Innovation and The Construction Industry: A Value-Chain Based Definition of The Sector

Innovation and the Construction Industry: A Value-Chain Based Definition of the Sector
A.-L. Asikainen, Centre de Recherche Public Henri Tudor M. Squicciarini, VTT Technical Research Centre of Finland
2009 Productivity Conference 14 15 October 2009, Saltsjbaden
VTT TECHNICAL RESEARCH CENTRE OF FINLAND
Outline
Outline
The construction sector and its importance; Characterising construction and its innovative activities. Aim of the study and motivation; The construction sector in the NACE classification; A value chain-based wide definition of the sector: Core and non-core activities; Performance indicators for core and non-core construction; R&D and innovation in construction; Conclusions.
Productivity Conference 2009, 14 - 15 October, Saltsjbaden
Characterising construction
The construction sector and its importance

10.7 % of GDP (EU 27) & 51.5 % of Gross Fixed Capital formation 2.9 million enterprises (EU 27) 93% with less than 10 employees; Biggest industrial employer in Europe: 26 million workers depend, directly or indirectly, on construction.
2a
Constructions share of GDP in 2007 (in %)

Austria; 11.6 Belgium; 13.2 Cyprus; 6.7 Denmark; 9.1 Czech Rep.; 14.2 Estonia; 26.7 Bulgaria; 18.9
EU27; 10.7 Finland; 8.5 France; 9 Germany; 9.7 Great Britain; 9.1 Greece; 6.5 Hungary; 11.8 Italy; 9.7 Latvia; 11.5 Lithuania; 11.5 Luxembourg; 11.8 Malta; 10 Netherlands; 10.2 Norway; 11.6 Poland; 9.2 Portugal; 12.3 Romania; 10.6 Slovakia; 9.1 Slovenia; 10.7 Switzerland; 10.7 0 5 10 Sweden; 15.1
Ireland; 19.6
Spain; 19 Turkey; 28 20 25 30
15
Source: Authors own compilation on data from FIEC (2008) Productivity Conference 2009, 14 - 15 October, Saltsjbaden
2b
Constructions share of value added 1995 2007

10 9
Percentage of total value
8 7 6 5 4 3 2 1 0
1995 4.2 6 6 5.7 5.5 9.1 3.2 1996 4.3 5.8 6 5.9 5.7 9 3.1 1997 4.3 5.6 6 6.2 6 5.2 8.4 3.2 1998 4.6 5.5 6.3 6 6.2 5.5 7.4 3 1999 4.7 5.6 6.6 5.6 5.6 5.6 6.1 2.7 2000 4.7 5.6 5.4 5.4 5.5 5.9 6.6 2.5 2001 4.9 5.7 5.9 4.7 5.3 5.7 7.4 2.4 2002 4.9 5.7 6.3 4.6 5.3 5.9 5.4 2.3 2003 4.8 5.7 6.8 4.5 4.7 6.1 6 2.4 2004 4.9 5.8 7 5 5.1 7.1 5.7 2.4 2005 5.2 6 7 5 4.9 7.9 5.3 2.5 2006 5.1 6.2 7.5 5.4 4.7 8.3 5.2 2.7 8.4 5.7 2.9 6.5 7.9 5.6 2007
United States EU27 total Aus tralia Turkey Brazil India Russian Federation South Africa
Source: Authors own compilation on data from OECD Factbook 2009 Productivity Conference 2009, 14 - 15 October, Saltsjbaden
The construction sector and its importance

10.7 % of GDP (EU 27) & 51.5 % of Gross Fixed Capital formation 2.9 million enterprises (EU 27) 93% with less than 10 employees; Biggest industrial employer in Europe: 26 million workers depend, directly or indirectly, on construction. BUT Has a very strong impact on natural resources: > 50% of all materials extracted from the earth are transformed into construction materials and products. Construction and the built environment account for the largest share of greenhouse gas emissions, in terms of energy use. Produces one of the largest waste streams - even though a significant part of it is renewable or re-usable (COM(2007)860-final).
Sector main features vis--vis innovativeness

Construction output is represented by large and immobile goods. It is meant to be more durable (and is more expensive) than other manufactured goods, with a life-cycle of several decades or more. Features a slow replacement rate of the building stock, and an even lower rate of demolition. Construction activities entail varying degrees of uniqueness and are normally carried out on site, rather than being produced in factories and then transported to the market, as it happens in other industries. Low-productivity low-technology sector, underperforms compared to other industries. Very long economic cycles. Strong cyclical variations in demand and profits. Low R&D investment.

