Abstract:The continuous accumulation and renewal of the means of production have brought about the deepening of capital in various industries in the economic system. Capital deepening has brought about capital-embodied technological progress. Biased technological progress causes different changes in the technical efficiency of different elements, affecting the input structure and output efficiency of each element, and then promoting industrial upgrading. Based on the panel data of 35 industrial industries in China from 1998 to 2019, the standardized supply-side system equation is used to estimate the elasticity of factor substitution, and the labor technical efficiency and capital technical efficiency of each industry are measured. The results show that the labor technical efficiency is higher than the capital technical efficiency in most industries, and the labor technical efficiency presents a rising trend, while the capital technical efficiency increases first and then decreases. Further analysis of the mediating effect model shows that factor technical efficiency has a significant partial mediating effect on capital deepening to promote industrial upgrading. Capital deepening, labor technical efficiency improvement, and capital technical efficiency improvement can all promote industrial upgrading. Capital deepening can promote industrial upgrading by improving labor technical efficiency, but it may also inhibit industrial upgrading by reducing capital technical efficiency. Therefore, it is necessary to accelerate technological progress, increase the level of human capital, appropriately promote capital deepening, optimize the allocation of factors, and give full play to the positive effects of the improvement of technical efficiency of factors on industrial transformation and upgrading, and then promote high-quality economic development through industrial upgrading.