The role of international quality standards certification for firms in institutionally weak countries Micheline Goedhuys1 and Leo Sleuwaegen2
Abstract This paper builds on a rapidly developing literature showing the importance of quality certificates, in particular ISO standards, for the efficient development of firms. The novelty of this paper is that it systematically tests if the effects of quality certification on productivity and sales performance of firms is differently affected in countries where markets are missing or institutions are weak, in supporting the efficient use and allocation of inputs and outputs. We find evidence that quality certification is indeed more important for the productivity and sales growth for firms in institutionally less developed (ILD) countries. In testing whether ISO certification has an extra signalling role to buyers in foreign markets, we tested whether, in addition to productivity gains, ISO certification contributes to export. The tobit estimation results indicate that ISO certification triggers firms to export and significantly raises the export intensity of firms.
keywords: certification, productivity, firm growth, export performance, institutional development, transaction costs JEL: D23, D24, O12, O17, O33
1
UNU-MERIT and Maastricht University, Maastricht, the Netherlands;
[email protected];
2
Corresponding author :
[email protected] Vlerick Leuven Gent Management School and
Catholic University of Leuven, Leuven, Belgium;
1. Introduction
Over the last decades, the development, spread and implementation of internationally accepted standards have dominated the scene of modern industrial production and distribution.
In collaboration with various stakeholders, standards have been developed
defining technical specificities of products in all industries. In addition, generic process standards are equally developed describing best-practice management systems. The most widely diffused and adopted standards in this category are those developed by the International Standards Organisation, and known as the ISO 9000 series related to the implementations of quality assurance systems.
Businesses that actually implement and respect international standards, can apply for certification. The firms‟ quality management system is then audited by a specialised third party, which issues a certificate of conformity if the requirements are actually met. Internationally, certification is still very unevenly distributed. In African and Latin American countries for instance, certification is still weak but it has recently taken off and is growing rapidly.
In the rest of the world, especially in Western European countries where the
standards were originally introduced, the growth rate of new certification and the share in global certification are declining3 (ISO, 2008). In other parts of the world such as Asia and Eastern Europe, certification is increasing rapidly.
Confronted with this trend, a rich empirical literature emerged, studying the motivations for firms to apply for certification and the benefits derived from it. Essentially it reveals two types of advantages or economic benefits to the firm. First, evidence shows that some firms realise important operational benefits internally in the process of applying for certification, as this imposes firms to analyse, evaluate, adjust and codify their production and distribution processes of goods and services, resulting in cost reductions and efficiency gains (eg. Blind, Hipp, 2003). Others view the merits of and motivations for certification in yet another perspective: firms strategically use the certificate to „signal‟ to external parties that the firm is 3
For instance, the share of Europe in worldwide ISO 9001 certification declined from 49% to 45% over the
period 2003-2007, a decline mainly due to Western European countries. It increased for Latin America and Africa from 1.87% to 4.14% and 4.04% to 8.29% respectively over the same period. In absolute numbers, the increase is still high in all regions of the world (being nearly doubled in Europe and quadrupled in Africa and Latin America).
a high-performer on quality management issues, reinforcing its credentials in the market place. Signalling becomes important when information asymmetries exist between sellers and buyers in vertical relationship, when important characteristics of the firm or product are not directly observable, thereby increasing uncertainty, raising transaction costs and potentially inhibiting economic exchange. This view is strongly embedded in the New Institutional Economics perspective, which builds on the influential work of Coase (1937) - who identified transactions costs as a factor why some transactions do not take place between firms but rather within firms – and
Williamson (1975, 1985) who identified bounded rationality and
individual opportunism as factors potentially raising those transaction costs.
To reduce
uncertainty in transactions, institutions are the important „rules of the game‟ that shape economic interactions (North, 1991) and they can be either formal institutions – including laws, regulations, property rights - or informal rules, such as norms and values, habits and practices, social conventions, reputations and trust. Some authors view certification as a decentralised institution, whereby the certificate represents a low-cost instrument capable of signalling a firm‟s superior but unobserved quality performance (King, Lenox, Terlaak, 2005; Terlaak and King, 2006, Clougherty and Grajek, 2008; Potoski, Prakash, 2009). The certificate thus opens up international markets and growth perspectives, improves the marketability of the product and raises the competitiveness of the firm. When information asymmetries loom large, when the geographical or cultural distance between both parties is large, or in industries with technological and product complexity, the possession of an international quality certificate can generate important such external benefits.
From a theoretical perspective, one would expect the benefits from implementing standards and certification to be extremely large for firms in developing countries where markets are missing or institutions are weak.
Firms operating in institutionally weak countries are
disproportionately hampered by information asymmetries and negative reputations effects. This can render the positive market signalling effect of certification and self regulation very large, with a positive effect on the performance of the firm in financial terms, especially when the firm engages in international transactions. This has so far never been explicitly tested at the firm level, the level where the decision to certify is taken. The majority of firm level studies assess the impact of certification by comparing performance of certified and noncertified firms in a particular country, mostly a developed country. However, the effect of certification is likely to very much differ across countries at different levels of institutional development and cultural identities.
