Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Profitability Variations across Construction Firms in the
United Arab Emirates: Assessing Industry Contributions to
National Economic Growth
Ghassan Ossman
The study establishes relationships between profitability in the construction industry of United Arab
Emirates (UAE) and determines its contribution to the overall economic growth of the country. It assesses
the status of profitability variations in the construction industry, in terms of the independent variables of
industry output, construction tender price, and labor rates movement. The study identifies the level of
economic growth in the country and analyzes how strongly, each of the profitability variables predict
economic growth. Descriptive method is utilized in the study and forecasting techniques on time series
analysis is used to analyze historical and current data and predict future trends on profits in the
construction industry and UAE economic growth in the long term. Documentary analysis obtained data
on profitability variations and actual performance of construction firms in the UAE.
To measure the degree of relationship between profitability variations and UAE economic growth,
correlation analysis is used, whereas T-test is employed to test the degree of contribution of the
profitability variables of industry output, construction tender price, and labor rates movements to the UAE
economic growth. The chi-square test of independence is utilized to test the hypothesis that categorical
variables of profitability variations and economic growth differ from one another and are independent of
each other. Regression analysis measures how strongly each of the profitability variations variables
predict the UAE economic growth.
Findings of the study reveal significant influence of the variables of industry output, construction tender
prices, and labor rates movement on economic growth of the country. There is high degree of influence of
construction tender price on economic progress and low positive correlation of industry output and labor
rates movement on economic growth. Overall, there is significant influence of profitability variations on
economic growth of the country. There is significant difference in the contributions of industry output,
construction tender price, and labor rates movement to the economic growth of the nation, at 05
significance level (2-tailed). The variables of profitability variations have different degrees of contributions
to the UAE economic growth. Profitability variations variables and economic growth are not independent
of each other. Changes in the rates of variables of construction industry output, tender price, and labor
rates movement will cause a change in the level of UAE economic growth. Industry output, construction
tender price, and labor rates movement are predictors of economic growth at 5% level of significance.
Beta coefficients of profitability variables of the economic growth model show that 74% of industry output,
23% of tender price, and 3.1% of labor rates movement will result in the achievement of targeted
economic growth of UAE, and are sufficient to support economic sustainability over the long run, and
maintain competitiveness in the global economic environment.
Recommendations of the study include regular monitoring of the rate of growth of profitability variations
variables of industry growth, construction tender price, and labor rates movement, identified to have
significant influence on the UAE economic growth. There is a need to continuously identify factors that
directly influence the profitability level in the construction industry, identify factors and issues that hinder
growth in construction industry profitability, and the conduct of further studies to focus on profitability
variables not included in the study, which are likely to influence the economic growth level.
Key Terms: Construction Industry Profitability, Economic Growth, Industry Output,
Labor Rates Movement, Tender Price
_____________________________________________________________________
Dr. Ghassan Ossman, Dean of the School of Business Administration, Al Dar University College, Dubai,
UAE, ossman2012@gmail.com, ossman_2001@hotmail.com, ghassan@aduc.ae.ac
Page 1 of 17
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
1. Introduction
Profitability is a financial metric utilized in the assessment of firm’s ability to generate
income compared to costs and expenses over a specific period of time and is measured by the
ratio of price to earnings. Its measurement is the gauge for business success and managers
must continuously search for ways to improve business profitability. Macroeconomic
indicators in the UAE show robust performance resulting from the country’s positive overall
performance in construction markets. Projections show the market outlook of the UAE
construction for the long-term is poised for continued growth and increased performance,
(Financial Stability Report, 2014).
Construction industry in the UAE is highly sensitive to industrial developments in the
macroeconomic conditions with the nation’s banking and financial institutions having
exposures to the industry, the construction sector is self-sufficient and do not receive any
government subsidy according to the Agreement Establishing the World Trading
Organization (WTO) 1994, (Ossman, 2006, 1999 & 1998). Overall assessment of the
construction sector reveals an increase in operations during the recent period. The industry is
growing gradually with increased developers that focus on the options of affordable housing
and continued population growth. The decade of economic reforms which developed national
infrastructure and improved construction business climate significantly contributed to the
economic expansion in the country. Recording a share of 8.4% of the total GDP in the first
quarter of 2014, Dubai construction industry records the 5th largest sector in the UAE
economy. With increased demand for new projects, projections show acceleration in the
growth of the industry over next future period. With the establishment of construction
industry as important component of UAE non-oil economy, the researcher is motivated to
uncover the elements of profitability in the industry and their influence and contributions to
the overall economic growth of the country.
1.1.Statement of the Problem
The study sought answers to the following questions:
1- Is there significant influence of profitability variations in the construction industry on the
UAE economic growth?
2- Is the degree of contribution of the profitability variables of industry growth,
construction tender price, and labor rates movement in UAE construction industry to the
UAE economic growth the same?
