The impact of the change in institutional regulation on construction productivity: firm-level evidence in a developing economy

Abstract

For many, the business environment is regarded as the main factor determining changes in construction productivity. However, changes in a country’s institutional regulation can contribute to the productivity changes of construction firms over the long term but are often overlooked in construction productivity research. To study the impact of institutional regulation on construction productivity, a sample of 55 public-listed construction Malaysian firms (2009–2020) is used as a case study to estimate total factor productivity (TFP) based on the Geometric-Young Index (GYI). Stochastic Frontier Analysis (SFA) is then used to decompose the TFP-GYI into the technological, environment, technical, scale-mix, and statistical noise components. This is followed by the Generalized Method Moments (GMM) to model the impact of different institutional regulations on TFP and decomposed productivity components. The results indicate that the institutional regulation framework influences construction firms’ TFP. Property rights and the rule of law (PRRL), and budget balance and change in wages (BBCW) have a positive impact on TFP, which largely influences technical efficiency. In addition to uncovering the impact of institutional regulation on construction productivity, namely capital availability and regulatory environment, it is concluded that institutional regulation plays a vital role in determining long-term construction firm productivity and needs to be considered by policymakers in formulating supporting incentives and policies.