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The Economic Impact of Artificial Intelligence

Much of the media coverage of artificial intelligence (AI) has been focusing, rightly so, on the fantastic new possibilities enabled by empowered, human-like computers.
But beyond the headlines about smart mobile phones and driverless cars lies the impact that these emerging technologies will have on the economy and business. If the steam engine paved the way for the industrial revolution and electricity forever altered the modern factory, how will the era of AI affect output?
Productivity-creation technology
One study tackled this question straight on. Accenture, the US consultancy firm, estimated in 2016 that AI will be responsible for doubling the pace of growth in 12 developed countries between then and 2035.1
To put a value figure to this prediction, let’s consider the US case: Accenture forecasts the country’s gross value added (a similar measure to gross domestic product) will accelerate to 4.6% annual growth in 2035 from 2.6% now, creating an additional $8.31 trillion.
In the slow-growth environment of the post-crisis world, this is no small feat. How is it attainable?
Traditionally, Accenture says, capital and labor are the production factors that drive growth. New technological breakthroughs have historically enhanced total factor productivity (TFP), as was the case with electricity and railways.
However, Accenture says the scope of AI’s transformational power makes it not simply another driver of TFP, but an entirely new factor of production. After all, AI can improve labor activities, and even perform tasks beyond the capabilities of humans. Similarly, AI acts as physical capital in the form of robots, which, rather than depreciate, can actually teach themselves to upgrade over time.
21st century winners
So who is going to benefit from this added value and economic efficiency? Who are the owners of the steam engines and the power generators of the 21st century?
Tech giants including Google and Baidu are leading the way in AI investments. McKinsey has estimated that these companies invested between $20 billion and $30 billion in AI in 2016 alone.2 The expenditures augur that these firms will be those dominating revenues from the AI world.
Yet, technology companies are facing increasing competition from businesses covering the whole spectrum of industries. According to Recode,3 the top corporate investors in AI by number of deals include cable company Comcast, Spanish telecoms operator Telefonica, investment bank Goldman Sachs and power-to-finance holding company General Electric.
Google has recently labeled itself an ‘AI-first’ company, saying all of its core products will focus on machine learning and intelligent technology to enhance consumer experience. The company tops several lists of AI takeovers.
The rush to acquire AI know-how reflects the growing potential for the technology. Innovators such as Google are betting their AI software can run their own products, but that they will increasingly help manage other, very diverse companies.
Tractica, a market intelligence firm, forecast last December that annual worldwide software revenue from AI technologies will grow from $3.2 billion in 2016 to $89.8 billion by 2025.4 Businesses that adopt knowledge-based systems in their operations will accelerate sales and lower costs.
A new revenue source for chipmakers
Lately, investors have appraised the potential for semiconductor companies as providers of the processing power than enables AI technology. In the same way as PCs and smartphones, AI systems require computer power and memory to run.
UBS has forecast that the AI chip market will grow to $35 billion by 2021, up from about $6 billion in 2016, amid increasing demand for smart appliances and robots, the Investor’s Business Daily reported in November.5
The STOXX® Europe TMI Semiconductors index jumped 41% in 2017.
An algorithm to find the AI pioneers
To allow exposure to those companies that are specifically investing in AI, STOXX launched the STOXX® AI Global Artificial Intelligence Index on Jan.23. The index is the world’s first to use an AI-related algorithm to select companies exposed to AI patents.
For the selection of the index constituents, STOXX has partnered with Yewno, an award-winning AI company, which applied its knowledge-graph technology to assess companies’ intellectual property (IP). The key criterion is the identification of patent filings related to AI, which can indicate leading AI innovators as well as AI adopters.
The index currently counts AI leaders including Google’s parent Alphabet and Amazon.com as members. It also includes less expected names such as Wal-Mart Stores, JPMorgan Chase and Volkswagen.
Accessing the AI space via a passive investment gives investors a transparent and liquid vehicle that also offers diversification across regions and industries.
A new economic paradigm
It is difficult to forecast with precision what a disruptive technology like AI will bring, as the science of intelligent computer programs is evolving very rapidly, bringing up new possibilities all the time. But the educated consensus is that AI may be as transformational as anything we have experienced so far.
Countries and companies that are laying the groundwork in the field are likely to reap the most economic benefits from it.

Reuters

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