Harnessing the Power of AI in RD&E Management: The Innovation Index

This paper investigates the complex relationship between AI-related technological innovation and its impact on the market returns of leading technology companies. We introduce the “Innovation Index”, a latent variable based on the number of AI-related patents, and incorporate it into the traditional Fama-French model to better capture the influence of AI advancements on financial performance. Using a state-space representation, our empirical analysis suggests that AI-related innovation significantly contributes to the market returns of prominent and leading technology firms. The findings highlight the strategic importance of AI investments in sustaining long-term growth and competitiveness.