International standards certification and exports from developing countries: firm level
evidence
Micheline Goedhuys1 and Leo Sleuwaegen2
Abstract
The paper tests if ISC certification has an extra signalling role to buyers in foreign markets
and stimulates exports by firms in developing countries. The empirical testing controls for
heterogeneity in productivity and skill intensity of the firm. The estimation results which are
based on a sample of manufacturing firms from over 89 countries indicate that ISC certified
firms are more likely to export and export at a larger scale.
keywords: certification, export performance, institutional development, transaction costs
JEL: D23, D24, O12, O17, O33
1
UNU-MERIT, Maastricht, the Netherlands; Goedhuys@merit.unu.edu;
2
Corresponding author : leo.sleuwaegen@econ.kuleuven.be Vlerick Business School and KU Leuven,
University of Leuven, Belgium;
1
1. Introduction
The role of International Standard Certification (ISC) in relation to the development of
international trade has been the subject of recent research. Studies by Clougherty and Grajec
(2008) and Potoski and Prakash (2009) who use macro data found that ISO diffusion has a
positive effect on exports, particularly from developing countries, yet no effect in developed
countries (Clougherty and Grajec, 2008). Yet, to date there are no detailed studies at the level
of the individual firm, the level at which ISC should have its direct impact, to validate and
deepen these findings.
This paper studies the export performance of firms using firm level data from the World Bank
Enterprise Survey, pooled from 89 countries, both developing and least developed countries.
It explicitly tests if ISC certification enhances the export performance of firm in developing
countries, controlling for other important determinants of export market participation and
export intensity. In addition the novelty of this paper lies in that it systematically tests
whether the effects of quality certification on firm exports 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 decision to export and export intensity: Conceptual model and hypotheses
The international trade literature focusing on firm heterogeneity relates differences in firms’
export performance and export status to differences in firms’ productivity (Melitz, 2003;
Bernard and Jensen, 1999; Aw et al., 2000; Chaney, 2008). The underlying assumption is that
only the more productive firms are able to overcome the huge risk and sunk costs that are
related to entering foreign markets. There is indeed mounting evidence that firms wishing to
export not only face variable costs such as transport costs and tariffs, but also critically face
2
some significant fixed costs that do not vary with export volume (Das, Roberts, and Tybout,
2001). These include costs to convince foreign buyers about the product, to research the
foreign regulatory environment and adapt the product to foreign standards, to set up trade
relationships and distribution channels in the foreign country and to conform to all the
shipping rules specified by the foreign customs agency. Although some of these costs cannot
be avoided, others are often manipulated by governments in order to erect non-tariff barriers
to trade (Melitz, 2003; Helpman et al., 2008) and thus differ countrywise.
Taking these sunk costs into account, theoretical and empirical models contend that more
productive firms self-select into becoming exporters (Melitz, 2003; Helpman et al., 2008,
Bernard and Jensen, 2004). The self-selection hypothesis has been largely supported by
empirical evidence (Clerides and Lach, 1998; Aw et al., 2000; Arnold and Hussinger, 2005;
Delgado et al., 2002; Damijan and Kostevc 2006). Bernard and Wagner (2001) find that
higher levels of productivity positively affect the probability of becoming an exporter.
Bernard and Jensen (1999) find similar effects for plant characteristics, with larger, highwage, more productive plants being more likely to export.
Yet another set of empirical studies shows that there are substantial differences in export
performance of equally productive firms, due to heterogeneity in firms’ ability to produce
quality. Entry into foreign markets thus seems to be conditional upon firms’ ability to attain
high levels of product quality (Hallak 2006, Brooks, 2006, Hallak and Sivadasan, 2013;
Verhoogen 2008). Therefore, to take part in global trade, developing country firms are
challenged to improve both “process productivity” and “product productivity” or quality of
products and processes (Maskus et al., 2005, Brooks 2006; Hallak and Sividasan, 2013).
