Entrepreneurs and innovators are often surprised to find that new technologies tend to spread slowly within industries. In some cases, the reasons for resistance seem clear: doctors in private practice or small-scale farmers might not have the resources to invest in a new technology that won’t pay off in the short term. But why don’t large corporations in competitive industries rush to adopt new technologies that would give them an edge?
To explore this question, Professor Amit Khandelwal looked closely at soccer-ball manufacturing in Pakistan. Manufacturers in the city of Sialkot produce a total of about 30 million soccer balls a year — about 40 percent of world production. Working with David Atkin of Yale, Azam Chaudhry and Shamyla Chaudry of the Lahore School of Economics, and Eric Verhoogen of Columbia University, Khandelwal found that virtually all 135 firms in the Sialkot cluster, whether large or small, produced their soccer balls in exactly the same way, making it an ideal setting for a study. “This is a place where everyone is doing the same tasks,” Khandelwal says. “If you come up with a technology that is beneficial, you can be reasonably sure that it will help every firm in the sector.”
Once the researchers had settled on an industry and location, they needed to introduce a new technology. Most production in Sialkot was carried out using manual labor, including the cutting of the 12 pentagons and 20 hexagons that are affixed to each soccer ball’s surface, shapes that are cut from rectangular sheets of rexine, an artificial leather. “We quickly discovered that the cutters were wasting expensive raw material,” Khandelwal says. “So we tried to come up with a way to reduce the waste, which would have obvious benefits for all of the firms.”
The researchers developed a pattern that would enable workers to cut more pentagons out of each sheet of rexine, which would in turn save 1 percent of the manufacturing cost of each soccer ball.
That might not seem like a big savings, but the average profit margin among the Sialkot firms is about 8 percent, which means that a 1 percent cost savings translates to a 15 percent increase in profits. “This was a technology that didn’t cost much to adopt, and it had very clear benefits going forward,” Khandelwal says. “We were sure we had come up with something that was so beneficial that it would immediately start to spread.”
The researchers traveled to Pakistan to introduce their new technology, giving it to a set of 35 randomly selected firms at no cost. Fifteen months later, they found that only six of those firms were still using it. The researchers, puzzled by this outcome, interviewed the firms and found that resistance among workers was behind the widespread lack of adoption. The researchers hypothesized that this was a clear case of misaligned incentives: saving raw materials reduced costs and increased profits for the owners, but the cutters were paid per piece. At least initially, using the new pattern would slow down the cutters’ pace and lower their take-home pay.
“The workers had very little incentive to adopt this new technology unless the owner compensated them for their lost wages,” Khandelwal says. Once the researchers realized the dynamics that were in play, they conducted a second experiment in which workers at half of the original firms that received the technology were offered a one-time monetary incentive to demonstrate competence with the new cutting pattern. In theory, this would help the cutters increase their pace of production and preserve their pay. The researchers subsequently found widespread adoption of the new technology among the set of firms whose workers received the incentive.
“There are lots of potentially profitable technologies out there, and firms have to allow workers to share the benefits,” says Khandelwal. He and his research partners are continuing to track the Sialkot firms over the next several months to see if the new technology spreads to competitors. “This isn’t just about a particular set of companies in a developing country,” he adds. “Whenever firms want to move forward with a new technology, they should make sure that their incentives are aligned with those of their employees.”
Amit Khandelwal is the Gary Winnick and Martin Granoff Associate Professor of Business in the Finance and Economics Division and a Chazen Senior Scholar at Columbia Business School.
Professor Khandelwal teaches an elective course on International Business. His research research interests examine issues in international and development economics, including the strategic response of firms to trade liberalizations and increased international competition.
Read the Research
David Atkin, Azam Chaudhry, Shamyla Chaudry, Amit Khandelwal, Eric Verhoogen
"Organizational Barriers to Technology Adoption: Evidence from Soccer-ball Producers in Pakistan"