Sharing the fame of the ISO Standard Adoption: Quality Supply Chain Effect Evidence from the French Employer Survey

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1 Sharng the fame of the ISO Standard Adopton: Qualty Supply Chan Effect Evdence from the French Employer Survey Marc-Arthur DIAYE CREST (ENSAI) and Centre d'etudes de l'emplo. Nathale GREENAN Centre d'etudes de l'emplo and TEPP (Cnrs FR, 3126). Sanja PEKOVIC Unversté Pars-EST Marne-La-Vallée (OEP), Centre d'etudes de l'emplo and TEPP (Cnrs FR, 3126) Abstract: The objectve of ths paper s to provde emprcal evdence whether the herarchcal poston of dfferent types of qualty supply chan categores (n terms of the qualty sgnal strength) mply the same herarchy n terms of monetary gans. Actually, usng French cross-sectonal surveys, we dstngush four types of qualty supply chan categores what help us to emprcally construct a relatonshp between frms and ther supplers (qualty certfed/non qualty certfed). Our fndngs, from a two-regme swtchng model, reveal that there s a postve correlaton between herarchcal poston of the qualty supply chan categores and the mpact on frm s productvty (measured by value added per employee). Key words: ISO 9000 standard; Supply Chan; Sgnal; Qualty; Club Goods JEL classfcaton: L15, H41, D62 1

2 1. Introducton In recent years, one of the central ssues of dscusson n economcs has been the sgnfcant shft n patterns of work organzaton brought about by dramatc changes n the busness envronment. These changes have arsen due to a number of global factors, some of whch nclude the spread of market globalzaton, severe competton, mprovement n communcaton as well as rapd development and transfer of technology. In ths context, adoptng mechansms that optmze qualty approaches, such as ISO 9000 standards or Total Qualty Management (TQM), has become a core competency for frms that strve to acheve long-term busness success. As a result, frms have conferred an ncreasng mportance on management practces based on qualty, snce these am to elmnate sources of error and neffcences, whch, n turn, can mprove a frm s performance n terms of meetng customer requrements, and ncreasng organzatonal performance and employee job satsfacton (Hackman and Wageman, 1995). In parallel to becomng qualty orented, frms have also been urged to develop close partnershp wth ther supplers. Actually, n order to acheve a compettve edge, many frms realze that t s not enough to enhance ther own performance snce competton today s evaluated as a network of cooperatng frms n the supply chan (Hult et al., 2004). In fact, n recent years, the competton s becomng less frm vs. frm and more supply chan vs. supply chan (Hult et al., 2007). In ths sense, frms have begun to look beyond ther own boundares, ther challenges are to move from nternal effcency to supply chan effcency (Olhager and Selldn, 2002). Thus, supply chan could be defned as a strategc collaboraton or partnershp between the frms n order to leverage strategc poston and to mprove operatng effcency. In other words, t s argued that frms establsh ther supply chan not merely as a means to get products where they need to be, but also as a tool to enhance key outcomes (e.g. Hult et al., 2004). Furthermore, t s suggested that there s systematc share of nformaton between frm and ts supplers (Creane, 2008) what makes the supply chan effcency one of the most mportant drvers of a frm performance mprovement (e.g. Lo et al., 2008). Consequently, we argue that the effectveness of frm performance vares also accordng to the characterstcs of the relatonshp, n terms of qualty level, between the frm and ts suppler (Cusumano and Takesh, 1991; Dyer and Nobeoka, 2000). However, the ncreased specalzaton wthn a producton chan cannot be acheved wthout a cost. For nstance, Hult et al. (2004) ndcated that supply chan processes mprovement has led frms to spend vast sums. Addtonally, a costly process of ISO certfcaton, as an obstacle for many frms, 2

3 nfluences frms strategc behavor to become or not ISO certfed 1. Hence, some frms may try to be ndrectly certfed, through ther supplers, to gan advantage of ISO certfcaton, but at the same tme try to avod a dffcult and costly process of ISO certfcaton. Therefore, each frm tres to establsh the structure of supply chan network that would best correspond wth ts strategc orentaton n term of fnancal resources, qualty level mprovement, etc. The objectve of ths paper s not to show the mpact of ISO 9000 certfcaton on frms economc performance as ths has already been shown by studes of Terlaak and Kng (2006) and Corbett et al. (2005). Rather, t s to provde emprcal evdence whether the herarchcal poston of the four qualty supply chan categores (n terms of the qualty sgnal strength) mply the same herarchy n terms of monetary gans? Ths queston s mportant because a postve answer means that ISO standard s a Club 2 Good 3 leadng to some fundamental open questons lke whether the number of ISO certfed frms s equal to the Pareto optmal number of ISO certfed frms. Indeed gven the exstence of externaltes t may be the case that the number of frms whch are ISO certfed s lower than the Pareto optmal number of ISO certfed frms. To verfy whether the herarchcal poston of qualty supply chan categores s postvely correlated wth frm s performance, we dstngush four categores of qualty supply chans based on the French Organzatonal Changes and Computerzaton survey 4 (COI) from The frst category called Drect Complete Qualty Supply Chan ncludes frms that have ISO 9000 certfcaton and whose supplers are also ISO 9000 certfed. The second category named Drect Non Complete Qualty Supply Chan, presents those frms that are certfed wth ISO 9000 certfcaton although ther supplers are not. The thrd category called Indrect Qualty Supply Chan ncludes frms whch are not ISO 9000 certfed but ther supplers have ISO 9000 certfcaton. The fourth category named Non Qualty Supply Chan ncludes frms 1 The cost of certfcaton can be very hgh (Anderson et al., 1999). More precsely, Anderson et al. (1999) report that obtanng ISO 9000 certfcaton n the manufacturng sector n the U.S. takes from 9 to 28 months and approxmately 35-40% of all stes fal the frst audt. The costs of the standard adopton and certfcaton are substantal. A medum sze manufacturng faclty employng 100 people can expect to spend $ For larger frms (sales from $100 mllon to $500 mllon), the average cost that the authors report s $ Moreover, Delmas (2000) argues that desgn costs of ISO standard are a more mportant constrant than are the regstraton costs and the annual cost of mantanng an ISO standard. 2 A club goods s classfed as a subtype of Publc Goods that s excludable but non rvalrous. 3 There are a number of studes conceptualzng ISO standard as a Club Good (e.g. Potosk and Prakash, 2005; Kollman and Prakash, 2002; Prakash, 1999); however there s, to the best of our knowledge, no emprcal analyss showng that ISO standard could be consdered as a Club Good. Addtonally, an approach n terms of supply chan s sgnfcant for confrmng that ISO 9000 standard acts as a Club Good because as shown by Bramoullé and Kranton (2007), the producton of Publc Goods fundamentally nduces a network of relatonshps between dfferent partcpants. 4 More detals about the desgn and scope of ths survey are avalable on : Survey COI-TIC 2006-INSEE-CEE/Treatments CEE. 3

