Supply chain transactions have become more complex and international than ever, making it increasingly difficult for buyers to observe and ensure quality sellers (Terlaak and King 2006). The International Organization for Standardization’s main objective is to provide a set of harmonized worldwide technical standards in order to facilitate international exchanges and promote global trade (Clougherty and Grajek 2014). In the early years, international standards like ISO 9000 had proven significant in acting as the determinants of international trade, indeed, more than that of national standards (Clougherty and Grajek 2014; Potoski and Prakash 2009). Specifically, the ISO 9000 Quality Assurance Standards were published by the Technical Committee (TC176) of the International Organization for Standardization in 1979 to provide universal quality management standards and to rectify information asymmetry issues in international trade. It has been proven that ISO 9000 can act as an effective driver to increase trade (Potoski and Prakash 2009; Terlaak and King 2006). However, in recent years many experts find that the effectiveness of quality management standards are deteriorating due to a process of institutionalization.
Although the original idea of quality management standards was to assure customer satisfaction and facilitate international trade, such a purpose can be easily distorted due to institutionalization. Institutionalization refers to a process whereby organizational innovations become more symbolic in their surface value and less substantial in their actual practice (Staw and Epstein 2000). In other words, firms could symbolically adopt quality management standards without really attaching to their principles. We conducted a large-scale longitudinal study based on objective archival data from firms listed in Shanghai and Shenzhen, China. We traced the relevant quality certifications obtained by a firm and the corresponding performance changes in Chinese manufacturing firms in the past 15 years (2000–2014).
A major research gap in the literature is that although it has long been argued that the process of institutionalization (i.e., symbolic adoption to meet regulatory requirements) will significantly weaken the effectiveness of quality management standards in China, there is a lack of objective evidence based on longitudinal data from the country. By tracking the time of firms’ quality management certifications over 15 years (from 2000 to 2014) and using objective accounting and financial data from stock listed firms in China, we provide first empirical evidence on the institutionalization of quality standards in the country based on longitudinal analysis of objective data (including sales performance and cost-efficiency). Our contribution to the literature is that our empirical evidence will help explain why the original purpose of quality management standards can be distorted and quality certifications in China can become less effective as time goes by and many firms adopt the standards symbolically rather than substantially.
Quality management standards and international trade
Before the establishment of the ISO 9000, information asymmetry appeared to be an unrecognized barrier within international trade agreements (Potoski and Prakash 2009). In fact, lack of certainty in the credibility of quality impedes international trade and thus should not be an overlooked issue (Grossman 1981; Lavissiere and Rodrigue 2017; Munim and Schramm 2018). This was especially true for developing countries, where there is often a lack of credible authorities to distinguish higher quality products from lower quality products. More importantly, buyers often associate poor quality of exports with these countries. As a result, firms that are actually capable of producing high quality products find themselves in a weak position when bargaining for a good price (Potoski and Prakash 2009). Quality management standards thereby can be an effective way to ease this information asymmetry issue and to promote the exports of less developed countries (Munim and Schramm 2018; Potoski and Prakash 2009).
According to Anderson et al. (1999), firms implement ISO 9000 for three main reasons: 1) to comply with government regulations, 2) to meet buyers’ quality requirements and enhance their confidence and business relationships, and 3) to gain operational efficiency. ISO 9000 has been widely adopted by firms all over the world. To obtain ISO 9000, a firm is required to establish written quality management processes and procedures that specify an internal quality policy and targets along with regular reviews and reports through accredited third-party audits. Firms need to provide training to staff members and designate a quality representative to coordinate the implementation of quality management systems. This extensive requirement allows ISO 9000 to be a credible agent to improve a firm’s internal quality systems and procedures (Potoski and Prakash 2009).
Quality certifications also allow firms, especially those located in developing countries such as China, to signal to potential international buyers their product quality (Terlaak and King 2006). Identification of high quality sellers has been a central issue surrounding international trade because desirable attributes are often complex and difficult to measure (Munim and Schramm 2018; Terlaak and King 2006). Linguistic and cultural differences further hinder credible international communication and negatively affect the confidence of international buyers, leading to high transaction costs for buyers trying to precisely identify high quality exporters (Hallak 2006; Hummels and Klenow 2005). This is particularly the case for sellers from developing countries who often find themselves at a disadvantage position because buyers often perceive lower quality standards from an generally negative product image in these countries (Hudson and Jones 2003; Tybout 2000). Quality certifications can effectively provide credible signals about product quality from firms in developing countries, enabling international buyers to differentiate between high- and low-quality products from the same country (Potoski and Prakash 2009).
Research hypotheses on the institutionalization of quality certifications in China
Quality certification programs provide clear specifications, which are available for free, about how to achieve the standards required to be certified. This allows firms that do not have the know-how to achieve the quality level demanded by importers to learn how to enhance their quality without any additional expense. As a result, this leads to accelerating sales growth while fostering trade potential (Potoski and Prakash 2009; Terlaak and King 2006). Like ISO 9000, other quality management standards are essential for international trade. They ease information asymmetries within international trade by providing a credible basis for buyers to identify quality exporters, especially from developing countries. As a result, firms certified for quality management standards should provide a credible signal to their buyers and supply chain partners, facilitating sales growth, particularly from those overseas buyers.
However, as quality management standards are increasingly institutionalized, their effectiveness to facilitate sales performance and international trade also deteriorates and becomes questionable (Staw and Epstein 2000; Yeung et al. 2011). Institutional theory is a widely accepted notion that human’s or organizational behaviors are often driven by normative, memetic and coercive forces for seeking legitimacy, leading to isomorphism and rational myths. According to institutional theory, late adopters are often driven by institutional forces (Guler et al. 2002). As firms seek quality certifications for legitimacy purposes only, the actual performance impact is weakened. As a result, the later the certification, the higher the level of institutionalization, and the weaker their effects on sale performance of stock listed firms in China:
Hypothesis 1: The positive impact of quality management certifications on sales performance has deteriorated as standards have been institutionalized in China in recent years.
Quality management standards provide fundamental guidelines for firms to follow, which allows firms to constantly learn and enhance their standards, and helps them increase their internal efficiency as they work to meet the demands of buyers (Corbett et al. 2005; Yeung et al. 2011). Quality management principles required by the standards provide firms with methods to consistently fulfil process requirements and meet customer demands. The basic principles of quality management, such as customer focus, process approach, continuous operational improvements, and factual approach to decision-making, allow firms to operate more cost-effectively. For example, ISO 9000-certified firms should establish systems, processes, and procedures to continuously reduce mistakes and eliminate process problems, decreasing waste, quality costs and compliance expenses. In theory, quality management certifications should increase the cost-efficiency of a firm (Corbett et al. 2005). However, as quality certifications become more institutionalized and symbolic, firms may only pay attention to the surface value without really following the insightful principles (Boiral 2007). Employees may act superficially to obtain the certificates and not really learn from quality management standards continuously (Guler et al. 2002). As firms are increasingly driven by normative, memetic and coercive pressures for the purpose of legitimacy seeking, the adoption of quality standards becomes rational myths for symbolic value only, not really for quality and efficiency improvements. As a result, the institutionalization of quality management standards can lead to a deteriorating impact on the cost-efficiency of firms in that the later the certifications, the less effective they are.
Hypothesis 2: The positive impact of quality management certifications on cost-efficiency ratio has deteriorated as the standards have been institutionalized in China in recent years.