Inside the black box of technology

By Rebecca Tan

SMU Office of Research & Tech Transfer – Technology-focused companies like Apple, Amazon and Alphabet rank among the largest and most profitable companies in the world. It is easy to assume, then, that adopting technology leads to economic growth. However, the impact of technology is not so straightforward; technology can disrupt certain sectors of the economy even as it causes a boom in others.

Take for example how websites and social media have supplanted newspapers and magazines, causing many once-esteemed – and very profitable – publications to close their doors. Just as the combustion engine put an end to horse carriages, technologies like autonomous vehicles are likely to cause some industries to die out while simultaneously launching new ones.

For Juliana Yu Sun, an Assistant Professor at the Singapore Management University (SMU) School of Economics, the role of technology in economic growth has been a career-long fascination. “One big question in the field of economics is what drives long-run economic growth; despite decades of research it remains an open question,” Professor Sun says.

“In my research, I study how characteristics of technology determine both long-run growth and industry dynamics in recessions or contractions. Since technology is fundamental to economic growth, I’m interested in digging deeper to understand the relationship between technology and growth as one of the fundamental questions in the field of economics,” she adds.

When technology doesn’t translate to growth

Firms invest in technology in the hope that it will help them produce goods more cheaply or efficiently. This investment in capital goods – goods that, rather than being consumed, are used to produce more goods – can have a multiplier effect on economic growth, says Professor Sun. In fact, investment-specific technical change accounts for as much as 60 percent of the economic growth that the US has experienced since the Second World War.

“However, the literature only focuses on the contribution of investment-specific technical change to growth for the US. We extended this research to many more countries and found that its contribution actually varies significantly around the world,” she says.

In particular, Professor Sun found that developing countries do not enjoy the kinds of returns on investment in technology that the US does. In a working paper published jointly with Professor Roberto Samaniego of the Columbian College of Arts and Sciences at George Washington University, Professor Sun showed that the contribution of investment-specific technical change to economic growth in developing countries is actually very small, or even negative in some cases.

“The reason is that a highly educated population is required to make the most out of high-technology goods, and you also need to have very sound institutions like the rule of law to protect intellectual property,” she explains. “Without these elements, it is not ideal for developing countries to adopt high-technology capital goods.”

The implication then, Professor Sun continues, is that developing countries should first invest in their human capital and institutions in order to enjoy the economic benefits of investing in technology.

Boom or bust? It depends

At the level of the individual company, technology can also influence how well each firm rides out the business cycles of expansion and contraction, Professor Sun says. In a 2015 study published in the European Economic Review, she investigated which industries were disproportionately affected by downturns or economic contractions, and found that the result depended on the characteristics of the technology typically used by a particular industry.

For example, although both the service sector and the pharmaceutical industry might conduct research and development (R&D), the levels of R&D activity would be much higher in the pharmaceutical industry. Similarly, firms can differ on other technological characteristics, such as whether they are more labour-intensive or how specific their capital is, with more specific capital requiring a higher degree of customisation.

By comparing each technological characteristic with a set of contraction indicators, Professor Sun showed that growth in labour-intensive industries and industries that use specific capital are especially sensitive to contractions, suffering more than other types of industries during economic downturns.

“I found that labour intensity and capital specificity significantly interacted with contraction,” Professor Sun says. “That is, industries that are highly labour-intensive – such as the textile and garment industry – and industries that use specific capital – such as the aircraft industry – are more severely affected during contractions.”

Building on her research on the impact of technology in times of contraction, Professor Sun is now also investigating how different industries behave in times of uncertainty, when there is high volatility.

An out-of-the-box approach

What unites her research on both long-run growth and short-term contractions is a focus on technology, she says. “The key idea is to study the way technology progresses and what characteristics of technology determine growth and industry dynamics.”

Noting how macroeconomic studies are increasingly relying on microeconomic foundations, Professor Sun hopes to study the impact of technology at the firm level, investigating how firms use technology, invest in R&D and innovate at the microeconomic level. “I am interested in how firms direct the progress of their technologies and how that progress then has an aggregate influence on the whole economy,” she says.

“People are no longer satisfied with taking technology simply as a parameter; we want to know what determines this parameter and ask even deeper questions to understand the black box of technology,” Professor Sun says. “I want to open the black box with my research.”

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