4 that are not ISO 9000 certfed and ther supplers also do not have ISO 9000 certfcaton. Ths categorzaton allows us to emprcally construct a relatonshps between frms and ther supplers (certfed/non certfed). The remander of the paper s organzed as follows: secton 2 explans supply chan effect; secton 3 develops the man ssue of the paper; secton 4 presents the data sets and ntroduces our econometrc analyss; secton 5 presents result, fnally secton 6 provdes dscusson and concluson. 2. The mpact of supply chan relatonshp Frms seekng to mprove ther performance are ncreasngly concerned about the performance of other frms upstream n ther supply chan what s justfed by the fact that unsatsfactory qualty performance records of supplers could degrade the reputaton of downstream customers who buy ther products (Delmas and Montel, 2009). Actually, a hgh level of nvolvement between frm and supplers s an mportant characterstc of many successful busnesses snce more than half the value of a frm s product s purchased from supplers (Levne, 1995). In the same ven, Baman et al. (2000) argue that the qualty of a frm s product depends not only on the frm s actons but those of ts supplers. Addtonally, consumers belefs about frm s qualty are updated upon observng frms decson to form a qualty partnershp wth ts supplers (Costa and Vasconcelos, 2010). It s argued that a supply chan network can be more effectve than a frm at the generaton, transfer and recombnaton of knowledge snce there s greater dversty of knowledge wthn a network of frms than n a frm (Dyer and Nobeoka, 2000). Hence, beng certfed s a postve sgnal concernng qualty mprovement (Terlaak and Kng, 2006), and havng a suppler as a certfed frm amplfes ths postve sgnal. Therefore, the frm s objectve s to establsh a good relatonshp wth ts supplers n order to assure contnuous mprovement of ts performance. Suppler qualty management must become an ntegral part of achevng consstent total product qualty. For ths reason, ISO 9000 has become an nternatonal standard that serves as a key selecton crteron for suppler selecton (Lo et al., 2008). Moreover, preferental supplers of large frms are often determned on the bass of a consstent supply of qualty (Reyners and Tapero, 1995). Adtonally, numerous frms have demanded that ther supplers become qualty certfed (Anderson et al., 1999). For nstance, n the US, large companes lke General Electrcs, Du Pont and Eastman Kodak demand that ther supplers become certfed. 4

5 On the other hand, for a certfed frm to have a non-certfed frm as a suppler, reduces the postve sgnals stemmng from qualty mprovement. However, havng a certfed frm as a suppler, whle beng non-certfed, mproves sgnals regardng qualty mprovement. In fact, suppler partnerng, whch nvolves close cooperaton between frms and ther supplers, allows non-certfed plants to learn about best qualty management practces from ther certfed supply chan partners (Terlaak, 2001). Actually, frms choose hgh qualty supplers n order to enhance ther own qualty reputatons (Delmas and Montel, 2009). Smlarly, t s argued that frms often seek partners to provde complementary assets when such assets are mportant but dffcult to acqure (Teece, 1986). As a consequence, the relatonshps between frms and supplers wll determne the category of the qualty supply chan and the strength of the sgnal (regardng qualty mprovement) that s generated through the relatonshp between frms and supplers. The fact that both actors n the relatonshp (frms and supplers) of Drect Complete Qualty Supply Chan 5 category are ISO 9000 certfed creates a very strong relatonshp n terms of two-way dffuson of qualty mprovement nformaton. Moreover, even f the supplers are not certfed n the Drect Non Complete Qualty Supply Chan category, the frm s certfcaton permts ths group to stll produce a strong qualty sgnal. Although the actors of ths group lost benefts because of they have one-way dffuson of qualty nformaton, they are stll on the second poston. Furthermore, n the case of the Indrect Qualty Supply Chan, although the prncpal benefcary of ISO 9000 advantages (frm) s not drectly certfed, frms n ths group ndrectly beneft from ISO 9000 advantages through ts supplers whch are certfed (ndrect membershp). We defne ths relatonshp as a farly weak n terms of the dffuson of qualty mprovement nformaton. Fnally, frms whch belong to the Non Qualty Supply Chan category are not ISO 9000 certfed, so the qualty sgnal s therefore very weak. Accordng to the qualty sgnal strength that frms produce, we can classfy them n four categores: the Drect Complete Qualty Supply Chan s at the top of the classfcaton, followed by the Drect Non Complete Qualty Supply Chan, then the Indrect Qualty Supply Chan and fnally the Non Qualty Supply Chan, respectvely. 5 Drect Complete Qualty Supply Chan nclude companes that have ISO 9000 certfcaton and ther supplers are also ISO 9000 certfed; Drect Non Complete Qualty Supply Chan contan frms that are certfed wth ISO 9000 certfcaton but ther supplers are not; Indrect Qualty Supply Chan nclude frms whch are not ISO 9000 certfed but ther supplers have ISO 9000 certfcaton; and Non Qualty Supply Chan nclude frms that are not ISO certfed and ther supplers do not have ISO 9000 certfcaton. 5

