Fact of the Week: Investing in AI Significantly Reduced Business Risk During the COVID-19 Pandemic
Source: Nick Drydakis, “Artificial Intelligence and Reduced SMEs’ Business Risks” (Institute of Labor Economics, February 2022).
Commentary: As market conditions evolve, dynamic business capabilities are essential to remaining competitive. Businesses with dynamic capabilities are able to adjust their resources to maintain competitiveness throughout continuously changing circumstances. Therefore, it should not come as a surprise that dynamic capabilities have proven critical for firm performance amid the COVID-19 pandemic, as many technological changes and market constraints arose. A recent paper from the Institute of Labor Economics (IZA) found that an important way businesses built dynamic capabilities to withstand the economic shock brought by the pandemic was adopting artificial intelligence applications.
Analyzing data on business-reported risk induced by COVID-19 from the International Labor Organization (ILOSTAT) and on application usage data from the ORBIS database, economists at IZA found a negative and statistically significant relationship between the use of AI applications and business risks faced during the COVID-19 pandemic. Regression analysis of the merged data showed that an increase of one standard deviation in the use of AI applications is associated with a 3.1 to 3.8 percent decline in business risks caused by the pandemic among small- and medium-sized enterprises. Among just medium-sized firms, an increase of one standard deviation in the use of AI applications is associated with a 9.2 percent reduction in business risks due to the pandemic. This analysis corroborates previous literature finding that AI implementation increases efficiencies by building firms’ dynamic capabilities to respond to markets where technological changes become more frequent. Further, their evidence shows that AI adoption benefits from economies of scale, while still offering benefits to smaller firms. Industry leaders seeking to build business resilience amid turbulent markets should recognize the advantage investing in AI presents for reducing risk.