In ‘Growing Exports by Signaling Product Quality: Trade Competition and the Cross-National Diffusion of ISO 9000 Quality Standards’, (Cao, Prakash, 2011), the issue of information asymmetrics is explored. Information asymmetrics describe a market condition where knowledge is not available at equal levels thus leading to incomplete ‘governance failure’.
The paper looks at the role ISO 9000 certification has in correcting this information irregularity against a positive background of ‘consensus that ISO 9000 adoption is valuable because it constitutes a credible signal about firms’ internal quality assurance practices. Exporting firms are therefore likely to believe that ISO 9000 adoption will improve their competitive position in relation to the non-ISO 9000 certified firms, or deny advantage to their competitors who have adopted these standards’.
The paper specifically raises the issue of the need for certification: ‘Why would a firm desire ISO 9000’s branding? After all, ISO 9000’s requirements are fairly straightforward and can be downloaded on the Internet. If improvement in quality were the sole motivation, firms would adopt ISO 9000–like practices without bothering with third-party certification, which is required to get the firm registered as ISO 9000 certified. Obviously, firms are willing to bear the expenses of third-party certification because they perceive some value in getting a formal ISO 9000 certification. This suggests that the ISO 9000 brand allows them to signal quality and improve their competitiveness’.
The conclusion is that ‘actors can themselves seek to respond to information problems by joining a decentralized, private solution, ISO 9000 quality certification standards. Given that trade is impeded by information asymmetries between international buyers and sellers, ISO 9000 is a mechanism by which sellers can mitigate these asymmetries, signal quality, and improve their competitiveness’.
These issues of certification to ISO 9000 solving some of the problems of asymmetric information and thus supporting trade were also discussed in Potaski, Prakash (2009), with the paper showing ‘that ISO 9000 certification levels are associated with increases in countries’ bilateral exports, particularly for developing countries’ exports, which may be due to their more severe quality assurance challenges’.
Paper available for purchase
Penn State University (Cao), University of Washington (Prakash)
Iowa State University (Potoski), University of Washington (Prakash)