Software is at the core of digitalisation and is often claimed to play a central role in innovation and in shaping competition across industries and firms. There are yet few studies of the extent and nature of software development across firms. We employ a unique firm-level survey comprising 3,929 firms across Sweden to analyse the distribution and characteristics of firms that invest in software development and the orientation of their investments. The results confirm that software development activities are present in most industries, but heterogeneously distributed across firms. Internal software development is associated with innovation-oriented large firms in high-tech and knowledge-intensive industries, and is often affiliated with MNEs. The results suggest that software development is comparable to R&D investments and constitutes an example of digital innovation. This strengthens the value of studying software development activities to understand how firms invest in and build competitive advantage in the digitalised economy. © 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.

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. © 2021