3- Is the UAE economic growth independent of profitability variations in Dubai construction
industry?
4- How strongly the profitability variation variables of industry growth, construction
tender price, and labor rates movement predict the UAE economic growth?
Null Hypotheses
Ho1: There is no significant influence of profitability variations in UAE construction industry
on the overall economic growth.
Ho2: The degree of contribution of the profitability variables of industry growth, construction
tender price, and labor rates movement in Dubai construction industry to the UAE
economic growth are not the same.
Ho3: The UAE Economic growth is not independent of profitability variations in Dubai
construction industry.
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Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
Ho4: Productivity variables of industry growth, construction tender price, and labor rates
movement, do not predict the UAE economic growth.
1.2. Scope and Limitations of the Study
The study determines the influence and contributions of the profitability variations in
the construction industry to the national economic growth of UAE. It focuses on the
independent variables; industry growth, construction tender price, and labor rates movement.
Furthermore, it finds out how strongly these variables predict the achievement of national
economic growth of the country.
1.3.Significance of the Study: The study provides insights to policy makers of United Arab
Emirates, for enhancement of economic and financial policies through new concepts on
profitability variations that will successfully increase the level of economic performance
of the nation. It can serve as a guide to students in understanding the profitability
strategies that can increase the economic performance level in UAE. Employees of the
respondent construction industry may utilize the information on the new trends in
maintaining survival and competitiveness through profitability techniques. The results of
the study are significant to all organizations in the global environment, and can be used to
build a framework for profitability contributing to increased economic performance level.
Other interested parties like future researchers interested in the same topic may use this
study as a reference in their research understanding.
2. Literature Review
Strategies of customer prioritization focusing on important customers can improve
profitability, but can also undermine profitability through inducement of customers in
becoming overly demanding, as revealed from anecdotal evidence Wetzel, Hammerschmdt
and Zablah (2014) . The research evaluates competing perspectives of 2 field studies which
build on social exchange theory. Findings show that prioritization efforts can initiate the
process of gratitude-driven that can enhance profits and sales, and the process of entitlementdriven that can enhance costs of service and result in reduced profits. Tactics in prioritization
differ in the extent that they trigger processes that compete and their ability to affect account
profitability. Critical moderators for prioritization transparency and competitive intensity
determine the extent that the process entitlement-driven undermines the process of gratitudedriven. Findings prove that moderating conditions and tactics employed determine the effects
of prioritization on profitability of accounts. Mohamed and Jones (2014) proposed a
comprehensive strategic model that can be used to manage profitability. The research adopts
the concepts and tools of strategic management accounting to manage and explore
profitability drives of revenue, assets, and costs. The variables of the profitability model were
identified by using a deductive approach. Findings reveal that the comprehensive profitability
model containing assets, cost, and revenue techniques is a better predictor of profitability
than alternative models which has a combination of the two variables. Khanna & Rivkin
(2014) presented a chart showing direction and existence of correlation between average
profitability in various industries in each of a pair of countries which cover numerous
developed and emerging-market countries.
Mithas, Tafti, Bardhan, and Mein (2012) investigated the effects of IT on improving a
firm’s profitability and compare its effects with advertising, research and development.
Empirical analysis of the archival data of more than four hundred firms show that IT has
positive impact on profitability. Findings prove that the effects of IT investments on
profitability and sales are higher than discretionary investments in terms of research,
development, and advertising. Revenue growth has significant impact of IT on the firm
profitability with no evidence on the effect of IT on profitability in terms of operating
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Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
reduction in cost. Business firms can achieve higher profitability utilizing IT-enabled
revenue growth than through IT-enabled cost reduction. The research provides implications
in making allocations on discretionary expenditures in terms of IT, advertising, and research
and development. Firms must accord higher priority to IT projects with potential for revenue
growth over those focusing on cost savings. The research of Aydilek and Allahverdi (2013)
focuses on the relationship between profitability, competitiveness, and make span of
business firms. It dealt with the problem in the minimization of make span in a machine flow
shop together with set up times of jobs which are bounded within intervals. A polynomial
algorithm is proposed in the study designed to generalize Yoshida and Hitomi’s algorithm
which uses a weighted average of setup times. Computational findings show that one of the
versions, with equal weights given to setup times, perform much better than others.
Performance of the best version is compared with the optimal solution, which is obtained by
Yoshida and Hitomi's algorithm applied to the problem after setup times is realized.