6 3. Herarchcal Postonng by Cost-Beneft Analyss Does the herarchcal poston of the four qualty supply chan categores (n terms of the qualty sgnal strength) mply the same herarchy n terms of monetary gans? The answer s not straghtforward. Indeed let v1, v2, v3, v4 be respectvely the values of the frms (see Fgure 1) belongng to the Drect Complete Qualty Supply Chan, the Drect Non Complete Qualty Supply Chan, the Indrect Qualty Supply Chan and the Non Qualty Supply Chan 6. Fgure 1 shows that frms n Indrect Qualty Supply Chan category do not act as free rders because they pay addtonal costs of havng certfed supplers. Thus, t seems that, for a frm t s a ratonal decson to become a part of a Drect Complete Qualty Supply Chan category, a Drect Non Complete Qualty Supply Chan category, an Indrect Qualty Supply Chan category or a Non Qualty Supply Chan category, because the other alternatves lead to a weaker net monetary gan. In other words, from the frm s standpont ts decson to become a part of the Drect Complete Qualty Supply Chan, the Drect Non Complete Qualty Supply Chan, the Indrect Qualty Supply Chan or the Non Qualty Supply Chan s always optmal. As a consequence, f we take four dfferent frms whch belong respectvely to the Drect Complete Qualty Supply Chan, the Drect Non Complete Qualty Supply Chan, the Indrect Qualty Supply Chan and the Non Qualty Supply Chan, t s a pror mpossble to say whether the net monetary gans for the frms belongng to the Drect Complete Qualty Supply Chan ( v 1 ) are hgher than the net monetary gans for the frms belongng to the Drect Non Complete Qualty Supply Chan ( v 2 ) whch are hgher than the net monetary gans for the frms belongng to the Indrect Qualty Supply Chan ( v 3 ) whch are hgher than the net monetary gans for the frms belongng to the Non Qualty Supply Chan ( v 4 ). 6 The notaton could be confusng, ndeed roughly speakng, we have to put an ndex to v j. For nstance k v j where j {1, 2, 3, 4}, and k {Drect Complete Qualty Supply Chan, Drect Non Complete Qualty Supply Chan, Indrect Qualty Supply Chan and Non Qualty Supply Chan}. 6

7 Fgure 1: Net monetary gans n the supply chan from the adopton or non-adopton of where: FNA FA ISO FA, FNA, SA and SNA respectvely mean ISO 9000 Adopter Frms, non ISO 9000 Adopter Frms, ISO 9000 Adopter Supplers and non ISO 9000 Adopter Suppler. - c 1, c 2, and c 3 are respectvely the cost of ISO 9000 certfcaton, the addtonal cost of havng supplers that are certfed wth ISO 9000 when the frm s certfed wth ISO 9000 and the addtonal cost of havng supplers that are certfed wth ISO 9000 when the frm s not ISO 9000 certfed. - g 1 +g 2 s the gan of a frm that s certfed wth ISO 9000 when ts supplers are also certfed wth ISO g 1 +g 3 s the gan of a frm that s certfed wth ISO 9000 when ts supplers are not certfed wth ISO g 4 +g 5 s the gan of a frm that s not certfed wth ISO 9000 when ts supplers are certfed wth ISO g 4 +g 6 s the gan of a frm that s not certfed wth ISO 9000 when ts supplers are not certfed wth ISO c 1 g 0 g 4 1 SA SNA SNA - v j,, j {1, 2, 3, 4}, s the net monetary gan that a frm could receve or not from the mplementaton/non-mplementaton of the ISO 9000 certfcaton. c g g 3 c g 0 g SA v g c g c g g c c v2 g1 c1 g3 v3 g4 g5 c3 v g g Of course, t seems reasonable to state that g 1 > g 4, g 2 > g 3 >g 5 > g 6 and c 1 >c 3 > c 2. 7

8 4. Method The database The research presented here s based on French mcroeconomc survey called the Organzatonal Changes and Computerzaton (COI, 2006). The COI survey was created by researchers and statstcans wthn the economc admnstraton. Ths collaboraton gathered a great deal of knowledge, whch made t possble to put together the surveys of dfferent frms and the surveys concernng employees secton (labor force). The orgnal dataset ncluded a representatve sample of prvate frms located n France from all ndustres except agrculture, forestry and fshng. Each frm flls n a self-admnstered questonnare concernng the utlzaton of nformaton technologes and work organzatonal practces n 2006 and changes that have occurred snce Frms were also ntervewed on the economc goals of organzatonal change and the economc context n whch those decsons were made. Because two varables, namely the value added and captal, were not avalable n the COI database, we merged t wth another French database, that s, the Annual Enterprse Survey (EAE). The fnal dataset ncludes usable observatons 8. Dependent Varable Followng prevous research (e.g. Black and Lynch, 2001; Greenan and Maresse, 2000), the productvty effects of dfferent qualty supply chan categores (producton factors) are determned by estmatng Cobb Douglas producton functons. Actually, our dependent varable s the logarthm of value added per employee: log(y/l). The standard Cobb-Douglas producton functon permts productvty (measured here by the value added per employee) to depend upon dfferent frm s characterstcs. The choce of these characterstcs, n ths paper, wll be presented further n ths secton. 8 The prevous edton of COI survey (1997) has been used by several researchers, for nstance, the specal ssue by Greenan and Maresse (2006), Acemoglu et al. (2007) or Aubert et al. (2006). 8

