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Research Policy 41 (2012) 770– 779

Research Policy 41 (2012) 770– 779 Contents lists available at SciVerse ScienceDirect Research Policy j ourh e l e B o ld r i n, Hi royu ki Chuma, and seminar and conference participants at the BWIE, EARIE, the International Schumpeter Society Conference, the TEPCO, and the University of Tokyo for their helpful comments. We also thank useful comments from anonymous referees and the Editor. Corresponding Author: Tel.: +81 1 3 5841 5511; fax: +81 1 3 5841 5521. E-mail address: ohashi@e.u-tok y o.ac. j p ( H. Ohashi). Although the d a t a u s e d h e r e r e f e r t o p l a n t s rather than firms, we use the terms “plant” and “firm” interchangeably, so as to conform to current usage in the litera- ture. 0048-7333/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi: 10.1016/j.respol.2011.11.002 rate of intra-firm diffusion—the rate at which a particular firm sub- stitutes a new technology for old in its production process—requires firm-level data that identify how capital is utilized by technology type. Using unique plant-level panel data, this paper analyzes the role of productivity in intra-plant diffusion, which has received little attention in previous empirical examinations. In particular, we focus on the refining furnace technology in the Japanese steel industry. In the 1950s and 1960s, many integrated steel makers updated their technology, shifting from the conventional open- hearth furnace (OHF) to the imported basic oxygen furnace (BOF). The introduction of the BOF was praised as “unquestionably one of the greatest technological breakthroughs in the steel industry dur- ing the twentieth century” (Hogan, 1971: 1543) . Interestingly, the period of the rapid dissemination of BOF technology coincides with that of the remarkable growth Japan experienced in the wake of the devastation wreaked by World War II. The steel industry expanded its production more than fourfold between 1953 and 1964, mak- ing Japan the world’s largest steel exporter by 1969. As we discuss in Section 2 , intra-plant diffusion played a major role in BOF dif- fusion, resulting in substantial industry growth in the 1950s and 1960s. Restricting our study to examining refining furnace tech- nology allows us to abstract from market structure effects in our study; virtually all steel plants faced the same market for crude " id="pdf-obj-0-6" src="pdf-obj-0-6.jpg">

Contents lists available at SciVerse ScienceDirect

Research Policy

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Research Policy 41 (2012) 770– 779 Contents lists available at SciVerse ScienceDirect Research Policy j ourh e l e B o ld r i n, Hi royu ki Chuma, and seminar and conference participants at the BWIE, EARIE, the International Schumpeter Society Conference, the TEPCO, and the University of Tokyo for their helpful comments. We also thank useful comments from anonymous referees and the Editor. Corresponding Author: Tel.: +81 1 3 5841 5511; fax: +81 1 3 5841 5521. E-mail address: ohashi@e.u-tok y o.ac. j p ( H. Ohashi). Although the d a t a u s e d h e r e r e f e r t o p l a n t s rather than firms, we use the terms “plant” and “firm” interchangeably, so as to conform to current usage in the litera- ture. 0048-7333/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi: 10.1016/j.respol.2011.11.002 rate of intra-firm diffusion—the rate at which a particular firm sub- stitutes a new technology for old in its production process—requires firm-level data that identify how capital is utilized by technology type. Using unique plant-level panel data, this paper analyzes the role of productivity in intra-plant diffusion, which has received little attention in previous empirical examinations. In particular, we focus on the refining furnace technology in the Japanese steel industry. In the 1950s and 1960s, many integrated steel makers updated their technology, shifting from the conventional open- hearth furnace (OHF) to the imported basic oxygen furnace (BOF). The introduction of the BOF was praised as “unquestionably one of the greatest technological breakthroughs in the steel industry dur- ing the twentieth century” (Hogan, 1971: 1543) . Interestingly, the period of the rapid dissemination of BOF technology coincides with that of the remarkable growth Japan experienced in the wake of the devastation wreaked by World War II. The steel industry expanded its production more than fourfold between 1953 and 1964, mak- ing Japan the world’s largest steel exporter by 1969. As we discuss in Section 2 , intra-plant diffusion played a major role in BOF dif- fusion, resulting in substantial industry growth in the 1950s and 1960s. Restricting our study to examining refining furnace tech- nology allows us to abstract from market structure effects in our study; virtually all steel plants faced the same market for crude " id="pdf-obj-0-17" src="pdf-obj-0-17.jpg">

Intra-plant diffusion of new technology: Role of productivity in the study of steel refining furnaces

Tsuyoshi Nakamura a , Hiroshi Ohashi b,

a Department of Economics, Tokyo Keizai University, Japan b Department of Economics, University of Tokyo, 7-3-1 Hongo, Tokyo, Japan

a r t i c

l e

i n f o

Article history:

Received 20 September 2010 Received in revised form 31 August 2011 Accepted 22 November 2011

Available online 30 December 2011

JEL classification:

D24

L61

O14

O33

Keywords:

Intra-plant diffusion Total factor productivity Innovation Technological change

a b s t r a c t

This paper examines intra-plant diffusion of new technology in the Japanese steel industry. The introduc- tion of the basic oxygen furnace (BOF) was the greatest breakthrough in steel refining in the last century. Using unique panel data, the paper estimates total factor productivity by technology type, and associates the estimates with intra-plant diffusion. The paper finds that intra-plant diffusion accounts for about a half of the industry productivity growth. Large plants are likely to adopt the new technology earlier, but

retain the old technology longer, than their smaller counterparts.

© 2011 Elsevier B.V. All rights reserved.

1. Introduction

Diffusion of new technology has been viewed as the main driv- ing force of economic growth. An important set of questions often raised in the literature concerns what factors determine a firm’s decision to adopt a new technology. While this issue of inter-firm technology diffusion has been extensively studied, the adoption of new technology is not in and of itself sufficient for economic growth. 1 For the social benefits of innovation to be realized, the outcome of an innovation must not only be adopted by a firm, but also be extensively utilized in economic activities. Productiv- ity and outputs would not increase in response to the adoption of new technology, if the utilization of the technology remains low. As Mansfield (1963: 356) explains, the accurate measurement of the

We thank Shigeru Asaba, Michele Boldrin, Hiroyuki Chuma, and seminar and conference participants at the BWIE, EARIE, the International Schumpeter Society Conference, the TEPCO, and the University of Tokyo for their helpful comments. We also thank useful comments from anonymous referees and the Editor. Corresponding Author: Tel.: +81 1 3 5841 5511; fax: +81 1 3 5841 5521. E-mail address: ohashi@e.u-tokyo.ac.jp (H. Ohashi).

