EU Strategy for Convergence of International Accounting Standards, 2000-2008 : Network Externalities Analysis

This analysis focuses on how the European Union (EU) succeeded in bringing the International Accounting Standards (IAS) to being accepted as the international accounting standards. It overcame resistances mainly from the U.S. which considered its accounting stan-dards, US GAAP, to be the superior ones and had been reluctant in supporting EU’s attempt ofthis. Michael L. Katz’s and Carl Shapiro’s model of network externalities is conceptually applied to this case. First, EU regulated all EU listed companies to use IAS from 2005 onwards. Second, it announced that it would apply this regulation to non EU companies from 2007 onwards. Non EU companies were regulated not to have access to EU financial markets for raising capital unless they make financial reporting, using the accounting standards which EU would consider to be equivalent to the standards it uses. This gave a big push to non IASusing countries to switching to adopting IAS, making IAS de facto international accounting standards. This maneuver of EU had what Katz and Shapiro called “a strategic, first-mover advantage.” The analysis covers developments only until early part of 2008 and does not coverdevelopments after the global financial crisis of 2008