Production technologies and financial performance: The effect of uneven diffusion among competitors

We explore the impact of a production technology on financial performance from the perspectives of technology diffusion and competitive strategy theory. We analyse how diffusion at firm and market levels influences the returns from the technology. We suggest that firm heterogeneity in the level of technology use leads to competitive advantages for relatively intensive adopters. We empirically test our propositions through the analysis of the diffusion of the Automated Teller Machine among Spanish savings banks between 1986 and 2004. Our results show that it is not the absolute but the relative level of use that drives the impact of the technology on profitability. Furthermore, as the technology is more intensively deployed in the market, the profitability of every firm decreases. Interestingly, in our empirical setting, this negative effect eventually leads to an aggregate negative impact on the profitability of the savings banks.

► This research explores the effect of technology diffusion on profitability. ► Our sample describes the diffusion of the ATM in the Spanish savings banks sector. ► We find that the relative level of use determines the profitability of the technology. ► We also find that industry-level diffusion erodes the rents of adopters. ► In the long term a technology may have a deleterious effect on average profitability.