  • 1 Although the data used here refer to plants rather than firms, we use the terms “plant” and “firm” interchangeably, so as to conform to current usage in the litera- ture.

0048-7333/$ – see front matter © 2011 Elsevier B.V. All rights reserved.

doi:10.1016/j.respol.2011.11.002

rate of intra-firm diffusion—the rate at which a particular firm sub- stitutes a new technology for old in its production process—requires firm-level data that identify how capital is utilized by technology type. Using unique plant-level panel data, this paper analyzes the role of productivity in intra-plant diffusion, which has received little attention in previous empirical examinations. In particular, we focus on the refining furnace technology in the Japanese steel industry. In the 1950s and 1960s, many integrated steel makers updated their technology, shifting from the conventional open- hearth furnace (OHF) to the imported basic oxygen furnace (BOF). The introduction of the BOF was praised as “unquestionably one of the greatest technological breakthroughs in the steel industry dur- ing the twentieth century” (Hogan, 1971: 1543). Interestingly, the period of the rapid dissemination of BOF technology coincides with that of the remarkable growth Japan experienced in the wake of the devastation wreaked by World War II. The steel industry expanded its production more than fourfold between 1953 and 1964, mak- ing Japan the world’s largest steel exporter by 1969. As we discuss in Section 2, intra-plant diffusion played a major role in BOF dif- fusion, resulting in substantial industry growth in the 1950s and 1960s. Restricting our study to examining refining furnace tech- nology allows us to abstract from market structure effects in our study; virtually all steel plants faced the same market for crude

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

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steel, a homogeneous product manufactured from the refining fur- naces. The nature of the market, along with the output data by technology type, allows our analysis to focus on the influence of other determinants of intra-plant technology diffusion. Our unique furnace/plant-level data set covers the inputs and outputs from each furnace type, and the timing and size of new capital instal- lation. The data permit an estimation of the production function based on furnace technology and the measurement of the change in productivity and output growth in the intra-plant diffusion of new technology. Our estimation results indicate that intra-plant diffusion makes a significant contribution to the industry-level productivity growth, and accounts for more than 70% of the diffusion of the new- technology in terms of industry production capacity. Furthermore, the estimates indicate that differences in the productivities of new and old technologies owned by a plant is negatively correlated with the rate of intra-plant diffusion; if a new technology is more productive than an old one within a plant, the plant will shift its production process from the old to the new technology faster than it would otherwise, so as to minimize the opportunity cost of retain- ing the old technology. The paper also observes that large plants are likely to adopt the new technology earlier than their smaller coun- terparts. This finding is consistent with those found in the literature on inter-firm diffusion such as in Rose and Joskow (1990). In his survey of the literature on new technology diffusion, Geroski (2000) identifies two leading models: the epidemic and probit models. The first model, originally proposed by Mansfield (1963), predicts that the extent of use of a new technology within a plant increases with the number of years since the first adoption. Fig. 1 traces the intra-plant diffusion rate of BOF, i.e., the changes in the share of BOF in a plant’s total capacity size, for each of all thirteen plants considered in the paper. Note that they are those that switched from OHF to BOF. Although the BOF share gener- ally increased over the study period, the epidemic model does not fully explain the BOF use observed in Fig. 1; the years elapsed since the first BOF adoption, with the use of a third-order polynomial of the variable, explain about ten percent of the total variability of the BOF output share, a finding similar to that of Battisti and Stoneman (2005). In the empirical implementation on intra-plant diffusion, along with explanatory variables that are considered as proxies for the epidemic effect, we incorporate variables that fea- ture the alternative model—the probit model, which presumes that differences in the diffusion rates reflect differences in firm and technology characteristics. Estimation of the model indicates a dif- ference in the productivity of new and old technologies across plants, an important determinant of the intra-firm diffusion of new technology. The rest of the paper is organized as follows. Section 2 pro- vides an overview of the Japanese steel market after the Second World War. It describes several important features of the market that have a direct bearing on the formulation of empirical strate- gies and on the interpretation of quantitative results discussed in the subsequent sections. Section 3 describes our data sources and presents a method for estimating productivity of furnace tech- nologies. The panel feature of our dataset enables us to correct for endogeneity problems when measuring productivity. Using the obtained productivity estimates, the section evaluates the extent to which the intra-plant diffusion contributed to productivity growth. Section 4 quantitatively examines the forces that drive the intra- plant diffusion pattern observed in Fig. 1. The analysis reveals that productivity difference between old and new technologies is an important vehicle in intra-plant diffusion of new technology. Section 5 discusses the relationship between productivity and both inter- and intra-plant diffusion patterns of new technology. Section 6 presents our conclusions, followed by the appendices on the data sources and estimation method used in the paper.

