Integration and innovation
By definition, outsourcing implies that the firm has once produced with its
own employees what it now buys over the market. Instead, the pattern
found in construction is characterized by subcontracting of services that
frequently lack a history of having been produced in-house (Costantino and
Pietroforte 2002, 2004). On the other hand, construction contractors often
reveal an interesting tendency to diversify into a wide range of activities that
appear to defy an unambiguous identification of their core business (Casson
1987; Cho 2003). At least two theories of the firm are ready to supply
explanations here, related to contracts (transaction cost economics) and the
resource-based view; both of these can be brought in to explain how construction
firms integrate vertically (Bridge and Tisdell 2004). A crucial
question when applying transaction cost analysis is how to model the effect
on production costs of alternative modes of governance (Chang 2006;
Bridge and Tisdell 2006). It is now possible to detect a move towards vertical
reintegration in the British construction sector (Cacciatori and Jacobides
2005), and it is interesting to speculate on the nature of the long-term consequences
in national and global markets.
The complexities of construction firms doing business internationally has
led Ofori (2003) to plead for more than one approach to strategy analysis.
Horizontal integration of construction activities across national boundaries
may include an element of vertical integration when firms develop their foreign
engagements; Cuervo and Pheng (2005) found that protecting the reputation
of the firm and managing the quality of service to clients were
perceived as important reasons for Singapore contractors to internalize their
foreign activities. There is a link between international strategy research and
Developing construction economics as industry economics 21
integration issues that could be exploited further: Ling et al. (2005) found
that foreign contractors entering the Chinese market appear to need to combine
a strategy of differentiation with one of low cost rather than choosing
between these alternatives. This combination of strategies recurs, albeit on a
regional level, in a study of how Alicante housebuilders perform (Claver
et al. 2003).
In recent years, the role of innovation and technology for the dynamics and
evolution of industries has moved to occupy the centre stage of industry economics
(Malerba 2007). There are numerous explanations why construction
firms at least appear to be – and probably are – less innovative than hightechnology
manufacturers (Reichstein et al. 2005). Enforceable intellectual
property rights are scarce; competitors easily gain access to and imitate any
innovations, and the service nature of contracting or construction-related
technical consultancy services are two reasons. Lack of return on investments
in research and development is often evident for construction contractors, and
part of the explanation will be given below in the context of quality signalling.
If individuals and firms in an industry exhibit ‘satisficing' behaviour rather
than utility or profit maximizing, their behaviour can be interpreted as reflecting
bounded rationality or as a symptom of risk aversion, a wish to receive
safe returns. Both interpretations should direct us to consider the effects of
changes in institutional settings, whether by government intervention or by
concerted industry action. An indication of the potential is given by the variety
of construction sector and institutional traditions within major European
countries and the consequences for innovation (Miozzo and Dewick 2004).
The difficulty of predicting long-term consequences of new technologies
affects not only component development but also contracting; site equipment
that is not built-in gives its producer greater opportunities for managing
or disregarding long-term risk, but innovation there will be classified
under manufacturing and not under the construction sector. Surely, the
disappointing low activity in construction innovation something could be
raised if construction is reclassified statistically along the value chain
(Winch 2003)? An alternative approach is to view construction as primarily
an industry of service producers and to define innovation not only as narrowly
technological but also including organizational novelty. Already in
the preface to their Economics of the Modern Construction Firm, Gruneberg
and Ive (2000) list several distinct characteristics of construction firms that
affect their modus operandi. Most of these factors, including a high degree
of project uniqueness, point clearly to innovation in the service sector
(Miles 2005) and not to manufacturing as the obvious paradigm. If we
persist in viewing construction as akin to manufacturing, we have to
acknowledge that the rate of construction technology innovation was perhaps
higher in ancient Rome (Lancaster 2005) than today and that we are
dealing with an industry that has an exceedingly long life cycle. Nevertheless,
we should note that the long-time perspective is far from unique to many
innovations in construction technology, and firms that wish to exploit
advances in the life sciences have to live with severe regulation intended to
minimize health risks for patients and even for future generations.