Technology Upgrading with Learning Cost

Adoption of new technology requires diversion of human and physical resources from direct production activities to learning/adjusting activities, which could reduce productivity temporarily. Focusing on the existence of such “learning cost”, we derive a simple model on the optimal timing for technology upgrading. This model suggests that, other things being equal, a firm perceived to have better learning ability will show more frequent technology upgrading and higher market value even with possibly lower current profitability. The model predictions are supported by regression results from an unbalanced panel data set of more than 1,000 companies in the US during the late 1980s and the early 1990s. Simulations based on an extended model reproduce the negative correlation between investment growth and TFP growth commonly observed in the US and Japanese industry-level data. Based on the model predictions and empirical findings, this paper tries to explain the large swing in the stock market in the late 1990s as a rational response to new information affecting perceived learning cost for technology upgrading. JEL classification: O30; O47; G10; D24.