15 July 2020

Cloud Computing and Firm Growth

Cloud technology makes IT equipment more accessible to firms and facilitates a remote and mobile workforce. The authors analyze newly available data at the company level for the United Kingdom. They find that the use of cloud technology enables companies to grow faster, particularly those in the start-up phase. Cloud also allows older established companies to reorganize and allocate employment away from the headquarters. High-speed fiber broadband is an important prerequisite for both new and established companies to successfully implement cloud solutions.

Key Issue

Over the past decade, a fundamental shift has occurred in the way firms access digital technologies. Traditionally, adopting information and communication technologies (ICT) required upfront, sunk investments in hardware and software for their IT departments. Now, firms can acquire their storage, processing, and software needs as a cloud computing service. Cloud providers offer such services “on demand” via “pay as you go” subscriptions, accessible on multiple devices in multiple locations.

Purchased in this way, ICT shifts from a centralized sunk cost to a largely variable cost, with services available everywhere. It offers an advantage for young firms innovating new products and services, as they can scale operations quickly. Incumbent firms, in contrast, have faced challenges in migrating legacy software systems on to the cloud, reducing its benefits. .

Approach and Methodology

This paper uses newly available data for the UK that captures the timing of adoption of cloud services by firms, along with the types of cloud services used (including data and storage, computing, email, etc.). Firm-level measures of cloud adoption have not previously been available to researchers on this topic.

The paper measures the causal effect of cloud adoption using postcode-level differences in the availability and expected speeds of high-speed fiber broadband – a technological prerequisite for firms adopting the cloud. A stable, high-speed broadband connection is required to allow the large flows of data between the cloud service providers and users.

Key Findings and Conclusions

The results suggest differential impacts of cloud adoption for younger and incumbent firms. Cloud technologies enable young firms particularly to grow in scale (measured in terms of employment or sales). Incumbents use the technology to reorganize, reduce their costs, and geographically disperse activity away from the headquarters. Cloud also enhances worker mobility, resulting in the firm reorganizing production in a way that moves workers across establishments.

This evidence suggests cloud is distinct from earlier IT technologies, which reinforced the scale advantages of incumbents. At the same time, cloud also decentralizes data availability throughout the firm, similar to previous waves of ICTs such as Enterprise Resource Planning software.