Valuating AI breakthroughs for firms along the supply chain

This paper exploits the release of the DeepSeek R1 model as a breakthrough event of artificial intelligence (AI) to examine how such a breakthrough affects firms along the supply chain of AI. Using an event study approach, we find that AI algorithm firms responded negatively initially but positively eventually to the release, followed by upstream suppliers on computational and data infrastructure. Specifically, for algorithm competitors, the pattern of market reaction was exacerbated by AI large model (LM) developers. The AI infrastructure firms with a greater AI knowledge stock enjoyed a more positive reaction. The downstream firms applying AI in their businesses had the least positive reactions to the release, and such reactions critically depended on their investment in information technology (IT). Over the three quarters after release, upstream suppliers recorded higher growth in operating margin, R&D expenses and market valuation. These findings suggest that AI breakthroughs achieve widespread but heterogeneous impacts along the supply chain if related firms are actively involved in supporting and exploiting AI.