They invest in high-quality labour (Verhoogen, 2008) and develop new products and
processes to meet the quality requirements of the international market (Iacovone and Javorcik,
2010, Alvarez and Lopez, 2005).
Likewise, the participation in export markets is equally positively influenced by mechanisms
that reduce the fixed entry cost thereby decreasing the productivity threshold required to
become exporter. Several studies find that firms benefit from the importing of goods and
services from abroad in setting up their export operations.
Sunk-cost complementarity
(Kasahara and Lapham, 2013) is a mechanism through which previous importing experience
positively impacts the probability of becoming an exporter. Empirical evidence has shown
3
that if the sunk cost associated with importing and exporting to the same market is shared,
having importing activity can increase the likelihood that a firms is a two-way trader (e.g.
Kasahara and Lapham, 2013; Muuls and Pisu, 2009). Aristei et al. (2013) find that prior
importing experience has a positive effect on the decision to start exporting. Empirical
evidence suggests that there is a positive effect associated with engaging in both importing
and exporting activities: two-way traders appear to perform better and to be more productive
(Muuls and Pisu, 2009; Aristei et al., 2013). Through imports companies can gain knowledge
about foreign markets, increase their productivity by having access to cheaper inputs and
reach the productivity threshold necessary to become exporters (Kasahara and Lapham, 2013;
Blalock and Veloso, 2007; Bas and Strauss-Kahn, 2013).
To raise productivity and quality of production, firms increasingly follow the requirements
and specificities spelled out in internationally accepted quality standards and engage in the
procedures necessary to obtain certification, indicating that the requirements of the
international standards are met3. The implementation of internationally accepted standards has
indeed become an increasingly important factor facilitating foreign market access for
developing country firms. Czubala et al. (2009) show this for African textiles and clothing
exports to the EU. Product 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 more generally. The most widely diffused and
adopted standards in this category are those developed by the International Standards
Organisation, and known as the ISO 9000 and ISO 14000 series related to the
implementations of quality assurance systems. The certification adoption is rising worldwide
as more and more developing country firms adhere to the standards. In studies that
empirically explain the role of quality in export performance, various scholar proxy the ability
to produce quality by the possession of international quality certificates (Hallak and
Sivadisan, 2013, Verhoogen, 2008). A number of papers show that ISO 9000 certification is
correlated with direct measures of product quality (e.g. Carlsson and Carlsson 1996, Brown et
al. 1998, and Withers and Ebrahimpour 2000) and customer satisfaction (Buttle, 1997).
3
For firm implementing the standards, certification can be obtained after an external audit confirms that the
requirement of the standards are met.
4
A vast literature developed in parallel, describing the motivations for firms to obtain
certification and its advantages for firm performance.
A major motivation for firms to
implement standards appear to be the resulting benefits and improvements in operational
performance, as firms experience cost reductions resulting from better managed and codified
production procedures (Sampaio et al., 2009).
However, the certificate is also used
strategically, to ‘signal’ to external parties that the firm is a high-performer on quality
management issues, reinforcing its credentials in the market place. Firms with a certificate
are more easily viewed as a reliable supplier committed to quality (see Sampaio et al., 2009
for an overview), facilitating foreign market entry.
This explains why firms not only
implement good management practices, but also try and obtain certification despite the
considerable financial investment it implies (Guler et al., 2002).
Signalling becomes important when information asymmetries exist between sellers and buyers
in vertical relationships, 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, where 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). It is therefore
an important instrument not only to raise efficiency levels but also to reduce foreign market
entry costs.
In view of the arguments above, we hypothesize:
Hypothesis 1. Controlling for productivity, firms with an international standards certificate
are more likely to be engaged in export transactions
5
The benefits from implementing standards and certification should be more important 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. When contract law is weak or less enforceable
in settling conflict situations and rules and regulations lacking or less respected, 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
then be higher. 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 ISC 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).
