Technology Upgrading with Learning Cost: A Solution for Two Productivity Puzzles

Abstract

As it takes time and effort to learn how to fully utilise new technology and realise its maximum potential productivity gain, adoption of new technology tends to reduce productivity temporarily, even though the potential productivity gain in the long run outweighs this short run loss. This paper points to such "learning cost" in technology upgrading as a potential explanation of the following two "productivity puzzles" reported in the Information Technology (IT) literature and in the studies of East Asian economic growth. First, in the 1980s, US companies made enormous IT investments, but little productivity gain was observed. Second, Total Factor Productivity (TFP) growth of "Newly Industrialising Countries" (NICs) in East Asia was mediocre in spite of the impressive investment drive in those countries.

A simple model of optimal intervals for technology upgrading with learning cost is developed. This model predicts that a company with higher frequency in technology upgrading will tend to have higher market value even with lower current profitability. An empirical study using unbalanced panel data of 1,031 US companies from 1986 to 1995 supports this prediction. Extending the scope from firm-level to industry-level, the paper estimates the magnitude of industry-wide learning-by-doing effects using annual data on 15 sub-industries in the Japanese machinery manufacturing sector from 1955 to 1990. The results show that industry-wide learning-by-doing was strong in low-tech industries where technological change was relatively slow, while it was insignificant in high-tech industries which experienced rapid technological evolution. It is also observed in the US and Japanese manufacturing industries that TFP growth tends to decrease with faster capital accumulation. Simulations based on an extended model of learning cost reproduce the observed negative correlation between the capital growth rate and the TFP growth rate.

JEL Classification: O30, O47, D24, F43