Despite the existence of many fruitful examinations of the challenges in managing and
executing large engineering projects, there is still room for incremental scholarly
improvement. Major intellectual landmarks in this literature include Miller and Lessard�s
(2000) rich description of projects as �real-options games;� Flyvbjerg, Bruzelius and
Rothengatter�s (2003) depiction of the delicate interplay between technical methods,
professional ethics, and the politics of urban planning; Loraine�s (1992) elucidation of
contractor responsibilities in mobilization, tendering and construction; and finally,
Stinchcombe and Heimer�s (1985) deep insight into the sociology of political life,
managerial life, and work life and the processes by which project organizations deal with
economic and technical uncertainties. Yet, in spite of this progress, there has been little
analysis of the location-specific context that cradles these projects, how different types of
project participants are embedded in this context to different degrees, how unfamiliar
elements and dynamics in this context can lead to emergent uncertainties and unforeseen
costs, and how different types of firms actually learn to cope with a local knowledge
deficit in an unfamiliar project setting.
RESEARCH QUESTIONS
To address this practical need, this research is organized around three clusters of research
questions:
Chapter I. How do unfamiliar institutions cause institutional exceptions? How
are they resolved? What types of unforeseen transaction costs arise?
Chapter II. How salient are unforeseen transaction costs for firms that enter
global projects in unfamiliar institutional environments? How much do these
costs increase as relations with local entities become more interdependent and
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institutionally diverse? And how much are these costs lessened when an entrant
has global experience, local experience, and recurring relations with local
entities?
Chapter III. What strategies do entrant firms use to reduce these costs and to
overcome the challenge of embeddedness in unfamiliar markets?
CONCEPTUAL OVERVIEW
Figure 1 offers a roadmap of the overall content and organization of the dissertation. The
figure previews the main findings, and shows how the findings are organized into three
chapters.
FIGURE 1 Conceptual Overview
Figure 1 also illustrates the conceptual story that emerged from the research; a story
that was observed across dozens of entrant firms, working across a variety of global
projects, in all major world regions. The story goes as follows. A firm enters a global
project in an unfamiliar host-country market. However, the home-office executives and
managers in charge of mobilization and operations lack a nuanced understanding of the
host-country language, history, organizations, institutions, and other locally-idiosyncratic
elements and dynamics. As a consequence, the firm incurs a basket of unanticipated costs
that reduce the profitability of the venture. As the management team continues to work
globally, they learn to prevent these so-called �unforeseen transaction costs� by
• Knowledge • Institutions • History • Activity
Knowledge Deficit about anUnfamiliar Market Setting
• Ecological Context • Actors & Relations • Technologies • Symbolic Systems
(Orr, 2005a; b; c)
Unforeseen Costs
• Money Costs • Time Costs • Relationship Damage • Reputation Damage
General Strategies to Cope with a Knowledge Deficit
• Increase the Supply of Local Knowledge • Decrease the Need for Local Knowledge • Reduce the Consequence of a Local Knowledge Deficit
Ch.1,2+
- Ch. 2,3
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employing three general strategies in new markets: increasing the supply of local
knowledge, decreasing the need for local knowledge, and reducing the consequence of a
local knowledge deficit. Depending on the specifics of their work, and depending on how
they cobble these three general strategies together, the firm evolves a preferred strategy
for continued global growth and expansion.
SCOPE DEFINITION
While completing this dissertation, I also wrote three working papers (Orr, 2005a; b; c).
The working papers offer a critical examination of foreign markets, identifying the
archetypical modules or constituent parts that exist ubiquitously, albeit in different
configurations, in markets the world over. In contrast, the three chapters here zoom in
specifically on the challenges and strategies that project participants face when they enter
large global infrastructure projects in foreign markets, underscoring the link between
unfamiliar institutions, unforeseen costs and foreign market entry strategies.
While the working papers offer perspective, this dissertation affords depth. The
working papers provide a view from 10,000 feet of the overall constitution and formation
of foreign markets. The three core chapters here focus in on the institutional elements of
foreign markets, and in particular, the challenges that foreign entrants face in
maneuvering effectively and efficiently within the tangle of locally-devised institutional
elements as well as the strategies they develop to achieve this end.
The stark contrast in breadth and depth of the working papers and the three chapters
here reflects the cognitive journey of discovery down which I have traveled as a doctoral
student. Indeed, as my core research on institutional conflicts and costs gained focus,
sharpness and clarity, my foundation of understanding concerning the totality of human
societal systems and their sub-systems continued to grow. Thus, while this dissertation
presents the central emphasis of my focused empirical research effort, the working papers
capture my expanded perspective concerning the comparative organization of societal
systems.
This dissertation is not a study of the organization of large infrastructure projects,
although the data were collected from firms engaged in these projects. Nor is it primarily
about transaction costs (Williamson, 1979), although much of the analysis focuses on the
5
unforeseen transaction costs that arise in foreign market environments. Nor are
institutions the exclusive theme, although institutional theory (Scott, 2001; North, 1990)
is a principal theoretical point of departure. Nor is it directly about the
internationalization process of the firm (eg. Johanson & Vahlne, 1977) or the strategies of
the multinational enterprise, i.e. global efficiency, national responsiveness, worldwide
learning, and social embeddedness (eg. London & Hart, 2004), although, it does provide
several theoretical stepping-stones to scholars of international business and strategy.
Finally, this research is not directly about the process of how entrant firms learn about
foreign market characteristics or dynamics broadly defined (eg. Sinkula, 1992), although
it does certainly emphasize the process of how entrant organizations learn specifically
about alien institutions.
This last point requires a few more words of clarification. In order to keep the project
focused and manageable, it was necessary to analyze the link between unfamiliar
institutions and cost growth in relative isolation from the other co-existing and
interdependent elements and dynamics of foreign markets that were identified in the
working paper series � i.e. technologies, actors & relations, symbolic systems,
ecological context, domain knowledge, activity and history (Orr, 2005b). Thus, while the
conceptual model in Figure 1 implies that the �local knowledge deficit�-�unforeseen
cost� relationship holds up with respect to all of the elements of foreign markets, it was
not actually possible to test this broad set of propositions within the scope of this single
dissertation (and that is the reason why the �institutions� element alone is enclosed by a
boxed border in Figure 1).
REFERENCES 1. Chan, E.H.W. and Tse, R.Y.C. (2003) Cultural Considerations in International
Construction Contracts. Journal of Construction, Engineering & Management 129 375-381.
2. Chua, D.K.H., Wang, Y. and Tan, W.T. (2003) Impacts and Obstacles in East Asian Cross-Border Construction. Journal of Construction Engineering and Management 129 131-141.
3. Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. (2003) Megaprojects and Risk: An Anatomy of Ambition, Cambridge: Cambridge University Press.
6
4. Johanson, J. and Vahlne, J.E. (1977) The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies 8 23-32.
5. Levitt, R.E., Horii, T., Mahalingam, A., Orr, R. and Taylor, J. (2004) Understanding and Managing the Effects of Institutional Differences in Global Projects. Specialty Conference on Management and Leadership in Construction.
6. London, T. and Hart, S.L. (2004) Reinventing strategies for emerging markets: beyond the transnational model. J. of Int�l Business Studies 35, 350-371.
7. Loraine, R.K. (1992) Construction Management in Developing Countries, London, UK: Thomas Telford Ltd.
8. Miller, R. and Lessard, D. (2000) The Strategic Management of Large Engineering Projects: Shaping Institutions, Risks, and Governance, Cambridge, MA: MIT Press.
9. North, D. (1990) Institutions, Institutional Change, and Economic Performance, Cambridge: Cambridge University Press.
10. Orr, R.J. (2005a) What is a foreign market? Collaboratory for Research on Global Projects Working Paper Series #21, 1-18. Available at: http://crgp.stanford.edu/publications/working.html
11. Orr, R.J. (2005b) Foreign Markets as Subsystems of Civilizations. Collaboratory for Research on Global Projects Working Paper Series #22, 1-29. Available at: http://crgp.stanford.edu/publications/working.html
12. Orr, R.J. (2005c) Two Way Comparison: Validating the "Recombinant DNA" of Civilizations Framework against Commercial Market Intelligence Reports and Analyzing the Reports against the Framework. Collaboratory for Research on Global Projects Working Paper Series #23, 1-13. Available at: http://crgp.stanford.edu/publications/working.html
13. Scott, W.R. (2001) Institutions and Organizations, 2nd Edition Thousand Oaks, CA: Sage.
14. Sinkula, J. (1994) Market Information Processing and Organizational Learning. Journal of Marketing 58 35-45.
15. Stinchcombe, A. and Heimer, C. (1985) Organizational Theory and Project Management: Administering Uncertainty in Norwegian Offshore Oil, Oslo: Norwegian University Press.
16. Williamson, O.E. (1979) Transaction Cost Economics: The Governance of Contractual Relations. Journal of Law and Economics 233-261.
7
I
Institutional Exceptions on Global Projects:
Ignorance, Sensemaking and Response1
�When you hear hoof beats, think Horses,
not Zebras�unless you�re in Africa.� �Anonymous
ABSTRACT
How do international managers learn to navigate unfamiliar institutions�beliefs, values,
norms, rules and laws�on large global projects? One way is by trial-and-error. With
institutional theory as a starting-point for interviews, this inductive study of 23 cases�
where an entrant reported unforeseen costs after failing to understand local institutions�
led to propositions and a generic narrative model. These findings contribute to theoretical
knowledge of how institutional exceptions�misjudgments, misunderstandings and
conflicts�are triggered and resolved, by illuminating a recurring pattern of ignorance,
sensemaking and response across all of the critical incident scenarios that were examined.
1 I Financial support for this research was provided, in part, by the National Science Foundation under Grant No. IIS-9907403 . Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Science Foundation.
8
INTRODUCTION
Managers on global projects2 report a shared problem: misjudgments, misunderstandings
and conflicts when participants fail to understand unfamiliar institutions�tacit beliefs;
informal values and norms; and formal rules (North, 1990; Scott, 2001). These so-called
�institutional exceptions� can generate unforeseen costs and strained relations. To
enhance our understanding of how this often-unexpected friction arises and is resolved,
we analyzed a set of 23 �critical incidents��situations where managers at firms like
Bechtel, Walt Disney and the World Bank told of unforeseen costs on a global project,
due to an institutional exception. Our theoretical contribution is a set of propositions and
a generic narrative model to illuminate similarities, and differences, across the 23 cases
and to address three questions: How are institutional exceptions triggered? How are they
resolved? And how are the consequences manifested? Through this work, we hope to
contribute to practical knowledge of how managers learn to navigate�and can be trained
to better cope with�unfamiliar institutions.
BACKGROUND
Gaps in the Literature
This study addresses four key gaps in the literature. The first gap is that expected
correlations between cultural distance and intercultural venture performance have not
been empirically validated. The majority of studies to test this relationship have applied
Hofstede�s (1984) cultural value dimensions, employing the Kogut & Singh (1988)
approach, to calculate an abstract cultural distance metric as an independent variable, and
have hypothesized that this metric should explain various measures of the performance of
cross-cultural collaborations and alliances (eg. Park & Ungson, 1997; Morosini, Shane &
Singh, 1998; Beamish & Kachra, 2004; Barkema et. al., 1997). Two recent studies
conclude that this approach has generated findings that are inconsistent and inconclusive
(Robson, Leonidou & Katsikeas, 2002; Shenkar, 2001). Why haven�t these empirical
2 Global projects include large industrial, commercial, residential and infrastructure projects that assemble component parts and organizational participants including financiers, vendors, engineers, designers and contractors from nations around the world (Chan & Tse, 2003).
9
efforts produced the expected correlations? One possible reason3 is that the cultural
distance approach is too narrow to account for all of the potential sources of friction
(Barkema et. al., 1997; Harzing, 2003). Therefore, we adopt a fresh approach, distancing
ourselves from these disembedded, abstract distance variables, to explore in concrete
settings how socially-constructed differences impact project outcomes.
A second shortcoming is that scholars of international business have not drawn much
on recent developments in institutional theory in conducting their empirical studies. A
number of scholars suggest that institutional theory offers a full, robust framework to
study how national differences create relational friction in cross-national alliances
(Westney, 1993; Kostova, 1999; Kostova & Zaheer, 1999; Xu & Shenkar, 2002).
Pioneers of internationalization theory associated with the Uppsala school also support a
more broadly-conceived institutional theory (Melin, 1992). Indeed, Johanson and Vahlne
(1977) first defined �psychic distance� broadly as �the sum of�differences in language,
education, business practice, culture and industrial development�; and Eriksson,
Johanson, Majkgård and Sharma (1997) found strong correlation between executives�
perceptions of lack of institutional knowledge4 and of global expansion costs. Although
promising, these studies have received little notice from researchers who, generally, have
been slow to employ a more robust institutional approach to frame empirical inquiry
A third gap is that few studies, even among those guided by institutional theory, have
focused on the collision of intercultural institutional systems. Considerable research has
been conducted to understand the construction, maintenance and effects of institutional
frameworks. Two core research areas have been the influence of institutions on the long-
term processes of economic change (North, 1990, 2005; Acemoglu, Robinson & Johnson,
2001; Greif, 1994) and the impact of institutions on the structuring of organizations and
organizational fields (Powell & DiMaggio, 1991; Meyer & Scott, 1983; Scott & Meyer,
1994; Aoki, 2001). This work recognizes that institutional conflict exists�that disputes
over jurisdiction create uncertainty about which rules and routines should govern; that
elites within established organizations have a self-interest in enforcing rules and 3 Other reasons also exist in the literature record. Shenkar (2001) notes five theoretical illusions subsumed in the cultural distance metric and advises researchers to focus on friction, rather than distance. Oyserman et. al. (2003) question the basis, validity and measurement of approaches to quantify culture. 4 Measured on two scales: lack of language knowledge, and lack of knowledge of foreign laws/ norms/ standards.
10
socializing newcomers (Powell & DiMaggio, 1991:30); and that violence, including
demonstrations, strikes, armed attacks, assassination and industrial disputes are often
caused by institutional disputes (Taylor & Hudson, 1972). Studies pursuing the theme of
institutional conflict have examined differences stemming from competing organizing
logics (e.g., DiMaggio, 1991; Greenwood & Hinings, 1993; Mol 2003; Thornton, 2004),
between sectors (e.g., Heimer, 1999; Stark, 1996), and over time (Fligstein, 1990; Scott,
Ruef, Mendel, and Caronna, 2000). But relatively few studies to date have examined
institutional conflicts that arise during cross-cultural encounters, and fewer still look at
how institutional conflicts unfold at the level of an individual, team or firm. Therefore,
attending to this shortcoming, our fieldwork concentrates on institutional exceptions (a
concept that emerged in this study) as the primary focus of our study, and we seek to
contribute to institutional theory with a micro-analysis of how institutional exceptions
arise, transpire and are managed (or mismanaged).
A fourth inadequacy is that studies of global projects promulgate an overly rational
approach to risks and risk mitigation. Most investigators posit an �undersocialized�
model of the principal actors (Granovetter, 1985), assuming them to be driven by
narrowly conceived cost-benefit models. For example, they do not account for: dogged
political-champions who make, or break, many projects (McCartney, 1988); opposing
bureaucratic/process and outcome orientations of government officials and project
managers, respectively, who battle for control (Mahalingam, 2005); participants with
differing mindsets, logics and rule systems�who misinterpret and misunderstand each
other, causing costs and delays; occupational groups with their varying work traditions
and cultures, who jealously police their turf and defend their work practices; pervasive
informal systems of interpersonal trust, kinship, or communal obligation that complement
and compete with more formal mechanisms for insuring exchange relations; and the
mobilization of suppressed or unrepresented interests that, perhaps in alignment with
transnational NGOs join forces to opposed or redesign projects. These often subtle,
nuanced, non-routine complexities are typically overlooked in favor of relentlessly-
rational discussions of formalized technical, financial, and project delivery contractural
mechanisms (e.g. Stinchcombe and Heimer, 1985). Studies that do address institutional
forces neglect cultural-cognitive and normative elements�the taken-for-granted, often
11
tacit, mental models that drive much of human behavior�instead, putting primary
attention on formal regulative institutions and project governability (e.g. Miller &
Lessard, 2000). Similarly, corporate practice is to treat social and political ambiguities as
if they were quantifiable and predictable risks, no different from landslides or
earthquakes in the physical environment. Software vendors and consultants5 who
promote these tools and techniques fail to recognize, whether innocently or intentionally,
that social movements and political actions are outcomes of human interpretation and
judgment, and thus, inherently difficult to predict . (Smith, 2003). To address this gap,
we offer data from �real-world� global projects to investigate �clashes of institutions��
their initiation, resolution and hidden costs.
Institutions
It is essential that we define institutions, and their component elements, since this
provides the starting point for our fieldwork. Institutions are complex and interlocking
sets of beliefs, values, norms, rules and laws concerning what is appropriate behavior in a
given context. These elements are social structures that have attained a high degree of
resilience and that provide meaning, regularity and stability to social life. The �three
pillars� approach to institutions (Scott, 2001) sorts these elements into three analytically
distinct but interdependent categories�regulative, normative and cultural-cognitive.
Regulative elements. Regulative elements include formal regulations and rules for
governing behavior such as constitutions, laws and property rights (Scott, 2001; North,
1990). The regulatory pillar �is distinguished by a prominence given to explicit
regulatory processes: rule setting, monitoring and sanctioning activities. In this view,
regulatory processes involve the capacity to establish rules, inspect another�s conformity
to them, and, as needed, manipulate sanctions�rewards or punishments�in an attempt
to influence future behavior� (Scott, 2001: 52). Regulations may be created and
maintained by trans-national authorities, nation-states, or provinces and local regimes
with power to create rules and sanction deviators. Firms and unions also issue rules,
monitor behavior and attempt to enforce compliance. Economists and political scientists
5 See Control Risks Group (http://www.crg.com/), Pegasus Consulting Inc. (http://www.pegasusconsultinginc.com/), Pertmaster Project Risk (http://www.pertmaster.com) and Palisade (http://www.palisade.com/).
12
have directed much attention to regulative institutional elements (Aoki, 2001; Weingast
& Marshall, 1988).
Normative elements. Normative elements include the informal norms, values,
standards, expectations, regimes, roles, conventions, practices, taboos, customs,
traditions, and codes of conduct that guide behavior and decisions (Scott, 2001; North,
1990). �Emphasis here is placed on normative rules that introduce a prescriptive,
evaluative, and obligatory dimension to social life. Normative systems include both
values and norms.� (Scott, 2001: 54) Values are conceptions of the preferred or the
desirable. Norms specify how things should be done; they define legitimate means to
pursue valued ends. Normative systems define goals and objectives (eg. winning the
game, making a profit) but also designate appropriate ways to pursue them (e.g. rules
specifying how the game is to be played, conceptions of fair business practices) Many
occupational groups, both professional and craft-based, generate and enforce work norms
and actively promulgate standards and codes to govern conduct (Van Maanen & Barley
1984; Brunsson & Jacobsson, 2000). Sociologists are particularly likely to emphasize
normative aspects of institutions.
Cultural-cognitive elements. Cultural-cognitive elements�the �operating
mechanisms of the mind� (North, 2005)�include shared beliefs, categories, identities,
schemas, scripts, heuristics, logics of action and mental models (Scott, 2001). These
elements are cultural in the sense that social reality is referenced and rationalized against
external symbolic frameworks and cognitive in the sense that social reality is interpreted
and constructed through internalized frames of meaning-making (Scott, 2001). Thus, both
external cultural benchmarks and internalized interpretive processes shape perceptions
and explanations of social reality. Some of the most important cultural-cognitive
elements provide archetypes for dividing labor, constructing organizations and project
teams, and crafting recipes and routines for conducting work (Greenwood & Hinings,
1993; Whitley; 1992a; 1992b). Cultural anthropologists and organizational theorists
emphasize these cultural-cognitive elements (Douglass, 1986; Geertz, 1973; DiMaggio &
Powell, 1991).
13
METHODS
Method Selection
A case-based method was chosen for four reasons. First, it provides a level of in-depth
scrutiny that survey methods omit , thus offering a prospect of new insights into links
among variables (Eisenhardt, 1989; Glaser & Strauss, 1967; Yin, 2003). Second, we
attempt to respond to calls in prior literature for case-based approaches providing insights
into the high incidence of failure and instability in global ventures (Parkhe, 1993; Parke
& Shin, 1991). Third, we seek to address research questions that begin with the word
�how�. This type of question, with a focus on processes in naturally occurring events
over which a researcher has no control, is ideally suited to a case-based research strategy,
with primary data collection by observation and open-ended interview (Yin, 2003).
Finally, as noted above, the method is intended to contrast with earlier studies that use
employ survey methods and employ cultural distance as an abstract metric. Rather, we
examine a set of concrete critical-incidents�and analyze the rich multivariate interaction
of actors, decisions, behaviors, errors, emotions and outcomes.
Data Collection
Data sources. The primary mode of data collection was by interview. The interviews
lasted one to two hours, were digitally recorded for subsequent transcription and review,
and conducted during the 18 months between May, 2003 and November, 2004.
Informants also provided extensive secondary archival data enriching the contextual
background surrounding many of the critical incidents, including newspaper articles,
project briefs, internal memos, email, organization charts, budgets, schedules and other
project documents.
Informants. We interviewed 39 managers�civilian and military�who had worked
on global projects with roles and responsibilities in management, engineering, design and
construction. This sample represented 29 distinct organizations ranging in size from small
consulting companies to the U.S. Navy. In combination, the collection of informants had
experience on projects in over 60 countries in various sectors, including oil and gas,
power, and construction, both civil and manufacturing. The goal of interviewing
14
informants from many organizations, in many industry sectors, on many projects, in
many countries was to develop a general descriptive model.
Informant selection. Many factors were considered in the selection of informants. We
sought individuals with direct global experience who agreed to have the interview
recorded. To reduce recall biases, data collection was limited to informants on active
projects, or on projects that had been completed within the last ten years. Another,
practical consideration was access. The Civil Engineering faculty at Stanford University
generously offered leads to alumni and industry affiliates.
Starting-point of investigation. Although we had institutional theory in mind as a
conceptual guide for fieldwork, and a strong sense from reviewing the literature that
institutional gaps would lead to conflicts and costs, we did not know how these situations
actually unfold. Thus, we made every attempt to begin our interviews with a tabula
rasa�an open mind, as recommended by established methodology primers6. Glaser and
Strauss (1967:37) advise, �An effective strategy is, at first, literally to ignore the
theoretical and empirical literature on the area under study, in order to assure that the
emergence of categories will not be contaminated by concepts more suited to different
areas. Similarities and differences with the literature can be established after the analytic
core of categories has emerged.�
Interview questions. The interviews followed an open-ended format. Informants were
encouraged to talk about challenges their organization had faced on a recent global
6 Clearly, this contradicts Yin�s (1989) position that case studies should start with a priori theoretical propositions. Far too often, it seems, researchers engage in unproductive debate over the level of theoretical purity that a researcher should possess when data collection begins. One camp argues that the tabula rasa blank theoretical mind is effectively impossible to achieve (e.g., Parkhe, 1993). The other camp contends that avoiding a priori theoretical constructs prevents conceptual contamination and theoretical capitalism (e.g., Glaser, 1992). However, this debate loses centrality when we recognize that Cressey, Eisenhardt, Glaser and Strauss, Lindeman, and Yin all subscribe to slightly different variations of the same fundamental inductive approach to theory building and that each methodological variation can have a proper place and a proper time. While it may be sensible to begin with a priori constructs if a researcher intends to challenge or refine an existing dominant theory (e.g., Yan & Gray, 1994), this may not be sensible for an exploratory study in a novel domain (e.g., Galunic & Eisenhardt, 2001). Rather than justifying whether one method is right, and one is wrong, it seems fruitful that researchers take a contingency approach to select a starting point for inductive study based on the attributes of the research situation. Such attributes include: characteristics of the research, maturity of extant theory, researcher preference, researcher strengths and researcher domain experience. Such an approach shifts discussion away from �right versus wrong� towards �more or less appropriate� given the situational attributes. Following this logic, we started the present study looking for institutional exceptions, but did our best to avoid any predetermined notion of how these situations would look or transpire.
15
project. These interviews began with open-ended questions such as, �Take me on a grand
tour of the project;� or, �Tell me about the challenges on the project that were
surprising.� There are two key points to note about these broad questions. First, by
requesting a grand-tour of a project, including many challenges beyond the scope of the
study, such as challenges with an unfamiliar natural environment or a new technology,
we could direct latter stages of an interview toward specific challenges that had arisen
from the unfamiliar social world�such as differences in beliefs, taboos, protocols or
rules. Second, these general questions created opportunities for spontaneous discussion
around emergent topics. For example, questions like, �No kidding�how much did that
cost?�, or, �Oh�there was a meeting?� encouraged respondents to offer more detail
about costs and resolutions to an exception.
Data Analysis
Inductive philosophy. The data analysis philosophy was grounded-theory building
(Eisenhardt, 1989), analytic induction (Robinson, 1951; Znaniecki, 1934) and the
�constant comparative� method, articulated by Glaser and Strauss (1967:105). This
method entails, �first, coding each incident in the data into as many categories of analysis
as possible and comparing incidents [in] each category; second, integrating categories
and their properties�resulting in a unified and �developing theory; and third, delimiting
the theory�and reformulating it with a smaller set of higher level concepts.� This
approach differs from enumerative induction, which applies statistics to assess the
strength of relationships between variables. Instead, by constant comparison,
�Cumulative growth and development of theory is obtained by formulating a
generalization in such a way that negative cases force us either to reject the generalization
or to revise it� (Lindesmith, 1947:12). In this manner, the exceptional instance serves as
the point where science is extended, refined and forced to grow.
Iterative analysis. With this philosophy, vignette preparation, random-member
checks, analysis, and follow-up interviews were performed in an iterative and dynamic
process. Critical incidents�where an unforeseen challenge on a global project could be
traced back to differing institutions�were written up in vignette format with a
chronological story-like summary of key details and events (Miles & Huberman,
16
1994:81). As vignettes were completed, random member checks (Lincoln and Guba,
1985) were conducted by email7 to ask informants to verify accuracy and approve the
disguise of traceable details, such as dollar amounts and locations. As analysis
progressed, brief follow-up interviews�from five to 30 minutes�were conducted by
telephone to clarify facts, thicken data and clarify the emerging theory.
Level of analysis. The critical incidents that were analyzed existed between
organizational entities. But in all cases, individual informants acted as spokespersons for
their organizations or for small directly-engaged teams within their larger organizations,
which is common in management science (Galunic & Eisenhardt, 2001; Yan & Gray,
1994).
Vignette selection. Of the 39 informants, 19 were able to confidently describe details
surrounding a critical incident well enough to support the preparation of a vignette. Four
informants provided data for two vignettes. In total, 23 vignettes were written up, and for
each, Table 1 displays major characteristics of the informant, their organization, and the
project. Interviews with the other 20 informants did not yield a detailed critical incident.
Many of these informants talked primarily of technical challenges, unforeseen problems
posed by the natural environment, or discussed in general terms culture, management
styles, or local customs, but did not share in-depth, specific examples of institutional
incidents. Hence, although these interviews did not produce vignettes, they did provide
context for interpreting the problems described by other informants.
Appendix 1 provides the full-length versions of the 23 vignettes, which are also
summarized in Table 2.
Cross-vignette analysis matrix. In order to compare and contrast incidents, we
�stacked comparable cases� so as to summarize categories and codes in a condensed
tabular format (Miles & Huberman, 1994: 69) and unify the factual basis of the �generic
narrative model,� or �typical story� (Abbott, 1992).
7 Excerpt from email to informants: �I would like to publish a story from our interview in a scientific publication. It is important to verify two criteria: (1) That all factual details are accurately represented, and (2) That the content is appropriately disguised to ensure confidentiality of the parties involved. Please read the story and let me know if it meets these criteria. If it needs modification, please suggest appropriate changes.�
17
TA
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Valu
eb
18
TABLE 2 Condensed Vignette Summaries
ID No. Key Sequence of Events
1 A US architect reported design progress by a US reporting convention that unintentionally mislead a Korean client to interpret design was progressing faster than was the case; this hurt the relationship
2 A foreign proposal to dam a river for hydroelectric power generation infuriated locals who believed in an ancestral spirit in a waterfall on the river that would cease to flow; this caused a public outcry
3 A US firm offered a Chinese workforce a performance incentive that failed because of local beliefs that an excellent employment record might attract government harassment; this damaged productivity
4 A US manager's patterns of informal conversation confused a Japanese manager who misinterpreted a sarcastic statement as an urgent request; he commited resources to a losing course of action
5 A US manager in charge of procuring local materials violated norms of personal exchange in Albania; he faced unexpected extortion from clan members who were responsible for sanctioning deviators
6 A group of US investors imposed a standard US format for the preparation of proforma financial statements on several European partners who at first were unwilling to comply; this hurt the relationship
7 A US project manager threatened to reject a sub-contractor's beam installation on a Chinese holiday associated with good luck and good fortune; this damaged the relationship
8 Joint venture partners had diverging cultural philosophies towards pursuing change orders to return a project that was losing money to profitability; a long-standing dispute destroyed the relationship
9 A Canadian contractor evaluating a project in Russia failed to understand the locally accepted function of paying bribes to secure work; they failed to win a contract they thought had been promised to them
10 A US design team held "working design meetings" with a Korean client whose unfamiliarity with this practice led them to be uncooperative and question the US team's technical ability; this soured relations
11 A Japanese firm's focus on technical excellence and professional duty caused them to fall victim to a US firm's intentional attempts to delay a project by refusing to pass quality inspections; this cost millions
12 A US firm's standard design for a high rise office building was unacceptable to a local partner who refused to collaborate unless the plan was modified; this caused friction in the relationship
13 A US contractor was unfamiliar with protocols of negotiation in Turkey and went ahead with a project without obtaining the necessary local approvals; this hurt the relationship and delayed the project
14 US designers expected a Spanish contractor to prepare shop drawings but the Spanish industry is organized such that contractors do not normally prepare shop drawings; a one year delay was incurred
15 A Japanese firm failed to understand the US process of submitting formal change orders when they over ran the budget on a guaranteed maximum price contract; they lost 15% of the contract value
16 A Canadian engineering team failed to comply with the local protocol of meeting with the villiage chieftain to approve of village projects; they faced sabotoge and other mysterious barriers to productivity
17 A Canadian firm violated the local taboo of promoting employees of a particular ethnicity to positions of management; they faced ostracism and ridicule by other locals
18 A US contractor failed to consider the tribal traditions of a Phillipine patriarchal society; their project was sabotoged and they faced costly delays
19 A US design team tried to persuade a Japanse client to change an expensive, but customary, building material listed on a blue print; this cost several months of negotiation
20 A US team had a Spanish sub-contractor sign a standard contract document; it was deemed unenforcable by Spanish legal counsel and ended up costing the US firm many hundred thousand dollars
21 A US organization forced a Japanese firm to comply with US safety regulations that violated a longstanding Japanese workpractice; this created friction in the relationship
22 Several US organizations tried to invest in projects in Vietnam but were unable to sign exlusive contracts with Vietnemese agents for lack of a modern legal system; they fled Vietnam and wrote-down the investment
23 A US firm developing a new chemical plant in Canada was unaware of a provincial government requirement that called for a local engineer to certify project design drawings; this added unexpected costs and delays
19
Limitations
Isolation of institutional elements. In a complex world, it is artificial to isolate
beliefs, norms or rules from other co-occurring and inter-reliant institutional elements
(Hirsch, 1997). Indeed, full-fledged institutional systems exist as a tangled web of
mutually-reinforcing elements. In any human system , tacit beliefs underlie and are
influenced by informal norms, and informal norms give rise to and are changed by formal
rule creation and maintenance (Greif, 1994; North, 2005; Giddens, 1979). Thus, our
analytic differentiation of elements�cultural-cognitive, normative and regulative�is an
oversimplification employed to identify the varying forces at work, but we recognize the
interdependence of these elements and marvel in the complexity of real world systems.
It is equally difficult to unpack and disentangle institutional and technological effects.
For example, do differences in work practices between US and Chinese scaffold workers
reflect differing institutions or differing technologies? While the technologies
(materials, methods) employed are clearly different, it is also the case that these
variations are reinforced by sets of differing institutions among scaffold vendors, workers
and safety inspectors. This is but one of many ways in which technologies are shaped by
social structures and conventions, and vice versa (Bijker, Hughes, and Pinch 1987;
Orlikowski 1992). However, here we attempt to control or bracket the effects of
technological differences in order to concentrate on institutional exceptions.
One-sided perspective. All of the cases were constructed from interviews with an
entrant�admittedly a one-sided point of view.8 The host�s version of the story was not
solicited, so that we were unable to explicitly attend to how host country stakeholders
perceive, interpret or respond to an entrant�s contested actions. Any comments in this
regard reflect our own inferences, based on the informant�s recollections. In the same
vein, our approach captures how foreign firms incur unforeseen costs on global projects
but, unfortunately, neglects those costs incurred by host countries.
8 We use the terms foreign entrant and local host, or just entrant and host, throughout, rather loosely, as
labels to capture the two parties in each critical incident. Our naming convention is that the informant, or the informant�s organization, is always defined as the entrant; and the second party in the cross-cultural interaction is always defined as the host. In most cases the entrant is a foreign consulting, engineering, design or construction firm; and the host is a local firm, interest group or government body. In a few cases, the terms parent and partner may have been more fitting, but for simplicity, we stick with entrant and host throughout.
20
Oversimplification of process. The evolution of cooperative teamwork is a complex,
iterative, feedback-driven process (Doz, 1993). When critical incidents interrupt
teamwork, actions, observations, inferences, conclusions and responses occur rapidly,
repeatedly and concurrently. In our analysis, we linearize this process, identifying
discreet, ordered stages. Obviously, reality is more complex, but, this dissection
illuminates ways in which all institutional exceptions are remarkably alike, although we
recognize that each is also different.
FINDINGS
How are institutional exceptions triggered? How are they resolved? And how are the
costs manifested? Vignette analysis revealed a three-phase generic narrative model to
answer these questions. Each phase entails three steps: a mode of thought, an associated
behavior, and a result. These phases and steps emerged from analysis of the cross-
vignette matrix. We develop propositions to sum up each step and note insights that
challenge, and fortify, extant theory.
Phase 1. Challenging Host Institutions
The evidence employed is summarized in Table 3, arranged to show how the first phase
of all 23 critical incidents is described by a three-step sequence: (1) an ignorant entrant,
(2) acts in a way that deviates from local institutions, (3) resulting in signals, attempted
corrections, and costs.
Institutional ignorance. Institutional ignorance has two key aspects: a knowledge
deficit about local institutional elements, and reliance on previously-scripted mental
models. Table 4a reveals that all 23 exceptions were triggered by an entrant�s institutional
ignorance, which precipitated misjudgment, misunderstanding and in many cases outright
conflict. For example, problems were triggered on a project in Albania when a US
manager lacked knowledge about local trading protocols of personal exchange, and
assumed, incorrectly, that US trading practices would be agreeable to local vendors (5 -
case ID number). In other cases, the entrant�s knowledge deficit and assumptions
variously concerned: keywords marking milestones in the design process (1), beliefs in
21
ancestral spirits (2), values for traditional building materials (12), habits of hiring and
promotion (17) and norms of contract enforcement (20).
TABLE 3
Ignorance, Deviant Action and Outcomes
A knowledge deficit occurs when an entrant is unfamiliar with local socially-
constructed institutional elements and arrangements. Table 3a indicates that in six cases,
the entrant�s knowledge deficit concerned basic cognitive-cultural institutions; in 13
cases, normative institutions; and in the remaining four cases, regulative institutions.
Table 3a indicates that in all 23 cases, the entrant�s knowledge deficit was exacerbated
when they placed unquestioned reliance in pre-existing�and misleading�mental
models, constructed from experiences in an institutionally-distant setting. Internalized
experiences, mental pictures, rules-of-thumb, presumptions, inferences, expectations,
priorities, taxonomies, know-how, judgments and algorithms are among the many mental
models at the core of personal and professional knowledge. Thus, the cases suggest that
ID No.
ID RN IA FT I ET MC Ignorance1 c X c,am s m rl ID = institutional differences2 c X v,a so w rl, of, s, rp c = cultural-cognitive n = normative 3 c X v,s s d rl, of r = regulative4 c X c o h rl, of RN = reliance on pre-scripted mental modelsa
5 c,n X c so w e6 c,n X c s w rl, of Deviant Action7 c,n X a s h rl IA = take inappropriate action8 c,n X v so d rl, of FT = fail to take required action9 c,n X am,a s w rl, of c = confuses LH; a = angers LH
10 n X c s d rl, of v = violates LH; s = scares LH11 n X po s w of am = accidentally misleads LH12 n X c s h rl, rp po = creates predatory opportunity for LH13 n X c,v so d rl, of14 n X c,am s m rl, of Results of Ignorance15 n X po s m rl, of I = intensity of cues from LH16 n X a v o d rl, of, s s = subtle; o = overt; so = subtle building to overt17 n X v,a o w rl, s, rp ET = elapsed time to recieve cues from LH18 n X a so m rl, s, of, e h = hours; d = days; w = weeks; m = months19 n X c s w rl MC = major associated costs20 r X po so m rl rl = relationship damage; s = sanctions21 r X v o d rl, s of = opportunity forgone; e = extortion22 r X c,s so m rl, of rp = reputation damage23 r X c o w of
a Such as institutional presumptions, experiences, expectations, judgements and rules of thumb.
3a 3b 3c
LegendDeviant Action
Results of IgnoranceIgnorance
22
past experience is actually a detriment when non-locally validated and calibrated mental
models lead to inadvertent overconfidence.
Several of the critical-incidents involved an entrant who was confused by an
unfamiliar �social actor� (16,18,22). Social actors refer to legitimate roles and
responsibilities for individuals and organizations (Scott et. al., 2000). In the US, social
actors include lawyers, paralegals, venture capitalists, engineers, corporations, not-for-
profits, states, counties, the FBI and the central bank (indeed, the �nation-state�, itself, is
a social actor). From country to country, social actors exist with a tremendous array of
forms and functions, each with unique rules and logics. Some of the largest unforeseen
costs were reported when a manager could not find an expected social actor, or
encountered, often problematically, an unexpected one. For example, a US manager on a
soccer stadium project in China reported the absence of bonding agencies and trade
unions; and they experienced the unpleasant discovery of a government design institute,
and a government inspection company. Differences in the cast of expected actors, and
their accompanying sets of rules or logics, caused many unbudgeted project costs. To
recap this evidence formally, and link to the next step:
Proposition 1a: When institutions differ between entrant and host, the entrant is
prone to unintentionally deviate from local routines and arrangements.
Proposition 1b: The more institutions differ, the larger or more apparent is an
entrant�s deviations.
Proposition 1c: The greater an entrant�s reliance on previously-scripted mental
models, the larger an entrant�s deviations.
Deviant act. Employing inappropriate premises, in each case, the entrant committed
an unintentional act of deviation�either by commission or omission�that provoked
negative feelings and a response from the host. Commission is an act of committing or
perpetrating an offense against the beliefs, norms or laws of a host. For example, in
Uganda, a US bank enraged locals when they proposed a project that would have
destroyed a waterfall that was thought to house an ancestral spirit (2). Omission is an act
of leaving something out or failing to do something that is required under the host�s
institutions. For example, in Cameroon, a Canadian engineering team angered a village
chieftain by initiating a community development project without seeking his consent, a
23
expected practice in that society (16). In other cases, contested acts ranged from applying
a new pay incentive system, which violated local norms (3), to mandating an obligatory
format for pro-forma financials, which confused a host (6), to failing to pay usual bribes,
which misled and angered a host (9), to failing to submit change-orders, which created
predatory opportunities for a host (15).
From the entrant�s frame of reference, few of these actions were considered deviant�
they were seen as entirely routine or rational. Although they were not flagrant violations
within the context of each case, 18 were classified as acts of commission, three were
classified as acts of omission, and two were counted in both categories (see Table 3b).
From the host�s perspective, these contested acts were the source of negative emotions
and responses. Table 3b indicates that in 13 cases, feelings of confusion were triggered;
in 9 cases, the local host felt violated; and in 2 cases each, feelings of fright, deception or
exploitation were provoked. These emotions, along with a complex of other factors�
such as the centrality of the institution broken by the entrant, the host�s culturally-
preferred styles of communication and conflict resolution, and the host�s level of
sensitivity and tolerance towards the entrant�s beliefs, norms and laws�influenced the
host�s response. For example, the angry chieftain in the Cameroon sabotaged equipment
and materials that belonged to the Canadian engineering team. From the engineering
team�s perspective, this response served as a warning flag that something was awry. To
summarize more formally, and to link to the next step,
Proposition 2a: When an entrant�s behavior is viewed as deviant, it will lead to
various kinds of signals and negative reactions from the host, with associated costs for
the entrant.
Proposition 2b: The more central the institution broken by the entrant, the more likely
is the host to react in a severe manner, and the greater the costs for the entrant.
Proposition 2c: The more tolerant and understanding the host, the less likely is the
host to react in an extreme manner, and the less the costs for the entrant.
Outcome of ignorance. The result of an entrant�s deviation is two-fold: after some
period of time, they perceive negative signals from the host; and they suffer a variety of
unexpected costs. For example, at a design meeting on an airport project, a local client
showed visible disapproval through body language and facial expressions with the lack of
24
progress on architectural drawings (1). These signals were sufficiently overt that the US-
British designers who had prepared the drawings became instantly aware of a
misunderstanding. But by the time these signals were received, the trust relationship
between the designers and the client was �crippled beyond repair�.
In other cases, signals and hints ranged from a client explaining that a tugboat was
ordered for the wrong day (4), to an angry project sponsor demanding a project be halted
(13), to a client failing to respond to escalating cost reports within a reasonable time
period (15). Associated costs included strained relations and a fee for a tugboat and crew
(4), several days of project delay with senior managers locked in debate (13), and US
$20M in potential cost overruns (15).
When the entrant finally perceives the host�s cues, they recognize that an exception
has arisen. At first, entirely unaware of having failed to comply with a local protocol,
they act surprised (13) or confused (11). In many cases, this point of realization starts
with a �gut-feeling� that things were not going to plan (14,11). As one informant noted,
�the project just wasn�t working out, we knew we had to change our tact (19).�
Table 4c indicates that in cases where a host�s signals were more frequent or overt, the
entrant perceived them more rapidly than when they were more subtle. Overt responses
occurred when a host was frightened and acting in a mode of self-protection (18,2), or
angered and acting in a mode of retaliation (17). In contrast, subtle responses, such as
passive silent treatment (12), or steady pressure to conform to local expectations (6)
typically resulted when a host was troubled or uncertain about how to react (14,19), or
afraid to react at all (3) Among our cases, we classified cues as subtle in eight cases; as
overt in seven; and as subtle escalating to more overt in eight.
Unforeseen costs were associated with each deviant action. Five categories of costs
were identified from the data: relationship damage, reputation damage, opportunities
forgone, sanctions and extortion (Table 4c). Relationship damage occurs when an
entrant�s trust-relationship with local partners is harmed (1). Reputation damage occurs
when an entrant is publicly ostracized, ridiculed or defamed (2). Opportunities forgone
occurs when an entrant unwittingly commits resources to a losing course of action (6).
Sanctions refer to situations in which an entrant faces penalties or punishment as a
consequence of a deviant action (21). Extortion is when an entrant faces threats of
25
intimidation, public accusation, exposure or demands for payments of bribes (18). From
an entrant�s outlook, these costs�which are not explicitly written into budgets and
forecasts�are unforeseen, unpredictable and surprising; thus, they can have major
adverse impact on project performance.
Some authors hypothesize that deep cultural-cognitive institutions lead to the most
complex, costly challenges (Hofstede, 1984; Khagram, 2004). However, on projects at
least, our case analysis suggests a different view. When entrants misjudged norms and
rules, the costs were equally unpredictable, and severe, as when they misjudged
cognitive-cultural aspects (see Table 3).
