How APIs Create Growth by Inverting the Firm

59 Pages Posted: 16 Aug 2019 Last revised: 9 Aug 2021

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

How might technology increase firm value? One method might be to facilitate more efficient use of internal capital. Another method might be to help the firm tap third party capital. This paper uses four unique data sets to measure growth in firm value based on adoption of Application Programming Interfaces (APIs), a technology that lets firms modularize and reconfigure resources for internal use or expose them to third parties for external use. The latter includes apps and services of the platform economy. We perform difference-in-difference and synthetic control analyses of financial outcomes for public firms and find that adopters of externally facing APIs grew an additional 38% over 16 years relative to non-adopters. Internal use cases were inconclusive. Using proprietary data on private APIs, we find that firms with public APIs grew faster after adoption than firms with private APIs. Then, using a Tobin's Q framework, we measure whether API adopting firms grew by lowering capital adjustment costs. Consistent with an inverted firm hypothesis, where value creation moves from inside to outside, we find that using the technology for external value creation explains more firm growth than using it for internal value creation. Finally, we document an important downside of API adoption: increased risk of data breach. Together these facts lead us to conclude that APIs, as the foundation of digital ecosystems, have a large and positive impact on economic growth and do so primarily by enabling external complementors rather than boosting internal productivity.

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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