MIS
Quarterly
Special Issue on Standards
(forthcoming in 2006)
Migration to
Open-Standard Interorganizational Systems:
Network Effects, Switching Costs, and Path Dependency
Kevin Zhu, Kenneth L. Kraemer, Vijay Gurbaxani, and Sean Xu
The
Abstract
As firms seek
to improve coordination through the use of electronic interorganizational
systems (IOS), open standards
are becoming increasingly important. To better understand the process of
standards diffusion, we investigate firms’ migration from proprietary
or less open IOS (i.e., electronic
data interchange or EDI) to open-standard IOS (i.e., the Internet). 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 develop a conceptual model that features network effects, expected benefits,
and adoption costs as prominent antecedents. We examine the model on a large
dataset of 1,394 firms. The empirical results demonstrate the significant
impacts of network effects on open-standard IOS adoption. We find that adoption costs are a
significant barrier to open-standard IOS adoption, but EDI users and non-users
treat this very differently: EDI users are much more sensitive to the costs of
switching to the new standard. This finding illustrates that experience with older standards may create
switching costs and make it difficult to shift to open and potentially better standards, a
phenomenon called “excess inertia” in technology change. Further testing the underlying
factors that contribute to network effects and adoption costs, we find that trading
community influence is a key driver of network effects, while managerial
complexity, as opposed to financial costs, is a key determinant of adoption
costs. 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.
Keywords
Open
Standards, Standards Diffusion, Network Effects, Path Dependency, Interorganizational
Systems, Internet, Electronic Data Interchange, Economics of Standards