Explaining Total Factor Productivity Trend in Building Construction: Empirical Evidence from Hong Kong

Abstract

This paper attempts to explain the total factor productivity (TFP) trend in Hong Kong’s building industry. Two major forces that shaped the TFP trend over the period 1972–2005 are identified. First, empirical evidence from Hong Kong suggests that technological progress from imported technologies has been the major source of long term TFP growth in the building industry. However this source of TFP growth is diminishing, as the technology gap between Hong Kong and other technologically advanced countries narrows over time. Second, short-term fluctuations in the TFP trend can be explained by movements in the real interest rate due to “time compression diseconomies”. An increase in ex post real interest rate will increase the developer’s cost of holding undeveloped land, which causes developers to accelerate the rate of development at the expense of the higher cost of construction. This will have a negative, but short term, impact on the industry level TFP trend.