In the end, a better indicator of cost severity appears to be the elapsed time between an
entrant�s contested action and their �point of realization��or first awareness of an
exception. This elapsed time varied tremendously: in three cases, it was hours; in seven,
days; in eight, weeks; and in five, months. The data indicate that the longer this time
period, the more irrevocable were decisions and resource commitments, the more
difficult it was to correct mistakes and repair relations (see Table 4c). Yet, there was no
obvious link between the type of element that caused the exception�cultural-cognitive,
normative or regulative�and the length of this time lag. It appears that relational and
personal dynamics were more central. To summarize and tie to the next step,
Proposition 3a: The longer the lag time from an entrant�s contested act, to their
perception of a host�s cues, the greater the costs for the entrant.
Proposition 3b: The more sensitive an entrant, the sooner they perceive a host�s cues.
Proposition 3c: The more overt are a host�s cues, the sooner an entrant perceives
them.
Proposition 3d: When an entrant perceives a host�s cues, they become aware of an
exception and enter a mode of sensemaking.
Phase 2. Making Sense of a Host�s Institutions
What happens after an entrant perceives hints and signals of disapproval from the local
host? Table 4 depicts a three-step process of sensemaking that applies to all 23 cases: (1)
an entrant�s mindset of sensemaking, (2) compels a search for local knowledge, (3) which
results in improved understanding of local institutions but at the cost of further resources.
26
Sensemaking. Sensemaking ranges from open-minded inquiry to close-minded
justification of pre-existing mental models (Weick, 1995). For example, upon realizing
that local natives worshipped a spirit in a waterfall downstream of a proposed dam site, a
US bank was very open-minded and spent several months attempting to understand the
native religious orientations (2). In contrast, the US Navy was close-minded on a project
in Spain�even after a one-year delay they were still confused as to why a Spanish
contractor causing this delay was unable to complete the required shop-drawings (14).9
TABLE 1
Sensemaking, Local Knowledge Search and Outcomes
9 This exception, we think, based on discussions with non-Navy managers who had Spain country-
experience, stemmed from the fact that the US and Spanish AEC industries are organized differently. In Spain, contractors do not have in-house designers, architects or engineers to prepare shop-drawings. Instead, this expertise resides in engineering and design firms. Whereas, in the US, contractors typically have design expertise in-house. Thus, the Spanish firm was confused by the Navy�s demand that they do shop-drawings. But the Navy, being close-minded, could not figure out the root-cause of this exception�even after many complaints from the contractor and a year�s delay.
ID No.
CM IB OM HM SA ET NC AC Sensemaking1 X i,e w 2 m,ct CM = close-minded & rigid adherence2 X i,e g,p m 1 m,c,ct to pre-existing knowledge3 X i,e g,p w 1 m,c,ct OM = open-minded inquiry & adaptation 4 X i,e h 3 m,ct of pre-existing knowledge5 X i,e w 3 m,ct IB = inbetween6 X i,e g m 2 m,ct7 X i h 1 m,c,ct Local Knowledge Search8 X i,e m 3 m,ct HM = hold meetings9 X i,e g d 2 m,ct i = internal; e = external
10 X i,e w 2 m,ct SA = seek answers from third-party locals11 X i,e m 3 m,ct g = general public; p = paid consultants 12 X i,e g m 1 m,ct13 X i,e g d 2 m,ct Results of Sensemaking14 X i,e m 3 m,ct ET = elapsed time in mindset of sensemaking15 X i,e p m 1 m,c,ct h = hours; d = days; w = weeks; m = months16 X i,e g w 1 m,ct NC = new clarity of knowledge of local17 X i,e g w 1 m,ct institutional code18 X i,e p w 2 m,c,ct 1 = high; 2 = med; 3 = low19 X i,e g,p w 1 m,c,ct ACa = associated costs20 X i,e g,p d 2 m,c,ct m = managerial effort; c = consultant fees21 X i,e g,p d 1 m,c,ct ct = communication & travel22 X i,e p m 3 m,c,ct23 X i,e p d 1 m,ct
a A fourth cost is project delay. It is not shown explicitly, as the durations listed under the "ET" category are indicative.
LegendSense-making Local Knowledge Search
Results of Sensemaking
4a 4b 4c
27
In cases of open-minded sensemaking, the entrant was consciously inquisitive (3) or
outwardly curious (16). In cases of close-minded sensemaking, the entrant stubbornly
denied it was their mistake (10,11,22), blamed the host (4) or was irritated that a host did
not favorably respond to their repeated attempts to �rectify� the situation (10,11,14). In
other cases, the entrant�s mindset was in-between these extreme modes of thought
(6,15,20).
The cases indicate that sensemaking processes occur both at conscious and
unconscious levels of awareness. Some entrants question, ponder and discuss in groups
the sequence of events, conversations and decisions leading up to an exception. They
introspectively examine the origin and applicability of their own expectations and mental
models. They intentionally seek to observe, evaluate and adapt their behaviors to fit
within the constraints of the local institutional code, much like a chameleon changes
colors to blend into a new environment. Other close-minded entrants outwardly oppose
unfamiliar institutions�justifying their actions against their internal reference-frames
and rationalizing their pre-existing mental models and presumptions (10,22). Not one
informant admitted to a fundamental distaste for the local way of life or business, but, in
many vignettes, it was obvious that prior mental models were at odds with local
institutions and obstructed reflection and adaptation.
In general, the cases suggest that as entrants accumulate global experience, they
become more open-minded in their sensemaking�both more investigative and more
tolerant of new institutions. In contrast, several entrants working abroad for the first time
were obstinately closed-minded (4,12). To summarize more formally, and link to the next
step,
Proposition 4a: The greater an entrant�s global experience, the more open-minded
they are.
Proposition 4b: The more open-minded an entrant, , the more extensive is their search
for local institutional knowledge.
Local knowledge search behavior. The search for local knowledge includes any effort
to understand local institutions. For example, when a US bank became aware that the
locals were unhappy with a project, they sent a cultural anthropologist to explore local
values and beliefs, held �town-hall� meetings to elicit local concerns, and met internally
28
to discuss facts, opinions and possible courses of action in a collective process of mutual
consensus-building (2). In other cases, local knowledge search involved seeking advice
from consultants (15), holding formal and informal meetings with colleagues (12) and
local stakeholders (14), talking with friends (19) or members of the local population (16)
and reading about local customs (13).
Many different strategies were applied to learn about unfamiliar institutions.
Informants relied on third-party friends, university alumni or acquaintances who played a
key role as confidantes and were trusted for honest advice because of their third-party
distance from a critical incident (3); local consultants, hired to provide a professional
opinion for large, complicated or confidential exceptions (3,15,18); a local guide
organization or joint venture partner (7); and translators, to assist in clarifying
communications�several noted that due to conflict, they hired their own translator
because they could not trust the host�s translator (7). Finally, the case evidence indicates
that more open-minded entrants triangulated among many sources of local knowledge to
increase the breadth and validity of their understandings (3,16,19). To summarize more
formally, and tie to the next step,
Proposition 5a: The more extensive is an entrant�s local knowledge search, the
greater the clarity of their mental models concerning local institutions.
Outcome of sensemaking. The result of an entrant�s sensemaking is two-fold: after
some period of time, a new clarity of knowledge about local institutions may emerge; and
a variety of unexpected costs may be entailed in this process. For example, on a dam
construction project in Turkey, an entrant reported that the sensemaking period lasted
several days, involving tense negotiations with the project sponsor, internal meetings,
reading a book called �The Arab Mind� and sleepless nights (13). In other cases,
sensemaking resulted in new insight into local building codes (23), a clearer conception
of tribal traditions and values in an indigenous community (18), new awareness of a
traditional Japanese work-practice to wear soft-toed shoes for scaffold work (21), a new
knowledge of Chinese beliefs about good luck (7) and a better sense of how bribes are
used to secure work in Russia (9).
But, not all sensemaking efforts brought clear understandings. In other cases the
entrant remained confused, even after perceiving cues, recognizing an exception and
29
attempting to understand the situation. For example, a Japanese contractor was never able
to decipher the use of sarcasm in US conversation (4), the US Navy did not seem to
understand the division of labor in Spain (14), and a US manager could not interpret
protocols of personal exchange in Albania (5).
The primary positive outcome of the sensemaking process is a new clarity of
understanding about unfamiliar institutions. Across the cases, we judged an entrant�s
clarity of knowledge�on a low, medium, high scale�based on how clearly they were
able to answer our �how� and �why� questions about the inner-workings of the local
logics and rule systems. The more open-minded entrants, who had aggressively inquired
about local institutions, were generally able to recount specific details, and explain subtle
nuances of the local systems. For example, when we asked a Canadian manager why he
had been ridiculed on a project in Malaysia for promoting Indian employees to
management positions, he launched into a 25 minute explanation of 100 years of
Malaysian history, how the balance of power had historically been divided between
Chinese, Malays and Indians, and how long-standing Malaysian traditions had influenced
the norms and expectations faced on his specific project (17). In contrast, the entrant�s
who were closed-minded were unable to give clear, coherent, logical accounts (14). The
cases indicate that an entrant�s open-mindedness is linked to the amount of energy they
expend to acquire local knowledge, and thus, the quality and accuracy of the opinions
that they form.
For each case, we estimated the length of time spent in sensemaking. This period
varied tremendously across the cases: in two cases, it consumed a few hours; in five, it
took several days, in eight, several weeks, and in eight, months were required. The cases
where an entrant was close-minded (8, 11, 14, 22), or the stakes were very high (2, 6, 15)
tended to result in longer periods of sensemaking.
Costs of sensemaking include delay, time spent in meetings, communications, travel,
rework and consultant fees. Significant opportunity costs result when exceptions tie-up
senior executives and managers (1, 2, 8, 15, 20). In general, the longer the period of time
spent diagnosing local institutions, the greater the absolute cost of this activity. (Note, the
usefulness of this metric is debatable as there is a relative trade-off between absolute
30
costs of local knowledge search and benefits of improving end outcomes.) To summarize
more formally and tie to the next step,
Proposition 6a: The longer the local knowledge search period, the greater are
absolute costs of the sensemaking process (but these may be offset by benefits that
come with greater clarity of local institutional knowledge).
Phase 3. Responding to a Host�s Institutions
After sensemaking, an entrant moves into a mindset of response. We employ the data in
Table 5 to illustrate how the third phase of all 23 critical incidents is described by a three-
step process: (1) an entrant formulates and compares response alternatives, (2) enacts a
response, (3) and achieves some outcome, which often leads to additional costs.
Response. An entrant enters a mindset of response after becoming convinced, either
rightly or wrongly, that they understand local logics, rules and feasible response
possibilities. In this mode, an entrant evaluates and selects a course of action perceived to
best minimize costs of their contested act. For example, a US manager on a soccer
stadium project in China had been angered when a Chinese contractor erected a truss that
failed to meet quality standards. But, after threatening to have the contractor removed
from the project, he learned from a translator that this particular day of the year was a
Chinese holiday associated with good luck, and that the truss had only been erected to
show �symbolic progress� (7). With this new knowledge, the US manager was able to
consider several alternative responses. In other cases, the entrant�s mindset of logical
response focused on repairing a strained relationship (16), recovering an unpaid fee (15),
avoiding the payment of bribes (5,9) improving the productivity of a Chinese workforce
(3) and negotiating an agreeable work plan (13).
The cases suggest a link between an entrant�s clarity of local knowledge at the end of
sensemaking, their reliance on local knowledge during response formulation, and the
number of alternative responses considered. Indeed, in the ten cases where an entrant�s
clarity of knowledge at the end of sensemaking was classified as high (Table 4c), for 8,
the entrant relied heavily on this new local knowledge in response formulation (Table
5a), and in all ten, the entrant consciously weighed the costs and benefits of multiple
31
TABLE 2 Response, Response Action and Outcomes
response alternatives (Table 5a). On the other hand, in the six cases where the entrant�s
clarity of knowledge at the end of sensemaking was low (Table 4c), for all 6, the entrant
relied almost solely on pre-existing mental models (Table 5a) and no more than one
response alternative was evaluated (Table 5a).
As with sensemaking, a mindset of response operates along a continuum ranging from
conscious to unconscious. There is an age-old distinction between decisions made by
intuition�fast, effortless, automatic and associative�and those made by reasoning�
slow, controlled, effortful and rule-governed (Kahneman, 2003; Smith, 2003). The cases
indicate that when sensemaking is closed-minded�justifying pre-existing mental
models�then the end response is typically unconscious, or intuitive, without explicit
ID No.
FL W Ac C D M Av IR C Response1 on 1 X i n FL = formulate logical response relying on:2 n 3 X X i r,e o = mostly old non-local institutional knowledge3 n 3 X i n n = mostly new local institutional knowledge4 o 1 X w n on = mix of both5 o 1 X w n W = weigh costs & benefits6 on 2 X wa r,e 1 = one alternative considered7 n 2 X i r 2 = two ore more alternatives considered8 o 1 X X w w9 o 1 X X w w Response Action10 o 1 X w w Ac = acquiesce D = defy11 o 1 X w w,r M = manipulate Av = avoid 12 n 3 X i n C = compromise13 n 2 X i w14 o 1 X X w w,r Results of Responseb
15 on 2 X w w IR = impact on relationship with LH16 n 2 X i r w = worsens; i = improves17 on 3 X X wa n C = associated cost18 o 1 X i r w = write-down costs of ignorance19 n 2 X i r r = further resource commitment20 n 2 X i r e = programs to educate local host21 n 2 X i r,e n = no additional cost22 o 1 X w w23 n 3 X i w,r
a Note, negative relational impact was carefully selected by the entrant as the best possible response given the unique circumstances of the situation.b Although not shown explicitly, all informants indicated some amount of experiential learning.
LegendResponse Response Action
Results of Response
5a 5b 5c
32
consideration of alternative courses of action. Alternatively, when sensemaking is open-
minded�usually reflecting greater clarity of local institutional knowledge�then the
decision process is based more on reasoning with conscious consideration of alternative
paths of action. For both response processes, the aim is to minimize impacts and
maximize benefits. The difference is that in an intuitive process, an entrant is not able to
calibrate mental models to match local practices, protocols or regulations. Summarizing
and linking to the next section,
Proposition 7a: The more an entrant�s reliance on local knowledge, the greater their
ability to create and compare alternative responses to fit local institutional
constraints.
Proposition 7b: The more reliance on local knowledge, the more likely that the entrant
will compromise or acquiesce.
Proposition 7c: The less reliance on local knowledge, the more likely that the entrant
will defy or avoid.
Response behavior. A typology proposed by Oliver (1991) consists of five strategic
responses to institutional pressure: acquiesce, defy, compromise, avoid and manipulate.
We found this typology to be useful in sorting out the entrant�s various responses. For
example, after trying for months to get European partners to adopt a standard format for
pro-forma financials, a US developer sent their CFO to train, coach and tutor
(manipulate) the partners to correctly prepare these reports (6). In other cases, the
entrant�s response was to acquiesce, by meeting a village chieftain to seek approval and
give gifts (16); to compromise, by negotiating to have 50% of a cost overrun passed on to
a US client (15) or by re-designing a pay system to make Chinese workers feel
comfortable (3); to avoid a project altogether, because paying bribes was deemed
intolerable (9); or to continue to defy, and thus terminate a soured relationship with a
joint venture partner (6).
The case evidence (Table 5) suggests that acquiescent or compromise strategies
improve host relations host while avoidance or defiance strategies worsen host relations.
For example, in the six cases with an acquiescent strategy, relations improved in four;
and in 11 with a compromise strategy, relations improved in seven. Similarly, in five
cases with a defiance strategy, relations worsened in four, and relations worsened in all
33
four cases with an avoidance strategy. Finally, in three cases with a manipulative
strategy, relations worsened in two and improved in one.
There is always dynamic and iterative interaction between an entrant�s strategy and a
host�s response. Acquiescence and defiance strategies always come in pairs: if an entrant
acquiesces, essentially, the host is able to defy; if an entrant defies, the host must
acquiesce, or relations will worsen. A compromise strategy only works if both sides
agree on a mutually beneficial alternative. A manipulative strategy only works if an
entrant provides incentives, or sanctions, to motivate a host to alter beliefs, norms or
rules�or at least behaviors. An avoidance strategy severs interaction, often terminating
relations. To summarize more formally, and link to the next section,
Proposition 8a: With an acquiesce or compromise strategy, host relations likely
improve.
Proposition 8b: With an avoidance or defiant strategy, host relations likely worsen.
Proposition 8c: The greater the lag time between initial deviation and final response,
the less likely are costs reversible, or the relationship repairable.
Outcome of response. Generally speaking, the outcomes of response are improved�
or worsened�host relations, higher costs and enhanced experiential knowledge. For
example, on a dam construction project in Turkey, after US managers grasped and
acquiesced to local norms of negotiation, their relations with a project sponsor were much
healthier. For future negotiations, the informant recalled, �We did it the local way�you
know, sat and had tea, and there were no more problems.� (13) However, the �local way�
turned out to be far more time-consuming than expected, and cost several weeks of
unplanned delay. In other cases, relations with a village chieftain improved, but at the
costs of many gifts and meetings (16); relations with a US client were critically damaged
and a $5M overrun absorbed (15); relations with a Russian client were terminated, and
many months of project feasibility planning written-down as sunk costs (9); and relations
with a joint venture partner were terminated, resulting in one of the �largest losses in
recent history� (6).
An important aspect of the final outcome was whether or not relations with the host
were repaired. Table 5c shows that in 11 cases, relations were improved; in eight,
worsened; and in four, did not change. A key finding is that relational outcome is
34
precipitated by an entrant�s sensemaking process. Indeed, the cases suggest a causal chain
from an entrant�s sensemaking mindset, to breadth of local knowledge search, to clarity
of understanding, to reliance on local knowledge in response selection, to response
enactment, to relational result.
Costs of the response phase were sorted into three types: absorbing initial costs of
ignorance when an act of deviance was deemed irreversible (2,23); committing resources
to educate a host (6); and developing alternatives to the original host relation (20).
In the cases where a deviant action was irreversible, the mindset of response was more
about impact minimization than about damage reversal. For example, the logical response
for a Japanese manager, who delivered a tugboat and crew to a jobsite on the wrong day,
was to re-plan delivery for the following week, and to apologize to a US project manager
(4). Or in the case of another Japanese firm, which had missed the legal window to
submit change orders, to admit a misjudgment and plea to recover a US $20M cost
overrun (15).
Finally, the cases indicate that the longer the elapsed time between an entrant�s
deviation, and end response, the more locked-in are costs and irreversible are the
damages. For example, had the Japanese contractor not gone six months before realizing
the need to submit change orders, they might have prevented their large financial loss --
US $10M and professional fee (15).
Toward A Generic Narrative Model
This research has explored how differences in institutions lead to unforeseen costs for
foreign firms. The findings are summarized in a set of propositions, and a generic
narrative model, depicted in Figure 1.
How do institutional exceptions arise? The findings suggest that ignorance�a
knowledge deficit about local institutions, with overconfidence in prior mental models�
is the condition that triggers an entrant to unintentionally take deviant actions�acts of
commission and omission�which provoke negative feelings�confusion, violation,
deception, fright and exploitation�and associated responses from the host. When the
entrant perceives these cues, they recognize an exception and enter a mode of
sensemaking.
35
FIG
UR
E 1
A
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odel
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36
How are institutional exceptions resolved? The findings indicate that sensemaking,
which varies in extent of open-minded exploration, allows an entrant to examine a host�s
institutions (and to reconsider their own assumptions). Internal meetings, external parleys
and talks with locals and consultants all can bring an entrant to a new clarity of
understanding about unfamiliar logics and rules. From this new understanding, an entrant
can shift into a mindset of response and conduct a cost-benefit analysis to select the best
response alternative�acquiesce, defy, compromise, educate, manipulate or avoid. The
end result is either to improve or worsen relations with locals, and to learn, or fail to
better cope with unfamiliar institutions.
How are costs manifested in this process? Costs are incurred in each phase. After a
deviant action, costs are sanctions, damage to relations and reputation, extortion and
opportunity forgone; during sensemaking, costs are delay, time devoted to meetings,
communications, travel, and consultant fees; in response, costs are resources to enact a
response, and to absorb sunk costs. And of course, our one-sided analysis does not
capture all of the costs to the host. It is not always up to the entrant to learn, compromise
and adjust. Indeed, especially when power is asymmetric, it is more likely the host who
bends, and absorbs many unforeseen costs in this process.
How significant are these costs? These costs vary enormously both in type and in
magnitude�from less than 1% (21) to more than 100% (2,15,22) of a firm�s expected
profits on a project; they can quickly erode profit margins because of their unexpected
nature; and they seldom are easy to quantify. While money costs, such as air tickets,
consultant fees and liquidated damages can be captured in a cost accounting system, it is
next to impossible to calculate opportunity costs. How do we begin to estimate the net
present cost of a tarnished public image or soured strategic relationship? Can this cost be
measured in terms of future projects and profits forgone? How do we assess the cost of a
key executive being distracted from operational and strategic roles while resolving an
institutional exception? Is this a cost that can be measured at all?
Can these costs be avoided? Unforeseen institutional costs are largely unpredictable.
Why? Institutional systems are products of human imagination�stunningly diverse and
wonderfully complex around the planet. Each evolves along a path-dependent trace
37
through history and continuously changes (North, 2005). Thus, when working in a
country the first time, it is impossible to anticipate the full set of institutional differences
that may cause problems. This is not to say that firms cannot learn to work in unfamiliar
locales. Indeed, many do. But, seldom by preplanning and rational risk assessment, as so
often is presumed, taught and tried. Instead, four strategies that firms use to reduce the
liability of foreignness are to: increase the supply of local knowledge, decrease the need
for local knowledge, improve exception handling, and encode lessons learned in the
corporate memory of policies, routines, manuals and the like (Orr, 2005).
CONNECTIONS TO THEORY
There are several perspectives that complement�and can be complemented by�the
findings.
Transaction Cost Economics
Hayek (1945) recognized that an ability to transact effectively and efficiently in a given
environment improves with increasing ‘‘local knowledge’’. Our study confirms that in the
absence of local knowledge, entrants incur high opportunity and transaction costs.
Game Theoretic View of Institutions
The observations fit closely�but also show a limit�to game theoretic approaches,
which recognize that a set of institutions in a domain evolves to a Nash equilibrium,
where all players earn a maximum payoff so long as they abide within these rules (Greif,
2005). This study confirms the view that unilateral deviation away from a stable set of
institutions results in sanctions and other unforeseen costs. It also exposes a weakness of
game theoretic approaches: the assumption that actors understand the rules. In the cases
we studied, such understanding was often missing. Instead, entrants relied on previous
knowledge and skills that often bore little or no relation to the situations encountered,
creating confusion and conflict.
38
Sensemaking Theory
As we analyzed the cases, it became apparent that each vignette presented another
version of the same story�a story of sensemaking as an entrant tried to decode signals
and hints from a host, or nuances of an unfamiliar belief, or norm, or rule. Hence, the
findings suggest a new domain of empirical study for sensemaking theorists (Weick,
1995).
Theory on Self-Reference Frame and Ethnocentrism
A body of scholarly work in marketing recognizes that a self-reference frame, or
ethnocentric mindset, leads to racial prejudice, discrimination or bias (Sharma, Shimp &
Jeongshin, 1995; de Ruyter, van Birgelen & Wetzels, 1998; Yoonhyeung & Cameron,
1995). This study confirms these views, and suggests that an entrant�s pre-existing mental
models, assumptions, and stereotypes impede open-minded inquiry and learning about
unfamiliar institutions.
Descriptive Theory of Decision Making
Tversky and Kahneman (1974) show that manager�s estimates of uncertainties and ranges
are frequently biased towards overconfidence. The present study suggests that biases and
overconfidence are extremely dangerous in a foreign institutional environment, and that
foreign managers make sub-optimal decisions and resource allocations when they base
decisions on non-locally calibrated mental models.
International Management Theory
What are the traits of successful global managers? Many researchers have investigated
this question (eg. Adler & Bartholomew, 1992; Bartlett & Ghoshal, 1992). At the top of
the list one study notes, are cultural empathy, curiosity, active listening, risk acceptance,
humility, self-awareness, and emotional resilience (Wills and Barham, 1994). Why are
these traits valued? Researchers have devoted less effort to this question, but the present
study provides a tenable answer�each of these traits catalyzes a shift from ignorance to
sensemaking.
39
Internationalization Theory
Internationalization theory suggests that with global experience, a firm develops a
�know-how�, or tacit ability, to acquire relevant local knowledge upon entering a foreign
environment (Eriksson et. al., 1997; Melin, 1992). The findings here support this view.
Each critical incident is like a learning episode. As experience grows, managers become
both more skilled at anticipating institutional differences, and in handling exceptions.
Cultural Globalization
The world today is dominated asymmetrically by western power and preeminence�the
imperialism of the affluent West (Sen, 2004). It is not a balanced contest. Western
institutions are generally thought to be superior�more effective and more rational. This
may be true in some areas, such as some safety, quality control and technical standards in
construction. But superiority in one area inspires hubris in others. Western economic and
political institutions are also alleged to be superior, and often are backed by world-system
authorities such as the IMF, UN or World Bank who have traditionally forced
institutional archetypes and models on less developed nations (Evans, 2004). Yet, all too
often, these attempts to assist devolve into misunderstandings and recriminations,
escalating costs for all parties.
CONCLUSIONS
Moral Dilemma
Proposition 8a suggests that firms that acquiesce to local expectations, practices and
protocols generally improve relations with local partners. Yet, this conjecture introduces
a deep moral dilemma. When is it not appropriate for entrant firms to bend to local
norms? What if locals engage in bribery, slavery, discrimination (17), unsafe practices,
pollution or non-sustainable resource extraction? It is outside of the descriptive scope of
this article to tackle this ethical dilemma head-on, and yet it is important for firms who
are working in the international arena to charily consider these questions.
40
Contributions to Knowledge
This study takes a fresh approach�intentionally broader than earlier cultural distance
approaches�to inspect intercultural friction. By defining institutional exceptions,
investigating how they are resolved and providing a set of propositions and model to
generalize beyond the cases sampled, the study improves upon existing theoretical
understandings of processes of institutional conflict. The study also illuminates the
centrality of sensemaking and response processes in resolving institutional conflicts.
Agenda for Future Research
The sample of cases analyzed in this article illustrates a set of critical-incident scenarios
where institutional differences between entrant and host led to significant unforeseen
transaction costs. However, the sample of cases was intentionally selected with
replication logic to compare and contrast situations where institutional differences had
observable consequences. Thus, based on this sample it is not appropriate to conclude
that all foreign entrants on all global projects are significantly impacted by these costs.
Nor is it appropriate to draw conclusions about the fraction of unforeseen costs arising
from institutional differences versus the fraction of costs arising from differences in
technologies, materials or organizations. Therefore, the next step should be to investigate
a random sample of entrant experiences, to see if these costs are consistently significant
across a large sample of average dyadic relations between entrant firms and host entities.
More broadly, institutional theory holds an unexplored potential to shed light on
global project performance; and global projects offer a splendid natural research
laboratory to study institutional processes. With our colleagues in the Collaboratory for
Research on Global Projects, we are conducting fieldwork in the following areas: to
examine how exceptions vary across settings, phases and sub-systems as a given project
proceeds from planning to completion stages; to identify coping mechanisms�at
interpersonal, inter-team, project, firm and wider levels�to deal with exceptions; to
examine attributes of project leaders who best mollify conflicts; to identify managerial
interventions�in organization structures, contracting practices, staffing policies, or
administrative procedures�to help bridge across institutional gaps; and to trace evidence
41
of organizational learning that supports improved performance within and across projects
and firms.
Contributions to Practice
Our advice to managers is three-fold. First, anticipate varied and unpredictable
differences in cultural-cognitive, normative, and regulative institutions on global projects;
and assess these gaps with an open-mind towards �localization� of strategy. Undeniably,
starting in sensemaking is far superior to ignorance. But unlocking oneself from one�s
own cultural prison is not easy. The cases reveal that even when entrants have convinced
themselves that they are adhering to a rational course of action, in many instances,
intuition was rooted in non-locally applicable mental models. Indeed, when navigating
unfamiliar institutions, past experiences may be invalid, assumptions may break down,
rules-of-thumb may require recalibration, knowledge may not bring advantage, local
beliefs, norms and customs may seem odd, and the political, financial and legal systems
may consist of a fully different set of rules, logics and enforcers. As one divisional
president at Bechtel exclaimed in an interview, �the toughest thing [on global projects] is
to train expatriates to see things differently.� This has two profound implications: it is
important�from the perspective of an executive with 45 years of global experience and
wisdom�that expatriate managers anticipate, assess and adapt to institutions in a foreign
location; but it is difficult to inspire such a transformation of mental programming.
Second, work to improve exception-handling capabilities. Exceptions are not always
preventable, so skills and processes to troubleshoot, mediate and reconcile critical
incidents are vital.
Third, understand that working globally is about change. Either locals, or entrants,
have to change their mindsets, practices, or both. Without a meeting of minds, or
practices, joint work is not possible, and development projects of importance, particularly
to local parties, cannot go forward.
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APPENDIX 1 23 Vignettes from Industry Informants
1 Reporting Design Progress�By Whose Milestones, in Korea?
A joint venture (JV) formed between a US engineering firm and a UK architectural
design firm won the bid to design a major intermodal transportation system for a major
international airport in Korea. A problem arose on this project due to a misunderstanding
about how the percentage of design completion should be reported in the design process.
The problem stemmed from the fact that in the US, there are four milestones typically
defined in design process, and in Korea only two are recognized. As the informant noted,
On the Incheon airport project, there were different conceptions about design
milestones, schematic, detailed, etc. Koreans have this definition of basic design as 30-
40% design complete and detailed design as 100% design complete. In contrast, in the
US, concept is 30%, schematic is 60%, detailed 90%, and construction documents are
100% design complete.
This caused a great amount of confusion. The Korean owner misinterpreted the
weekly US production reports and assumed that the design was progressing faster than
was actually the case. Six months in to the project, when the Koreans actually reviewed a
draft of the drawings, they were shocked at the visible lack of detail. As the US manager
remembered, There was a lot of difference in terms of what they meant by basic design and what we meant by
basic design. We thought that �basic design� meant about 10% designs complete. So, six months
into the project we showed them what we had done and it was nowhere near what they expected.
The US manager reported that the miscommunication hurt the level of trust in the
relationship, and noted that,
We spent many days and hours trying to figure out and understand the accepted process of design
in Korea. We also tried to accelerate the project, because the client was unhappy, but this led to
additional misunderstandings related to the change order process, and it all became very
cumbersome. It delayed the project substantially and also the cost escalated.
2 �Spirit in the Waterfall� in Uganda.
The US�based AES Corp., the world�s largest independent power producer, proposed to
construct a US$530�million hydroelectric dam on the Nile River. The informant who told
49
this story was an employee of a third-party project review panel, and explained in an
introductory email, There were a lot of economic, social and environmental problems with the proposed dam in
addition to the fact that it would submerge the Bujagali Falls. Bujagali falls is a huge tourist
attraction, national treasure for Uganda, site of some of the best white water rafting in the world
(even better than the Colorado River), and is also known to house a spirit worshiped by the locals.
According to a public website operated by the International Rivers Network10, According to AES's environmental impact assessment, the dam would displace 820 people and
affect an additional 6,000 people, including by submerging communal lands, burial sites or
portions of their land. The Jinja District, where the dam would be built, is one of the most heavily
populated non-urban areas in the country, and replacement land for those who would lose homes
or crops is practically non-existent in the area. Many of the families that would be displaced have
been in the area for generations. Bujagali is also a cultural and religious site, where the "Spirit of
Bujagali" has had a storied association with the Falls for centuries. The Spirit is the cultural
embodiment of the community, and is believed to protect the community from harm by
performing rituals at the Falls. The current spirit�an actual person who lives in a mud hut 100
yards from the Falls�is the thirty-ninth.
After the project was proposed, a group of locals and NGOs, who were upset at the
prospect of the project destroying local cultural and historic sites, submitted two different
request to have the project reviewed by an independent review panel operated by an arm
of the World Bank. It�s a pretty complex set of actors, internally in Uganda, domestically. [There are many] different
groups, with [many] different views. The government officials think very differently from the
displaced people, and they think very differently from the �requestors� who launched the
complaints about the project. So, the issue about the locals is a complex one. There were two
requests. The main issues in the requests were the economic issues, the evaluations that were not
seen as comprehensive enough, the issue of the project being overvalued, the issue of whether the
Ugandans would be able to afford the electricity, the issue of whether it was really a poverty
alleviation project, the issue of whether it would address rural electrification, and all of these other
things. In the second request, it was noted that the local tribe�s people were angered about the loss
of the waterfall, which was said to be a host for a spirit at the center of their religious orientation.
When asked to put the issue of the �spirit in the waterfall� into context with the other
requests that had been made by the locals, the informant noted,
10 http://www.irn.org/programs/bujagali/index.asp?id=/programs/safrica/000117.nile.html
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It was indeed an issue when the request came into the panel. It wasn�t what stopped the project,
but it was what got a lot media attention: here�s this man who claims to mediate between the gods
and the people. The other big questions were hardly mentioned in the press�Is this poverty
alleviation? Are huge private infrastructure projects something that banks should be doing in sub
Saharan Africa? Are the agreements adequately disclosed? Is corruption rampant? �But the
�spirit in the waterfall� was something that people were eager to hear.
The informant described that the �spirit in the waterfall� issue did lead to a long period
of meetings and negotiations, as follows: The bank had sessions with both of the persons who claimed to be representing the spirits. And the
strategy was to hold conversations with �the living Bujagali��the living embodiment of the
spirit�such that it could be said that they tried in a good faith effort to come up with an
alternative. �Can we move the spirits?� was basically the approach. And at first they were told that
they could, then that they couldn�t. This went on for a couple of years. In 1998, the living Bujagali
said that the spirits could accept changes in the landscape, which means the consultations had been
going on for at least, well, quite a while before that. In 2001, of course, it was already said that, no
that�s not possible. That�s three years later. It wasn�t until 2003 that AES withdrew. But there was
still active resistance at that point. So it wasn�t as if the issue was ever solved. It certainly wasn�t
solved. And it�s pretty much unsolvable. Because either the falls are gone or they are not. There
are shrines that could be moved, and such. And depending on what the living Bujagali says, the
spirits could agree to move or not, or agree to a change in the landscape or not. But either the land
is going to be lost, or its not. And if the dam goes forward the land is lost.
The informant cautioned not to distort the significance of the cultural issues, and
stressed the array of broader issues that led to its eventual postponement: So while it is certainly an interesting case study of cultural values conflicting with large-scale
"development" projects�and calling it development has been disputed by those who oppose the
project for economic and environmental reasons�it could just as easily be a case study on
corruption, on clashing development paradigms, or on the effects of lopsided political dynamics
between major international financial institutions, small poor governments, their parliaments, and
civil society. All of these factors may be a bit difficult to disentangle if you're trying to analyze it
as a solely cultural conflict, although it could certainly be argued that even if all of the other
problems weren't there, the cultural constraints alone may have been enough to postpone the
project. But again, the cultural issues are important to a sector of society. I wouldn�t want to
minimize that at all. It is not as if the people don�t care that their gods are going to be submersed,
and that the waterfall is not going to exist.
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Also, the informant noted that the cultural issues tend to get distorted, and used as a
�scapegoat� to excuse other faults, inadequacies, or criticisms linked to a failed project, Something else to look at is why it might be spun as though cultural issues were the main problem.
And something that I know [the vice president] at the [major funding institution] has talked about,
is, this Bujagali project, and he�ll say. �Oh you know. What a tragic thing that happened. We had
this beautifully designed project. And who were we to know that there would be these spirits to
come along that would make it impossible to build.� And it is very convenient to say that the
cultural issue was the problem. Because, then there is no wrong doing on the part of anyone else.
So it can be a convenient scapegoat. It�s very easy to see that no one else will get faulted, if it is
indeed found that the cultural issues are the main problem.
3 Failed Performance Incentives in China.
A US firm entered China to build and operate a manufacturing facility. But they
encountered unexpected challenges with motivating the workers. To overcome these
problems, they hired a Chinese consultant to investigate and advise. A friend of the
consultant told the following story, So they had built this wonderful factory. Operations were underway. And the US managers were
unhappy with production output and offered an incentive program to Chinese factory workers who
contributed to production increases. But after several weeks the new incentive program was not
working� Management of [the US firm] was perplexed as to why it did not seem to motivate the
Chinese workers to increase production levels. It was a program that had worked in other
countries... Not sure what to do, they consulted with [my friend�s organization] to troubleshoot.
After a week or two of talking with the workers, the Chinese consulting group was
said to have provided the following advice, First, Chinese people have been under the rule of communism for such a long time that promotion
incentives do not reinforce behavior, because traditionally people that rise to the top are watched
closely by the government, and occasionally even killed. You know, the quacking duck gets shot,
as the old saying goes. Second, negative reinforcement works more effectively because Chinese
don�t want to lose face� They don�t want to stick out. They don�t want to produce more then
their friends. They want harmony.
Following this advice, the US managers instituted a �performance control program��
to punish non-performance�to replace the ineffective performance incentive program.
As the friend remembered,
52
Based on the recommendations, a new program was adopted to punish workers for not meeting a
mandatory performance output quota in their work. This worked extremely well. [All] of the
employees increased their output in unison, and none of the employees felt that they were rising
above the rest, so it worked out well.
4 Sarcastic Comments by an American Confuse a Japanese Manager.
A senior site manager of a large bridge construction project told the following story, You need to know that the Carquinez Bridge replacement project is a new suspension bridge west
of the existing bridges. The existing 1927 bridge will be demolished after the completion of the
replacement bridge and approaches. The bridge spans San Francisco Bay in the State of California,
and is the first long suspension bridge built in the U.S. in about 40 years. The original plan was to
build deck in china, but the Japanese put forward a good price and a lot of favorable terms�i.e.
complete offer of fabrication and payment when delivered. They formed a joint venture with two
U.S. companies in March 2000. The design was the first of its kind in the US: an orthotropic steel
box girder, weighing more than 12,000 tons, fabricated in Japan, and shipped overseas to the site
in California.
The assembly process of installing each of the modular box girder sections involved a
complex operation, as described, After pouring the foundation, erecting the towers, spinning the suspension cables, and hanging the
suspenders, it was time to install the deck girders. This was done by loading the deck sections onto
a barge, pulling them into position with a tugboat, hoisting them with a crane, and fastening them
to the suspenders at the connection points.
The site manager explained a mix-up related to the hoisting of the first deck section: One night, a few days before we were ready to start hanging deck sections, we were standing out
on the deck, looking out over the whole job, before going home for the day. Sarcastically, I joked
to [the Japanese manager] that it would be nice to have the first deck section ready to go for 9am
the next morning. And what do you know, when I got to work the next day, he had mobilized a
huge crew, and he had it all loaded up and four tugs out on the water under the bridge and ready to
go...ready to go for 9am, but we weren�t ready to install for another 3-days. And I wasn�t going to
give him any compensation for putting four tugs out on the water. It was just a joke, a casual
conversation�there had been no formal instruction. [This Japanese manager] completely
misunderstood, and I wouldn't pay him for it.
When asked how the Japanese manager responded, the US manager noted, Well, he called in his tugboats right now, and didn�t really protest much, although he mumbled
about compensation and seemed flat out confused. I guess it was just a genuine communication
53
problem. Later I learned that the Japanese language doesn�t include much sarcasm. So, since then,
I�ve tried not to joke around in this way with the Japanese.
5 US Navy Encounters the Mafia in Albania.
An US Navy officer recalled the following series of events, during the procurement of
supplies for a road construction project in Albania, We were building a road in Albania. When we needed to purchase materials. We were buying
crushed stone, food, office supplies, printers, papers, pens, everything was needed. But we ran into
the local mafia�for lack of a better word. We would buy from one guy, and he would say, "Oh,
you're working on a road. You're going to need food and water" and he would say, "I can point
you towards my cousin who has a shop that can provide everything you need."
But the US officers were unfamiliar with how to procure supplies in this marketplace
where family-relations were so strong. As noted, The problem was, they were all so interconnected. And we were thinking, "We�ll just go find four
or five bidders, or find the place with the highest quality stuff and the least cost, some combination
of these two, where we get the best value, not just because we want to support this other guy." But
[when we did this, we ran] into clashes with different groups�vendors, suppliers, or literally
mafia groups that are associated with them�where they are all trying to get a piece of that project,
the money from the project. It�s just different practices, where they don't understand why you can't
just go to his cousin because he recommended it.
After several of weeks of unsuccessfully trying to �obtain low bids and select best
value� in the procurement process, finally the US officers decided to hire a local agent to
do the haggling and negotiation. As described, The way we worked through these things is we hired what we call a husbanding agent�a local
guy. He was more attuned to local politics, and the local economy, and it was his job to help be the
interface between the folks working on the projects�the US company and the host nation. And he
would go into the community, and maybe see some of these other things. He would go along with
us to do purchasing or translation. Or often he would do some of the research ahead of time before
we'd go, and choose a vendor that would make sense and give us the most value in the end. And
then we'd just go that vendor to negotiate. He was a guy who could go bargain in the local
language, knew the local customs, and wouldn't inadvertently give a hand shake with the wrong
hand and tick the guy off so he wouldn�t do business with us. He was a guy who could haggle in
the right way. So that is one of the solutions the military uses. And when you see Dynacor Brown
& Root working in Albania or wherever else, oftentimes they also hire a local agent to do the same
sort thing.
54
Finally, when asked to reflect on how this decision to use a husbanding agent effected
the relations with the other local Albanian vendors, he remarked, Well, it�s hard to say. I think a lot of them didn�t like us to begin with. And when we wouldn�t buy
from them, they were even more upset. The whole business environment there�it�s really
mysterious. But it worked for us in the end. We got the road built.
6 Proforma Financial Templates Strain US-European Relations.
A private US development firm (the parent), funded by a large US-based emerging
markets fund and by other private US investors, entered several European countries in the
1990s with a strategy to develop real estate projects. Part of this strategy was to partner
with experienced local development firms in each country.
Once involved with active projects, these local firms were expected to meet the US
investor-driven reporting conventions. On most projects funded by US investors, there is
an insistence that managers comply with certain norms of document preparation. These
conventions included such things as, �how to format a pro-forma, how to put together a
monthly report, and how to prepare a draw-package that goes to investors for funding
approval.� However, on most occasions the local European partners were unfamiliar with
these norms, which had evolved in the distant US marketplace, and they did understand
what was being requested of them. Thus, the proforma documents that they submitted to
the US parent tended to be of objectionable substance, format, or lacking in both areas.
At times, this perceived incompliance created undue strain on relationships and caused
delays in getting projects funded. Since it was out of the question to change the
conventions of the entire US investment community, with its unyielding set of informal
codes and expectations, the parent managers decided it was necessary to re-educate the
European partners to prepare documents with the appropriate content and format. The
first attempt in this effort was to provide the partners with digital document templates to
modify or copy. However, in many cases, even with digital templates, the partners were
still unwilling, or unable, to prepare acceptable pro-forma and other supporting
documents. The next attempt, which was more costly, was to educate the partners one-on-
one. The US executive who related this story noted that: There was definitely some training going on. There was a controller in London and most of his
time was going to all of these countries and the country-heads and just talking to them and training
55
them about what the expectations were. And I remember one time [when we had all of the partners
together at an annual meeting] we brought someone in from Chicago who [gave a seminar to]
show�how to put a pro forma together, how to put the assumptions together, and how to do a
forecast of whether a project was going to be successful or not.
Over a period of several months, with continued coaching and tutoring, eventually the
European partners were able to adapt to the US requirements.
7 Ceremonial Beam Installation Causes Conflict in China.
A project manager for a large US contractor told the following story, about a situation he
experienced while managing the construction of a soccer stadium in China: On this project, I demanded international standards. And I won them over, over an eight month
period. The owner was extremely supportive. For example, let me tell you a story about the trusses
on the outside of that stadium. The manufacturing of those trusses, the welding of those trusses, by
our standards was absolutely deplorable. All they care about on welding is that the penetration is
there and it meets the code. They don�t understand about clean steel. They don�t understand about
priming. They don�t understand about painting. Or quality specification. Or even using the right
paint. So when those trusses went up in the air, they didn�t look right. I kept rejecting them, or my
people, they kept rejecting them. We would not allow them to lift these trusses until they did it
right. And we�d go out there and walk around everyone of them. And look at this stuff. And a guy
would put a gauge on it. And finally when number 5 got up there, and they looked at it from a
distance, and the sun was shining on it, and it was twisted. And finally they said, �Oh, now I see
what you were talking about.�
Based on the quality control issues, there was a lot of tension and anxiety in the
relationship between the Chinese steel truss supplier, and the US project management
team. This mood catalyzed the following incident,
The point I want to stress is that misunderstandings lead to bad decisions lead to conflict.
