The global trading activities of consulting engineering firms: managing risk and geographical choice

This thesis considers the nature of: (i) Firms’ decision-making regarding the international location of their activities; and (ii) their choice between co-operating with other firms already based in overseas locations, as opposed to establishing their own overseas subsidiaries. These questions are important because of possible links between such internationalisation on the one hand and corporate performance on the other. The thesis analyses these links firstly using existing data sets, and secondly by analysing the data generated through our own questionnaire surveys and follow-up interviews. This research provides one of the first empirical studies of engineering services firm strategies for internationalisation. Dunning (1988) suggests that foreign direct investment is driven by: market seeking, asset seeking, efficiency seeking and strategic asset seeking/augmentation. The international diversification theory holds that a multinational corporation has a lower systematic risk relative to similar domestic firms due to diversification, with cash flows from different countries. Rugman (1979), Miller and Pras (1980) and Caves (1996) propose that foreign operations have the effect of stabilising overall returns due to the fact that different economic conditions tend to be uncorrelated across different international markets. Internationalisation is expected to increase the firm’s turnover, competitiveness and diversification, and to provide opportunities for future growth. We research the choice of foreign direct investment (FDI), joint venture (JV) and acquisition. Williamson (1975) in his Transaction Cost Theory argues that it is likely for firms to internalise the transaction within its own organisation and structure of governance when they are faced with the situations such as: risk of opportunism by other parties, when there are limited numbers of partners to choose from for market transaction and uncertain or complex market condition. Dunning (1989) in his research on the importance of transaction costs in explaining the growth of multinational service activities, finds that foreign direct investment tends to be the preferred entry mode for professional services activities rather than by contractual relationships. This is due to the risk of imitation once competitors have access to the knowledge and geographical diversification which provides advantages to firms. We use Dunning’s Eclectic Theory (Dunning, 1989) and The Uppsala Model (Johanson and Vahlne, 1977) as the theoretical basis to examine factors affecting geographical choice and foreign subsidiary performance. Our questionnaire and interview findings were reviewed with specific attention given to the effect of ‘psychic distance’ and ‘liability of foreignness’ on geographical choice. The findings were also reviewed against research from the World Bank Doing Business project. To consider why consulting engineering firms internationalise and what effect this has on performance, questionnaires were distributed to the top 50 UK-based consulting engineering firms (ranked by total revenue), with follow up interviews to collect information on factors affecting the firm’s internationalisation decision. The financial data (panel data) of the top UK based consulting engineering firms were obtained from the FAME database to determine the correlation between the firm’s degree of internationalisation and overall turnover. Qualitative methods were used to collect information on why consulting engineering firms internationalised, what factors affect entry mode and geographical choice, and how firms adapt their international operational strategy to optimise their performance, as quantitative data alone does not give sufficient insight on decision-making. Questionnaire returns were received from 20 firms (a 40% return). Of these, 70% (i.e. 14) firms participated in the follow-up interviews. Firms interviewed were reassured of anonymity, and that the information provided would be used for academic research purposes only. However, due to the competitive nature of the industry, I was aware that firms may have been selective in providing information during interviews, in order to protect their competitive advantages. With internationalisation, firms must develop the capability to manage the risk and adapt organisational structures for the increased complexity and scope of operation. The final part of our research examines how consulting engineering firms have adapted to these challenges arising from their international operation. A new form of organisational structure (the regional hub approach) is proposed, and is assessed against returns from our questionnaires and interviews.