Table of Contents

Introduction...................................................................................................................................1
1.2

1.3

Background............................................................................................................................1
Rational of the Study:...............................................................................................................2

1.4

Research Aims and Objectives:..............................................................................................4

1.4.1

Aim................................................................................................................................4

1.4.2

Objectives:.....................................................................................................................4

2.

Literature Review.........................................................................................................................4

3.

Research Methodology:.................................................................................................................6

3.1

Steps of Research Methodology................................................................................................7

3.2

Limitations.................................................................................................................................8

References:....................................................................................................................................9

Introduction

The globalisation of market and trade increased competition among businesses to explore and
develop capabilities to enter into foreign market. Businesses develop their strategies for
global expansion and use different entry modes by which they can accomplish their business
objectives. Beamish and Kachra (2004) stated that there are different types of international
market entry mode such as exporting, licensing, franchising, mergers and acquisitions and
joint ventures etc.

Beamish and Kachra (2004) further added that all these form of

international market entry mode has certain advantages and limitations and selection is based
on company size, management capabilities, available resources, market condition and many
other factors that can have direct or indirect influence on company operations. However, the
most popular choice of cross boarder alliances is joint ventures (Schuler et al, 2004; Ernst and
Halevy, 2004).
The proposed thesis is based on the evaluation of opportunities and hindrances in managing a
foreign direct investment (FDI) in a developing country by the western multinationals from
Europe and USA. The viable option of FDI selected for this research is international joint
ventures due to their multiple modes of operations and available flexibility in gaining the
ownership and minimization of risks in presence of a joint foreign or local partner company
or companies. Despite of the availability of vast literature on joint ventures as an entry
strategy in western economies, there is very little evidence of research is available on these
ventures in Asia and especially in emerging economies of Middle East like Saudi Arabia.

Background

In past, Saudi Arabia has opened the venues of trading activities only to Gulf Cooperation Council

(GCC) member nations companies and Saudi local organizations and provided them registrations
as private entities. According to Elattari, L., (2011), in order to attract large number of more
foreign investors Kingdom of Saudi Arabia (KSA), government has gradually decreased the trade
barriers and restriction in foreign direct investments. The allowance to foreign corporations to
opened up businesses with local Saudi firms and with other foreign companies has increased FDI
activities in the country. Further, the World Trade Organisation (WTO) adhesion has forced the
Saudi government to liberalised the retail, services, and certain manufacturing sections except
military equipment and oil and gas industries. As per guidelines of Saudi Arabian General

Investment Authority

(SAGIA), the capital requirement of foreign partner/s is decided at minimum of USD 5.3
million and accordingly the equity share can be reached to 75% in the period of 3 years in a joint
venture contract (Elattari 2011). For industrial sectors like construction and heavy manufacturing,
foreign investors can establish a 100% owned foreign company with the complete freedom of
trading their manufactured products. On the other hand, MENA Fact Sheet (2013) quoted that

the conduct of a business in KSA for an international investing company, a local partner firm
is recommended to support the legal, commercial, or practical concerns in host country. Also,
the establishment of a legal entity in large businesses with a licensed form of operations is
needed a local joint venture partner in KSA.
As far as construction and engineering sector are concerned, they are treated as amongst the
most significant sectors in the strong economy of KSA. The construction sector Saudi Arabia has
an approximate growth rate of 6 percent per annum in recent years due to the continuation of
major infrastructure projects in the country irrespective of the international recession conditions
since 2008. The construction sector is mostly dominated by public firms and the international
conglomerates from Europe, China, and USA. The importance of this sector increased due to the
diversified investment of Saudi government in construction projects to boost the economy. The
government-led infrastructure progress is mainly observed in construction sector like in
manufacturing plans and large housing schemes to meet the needs of growing population ( Mena

Fact Sheet 2013).

