ISO Certification, Corruption and Firm Performance: A Cross-Country Study

We employ the World Bank Enterprise Survey (WBES) data collected from 2006-2011 for over 40,000 firms in 115 countries to study the effect of International Organization for Standardization (ISO) certification on firm performance measured by sales growth and labor productivity. Our results from both the univariate tests and multivariate regressions show that ISO-certified firms exhibit higher sales growth and higher labor productivity than non-certified firms. We further investigate whether the effects of ISO certification on firm performance vary when firms operate in different levels of corrupt business environment. We find that the positive link between ISO certification and labor productivity remain highly significant regardless the corruption levels. This is consistent with the internal improvement theory of international quality standards since labor productivity is mostly a function of internal control. However, when firms operate in a highly corrupt business environment, the positive effect of ISO certification on sales growth becomes insignificant, consistent with the market signaling theory. In a highly corrupt business environment, information asymmetry between insiders and external stakeholders (i.e. customers) is severe, diminishing the signaling effect of ISO certification on sales. Our paper provides the first large scale cross-section and cross-country evidence on the effect of ISO certification on firm performance. JEL Classification: G00, O11, O40