We found one micro-evidence based study
demonstrating different effects of certification, comparing the effect of certification for businesses in the US and Thailand (Ussawahanitchakit, 2002). Equally interesting are the studies by Clougherty and Grajec (2008) and Potoski and Prakash (2009) who use macro data to find that ISO diffusion has a positive effect on exports, particularly from developing countries, yet no effect in developed countries (Clougherty and Grajec, 2008).
This paper explicitly tests if ISO certification matters more for firms in developing countries, or more precisely, in countries with lower levels of institutional quality. It uses firm level data from the World Bank Investment Climate Survey, pooled from 59 countries, both developing and least developed countries. The empirical analysis not only addresses the question of whether the possession of a quality certificate has a positive impact on firm performance. The novelty of this paper lies in that it systematically tests whether the effects of quality certification on performance of firms is different in countries at different levels of institutional development, underscoring its strategic „signalling‟ role in reducing transaction costs.
The paper is structured as follows: section two presents the findings of the literature and builds hypotheses for testing. Section three develops the empirical approach, presents the data, estimating model and variable construction. Section four presents the results. Section five discusses the findings and concludes.
2. The benefits of quality certification
In recent years, a rich literature developed, mainly in business studies and strategy, examining the motivations for firms to obtain certification and the advantages certification provide for the performance of the firm. The motives for certification as well as the resulting benefits appear to be either internal to the firm- as the firm expects and experiences cost reductions and operational improvements resulting from better managed and codified production procedures - or external to the firm, as the firm is more easily viewed by others as a reliable supplier committed to quality which gives the firm a superior position in the market (see eg. Sampaio et al., 2009 for an overview).
A large number of studies find positive outcomes such as significant abnormal returns and improved financial performance after certification (e.g. Corbett, Montes-Sancho and Kirsch (2005), Häversjö (2000) for Danish firms, Cascadesús and Gimenez (2000) for Spanish firms, Turner, Ortmann and Lyne (2000) for South African firms). However, others (Heras et al, 2002; Adams, 1999, Dimara et al., 2004; Han et al., 2007) do not find certification to substantially and significantly improve performance. Dunu and Ayokanmbi (2008) have indications that revenue and income improve after ISO 9000 certification, but the effect vanishes when other indicators are used.
The lack of conclusive evidence from these studies may be due to the fact that in a competitive market environment firms can realise important productivity gains also without applying for a certificate and this weakens the link between certification and superior performance. In addition, there may be a self-selection process, such that the more efficient firms have a greater propensity to apply for certification (Heras, Dick, Casadesús, 2002) with as a result that the difference in performance before and after certification is limited. As the application procedure is a costly procedure, and less efficient firms will face a higher cost, it is to be expected that superior efficiency or productivity are associated with adoption of standards and certification.
This raises a first interesting set of hypotheses, about the intrinsic relationship between certification and productivity.
Are it indeed the high quality firms, operating at higher
efficiency levels, which are more likely to acquire an international quality certificate? And does the possession of a quality certificate further reinforce the productivity gains of the firm? Clearly both efficiency and certification are conditional upon firms‟ access to valuable production factors, which are in limited supply, and the development of important complementary firm-specific capabilities and knowledge relevant to production. Building on works by Fransman (1985), Katz (1987), Lall (1992), Kim (1997) and others, an interesting strand of research explores the development of „technological capabilities‟ in developing countries where the majority of firms are operating far from the technological frontier. Technological capabilities are defined as the information and skills – technical, managerial and institutional - that allow productive enterprises to utilize equipment and technology efficiently and bring it up to the competitive „window‟. In empirical studies they are proxied by variables measuring human capital, investment in newer machinery and equipment, research and development, process innovation and technology licensing agreements.
In profiling the quality certificate holders, we expect them to be indeed high-quality firms, which develop technological capabilities and have a record of superior efficiency. We also expect that the certificate may itself explain higher productivity levels. We therefore test the following hypothesis about certifications-productivity relationship:
Hypothesis 1a: firms with a quality certificate are high-quality firms which demonstrate superior efficiency levels (self selection hypothesis)
Hypothesis 1b: firms with quality certification reach higher levels of productivity, controlling for other activities that directly affect productivity
What is less clear, is whether we will observe differences across countries depending on the quality of institutions and the quality of corporate governance and management in the country Firms that are more distant from the technological frontier may benefit more from implementing best practice quality management systems.
However, the absorption and
implementation of international standards is not costless to the firm. Certainly in countries characterised by low levels of human capital and weak absorptive capacity, the efforts and associated costs for firms to obtain certification can be a serious hindrance.
