Technology Adoption and Absorption: The Case of Shanghai Firms

Using a unique firm-level survey dataset collected by one of the authors, this paper addresses two questions central to the literature on technology diffusion: What factors influence technology adoption, and how well do firms absorb newly acquired technology? We find that given the same technical capacity, firms with better access to cheap bank credit are more likely to adopt larger technology projects and invest more in imported equipment from technologically-advanced countries. On the other hand, the return to technology investment differs significantly across firms. In particular, firms with better access to cheap credit have significantly lower project profitability and capacity utilization. These results have important implications for the role of financial development in technology diffusion. (JEL Classification: O3) ∗Brandt: Department of Economics, University of Toronto, 150 St. George Street, Toronto, Ontario, M5S 3G7, Canada. Zhu (corresponding author): Department of Economics, Michigan State University, Marshall Hall, East Lansing, MI, 48824, USA. We are grateful to Steven Haider, Bart Hobijn, Rich Jensen, Raoul Minetti, Ximing Wu, seminar participants at McGill University, Michigan State University, and conference participants in the Mid-West International Economics Meeting 2002, the 9th EIIT conference, the Econometric Society North American Summer Meeting 2003, the NBER Summer Institute 2003, and the CEA Annual Meetings 2004. Brandt would like to acknowledge the support of the Shanghai Economic Research Center and the National Statistical Bureau for their help in carrying out the survey. He would also like to thank former colleague Yehuda Kotowitz for his important contribution to the project at an earlier date. Financial support for the survey was provided by the Canadian International Development Agency.