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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

Background and Context

Research Question

The study examines whether artificial intelligence (AI) can transform economies and spur economic growth by analyzing how firms invest in and benefit from AI technologies.

Methodology

The researchers develop a novel measure of firm-level AI investments using employee resumes from Cognism (535 million profiles) and job postings from Burning Glass (180 million vacancies).

Data Coverage

The study analyzes U.S. public firms between 2010-2018, excluding tech sector companies to focus on AI adoption rather than AI development.

Dramatic Increase in AI Investment Across Industries (2007-2018)

  • AI worker share grew more than sevenfold from 0.04% in 2007 to 0.29% in 2018
  • Growth accelerated particularly after 2014
  • Based on actual employee resume data from Cognism

AI Investment Drives Significant Firm Growth (2010-2018)

  • One standard deviation increase in AI investment associated with:
  • 19.5% increase in sales
  • 18.1% increase in employment
  • 22.3% increase in market valuation

Larger Firms Benefit More from AI Investment

  • Large firms see 22.3% sales growth from AI investments
  • Medium-sized firms achieve 21.9% growth
  • Small firms only see 4.6% growth
  • Suggests AI technologies have significant scale advantages

AI Drives Growth Through Product Innovation

  • 13.4% increase in new trademarks
  • 23.9% increase in product patents
  • Only 1.4% increase in process patents
  • Shows AI primarily drives growth through new product development rather than efficiency gains

AI Investment Increases Industry Concentration

  • Industries with higher AI adoption show 17.3% higher sales growth
  • 20.1% higher employment growth
  • 1.2% increase in industry concentration (HHI)
  • 1.4% increase in market share of top firms

Contribution and Implications

  • First comprehensive study measuring AI adoption across broad range of industries using detailed firm-level data
  • Shows AI primarily drives growth through product innovation rather than cost reduction or automation
  • Reveals AI contributes to industry concentration by favoring larger firms with more data resources
  • Suggests policy implications for data ownership and industry competition in the AI era

Data Sources

  • AI Growth Chart: Based on Figure 1 Panel (a) showing resume-based measure of AI workers
  • Firm Growth Chart: Based on Table 3 showing long-differences estimates of AI investments impact
  • Size Effect Chart: Based on Table 4 showing heterogeneous effects by initial firm size
  • Innovation Chart: Based on Table 6 showing product innovation measures
  • Industry Concentration Chart: Based on Table 9 showing industry-level outcomes