Hence,
Hypothesis 2: The impact of quality certification on the probability of being an exporter is
stronger in institutionally weak countries
Success in global markets - measured by total export sales– is to a large extent determined by
the same factors that make firms start exporting. Higher levels of productivity are associated
with better export performance. However, once active on foreign markets, there appear in
addition to be some feedback mechanisms which enable exporting firms to better realize
economies of scale and through which firms learn from interacting with sophisticated and
demanding buyers, so called learning-by-exporting hypothesis.
Various scholars find
supportive evidence for learning-by-exporting (Bigsten et al., 2004; Blalock and Gertler,
2004; Kraay, 1999; Girma et al., 2005; Van Biesebroeck, 2005; Yasar et al., 2006), though the
evidence is more mixed than for the self-selection hypothesis (Clerides and Lach, 1998,
Castellani, 2002, Delgado et al., 2002, Arnold and Hussinger, 2005, Damijan and Kostevc,
2006). In a survey paper on the issue, Wagner (2007) summarises the debate and concludes
that ‘the more productive firms self-select into export markets, while exporting does not
necessarily improve productivity’.
6
But, besides productivity, both fixed and variable transaction costs influence the export
intensity. Helpman et al. (2008) develop a model that explains the export volumes between
pairs of countries by the productivity of firms and the existing differences in fixed and
variable costs in setting up and sustaining trade relationships in these countries. Only the
more productive firms find it profitable to export. However, the profitability of exports varies
by destination; it is higher to countries with higher demand levels, lower variable export costs,
and lower fixed export costs.
Along these lines, Lawless and Whelan (2008) observe a limited role for productivity in
explaining firm exporting behaviour, but find that past exporting to a particular market has a
strong impact on the current exports there. In a similar way, Das et al. (2007) find that the
existence of entry costs makes firms exports dependent on their previous exporting status:
firms that already export can increase their volumes at marginal production costs, while those
that do not, must bear the sunk cost of entry into foreign markets and establishing
relationships with foreign buyers. Yoshino (2008) finds that technological factors such as
new vintage capital and internet access reduce export costs and raise export intensity of
African manufacturing firms. Also foreign ownership is a significant factor in characterizing
the intensity of global exports. Using data on Colombian firms, Brooks (2006) finds that in
addition to plant size, factor intensities, location, ownership structure and heterogeneity in
product quality and better skilled workforce need to be taken into account to explain the
observed export sales distribution.
Clougherty and Grajek (2008) argue and find supporting macro-evidence at the country level
that a widespread use of ‘ISO 9000 helps standardise practices and terminology, mobilise
resources, and structure efforts across organisations. The quality-signal, common-language,
and conflict-settling 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.’ Additional to the productivity and quality differences, quality
certificates can therefore be an efficient instrument to reduce the cost of sustaining relations
with international clients and for signalling producer quality. Firms have an incentive to use
quality standards to signal their commitment to continuously deliver a reliable product and
provide the necessary sales service. Clearly, for firms who sell their products to wider
markets, the information problems that raise transaction costs may be more serious, as spatial,
7
cultural, and linguistic barriers complicate the buyers’ capability to assess product quality
(King, Lenox and Terlaak, 2005; Potoski and Prakash, 2009). Testing these arguments at the
level of the individual firm,
We therefore hypothesise:
Hypothesis 3. Controlling for productivity, firms with an international standards certificate
export more
Clougherty and Grajek (2008) find a wide diffusion of ISO certifications to ‘‘push’’ exports to
hold only for developing countries. They interpret this finding that the signaling role of a
quality certificate matters more for firms based in countries where institutions are weakly
developed. While they could show evidence for export sales at the country level, our data
allows us to refine the testing of this argument with firm level data. Next, to hypothesizing
that a quality certificate increases the likelihood to engage in exporting more in institutionally
weak countries, we test:
Hypothesis 4: The effect of certification on the total export sales of a firm 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 89 developing and transition countries.
