Biased Technology and Contribution of Technological Change to Economic Growth: Firm-Level Evidence

The increasing mean wage-interest ratio and decreasing mean capital-labor ra- tio observed in some Chinese manufacturing industries suggest that technological change is factor-biased. In order to study the nature of technological change and its contribution to economic growth, this paper builds and estimates a structural model of firms' production decisions with biased technological change. This model allows me to identify and estimate the firm-time-specific factor-biased technology using micro data. The basic idea of the estimation is that the choice of inputs contains information about the unobserved productivities; therefore we can invert the inputs demand function to recover the unobserved productivities. I estimate the model from a firm-level data set of four Chinese Manufacturing industries. The empirical results provide firm-level evidence of biased technological change over time and biased technological dispersion across firms. The estimation results show that technological change contributes to the growth of gross output by 1.81%-3.10% annually and value added by 12.67%-21.16%, which is higher than the combined contribution of capital and labor. Capital efficiency grows much faster than la- bor efficiency in China, and the contribution of technological change to economic growth is mainly due to the change of capital efficiency. The results also show that large firms have a higher capital-labor efficiency ratio and that biased technological dispersion explains a large part of the dispersion of capital-labor ratio across firms.