Therefore translators are extremely important, and need to be the highest caliber. Our translators
were kind of mediocre. One example that occurred�and Dr. M just happened to be there, she was
our consultant, a survivor of the cultural revolution in China, and educated in the US, and helps us
with these issues�is that the steel contractor was lifting a truss, after we had rejected it, because it
hadn�t been primed or painted. And I had a knock down drag out fight with the contract manager
of the steel company. And basically I told him that unless that truss was down by the end of the
day, he might as well not come back to the job ever again. So, Dr. M was there, and she had a talk
with this guy, and in a little while came back to me to explain the situation. So, it turned out that
there was an important day, not a festival, but an important date in the Chinese culture that brings
56
good luck. So this Chinese contractor just wanted to get the truss up in the air to get good luck in
the relationship.
After realizing the misunderstanding, the project manager explained the following
resolution,
So the way out of this was�if Dr. M wasn�t there, I would not have known there was a
misunderstanding�I let the guy lift it up there and then in a few days I had him take it down again
once the holiday was past. This may sound like a little thing, but it was huge. It was really huge. If
Dr. M wasn�t there, I would have fired that contractor. And it might have taken weeks to replace
him. And a good translator would have picked that up, but like I said, ours were mediocre. So, I
was able to be a good sportsman because she was there, but if not, the outcome would have been
much different.
8 Disagreements in a US-Israeli Joint Venture.
In the late 1990s, a JV between an Israeli firm and a US-British consortium won a lump-
sum bid to complete a major airport construction project in Europe. The US-British group
was a large, highly regarded international contractor and the Israeli firm was smaller and
locally headquartered. As the project went along, the JV managers noticed mistakes in
their estimate calculations and realized that their lump-sum bid price to the owner was
not enough to cover their costs, let alone leave allowance for a profit. While the JV
managers all agreed that the project was on the brink of becoming seriously unprofitable,
they could not reach an agreement about an appropriate plan of action for how to proceed
in this awkward circumstance. One of the JV managers on the US side reported: Contractor A [Israeli] strongly felt they could pursue change-orders into profitability and
Contractor B [US-British] didn�t feel that they should do that sort of thing. So, then it became like
a dysfunctional relationship. Where A and B, who were supposed to work together, had two
opposing philosophies for how they were going to pull off the job. Contractor A was of the notion
that every time the owner coughs, we�re going to go back for more money. And Contractor B said,
no, we can�t do that, we�re a very honorable group and we have a long-term relationship to
uphold. Due to concerns of confidentiality, the informant was not willing to recount the
specific details of the final outcome in this situation. But he did say that as the
relationship soured, there were many months of intense meetings, and arguments, the
situation became very embarrassing for both firms, and as a result of the inability to work
57
together and other �cultural and individual issues�, the JV became one of the �largest
losses in recent history� and ended-up losing �excessive amounts of money.�
9 No Bribes, No Contract: Canadians in Russia.
Members of the Russian government approached a Canadian telecommunications
contractor, to invite them to design, supply, and build a new fiber optic backbone, to
connect major cities along the trans-Siberian railroad. The Canadian firm sent an
estimating team to Russia, to fly the route in a helicopter, and to survey the geography
and condition of the existing railroad infrastructure. As a former engineer remembered, It was an exciting trip. We were treated like royalty. The finest Russian vodka, caviar� just like
James Bond. The scenery was matchless�the mountains, the expansive forests. We spent a week,
flying the route at low altitude, surveying the route. Preparing the basis of a price estimate,
counting the road crossings, the condition of the track, and previewing the terrain. When we
survey a new route we measure three types of terrain: mountain, country, and city. Each has a
different price factor. Mountain terrain requires a lot of blasting, so that costs more money;
country terrain is easy plowing; and city work involves a lot of directional drilling and utility
locates and it is the most difficult to estimate.
After the route survey, the Canadian firm returned home, with a promise from the
Russian government sponsors that they would be awarded the project on a negotiated
price basis, without a competitive bidding process. But they also were informed that they
would be required to �share the profits�, as remembered by the engineer,
After the survey, we were all in high spirits. The Russians were happy with our technology. Also,
one of our estimators, he liked Harley Davidson motorcycles. And the lead Russian, he also liked
Harleys, so there was a strong connection. And they agreed to give us the job. But it was a bit odd;
at the end they also mentioned that they expected we would share in the profits. We didn�t know
what they meant at first�I mean, how can we share in the profits? They are the owner? And then
we realized they meant personally, you know, pay them money under the table. They didn�t think
there was anything wrong with it.
The Canadian estimating group returned to Canada, and several of the senior managers
and executives deliberated for some time about the ethical aspects of the Russian
proposal. In the engineers words,
So we returned home, and we talked with our management for a few of days, and also with the
Russians. And it turned out that this is exactly what they wanted. They wanted us to siphon money
58
back to them�you know, pay us government cash to do the work, and then we send them cash
into private accounts to return the favor. We talked about this for a number of weeks. It was an
attractive project. But in the end we decided it wasn�t worth the risk to get caught up in these
games. This is how people get killed, you know� So in the end, we submitted a bid to do the
work but refused to pay the bribes. But without an agreement on the bribes, the Russians wouldn�t
take it; they were more interested in the personal kickbacks then in building the backbone. It all
cost us a lot of money.
10 US-UK �Working Design Meetings� Don�t Work, in Korea.
A joint venture (JV) formed between a US engineering firm and a UK architectural
design firm won the bid to design a major intermodal transportation facility for the
Incheon International Airport in Korea. During the design and planning phase of the
project, a �major cultural blockage�, as described by the US informant, emerged between
the JV partners and the Korean client.
The �blockage� concerned the early design meetings, or so-called charettes, planned
by the US-UK JV partners to work alongside the Korean client to prepare a conceptual
design for the project. Having had many years of international experience, the US-UK JV
managers were well aware that cultural differences on the project could lead to
significant consequences. As one US JV manager noted:
Because of the cultural differences, we thought it would be a good idea to have these charettes and
planning sessions to share ideas with the project managers, architects and engineers on both sides.
But these meetings turned out to be extremely ineffective. The concept of a work
meeting was alien to the Korean client representatives, who from the US-UK perspective,
tended to be reluctant to openly express or discuss their interests or concerns during the
charette design sessions. In the end, the American managers ended up dominating most
of the conversations, with little feedback from their Korean client. Reflecting on these
meetings, the US manager explained:
What ended up happening, right from the first meeting, is often times the US side ends up talking
a lot, and the clients and the people who actually know more about how the project should be run,
they are usually silent and they don�t say anything, and they are not used to this kind of a
participatory environment. So, although they have a lot to say, oftentimes, they would not say
anything. Then what would happen is at the end of the charette we would go out for dinner and
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they would start rehashing some of these issues and then they would talk. Or they wouldn�t say
anything for a long time and three months into the project the same question that we asked [and
thought had been a non-issue] would come up again. As the project went on, the US-UK managers eventually began to understand that in a
more informal environment, at dinner in a restaurant for instance, the Korean team was
more open and willing to discuss many of the issues that had been on the agenda for the
formal design charette sessions. They discovered, through the course of these informal
conversations, that the Korean client team had viewed the whole design charette exercise
as a sign of �technical incompetence� on the part of the US-UK JV. They learned that in
Korea, the process of conceptual design preparation does not typically involve design
participatory meetings where a client is expected to give real-time input into the design
plans or possibilities. They discovered that instead, a design firm typically prepares and
series of comprehensive design alternatives, which the client formally reviews and marks
up; and after each design revision, the design firm incorporates the suggested feedback,
suggestions, and ideas. These lessons came at the cost of injury to the relationship very
early on in the project and the time commitment of approximately 20 high level managers
and executives who participated in several ineffective all-day design charette meetings.
Furthermore, because the design charettes were unsuccessful, the US design team never
did reach a clear understanding of the Korean client�s needs, expectations, or concerns,
which in turn, caused a domino effect of problems in the later stages of the project. As
the manager explained:
Ninety percent of the charettes were a failure, and from the beginning we did not have a very clear
conception of what [the client] wanted. Once the US managers realized that the design charettes were ineffective, and started to
find a middle ground more closely in line with the Korean client�s expectations, they
found that the project went forward �more easily�.
11 Japanese Focus on Technical Excellence; One-year Delay in USA.
The project manager who told the story about the tugboat (case number four) also
explained a far deeper culturally rooted misunderstanding and conflict, which had been
triggered by unforeseen ground conditions,
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There was 368-day delay on this project, because of unforeseen ground conditions. What
happened is, the soil conditions were unstable and continually collapsed within the hole while it
was being drilled. The diameter of the hole could not be maintained enough to infill with concrete.
To overcome this adversity, engineers designed an alternative method involving a newly designed
drill head. But this caused a $12 million modification plan, and 368-day delay. And the delay also
impacted the Japanese bridge deck contractor and caused all kinds of problems for them. Well,
actually, [the government client] caused all kinds of problems for them.
The problems were caused by a US consultant, who used this situation to take advantage
of the Japanese culture of professionalism, duty, and attention to technical detail. As the
informant described,
According to the contract [between the government client and the Japanese bridge deck contractor,
the Japanese contractor] had to do a submittal documenting their fabrication procedure. But once
the project was delayed, [the US client] took advantage of this clause, to [intentionally] delay the
Japanese. Instead of accepting the usual standard fab procedure, the US client demanded a 200
page document�and you have to remember, [this Japanese firm] is probably the most qualified
fabricator in the world �to provide details on the entire fab procedure... right from raw steel, to
shop blasting, to pick up and put down, every twist, and every turn, through cutting, hoisting,
painting, and the jacking system. The [government client] claimed that this was necessary because
it was a new technology in the US, and the Japanese, they are very professional, and want to build
a good relationship. They didn�t say anything. They wouldn�t put forward a guy to call bullshit.
This guy [with the US government client], Mr. S, he was an asshole. He had worked with the
Japanese before, and I think he knew how to take advantage of their professionalism. He had got
them to the point where they were not putting forth what they wanted to do; they were putting out
what he wanted them too. And the Japanese wouldn�t call bullshit on this guy. They would have
meetings, and [the Japanese] were very quiet, these meetings would be difficult� The Japanese
were way out of their comfort zone... Mr. S was so arrogant it got to be demeaning. Voices were
raised. The meetings were out of control. And this Mr. S was gonzo. Just demeaning, and asking
for way too much detail. So the government client was trying to control the means and methods of
the fabricator. But, you can't make the Japanese do everything you want them to do and also
expect them to take control of the work, can you? So, it took 1.5 years to get the fabrication issue
approved.
The US engineer explained that the motivation behind the US government client
intentionally delaying the Japanese steel deck supplier was one of self-interest:
The consultant was smart. They knew that there was a 358-day delay because of the ground
conditions, and they knew that every day they could hold up the fab is one less day of storage [for
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the bridge deck sections]. Had the Japanese delivered [the bridge decks] on time, it would have
been 358 days in port. And guess who has to pay for that? It�s the client�s problem. And the
consultant represents the client. Also, these consultants bill by the hour. So they don�t mind taking
a little more time. The more they delay, the more they get paid. I guess you get bad people in
every community. But what�s sad is I don�t think the Japanese ever figured it out.
12 Operable or inoperable windows?11�A High-rise office tower in Berlin.
A well-known US real estate investor and developer, with an asset base valued in excess
of $13 billion, entered Berlin, Germany to build a high-rise office building. The design
phase of this project was characterized by a number of unexpected issues and conflicts.
One such issue was a clash of opinion between the Americans and the Germans
concerning the glass windows. In the USA, most high-rise buildings have internal air-
conditioning systems, and the windows in the glass façade are �inoperable��they have
no moving parts and they are permanently closed to ventilation. On the contrary, in
Western Europe, air-conditioning systems are less common, and windows in high-rise
buildings are generally �operable��they can be opened and closed to regulate the
ambient temperature within the building. As the informant expressed,
[Our firm] has some specific expectations for system performance on the buildings that they build.
Some of these expectations are different in the US and Germany. For instance, in the US buildings
are regulated almost completely by mechanical systems. In Germany there is a more passive
approach to energy usage and consumption substituted by operable windows that you could
open�a more natural approach. In [the] US, buildings are taller, in harsher conditions, and there
is a push towards creating totally air-conditioned environments.
This slight difference in aesthetic preference and standard of architectural design
created confusion and disagreement between the US and German parties. As might be
imagined, the American expatriates and architects preferred the inoperable windows.
Quite the opposite, the German project managers feared that the inoperable windows
would make the building �ugly�, causing a loss of respect among their peers, and making
it difficult to contract with tenants. One of the American expatriate managers described
this scenario as follows,
11 Many thanks to my colleague and friend, Ashwin Mahalingam, who collected this vignette on a data collection trip in Europe in 2002.
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The process of bringing the Germans to see the American point of view, and vice versa, was a
challenge�it would have been foolish to build a US building in Germany�there are examples of
that which have failed! The real goal is to find the best product by combining local architectural
and engineering knowledge, local client expectations, international experience, and international
operating questions. So even before the drawings were made, people sat around the table and
talked about what the project would look like.
Also during this time, there were several heated discussions and meetings with the
German partners, damaging trust, openness, and respect in the relationship. Eventually,
after several months of deliberation, the US firm finally accepted and adopted the
German standard of operable windows. As the informant described,
[We] came from an American perspective, trying to create an American building in Berlin. [But]
we were wrong. In contrast to [our] opening stance of �we will not have these goddamn operable
windows,� we do have them since it�s the right thing to have. It was tough to push ourselves out of
our box. Companies get into their sweet spot and perform, perform, perform, but when you get
into another environment you are forced to come out.
13 Have Tea before you spark the Dynamite in Turkey.
A US contractor was responsible for the foundation engineering on a large dam
construction project in Turkey. As the lead engineer remembered, We had a big dam we were building in Turkey, and it was in caustic limestone. So we had all
kinds of foundation troubles. And so we were driving these adits back in to explore [the strength
of the rock], so we could put in a meaningful cutoff under this dam. It was a 200m high dam. We
were concerned because there were all kinds of caves under this thing, and we were worried we
could lose the whole reservoir through a cave.
The lead engineer reported confusion and misunderstanding in several of the negotiations
with the Turkish project sponsor, as follows: We went in to talk to the general director, to tell him that we needed to extend the adits, which
would cost a lot of money. And� he would nod his head, and his deputies would nod there heads,
and [the next day] our guys would go out and start blasting the [adits]. But, they would say, �Stop!
What are you doing, why are you doing this?� And we said, �We talked about it yesterday, and
you agreed to do it.� But they�d say, �We never agreed to that yesterday�� So, you think you
have a deal, but you don�t really have a deal.
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After the disagreement, the lead engineer remembered several meetings, discussions,
and negotiations that were intended to sort out the misunderstanding, but ended up being
ineffective, and with recurring communication problems.
When we realized they were upset, we meet with the Turkish resident director. We would meet
with him and go through this whole thing with his cadre of engineers. He was a local, with the
Department of Water Resources for Turkey. We had to make sense of why they didn�t understand
us. And we went through that exercise two or three times. And then we realized we just weren�t
getting through in the discussions.
This misunderstanding delayed progress on the project. As the lead engineer recalled,
It stopped one part of the job�and this foundation was such a problem�we had to talk it through,
for a couple of days. There was a track drill, blasting crew, and local contractor with three or four
laborers, sitting idle for two or three days. And it was a confusing thing�
Eventually, they came to understand the local communication style, and cultural
protocols of negotiation. The lead engineer described how this happened, as follows: One of the fellows that was there, he said, you need to read a chapter of the book called the Arab
Mind. There is a chapter in there on making a deal. It was pretty simplistic, and I repeat it to you
because maybe you haven�t heard it before. The gist of it was, when you�re dealing with the Arab
mentality, you discuss things, and you keep discussing them. And when they nod their heads, they
are saying they hear you, it does not mean they agree. They are saying, we hear you, and we
understand you, but we are not saying we agree. When you deal with these fellows, just because
they nod their head doesn�t mean they agree.
Applying this new understanding of the local culture, the US team modified their
negotiation style in the meetings. The lead engineer laughed when he explained,
And we used to sit there drinking Chai, for hours, until you�re almost peeing your pants, drinking
so much tea, talking the same subject, and you say it over again, you say it one way, and you say it
another way, and you say it this way, and you say it upside down, and you show a picture, and you
draw a crude cartoon, and you show a sketch of what you want to do, and finally they say, �yes we
believe it�s a good idea.�
The lead engineer described that from that point on, the negotiations went smoothly and
there were no further delays to the project. In his own words, From then on, that is the way all the meetings went. When we wanted to change something, we�d
get together and we�d go over to the general director�s office and we�d talk to them, and have tea,
until we felt like we got agreement� The general director was also a coach. He was in charge of
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the whole project, and he was also astute enough to say, if we�re going to get this done we�re
going to have to work together. We had at least two or three meetings before we got to understand
just how to do this� After that the negotiations went fairly well. And once we got over it, we felt
a lot better, and I think they felt a lot better. Because we didn�t have misunderstanding or
dissension.
14 Responsibilities for �Shop Drawings� in Spain.
A US Navy officer reported the following sequence of events related to an office-
building construction project on a navy base in Spain: I was the assistant operations officer. So I was in charge of companies in our battalion that had
different jobs in Spain, Italy, and Greece, and I tracked that all that on a daily, weekly, and
monthly basis. I handled the portfolio management and prepared the monthly status reports. For
this Spain project, it was right in my back yard� It was an office building for a tenant on the base.
We were acting as the project managers and the general contractor, and we were self performing a
lot of the work�concrete foundation, site work, steel erection, etc. But there were dozens of
Spanish sub-contractors, from a doors and windows guy, to the concrete guy, to the roof guy, etc.
etc. And the steel fabrication and concrete panels were both from a local supplier. Just about 100%
of the materials were procured locally, except that [the electrical] is built to the 110 US standard,
so those materials had to come from the US.
He related the following details about the project organization structure and process
arrangements,
The US designer does the preliminary basic design. Then we go out to the local marketplace, and
say, �This is what we need built.� And six subcontractors will say, �We can do that,� and we take
the low bid. Then the local subcontractors�who supply steel, concrete panels, etc.�they prepare
shop drawings. They have to say, �here is exactly how we are going to build it, and here are the
tabs that are going to hang on the steel frame.� And they submit these back to the US [designer].
And then the US [designer] says either, �Yes, that fits our requirement�, or, �[No, do it again]�. .
And the US based guys had very strict requirements as to the structural requirements for the
building. Some of it was new after September 11; the building should withstand certain bomb
loads, and that kind of thing.
But the project did not go smoothly. There was considerable delay due to a mix-up
between the US design group, who did not understand the Spanish construction industry
practices, and the Spanish contractors. As the US operations manager explained,
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And we just went through round after round of shop drawings. And they just could never get it
right. And after months of chasing our tails, we realized that no one had ever done it that way
before [in Spain]. So, we just did not have a meeting of the minds. It probably took twice as long
as it should have. The building should have been finished in a year, and it took twice that. The
material price goes up with time. And if you look at the number of hours that it took, it was
enormous.
All of this went on for several months, with meetings, and escalating tension in the
relationship, until the point that the panel contract was terminated. The US officer noted,
The concrete panel contractor would come into our office, and we would talk about shop
drawings, when can you deliver these concrete panels, and we [need timelines] and we need shop
drawings for this day, we need delivery this day. And those dates kept slipping because they
couldn�t get the design right for those panels. No one had ever built them before; it was sort of a
new way of doing it. So every time the shop drawings came in, the [US] designer would look at
them and say, �those tabs won�t work� and it was just kind of an endless cycle�this went on for
several months�a pretty significant chunk of time. [Each of the] meetings was at least an hour.
You�d have the folks from our battalion that were doing the construction. You�d have two or three
people from procurement. Some of them are from the US, but they�ve been in Spain long enough
that they speak Spanish. So there [were] usually 6 to 10 people per meeting. I remember a couple
of meetings on each of those issues. After a year, the concrete panel issue was still unresolved, and
we terminated the contractor.
When asked to speculate on the reason for the delay, the US operations officer said:
I would say it was probably a misunderstanding in design� And I think it was the fragmented
way that we approached the project, with designers based in the US... The US designers thought
that this was a universally used, easily understood system, of building, you know, with 4� thick,
10� by 6� concrete panels that get hung [on the building frame]. They use this system in the US,
where you pre-cast the wall panels and you stand them up with a crane, and the whole thing just
hangs there on these little tabs that act as hangar brackets. Just like the pre-cast panels that you see
in a high-rise� But, instead of getting a little more local knowledge, we went with a design that
we thought would work� based on our experiences in other parts of Europe. 12
When asked if he would do anything differently based on this experience, he replied:
12 Another reason for this delay, based on interviews with other international mangers who had worked in Spain, was that the US and Spanish architecture, engineering, and construction industries may differ in the organization of roles, responsibilities, and the distribution of design expertise across architectural, engineering, and construction firms. In particular, Spanish contractors do not typically employ in-house designers, architects or engineers to prepare shop-drawings. Instead, this expertise typically resides in specialized engineering and design firms. In contrast, US contractors tend to offer in-house design expertise to their clients. If this claim is true, it may to some extent explain why the Spanish firm was confused at the Navy�s demand that they should prepare detailed shop-drawings.
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Maybe utilizing a local Spanish design firm, instead of just using them for the
architectural finish stuff, using them more for�the, how do you build? I think [we had]
this mindset of, �it�s a US building, on a US base, and we�re going to build it to US
standards.� But you [need to gain] an understanding of how the Spanish build it, with
their means and methods� [In fact,] our local Spanish designer [hired for another
project] even recommended, �Why don�t you let me build it with block or something
else. And I can give it to you with half the cost, and twice as fast.�
15 Japanese Misunderstanding of a US GMAX Contract.
A large Japanese building contractor won a design-build bid to retrofit and renovate a
manufacturing facility for a Fortune 100 US high technology firm. Without
comprehending the implications of the decision, they agreed to sign the owner�s contract
form. This contract specified that the final price was �not to exceed� US $43.1M. There
were no clauses in the contract to allow change-orders based on unknown, uncertain,
unexpected, or unforeseen conditions. This so-called guaranteed maximum price
(GMAX) contract form is used commonly in the US construction industry. During an
interview, one of the Japanese managers grimly explained: This is the biggest mistake in the project. Based on past experience, we don�t make a GMAX price
this early, at this stage. If it�s an 18-month project, we might sign a GMAX towards the end. But
signing a GMAX on a retrofit at the beginning is not smart because you don�t know what the final
price will be. So even though we signed the contract, we didn�t understand the meaning at that
time. There is a difference between US and Japanese contractual consciousness. As the project unfolded, many unexpected technical complications related to the
retrofit caused extra costs and the final price ended up at US $62.9 (excluding the
Japanese contractor�s fee). As costs escalated, the Japanese firm continued to submit
budget revisions on a monthly basis to the owner in the form of a cost report. However,
they did not submit a formal change order to request an increase in the contract amount.
We didn�t think to submit a changing order. The owner knew the cost was rising
because we were submitting the cost reports and [even though they were receiving them],
they didn�t say anything. So, we thought it was OK to keep working. We were focused on
doing a highly professional job � it was a difficult project.
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Eventually the project was completed and the Japanese firm submitted the final
invoice to the owner to request payment. But the owner argued that they did not owe any
more than the GMAX price stipulated in the original contract document. A lengthy
negotiation followed and the Japanese firm sought US legal counsel. It was the legal
counsel�s opinion that the Japanese firm should have pressed for a formal change order at
the time they realized the project cost was escalating, and if this had not been granted,
halted all work on the project. Furthermore, in the absence of having submitted formal
change order requests, they determined that the Japanese firm had no basis to file a
lawsuit. In the end, the owner, realizing an honest mistake had been made, agreed to split
the cost over run and awarded the Japanese firm the sum of US $52.8M. However, even
with this extra payment, the Japanese firm ended-up absorbing a US $10.1M charge and
forfeiting their fee on the project.
16 Meeting the Village Chieftain in Cameroon.
In 2002, Engineers Without Frontiers, a not-for-profit organization based in Canada, sent
two engineers to the Cameroon to manage the implementation phase of a project to
provide 12-rural communities with hygiene education, potable drinking water and
latrines. Upon arrival, the Canadian engineers hired local labor and administrative staff to
support the project, and they started latrine construction almost immediately. During the
first few days, the projects encountered a steady and puzzling sequence of problems
including, every night, the disappearance of building materials and tools. It seemed to the
Canadian engineers that the villagers were intentionally sabotaging their progress, and
they were confused by this, because they were in the Cameroon to help, and not hurt, the
locals.
As they got to know the locals better, the engineers learned about local traditions and
customs, about the complicated hereditary and polygamous social structure, and most
importantly, about how to gain the blessing of the village chieftain. But after having
violated local customs, it took some time to re-gain the trust of the people, which
involved many long conversations with trusted villagers who helped them to understand
the taboos and local routines.
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We learned to follow the proper protocol if we wanted our efforts to be effective. First, you need
to know someone on the chieftain�s council. Then you need to get that person to set up an
audience with the chieftain. Then you go meet the chieftain and you have to bring a gift based on
the prestige of the chieftain. It�s a gift giving culture. You have to show that you�re submitting to
his authority. The way that you behave with the king is important. You have to speak to his
majesty with your hands folded in front of your mouth. You have to be spoken to in order to
speak. If we didn�t follow the protocol, we learned the hard way that nothing would work for us. After leaning about the protocols, they made an extra effort to meet with the Chieftain
in each of the 12 villages, and their work was usually approved in just one or two
meetings. As the development project went on, the engineers learned to hold bi-weekly
�audiences� and to give additional gifts to prevent any further mysterious obstacles to
productivity.
17 Traditional Hiring Practices in Malaysia.
A joint-venture (JV) formed by Canadian firms SNC-Lavalin and Bombardier was one of
several international specialty contractors working with local government affiliated
contractors on a US $4B light-rail transit project in Kuala Lumpur, Malaysia. The JV
project team included 60 expatriate managers�primarily Canadian, but also Australian,
British and American�and a direct hire workforce of approximately 600 employees of
Indian, Malay, and Chinese decent.
Historically, the social structure in Malaysia has been very complex. The informant,
an engineer and general superintendent in charge of all field personnel, explained that,
In recent years the balance of power in Malaysia has been divided across these three cultures: the
indigenous Malays control the government, the entrepreneurial Chinese own and manage a large
proportion of private enterprise and complain that they are overtaxed by the Malays, and the
community of Indians perform many of the blue-collar functions and feels marginalized and
oppressed by both groups. This ethnic segregation has led to infighting.
So, rising out of this historical context, there were challenges on the project concerning
practices of hiring and promotion. As the engineer explained,
The standard set by nearly all the contractors was to have a Malay partner or partial
owner with political ties, Chinese managers, and Indian labor to accomplish the work. In
the absence of prior experience in Malaysia, the group of managers decided to stick with
the local tradition and hire Indian labor and Chinese managers. But as the project went
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on, we became uncomfortable with how they felt several Chinese managers were [based
on our Canadian standards] mistreating Indian workers. In reaction, we started to
promote and empower competent Indian laborers into managerial positions to replace the
most abusive Chinese managers.
This decision stimulated more cohesion, respect and control and brought about an
overall boost in efficiency because the Indian managers understood the language and
culture of the Indian workforce. Commenting on this decision, the Canadian manger
explained: All of a sudden you�ve got an Indian manager leading an Indian workforce versus a Chinese
manager leading an Indian workforce. You�ve got one of your own � an Indian guy, who knows
the culture, knows the language, treats them with respect � in charge. All of a sudden you�ve got a
much more efficient workforce.
With this excellent result, many more of the Chinese managers were replaced with Indian
managers. At this same time, several local participants on the project who felt that
Indians were culturally incompetent, were �shaking their heads�, criticizing the Canadian
led JV and saying they �were going to fail�.
This shunning and shaming from managers in other firms made the Canadian
expatriate managers question their decision for many weeks and they had many internal
conversations about what to do in response. The outcome of these talks was a decision to
continue promoting Indians to management positions, even if the local peer group found
it unacceptable. In the words of the superintendent:
We didn�t care if you were white, Indian, Chinese, or Malaysian�as long as you had the skill set
to do the job. And [the Indians] had the skill-set to do it and this commanded much better control,
respect and motivation of the workforce. I�d do it again in a heartbeat!!
In fact, contrary to the criticisms, the Canadian JV�s reputation for promoting Indians
traveled quickly within the Indian community and this attracted many of the highest
caliber Indian people to come over from other companies. On the whole, this practice of
promoting Indian managers to run Indian crews brought increased productivity, success,
and profitability to the firm.
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18 Village Protocols & Project Postponement in the Philippines.
In the late 1990s, a multi-purpose redevelopment project in Northern Luzon was initiated
to increase rice production. One of the project consultants told the story as follows, The project was to divert water from two rivers to irrigate the fields, so that in the dry season it
would be possible to have two rice crops. But the project was done in, what we would call the
Philippine jungle�very high ground, mountainous ground, and there were local tribes that at one
point used to be headhunters. So the locals were not exactly friendly to begin with�although
supposedly they hadn�t been headhunters for a while� It was the Philippine government that was
the major developer; it was a US company providing a lot of the funding; and a Korean contractor
who was doing most of the construction. And the local tribe was called the Bugalots.
When, the project was initiated, no one consulted with the local Bugalot tribe�s
people, and as a consequence many problems erupted. In the informant�s own words,
When [the contractor] first started trying to cut the access roads, to get to the main part of the site,
where they could actually do the construction, they would come back to work in the morning and
find that their access roads had been blockaded. They would be blocked with heavy trees that were
very difficult to move, or the road would be torn up, or made impassable with large holes or digs,
or sometimes they would do human blockades� It would take a long time, to stop work, and re-
do the [access road], and get it all back together.
The sabotage to the access road and project delays continued for at least six months, and
according to the informant, all this time, the Korean contractor on the site was,
�portraying a very negative picture of the locals, and basically saying, �They are the problem.�
It�s not like they were trying to hide the problem. They were basically saying, there is going to be
no solution. And this is when the US financier came in, and said, �I just don�t think it is that
difficult.�
Eventually, as the informant remembered, it was the US financier who decided to send
a representative in to investigate. As the US consultant recalled,
Finally it was actually the American company that [realized the locals were unhappy], and they
indicated that they believed that a meeting with the locals was needed, to find out what the locals
wanted. And they would have expected that the Korean contractor would have done this, because the
contractor, of course, is responsible for the construction�to be on time, and on schedule. But the
American company takes great pride in trying to work with local people, and providing private funding
for infrastructure, and that type of thing. And so they actually were the ones who went in, with their
project manager, to set-up meetings� The manager they sent, he was a gentleman that had worked on
their projects all over the world, so he was quite familiar with different cultures, and people, and
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behaviors. What was interesting, while the Koreans didn�t care for his behavior�he was kind of a
cowboy in a way�the locals loved him, because he cared about them.
This whole process went on for several weeks. After several �town hall meetings�, the
US manager learned that the local tribes were angered and annoyed by the fact that they
had not been consulted about the project, as customarily would be the case in their
society, before a project was commenced. The informant recalled that,
They [had] town hall meetings, where they would come in, and meet with the head of the tribe, the
chief, and sit down and have discussions. And what they were able to do, is they were able to
negotiate, and they were able to use some of the local men for construction, and it became a
partnership with the local people. And they learned that the locals needed a schoolhouse. And all
of a sudden the roadblocks went away, and the people were happy�
This whole process involved a number of senior executives and managers within the
US financier�s organization, as noted by the informant,
This definitely was a senior executive level project. I would say that the gentlemen they sent in
was a very senior person, I don�t think he was an executive, but certainly had been with [this firm]
for many, many years. He was I believe, their only onsite rep, and certainly on their A team. And I
know this was problem was a subject of many meetings back at headquarters, and discussed quite
frequently. Obviously there were other problems, particularly the termination of the Korean
contractor for lack of performance, and another contractor hired to finish the project. So it went
through the woes of any typical international project that we see all the time.
After the initial �blockages� were resolved, the informant acknowledged that the
relationship with the locals started to improve, and in the longer-term this relationship
continued to grow stronger,
After the first few weeks it took to solve the main problem, they continued to keep them involved
throughout the remainder of the project. In the end, there were continual meetings�[for example],
to be [certain] there were no further concerns, to announce how things were progressing, or to give
them a status of the project.
The final result was that the relationship with the local community was significantly
improved, and in the and, according to the informant, �the project was very sustainable, and
there was no inequity done at all.�
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19 Customary Building Material��Woodchip cement sideboard��in Japan.
In 2000, the Seabees, an elite force of sea-faring engineers within the US Navy, were
planning to construct a softball diamond and a two-story concession building next to
a US Navy base in Japan. A Japanese engineering group had prepared the design
documents and specifications for the project. Before construction began, the Seabee
officer who was to manage the construction was reviewing the drawings from her US
home office when she noticed an unfamiliar and very expensive material specified for
wall construction � woodchip cement sideboard. None of her American engineering
colleagues were familiar with this product or had any idea about the method of
installation. She decided to contact the Japanese engineering group to ask them to
change the material to a less expensive poured-concrete solution. After a month of
slow email and teleconference communication, with multi-person email exchanges
and long waits between replies, she was unable to convince the Japanese engineer to
change the design. The Seabee officer summarized this experience:
We had never heard of wood chip cement sideboard. We wanted to do it our way and they wanted
to do it that way. We didn�t understand why we should use this method, you know concrete is
cheap, we could have just poured it and put on the fake finish afterwards. Communications were
slow and it took about a month to get a good answer, and to be honest, [this didn�t happen] until I
went there on my site visit and actually got to see it, and understand, and I got a catalog-cut, and
took it back to my guys to see.
Not wanting to make early enemies with an engineering team that would be an
important participant on the project, she finally agreed to use the new product, even
though it seemed more expensive. The Seabee officer explained:
It turns out, it�s just the way they do construction there. Their emails basically said, �Do it this
way because this is how we do it in Japan.� There were a lot of reasons that they wanted to use
this sideboard. And that�s fine; we were there to give them that finished product that they were
specifying. They had a process that worked really well for them and they didn�t want to change it.
Much later, during construction, when the material arrived on site, the Seabees crew
was unclear on the proper method of installation. As the Seabee officer recalled:
There was a felt paper that came with it, and a glue, and an instruction book about 20 pages thick
all in Japanese. So we had a Japanese contractor come out for two days and train our crew.
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After some initial rework, partly due to the unfamiliar product, and partly due to the low
level of experience of the Seabee work crew, the job was completed to the satisfaction of
the Japanese engineers.
20 Contract Enforcement in Spain.
In the 1990s, a US real estate developer was attracted to invest in a new high-rise office
building development in Spain. An agreement was reached with a Spanish sub-contractor
to manage all of the sub-surface excavation, earthmoving, and foundation construction.
To seal the agreement, the US developer had the Spanish sub-contractor review, approve,
and then sign a �standard contract form� for foundation work, a contract form that had
served the US firm well, and had been iteratively refined over decades of project
development work in the United States. Most importantly, the contract form included a
specific clause making the sub-contractor responsible for all adverse and unexpected
ground-conditions. The sub-contractor signed the contract, willingly, without any
objection to this clause, which must have appeared to be very strongly worded in favor of
the US side.
The project went well for several months. But then, without warning, the temporary
shoring structures that had been constructed to buttress and strengthen the walls of the
excavation collapsed. As the walls of the excavation caved inwards, the temporary
structures, formwork, and foundations were buried or destroyed.
After the unexpected and sudden failure, the sub-contractor refused to continue work.
Estimates pegged repair of this failure at tens of thousands of dollars. The sub-contractor
told the US developer that they would only resume work after the walls of the excavation
had been stabilized and the damages repaired.
Not feeling that it was their responsibility to cover the damages, the US developer
went back to the contract that had been signed. They met with the Spanish sub-contractor
to remind them that by signing this contract, they had assumed absolute responsibility for
unexpected site conditions, including the very sort of failure that had occurred.
Additionally, the US developer tried to threaten, stating that they would file a lawsuit
unless the sub-contractor returned to site, repaired the damages, and resumed their work.
But the threats were not successful. The sub-contractor remained defiant and refused to
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return to work. With the parties at an impasse and the project delayed, the US developer
sought advice from a respected Spanish lawyer who specialized in construction claims.
After hearing the story, the legal counsel concluded, �no judge in Spain would enforce
such a ridiculously one-sided contract�. So, with the outcome of a lawsuit looking very
unfavorable, the US developer completed the restabilization work at their own expense,
in order to keep the project on schedule, by hiring a second local subcontractor. Only
after the restabilization work was complete did the Spanish sub-contractor finally return
to the site to resume foundation construction.
21 Japanese �Tabi Shoes� Clash with US Safety Regulation.
In 1999, a US military unit was managing a building construction project on a US
military base in Japan. A few weeks into the project, a US superintendent noticed that
the workers employed by the Japanese scaffolding contractor were not wearing the
necessary steel-toed safety boots. Instead, they were wearing, as the superintendent
described, �thick socks with a rubber sole, and a single split forming two big toes, called
tabi shoes in Japanese.� According to US military contract requirements, all contractors
on US military bases are required to abide by standard US military safety regulations,
which are specified in the Army Corp of Engineer�s Manual. When asked to describe
how this incident unfolded, the US superintendent recalled: So, I went out and told them, �this is unacceptable, you�re on an American job, you agreed to
conform to our regulations, and you need to wear steel-toed boots.� So, the next day, I come back,
and yeah the construction manager has got steel-toed boots on, but the construction workers don�t
have them. So I say, �No, the idea is everybody needs to have these steel-toed boots on.� So
finally the Japanese manager said, �they don�t make these boots in Japan.�
The US manager was not sure if she should believe this comment about steel-toed
boots not being available in Japan, so she asked the Japanese building inspector, who
confirmed that �yes, they do make steel-toed boots in Japan.� The next day, she called a
meeting with the Japanese manager to issue a letter of non-compliance and to show him a
copy of the particular section of the safety manual that by contract, he had agreed to
follow. She also showed him a catalog cut of several pairs of steel-toed boots that she had
obtained from a local shoe store. Finally, after resisting for several weeks, the entire
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Japanese scaffold crew reported to work wearing new low-cut, light-weight sneakers, but
with the necessary steel-toes. The US manager noted:
According to our rules [the sneakers] were acceptable! So they managed to find a way around the
rule. I guess especially scaffold workers really enjoy working with those tabi shoes, because they
say, they are able to feel with their feet better. They do well with these shoes, but it�s just not
according to our regulation because we find it unsafe. It was interesting to me how at first they
pretended to conform to the rule and then they found a way around it. This solution provided a satisfactory tradeoff between the safety regulation and the
comfort of the work crew who preferred to wear the lighter, thin-soled footwear. In the
end, this process of going to site, researching shoe stores, and writing letters cost the US
superintendent a total of two workdays of unplanned coordination effort. Presumably, it
cost the Japanese superintendent a similar delay, in trying to interpret and dodge the
regulation. It also caused strain and anxiety in the relationship between the US and
Japanese parties.
22 �Memoranda of understanding� in Vietnam (without the understanding).
In the early 1990�s, the United States re-established diplomatic relations with Vietnam,
and in just a few years, many US funding institutions sent foreign agents to Vietnam to
explore investment options and possibilities. The informant who told this story had been
working for one of these prospective US investors, and remembered that, This was right before Vietnam re-opened the relationship with the US. Vietnam was under the
communist regime, and the US did [had not had] an embassy in Vietnam [since] the war. So in the
early 1990s, Vietnam was in this mode of trying to open their doors and revitalize their public
infrastructure. So right before the normalization, the Vietnamese government invited a US
consortium to come and look at improving the three major airports in the country�North Hanoi,
Danang, and Saigon�to improve the airport infrastructure. They were looking for a consortium to
fund, design, build�almost like a BOT type of deal. So they invited a consortium from several
countries�from the UK, Japan, France, and I was part of the US consortium. By the time we met,
these other countries had already been through� But [the Vietnamese officials] told us we were
the favorite. By that time, they [were eager] to restart the normalization process with the US, so
they really favored the US company� The Vietnamese really welcomed the US companies
coming in, and we were interested in the large market potential�a population of 70 million, and a
rich natural resource base� So we spent enormous amounts of time. They indicated to us that
Japanese had provided very favorable terms�a loan of almost 0%. But they had a condition�
76
they didn�t want any military operation in the airports that they fund. So that was the reason the
Japanese didn�t work out. After some of these initial meetings with other countries, we spent our
own money to prepare a detailed feasibility report� We actually went through the whole
feasibility study process. But from there, we quickly learned that Vietnam�s legal system was still
quite primitive, and that it was lacking a system of contracts and contract enforcement.
So instead of preparing contractual agreements to finalize negotiations and investment
arrangements, the US firm drafted and signed what was called an �exclusive
memorandum of understanding (MOU)�, and returned home to the US, under the
assumption that these memoranda had sealed the arrangements of the various investments
that had been discussed. But this was not the end of the story. Through a local agent, the
US firm learned that the Vietnamese officials had signed duplicate versions of these
supposedly exclusive MOUs with other consortia from the other countries. This eroded
trust, and as the US informant recalled, We had an agent�a lobbyist�in Hanoi. And he was the one that found out that there were
similar MOUs signed. There were Vietnamese, and English MOUs signed side by side, and
there were translations. I think at first we were surprised, and we even laughed. We all knew
when we went in to this market that this was a high-risk endeavor. But the companies we had
involved were very good, and there were some altruistic motivations as well, [to accelerate the
normalization]. So, we went in good faith, and we did a lot of pro bono work. But subsequent
to that we learned from various sources that other consortia had had the same experience, with
these [allegedly] �exclusive� MOUs.
The US agents were not immediately clear on how to interpret the duplicate MOUs on
the part of the Vietnamese government agents. As the informant explained,
We did some investigative work to salvage the project, and to question the rumors. We made two
or three trips, over a period of a year, with about 7 or 8 senior VPs, partners from law firms, and
executives. We met the Minister of the Civil Aviation Authority, the top guy, and the second time
we met a Vice Premier. So we really met at the top level, and they gave us a major reception,
because we were one of the first consortiums to return [to their country]. We realized that things
were loose there, and we laughed about it. Our agent did tell us that despite [the duplicate MOUs],
they were interested in working with a US company. We believed that even if they had signed the
MOUs with all of these other countries, they wanted to work with us. As far as they were
concerned, because they did not have any concept of exclusivity, they had not done anything
wrong.
Of course, the expenses accrued quickly�hundreds of thousands of dollars�during this
project shaping process. The informant described that,
77
Travel expense was enormous. Several people making trips. And not just time itself, but several
senior people tied up. And we also invested a lot of money developing this feasibility report on
our own nickel. The upside that we felt, is that when you go into a country and you are the first in
line, the upside in the long run is substantial. But, while we were incurring all of these costs, the
risk and uncertainty did not decrease. And it might have even increased slightly. And we couldn�t
determine if their [MOU] commitment was sincere. So all of a sudden we started to identify
additional risk that we [hadn�t seen] before... And at the same time we were spending money, and
this risk was not decreasing.
Not sure how to proceed, and not wanting to shift any more resources to the project,
eventually they decided to write-down the initial investment, exit Vietnam, terminate the
relationship, and mitigate further costs. In the end, the exclusive MOUs were never
honored, and the proposed projects never completed. As the informant remembered,
What could have been a very interesting period of investment and development in Vietnam ended
completely for lack of a Vietnamese system of contracts and enforcement, and maybe also for lack
of a US familiarity about how to conduct business in this new environment. Ultimately, we backed
away gracefully, maintained a low profile, assigned someone to be a contact person, and let [the
relationship] die a slow death.
23 Canadian Regulations Catch US Firm Off-guard.
An informant from a large US multi-national firm specializing in the providing facilities
for the production and refinement of chemical products told the following story: We built a plant in Winnipeg, Canada, and we did not realize that we needed to have a certified
professional engineer from Manitoba to stamp the drawings etc. etc., and that�s according to the
provincial law of the land.
