The impact of capital intensity on construction firms’ labor productivity in a developing economy: the effect of market regulation

Purpose The construction industry plays a significant economic role but has struggled with improving labor productivity. Understanding the reasons behind this slow growth is valuable for the industry’s sustainability and improving wages. This study aims to explore the impact of capital intensity and the interaction effect of market regulations on construction labor productivity. Design/methodology/approach Using two-stage least squares panel data modeling, financial data from 55 Malaysian construction firms and economic data from 2009 to 2020 are analyzed. Findings The findings reveal that higher capital intensity associated with mechanization and innovation generally boosts labor productivity. However, certain market regulations, such as economic and capital freedom (ECF) and foreign debt rules (FDR), can counteract this positive effect. This suggests that poorly developed financial regulations may lead to inefficient capital allocation, reducing labor productivity in the long run. Originality/value The study highlights the importance of policymakers understanding these dynamics to develop effective strategies for enhancing labor productivity in the construction industry by considering the impact of capital intensity and the moderating effect of market regulation.