Analysis reveals that the overall average absolute error of the best algorithm is 0.03 percent,
and decreases in size with increased number of jobs.. The analysis indicate that the
proposed best version yields robust results regardless of range of set up time and
distributions of set up times. Prediction of the profitability of the business is desirable in the
design phase of business collaboration (Kotlar, Fang, De Massis, and Frattini, 2014). The
techniques for assessing profitability, costs, risks, and revenues are based on the framework
of probabilistic architecture modeling with capability of advanced sound reasoning on
profitability risks. The probabilistic modeling framework is based on e-value modeling and
object constraint language. Modeling approach, prediction approach, and a supporting
software tool were introduced in the study. Singhania, Sharma, and Rohit (2014) examined
the relationship between working capital management strategies of a business firm and
profitability. The impact of the global macroeconomic conditions on the relationship was
also determined. Correlation analysis and estimation of fixed effects on the respondent
companies were applied. The study utilizes cash conversion as a measure of the
management of working capital, and as a proxy for profitability and gross operating profit.
Findings prove that the cycle of cash conversion is negatively correlated to profitability.
Managers can enhance performance through decreased number of days receivables and
increased number of days payables. Outcomes show that strategies of working capital must
be formulated to consider global macroeconomic conditions. Highlighted in the study is the
importance of efficient working capital management practices in the improvement of
company profitability. Pai (2009) examines the profitability and efficiency of banks
operating in India. Analysis of Variance determines the existence of variability among the
bank groups in terms of return on assets and profit per employee. Data analysis reveals
significant variation in profitability and efficiency of the respondent bank groups.
Discriminant analysis classifies the group as high profitable and high efficient banks, and
low profitable and low efficient banks relative to each other. The study uncovers high
performance of foreign banks and the three remaining groups as banks with low
performance. Beard and Dess (1978) focused on the effects of industry profitability on profit
of the firm for single business firms showing that effects of inter industry variation in
profitability are significant and positive. Minimal effects of the three other intra-industry
variation were found among sample firms. The research of Thomadakis (1977) examines
industry organization traditional hypotheses in order to relate various aspects of market
structure to cross-sectional variation of industry or firm profitability. The study presumes
association between profitability and. structure indicating the presence of excess profits
absent under perfect competition. It identifies existence of entry barriers and ability of
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Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
industry firms to coordinate output-price decisions as the fundamental causes of excess
profits reaped by the industry. Analysis reveals that varying profitability within an industry
or among firms are due to super efficiency in production and distribution and superior
bargaining position of the firm. Firm’s ability to maintain advantages of the future implies
deficiency correspondingly in the long-run process of competitiveness even in conditions of
super efficiency of current structural position since industry entry is expected to wipe out
differentials in efficiency.
The purpose of the study of Adams (1976) is to explain the variations of rates of return on
investment across industrialized countries. Two hypotheses developed are based on the
environment of market structure in which the firm operates and one hypothesis related to
variations in growth national rates. The fourth hypothesis involves the procedures of financial
accounting. The data involved profitability variations in seven large manufacturing
companies in Atlantic Community nations. The study reports the extent to which market
structure explain the international variations in corporate profitability, exploring the roles of
financial accounting practices and national growth rates. Conclusions of the study show that
relative profitability of a firm is dependent on market structure in which it operates, with
variations in market structure effect across countries. Skitmore (1989) defines construction
contract pricing as a process flow in which events are taken into consideration over a
continuous time period, and pricing activities do not occur in simultaneous fashion as in a
static situation in product pricing. A variety of pricing systems in the construction industry
was recognized by Flanagan and Norman (1989) which are determined by contractual
relationship of the client and contractor. Schill (1985) concludes that risk distribution
between contracting parties is essential in contract pricing. The study of Akintoye (1991)
identifies the various factors considered when making decisions on construction bid price.
The broad areas of environmental, cost estimating, procurement factors and profitability have
been identified as factors influencing the pricing system. According to Nguyen (1985), when
cost is not the only criterion used in tender price evaluation, the process is considered to be
dependent on subjective judgment. The study proposes a systematic procedure for the
selection of bid contracts based on fuzzy set theory and multi-criteria modeling. The
procedure is considered suitable for the evaluation of tender price which involve various
decision making parties and non-interactive multiple criteria. Major criteria can involve
present bid information, cost, and past experience of tenderers. For cost models development
that are logically transparent and explanatory, Beeston (1983) states that understanding
construction price movements is one of the paradigm shifts. It is apparent therefore t to
explain and predict tender price level with tolerable accuracy. Bowen and Edwards (1985)
reveal the need for future cost modeling approaches and forecasting of price for construction
projects in order to accept a continuing need for historically derived data in the exploration of
cost trends and relationships. The paper of Enshassi, Kumaraswamy, and Al Najjar (2014)
identifies factors that influence time and cost overruns in construction projects in Gaza Strip.
The study revealed that lack of materials in markets, delay of material delivery to site, strikes,
border closures, cash flow problems during project execution, and poor management of site
are the most significant causes of time delay. While donor policy in awarding tenders to the
lowest bidder, political situation, increase in material prices, supply of raw materials and
equipment, fluctuations in building materials cost, instability of the local currency, delay in
construction, project materials monopoly by suppliers, and low commitment of donors to
compensate negative outcomes, are the most significant causes of cost overruns.