Some authors argue it is the complementary signalling function of the certificate which lies at the heart of the further performance improvements of firms (e.g. Clougherty and Grajek, 2008) through enhanced sales. The impact of certification is therefore found especially important when the information asymmetry problem looms large. For instance, Terlaak and King (2006) found ISO 9001 certified firms to grow faster and the effect is larger in industries where intangibles such as R&D and advertising are important – industries thus where buyers have greater difficulty acquiring information about suppliers.
Obviously, for firms who intend to sell products to wider markets, the information problem may be more serious, as spatial, cultural and linguistic barriers complicate the buyers‟ capability to assess product quality (Potoski and Prakash, 2009). Firms will have an incentive to use quality standards to signal their commitment to deliver a reliable product and provide the necessary sales service. This signalling role will be more important for firms who are at a distance from the final buyer. Hence,
Hypothesis 2: Firms who consider the national market or international market as their relevant market will be more likely to use quality certification than firms that operate on the local market.
The contribution of certification to firms‟ efficiency and its additional signalling role are key to the rapid development of firms in the market. We would therefore expect that certified firms will grow more rapidly. Certified firms have a better knowledge of their relative efficiency, and are likely to convince more buyers than uncertified firms. Merging these arguments with the evolutionary growth model of Jovanovic (1982) and Ericson and Pakes (1995), we expect ISO certification to have a discretionary impact on the growth process of firms.
But more importantly, we expect the growth effect of certification to be larger in these countries where weak institutions and deficient informational systems hamper the efficient functioning of markets. Indeed, depending on the kind of institutions that prevail and their enforcement characteristics, economic exchanges will occur at high or low transaction costs. Inappropriate institutions lead to greater insecurity in transactions (North, 1990). In countries which have poor infrastructure and regulatory capacity problems or are perceived to have them, demonstrated self-regulation becomes highly important. Previous studies on African firms (Goedhuys and Sleuwaegen, 1999; Sleuwaegen and Goedhuys, 2002) found that firm growth was upward shifted for formally registered firms which enjoyed legitimate reputation effects in the industry, even when traditional growth determinants size, age and efficiency were included in the analysis. These studies indeed underscore the importance of signalling effects, in less developed markets. We therefore hypothesise that:
Hypothesis 3a: Sales growth will be higher for firms with a quality certification
Hypothesis 3b: The effect of certification on growth will be higher in countries with weak institutional quality
Relative to the ISO signalling effect, it has been argued that physical, but also social, cultural, and institutional distance may increase information asymmetry and reduce information transfer. King, Lenox and Terlaak (2005) observe in this context that the more distant a firm‟s potential buyers are, or the more they are located in foreign countries, the greater is the
propensity for a firm to certify with (environmental) quality management standards. Following up on this line of reasoning, it is evident that the impact of certification should have a strong impact on international transactions of firms. Recent theoretical and empirical models explaining the export behavior of firms are based on heterogeneous-firm trade theories, which emphasize efficiency differences among firms (Roberts and Tybout, 1997; Melitz, 2003, Bernard and Jenssen, 2007) and differences in fixed and variable costs in setting up and sustaining trade relationships with foreign buyers (Helpman et al., 2008, Yoshino, 2008 and Lawless and Whelan, 2008). To properly understand the role of trade costs in this context, a broad definition should be used to include the various types of transaction costs, which can be all explicit trading costs but also include all costs associated with finding and reliably dealing with foreign partners. The last condition assumes that contingent claims contracts can be written and enforced. However, for firms in countries characterized by weak institutional regimes where contract law is weak or less enforced and rules and regulations lacking or less respected, such transaction cost may turn out to be very substantial. The cost of convincing trading partners about reliability and trustworthiness in respecting formal and informal contractual agreements will be aggravated by asymmetries of information between the potential trading partners. Accompanying problems of adverse selection and moral hazard may withhold foreign buyers to engage in deep trading relationships with firms in countries characterized by strong institutional deficiencies.
It seems logical that under such circumstances firms will take own initiatives to convince foreign buyers of their reliability and use ISO certification not only as a proof of efficiency but also as a signaling device of trustworthiness in respecting rules and procedures, including seller-buyer contractual agreements (Terlaak and King, 2006; Potoski and Prakash, 2009). In a recent empirical paper on the topic Clougherty and Grajek (2008) argue and find supporting evidence that “ ISO 9000 helps standardise practices and terminology, mobilise resources, and structure efforts across organisations. The quality-signal, common-language, and conflictsettling properties lower the transaction costs and information asymmetries involved with business-to-business relations across borders, thus making arm‟s length trading relations less costly.” In their empirical study testing for this argument at the country level they indeed find the diffusion of ISO certification in developing countries to „„push‟‟ exports to developed countries.
Taking the analysis at the level of the firm, we therefore expect ISO to play an extra role, besides its effect on productivity and sales growth, in stimulating export transactions of firms.
Hypothesis 4a: The likelihood that firms with quality certification will engage in export transactions is higher and their export intensity higher than for other firms.
