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 fi rms' production decisions with biased technological change. This model allows me to identify and estimate the firm-time-specifi c 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 fi rm-level evidence of biased technological change over time and biased technological dispersion across rms. 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 fi rms have a higher capital-labor efficiency ratio and that biased technological dispersion explains a large part of the dispersion of capital-labor ratio across fi rms.