The production characteristics in Hong Kong's construction industry

This thesis analyzes the relationships between input factors and output in the construction industry of Hong Kong. The goal of this study is to investigate the nature and characteristics of the production structure of Hong Kong's construction industry, and how this production structure has changed over time. Against this goal of study are three foci of analysis. The first focus concerns substitutability between input factors. The second focus concerns the effects of size on production efficiency. The third focus relates to technological progress. The analyses in this study are based on input and output data of Hong Kong's construction industry down to the 4-digit Hong Kong Standard Industrial Classification (HSIC) trade classification level from 1981 to 1999. The results of the analysis suggest that capital, labor, and intermediate inputs are substitutable for each other. The elasticity of substitution between capital and labor is the highest amongst all elasticities of substitution. This is because the substitution of materials for other inputs would normally change the nature of the output. Furthermore, from 1981 to 1999, the substitutability between labor and capital have been increasing. There is, however, no obvious time trend of elasticity of substitution between capital and intermediate inputs; the same is true for that between labor and intermediate input. This phenomenon is due to capital intensive that was prompted by the high capital depreciation allowance for tax purposes in Hong Kong. In addition, the high growth rate of construction labor costs in Hong Kong also stimulated capital investment. As a result, the construction industry in Hong Kong has become more capital intensive and less labor intensive. There were significant increasing returns to scale in Hong Kong's construction industry during the observation period. We have used cross-sectional analysis to disentangle the contribution of economies of scale from that of technological progress. The results indicate that there were significant economies of scale in nine of the years during the period of observation (1981 - 1999). The sources of these economies of scale include specialization in inputs and output, bulk purchases discount, higher credit rating, and therefore lower financial costs and more efficient use of administrative overhead for larger companies. In addition, natural and artificial barriers to growth such as the prequalification system adopted by the public sector could also contribute to the observed economies of scale. Besides economies of scale, technological progress also contributed to the growth of the industry. Our results suggest that there has been significant technological progress. However, technological progress is not Hicks-neutral. This result casts doubt on previous studies which assumed Hicks-neutral technical change. The nature of technological progress is capital-using, labor-saving, and intermediate-neutral. Although there is evidence showing technological progress during the period of observation, the rate of technological progress has been declining. This result is consistent with the catching up hypothesis and empirical evidence in other industries in developing economies.