Investments and Innovation with Non-Rival Inputs: Evidence from Chinese Artificial Intelligence Startups

Abstract

We examine the effect of investments by large technology firms on innovation by AI startups. Large technology firms have substantial advantages in data, a key non-rival input for developing AI technology. However, the success of innovation by AI startups may cannibalize large technology firms' business. We develop a model to show the scenarios where data synergies outweigh competition concerns. For empirical analysis, we assemble a unique dataset containing (nearly) the universe of AI-inventing startups in China. Our difference-in-differences estimation shows that AI startups increase the number of AI patent applications by 62% and the number of software products by 56% after receiving investments from large technology firms. Using a triple-differences strategy, we further show that the innovation effect of investments by large technology firms is stronger than that of investments by other firms without data advantages. Finally, we provide novel evidence that the innovation effect works mainly through sharing non-rival data.

Keywords: Innovation, Investments, Artificial Intelligence, Non-Rival Inputs, Data Sharing

JEL Classification: O30, G20, M13, L20, L63