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35,10 Impact of ISO 9000 certification
on firm performance: evidence
from Brazil
974
Francisco Starke
FEA (School of Economics and Administration), Universidade de São Paulo,
São Paulo, Brazil
Rangamohan V. Eunni
Williamson College of Business Administration, Youngstown State University,
Youngstown, Ohio, USA, and
Nuno Manoel Martins Dias Fouto and Claudio Felisoni de Angelo
FEA (School of Economics and Administration), Universidade de São Paulo,
São Paulo, Brazil
Abstract
Purpose – The purpose of this paper is to investigate the impact of ISO 9000 certification on three
dimensions of firm performance that are theoretically derived to have a relationship with the adoption
of ISO 9000 standards, namely, sales revenue, cost of goods sold/sales revenue, and the asset turnover
ratio (sales/total assets).
Design/methodology/approach – Employing a panel data approach covering all publicly traded
companies in Brazil that had adopted the ISO 9000 standards from 1995 to 2006, the authors
investigate the impact of the certification on firm performance using three categories of economic
regression models: the pooling of cutting data with ordinary least squares, the fixed effects and the
random effects.
Findings – ISO 9000 certification is found to be associated with an increase in sales revenues,
decrease in cost of goods sold/sales revenue and increase in the asset turnover ratios of the certified
firms.
Research limitations/implications – The research findings suggest that companies large or
small, irrespective of their capital structure (i.e. debt/equity) and cutting across industries will benefit
from the adoption of ISO 9000 standards. However, the extent to which firms benefit from such
adoption is likely to vary. Moreover, the generalizability of the research findings is limited by the size
of the sample.
Originality/value – The paper’s chief contribution lies in the validation of the signaling theory in
the context of business organizations and extending the domain of research on this topic to emerging
markets generally.
Keywords Brazil, Public companies, ISO 9000 series, Organizational performance, Sales turnover
Paper type Research paper
Introduction
The ISO 9000 family is widely recognized as a quality management system and is
Management Research Review increasingly popular among large and small companies alike around the world. Originally
Vol. 35 No. 10, 2012
pp. 974-997 published by the International Organization for Standardization (ISO) in 1987, the
q Emerald Group Publishing Limited standards underwent successive revisions in 1994, 2000, and more recently in 2008. The
2040-8269
DOI 10.1108/01409171211272697 popularity of the certification could be gauged from the fact that the number of firms that
had adopted the standards increased from a mere 46,571 in 1993 to 1,064,785 spread over Impact of ISO
176 countries in 2009 (ISO Survey, 2010). In B2B transactions such as in the auto industry, 9000 certification
manufacturers typically require their suppliers to be ISO 9000 certified as an assurance
for quality and reliability of components (Barnes, 1998). The European Commission and
other European Community institutions actively promoted the adoption of the ISO 9000
standards which were eventually incorporated in the European Union business directives
(Karapetrovic et al., 2010). As a result, over 0.5 million firms have adopted the standards 975
in Europe. The corresponding number of firms in China is over 0.25 million (ISO, 2010).
There was a remarkable growth in the numbers of certified businesses around the world
since its inception in 1994-2010. Is the growing popularity of the ISO 9000 due to the
perceived benefits of such certification? Does ISO 9000 contribute to enhancing firm
performance?
The evidence is mixed and often contradictory. Proponents of the standards cite
benefits such as improved operational efficiency, enhanced customer satisfaction, increase
in market share, cost savings, competitive advantage, perceived higher quality, increased
revenues and operating income (DeAngelis, 1991; Hambrick and Mann, 1995; Castledine
and Bannister, 1996; Elmuti, 1996; Aksoy and Schaedel, 1997; Ebrahimpour et al., 1997;
O’Neil, 1998; Zuckerman, 1998; Casadesus and Gimenez, 2000; Douglas et al., 2003;
Corbett et al., 2005; Bhuiyan and Alam, 2005; Dunu and Ayokanmbi, 2008). On the other
hand, the certification process has been criticized as being expensive and time consuming
without any real gains in financial performance accruing to the firms (Mallak et al., 1997;
Joubert, 1998; Stevenson and Barnes, 2001; Han et al., 2007). These divergent inferences
might in part be due to their focus on macro measures of firm performance such as market
share, profitability, operating income, etc. which could be confounded by factors other
than ISO 9000 quality certification.