Recommendations to minimize adverse effect of construction delays include inclusion of
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Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
appropriate contingency allowance in project estimate and better project management
procedures.
Construction and real estate industry in UAE achieved a double-digit annual growth
and 15% share of the country’s GDP (Kumar, Agarwal, and Khullar, 2010). Unprecedented
growth is mainly contributed by Abu Dhabi and Dubai, with the highest growth record of
construction projects, making the two cities the hub for some of the world’s biggest
construction companies, with the UAE account of 23% of the economy of the GCC region.
Massive boom in economic activities is apparent in UAE with the construction sector growth
of 25.6% in 2007, and the country being the driving force of economic transformation of the
GCC region into a global hub (The Allen Consulting Group, 2013). The industry growth
record at 20% for the year 2003 to 2007 with favorable regulatory environment, ample
liquidity, and growing expatriate population as the contributing factors. Dubai, Abu Dhabi,
and Sharja recorded to be the beneficiaries of industry growth due to creation of free zones
for local and foreign investments, increasing infrastructure investment, property laws,
liberalization of real estate, and subsidized water and energy prices. Theoretical Framework
of the Study
Figure 1: Theoretical Framework of the Study
“Drivers of Enterprise Value”(Scheider, 2014)
Figure 1 presents a profitability model which indicates the 3 main drivers of the value
of an enterprise. As shown in the framework, profitability is the most essential measures of
success of a business firm and its ultimate value. Value of business includes current
profitability which is the remaining amount of money after payment of overhead expenses
and compensation. Sources of growth, which refers to the increase in reasonable profits
expected in the future period, is highly dependent on assumptions in capital markets,
potential growth of clients, and acquisition of new client households; and profit sustainability
which is an assessments of objective of the risk for future profits which can be utilized in the
measurement of future profits.
Improving profitability includes regular measurement which entails awareness of the
organization’s profitability and focus on the improvement that will lead to profitability. The
strategy also includes ensuring the level of fees are in line with the service level offered
which needs charging of fees that fairly represent the service level required to generate high
revenue clients. The model discusses assessment of profitability, where revenue matters and
the concept that business organizations cannot have value without having profits.
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Proceedings of Annual Switzerland Business Research Conference
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ISBN: 978-1-922069-86-3
2.1.Conceptual Framework of the Study
IndependentVariables
Profitability
Variations in the
Construction
Industry in the
United
Arab
Emirates in terms
of
1. Industry Growth
2.Construction
Tender Price
3.Labor
Rates
Movement
Dependent Variable
Increased Level
of Economic
Growth in the
United Arab
Emirates
Figure 2: Research Paradigm
Cause and Effect Relationships of Independent and Dependent Variables
A cause and effect relationship is used in the study to indicate the influence and contribution
of profitability variations on the dependent variable. This study adopts the notion that
variations in profitability in the construction industry in areas of industry output, construction
tender price, and labor rates movement will lead to increased level of economic growth in
UAE. The research identified the independence of construction profitability and economic
growth and will determine which of the profitability variables, singly or in combination,
predict the UAE economic growth. A profitability model was formulated to provide increased
profitability in the construction industry and contribute to national economic growth. Fig. 2,
presents the conceptual framework of the study.
3.
Methodology
3.1.Research Design
Descriptive method is utilized in the study, whereas forecasting techniques on time series
analysis were used to analyze historical and current data and predict future trends on profits
in the construction industry and UAE economic growth in the long term. Documentary
analysis is employed to obtain data on profitability variations of constructions firms in the
country. Data used in the study were obtained from documentary analysis of actual
performance of the construction firms in the United Arab Emirates.
3.2.Research Instruments and Techniques
Unstructured interviews were conducted at random among employees in selected
construction firms to elicit more information, which supplemented the data that were
gathered from secondary sources. The researcher reviewed annual reports, brochures, office
records available, and government manuals and standards. Other possible company
documents were sourced out while the study is in progress. These provided supplementary
explanations to some issues raised by the study. Arithmetic mean is a measure of the central
tendency of raw data which provides information of a representative value of the data set.
This statistical tool was used in the measurement of central tendency of data for profitability
variations and economic growth of the country. Correlation analysis was utilized to measure
the degree of relationship between the profitability variations and the UAE economic growth.
T-test identified the degree of contribution of the profitability variables of industry output,
construction tender prices, and labor rates movements to the UAE economic growth. The chisquare test of independence was used to test the hypothesis that categorical variables of
Page 7 of 17
Proceedings of Annual Switzerland Business Research Conference
12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland
ISBN: 978-1-922069-86-3
profitability variations and economic growth differ from one another and are independent of
each other. Regression analysis predicted a dependent variable using one or more
independent variables and measures how strongly each of the profitability variations
variables predict the UAE economic growth.