This misjudgment of the local legal requirements was based on an assumption that
Manitoba would be similar to other provinces in Canada. As the informant remembered, We had built plants in Ontario and Quebec, and assumed it would be the same in Manitoba. And
that is probably a naïve US assumption, because provinces in Canada are probably a little more
independent than states are in the US.
This misinterpretation was recognized early in the design process, and was obvious to correct�
�sort of a no brainer��because it was a matter of compliance with a formal legal requirement. As
the informant recalled, As we got into the design process, the project manager at the time, he understood, as we were
executing the project, he realized that we had not understood the legal requirements�to comply
78
with provincial law. We weren�t that far into the design process, maybe a few weeks, when we
realized our mistake, but we had already fixed a price with the customer.
Thus, because the contract with the client, the City of Winnipeg, had been fixed based on
inaccurate assumptions, the overall impact of having misjudged the legal requirement was an
irrecoverable loss in the value of the transaction. As the informant noted, In this long-term contract business, we build and own a plant, and supply chemicals to a customer.
And once you set the price, it is very hard to change. It became pretty apparent once we made a
mistake, but it was too late to re-price the deal� I don�t remember how much this cost, but it was
less than 10% of the total cost� We just ate it, because it was not large enough to be a problem.
In addition to the financial loss, there was a time delay to the project of several weeks,
during which time a local Canadian firm was identified, and the necessary certification
process was carried out to completion.
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II
Measuring Relational Friction, Interorganizational Conflict
and Unforeseen Transaction Costs on Global Projects We cannot confine our analysis to what happens within a single firm. This is what I said in a lecture published in Lives of the Laureates: �The costs of coordination within a firm
and the level of transaction costs that it faces are affected by its ability to purchase inputs from other firms, and their ability to supply these inputs depends in part on their costs of coordination and the level of transaction costs that they face which are similarly affected by what these are in still other firms. What we are dealing with is a complex interrelated structure.� Add to this the influence of the laws, of the social system, and of the culture, [�] and you have a complicated set of interrelationships the nature of which will take
much dedicated work over a long period to discover. �Ronald Coase, 1998: 73
ABSTRACT
This quantitative hypothesis-testing study responds to three research questions: How
salient are unforeseen transaction costs for firms that enter global projects in unfamiliar
institutional environments? How much do these costs increase as relations with local
entities become more interdependent and institutionally diverse? And how much are
these costs lessened when an entrant has global experience, local experience, and
recurring relations with local entities? The data concerning relational attributes and
unforeseen transaction costs was collected by structured-interview with managers and
engineers employed by international contractors and consultants on nine large global
infrastructure projects in five countries in Asia. The data collection instrument offers a
fresh, replicable approach to collecting empirical data for transaction cost analysis. Five
types of dyadic entrant-to-host entity relations were examined: formal regulatory
relations, formal market relations, formal client relations, informal project relations and
informal community relations. The empirical findings confirm the salience of relational
friction, conflict and unforeseen transaction costs for foreign entrants, which extends the
transaction cost view of foreign market entry and re-confirms the value of an
embeddedness perspective in international business and economics.
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INTRODUCTION
Transaction costs are the costs of formulating13 and enforcing agreements (North, 1990)
and arise in the form of direct costs or opportunity costs (Malone, 1987; Masten, Meehan,
& Snyder, 1991). Across countries, transaction costs vary significantly; typically in
relation to variations in institutional and technological development (North, 1990). Even
within countries, researchers have noted tremendous variation in the costs of basic
transactions such as transferring the ownership of an apartment or connecting a telephone
(Benham & Benham, 2001). Generally, as Western societies have advanced, researchers
have identified a steady decline in the cost of individual transactions, while
simultaneously observing a relative increase in the transaction sector of the overall
economy (Wallis & North, 1986).
While many authors have emphasized the link between institutions and transaction
costs, there has been little investigation of firms transacting in alien institutional
environments where they are unfamiliar with the locally-defined matrix of institutions
and transaction costs. In Chapter I, case-study evidence indicated that in dyadic
relationships between foreign entrant firms and local host entities, differences in
regulative, normative, and cultural-cognitive institutions led to misjudgments,
misunderstandings, and conflicts and many unforeseen transaction costs (a concept that
emerged during the course of this earlier study). These costs, which varied from less than
1% to more than 100% of expected project costs, were sorted into four main categories:
money costs, time costs, reputation damage, and relationship damage. While the case-
study evidence strongly suggests the view that unforeseen transaction costs can have a
significant negative impact on new entrant firms, the small sample size was insufficient
to conclude that these costs were in fact significant in the average dyadic relation
between entrant and host entities.
The primary objective of the present chapter is to deepen this investigation; to verify
the statistical significance of unforeseen transaction costs relative to overall project costs.
Verification is accomplished by measuring unforeseen transaction costs in a sample of
dyadic relations on active global infrastructure projects in Asia. The investigation is
13 One major component of the cost of formulating agreements is the cost of measuring the valuable attributes of what is to be exchanged (North, 1990).
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organized around three central research questions: How salient are unforeseen transaction
costs for firms that enter global projects in unfamiliar institutional environments? How
much do these costs increase as relations with local entities become more interdependent
and institutionally diverse? And how much are these costs lessened when an entrant has
global experience, local experience, and recurring relations with local entities?
The evidence presented here confirms that in both formal and informal dyadic
relations with local host entities, foreign entrants experience relational friction and
conflict, which perpetuates unforeseen transaction costs. While unforeseen transaction
costs may arise from a number of differing sources, the focus of this article is on those
that arise from diverging institutional logics and resulting conflicts (Scott, 1995).
Relational friction and conflict are aggravated by interdependence and institutional
differences and assuaged by managers with local country experience and through
recurring relations. The main scientific contribution is to advance the transaction cost
perspective of foreign market entry (eg. Gatignon and Anderson, 1988; Klein et al., 1990;
Hennart, 1991; Erramilli and Rao, 1993; Delios and Beamish, 1999; Brouthers &
Brouthers, 2003), by exposing unforeseen transaction costs as an understudied, yet salient
class of transaction costs, and by identifying crucial antecedents and moderators.
THEORY & HYPOTHESES
Large Public Infrastructure Projects
Large public infrastructure projects�transportation systems, subways, water treatment
facilities, and airports�provide a unique natural experiment for the study of intercultural
interactions among international firms and local host entities.
There have been many fruitful investigations of large engineering projects. This
corpus of research includes studies of temporary organizations that undergo simultaneous
structuring and operations (eg. Thompson, 1967); the quasi-firm and the organization of
the construction industry (eg. Eccles, 1981); mega-projects and the management of
uncertainty (eg. Stinchcombe and Heimer, 1985); construction projects as hierarchies of
contracts (eg. Stinchcombe, 1990); and projects as high-stakes real-options games (eg.
Miller & Lessard, 2000). Despite these many advances, there has been little if any
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emphasis on the unforeseen transaction costs that arise due to intercultural institutional
conflicts between project participants (for an exception, see Khagram, 2004).
Conflict Escalation and Unforeseen Transaction Costs
In Chapter I, we analyzed 23 ‘‘critical incident’’ cases where an entrant firm
reported unforeseen transaction costs. In each case, the costs were triggered when
an entrant firm failed to fully comprehend the significance of local beliefs, norms,
or rules, which in turn led to misunderstandings and conflicts with local entities.
Conflict has been described as an "overt behavior arising out of a process in which
one unit seeks the advancement of its own interests in its relationship with the
others" (Schmidt & Kochan, 1972: 363). Conflict escalation theory offers a strong
theoretical lens to analyze the intensification of friction and conflict in human
interactions.
Pondy (1967) describes a model of conflict escalation involving four stages: (1)
latent conflict where conditions for conflict exist in a relationship, (2) perceived
conflict where parties are aware of conflict conditions but not affected by them, (3)
felt conflict where participants are aware of conflict conditions and feel anxious,
tense, or bothered, and (4) manifest conflict which involves overtly conflicting
behaviors. While many latent conflicts do develop into manifest conflicts, through
good management, many potentially hazardous conflicts are also avoided (Pondy,
1967).
Latent conflict arises from at least three underlying sources that have been defined in
the literature: consensus conflict, resource conflict, and goal conflict. Consensus conflict
occurs when an actor�s opinions, ideas, or beliefs are incompatible with those of another
(Aubert, 1962; Thompson & Hastie, 1990). Resource conflict exists when one person
perceives another as desiring the same scarce resources (Aubert, 1962; Druckman &
Zechmeister, 1973). Goal conflict arises when an actor�s objectives, plans, or goals are
incongruent with those of another (Schmidt & Kochan, 1972; Gray & Starke, 1988).
Rubin et al. (1994) define escalation as ‘‘an increase in the intensity of a conflict
as a whole.’’ In a review of the escalation literature Friedman & Currall (2003)
note that this process involves a perceived divergence of interests, mild actions to
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achieve goals, more aggressive actions such as complaints or demands, and in some
cases, contentious tactics such as harassment and threats that further escalate the
conflict in a vicious cycle. They explain that ‘‘more aggressive tactics may be used
until the desired changes are achieved or the cost of the effort outweighs the
expected benefit.’’ This process of escalation can also involve changes in
perceptions and attitudes, assignment of blame, misinterpretation of ambiguous
actions, reduced empathy, deindividuation, retaliation, and avoidance (Pruitt et al.,
1997). Overall, as conflict escalates, cooperation and trust tend to decrease (Sengir
et al., 2004).
Many factors influence the escalation of conflicts including a lack of existing
social ties, aggressive actions, and the psychological and emotional state of each
party (Rubin et. al., 1994). Other factors include unpleasant behavior (Burgoon et
al., 1995), perceptual biases that make people see themselves as different from the
other (Davidson & Friedman, 1998), perceptual biases that make people see only
evidence that justifies their view of the other (Hastorf & Cantril, 1954), and
‘‘reciprocated contentious communications’’ (Brett et al., 1998).
The case-study evidence in Chapter I proves that conflict causes many
unforeseen transaction costs, including time costs, money costs, reputational
damage, and relational damage. This view fits closely with theoretical arguments that
transaction costs and trust are inversely correlated (Chiles and McMackin, 1996;
Williamson, 1993; Uzzi, 1997).
Based on this review of the escalation of conflicts, which grow from latent,
perceived and felt stages to more overt disputes and stand-offs (Pondy, 1967), and
based on the recognition that conflict in dyadic relations leads to unforeseen
transaction costs, we posit two linked hypotheses:
H1a: The greater the level of relational friction14 in a dyadic relation between an
entrant and a host entity, the greater the conflict15 that erupts.
14 In the rest of this chapter, we adopt the term relational friction in place of Pondy�s term felt conflict. 15 In the rest of this chapter, we adopt the term conflict in place of Pondy’s term manifest conflict.
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H1b: The greater the level of conflict in a dyadic relation between an entrant and
a host entity, the greater the unforeseen transaction costs.
Institutional Difference, Conflict Escalation, and Unforeseen Transaction Costs
Institutions are the cultural-cognitive, normative, and regulative elements that support,
guide, and constrain human behavior and thereby provide stability to social life (Scott,
2001). Cultural-cognitive elements include the �operating mechanisms of the mind
(North, 2005)��the scripts, mental models, cognitive templates, typifications, categories,
and schemas that provide tacit and taken-for-granted meaning in everyday life (Scott,
2001). Normative elements include informal values, norms, protocols, taboos, customs,
and conventions that add an obligatory dimension to social and economic behavior
(North, 1990; Scott, 2001). Regulative elements include formal rules, property rights,
constitutions, regulations, and requirements that are enforced through official sanctions
and incentives (North, 1990; Scott, 2001). Within a single human society, full-fledged
institutional systems consist of a tangle of these elements which evolve endogenously
over time (Greif, 1994).
Institutional differences have been conceptualized in terms of �institutional distance�
(Kostova, 1999; Kostova & Zaheer, 1999; Xu & Shenkar, 2002), a concept that widens
the prior-defined notion of cultural distance, which was operationalized as differences in
national values (Kogut & Singh, 1988; Hofstede, 1984). The main improvement of the
institutional difference perspective, is the recognition that national value differences
represent just one cell in the broader matrix of cognitive-cultural, normative, and
regulative differences, which can operate variously at individual, group, organizational,
organizational-field, national, and supra-national levels (Scott, 2001). For example, an
institutional distance perspective makes it possible to represent many national-level
variations such as differences in property rights (De Soto, 2000), the division of labor
(Taylor, 2005), and industrial organization (Hall & Soskice, 2001), which could not
easily be represented in a narrower cultural distance perspective.
Institutional differences have the potential to complicate relations, interactions, and
transactions between intercultural actors. For example, authors of the GLOBE study
(Javidan & House, 2002) propose that, �From a practical point of view, the complexity of
85
cross-national negotiations, mergers, assignments, and leadership probably depends on
the extent of the difference between the two cultures.� One specific way in which
institutional differences complicate intercultural relations is through increased behavioral
uncertainty. For example, an entrant who is unfamiliar with local beliefs, norms, and
rules of the game has only a limited ability to predict, assess, and interpret the actions of
host actors. But as that entrant learns more about the wider institutional context that has
shaped the identities, worldviews, and interests of host actors, then their behavior patterns
probably become less confusing and more knowable. Work in transaction cost analysis
suggests that behavioral uncertainty increases the costs of monitoring transactions (Heide
& John, 1990; Rindfleisch & Heide, 1997).
Past research shows a number of other ways in which institutional differences can
possibly complicate intercultural relations. Differences in institutional perceptions can
cause communication difficulties (Browne, Rugman & Verbeke, 1989; Park & Ungson,
1997), dissatisfaction (Lasserre, 1999) conflict (Sim & Ali, 2000), and uncertain
situations in conflict resolution (Lin & Germain, 1998). In contrast, institutional
similarities can facilitate and enhance the ability of partners to communicate, cooperate,
develop trust, and integrate knowledge (Killing, 1983). From a conflict escalation
perspective, institutional differences represent latent consensus conflicts (Pondy, 1967).
All of these factors probably contribute to increased transaction costs (Shane, 1993). The
case studies in Chapter I confirm that institutional differences can lead to conflicts and an
assortment of unforeseen costs including time costs, money costs, relationship damage,
and reputation damage.
Therefore, based on the case evidence, the theoretical arguments above, and the
earlier discussion of conflict escalation dynamics, we propose three related hypotheses:
H2: The greater the perceived institutional difference in a dyadic relation between
an entrant and a host entity, (a) the greater the relational friction; (b) the greater
the conflict; and (c) the greater the unforeseen transaction costs.
Interdependence, Conflict Escalation, and Unforeseen Transaction Costs
Several varieties of interdependence have been defined in organization research,
including workflow/task interdependence (Thompson, 1967; Van de Ven, Delbecq &
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Koening, 1976), role interdependence (Thomas, 1957; Pennings, 1974), outcome
interdependence (Wageman, 1995) and goal interdependence (Tjosvold et al., 1991). This
study investigates yet another variety, resource interdependence, which occurs when
actors recognize that they have the abilities and resources to affect each other's outcomes
(Thibaut & Kelley, 1969; Deutsch, 1973; Pfeffer & Salanick, 1978; Lawler & Yoon,
1993; 1996). Resource interdependence measures the extent that actors feel dependent on
one another (Tjosvold et al., 2001).
The concept of resource interdependence from organization research, bears an
important resemblance to the notion of transaction specificity, the second of three
transactional dimensions defined by Williamson (1979). Although there are many
differences, both concepts describe the degree to which one actors success is �tied to� a
relationship with another actor. The main difference is that resource interdependence has
traditionally been defined within the hierarchy, between one work unit and another, while
transaction specificity has generally been defined in the market, between a buyer and a
seller.
Both resource interdependence and transaction specificity generate the condition of
close interpersonal coordination, interaction, and negotiation that can lead to relational
friction and conflict. Several researchers in organization research have suggested that
resource interdependencies lead to goal and consensus conflicts that are positively
associated with conflict escalation (De Dreu &Van de Vliert, 1997; Tjosvold et. al.,
2003). Similarly, researchers in economics have found that transaction specificity causes
unilateral and bilateral �hold-ups� between buyers and sellers (Williamson, 1983;
Joskow, 1988; Klein 1988). The term �hold-up� implies a goal or resource conflict and a
potential scenario of conflict escalation. In order to formalize the conflict escalation
dynamics that arise in interdependent interactions, and to account for the bi-directional
nature of dependencies, we propose two clusters of three related hypotheses:
H3: The greater an entrant�s level of dependence on a host entity, (a) the greater
the relational friction; (b) the greater the conflict; and (c) the greater the
unforeseen transaction costs.
87
H4: The greater a host entity�s level of dependence on an entrant, (a) the greater
the relational friction; (b) the greater the conflict; and (c) the greater the
unforeseen transaction costs.
Communication Volume, Conflict Escalation, and Unforeseen Transaction Costs
Communication and information sharing are fundamental to most business transactions
(Kapp & Barnett, 1983; Mohr & Nevin, 1990). And different types of transactions require
different levels of inter-firm communication (Rinehart et al., 2004). For example, while
only a few communications are necessary to buy a new home from a home builder,
several hundred communications may be necessary to hire a new builder to construct a
custom home. Communication volume is defined as the total number of interactions
between two actors across a relational or transactional interface. This concept is similar in
many respects to the concepts information exchange and communication frequency,
which are positively correlated to relational longevity (Hallén, Johanson, & Seyed-
Mohamed 1991; Cannon & Homburg, 2001).
There are many benefits that come with increased interaction, such as shared
experiences, mutual understandings, and reduced bargaining asymmetries (Tsang,
Nguyen, Erramilli, 2004; Lin & Germain, 1998), and it is likely that these benefits
increase collaboration and reduce the likelihood of behaviors such as steamrolling and
politicking (Pfeffer, 1981; 1992). But, it is also likely that larger numbers of
communications increase the raw potential for errors and costs (Thomsen, Levitt & Nass,
2005). Larger numbers of communications suggest a more complex task, more emergent
uncertainty, and thus the rise in unexpected contingencies (Galbraith, 1973). Therefore,
we hypothesize that:
H5: Sheer communication volume between an entrant and a host entity will not
impact (a) the level of relational friction; (b) or the level of conflict; but (c) it will
impact the level of unforeseen transaction costs.
Global Experience, Conflict Escalation, and Unforeseen Transaction Costs
Global experience is often associated with the duration, depth, and diversity of exposure
across international markets (Erramilli, 1991). Global experience yields an ability to
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acquire local institutional and business knowledge and to anticipate the costs of
international expansion (Eriksson et al., 1997; Davidson, 1983).
Operating in diverse circumstances has many important benefits (Levitt and March,
1988). One benefit is a broadened base of knowledge, widened mental models, and
expanded repertoires of action (March, 1991; Huber, 1991; Barkema & Vermeulen, 1997;
1998). Others benefits are richer knowledge structures, both of CEOs (Calori, Johnson, &
Sarnin, 1994) and at lower levels within the firm (Walsh, 1995), and stronger technical
capabilities (Cohen & Levinthal, 1989, 1990, 1994). Yet another benefit is the potential
development of an �international dominant logic� shared between managers in the
strategic apex of the firm, which is thought to be a critical antecedent of overall
internationalization performance (Thomas, 2005). Finally, managers with diverse
experiences are more likely to develop many of the relational skills�such as tolerance,
adaptability, active listening, and empathy, (Wills & Barham, 1994)�that are crucial for
collaborating with local staff, partners, and regulators, and that are imperative for
avoiding conflicts (Lin & Germain, 1998).
Therefore, prior studies, albeit implicitly, suggest a link between the international
diversity of managers and their capability to head-off conflicts, maximize collaborative
synergies, and minimize costs in relations with host-country entities. Based on this
observation, and the earlier discussion of conflict escalation dynamics, we draw three
hypotheses:
H6: The greater the diversity of prior global experience of entrant firm managers,
(a) the less the relational friction; (b) the less the conflict; and (c) the less the
unforeseen transaction costs in relations with host-country entities.
Local Experience, Conflict Escalation, and Unforeseen Transaction Costs
Local experience is often associated with the intensity of exposure to factors and forces
that drive local market dynamics (Luo & Peng, 1999), and has been empirically measured
both as the time spent (Barkema & Vermeulen, 1997; Butler, 1995) and the number of
entries (Kogut & Singh, 1989) into a given host market. Local experience yields local
knowledge and an ability to maneuver and transact effectively and efficiently within the
local business and institutional context (Hayek, 1945; Geertz, 1983).
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The view that local experience increases a firm's familiarity with the host country
environment and thereby reduces its liability of foreignness (Li, 1995; Barkema et al.,
1996; Barkema et al., 1997; Mitchell et al., 1994) has been confirmed in a number of
empirical studies. For example, we know that local experience is positively associated
with the performance of MNE subsidiaries (Luo & Peng, 1999), that it increases the
success (and the likelihood) of acquisitions (Barkema et al., 1996; Barkema &
Vermeulen, 1998), and that it positively influences the survival of wholly-owned
subsidiaries (Delios & Beamish, 2001).
This prior evidence suggests that as managers accumulate local knowledge, they are
better informed and prepared to conduct business with local entities in accordance with
generally-accepted norms and practices, and thus the likelihood of misjudgments and
misunderstandings and potential conflict situations are diminished. Based on these prior
findings, and the earlier discussion of conflict escalation dynamics, we propose three
hypotheses:
H7: The greater the intensity of prior local experience of entrant firm managers,
(a) the less the relational friction; (b) the less the conflict; and (c) the less the
unforeseen transaction costs in relations with host-country entities.
Recurring Relations, Conflict Escalation, and Unforeseen Transaction Costs
A third transactional dimension is the degree to which a transaction is one-time,
occasional, or recurrent (Williamson, 1979). As trade relations increase in frequency
between two trade partners, perceptions of opportunism decrease (Parkhe, 1993), trust
rises (McAllister, 1995), and formal legal governance mechanisms become less of a
necessity (Gulati, 1995). The classic example is from Williamson (1979), who recounts a
vignette from the 1800s where a German buyer continued to send anonymous orders to a
British manufacturer, who, based on his recognition of the handwriting, would fill the
orders, despite an ongoing war and a government decree to cease trade relations.
Conceptualizations of transactions in a game theoretic framework (Heide and Miner,
1992; Parkhe, 1993) have confirmed that a relationship�s expected time horizon�the so-
called �shadow of the future,��enhances the evolution of cooperation (Axlerod, 1984).
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Based on this reasoning, and based on the earlier discussion of escalation dynamics, it
seems likely that as relations become more recurrent, relational friction, conflict, and
unforeseen transaction costs decline. More formally,
H8: The greater the duration of prior recurring relations between an entrant and a
host entity, (a) the less the relational friction; (b) the less the conflict; and (c) the
less the unforeseen transaction costs.
Interfaces and Distinctive Characteristics
Within the project management literature, there is a significant body of work on the
linkage between interface management and project success (Morris, 1983; Pavitt & Gibb,
2003; Healy, 1997; Stuckenbruck, 1983; Lock, 1986; Delmon, 2000). Interfaces have
been defined broadly as the formal and informal boundaries and relationships among
people, departments, organizations, or functions (Baker & Baker, 1992), and interface
management has been defined as the management of communication, coordination, and
responsibility across a common boundary between two organizations, phases, or entities
(Wideman, 2002).
Contractors and consultants on global projects manage many interfaces (Miller &
Lessard, 2000). Formal regulatory interfaces include those with various arms and
agencies of government who enforce rules, regulations and requirements such as building
permits, fire inspections, traffic diversion, worksite safety, and the fair treatment of labor
(eg. transport and highways, fire department, police, building department). Informal
project interfaces include dealings with other firms on a project, non-contractual in
nature, that arise by virtue of working side-by-side and sharing limited project resources,
physical workspace, and thus needing to liaise and coordinate physical and phase
dependencies (e.g., foundation, electrical, or elevator subcontractors). Informal
community interfaces include interactions with community groups and stakeholders that
can provide legitimacy to a project (eg. NGOs, school board, shopkeepers guild)
(Flyvberg, Bruzelius, & Rothengatter, 2003).
Perhaps the most widely-recognized type of interface for projects is the formal
transactional interface (Williamson, 1979) with sub-contractors, consultants and vendors
of products and services (e.g. equipment supplier, steel fabricator). According to a study
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by Rinehart et al. (2004) transactional interfaces can be divided into distinct categories�
eg. non-strategic transactions, contractual relations, administered relations, specialty
subcontract relations�which vary along the dimensions of personal character, perceived
dependence, communication frequency, organizational capability, business volume, and
investment.
Building on the findings of Rinehart et al., it is likely that distinct, measurable,
statistically significant differences exist between the varying types of relations managed
by contractors and consultants on global projects. More formally we expect that,
H9: Different types of entrant-local entity relations, i.e. informal community
relations, informal project relations, formal regulatory relations, and formal
transactional relations, exhibit different combinations and levels of the following
attributes: interdependence, perceived institutional difference, communication
volume, relational friction, conflict and unforeseen transaction costs.
DATA & METHODS
A structured-interview approach was employed to gather data on large global
infrastructure projects from expatriate managers and engineers who had been personally
engaged in dyadic relations with local host country entities. The unit of analysis was the
dyadic relation, which is consistent with the early work of Commons (1934) and with
more recent work in transaction cost analysis (eg. Walker & Poppo, 1991).
Sample
Data were examined from 243 dyadic relations, based on descriptions collected from 50
informants employed by 25 unique international firms, on nine large global projects in
five Asian countries.
Table 1a depicts the five Asian countries where the data sites were located. The
countries were selected based on the presence of an on-going infrastructure project, the
availability of a local �champion� to grant project access, and the affordability of airfare.
Table 1b portrays the 25 international firms. They were mainly contractors and
consultants, originating from 11 home countries, with contract packages ranging from
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several hundred thousand to one billion US dollars and scheduled work durations ranging
from two to slightly more than five years (Table 1b).
Table 1c describes the 50 informants (left column) and the 243 reported
relations/interfaces (right column). The informants were mainly managers and engineers,
with roles and responsibilities in project administration, engineering, design and
construction. On average, each informant provided data concerning 4.9 relations. TABLE 1A
Sample Description � Projects
Host Government Type of Project
Pakistan 1 International Airport 1China 3 Metro 2
Thailand 2 Rail (LRT, MRT) 5India 1 Water Treatment 1
Taiwan 2
Total 9 Total 9
TABLE 1B Sample Description - Firms
Japan 6 Systems Contractor 8 < $1Ma 7 < 2 yrs 5UK 5 Project Consultant 6 < $10M 7 < 3 yrs 9
China 3 General Contractor 5 < $100M 6 < 4 yrs 4German 3 Design Sub-Consult. 3 < $1B 5 < 5 yrs 3
US 2 Sub-Contractor 3 $1B + 0 5 yrs + 4Finland 1France 1
Thailand 1Pakistan 1Korea 1India 1
Total 25 Total 25 Total 25 Total 25a All of the contracts in this category were either project consultant or design sub-consultant contracts.
Home Nation Role of Firm Contract Sizea Planned Duration
TABLE 1C Sample Description - Informants & Relations
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Project Executives 8 Formal Relations - Market Entities 105 (eg. project director, vice pres., general mgr) (eg. sub-contractors, vendors)Senior Engineers / Designers / Managers 17 Formal Relations - Regulatory Entities 71 (eg. chief resident engineer, contracts mgr) (eg. police, customs agent, roads authority)Middle Engineers / Designers / Managers 13 Formal Relations - Client 9 (eg. station mgr, M&E coordinator) (host-government)Site Engineers / Managers 12 Informal Relations - Interested Stakeholders 29 (eg. QC engineer, site superintendent) (eg. interest groups, schools, NGOs)
Informal Relations - Other Firms on Project 29 (eg. systems contractors, utilities)
Total 50 Total 243
Informants Relations
Data Collection
Data collection was carried out during a three week period in February, 2005. We visited
the project sites spending one to three days at each location, coordinating and conducting
individual face-to-face interviews. Most interviews lasted from 15 to 60 minutes and
were digitally recorded for subsequent analysis. The interviews focused on the perception
of entrant managers concerning dyadic relations with local entities. The entrant managers
had first-hand knowledge of these relations, which is why they were selected as
informants.
Local champions played a crucial role. Approximately 11 of the informants were
contacted and agreed to act as local champions prior to the site-visits. Not only did they
admit project access and act as informants themselves, but in many cases, they also
helped with coordinating travel plans and logistics, certifying the legitimacy of the
research internally within their organizations, and prearranging interviews with
colleagues and other project participants. One especially supportive champion supplied a
master phone list, cell phone, limousine and chauffer and sent an
email of introduction copied to his entire project organization to solicit their keen and
candid participation as informants.
The interviews followed a highly-visual structured-interview protocol, with five main
stages. First, identifying key managers within the informant�s organization and recording
their global and local experience (Appendix 2); second, mapping out local entities on the
Relationship Map (Appendix 3); third, collecting data on 10 of the 14 response items for
94
each mapped relation (Appendix 4/5); fourth, collecting general demographic and firm-
level data (Appendix 5); and fifth, associating a manager number to each of the mapped
relations and thereby completing the last response items in one step (Appendix 2/3).
The main feature of this approach was a visual aid called a Relationship Map, a
�wheel-and-spokes� style schematic diagram with ovals at the end of the spokes. In stage
two, informants were asked to record in the ovals the formal and informal local entity
relations that they had been involved with personally on the project. Examples of local
entity relations included the Imam of local mosques, a shopkeeper�s guild, a landscape
contractor, a steel fabricator, the Department of Traffic and the Police. In stage three,
informants were asked to provide characteristics of each local entity relation, such as
unforeseen costs that had arisen, level of conflict, and level of interdependence. Most of
the questions were closed-ended, with a six-point Likert scale, and can be found in
Appendix 4. This protocol was piloted and revised several times over a 12 month period
leading up to actual data collection and offered two distinct advantages compared to
traditional survey approaches. First the visual Relationship Map was more effective in
captivating the informant�s attention and second the format shortened the overall duration
of the response task.
There had been a concern during the pilot stage that an informant�s like or dislike for
certain colleagues might bias their responses, especially concerning unforeseen costs. To
combat this possible effect, the sequence of questions was designed so that the task of
attributing individual managers to particular relations was the very last step, completed
only after all other data was secured.
LISREL Analysis
Data were analyzed using the standard LISREL method (eg. Erikkson et al., 1997;
Erikkson & Sharma, 2003; Blomstermo et al., 2004). LISREL is a software package for
carrying out confirmatory factor analysis and for assessing causal relationships among
latent variables using covariance structure analysis (Anderson & Gerbing, 1988; Jöreskog
& Sörbom, 1989; Bollen, 1989). LISREL version 8.72 was used throughout.
The validity of a structural model is verified with a two-step process (Jöreskog &
Sörbom). The first step is the creation of a measurement model, with latent constructs
95
that capture a set of lower-level indicator variables, but without causal relations between
the constructs. The purpose of the measurement model is to test the validity of the
constructs independent of the context of the structural equation model (Anderson and
Gerbing, 1988). Construct validity is tested along two dimensions: convergent validity,
which refers to the homogeneity of latent constructs, and discriminant validity, which
refers to the degree of separation between constructs (Bollen, 1989). To assess
convergent and discriminant validity, the authors of LISREL recommend an investigation
of factor loadings, t values and R2 values (Jöreskog & Sörbom, 1993: 5, 9, 121).
The second step is the creation of the structural model with causal relations between
latent variables. The purpose of the structural model is to test the strength and
significance of the causal relations between latent constructs and the overall fit of the
model to the data, which is called a test of nomological validity (Bollen, 1989). The test
of the overall model accounts both for direct and indirect effects, including counteracting
TABLE 2 The Constructs and Their Indicators
96
IDNo.
Constructs IndicatorsScale Typea
Factor loading
t -value R2 value
1 Relational Friction Tension/ anxiety/ stress in relations with this entity (REF) C 1 n.a. 0.84
2 ConflictConflict/ disputes/ hot discussions in relations with this
entity (CON) C 1 n.a. 0.81
3 Relative Unf-oreseen Delay
Days of unforeseen delay this entity has caused our organization (RUD) O 1 n.a. 0.800
4Institutional Difference
It has been difficult at times to understand this entity�s regulations/ rules/ requirements (FOR) C 0.72 5.37 0.52
It has been difficult at times to understand this entity�s expectations/ assumptions/ logics (INF) C 0.87 6.83 0.75
5 They Depend on You
This entity's success dependsb on relations with our firm (TOY)
C 1 n.a. 1
6 You Depend on Them
Our firm's success dependsc on relations with this entity (YOT)
C 1 n.a. 0.74
7 Communication Volume
# of meetings/ phone calls/ face-to-face conversations with this entity (COV) O 1 n.a. 0.80
8 Global Experience
Global experience of the manager(s) in charge of this relation - in number of countries worked (GEC) O 0.81 9.19 0.66
Global experience of the manager(s) in charge of this relation - in years (GEY) O 0.81 8.06 0.66
9Local
ExperienceLocal experience of the manager(s) in charge of this
relation - in number of projects (LEP) O 0.86 16.13 0.79
Local experience of the manager(s) in charge of this relation - in number of years (LEY) O 1.01 15.93 0.89
10 Recurring Relations
Prior relations between your firm and this entity - in number of projects (RRP)
O 0.86 6.66 0.74
Prior relations between your firm and this entity - in number of years (RRY) O 0.90 6.76 0.82
a C = Closed 6 point scale from -3 to +3, Strongly Disagree to Strongly Agree / O = Open scaleb This entity "depends "on our firm if they need knowledge/ information/ resources/ authorization/ legitimation from our firm, that only we can provide.c Our firm "depends "on this entity if we need knowledge/ information/ resources/ authorization/ legitimation from this entity, that only they can provide.
and reinforcing effects between variables. To assess nomological validity, the authors of
LISREL recommend an investigation of the chi-square value, which measures distance
between data and model, and a degrees of freedom probability value, which is a test of a
nonsignificant distance between data and model (Jöreskog & Sörbom, 1993). An
unresolved debate among LISREL modelers (eg. Eriksson & Sharma, 2003) suggests that
several variables may be chosen for assessment of nomological validity (Bollen & Long,
1993), but as Jöreskog & Sörbom (1993) point out, all are functions of the chi-square
97
statistic. Eriksson and Sharma (2003) note that three commonly used measures are the
GFI, which checks for sample size effects and should be above .90; (2) the RMSEA,
which measures population discrepancy per degree of freedom and should be below .08;
and (3) the CFI, which checks for non-normal distributions and should exceed .90
(Murtha et al., 1998; Bollen, 1989; Jöreskog & Sörbom, 1993).
Constructs and Validity
Table 1 summarizes the ten latent constructs that are used for structural equation
modeling and testing. The first three are NY, or downstream constructs (i.e. dependent
variables) and the final seven are NX, or upstream constructs (i.e. independent variables).
Downstream constructs. The first two constructs, �relational friction� and �conflict�
are intended to capture the average level of felt and manifest conflict (Pondy, 1967) in
relations between an entrant firm and host entity. Relational friction is approximated as
the level of stress, anxiety, or tension in the relationship. Conflict is approximated as the
level of conflict, disputes, or hot discussions. These measures build on a long lineage of
research to measure both manifest conflict (eg. Brown & Day, 1981; Eliashberg &
Mitchie, 1984; Habib, 1987) and felt conflict (Hunger and Stern, 1976; Etgar,
1979).
The third construct and the main dependent variable, �relative unforeseen delay,� is a
proxy for unforeseen transaction costs; calculated as a unitless ratio of absolute delay
caused by each local entity (measured in days) divided by the as-planned duration of the
overall project (also measured in days). In the past, there have been two main limitations
associated with objective and financial performance measures. First, corporate managers
perceive objective data to be key to competitiveness and confidential, thus, except for
consolidated financial reports, researchers have had difficulty collecting this data in large
samples (Geringer & Herbert, 1989). Second, in the international arena, many financial
measures lack comparability because accounting conventions, tax rates, currencies and
purchasing power parity tend to vary enormously across borders (Lasserre, 1999). In this
study, the unforeseen delay metric addresses both of these limitations. First, unforeseen
delay data is generally non-confidential. Second, it is non-financial. Thus it is easy to
collect and issues of comparability are largely avoided. A further advantage is that
98
contractors and consultants actively track project progress against an �as-planned�
schedule (Stinchcombe & Heimer, 1985) and thus delay information is readily
obtainable. However, no single performance measure is without its flaws (Katsikeas,
Leonidou & Morgan, 2000). The main limitation of unforeseen delay as a metric for
unforeseen transaction costs is that it is an incomplete measure. Although it captures time
costs reasonably well, it neglects the reputational, relational, and financial aspects of
these costs that were also identified in Chapter I.
Upstream constructs. The fourth construct is a perceptual measure of �institutional
difference,� with two indicators to assess both formal and informal differences. These
indicators are akin to many subjective measures of cultural and psychic distance that have
proven useful in empirical studies of cross-national interactions (eg. Lasserre, 1999; Lin
& Germain, 1998; Sim & Ali, 1998; Sim & Ali, 2000). What is new here is the formal vs.
informal distinction, which is intended to address both the more obvious regulative
differences in rules, regulations, and requirements; as well as the more subtle normative
and cultural-cognitive differences in assumptions, expectations, and logics (North, 1990;
Scott, 2001).
Constructs five and six, "they depend on you" and �you depend on them,� follow
directly from prior empirical measures of inter-firm bi-directional interdependence. For
example, Tjosvold et al. (2003), had managers rate on a 7-point Likert scale both the
extent that they needed information and ideas from their subcontractors and the extent
that their subcontractors needed information and ideas from them (see also Tjosvold,
Andrews, and Struthers, 1991).
Construct seven, "communication volume," is defined as the number of times the
entrant firm communicates with the host entity, either by telephone, meetings, face-to-
face exchanges, or email. This measure is adapted from marketing studies of buyer-seller
communication (Cannon & Homburg, 2001; Mohr & Nevin, 1990), and from social
network analysis of interaction between entities in complex project teams (Mead, 2001).
Following the tradition in marketing (e.g. Mohr, Fisher & Nevin, 1996), the various
modes of communication (e.g., face-to-face, email) were lumped together into a
composite index.
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Construct eight, �global experience,� captures both the duration and diversity of
international experience of manager(s) responsible for relations with host entities. Prior
research lays the groundwork for this measure. It is common to operationalize global
experience in terms of diversity, or the absolute number of countries entered (Tallman &
Li, 1996; Zahra, Hitt & Ireland, 2000; Eriksson et al., 2000; Vermeulen & Barkema,
2001; Blomstermo et al., 2004). Other measures focus on duration or length of time
abroad (eg. Maclayton, Smith & Hair, 1980; Davidson, 1980). A few studies offer
measures of both scope and length, such as Gencturk & Aulakh (1995) and Erramilli
(1991). In the latter, the two variables are correlated with a coefficient of 0.68, significant
at p < 0.001. In the present study, the global experience construct consists of both
duration and diversity indicators. What is new here is the level of analysis. While prior
studies focus on the firm level, the data here are at the level of the manager responsible
for relations with each host entity; when multiple managers are involved, an arithmetic
mean is computed to approximate the global experience of the management team.
Construct nine, �local experience,� captures both the duration and diversity of local
experience, also at the level of the manager(s) responsible for relations with host entities.
This approach is similar to other measures of local host country experience (e.g. Makino
& Delios, 1996; Barkema and Vermeulen, 1997; Luo & Peng, 1999; Vermeulen &
Barkema, 2001).
The tenth and final construct, �recurring relations,� measures the recurrence of prior
relations between an entrant firm and local entities. This item is adapted from previous
measures of transaction frequency (eg. Anderson & Schmittlein 1984; Maltz 1993; 1994;
Klein, 1989), of which there have been relatively few according to reviewers of empirical
work in transaction cost analysis (Shelanski & Klein, 1995; Rindfleisch & Heide, 1997).
Construct validity. All key statistics for the non-single item constructs support
convergent validity (see Table 1). The t values are all above 5.37, factor loadings are
above 0.72, and the R2 values are above .66. The t values and R2 values indicate good
convergent validity. The correlation matrices of indicator variables and latent constructs
are available in Appendix 6 and 7 respectively. Multicollinearity is not a concern because
standard errors are low, relationships are significant, and all correlations between latent
constructs are less than .70 (Newbold, 1991: 596).
100
For latent constructs composed of single indicators, factor loadings are fixed to equal
unity and error variances are fixed according to the approach recommended by Hayduk
(1987: 103, 118) for analysis of covariance structures.16
Finally, several of the variables are non-normal with skewed distributions and high
kurtosis. For example, of the 243 relations analyzed, 140 were non-recurrent (i.e. zero
prior history), and 91 were managed by an entrant manager (or team) with zero years of
prior local experience. Thus, these distributions have high skewness and kurtosis because
of the disproportionately large numbers of zero values.
RELATIONAL FRICTION, CONFLICT & UNFORESEEN DELAY
The results of the statistical analysis are shown in Figure 1. The structural model has a
Satorra-Bentler17 2 of 25.37 with 33 degrees of freedom at a probability 0.83. The 2
statistic is non-significant, indicating a good model fit to the sample variance-covariance
structure. Additional measures support validity since the GFI, RMSEA, and the CFI are
all well above acceptable levels. Since the model fits well, is theoretically consistent, and
provides statistically significant parameter estimates, it is appropriate to discuss the
results in detail.
The model shows that relational friction has a positive effect on conflict (0.33) and
that conflict has a positive effect on unforeseen delay (0.47) thus supporting hypotheses
1a and 1b concerning conflict escalation.
While institutional difference is positively associated with relational friction (0.38)
and conflict (0.34), evidently, it is not significantly associated directly with unforeseen
delay. Thus while hypothesis 2a and 2b are supported, 2c is not.
The model shows that an entrant�s dependence on host entities is positively associated
with relational friction (0.32) and unforeseen delay (0.25), but not directly with conflict.
In the opposite direction, a host entity�s dependence on entrants is associated positively
with relational friction (0.26) and conflict (0.37), but not necessarily with unforeseen
delay. Based on this evidence, we conclude full support for hypotheses 3a and 4a, 4b (but
not 3c), and 3c (but not 4c). 16 Error variance of each indicator is fixed to equal ((1-reliability) * (Variance of the variable)). 17 The Satorra-Bentler chi-square is recommended for small samples (N = 200 to 500), non-normal continuous variables, and high kurtosis (Curran, West, & Finch, 1996; Schumacker & Lomax, 2004).
101
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0.32
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0.26
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0.85
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0.86
0.33
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0.47
**(3
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GEY
GE
C0.
81
0.81
102
TABLE 3 Summary of Model Results and Conclusions
Hypothesized Relations Between ConstructsSEM
ModelaMultivariate
Regression Modelb
Relational Friction → Conflict 0.33 (3.65)** n/a H1a supportConflict → Unforeseen delay 0.47 (3.11)** n/a H1b supportInstitutional difference → Relational Friction 0.38 (4.19)** 0.357 ( 6.12)** H2a supportInstitutional difference → Conflict 0.34 (3.56)** 0.417 (7.56)** H2b supportInstitutional difference → Unforeseen delay - 3.241 (4.10)** H2c partialYou depend on them → Relational Friction 0.32 (2.76)** 0.216 (3.71)** H3a supportYou depend on them → Conflict - 0.174 (3.16)** H3b partialYou depend on them → Unforeseen delay 0.25 (2.01)* 2.618 (3.31)** H3c supportThey depend on you → Relational Friction 0.26 (2.57)** 0.257 (3.90)** H4a supportThey depend on you → Conflict 0.37 (3.80)** 0.437 (6.85)** H4b partialThey depend on you → Unforeseen delay - - H4c no supportCommunication volume → Relational Friction - - H5a no supportCommunication volume → Conflict - -0.0000366 (3.71)** H5b partialCommunication volume → Unforeseen delay - 0.000329 (2.33)** H5c partialLocal experience → Relational Friction -0.09 (1.65)* -0.0186 (2.26)* H6a supportLocal experience → Conflict - -0.0234 (3.01)** H6b partialLocal experience → Unforeseen delay - - H6c no supportGlobal experience → Relational Friction - - H7a no supportGlobal experience → Conflict - - H7b no supportGlobal experience → Unforeseen delay - - H7c no supportRecurring relations → Relational Friction -0.18 (2.31)* -0.0157 (2.01)* H8a supportRecurring relations → Conflict - - H8b no supportRecurring relations → Unforeseen delay - - H8c no supportLocal experience → Prior Relations 0.15 (2.19)* n/a n/a logicalGlobal experience → Prior Relations -0.27 (2.43)* n/a n/a logical
* p < 0.05, **p < 0.01 one-tailed test.