  • 2. Overview of the post-war Japanese steel market

In the early 1950s, most Japanese steel was produced by inte- grated steel manufacturers. Integrated steel works transform raw materials (iron ore and coking coal) into pig iron in a blast fur- nace. Pig iron is subsequently transformed into crude steel in a second furnace by removing carbon and other elements. The preva- lent technology used in this second or “refining” stage was the OHF, which blows burning fuel gas over the molten pig iron, which pro- vides the heat required to purify the pig iron. In the late 1950s, the OHF began rapidly losing ground to the BOF. This new technol- ogy blows oxygen to oxidize the iron, making it possible for steel makers to refine molten iron and scrap charge into steel in approxi- mately 45 min—a sharp decrease from the 6 h that the OHF normally required then. Since molten pig iron is a key input for the BOF and the pig iron is made by blast furnaces, we focus our attention to plants owning blast furnaces as well as OHFs. At the time the BOF was invented, there were thirteen plants owned by nine firms, uti- lizing blast furnaces as well as OHFs, all of which have shifted their entire steel refining technology from OHF to BOF by early 1970s. Our data set is derived from these thirteen plants. Invented in Austria, BOF technology was further developed by Japanese steel makers after being imported to Japan. The Japanese have been responsible for the two most important improvements in the BOF hardware: the multi-hole lance and the oxygen con- verter gas recovery system (OG system) (Lynn, 1982: 34; Odagiri and Goto, 1996: 149). The multi-hole lance reduces splashing in the BOF, thus increasing steel-making yield and improving refractory life. Over the course of our study period, the BOF lance continu- ously improved its capability for softer blowing at lower velocities while achieving higher production rates. The OG system allows the recovery of gases from the BOF. It controls pollution and helps reduce energy costs, while contributing to steel-making yield. These “user-centered technological improvements” (von Hippel, 2005) associated with the BOF are known to have contributed to the increase in steel-making productivity in Japan. In Section 3, we observe the effects of these user-side technological innovations on the process of intra-plant diffusion. 2 Fig. 2 illustrates the diffusion of the new technology observed from the dataset. Three BOF diffusion paths are plotted in the figure:

overall diffusion is the BOF share in the industry’s total capacity size; inter-plant diffusion is defined by the percentage of plants that installed at least one BOF out of the population of 13 plants; and intra-plant diffusion is the annual average across all thirteen intra- plant diffusion patterns shown in Fig. 1. The inter-plant diffusion indicates that all plants represented in the data had adopted the BOF by 1965, at which time within-plant technology penetration had reached approximately 30%, and intra-plant diffusion became the sole driving force of the overall diffusion. Interestingly, it was between 1965 and 1970 that the Japanese steel industry doubled its output. The figure thus illustrates the importance of intra-plant diffusion in the later stages of the diffusion process. This finding has also been observed with regard to other technologies, including computer numerically controlled (CNC) machine tools as reported in Battisti and Stoneman (2004). Industry circles have recognized that producing steel involves substantial learning from current and previous production. Hogan (1971) and Lynn (1982) both noted that it was only through extensive furnace use that detailed knowledge of furnace oper- ation was gained. Both OHF and BOF refining furnaces cannot be operated without skilled workers. It was the experience and judgment of skilled workers that made it possible for plants to

  • 2 This paper does not consider the electric furnace (EF), because its share in pro- duction was small during our study period.

772

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

100% 80% 60% 40% 20% 0% Years No. BOF plants 1957 195 8 195 9 196
100%
80%
60%
40%
20%
0%
Years
No. BOF plants
1957 195 8 195 9
196 0 196 1
196 2 196 3
196 4 196 5 196 6
196 7 196 8
196 9 197 0
197 1
122
4 7
8 10
11
13
13
13 13
13 13
13
No. OHF plants
13
13 13
13 13
13 13
13
12
10
9
8
6 3
0

Fig. 1. Diffusion of BOF capacity size (13 plants from 1957 to 1971).

adjust the frequency and size of furnace operations, while main- taining the quality and durability of the crude steel produced. While Ichniowski and Shaw (1999) found that job rotation was a marked feature of Japanese steel-finishing lines in the 1980s and 1990s, by the time of our study period, Mori (2006) discovered in the archives that rotation was already rarely observed in the operation of refin- ing furnaces in Japan. This finding underscores the importance of experience in the refining stage of Japanese steel production. Theoretical and empirical research informs us that firm size plays an important role in the diffusion of new technology, and casual observation of our data indeed reveals a clear relationship between plant size and intra-plant penetration of the BOF. Fig. 3 plots the year in which the first BOF was adopted and the year in which the last OHF was terminated from use for each steel refin- ing plant. The adoption and termination years are sorted by plant size, as measured by the logarithmic number of workers in 1968. The number of workers evaluated at a different year of the study period has little impact to the results discussed here. The figure contains two important observations. First, a negative correlation

(%)

is observed between plant size and the year of new technology adoption, and that larger plants tended to adopt the BOF earlier. This observation, which concerns inter-plant technology diffusion, is well documented in the current body of literature. For exam- ple, Rose and Joskow (1990) reports that larger firms adopt new technologies earlier than smaller ones in the electric utility indus- try. Second, a negative relationship is observed between plant size and the rate of intra-plant diffusion of the BOF. The figure indi- cates that the smallest plant needed four years to fully replace the OHF, whereas the largest plant took twelve years. The correlation between replacement speed and plant size is large enough to gener- ate a negative correlation between plant size and the year in which the OHF ceased to be used. While the first observation regarding inter-plant diffusion has been extensively studied, the second one has not received signifi- cant attention. To address this imbalance, the econometric analysis presented in Section 3 concentrates on analyzing the second observation. Note, however, that our empirical analysis uses evi- dence pertaining to inter-plant diffusion, when controlling for

100 80 Inter-p lant Diffusion (Perce ntage of plants 60 install ed BOF) 40 Intr a-plant
100
80
Inter-p lant Diffusion
(Perce ntage of plants
60
install ed BOF)
40
Intr a-plant Diff usion
(Aver age BOF share in the
total capacity acr oss plants
20
Over all Diffusion
(BOF share in the total
capacity at the industry level)
0

1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971

Fig. 2. BOF Diffusions patters, 1957–1971.

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

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T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779 773 Fig. 3. Relationship between
T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779 773 Fig. 3. Relationship between

Fig. 3. Relationship between plant size and the rate of intra-firm diffusion.

selection issues. The econometric analysis described in Section 4 reports that productivity differences between furnace technologies account for the intra-plant diffusion of the BOF. The next section describes the method used to estimate the productivity of furnace technology.