9 Independent Varable We use four categores of qualty supply chans, the Drect Complete Qualty Supply Chan, the Drect Non Complete Qualty Supply Chan, the Indrect Qualty Supply Chan and the Non Qualty Supply Chan, n order to create sx dummes of qualty supply chan categores that wll permt us to evaluate ther mpact on frm s value added per employee (productvty). To resume, we consder sx models: In Model 1, the dummy varable s 1 f the frm belongs to a Drect Complete Qualty Supply Chan and s 0 f the frm belongs to a Drect Non Complete Qualty Supply Chan. In Model 2, the dummy varable s 1 f the frm belongs to a Drect Complete Qualty Supply Chan and s 0 f the frm belongs to an Indrect Qualty Supply Chan. In Model 3, the dummy varable s 1 f the frm belongs to a Drect Complete Qualty Supply Chan and s 0 f the frm belongs to a Non Qualty Supply Chan. In Model 4, the dummy varable s 1 f the frm belongs to a Drect Non Complete Qualty Supply Chan and s 0 f the frm to an Indrect Qualty Supply Chan. In Model 5, the dummy varable s 1 f the frm belongs to a Drect Non Complete Qualty Supply Chan and s 0 f the frm belongs to a Non Qualty Supply Chan. In Model 6, the dummy varable s 1 f the frm belongs to an Indrect Qualty Supply Chan and s 0 f the frm belongs to a Non Qualty Supply Chan. For nstance, when we compare frms n the Drect Complete Qualty Supply Chan category to frms n the Drect Non Complete Qualty Supply Chan category, y 1 wll be the logarthm of the value added per employee of frms (productvty) n the Drect Complete Qualty Supply Chan category and y 0 wll be the logarthm of the value added per employee per employee of frms n the Drect Non Complete Qualty Supply Chan category. Controls Our analyss ncludes several frm characterstcs to control for sources of frm-level heterogenety. The choce of varables s based on prevous studes relatng qualty standards and productvty (e.g. Pekovc, 2010; Terlaak and Kng, 2006; Zwck, 2004; Black and Lynch, 2001; Greenan and Maresse, 2000). 9

10 Features of the frm s strategy. It s argued that qualty standards adopton s postvely assocated wth features of the frm s strategy such as qualty mprovement, cost reducton, technologcal mprovement, standardzaton, mprovement and/or mantenance of sklls, delay reducton and compettve prce snce adopton of qualty practces contrbutes to the mprovement of these strateges by work method contnuty, by reducng non-value added actvtes, by mprovng operatons, by supportng nnovaton (e.g. Pekovc, 2010). In order to ntroduce specfc strategy frm has to change sgnfcantly way the busness s organzed. Therefore, followng Black and Lynch (2001), we argue that changes n organzaton have been a sgnfcant determnant of the frm s productvty. We create seven bnary varables representng qualty mprovement, cost reducton, technologcal mprovement, standardzaton, mprovement and/or mantenance of sklls, delay reducton and compettve prce that equal 1 f the frm consders qualty mprovement, cost reducton, technologcal mprovement, standardzaton, mprovement and/or mantenance of sklls, delay reducton and compettve prce as mportant or very mportant strategy, respectvely. External market s constrants. The lterature revew confrms that frm mplements qualty practces drven by external pressure (e.g. Terlaak and Kng, 2006). The belef that external pressure enhances frm s productvty s wdespread and t s based on the fact that external pressure plays a role n motvatng organzatonal effcency and growth (e.g. Bottasso and Sembenell, 2001; Aghon et al., 1999). We nclude four measures to control for the external market s constrants. More precsely, we ntroduce varables compettve pressure and uncertanty on the market that have value 1 f they nfluences strong or very strong the choce of frm s organzaton and computerzaton strategy and varables supplers and clents condtoned that takes value 1 f three man supplers or clents make up 50% of the frm s turnover, respectvely. Prevous experence. We also control for the experence wth related management standards, such as the envronmental standards. Actually, prevous adopton of smlar standards can ad the successful mplementaton of the ISO 9000 certfcaton through the utlzaton of related nformaton, resources and sklls (Pekovc, 2010). Moreover, frms that have prevous experence wth smlar standards are expected to ncur lower addtonal costs (e.g. through the overlap of documentaton) because of learnng-by-dong and scale economes (Grolleau et al., 2007). Furthermore, prevous emprcal analyss provdes evdence that envronmental practces mprove productvty through waste elmnaton (e.g. Galdeano-Gómez and Céspedes-Lorente, 2008). We therefore nclude a varable representng the adopton of 10