Moreover, many of these studies were cross-sectional focusing on financial
performance in particular years following certification rather than over time (Lima et al.,
2000; Singels et al., 2001; Martinez-Costa and Martinez-Lorente, 2002; Nicolau and
Sellers, 2002; Tari and Molina, 2002; Santos and Escanciano, 2002; Naser et al., 2004;
Bayati and Taghavi, 2007; Han et al., 2007). In studies which were longitudinal too,
the data were collected for specific years in a time span rather than in all the years
(Corbett et al., 2001; Wayhan et al., 2002; Terlaak and King, 2006; Dick et al., 2008;
Karapetrovic et al., 2010). Moreover, in both types of studies, the theoretical basis
for adopting particular measures of firm performance was not always rigorously
established. With a view to address these possible limitations, in our study we employ
the panel data approach and include all publicly traded companies in Brazil that have
adopted the ISO 9000 standards over a 12 year period, 1995-2006. We investigate the
impact of the certification on three dimensions of firm performance that are theoretically
derived to have a relationship with the adoption of ISO 9000 standards namely, sales
revenue, cost of goods sold and asset turnover ratio.
The rest of this paper is structured as follows. In the next section, we review relevant
literature relating the adoption of ISO 9000 standards to the financial performance of
firms followed by the derivation of hypotheses formulated for this study. We then report
on the methods and results of statistical analysis to test these hypotheses. We conclude
with a discussion of the findings of the study and its implications.
MRR Literature review
35,10 There is no consensus concerning the effective contribution of quality management
practices to the performance of a company. Despite the existence of a series of studies
that point to a positive correlation between ISO 9000 certification and superior financial
performance of certified firms, a number of researchers suggested that the standard is
either process focused or works as a marketing strategy, devoid of any direct impact on
976 corporate financial performance.
There have been a number of cross-sectional studies which concluded that ISO 9000
certification correlates with a positive impact on a firm’s financial performance. Tari
and Molina (2002) found a positive correlation between ISO 9000 registration and the
business performance of companies. The authors used factor analysis and cluster analysis
to evaluate total quality management and its effects on ISO 9000 certified firms.
Additionally, the authors concluded that these firms achieved greater customer
satisfaction, employee satisfaction, social impact and heightened business performance.
Naser et al. (2004) developed a performance evaluation model based on a sample of
companies located in Malaysia and confirmed that ISO 9000 certified companies
experience higher financial success.
Nicolau and Sellers (2002) conducted an event study in Spain, analyzing the stock
market’s response to a company after it had become ISO 9000 certified. The results
showed a significant positive reaction to ISO 9000 certification as measured by an
increase in stock price. They had also noted that such certification gives shareholders a
means of predicting a firm’s future success. Casadesus and Gimenez (2000) measured the
firms’ performance before and after certification, and derived a positive correlation
between ISO 9000 certification and a business’ financial success. Earlier on, Lloyds
Register of Quality Assurance Ltd’s (1996) survey found that the performance of ISO
9000 certified companies measured by sales growth, profit margins, and return on
capital employed was far superior to the industry average.
On the other hand, several other cross-sectional studies contradicted these findings
and concluded that there is no relationship between a firm’s performance and ISO 9000
certification. For instance, studies by Lima et al. (2000) in Brazil, Singels et al. (2001) in
The Netherlands, and Martinez-Costa and Martinez-Lorente (2002) in Spain found no
association between ISO 9000 certification and improved firm performance. In a survey
of 100 quality professionals in UK firms conducted by Douglas et al. (2003), 49 percent of
respondents opined that no benefits in terms of cost savings or waste reduction resulted
from the adoption of ISO 9000 standards.
