Analysis of productivity performance of real estate and construction firms in Indonesia

Abstract

Sustained total factor productivity (TFP) growth of firms is essential to achieve sustained supply growth, which is necessary to solve the housing shortage and affordability problems. Existing productivity literature focuses on large firms whilst smaller firms make a significant contribution to the total supply. This paper investigates the productivity of 363 Indonesian real estate construction firms of medium and large sizes. We estimate Färe-Primont TFP measures under the meta-frontier framework, accounting for differences in the overall technologies under which each group of firms operates. Results deliver several important findings. First, large firms have higher productivity levels than medium firms, but average productivity levels are very low. Second, the productivity growth of large and medium firms is negative, which contributes to the growth of the housing shortage in Indonesia from 2012 to 2016. Third, in case of easier transfer or spill-over of production technologies between two firm groups, firms could enhance further their efficiency and productivity. Fourth, those factors related to branch numbers, legal structure and experience of doing business have positive correlations with the productivity performance of firms in both large and medium groups. Additionally, medium firms could gain higher productivity by diversifying their income. Importantly, our study shows evidence to support that government subsidies have a positive influence on the productivity level of medium firms.

Keywords:

• Färe-Primont index
• total factor productivity index
• productivity efficiency
• meta-frontier analysis

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Several elements of data and codes can be made available from the second author upon reasonable request.

Notes

1 The literature on efficiency and productivity is extensive. Empirical analysis can be done at many levels which include plant, firm, industry, and regional and national aggregate levels. Ahmed and Bhatti (2020) provide a review of the most frequently used methods in the empirical literature.

2 Another strand of literature decomposes aggregate productivity into various components that capture the productivity change of surviving firms, changes in market shares, and firm entry and exit (Baily et al. 1992, Melitz and Polanec 2015, Dias and Marques 2021). While the present article has a focus on firm-level analysis, it is desirable to investigate productivity issues around the linkages from firms to the industry level.

3 It is desirable to undertake analysis at a more disaggregated level, for example, between low-cost housing projects and other projects. However, because the data provided is aggregated at the firm level and there are no possible criteria that can be reasonably used to disaggregate at the project level, such an analysis is not possible in the present article.

4 Note that it is possible that a firm becomes a large firm due to its higher productive performance (efficiency and productivity) in the past. This means that larger firms are not more productive simply because they are large. In this sense, productivity analysis in dynamic settings taking into account entry and exit issues could provide useful insights. We thank one of the reviewers for noticing of this important issue.