The Constraints of Farmers’ Endowments, Technological Progress Bias, and Modern Agricultural Production: Evidence from China’s Incomplete Factor Markets

China’s agricultural modernization hinges on integrating smallholder farmers into modern production systems, yet incomplete rural factor markets and endowment constraints hinder this transition. This study examines how capital, labor, and land constraints limit smallholders’ adoption of modern agricultural production (MAP) and whether technological progress biases exacerbate these barriers. Using panel data from Shandong and Henan (2012–2022), we find that endowment constraints reduce MAP adoption by 0.028% per 1% increase in constraints, with capital constraints being the most binding. These findings remain robust after endogeneity concerns and robustness checks. Regarding the mechanism, capital-based technological progress bias mitigates the negative impact, whereas labor-based technological progress bias exacerbates it. Smallholder farmers are generally biased towards increased use of labor-based technologies and reduced use of capital-based technologies, but the trend is gradually reversing. Policy priorities include targeted subsidies to alleviate capital constraints, land tenure reforms to facilitate scale operations, and technology extension programs tailored to smallholders’ resource endowments. These findings offer a roadmap for China’s rural revitalization strategy and broader agricultural modernization efforts in developing economies.