Using New Technology Boosts Profits

Companies that adopt new technologies in their production processes can make significantly bigger profits, while those that don”t, lose out. That is the conclusion of Professor Paul Stoneman and Dr Myung Joong Kwon in a paper published in the latest issue of the Economic Journal. Exploring the impact on firm profitability of the adoption of four technologies (Computer Numerically Controlled Machine Tools, Computers, Microprocessors and Carbide Tools) in the UK engineering sector in the 1980s, they find that adopters of new technologies achieved profit gains equivalent to 11% of the average profit level.

National and international concerns with the innovative performance of industry are grounded in the belief that innovators benefit while non-innovators suffer in the face of innovation elsewhere. This research confirms and quantifies these effects: the adoption of one or more of the four new technologies boosted profits for the adopting firms, while the profits of non adopters declined as other firms adopted the new technologies. The researchers find that the extent of the profit gain realised by adopting firms depends upon the particular technology adopted, the number of other users of the new technology, the characteristics of the adopter, such as its size, and the cost of acquiring the technology.

There is no evidence that early adopters made larger profits than later adopters. There is a considerable existing literature of economic research showing the returns to expenditure on R&D, as well as a literature showing that first adopters of new technology make profit gains. But this is the first research to show that all adopters of new technology gain, not just the first. It is also the first to define what determines the size of those gains, and to indicate that non adopters experience profit reductions as innovations spread elsewhere.

”Technology Adoption and Firm Profitability” by Professor Paul
Stoneman of Warwick Business School and Dr. Myung Joong Kwon of Yonsei University
in Korea is published in the July 1996 issue of the Economic Journal.

Paul Stoneman

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