Conclusion
a The figures given are standardized solutions with t- values in parentheses.b The figures given are standardized partial regression weights with t -values in parantheses.
Surprisingly, the log18 of communication volume is not significantly associated with
any of the dependent variables. Thus, hypotheses 5a, 5b and 5c are not supported by the
structural model.
The fit of data to model confirms that as managers become more locally experienced,
there is less relational friction with local entities (-0.09) but not necessarily less conflict
18 The raw COV variable caused �non-positive definite� matrix errors in LISREL because of its extremely large variance (3.8x107) relative to the other variables in the analysis. Thus, a log scale transform was conducted to mitigate this effect.
103
or unforeseen delay. Thus, the structural model lends support for hypothesis 6a, but not
for 6b or 6c.
Also a surprise, global experience is not significantly associated with a reduction in
relational friction, conflict, or unforeseen delay, thus hypotheses 7a, 7b, and 7c are
unsupported. A possible explanation for this result is discussed in the next section.
Finally, according to the data, recurring relations play a significant role in reducing
relational friction (-0.18), but not directly in reducing conflict or unforeseen delay. Thus
there is support for hypothesis 8a, but not for 8b or 8c. Interestingly, recurring relations
were positively associated with local experience, and negatively associated with global
experience, a logical result that is addressed below in the discussion.
In addition to structural equation modeling, we performed a multivariate regression
analysis. The first purpose of this analysis was to assess the effect of the raw COV
variable (non-log transform) on the dependent variables. This relation was not assessed in
the structural equation model because of the matrix errors previously noted. The findings
of the multivariate regression are shown in Table 3. In addition to verifying the
significant paths identified in the structural equation model, they also show that the
communication volume variable is positively associated with unforeseen delay and
negatively associated with conflict, thus partially supporting hypotheses 5b and 6b.
Furthermore, the model suggests that three of the paths that were non-significant in the
structural equation model, from INF to RUD, from YOT to CON, and from LEY to
CON, are in fact significant at the p < 0.01 level in the regression model. This confirms
partial support for hypothesis 2c that informal institutional differences lead to unforeseen
delay; for hypothesis 3c that dependence on local entities leads to conflict; and for
hypothesis 5c that local experience reduces conflict.19 Overall, the independent variables
in the regression analysis explain 42% of the variance of Relational Friction, 48% of the
19 We choose the term �partial support� because multiple regression analysis, although perfectly acceptable to the scientific community, is not as powerful as structural equation modeling (SEM). Advantages of SEM compared to multiple regression include more flexible assumptions (particularly allowing interpretation even in the face of multicollinearity), use of confirmatory factor analysis to reduce measurement error by having multiple indicators per latent variable, the desirability of testing models overall rather than coefficients individually, the ability to test models with multiple dependents, the ability to model mediating variables, and the ability to model error terms (Garson, 2000). Thus, giving credence to the methodological superiority of SEM, even though the findings of the regression analysis are significant at p < 0.05, we claim only partial support.
104
variance of Conflict, and 28% of the variance of Unforeseen Delay. Table 3 contrasts the
results of the regression analysis alongside the results of the structural equation model
and summarizes support for the hypotheses.
The second purpose of the multiple regression was to check for interaction effects.20
Interaction terms were added to the model to incorporate the joint effect of the
institutional difference and dependence variables (i.e., INFxYOT, INFxTOY, FORxYOT,
FORxTOY) on the dependent variables (i.e., REF, CON, RUD). Of the 12 (i.e. 4 x 3)
possible combinations, 10 of the interaction terms provided incrementally significant
increases in the R2 of the regression equation. The only two interaction terms that were
not significant were FORxYOT on RUD, and INFxTOY on REF.
RELATIONAL PROFILES
The evidence in Table 4 verifies that relations with local host entities vary along a
number of key dimensions, thus confirming hypothesis 9. Formal relations with market
entities are generally characterized by low levels of formal and informal institutional
differences, low levels of relational friction and conflict, and extremely high volumes of
communication and email.
Typically, formal relations with regulatory entities exemplify high levels of formal
and informal institutional differences, but low levels of relational friction and conflict,
and the greatest dependency mismatch (i.e. the entrant is highly dependent on the
regulatory entity and the regulatory entity is minimally dependent on the entrant).
Surprisingly, regulatory relations also yield the lowest level of relative unforeseen delay.
Client relations are often the most problematic. They exhibit the greatest levels of
formal and informal institutional differences, relational friction, conflict, and reciprocal
interdependency. In the sample that we analyzed, on the average, client relations led to a
197 day delay, equating to 19% of the as-planned project duration.21
20 It is possible to check for interaction effects with SEM methods, but it is difficult. To model such an interaction, the researcher must add four additional input matrices to LISREL: Kappa, Alpha, Tau-X, and Tau-Y and in them specify a complex series of constraints (see Jaccard and Wan, 1996: 56-57). For simplicity, multiple regression was used to check for interactions. 21 In several cases, the contractor or consultant was reimbursed for the time delay by initiating claims against the client. In one particular case, payments for delay amounted to several tens of millions of dollars.
105
In most cases, informal relations with interested stakeholders are distinguished by the
lowest levels of formal and informal institutional differences, low levels of relational
friction and conflict, and low levels of relative unforeseen delay.
Finally, informal project relations are usually characterized by low levels of formal
and informal institutional difference, medium levels of communication and email, and
medium levels of reciprocal interdependence.
Although there are many exceptional instances, the statistical analysis confirms that on
the average, significant differences exist across the relational profiles managed by foreign
entrant contractors and consultants. In the discussion we discuss several implications
linking the different relational profiles, conflict escalation, and unforeseen cost growth.
TABLE 4 Profile of Differences between 5 Types of Relations
Min Max F p
1. AUD - Absolute Un- foreseen Delay (days) 0.0 1080 2.86 0.024 125.4 56.9 197.8 51.7 67.4 92.3
2. RUD - Relative Un- foreseen Delay (%) 0% 67% 4.13 0.003 8% 4% 19% 5% 5% 6%
3. TEN - Tension/ anxiety/ stress -3.0 3.0 4.61 0.001 -0.2 0.0 1.7 -0.4 0.4 0.0
4. CON - Conflict/ dis- putes/ hot discussions -3.0 3.0 2.82 0.026 -0.3 -0.1 1.6 -0.4 0.3 -0.1
5. INF - Informal instit-utional differences -3.0 3.0 13.18 0.000 -0.6 0.6 1.3 -1.1 -0.8 -0.3
6. FOR - Formal inst- itutional differences -3.0 3.0 23.76 0.000 -1.1 0.9 1.4 -1.2 -1.0 -0.4
7. COV - Comm- unication volume 0 54000 3.97 0.004 3514 472 2914 82 1404 1942
8. EMV - Email volume 0 10000 3.13 0.016 751 132 522 58 701 473
9. TOY - Extent that they depend on you 0.0 5.0 50.94 0.000 3.0 1.1 4.1 2.6 2.7 2.4
10. YOT - Extent that you depend on them 0.0 5.0 5.11 0.001 2.6 3.2 4.3 2.2 3.2 2.9
a F and p values calculated with single factor ANOVA test.
Indicator VariableRange Overall
Average(n=243)
Significant Variation Between
Relational Profilesa
Relational ProfilesFormal Informal
Market Relations(n=105)
Regulatory Relations
(n=71)
Client
(n=9)
Community Relations
(n=29)
Project Relations
(n=29)
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DISCUSSION
Answers to Research Questions
This study was motivated by three research questions. How salient are unforeseen
transaction costs for firms that enter global projects in unfamiliar institutional
environments? How much do these costs increase as relations with local entities become
more interdependent and institutionally diverse? And how much are these costs lessened
when an entrant has global experience, local experience, and recurring relations with
local entities?
Salience. The evidence confirms that unforeseen transaction costs are salient. On
average, unexpected delays are 6% of as-planned schedule duration. And this measure
does not include the other unforeseen time, money, relational, and reputational costs
associated with conflicting institutional arrangements and understandings.
Antecedents. The evidence also confirms that formal and informal institutional
differences and two-way dependencies are the ingredients for conflict and unforeseen
delays. But these variables are not always direct antecedents. Instead, the findings tell a
more complex story. These variables interact together to cause relational friction, which
in turn triggers escalating levels of conflict and ultimately leads to unforeseen delay.
Moderators. The evidence confirms that local experience and recurring relations
reduce relational friction, which is a precursor to conflict and delay. This result
corroborates a growing set of studies in the IB literature showing positive benefits of
local experience (Luo & Peng, 1999; Barkema et al., 1996; Barkema & Vermeulen, 1998;
Delios & Beamish, 2001). This result also provides a contribution to transaction cost
analysis, where surprisingly few studies have examined the link between recurring
relations and the reduction of transaction costs (Heide & John, 1990; Rindfleisch &
Heide, 1997).
Further Insights
Beyond the quantitative data collection, the interviews with informants provided many
further insights. In this section, we draw on these insights to enrich the interpretation of
107
the findings and to shed light on the dynamics of dyadic relations on large public
infrastructure projects.
Non-significance of global experience. We did not find statistical support for the
hypothesized moderating effect of global experience. However, the interviews provide a
plausible explanation for this surprising result: in general, with increasing global
experience, managers are assigned to oversee increasingly difficult and delicate tasks and
local entity relations. One manager on a metro project summarized this as follows, When things don't go as planned with an installation and we start to fall behind they call me in.
That's why I'm here on this [project]. I'm the globe-trotter who orchestrates the turnarounds. And
here we had fallen way back on schedule because we had overestimated the technical capabilities
of the locals... So even though I�m in charge of all these relations that are behind, it�s not my fault
that they�re behind.
Thus, our results reflect the fact that experienced global managers receive increasingly
challenging task assignments, which counteracts the hypothesized positive benefits of the
capabilities that derive from their experience, which is probably why this variable turns
out not to be non-significant in the structural model.
Asymmetric effects of dependence. The evidence shows that while local entity-to-
entrant dependence leads to relational friction and conflict, it is not directly associated
with delay, whereas, while entrant-to-local entity dependence leads to relational friction
and delay, conflict it typically avoided. This implies that even in the face of high
relational friction and impending delay, an entrant who is dependent on a local entity for
resources, approvals, or legitimacy actively avoids situations of conflict. But in the
opposite case, when a host entity is dependent on an entrant, conflict tends to escalate to
higher levels but without causing delay to the entrant�s work schedule.
Communication volume. The evidence also suggests that communication volume is a
positive correlate of unforeseen delay and a negative correlate of conflict. However,
despite the hypothesized correlations, the link between these variables may be more
complex than we have shown here. Indeed, there are many examples in our sample of
formal market relations where an entrant and host entity exchange 10,000+
communications and complete work well ahead of schedule. And of regulatory relations
with less than 50 communications, but where a building permit, customs clearance, or
traffic diversion approval causes significant delay. Thus, it seems that the association
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between communication volume and unforeseen delay needs to be examined within the
context of the distinctive characteristics of each relational profile.
One-time nature of relations. Williamson (1979) suggested that "few transactions
have a totally isolated, one-time character." However, the data in our study contradict this
view. In our sample of 243 relations, more than 50% were strictly one-time, i.e. the two
parties had no relational history prior to the project. Although it may be unusual to have
one-time relations in other non-project-based industries, in the global project business,
more than half of the relations reported are of a one-time nature.
Procurement delay. A number of the delays reported by informants were associated
with the slower than expected delivery of goods and services to the project site. In many
cases, unrealistic expectations about delivery times stemmed from a lack of
understanding about the institutional context supporting the delivery of goods to the
project site, such as customs processing times, national holidays, acceptable tolerances
for meeting deadlines, and the general reliability of supply chains and the shipping
industry. However, future studies that use unforeseen delay as a metric might consider
measuring procurement delay as a direct independent variable.
Political will. On a project in Pakistan, four corrupt in-fighting governments battling
for control caused a 4.5 year delay. In stark contrast, in Thailand a very powerful Prime
Minister with an 80% majority and with support of the King used his political clout to
convince his government and his country that new infrastructure development was a
national priority. He was able to fast-track what is normally a two-year feasibility and
review period for new projects down to less than six months. On one new airport project,
he would camp out and cook food to motivate the work crews. While the project suffered
two years of internal delays, with the addition of night shifts and thousands of workers, it
still finished more or less on time. These examples suggest that within a host country,
high level political interests tend to filter down and flavor the flexibility of the entire
government system, from permitting, to building inspection, to environmental, to every
other regulative arm and agency.
Informal coordination. Almost thirty of the relations in the sample fall into the
�informal project relations� category. Based on our interviews, these informal relations
can cause many of the most complicated coordination challenges on large projects.
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The dynamics of these relations arise from the way that large projects are structured.
Usually, the host government hires a consultant, who contracts with a set of 20 to 100
designers, sub-consultants, and contractors on behalf of the host government, who each in
turn contract with a collection of sub-subs and sub-sub-subs, until, as one informant
explained, �at the bottom of the tree you have five guys and a truck coming in to do some
work.� As the work proceeds, this arrangement leads to an enormous amount of informal
coordination between contractors, subcontractors, sub-subs and sub-sub-subs. And when
one entity is delayed, there can be a domino effect of unforeseen delays oscillating up and
down the hierarchy.
Based on our interviews with dozens of managers, we found that a disproportionate
number of the most serious project delays stemmed from this hierarchy of contracts
arrangement. There is very little contractual guidance to prescribe how interfirm
coordination should be conducted. Generally, each of the contracts in the hierarchy
contains a clause to the effect of, �your firm is responsible to coordinate and liaise with
all of the other firms on the project.� However, this clause is extremely ambiguous. It
causes dozens of disputes and disagreements that culminate in formal legal claims and
counter claims that pile up until the lawyers get involved at the end of the project. The
ensuing legal battle can go on for months. Overall, this quasi-hierarchy arrangement leads
to complex strategies and gamesmanship involving requests for change orders, denials of
requests, threats of contract termination, and other hold-up situations.
Anti-corruption units. The character of regulative relations is also influenced by the
presence of national Anti-Corruption Units (ACUs), governmental departments that are
formed with a mission of stamping out corruption. In a study of a large metro
construction project in New Delhi, India, Mahalingam (2005) found that the scrutiny of
an Indian ACU had many unintended consequences on the performance of the project.
Bureaucrats were unusually slow to make decisions, overly conservative in following
internal rules and regulations, and afraid to use their professional judgment in cases
where a rule did not exist, all because they were afraid of being arrested, investigated,
and prosecuted by the ACU who had the power to freeze promotions and issue penalties.
In our cross-sectional investigation of projects in Thailand, China, Pakistan, Taiwan
and India, we observed anti-corruption units in all five countries. Confirming and
110
generalizing Mahalingam�s findings, these anti-corruption units created a unique and
complex dynamic in the regulatory environment cradling the projects that we studied. In
some countries, warring factions within the government would use the ACU as a strategic
source of power, by forming alliances with ACU investigators and using those alliances
to have opponents investigated.
Freelance expatriates. Across all nine projects in the sample, we observed the
presence of a group of so-called freelance expatriates originating from commonwealth
countries, such as the UK, Canada, New Zealand, Australia and South Africa. These
expatriates, generally hired for their technical expertise, also played a crucial role as
intermediaries between the client and contractor sides of the organization, reducing
delays, pushing the project ahead, and unperturbed by the anti-corruption regimes.
Mahalingam�s (2005) research confirms and expands on the critical role played by these
freelance expatriates from �cricket-playing countries.�
Embeddedness in Social Relations and Institutions
The evidence presented here confirms that foreign entrants incur unexpected costs in
formal and informal relations with local host entities. This finding implies that as entrants
become more embedded with local entities, they face increasing unforeseen costs. This
finding illuminates a key limitation in neoclassical economics, and highlights a key
shortcoming in the current international business literature.
Economics and embeddedness. Coase (1988: 73) has described mainstream
economics as a �study of the circulation of the blood without a body.� For decades,
neoclassical economists have discounted the fact that market interactions are embedded
in social relations and a cultural context (Boulding, 1972; Granovetter, 1985). While this
assumption might serve researchers reasonably well in a mono-cultural market setting
where it can be assumed that all actors speak a common language, hold relatively similar
beliefs and values, and embrace a shared conception of the formal and informal �rules of
the game�, it becomes problematic in a globalized world where transactions span cultural,
legal and political boundaries and where actors with competing institutionalized
understandings are frequently in close contact. It becomes problematic because when an
actor attempts to negotiate, coordinate, or transact in an unfamiliar institutional context or
111
with actors from an alien context, evidence from the present study indicates that these
relations create the possibility for institutional exceptions�misjudgments,
misunderstandings, and conflicts�which in turn lead to salient unforeseen transaction
costs. The findings here imply that, in general, the greater an entrant�s level of social
embeddedness with foreign actors, the greater the aggregate potential for relational
friction and inefficient transactions. Therefore, in a rapidly-globalizing world, as the
numbers of transactions across market boundaries and across divergent institutional
logics and rule-systems continues to expand, the soundness of the under-socialized
assumption becomes increasingly suspect.
International business and embeddedness. Recently, international business scholars
have proposed that �social embeddedness� is a strategy that MNEs need to adopt if they
are going to in capture the enormous base of the pyramid market in emerging economies
(London & Hart, 2004). However, in the present paper we provide evidence that social
embeddedness leads to a host of unforeseen transaction costs that negatively impact
performance and profitability. Obviously, there is a divergence of opinion. London and
Hart argue that entrant firms should seek to become more embedded to ensure their
success, and we show evidence that embeddedness leads to unforeseen costs, implying
that entrants should avoid becoming too embedded. Can both views be correct?
Yes, both views can co-exist in harmony. The main difference is the short run versus
long run emphasis. London and Hart focus on continuing business operations (Coca-cola,
GE, Maytag, etc). In contrast, we focus on short-term projects where an entrant goes in,
executes a project, and then exits thereafter without gaining any benefit of establishing a
market presence (Bechtel, Fluor, etc.). In the short run, being too embedded leads to all
kinds of unforeseen costs22�time costs, money costs, reputation damage, relationship
damage�when an entrant fails to understand local tacit beliefs, informal norms, and
formal rules of the game. But in the long run, if an entrant fails to become embedded,
then they never learn to maneuver within the local institutions nor do they develop an
internal stock of localized human-resource capacity. Thus, social embeddedness is like a
double-edged sword�you�re damned if you get embedded to soon, and damned if don�t
22 In this study, we only measured time costs, but in the last chapter we also approximated relationship damage, reputation damage, and money costs.
112
get embedded eventually. The key then is to enter alien markets gradually, not too slow,
not to fast, and as the base of operations expands, to build up local human-resource
capabilities to manage the growing number of local entity interfaces and interactions.
Limitations
As with most research efforts, ours has several limitations. We call attention to some of
the most important of which we are aware.
One-sided interviews. The interviews concerning the outcome of the dyadic relations
were one-sided, and did not account for the host entity perspective. This is partly
justified, however, because the goal of the study was to learn about unforeseen costs
incurred by entrant firms and not about the unforeseen costs incurred by local host
entities.
Unforeseen delay metric. The unforeseen delay metric is imperfect. Occasionally a
contractor will intentionally underestimate project duration, knowing that foreseeable
delays will lead to additional opportunities for change orders and profits. Furthermore,
the value of time may differ across projects and entities, which reduces comparability.
Blurring of relational profiles. At the beginning of the study, we had hoped to test the
hypotheses separately for each relational profile. However, SEM methods require a
sample with greater than 200 cases (Schumacker & Lomax, 2004) and the realities of
field-data collection made it impossible to gather a sample this large for each profile.
Interconnected relations. In several cases, the interconnected nature of relations
makes it difficult to untangle the true source of unforeseen delay. For example, on an
elevated rail project in Hong Kong, a Temporary Traffic Management Scheme (TTMS)
was set up by three regulative bodies: the Police Department, the Roads Department, and
the Highways Department. Over the course of the project, the general contractor filed
more than 1000 applications to the TTMS for temporary traffic diversion. Whenever
these permits were not in place, the project was delayed, which happened on more than
fifty occasions. But whose fault was the delay? Was it the government client, who had
contractually guaranteed the general contractor access to the project site? Was it the
virtual and ephemeral TTMS entity that authorized the permits? Or was it one of the three
distinct regulative bodies that backed the TTMS and made it a credible actor? Was it the
113
public citizens, who called in complaints to the three regulative bodies, who in turn
would conduct investigations for permit infractions? Was it the subcontractors, the only
party whose work was actually delayed when a permit was out of place? Or was it the
general contractor for failing to think through the implications of this web of
organizational dependencies ahead of time? Who is the offending party? And who should
bear the cost of the project slipping behind schedule? This example highlights just why it
is that delay claims are inordinately complex, and why there is an entire industry of
accountants and lawyers who specialize in preparing construction claims, which can take
months to compile, years to resolve, and be in the magnitude of millions of dollars, often
far exceeding a contractor�s budgeted profit margin. It also highlights the limitation of
examining strictly dyadic relations, when in actuality it is a complex network of
interdependent actors that influence project outcomes.
Reverse interpretation of findings. Our interpretation of the findings may also be
explained in reverse. Technical or economic difficulties may cause unforeseen delay,
which cause conflict and tension, which then magnify perceptions of institutional
difference and interdependencies. However, this was not the direction hypothesized from
theory, so we did not test this alternative.
Competitive versus collaborative conflict. Additionally, we did not account for the
difference between competitive and collaborative conflict (Deutsch, 1973; Tjosvold et al.,
2003). For example, regulatory relations are generally adversarial in nature. But informal
project relations tend to be more collaborative with a common goal of project completion.
So the conflict reported in these two cases may actually have very different theoretical
bases, indicators and impacts.
Non-linear escalation of conflict. After conducting this study, our view is that
conflict cannot be measured on a linear scale. Relational dynamics involve non-linear
effects and spikes of tension and conflict that rise and fall with the progression of time. A
misunderstanding in one relation may actually create 100% more anxiety, stress, tension,
disputes and conflict than any other relation on a project. While most relations go well,
the one that goes wrong tends to really go wrong and in that case, a linear scale can not
capture the true magnitude of the critical incident scenario.
114
Selection bias. All data were from nine large public infrastructure projects within
Asia. While the sample of dyadic relations that was drawn from this population was
largely random, this population may not be representative of all infrastructure projects in
other regions of the world or at other points in time. Thus, generalizations of the findings
to other projects in other regions or sectors should keep this potential sample bias in
mind.
CONCLUSION
Contributions to Science
The main contribution of this article is the identification of the existence and salience of
unforeseen transaction costs and their antecedents, correlates and consequences. Drawing
on several literatures, the article presents a more complex story of interdependencies,
institutional differences, conflict escalation, and unforeseen transaction costs than
currently exists in the economics or international business literature. We view this as a
contribution because, in the transaction cost view of foreign market entry (e.g. Gatignon
and Anderson, 1988; Klein et al., 1990; Hennart, 1991; Erramilli and Rao, 1993; Delios
and Beamish, 1999; Brouthers & Brouthers, 2003), authors have not explicitly identified
the existence or significance of unforeseen transaction costs.
In addition to the main contribution, these findings offer several more modest
contributions. They take a small step towards confirming one of Hayek�s (1945)
conjectures about the importance of local knowledge in reducing transaction costs. They
show that at least five distinct types of relational interfaces exist for consultants and
contractors on large projects. Finally, they verify the impacts of intercultural institutional
differences (North, 1990; Scott, 2001) in causing relational friction and conflict, with an
approach that intentionally deviates from the problems (Shenkar, 2001) of using national-
cultural distance as an independent variable (Hofstede, 1984; Kogut and Singh, 1988).
Contributions to Practice
For practice, this study demonstrates the salience of unforeseen transaction costs. They
are not imaginary, immeasurable or insignificant. The evidence suggests that in relations
115
with unfamiliar local host entities, entrant firms should anticipate schedule delays ranging
from 4% to 20%, depending on the type of relation.
Host governments need to recognize that they themselves can be a major source of
delay. Bankers need to recognize that budgeted project estimates are often too low.
Project consultants need to understand the complexity that dyadic relations can bring and
design a project to minimize interdependencies and streamline the resolution of
interorganizational disputes and conflicts.
Contractors and consultants need to account for these hidden costs, recognize the
importance of locally experienced personnel, and avoid dependencies where local
experience is inadequate. One strategy to achieve this is to outsource activities embedded
in local institutions to local guides, agents, partners, or subcontractors who have
knowledge to execute according to local protocols and institutional idiosyncrasies.
Finally, by maintaining a market presence, developing recurring network relations, and
cultivating a staff with local knowledge, an entrant contractor or consultant can slowly
learn to maneuver and transact effectively and efficiently within the tangle of locally-
devised institutional enablers and constraints.
Areas for Future Research
Future research might go in a number of fruitful directions. To better understand the
dynamics of each relational profile, researchers might gather larger data samples to test
the hypotheses separately for each of the five groups. To examine the effects of political
will and the strength of anti-corruption units in causing unforeseen delay in relations with
host government regulatory agencies, researchers might develop a set of indicators to
measure these latent constructs. To better understand relational interdependencies,
researchers might develop a finer grained model of dependency by splitting the elements
of our survey question into five individual items: legitimacy, resources, authorization,
knowledge, and information. To better understand the longitudinal process of
internationalization and how unforeseen transaction costs decline as firms become more
internationally experienced, researchers might test the link between the global experience
of the firm and the firm�s ability to acquire relevant local knowledge upon entering a new
environment. To understand the non-linear effects of conflict escalation, researchers
116
might use a 100 point scale to measure conflict, with 0 to 10 defined as the normal range,
and 11 to 100 defined as the range of escalation for critical incident scenarios. Finally, to
continue to explore the dynamics of dyadic relations and transaction costs, researchers
might continue to refine the highly visual �hub-and-wheel� approach that was pioneered
in this study and was crucial in being able to collect a large sample of field data about
relational factors and transactional outcomes.
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APPENDIX 1 Data Collection Protocol
1. Complete �Key Manager Form� with actual data
a. Position, local experience (projects, yrs), cross-cultural experience (countries, yrs)
2. Show sample �Relationship Map� to give idea of completed product & then
complete blank �Relationship Map Form� with actual data a. Name of each entity in big bubble b. Number all entities clock-wise (also in big bubble) c. Indicate unforeseen/ surprising/ unexpected delay caused by each entity in
small bubble closest to big bubble* d. Length of prior working relations with each entity (in yrs, second bubble
away from big bubble**; in projects, third bubble away from big bubble***)
3. Complete �Relationship Data Matrix� with actual data
a. I show the list of questions and the anchored-scale b. The informant thinks about the question for each entity on the
Relationship Map, selects a response from the scale, and then goes on to the next entity moving clockwise �around the wheel�
c. I fill in the matrix as they answer each question
4. Complete �Other Factors� a. If �other� is selected for any line-item, ask for details
5. Indicate Mgr # in charge of each entity using data from Key Mgr Form
a. Small bubble**** furthest from big bubble ****Mgr # ***Length of prior relations with this entity (projects) **Length of prior relations with this entity (yrs) *Unforeseen/ surprising/ unexpected delay (days) Name of local entity
129
APP
EN
DIX
2
Tra
nsac
tion
Map
R
egul
ator
y Ag
enci
es(F
orm
al R
elat
ions
)(i.
e. g
over
nmen
t/ po
lice/
cus
tom
s/ in
spec
tor)
Inte
rest
ed S
take
hold
ers
(Info
rmal
Rel
atio
ns)
(i.e
com
mun
ity/ N
GO
/ int
eres
t gro
up)
Oth
er F
irms
on P
roje
ct(In
form
al R
elat
ions
)(i.
e. s
ub/ c
onsu
ltant
/ sur
veyo
r)
Prod
uct/
Serv
ice/
Inpu
t Pro
vide
rs(F
orm
al R
elat
ions
)(i.
e. s
ub/ l
egal
/ sup
plie
r/ m
echa
nic)
YOU
RFI
RM
130
APPENDIX 3 Key Manager Form
Mgr 1 Mgr 2 Mgr 3 Mgr 4 Mgr 5 Mgr 6
Local experience - in this country
(yrs / projects)
International experience - all countries
(yrs / countries)
Key Managers
Position
131
APPENDIX 4 Closed-Ended Questions & Scale
-3 -2 -1 +1 +2 +3STRONGLY DISAGREE DISAGREE MILDLY
DISAGREEMILDLY AGREE AGREE STRONGLY
AGREE
SCALE 1
A. This entity has created high levels of tension/ anxiety/ stress
B. We have had conflict/ disputes/ hot discussions with this entity
C. At times it has been difficult to understand this entity�s regulations/ rules/
requirements
D. At times it has been difficult to understand this entity�s expectations/
assumptions/ logics
E. Estimate # of meetings/ telephone calls/ face-to-face conversations with
this entity.
F. Estimate # of emails sent to this entity.
G. This entity depends23 on relations with our firm to be successful
H. Our firm�s depends24 on relations with this entity to be successful
23 This entity "depends "on our firm if they need knowledge/ information/ resources/ authorization/ legitimation from our firm, that only we can provide 24 Our firm "depends "on this entity if we need knowledge/ information/ resources/ authorization/ legitimation from this entity, that only they can provide
132
APPENDIX 5 Relationship Data Matrix & Other Factors
Relationship Data Matrix
B C D E F G H123456789
101112131415161718192021222324252627282930
Other Factors
Type of Firm General Contractor____; Sub____; Hardware Provider____; Developer____; Consultant____; Engineer/Design____; Other____
Entry Mode Importer____; Start-Up____; Partner____; Acquisition____ If partner, what type? Local Gov't____; Local Private Firm____; Foreign Firm____; Other_____ Primary Control Home Office____; Regional Office____; Project Site Office____ Your Position Exec____; Project Mgr____; Site Engineer____; Designer____; Other__ Global Experience Your firm ____ (yrs); The exec responsible for this project _____ (yrs)
___________ (yrs, months, days)
Entity #
As-Scheduled Project Duration
AQuestion
133
APP
EN
DIX
6
Indi
cato
r V
aria
bles
- M
eans
, Sta
ndar
d D
evia
tions
and
Cor
rela
tions
Indi
cato
r V
aria
bles
Min
Max
Mea
ns.d
.1
23
45
67
89
1011
1213
1415
1.A
UD
- A
bsol
ute
Un-
fo
rese
en D
elay
(day
s)0
1080
.092
.318
2.57
2.RU
D -
Rela
tive
Un-
fo
rese
en D
elay
(%)
00.
70.
10.
120.
94**
*
3.RR
Y -
Prio
r Re
latio
ns (y
rs)
010
0.0
4.8
7.06
-0.1
6*-0
.14*
4.RR
P - P
rior
Rela
tions
(pr
ojec
ts)0
100.
03.
26.
62-0
.14*
-0.1
20.
78**
*
5.G
EY -
Glo
bal E
xp-
erie
nce
(yrs
)0
40.0
15.9
7.92
-0.0
3-0
.01
-0.0
9-0
.27*
**
6.G
EC -
Glo
bal E
xp-
erie
nce
(cou
ntrie
s)0
20.0
4.9
3.38
0.10
0.18
**-0
.19*
*-0
.27*
**0.
67**
*
7.LE
Y -
Loca
l Ex
perie
nce
(yrs
)0
20.0
7.5
7.76
-0.3
0***
-0.2
9***
0.26
***
0.24
***
-0.1
0-0
.22*
**
8.LE
P - L
ocal
Exp
erie
nce
(pro
ject
s)0
12.0
4.5
4.94
-0.2
9***
-0.2
9***
0.28
***
0.26
***
-0.0
4-0
.23*
**0.
78**
*
9.RE
F - T
ensio
n/ a
nxie
ty/
stre
ss-3
3.0
0.0
1.98
0.42
***
0.45
***
-0.2
4***
-0.2
-0.0
40.
15*
-0.5
5***
-0.5
3***
10.
CON
- Co
nflic
t/ di
s-
pute
s/ h
ot d
iscus
sion
s-3
3.0
-0.1
1.96
0.41
***
0.45
***
-0.1
7**
-0.0
9-0
.02
0.19
**-0
.47*
**-0
.48*
**0.
51**
*
11.
INF
- Inf
orm
al in
stit-
utio
nal d
iffer
ence
s-3
3.0
-0.3
1.71
0.37
***
0.38
***
0.01
-0.0
3-0
.10
0.05
-0.4
2***
-0.3
9***
0.46
***
0.46
***
12.
FOR
- For
mal
inst
- itu
tiona
l diff
eren
ces
-33.
0-0
.41.
830.
15*
0.14
*0.
15*
0.12
-0.1
8**
-0.0
1-0
.26*
**-0
.22*
**0.
34**
*0.
36**
*0.
77**
*
13.
COV
- Co
mm
- un
icat
ion
volu
me
054
000.
019
41.6
6173
.20.
24**
*0.
30**
*0.
030.
000.
05-0
.01
-0.2
1***
-0.2
0**
0.19
**0.
15*
0.12
-0.0
2
14.
EMV
- Em
ail v
olum
e0
1000
0.0
472.
813
66.0
0.18
**0.
14*
-0.0
9-0
.1-0
.06
-0.0
9-0
.28*
**-0
.24*
**0.
17**
0.14
*0.
110.
090.
38**
*
15.
TOY
- Ex
tent
that
they
de
pend
on
you
05.
02.
41.
440.
39**
*0.
40**
*-0
.19*
*-0
.13*
0.01
0.02
-0.2
6***
-0.2
6***
0.34
***
0.36
***
0.01
-0.1
6*0.
30**
*0.
21**
*
16.
YO
T - E
xten
t tha
t you
de
pend
on
them
05.
02.
91.
520.
35**
*0.
37**
*-0
.07
-0.1
10.
050.
22**
*-0
.41*
**-0
.43*
**0.
44**
*0.
44**
*0.
38**
*0.
32**
*0.
19**
0.20
**0.
26**
*
* p
< 0.
05,
** p
< 0
.01,
***
p <
0.0
01n
= 24
3
134
APPENDIX 7 Latent Constructs - Means, Standard Deviations and Correlations
1 2 3 4 5 6 7 8 9 10
1.1
2.0.67*** 1
3.-0.27*** -0.17** 1
4.0.47*** 0.49*** 0.10 1
5.-0.20** -0.20** 0.21*** -0.08 1
6.0.4*** 0.36*** -0.21*** 0.17** -0.35*** 1
7.0.59*** 0.60*** -0.14* 0.44*** -0.17** 0.45*** 1
8.0.56*** 0.59*** -0.17** 0.27*** -0.11 0.32*** 0.51*** 1
9.0.35*** 0.41*** -0.27*** -0.14** -0.06 0.57*** 0.33*** 0.33*** 1
10.0.09 0.14* -0.28*** -0.11 -0.30*** 0.16** 0.23*** 0.12 0.09 1
* p < 0.05, ** p < 0.01, *** p < 0.001n = 243
They Depend on You
Global Experience
Latent Construct
Local Experience
Communication Volume
You Depend on Them
Relative Unforeseen Delay
Relational Friction
Conflict
Recurring Relations
Institutional Difference
135
III
Embeddedness, Emergent Uncertainty and Strategies to
Succeed in Unfamiliar Markets
�What is called foreknowledge cannot be elicited from spirits, nor from Gods, not by analogy with past events, nor from calculations. It must be obtained from men who know
the situation.� -- Sun Tzu (500 B.C.)
ABSTRACT
This inductive study investigates the challenges that entrant firms face on large global
development projects � e.g., airports, transportation systems, oil refineries, resorts � in
foreign market environments, and the strategies that they evolve to cope with these
challenges. It uses a multi-case research design with interview data from four types of
firms�Systems Contractors who sell, test and deliver integrated technical systems;
Project Consultants who plan, manage and control large projects on behalf of a client;
General Contractors who undertake responsibility for overall project delivery; and
Developers who finance, acquire land and prepare a site for commercial use. The
research design invokes two logics: a theoretical replication logic, because the level of
embeddedness of the four types of firms varies; and a two-way literal replication logic,
with two firms of each type, each with two projects. The findings indicate that, as firms
become more embedded in an unfamiliar market context, they face a greater local
knowledge deficit and more frequent situations involving emergent uncertainty. As a
result, they are more inclined to use a partner or acquisition entry mode vs. a start-up, to
hire larger numbers of locals relative to expatriate staff and to decentralize control to the
local level. The findings are summarized in 12 formal propositions and reconfirm the
value of Chandler�s classic theorem that a firm�s strategy and structure need to be in
136
alignment with its environment. The findings also shed light on the existence and nature
of �general internationalization knowledge,� by pinpointing three general strategies that
entrant firms use repeatedly across projects and countries: increasing the supply of local
knowledge; decreasing the demand for local knowledge; and reducing the consequence
of a local knowledge deficit. These general strategies disconfirm the popular myth that an
entrant�s performance is tied to climbing a �country learning curve.� On the contrary,
they suggest that absorbing locals into the firm, avoiding the need to learn and avoiding
the consequence of not learning, are equally effective strategies to improve performance.
Overall, the evidence from this study highlights and addresses six key inadequacies and
inaccuracies within the extant international business literature.
INTRODUCTION
A CEO went to Okinawa for the first time. He was on vacation�to see the beaches, to
experience the local culture and to play golf. After the trip, a researcher asked him a
question: �How much did the success of your trip depend on your knowledge of the local
Japanese context: the language, history, culture, economics and politics?� His answer
was: �Gee. Not very much. I had to count local currency, book a hotel room and I even
learned a few words of Japanese and it was a good holiday.�
A second CEO also went to Okinawa, also for the first time, but with a different
objective. He went to buy land and to build a beachfront hotel and resort. Two years into
the project, he was asked the same question and he offered a far more elaborate reply: It was impossible to know all the risks going in. And even the risks that we thought we knew, it
didn�t mean we knew what to do about them. Our success owes more to our [adaptability] than it
does our ability to predict the risks. And we adapted by making friends with locals and by tapping
local knowledge for each key decision� [Local knowledge includes] all manner of facts and
trends about the local theatre�about real estate activity, capital markets, city bylaws, building
codes, contract protocol, the gray area between the written law and what is enforced� health and
safety standards, the credibility of suppliers, the needs of our customers and so on and so forth.
We made good decisions because we had a steady stream of local knowledge.
These responses are typical of managers who enter foreign markets: they need local
knowledge specific to the purpose for their entry (Geertz, 1982); and generally, the more
embedded they are in the local context, the more local knowledge they need to achieve
137
their goals. Yet, while the degree of learning engagement seems to influence performance
in foreign markets (Petersen & Pedersen, 2002), there has been little research to explore
how the depth of learning engagement is linked to embeddedness (Melin, 1992; Jones
1993; Luo & Mezias, 2002) or how entrants cope with a local knowledge shortfall
(Sinkula, 1994).
In this article, we begin the empirical investigation of the link between level of
embeddedness in an unfamiliar market context, level of need for local knowledge and
strategies to cope with a local knowledge deficit. In doing so, we seek to develop a
grounded theory by integrating the experiences of managers engaged in the planning,
design and management of large global projects such as airports, oil refineries, and water
treatment facilities.
The concept of embeddedness (Granovetter, 1985) is central to this study. For a
working definition, we define embeddedness as the level of interaction, coordination or
negotiation between an entrant and other entities in a host market environment. This
implies that an entrant�s level of embeddedness is also linked closely to the entrant�s
degree of exposure to local host institutions�the formal rules and regulations, informal
norms and customs and tacit beliefs and values that support, guide and constrain all
aspects of social action (Scott, 2001; North, 1990; 2005).
This approach builds on Granovetter�s platform. His well-known article concerns the
extent to which economic action is embedded in social relations in modern industrial
society. His thesis is that neoclassical economists have tended to understate the
importance of social relations in market interactions�the so-called �under-socialized
view�� preferring instead assumptions of rational, self-interested behavior affected
minimally by social structure; and that sociologists and reformist economists, have
branched to the opposite extreme�the �over-socialized view��which overstates the
centrality of social structure. He concludes by proposing a middle ground�an
�embeddedness view��to �stress the role of concrete personal relations and structures
(or networks) of such relations, in generating trust and discouraging malfeasance.� He
argues that �most economic behavior is closely embedded in networks of interpersonal
relations and that an embeddedness approach avoids the extremes of under- and over-
socialized views of human action.�
138
In the present study, we build on this view, but in an orthogonal direction. We take it
for granted that embeddedness can and does exist and, rather than playing it up or down
via theoretical filters, we take the view that embeddedness is a measurable variable. Thus,
having first recognized the existence of embeddedness as a concept, as Granovetter did,
we are equipped to go on to the next step of measuring the level of embeddedness that
entrants face in an unfamiliar market setting.
The present study is organized around two core questions: What challenges does
embeddedness create for foreign entrants? And what strategies do entrants actually use to
cope with different levels of embeddedness? Clearly, these questions are closely allied to
the �big question� on the international business (IB) research agenda: What determines
the international success and failure of firms? (Peng, 2004) By responding to these
questions, we take a small step towards injecting the concept of embeddedness into the
sphere of IB research, by examining the effect of variations in level of embeddedness.
The findings tell a dynamic story. The empirical evidence suggests that different firms
do indeed face different levels of embeddedness, determined dually by the type of work
engagement, and the key strategic decisions of management. The evidence indicates three
generic strategies that managers adopt to cope with high levels of embeddedness:
increasing the supply of local knowledge; decreasing the demand for local knowledge;
and reducing the impact of a local knowledge deficit. By adopting these generic
strategies� which apply to any country or foreign market entry situation�firms learn to
minimize unforeseen costs and improve performance. The evidence indicates that while
experiential learning is crucial to success in foreign markets, it has been overemphasized
in the literature, at the detriment of failing to recognize other key strategies such as
circumventing or avoiding the proverbial learning curve.
BACKGROUND
Challenges in Foreign Markets
Despite differing pragmatic aims and the use of a variety of terms and nuanced
definitions, IB scholars who write about entering foreign markets repeatedly employ key
terms that are conceptually similar. The terms �liability of foreignness� (Hymer, 1976;
Ghoshal & Nohria, 1989; Zaheer, 1995; Hennart, Roehl & Zeng, 2002; Beamish & Lu,
139
2004), �liability of newness� (Li & Guisinger, 1991; Lu & Beamish, 2004), �cultural
distance� (Kogut & Singh, 1989; Barkema et. al., 1997; Sim & Ali, 1998; Hennart &
Zeng, 2002), �institutional distance� (Kostova, 1999; Kostova & Zaheer, 1999; Xu &
Shenkar, 2002), �psychic distance� (Johanson & Vahlne, 1977; ) and �political or social
risk� (Goodnow & Hansz, 1972; Kobrin, 1979; Agarwal & Ramaswami, 1992; Barkema
& Vermeulen, 1998; Chua, Wang & Tan, 2003) each have a long and rich history in the
IB literature. Yet all of these terms imply a common assumption: that foreign firms face
challenges and, perhaps, outsider disadvantages, when they enter new or unfamiliar
market settings.
Although there are many variances in these views25, none deals with a key real world
fact. As noted by Melin (1992), they ignore any notion of depth of embeddedness in the
local context. Too many studies suggest, albeit implicitly, that two firms from Country A
who enter Country B will suffer equally from �liabilities of foreignness�, �cultural
distance�, �psychic distance�, �institutional distance� and other forms of �risk�, such as
country risk or political risk. For example, many scholars have discussed the concept of
�foreignness� in a language that implies an amorphous disadvantage or liability that
trickles down and touches all entrants evenly (eg. Zaheer, 1995; Luo & Peng, 1999;
Reuer & Leiblein, 2000; Delios & Beamish, 2001; Guillen, 2002). Similarly, in previous
systematic analyses of the performance of foreign invested affiliates, scholars have
expected to find that �cultural distance�, �psychic distance� or �institutional distance�
would encumber all foreign entrants to the same extent (eg. Park & Ungson, 1997;
Beamish & Kachira, 2004; Barkema et. al., 1997). Likewise, many logical discussions of
�country risk� or �political risk� imply a halo of misfortune that floats down to plague
every venture uniformly within the boundary of a given nation-state (eg. Kobrin, 1979;
Agarwal & Ramaswami, 1992; Barkema & Vermeulen, 1998). But is it really true that
entrants to a foreign market all face the same deficit of and need for local knowledge?
