Technological Diffusion, Bank Performance, and Solow’s Paradox: Insights from an Emerging Economy

Technological innovation is paramount for realizing long-term productivity benefits in any section of society. As pivotal inter-sectoral intermediaries, commercial banks are expected to deliver consistent and convenient services to a broad demographic, and hence, technology adoption and innovation have become one of the primary objectives for the Indian banking sector. IT-led productivity growth presents an attractive avenue for commercial banks, currently entangled in a web of shrinking profits, increased competition, and strict regulatory compliance. Nevertheless, the unexpected failure of IT in improving bank profitability lends credence to Robert Solow’s dictum, “You can see the computer age everywhere, except in productivity statistics”. This paper investigates the multifaceted relationships that govern technological diffusion, its impact on the performance metrics of banks, and the potential manifestation of Solow’s paradox in this dynamic environment. Additionally, the study seeks to ascertain whether the relationship between fintech investments and performance varies according to bank ownership, size, age, and investment intensity. The results confirm the existence of the paradox, suggesting that Indian banks are unable to leverage IT for profit enhancement or cost reduction. Intra-industry comparisons reveal that if IT-driven profitability is assumed to be a nation’s long-term objective, industry characteristics should dictate the allocation of knowledge capital. From a managerial perspective, the findings identify overinvestment in IT capital as a contributing factor to the profitability paradox. The study provides contrasting evidence regarding the performance of IT investments and advises bank managers to exercise caution while implementing IT proposals.