4.
4.1.
Results and Discussions
UAE Economic Growth
United Arab Emirates strengthens its position as a primary and the most important
trade center in the GCC region, considered as the third largest re-export center in the world.
This is attributed to increased oil revenues, economic diversification, stringent government
spending, and zero-deficit budget. It has one of the world’s highest GDP per capita and is one
of the most developed countries in the Gulf region, with huge investments in the construction
industry, financial sector, and tourism. The country strives to reduce dependence on oil
revenues and diversifies the economy into tourism with 15.5% of output growth,
manufacturing, communication and transport, and wholesale and retail activities. Economic
boom of the country is due mainly to the diversification strategy in the non-oil industries as
oil exports continue to contribute to increased economic performance of the country of about
30% of the GDP. The construction industry contributed about 12% of the non-oil GDP, and
continues to be the key source of income, economic growth, and employment.
The country has positive prospects for real GDP, with annual average growth rate of
7.2% during 2001 to 2008, making the country’s economic growth, one of the strongest in the
world. Marginal decrease in growth rate was the result of a slowdown in economic growth of
advanced economies as a consequence of financial deterioration and its negative effects in the
Eurozone. The GDP expanded 4.5% in 2013 with an average of 4.7% from year 2000 until
2013 reaching an all time high record of 9.8% in 2007 and a low record of -4.8% in 2009.
Drop in economic growth is due to low price of crude oil and global financial crisis,
associated with dramatic falls in global trade and industrial production. Slowdown in
economic activity was reflected in deflationary pressures with 12.3% fall in inflation rate in
2008 to 1.56% in 2009. Expansionary fiscal and monetary policies that stimulate aggregate
demand were used by governments as a response to the crisis. The UAE economy was
adversely affected by the regional and global developments in 2009 as the country is engaged
in the supply of oil to the rest of the world.
With strong signs of an upward trend in oil price, the economy grew at 4.2% in 2012
and 4.5% in 2013, and a strong recovery of 4.7% in 2014. Projects on hold have started as
the country moved in restructuring to attract income-producing investments. GDP growth
recorded in the current year was driven by accelerated population growth, stable political
environment, and renewed investments in the service sector, manufacturing, and real estate as
the largest contributors to economic growth. Overall UAE GDP growth has been projected to
head towards 5.1 % in the current year. Fig. 4.1 presents the UAE GDP growth rate from
2005 to 2015.
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ISBN: 978-1-922069-86-3
GDP GROWTH RATE
10
0
-10
Figure 4.1: UAE GDP GROWTH RATE
(Source: Samba, IMF, IIF, National Bureau of Statistics, UAE)
4.2.Construction Industry Output
The UAE construction industry is the third largest industry in the country, with major
construction activities taking place in Dubai and Abu Dhabi, top the list in project value in
the GCC region, with 51.1% of the total market share. The overall project value amounting
to 319.1 billion US dollars consisted of major construction projects in infrastructure markets
and residential projects. With more than six thousand firms operating in the country, the
industry is expected to contribute 11.1 percent to the GDP in the current year. Industry
growth rate is attributed to investments in transport infrastructure, communications, public
sector, commercial, and industrial construction, considered to be the key drivers of industry
growth. As population in the country continue to increase from 5.4 million in 2010 to 6
million by 2015, attributed to the increase in expatriate population, it emerged as the major
key driver in the demand for commercial and residential buildings in the UAE. Commercial
construction industry has flourished with the start of high-profile projects and as the country
is a popular destination for leisure and business.
The UAE construction industry, which has always been a key source of growth for the
country’s economy, records a positive output over the forecast period resulting from
industrial construction and increased government expenditure on the development of
infrastructure. Year 2012 records a momentous industry growth which led to extraordinary
demand for technological innovations and construction materials. As presented in Fig. 4.2,
industry output records a 12% highest growth in year 2005 and a low record of 8% in year
2013. Output growth rate rose to 9% in 2014 and continue to rise to 11.1% in the current
year. The year 2007 showed a rocketing increase in construction industry output, which
peaked at AED 62.4 billion. Industry output has maintained a high level - above AED 40
billion per year. Despite increase in construction cost, increase in pay back periods, and
decrease in rate of return targets, returns on investment remain attractive in the industry. Fig.
4.2 presents the UAE construction industry output from year 2005 to year 2015.
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INDUSTRY OUTPUT
20
0
Figure 4.2: UAE Construction Industry Output
(Year 2005-2015)
Source: NDB Sector Economics (2014)
4.3.Construction Tender Price
The tender price index uses data from accepted tenders, lowest or second lowest bids,
and final accounts.
