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Arai, K and Morimoto, E (2016) Construction Industry and (dis)Economies of Scope. In: Chan, P W and Neilson, C J (Eds.), Proceedings 32nd Annual ARCOM Conference, 5-7 September 2016, Manchester UK. Association of Researchers in Construction Management, 279–287.

  • Type: Conference Proceedings
  • Keywords: bid rates, economies of scope, Japan, public procurement, win rates
  • ISBN/ISSN: 978-0-9955463-0-1
  • URL: http://www.arcom.ac.uk/-docs/proceedings/e00e3abdc22dc3bdfb88c28ce6a59916.pdf
  • Abstract:

    This paper explores the presence, causes and effects of economies of scope in the construction industry. Using public procurement data of the Hokkaido Regional Development Bureau in Japan from fiscal years 2006 to 2012, from the cost efficiency viewpoint, the bid rates and win rates are regressed by factors such as the number segments in the public procurement in which a construction business operates. As a result, the bid rates of diversified firms are higher than those of specialized firms; thus, the probability that a firm wins decreases as their number of operational segments increases.

    From previous work regarding the network effect of the construction industry, there has been little presence of permanent networks, whereas the temporary networks had substantial coordination because of project independency. We verified the claim quantitatively by using the procurement data. The effect on the successful bid selection was regressed by the number of construction divisions and other control factors such as the size of a project and the number of participants of the procurement. As a result, the bid rates and win rates of firms operating in multiple segments were higher than those of firms operating in fewer segments. This result was verified through the probability of winning bids, as it decreased as the number of segments in which a firm participated increased.

    The cause of the diseconomies of scope in the construction industry was considered. One hypothesis was that the specialization of segmentation enhanced efficacy in the construction industry. We performed regression analysis between the average bid rate of each business and the number of bids in which a firm participated to check this hypothesis. The results showed that costs are reduced for jobs that receive many bids, especially from firms participating in few segments.