Hypothesis 4b: The effect of certification on exports will be higher in countries with weak institutional quality
In the next section we empirically test these hypotheses against a large data set on manufacturing firms operating in 59 developing and transition countries.
3. Empirical approach
3.1. Data
The data for our analysis are derived from the World Bank Investment Climate Survey (ICS), conducted in a harmonised manner in 2006 in various African and Latin American countries and in 2008 in Eastern Europe and Central Asian countries. The ICS data are the most important source of firm-level survey data covering the factors that affect the performance of firms in developing countries. The data are cross-section data and contain key information on indicators of the performance of the firm. These allow estimating the value added, capital stock of the firm, employment, sales and exports of the last accounting year before the interview was conducted, i.e. 2005 for African and Latin American surveys, 2007 in Eastern European and Central Asian countries. In addition, the data set contains some historical information on sales and employment of three years earlier, which raises the opportunity to calculate growth over a three years period, 2002-2005 for data from African and Latin American surveys and 2004-2007 for European and Central Asian firms. For the purpose of this analysis, the data set also contains information on the certification status of the firm, its industry of activity, and its technological efforts and other relevant aspects.
The samples of firms in the ICS are drawn from the business register following a stratified random sampling based on location, size and industry (for more details on methodology of the survey see World Bank, 2003). After pooling the various country data sets, we retained only firms active in manufacturing, while firms in services and retail were dropped. This was done because the questionnaire used for retail and services firms was more limited and crucial information on a few variables was not asked. Unfortunately a number of firms dropped out because they had missing information on variables crucial to our analysis, such as employment, capital or sales. This resulted in a firm level data set of 8506 firms. The firms in our sample are active in the following broad categories: food processing and beverages (25%), textiles (8%), garments (14%), chemicals (11%), non-metallic mineral products (5%), machinery and equipment (6%), electronics (1%), basic metals and metal products (8%), other manufacturing (22%). The sample is presented in table 1.
Insert table 1 here
Table 1 presents the countries included in the sample and the number of observations in each country. The countries are subdivided in three groups, according to their level of institutional quality. For this, an indicator for institutional quality of the country was derived from the World Bank Ease of Doing Business index, 2008. This index measures the regulations directly affecting businesses and is a composite index based on the average of 10 sub-indices including starting a business; dealing with construction permits; employing workers; registering property; getting credit; protecting investors; paying taxes; international trading; contract enforcement; closing a business (for more details see World Bank, 2005). The index is used to rank countries – about 180 in total in 2008 - according to their score on the composite index. In the first column of table 1, we present the countries that appear in the top-60 ranking according to the ease of doing business index. In the second column, countries ranked 60th -120th appear. In the last column the countries ranked in the range 120th -180th appear, the low institutional quality countries, where business environment conditions are most adverse. On average 22% of the sampled firms have a quality certificate. There are however large differences across countries, ranging from as high as 74% in the Czech Republic, 63% in
Hungary and 54% in Slovenia to a low of 4% to 7% in countries like Cabo Verde, Guinea Bissau, Angola, Burundi, Guinea, Burkina Faso and Paraguay. Interestingly, at the more aggregate level, grouping countries by institutional quality, the average proportion of certified firms goes up with the institutional quality, being respectively 15%, 19% and 32% in low, medium and high institutional quality countries.
3.2 Econometric model
Following the arguments in section 2, our main interest lies in the nature of the relationship between certification and firm performance and in particular whether or not we observe a different impact in countries at different levels of institutional development. We first explain the incidence of certification and see if it varies with the countries‟ level of institutional development.
Next, we assess the relation between certification and three
performance indicators by estimating three separate equations: one explaining productivity; one explaining sales growth and one explaining export intensity.
First, quality certification (ISO) is modeled following a probit model, which relates the probability for firm i of having an international quality certificate to the characteristics of this firm, including its size, age and foreign ownership; complementary technological activities, and the institutional quality level of the country in which it operates. The equation includes TFP as an explanatory variable to account for the possible self-selection process as stated in hypothesis 1a and is constructed following the cost-share method developed by Caves et al. (1982) and used in Aw et al. (2003). To test hypothesis 2, that firms serving larger and international markets have more incentive to certify, the relevant geographical market is added as an explanatory variable. Industry and country control variables are equally included. The estimating equation thus becomes4: ISO= 1 if ISO*≥0 ;
4
To simplify notation and as all variables are measured at the level of the firm, the subscript i for firm i is left
out from the equations.
ISO= 0 if ISO* 0 IEXP=0 if IEXP*≤0
with IEXP*= d0+ d1 (Firm characteristics)+ d2(TFP)+ d3 (ISO)+
d4 (ISO*Institutional Quality)+ d5 (Technological characteristics) + d6 (Industry Dummies) + d7 (Country dummies)+
(4)
where IEXP is the dependent variable, export intensity, explained by a vector of independent variables, including firm and technological characteristics, quality certification, productivity, industry and country dummies; with their corresponding vectors of unknown coefficients d0 to d7. is an independently distributed error term assumed to be normal with zero mean and constant variance .
