THE ADOPTION OF INTERORGANIZATIONAL SYSTEMS AND NETWORK EXTERNALITIES: AN ANALYTICAL AND EMPIRICAL STUDY

Abstract

Recent work in the information systems literature has argued that network externalities, the value of a network created as a by-product of an existing installed base, are a determinant of interorganizational systems (IOSs) adoption. However, almost no empirical studies have reported the impact of network externalities on the adoption of IOSs. As a result, little is known about the extent to which network externalities may influence the adoption and diffusion of IOSs. Using electronic banking as a context, an analytical framework is developed to model the business value of a shared network to a bank that is considering whether to become involved. We show that network externalities, proxied by expected shared network size, as well as the size of banking firms, are major elements of the perceived value of the network. To empirically assess the impact of these elements on the timing of network adoption and validate our analytical model, we estimate a hazard model (also known as duration or failure time model) using the adoption data for Yankee 24, the largest shared electronic banking network in New England. The hazard model approach that explicitly incorporates covariates in the specification of time to adopt is employed to accommodate right-censoring of our observations of adoption times. We find that banks in markets that can generate a larger effective network size and have more depositors served per branch tend to adopt early, while the size of a bank's own branch network decreases the probability of early adoption.