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Artificial intelligence (AI) has greatly increased firms’ capacity to translate business functions into code, transforming industries and markets and changing the rules of competition in the process. It has facilitated firm innovation by making it possible to manage – create, retain, recombine, and transfer – knowledge in new ways. This paper proposes and empirically examines both the direct and indirect effects of AI innovation capabilities on firm innovation performance, i.e., the direct effect of AI on AI-enabled innovations and its indirect effect on non-AI innovations through spillover effects, as well as how both effects are shaped by pertinent AI regulations. Evidence from the U.S. medical device industry from 2010 to 2020 shows that AI adoption indeed positively influences firm innovation performance both directly and through spillover effects, and that AI regulation reinforces this positive relationship. The findings further …