3. Empirical approach
3.1. Data
For studying these relationships at the micro-level, we use firm level data from the World
Bank Enterprise Surveys (WBES) from 89 countries which were surveyed between 2006 and
2013. For countries which were surveyed more than once in this period, the data of the last
survey round are used for the analysis. The WBES data are the most important source of
harmonised firm-level survey data comparable across countries, covering the factors that
affect the performance of firms in developing countries. The samples of firms in the WBES
8
are drawn from national business registers following a stratified random sampling based on
location,
size
and
industry
(for
more
details
on
methodology
of
the
http://www.enterprisesurveys.org/Methodology). The data are cross-section data and contain
key information on indicators of the performance of the firm, including their exposure to
foreign competition and their export performance. For the purpose of this analysis, the data
set also contains information on productivity, the international standards certification (ISC)
status of the firm, human capital, industry of activity, technological efforts and other relevant
aspects.
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 missed information on the capital stock and skill level of the
work force. In addition, a number of firms dropped out because they had missing information
on variables crucial to our analysis. This resulted in a firm level data set of over 18000 firms
active in the following major sectors: food processing and beverages (20%), machinery and
metal (16%), garments (13%), non-metallic and plastic materials (11%), textiles (8%),
chemicals (8%), wood and furniture (4%) , electronics (2%), auto components (1%), other
manufacturing (13%). 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.
To test hypotheses 2 and 4 – that ISC is more important for firms in institutionally weak
countries- we need a measurement of institutional quality of the countries. For this, we use
the World Bank Ease of Doing Business (EDB) index corresponding to the respective year of
the survey. The EDB-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).
9
On average 28% of the sampled firms have an internationally accepted quality certificate.
There are however large differences across countries, ranging from as high as 73% in the
Czech Republic, 71% in China and 64% in Hungary to a low of 3% to 7% in Guinea Bissau,
Burundi and conflict-affected states like Iraq and Côte d’Ivoire. Interestingly, splitting the
countries by level of institutional quality, the average proportion of certified firms is 38% in
the upper half of countries with better institutional quality, against 19% in the lower half of
countries with weaker institutional quality.
3.2. Econometric model
Since we are interested in explaining both the probability of being an exporter as well as the
export intensity, i.e. the amount of sales coming from exporting for those who export, we
develop an econometric model and estimation strategy that accounts for the zero values in the
export intensity equation for the non-exporting firms. We therefore estimate a two-step
model, inspired by Heckman (1979) for cross-section data, which estimates in the first stage
the likelihood that a firm is exporting. In the second stage, an export intensity equation is
estimated for the exporting firms only, with selection bias correction. Indeed it is likely that
unobservable factors that affect export participation are equally influencing the export
intensity.
Formally, the first step would estimate, using a Probit model, the following equation
Pi (Export=1)= γZ i + ε i
(1)
This is the selection equation, where Pi is the probability that a firms is exporting or not and
Zi is a vector of relevant explanatory variables. In line with the arguments developed above,
the key variables of interest included in Zi are measures of firm productivity and the
possession of an ISC.
Based on equation (1), estimates of the inverse Mill’s ratio will be obtained for each firm as:
λ1i (γ Z i ) = φ(γ Z i ) / Φ (γ Z i ) for the exporting firms and 
λ0i (γ Z i ) = - φ(γ Z i ) / (1- Φ (γ Z i )) for the non-exporting firms
10
where φ(.) is the density function and (.) Φ is the cumulative distribution function of the
standard normal distribution N(0, 1). The inverse Mill’s ratio is the instrument that will be
used to correct the selection bias in the second stage.
In the second step we estimate using OLS:
Log(Exports)=  X i +  λ1 i + ε i
Again, the key variables of interest included in Xi are measures of firm productivity and the
possession of an ISC for testing hypotheses 1 and 3.
By interacting certification with
institutional quality variables of the country where the firm is active, we test whether
certification has a different impact on exports depending on the level of development of the
country (hypotheses 2 and 4).
