The direction of technical change: a study based on the inter-provincial panel data of China

Technical change is usually biased and benefits some factors more than others; however, the literature on the effect of technical progress is limited to the direction of technical change. For developing countries, whether technical change is biased towards particular factors is of central importance. We apply the framework of Acemoglu, D. (2002, ‘Directed technical change’, The Review of Economic Studies, 69, 781–809) to develop explanations for the following questions: What kind of production function is appropriate to special economies? If and to what degree technical change is biased towards particular factors? Based on inter-provincial panel data of China, this paper shows that: First, biased production functions are more appropriate than neutral ones. Second, the elasticity of substitution between labour and capital is less than a unity within the interval of 0.50 to 0.70, which indicates the asymmetric effect of technical progress on the productivity of capital and labour (a bias clearly in favour of capital). Third, the extents of bias in CES, VES, and CEEDx are 0.424, 0.108, and 0.213, and more biased towards capital at 3.6%, 1.3%, and 2.2% (from 1978 to 2010). This paper indicates that a crucial issue in China is how to change the direction of technical change and promote the productivity of labour.