The Effect of Robot Adoption on Profit Margins

Abstract

In this article, we examine the relationship between the degree of robot adoption and profit margins at countryindustry level for 25 European Union countries during the 19952017 period. We find evidence of a negative and U-shaped relationshiprobot adoption is negatively associated with profit margins, up to a point, before displaying a positive relationship upon a further increase in robot adoption. We suggest that this is caused by robots affecting the industry's product life cycle on the one hand, and how firms select competitive strategy, on the other. At low levels of robot adoption, firms use robots to reduce costs via process innovation; at high levels of robot adoption, the technology is applied to increase revenue via product innovation. These mirror cost leadership and market differentiation, respectively, in Porter's competitive strategy theory. We conducted markup-based analysis to provide further support for our explanation of the observed U-shaped relationship, as well as corroborating evidence from interviewing a major medical equipment manufacturer in the United States. By viewing robots as an emerging advanced manufacturing technology in the process of displacing more traditional manufacturing methods, we bring together the theories of technological transition, the product life-cycle model of dominant design, and Porter's competitive strategy in the context of robot adoption, with implications for both theory and practice.