Similarly, Dimara et al. (2004) found that there were no significant improvements in
financial performance indicators of the firms studied after six years of the adoption
of ISO 9000. Based on a study of the performance effects of the adoption of ISO 9000
standards by companies manufacturing electronic, electrical equipment and
components, chemicals and allied products in the USA, Han et al. (2007) reported
that ISO 9000 certification does not by itself guarantee customer satisfaction or
improve a firm’s business performance. Finally, Dunu and Ayokanmbi (2008) had
found that while revenues and operating income improved following ISO 9000
certification, there were no significant improvements the ratios of revenue to assets
or operating income to assets. They had also reported that although ISO 9000
certified firms performed better than non-ISO 9000 firms, the differences were not
statistically significant.
Extant research on the relationship between ISO 9000 certification firm performance Impact of ISO
also includes several longitudinal studies with considerable divergence in their findings. 9000 certification
For instance, Heras et al. (2002a, b) compared the return on assets employed of
400 accredited and 400 non-accredited Spanish firms, and found that the returns on
assets employed were consistently better in certified firms than in non-certified ones.
However, these scholars had also noted that the success might be due to an increased
propensity to pursue ISO 9000 certification, and their research did not measure the firms’ 977
performance after receiving certification.
Corbett et al. (2005) had investigated the performance of US companies with SIC codes
2000-3999 during 1987-1997 using event-study methods, and found that the ISO 9000
certification was indeed followed by significant abnormal improvements in financial
performance although the exact timing and magnitude of this effect depended upon the
specification of the control group. The measures of performance used in this study were
return on assets, Tobin’s q, cost of goods sold/sales and sales/assets. Haversjo (2000)
investigated 664 firms, some of which were ISO 9000 certified while others were not
using the rate of return as the measure of firm performance, and concluded that ISO 9000
certified companies yielded drastically higher rates of return than non-ISO firms.
However, much like the study conducted by Heras et al. (2002a, b), these tests fail to
account for pre-ISO versus post-ISO performance.
In contrast to the foregoing studies, several longitudinal studies had concluded that
ISO 9000 certification has no impact on a firm’s financial success. For instance,
Wayhan et al. (2002) found that in a sample of 96 US firms, although there was no increase
in sales, cost savings resulted in increased profitability in ISO 9000 certified firms during
1994-1998. The return on assets of these firms was only marginally higher than those
without such certification. Haversjo’s (2000) analysis of the returns on capital employed of
800 Danish companies between 1989 and 1995 also found no significant improvement post
certification for three years. However, the certified firms enjoyed four years of better sales
growth compared to the non-certified firms.
Heras et al. (2002b) found that, although the performance of certified companies is
superior to that of non-certified firms generally, there is no evidence of improved
performance differentials between the two post certification. They had therefore
concluded that the superior performance of certified firms might be because such firms
have a greater propensity to pursue ISO 9000 registration. The measures of performance
were sales growth and return on total assets and the period covered was 1994-1998.
Similarly, Karapetrovic et al. (2010) had analyzed the benefits and costs of ISO 9001
certification for more than 1,000 firms in Catalonia, Spain and found that the benefits of
certification have gradually decreased over time. In addition, they concluded that
the costs of becoming ISO certified have also decreased over the last several years.
A summary of research studies on this topic during the period 2000-2010 along with the
nature of findings on the relationship between ISO 9000 certification and firm
performance as well as the metrics used to estimate firm performance is presented in
Table I. For ease of reference, these studies are organized into a 2 £ 2 matrix using the
nature of study – cross-sectional/longitudinal and the findings whether ISO certification
affects business performance – yes/no, which is presented in Table II.
The differing reasons that lead companies to obtain the ISO 9000 certification may have
an explanation for the divergent outcomes (Jones et al., 1997). Gore (1994) argued that if a
company had chosen to obtain the certification for exogenous reasons, then the certification
978
35,10
MRR
Table I.
