Artificial Intelligence, Firm Growth, and Product Innovation

If technological change is, in general, a key driver of economic growth, how does artificial intelligence (AI) specifically impact economic growth? Further, what is the impact of AI on firms, and how do firms invest in and benefit from artificial intelligence?

In order to analyze firm investment in AI technologies and the respective benefits associated with such investments, the researchers introduce a measurement that captures firm investment based on their AI-skilled human capital. The reasoning for such a measurement is that AI relies heavily on human expertise. The measurement is constructed from a combination of data that allows the researchers to analyze both the “stock of” and “demand for” AI-skilled workers in U.S. firms. First, the researchers utilize job postings from Burning Glass technologies in order to capture each firm’s demand for a certain skill, (i.e. particularly those related to artificial intelligence). Second, they obtain resume data from Cognism to understand the “actual composition of a firm’s workforce”. 

The key takeaway is that firms that invest more into artificial intelligence have higher growth, mainly arising from the increase in product innovation (as seen by increased trademarks and product patents). This result suggests that AI may support firm growth by reducing the costs of product development and therefore, increasing product innovation. Specifically, the researchers document “a strong and consistent pattern of higher growth among firms that invest more in AI: a one-standard-deviation increase in the resume-based measure of AI investments over the 8-year period corresponds to a 20.3% increase in sales, a 21.9% increase in employment, and a 22.4% increase in market valuation”.

Further, the paper finds a positive feedback loop between artificial intelligence investments and firm size. Meaning, “AI investments concentrate among the largest firms, and as firms invest in AI, they grow larger, gaining sales, employment, and market share”.

Works Cited

Babina, T., Fedyk, A., He, A., & Hodson, J. (2021). Artificial Intelligence, Firm Growth, and Product Innovation. Firm Growth, and Product Innovation (November 9, 2021).