Do Capital Incentives Distort Technology Diffusion? Evidence on Cloud, Big Data and AI

Investment Rating - The report does not explicitly provide an investment rating for the industry under study Core Insights - Capital incentive policies in OECD countries, while aimed at promoting IT capital investment, may inadvertently hinder the adoption of cloud computing, big data analytics, and AI technologies [4][10][15] - The introduction of the Annual Investment Allowance (AIA) in the UK served as a quasi-natural experiment, revealing that while it increased IT capital investment by 61.7% from 2007 to 2013, it simultaneously reduced cloud adoption by 17 percentage points compared to the average cloud adoption rate of 28% during the same period [13][14] - The AIA's negative impact on technology diffusion was particularly pronounced for small and medium-sized enterprises (SMEs), which were found to be 37% less likely to adopt cloud technologies due to the capital incentive [14][15] Summary by Sections Introduction - The report discusses how capital incentives can shape production technology and the unintended consequences these policies may have on technological change [8][9] Policy Analysis - The AIA was introduced to stimulate investment in tangible capital, including IT capital, but has been shown to distort the choice between investing in IT capital and adopting cloud services [12][22] Empirical Findings - The empirical analysis indicates that the AIA led to a significant increase in tangible capital investment but a decrease in the adoption of cloud technologies, big data analytics, and AI [13][15] - The report estimates that the AIA policy reduced overall cloud use in the UK by 7-9 percentage points, effectively slowing cloud diffusion by more than one year [13][15] Technology Adoption - The findings suggest that the AIA also lowered the likelihood of using big data analytics and AI by 18% and 3%, respectively, among treated firms [15][16] - The report highlights that the demand for data analytics workers decreased by approximately 1.1% in firms affected by the AIA, indicating a direct link between capital incentives and labor demand in data-intensive roles [16][19] Conclusion - The report concludes that capital incentive policies can inadvertently affect the direction of technological adoption, leading to outcomes that contradict their intended objectives [18][20]