Why Is It Difficult to Adopt Innovative Technologies? The Role of Coordination and Collateral Borrowing in Technology Adoption

Abstract

Adopting highly innovative technologies is difficult due to many socioeconomic factors. We analyze the economic mechanisms associated with the large fixed costs jointly faced by various subsectors of an economy and the financing difficulty. We construct a Romer (1990) type growth model of technology adoption with fixed cost and then analyze macro dynamics showing why adopting innovative technology is difficult. We show that exercising coordination power in centralized economies can boost aggregate demand, facilitating the adoption of new technologies. Similarly, collateral lending in decentralized economies can play the role of helping technology adoption. Only when a threshold level of investment (i.e., the tipping point) is funded will the increasing returns to scale property arising from fixed costs generate a dynamic path toward a stable equilibrium with high output. We draw some implications.