Industrializing Construction Economics

 

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 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.

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