Firms and Technology Adoption: The Role of Political Institutions and Market Size (Article)

The study presents a political economy model and analyses how firms behave towards technology up-gradation given the different dynamics of political and market institutions. The model presented here depicts that political power is controlled by the elite, who formulate trade policy to consolidate power. While the middle-class access the production technology and the labour class provides labour inelastically. The model shows that the technology adoption decision of a firm essentially depends upon the political institutions and the market size of the country. Firms in a country with strong democratic institutions adopt new technology more rapidly. While in a weak democracy, firms successfully persuade the elite policymaker to impose higher trade restrictions and obtain higher protection from technologically advanced foreign firms. Moreover, the model also shows that firms operating in a large market adopt technology more rapidly since a large market has a high price elasticity of demand and supports a large number of larger firms. Furthermore, firms adopt technologies more swiftly when the productivity gains from the adoption are relatively large.