Impact of ISO 9000
research, 2000-2010
certification on firm
performance: summary of
Cross-sectional/ Does ISO 9000 affect business
Research study longitudinal performance? Yes/no Variables used to measure firm performance
would be seen as an end in itself and the company might make minimal changes in quality
management systems in order to achieve certification. Companies that view ISO 9000 as an
opportunity to adopt and improve their quality management systems are more likely to
reap improved performance consequences than those that see the certification merely as a
token or badge of achievement (Heras et al., 2002a, b). ISO 9000 certification thus serves as
a sign of higher quality attributes, not necessarily observable, which would provide a
competitive advantage. These explanations linking performance outcomes of ISO 9000
adoption to the underlying motivational factors are novel and interesting but need to be
empirically established before credence could be placed in them.
In our assessment, there are three issues with the extant research on the ISO 9000
certification – firm performance relationship on both sides of the aisle, which need to be
addressed in order to be able to make valid statements about the performance implications
of the quality management system. First, the nature of the association between the adoption
of the ISO 9000 standards and firm performance needs to be rigorously grounded in theory.
Second, the study should necessarily be longitudinal with a sufficiently long time span and
with data for all the years in order to be robust enough to yield credible inferences. Third,
the metrics of performance should as far as practicable be those measures which are less
likely to be confounded by myriad other factors that could potentially influence firm
performance. For instance, profitability would not be an appropriate performance measure
to capture the impact of ISO 9000 certification because whether it is defined as operating
margin, net margin, return on sales or return on assets because all such measures are
arrived at after accounting for various operating expenses, interest and/or taxes, which can
impact and confound the performance metric. Our present study is an attempt to address
these issues. We ground our argument to propose a direct and positive relationship between
ISO 9000 certification and firm performance in the theoretical framework of information
economics (Akerlof, 1970; Spence, 1973). The relationship will be explored in a longitudinal
setting spanning 12 years with panel data for each of the years over this time span. Finally,
the metrics that we will use to estimate firm performance will be such that extraneous
MRR influences are likely to be minimal. The metrics chosen for this study and the reasons
35,10 therefore will be elaborated in the section on methods.
Hypothesis development
Impact of ISO 9000 adoption on sales revenues: an economic argument
Quality is not an absolute measure, but a goal to be achieved, which is constantly changing
980 as consumer needs and demands evolve. A consumer prefers to source a supplier who has
established credentials of quality whether by the consistency of deliveries, the reliability of
materials used, or more generally by the capacity of the supplier to understand the
consumer’s desires. Consumer is the judge of a product’s quality. To judge correctly, they
need accurate and complete product information. Asymmetric information could result in
bad choices, especially in economic decision making and lead to imperfect agreements and
inefficiencies (Radner, 1968; Rosser, 2003). In classical economics, dispersed, tacit, and
inaccurate information is what is termed as asymmetric information.
Asymmetric information results in preponderance of “lemons” (low quality products),
which undermine the credibility and price of higher quality products leading to their
withdrawal from the market (Akerlof, 1970; Rosser, 2003). The phenomenon in which
“lemons” force quality goods to be withdrawn from the market is termed adverse
selection. Akerlof (1970) developed this theory in the context of organizations and
illustrated it with the example of used car dealerships. A solution to this problem of
market imperfection would be to develop enough reputation so a consumer would give
necessary credence to the seller. By making information more symmetrical to the market,
a company creates the necessary reputation so its product’s quality becomes
unquestionable, keeping the “lemons” off direct competition (Figure 1). Kreps (2004)
uses the term “hidden information” to describe the same phenomenon. The antidote for
hidden information is its disclosure. This is achieved through certificates, opinions of
independent bodies, advertising, etc. Spence (1973) terms it as the “signaling” of
capabilities. Companies could set a higher price for their products, provided they could
show that their products are not “lemons”. The creation of reputation would signal the
reduction of asymmetric information for consumers, which can serve as an entry barrier
preventing “lemons” from entering the competition. The ISO 9000 certification is one
such signaling approach designed to differentiate quality products from lemons.