25 One key variance is the oscillation between over-socialized and under-socialized views (Granovetter,
1995). Adherents of �cultural distance�, �psychic distance� and �institutional distance� most always fall to the side of over-socializing IB theory, claiming that differences in social behavior and relations are central to the success of foreign invested affiliates. Meanwhile, the proponents of �risk� generally go towards an under-socialized view, with main emphasis on probabilities and consequences of events, which leaves little room for the dynamics of social realities. Views of a �liability of foreignness� tend to fall somewhere in between these extremes.
140
Learning to Cope with Challenges in Foreign Markets
Within the corpus of IB research, from the earliest studies to the present day, scholars
have reached almost universal consensus concerning the premise that entrants into
foreign markets improve performance as they adapt, learn and accumulate experience
(Cyert & March, 1963; Johanson & Vahlne, 1977; Erramilli, 1991; Eriksson et. al., 1997;
Barkema et. al., 1997; Autio, Sapienza & Almeida, 2000; Barkema & Nadolska, 2003).
This pervasive view is clearest in studies that recognize entry into foreign markets as
processes of internationalization (eg. Anderson, 1993; Welch & Luostarinen, 1988)
organization learning (eg. Luo & Peng, 1999; Lord & Ranft, 2000) and evolutionary
strategy development (eg. Melin, 1992; Douglas, 1996). Despite considerable variance
across these views, the dominant perspective is that entrants learn to maneuver and
transact effectively and efficiently within the context of an unfamiliar market
environment as they iteratively acquire market information, adapt to unexpected
conditions, amend mental models and encode lessons-learned into strategies to guide
future action (eg. Sinkula, 1994; Chapter I).
However, these views fail to address two key realities. First, there has been virtually
no acknowledgment that different types of firms face different levels of embeddedness
that affects the depth of their learning engagement. According to Melin (1992), who
quotes (Jones 1991:13) �mainstream theories of the MNC are unable to access the
institutional and social environment �due to their undersocialized construction�.
Second, the content of what is actually learned has never been adequately described
and learning is inferred, rather than empirically investigated (eg. Makino & Delios, 1996;
Barkema et. al., 1997; Luo & Peng, 1999). Lord & Ranft (2000) provide the following
critique: In this literature� the organizational learning process is typically discussed in broad, illustrative
terms and is usually inferred rather than directly and empirically measured. Learning processes
that are described as being complicated and arduous in theory most often are operationalized and
measured using simple proxies�firms are treated as singular, homogenous entities that �learn�
about a new international market as a function of the overall elapsed time or resources spent in a
new country context.
This prevailing paradigm of abstracting out the content of what firms actually learn or
so-called �content-free learning�, can be traced back to general management science
141
where the �learning curve� or �experience curve� was first developed (Wright, 1936).
The �learning curve� model stems from the observation that as organizations produce
more units of a product (eg. airplanes) the unit cost of production typically falls (eg.
labor-hours per unit produced), but at a decreasing rate (Epple, Argote & Devedas, 1991).
This mathematically definable relationship has frequently been cited as evidence for
learning (eg. Wright, 1936; Hirschmann, 1964; Ghemawat, 1985; Epple, Argote &
Devidas, 1991; Levin, 2000). Further support for �learning curve� models has been cited
from psychology (eg. Lave & March, 1975; Huberman, 2001), where experiments show
that a rat learns to navigate a T-maze according to a similar mathematical �learning
curve� relationship (eg. Tolman & Honzik, 1930, Seward, 1949).
Several IB scholars have implicitly embraced �content-free� models of learning and
have suggested the notion that organizations follow a curve as they learn to work in a
particular host-country environment (Child & Yan, 2003; Isobe, Makino & Montgomery,
2000). However, this notion may be misleading. The reason is that �learning curves� only
evolve when the �learner� is engaged in a standard task. For example, they only evolve in
manufacturing production when the manufacturer has a standard product (Abernathy and
Wayne, 1974) or in �rat-maze performance� when the rat has to negotiate a standard
maze (Staddon, 2003). However, as Ursic and Czinkota (1984) acknowledge, the task of
navigating the foreign market environment involves many non-standard activities.
Furthermore, organization environments are dynamic and turbulent (Aldrich, 1979; Scott,
2003) and in emerging markets volatility is especially problematic (Luo & Peng, 1999).
Thus, speculations that suggest a mathematical learning curve relationship between
length of experience and performance for entry into a particular country may be
questionable.
In addition to having questionable theoretical roots, extant �content-free� theories of
learning fail to address two key questions. The first question is: What is actually learned?
Scholars suggest that learning to succeed in foreign markets involves the accumulation of
at least three distinct types of experience: general, country and business/activity (Kogut
& Singh, 1988; Benito & Gripsrud, 1995). A number of scholars linked to the Uppsala
school corroborate this view, drawing a similar distinction between international
experience, institutional knowledge and business knowledge (Johanson & Vahlne, 1997;
142
Eriksson et. al., 1997; Petersen & Pedersen, 2002). �Institutional knowledge� consists of
knowledge of the institutional framework, rules, norms and values in a particular market.
�Business knowledge� includes knowledge on counterparts (customers, suppliers,
distributors, competitors) in the foreign region, including knowledge about the local
business cultures. However, despite exhortations to flesh out this more complex story of
experiential learning, there has been little effort to untangle general strategies of
internationalization from those that are specific to a particular country or
business/activity (Luo & Peng, 1999).
The second key question is: How much learning is necessary? The question of depth
of learning has been largely avoided, because with extant �content-free models� it has
been infeasible to compare how entrants face varying levels of need for local knowledge.
One exception is a study by Petersen and Pedersen (2002), which indicates that across
foreign entrants there is significant variation in the depth of the learning engagement�
i.e., the effort and ability necessary to learn how to conduct business in a foreign
environment. As already noted, there has been a general neglect of the concept of
embeddedness in the IB literature, so it is not surprising that scholars have been ill-
equipped to analyze an entrant�s level of need for local knowledge. Without a notion of
embeddedness, the local knowledge deficit is presumed to be equal across all types of
entrants. Furthermore, without a notion of depth of need, there has been no impetus to
investigate how firms facing different levels of need adopt different coping strategies
(expatriate versus local staffing, entry mode, organization structure etc.) across industry
sectors.
Given the lack of existing theory connecting embeddedness, the need for local
knowledge and strategies to overcome local knowledge deficits, this research was
designed to generate new theory, not to test existing theory and the paper is organized to
present a new model rather than to refute an old one. Thus, in the tradition of inductive
research, we do not propose any initial hypotheses. Instead, we go directly to a grounded-
theory methodology.
143
METHODS
Table 1 portrays the eight firms studied. All of these firms are in the business of
providing products and services that contribute to the planning, engineering and
construction of large global infrastructure projects. Although not all eight firms would
likely be encountered on any single project, it is conceivable and even likely, that
subgroups of them have collaborated together on past projects, in different countries,
worldwide. TABLE 1
Firm Descriptions
Firm ID Firm Name Firm Type Employ-
eesRevenue
(mil.)aHome
Country Firm AgeGlobal
DiversitybNumber of Interviews
1 Kelso Systems Contractor 33,000 6,800 Finland 90+ 36/110 72 Archer Systems Contractor 76,000 21,000 France 100+ 55/150 43 Duke Developer 1,800 400 US 50+ 5/5 54 Heroic Developer 2,800 750 US 40+ 12/16 135 Marengo Project Consultant 7,000 800 UK 100+ 35/120 56 Phantom Project Consultant 1,300 200 Japan 50+ 17/120 117 Boomerang General Contractor 44,000 16,000 US 100+ 26/140 88 Forester General Contractor 35,000 9000 US 80+ 25/95 7
a The revenue and employee figures aggregate international operations, across several corporate divisions,for the calendar year 2003.b Number of countries with corporate headquarters as of May 2005. / Number of countries with project siteoffices, both past and present.
Case Study Design
The study invokes a multiple case study design. The logic underlying the use of multiple
cases is replication. As Yin (2001) explains, �Each case must be carefully selected so that
it either�predicts similar results to enhance reliability of the findings (a literal
replication) or�produces contrasting results but for predictable reasons (a theoretical
replication).�26 The eight-firm sample was designed to generate four instances of
theoretical replication along the embeddedness dimension (i.e., each of the four types of
firm has a different level of embeddedness); and to generate several literal replications
(i.e., there are two instances of each type of firm, and each firm has at least two projects).
26 Yin�s original language has been modified slightly to fit the context of this particular paragraph.
144
Research Setting
Large global projects provide a setting where many international firms congregate, each
with different roles, responsibilities and home country affiliations. Literature related to
large engineering projects includes studies of temporary organizations that undergo
simultaneous structuring and operations (eg. Thompson, 1967); the quasi-firm and the
organization of the construction industry (eg. Eccles, 1981); mega-projects and the
management of uncertainty (eg. Stinchcombe and Heimer, 1985); construction projects as
hierarchies of contracts (eg. Stinchcombe, 1990); and projects as high-stakes, real-options
games that involve the shaping of risks, stability and governability (eg. Miller & Lessard,
2000).
Global construction projects provide a unique research setting for two chief reasons.
First, most international project participants enter the host market expressly to work on a
single project and exit immediately upon completing their work. Thus, they face all of the
short-run downside risk that comes with foreign market entry, yet they enjoy little of the
long-term advantage that comes with establishing a permanent market presence. Second,
many participants face extremely high levels of embeddedness. To execute their work,
they must interact with literally hundreds of local firms and government agencies and
maneuver and transact within a gridlock of locally-devised rules, requirements, standards,
practices, protocols and assumptions related to the building construction industry.
Data Sources
Data collection included open-ended interviews, project visits, structured interviews,
meeting observations and review of project documents.
Focus on projects. We interviewed approximately 50 managers who had worked on
global projects with roles and responsibilities in management, engineering, design and
construction. Table 2 summarizes the projects that were discussed in the interviews. They
ranged in value from $50 million, to $1.7 billion and in scheduled duration from two
years, to just over five years. Table 3 portrays the budget, schedule, staffing, contract and
risk characteristics of the project engagements for each type of firm. At the time of the
interviews, all projects were ongoing or had been completed within the past five years.
145
Open-ended interviews. The majority of the interviews followed an open-ended
protocol, as recommended by Spradley (1979). They lasted between one and two hours,
were digitally recorded for subsequent transcription and review and were conducted
during an 18-month period between May, 2003 and November, 2004. Informants also
provided more than 200 pages of secondary archival data enriching the contextual
background surrounding many of the critical incidents, including newspaper articles,
project briefs, internal memos, email, formal organization charts, budgets, schedules and
other project documents. Through the process of conducting and analyzing these
interviews, we recognized the critical importance of the embeddedness concept and
subsequently designed structured interviews to deepen the investigation.
Structured interviews. The structured-interview protocol, which was developed to
measure embeddedness, is provided in Appendix 1. The questions were printed on 8.5� x
11� cardstock, in size 18 font, to focus, guide and normalize the interview dialogue.
Administering the structured interviews. Structured interviews were conducted both
by telephone and in face-to-face meetings. In January, 2005, informants at Duke, Heroic,
Boomerang and Forester were interviewed by telephone. In February, 2005, we visited
several large infrastructure projects in Asia to interview informants at Kelso, Archer,
Marengo and Phantom. In addition, these site visits also provided many spontaneous
opportunities to observe meetings, decisions and interactions. Most of the interviews
lasted between 15 and 30 minutes. In the case where an informant did not have an
�instant� answer, they were encouraged to contact a more knowledgeable colleague. For
example, when estimating the number of formal market relations, most informants made
a quick call to the project�s Accounts Payable department.
Data Analysis
We followed the grounded-theory approach recommended by Glaser and Strauss (1967),
Miles & Huberman (1994) and Eisenhardt (1989), analyzing the data in three distinct, yet
highly iterative and interrelated phases. As Glaser and Strauss (1967:105) explain, this
method entails, �first, coding each incident in the data into as many categories of analysis
as possible and comparing incidents [in] each category; second, integrating categories
and their properties�resulting in a unified and �developing theory; and third, delimiting
146
TABLE 2 Project Descriptions
Project ID Project Description Firms Present Region Project
DurationProject Value
Site Visit by 1st Author
1 Mass Transit System
Kelso, Archer, Boomerang,
Phantom Asia 61 mo. $700M yes2 International Airport Kelso, Phantom SE. Asia 36 mo. $1.1B yes3 Water Treatment Plant Archer, Marengo Asia 54 mo. $160M yes
4 Rail Transit SystemMarengo,
Boomerang Asia 78 mo. $13B yes5 Resort Complex Duke Asia 36 mo. $1.7B no6 High End Housing Development Heroic E. Europe 24 mo. $30M no7 High End Housing Development Heroic E. Europe 40 mo. $45M no8 Commercial Office Development Heroic W. Europe 28 mo. $100M no9 Commercial Office Development Heroic E. Europe 48 mo. $50M no
10 Motor Way Boomerang E. Europe 42 mo. $260M no11 Petro Chemical Refinery Forester Asia 48 mo. $1.2B no12 Petro Chemical Refinery Forester Middle East 48 mo. $900M no
TABLE 3 Project Engagement Characteristics, by Firm Typea
Activities Project Consultants Systems Contractors General Contractors Developers
Budget $3M - $24M $14M - $79M $50M - $800M $50M - $1.7BWork Schedule 2 - 7 yrs 1 - 3 yrs 2 - 5 yrs 2.5 - 6 yrs
Peak Professional Staff 25 - 190 12-Feb 22 - 82 9 - 250b
Peak Labor Force 0 20 - 120 800 - 3500 0
Type of Contract Professional Fee Lump Sum, Fixed Price
Lump Sum, Fixed Price n/a
Profit Terms Markup on Fee 5% - 40% Contract Value
1% - 5%Contract Value
12% - 25%ROIc
Primary Project Delivery Risks
Contract termination by a dissatisfied
client; liability for professional negligence
Delay caused by other project parties or
customs inspection.
Cost or schedule overrun without
possibility for claims.
Cost or schedule overrun that impacts
ROI profile.
Contingency n/a 2%-8% 2%-5% 5%
aN = 17. Project details are described in Table 2. bHeroic: 9-31; Duke 30-250. cROI stands for return on investment. the theory�and reformulating it with a smaller set of higher level concepts.� Once the
categories had emerged and once we had developed a coherent and parsimonious
147
conceptual framework to integrate the categories, we selected illustrative quotes and
vignettes from the interview transcripts to provide telling examples.
CHALLENGES IN FOREIGN MARKETS
Embeddedness
Many IB studies suggest a link between the performance of foreign entrants and
measures of �cultural distance� (Kogut & Singh, 1989; Barkema et. al., 1997; Sim & Ali,
1998; Hennart & Zeng, 2002), �institutional distance� (Kostova, 1999; Kostova &
Zaheer, 1999; Xu & Shenkar, 2002) and �psychic distance� (Johanson & Vahlne, 1977).
Studies that take this perspective make the implicit assumption that cultural, institutional
and psychic distance encumber all foreign entrants equally.
The data from this research suggests that this assumption is mistaken. Certainly, as
extant theories well predict, firms that enter foreign markets face unexpected conditions
and incur unforeseen costs when they misjudge and misunderstand local culture and
institutions (Chapter I, Chapter II). However, these conditions and costs are not uniformly
distributed across all entrants, as previously had been assumed. Instead, our findings
suggest that each type of firm faces a distinct level of embeddedness in the host country
context. Our evidence reveals that the level of embeddedness is different for every
entrant, because every type of entrant has specialized objectives, resource needs,
activities, regulatory requirements, levels of exposure to civil society and industry
affiliations. Our results also indicate that as entrants become more heavily embedded in
the local context, they need more local knowledge in order to anticipate, assess and adapt
to the locally defined ideas, interests and institutions. Consequently, when they fail to
acquire this local knowledge, they face a greater likelihood of unanticipated relational
friction. More formally,
Proposition 1: The more deeply an entrant is embedded in an unfamiliar market
setting, the more local knowledge that entrant needs to achieve its objectives and to
avoid unforeseen costs.
Table 4 and Table 5 display evidence to show that embeddedness varies significantly
for different types of global project entrants. Table 4 illustrates �overall embeddedness,�
148
i.e. a measure of the total number of relations between a global project entrant and local
organization entities. The local organization entities are grouped into four categories.
TABLE 4
Overall Embeddednessa
Min Max Mean Min Max Mean Min Max Mean Min Max MeanFormal Regulatory Relations 9 24 17 3 5 4 8 29 14 12 21 16.75Formal Market Relations 12 220 78 9 55 36 50 95 64 640 1600 1123Informal Community Relations 3 55 22 0 0 0 5 15 10 5 28 12Informal Project Relations 12 380 166 6 18 12 0 5 2 12 31 20.75
Total Number of Relations 36 679 282 18 78 52 63 144 90 669 1680 1172
aN = 17. Project details are described in Table 2.
Systems ContractorsType of Relation
DevelopersProject Consultants
General Contractors
Formal regulatory relations include interfaces with local arms and agencies of
government that grant approvals, permits and licenses (e.g., Transport and Highways,
Fire Department, Police, Building Department). Formal market relations include
transactions with local firms in the marketplace that provide products and services (e.g.,
tool suppliers, materials vendors, sub-contractors). Informal community relations include
interactions with community groups and stakeholders that provide legitimacy to a project
(e.g., NGOs, school board, shopkeeper�s guild). Informal project relations include non-
contractual dealings with other firms on a project that arise by virtue of working side-by-
side and sharing limited project resources and physical workspace (e.g., foundation,
electrical or elevator subcontractors). Table 4 reveals that, as a class, General Contractors
bear by far the greatest level of overall embeddedness, with a low of 669, a high of 1680
and a mean of 1172 total relations with local entities. On the other end of the spectrum,
Table 4 indicates that the Systems Contractors face the lowest level of embeddedness,
with a low of 18, a high of 78 and a mean of 52 relations with local entities.
Table 5 illustrates �relative embeddedness,� i.e. the relative level of engagement for a
global project entrant across a set of eight project activities. The evidence indicates that
the relative depth of embeddedness varies considerably across entrants. For example, as a
class, Developers face a much higher level of embeddedness than do Systems
Contractors. This is because Developers need to buy land, understand property rights,
resettle displaced peoples and navigate the often political processes of gaining
149
entitlements and building permits, all according to local practices and protocols that are
different in every country and often in every city. As one Heroic executive explained, �In
Russia, our project was delayed 1.5 years because we didn�t understand the process of
getting all the necessary approvals and permits and they were a very complex set of
requirements we had to comply with.� In contrast, Systems Contractors who supply,
install and maintain building systems such as elevators enter a country, do their work and
TABLE 5 Relative Embeddednessa
ActivitiesProject
ConsultantsbSystems
ContractorsbGeneral
Contractorsb Developersc
Buying Land 0 1.3 1.3 3.0Handling Resettlement Issues 0 1.5 0.5 1.6Getting Goods through Customs 2.0 1.0 2.5 1.6Applying for Permits and Entitlements 0.5 1.3 1.8 3.0
Procuring Local Labor 1.3 0.5 3.0 2.0
Procuring Local Supplies 3.0 1.5 1.3 1.4
Negotiating with Local Government 0 3.0 2.0 2.0
Entering into Locally-Enforced Contracts 0 2.8 3.0 2Total Relative Engagement 6.8 12.8 15.3 16.6
aValues in cells correspond to relative level of engagement in each activity:0 = None, 1 = Low, 2 = Medium, 3 = High. This scale provides an ordinal indication of a project entrant's level of interaction, negotiation, and coordination with local entities to complete each activity, relative to other project participants.bN = 4; cN = 5. Project details are described in Table 2.
then exit without undertaking many of these difficult, locally-embedded activities. As one
Kelso executive noted, �We have a country manager who sells into each country and
once a sale is committed, there really isn�t a lot that can go wrong.�
Thus, the level of embeddedness is not uniform, although past studies have assumed
uniformity of embeddedness or have ignored its effects. Rather, different types of firms,
with different kinds of work and activities, face dramatically different levels of
engagement with organizations and institutions in the host environment, as evidenced in
Table 5.
Embeddedness, by firm type. Of all firm types, General Contractors face among the
highest levels of embeddedness and hence the greatest outsider disadvantages, when they
enter new markets. For example, on a Motorway project, Boomerang reported more than
20 regulatory relations, more than 200 direct hire sub-contractors, more than 1000
.
150
vendors and suppliers, more than 25 regulatory relations, more than 20 community
relations and more than 30 informal project relations. One key aspect of this outsider
disadvantage stems from extremely high levels of formal regulation. As one Forester
representative described, The permit requirements are extremely different in every country. And the branches of
government you need to obtain permits from, they differ too. There is no standard government.
Some of the agencies that you find�you just shake your head and wonder why they were ever
created in the first place� On this project, we encountered the Executive of Yuan, the Department
of Tax, the MRT Company, the Department of Economics, the Department of Labor, the
Department of Internal Affairs, the Fire Department, the Police, The Environmental Department,
the Road Authorities, the National Water Company, the National Power Company, the City
Planning Department, the Department of Construction, the Work and Safety Agency, the
Department of Immigration and the Customs & Excise Board and there might be more. And they
all require a permit or an approval or an inspection or [who] knows what.
Another key aspect of this outsider disadvantage stems from high levels of interaction
with the local community. As one Boomerang executive noted, There are a number of groups in the community with whom we coordinate and liaise. The ND
Traders Association (who don�t want their businesses to be disrupted), the local project directors
and investors (who want to be sure contracts are awarded to their FBI clan�friends, buddies & in-
laws), a local environmental conservation group (who are worried about the ecological impacts),
the press and media (who claim corruption), the Imam of local mosques (who complains about
noise), the schools and shops along the metro corridor (who complain about dust and safety),
Members of Parliament and other VIPs (who come to the site for tours), the squatters (who get
into the work area) and all of the clever locals (who decide to file a lawsuit against you). There can
be dozens of them. One by one they take legal action and claim their pound of flesh from the
project. They claim for cracks in their walls, differential settlement of their foundations and
whatever else they can dream up to extract a pay-off.
All of these relations bring significant levels of contact with local beliefs, values,
practices and rules. And vice versa. Since General Contractors face high levels of formal
regulation, informal monitoring and social scrutiny, they also face greater numbers of
obligatory interfaces and a greater necessity, intensity and complexity of negotiation with
local actors. So, the combination of needing to enter large numbers of voluntary relations
with local vendors and suppliers and to comply with an assorted variety of social
151
expectations and regulative requirements, prompts a very high level of embeddedness for
General Contractors.
Developers also face high levels of embeddedness. As Table 5 depicts, many activities
that developers undertake are in the early �fuzzy front-end� shaping phase of project
development. Activities such as buying land, handling resettlement issues and negotiating
with local government officials for entitlements, approvals and permits all require a deft
understanding of local politics, historical precedents and power games. In addition,
developers usually work at risk, so the consequence of not understanding these local facts
and trends can be extremely expensive. As one Heroic executive noted, �We spent more
than $1M on conceptual design for a project in Europe and then we learned that the land
title that we thought we had, was in limbo. And we never did build the project.�
Project Consultants also face high levels of embeddedness, as indicated in Table 4.
However, they tend not to face as much of an outsider disadvantage as do General
Contractors or Developers. They generally face much less downside risk, because they
are compensated monthly on a reimbursable cost plus fixed-fee basis, so they get paid
regardless of a particular project outcome. And their product is information�nowadays
often delivered in digital form�so they can do much of the work in their home country
office and transmit their work product to the local country without having to deal with
local customs officials, delivery services and the like. In contrast, General Contractors
and Developers work primarily at risk�with hard-money, fixed-price contracts.
Secondly, Project Consultants, especially on civil infrastructure projects such as dams,
roads, railroads or water supply projects, generally work closely with a local
governmental client in a supporting role. They assist the client in an advisory capacity
with technical, financial and general project management and decisions. Although they
are involved in large numbers of local relations and negotiations, this is usually in
partnership with a client representative who has a long history in the local community
and the benefit of access to all of the host government resources. In contrast, global
General Contractors and Developers work independently at arms length�by design�
and lack the benefit of a collaborative local client to play the role of trusted local guide.
Table 4 and Table 5 indicate that Systems Contractors face the lowest levels of
embeddedness and that the majority of their local relations fall into the �Formal Market
152
Relations� and the �Informal Project Relations� categories. The bulk of the formal
market relations are with vendors who supply basic materials, hand tools, office furniture
and stationary. In contrast to Developers and General Contractors, very few of the formal
market relations are with subcontractors, primarily because most of the work associated
with installing their systems in a building or infrastructure project is of a very complex
technical nature and thus, not amenable to being outsourced. The large number of
informal project relations is explained by the fact that Systems Contractors provide core
systems, such as elevators and escalators in a building, pumps and piping in a water
treatment facility or signals and track work in a subway. Thus, they need to coordinate
and liaise with other major systems providers and sub-contractors to ensure functional
integration with other systems and structures.
Finally, in many instances the size of an entrant�s project team in a country is a useful
proxy for the number of linkages with local entities. Large contractors who have
hundreds of local employees will also tend to have a larger number of local relations than
do systems contractors who have only a dozen or so local staff.
Consequences of embeddedness. The consequence of embeddedness is that for every
activity associated with local actors or institutions, an entrant requires a certain basic
level of local knowledge about those elements. If the relevant elements are well
understood prior to performing the task, much of the activity can be planned in advance
and the task is accomplished in the most efficient fashion at a minimum level of effort to
the responsible manager (Galbraith, 1973). If these elements are not understood, then
institutional exceptions�misjudgments, misunderstandings and conflict� arise that lead
to changes in priorities, plans and strategies. Our evidence suggests that all of these
changes require sense-making, trial-and-error learning, local knowledge search and
adaptation and a high likelihood of relational friction (Chapter I). Therefore, the greater
an entrant�s knowledge deficit at the outset of a task, the greater the likelihood that sense-
making, trial-and-error learning, rework and adaptation will occur during task execution
to achieve a given level of performance and the greater the probability of unanticipated
relational friction with the locals. Thus, the central effect of an actor�s local knowledge
deficit is a limited ability to anticipate issues, make sense of problems that arise, set
priorities, develop strategies or make decisions about activities in advance of their
153
execution. For example, a knowledge deficit with respect to local contract law can lead to
difficulties in relations with local sub-contractors. As one Boomerang informant
described, If we don�t understand the local law and we muddle the language in the first contract or leave
something out, it probably means that we will repeat this mistake in the next 99 contracts, because
we use the first as a template for the others. A mistake like that could spell disaster. It could cause
lawsuits and months and months of unnecessary claims and counter-claims.
Similarly, a knowledge deficit with respect to local work practices can lead to relational
friction with the craft trades. As one Forester executive explained, In Hong Kong, it takes a while to figure out all of the trades and their normal working hours. No
matter how hard you try, you will never get the electricians to come in before 9am. All of the other
trades will come in early, but not the electricians. They feel it is their right to come in at their
leisure. And when we first arrived, this caught us by surprise and we spent weeks chasing our tails
trying to get them to come in early.
Likewise, a knowledge deficit concerning local political games can lead to confusion
about who to believe or trust. For example, one Phantom project executive explained, In Thailand, the newspaper will print anything if you pay them enough baht. It is common practice
for top government officials to buy a nice story about themselves. Or, another common tactic is to
call the newspaper if you want to insult an enemy. And I guess it�s no different from the political
gamesmanship that you see other countries. But this makes life miserable when you�re trying to
run a project, because all of the slanderous stuff that makes its way into the press. And you never
know who to believe or trust. So you spend a lot of time tip-toeing around and getting second
opinions about everything you hear in the news.
Therefore, it is evident from the discussion above and these supporting examples, that
every relation with a local entity brings some level of need for local knowledge. This
local knowledge is necessary to avoid errors, quarrels and confusion and to resolve
relational friction quickly when it begins to escalate. In general, the greater the number of
interfaces with locals, the greater the variety of interfaces and the greater the intensity of
interaction across each linkage, the greater an entrant�s aggregate need for local
knowledge.
154
As entrants become more embedded in the local context, a failure to acquire relevant
local knowledge can lead to unforeseen costs. For example, as, one senior VP at
Boomerang described, The four most difficult things you can do in a foreign country are buying land, getting things
through customs, getting permits and enforcing your contracts. And each country you go it�s a
different set of hoops you need to figure out and jump through. And if you don�t figure it out,
these things can add delay to your project and can cost you a whole lot of money. Usually less
than 10% of your total project costs, but that can be a huge amount if you�re operating on a 5%
contingency and 5% profit margin.
Indeed, when an entrant fails to understand local host institutions, misjudgments,
misunderstandings and conflicts inevitably arise, which translate into unforeseen costs for
the entrants: money costs, time delay, relationship damage and reputation damage (Orr &
Scott, 2005). One striking example comes from a water treatment facility project in Asia.
The Marengo consulting engineer who told the story noted that, We split the project into two smaller work packages�no difference in scope. We put them out to
international tender and two different Chinese firms won the bid. So it was a bit of horse race.
Firm One turned around and hired the best local contractor in Pakistan, Habib Rafiq and their
name is as good as credit, to manage the project. So it was basically a Habib Rafiq job from day
one. Firm Two took a different tack. They sent Chinese managers over and tried to self-perform
the work. Well, as you might imagine, Firm One finished right on schedule�more than a year ago
now� and Firm Two is still goofing around getting materials delivered and finding skilled labor.
Finally, although it is tempting to think of embeddedness as an independent variable,
our evidence suggests that it can also be a decision variable. As one Heroic informant
expressed, �you have to decide how embedded you want to get and that depends on your
long term goals.� Another Heroic informant noted, �how embedded you get depends on
your risk profile�the more embedded, the more risk you face on a big [real estate]
development.� A senior Boomerang executive explained, When you win a big project, you can do two [extreme] things. You can farm out the entire job, all
kit-and-caboodle, in one big sub-contract package. Or you can try to self-perform the work and
hire dozens of sub-contractors, who in turn hire hundreds of sub-subcontractors, until at the
bottom of each tentacle you�ve got five guys and a truck coming in to do some work. But
remember, each interface creates some coordination and risk. So, if you adopt this [second]
155
strategy, you really need to be in tune with the local market, means and methods and you need an
exceptional local staff.
Overall, our evidence suggests that two main factors affect a firm�s level of
embeddedness in the local context: the types of activities that they set-out to achieve; and
the management decisions that are made to allocate responsibility for completing those
activities. For example, decisions to execute activities internally versus to outsource
activities to a local contractor or consultant can have a large impact on an entrant�s level
of embeddedness.
Emergent Uncertainty
Recently, a number of authors (eg. Han & Diekmann, 2001; Chua, Wang & Tan, 2003;
Chan & Tse, 2003; Wade, 2005) have written about political, cultural and social �risks�
in foreign markets in tones that imply a priori predictability. Similarly, many software
vendors and consultants27 suggest in their marketing materials that political instabilities,
cultural conflicts and social uprisings can be assessed and predicted with probabilistic
tools and techniques.
Our findings contradict this view. We find that these approaches, which rely on
subjective assessment of probabilities (Howard & Matheson, 1983), are unreliable
without significant recent country experience. We also find that relational interactions
that are characterized by indeterminacy28 often lead to critical incident scenarios that
cannot possibly be predicted a priori, but, can only be managed if and when they occur.
Thus, we conclude that as entrants face greater levels of embeddedness, they also face
more frequent situations of emergent uncertainty�i.e., situations when unanticipated
27 For example: Control Risks Group (http://www.crg.com/), Pegasus Consulting Inc. (http://www.pegasusconsultinginc.com/), Pertmaster Project Risk (http://www.pertmaster.com) and Palisade (http://www.palisade.com/). 28 Lessard & Miller (2000:76) distinguish between weak uncertainty, strong uncertainty and indeterminacy: �Weak uncertainty holds when managers have enough information to structure problems, estimate distribution and build decision models. Strong uncertainty characterizes situations in which there is such an absence of knowledge and information that decision-making issues are ambiguous. Indeterminacy means that future outcomes are not only difficult to assess but depend on exogenous events or endogenous processes that can lead to multiple possible futures. Indeterminacy is thus a risk that can be partly solved by strategic actions.� Note that this distinction follows from Knight (1921), who first proposed a difference between insurable risk (i.e. weak uncertainty) and uncertainty/ambiguity (i.e. strong/emergent uncertainty).
156
factors and dynamics arise in the alien market setting and when complex and interactive
relations yield unexpected outcomes. More formally,
Proposition 2: The more an entrant is embedded in an unfamiliar market setting, the
less likely that a priori risk analysis approaches will help to prevent unforeseen costs.
Proposition 3: The more an entrant is embedded in an unfamiliar market setting, the
more likely that emergent relational dynamics will generate unforeseen costs.
Table 6 illustrates situations where an entrant incurred unforeseen delay as a consequence
of an unanticipated event in a foreign host market. The examples illustrate how each
situation, from the entrant�s perspective, was characterized as unexpected, unforeseen or
surprising. Thus, the examples highlight the weakness of formal risk analysis: without
recent country experience and a foreknowledge of the pertinent risk drivers and
dynamics, an entrant is unable to anticipate many of the main risk factors. Thus, while
formal risk analysis may be helpful as a proactive exercise to stimulate an entrant to
consider risks and consequences, it is only as informative as the experience of the analyst.
The examples suggest that, when an entrant lacks local knowledge about factors like the
capabilities (or lack of capabilities) of local actors, incidences of terrorism, legal
precedents, customs protocols or levels and forms of government corruption, then
unexpected events and consequences can and do arise.
157
TA
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"One
of t
he m
ost u
nexp
ecte
d th
ings
that
hap
pene
d, w
as a
sub-
cont
ract
or re
fuse
d to
hon
or a
n un
fore
seen
gr
ound
con
ditio
ns c
laus
e in
our
stan
dard
form
con
tract
. We
felt
they
wer
e co
ntra
ctua
lly re
spon
sibl
e to
fix
a ca
ve-in
, but
they
refu
sed
and
wal
ked
off t
he jo
b. W
hen
we
talk
ed to
a lo
cal l
aw c
onsu
ltant
, the
y to
ld u
s tha
t 'n
o ju
dge
in S
pain
wou
ld e
nfor
ce su
ch a
ridi
culo
usly
one
-sid
ed c
ontra
ct.'"
Arc
her/
Proj
ect
Man
ager
Cus
tom
s cle
aran
ce
was
del
ayed
for
outg
oing
ship
men
ts
Six
mon
th c
ritic
al-
path
del
ay to
in
stal
ling
Wat
er
Pum
ps
"The
hos
t gov
ernm
ent c
reat
ed a
fast
-trac
k pr
ogra
m to
exp
edite
all
of th
e sh
ipm
ents
thro
ugh
cust
oms.
But
ther
e w
as n
o pr
ogra
m to
get
ship
men
ts b
ack
out o
f the
cou
ntry
; and
we
need
ed to
send
equ
ipm
ent b
ack
to th
e fa
ctor
y fo
r rep
airs
and
alte
ratio
n. A
nd th
is c
ost u
s mon
ths o
f wai
ting.
.. A
nd ta
lkin
g se
nse
into
an
[Asi
an]
cust
oms a
gent
just
isn'
t eve
n an
opt
ion.
The
y ha
ve th
eir r
ules
to fo
llow
."
Mar
engo
/ R
esid
ent
Engi
neer
Equi
pmen
t was
sa
boto
ged
by h
ost
gove
rnm
ent t
o hi
de
corr
uptio
n
Seve
ral w
eek
criti
cal-p
ath
dela
y w
aitin
g fo
r new
eq
uipm
ent
"Offi
cial
s in
the
host
gov
ernm
ent d
am u
p th
e ca
nal a
nd th
e w
ater
runs
dow
n th
e m
ount
ain
into
man
mad
e la
kes.
They
pum
p th
e w
ater
into
priv
ate
wat
er ta
nker
truc
ks. T
hen
they
turn
off
the
wat
er to
a p
art o
f the
city
(a
des
ert c
limat
e) a
nd ru
n th
e ta
nker
s int
o to
wn
to se
ll w
ater
doo
r to
door
. Its
org
aniz
ed ro
bber
y. A
nd th
ey
sabo
tage
the
wat
er m
eter
in th
e ca
nal s
o th
at k
now
one
kno
ws h
ow m
uch
they
stea
l. I'v
e al
read
y re
plac
ed it
th
ree
times
this
yea
r and
it sh
ould
hav
e a
20 y
ear l
ife e
xpec
tanc
y. A
nd h
ow [o
n ea
rth] i
s you
r ris
k an
alys
is
ever
supp
osed
to c
atch
that
one
?"
158
Emergent uncertainty, by firm type. General Contractors, with the highest level of
absolute embeddedness in the present sample, exhibit little faith in formal risk analysis
and acknowledge that emergent uncertainty is not an exception, but an everyday business
reality. A Forester executive described his view on risk analysis, as follows, It�s like Donald Rumsfeld [the US Defense Secretary] articulated last week. There are known
knowns, there are known unknowns and there are unknown unknowns. And when you�re dealing
with unknown unknowns, then risk analysis isn�t going to do you a damn bit of good. And that�s
what makes our business so unique. If you want to be a general contractor, you�ve got to be
adaptable. I�d say we have to be a lot more adaptable then the consultant or then the systems
contractors, because we�ve got the most exposure to the local mechanics. We�re the most
connected to the moving cogs and gears that drive the project forward.
Reinforcing this point, a second Forester executive noted, Take for example this project in [the Middle East]. It has just been one firefight after another. And
that�s how most of our projects go. A lot of this stuff is unpredictable. Its fire fighting. As you get
one fire contained, you find the next one you need to fight. And sometimes there are two or three
at a time and you have to prioritize. And the faster you get to them, generally the faster you can
douse them, but not always. There was a misunderstanding with the Sheik�s son last month that is
still causing us all kinds of brain damage�and we got to that one right away.
He went on to explain that high levels of embeddedness create large numbers of meetings
and possibilities for emergent uncertainty, You can almost characterize the type of work that we do by the number of meetings that we have.
Meetings here. Meetings there. It shouldn�t be called construction management, it should be called
relationship management. And when you go international, every time you need to use a translator,
the possibility for miscommunication shoots way up. Our business is all about communication and
coordination and anytime you�re dealing with real people on a deadline, there are going to be
disputes to sort through and tough decisions to be made.
Developers, who face relatively high levels of embeddedness, also tend to face high
levels of emergent uncertainty and they also seem to understand intuitively the limits of
formal risk analysis. As the CEO of Heroic acknowledged, in response to his own
question, Can we predict the risks in a foreign market�the cultural, political and market risks? Well,
hindsight says no. Even if we know what the risks are going to be, we�ll never have a clue about
159
what to do about them. There is no formula for it. We don�t have any sort of step-by-step or how
to manual�I think, even if you could figure out what the issues were going in, you couldn�t
necessarily figure out how to solve them. So, the short answer is no. So what we do instead, is we
go in and we physically try to find someone who is in the country and who is already effective
there, to be our guide and mentor.
He also alluded to the fact that the level of embeddedness faced by his organization is
much greater than that faced by other internationalizing firms, with the following remark, And we have a lot more to predict going in than a guy who goes in to open up a new coffee shop
or a currency exchange booth. And I used to subscribe to some of the academic journals on
international business. And some of it was good, but so much of it was for the guy that does the
fast food restaurant or the currency booth. And we just face so much more complexity than that.
So eventually I cancelled the subscriptions because what we do is so much more inherently risky.
Strikingly, Project Consultants, who do face lesser consequences of debilitating project
risks, are among the strongest advocates of formal risk analysis tools. When we visited
one Marengo site office, several of the engineers were proud to show off risk analyses
that had been prepared for their project. As one engineer noted, This is a tool we can offer our clients, to help them plan for the unexpected. Good risk analysis is
critical to project success. And we help guide this process. We provide the framework and elicit
their inputs to develop the model, because they know so much more about the situation here in
[Asia].
Finally, the Systems Contractors, who are among the least embedded, are also the most
likely to use formal risk analysis techniques. For example, at Kelso, a risk analysis is
mandatory before every major project, using an MS Excel tool to record the probabilities
and consequences of all the uncertain factors. While demonstrating his firm�s risk
analysis software, one Kelso director of major projects described, This is our risk management approach�Although the tricky part is discerning what to put in here,
in our business, most of the factors stay the same from country to country, so the general template
and the line items don�t tend to change too much from project to project�And that works pretty
well. What�s interesting is to go back after we build out a project and check the precision of our
numbers. Usually they are right on, except in the impossible case when we don�t even know to
anticipate a certain cost factor and it jumps out of the bushes like a snake to bite us.
160
Similarly, at Archer, risk analysis was a deeply engrained aspect of the corporate culture.
As one Archer executive expounded, We have had several situations where our risk analysis overlooked the major uncertainties that in
the end were the big ticket cost items. But most of the time, our analysis is pretty good. There isn�t
all that much can go wrong. We have developed our tools and a culture of using the tools to assess
most of the factors well before they cause trouble. So, risk analysis is something we�re really big
on at [Archer].
In summary, our evidence suggests that without knowledge of the local context, an
outsider is unprepared to use risk analysis tools to predict unforeseeables. Our evidence
also suggests that an entrant�s level of emergent uncertainty is connected to their level of
embeddedness in local relations and institutions. In addition, our evidence confirms that
relational uncertainty is an emergent phenomenon, that can be shaped through good
communication and thus is extremely difficult, if not impossible, to predict a priori. For
these reasons, General Contractors and Developers, who are the most embedded, tend to
be far less likely to extol the benefits of formal risk analysis processes than Project
Consultants and Systems Contractors who face much lower levels and consequences of
embedded relations.
FIRM-SPECIFIC STRATEGIES
TO COPE WITH CHALLENGES IN FOREIGN MARKETS
Firm-Specific Strategies
Many studies have examined the process of organizations learning to succeed in foreign
markets (Johanson & Vahlne, 1977; Erramilli, 1991; Eriksson et. al., 1997; Barkema et.
al., 1997; 2004). Other related studies have zoomed in on one specific aspect of this
process, such as, mode of foreign market entry (eg. Erramilli, 1991, Brouthers, 2002);
sequence of foreign market entry (Pan, Li & Tse, 1999), or staffing policies of new
entrant firms (Boyacigiller, 1990; Gong, 2003).
These studies tend to have two key limitations. First, in the empirical studies, we find
high levels of aggregation across industry sub-groups (eg. Erramilli, 1991; Pan, Li & Tse,
1999; Brouthers, 2002), often to ensure a statistically significant sample size, but at the
cost of ignoring the unique drivers, dynamics and strategies that characterize each
161
industry sub-group. Second, across all of the studies, we find that embeddedness has not
been seriously considered as a determinant of the level of need for organizational
learning or the market entry strategies that evolve.
In contrast to these studies, our sample explores the effects of variance along the
embeddedness dimension and finds that embeddedness plays an important role in how
different types of organizations perceive and learn about the challenges in foreign
markets. Moreover, our data confirm that embeddedness is a primary determinant of
entry strategy, staffing policy and organization structure. This confirms Melin�s (1992)
observation, that �when studying internationalization within a strategy process
framework, it is crucial to focus on �organizations in their sectors (Child, 1988).�� Our
evidence, which is discussed in detail below by firm type, suggests the following formal
propositions,
Proposition 4: The more an entrant is embedded in an unfamiliar market setting, the
more it needs local knowledge and hence: 4a) the greater the unforeseen costs
associated with a start-up or �green field� investment entry strategy; 4b) the greater
the benefit of an acquisition strategy or partnering entry strategy; 4c) the greater the
advantages of local staff over expatriate staff; and 4d) the greater the benefit of
decentralizing control to the project site office.
Firm-specific strategies, by firm type. Firms in the Systems Contractor category fill a
specialized technical role; they manufacture, ship and install standardized hardware and
equipment systems. They indicate that their international strategy relies primarily on
reducing their level of embeddedness in the foreign market by pre-fabricating equipment
components in their home country or in a third-country, where they are already familiar
with the local actors and institutions. An Archer engineer noted, �if the equipment ships
as designed and the design is good, then our job is easy�we don�t have to do
workarounds29�and that�s important when [we�re] in emerging markets, because the
smallest workarounds can be very costly.� Thus, by adopting this strategy of pre-
fabrication, shipment and assembly, they effectively minimize dependencies on local
organizations, resources and institutions. In particular, they avoid the need for local labor, 29 A �workaround� is a temporary solution used to bypass, mask or otherwise avoid a bug or design-flaw in some system.
