We examine the rise of cloud computing and AI in China and its impact on industry dynamics. We find that industries that depend more on cloud infrastructure experience a higher increase in firm entry and exit after cloud computing expands in China. The positive relation with firm exit is driven by the increased exit through business failure and adjustments. We also compare cloud computing to artificial intelligence (AI) and show a differential effect of these technologies on exit. For AI, larger incumbents are less likely to exit. M&A is also more likely for cloud computing but not for AI. Concentration decreases post-cloud computing expansion but increases post-AI. These findings point to changes in competition from new technologies but with differential effects based on which types of firms are likely to adopt new technologies.

Large technology firms have substantial advantages in data, a key non-rival input for developing AI technology. We argue that investments by large technology firms stimulate innovation by AI startups through the sharing of data, bringing more than money to the startups. We assemble a unique dataset containing (nearly) the universe of AI-inventing firms in China to examine the innovation effects of these investments. Our difference-in-differences estimation shows that, after receiving investments from large technology firms, AI startups increase the number of AI patent applications by 62% and the number of software products by 56%, relative to their mean values prior to the investments. Using a triple-differences strategy, we further find that the innovation impact of investments by large technology firms is stronger than that of investments by other firms without data advantages. We confirm these findings using an instrumental variables approach based on recent investments by large technology firms in peer startups. Finally, we provide novel evidence that the innovation effect works mainly through sharing non-rival data by leveraging our rich information on non-AI data-related patent applications and data-related online job postings.