How APIs Create Growth by Inverting the Firm
63 Pages Posted: 16 Aug 2019 Last revised: 27 Jul 2022
Date Written: August 5, 2019
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
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