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

Kevin Zhu, Graduate School of Management - University of California, Irvine, Kenneth L. Kraemer, Graduate School of Management - University of California, Irvine, Vijay Gurbaxani, Graduate School of Management - University of California, Irvine, and Sean Xu, Graduate School of Management - University of California, Irvine

5/09/2008
(Original Publish Date: 6/1/2005)

The phenomenon of interest in this study is organizational migration across interorganizational systems (IOS) that are built on standards with relatively different degrees of openness. As firms increasingly seek to improve inter-firm coordination through the use of network technologies, open standards are becoming increasingly important. To better understand the process of standards diffusion, this study investigates the migration to open-standard IOS (i.e., the Internet) from relatively less open IOS (i.e., electronic data interchange or EDI). Viewing the decision to adopt open-standard IOS in terms of its benefits and costs, we develop a model of open-standard IOS adoption that features network effects, expected benefits, and adoption costs as prominent antecedents. We test this model and associated hypotheses using structural equation modeling on a large international 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 a differential effect of adoption costs between those firms that were migrating from EDI (significantly negative) and those firms that were 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 influence on the strength of network effects, and the importance of managerial complexity as a key determinant of adoption costs. Relative to the literature, this work focuses on an open-standard network with broader impacts on a firm’s value chain activities (compared to EDI networks), and examines a wider scope of partner efforts involved in establishing network effects (compared to automated teller machine networks). Overall we believe that this study, based on a rigorous empirical analysis of a large international dataset, provides valuable insights into how network effects influence standards diffusion.