An empirical model of technological change and industry-level investment

The role of technological change as a determinant of investment behavior has been either ignored or inadequately incorporated in the mainstream literature on investment dynamics, as well as in alternative traditions of economic thought. In this study, a recent empirical model of firm investment behavior in the United States is extended to include variables representing the effects of technological progress. The model that is extended lies within the post-Keynesian tradition in that it views investment as a function of capacity utilization and internally- and externally-generated finance. The principal empirical hypothesis tested is that U.S. industry and firm investment behavior during the 1980s was partly determined by the intensity of industry-level technological change. An additional hypothesis, that technological change influences investment by creating competitive pressures on firms to increase their investments in new productive capital, is also explored. A composite variable representing the intensity or pace of technological change is constructed, using factor analysis, and entered into a single-equation variance components regression model. The composite variable is based upon the rates of change in five proxy variables assumed to be correlates of the process of technological change. The model is estimated from pooled time series-cross section data at the firm segment and industry levels for the U.S. manufacturing sector from 1981 through 1986. The analysis shows the technological change variable (which is assumed to represent primarily product-related technological change) to be a significant determinant of investment behavior, especially in highly concentrated industries.