Signaling Quality and Increasing Trade? Examining the Impact ISO 9000 Quality Management Systems on Bilateral Trade, 1994-2002.

Developing effective international governance institutions is important and challenging. While attention has mostly focused on inter-governmental institutions as instruments of global governance, non-governmental institutions play an important role in providing valuable governance services. This paper examines the efficacy ISO 9000, one of the most prominent non-governmental global institutions. ISO 9000 is a certification program that encourages firms to systematically and verifiably improve their quality control management practices. ISO 9000 seeks to provide a credible signal that producers have indeed adopted quality control practices, thereby reducing transaction costs stemming from information deficits regarding the quality of goods. While more than 776,608 facilities across 161 counties have joined this voluntary regulation since its launch in the late 1980s, it remains unclear whether ISO 9000 has increased international trade. Using country dyads as our unit of analysis, we examine the relationship between ISO 9000 adoption and bilateral trade. Our key hypothesis is that ISO 9000 adoption is associated with increases in bilateral trade when the potential seller is able to signal the quality of its products (proxied by ISO adoption levels in the exporting country) and the potential buyer has the ability to understand this signal (proxied by ISO 9000 adoption levels in the importing country). We find that ISO 9000 is associated with increases in bilateral trade only when both the countries in the dyad have adopted ISO 9000. This relationship holds for developing country - developing country dydas and developing country - developed country dyads but not for developed country-developed country dyads. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]