Please rotate your device to landscape mode to view the charts.

Artificial Intelligence, Firm Growth, and Product Innovation

Journal: Journal of Financial Economics

Date: 20240101

Author: Babina, Tania; Fedyk, Anastassia; He, Alex; Hodson, James

Abstract:
We study the use and economic impact of AI technologies. We propose a new measure of firm-level AI investments using employee resumes. Our measure reveals a stark increase in AI investments across sectors. AI-investing firms experience higher growth in sales, employment, and market valuations. This growth comes primarily through increased product innovation. Our results are robust to instrumenting AI investments using firms' exposure to universities' supply of AI graduates. AI-powered growth concentrates among larger firms and is associated with higher industry concentration. Our results highlight that new technologies like AI can contribute to growth and superstar firms through product innovation.

Link: Google Scholar

Key Findings

AI Adoption Drives Firm Growth

Firms investing in AI experience 19.5% higher sales growth, 18.1% higher employment growth, and 22.3% higher market valuations over 8 years

Product Innovation Focus

AI investments lead to increased product innovation through more trademarks (+13%) and product patents (+23%), rather than productivity gains

Industry Concentration Impact

AI investments contribute to industry concentration, with stronger benefits for larger firms and increased market share for industry leaders

AI Investment Impact on Firm Growth

  • One standard deviation increase in AI investments associated with 19.5% sales growth
  • Employment grows by 18.1%, showing AI complements rather than substitutes labor
  • Market valuations increase by 22.3%, reflecting investor confidence in AI strategy

Product Innovation Metrics

  • Trademarks increase by 13.4% for AI-investing firms
  • Product patents grow by 23.9%
  • Results indicate AI primarily drives product innovation rather than process efficiency

Industry-Level Impact

  • Industry-level sales increase by 17.3% and employment by 20.1%
  • Market concentration (HHI) rises by 1.2%
  • Top firm market share grows by 1.4%, indicating concentration effects

Contribution and Implications

  • First comprehensive study measuring firm-level AI investments using detailed employee and job posting data
  • Documents AI as a general purpose technology driving growth through product innovation rather than labor replacement
  • Shows AI contributes to industry concentration by favoring larger firms with data advantages
  • Provides evidence for policy discussions around AI adoption, data ownership, and market competition

Data Sources

  • Firm growth impacts based on Table 3 long-differences estimates
  • Product innovation metrics derived from Table 6 regression results
  • Industry-level effects from Table 9 showing changes in industry outcomes
  • All visualizations use standardized measures from 2010-2018 sample period