Software development and innovation: Exploring the software shift in innovation in Swedish firms.

• Firms that develop software show a higher likelihood of introducing innovations and higher innovation sales. • The link between innovation and software development is stronger for firms with in-house software developers than those that only use external developers. • We also find support for complementarity between software-based technology and human capital. A number of scholars and industry professionals have claimed that there has been 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. In this paper, 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 service industries. Furthermore, this positive relationship is stronger for firms that employ in-house software developers than for those that only use external developers, suggesting that there is a hierarchy but possibly also a complementarity between in-house 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 both STEM and other disciplines. [ABSTRACT FROM AUTHOR]