Τhe expected value of IEXP is E(IEXP)=XβF(z)+σ f(z), where X are the above mentioned independent variables and β the corresponding coefficients, f (z) is the unit normal density and F is the cumulative normal distribution function and F(z) the probability of IEXP>0.
McDonald and Moffitt (1980, p.318) have shown that E ( IEXP ) E * ( IEXP ) F ( z ) F ( z) E ( IEXP ) x x x
where E*(IEXP) is the expected value of IEXP for cases above the limit (positive exports). The equation implies that the total change in IEXP can be decomposed into two (i) the change in IEXP for those above the (zero) limit, weighted by the probability of being above the limit; and (ii) the change in the probability of being above the limit, weighted by the expected value of IEXP if above. In the results we discuss the unconditional marginal effect E *( IEXP) x
and
E ( IEXP) x
and the marginal effects
for the different independent variables ( not yet in this version of the
paper). For dummy variables such as the holding of an ISO certificate the „marginal‟ change effects will be calculated for discrete changes of the variable moving in value from 0 to 1 (Hoffmann and Kassouf, 2005).
The estimation of the model needs to account for possible bias that originates from the hypothesized simultaneity of certification with technological efficiency and export sales. To this end we have employed – in addition to the OLS estimations - an instrumental variables estimation technique including the predicted values of the probability that a firm has a certificate and of total factor productivity as explanatory variables in the estimated models.
3.3.Variables
The variables used in the estimations and their summary statistics are presented in table 2. In line with the arguments developed in the theoretical section, in the certification probit, apart from firm size and age and productivity, we include a human capital variable proxying the skills level of the labour force conditional to the successful certification and two dummy variables for firms reporting to serve national, respectively international markets, the reference being firms that serve local markets.
We also use the variable D-audit, for firms
whose financial statements are checked and certified by an external auditor. It proxies to what
extent the firm is familiar with the detailed documenting of the financial aspects of its activities, a managerial expertise that facilitates the documentation requirements upon which certification is conditional. To explain firm level productivity, we follow an important strand in the empirical literature5 which has found product (and process) innovation to affect productivity, based on the model developed by Crépon, Duguet and Mairesse (1998). This literature is embedded in the neoclassical view that technological progress and innovation are drivers of growth through productivity gains. Two variables are included in our productivity equation to capture these effects: one dummy variable for product innovation, and one for firms using ICT generic technologies for interacting with its clients and suppliers through the development of a company website.
These two variables are equally included in the sales growth equation. A positive impact of product innovation on firm growth has been documented in the literature (see Coad, 2009). Goedhuys and Sleuwaegen (2010), using a quantile regression applied to data from developing countries, found the use of ICT to have an important influence on firm growth, especially among high-growth firms. Firms that are actively servicing their product markets by successfully introducing new or significantly improved products into the market and connecting to clients through setting up their own website - show growth distributions skewed to the right. In the analysis here, we equally test the impact of both variables. For the export intensity equation, in line with other studies (as surveyed in Bernard and Jensen, 2004) we introduced as explanatory variables capital intensity, firm size, productivity, product innovation and the basic firm characteristics firm age and foreign ownership. We equally include the use of ICT, to facilitate the connectivity to long distance customers. To construct a measure of institutional quality, we made a dummy variable D-HIGHIQ, if the country where the firm is active ranks among the first third (the first 60 countries) of high institutional quality countries, D-MEDIQ, if the country ranks in the middle group of countries, and D-LOWIQ if the country ranks among the last third of low institutional quality countries, where business environment conditions are most adverse. In the estimations we
5
See eg. Hall, Lotti and Mairesse (2009) for a discussion of this literature.
mostly use D-HIGHIQ and D-MEDIQ, to see the differential impact vis-à-vis reference DLOWIQ. Insert table 2 here
5. Results
The results of the estimations are presented in table 3. The first two columns show the ISO probit results, where the first column gives the estimated coefficients, and the second column reports marginal effects, with for dummy variables the change in the probability of having a quality certificate from a discrete change of the dummy from zero to one.