  • 3. Measuring productivity

This section presents the method used to estimate total factor productivity (TFP) of furnace technology of the steel refining pro- cess at the plant level. We use thirteen plants owned by nine firms in the estimation, whose BOF capacity sizes are presented in Fig. 1. Our data set consists of annual data from 1957 to 1970. The Japan Steel Federation (1955–1970) provides data on the amount of outputs and inputs at the plant level by technology type. Data sources are detailed in Appendix B. The OHF and BOF both produce crude steel, a homogeneous product. Our econometric model of the produc- tion function describes how efficiently the furnaces completed the transformation process. We use the following Cobb-Douglas equa- tion estimating the parameters, ˇ x , ˇ k , and ˇ z (all are in logarithmic form):

y s

i,t = x i,t

s

s

ˇ x + k i,t

ˇ k + z i,t ˇ z + u s

s

i,t ,

(1)

where y i,t s is the annual output (in tons and logarithm) for furnace

s (either OHF or BOF) at plant i in year t. In (1), we use plant as the unit of analysis, and abstract issues of multi-plant operation. The production function comprises of a number of input vari- ables. Vector x i,t s includes electricity and labor along with a constant

term. All furnaces use electricity as an energy source. The labor vari- able is in units of man-hours, and we multiply the average hours worked at the industry level by the number of workers employed at each plant in the data set. The capacity size of furnace s is indicated by k i,t s . The age of fur-

nace s at plant i (i.e., the number of years for which furnace s was used at plant i) is denoted by z i,t . The last variable captures two

s

aspects of capital utilization: on one hand, this variable reflects the experience level, i.e., the extent to which extensive use of a par- ticular furnace type leads to more efficient production; and on the other, it also indicates the degree of capital depreciation, as fur- nace productivity deteriorates with age. The estimated coefficient of the variable implies which of the two effects dominates in our

application. Considering that the two furnace technologies, OHF and BOF, exhibit different operational characteristics, we allow for ˇ z to differ in terms of technology type. Apart from the three factors described in (1), two other impor- tant influences on steel production are plant-level efficiency of production management and improved furnace technologies. Such unmeasured determinants are represented by u i,t s . Productivity

unobserved by the econometrician may create endogeneity in input choice. Endogeneity in input choice arises when producers adjust the amount of material (electricity and labor in our application) according to their efficiency differences in u i,t s . For example, plants

that are perceived to have higher productivity might use more of electricity. Our first response to the endogeneity problem is to use plant-, year-, and technology-specific components in the esti- mation. Further, we allow the fixed technology dummy to differ

according to the year, as follows: u s

i,t = i + t s

+ ε i,t s , where ε s

i,t

is

a mean-zero error. The fixed plant component, i , deals with effi- ciency differences between plants, which do not change over time. The inclusion of s serves to control for the differences in furnace technologies, which change according to the year. This fixed-effect specification, however, may appear to be restrictive in that a pro- ductivity difference known to the firm is constant over time. In an alternative specification, we follow the generalized method of moments (GMM) approach developed by Blundell and Bond (1998). Details of this approach are presented in Appendix A.1. Table 1 presents three results based on methods without fixed effects (1-A), those with fixed effects (1-B), and GMM (1-C). The upper part of the table presents estimates of the regression coefficients. Our inference is based on heteroskedasticity-robust standard errors. Note that estimates of constant parameters are not reported in (1-C), since the estimated equation is quasi-differenced as noted in Appendix A.1. The reported statistics indicates that our estimation model performs moderately well: the measures of adjusted R 2 for specifications (1-A) and (1-B) are above 0.8, and the Sargan test statistic for (1-C) would not allow us to reject the orthogonality condition between some of the instruments and the error. Note that Blundell and Bond (1998) propose to use the lagged

t

explanatory variables for x s , k s and z

i

i

i as a set of the instruments in

s

the estimation of (1). The estimation method creates a concern for endogeneity in the estimates, if ε s is serially correlated. In order to verify the significance of this concern, we perform the Arellano

i

774

Table 1

Production function estimates.

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

(1-A) OLS

Est.

Std. Err.

(1-B) Fixed effects

Est.

Std. Err.

(1-C) GMM

Est.

Std. Err.

Labor

Electricity

Capacity

OHF age

BOF age

Constant

OHF dummy

BOF dummy

Sargan statistic

R-squared measure

No. observations

0.633

a

0.169

a

0.387

a

0.158

a

0.024

1.563

a

2.852

a

0.9996

229

0.077

0.034

0.040

0.040

0.059

0.605

0.700

Arellano-bond test for zero autocorrelation

0.647

a

0.132

0.198

c

0.075

0.060

3.598

b

0.8631

229

0.120

0.098

0.100

0.352

0.072

1.494

0.897

a

0.141

b

0.212

b

0.060

0.074

0.085

0.067

0.094

0.060

0.094

117.50(109)

229

 

Statistics

p-value

 

Order 1

2.661

0.008

Order 2

1.329

0.184

Order 3

1.170

0.242

Notes: The data contain thirteen plants considered in the data. Heteroskedasticity-robust standard errors are used in the table. The variables of labor, electricity, capacity, OHF age and BOF age are all in logarithm. The estimated coefficients on technology- and year-specific dummies are not reported in the table. a Signfincance at the 99% confidence level. b Signfincance at the 95% confidence level.

  • c Signfincance at the 90% confidence level.

and Bond (1991) test for the existence of serial correlation in the estimated error. As reported in the lower part of Table 1, the corre- lations are estimated to be statistically insignificant up to the third order. This result may be understandable in that we already control for year-specific component by technology type in the estimation. The table shows that the input coefficients are estimated to be positive and many of them are statistically different from zero. While the estimates found in (1-B) are similar to those in (1-A), we are concerned that endogeneity in input choice may lead to a correlation between the inputs (labor and electricity) and the unobserved productivity error that varies over time. If input con- sumption was readily adjusted to productivity, the resulting bias in the inputs coefficients could be severe. The GMM estimator reported in (1-C) accounts for this bias. While both estimates of the input coefficients in (1-C) are not statistically different from those found in (1-B), their mean values are estimated to be approximately 40% larger than those in (1-B). Although it is generally impossible in a multivariate context to sign the bias of the fixed-effects esti- mates when simultaneity exists and there are many inputs, the finding from the inputs estimates are consistent with the hypothe- sis that input’s correlation with productivity shock is much smaller than either the capacity’s or furnace-age’s correlations with the productivity. 3 The coefficient of the capacity-size variable is less than one, which may indicate the existence of decreasing returns to scale. The furnace-age variable is found to be statistically insignifi- cant. Based on the estimation results shown in Table 1, we first aggregate industry productivity for the 1957–1968 period. Our productivity measure comprises the contribution of furnace age (represented by z i,t ) and of disembodied technical progress (represented by u i,t s ). Fig. 4 shows annual changes in the aggre- gated industry productivity. Productivity at the industry level is

s

3 This hypothesis is corroborated by the observation that the plant-level labor and electricity inputs did not vary much over time. The positive correlation between the inputs and capital size (or furnace age) provides an additional support for the downward bias of the FE inputs estimates.

