In response to population growth, rising income and urbanisation, the demand for dairy products is growing in Ethiopia. However, the dairy sector has not been able to produce adequate milk to satisfy this demand, mainly due to low productivity of dairy animals. The use of technological inputs, such as improved breeds of dairy cows and cultivation of improved forages, is often seen as a prerequisite to increasing livestock productivity and resource use efficiency in the smallholder dairy sector. However, adoption of such technologies has been low, despite numerous efforts to disseminate the technologies in the past. The overall objective of this study was understanding the factors affecting adoption of technologies that enhance the productivity of livestock production and water use efficiency in the Ethiopian highlands, with particular emphasis on dairy production. The findings show that low adoption of the technologies that enhance the productivity of livestock production and water use efficiency stem from farmers’ limited access to farm resources, differentials in potential welfare impacts of the technologies, lack of effective and reliable supply chains for inputs and outputs, inadequate physical infrastructure and weak institutions and policies. Given the multiple constraints at different scales and the associated transaction costs facing smallholders in rural Ethiopia, the returns to investment for the technologies may be too low to justify widespread adoption of the technologies. Therefore, adoption of technologies in the dairy sector requires interventions at production, storage, transportation, processing and marketing chains and at macroeconomic institutions and policies.