TENDER PRICE
20
0
2005 2007 2009 2011 2013 2015
-20
Figure 4.3: UAE Percentage Change of Tender Price Index, Year: 2005 - 2015
Source: International Monetary Fund (2014)
Tender prices in UAE construction industry are expected to continue to rise as funding
becomes readily available and confidence return to the global economy. Tender prices were
up by 4.4% in 2013 and gain further to 5.2% in 2014 and 4.6% in the current year. In line
with input costs, tender prices dropped by 1.7 percent in year 2011. Construction tender price
index measuring changes in contractor input costs reveal a 32% decrease in price of rubber,
26% for tin, and 25% for nickel, showing the most movement during the forecast period.
Data shows rise in material prices and construction labor rates influencing tender prices in
year 2013 and contractors are expected to absorb price increase in construction materials and
labor which impact on profitability margins. As presented in Fig. 4.3, construction tender
price records highest in year 2007 at 9.8% and lowest at -4.3% in year 2010. As construction
output remains strong in United Arab Emirates, tender prices continue to outstrip retail price
inflation. With fluctuating commodities markets, limited availability of resources, and the
demand driven construction market, costs of construction rose to 20% in year 2008.
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ISBN: 978-1-922069-86-3
4.4.
Labor Rates Movement
LABOR RATES MOVEMENT
10
5
0
Figure 4.4: Labor Rates Movement (2005-2015)
As presented in Fig. 2.4, labor rates movement in UAE records a high rate of 10% in
year 2011 and a low record of 4.9 in year 2010. Labor rates movement shows steady growth
at an average of 5.7% over the last ten years. The country economy experiences a steady rate
of labor attributed to growth in industries and the continuing economic progress of the
country.
4.5.
Significant Influence of Profitability Variations of UAE Construction Industry on
Economic Growth
Table 4.1: Significant Influence of Profitability Variations of UAE
Construction Industry on Economic Growth
M
ea
n
Correlations
Pears
on
Std.
Corre
Devi
lation
ation
N
Industry
10.
3.18
11
Output
08
Tender
5.2
8.33
11
Price
8
Labor
5.6
1.47
11
Rates
6
Moveme
nt
**Correlation is significant at
0.01 level (2-tailed)
.302
.850**
.175
Sig
.
(2tail
ed)
.00
5
.00
1
.00
5
Interpretati
on
Low Positive
Correlation
High Positive
Correlation
Low Positive
Correlation
As presented in Table 4.1, findings reveal significant relationships between industry
output and construction tender price, indicated by the ρ value of .005 and .001, Sig(2-tailed),
at 0.01 significance level. Findings show that there is high degree of influence of tender price
on economic growth, and low correlation between industry output and labor rates movement
on economic growth, indicated by the Pearson Correlation Coefficients of 0.001 for tender
price and 0.005 for industry output and labor rates movement. These correlations are
significant at the significance level of both 1% and 5%. Thus, the null hypotheses were
rejected for all the profitability variations variables. There is significant influence of industry
output, construction tender price, and labor rates movement on economic growth.
These findings imply that a change in the rate of industry output, construction tender
price , and labor rates movement will lead to a change in the level of UAE economic growth.
Findings further revealed that construction industry in United Arab Emirates experiences
growth on investments and profitability due to government support with market growth in its
full capacity, contributing to the GDP growth of the country. Gulf News (2015) reports that
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UAE Construction Industry rises to new heights with its market expected to grow at a
compound annual growth rate of 9.5% until the end of 2016. Construction market increases
were also attributed to thriving tourism and leisure industry sectors, growth of investments in
pipeline construction projects, ability of the industry to raise debt funding, government
policies on freeholds and leaseholds that attract foreign direct investments, and the favorable
construction tender price levels. The construction industry, considered to be the key source in
driving national economic growth and expected to boost the economy further, will experience
extraordinary demand for technological innovations and building materials. It has
experienced enormous investment during the past years, from both private and public firms
and is projected to exhibit sustainable growth prospects in the next future period (Abu Dhabi
Press News, 2015).
4.6.
Samples Test on the Significant Difference in the Contributions of Profitability
Variables to UAE Economic Growth
Table 4.2 : Significant Difference in the Contributions of Profitability
Variables to UAE Economic Growth
One-Sample Statistics
Test Value = 0
Independent
Variables
Industry Output
Tender Price
Labor
Rates
Movement
N
11
11
11
Mean
10.1
5.28
5.66
Std.