Technical interdependence and organisational independence
Multi-inputs goods: many independent and heterogeneous contractors needed. Each contractor responsible only for its own contribution -> interrupted workflows, conflicts, time and cost over-runs, quality problems.
(On average) low education of construction workforce

Firms often exhibit little absorptive capacity. In many construction trades learning is neither organised nor widespread.
Project-based organisations
Supply clients with custom-designed products and services, on a project base. Impossibility to produce a test piece. Project-specific innovations difficult to translate into firm-wide capability.
Incrementality of innovation and "hidden" innovations

Innovations undetected by conventional measures, e.g. project-level innovation activities, organisational, and design innovations.
Standards and regulations

Directly and indirectly affect every activity and aspect of construction, and are product, safety, energy, and environment-related.
4a
Construction workforce
Senior, executive, and business process managers Construction managers Non-construction professional, technical, IT, and other office -based staff Wood trades and interior fit-out Bricklayers Building envelope specialists Painters and decorators Plasterers and dry liners Roofers Floorers Glaziers Specialist building operatives nec* Scaffolders Plant operatives Plant mechanics/fitters Steel erectors/structural Labourers nec* Electrical trades and installation Plumbing and HVAC Trades Logistics Civil engineering operatives nec* Nonconstruction operatives Total (SIC 45)
2009 98,010 219,080 282,340 281,150 88,160 92,590 135,660 48,300 46,520 38,050 41,740 56,170 24,260 46,750 27,060 28,330 116,590 177,880 176,920 32,280 59,660 123,930 2,241,430
As % of SIC^45 4.37 9.77 12.60 12.54 3.93 4.13 6.05 2.15 2.08 1.70 1.86 2.51 1.08 2.09 1.21 1.26 5.20 7.94 7.89 1.44 2.66 5.53 100.00
Source: Authors own compilation on data from the UK Construction Skills Network, 2009 Productivity Conference 2009, 14 - 15 October, Saltsjbaden

Technical interdependence and organisational independence
Multi-inputs goods: many independent and heterogeneous contractors needed. Each contractor responsible only for its own contribution -> interrupted workflows, conflicts, time and cost over-runs, quality problems.
(On average) low education of construction workforce

Firms often exhibit little absorptive capacity. In many construction trades learning is neither organised nor widespread.
Project-based organisations
Supply clients with custom-designed products and services, on a project base. Impossibility to produce a test piece. Project-specific innovations difficult to translate into firm-wide capability.
Incrementality of innovation and "hidden" innovations

Innovations undetected by conventional measures, e.g. project-level innovation activities, organisational, and design innovations.
Standards and regulations

Directly and indirectly affect every activity and aspect of construction, and are product, safety, energy, and environment-related.
Aim & Motivation
Aim of the Study & Motivation

Build a comprehensive value-chain based classification of the sector, encompassing constructions full range of activities. This wide classification would help to better capture constructions true dimension, value added and potential, and to uncover hindering factors -> help formulating policies aiming to enhance its performance, especially innovativeness. Current NACE Classifications provide a narrow picture of construction, its size and relevance. Many activities almost exclusively related to construction are considered as different sectors. Systemic construction features are overlooked, e.g. innovation dynamics, and little understood. Policies supporting construction often reflect the sector strict definition -> overlook important sectors components & likely fail to achieve their goals.
Construction in NACE
Core NACE Codes (Rev 1.1 & Rev 2)

NACE Rev. 1.1 (2002) - Section F codes 45 45.1 Construction Site preparation NACE Rev. 2 (2008) - Section F codes 41 41.1 41.2 42 45.2 45.3 45.4 Building of complete construction or 42.1 parts thereof; civil engineering 42.2 Building installation Building completion 42.9 43 43.1 43.2 45.5 Renting of construction or 43.3 demolition equipment with operator 43.9 Construction of buildings Development of building projects Construction of residential and non-residential buildings Civil engineering Construction of roads and railways Construction of utility projects Construction of other civil engineering projects Specialised construction activities Demolition and site preparation Electrical, plumbing and other construction installation activities Building completion and finishing Other specialised construction activities
Construction in NACE
Constructions value added by activity
Building completion 15.1%
Renting of construction or demolition .equip 0.7%
Site preparation 3.5%
Building installation 22.4%
General & building civil engineering 58.2%
Source: Eurostat (Structural Business Statistics), 2009.
Construction value chain
Pre-production (input) activities & services
Core activities (Section F)
Post-production activities & services
Support activities & services
Upstream activities, mainly manufacturing ones, whose output is an input into construction core activities + services preceding constr. core phases
Post-production activities & services
Downstream activities, normally carried out in connection to a building or civil engineering work. E.g. maintenance of buildings, real estate services, facility mngt.
Downstream activities, normally carried out in connection to a building or civil engineering work. E.g. maintenance of buildings, real estate services, facility mngt.
Broad range of production and service activities, from wholesale of construction materials, to renting machinery and equipment, to recycling waste and scrap.
Construction value chain (Rev. 1.1)
Pre-production: 14.11; 17.54; 20.20; 20.3; 24.30; 25.23; 26.14; 25.25, 26.30; 26.4; 26.51; 26.52; 26.53; 26.6; 26.7; 28.11; 28.12; 28.22; 29.52; 28.72; 36.63; 74.2
Core activities: 45
Post-production activities & services: 70.11; 70.2; 70.3
Support activities & services 37.20; 45.31; 51.53; 51.54; 52.46; 71.32; 74.2
Input-Output Table, Finland