1.3

Rational of the Study:

The study is important due to the significance of FDI as the fastest growing activities in
economics globally after world international trade. Helpman, (2006) asserted that the volume
of global FDI inflows was about 560 billion dollars by 2003. On the other hand, Saudi
Arabia, being the global largest oil producer in last 70 years, attracted a more substantial
quantity of FDI; has been increased by 50% in 13.4 billion. Chah, (2012) termed this
growth as a result of easiness in FDI in Saudi trading legislations in the year 2000 in order to
diversify the economy in the Foreign Investment Act by the Saudi Arabian General
Investment Authority (SAGIA). Ramady and Saee (2007) explained the purpose of SAGIA
as a one-stop shop to facilitate the foreign investors and companies from issuing licenses to
incorporation of new joint venture or wholly owned companies. In a small waiting period of
30 days, sixteen government agencies are integrated operations to speed up the investment
procedures which have attracted the large number of western companies in KSA which are
reluctant in past due to rigid legislations and slow regulatory and registration procedures. The

inflow of MNCs in all allowed sectors are tremendously increased after year 2000 due to the
allowance of full project ownerships, flexible joint venture partnership agreements, rights of
receiving full benefits from business expansion and profits, and facility of transfer of revenue
to the countries of origin. Further, the restricted activities in past are also relaxed in this new
investment law in the areas of heavy manufacturing and industrial construction projects
(Ramady and Saee 2007).
A part from this entire significant enhancement in IJV, Saudi Arabian market is still a
challenging arena for foreign investors in construction sector as investment freedom,
protection of property rights, transparency of operations are still to achieving this market
(Chah 2012). For western firms from Europe and USA, the cultural difference is vast, that has
become more intense as the policy of Suadization has made it compulsory for every joint
venture of foreign companies, at least 30% employees must be local Saudis. Therefore, the
issue of cultural management due to different cultural norms and values in Saudi Arabia made
it difficult for foreign investors to deal easily (Anderson & Gilmore 2010). Also, the stereo
typed image of Saudi Arabia being a conservative society in some foreign investors also
made the work difficult in joint ventures. Ramady and Saee (2007) mentioned the fear of
foreign investors to work alone in KSA and prefer to have a local partner firm in JV.
Therefore, it is important to evaluate to the attractions of foreign companies in KSA to start
IJV and work on long term projects after overcoming the hurdles of adjustment in Saudi
culture and economy.
Moreover, the emerging economies such as China, India, Brazil etc are enjoying benefits of
joint ventures which increased the employment rate and boost economies by improving living
standards of general public (Narula and Duysters, 2004). IJVs in these economies benefitted
both MNCs and host countries in-terms of sharing of resources, capital, and technology thus
MNCs benefit from cheap labour and resources and these countries are improving their GDP
(Islam et al, 2011). Saudi Arabia is also a developing country however, the potential in oil
industry attracted many international companies to invest in petrochemical industries. The
country employment rate is low due to the vast number of expatriates in the country for
which IJV can improve employment rate through new job opportunities and research and
development.

Research Aims and Objectives:

1.1.1

Aim

The aim of this proposed research is to evaluate the opportunities and risks associated with
the International Joint Venture (IJV) in construction industry of Saudi Arabia. The
comparison of JVs of European and Chinese construction corporations with local Saudi
companies will be used to evaluate the impacts of cultural orientation and JV contracts
on the success and performance of these joint ventures in Saudi Arabia.

1.1.2

Objectives:

Based on the research aim the following objectives are derived:

1. To review the literature on market entry modes theories and models and to undertake
an analysis of construction industry International Joint Venture in Saudi Arabia.
2. To identify the perspective benefits and the problems faced by the international
construction firms of Europe and China in IJV with Saudi companies.
3. To analyse the opportunities for MNCs for IJV in Saudi market and identify potential
impact on Saudi economy.
4. To identify the impact of cultural orientations and nature of IJV agreements on the
success of foreign- Saudi JVs.