calculated annually as the share-weighted average of furnace and plant productivity, defined as:

i,t w i,t y i,t

s

s

  • i s

− x s i,t
− x s
i,t

ˇ x k s

i,t

ˇ k ,

(2)

in which i,t is the output share of technology s (either OHF or BOF)

s

at plant i at year t, and w i,t is plant i’s share in the total industry

BOF

output of crude steel at year t. Note that

i,t

takes the value of zero

before year t when plant i adopts BOF. Fig. 4 uses the GMM estimates under (1-C) in Table 1. The productivity increased at an annual rate of 14.5% until 1965 when all thirteen plants in the data installed at least one BOF. Thereafter, the productivity grew by 11.6%. The figure decomposes the productivity growth into two fac- tors; one is attributed to inter-plant diffusion, and the other to intra-plant diffusion. We calculate the productivity contribution of

BOF

inter-plant diffusion by using (2) under the assumption that

i,t

BOF

takes the value of

i,t i

for t t i , where t i is the year when plant

i adopted BOF. The difference between (2) and the productivity contribution of inter-plant diffusion calculated above is assumed to come from intra-plant diffusion. Note that the assumptions made here are likely to understate (or overstate) the productiv- ity contribution of intra-plant (or inter-plant) diffusion, because

the intra-plant diffusion is assumed to be absent before the inter- plant diffusion is completed, in contrast to the observations made in Fig. 2. Fig. 4 shows that the productivity growth after 1964 when the inter-plant diffusion is completed can be solely attributed to the intra-plant diffusion. The industry productivity associated with intra-plant diffusion is 13.1%, higher than that of the indus- try growth. Moreover, this intra-plant diffusion contributes more than half of the industry-level productivity at the end of our study period. One of key determinants of intra-plant diffusion pattern is the productivity difference between OHF and BOF at the time of adop- tion. Fig. 5 presents estimated productivity by furnace type, BOF

t

and

OHF

t

, over the period from 1957 to 1968. Note that s is esti-

t

mated by both technology- and year-dummy variables. The figure uses the GMM estimates under (1-C), but the other estimates shown in Table 1 have qualitatively the same features. The TFP estimates

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

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1.6 1.4 1.2 A ributed to Intra- plan t Diffus ion 1.0 0.8 0.6 A ributed
1.6
1.4
1.2
A ributed to Intra-
plan t Diffus ion
1.0
0.8
0.6
A ributed to Inter-
plan t Diffus ion
0.4
0.2
0.0
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
l og TFP t - log T
FP 1957

Fig. 4. Decomposition of TFP growth.

2.0 1.5 BOF 1.0 0.5 OHF 0.0 -0.5 1957 1958 1959 1960 1961 1962 1963 1964
2.0
1.5
BOF
1.0
0.5
OHF
0.0
-0.5
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968

Fig. 5. Productivity by furnace type, averaged over plants.

confirm that BOF was more efficient than OHF. The figure also indicates that the TFP measures of the two technologies diverged over time: the productivity of BOF more than tripled over the study period, while the productivity of OHF was roughly constant. The productivity increase of BOF could be due to user-centered innovations (von Hippel, 2005), including the multi-hole lance and the OG system mentioned in the previous section. It could also be due to a feature of inter-plant diffusion process: as experience in the use of the BOF accumulated in adopting firms, some, if not all, of this experience would spread among non-adopting firms by word- of-mouth or knowledge spillover. In either case, the late adopters would benefit from the knowledge transferred from early adopters, and thus enjoy higher initial productivity when adopting the BOF. The productivity decline of the old furnace during the later years in the study period may be primarily attributed to capital depre- ciation: smaller plants spent less time and effort maintaining and

repairing the OHF prior to adopting the BOF. 4 Although the knowl- edge spillover also possibly affected OHF operation, the figure appears to indicate that the depreciation effect dominates. Section 5 discusses the role of productivity in diffusion patterns in further detail. While identifying the sources of furnace productivity requires further data collection, the measured productivity presented in this section implies a negative relationship between plant size and the

4 Data regarding furnace maintenance time and frequency are available for only one plant in Yawata, then the largest steel maker in Japan. We observed the four OHFs owned by the plant, and noted that maintenance time and the OHF sizes were clearly negatively correlated. Since smaller plants tend to own OHFs of smaller capacity size, this observation is in line with our finding regarding changes in measured OHF productivity.

776

Table 2

Determinants of rate of intra-firm BOF diffusion.

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

 

(2-A)

(2-B)

(2-C)

(2-D)

Explanatory variables

(Est.)

(Std. Err.)

(Est.)

(Std. Err.)

(Est.)

(Std. Err.)

(Est.)

(Std. Err.)

Plant size

0.427

a

0.089

0.354

a

0.088

0.410

a

0.085

Plant size when the size is over 10,000

0.065

0.264

Plant size when the size lies between 5000 and 10,000

0.028

0.286

Plant size when the size is below 5000

0.004

0.312

ln(TFPBOF) ln(TFPOHF)

0.593

a

0.157

0.580

a

0.157

0.758

a

0.232

ln(BOF age)

0.073

0.244

0.165

0.227

0.344

0.259

0.174

0.221

ln(BOF age) squared

0.213

c

0.109

0.275

b

0.106

0.345

a

0.112

0.284

a

0.105

Inverse mills ratio

0.320

0.317

Constant

2.185

a

0.776

0.938

0.854

1.606 c

0.871

2.090

2.728

Pseudo R-squared

0.189

0.255

0.262

0.274

The number of observations is 101. Notes: The data contain thirteen plants considered in the data. Tobit Model is used in the estimation. The independent variable is the share of BOF in production capacity (in ton) by plant. Heteroskedasticity-robust standard errors are used in the table. The variable of BOF age is in logarithm. a Signfincance at the 99% confidence level. b Signfincance at the 95% confidence level.

