Wed. May 29th, 2024

Key Points:

  • An article authored by three professors from the School of Economics discusses the impact of factor endowments on technology choice and industrial upgrading.
  • The article utilises a dynamic infinite-industry model to observe the evolving nature of the industrial sector as capital endowment becomes more abundant.
  • It argues that industrial structure and technology choices within industries are significantly affected by changes in endowment structure.

A recently published academic paper discusses the impact of factor endowments on technology choice and industrial upgrading. The research was undertaken by Assistant Professor Liu Zhengwen, Professor Zhang Bo of the School of Economics, and Professor Justin Yifu Lin from the Institute of New Structural Economics and National School of Development. It crucially uses a dynamic infinite-industry model to study the evolving nature of the industrial sector.

The study finds that as capital endowment becomes more abundant, the industrial sector – considered as the main driver of fast economic growth – exhibits two clear patterns. Firstly, the production technology in each industry becomes more capital-intensive, and secondly, the more capital-intensive industries gain a larger share of the market within the industrial sector.

The paper aims to address two central questions – how the aggregate endowment structure determines technology choices and industry structure, and how dynamics in the endowment structure, technology choices, and industrial structure interact with each other. Using the National Bureau of Economic Research—U.S. Census Bureau’s Center for Economic Studies (NBERCES) Manufacturing Industry Database from 1958 to 2011, the professors documented the capital intensity and value-added share of each industry in the economy.

Their findings reveal that capital intensity in the industry and the whole industrial sector is increasing over time, with market shares shifting to more capital-intensive industries as the economy becomes more capital-abundant. This trend was consistent across the NBER-CES Manufacturing Industry Database, the China Industrial Productivity data set, and the United Nations Industrial Development Organization’s data set.

To elaborate on this, the researchers used a dynamic infinite industry general equilibrium model that incorporated technology choice. In doing so, they observed that while adopting new technology can be costless, the practical costs of adopting new technology like patent acquisition and infrastructure investments can often be high. These costs might lead to halting technological progress and industrial upgrading, necessitating government intervention.

The paper also states that factor endowment structure plays a key role in determining technology choice and industrial structure. Essentially, technology choices and industrial structure are driven by given endowments during each period. As capital endowment becomes more abundant over time, optimal technology choices and industrial structure ensure maximum speed in accumulating capital, indicating a dynamic industrialization process.

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