Migration to Open-Standard Interorganizational Systems: Network Effects, Switching Costs, and Path Dependency

This study examines firms’ migration across interorganizational systems (IOS) that are built on standards with relatively different degrees of openness. As firms seek to improve inter-firm coordination using network technologies, open standards are becoming increasingly important. To better understand the process of standards diffusion, we investigate the migration from relatively less open IOS (i.e., electronic data interchange or EDI) to open-standard IOS (i.e., the Internet). Viewing the decision to adopt openstandard IOS in economic terms (benefits vs. costs), we develop a conceptual model of open-standard IOS adoption that features network effects, expected benefits, and adoption costs as prominent antecedents. Theoretical work in economics suggests that network effects are a determinant of network adoption, yet the extant literature falls short of empirical testing of the theory. We examine our conceptual model on a large dataset of 1,394 firms. The empirical results demonstrate that network effects are a significant driver of migration to open-standard IOS. We also find that the effect of adoption costs is different for firms that are migrating from EDI (significantly negative) and firms that are not (no effect). While this finding may sound counter-intuitive, it illustrates the subtle role of path dependency in standards migration. Experience with older standards may keep the firm “trapped” and make it difficult to shift to open and potentially better standards. Our work also teases out finer-grained relationships such as the positive impact of trading community on the strength of network effects, and the importance of managerial complexity as a key determinant of adoption costs. Relative to the extant literature, this paper focuses on adoption of an open-standard network with broader impacts on value chain activities (compared to EDI networks), and with a wider scope of partner efforts involved in establishing network effects (compared to systems such as automated teller machine networks). Overall we believe that this study, based on a rigorous empirical analysis of a unique international dataset, provides valuable insights into a set of key factors that influence standards diffusion.