The ISO 9000 certification requires the completion of an audit carried out by an
independent certification body. Certification once achieved is subject to periodic review to
maintain its continuance, usually once every two to three years. Thus, ISO 9000 certification
is an ongoing signaling process: that by performing a regular review, a company seeks to
Figure 1. Note: George Akerlof and Michael Spence shared the 2001 Economics Nobel Prize with
Akerlof-Spence signaling Joseph Stiglitz for this work
approach
Source: Based on Akerlof (1970) and Spence (1973)
continuously improve their quality management practices. Terlaak and King (2006) Impact of ISO
highlight that the previous studies on the impact of quality on firm performance failed 9000 certification
to explain from a theoretical standpoint the nature of quality management, and the
causal relationship between ISO 9000 certification and firm performance.
A company that implements the ISO 9000 standards is in effect making a statement,
informing potential customers that its products and services result from an organized and
structured process management system, which is continuously seeking improvement. 981
This is not known to consumers because it is an internal practice and is therefore a hidden
attribute of the company and its products. ISO 9000 certification thus serves as a signal to
the market, conferring a competitive advantage to the companies by disclosing
information on hidden attributes (Terlaak and King, 2006) thereby distinguishing certified
companies from non-certified ones (Anderson et al., 1999), enabling them to charge a
premium price as well as achieve enhanced sales volume. Exploring the strategic use of
decentralized institutions such as the ISO 9000/ISO 14000 management standards,
King et al. (2005) theorized that firms use such certifications as a means to reduce problems
that could arise with exchange partners who lack credible information or fear supplier
opportunism. Certification thus emerges a way to provide credible information about
hard-to-observe organizational attributes. In fact, King et al. (2005) confirmed that
certification reveals the existence of an underlying management system and
demonstrated that such systems are associated with performance improvements.
Nayyar (1990) argues that the asymmetry is one of the most important factors to
determine the transaction costs in an exchange relationship: the consumer lies within
an environment that depends, in large part, on that information provided before and
after their purchase. Therefore, firms that consider quality a marketing priority need to
reduce this information asymmetry; the certification of this quality and the related
management systems would, therefore, help reduce this phenomenon, and ensure an
advantage over those competitors who do not take into account the value of quality
(Nicolau and Sellers, 2002).
By choosing to obtain the certification, a company is in effect signaling to the market,
their suppliers and consumers that it offers high-quality products and services, due
to some hidden attributes (quality management systems), information to which the
various interested parties (stakeholders) have no access. ISO 9000 certification makes the
information less asymmetrical and the selection less adverse. Removal of asymmetry in
information about a company’s products not only enables it to charge a higher price but
also attract more customers due to the recognition of quality of its products. Both these
factors contribute to an increase in the sales revenues of firms following the adoption of
ISO 9000 standards.
Unlike other profit linked measures of financial performance such as operating or net
income, return on sales, return on assets, etc. which could be confounded by myriad
other factors such as operating expenses, interest and taxes, sales growth is one measure
that could capture the impact of ISO certification directly and with integrity. It is in part
for this reason that in some earlier studies such as those of Haversjo (2000), Dimara et al.
(2004) and Dunu and Ayokanmbi (2008) the total sales or increase in sales were used to
measure firm performance following such certification. Based on these arguments, we
hypothesize as follows:
H1. There is a direct and positive relationship between ISO 9000 certification and
increase in sales revenues.
MRR ISO 9000 adoption and cost savings
35,10 The cost of quality concept postulates that as quality improves the total cost of quality
decreases (Hendricks and Singhal, 2001). The internal and managerial motivation to
adopt ISO 9000 often has a beneficial impact on the company’s ability to achieve
performance effectiveness configuration (Boiral and Amara, 2009). Withers and
Ebrahimpour (2000) believe that realization by the management of the intrinsic value of
982 ISO 9000 certification is an important factor in securing a competitive advantage.
Operating a company according to the process management model recommended by
ISO 9000 may also contribute to reducing the development time for new products and the
production costs in general (Dimara et al., 2004) as well as to improve the efficiency of
internal processes (Santos and Escanciano, 2002).