3.3.Variables
The variables used in the estimations are defined and their summary statistics are presented in
table 2.
Insert table 2 here
The main variable relates to the possession of an Internationally recognised Standards
Certificate (ISC).
Firms were asked in the survey if they ‘possess an internationally
recognised quality certificate (some examples are ISO 9000, 9002, ISO 14000, HACCP (for
food) and AATCC (for textiles)’. We constructed a binary variable equalling one if the firm
answered yes to the question.
Productivity is measured as the normalized sales per employee in the last book year. Given
the large number of countries in the sample, and the fact that sales are expressed in local
currency unit and related to different years for different countries, the variable was normalised
with a min-max normalisation4, where the industry and country minimum and maximum
values were used.
4
Min-max normalization is the process of taking data and transforming it to a value between
0 and 1. The lowest (min) value is set to 0, the highest (max) value is set to 1. This provides
11
We used a dichotomous variable to indicate the ‘institutional quality’ of a country. The
variable takes the value one if the firm is active in a country belonging to the upper half of
institutional quality ranking following the Ease of Doing Business’ measure compiled by the
World Bank.
Control variables
As control variables we include a human capital variable measuring the skills level of the
labour force (%Skilled). We also control for firm size, measured by the log of capital
(lcapital).
In accordance with the literature section, we include in the estimations the
percentage of foreign inputs to measure the possible effect of sunk cost complementarity on
the exporting status and performance. In the export sales equation which we run on the
exporting firms, we equally include the number of years since they first started exporting, as
suggested by Das et al., 2007. Finally, sector and country dummies are included to capture
country and industry specific effects such as exchange rate differences and technological
conditions determining the existence of scale economies.
4. Results
4.1
Who is exporter?
Before turning to the estimation, we first look at the descriptive statistics presented in table 3.
About one third of the entire sample of firms is actually exporting. When we look at the
subgroup of firms without an ISC, this proportion reduces to 23.7%. By contrast, for the
group of firms possessing an ISC, more than half of the firms, or 56.8% is an exporter,
suggesting a strong correlation between the two variables. Also the institutional quality of the
country reveals some differences: of the firms located in countries with better institutional
quality, the proportion of exporters is 41%. In institutionally weaker countries, only 27% of
the firms export. Since we are interested in the interaction of ISC and the institutional quality
of the country, we also present the proportions along these two variables combined. It can be
an easy way to compare values that are measured using different scales. The normalised
value is defined as : ( the value – the minimum )/(the range of values).
12
seen from the table that in institutionally weaker countries, there is a large gap in the
proportion of firms exporting between the ISC holders and the other firms: 19% versus 57%.
In other words, the probability of being an exporter is very low in institutionally weak
countries if the firm has no ISC. On the contrary, when the firm has an ISC, the chances of
being an exporter come close, or even exceed, those of ISC holders in highly developed
countries. In the latter countries, nevertheless, not-having an ISC seems to be less harmful for
the export status: still 31% of the firms are exporting without possessing an ISC.
Firms relative productivity position within the own industry and country is also different and
superior for exporting firms. The low mean value of the productivity variable indicates that
there is a large heterogeneity in productivity across firms, resulting in a skewed distribution of
productivity. Clearly, as suggested in the literature section, holding an ISC is correlated with
higher productivity levels. The values of the productivity variable for ISC holders versus
other firms are 0.13 versus 0.09 respectively. It therefore remains an interesting question
whether, controlling for productivity, ISC will still show up as a significant determinant of
export performance.
Insert table 3 here
To tease out the mechanisms and interactions between the various variables explaining to the
export decision, we present in table 4, column one and two, the results of the probit
estimation. The table 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. The results confirm what was already suggested from the bivariate presentation. More
productive firms are more likely to be exporter. Controlling for this, the possession of a
quality certificate still raises the likelihood of being an exporter by 23%, underscoring the
signalling role of certification and the importance of quality performance in international trade
and providing support for hypothesis one. It is also more likely to be an exporter when the
firm operates from a country with solid institutions, that are instrumental in reducing or
overcoming high sunk cost related to entering foreign markets.
