4. Technology Sophistication, Productivity, and Employment
Introduction The centrality of technology in economic development rests on the relationship between technology adoption and firm performance. At the macro level, economists widely agree that variation in technology accounts for a large share of the differences in GDP per capita across countries.1 This positive view of the aggregate impact of technology is supported by Joseph Schumpeter’s concept of “creative destruction,” and more generally by the positive impact that technology-based firms have on disrupting markets and enhancing business dynamism. At the firm level, technology is a key driver of productivity growth. If firms use better technologies, they are able to produce more and better-quality products and services with the same inputs. This can allow for higher remuneration of all factors involved in production, including higher wages for labor—given that the marginal product of labor is likely to increase, and workers may also capture part of the economic rents generated by the innovations brought to the market. Yet every new wave of industrial revolution tends to raise concerns about job displacement. Since the Luddites railed against modern technology in nineteenth-century Europe, the potential negative effects of the diffusion of new technologies for the quality and quantity of jobs have been highlighted in the policy debate. This concern is especially relevant for policy makers in developing countries that are facing an increasing diffusion of advanced digital technologies and automation that could undermine labor cost advantages. The question is whether the adoption of the latest round of technologies is characterized by the same or different dynamics on employment than past ones. While many studies and a considerable body of evidence focus on the country level and high-income economies, this chapter looks at these issues from the perspective of the firm and developing countries. Specifically, the chapter addresses the following questions: ■■
What is the relationship between adopting more sophisticated technologies and productivity at the firm level?
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