Insert table 3 here
The results support our first hypothesis 1, the self-selection hypothesis, stating that firms that apply for an international quality certificate are technology active high-efficiency firms. The certified firms are larger, more capital intensive and exhibited higher levels of productivity, but it is especially the size effect which is the dominant determinant here. A doubling of the size, leads to an eight percent increase in probability that a firm has a certificate. A doubling of the estimated TFP level leads to three percent increase. A doubling of capital intensity leads to a one percent increase. Foreign ownership equally adds strongly to the probability that a firm has a quality certificate, raising it by 6%. The certified firms also have a more skilled workforce. Half a standard deviation below versus above the mean value of the variable SKILLS corresponds to a two percent difference in the likelihood that the firm has a certificate. Similar findings were presented by Correa et al. (2008), who found that ISO certification is correlated to access to complementary inputs such as managerial capacity, skilled labor, finance, and infrastructure, and to international knowledge through foreign direct investment or exports. In support of hypothesis 2, the signalling hypothesis, we find firms who consider the national market as their relevant market to apply more frequently for certification than local firms. The
effect becomes stronger for firms who see their relevant market stretching beyond national borders. The marginal effects presented in the table suggests that a firm that considers the international market as the relevant markets shows a probability to apply for a certificate that is nine percent higher than for a local firm, whereas for firms serving national markets, the probability is five percent higher than for local firms. Controlling for those differences, we observe that in countries with low institutional quality the likelihood of certification is higher than among firms located in countries with medium institutional quality, the latter being 21% less likely to have a certificate. The difference for firms in low versus high institutional quality countries is not significant. Important industry and country differences are equally observed (but not reported in detail).
Columns three and four show the results for the productivity equation. Higher productivity levels are found for younger firms, firms using ICT and firms introducing new products. Focusing on the relationship between predicted certification and productivity, we find that productivity goes up with higher probabilities of certification, an effect which is statistically significant at the one percent level and confirms hypothesis 1b. For firms in countries with higher institutional quality, the negative coefficient for the interaction terms with ISO suggests a downward correction of the ISO effect (column 4). The coefficients suggest that the effects from certification are strongest for firms located in low institutional quality countries, least strong in high institutional quality countries, and an intermediate effect in medium institutional quality countries.
The differential effect is statistically significant
between high, and low institutional quality and between medium and low institutional quality, and also between high and medium institutional quality, implying a gradual decline of the effect of certification along with the improvement of institutional quality of the country where the firm is located. Clearly, the effect of implementing best practice in quality management becomes stronger when institutions are weak and market forces cannot fully play a disciplining role. The larger effect from certification in the lowest IQ countries thus reflects an existing gap between quality certified firm implementing world standards on the one hand and a majority of firms operating far from frontier technology practice on the other hand.
Apart from this potential operational efficiency difference, it could well be that high quality firms benefit from the signalling effects of their certificate, and reach higher sales levels, an effect which is hypothesised to be particularly strong in low IQ countries. To test if signalling quality has an extra effect on firm growth, we included quality certification in a sales growth
equation (Table 4, column 1 and 2). Sales growth is typically related to firm size and age, in line with the stylised fact that smaller and younger firms grow faster, as a result of learning process that takes place in the earliest years of operation, during which efficient firms discover their true efficiency and grow, until they reach at least a minimum efficient scale. Our data supports the negative size-growth and age-growth relationships. Zooming in on the certification-growth relationship, we observe an extra positive and significant influence from certification. Again, this effect is highest in low IQ countries, with downward corrections for medium and especially high IQ countries (see column 2). The coefficients of both interaction terms are significantly different from each other.
These
findings clearly underscore the importance of ISO as an instrument to tackle informational problems and asymmetries in institutionally weak markets.
Finally we look at the importance of certification for exports (table 4, columns 3 and 4). The traditional export determinants – size, capital intensity, productivity, firm age and foreign ownership- are significant and with the expected sign. Certification positively affects export intensity, and the effect is significant at the 5% level. The interactions with D-HIGHIQ and D-MEDIQ however do not reveal a significantly different impact of certification in high, medium and low IQ countries.
6. Discussion and conclusions
The economics and management literature has identified two important effects of quality certification for firms, one raising its efficiency through internal operational improvements, the other effect being of strategic nature as a firm can use the certificate as a „quality signalling device‟ reinforcing its position in the market. For both types of benefits empirical support has been found in the empirical literature.
A number of recent studies have been more concerned with the effect of certification as a signalling device.
Global standards, including the widely used ISO 9000, are seen as
transaction supporting institutions by themselves and considered as a substitute for missing or deficient national institutions. Recent empirical studies have argued that firms located in developing countries face the difficulties that consumers in global markets, deciding under
information asymmetry, associate their product with the generally poor reputation of its country of origin (Potoski, Prakash, 2009). They infer that these producers face greater difficulty in signalling their product quality and that international standards act as a mechanism to mitigate information asymmetries and stimulate international trade. Macro evidence was found to support this idea.
Building on these results, our study delves deeper into the relationship between certification and performance at the micro level, the level where the decision to certify is taken. It presents original evidence on the effects of quality certification by firms located in countries differentiated by the quality of institutions. Against a large dataset of manufacturing firms operating in 59 countries we test the basic hypotheses that, first, quality certification following international standards is beneficial to firm performance and, second, that it matters more for firms in institutionally weak national environments.
The results of the empirical analysis support this view. Clearly, we find strong correlations between productivity and certification. In profiling the certificate holder, we find more productive firms and human capital endowed firms to be more likely to have a certificate. Besides this, it comes out strongly that size is an important determinant, as in Terlaak and King (2006), but also the broader relevant market the firm reports to serve. Certification in turn contributes positively to productivity levels, as manufacturing benefits and operational or technological improvements are being implemented in the course or as a result of certification. Interestingly, the disciplining effect of certification on performance is stronger in low IQ countries. It is likely that in such countries, to reach best practice, effective improvements in operational performance are necessary, as market forces in institutionally deficient countries are to weak to fully prepare firms for global best practices.
