Sinziana Dorobantu, Thomas Lindner, and Jakob Müllner:
Around the world, spending on large-scale infrastructure projects (airports and ports; power plants; pipelines and railroads) increased tenfold from $41.3 billion in 1994 to $415 billion in 2013, and has been growing since. These projects are often financed by multiple organizations that come together in multi-partner alliances, but we don’t know very much about how these alliances work. Why do the firms leading them pick the partners they do? In a recent paper entitled “Political Risk and Alliance Diversity: A Two-Stage Model of Partner Selection in Multipartner Alliances,” we tried to understand how context influences the number and diversity of organizations in the multi-partner alliances that fund these projects by looking at the effects of political risk on 1,044 multi-partner banking syndicates that financed large-scale infrastructure projects in 68 countries between 2003 and 2012.
In places where political stakeholders have the power to affect policy unilaterally, even very large projects are vulnerable to interference and obstruction. This is what happened in Mexico in 2018, when newly elected president Andrés Manuel López Obrador cancelled a $13.3 billion project for a new international airport in Mexico City, despite the fact that it was one-third complete. To respond to these kinds of challenges, firms working in politically risky environments need have a firm grasp of the situation on the ground—past experience working in the country, or knowledge about local stakeholders, judicial systems, or other political factors that are important for a project’s success. They also need to be able to exert political influence on the host country to keep things on track if the political situation around the project changes.
We found that when selecting a firm to lead an alliance, the preference is for firms that have both knowledge of the project’s host country and political influence over it. But satisfying the need for context-specific knowledge and influence becomes a more complicated decision when the lead firm selects its partners. In a strong alliance, all the members need to work well together, so partner firms are selected as a group rather than as individuals. Partners that are more similar have an easier time communicating and coordinating, and these alliances are less costly to run. But when alliances are operating in politically risky countries, lead firms choose more diverse partners, constructing alliances that are costlier to maintain but that provide more breadth of knowledge and influence to draw on if problems arise.
The need for funding to finance infrastructure projects is growing – it is projected to be $90 trillion globally for the period from 2015 to 2030. Knowing more about the alliances that provide this funding helps us understand how firms adapt their strategies to provide financing in a wide range of host-country contexts.
The paper is available online and forthcoming at the Academy of Management Journal: https://doi.org/10.5465/amj.2017.0265
This post is also available on Sinziana Dorobantu’s personal website: http://www.sinzianadorobantu.com/blog-posts.html.