162
skills, manufacturing plant and supplies; and they avoid having to deal with unfamiliar
norms of quality control, standards of employment and regulations unique to the local
industry. For sales, both Archer and Kelso employ a single specialist in each country or
region to manage sales and to learn, manage and navigate the local interfaces, rules and
requirements. However, a solitary sales representative can also create problems, as one
Kelso executive indicated, Our country managers, with their little black book of contacts, they can be very secretive about
their work and our organization is totally beholden to them and they can create bottle-necks. But
they are hard to replace, because it takes years to get to know a country like they do.
In addition to selling new equipment systems, Kelso and Archer both operate a long-term
maintenance business in many countries and use this arm of their business to generate
new sales leads and to maintain a staff of local technicians. However, while Kelso and
Archer hire and prefer to work with locals wherever possible, their performance on new
projects is not strictly tied to the achievements of local staff. Rather, in a crisis situation
where a job falls behind schedule, both firms quickly revert to sending in highly skilled
expatriates to diagnose, reform and accelerate project completion. Since their work is
mainly of a technical nature, outside expatriates can be a very useful defense against
project delay. For example, on the Mass Transit System project, a Kelso senior project
manager explained, �After I � figured out where things had gone sideways, I sent for 10
or 12 installers from Germany, France and the UK and had them parachuted in to get the
job back on track.�
As for project entry mode, both Archer and Kelso prefer start-ups; typically, when
they do not already have a local maintenance office, they send in a senior expatriate to
rent an office space and to staff-up for an installation. Finally, both firms prefer an
organization structure with control centralized to the home office or to the factory. In
fact, one senior Kelso project manager opined, That�s the biggest problem with the way Kelso is set-up; every single decision has to go through
the factory. If I want to spend $500, I have to call for permission and I�ve been here almost 25
years. Those guys over there from Boomerang, they can spend up to $50,000 with a field purchase
order. Now how do you figure that one out?
163
Firms in the Project Consultant category engage in an advisory capacity to assist a project
sponsor in all stages of project implementation, from feasibility, design and tendering,
through construction management, commissioning and subsequent expansion. Phantom
and Marengo indicate that their international strategy relies on a fee and contract
structure such that they avoid the consequences of embeddedness. For example, one
Marengo manager explained, It doesn�t much matter how long a project goes or how much it runs over budget, at the end of the
day, we get paid. Of course, we have our reputation to protect, but as long as we don�t do
something stupid, a delay to a project is usually in our favor. So it doesn�t matter to us how
corrupt or complicated the situation is in whatever country it happens to be�because we always
get paid no matter what.
Thus, even though Project Consultants face medium to high levels of embeddedness in
the local context, they are able to avoid the financial consequences that typically come
with a lack of knowledge about the local market setting. As for sales and business
development, typically a seasoned international executive handles relations with potential
leads and with past clients for repeat business. In Phantom�s case, the Vice President who
fills this sales function speaks five languages and has studied and worked abroad for
more than 40 years. As necessary, Project Developers recruit local professional staff on a
project basis, primarily for design and engineering activities.
When entering new projects, the mode of entry that Marengo and Phantom adopt is
best described as a partnership. But, in some ways, because the partner is with the local
government sponsor, it is far more beneficial than a partnership with a private firm. In
particular, a government partner is often the author and enforcer of the formal
regulations, has access to a large base of tangible and intangible resources and is a
dependable source of payment. In addition, a government sponsor often provides office
space and administrative assistance, as was the case for Marengo and Phantom on
projects 1 through 4. In a crisis situation, Project Consultants tend to defer key decisions
to their client and thus they avoid primary responsibility for events that arise
unexpectedly or for conflicts that escalate beyond a comfortable level. Finally, since most
consultants are very experienced and because projects have unique needs, the
organization structure that Project Consultants adopt permits decentralization to the
164
project site office or to a regional office. (For example, in one country, Phantom was
managing both a transport project and an airport project, from a single regional office.) In
fact, Marengo and Phantom consultants in the individual project site offices enjoy a great
deal of autonomy from their head offices in the UK and Japan, respectively. As one
consultant bragged, �The best part of my work is my independence. I plan these projects.
I build these projects. And I have freedom from headquarters.�
General Contractors contract for and assume responsibility for completing
construction projects and they hire, supervise and pay all of the subcontractors. In foreign
markets, the primary strategy that Boomerang and Forester employ is to decrease their
level of embeddedness and to increase their supply of local knowledge. They do this both
by allocating work and responsibility to competent local subcontractors; and by using
local staff, agents, partners and advisors to guide and manage relations with local
subcontractors, vendors, regulators and community stakeholders.
To identify good local suppliers and subcontractors quickly, both Marengo and
Forester have formalized a sophisticated �pre-qualification process,� so that they can
quickly identify which of the local firms are competent and capable and eliminate those
that do not have adequate capacity, skill or capitalization. They win projects in two main
ways: bidding competitively, or negotiating preferred work. On a large infrastructure
project, a General Contractor often directly employs more than 2500 laborers, foremen
and field supervisors and, indirectly, a much larger number. They also hire dozens of
local professional staff, including project administrators, translators, procurement
managers, engineers and project managers. In addition, they are especially attuned to
enlisting the aid of so-called �freelance expatriates, as one Boomerang Project Executive
explained, The Brits Aussies, Kiwis, Canucks. You find them all over Asia. They go from project to
project�They can really play an important role because they've already adapted to the
local culture and they are versed in the Western management systems.
Research by Mahalingam (2005) confirms and expands on the critical role played by
these freelance expatriates from �cricket-playing countries.�
In emergency situations, General Contractors are conditioned to adapt expediently.
They rely both on contingency plans and on the judgments of seasoned expatriates.
These expatriates typically have experience on projects in anywhere from 10 to 50
165
countries and are familiar with managing thorny, unpredictable, high-risk situations. The
expatriates usually have very strong personalities, characterized as outgoing, people-
friendly, empathetic, curious and resilient. As one Forester informant noted, �Notice all
of the top managers in the [General Contractors] � they have a high level of emotional
intelligence. Notice all of the top managers in the [Systems Contractors], now they have a
more technical persona. It�s a different set of skills that you need to handle all of these
relationships that we deal with as a [General Contractor].�
In addition, General Contractors rely on local partners and consultants to provide
�localized advice.� One Boomerang informant mentioned the value of seeking counsel
from local branches of international consultancies, such as Ernst & Young, Price
Waterhouse Coopers and HSBC.
As for project entry mode, General Contractors typically implement a single-partner
or multi-partner joint venture strategy, usually with at least one local firm and frequently
with other international contractors as well. As a consequence of their large size and
temporary nature organizational structures of the General Contractors are unique and
utilize a complex array of locals to manage local interfaces and freelance expatriates to
manage aspects of the technology and contract. Although they may be in terms of details,
General Contractors� project organizations tend to include similar elements from project
to project. As one Boomerang executive noted, We have the same basic departments on every project. The same template organization chart, if
you will. And then depending on the size of the project, we hire a greater or lesser number of staff
to fill each box and to balance the workload against the staff that we hire.
Typically, because the pace of change and decision making on a project is very rapid,
project controls are handled directly within the project site office and thus the home
office has little connection with day to day operations.
Firms in the Developer category sponsor, build and operate projects with private funds
and specialize in areas such as design, finance, engineering, construction management
and asset management. A main driver of their international strategy is the need to localize
their operations, because, after they enter and invest in a new market, they usually intend
to stay for a lengthy period of time�often several decades. Like General Contractors,
they face high levels of embeddedness, especially in the front-end, �shaping� phase of a
166
project, which involves land acquisition, permitting and seeking government approvals
for new development. When selecting new markets for entry, Duke uses an �income
prequalification� process to prioritize market opportunities based on economic potential.
As one Duke vice president expressed, We are by and large indifferent to world location. We have considered Europe, Asia, Latin
America� What we care most about is a strong customer base with the potential to generate
revenues that will pay-back the investment in the project and to return a profit that satisfies our
executives and our shareholders.
Within Heroic, the process of market selection is far less clearly defined and happens in
two main ways. First, because Heroic is a highly-regarded international developer with
the financial capacity to fund projects, many firms from around the world approach them
with project opportunities. As one Heroic executive said, �Of the projects that come to
us, we pick and choose the ones that are most attractive.� Second, Heroic has two senior
executives who focus on pro-actively generating new investment opportunities via leads
and contacts that come from within their firm and from large personal contact networks
that come from a lifetime of experience in the industry. Both Duke and Heroic hire
professional local staff, but they avoid hiring labor directly. Once they have a project
approved, Heroic prefers to employ a smaller staff of eight to 13 managers, of which one-
half to two-thirds are expatriate and to divide the overall package of work across 10 to a
maximum of 20 local subcontractors.
Concerning crisis management, in a situation where local contractors were not
meeting quality expectations, Duke responded by sending a staff of more than 250 US
engineers to micro-manage every aspect of the design and construction integration.
Heroic, which is far more experienced internationally, takes a more localized approach to
managing crisis situations, which is made possible by their mode of entry approach. As
one Duke Vice President explained, Initially we had a very large expat management group in [the first foreign market that we entered.]
There was [sic] probably seven expats who were directly involved with [this first] project.
Everybody local was middle to lower management. But, we found that was not really the smartest
or most effective way of approaching a country. So, we started to move away from creating
beachheads in these countries with expat groups, to where we were really finding an established
local experienced developer that had been around the block a few times in the country who could
167
partner with us, at first; and if that relationship seemed like it was compatible, then we would
either buy out their company or hire the principal away from the company and start a [Heroic]
office using experienced local management to really run the office at a very high management
level and the expats would be purely resource and support to those people, rather than the main
manager or director of those people. And that seemed to be a much more effective way of getting
into a country and making fewer mistakes... And when we did make mistakes, we found that
having a committed local partner was the best way to resolve them.
In order to make the acquisition strategy work, Heroic notes a heavy emphasis on trial
partnerships with potential acquisition targets, education and training to indoctrinate the
local acquisitions in the parent firm�s practices and protocols and eventual transfer of
operating control to locally acquired partners. While Heroic has evolved to prefer an
acquisition entry strategy, Duke, which has far less international experience, has focused
more on partnering with local firms and, in one case, on licensing their brand to a local
firm to develop and operate a resort. Finally, for both firms, after an investment decision
is committed, the structure of local operating units is heavily influenced by the
preferences and expectations of local partners and acquisitions and thus control is highly
decentralized down to the level of the country office. However, given the high-profile
nature of development and the large sums of money involved, the locus of control is not
usually a project site office, but rather, a regional office established in the central
financial district of the nearest major city center.
Learning How to Match Embeddedness, Strategy and Structure
A prominent business historian has argued that a firm�s strategy and structure need be
aligned with the characteristics of its environment (Chandler 1962). Yet, few studies in
the IB literature have built on this classic model (Melin 1992), despite calls for a more
integrated link between the classic management theory and the more recent IB offshoots
(Daniels, 1991; Melin, 1992; Wright, 1994).
Although this classic perspective has been overlooked by IB scholars to date, the
evidence in Table 7 confirms that it may have much to offer scholars of international
management. The evidence provides strong indication that firms in different industry sub-
groups on global projects select their strategies and structures contingent on their level of
168
embeddedness in the foreign market environment. Simultaneously, they select an
appropriate level of embeddedness, given their strategic and structural preferences. For
example, Systems Contractors, with low embeddedness repeatedly use a start-up mode of
entry, whereas General Contractors and Developers, with much higher levels of
embeddedness learn to use a partnering or acquisition mode of entry.
The evidence from this study indicates a similar trend for staffing policy and
organization structure. Systems Contractors, with a smaller need for local knowledge,
hire very few locals and control is centralized to the home office or factory; in contrast,
General Contractors and Developers, with a much greater level of embeddedness, hire
many locals into key �local interface� positions and control is decentralized to the project
or regional office. Indeed, our evidence indicates that firms adapt their entry strategies,
subsidiary staffing plans and organization structures, whether consciously or otherwise,
according to their level of embeddedness in the unfamiliar project environment. These
findings reinforce and extend Chandler�s classic theory.
TABLE 7
Indicators of Embeddedness-Strategy-Structure Fit
Systems Contractors Developers Project
ConsultantsGeneral
Contractors
Mean # of embedded relations (Table 4) 52 90 282 1172
Relative embeddedness score (Table 5) 6.8 16.6 12.8 15.3
Main entry strategy Start-Up License/ Partner/Acquisition
Partner with project sponsor
Partner/ Multi-Partner JV
Main defense against institutional exceptions
Country Manager/ Highly
Experienced Expatriates
Partner/ Acquisition/
Highly Experienced Expatriates
PartnerPartners/ Highly
Experienced Expatriates
Use of local partners or agents/ country/ project 0 - 2 3 - 12 1 - 7 3 - 14
Ratio of expatriate to total professional staff 75-90% 40-70% 2-45% 15-40%
Centralization of control Home Regional Project / Regional Project
# countries with regional office / # countries entered < 20% > 70% > 50% 20% - 50%
169
GENERAL STRATEGIES
TO COPE WITH CHALLENGES IN FOREIGN MARKETS
There have been many fruitful efforts to investigate the linkage between international
experience and performance in foreign markets (eg. Ursic & Czinkota, 1984; Makino &
Delios, 1996; Barkema et. al., 1997; Luo & Peng, 1999). Yet, despite these advances,
there has been little effort to describe what firms actually learn as they accumulate global
experience or to unpack the black box of �general internationalization knowledge� that
has been alluded to by many prior scholars (eg. Benito & Gripsrud, 1995; Johanson &
Vahlne, 1997; Eriksson et. al., 1997; Petersen & Pedersen, 2002). Specifically, what
types of general strategies do firms devise in order to combat the challenges of
embeddedness and emergent uncertainty in alien market environments?
In response to this question, our evidence suggests that firms evolve multiple variants
of three general strategies: increasing the supply of local knowledge, decreasing the need
for local knowledge and reducing potential impacts of a local knowledge deficit.
Instances of these general strategies are explained in detail on the pages that follow and
were observed repeatedly across all eight firms in our sample, across a wide variety of
market and project settings, in a number of world regions. In formal terms,
Proposition 5: When firms face a knowledge deficit in a foreign market, they can
improve performance by: 5a) increasing the supply of local knowledge; 5b)
decreasing the need for local knowledge; and 5c) reducing the consequence of a local
knowledge deficit.
Increase the Supply of Local Knowledge
Table 8 provides evidence of at least three tactical strategies that foreign entrants use to
increase their supply of local knowledge on a global project in an unfamiliar market: they
increase the level of �initial knowledge� contained within the boundary of their firm prior
to commencing a new project, they accelerate the rate of learning of their existing
members and they increase the period of learning, so that their existing managers have
more time to interpret local realities and to align their strategy accordingly.
Increase �initial knowledge.� Entrants gather intelligence information, prepare
executive briefing reports and identify, investigate and integrate key drivers, indicators,
170
indices, metrics and trends prior to entering a new market setting. They compile this
information from public and proprietary sources such as industry trade associations,
market research consultants and economic journals. In addition, several informants report
that industry-benchmarking partners are a key source of recent and reliable unit cost and
productivity data for foreign markets.
Entrants also �ingest� locals into their organization, by hiring locally experienced staff
and teaming with local partners, thereby increasing the level of local knowledge stored
within the boundary of their firm. Locally recruited personnel, who are hired as
individuals or acquired en masse through acquisitions, bring a stock of knowledge about
local history, patterns of living, politics and economic trends. Local partners, who range
from individual professionals to formal joint ventures, bring a similar stock of local
knowledge.
Strikingly, some of the best carriers of local knowledge are not locals per se, but are
freelance expatriates�primarily from the UK and other British Commonwealth countries
such as Australia, Canada, India and New Zealand�who play an important role as
cultural intermediaries on many large global projects (Mahalingam, 2005). The freelance
expatriates provide technical expertise and act as negotiators, links and go-betweens to
guide relations between culturally diverse project participants. These professionals show
little allegiance to a particular firm and rove from project to project through a social-
network of acquaintances developed on past projects that is maintained and reinforced by
social clubs such as the �Hash House Harriers� to which many of them belong. Their
unique experience base and skill-set enables them to anticipate, assess and adapt to subtle
differences in a new environment; to unify various organizational, professional and
national cultures; and to mediate disputes and standoffs rooted in differing institutional
logics. A number of the entrants in our sample routinely hire these freelance expatriates
on a project-by-project basis to gain access to their knowledge base, which includes all
three types of knowledge: country/institutional, industry/business and
global/internationalization.
Extend learning rate. Entrants rely on formal training programs, �executive briefing
reports,� and other formal intelligence information to train expatriates quickly with
respect to the local language, history, business practices, economic trends, political
171
influences and institutions. For example, Duke reported sending expatriates to �charm
school� to be trained in the finer nuances of local social niceties and mores.
Entrants also accelerate their learning by seeking advice from local consultants who act
as mentors and from local guide organizations and agents who provide on-the-job counsel
and guidance. For example, one Boomerang executive noted that many global contractors
rely extensively on local branches of large global financial advisory firms, such as Ernst
& Young, Price Waterhouse Coopers and HSBC.
Increase learning period. Entrants use scaled-down, �trial balloon� and pilot projects
and partnerships to immerse themselves in the host market environment and to assess
potential partnerships under realistic operating conditions, but without the risks.
Experienced managers use this strategy to gain the benefits of trial-and-error learning
before they irrevocably commit resources to a high-risk project or partnership. For
example, by first building a small factory in China, it is possible to work out the kinks,
train the locals, learn the local history, language and institutions, get a feel for the
volatility and dynamics of the marketplace, build a team, and then confidently to proceed
with building the larger factory.
172
TA
BL
E 8
St
rate
gies
to In
crea
se S
uppl
y of
Loc
al K
now
ledg
e Fi
rm N
ame/
In
form
ant
Posi
tion
Tac
tical
St
rate
gyE
xam
ple
Quo
te fr
om I
nter
view
Boo
mer
ang/
V
ice
Pres
iden
t
Redu
ce
Scop
e of
W
ork
Avo
id ta
king
wor
k th
at e
xcee
ds lo
cal
know
ledg
e ca
paci
ty
"You
hav
e to
beg
in b
y as
king
you
rsel
f if y
ou re
ally
hav
e th
e co
nnec
tions
and
the
capa
city
to p
ull o
ff a
pro
ject
. And
this
may
so
und
like
a si
mpl
e en
ough
thin
g, b
ut it
isn't
sim
ple.
Whe
n do
you
hit
that
poi
nt?
Its a
lway
s goi
ng to
be
a ga
mbl
e, y
ou'll
ne
ver k
now
unt
il yo
u're
fini
shed
. We
had
an o
ffer t
o do
a p
roje
ct fo
r a c
lient
in [A
sia]
but
we
just
had
to sa
y no
, we
wer
en't
ther
e ye
t with
our
team
."
Boo
mer
ang/
V
ice
Pres
iden
t
Red
uce
Embe
dded
- ne
ss in
Loc
al
Con
text
Hire
loca
l age
nts t
o ha
ndle
em
bedd
ed
activ
ities
"For
thin
gs li
ke b
uyin
g la
nd, p
erm
ittin
g an
d hi
ring
labo
r its
bes
t to
outs
ourc
e to
a lo
cal a
gent
... o
r par
tner
, or g
uide
. The
key
is
how
we
set u
p th
e ag
reem
ents
. We
pay
them
a sm
all %
up
front
, som
ewhe
re b
etw
een
10%
and
50%
and
not
ano
ther
pl
ugge
d ni
ckel
unt
il th
ey p
erfo
rm w
hate
ver i
t is w
e ne
ed. W
e bi
nd th
em in
to in
tegr
ity. W
hen
we
need
per
mits
alo
ng a
ra
ilroa
d to
inst
all f
iber
opt
ics,
we
don'
t pay
them
out
unt
il th
ey p
rese
nt u
s with
a b
inde
r with
eve
ry si
ngle
per
mit
in p
lace
. If
we
need
a p
iece
of l
and,
we
don'
t pay
them
out
unt
il th
e tit
le is
in o
ur h
ands
and
we'r
e su
re it
s not
a fa
ke. I
f we
need
a la
bor
forc
e, w
e do
n't p
ay th
em o
ut u
ntil
the
job
is m
ovin
g lik
e cl
ockw
ork
and
we'r
e ce
rtain
that
the
labo
r isn
't go
ing
to [g
oof]
off
afte
r the
y co
llect
a fe
w p
ay c
heck
s."
Her
oic/
Vic
e Pr
esid
ent
"O
utso
urce
to lo
cal
cont
ract
ors
"'[H
eroi
c] w
ould
muc
h ra
ther
pay
a c
ontra
ctor
--w
ith w
hate
ver f
ees h
e w
ould
put
on
top
of v
endo
rs a
nd su
pplie
rs--s
o th
at
ther
e is
a o
ne st
op sh
op. I
f we
are
in a
new
cou
ntry
, in
a ne
w e
nviro
nmen
t, w
e ar
e ab
solu
tely
goi
ng to
wan
t to
push
the
risk
onto
ano
ther
ent
ity. I
ts b
est t
o le
t tha
t loc
al c
ontra
ctor
han
dle
all o
f the
loca
l con
tract
s on
your
beh
alf."
Her
oic/
Vic
e Pr
esid
ent
"Pu
sh le
gal r
isks o
nto
loca
l con
tract
ors
"The
re is
a p
roce
ss in
Eur
ope
calle
d 'n
ovat
ion'
whe
re th
e co
ntra
ctor
act
ually
form
ally
bec
omes
the
desi
gner
on
the
proj
ect.
The
arch
itect
says
, I a
m h
andi
ng o
ver t
o yo
u al
l of m
y w
ork
and
you
assu
me
all r
espo
nsib
ility
and
liab
ility
. So
this
syst
em
mak
es it
a re
al tr
ansf
er o
f lia
bilit
y an
d ris
k, a
s opp
osed
to th
e U
S. S
o in
Rus
sia,
we
hire
d a
loca
l gen
eral
con
tract
or, g
ave
them
all
of th
e de
sign
doc
umen
ts a
nd b
asic
ally
said
, 'W
ith th
is c
ertif
icat
e of
nov
atio
n yo
u ar
e no
w re
spon
sibl
e to
get
all
the
appr
oval
s an
d in
spec
tions
thro
ugh
the
city
.'"
Fore
ster
/ Vic
e Pr
esid
ent
"O
ffsh
ore
fabr
icat
ion
to a
third
-cou
ntry
"We'r
e m
ovin
g qu
ickl
y to
war
ds a
fabr
icat
e an
d as
sem
ble
appr
oach
. If y
ou d
o th
e fa
bric
atio
n in
a d
epen
dabl
e co
mm
unity
w
here
you
und
erst
and
the
labo
r situ
atio
n, th
e un
ions
and
the
type
of q
ualit
y yo
u ca
n ex
pect
, the
n yo
u av
oid
a lo
t of h
assl
es in
th
e fo
reig
n th
eate
r. Th
e as
sem
bly
is e
asy
if al
l of t
he c
ompo
nent
s are
pre
-des
igne
d, p
re-fa
bbed
and
go
toge
ther
like
lego
, you
ca
n do
the
asse
mbl
y an
ywhe
re, o
n th
e m
oon
if yo
u ha
d to
."
Boo
mer
ang/
G
ener
al
Cou
nsel
"O
ffsho
re c
ontra
cts t
o a
third
-cou
ntry
lega
l sy
stem
"One
of t
he k
ey s
trate
gies
use
d in
the
1990
s was
to si
gn c
ontra
cts u
nder
the
juris
dict
ion
of a
third
-cou
ntry
, usu
ally
the
UK
. A
nd th
at w
ay y
ou c
an a
void
the
idio
sync
raci
es o
f loc
al la
w a
nd y
ou h
ave
a cl
ear p
ictu
re o
f the
rule
s. Th
is h
as b
een
espe
cial
ly u
sefu
l in
coun
tries
like
Vie
tnam
, whe
re th
ere
is a
com
plet
e ab
senc
e of
a le
gal f
ram
ewor
k an
d w
hat l
aw th
ey d
o ha
ve is
pub
lishe
d in
the
new
spap
er. A
nd it
als
o ha
s the
eff
ect o
f mak
ing
the
loca
ls le
arn
your
rule
s, in
stea
d of
the
othe
r way
ar
ound
."
173
TA
BL
E 8
(CO
N�T
) St
rate
gies
to In
crea
se S
uppl
y of
Loc
al K
now
ledg
e
Firm
Nam
e/
Info
rman
t T
actic
al
Stra
tegy
Exam
ple
Quo
te fr
om In
terv
iew
Her
oic/
Vic
e Pr
esid
ent
Incr
ease
"S
tart
Kno
wle
dge"
Proc
ure
a "m
ap"
of
perm
ittin
g pr
oces
ses
prio
r to
entry
"In
Pola
nd p
erm
ittin
g de
laye
d us
a y
ear.
So w
hen
we
wen
t to
Cze
chos
lova
kia,
we
paid
a lo
cal c
onsu
ltant
mor
e th
an
$30,
000U
S to
pre
pare
a d
etai
led
map
of a
ll of
the
steps
to g
et d
evel
opm
ent a
ppro
val.
Let m
e sh
ow it
to y
ou. [
Info
rman
t ru
mm
ages
in fi
le c
abin
et a
nd p
ulls
out a
n 11
" x
17"
flow
-cha
rt di
agra
m w
ith d
ozen
s of b
oxes
and
arr
ows.]
Thi
s was
a li
fe-
save
r. W
ithou
t it ,
we
wou
ldn't
hav
e kn
own
whe
re to
beg
in."
Duk
e/ V
ice
Pres
iden
t"
Prep
are
"exe
cutiv
e br
iefin
g" re
ports
"I p
repa
re a
n ex
ecut
ive
brie
fing
repo
rt be
fore
we
go in
to a
cou
ntry
. I b
egin
with
cur
renc
y. B
ear i
n m
ind,
thes
e br
iefs
are
de
sign
ed fo
r eng
inee
rs w
ho o
ne d
ay g
et a
tap
on th
e sh
ould
er a
nd a
re to
ld, '
you�
re g
oing
to b
egin
to p
artic
ipat
e on
a p
roje
ct
in sa
mpl
e m
arke
t �X
�.' S
o I b
egin
with
a b
asic
des
crip
tion
of th
e co
untry
, its
form
of g
over
nmen
t, its
eco
nom
y fr
om th
e st
andp
oint
of i
s it f
ree,
is it
gov
ernm
ent s
uppo
rted,
that
kin
d of
stuf
f. A
nd th
at�s
all
read
ily a
cces
sible
, the
re�s
not
a w
hole
lot
of m
yste
ry to
find
ing
that
kin
d of
stuf
f. I
use
both
pub
lic a
nd p
rivat
e so
urce
s and
rely
on
trade
-gro
ups l
ike
ASE
AN
, Tr
ansp
aren
cy In
tern
atio
nal,
the
Econ
omist
Inte
llige
nce
Uni
t, th
e IS
O si
te, U
S go
vern
men
t site
s [i.e
. Sta
te D
epar
tmen
t ba
ckgr
ound
not
es, C
IA fa
ct fi
le],
Wor
ld B
ank
stuff,
new
spap
ers,
the
libra
ry a
nd m
ost-i
mpo
rtant
ly o
ur in
tern
al
benc
hmar
king
par
tner
s to
get r
ecen
t uni
t cos
ts w
hich
are
cor
e to
com
petit
iven
ess a
nd y
ou c
an't
just
go
out a
nd b
uy."
Boo
mer
ang/
Tr
ansl
ator
"
Hire
loca
ls fo
r "i
nter
face
role
s" a
nd
brin
g in
exp
atria
tes
to fo
rm "
tech
nica
l co
re"
"[Lo
okin
g at
an
orga
niza
tion
char
t tog
ethe
r.] S
ee th
e w
ay it
is se
t up.
All
of th
e "i
nter
face
role
s" w
e ca
ll th
em, t
hey
are
all
fille
d by
loca
ls. T
he p
rocu
rem
ent m
anag
er, t
he tr
ansl
ator
, the
ass
ista
nt p
roje
ct m
anag
er w
ho g
ets t
he p
erm
its. S
ee th
ere,
that
lit
tle b
ox b
y ea
ch p
erso
ns n
ame,
it sh
ows t
he n
umbe
r of y
ears
of l
ocal
exp
erie
nce
on to
p an
d nu
mbe
r of y
ears
of o
vera
ll ex
perie
nce
on b
otto
m. A
nd se
e, a
ll of
the
role
s in
the
"tec
hnic
al c
ore"
we
call
them
, the
y ar
e fil
led
by o
ur e
xpat
team
."
Boo
mer
ang/
Pr
ojec
t Ex
ecut
ive
"
Hire
"fr
eela
nce
expa
triat
es"
who
ha
ve tw
o-w
ay
cultu
ral k
now
ledg
e
"You
'll n
otic
e th
at w
e hi
re a
lot o
f Brit
s Aus
sies
, Kiw
is, C
anuc
ks. Y
ou fi
nd th
em a
ll ov
er A
sia.
The
y go
from
pro
ject
to
proj
ect.
They
go
from
the
Hon
g K
ong
airp
ort,
to th
e M
alay
sian
mon
o-ra
il, to
Sin
gapo
re a
nd th
en B
angk
ok. A
fter a
pro
ject
en
ds th
ey c
all t
heir
frie
nds a
nd m
ove
on to
the
next
one
. The
y of
ten
mar
ry A
sian
wom
en. S
o th
ey g
et to
the
poin
t whe
re th
ey
are
real
ly g
ood
in a
cul
ture
. So
whe
n w
e sta
rt fr
esh,
if w
e ca
n fin
d a
few
of t
hem
that
hav
e ju
st fin
ished
a p
roje
ct, t
hey
can
real
ly p
lay
an im
porta
nt ro
le b
ecau
se th
ey'v
e al
read
y ad
apte
d to
the
loca
l cul
ture
and
they
also
kno
w th
e W
este
rn
man
agem
ent s
yste
ms."
Boo
mer
ang/
Pr
ojec
t Ex
ecut
ive
"
Hire
loca
l med
ia
prof
essi
onal
to
hand
le th
e "m
edia
sp
in"
"The
guy
that
sits
at th
e ha
ll. W
e hi
red
him
bec
ause
mos
t of h
is e
xper
ienc
e w
as in
new
s cas
ting.
He
had
run
hard
on
his l
uck
and
that
�s w
hy h
e ca
me
to u
s for
a jo
b an
d w
e th
ough
t we
coul
d us
e hi
m to
pla
y th
e m
edia
gam
e. S
o he
act
ually
spen
ds m
ost
of h
is ti
me
wor
king
the
med
ia sp
in. H
e kn
ows a
ll of
the
loca
l rep
orte
rs a
nd if
they
pub
lish
som
ethi
ng a
gain
st u
s he
can
get a
co
unte
r sto
ry o
ut a
lmos
t jus
t as f
ast.
And
he
sele
ctiv
ely
leak
s sto
ries t
o th
e pr
ess,
on th
e co
nditi
on th
ey p
ublis
h hi
s ang
le.
And
he's
real
ly g
ood.
Har
d to
qua
ntify
in n
umbe
rs ju
st w
hat a
guy
like
him
is re
ally
wor
th."
174
Decrease the Need for Local Knowledge
The evidence provided in Table 9 is organized into two key tactical strategies that foreign
entrants use to reduce their level of need for local knowledge in an unfamiliar market
setting: reducing the scope of work, and reducing their level of embeddedness in the local
context. In many cases, these approaches are used to avoid the need to learn about local
language, history, technologies, and institutions.
Reduce scope of work. Although it seems obvious, the first question an entrant needs
to ask is, �Are we qualified and connected enough to execute this project?� If not, the
best strategy is to avoid accepting responsibility for the project or to sub-contract the
entire work package to a local firm or to another international firm who is more
established and connected within the local market. One Boomerang executive confirmed
that the go/no-go decision is the most difficult and most important of all strategic
decisions in the international contracting business.
Reduce embeddedness in local context. By off-shoring, outsourcing and sub-
contracting, entrants are able to reduce their level of embeddedness in the local context.
A simple example of this strategy is a visitor who hires a taxi-cab to avoid needing to
learn the maze of streets, landmarks and traffic patterns in a new city. For an entrant
organization, the analog is using local agents, guides, partners and acquisitions to avoid
needing to learn the tangled complex of unfamiliar institutions, technologies, actors and
relations and business facts.
Our evidence indicates that entrants use outsourcing and sub-contracting as a strategy
to limit their responsibility contractually for activities that are heavily embedded in the
local regulatory environment, such as buying land, permitting, getting shipments through
customs and hiring a labor force. Heroic, especially, uses this strategy for breaking a
project into sub-packages, such as permitting maps, foundations, buildings and
landscaping, which are procured as complete turnkey packages according to a design
specification. This goes well beyond partnering. A local partnering strategy entails the
use of partners to gain access to local knowledge and counsel. In contrast, an outsourcing
strategy entails the use of contractors and consultants who are contractually obligated to
complete a specific activity or set of activities or to deliver a specified level of service or
performance. Thus entrants report that outsourcing can prevent errors and mistakes when
175
TA
BL
E 9
St
rate
gies
to D
ecre
ase
the
Nee
d fo
r L
ocal
Kno
wle
dge
Firm
Nam
e/
Info
rman
t Po
sitio
n
Tac
tical
St
rate
gyE
xam
ple
Quo
te fr
om I
nter
view
Boo
mer
ang/
V
ice
Pres
iden
t
Redu
ce
Scop
e of
W
ork
Avo
id ta
king
wor
k th
at e
xcee
ds lo
cal
know
ledg
e ca
paci
ty
"You
hav
e to
beg
in b
y as
king
you
rsel
f if y
ou re
ally
hav
e th
e co
nnec
tions
and
the
capa
city
to p
ull o
ff a
pro
ject
. And
this
may
so
und
like
a si
mpl
e en
ough
thin
g, b
ut it
isn't
sim
ple.
Whe
n do
you
hit
that
poi
nt?
Its a
lway
s goi
ng to
be
a ga
mbl
e, y
ou'll
ne
ver k
now
unt
il yo
u're
fini
shed
. We
had
an o
ffer t
o do
a p
roje
ct fo
r a c
lient
in [A
sia]
but
we
just
had
to sa
y no
, we
wer
en't
ther
e ye
t with
our
team
."
Boo
mer
ang/
V
ice
Pres
iden
t
Red
uce
Embe
dded
- ne
ss in
Loc
al
Con
text
Hire
loca
l age
nts t
o ha
ndle
em
bedd
ed
activ
ities
"For
thin
gs li
ke b
uyin
g la
nd, p
erm
ittin
g an
d hi
ring
labo
r its
bes
t to
outs
ourc
e to
a lo
cal a
gent
... o
r par
tner
, or g
uide
. The
key
is
how
we
set u
p th
e ag
reem
ents
. We
pay
them
a sm
all %
up
front
, som
ewhe
re b
etw
een
10%
and
50%
and
not
ano
ther
pl
ugge
d ni
ckel
unt
il th
ey p
erfo
rm w
hate
ver i
t is w
e ne
ed. W
e bi
nd th
em in
to in
tegr
ity. W
hen
we
need
per
mits
alo
ng a
ra
ilroa
d to
inst
all f
iber
opt
ics,
we
don'
t pay
them
out
unt
il th
ey p
rese
nt u
s with
a b
inde
r with
eve
ry si
ngle
per
mit
in p
lace
. If
we
need
a p
iece
of l
and,
we
don'
t pay
them
out
unt
il th
e tit
le is
in o
ur h
ands
and
we'r
e su
re it
s not
a fa
ke. I
f we
need
a la
bor
forc
e, w
e do
n't p
ay th
em o
ut u
ntil
the
job
is m
ovin
g lik
e cl
ockw
ork
and
we'r
e ce
rtain
that
the
labo
r isn
't go
ing
to [g
oof]
off
afte
r the
y co
llect
a fe
w p
ay c
heck
s."
Her
oic/
Vic
e Pr
esid
ent
"O
utso
urce
to lo
cal
cont
ract
ors
"'[H
eroi
c] w
ould
muc
h ra
ther
pay
a c
ontra
ctor
--w
ith w
hate
ver f
ees h
e w
ould
put
on
top
of v
endo
rs a
nd su
pplie
rs--s
o th
at
ther
e is
a o
ne st
op sh
op. I
f we
are
in a
new
cou
ntry
, in
a ne
w e
nviro
nmen
t, w
e ar
e ab
solu
tely
goi
ng to
wan
t to
push
the
risk
onto
ano
ther
ent
ity. I
ts b
est t
o le
t tha
t loc
al c
ontra
ctor
han
dle
all o
f the
loca
l con
tract
s on
your
beh
alf."
Her
oic/
Vic
e Pr
esid
ent
"Pu
sh le
gal r
isks o
nto
loca
l con
tract
ors
"The
re is
a p
roce
ss in
Eur
ope
calle
d 'n
ovat
ion'
whe
re th
e co
ntra
ctor
act
ually
form
ally
bec
omes
the
desi
gner
on
the
proj
ect.
The
arch
itect
says
, I a
m h
andi
ng o
ver t
o yo
u al
l of m
y w
ork
and
you
assu
me
all r
espo
nsib
ility
and
liab
ility
. So
this
syst
em
mak
es it
a re
al tr
ansf
er o
f lia
bilit
y an
d ris
k, a
s opp
osed
to th
e U
S. S
o in
Rus
sia,
we
hire
d a
loca
l gen
eral
con
tract
or, g
ave
them
all
of th
e de
sign
doc
umen
ts a
nd b
asic
ally
said
, 'W
ith th
is c
ertif
icat
e of
nov
atio
n yo
u ar
e no
w re
spon
sibl
e to
get
all
the
appr
oval
s an
d in
spec
tions
thro
ugh
the
city
.'"
Fore
ster
/ Vic
e Pr
esid
ent
"O
ffsh
ore
fabr
icat
ion
to a
third
-cou
ntry
"We'r
e m
ovin
g qu
ickl
y to
war
ds a
fabr
icat
e an
d as
sem
ble
appr
oach
. If y
ou d
o th
e fa
bric
atio
n in
a d
epen
dabl
e co
mm
unity
w
here
you
und
erst
and
the
labo
r situ
atio
n, th
e un
ions
and
the
type
of q
ualit
y yo
u ca
n ex
pect
, the
n yo
u av
oid
a lo
t of h
assl
es in
th
e fo
reig
n th
eate
r. Th
e as
sem
bly
is e
asy
if al
l of t
he c
ompo
nent
s are
pre
-des
igne
d, p
re-fa
bbed
and
go
toge
ther
like
lego
, you
ca
n do
the
asse
mbl
y an
ywhe
re, o
n th
e m
oon
if yo
u ha
d to
."
Boo
mer
ang/
G
ener
al
Cou
nsel
"O
ffsho
re c
ontra
cts t
o a
third
-cou
ntry
lega
l sy
stem
"One
of t
he k
ey s
trate
gies
use
d in
the
1990
s was
to si
gn c
ontra
cts u
nder
the
juris
dict
ion
of a
third
-cou
ntry
, usu
ally
the
UK
. A
nd th
at w
ay y
ou c
an a
void
the
idio
sync
raci
es o
f loc
al la
w a
nd y
ou h
ave
a cl
ear p
ictu
re o
f the
rule
s. Th
is h
as b
een
espe
cial
ly u
sefu
l in
coun
tries
like
Vie
tnam
, whe
re th
ere
is a
com
plet
e ab
senc
e of
a le
gal f
ram
ewor
k an
d w
hat l
aw th
ey d
o ha
ve is
pub
lishe
d in
the
new
spap
er. A
nd it
als
o ha
s the
eff
ect o
f mak
ing
the
loca
ls le
arn
your
rule
s, in
stea
d of
the
othe
r way
ar
ound
."
176
they themselves face a local knowledge deficit. By using this strategy of shifting the
burden of responsibility to local contractors and consultants, entrants report a reduced
need to self-learn or to recruit and manage a staff of locals.
Entrants also use off-shoring strategies to reduce their level of need for local
knowledge. By pre-fabricating and assembling modular system components and sub-
components, Kelso and Archer minimize their touch-points, contacts and interfaces with
local actors and institutions. Many equipment and systems providers use this strategy for
products such as elevators, pumps, air conditioners and signaling systems, but this
approach is being used for increasingly larger sub-systems such as structural steel
building frames and bridge decks. Pre-fabricated members or modules are shipped by
barge or inter-modal transport container and are welded or bolted together with minimal
onsite coordination and expertise. Thus, this strategy reduces reliance on local labor,
capabilities and building technologies.
One specific type of off-shoring that was used extensively by Boomerang and Forester
during the 1990s, was the off-shoring of contracts and their enforcement.30 By signing
contracts under the jurisdiction of international law or under the law of a third-country
such as in the UK, rather than under the law in the country where the product or service is
to be provided, there is less need to learn about legal institutions and protocols in the host
country. In addition, there is less dependence on host country legal professionals. The
General Counsel at Boomerang noted during an interview that this strategy has been
especially useful in weak or failed states where legal institutions are unclear and their
enforcement is unpredictable. However, this strategy also has its problems. Decisions in
offshore courts still need to be enforced in the local country, unless the local entity with
which the entrant has a dispute has offshore assets that can be seized to enforce a
judgment (Orr, 2005). It also prevents reform of local institutions.
6 Note that these avoidance strategies�outsourcing and deciding which regimes to operate under�can undermine important controls and create unexpected and unpleasant costs and consequences for local host organizations. Nevertheless, from an entrant�s self-interested perspective these strategies can be very effective.
177
Reduce the Impact of a Local Knowledge Deficit
The evidence in Table 10 is organized around three tactical strategies that foreign
entrants use repeatedly to reduce the consequence of a local knowledge deficit in a
foreign market setting: prepare contingency plans, cultivate adaptability and insure
against uncertainties.
Prepare contingency plans. Entrants into foreign markets learn, as one Marengo
informant noted, to prepare �mentally and organizationally� for unforeseeable crisis
situations and emergent uncertainties and to get beyond psychological barriers that create
blind spots to unexpected disasters. For example, at Forester, contingency planning
exercises enable executives to envision a wide range of potential disaster or crisis
situations, to ensure that action plans are in place in the event of disaster and to ensure
that resources are available to carry out those action plans.
At Boomerang, unexpected situations are such a fact of life that managers have
developed a process-driven approach to systematically anticipate, assess, monitor and
shape emergent uncertainties as they arise and unfold. As one executive explained,
�Whenever an external threat arises that could affect our ability to win preferred work or
to perform work as sold, we prepare a document called an Issue Paper to re-visit and re-
align our strategy to head-off these threats.� The Issue Paper consists of a concise
summary of the issue, strategic interests, key facts, judgments, goals and objectives (see
Table 9). Within Boomerang, the Issue Paper is viewed as a �living document,� one that
is continuously revised to match the realities of a dynamic and changing project situation.
Thus, a contingency plan plays a significant role in reducing the impact of a knowledge
deficit because it supplies a general framework for organizational action that can
significantly accelerate the rate of organizational response and adaptation in the event of
an unforeseeable event or outcome.
Cultivate adaptability. By cultivating an ability to respond adaptively to conflicts,
crisis and emergent uncertainties, new entrant firms are able to reduce the unforeseen
costs of a local knowledge deficit. In order to endorse and encourage adaptive behaviors,
entrants promote adaptable managers into top managerial positions, avoid formalization
of �best practices,� decentralize control to the front lines, call-on highly experienced
expatriates to �fight fires,� and evolve flexible contract documents.
178
For example, at Forester, managers who demonstrate an ability to achieve success on
difficult international assignments, are rewarded both formally, through promotions and
pay increases and informally, through corporate-wide recognition in a prestigious
newsletter. In fact, as one vice-president remarked, �At [Forester], if you don�t excel on
the tough international assignments and if you can�t become a cosmopolitan�you won�t
move into the upper ranks. It�s that simple.� In an evolutionary sense, the Forester
organization culture and promotion policies serve as a survival-of-the-fittest mechanism
to ensure that top-managerial and executive positions are filled by individuals with the
highest levels of global experience, cross-cultural savvy and a demonstrated ability to
adapt to complex, unfamiliar and turbulent environments.
