The economic crisis and efficiency change: Evidence from the Korean construction industry

Abstract

This article gauges and analyses different types of efficiency in the Korean construction industry for the period 1996 to 2000, which includes the country's economic crisis. We also identify several important factors of the efficiency change and provide some managerial implications for the reason why most Korean construction firms had failed to maintain or enhance efficiency during this period. The results show that efficiency measures decreased significantly during the sample period and that there are large differences over the period before and after the economic crisis. Unlike many other industries, the low level of cost efficiency of the construction industry is mainly due to allocative inefficiency (inappropriate mix of input factors) rather than technical inefficiency. The low level of allocative efficiency, together with the strong relationship between institutional investors and efficiency, implies that the agency problem between managers and owners had prevailed in the Korean construction industry, and that construction firms could increase efficiency by minimizing agency costs. The study also implies that firms having failed in decreasing the leverage ratio, disposing unproductive assets and increasing the receivables overdue turnover could not avoid the efficiency decrease.