116 / 2024-04-20 20:02:31

A Curvilinear Impact of Artificial Intelligence Implementation on Firm’s Total Factor Productivity

artificial intelligence,productivity,digital infrastructure,business diversification,demand uncertainty

The impact of Artificial Intelligence (AI) on firm performance is a key emerging issue in both practice and research. However, discussions surrounding the effect of AI on productivity are enshrouded in a paradoxical quandary. This study examines the relationship between AI implementation and Total Factor Productivity (TFP), considering moderation by digital infrastructure, business diversification, and demand uncertainty. Using data from 2155 Chinese firms over 2016-2021, our empirical analysis reveals a nuanced pattern: while moderate AI adoption enhances productivity, excessive implementation yields diminishing returns. The curvature of this inverted U-shaped relationship flattens with higher levels of digital infrastructure investment in firms but steepens when firms undertake diversified business operations and face heightened demand uncertainty. This result suggests that the impact of AI on productivity is not universally beneficial, and the relationship between AI and productivity varies across different contexts. These findings provide an explanation for the "Modern Productivity Paradox" and furnish invaluable guidance on how firms can strategically implement AI to maximize its value.