11 envronmental standards whch s a bnary varable wth value 1 ndcatng the adopton of those standards. Relaton wth Clents. The concept of qualty practces s based on the fact that t s essental to mantan very close lnks wth customers n order to both dentfy ther needs and receve the feedback necessary for the frm to understand to what extent t has succeeded n satsfyng those requrements and whether to ntate the relevant mprovement actvtes (Pekovc, 2010). Moreover, f the qualty level of frms s unobservable, from a sgnallng perspectve, qualty standards can provde nformaton on the general capablty of a frm to meet the qualty expectatons of customers and thus make unobservable characterstcs more publc (Spence 1973). It s expected that good relaton wth clents mpacts postvely frm s productvty snce mprovements n customer satsfacton can decrease the tme and effort devoted to handlng returns, rework, warrantes and complant management whle at the same tme lowerng the costs of makng future transactons (Anderson et al., 1997). We use three bnary varables as ndcators for relaton wth clents: usng labellng for goods and servces, delver or supply goods or servces n a fxed deadlne and contact or call centre for clents. They take value 1 f under customer polcy frm uses labellng for goods and servces, delver or supply goods or servces n a fxed deadlne and have contact or call centre for clents. Captal. Frms wth more captal are expected to nvest n qualty standards (Pekovc, 2010). Furthermore, captal s consdered as an mportant determnant of productvty (e.g. Zwck, 2004; Black and Lynch, 2001; Greenan and Maresse, 2000). Therefore, we ntroduce the captal that s a contnuous varable. Labor. The majorty of emprcal studes (e.g. Pekovc, 2010; Terlaak and Kng, 2006) found that the the probablty of the adopton of qualty standards ncreases wth a frm s sze. Furthermore, sze has also been consdered as sgnfcant determnant of productvty (e.g. Zwck, 2004; Black and Lynch, 2001; Greenan and Maresse, 2000). The mpact of frm s labor sze on dfferent types of supply chan categores and productvty s measured by contnuous varable representng number of employees nsde the frm. Sector of Actvty. Fnally, t s argued that sector characterstcs nfluence the lkelhood that a frm decde to mplement qualty practces (Pekovc, 2010). Furthermore, the productvty effects of one sector cannot easly be transferred to other sectors (Godard and Delaney, 2000). In order to control for sectoral dfferences, we nclude sectoral dummy varables based on the N36 sector classfcaton created by the French Natonal Insttute for Statstcs and Economc Studes. More precsely, we ntroduce 11 dummy varables that equals to 1 f the frm actvty s agrfood, consumpton goods, cars and equpments, ntermedate goods, energy, 11

12 constructon, commercal, transport, fnancal and real-estate actvtes, servces for frms and servces for ndvduals, respectvely. The varables used n estmaton and ther defntons are presented n Table 1. No problem of strong colnearty has been detected (Appendx 1). *** [Insert Table1 around here] *** Econometrc Strategy We am to show that from an emprcal standpont the net monetary gan of a frm ( v j ) vares accordng to the qualty supply chan category (j) that a frm belongs to. More specfcally, we wll look at the orderng v 1 v 2 v 3 v 4 (where v represents frm s monetary gan). Let y be the economc performance varable, n our case defned as frm s productvty. y s therefore the productvty varable of frm. y can be wrtten as: y (1) Z1 Z2, where Z 1 s the productvty due to all other factors but the qualty supply chan category, and Z 2 s the productvty due to the qualty supply chan category. Let: Z X.. X u 1, where the X,., X are varables whch p p 1 explaned Z 1 ; and p Z v v v v u 2 f we look at the orderng v 1 v 2 v 3 v 4. Of course, the 1, 2, 3, are the characterstc functons whch equal to 1 f the frm 4 belongs to the correspondng category and 0 f otherwse and u, u are error terms. Testng v 1 v 2 v 3 v 4 n the model y X.. X v v v v 3, p p s equvalent to testng 0 v v v n the model y g0 1X 1.. px p v 22 v 33 v However, ths model consders qualty supply chan categores as exogenous. More precsely, frms choose to become a part of partcular qualty supply chan category and ther decson may not be random as t may depend on frms ndvdual characterstcs. In spte of the fact 12

13 that we are able to control for frm s characterstcs, some unobserved characterstcs that nfluence the frm s choce of a specfc qualty supply chan category could also nfluence frm s productvty. For nstance, costs and benefts effects are correlated wth frm s productvty; hence, the decson to choose among dfferent supply chans categores s endogenous, leadng to based estmates. Moreover, several emprcal researches have demonstrated that gnorng the potental bas endogenety of measures of management practces leads to downward based estmates of these practces on frm performance (e.g. Ichnowsk and Shaw, 1995). In order to avod ths problem, we use the swtchng regresson model whch permts us to control for the endogenous effect by estmatng smultaneously the selecton equaton and the productvty equatons, for two regmes: superor or nferor qualty supply chan category. The swtchng model structure s defned by two states: state 1 and state 0, correspondng respectvely to a specfc type of qualty supply chan categores (for nstance state 1 may correspond to the Drect Complete Qualty Supply Chan and state 0 to the Indrect Qualty Supply Chan). Hence, the model s composed of the followng system of three equatons that are estmated smultaneously: log y X (5) log y X (6) 0 0 o ISO M Z 0 (7) * Equatons (5) and (6) are the structural equatons that descrbe the productvty of frms n the alternatve regmes. More precsely, as we defne prevously, y 1 and respectvely the productvty of frm n state 1 and state 0. Furthermore, y 0 represent X s a vector of explanatory varables (features of the frm s strategy, external market s constrants, prevous experence wth related management practces, relatons wth clents, logarthm of the captal per employee, logarthm of the labor, sector of actvty), and 1 0 are vectors of slope coeffcents to be estmated. Fnally 1 and 0 are the dsturbance terms for the two equatons respectvely, wth null means and varances equal to 2 1 and Equaton (7) s the selecton equaton that determnes a frm s propensty of belongng n one of qualty supply chan categores that depends on the dfferences between monetary

