In this paper the dynamics of technological change and technical efficiency in the Indonesian pulp and paper industry are analysed. The industry is characterised by rapid growth of output and capacity, with some mills investing heavily in state-of-the-art machinery after 1984. Using stochastic frontier analysis, we distinguish between technological advances of best practice mills and the rate of technological inefficiency. We use a newly constructed micro-level dataset describing the complete population of Indonesian paper mills and paper machines from 1975 to 1997. We find an increasing divergence in technical efficiency over time, indicating that most plants have been not able to keep up with the technological leaders in the industry. Several of the plants operating the latest technologies have lower levels of efficiency than mills operating more outdated equipment. These outcomes qualify the common understanding of dualistic economic structures in developing countries, composed of less efficient traditional and more efficient modern capital intensive establishments.