Quality and Standards Matter: Implementing Effective Quality Systems to Support Trade and Competitiveness Initiatives

1. Quality and Standards Matter:Implementing Effective Quality Systems to Support Trade and Competitiveness Initiatives José-Luis Guasch World Bank and University of California, San Diego

2. Quality and its effects: • On exports , FDI performance • Long term growth and productivity • Quality: long term growth • Quality and Standards as entry points to innovation • Quality and standards as instruments for mainstreaming of SMEs into supply chains • Government role: policies and programs to support quality and standards use and adoption

3. IMPACT

4. Figure 5: Contribution to output growth in the UK (1948-2002) Source: BSI 2005

5. Table 4: Partial productivity elasticities by country Source: DTI 2005

7. Source: The ISO Survey. Numbers on top indicate ISO 9000 Certifications

8. CHILE

9. CHILE

10. Figure 6

11. ISO 9000 standards can bring benefits due to both internal and external factors to the organization (but they are costly). Benefits due to internal factors include: Lower costs and shorter cycle time due to more effective use of resources. Higher quality processes, leading to fewer costly inspections, warranty costs and reworking. Greater customer focus, resulting in flexible and fast responses to market opportunities. Greater management involvement in improving quality performance and control over employee performance. Better working conditions and motivation for employees. Benefits due to external factors include: Greater consumer confidence that products will meet their requirements or regulations, leading to an increase in customer base. Greater consumer satisfaction, leading to repeat purchases. Better image of the organization.

12. Table 10: Summary of studies evaluating the effect of certification on firm performance Notes: 0 = no effect, + = slight positive effect, ++ significant positive effect

13. Brazil Average Coefficients (% Changes in TFP corresponding to a Unit Increase in the Explanatory Variable, ceteris paribus) for Selected Variables, by Groups of TFP Models and Firm’s Size (con’t)

14. IC Economic Performance:

15. Entry Point to Innovation and to Supply and Value Chains

16. The Innovation Cycle for SME’s R&D Business Intelligence Product Development + Innovation Technological Audits Prototyping Quality Product & Systems Certification Lab Tests Training Legislative Surveillance

17. From a Survey of LAC Firms • Firms that secured quality certification were 10 times more likely to innovate/tech adoption than those firms that did not, within five years of event • Firms which products complied with standards domestic or international were 5 times more likely to innovate than those that not within five years of event

18. Quality and standards as instruments for mainstreaming of SMEs into supply chains • Firms that secured quality certification were 8 (12) times more likely to become suppliers of major firms (exporters) those firms that did not, within five years of event • Firms which products complied with standards domestic or international were 3 (5) times more likely to become suppliers of major firms (exporters) than those that not within five years of event

19. Types of Coordination Mechanisms: Market (de facto) standards are the result of industry self-regulation. Market standards can be unsponsored if they do not involve any proprietary rights or identifiable author and are accessible to all market participants. Sponsored market standards involve the proprietary rights to a set of technical specifications, where a specific design wins a position of market dominance. A growing number of market standards have been established through industry consortia. Formal (de jure) standards involve an explicit coordination and negotiation process prior to commitment to a particular standard. Voluntary standards can be developed by interested groups through voluntary standards development organizations (SDOs). Mandatory standards or technical regulations are elaborated by governmental authorities and their application is compulsory.

20. Government Role • Policy setting • Designing the National Quality System • Regulatory oversight • Setting mandatory standards and enforcing compliance • Institutions • Providing services • Coordinating function • Providing information and business intelligence on standards and quality requirements in external markets (and domestic) • Seeking agreements (acreditation, recognition, reciprocity etc) with other countries (trade partners) • Financing programs to assist (some) firms and providing incentives

21. Government Role:On financing and subsidies and on service provision • Justified on account of market failures • Public good nature of information: diffusion • Lumpiness, scale effects of investments, geography: laboratories, accreditation, certification • Coordination failures • Externalities • Imperfect capital markets • Fiduciary responsabilities: compulsive testing • Rate of discount-Accelerating outcomes and impact • Demostration effects

22. INSURING COMPLIANCE WITH OVERSIGHT GLOBAL ORGANIZATIONS:The World Trade Organization (WTO) Technical Barriers to Trade (TBT) Agreement forbids the use of standards, conformity assessment procedures and technical regulations as non-tariff trade barriers. The TBT Agreement is an integral part of the WTO Agreement, which now counts 148 countries. The principles of the TBT Agreement include the following: The avoidance of unnecessary obstacles to trade Harmonization Non-discrimination Equivalence Mutual recognition Transparency

23. Table 16: Activities of Standardization bodies * only legal metrology

24. Table 10: cont. Summary of studies evaluating the effect of certification on firm performance Notes: 0 = no effect, + = slight positive effect, ++ significant positive effect

25. Table 12: Total ISO 9000 implementation and certification costs

26. Table 12: cont. Total ISO 9000 implementation and certification costs Note: firm sizes are defined as follows - a. small & medium= less than US$ 25m annual sales, medium-large = US$ 25m to 200m annual sales; b. small & medium = less than US$ 11m annual sales, medium = US$ 11m to 25 m annual sales; c. medium = US$ 25m annual sales; d. small = less than 50 employees, medium = 50-350 employees, large = less than 350 employees; e. no definition; f. small = 20-99 employees in industry and 10-49 employees in commerce, medium = 100-499 employees in industry and 50-249 employees in commerce, large = 500 or more employees in industry and 250 employees or more in commerce; h. small = less than US$ 18m turnover, medium = US$18m to 117m turnover, large = more than US$ 117m turnover. Source: a. Plexus Corporation 1999 in Wilson 2002; b. Irwin Publishing 1996 in Schuurman 1997; c. Zuckerman 1994 in Stevenson 2001; d. ISO 1995 in Schuurman 1997; e. Ramos 1995; f. QSP 1999 in Santos 2002; g. Magd 2003; h. Turner 2000.

27. Table 14: Typical ISO 9000 registration costs in Latin America (2005) Source: interviews with certification bodies operating in Argentina, Ecuador, Mexico and Peru.