Software Development and Innovation – Exploring the Software Shift in Innovation in Swedish Firms

Several scholars as well as industry professionals have claimed that there is a “software-biased shift” in the nature and direction of innovation in that software development is a core part of innovation activities in firms across a wide array of industries. Empirical firm-level evidence of such a shift is still scant. We employ new and unique firm-level survey data on the frequency and nature of software development among firms in Sweden, matched with the Community Innovation Survey (CIS). We find robust evidence supporting a software-bias in innovation in that software development is associated with a higher likelihood of introducing innovations as well as higher innovation sales among firms in both manufacturing and services industries. Furthermore, this positive relationship is stronger for firms employing in-house software developers than for those that only use external developers, suggesting that there is a hierarchy but possibly also a complementarity between internal and external software development. We also find support for complementarity between software-based technology and human capital; the estimated marginal effect of software development on innovation is particularly strong for firms that combine in-house software development with a highly educated workforce in STEM as well as in other disciplines.