The Adoption of Interorganizational Systems and Network Externalities : an Analytical and Empirical Study

Recent work in the information systems literature has argued that networkexternalities, the value of a network created as a by-product of an existing installed base, area determinant of interorganizational systems (IOSs) adoption. However, almost noempirical 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 theadoption and diffusion of IOSs. Using electronic banking as a context, an analyticalframework is developed to model the business value of a shared network to a bank that isconsidering whether to become involved. We show that network externalities, proxied byexpected shared network size, as well as the size of banking firms, are major elements of theperceived value of the network. To empirically assess the impact of these elements on thetiming 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, thelargest shared electronic banking network in New England. The hazard model approachthat explicitly incorporates covariates in the specification of time to adopt is employed toaccommodate right-censoring of our observations of adoption times. We find that banks inmarkets that can generate a larger effective network size and have more depositors servedper branch tend to adopt early, while the size of a bank's own branch network decreases theprobability of early adoption