How APIs Create Growth by Inverting the Firm

63 Pages Posted: 16 Aug 2019 Last revised: 27 Jul 2022

See all articles by Seth Benzell

Seth Benzell

Chapman University - The George L. Argyros School of Business & Economics; MIT Initiative on the Digital Economy; Stanford University, Human-Centered Artificial Intelligence Digital Economy Lab

Jonathan Samuel Hersh

Chapman University - The George L. Argyros School of Business & Economics

Marshall W. Van Alstyne

Boston University – Questrom School of Business; Massachusetts Institute of Technology (MIT) - Sloan School

Guillermo Lagarda

Global Development Policy Center Boston University

Date Written: August 5, 2019

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 that 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% relative to similar non-adopters. 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 external API adoption: 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 as opposed to pipeline strategy.

Keywords: Platforms, APIs, Information Security, Technology Strategy, Market Capitalization

JEL Classification: D24, D85, O3, O32, L11, L22, L32, M15

Suggested Citation

Benzell, Seth and Hersh, Jonathan Samuel and Van Alstyne, Marshall W. and Lagarda, Guillermo, How APIs Create Growth by Inverting the Firm (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3432591 or http://dx.doi.org/10.2139/ssrn.3432591

Seth Benzell (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

MIT Initiative on the Digital Economy ( email )

245 First Street
Cambridge, MA 02142
United States

Stanford University, Human-Centered Artificial Intelligence Digital Economy Lab ( email )

Stanford, CA 94305
United States

Jonathan Samuel Hersh

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://jonathan-hersh.com

Marshall W. Van Alstyne

Boston University – Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-3571 (Phone)

HOME PAGE: http://questromapps.bu.edu/mgmt_new/Profiles/VanAlstyneMarshall.html

Massachusetts Institute of Technology (MIT) - Sloan School ( email )

Initiative on the Digital Economy
245 First St, Room E94-1521
Cambridge, MA 02142
United States
617-253-0768 (Phone)

HOME PAGE: http://web.mit.edu/marshall/www/home.html

Guillermo Lagarda

Global Development Policy Center Boston University ( email )

53 Bay State Road
Boston, MA 02215
United States

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