Abstract

The lure of artificial intelligence (AI) has increased with its accessibility and sophistication, leading firms to explore the use of AI as a way to increase productivity. This paper studies the impact of AI investment on firm growth and the sensitivity of this relationship to labour market conditions. Using the generalised method of moments (GMM) estimation on 1,950 unique American firms over 1996-2016, we show that a 10% increase in AI investment leads to an increase in firm growth by 0.04%. However, this result is highly sensitive to labour market conditions, as labour productivity can positively impact firm growth, but labour cost and labour share negatively influence firm growth. These results offer original insights into an essential channel via which investment in AI may mediate firm growth.