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Technological Progress

The discovery of new and improved methods of producing goods

What is Technological Progress?

Technological progress refers to the discovery of new and improved methods of producing goods. Changes in technology lead to an increase in productivity of labor, capital, and other factors of production. Technology refers to the process through which inputs are transformed into outputs.

 

Technological Progress

 

A technological change involves the invention of technologies and their release as open source via research and development, the continual improvement of the technologies, and the diffusion of the technologies throughout the industry or society.

 

Phases of Technological Progress

 

1. Invention

Invention is the act of creating new technology. It involves a new scientific or technical idea, and the means of its embodiment or accomplishment. To be patentable, an invention must be novel and have utility.

 

2. Innovation

Innovation may be used synonymously with “invention” or may refer to discovering a new way in which to use or apply existing technology. Everett Rogers thought of innovation as an idea, behavior, or product that appears new to its potential adopter. There are five main attributes of innovative technology: Relative Advantage, Compatibility, Complexity, Trialability, and Observability.

  • Relative advantage means the product or behavior is perceived as being better than the alternatives by the person adopting the innovation. Better can mean a lot of different things. It can be a device that can peel a potato faster so it saves time or a seat belt that offers the advantage of greater safety.
  • Compatibility refers to how the innovation aligns with the adopter’s lifestyle.
  • Complexity is how easy or difficult in innovation is to understand. The easier an innovation is to understand and use, the more likely it is to be adopted. Complex innovations face an additional challenge to mainstream adoption.
  • Trialability refers to the process of testing the innovation to see if, or how well, it works. Extensive testing usually occurs before an innovation is adopted or taken to market.
  • Observability involves seeing the product or behavior in action. It can demonstrate how it can be used. It is easier to get potential adopters to simply observe an expensive product like a car than it is to get all of them in one for a test drive. Also, the more people around you that you see using a product, the more likely you feel like buying that product too.

 

3. Diffusion

Diffusion pertains to the spread of technology throughout a society or industry. It is the process by which a new idea, product, or behavior is accepted by the market. Technology diffusion means the spread of usage/application of new technology from its current user to others. The diffusion of innovation theory, introduced by Everett Rogers, explains how different groups of people adopt innovation in different ways, in order to best suit their own needs or desires.

 

How to Measure Technological Progress

One of the most common methods used to measure technological progress is through the Solow Residual. The Solow Residual method works under the assumption that all changes in output that can’t be explained by changes in the capital stock or changes in the number of workers must be due to technological progress. The method uses a simple linear regression to estimate growth.

  1. Regress output on capital and labor using simple linear regression.
  2. The regression residuals are TFP growth. (Total Factor Productivity – the ratio of aggregate output (e.g., GDP) to aggregate inputs)

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Broad Factors Analysis
  • Economies of Scale
  • Value Chain
  • Virtual Team

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!