  • c Signfincance at the 90% confidence level.

rate of intra-plant diffusion. Because early generation BOFs exhibit lower productivity than later models, it takes more years for early BOF adopters to replace the old technology. In the next section, we statistically analyze the role of the measured productivity differ- ences in intra-plant diffusion.

  • 4. Econometric analysis of intra-plant diffusion

This section investigates economic determinants of intra-plant diffusion of BOF observed in Fig. 3, considering the relationship between plant size and the number of years a plant took to replace the old with the new technologies. For this purpose, we use plant- level panel data that identify technology type as either OHF or BOF. We employ, as the indicator of the extent of intra-plant diffusion, the BOF share in the total capacity size for each plant, presented logarithmically. Thus, the rate of intra-plant diffusion is analyzed using the following diffusion equation presented in Battisti and Stoneman (2005):

ln

BOF

K

i,t

OHF

K

i,t

BOF

+ K

i,t

= W ln(W i,t ) + u u i,t + i,t . (3)

As defined in the previous section, K i,t exp(k i,t s ) (where s is either OHF or BOF) takes the value of zero when furnace s at plant i ceases to be used at year t. Battisti and Stoneman (2005) summa- rize the basis upon which recent theoretical advances in diffusion analysis have been built using a neo-classical dynamic optimization procedure. 5 We estimate (3) using a Tobit model and deal with possible selection bias when K i,t is zero. The vector, W i,t , includes two variables. Plant size is a commonly explored variable in the lit- erature of technology diffusion. There are a number of channels through which plant size may influence the likelihood of technol- ogy adoption: larger plants are considered to be more capable of and less risk-averse to adopting a new technology before substan- tial experience has been gained by using it; and the presence of scale economies may also enable larger plants to reduce costs at a faster pace through learning by doing in production. To capture the

s

s

5 In the analysis of the diffusion of CNC, Battisti and Stoneman (2005) explicitly include relative user costs of capital for new and old technologies as a determinant of (3). We have no access to the data on user costs on steel refining furnaces; how- ever, notice that steel-making furnaces were installed far less frequently than was CNC. Thus, annual changes in user costs may have had little impact on the diffusion pattern of steel furnaces.

plant-size effect, we use the number of workers at the plant level in year t. Note that plant size is highly collinear with the number of old furnaces owned by the plant, with a correlation coefficient of 0.8. We thus do not use, as an explanatory variable, the number of OHF owned by plant, and assume that the plant-size variable captures the feature that a plant that owned more (or fewer) old furnaces may be slower (or faster) in installing the same number of new fur- naces. Finally, we add a plant-level variable in (3) to account for the possibility of technology leapfrogging. The BOF-age variable is included to assess how a plant’s experience with the BOF affects the extent of intra-plant diffusion. We include a squared term of this age variable, so as to capture the S-shaped BOF diffusion patterns observed in Fig. 1. The second term on the right-hand side of (3), u i,t , reflects difference in unobserved productivity between old and new tech- nologies shown in Fig. 5. In the estimation, we use the productivity estimates obtained from (1-C) in Table 1, but using these other esti- mates has little qualitative impact to our results. The last term on the right-hand side of (3) is the error term, i,t , and the parameters to be estimated are W and u . In the intra-plant diffusion analy- sis, we employ data from plants that operated both OHF and BOF, so that the value of the left-hand side of (3) lies within the range (, 0). We correct for this selectivity of furnace technology by adopting the Heckit method, the details of which are discussed in Appendix A.2. We pool the data from the thirteen plants. Table 2 presents four estimation results based on the Tobit method. Our inferences are based on heteroskedasticity-robust standard errors. Specification (2-A) indicates that a one-percent increase in the number of plant workers decreases the relative BOF share by less than half a percent. With the other factors held at the sample averages, the intra-plant BOF diffusion rate is 48% higher for the smallest plant than for the largest. The diffusion rate decreases to 38% in (2-B), in which the variable of productivity difference between the old and new tech- nologies, u i,t , is included in (3) as an explanatory variable. The elasticity of the diffusion indicator with respect to the productivity difference between BOF and OHF is found to be 0.59. Since the larger plants were subject to smaller productivity differences, the sign of the estimate is consistent with findings concerning the plant-size estimate. BOF-age variable estimates indicate that it takes the aver- age sample plant about 10 years to achieve the intra-plant diffusion rate of 50%, and 14 years for the BOF to fully penetrate throughout all plants. Specification (2-C) corrects for selectivity in technology choice. In the intra-plant diffusion analysis, we need to consider plants

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

777

Table 3

Probit estimation on BOF operation.

Explanatory variables

Est.

Std. Err.

Plant size Blast furnace size Plant age

Plant age squared OHF age OHF age squared

#OHFs others

Year trend Year trend squared Constant Pseudo R-squared

0.778

0.675

13.651

c

1.967

c

7.697

1.441

0.104

b

1.132

a

0.067

a

27.957

a

0.

0.546

0.506

7.777

1.101

5.464

0.916

0.040

0.219

0.013

8.025

576

The number of observations is 169. Notes: The data contain thirteen plants considered in the data. This estimation is used to control for sample selectivity in the estimation of Eq. (3). The variables of plant size, blast furnace size, plant age, and OHF age are in logarithm. a Signfincance at the 99% confidence level. b Signfincance at the 95% confidence level.

  • c Signfincance at the 90% confidence level.

that simultaneously operated both OHFs and BOFs. This sampling method, although necessary in our analysis, could generate biased estimates if there existed a persistent relationship between the dif- fusion rate and the choice of plants in the sample. This concern would make the number of years of technology use correlate with the error in the equation. The probit results obtained in Table 3 pro- vide an estimate of the expected value of the error in the intra-plant diffusion, i,t . We have applied the Heckit correction procedure in the sample selection, and included the inverse Mills ratio. Includ- ing this variable and assuming normality in the distribution of the latent variable, the estimates in (2-C) will be consistent even if the selected sample is endogenous. The results under (2-C) do not indicate the problem in the sample selection. The magnitude of dif- ferences in the estimates between the results from (2-B) and (2-C) are not significantly different from zero. Thus, we conclude that the selection problem is not severe, probably because the termination of OHF use or adoption of BOF is not related to the intra-plant dif- fusion process. This finding that intra-plant diffusion is statistically independent from inter-plant diffusion bear a resemblance to those reported in Battisti and Stoneman (2005) for CNC and Battisti et al. (2009) for e-business. The three specifications discussed above assume that the effect of the number of plant workers on the diffusion rate is the same for all plant sizes. Specification (2-D) relaxes this assumption, and allows for the plant-size coefficient to differ by size category. We include three class size-specific variables: plant size of over ten thousand workers, between five and ten thousand workers, and the rest of the plants. The three size variables are all estimated to be insignificant, and would not reject the linearity assumption regarding the plant size coefficient that we made in the prior spec- ifications.