14 Other mining and quarrying
14.11 Quarrying of ornament and building stone
Average % values 1995-2005 42.6 37.4 63.6
20 Manufacture of wood and products of wood and cork, except furniture

20.2 Manufacture of veneer sheets; plywood, lamin, boards, and panels 20.3 Manufacture of builders carpentry and joinery
26 Manufacture of other non-metallic mineral products

26.14 Manufacture of glass fibers 26.26 Manufacture of refractory ceramic products 26.3 Manufacture of ceramic tiles and flags 26.4 Manufacture of bricks, tiles and construction product in baked clay 26.51 Manufacture of cement 26.52 Manufacture of lime 26.53 Manufacture of plaster 26.6 Manufacture of articles of concrete, plaster and cement 26.7 Cutting, shaping an finishing of ornamental and building stone
71 Renting of machinery and equipment without operator and of personal and household goods
71.32 Renting of construction and civil engineering machinery and equipment
28.2
Performance indicators
10
Performance indicators, core & non-core construction, Finland 2000-2007

Av. salary per employee (growth rate %) Av. turnover per firm (growth rate %) Av. turnover per employee (growth rate %) Av. # employees per firm (growth rate %)
Construction
28.9 (3.26)
572.3 (1.72)
145.1 (-1.86)
3.9 (3.63)
Non-core manufacturing
30.4 (3.52)
8408 (8.5)
188.6 (3.57)
37.3 (6.11)
Non-core service
33.3 (3.32)
1795 (6.37)
367 (18.0)
14.2 (6.1)
Source: Authors own compilation on Statistics Finland data Productivity Conference 2009, 14 - 15 October, Saltsjbaden
11
Investment in R&D (CIS4)
Sector
Num. Obs. Internal R&D External R&D 3.5 11.8 14.5 12.7
Percentage values Inv. machines 16.6 29.3 32.3 29.8 Acq. Ext. knowledge 4 8.4 10.5 9.4 Continuous R&D 40.8 54.8 64.2 61.8 Occasional R&D 59.2 45.2 35.8 38.2
Core Non-core All BUT wide construction All industries
10,904 8,510 47,873 67,287
8.5 21 27.2 23.8
Source: Authors own compilation on data from CIS4
12
Innovative activities (CIS4)
Sector
Num. Obs. Product innovators
Percentage values Process innovators 5.944 8.979 13.396 11.773 Share turnover Inno. new to market 0.728 2.204 3.346 2.842 Share turnover Inno. new to firm 1.909 3.659 5.096 4.475
11,846 9,036 52,828 73,710
4.792 17.381 20.27 17.908
13
Use of IPR (CIS4)
Sector
Num. Obs. Patents
Percentage values Trademarks 1.2 6.7 7.1 6.3 2.4 11.8 12.2 10.9 Designs 0.7 4.9 4.6 4.2
11,846 9,036 52,828 73,710
Conclusions
14
To conclude
We propose a value-chain based definition of construction, able to better capture the importance and dynamics of the sector. The definition is NACE based and does not require NACE classifications to be changed. -> Comparability through time and across countries; immediate applicability. The construction industry looks very different when non-core activities are considered, in terms of all indicators. Ignoring this leads to a general misperception of the sector. The proposed value-chain definition of construction helps uncovering leverage points, and formulating more effective policies, especially innovation ones.
Thanks for your attention

For comments & suggestions, please email: mariagrazia.squicciarini@vtt.fi

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Innovation and the Construction Industry: A Value-Chain Based Definition of the Sector

2009 Productivity Conference 14 15 October 2009, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

The construction sector and its importance

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Constructions share of GDP in 2007 (in %)

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Constructions share of value added 1995 2007

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

The construction sector and its importance

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Sector main features vis--vis innovativeness

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Sector main features vis--vis innovativeness

(On average) low education of construction workforce

Incrementality of innovation and "hidden" innovations

Standards and regulations

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Sector main features vis--vis innovativeness

(On average) low education of construction workforce

Incrementality of innovation and "hidden" innovations

Standards and regulations

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Aim & Motivation

Aim of the Study & Motivation

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Core NACE Codes (Rev 1.1 & Rev 2)

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Constructions value added by activity

Building completion 15.1%

Renting of construction or demolition .equip 0.7%

Site preparation 3.5%

Building installation 22.4%

General & building civil engineering 58.2%

Source: Eurostat (Structural Business Statistics), 2009.

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Construction value chain

Construction value chain

Pre-production (input) activities & services

Core activities (Section F)

Post-production activities & services

Support activities & services

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Construction value chain

Construction value chain

Core activities (Section F)

Post-production activities & services

Support activities & services

Productivity Conference 2009, 14 - 15 October, Saltsjbaden

VTT TECHNICAL RESEARCH CENTRE OF FINLAND

Construction value chain

Construction value chain

Core activities (Section F)

Support activities & services

Productivity Conference 2009, 14 - 15 October, Saltsjbaden