Measuring the prevalence and direction of innovation: a pilot approach using LLMs

This paper pilots a method for measuring firms’ product and process innovation at scale. Our approach uses LLMs to complete a detailed innovation survey for a sample of 600,000 companies operating across 40 countries. The preliminary results contain 6 million individual instances of innovative activity along with rich textual descriptions. These responses carry signal, for example a one-standard-deviation increase in a firm’s product innovation index is associated with a 5% higher measured TFP residual. The data reveal that innovation is widespread: two-fifths of companies engage in product innovation and one-quarter in process innovation, far exceeding the share of patenting firms. Firms are more likely to have labor-augmenting than labor-saving introductions, while about 14% have green product innovation and 12% have green process innovation. Greenness and net labor augmentation are positively associated across countries. Beyond our specific application, this paper illustrates the potential for using LLMs to generate survey-level insights at population scale.