In column two, the interaction term between ISC and InstitutionalQ is added to the equation.
For firms in countries with higher institutional quality, the negative coefficient for the
interaction terms with ISC points at a downward correction of the ISC effect. The coefficient
suggests that the effects from certification are strongest for firms located in low institutional
quality countries and less strong in high institutional quality countries. This implies that in
13
countries with good institutions, the signalling role of ISC is less important. Alternatively in
weakly developed markets, the obtention of an ISC is more important in distinguishing
between exporting and non-exporting firms, indicating that ISC act as substitutes in deficient
markets. This grants support for hypothesis 2.
Interestingly, the additional control variable %Foreigninputs also turns out to be a significant
determinant for the decision to export. Foreign market knowledge acquired through import
activities also facilitates the development of export activities. The positive coefficient for
Lcapital (capital assets) reflects the fact that large firms can more easily incur and overcome
the large sunk costs associated with exporting.
Somewhat remarkably, the skill intensity of the labour force found in many empirical studies
from developed economies is not significant here. Important industry and country differences
are equally observed (but not reported in detail).
Insert table 4 here
4.2 Export sales
Columns three and four show the results explaining the (logarithmic) value of exports.
Higher productivity levels are associated with higher export levels. Controlling for this,
having an ISC significantly raises the value of exports, in support of hypothesis 3. We indeed
find evidence in support of a significant micro-level export bonus for certificate holders,
which at the more aggregate level may lead to a healthy contribution to the export
performance of developing countries, as found by Potoski and Prakash (2009).
On the
contrary, we do not find that the interaction term of ISC and the institutional quality of the
country is significant. Hence, hypothesis 4 is not supported.
To account for longer term influences of the exposure to international market knowledge we
also added the years of experience in exporting to the equation, also including the quadratic
term to allow for non-linearities in the relationship.
We find an inverted U-shaped
relationship between the duration in exporting and the amount of exports. It is calculated that
at the sample means the amount of exports go up by 4% with an additional year of export
experience. Also the skill level of the labour force is positive and significant in the equation
here, as is the percentage of inputs of foreign origin.
14
Altogether, these variables indicate that, while the decision to export is largely determined by
variables related to overcoming initial sunk cost of starting to export, export performance
measured through export sales is explained by firm specific knowledge and skills about the
export market, built up over time.
Finally, the significance of the inverse mill’s Ratio, denoted by λ1, shows that there are
unobservable characteristics that affect both the decision to export and the export intensity.
4.3 Local versus foreign firms
Finally we examined differences in ISC impact for local firms (column 5) versus foreign firms
(column 6). The traditional export determinants – capital intensity and productivity- are
significant and with the expected sign. Certification positively affects export sales in both
subsamples but the effect appears to be larger for local firms than for foreign firms.
6. Discussion and conclusions
This study presents original evidence on the relationship between certification and export
performance at the micro level of the firm, and 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 89 countries we test the basic hypotheses that international
quality certification has a major impact on the decision to export and the intensity of exports,
as measured by the value of exports.
We argue that firms implement internationally accepted standards to improve the efficiency of
their operations and quality of their products and services, two factors that are found to be key
determinants for the export performance of firms. In addition, firm apply for a certificate of
conformity with the international standards to signal to buyers and other stakeholders their
commitment concerning quality of governance and reliability in commercial transactions.
This is an important instrument to reduce both variable and fixed transaction costs, which in
environments characterised by uncertainty and asymmetric information, can be very high and
hampering international trade. A number of recent studies investigate such effects 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
15
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.