Devia
tion
3.18
8.33
1.47
Std. Error
of
the Mean
.959
2.51
.443
95% Confidence Interval of the
Difference
t
10.52
2.10
12.79
df
10
10
10
Sig. (2tailed)
.000
.000
.000
Mean
Difference
10.08
5.278
5.66
Lower
7.95
-.32
4.68
Upper
12.21
10.87
6.65
As presented in table 4.2, there is significant difference in the contributions of the
profitability variables of industry output, tender price, and labor rates movement to the UAE
economic growth, indicated by the ρ values of 0.000 for all the variables, significant at 0.01
and 0.05 significance levels (2-tailed). Thus, the null hypotheses for the three variables were
rejected. As shown in the table, industry output has the greatest contribution to UAE GDP
growth with a mean of 10.1, as the industry is witnessing massive investments from the
different industries and fuelled by expansion. Labor rates movement has the second largest
contribution to GDP growth, with mean of 5.66, and tender price, with a mean of 5.28.
Findings of the study imply that the last ten years gave rise to myriad of construction
developments which can provide profit sustainability over the long run. GDP growth is
expected to continue to rise, with variations in the contributions of profitability variables of
construction industry output, tender price, and labor rates movement in the country.
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4.7.
Chi-Square Test of Independence of Categorical Profitability Variations Variables and
Economic Growth in United Arab Emirates
Table 5: Chi-Square Test for Independence of Variables
Value
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear Association
N of Valid Cases
df Asymp. Sig. (2-sided)
334. .000a 315
.236
109.789 315
1.023
.052
1
.821
11
The Chi-square test of independence is used to test the hypothesis that the variables of
profitability variations and the UAE economic growth are independent of each other. Twosided significance presented in Table 8 show Pearson Chi-Square value of 334.0 and ρ value
equivalent to .236 greater than significance levels at both 5% and 10%. The null hypothesis is
accepted. Profitability variations variables and economic growth are not independent of each
other. Findings imply that changes in the rates of variables of construction industry output,
tender price, and labor rates movement will cause a change in the level of UAE economic
growth. The rising trends of profitability in the construction industry contribute to the
increasing level of economic growth in the country and is projected to continue in the next
future period. Findings reveal that UAE construction sector which demonstrated consistent
growth over the last ten years, attributed to government support and budget allocation, active
implementation of projects, and initiatives from private and public sectors partnership led to
significant increases in national economic growth. Construction resources attracted high
portion of private local and foreign investments and have caused a positive multiplier effect
in the different industries contributing to sustained national economic growth.
4.8.
Profitability Variations Variables That Predict UAE Economic Growth
Table 4.3: Model Summary for Test of Goodness of Fit of the Regression Model
Model Summary
M
od
el
1
R
.9
19
R
Sq
uar
e
.84
4
Adj
uste
dR
Squ
are
.778
Std.
Err
or
of
the
Esti
mat
e
1.85
Change Statistics
R
Squ
are
Ch
ang
e
.84
F
Ch
ang
e
12.
66
d
f
1
3
d
f
2
7
Sig.
F
Ch
ang
e
.00
3
Dur
binWa
tson
2.26
a
a. Predictors: (Constant): Industry Output, Tender Price, Labor Rates Movement
Table 4.3 shows R values for assessing the overall fit of the regression model R²
value of 0.844 is the variance explained by the profitability variables of industry output,
tender price, and labor rates movement. The value reveals the overall variance of 84.4% of
variation in economic growth is explained by the combination of the independent variables.
The three predictors of economic growth account for 84.4% of the variance of economic
growth. Adjusted R² value of 0.778 adjusts for the number of explanatory profitability
variations variables in the regression model.
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Table 4.4: Regression Coefficients of Profitability Variations Variables
Regression Coefficients
Unstandardized
Coefficients
Std.
Model
B
Error
1 (Constant) 7.992 2.826
Industry
-.091
.186
Output
Tender
.434
.072
Price
Labor
-.909
.407
Rates
Movement
Dependent Variable: Economic Growth
Standardized
Coefficients
Collinearity
Statistics
Sig.
.025
.002
Tolerance
VIF
.740
t
2.828
-.490
.976
1.024
.230
6.048
.001
.954
1.048
.031
2.233
.001
.955
1.047
Beta
Table 4.4 presents the regression coefficients of the independent variables and their
significance. As shown, industry output with ρ value of 0.002 and tender price and labor rates
movement, with ρ value equivalent to 0.001, are predictors of economic growth at 5% level
of significance. As presented in the table on beta coefficients of profitability variables, the
economic growth model shows that 74% of industry output, 23% of tender price, and 3.1% of
labor rates movement will result in the achievement of targeted economic growth of UAE,
sufficient to support economic sustainability over the long run and maintain competitiveness
in the global economic environment.
Multicollinearity test conducted, to determine the presence of highly intercorrelated
predictor variables in the regression model and the possible effects to invalidate assumptions,
reveal low values 0.186, 0.072, and 0.407 standard errors in regression coefficients,
indicating stable estimates of the true model parameters.
