Measuring Firm-Level Technology Gap: A Total Factor Productivity Approach

Drawing on the methodology proposed by Yang et al. (2018), this article outlines the measurement of a firm's technology gap. The technology gap is determined by calculating the ratio of a firm's technology level in a given year (t) to the highest technology level observed within its industry.

To facilitate a positive interpretation, the reciprocal of this ratio is used. Consequently, a larger value signifies a smaller technology gap, indicating the firm's technological advancement relative to its industry peers. Notably, the technology level is assessed using the OP method, a robust measure of a firm's total factor productivity (TFP). This approach offers a comprehensive understanding of the firm's efficiency in utilizing its inputs to generate output, serving as a proxy for its technological sophistication.