We find equally evidence for a signalling effect in the market. Controlling for all relevant determinants, including size, age and foreign ownership, certification proves to have a strong positive effect on sales growth and on export intensity. The most interesting finding however is that this effect goes up for firms located in less institutionally developed countries, thereby providing micro evidence for the role of certificates in reducing transaction costs. While there appears to be a stronger effect for the least institutionally developed countries for sales growth, the effect is less solid and important
for export intensity. Nevertheless, there are strong indications from the ISO probit that serving broader international markets, or the national market are incentives to certify.
References
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Table 1: composition of the sample, by type of country and incidence of certification High
Medium
Low
institutional
institutional
institutional
quality
quality
quality
countries
countries
countries
# obs.
% ISO
# obs.
% ISO
# obs.
% ISO
Armenia
62
0.37
Argentina
380
0.26
Albania
24
0.33
Botswana
104
0.15
Azerbaijan
78
0.27
Angola
171
0.05
Bulgaria
59
0.29
Belarus
47
0.17
Bolivia
212
0.16
382
0.22
Bosnia-Herz.
72
0.42
Burkina Faso
47
0.06
Czec Rep.
54
0.74
Colombia
522
0.11
Burundi
88
0.05
Estonia
71
0.46
Croatia
46
0.46
Cameroon
109
0.21
Georgia
64
0.17
El Salvador
299
0.14
Cape Verde
46
0.04
Hungary
78
0.63
Macedonia
85
0.36
Congo D.R.
147
0.08
Latvia
63
0.38
Guatemala
265
0.12
Ecuador
232
0.19
Lithuania
62
0.23
Kazakhstan
113
0.33
Guinea Bissau
42
0.05
Mexico
750
0.25
Kyrgyz Rep.
68
0.25
Guinea
100
0.06
Mongolia
124
0.19
Moldova
100
0.19
Honduras
192
0.17
Namibia
95
0.27
Montenegro
19
0.16
Mauritania
78
0.10
239
0.18
Nicaragua
224
0.16
Rwanda
50
0.14
Romania
68
0.44
Panama
104
0.09
Tajikistan
63
0.17
Slovak Rep.
45
0.42
Paraguay
122
0.07
Tanzania
241
0.21
Slovenia
72
0.54
Poland
67
0.28
The Gambia
29
0.17
Turkey
443
0.51
Russia
280
0.21
Ukraine
194
0.20
Serbia
116
0.46
Uzbekistan
103
0.19
64
0.27
Uganda
267
0.14
Uruguay
165
0.15
3503
0.19
2168
0.15
Chile
Peru
Swaziland
Total
2835
0.32
Total
Total
Table 2: Definition of variables Dependent variables
Mean
(1)
0.22 12.62 (2.22) 8.83 (1.93) 0.14 (0.34)
X
ISO Ln(VA)
=1 if firm has internationally recognized quality certification Value added in period t, in log.
TFP
Estimated Total Factor Productivity in period t
SALES GROWTH
Growth of sales over a three year period, measured by [ln (Salest) – ln (Salest-3) ]/3
EXPORT/SALES
Exports/Sales in period t
0.14 (0.29)
Ln(EMP)
Firm size, measured by employment in period t, in log.
X
Ln(SALESt-3)
Sales in period t-3, in log.
