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CEP discussion paper
Data-intensive innovation and the State: evidence from AI firms in China
Martin Beraja, David Y. Yang and Noam Yuchtman
March 2021
Paper No' CEPDP1755:
Full Paper (pdf)

JEL Classification: O30; P00; E00; L5; L63; O25; O40

Tags: data; innovation; artificial intelligence; china; economies of scope; directed technical change; industrial policy; privacy; surveillance

Artificial intelligence (AI) innovation is data-intensive. States have historically collected large amounts of data, which is now being used by AI firms. Gathering comprehensive information on firms and government procurement contracts in China’s facial recognition AI industry, we first study how government data shapes AI innovation. We find evidence of a precise mechanism: because data is sharable across uses, economies of scope arise. Firms awarded public security AI contracts providing access to more government data produce more software for both government and commercial purposes. In a directed technical change model incorporating this mechanism, we then study the trade-offs presented by states’ AI procurement and data pro-vision policies. Surveillance states’ demand for AI may incidentally promote growth, but distort innovation, crowd-out resources, and infringe on civil liberties. Government data provision may be justified when economies of scope are strong and citizens’ privacy concerns are limited.