Growing number of firms in developing countries have earned certifications such as International Standards Organization (ISO) as it enhances reputation of their company or brand and attract buyers particularly in export market. This study evaluates the effect of international standards certification on firm's export performance in Europe and Central Asia by applying the control function approach with endogenous treatment effect to firm-level data. Certification is found to increase export share in firm's sales by 44.9% on average. The results suggest that ignoring the effect of self-selection of certification leads to a substantial bias in the estimated treatment effect.ontrol Function, international standards, international trade, self-selection

Tsunehiro Otsuki

English

Research Papers in Economics

OSIPP Discussion Paper : DP-2011-E-005       
 
 
Effect of ISO Standards on Exports of Firms in Eastern Europe and 
Central Asia: An Application of the Control Function Approach 
 
June 8, 2011   
 
Tsunehiro Otsuki 
Associate Professor, Osaka School of International Public Policy (OSIPP) 
 
 
【Keywords】Control Function, international standards, international trade, 
self-selection 
【JEL Codes】C34, F10, L15 
【Abstract】 
Growing number of firms in developing countries have earned certifications such 
as International Standards Organization (ISO) as it enhances reputation of their 
company or brand and attract buyers particularly in export market. This study 
evaluates the effect of international standards certification on firm’s export 
performance in Europe and Central Asia by applying the control function approach 
with endogenous treatment effect to firm-level data. Certification is found to 
increase export share in firm’s sales by 44.9% on average. The results suggest that 
ignoring the effect of self-selection of certification leads to a substantial bias in the 
estimated treatment effect. 
 
 
Correspondence: Tsunehiro Otsuki, The Osaka School of International Public 
Policy, Osaka University, 1-31 Machikaneyama-cho, Toyonaka, Osaka 560-0043 
Japan.  
E-mail address: otsuki@osipp.osaka-u.ac.jp 
Acknowledgement: I am grateful for financial support from the Japan Society for 
the Promotion of Science, Grant-in-Aid for Scientific Research (B), 2010-2013. 1.  Introduction 
One of the recognized roles of international standards is to mitigate trade losses 
associated with the mandatory standards imposed by importing countries as those 
standards are set based on each country’s safety or quality criteria which do not 
necessarily conform with the international norm (Maskus and Wilson, 2000). 
International standards certification may be particularly important for exporters in 
developing economies, who compete with firms in developed countries that have longer 
histories and better reputations in export markets. Firms that are certified as meeting 
international standards create favorable perceptions of their company or brand and 
attract buyers (Acharyya, 2005). For example, the number of firms in Central and 
Eastern Europe and Central Asia (Europe and Central Asia, hereafter) that earned ISO 
9001 rose 6.6 times to 109,000 from 2002 to 2008, according to ISO surveys (ISO, 2006, 
2008).  
 
On the other hand, costs to attain international certification—application fees, monetary 
and human effort, and maintenance—may limit the ability of developing country firms 
to export. Thus, a firm’s decision on acquisition of international standards depends on 
net benefit to firms. Benefits of certification may be difficult to predict because the 
benefits depend on many uncertain factors such as consumer’s valuation of certification.   
 
Several studies found a higher sales and export for firms certified with international 
standards (for example, Heras, Dick, and Casadesús (2002), Naveh and Marcus (2005), 
Ferro (2011)). But the previous studies do not consider the endogeneity of certification; 
firms that pursue certification are self-selecting with the expected returns in mind. This 
study applies a control function (CF) approach with endogenous treatment variable 
based on Heckman’s selection model. The CF approach yields a consistent estimator of 
the effect of treatment (certification) by correcting for the sample selection bias as well 
as controlling for covariates that affect the outcome. In addition, the previous studies do 
not consider heterogeneity in effects across firms. This study also allows the treatment 
effect to vary across firms.  
We estimate the benefit of international standards certification on exports of 
manufacturing and service sector firms in the developing economies of Europe and 
Central Asia in 2002, 2005, and 2008/2009. The countries in this region are integrating 
or seeking to be integrated into the EU, and it is important that firms meet international 
standards when accessing to and competing in the EU market. We use firm-level data of 
25 countries from the Enterprise Survey of the World Bank for production, sales and 
export performance, certification and business environment.   
 
The reminder of the paper is organized as follows. Section 2 develops the empirical 
model. Section 3 describes the data used for the estimation. Section 4 presents and 
discusses the estimation results. Section 5 concludes. 
 
2.  Model 
This study uses firm-level data of 25 countries to evaluate the effect of earning 
international standards certification on a firm’s export performance. This analysis faces 
a problem that is typical in nonexperimental data; the samples were not made 
comparable between treated (certified) and untreated (uncertified) firms with identical 
characteristics as in the experimental data. The literature regarding program evaluation 
has addressed problems associated with using nonexperimental data through 
randomization. The randomization makes individuals in a treatment group (the group 
participating in the program) and a comparison group (group not participating in the 
program) comparable. Matching methods introduced by Rosenbaum and Rubin (1983) 
have been widely used and they randomize the data through a propensity score (a 
probability of participation determined by individual characteristics).   
 
