Nicholas Bloom’s New Research Shows Cloud Computing Is Helping Smaller Firms Compete

By TAP Staff Blogger

Posted on November 9, 2018


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Despite statistics suggesting a decline in U.S. dynamism, technology has been known to disrupt incumbents when they least expect it. Cloud computing may ultimately prove to be one of those disruptive forces.
   - from “Research: Cloud Computing Is Helping Smaller, Newer Firms Compete” by Nicholas Bloom and Nicola Pierri


New research conducted by Stanford economist Nicholas Bloom and doctoral candidate Nicolas Pierri shows unprecedented rates of adoption for cloud-based services. This is spreading computing capabilities to hundreds of thousands of firms across the nation. In “Research: Cloud Computing Is Helping Smaller, Newer Firms Compete,” Professor Bloom and Mr. Pierri summarize their research findings: The growing availability of convenient, seemingly endless cloud-based digital storage and services is “democratizing computing.”
 

Is digital technology a democratizing force, allowing smaller, newer companies to compete against giant ones? Or does it provide even greater advantage to incumbents? That question has gotten a lot of attention lately, in response to data showing that the rate of new business creation in the U.S. has slowed, and that in most industries the biggest firms have higher market share than they did a decade ago.
 

Despite those trends, our research suggests that technology can in fact provide an advantage to small and new firms. In recent research, we studied the adoption of cloud computing across U.S. businesses. Cloud computing is an IT paradigm based on remote access to a shared pool of computing resources. Putting data “in the cloud” essentially means paying someone else to manage it, and then connecting to their servers via the internet to access your data when you need it. It also means you don’t need to analyze these data on your own machines, but you can “rent” them on demand. The popularity of cloud computing has exploded during the last half a decade. By cutting the fixed costs of computing — avoiding the need to hire IT staff, servers, and hardware — even the smallest firm can satisfy large and unexpected computing needs.
 

For example, KenSci is a small Seattle-based healthcare analytics company, which uses machine learning techniques to analyze hundreds of variables about patients’ conditions to provide real-time predictions about mortality, readmissions, and other health-related risks. Relying on the cloud, KenSci has been able to quickly scale up and offer its services worldwide, without building a sizeable IT-infrastructure beforehand. The computational agility of cloud computing has been playing a role in manufacturing as well, fostering the creation of new “smart’” products. Pivothead is a firm with 25 employees producing wearable technologies to help the blind and visually impaired. Information collected by the wearable sensors are sent to the cloud, processed through machine learning algorithms, and transformed into speech or text, in order to help the client navigate the surrounding environment.
 

The Adoption of Cloud Technology Across Industries in the U.S.
 
  • We see cloud adoption rates rising from 0.3% in 2010 to 7% in 2016, which is a more than doubling every other year. Moreover, this rise has occurred in every broad industry group we studied, highlighting how the increase in cloud computing has spanned the U.S. economy.
  • Our research also shows the geographic spread of cloud computing, showing a broad adoption across U.S. counties. This is not just a technology used by hipster startups in New York and San Francisco — it’s being adopted all across the country. Every U.S. county we have data on has seen an increase in cloud computing since 2010.
  • The very smallest firms have the highest adoption rates. Firms with fewer than 25 employees have adoption rates of 10% to 15% on average, while medium-sized firms have lower adoption rates.
 

All of this suggests that cloud computing is an unusual technology that appeals to smaller, younger firms. We believe its ability to provide high-powered computing without the overhead costs associated with in-house software and hardware provision has driven this. In this sense cloud computing has spread computing out to the masses, democratizing computing.

 

These are encouraging findings, especially in light of the decline in business dynamism and the rate of new startup creation documented by John Haltiwanger and his colleagues. Although we don’t have data on how cloud computing affects firm performance, it’s not hard to imagine that lowering computing costs would substantially improve younger and smaller companies’ chances. Despite statistics suggesting a decline in U.S. dynamism, technology has been known to disrupt incumbents when they least expect it. Cloud computing may ultimately prove to be one of those disruptive forces.

 
Read the full article on the Harvard Business Review: “Research: Cloud Computing Is Helping Smaller, Newer Firms Compete.”
 
(The researchers thank Toulouse Network for Information Technology for funding for the data.)
 
Nicholas Bloom is the William Eberle Professor of economics at Stanford University and a codirector of the Productivity, Innovation and Entrepreneurship program at the National Bureau of Economic Research.
 
Nicola Pierri is a PhD candidate at Stanford University.
 

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