The Bright and Dark sides of AI-driven Transformation: Evidence from Italian firms

This study examines how firm-level Artificial Intelligence (AI) capabilities are associated with sustainability-oriented and efficiency-oriented innovation trajectories in AI-driven transformation. Combining survey data with LinkedIn information on AI-skilled employees, we construct an AI Capability Index that captures tangible, human, and intangible knowledge sources to define firmlevel AI capabilities. We find that stronger AI capabilities are associated with a higher likelihood of both brown and green innovation, but with different performance profiles over time. Brown innovation is linked to short-term efficiency gains, whereas green innovation is associated with more persistent improvement in productivity and revenue growth. We further find that the association between AI capabilities and innovation trajectories varies with government support: among firms with stronger AI capabilities, public support is more strongly associated with green innovation, whereas brown innovation is more frequently observed in lower-capability settings. Finally, firms with stronger AI capabilities in 2019 are substantially more likely to report AI adoption by 2023, consistent with path-dependent capability and adoption dynamics. Overall, the results suggest that AI capabilities and public support are jointly associated not only with whether firms innovate, but more importantly with the nature of AI-enabled innovation outcomes