The Absence of Innovations and Slow Productivity Growth in the Real Estate Industry - A Behavioural Explanation

The basic idea in public sponsoring of corporate R & D is to increase the level of risk taking in firms. Low levels of exploration of new opportunities (i.e. R & D) is especially prominent in the real estate and construction field. The increase in productivity of the entire real estate cluster has lagged behind almost all other sectors in Finland as well as in most other developed countries. The research question of the paper focuses on this dilemma of low levels of R&D and the slow development of productivity. One explanation put forward is that the cyclical nature of the real estate and construction industry has led to a business environment where the common attitude is that either there are not enough resources to develop new business opportunities or then there is no need for experimentation when the market environment is favourable. The result is a low level of exploration of new ideas and an environment with few innovations. In this paper, we discuss the question how the R&D intensity could be enhanced in the real estate industry and what the main challenges of this process are. We approach this question using a behavioural risk taking approach by March & Shapira (1992, 1987). In addition, we discuss the value added from using a collective R&D program, named a Technology Program, to remedy the issues raised. In the empirical part of the paper we study the structures of past and ongoing Technology Programs in order to test whether our proposed factors, that should enhance the level of risk taking in the industry. can be identified as key-drivers in the programs. We begin by briefly discussing the logic behind the March & Shapira model in explaning risk taking in organisations. Then, we focus on the concepts of exploitation and exploration in relation to R & D activities of an organisation. Our main hypothesis is that the low levels of R&D activities can be explained by a shift of focus from the survival point to a point above the aspiration level of the organisation due to the cyclical nature of the industry. Our main finding is that the main function of a collective sponsoring of the R&D activity an industry (i.e. of a Technology Programme) is not to generate exploration by increasing slack in organisations using public subsidies but to sponsor a collective network to increase the aspiration level of the participating organisations. Thus the Technology Program has a very important networking function, in addition to knowledge sharing, in creating an environment where the aspiration level of the participating firms is raised to induce risk taking in the form of innovative R&D.