14 gans assocated wth each category (beng Drect Complete Qualty Supply Chan, Drect Non Complete Qualty Supply Chan, Indrect Qualty Supply Chan or Non Qualty Supply Chan). More precsely, ISO * s the monetary gan for the frm for belongng to one of the qualty supply chan categores and a frm wll choose one of the categores f ts monetary gan of belongng to ths category s strctly postve. In equaton (7), M s a vector of explanatory factors of beng n one of the qualty supply chan categores and s an error term whch follows a normal law wth mean and varance respectvely equal to zero and one. Here * ISO s a latent varable measurng the tendency or the frm s lkelhood of beng n the frst or the second regme and t has followng form: ISO f ISO * 1 0 ISO 0 otherwse. (8) Noteworthy, t s well known that ths type of models are senstve to the dstrbutonal assumpton and the specfcaton of the both the frst step swtchng equaton and the productvty equatons. Hence, n order to reduce ths senstvty, we need to have an addtonal varable that nfluences frm s choce to become a part of a specfc qualty supply chan category but does not to nfluence productvty (.e. at least one varable n M whch s not n X). To acheve ths dentfcaton, we nclude the vector Z contanng: whether a frm has a full tme qualty manager or outsource manager for qualty. The ncluson of those varables may be justfed by argument that an admnstratonal unt (such as the nternal and external qualty unt) ndcates a closer proxmty to nsttutonalzed norms, thus ncreasng the perceved need to comply wth those norms (Pekovc, 2010; Beck and Walgenbach, 2003). Addtonally, admnstratve departments (n our case nternal and external qualty departments) serve as drect channels through whch new practces enter the frm from ts nsttutonal envronment (Pekovc, 2010). Moreover, Beck and Walgenbach (2003) fnd that havng a larger proporton of admnstratve staff,.e. concernng qualty ssue, mproves and promotes better possblty of mplementng ISO Smlarly, Pekovc (2010) fnds that nternal and external qualty departments mpact postvely adopton of ISO 9000 standard. Even f ths s not a proper test for nstrumental varable valdty, t s worth notng that none of our proposed nstrumental varables appear to be a sgnfcant determnant when ncluded drectly n a sngle equaton logt model. Furthermore, to our knowledge, there s no emprcal 14

15 or theoretcal evdence regardng the drect relatonshp between those varables and frm s productvty. Fnally, we observe 1 log y f 1 log y f ISO 0, wth the varancecovarance matrx whch can be wrtten: ISO and Besdes, the varance-covarance matrx can be estmated n one step. In order to test for the endogenety of the swtchng model, the parameters of nterest are the covarances of the error term of each productvty equaton wth the error terms of the selecton equaton. If these covarances are dfferent from zero, then the selecton process s not exogenous, and the estmaton of the productvty equatons by Ordnary Least Squares (OLS) would produce nconsstent estmators of the parameters of the model. The covarance between the error terms of the selecton equaton and frm s productvty equatons nforms us about the adequacy of usng the swtchng model to descrbe the selecton process. Actually, we have endogenety f 1 or 0 are sgnfcantly dfferent from zero,.e. f the errors of the productvty equatons and the error of the choce equaton are correlated. 10 s not defned snce the two regmes are never observed smultaneously. Swtchng models are then based on the analyss of three varables but each of them s partly observed (Maddala, 1983). The selecton varable, through a dummy ISO. Moreover, the probablty of observng y 1 or y0 ISO *, s not drectly observed but only depends on the outcome of the selecton varable ISO. The expected productvty, condtonally on beng state 1 can be calculated as follows, ( ' M ) E log( y1 ) ISO 1 1 ' X 11 1 ( ' M ) (9) In the same way, the expected productvty, condtonally on beng n state 0 s gven by 15

16 E log( y ) ISO 0 ' X ( ' M) 1 ( ' M ) (10) The model s estmated by the method of Maxmum Lkelhood. Although we do not observe the tendency of a frm beng n one or the other productvty regme, we know that f ISO 1 the frm s productvty s determned by equaton (5), and f ISO 0, the frm s productvty s determned by equaton (6). The lkelhood functon for each observaton s thus gven by: n log L prob( ISO 1) f log( y1 ) ISO 1 1 prob( ISO 0) f log( y0) ISO 0, (11) wth prob( ISO 1) ( ' M ) prob( ISO 0) 1 ( ' M ) ' f log( y ) ISO 1 ( ' M ) log( y X ) / ' x 1 ' M 2 2 log y1 1X1 1 1 (12) ' f log( y ) ISO 0 ( ' M ) log( y X ) / ' x 1 ' M 2 2 log y0 0X 0 (13) Results The results of the swtchng model estmaton are presented n Tables 2 to 9. Tables 2 and 6 present the determnants of qualty supply chan categores, Tables 3 and 7 present the determnants of productvty for the superor category of qualty supply chan and Tables 4 and 8 provde the determnants of productvty for the nferor category of qualty supply 16