2.

Literature Review

The success of IJVs lies in managing internal and external sources to avoid risk of failure
and to achieve the goals. The recent economic crisis (2007) has also pushed international
companies to take advantage through strategic alliances to take advantage from local firm
resources and expertise. IJVs are an effective way to enter into new market quickly.
Moreover, the sharing of different risks, culture, language and resources are more attractive
through IJVs. According to Luo (2000) and Evans et al (2002), international joint ventures
(IJV) are a popular choice of multinational companies but they are also difficult to develop,
manage and lead. They highlighted that the majority of IJVs fail to achieve their stated goals
and result in costly failure. This failure can be the result of external environmental forces
such as political and legal system, state of economy or internal organisational forces such as
partner differences, inefficient management of human resource or contract terms. Bouchet et
al (2004) argued that IJVs need to fulfil both partners/organisations goals and also need to

maintain the competitive strength in multiple markets. In contrast, Evans et al (2002)

commented that despite many difficulties, IJVs are also beneficial for companies and
remained a common choice for MNCs entering into global market.
Driouchi and Bennett (2011) identified the reason for forming IJVs and stated that the basic
motivation of IJVs is risk sharing among participants which is beneficial for both parties in
highly capital intensive industries to avoid any failure of product and services. In a high
fixed cost industries IJV with large corporations provide economies of scale and effective
way to pool resources and achieve critical mass. Gilmore et al (2003) stated that one of the
reason for formation of IJVs are the lack of basic understanding of customers and
infrastructure to reach customer and fulfil their demands. Thus choosing a right partner helps
to establish effective and efficient distribution channels. Moreover, penetrating in foreign
market without JV is difficult due to lack of experience and due to the local barriers to
foreign owned companies. Meyer and Nguyen (2005) stated that the upfront development
cost is shared among partners in JV which solve the problems of funding.
Beamish and Lupton (2008) identified that appropriate planning and strategy is necessary
before forming a JV as like all businesses JV are also formed to make profit for its
shareholders and owners. The quality of managing IJVs in the domain knowledge and skills,
using country-specific strategy and venture formation of firms in IJV in important. Islam et
al (2011) examined the influence of three country specific strategies (Market-seeking, Client
and resource-seeking) on new venture formation decisions for firms entering central and east
Europe. All researches in this study found out that market-seeking and source-seeking
strategies influence investments strategy. They indicated that firms perusing different country
specific-strategies made different choice regarding new international structure. Finally, they
recommended that firms of the same industry entering the same international market should
unite the structure of their IJVs similarity. Isabella (2002) stated that IJVs also benefit
countrys economy through foreign investment, research and development and expertise
whereas, the local government intervention, conflict of interest among partners, differences of
culture, and nurturing competitor are the risk associated with IJV. Therefore, IJVs have both
bright and dark side which can nurture a company from diverse resources and operations or it
can lead to failure due to conflict among two partners.

3.

