AI-Driven Productivity Gains: Insights from European Companies

Published Date : 06/01/2025 

As the UK aims to enhance productivity through increased public and business investment, this article explores how Artificial Intelligence (AI) can play a crucial role in helping firms improve their performance and narrow the productivity gap. 

As the United Kingdom seeks to boost productivity through greater public and business investment, the role of Artificial Intelligence (AI) in enhancing firm performance is becoming increasingly significant.

In a conversation with Dr.

Larissa Marioni, Principal Economist at the National Institute of Economic and Social Research (NIESR), we delve into how AI innovation can bridge the productivity gap between leading and lagging firms in Europe.

The productivity slowdown since the 2008/09 financial crisis has led to a widening gap between leading and lagging firms.

A key factor in this trend is the difficulty faced by lagging firms in keeping up with the technological advancements adopted by market leaders.

The Fourth Industrial Revolution, driven by digital technologies and AI, has brought a transformative shift in productive and organizational practices.

How AI Innovation Influences ProductivityOur research, which uses firm-level data from 15 European countries, examines the productivity effects of AI innovation.

The study measures AI innovation through patenting success in AI fields.

The findings indicate that AI innovation is directly associated with productivity gains, ranging from 6% to 17%.

This is gauged through a difference-in-differences analysis, where the performance of AI firms is compared with that of similar firms without AI innovation.

Benefits for Firms Further from the Productivity FrontierWhile leading firms benefit significantly from AI, our study also shows that firms further from the productivity frontier can gain from AI innovation.

Using a Distance-to-Frontier (DTF) analysis, the results reveal that the benefits of AI innovations are proportional to a firm’s distance from the technological frontier.

For lagging firms, the direct impact of AI ranges from 2% to 6%, while indirect effects are more modest, between 0.3% and 0.7%.

By developing AI technologies, lagging firms can enhance their capabilities and narrow the gap with leading firms, suggesting that AI may act as an equalizing technology.

Policy ImplicationsThe findings from our research highlight the substantial promise of AI in increasing firm productivity.

However, targeted policy measures can further enhance this potential.

Policymakers aiming to leverage AI for economic growth should consider the following strategies - Increasing Investments in AI Research Supporting research and development in AI can foster innovation and technological advancements.- Expanding Access to Digital Infrastructure Enhancing digital infrastructure can make AI more accessible to a wider range of firms.- Fostering Collaboration Encouraging collaboration between universities and Small and Medium Enterprises (SMEs) in AI and related technologies can facilitate knowledge sharing and technology transfer.- Implementing Targeted Training Programs Training programs can make AI more accessible to firms beyond the leading frontier.

For firms further from the productivity frontier, policies aimed at facilitating AI development can help build capacity for knowledge absorption and technology transfer from leading firms.

This is particularly important for countries like the UK, where many businesses are slow to adopt advanced technologies.

Our findings suggest that AI has the potential to act as a General Purpose Technology (GPT), creating opportunities for productivity improvements across the economy.

ConclusionTargeted policies supporting AI can not only enhance firm-level productivity but also address the broader trend of declining productivity in Europe.

These policies would help create a more level playing field, stimulate innovation across sectors, and ensure Europe remains competitive in the evolving digital economy.

Our research, detailed in the paper 'Productivity performance, distance to frontier and AI innovation Firm-level evidence from Europe,' underscores the transformative potential of AI in driving economic growth and narrowing the productivity gap.

--- About NIESR The National Institute of Economic and Social Research (NIESR) is an independent research institute focused on economic and social policy.

It provides evidence-based research and analysis to inform policymakers and the public on a wide range of economic and social issues. 

Frequently Asked Questions (FAQS):

Q: What is the productivity slowdown and how does it relate to AI?

A: The productivity slowdown since the 2008/09 financial crisis has led to a widening gap between leading and lagging firms. AI can help bridge this gap by enhancing technological capabilities and operational efficiency.

Q: How does AI innovation contribute to productivity gains?

A: AI innovation, measured through patenting success, is directly associated with productivity gains, ranging from 6% to 17%. This is determined through a difference-in-differences analysis comparing AI firms with non-AI firms.

Q: Can firms further from the productivity frontier benefit from AI?

A: Yes, firms further from the productivity frontier can benefit from AI. The direct impact of AI for these firms ranges from 2% to 6%, while indirect effects are more modest, between 0.3% and 0.7%.

Q: What policy measures can support AI adoption and innovation?

A: Key policy measures include increasing investments in AI research, expanding access to digital infrastructure, fostering collaboration between universities and SMEs, and implementing targeted training programs.

Q: Why is AI considered a General Purpose Technology (GPT)?

A: AI is considered a General Purpose Technology (GPT) because it has the potential to create opportunities for productivity improvements across various sectors and firms, contributing to broader economic growth. 

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