The innovation payoff of AI in production: evidence from German manufacturing

This study examines the relationship between the implementation of artificial intelligence (AI) in production processes and product innovation outcomes in manufacturing firms. It contributes to the literature by providing empirical evidence on the role of AI in innovation while accounting for firm-level heterogeneity in established innovation drivers, including R&D intensity, workforce qualifications, human-centric practices, and structural characteristics. Using data from 1,334 firms in the 2022 German Manufacturing Survey, we find that AI implementation in production is positively associated with innovation-enhancing processes that complement existing organisational resources and capabilities. However, this relationship is limited to product innovations that are new to the firm and does not extend to innovations that are new to the market. Furthermore, distinguishing between product innovation types relevant to the twin transition, we find that AI implementation is primarily associated with a higher likelihood of digital product innovations, whereas eco-oriented product innovations are more strongly linked to the adoption of human-centric practices. These findings suggest that AI in production should be viewed not merely as an operational technology but as a strategic capability whose innovation potential depends on its integration with complementary organisational resources and capabilities.