Ln(CAP/EMP) TFP
Capital stock in net book value/ employment; in period t, in log. Estimated Total Factor Productivity in period t
Ln(AGE)
Age of the firm in t, in logarithmic terms
D-FOREIGN D-HIGHIQ
=1 if the firm is foreign owned =1 if the firm is active in a country with high institutional quality
3.45 (1.35) 12.97 (2.21) 8.54 (1.92) 8.83 (1.93) 2.61 (0.87) 0.13 0.33
D-MEDIQ
=1 if the firm is active in a country with medium institutional quality Proportion of skilled production workers in total production workers =1 if the firm has its annual financial statements checked and certified by an external auditor
D-LOCAL
(2)
(3)
(4)
X X X X
Explanatory variables X
X X
X
X X
X
X
X
X
X X
X X
X X
X X
0.41
X
X
X
X
0.66 (0.33) 0.49
X
=1 if the firm‟s main market of its main product line is the local market (product sold mostly in same municipality where the firm is located)
0.52
X
D-NATIONAL
=1 if the firm‟s main market of its main product line is the national market (product sold mostly across the nation where the firm is located)
0.36
X
DINTERNATIONAL
=1 if the firm‟s main market of its main product line is the international market (product sold mostly outside the country where the firm is located)
0.12
X
D-ICT
=1 if the firm uses a website to interact with clients and suppliers
0.43
X
X
X
D-PRODUCT
=1 if the firm has introduced into the market any new or significantly improved products in the past three year period
0.68
X
X
X
SKILLS D-AUDIT
X
Table 3: estimation results Dependent: Ln(EMP) Ln(CAP/EMP) TFP Ln(AGE) D-FOREIGN SKILLS D-HIGHIQ D-MEDIQ
ISO (1) 0.333*** (0.017) 0.049*** (0.011) 0.113*** (0.016) 0.037 (0.023) 0.241*** (0.052) 0.189*** (0.058) -0.355 (0.274) -0.950** (0.438)
ISO (Dy/Dx)b (2) 0.081*** (0.004) 0.012*** (0.003) 0.027*** (0.004) 0.009 (0.006) 0.064*** (0.015) 0.046*** (0.014) -0.081 (0.059) -0.211** (0.090)
ISO a
TFP (3)
TFP (4)
-0.039** (0.016) 0.060 (0.040) -0.052 (0.039)
-0.043*** (0.016) 0.043 (0.041) -0.053 (0.039)
3.145*** (0.084)
0.226*** (0.029) 0.063** (0.028)
3.906*** (0.181) -1.023*** (0.193) -0.780*** (0.194) 0.220*** (0.029) 0.066** (0.028)
8.752*** (0.075)
8.834*** (0.076)
8506 0.58
8506 0.58
ISO*D-HIGHIQ a ISO*D-MEDIQ a D-ICT D-PRODUCT D-NATIONAL DINTERNATIONAL D-AUDIT Constant
Observations R-squared
0.187*** (0.041) 0.338***
0.046*** (0.010) 0.092***
(0.059) 0.273*** (0.041) -3.727*** (0.299)
(0.018) 0.066*** (0.010)
8506
8506
Notes: a In the TFP model the predicted value of ISO is used, also in the interaction terms with D-HIGHIQ and DMEDIQ. b In estimation 2 (ISO), marginal effects are reported, with for dummy variables the change in dependent from a discrete change of the dummy from 0 to 1; Industry and country dummies included in all estimations; Robust standard errors in parentheses; * significant at 10%; ** significant at 5%; *** significant at 1%
Table 4: estimation results Dependent:
Sales growth
Sales growth
Ln(EMP)
Ln(CAP/EMP)
TFP
Ln(SALES t-3)
Ln(AGE)
D-FOREIGN
ISO
a
ISO*D-HIGHIQ
ISO*D-MEDIQ
Export/Sales
0.072***
0.072***
(0.010)
(0.010)
-0.000
-0.000
(0.005)
(0.005)
0.014**
0.014**
(0.007)
(0.007)
-0.136***
-0.138***
(0.005)
(0.005)
-0.027***
-0.028***
-0.062***
-0.062***
(0.005)
(0.005)
(0.010)
(0.010)
-0.022**
-0.026**
0.148***
0.148***
(0.010)
(0.011)
(0.022)
(0.022)
1.141***
1.333***
1.010***
1.051***
(0.042)
(0.071)
(0.073)
(0.107)
a
a
D-ICT
Export/Sales
-0.265***
-0.035
(0.057)
(0.095)
-0.161***
-0.068
(0.058)
(0.094)
0.073***
0.072***
0.075***
0.075***
(0.008)
(0.008)
(0.019)
(0.019)
0.013*
0.014**
0.004
0.005
(0.007)
(0.007)
(0.019)
(0.019)
1.726***
1.769***
-1.115***
-1.116***
(0.055)
(0.056)
(0.091)
(0.094)
Industry dummies
yes
yes
Yes
yes
Country dummies
yes
yes
yes
yes
Observations
7467
7467
8506
8506
R-squared
0.41
0.41
D-PRODUCT
Constant
Notes: a The predicted value of ISO is used, also in the interaction terms with D-HIGHIQ and D-MEDIQ. Industry and country dummies included in all estimations; Robust standard errors in parentheses; * significant at 10%; ** significant at 5%; *** significant at 1%
Appendix Results of Cobb Douglas specification explained in footnote 5 Dependent: Ln(EMP)
L(VA)
0.557*** (0.019) Ln(CAP) 0.121*** (0.008) Ln(AGE) -0.034** (0.016) D-FOREIGN 0.028 (0.041) ISO a 4.512*** (0.236) ISO*D-HIGHIQ a -1.166*** (0.199) ISO*D-MEDIQ a -0.760*** (0.197) SKILLS -0.114*** (0.040) D-ICT 0.253*** (0.029) D-PRODUCT 0.069** (0.028) Constant 8.980*** (0.125) Observations 8506 R-squared 0.77 Dependent variable: Value added in period t, in log.; Ln(CAP) is net book value of capital stock in period t, in log.; other variables as defined in table 2. a The predicted value of ISO is used, also in the interaction terms with D-HIGHIQ and D-MEDIQ. Industry and country dummies included in the estimation;