At Heroic, executives had discussed the benefits of publishing a corporate manual
outlining best practices for foreign market entry. In the end, they dismissed this plan for
fear of constraining their innovative and entrepreneurial culture and for fear that
managers would be less apt to �trust their own instincts�gut-feeling or intelligence.�
At all of the firms, with the exception of Kelso and Archer, control was decentralized
to the project or regional site office. Local authority to make decisions enables quick,
locally-informed, pro-active decision making, which is crucial for organizations that face
high levels of embeddedness, allowing local operating units to adapt spontaneously to
emergent threats and uncertainties, respond to situational cues and self-correct mistakes.
At Kelso, Archer, Boomerang, Duke and Heroic, several situations were observed in
which experienced expatriates were called in to trouble-shoot or re-organize a project that
was facing internal or external barriers to progress. Boomerang has what is known
internally as a �SWAT team��a group of seasoned expatriates who fly from one
difficult project to the next, as needed, offering advice and guidance. Kelso also retains a
staff of highly experienced managers who perform this function, of �parachuting� in to
fix a project that has exceeded budget or schedule.
Finally, at Boomerang, a strategy to promote adaptability involves the design of
flexible contract documents. Especially for long term contracts, clauses are intentionally
designed to be flexible under conditions of heightened uncertainty and to account for all
possible contingencies�even those that are unforeseeable at the time a contract is drawn
179
TA
BL
E 1
0 St
rate
gies
to R
educ
e th
e Im
pact
of a
Loc
al K
now
ledg
e D
efic
it Fi
rm N
ame/
In
form
ant
Tac
tical
St
rate
gyE
xam
ple
Quo
te fr
om In
terv
iew
Mar
engo
/ Pr
ojec
t M
anag
er
Prep
are
Con
tinge
ncy
Plan
s
Imag
ine
cris
is
situ
atio
ns a
nd
prep
are
to d
eal w
ith
unex
pect
ed e
vent
s
"Las
t yea
r we
had
terr
oris
ts h
it a
proj
ect i
n K
haza
kast
an a
nd h
avin
g th
e co
ntin
genc
y pl
an is
wha
t sav
ed a
num
ber o
f liv
es. A
lo
t of w
hat w
e kn
ow a
bout
con
tinge
ncy
plan
ning
com
es fr
om S
hell,
the
oil g
iant
. W
e br
ains
torm
eve
ry p
ossi
ble
cris
is
situ
atio
n th
at c
ould
hit
and
we
deve
lop
a co
mpe
nsat
ing
plan
of a
ctio
n. W
ith a
con
tinge
ncy
plan
, we'r
e re
ady
both
men
tally
an
d or
gani
zatio
nally
, to
spot
smol
derin
g fir
es a
nd c
onta
in th
em b
efor
e th
ey o
ut o
f con
trol."
Boo
mer
ang/
V
ice
Pres
iden
t"
Prep
are
an
"Alig
nmen
t Pap
er"
to sh
ape
emer
gent
un
certa
intie
s
"We
wan
t to
be p
roac
tive
rath
er th
an re
activ
e. T
he d
ual n
atur
e of
our
wor
k is
ant
icip
atin
g pr
oble
ms a
nd h
eadi
ng th
em o
ff.
Our
alig
nmen
t pap
er is
our
mos
t im
porta
nt to
ol. I
t has
six
sect
ions
and
look
s lik
e a
bala
nce
shee
t. (1
) Iss
ue: w
e st
ate
the
prob
lem
; (2)
Our
Stra
tegi
c In
tere
sts:
we
mak
e th
e bu
sine
ss c
ase,
as a
ffect
ed b
y th
e is
sue;
(3) K
ey F
acto
rs: w
e st
ate
the
mat
eria
l fac
ts, r
elat
ions
hips
, or o
ther
par
ty in
tere
sts;
(4) J
udgm
ents
: we
go b
eyon
d th
e fa
cts t
o a
prof
essi
onal
est
imat
e of
lik
ely
outc
omes
; (5)
Goa
ls: w
e de
scrib
e th
e go
als w
e sh
ould
try
to a
chie
ve, i
deal
ly, d
riven
by
the
fact
s an
d ju
dgm
ents
; (6)
O
bjec
tives
: we
fix c
oncr
ete
actio
ns...
impl
emen
tatio
n ta
rget
s, p
rogr
ess t
hat c
an b
e m
easu
red.
"
Kel
so/ S
enio
r Pr
ojec
t M
anag
er
Cul
tivat
e A
dapt
ibili
ty
"Par
achu
te"
high
ly
skill
ed e
xpat
riate
s in
to a
pro
ject
to
acce
lera
te p
rogr
ess
"Whe
n th
ings
don
't go
as p
lann
ed w
ith a
n in
stal
latio
n an
d w
e st
art t
o fa
ll be
hind
they
cal
l me
in. T
hat's
why
I'm
her
e on
this
[p
roje
ct].
I'm th
e gl
obe-
trotte
r who
orc
hest
rate
s the
turn
aro
unds
. And
her
e w
e ha
d fa
llen
way
bac
k on
sche
dule
bec
ause
we
had
over
estim
ated
the
tech
nica
l cap
abili
ties o
f the
loca
ls. S
o af
ter I
cam
e in
and
figu
red
out w
here
thin
gs h
ad g
one
side
way
s, I s
ent f
or 1
0 or
12
inst
alle
rs fr
om G
erm
any,
Fra
nce
and
the
UK
and
had
them
par
achu
ted
in to
get
the
job
back
on
track
. Th
is te
am w
as e
xcel
lent
and
they
wer
e he
re fo
r abo
ut th
ree
mon
ths."
Her
oic/
Vic
e Pr
esid
ent
"
Avo
id fo
rmal
izin
g pr
oces
ses t
hat
rest
rict a
dapt
ive
thin
king
"As w
e op
ened
up
coun
tries
, we
talk
ed a
lot a
bout
pre
parin
g a
man
ual,
or a
pro
toco
l, th
at c
ould
be
used
thro
ugho
ut th
e w
orld
. And
we
wer
e se
rious
, but
we
deci
ded
not t
o be
caus
e w
e ar
e ve
ry, v
ery
entre
pren
euria
l. A
nd th
e fe
ar is
, onc
e yo
u pu
t so
met
hing
in w
ritin
g w
ith [t
he p
resi
dent
's na
me
on it
] as
an e
dict
from
the
corp
orat
e le
vel,
peop
le b
egin
to re
fer t
o th
e m
anua
l rat
her t
han
thei
r ow
n gu
t fee
ling
or in
telli
genc
e. A
nd w
e w
orrie
d th
at th
is w
ould
be
a di
sadv
anta
ge in
mar
kets
ab
road
. So
we
deci
ded
not t
o pu
t a m
anua
l tog
ethe
r for
fear
it w
ould
real
ly li
mit
peop
le in
wha
t the
y fe
lt w
as th
e rig
ht
resp
onse
, bec
ause
they
had
this
man
ual t
o fo
llow
."
Boo
mer
ang/
G
ener
al
Cou
nsel
Insu
re
Aga
inst
U
ncer
tain
ties
Buy
pol
itica
l ris
k in
sura
nce
to re
duce
ris
k of
exp
ropr
iatio
n
"Pol
itica
l ris
k in
sura
nce
is p
urch
ased
for t
wo
reas
ons.
From
one
vie
w, t
he p
roje
ct sp
onso
rs tr
y to
pro
tect
them
selv
es fr
om
expr
opria
tion
risk.
At a
noth
er le
vel,
the
spon
sors
are
try
to c
reat
e an
ince
ntiv
e fo
r the
hos
t gov
ernm
ent n
ot to
exp
ropr
iate
fo
r fea
r of c
ompr
omis
ing
thei
r rel
atio
nshi
p w
ith th
e U
S go
vern
men
t (O
PIC
) or M
IGA
who
pro
vide
the
cove
rage
and
who
ba
ng th
ese
coun
tries
ove
r the
hea
d an
d th
reat
en to
revo
ke fu
ture
loan
s whe
n th
ey [m
isbe
have
].�
Mar
engo
/ R
esid
ent
Engi
neer
"H
old
a pr
ojec
t "c
aptiv
e" to
insu
re
paym
ent
"[Th
e sp
onso
r] is
six
mon
ths i
n ar
rear
s on
paym
ent.
They
're a
ll co
rrup
t, rig
ht to
the
top.
But
they
'll p
ay. T
hey'l
l hav
e to
pay
be
caus
e w
e ha
ve th
eir p
roje
ct c
aptiv
e. T
hey
need
two
mor
e m
ain
lines
inst
alle
d an
d w
e w
on't
put i
n on
e m
ore
pipe
unt
il w
e ge
t pai
d. In
fact
, I'v
e dr
afte
d a
lette
r and
we'r
e ha
lting
the
wor
ks n
ext w
eek
until
we
rece
ive
the
bala
nce
owed
."
180
up. In addition, special clauses are inserted that allow for re-negotiation, should emergent
uncertainties cross pre-determined thresholds.
Insure against uncertainties. Foreign entrants use various insurance schemes to
reduce the consequence of a local knowledge deficit. For example, Duke buys insurance
to alleviate political risks, market risks and currency-exchange risks. Kelso and Archer
buy insurance to guarantee product shipments and secure inventory against fire, theft and
vandalism. In addition to formal insurance markets, firms use powerful connections or
threaten to withhold resources to insure against undesirable events. For example, in many
countries Boomerang relies on top-tier political and military officials to certify payment
and performance of local sub-contractors. Similarly, Marengo has threatened to abandon
semi-completed projects in order to accelerate payment.
Towards a Model of Strategies to Succeed in Foreign Environments
Figure 1 pulls together the strategies discussed on the previous pages, which are
hypothesized to be exhaustive from a knowledge-based perspective, to propose a model
of strategies for coping with embeddedness and emergent uncertainty in foreign
environments. The model displays an array of tactical strategies, all of which converge on
the three general strategies that represent different pathways an entrant can take to
minimize unforeseen costs and maximize project performance.
While the general strategies each offer a theoretically distinct approach to minimizing
the likelihood of unforeseen costs in a foreign market, they are not always separable
when observed in the field. On the contrary, the general strategies often come bundled
together in sets. For example, when an entrant acquires a local firm, the entrant not only
increases its stock of local knowledge by ingesting a team of experienced nationals into
its organizational boundary, but it also decreases its need for self-learning. Moreover,
acquiring a local firm decreases the potential costs associated with resolving emergent
uncertainties such as a contract disputes or terrorist threats, by virtue of having a local
team on-call that is well-prepared to identify, prioritize and mitigate emergent
uncertainties and their hazardous consequences.
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FIGURE 1
Strategies to Succeed in Foreign Environments31
Finally, it is important to point out that none of these strategies comes for free. There
are costs of entering into local partnerships, providing training, hedging and off-shoring
prefabrication. How far do firms want to go in reducing unforeseen transaction costs?
Firms do not attempt to drive transaction costs to zero, but rather they seek to minimize
the sum of production costs and transaction costs by selecting strategies in order of cost-
effectiveness until they reach a point of diminishing marginal returns to additional
investment (North, 1990).
Learning How to Circumvent the �Country Learning Curve�
A number of studies have presented theoretical arguments to suggest a �learning-curve�
or �experience curve� relationship between the time spent in a given host country and
31 The corollary to this strategic objective is to maximize future benefits, which is especially important for ongoing business operations. However, it is not explicitly represented in this particular model because, for a single project, most project entrants go in with a fixed budget and thus their primary concern is cost minimization.
Decrease Need for Local
Knowledge
Reduce Impact of Knowledge
Deficit
Minimize Unforeseen
Costs5
Increase Project
Performance
GENERAL STRATEGIES
Reduce Embeddedness in Local Context
Reduce Scope of Work
Prepare Contingency Plans
Insure Against Exceptions
Increase Supply of Local
Knowledge
Increase Learning Rate
Increase Initial Knowledge
Increase Learning Period
TACTICAL STRATEGIES
STRATEGIC OBJECTIVES
Cultivate Adaptability
182
operational performance (Child & Yan, 2003; Isobe, Makino & Montgomery, 2000; Lee,
1999; Luo & Peng, 1999).
Our evidence contradicts this view and presents a more complex story. What we find,
in our sample of highly experienced international firms, is a deft ability to circumvent the
learning curve. Circumvention strategies enable entrants to succeed rapidly upon arriving
in a new host country with only minimal learning about the local business and
institutional environment. Stated more formally,
Proposition 6a: As firms internationalize, they learn to circumvent the country
learning curve, by �ingesting� locals, by reducing the need to learn about local
institutions and by reducing the consequences of not learning.
Proposition 6b: The greater a firm�s diversity of international experience, the greater
their ability to circumvent the learning curve for a new country in achieving objectives
and avoiding unforeseen costs in an unfamiliar market.
Three main �circumvention strategies� were observed. First, purposeful strategies to
avoid learning�e.g., hiring locals, partnering and acquiring local firms�were observed
to increase an entrant�s access to local knowledge without having to learn anything
themselves (see Table 6). As Simon (1991) noted, there are only two ways an
organization ever learns anything: by the learning of the firm�s existing members or by
the ingestion of new members. And thus, by ingesting new members or at least by
partnering with them, an entrant organization gains knowledge as an entity and shifts the
burden of learning away from the existing members. Second, strategies to decrease
exposure to local actors and institutions, such as outsourcing and off shoring, were
observed to reduce an entrant�s need for local learning drastically (see Table 7). Third,
strategies to reduce the severity of unforeseen conditions or events�e.g., planning for
contingencies, designing an adaptable organization and insuring�were observed to
reduce the hazard associated with an entrant�s local knowledge deficit (see Table 8).
Our findings indicate that as firms gain global experience, they enact many variants of
these three general strategies, which seem to be applicable across all markets and
countries. Our findings also indicate that by using variants of these strategies, firms are
able to succeed in unfamiliar markets without encountering the steep learning curve that
183
is so often assumed in the literature (eg. Arnold & Quelch, 1998; Stanat, West, & West,
2000). Thus, our findings contribute to the knowledge of how firms learn to work
internationally: they learn to buy local knowledge, they learn to avoid the need for local
knowledge and they learn to avoid the impacts of a local knowledge deficit.
Finally, it is useful to note that each of these general strategies represents an instance
of deutero-learning, the process of learning about learning (Bateson, 1972). Our evidence
suggests that at its heart, internationalization experience is learning about the process of
learning to work in foreign markets. It is learning how to accelerate this process, learning
how to reduce the scope of this process and learning how to reduce the potential
ramifications of this process. As Sinkula (1994) aptly states, �Learning on this level is
essential if the organization is to understand its ability to learn, its speed of learning, the
correctness and relevance of what it learns and ultimately the relationship between what
it learns and how it performs in relevant markets.�
CONCLUSION
This chapter has explored the link between the level of embeddedness an entrant faces in
an unfamiliar market environment, the level of an entrant�s need for germane local
knowledge and the strategies it uses to cope with a (so-called) local knowledge deficit.
Contribution to Theory
This research proposes a new, grounded-theoretic view of the strategies firms actually
develop as they learn to cope with embeddedness and emergent uncertainty in foreign
markets and it identifies a clear link between these strategies and firm performance. Table
11 lays out six contributions of this article to the theory of international business and
highlights the shortcomings of extant theory that are addressed by each contribution. For
the convenience of readers who wish to refer back to the findings presented in the body
of the article, Table 11 is organized by article section/sub-section.
184
TABLE 11 Summary of Shortcomings of Extant Theory and the Contribution of this Article
Article Section or Sub-Section
Inadequacy or Inaccuracy of Extant Theory
Contribution
Embeddedness Inaccurate: Assumes equal embeddedness for all entrants.
Show that embeddedness differs by firm-type and is linked closely to the size of an entrant's local knowledge deficit and
the potential for situations of emergent uncertainty.
Emergent Uncertainty Inaccurate: Assumes predictability of risks.
Show that with increasing embeddedness, risks grow, and become less predictable.
Firm-Specific StrategiesInadequate: Ignores
embeddedness, aggregates data across industries.
Show that entrant strategies and structures differ across industries, as a function of an entrant's embeddedness
Learning How to Match Embeddedness, Strategy, and
Structure
Inadequate: Ignores classic management theory.
Show that classic theory is useful, in combination with an embeddedness view, to describe the strategies and structures
that entrants adopt.
General Strategies
Inaccurate: Assumes that internationalization knowledge is tacit, a black box that cannot
be unpacked.
Shows that internationalization knowledge consists of three main strategies: increasing the supply of local knowledge,
decreasing the demand for local knowledge and reducing the consequence of a local knowledge deficit
Learning How to Circumvent the �Country Learning Curve�
Inaccurate: Assumes country learning curves.
Show that in addition to learning about the local context in an unfamiliar country, firms learn to "not learn" and learn to
reduce the consequence of "not learning"
Contribution to Practice
For international business managers, this chapter identifies three complementary
strategies for reducing a firm�s exposure to embeddedness and emergent uncertainty in
foreign markets that form a template for an almost infinite number of tactical variants. It
also presents numerous illustrative examples that provide a sense for how these strategies
have been used by successful international firms. Managers can benefit most by using
these strategic archetypes to craft their own fine-grained internationalization strategies,
customized to the specific time, location and environmental context in which they do
business.
Areas for Future Research
To advance this line of inquiry, other researchers might use the simple proxy for
embeddedness that we have proposed to map out the level of embeddedness that faces
other types of firms in other industry sectors. In addition, it would be beneficial to
develop a set of simple measures to measure the �intensity� of interaction, negotiation
and coordination across each local linkage. Researchers can attempt to replicate or refute
185
our results by adding the dimension of embeddedness into their extant data sets�either
using a similar quantitative measure of embeddedness, if data to do this are available or
could be gathered, or simply by categorizing each firm�s level of embeddedness
qualitatively as �low� or �high��and reinterpreting their previous findings. In addition,
researchers might take steps to test the propositions we have proposed using new
quantitative data, larger samples and appropriate methods of statistical inference.
186
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APPENDIX 1 Structured Interview Protocol
The structured interviews to measure depth of embeddedness involved two questions: 1. Estimate the number of relations that your firm has with each class of local entities?
• Vendors and sub-contractors (eg. materials supplier, concrete subcontractor or any other entity that your firm has paid for products or services in the local market).
• Formal regulative agencies (eg. police, building inspection, customs authority, traffic department, etc.).
• Community organizations (eg. non-governmental organizations, community interest groups, school-board, shopkeeper�s guild, etc.)
• Other entities on the project (eg. architectural designer, power supplier, electrical subcontractor or any other entity with which you lack a formal contract).
2. For a �typical project�, what is your firm�s level of engagement in each of the following types of activities, relative to other types of firms on the project?
• Types of firms: Developers, GCs, project consultants, systems contractors • Types of activities: Buying land, handling resettlement issues, getting goods through
customs, applying for permits and entitlements, procuring local labor, procuring local supplies, negotiating with local government, entering into locally enforced contracts.
• Note on process: This question was presented in accompaniment with a matrix-style visual aid. The matrix displayed �types of firms� across the columns, �types of activities� across the rows and the cells remained blank.
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Conclusion
This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
--Sir Winston Churchill
194
CONTRIBUTIONS TO PRACTICE
This dissertation was motivated by a practical problem: firms that enter foreign markets
to work on global projects report many unforeseen, unexpected, uncertain and unknown
costs and conditions during planning, design, engineering and construction. To address
this problem, this dissertation has examined the processes through which these costs are
incurred, the types of costs that are incurred, the magnitude and ramifications of these
costs, and the general strategies that firms adopt to cope with these costs.
For practitioners, there are at least three big takeaways. The key takeaway from
Chapter I, is that, when navigating unfamiliar markets, past experiences may be invalid,
assumptions may break down, rules-of-thumb may require recalibration, knowledge may
not bring advantage, local assumptions, conventions and requirements may seem unusual
and the political, economic and legal systems may consist of an entirely different set of
rules, logics and enforcers. Thus, it is inevitable that institutional exceptions�
misjudgments, misunderstandings and conflicts � will arise. A key to prevention is to
increase awareness about local institutions and business realities. A key to cost
minimization is to quickly perceive, diagnose, mediate and reconcile potential critical
incident scenarios before they escalate.
The key takeaway from Chapter II is that institutional exceptions lead to significant,
quantifiable, project-delaying transaction costs, including time delay, money costs,
reputation damage and relationship damage. These costs are not imaginary, insignificant
or immeasurable. The evidence suggests that in relations with unfamiliar local host
entities, entrant firms should anticipate schedule delay ranging from 4% to 20%,
depending on the type of relation. Contractors and consultants need to be aware of these
hidden costs and their consequences, i.e. sapped project resources, lower profits or even
losses, and in the case of reputation damage, lower prospects of future clients and
projects. To avoid these costs, they need to recognize the importance of locally
experienced personnel and to avoid dependencies where local experience is insufficient.
One strategy to achieve this is to outsource activities embedded in local relations and
institutions to local guides, agents, partners, or subcontractors who have knowledge to
execute according to local protocols and institutional idiosyncrasies. Finally, by
sustaining a market presence over time, developing recurring network relations and
195
cultivating a staff with local knowledge, an entrant contractor or consultant can gradually
learn to maneuver and transact effectively and efficiently within the tangle of locally-
devised institutional enablers and constraints.
Chapter III, the strategy chapter, may offer the most important insight for
practitioners. The big takeaway in this chapter is a �strategic toolkit� of three general
strategies, and any number of tactical variants, that managers can use to craft their own
context- and industry-specific approaches to internationalization, in order to cope with
embeddedness and emergent uncertainty in foreign markets. The three general strategies
are as follows: increasing the supply of local knowledge, decreasing the demand for local
knowledge and reducing the consequence of a local knowledge deficit. Examples of each
strategy are provided that can be used as mini cases-studies.
CONTRIBUTIONS TO THEORY
Within the present dissertation, several theoretical contributions have been noted. These
new insights are summarized in Table 1, along with related theoretical perspectives,
theoretical shortcomings and research questions.
In addition to offering contributions to extant theoretical perspectives, the present
dissertation also lays the groundwork for a fresh conceptual model summarizing the basic
challenges, costs and strategies associated with encountering unfamiliar institutions in
foreign markets. This overall conceptual model is provided in Figure 132 and pulls
together the core ideas contained in each of the three chapters as well as those from three
additional working papers (Orr, 2005a; b; c). The model shows a positive correlation
between an entrant�s local knowledge deficit and the extent of unforeseen costs, with
compensating strategies as a moderator of this relationship. Overall, the model enriches
our understanding concerning: the types of unforeseen costs that are incurred as a result
of failing to understand alien institutions; and the main strategies that are used to cope
with a local knowledge deficit concerning alien institutions. This conceptual model
unifies the insights contained within each of the individual chapters, and thus, the model
itself offers perhaps the most extensive contribution contained within this dissertation.
32 Note that Figure 1 was also briefly highlighted in the Introduction, where it was labeled a �Conceptual Overview� or roadmap (see Figure 1, page 17).
196
For the sake of simplicity, the conceptual model is shown with a minimum number of
boxes and arrows. However, this simple representation omits two important variables and
relationships that deserve mention. First, an entrant�s level of embeddedness in the
foreign market setting influences the extent of its local knowledge deficit (Chapter II &
III); and second, overall project performance is impacted by unforeseen transaction costs
(Chapter I & II). Although these variables and relationships are not explicitly depicted in
the model, they should be self-evident from the discussion up to this point.
The main benefit of the model is its potential broad-ranging applicability. The model
proposes, quite simply, that when an entrant (individual or organization; private or
public) lacks local knowledge about the elements and/or dynamics of a foreign market,
then unforeseen costs are a likely result. This broad conjecture extends well beyond the
empirical contribution of the present dissertation, which was limited to testing the
relationship between an entrant�s lack of institutional knowledge and unforeseen costs.
However, it is expected that this �local knowledge deficit�-�unforeseen cost� relationship
also holds when an entrant runs into other unfamiliar elements and dynamics of markets
that tend to vary systematically across national and regional settings (see Orr, 2005b). For
example, it is not hard to imagine that an entrant�s lack of understanding and
preconceived expectations concerning host country symbolic systems (i.e. language,
signage etc.), local actors (i.e. existence of certain government arms, roles and
responsibilities of positions), relations between actors (i.e. industrial network
configurations, division of labor), and/or technologies (i.e. existence of power, water,
transit infrastructure) would precipitate many additional unforeseen costs. Thus, a
considerable amount of fruitful empirical work could be conducted within the framework
of the conceptual model, to verify the positive association between a local knowledge
deficit and unforeseen costs, with a specific emphasis on these other non-institutional
market elements.
It is also important to point out the main limitation of the conceptual model (and this
dissertation). While it captures many of the short-term challenges and costs of foreign
market entry, it does not provide insight into the overall strategies of the multi-national
enterprise, or the longer-term benefits of global expansion. Thus, the model is
complementary to other research efforts that concentrate on multi-national strategies, i.e.
197
global efficiency, national responsiveness, and worldwide learning (eg. London and Hart,
2004; Bartlett & Ghoshal, 1989); and also to research efforts that focus on the
opportunities and advantages that come with internationalization, such as increased
market size, diversification, resource control, economies of scale and scope, and
technological learning (eg. Zahra, Ireland, & Hitt, 2000).
FIGURE 1
Conceptual Overview
• Knowledge • Institutions • History • Activity
Knowledge Deficit about anUnfamiliar Market Setting
• Ecological Context • Actors & Relations • Technologies • Symbolic Systems
(Orr 2005a; b; c)
Unforeseen Costs
• Money Costs • Time Costs • Relationship Damage • Reputation Damage
General Strategies to Cope with a Knowledge Deficit
• Increase the Supply of Local Knowledge • Decrease the Need for Local Knowledge • Reduce the Consequence of a Local Knowledge Deficit
Ch.4,5+
- Ch. 5,6
198
T
AB
LE
1
Sum
mar
y of
Con
trib
utio
n
Cha
p-
ter
Theo
retic
al
Pers
pect
ive
Inad
equa
cy o
r In
accu
racy
Res
earc
h Q
uest
ions
Con
trib
utio
n
IC
ultu
ral
Dist
ance
Inad
equa
te: E
mpi
rical
stud
ies h
ave
gene
rate
d co
ntra
dict
ory
conc
lusi
ons
abou
t the
link
bet
wee
n cu
ltura
l dis
tanc
e an
d pr
ojec
t per
form
ance
.
Con
firm
s tha
t ins
titut
iona
l diff
eren
ces l
ead
to in
stitu
tiona
l exc
eptio
ns--
mis
judg
men
ts, m
isun
ders
tand
ings
and
conf
licts
--tha
t cau
se fo
ur m
ain
type
s of c
osts
--tim
e co
sts,
mon
ey c
osts,
repu
tatio
n da
mag
eand
re
latio
nshi
p da
mag
e--th
at w
eake
n pr
ojec
t per
form
ance
.
IIn
stitu
tiona
l Th
eory
Inad
equa
te: F
ew st
udie
s in
inst
itutio
nal
theo
ry fo
cus o
n th
e co
llisi
on o
f in
terc
ultu
ral i
nstit
utio
nal s
yste
ms.
Prov
ides
a p
roce
ss m
odel
of h
ow in
terc
ultu
ral i
nstit
utio
nal e
xcep
tions
ar
ise
and
are
reso
lved
.
IIn
tern
atio
nal
Bus
ines
s
Inad
equa
te: I
nstit
utio
nal t
heor
y of
fers
pr
omis
ing
pote
ntia
l to
scho
lars
of
inte
rnat
iona
l bus
ines
s, bu
t has
bee
n un
deru
tiliz
ed.
Con
firm
s the
val
ue o
f an
inst
itutio
nal p
ersp
ectiv
e in
inte
rnat
iona
l bu
sine
ss, b
y ve
rifyi
ng th
at in
stitu
tiona
l exc
eptio
ns c
an h
ave
cost
ly
cons
eque
nces
for e
ntra
nt fi
rms.
ILa
rge
Engi
neer
ing
Proj
ects
Inac
cura
te: P
rom
ulga
tes o
verly
ratio
nal
view
of l
arge
pro
ject
s, as
sum
ing
them
to
be d
riven
by
narr
owly
con
ceiv
ed c
ost-
bene
fit m
odel
s.
Show
s tha
t ins
titut
iona
lly ro
oted
exp
ecta
tions
, con
vent
ions
, pr
actic
esan
d pr
otoc
ols h
ave
a he
avy
influ
ence
on
the
inte
ract
ions
be
twee
n pr
ojec
t adm
inis
trato
rs th
at e
ffect
tech
nica
l, co
ntra
ctua
land
m
anag
eria
l pro
cess
es a
nd p
erfo
rman
ce.
IITr
ansa
ctio
n C
ost
Econ
omic
s
Inad
equa
te: F
ails
to c
onsi
der "
unfo
rese
en
trans
actio
n co
sts"
that
aris
e fr
om c
lash
es
in in
stitu
tiona
lized
ass
umpt
ions
, lo
gics
and
rule
s.
Iden
tifie
s "un
fore
seen
tran
sact
ion
cost
s" a
re a
n un
ders
tudi
ed, y
et
salie
nt, c
lass
of t
rans
actio
n co
sts t
hat a
rise
in tr
ansa
ctio
ns b
etw
een
inte
rcul
tura
l age
nts.
IIIn
tern
atio
nal
Bus
ines
s
Inad
equa
te: H
as n
ot b
een
able
to q
uant
ify
the
salie
nce
of c
osts
that
aris
e fr
om
inte
rcul
tura
l fric
tion
and
conf
lict.
Prov
ides
qua
ntita
tive
evid
ence
to sh
ow th
at in
stitu
tiona
l diff
eren
ces
can
and
do c
ause
sign
ifica
nt d
elay
for g
loba
l pro
ject
ent
rant
s, w
hich
in
crea
se in
salie
nce
with
the
frequ
ency
and
inte
nsity
of f
orm
al a
nd
info
rmal
rela
tions
with
loca
l ent
ities
and
dec
reas
e w
ith lo
cal e
xper
ienc
e an
d re
curr
ing
rela
tions
.
How
do
unfa
mili
ar in
stitu
tions
ca
use
inst
itutio
nal e
xcep
tions
? H
ow a
re th
ey re
solv
ed?
Wha
t ar
e th
e co
sts?
" " "
How
salie
nt a
re u
nfor
esee
n in
stitu
tiona
l tra
nsac
tion
costs
fo
r firm
s tha
t ent
er g
loba
l pr
ojec
ts in
new
mar
kets?
"
199
TA
BL
E 1
(CO
N�T
) Su
mm
ary
of C
ontr
ibut
ion
Cha
p-te
rTh
eore
tical
Pe
rspe
ctiv
eIn
adeq
uacy
or
Inac
cura
cyR
esea
rch
Que
stio
nsC
ontr
ibut
ion
III
Inte
rnat
iona
l B
usin
ess
Inac
cura
te: A
ssum
es e
qual
em
bedd
edne
ss
for a
ll en
trant
s.
Show
s tha
t em
bedd
edne
ss d
iffer
s by
firm
-type
and
is li
nked
clo
sely
to
the
size
of a
n en
trant
's lo
cal k
now
ledg
e de
ficit
and
its p
oten
tial t
o en
coun
ter s
ituat
ions
of e
mer
gent
unc
erta
inty
.
III
Inte
rnat
iona
l B
usin
ess/
R
isk A
naly
sis
Inac
cura
te: A
ssum
es p
redi
ctab
ility
of
risks
.Sh
ows t
hat w
ith in
crea
sing
em
bedd
edne
ss, r
isks
gro
wan
d be
com
e le
ss
pred
icta
ble.
III
Inte
rnat
iona
l B
usin
ess
Inad
equa
te: I
gnor
es e
mbe
dded
ness
, a g
greg
ates
dat
a ac
ross
indu
strie
s.Sh
ows t
hat e
ntra
nt st
rate
gies
and
stru
ctur
es d
iffer
acr
oss i
ndus
tries
, as
a fu
nctio
n of
an
entra
nt's
embe
dded
ness
III
Inte
rnat
iona
l B
usin
ess
Inad
equa
te: I
gnor
es c
lass
ic m
anag
emen
t th
eory
.
Show
s tha
t cla
ssic
theo
ry is
use
ful,
in c
ombi
natio
n w
ith a
n em
bedd
edne
ss v
iew
, to
desc
ribe
the
stra
tegi
es a
nd st
ruct
ures
that
en
trant
s ado
pt.
III
Inte
rnat
iona
l B
usin
ess
Inac
cura
te: A
ssum
es th
at
inte
rnat
iona
lizat
ion
know
ledg
e is
taci
t, a
blac
k bo
x th
at c
anno
t be
unpa
cked
.
Show
s tha
t int
erna
tiona
lizat
ion
know
ledg
e co
nsis
ts o
f thr
ee m
ain
stra
tegi
es: i
ncre
asin
g th
e su
pply
of l
ocal
kno
wle
dge,
dec
reas
ing
the
dem
and
for l
ocal
kno
wle
dge
and
redu
cing
the
cons
eque
nce
of a
loca
l kn
owle
d ge
defic
it
III
Inte
rnat
iona
l B
usin
ess
Inac
cura
te: A
ssum
es c
ount
ry le
arni
ng
curv
es.
Show
s tha
t in
addi
tion
to le
arni
ng a
bout
the
loca
l con
text
in a
n un
fam
iliar
cou
ntry
, firm
s lea
rn to
not
lear
n an
d le
arn
to re
duce
the
cons
eque
nce
of n
ot le
arni
ng
Wha
t cha
lleng
es d
oes
embe
dded
ness
cre
ate
for
fore
ign
entra
nts?
Wha
t st
rate
gies
do
entra
nts u
se to
co
pe w
ith e
mbe
dded
ness
?
" " " " "
200
AREAS FOR FUTURE RESEARCH
Within each of the individual chapters, several promising areas for future research have
been proposed. For the reader�s convenience, these �next steps� are summarized below,
along with several other areas that became apparent during the research process and
during completion of the working papers (Orr 2005a; b; c).
Describing Institutional Exceptions, Associated Costs and Resolutions
Institutional theory holds an unexplored potential to shed light on global project
performance; and global projects offer an uncommon natural research laboratory to study
processes of institutional conflict and evolution. Further research is necessary to examine:
! to examine how exceptions vary in frequency, intensity and costliness across
settings, phases and sub-systems as a given project proceeds from planning to
completion stages;
! to identify coping mechanisms � at interpersonal, inter-team, project, firm
and wider levels � to deal with exceptions;
! to examine attributes of project leaders who best mollify conflicts;
! to identify managerial interventions � in organization structures, contracting
practices, staffing policies or administrative procedures � that can help
bridge across institutional gaps; and
! to trace evidence of organizational learning that supports improved
performance within and across projects and firms.
Even more broadly, in order to enhance our understanding of institutional processes, it
is necessary to further examine the cause and effects of intercultural institutional
exceptions in other social, political and economic contexts. This analysis might be
conducted at many units of analysis, from more basic conflicts between individuals and
teams, to collisions between organizations, to the most momentous clashes between
countries and entire civilizations (eg. Huntington, 1996). For example, in completing this
PhD dissertation, I uncovered the fact that Saudi Arabia has faced tremendous challenges
in trying to integrate various German, Japanese, British, French and US technical
standards for basic infrastructure systems and components (power, sewer, phone, etc.), to
201
the point that many of their systems exist today as a hodge-podge of components
connected with localized innovation to bridge the gaps (Westney, 1989), with many
serious incompatibilities that jeopardize overall safety and performance. Not surprisingly,
this leads to many one-time costs of system integration and also many recurring costs that
are difficult to quantify when systems break down or require routine maintenance. These
recurring costs arise because few technicians understand the full gamut of systems or
standards that have been installed, leading to permanent reliance on the most skillful and
costly outside contractors for restorations and repairs.
Measuring Unforeseen Transaction Costs
Future research related to the measurement of unforeseen transaction costs might go in a
number of fruitful directions. To better understand the dynamics of distinctive relational
profiles, researchers might examine each of the five profiles � formal client relations,
formal market relations, formal regulatory relations, informal community relations, and
informal project relations � in isolation. To examine the effects of political will and the
strength of anti-corruption units in causing unforeseen delay in relations with host
government regulatory agencies, researchers might develop a set of indicators to measure
these latent constructs. To better understand relational interdependencies, researchers
might develop a finer grained model of dependency by splitting the elements of our
survey question into five individual bases of dependency: legitimacy, resources,
authorization, knowledge, and information. To investigate the longitudinal process of
internationalization and how unforeseen transaction costs decline as firms become more
internationally experienced, researchers might test the link between the global experience
of the firm, or of the top managers and executives in the strategic apex, and the firm�s
ability to acquire relevant local knowledge, either through partnering, hiring locals, or
acquisitions, upon entering a new environment. To understand the non-linear effects of
conflict escalation, researchers might use a 100 point scale to measure conflict, with 0 to
10 defined as the normal range, and 11 to 100 defined as the range of escalation for
critical incident scenarios. Finally, to continue to explore the dynamics of dyadic
relations and transaction costs, researchers might continue to refine the highly visual
�hub-and-wheel, transaction-map� approach that was pioneered in Chapter II, which was
202
crucial in collecting a large sample of field data about relational factors and transactional
outcomes.
Finally, an institutional knowledge deficit is not the exclusive source of unforeseen
transaction costs. Rather, a lack of knowledge about any of the local market elements can
lead to these costs. For example, when an entrant is in the market to buy a piece of land,
it needs to understand ground conditions (ecological context), past usage to assess
possible contamination (history), local real estate professionals (actors), norms and
regulations concerning the acquisition of property (institutions), and whether or not the
available building means and methods will allow the site to be productively developed
(technologies). Obviously, a lack of factual information in any of these areas could lead
to unforeseen transaction costs. Therefore, it would be fruitful for future researchers to
test the �unforeseen cost�-�local knowledge deficit� relationship for these other elements
and dynamics of foreign markets, beyond strictly the institutional elements. To achieve
this end, researchers would be advised to take an �activities� approach to analysis, to
have informants map out their project into major activities with precedence relationships,
to analyze the unforeseen costs that arise activity by activity, and then to trace these costs
back to a lack of knowledge concerning supporting elements in the local market setting.
Expanding the Embeddedness Framework
Other researchers might use the simple proxy for embeddedness that has been proposed
in Chapter III as an approach to map out the level of embeddedness that faces other types
of firms in other industry sectors, beyond just firms that are participants on global
projects. In addition, it would be beneficial to develop a set of simple measures to
measure the �intensity� of interaction, negotiation and coordination across each local
linkage. Researchers might add the embeddedness dimension to their extant data sets�
either using a similar quantitative measure of embeddedness, if data to do this are
available or could be gathered or simply by categorizing each firm�s level of
embeddedness qualitatively as �low� or �high��and reinterpreting their previous
findings.
In addition, researchers might take steps to test the propositions we have proposed
using new quantitative data, larger samples and methods of statistical inference. Finally,
203
researchers might deepen the analysis of strategies to reduce embeddedness (eg.
outsourcing, off shoring) and strategies to reduce the consequence of embeddedness (eg.
cultivating adaptability, insuring, preparing contingency plans), which have been under-
represented in the IB literature.
Casting a wider net, a fruitful frontier of future research lies in expanding the
embeddedness concept beyond social or institutional embeddedness, as a few authors
have begun to do already in articles that define subsidiary embeddedness (Andersson &
Forsgren, 1996), technology embeddedness (Andersson, Forsgren & Pedersen, 2001),
ecological embeddedness (Whiteman & Cooper, 2000) and relational embeddedness
(Dhanaraj et. al., 2004). I can imagine a paper titled, �Embeddedness and the Specificity
of Knowledge,� which examines the link between the number of interdependencies
between an actor or organism in a particular natural or human-devised environment, the
various elements of that environment and the extent of context-specific knowledge that is
necessary to survive and compete effectively and efficiently in that environment. A
useful starting point for this inquiry might be to define embeddedness with respect to the
set of elements identified in Orr (2005b), which would immediately yield six main types
of actor embeddedness: relational embeddedness, institutional embeddedness, symbolic
system embeddedness, technological embeddedness, knowledge embeddedness and
ecological embeddedness.
Other Potential Research Areas
There are several exciting areas for research on global projects. The first is to explore the
impact of political will on the approval and successful completion of large projects. The
second is to examine the dynamics and strategies involved in the �fuzzy front end�
shaping phase of large projects � especially the �coming together phase� when the
project sponsor and main stakeholders get serious about proceeding and many critical
decisions are committed. The third is to analyze the �pre-qualification processes� used by
large contractors and to identify the mechanisms that enable quick and efficient selection
of large numbers of unknown local contractors. The fourth is to analyze the actual
strategies that large contractors use when breaking up projects into smaller sub-contract
204
packages to minimize risk � How big should packages be? How much redundancy?
Why?
With respect to methodology, the most exciting discovery has been the following
question, �What is similar and what is different, across all human civilizations?� It
sounds simple enough, but this question can be posed for any phenomenon that we
observe in the world around us. For example, next time you are outside, look closely at a
tree and all of its leaves and ask yourself, �What is similar and what is different, across
all leaves?� You will notice that all leaves are remarkably similar, and yet, all leaves are
entirely unique. Indeed, the key to knowing what is a leaf lies in understanding what is
similar about all leaves and what is potentially different about all leaves. Only when you
understand these two things, do you truly understand what a leaf is. This is also true for
trees, humans, ecosystems, organizations, civilizations, ice ages, hurricanes, stock market
collapses, elections, planets, wars or just about any other phenomenon that might be
imaginable. In efforts to classify the animal kingdom, the chemical elements and the
human genome, this was a main underlying question that was addressed across all cases.
This question is crucial to understanding the incredible variation and yet the remarkable
similarity, of so many sets or collections of phenomena that we observe in our universe.
Once you satisfy your curiosities with respect to this first question, a second related
question is, �What are the sources of similarity and what are the sources of difference,
across all human civilizations?� This question is not as easy to answer � for example, in
order to understand the variation in humans, geneticists had to unlock the DNA code; and
to understand the diversity across chemical elements, chemists had to be able to count
atoms, neutrons, protons and electrons. Based on their vast general applicability to
investigations of physical and social phenomenon, these questions are of potential value
to researchers across most fields of science.
REFERENCES
1. Andersson, U. and Forsgren, M. (1996) Subsidiary Embeddedness and Control in
the Multinational Corporation. International Business Review 5 487-508.
2. Andersson, U., Forsgren, M. and Pedersen, T. (2001) Subsidiary performance in multinational corporations: the importance of technology embeddedness.
205
International Business Review 10 3-23.
3. Bartlett, C. and Ghoshal, S. (1989) Managing Across Borders, Boston, MA: Harvard Business School Press.
4. Dhanaraj, C., Lyles, M., Steensma H. Kevin and Tihanyi, L. (2004) Managing tacit and explicit knowledge transfer in IJVs: the role of relational embeddedness and the impact on performance. Journal of International Business Studies 35 428-442.
5. Huntington, S.P. (1996) The Clash of Civilizations and the Remaking of World Order , New York, N.Y.: Simon & Schuster.
6. London, T. and Hart, S.L. (2004) Reinventing strategies for emerging markets: beyond the transnational model. Journal of International Business Studies 35, 350-371.
7. Orr, R.J. (2005a) What is a foreign market? Collaboratory for Research on Global Projects Working Paper Series #21, 1-18. Available at: http://crgp.stanford.edu/publications/working.html
8. Orr, R.J. (2005b) Foreign Markets as Subsystems of Civilizations. Collaboratory for Research on Global Projects Working Paper Series #22, 1-29. Available at: http://crgp.stanford.edu/publications/working.html
9. Orr, R.J. (2005c) Two Way Comparison: Validating the "Recombinant DNA" of Civilizations Framework against Commercial Market Intelligence Reports and Analyzing the Reports against the Framework. Collaboratory for Research on Global Projects Working Paper Series #23, 1-13. Available at: http://crgp.stanford.edu/publications/working.html
10. Westney, D.E. (1993) Imitation and Innovation. In: Ghoshal, S. and Westney, D.E., (Eds.) Organization theory and the multinational corporation, pp. 53-76. New York: St. Martin's Press.
11. Whiteman, G. and Cooper, W. (1265-1282) Ecological Embeddedness. Academy of Management Journal 43 1265-1282.
12. Zahra, S.A., Ireland, R.D. and Hitt, M.A. (2000) International expansion by new venture firms, mode of market entry, technological learning, and performance. Academy of Management Journal 43, 925-951.