Technology Upgrading with Learning Cost

Abstract

Adoption of new technology requires diversion of resources from direct production activities to learning/adjusting activities, which could reduce productivity temporarily. Focusing on the existence of such "learning cost", we derive a simple model on the optimal timing for technology upgrading. This model suggests that a firm perceived to have better learning ability will show more frequent technology upgrading and higher market value even with possibly lower current profitability. The model predictions are supported by regression results from a panel data set of more than 1,000 companies in the US during the late 1980s and the early 1990s. Simulations based on an extended model reproduce the negative correlation between investment growth and TFP growth.Technology, Learning, Total factor productivity (TFP), Market Value