Based on a survey of 393 professional members of the Quality Management Division
of the American Society for Quality (ASQ), Sower et al. (2007) found that as a company’s
quality control system matures, the quality cost distribution will systematically change
among the four categories of costs recognized by the ASQ – prevention, appraisal,
internal and external failure costs. The study found that external failure costs decrease
as a percentage of total quality cost as the organization’s quality system matures. The
study also found evidence for the premise that external failure costs decline with
increased appraisal costs and that both internal and external failure costs decrease with
increases in prevention costs. As a company’s quality system matures, the proportion of
total quality cost spent on prevention activities increases while the costs of external
failure decrease. Total cost of quality decreases over time for companies with quality
systems and which track the cost of quality but the magnitude of the decrease
diminishes the longer the quality system has been in place.
Anderson et al. (1999) indicated as important motivators in obtaining ISO 9000
certification:
.
cost reduction and consequent improvement of product quality;
.
the lower costs of operating with various customers;
.
the opportunity for internal improvement in management processes of
companies; and
.
the greater involvement of employees.
Han et al. (2007) conclude that the efforts to obtain the ISO 9000 certification increase
competitiveness, which in turn increases the performance of companies. This is due to the
improved quality, reduced costs and operational flexibility. Docking and Dowen (1999)
reported that adherence to ISO 9000 certification indicates that the company has been
positioned itself in the market for a long time which in turn leads to business
commitment. Certification compliance process cuts internal production costs, which can
be transferred to customers and investors.
The main reason for adopting the ISO 9000 standards is to improve organizational
performance through a more efficient use of resources and processes in order to generate
better quality products and services. Following Corbett et al. (2005), we argue that
implementation of the ISO 9000 quality management system requires the management of
the company and its employees to work with discipline. It entails adoption of procedures
that ensure that quality is measured and corrective steps taken when necessary. Focus on
failure prevention leads to the reduction of operating costs due to earlier detection of defects
which could be corrected at a lower cost. By documenting these practices, obsolescence is Impact of ISO
eliminated with timely response to changing quality expectations. While cost savings 9000 certification
would impact profitability, as argued earlier, the latter measure defined as operating
margin or net margin would not accurately capture the true impact of ISO 9000 certification
on such savings. This is due to the fact that operating income/margin is arrived at after
accounting for a variety of operating expenses from sales revenues while net
income/margin is computed after deducting interest and taxes. For the same reasons, 983
any “return” or “income” based measures of profitability such as return on sales or return
on assets would not be accurate metrics to capture the performance implications of
ISO 9000 certification. Hence, we preferred to use cost savings scaled over the sales
revenues as an appropriate measure of firm performance. Based on this line of reasoning,
we hypothesize as follows:
H2. ISO 9000 certification is likely to be associated with reduction in the ratio of
cost of goods sold to the sales revenues of the certified firm.
Methodology
Variables and their operationalization
The description and types of variables used in our study are summarized in Table III.
The independent variable in our study was “ISO 9000 certification”, which is an
indicator variable. It may take the value 0 for non-certified publicly held companies
MRR
Variable name Description Type
35,10
TOT VEND Annual sales revenue Financial/dependent
CSVtoVEND Ratio of production cost to sales revenue Financial/dependent
VENDtoAT TOT Ratio of sales revenue to total assets Financial/dependent
CERT ISO Company’s certification by ISO 9000 Indicator/independent
984 RISCO Operating risk Financial/control
LUCRAT Profitability calculated by net margin Financial/control
ENDIV Long-term debt to equity ratio Financial/control
TAM EMP Firm size ¼ logarithm of total assets Financial/control
Table III.
Variables used in the Note: Notation used for the names of the variables is based on their description in Portuguese
regression models Source: Prepared by the authors
or for periods in which they did not have ISO 9000 certification and 1 for companies
with ISO 9000 certification, under any of the available versions: 1987, 1994 or 2000.