Research Methodology:
The method used for data collection for the research is called research methodology and the
purpose of any research is to improve the existing knowledge or to produce new knowledge
in the field of study. According to Saunders et al (2009), there are many types of research
such as explanatory, exploratory, empirical or constructive and this research is an exploratory
research which will analyse the opportunities and risk associated with IJVs in Saudi Arabia.
Anderson (2009) identified that the accuracy and validity of any research depend upon the
appropriate data collection. There are two types of research approaches which are qualitative
and quantitative where qualitative research is the most common types of research approach
that gave rich insight into the research study whereas quantitative research approach is used
numerical data analysis. Groves (2009) stated that quantitative research is used to confirm
hypothesis of the research study and is inflexible as compare to qualitative research.
Moreover, qualitative research allows studying the population attitude, behaviour and opinion
and cultural specific information. For this research, qualitative research approach will be
appropriate to gather data and information related to the research.
The descriptive research is more specific in answering the purpose and to explain data
characteristics as compared to the exploratory research methods. The more accurate and
mathematical approach of descriptive methodology are more suitable where premises are
already established on strong theoretical support. In this present case, IJV premises are
established on international trade theories. On the other hand, the nature of the proposed
research is more abstract and subjective as the exploration of risks and opportunities are
involved in a market where very less prior researches are available. Therefore, the factors and
relationships are suited with the exploratory methodology that supports qualitative collection
of data.
The data for the research can be collected through primary and secondary data where primary
data is first hand data and secondary data is already published data in form of books, journals,
articles etc. For this research primary data collection method is used to gather information
regarding opportunities for IJVs for MNCs in Saudi Arabia. Levy (2008) stated that primary
research is expensive and time consuming as compared to secondary research as researcher
has to gather information with his own experience and knowledge. However, Silverman
(2011) stated that fresh data might not be available for the research study topic and might be
outdated for which primary data is more reliable. Therefore, this research is based on both
primary and secondary research as the literature will allow obtaining all background

information and primary research will nurture researcher experience and understanding about
the research topic.

3.1 Steps of Research Methodology

The methodology of this research consists of the following steps:
Step 1: Study of all types of joint ventures in Saudi construction industry. A literature search is
focused on the problems of joint venture and the critical review of previous scholarly researches in on
IJV in this region and the regions of Europe and China.
Step 2: Data is gathered through site visits, interviews and discussions with partners, the Saudi and the
foreign joint venture with European and Chinese construction companies.
Step 3: From the preliminary interviews and the literature review, a semi structured interview
questionnaire is going to be formulated. The major areas to be covered in this questionnaire are
related to the choice of country, available facilities, impact of government policies, ownership
advantage as compared to the joint venture, location specific and internationalization specific factors
(Dunning 2001). The impact of these factors to n=be judged in positive or negative FDI inflow in
KSA by these foreign companies.
Step 4: Sampling technique will used as probability based random sampling method in which the
database of Saudi Arabia commerce ministry will be used to locate the European and Chinese IJBV
companies in construction industry in both public and private sectors. A total of 20 companies will be
selected in which 10 will be Chinese-Saudi JVs and 10 will be European-Saudi JVS in construction
sector. The sample size is suggested to be large as the chances of no response from the companies or
delay in arrangement of appointments. The preliminary interviews will be taken from two companies
in each group to form the questionnaire. E-mails, personal references, and industry contacts will be
used to communicate with the companies. Proper request letters will be submitted to explain the
research nature and aims. An appointment of one hour will be fixed with company respondent in their
international operations divisions. The questionnaire will be sent prior to the interview meeting so that
the respondent will do some data collection at their side to answer the respective questions.
Step 5: The questionnaire will be used in the interviews of foreign JV companies correspondents. The
qualitative data collected from these interviews will be arranged, classified, and the methods like data
reduction and pattern matching methods will be used. Important methods selected to be used for
qualitative data are transcribing, reduction of data, data display, pattern matching, and interpretations
are involved.

Step 6: Data analysis methods will convert data in to empirical information as only important
thematic data will be selected in data reduction process. The other information will be explained but
not to be included in empirical information. Pattern matching and conclusion drawing

commences at the start of data collection as the researcher tries to make meaning out of
complex data by trying to identify patterns. After reducing and displaying the data, we went
ahead to identify similar viewpoints as well as conflicting viewpoints which helped us in
analyzing and making conclusions. We sought to identify these patterns between the different
respondents answers and also between these answers and our theories.

3.2

Limitations

Furthermore, the cost for primary data can be controlled as researcher himself belong to
Saudi Arabia and the research is also based on the IJVs in Saudi Arabia therefore primary
data gathering will be easy for the researcher due to social and cultural awareness and
understanding. The limitation of time for the primary research can also be controlled as the
research is completed during PhD which allows plenty of time for the research and data
gathering and analysis.

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