  • 5. Discussion on diffusion pattern

early adopter takes more years to replace the old technology than a later adopter. In theory, diffusion paths are generated under the assumption that adoption cost or uncertainty of the innovation declines over time. For example, Jovanovic and Lach (1989) show that S-shaped diffusion arises naturally in an environment in which homogeneous agents face the prospect of learning by doing, which is an important feature of steel-refining technology discussed in Section 2. Owing to learning by doing, costs decrease as time progresses. These reduc- tions in costs are not appropriated by the incumbents but spill over to potential adopters of later generation technology. In the model described by Jovanovic and Lach (1989), since early adopters have the advantage of higher revenues per unit of output, delaying the adoption of new technology entails both benefits and costs. Large plants were likely to adopt the new technology earlier than their smaller counterparts, partly because they were more productive plants to begin with. Indeed the largest plant exhibits 28% higher productivity than did the smallest in 1957. This gap in the productivity between the largest and smallest plants increas- ingly widened up to 43% by the end of the study period. This observed adoption pattern has been supported by Caselli (1999), who argued that skilled biased technology tends to be adopted by plants with high human capital levels, because skill and technology are complementary under strong learning-by-doing conditions. Since plants with more skilled workers are more productive, the theory implies that productive plants are more likely to adopt the BOF technology. Indeed, in his study of Japanese steel plants in the 1950s and 1960s, Yoneyama (1978) reported that skilled workers tend to be allocated to the BOF operation, while unskilled workers were like- lier to be assigned to the OHF operation. Since a considerable degree of knowledge regarding steel production was embodied in the skilled labor force, it is reasonable to consider that skilled workers may have found it easier to accustom themselves to the operation of new furnace technology. The observation made by Yoneyama (1978) evidences the importance of human capital levels in the adoption and diffusion of BOF in Japan. While the estimation results reported in Section 4 indicates that the productivity difference between the old and new technolo- gies play an important role in intra-plant diffusion, the presence of human capital provides another interesting viewpoint in deep- ening the understanding of intra-plant diffusion pattern. A large plant is assumed to have a wider range of workers both skilled and unskilled. Therefore, it must have been easier for a large plant to promptly adopt BOF to take advantage of its stock of high-level human capital. Indeed, the productivity of BOF grew at an annual rate of 7.4% for large plants, and only 4.6% for smaller ones. The difference in the growth rates of BOF productivity may have been due to large plants having more highly skilled workers than did smaller plants. A limitation of this study is that our data did not include indicators of human capital levels, and as such we were not able to test the role of worker knowledge in skilled workers in the intra-plant diffusion patterns. This is an area that could be examined further by future research.

Firm size (or plant size in the paper’s application) is a commonly explored variable in the empirical literature on technology diffu- sion. Firm size is relatively easy to observe, and is typically taken as a proxy for factors such as productivity, ability to assimilate and exploit new process or economies of scale. In the empirical analy- sis above, we have focused our attention on the role of productivity by furnace type at the plant level, and have noted three observa- tions regarding the diffusion of new technology: (i) large plants are likely to adopt the new technology earlier than their smaller counterparts; (ii) the productivity of the old and new technologies measured at the time of adoption diverged over time; and (iii) an

6. Conclusion

In the Japanese steel industry, the share of output produced using the new technology was limited even several years after dif- fusion had taken place. While inter-plant diffusion was the main driver early in the overall diffusion of BOF, intra-plant diffusion became the main contributor in later years, accounting for at least half of industrial productivity growth from 1957 to 1968. This paper further analyzes the intra-plant diffusion pattern of the new tech- nology, a topic that has been relatively neglected in the diffusion literature.

778

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

By making use of available panel data that capture the adop- tion and use of old and new technologies used in the Japanese steel refining stage, this paper observed that large plants were likely to adopt new technology earlier, but retain old technology longer, than their smaller counterparts. This finding, not previously remarked in the literature, implies a negative relationship between plant size and the rate of intra-plant diffusion of the BOF. The esti- mation results indicate that productivity difference between new and old technologies play an important role in the pattern of intra- plant diffusion. If the new technology is more productive than the old one, the plant will shift its production process from the old technology to the new faster than it would otherwise, to minimize the opportunity cost of retaining the old technology. The paper also reports that larger plants are estimated to be more productive, as they might have had higher human capital levels. In addition to the above contributions, this paper observed some other important findings regarding the intra-plant diffusion of the BOF. The results of the regression of intra-plant diffusion (3) indi- cate the importance of learning by doing in the operation of furnace technology. The estimation results are robust to the presence of sample selection and endogeneity because of the existence of firm- specific uncertainty. This study’s findings on intra-plant diffusion have important public policy implications. Analyses of diffusion policy require knowledge of whether a firm’s realized intra-plant diffusion per- formance differs from the optimal performance, and of whether policy interventions addressing the diffusion path actually improve social welfare (Stoneman, 2001). The paper’s analysis suggests that diffusion policies could be justified on the grounds that firms have insufficient information regarding the use of new technol- ogy. Our estimation results indicated that experience in furnace operation was an important determinant of intra-plant diffusion of BOF. Indeed, our analysis showed that approximately 30 percent of the variation in BOF diffusion could be explained by operational experience. If this operational experience exhibits externalities that cannot be fully accounted for by the firms themselves, there must be a need for public policy regarding intra-plant diffusion. Measur- ing the magnitude of the externalities that arise from the adoption and use of BOF would be the next step to understanding the need for public policy addressing technology diffusion.