17 chan. Tables 5 and 9 provde comparson of the observed and predcted productvty for four types of qualty supply chan categores. *** [Insert Tables 2 to 9 around here] *** Table 4 and Table 8 present the correlaton coeffcents between selecton equatons (the choce of a specfc qualty supply chan) and productvty equatons ( 0 and 1 ). The fgures obtaned tell us that there s evdence of endogenety and hence, f we omt the effect of unobservables, predcted productvty for superor and nferor qualty supply chans categores would be nconsstently estmated. Thus, we may conclude that our econometrc model s approprate. Frstly, we present the estmaton results regardng the factors that may nfluence frms to choose one of the qualty supply chan categores (Tables 2 and 6). Generally, standardzaton, prevous experence, relaton wth clents, captal and labor are sgnfcant and confrm prevous studes (e.g. Pekovc, 2010; Terlaak and Kng, 2006). Unexpectedly, other varables representng features of the frm s strategy and external market s constrants were found to have no mpact on frm s choce to become member of superor qualty supply chan category. A possble explanaton for ths fndng could be that f all wn-wn or free-lunch opportuntes have already been exploted (Pekovc, 2010; Palmer et al., 1995), those frms may then be focused on the mprovement of other areas. Furthermore, the results ndcate that frms n sectors such as agro-food, cars and equpments and servce for ndvduals are mostly wllng to become a member of superor qualty supply chan category. Fnally, as expected our nstrumental varables are postve and sgnfcant determnants of the frm s choce to become a member of superor qualty supply chan category. The second stage results defne factors that may mpact the logarthm of the value added per employee for superor qualty supply chans categores (Tables 3 and 7) whle the thrd stage results defne factors that nfluence logarthm of the value added per employee for nferor qualty supply chan categores (Tables 4 and 8). Generally, the factors that nfluence the frm s productvty are smlar for both stages and they are consstent wth prevous researches concernng the postve mpact of features of the frm s strategy, envronmental standards, relaton wth clents, captal and labor on frm s productvty (e.g. Galdeano-Gómez and 17

18 Céspedes-Lorente, 2008; Zwck, 2004; Black and Lynch, 2001; Greenan and Maresse, 2000; Anderson et al., 1997). Surprsngly, external market s constrants manly nfluence negatvely frm s productvty. Ths could be explaned by the fact that hgher external pressure does not allow frms to better allocate dfferent resources what results n productvty decrease. Addtonally, frms could be under greater pressure to perform well when there s a major stakeholder (such as suppler or customer), snce major stakeholder could employ a sgnfcant degree of control over the operatons of the frm. Concernng sector of actvty, we may conclude that beng a part of a specfc sector ncrease frm s probablty to mprove ts productvty (e.g. commercal, energy, fnancal and real-estate actvtes and servces for frms). The results obtaned from the comparson between frms n the Drect Complete Qualty Supply Chan and the Drect Non Complete Qualty Supply Chan categores (Table 5) are sgnfcant and postve. Beng qualty certfed and dealng wth a qualty certfed frm amplfes the postve sgnal whle, dealng wth a non-certfed frm when certfed decrease the postve sgnal. The results are gong nto the same drecton when we compare the frms that belong to the Drect Complete Qualty Supply Chan and the Indrect Qualty Supply Chan categores and the frms that belong to the Drect Complete Qualty Supply Chan and the Non Qualty Supply Chan categores. Actually, we may conclude that frms belongng to the Drect Complete Qualty Supply Chan category have superor productvty of 9% comparng to the frms that belong to the Drect Non Complete Qualty Supply Chan category, 18% comparng to the frms that belong to the Indrect Qualty Supply Chan category and 21% comparng to the frms that belong to the Non Qualty Supply Chan category. Hence beng a certfed frm whle havng certfed supplers permts to have the strongest mpact on productvty. Therefore, ths confrms that frms that belong to the category of the Drect Complete Qualty Supply Chan are leaders n the qualty supply chan herarchy concernng frm s productvty mprovement. Furthermore, concernng the frms n the Drect Non Complete Qualty Supply Chan category (Table 9), we may conclude that those frms are n a more proftable poston comparng to the frms n the Indrect Qualty Supply Chan or Non Qualty Supply Chan categores. More precsely, the results suggest that frms that belong to the category of Drect Non Complete Qualty Supply Chan also have superor productvty of 26% and 9% than frms that belong to the categores of the Indrect Qualty Supply Chan and Non Qualty Supply Chan, respectvely. Hence, even that the supplers of the Drect Non Complete Qualty Supply Chan category are not certfed, the frms drect certfcaton s enough strong to have a superor 18

19 mpact on productvty comparng to the frms n the Indrect and the Non Qualty Supply Chan categores. However, the negatve effect (havng none certfed suppler) of a partnershp domnates the postve effect (beng certfed) on frm s productvty (Costa and Vasconcelos, 2010). Hence, the Drect Non Complete Qualty Supply Chan s stuated on the second poston nsde the qualty supply chan herarchy after the Drect Complete Qualty Supply Chan (the category whch generates only postve effects). The fndngs assocated to the Indrect Qualty Supply Chan category (Table 9) prove agan that frms can ndrectly proft from the ISO certfcaton (va supplers), what makes them dfferent from the frms belongng to the Non Qualty Supply Chan category. In fact, beng a part of the Indrect Qualty Supply Chan category s postvely assocated to superor productvty of 19% comparng to the frms n the Non Qualty Supply Chan category. Consequently, frms n the Indrect Qualty Supply Chan category are placed on the thrd poston nsde the qualty supply chan herarchy. Fnally, as frms n the Non Qualty Supply Chan category do not receve a qualty sgnal, drectly or ndrectly, ths nfluences that they are stuated on the last poston n the qualty supply chan herarchy. Based on obtaned results, we may conclude that there s a postve relatonshp between the poston of the qualty supply chan categores nsde the qualty herarchy and the mpact on productvty. Hence, the productvty of the frms belongng to the Drect Complete Qualty Supply Chan s hgher than those of the frms belongng to the Drect Non Complete Qualty Supply Chan whch s hgher than those of the frms belongng to the Indrect Qualty Supply Chan whch s hgher than those of the frms belongng to the Non Qualty Supply Chan. These fndngs suggest that beng a certfed frm amplfes a postve effect on the productvty of frms. In addton, owng to the Club effect, a non-certfed frm dealng wth certfed supplers (Indrect Qualty Supply Chan) can also mprove ts productvty. Fnally, the results of ths supply chan analyss confrm emprcally that the ISO standard could be conceptualzed as a Club Good Dscusson and Concluson The exstng emprcal lterature dealng wth ISO 9000 standards manly evaluates the effect of these standards on frm performance (e.g. Terlaak and Kng, 2006; Corbett et al., 2005). 9 The results are emprcally confrmed usng COI database from The results are avalable upon request from the authors. 19

