Benefits of Investing into the Development of 4IR-Related Technologies

The Fourth Industrial Revolution (4IR) presents a major technology transformation towards a data-driven economy, associated with both high costs and potential benefits. We build and estimate a dynamic discrete technology choice model to explain a firm’s decisions to engage in the development of new 4IR and (or) non-4IR related technologies. The model takes the endogenous nature of the decisions into account and allows them to persistently affect the firm’s future productivity path. We estimate the benefits and costs of either technology using a panel data set of high-tech manufacturing firms in Germany between 1993-2016, combined with information on the type of technology using patent applications. Our results show high returns to the development of both types of technology, and of similar magnitude. Firms achieve an average productivity increase of 6.6 % from developing 4IR technologies and of 6.8 % from non-4IR technologies and 8.9 % from doing both. These short-run productivity gains are carried over to future periods through a highly persistent productivity evolution process. However, the costs for developing both technologies differ substantially. For firms without experience in developing 4IR technologies, start-up costs are on average more than double the corresponding start-up costs for non-4IR technologies (137 vs. 61m Euro), representing a severe barrier to entry. But once the firm has incurred these sunk start-up costs, the costs of continuing the development of 4IR technologies is lower (10m Euro) than for non-4IR related technologies (about 8m Euro).

Benefits of Investing into the Development of 4IR-Related Technologies

Bettina Peters
Markus Trunschke
working paper 50/2021