AI Investment and Firm Performance: Insights from China

Abstract

We study the implication of artificial intelligence (AI) adoption in emerging markets for firm performance. Leveraging China’s distinctive top-down AI incentive policies and highly digitalized, dynamic market environment, our study examines how AI investments affect firm outcomes. Using over two million job postings between 2016 and 2020, we construct a novel measure of AI exposure for a broad sample of Chinese publicly listed firms. We find substantially different AI investment patterns compared to more market-driven economies, with notably higher adoption rates in sectors such as manufacturing, services, and education. Integrating AI adoption measures with financial data from the China Stock Market & Accounting Research database and patent data from IncoPat, we find that a firm’s AI adoption ratio significantly increases revenue growth over five years: a one-standard-deviation increase in a firm’s AI hiring would lead to a 5.7% revenue growth, following a one-year lag. Our estimates suggest that this corresponds to an additional 531 million RMB (approximately 75 million USD) in revenue per firm. We perform further robustness checks, including a standard lead-lag model and an instrumental variable approach based on industry-level IT employment shifts and provincial government IT funding, and show our results are robust and causal. Interestingly, we find that the returns to AI investments vary significantly by industry and investment type. These sectors favored by government policies not only adopt AI more but also achieve the highest returns. Also, among all types of AI investments, applied AI demonstrates superior performance, while foundational AI investments show statistically insignificant effects on firm performance. We further identify key enablers and barriers to AI adoption in emerging markets. Firms led by a CTO or CIO and those located in regions receiving early-stage government AI funding gain substantially more from their AI investments. Finally, our results suggest that increased AI adoption is associated with enhanced innovation output and greater market concentration, suggesting far-reaching implications for China’s economic dynamics. Altogether, these findings shed light on the theoretical mechanisms underlying the effectiveness of AI adoption and provide practical guidance for policymakers and executives who seek to invest in AI to enhance firm productivity and accelerate innovation.

Keywords: AI Investment, Technology Exposure, Firm Performance, Innovation, Industry Dynamics

JEL Classification: D22, E22, J23, J24, L11, O33