20 Rather than smply nvestgatng whether the ISO standard mpacts postvely or negatvely on the productvty of frms, ths paper tres to extend prevous research by provdng an emprcal answer to the queston of whether there s a postve correlaton between herarchcal poston of the qualty supply chan categores and the mpact on frm s productvty. Actually, our analyss hghlghts the subtle effects of qualty standards on frm s performance that arse from the qualty relatonshp between frm and ts supplers. Addtonally, the contrbuton of ths paper s the provson, through supply chan analyss, of emprcal evdence demonstratng that ISO standards can be seen as a Club Good. Snce our focus s analyss n terms of qualty supply chan, where members of supply chans are ntegrated based on best strategc soluton, we have assembled datasets that aggregate dfferent characterstcs and strateges of frms and ndcators of performance. We controlled for the potental endogenety of qualty supply chan categores varables usng an endogenous swtchng model. Our fndngs demonstrate that there s a postve and sgnfcant relatonshp between the herarchcal poston of the qualty supply chan categores and the mpact on productvty. Hence we may argue that, all other thngs beng equal, the productvty of the frms belongng to the Drect Complete Qualty Supply Chan s hgher than that of the frms belongng to the Drect Non Complete Qualty Supply Chan whch are hgher than those of the frms belongng to the Indrect Qualty Supply Chan frms whch are hgher than those of the frms belongng to the Non Qualty Supply Chan. The evdence we accumulated ndcates that adoptng the ISO 9000 standard per se does not rase productvty to the same degree as when frms also deal wth supplers that are qualty certfed. It s ths combnaton that seems to matter most for productvty. Polcymakers can emphasze ths beneft n order to encourage frms to choose qualty certfed supplers. Moreover, we show that frms whch are not ISO certfed wll, f they have ISO certfed frms as supplers, proft from ths partnershp, generatng a postve sgnal on the market through ther certfed supplers. Hence, cooperaton among frms and supplers permts frms n Indrect Qualty Supply Chan category to beneft from suppler knowledge and experence about qualty and therefore mprove ther performance as compared to frms n Non Qualty Supply Chan category. Ths shows that a key objectve for these frms s to establsh a good relatonshp wth supplers n order to assure contnuous mprovement of ther performance. A qualty producton and dstrbuton strategy for supply chan networks plays a key factor n enhancng frm s performance. Actually, we may conclude that strong relatonshps wth suppler wll lead to faster development and performance mprovement. 20

21 The evdence of ths paper suggests that havng multple qualty afflatons mproves productvty more sgnfcantly than havng only one afflaton (Erksson and Jacoby, 2003). From a theoretcal perspectve, our fndngs underlne the mportance of supply chan n the process of performance mprovement. Partcpatng n qualty supply chan offers opportuntes and creates sklls necessary for better productvty. Havng multple tes generates large amounts of nformaton, ncludng new nformaton that compettors may not possess (Podolny and Baron, 1997). In pont of fact, our emprcal analyss shows that the productvty of a frm depends on the performance of other frms upstream n ts supply chan. Even though the objectve of ths paper s not to evaluate the mpact of ISO certfcaton on frms economc performance, gven that we have dentfed a statstcally and economcally sgnfcant effect of certfcaton for frms n Drect Complete Qualty Supply Chan and Drect Non Complete Qualty Supply Chan categores on productvty (all other thngs beng equal), we may also conclude that the ISO 9000 standard s postvely assocated wth productvty mprovement (all other thngs beng equal). Moreover, ths paper poses an mportant theoretcal queston as to whether the number of frms whch are ISO certfed s equal to the Pareto optmal number of ISO certfed frms. Ths queston s not trval. At frst glance, due to the exstence of external factors, the answer could be a negatve one (.e. the number of frms whch are ISO certfed s lower than the Pareto optmal number of ISO certfed frms). However, snce there s no poachng effect (.e. the frms whch are not ISO certfed also have to pay an addtonal cost n order to have ISO certfed supplers), the frms whch are not ISO certfed drectly have n some sense nternalzed the external effects n ther behavour. Hence, t may be the case that the number of frms whch are ISO certfed s equal to the Pareto optmal number of ISO certfed frms. Another research avenue s to understand why frms n the Drect Non Complete Qualty Supply Chan category choose to have supplers that are not certfed when such a partnershp s dong sgnfcant damage to ther performance. Addtonally, research on ths ssue should be extended n an nternatonal settng snce the mplementaton of management practces depends also on a country s nsttutonal framework (Pekovc, 2010). Some countres may mplement those practces followng nvolvement way rather than ntensfcaton way whch may explan dfferent fndngs across countres. Fnally, n order to generalze better our concluson supportng a postve correlaton between herarchcal poston of the qualty supply chan categores and the mpact on frm performance, t wll also be nterestng to examne addtonal ndcators of frm performance other than productvty. The choce of 21

22 performance measures matters snce they medate the relaton between the frm s probablty of choosng to become one of the categores of qualty supply chan and frm performance. 22

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