How APIs Create Growth by Inverting the Firm

Seth G. Benzell (), Jonathan Hersh () and Marshall Van Alstyne ()
Additional contact information
Seth G. Benzell: Argyros School of Business and Economics, Chapman University, Orange, California 92866; Stanford Human-centered Artificial Intelligence Digital Economy Laboratory, Stanford, California 94305; Massachusetts Institute of Technology Initiative on the Digital Economy, Massachusetts 02215
Jonathan Hersh: Argyros School of Business and Economics, Chapman University, Orange, California 92866
Marshall Van Alstyne: Massachusetts Institute of Technology Initiative on the Digital Economy, Massachusetts 02215; Questrom School of Business, Boston University, Boston, Massachusetts 02215

Management Science, 2024, vol. 70, issue 10, 7120-7141

Abstract: Traditional asset management strategy has emphasized building barriers to entry or closely guarding unique assets to maintain a firm’s comparative advantage. A new “inverted firm” paradigm, however, has emerged. Under this strategy, firms share data seeking to become platforms by opening digital services to third parties and capturing part of their external surplus. This contrasts with a “pipeline” strategy where the firm itself creates value. This paper quantitatively estimates the effect of adopting an inverted firm strategy through the lens of application programming interfaces (APIs), a key enabling technology. Using both public data and those of a private API development firm, we document rapid growth of the API network and connecting apps since 2005. We then perform difference-in-difference and synthetic control analyses and find that public firms adopting public APIs grew an additional 38.7% over 16 years relative to similar nonadopters. We find no significant effect from the use of APIs purely for internal productivity: the pipeline strategy. Within the subset of firms that adopt public APIs, those that attract more third-party complementors and those that become more central to the network see faster growth. Using variation in network centrality caused by API degradation, an instrumental variables analysis confirms a causal role for APIs in firm market value. Finally, we document an important downside of public APIs: increased risk of data breach. Overall, these facts lead us to conclude that APIs have a large and positive impact on economic growth and do so primarily by enabling an inverted firm strategy.

Keywords: platforms; digital platform; API; application programming interface; inverted firm; open innovation; network effects; digital strategy; data breach; business ecosystem; market capitalization (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2023.4968 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:10:p:7120-7141

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().