Abstract

Artificial intelligence (AI) may influence economic performance through productivity, innovation, and the diffusion of advanced technologies, but direct country-level measures of AI adoption remain limited for small economies. This study examines the association between AI-related technological capability and economic growth in Cyprus. The descriptive analysis covers 1993–2024, while the econometric analysis uses the common annual sample for 2008–2024 after introducing one-period lags. High-technology exports as a percentage of manufactured exports are treated as an indirect indicator of technological sophistication and absorptive capacity, rather than as a direct measure of AI adoption. A sequential distributed lag ordinary least squares framework introduces current and lagged high-technology exports, merchandise trade, and inflation, with heteroskedasticity-consistent HC3 standard errors. A COVID-19 indicator for 2020–2021 and an observation-exclusion sensitivity analysis are used to assess the influence of exceptional pandemic-era movements. The preferred specification explains a substantial share of annual GDP growth variation, but the small sample requires cautious interpretation. The estimates indicate a positive contemporaneous and a negative lagged association for high-technology exports, a stronger lagged than contemporaneous trade association, and opposite-signed current and lagged inflation coefficients. The COVID-19 indicator is statistically insignificant and does not materially alter the principal coefficient pattern. Complementary DESI, Eurostat enterprise AI use, and ICT employment indicators show that Cyprus has broadly adequate digital inputs while enterprise AI adoption has not yet reached the European Union average, indicating considerable scope for further diffusion. The findings are exploratory statistical associations and do not identify causal effects of AI. The study contributes a country-specific macroeconomic assessment of technological capability, digital readiness, and growth in a small, highly open economy.

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