Our empirical results support the importance of quality certification for both the export status
and the level of export sales by individual firms. Controlling for productivity of the firm, ISC
raises the likelihood of exporting – in line with argument that it helps to overcome sunk cost
of establishing relations with foreign buyers and facilitates entry. An interesting finding is
that this effect goes up for firms located in institutionally less developed countries, thereby
providing micro evidence for the specific role of international quality certificates as a
substitute institution for reducing transaction costs. Consistent with its impact on the decision
to start exporting, ISC raises export sales by reducing transaction costs and by sustaining the
firm’s competitive edge in international trading relations.
16
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20
Table 1: composition of the sample, by country and incidence of certification
Country survey
Afghanistan2014
Albania2007
Angola2010
Argentina2010
Armenia2009
Azerbaijan2013
Bangladesh2013
Belarus2013
Bolivia2010
Bosnia and Herzegov..
Botswana2010
Brazil2009
Bulgaria2007
BurkinaFaso2009
Burundi2006
Cameroon2009
Chile2010
China2012
Colombia2010
Costarica2010
Croatia2007
Czech Republic2009
DRC2010
DominicanRepublic2010
Ecuador2010
Elsalvador2010
Estonia2009
Ethiopia2011
Fyr Macedonia2009
Gambia2006
Georgia2013
Ghana2007
Guatemala2010
Guinea2006
GuineaBissau2006
Honduras2010
Hungary2009
Indonesia2009
Iraq2011
Ivory Coast2009
N
17
45
116
577
62
8
1,088
57
38
73
53
975
379
34
88
81
602
1,391
572
202
230
55
72
80
92
80
71
106
91
27
48
269
202
96
42
44
81
619
471
110
%ISC
Country survey
0.47
0.33
0.28
0.37
0.35
0.00
0.22
0.16
0.21
0.44
0.21
0.18
0.37
0.24
0.05
0.27
0.36
0.71
0.33
0.19
0.37
0.73
0.13
0.24
0.33
0.23
0.46
0.18
0.36
0.19
0.21
0.07
0.14
0.06
0.05
0.32
0.64
0.11
0.03
0.06
LaoPDR2012
Latvia2009
Lithuania2009
Madagascar2009
Mali2010
Mauritania2006
Mauritius2009
Mexico2010
Moldova2013
Mongolia2009
Montenegro2009
Mozambique2007
Namibia2006
Nepal2013
Nicaragua2010
Nigeria2007
Pakistan2007
Panama2010
Paraguay2010
Peru2010
Philippines2009
Poland2009
Romania2009
Russia2012
Senegal2007
Serbia2013
Slovak Republic2009
Slovenia2009
SouthAfrica2007
SriLanka2011
Swaziland2006
Tajikistan2008
Tanzania2013
TrinidadandTobago2010
Turkey2008
Uganda2013
Ukraine2008
Uruguay2010
Uzbekistan2008
Venezuela2010
21
N
36
60
63
142
16
73
106
1,015
36
126
19
263
95
181
23
870
125
13
69
504
463
67
69
439
214
69
46
71
652
237
61
67
49
73
465
63
201
168
116
44
%ISC
0.19
0.38
0.22
0.10
0.06
0.08
0.16
0.23
0.22
0.19
0.11
0.14
0.28
0.16
0.39
0.09
0.46
0.31
0.25
0.27
0.33
0.28
0.42
0.17
0.07
0.54
0.43
0.52
0.37
0.14
0.26
0.18
0.20
0.26
0.51
0.22
0.20
0.25
0.21
0.18
Jamaica2010
Kazakhstan2013
Kenya2013
Kosovo2009
Krygyz Republic2013
75
46
190
62
44
0.27
0.26
0.31
0.10
0.18
22
Vietnam2009
Yemen2010
Zambia2013
Zimbabwe2011
635
112
135
348
0.28
0.09
0.19
0.32
TOTAL
18,460 0.28
Table 2: Definition of variables
Variable name
Definition
Mean
(STD)
Dependent variables
EXPORT
=1 if the firm exports (in the last fiscal year prior to the survey)
0.14
(0.29)
LEXPORT
Value of those exports, in log.
