How APIs Create Growth by Inverting the Firm

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