The Variance Inflation Factor shown in Table 4.4 shows that variables of industry
output, tender price, and labor rates movement are linearly independent indicating no perfect
linear relationship among the independent variables. The Variance Inflation Factor of 1.024
for industry output, 1.048 for tender price, and 1.047 for labor rates movement indicate the
absence of multi-collinearity among the variables of profitability variations.
4.9.UAE Economic Growth
With an upward growth trend in UAE industries, the economy is continuously
growing driven by accelerated population growth, stable political environment, renewed
investments with the service sector, manufacturing, and real estate as the largest contributors
to economic growth. The UAE construction industry, which has always been a key source of
growth for the country economy, records a positive output over the forecast period resulting
from industrial construction and increased government expenditure on the development of
infrastructure and attributed to investments in transport infrastructure, communications,
public sector, commercial, and industrial construction, considered to be the key drivers of
industry growth. Tender prices in UAE construction industry are expected to continue to rise
as funding becomes readily available and confidence return to the global economy. Labor
rates movement shows steady growth at an average of 5.7% over the last ten years. The UAE
economy experiences a steady rate of labor attributed to growth in industries and the
continuing economic progress of the country.
4.10. Significant Influence of Profitability Variations Variables on Economic Growth
Findings reveal significant influence of the variables of industry output, construction
tender prices, and labor rates movement on UAE economic growth, indicated by the р value
of 0.005, 0.001, and 0.005, respectively, at 0.01 significance level for all the variables
investigated. There is high degree of influence of construction tender price on economic
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progress and low positive correlation of industry output and labor rates movement on
economic growth. The null hypotheses were rejected for all the profitability variations
variables. Overall, there is significant influence of profitability variations on economic
growth of the country.
4.11. Significant Difference in the Contributions of Profitability Variations Variables
on Economic Growth
There is significant difference in the contributions of industry output, construction tender
price, and labor rates movement to the economic growth of the nation, at 0.05 significance
level (2-tailed). The null hypothesis was rejected. The variables of profitability variations
have different degrees of contributions to the UAE economic growth.
4.12. Independence of Profitability Variations Variables with Economic Growth
Profitability variations variables and economic growth are not independent of each
other. Changes in the rates of variables of construction industry output, tender price, and
labor rates movement will cause a change in the level of UAE economic growth.
4.13. Profitability Variations Variables That Predict UAE Economic Growth
Industry output with ρ value of 0.002 and tender price and labor rates movement, with
ρ value equivalent to 0.001, are predictors of economic growth at 5% level of significance.
Beta coefficients of profitability variables of the economic growth model shows that 74% of
industry output, 23% of tender price, and 3.1% of labor rates movement will result in the
achievement of targeted economic growth of UAE, sufficient to support economic
sustainability over the long run and maintain competitiveness in the global economic
environment.
5. Conclusions
The economy is continuously growing driven by accelerated population growth, stable
political environment, and renewed investments in service sector, manufacturing, and real
estate as the largest contributors to economic growth. The UAE construction industry,
records a positive output over the forecast period resulting from industrial construction and
increased government expenditure on the development of infrastructure and attributed to
investments in transport infrastructure, communications, public sector, commercial, and
industrial construction, considered to be the key drivers of industry growth. Tender prices in
UAE construction industry are expected to continue to rise as funding becomes readily
available and confidence return to the global economy.Labor rates movement shows steady
growth at an average of 5.7% over the last ten years and experiences a steady rate of labor
attributed to growth in industries.There is significant influence of the variables of industry
output, construction tender prices, and labor rates movement on economic growth of the
country. The null hypotheses were rejected for all the profitability variations variables. There
is significant difference in the contributions of industry output, construction tender price, and
labor rates movement to the economic growth of the nation, at .05 significance level (2tailed). The null hypothesis was rejected. Profitability variations variables and economic
growth are not independent of each other. Changes in the rates of variables of construction
industry output, tender price, and labor rates movement will cause a change in the level of
UAE economic growth. Industry output, tender price and labor rates movement, are
predictors of economic growth at 5% level of significance. Beta coefficients of profitability
variables of the economic growth model shows that 74% of industry output, 23% of tender
price, and 3.1% of labor rates movement will result in the achievement of targeted economic
growth of UAE, sufficient to support economic sustainability over the long run and maintain
competitiveness in the global economic environment.
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Proceedings of Annual Switzerland Business Research Conference
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ISBN: 978-1-922069-86-3
6. Recommendations
Recommendations of the study include the regular monitoring of the rate of growth of
profitability variations variables of industry growth, construction tender price, and labor rates
movement, identified to have significant influence on economic growth of the country,
continuously identify factors that directly influence the level of profitability in the
construction industry, identify factors and issues that hinder growth in construction industry
profitability and the conduct further studies to focus on profitability variables not included in
the study, which are likely to influence the level of economic growth.
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