The dependent variables of our study are annual sales revenue, the ratio of
production cost to sales revenue, and the ratio of sales revenue to total assets. We have
decided to primarily rely up on sales revenue related measures to estimate financial
performance rather than the more popular profit linked measures such as return on
sales, return on assets, etc. because such measures do not capture performance
consequences of the occurrence of an event such as ISO certification with integrity. Any
financial ratio that is income or profit linked necessarily incorporates all direct costs and
operating expenses, and in the case of net profit even interest costs and taxes. In effect, an
increase in sales presumably resulting from an event such as ISO certification gets
confounded by a host of these extraneous factors such as operating efficiencies, capital
structure of the firm and tax burden in a country. In order to eliminate the impact of all
such unrelated influences and focus on the effect of ISO certification on firm
performance, we preferred to confine the metrics of our study to sales revenues,
production costs/sales and sales/assets. We believe that in this manner we would be able
to isolate the impact of ISO certification on firm performance in a more robust way.
The controls variables of our study are operating risk, profitability measured by net
margin, long-term debt to equity ratio, and firm size. Operating risk is measured by
sample standard deviation of the return on assets over the period 1996-2006.
Profitability is measured by the net margin, i.e. the ratio of net operating income and net
revenue multiplied by 100. Debt to equity ratio is given by the ratio of long-term debt and
total equity multiplied by 100. Finally, company size is measured by the logarithm of
total assets. The control variables were carefully chosen to ensure that the effect of
extraneous factors on the relationship between the independent and dependent variables
is minimized.
This study was conducted in Brazil using Portuguese language software for
statistical analysis. As a result, the notation used for the names of the variables is based
on their description in Portuguese.
Y it ¼ b 0 þ b j x it þ m it þ a i
where b0 represents the intercept, the other bj represent the coefficients of each regressor
variable, i represents the i-th cross-section unit (publicly held companies), t represents
the t-th period of time, mit represents the error term, and ai the random error of each
cross-sectional unit. While the fixed effects model considers that the intercept b0 of the
model may vary among individual companies to account for the fact that each company
may have special characteristics, the random effects model considers that the intercept
MRR of any individual company would be a random extraction of a much larger population
and with a constant average value (Wooldridge, 2006, p. 526).
35,10 Three categories of econometric regression models were employed: the pooling of
cutting data with ordinary least squares, the fixed effects and the random effects. Static
panel data models are those that consider strictly exogenous independent variables
(regressors), which admit no lags from the dependent variables (Richieri, 2007, p. 109). We
986 used the Fischer, Breusch-Pagan and Hausman tests to accept or reject the null hypotheses
related, respectively, with:
.
the existence or not of a single intercept of the cross-section units;
.
variance set to zero; and
.
estimators being consistent with the generalized least squares.
Results
The final regression models applied to test the hypotheses of this study are presented
below:
The descriptive statistics for all the variables are summarized in Table IV.
Multicollinearity between variables was investigated through the variance inflation
factors. The VIF values ranged from a minimum of 1.017 and a maximum of 1.121,
validating the regression models. For values over 10, it is recommended to remove such
variable from the regression model. This has not occurred in this study as can be seen from
Table V. The use of all the variables proposed was validated in the regression models as
seen from the correlation matrix presented in Table VI.
Note that the independent variable CERT_ISO has negative correlation coefficients with
CSVtoVEND, RISCO and ENDIV. We thus infer that ISO 9000 certification contributes
positively to the reduction of:
.
production costs;
.
risk; and
.
debt.
