From the boom to the collapse: a technical efficiency analysis of the Spanish construction industry during the financial crisis

Abstract

Despite its contribution to the Spanish economy, as far as the authors are aware, the technical efficiency of the Spanish construction industry has neither been measured nor have the factors influencing it been analyzed. This paper measures the technical efficiency of the Spanish construction sector before and during the current financial crisis and investigates the degree to which factors influencing efficiency levels in this sector have changed. Stochastic frontier analysis (SFA) methods are applied to firm-level data (692 constructions firms) over the period 1996-2011. The results show that the average Technical Efficiency of the sector is 0.85. Results also indicate that variables affecting Technical Efficiency in the construction sector must be analyzed depending on real state cycle. Based on the findings, policy recommendations to improve the sector efficiency were developed. Important factors affecting efficiency change have been identified, and some managerial recommendations to increase the sector efficiency have been developed. The main recommendations for construction companies include: (1) cooperation and company mergers have a positive impact on companies’ efficiency; (2) accumulation of excessive financial burden damages the business long-term stability; and (3) business strategy should be tailored to economic prospects.