Appendix A. Estimation methods

This appendix discusses the methods used to estimate the pro- duction function (1) and the diffusion equation (3), which appear in Sections 3 and 4, respectively.

A.1. GMM estimation of production function

In the estimation of production function, we employed the

method proposed by Blundell and Bond (1998) for specifi-

cation

(1-C).

Remember

that

u s

i,t = i + i,t + t s

+ m i,t s ,

where

i,t = i,t1 + e i,t , and that m i,t and e i,t are serially uncorrelated and are the mean zero errors. We quasi-differenced the production function and estimate the following dynamic representation:

y s

i,t

s

= y i,t + (z

s

1 + (x i,t

s

x i,t

s

1 )ˇ x + (k i,t

s

k i,t

1 )ˇ k

s

i,t z

i,t 1 )ˇ z + (1 ) i + ( s s 1 ) + i,t s ,

s

t

t

(4)

where s represents either OHF or BOF, and s

i,t e i,t + m s i,t

m i,t s 1 . Estimating (4) takes care of the firm-specific component. Blundell and Bond (1998) suggests that the production function be estimated by the GMM as a system combining the first differenced and level equations. For the differenced equation, we use as a set of

instruments x s

i,t r , k i,t

s

the level equation x s

r

and z i,t , where r = 2 and 3, and 3 < t, and for

s

s

i,t 1 x i,t

2 , k i,t

s

1 k i,t

s 2 and z

i,t , where 3 < t.

s

We also employ year dummy variables and the dummy variables that represents s as valid instruments. The estimation results are shown under (1-C) in Table 1.

t

A.2. Correcting for selectivity in diffusion equation

Let d i,t be a binary response for plant i at year t. It takes the

OHF

value of 1 when the conditions of 0 < K

i,t

BOF

and 0 < K

i,t

are both

satisfied; and takes the value of 0 otherwise. Each plant chooses d i,t so as to maximize the discounted stream of profits, the reduced form of which is parameterized as:

i,t = i,t ˛ + i,t ,

(5)

where i,t contains the constant term and a vector of plant- and year-specific observed characteristics that affect the profitability of plant i’s technology adoption at time t. We will discuss these variables in i,t shortly in this appendix. The unobserved factors not captured by i,t are denoted by i,t , the mean-zero error and ˛ represents a vector of the parameters to be estimated. We assume that the response d i,t is binary and that each plant bases its adoption decision on the latent variable i,t using a probit model. The maximum likelihood estimates of (5) are presented in Table 3 and are used in the intra-plant diffusion estimation when controlling for endogeneity in technology adoption. Based on the literature of inter-plant technology adoption (see Geroski, 2000, for example), we employ the following four types of plant-specific vari- ables for i,t , along with the plant-size variable already introduced in (3). We include the variable of blast furnace size (in ton, logarithm) to test whether the presence of a blast furnace affects the propen- sity of the plant to adopt the BOF. We also include the variables of plant age and OHF age (in logarithmic forms). The two age vari- ables may affect the technology choice because older (or younger) plants have a greater (or lower) likelihood of substituting the BOF for the old facilities. We add the squared terms of the age variables in the estimation. Lastly, we incorporate in i,t the number of old furnaces owned by the other plants in the same company at t 1. A company may face difficulty in adopting a new technology, if more workers are familiar with the OHF. Along with these plant vari- ables, a yearly trend variable and its squared term are included in the estimation to control for the industry-wide aggregate shocks. The binary probit model predicts 148 out of 169, or 88%, of the observations correctly, suggesting a fair fit to the data. Table 3 shows that the estimated coefficients for plant and blast- furnace sizes are both positive, but not significantly different from zero. While the coefficient of the OHF-age variable is statisti- cally insignificant, the plant-age and yearly trend estimates are both statistically and economically significant, indicating that the plants that were most likely to install the BOF have a plant age of 32 years (because the plant-age variable has a value of 32.13) in the year 1965 (because the year-trend variable has a value of 1964.5). Finally, the estimate indicates that a plant with more old furnaces was less likely to adopt the BOF than one with fewer OHFs.

Appendix B. Data description

The data used in the paper are plant-level annual data for 13 steel-making plants from 1957 to 1970. These plants are owned by 9 Japanese steel firms. The data are disaggregated by plant and furnace type, and cover approximately 95% of total industry steel production throughout the study period. Most plants in the data operated more than one furnace in a given year; however, the input

T. Nakamura, H. Ohashi / Research Policy 41 (2012) 770– 779

779

and output data are aggregated over the multiple furnaces of the same technology type within each plant. The output data of crude steel and the input data are both obtained from the Japan Steel Federation (1955–1970). The estimation uses two inputs variables; the amount of electricity and labor. The electricity data are obtained from the same source as the output data. Data on labor input are constructed from two variables: the number of workers at the plant level and by furnace type; and the average work hours at the industry level. The data on the former variable are disaggregated by furnace type. The latter variable is obtained from Tekko Shimbunsha (1955–1970). We multiply the two variables to obtain the variable of labor input, expressed in terms of total man hours. The data pertaining to furnace capacity by plant are obtained from companies’ semiannual financial reports. They identify the capacity sizes of each of the furnaces located in each plant. The data recorded the capacity size at the end of year t, and investment was made only when a new furnace was built. The capacity size of furnace j s of technology s located at plant i in year t is thus expressed as: K i,t j = (1 ı)K i,t j 1 , where ı is the depreciation rate. The estima-

s

s

tion result reported in Section 3 is based on the assumption that the value of ı equals zero. To check the robustness to the assump- tion of no capital depreciation, we set the value of ı to be at 0.05 to re-estimate the model. We find that this assumption makes little change to the original results. While we know the capacity size of individual furnace, we aggregated K i,t j over s to make the construc-

s

tion of the variable consistent with those of the others used in the paper. Finally, the data on furnace age by plant are from the Ministry of International Trade and Industry (MITI, 1958, 1961). The data source provides the year that an individual furnace was installed at each plant in our data set. We supplement the data with semi- annual financial reports published by each company to obtain the year at which each individual furnace was shut down. We take a simple average of furnace ages over each plant to construct the

variable of the number of years for which furnace s was used at plant i, namely z

s

i,t .

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