Network effects cross borders
The geographic scope of within-country and cross-country network effects affects the decision of foreign entry modes for digital platform companies. Typical within-country network externalities are local food deliveries or services like Uber with location-bound firm-specific advantages (FSAs). Those companies have to build up new local suppliers (for food deliveries) and drivers (for Uber). However, firms like PlayStation with non-location bound FSAs (game developers and user groups) can quickly gain cross-country network effects. This type of FSAs is fungible across borders, meaning that it can be "transferred at low marginal costs and used effectively in foreign operations."
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If a digital platform company possesses non-location-bound FSAs, like technology-, branding-, or management capabilities, a company with location-bound FSAs can scale globally. However, they also have to develop a solid user base in the target market as the platform's attractiveness depends on its local user network. Therefore, for digital platform companies with cross-country network effects, the size of the global user base is more important than the local user base in each market.
The geographic scope of network effects experienced by platforms can vary. For example, national job-seeker platforms may not extend across borders since they need to comply with regulatory and language barriers. Uber cannot easily move drivers between countries. We can hence classify direct and indirect network effects to their ability to travel across borders. There are most symmetric examples of digital platform companies where the effects are either within or across countries.
However, network externalities generate first-mover advantages only if there are high switching costs, which is often not the case in digitalized business. We can therefore argue that platform user networks represent a critical FSA for platform firms. A large existing user base can generate more economic value than rivals with smaller networks. However, networks, network effects, and quality of services are not FSAs; they can only be accounted for after implementation. Networks are rather a characteristic of the industry or business model within an industry.
Companies use their intangible resources like behavior- and management capabilities to build networks. However, reputation embedded in trademarks is a crucial FSA and a driver of the internationalization of digital platform companies. But is network effects sufficient to drive internationalization?
The success of the internationalization of digital platform companies depends on the collective interactions of the users, international (cross-boarder) network effect, and the rising number of users to invert the platform firm to move its locus of value-adding activities outside the firm boundaries.
However, the well-known problem of "liabilities of outsidership" of firms going global, where the businesses and user networks are not accepting your company, can also be a problem for digital platform companies. They can even meet existing network effects from competing platform companies. Where a standard is set and changing to your platform involves a high switching cost. As a result, they may need to start all over again when moving into a new market. There are ways to handle existing network effects, like complementarity, but another blog post is coming soon on this topic.
Literature and macro-data from Ghemewat (Ghemawat, 2016) show that the core value transaction on digital platforms may be primarily domestic, and national borders still matter. However, typical digital platform companies based advantages like ecosystems, open platform architecture, and plug-and-play digital capabilities can help new ventures to overcome this "liability of outsidership" in global markets.
To mitigate the limiting network effects of national borders, digital platform companies can first start to globalize in countries with higher country clout, i.e., countries with the capacity to influence others through economic power and social connections. With a higher country clout globalization strategy, digital platform companies strengthen their international network effects and reduce the time to penetrate other countries.
To conclude, when having a globalization strategy for digital platform companies, it is essential to remember that you let the networks guide you in your choices. In other words, the network structure and reputation matter. Launching in a country with higher clout and having influential and prestigious international users can improve your reputation and will make it easier to get more global users and extend the network with network effects.
Read more about how “born global” platform companies grow with networks:
