Abstract Environmental concern is one of the driving forces behind residential industrialization policies in developing countries. Using manually collected data on prefabrication policies in Chinese provinces and the province-level data from China Construction Industry Yearbooks, this paper investigates the effects of China’s prefabrication policies on the performance of the construction industry in Chinese provinces. The difference-in-differences (DID) and the synthetic control methods are used in the analysis. The effects of two kinds of prefabrication policies (directive vs. supportive) in China are investigated. And the results show that supportive prefabrication policies significantly increase the labor productivity of construction firms and decrease the usage of construction materials whereas directive policies without substantive supporting measures do not have the above effects. The results imply that only the government policies with substantial incentives/supporting measures can encourage the widespread use of the modern prefabricated methods of construction that not only increase the labor productivity but also save construction materials.