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TECHNOLOGY
Research: Cloud Computing Is
Helping Smaller, Newer Firms
Compete
by Nicholas Bloom and Nicola Pierri
AUGUST 31, 2018
ANSGAR SCHWARZ/EYEEM/GETTY IMAGES
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
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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.
These anecdotes suggest that cloud computing has “democratized computing” by bringing it to the
masses of firms. Our research confirms this intuition using a massive new dataset of over 1 million
U.S. firms since the 1980s. Specifically, we found three key results. First, cloud computing has seen
massive growth. Less than 0.5% of firms had adopted it in 2010, whereas 7% had by 2016, which is
an annualized growth rate of almost 50%. Second, the adoption of cloud computing has occurred
across the U.S., not just in one region — albeit with heaviest and earliest adoption in urban and
educated areas. But third, and most strikingly, cloud computing — unlike other technologies like PCs
and e-commerce — has been adopted first by smaller and younger firms.
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The dataset for our analysis comes from Aberdeen Information’s call center which has been making
annual phone calls to millions of firms across the U.S. since the 1980s. They painstakingly record the
hardware and software used by millions of firms per year back to 1981. This dataset is often used by
academic researchers because of its broad coverage and data quality. Surveys aren’t perfect, of
course, and one disadvantage of this data is that respondents have discretion over what they
consider to count as cloud computing. (Although many internet services these days involve
accessing your data from another company over the internet, for the purposes of this survey we
expect that firms are responding to a narrower use case: the use of specific enterprise cloud-hosting
services such as AWS, Microsoft Azure, Google Cloud Platform, IBM Cloud, Oracle, or Alibaba.) In
this paper we use the records from more than 150,000 U.S. firms with information on their adoption
of cloud computing.
The Adoption of Cloud Technology Across Industries in the U.S.
The chart below shows the rise of cloud computing since 2010, the first year the database started
recording this. 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.
Small, Young, and Cloudy
Our next chart is the most important. It shows that
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.
Indeed, adoption rates are lowest in firms with about 100 employees, perhaps because they have
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enough scale to adopt in-house computing systems but not enough scale to be able to afford both
those in-house systems and cloud services. The largest firms — those with 500 employees or more —
again see rising adoption rates, typically with 5% to 10% of firms adopting cloud computing.
This cloud “tick” also turns out to be surprisingly
robust. We see this across industries, firm types, and
years in our data. Small firms really do seem to be
the pioneers of cloud-computing adoption.
For contrast, we compared the adoption of cloud
computing to adoption rates for two other
technologies: personal computers (PCs) and ecommerce. These show the more classic pattern of
greater adoption by large firms. Cloud really does
stand out as being particularly attractive to the very
smallest firms.
But it’s not just small firms driving the adoption of
cloud computing. Young firms are adopting cloud
computing faster than older ones. So, the most
nimble, youthful, and entrepreneurial companies are the pioneers of adoption. Again, we did not
see that with other technologies — older firms tended to be the first adopters of PCs and ecommerce.
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.
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Flexible access to computing resources allows small
firms to scale-up (or down) rapidly and to
experiment with new products and features. This
operational agility can be particularly valuable when
facing uncertain demand or a fast-evolving
competitive environment. Recent evidence from
Kristina McElheran and Wang Jin shows that the
ability of “renting” IT resources has also aided young
firms to survive and increase productivity.
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.
(We 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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This article is about TECHNOLOGY

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2 COMMENTS
Shalabh Deepankar a year ago
The higher adoption of cloud computing by small and newer companies is because of its better security. Moreover,
the recurring nature of services such as training and education, installation, software upgrades, consulting, and
maintenance is also boosting the adoption. We @MarketsandMarkets have been researching on cloud computing
over a period. For instance, the global healthcare cloud computing market is projected to reach $44.93 Bn by 2023
from $19.46 Bn in 2018, at a CAGR of 18.2%. The market is majorly driven by factors such as increasing adoption of big
data, wearable devices, and IoT in healthcare; and advantages of cloud usage (such as improved storage, flexibility,
and scalability of data).
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