TOT_VEND 528
CSVtoVEND 528 7.0655 £ 10þ 01 1.2866 £ 10þ 01 7.1993 £ 10þ 01 0.0000 1.1039 £ 10þ 02 0.182098
VENDtoAT_TOT 528 92.2734 82.6697 75.1507 0.0000 703.443 0.895921
CERT_ISO 528 1.14962 0.690378 1.0000 0.0000 2.0000 0.600527
RISCO 528 5.95630 5.38498 4.63288 0.0000 36.4312 0.904081
LUCRAT 528 4.28067 42.59720 4.71278 2 135.9040 902.9260 9.951060
ENDIV 528 68.55370 327.59000 50.71290 25,429.050 2,353.690 4.778590
TAM EMP 528 14.31150 1.76606 14.24050 0.0000 19.1881 0.123402
Source: Prepared by the authors
9000 certification
Descriptive statistics
Impact of ISO
987
Table IV.
MRR ISO 9000 certification and annual sales revenues
35,10 The H1 of our study was designed to ascertain whether there is a direct and positive
relationship between the adoption of ISO 9000 standards and increase in sales revenues
of the firm post certification. Table VII presents the regression results. For our panel of
44 companies, the best model based on the Fischer, Breusch-Pagan and Hausman tests
was the fixed effects model. This is also confirmed by the Akaike and Schwarz criteria.
988 All the coefficients for the independent ISO 9000 certification variable appeared
positive and significant at 1 percent, evidencing positive contribution of the
certification to increase in sales revenues. Thus, our H1 was confirmed. As
theoretically predicted, the adoption of ISO 9000 standards by a firm is followed by a
significant increase in its sales revenues.
Table VII.
989
990
35,10
MRR
Table VIII.
of the three models, the random effects model emerges as the best model to explain this
relationship. However, the Akaike and Schwarz criteria suggest that the fixed effects
should also be considered because the values were lowest for the fixed effects model.
All the coefficients for the independent variable in the random effects model were
positive and significant at 1 percent, allowing us to infer that H3 is also validated. The
signs of all other variables, except profitability (net margin) in the pooled OLS model,
were along expected lines. Thus, we conclude that the adoption of ISO 9000 standards
by a company is associated with an increase in the asset turnover ratio, i.e. sales
revenue/total assets of the certified firm.
In sum, all the three hypotheses formulated for our study were confirmed by the
panel data of 44 publicly held companies in Brazil during the years 1995-2006.
Discussion
The increasing popularity of the ISO 9000 begs the question whether it is due to the
perceived benefits of such certification and whether the certification does in fact
contribute to enhanced firm performance. Although this topic has received extensive
attention of scholarship, the findings of extant research are divergent and often even
contradictory. This, in our view, might be due to the use of profit linked measures of firm
performance, which do not accurately isolate the impact of ISO 9000 certification.
Moreover, many of these studies were cross-sectional. Even where the studies were
longitudinal, the time span employed was often limited. With a view to address these
issues, our study covered a 12 year period, 1995-2006, and we used annual sales
revenues, the ratio of cost of goods sold to sales revenue and asset turnover ratio to
measure firm performance, which are less likely to be confounded by extraneous factors.
We grounded our argument to propose a direct and positive relationship between
MRR ISO 9000 adoption and firm performance employing the theoretical lens of information
35,10 economics (Akerlof, 1970; Spence, 1973). The hypotheses we formulated relate
ISO certification to the three measures of firm performance, namely, annual sales
revenues, the ratio of cost of goods sold to sales revenue and asset turnover ratio. All the
three hypotheses were confirmed by the panel data of all publicly held companies in
Brazil, which had adopted the ISO 9000 standards during the captioned period. Thus, we
992 found that adoption of ISO 9000 standards is followed by an increase in sales revenues,
decrease in the cost of goods sold/sales revenue and an increase in the asset turnover
ratios of the certified firms.
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Further reading
Franceschini, F., Galetto, M. and Gianni, G. (2004), “A new forecasting for the diffusion of the ISO 997
9000 standard certification in European countries”, International Journal of Quality
& Reliability Management, Vol. 21 No. 1, pp. 32-50.
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Brazilian publicly-traded companies”, doctoral dissertation, Universidade Presbiteriana
Mackenzie, São Paulo.
Corresponding author
Rangamohan V. Eunni can be contacted at: rveunni@ysu.edu