Van Alstyne, MarshallBenzell, SethHersh, Jonathan2024-08-072024-08-072023-12-07M. Van Alstyne, S. Benzell, J. Hersh. 2023. "How APIs Create Growth by Inverting the Firm" Management Science.0025-1909https://hdl.handle.net/2144/49131Traditional 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% over sixteen years 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 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.This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. You are free to download this work and share with others for any purpose, even commercially if you distribute your contributions under the same license as the original, and you must attribute this work as “Management Science. Copyright © 2023 The Author(s). https://doi.org/10.1287/mnsc.2023.4968, used under a Creative Commons Attribution License: https://creativecommons.org/licenses/by-sa/4.0/.https://creativecommons.org/licenses/by-sa/4.0/Platforms, APIs, information security, technology strategy, market capitalizationInformation and computing sciencesCommerce, management, tourism and servicesOperations researchEconomicsArticle2023-02-030.1287/mnsc.2023.4968791554