How APIs Create Growth by Inverting the Firm

Traditional asset management strategy has focused on creating barriers to entry and protecting proprietary assets to maintain competitive advantage. A new “Inverted Firm” paradigm has emerged in which firms share data to become platforms, opening digital services to third parties and capturing part of the external value they generate. This stands in contrast to the traditional pipeline model where firms create value internally.

This paper quantitatively evaluates the impact of adopting an inverted firm model by examining Application Programming Interfaces (APIs), a critical enabling technology. Using both public data and proprietary data from a private API development firm, the authors document rapid growth of the API ecosystem and the expansion of app connectivity since 2005.

Using difference-in-differences and synthetic control techniques, the paper finds that:

• Public firms adopting public APIs grew 38.7% more than comparable non-adopters.
• No significant productivity gains are seen for firms using APIs solely for internal processes.
• Among adopters, those attracting more third-party complementors and gaining greater network centrality experience faster growth.

Leveraging variation in network centrality induced by API degradation, an instrumental variables analysis provides causal evidence of the role APIs play in boosting firm market value.

However, the study also identifies a key downside: external API adoption increases vulnerability to data breaches.

Overall, the findings suggest that APIs significantly and positively influence economic and firm-level growth, primarily through enabling an inverted firm model rather than enhancing traditional pipeline operations.