17.12
(3.53)
0.12
(0.22)
ISC
lcapital
Productivity, measured by sales per employee, in the last fiscal year
prior to the survey, normalised, using the country-industry specific
range
=1 if firm has internationally recognized quality certification
Net book value of the capital stock, in log.
D-Foreign
InstitutionalQ
%Skilled
=1 if the firm is foreign owned
=1 if the firm is active in a country with high institutional quality
Proportion of skilled production workers in total production workers
%Foreigninputs
Percentage of inputs of foreign origin
Yearsexporting
Number of year of experience in exporting
Explanatory variables
Productivity
23
0.27
15.98
(3.38)
0.11
0.41
0.50
(0.28)
28.19
(35.19)
3.81
(8.67)
Table 3: Firm and country characteristics and the export status of the firm: summary statistics
Non-exporting
Exporting
Total
Number of firms
Full sample
With ISC
InstitutionalQ=0
InstitutionalQ=1
12,377
2,209
7,997
4,380
6,083
2,920
2,994
3,089
18,460
5,129
10,991
7,469
% of firms
all
Without ISC
With ISC
InstitutionalQ=0
InstitutionalQ=1
67.05
76.27
43.07
72.76
58.64
32.95
23.73
56.93
27.24
41.36
100.00
100.00
100.00
100.00
100.00
80.04
42.41
19.96
57.59
100.00
100.00
68.79
43.54
31.21
56.46
100.00
100.00
0.102
0.170
0.124
In InstitutionalQ=0:
Without ISC
With ISC
In InstitutionalQ=1:
Without ISC
With ISC
Productivity
24
Table 4: Results of the probit and OLS regressions explaining the export decision and value
OLS
VARIABLES
Productivity
ISC
InstitutionalQ
PROBIT
All firms
EXPORTa
PROBIT
All firms
EXPORTa
OLS
Exporters only
lexport
OLS
Exporters only
lexport
OLS
Local firms
lexport
OLS
Foreign firms
lexport
0.078***
(0.020)
0.227***
(0.010)
0.223*
(0.121)
2.281***
(0.125)
0.608***
(0.048)
2.549***
(0.902)
0.054***
(0.002)
-0.006
(0.014)
0.002***
(0.000)
0.079***
(0.020)
0.251***
(0.013)
0.235*
(0.121)
-0.044***
(0.016)
0.054***
(0.002)
-0.006
(0.014)
0.002***
(0.000)
0.345***
(0.019)
0.292***
(0.092)
0.003***
(0.001)
0.039***
(0.004)
-0.000***
(0.000)
-1.109***
(0.122)
9.807***
(0.568)
2.280***
(0.125)
0.588***
(0.068)
2.530***
(0.898)
0.039
(0.089)
0.345***
(0.019)
0.293***
(0.092)
0.003***
(0.001)
0.039***
(0.004)
-0.000***
(0.000)
-1.111***
(0.122)
9.817***
(0.568)
2.439***
(0.160)
0.537***
(0.078)
1.654**
(0.676)
0.093
(0.101)
0.305***
(0.022)
0.169*
(0.102)
0.001*
(0.001)
0.042***
(0.005)
-0.000***
(0.000)
-1.210***
(0.134)
9.708***
(0.634)
1.917***
(0.201)
0.339**
(0.137)
-0.882
(0.619)
0.039
(0.189)
0.383***
(0.040)
0.752***
(0.193)
0.002
(0.001)
0.041***
(0.012)
-0.001**
(0.000)
-0.522*
(0.283)
10.529***
(1.200)
18,451
18,451
6,051
0.788
6,051
0.788
4,653
0.779
1,398
0.815
ISC*InstitutionalQ
lcapital
%Skilled
%Foreigninputs
Yearsexporting
Yearsexporting^2
λ1
Constant
Observations
R-squared
Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1;
a
Marginal effects reported, 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.
25