In addition to randomization, the CF approach with endogenous treatment variable 
accommodates the self-selection of participating firms while the matching estimators 
suffer from bias due to the violation of mean conditional independence (see, for 
example, Cameron and Trivedi, 2005). Because seeking international certification is a firm’s decision, acquiring these standards is endogenous. The CF approach explicitly 
corrects for the potential bias in the fashion of Heckman’s (1979) selection model. 
Further, randomization is conducted through the selection equation in the CF methods, 
which is equivalent to that in matching methods using a propensity score. Thus, in our 
study, it is appropriate to use the CF approach because of the need for randomization 
and the endogenous nature of participation. 
 
Let  y  denote the outcome (export performance in our case) and  d  denote a dummy 
treatment variable (international standards certification in our case) with value of 1 if 
treated and 0 otherwise. The two outcomes  1 y  and  0 y   are associated with the treated 
state ( 1 d  ) and the untreated state ( 0 d  ), respectively.   
 
Let  z  denote the variables that determine participation. The expected outcome is a 
function of  x and d . 
[|,] [|,,] ii ii i i Eu d Eu d  xx z      ( 1 )  
Consider the following model: 
11 1 ' ii i y u   x        ( 2 a )  
00 0 ' ii i y u   x        ( 2 b )  
* ' ii i d    w        ( 2 c )  
where (2a) and (2b) are the outcome equation, and (2c) is the selection equation. The 
variable 
*
i d   is a latent variable such that 
 
*
*
1  iff  0
0  iff  0
i
i
i
d
d
d
    
  
 
and  {,}  wx z . The vector  z   is a vector of the variables not contained in the outcome 
equations and is included in the selection equation. It is assumed that 
10 [ |,] [ |,] 0 Eu Eu  xz xz . It is also assumed that the error terms  10 (,,) ii i uu  follow  a 
joint trivariate normal distribution with zero mean and covariance matrix    
11 10 1
10 00 0
101







 
 
. 
The variance of   is normalized to 1 for identification. The nonzero covariance 
parameters  1   and  0    reflect the endogeneity of the treatment variable.   
 
The benefit of treatment can be evaluated in two ways. The average treatment effect 
(ATE) measures the population average of the treatment effects. By definition, the ATE 
is given by 
10 10 [| ] [ ] () ATE E y y E      xx .      ( 3 )  
The average treatment effect on treated (ATT) measures the effect of treatment on the 
treated samples, and hence, the benefit of participation. According to Maddala (1983), 
the treatment effect for the treated sample i is given by 
10 1 0 [ | ,1 ] [ | ,1 ] [ | ,1 ] i i ii i ii i ii i T T E y yd E yd E yd       xxx  
10 0 1
(' )
() ( )
(' )

 
  

 

w
x
w
.       ( 4 )  
The second term represents the effect of selection, and  01 0       if the program 
produces a greater benefit under self-selection than under random assignment. The 
average of  TT   over the treated individuals gives the ATT. 
 
The treatment effects can be estimated by applying Heckman’s (1979) two-step 
estimation separately to the subsample with  1 d   and  0 d   (Maddala, 1983) as it 
yields a consistent estimator by controlling for the effect of sample selection. The probit 
model is used to estimate the contribution of  x and z in the self-selection of a firm to 
acquire certification. 
 
3.  Data 
We use firm-level data for 25 countries in Europe and Central Asia in 2002, 2005, 
2008/2009 from the Enterprise Survey of the World Bank. It includes data for 
establishments of all sizes in manufacturing and service industries and provides a selection of information regarding production and marketing performance, and the 
business environment in all establishments. Some firms were interviewed more than 
once, but the data will not allow us to explore the nature of panel data since two-thirds 
of the firms were interviewed only once. The descriptive statistics are presented in 
Table 1. Out of the entire cleaned sample of 25,554 firms, we use 2164 observations 
after eliminating samples with missing data.   
 
Share of export in total sales is used to measure export performance. Acquisition of 
international standards is a dummy variable with the value 1 if acquire, and 0 otherwise; 
thus, it represents the treatment status. The outcome-equation covariates (x) and the 
variables in the selection equation that are excluded from the outcome-equation (z ) are 
also included in the table.   
 
 
Table 1. Summary statistics for the variables used in the estimation (N = 2164) 
Source: Author’s calculation based on 2002, 2005 and 2008/2009 Enterprise Surveys. 
Variable Mean  Std.  Dev.  Min  Max 
Share of export in sales  0.163 0.284  0 1
  Acquisition of internationally recognized standards such as ISO  0.326 0.468  0 1
Explanatory variables  x    
Share of foreign ownership  0.138 0.315  0 1
Firm size as the number of workers  63.688 36.480  6 100
Firm age as the number of years since the firm is established  21.460 23.411  2 184
Explanatory variablesz    
Ratio of expenditure on R&D to sales  0.035 0.066  0 0.8
Visit of external auditors to check financial statements  0.673 0.469  0 1
Percentage of production workers who received training program  24.537 31.505  0 100
Percentage of nonproduction workers who received training program  11.363 23.794  0 100
Degree of importance of pressures from foreign market in decisions to 
develop new products or services (1=Not at all important, 2 =Slightly 
important, 3=Fairly important, 4=Very important) 
2.373 1.168 1 4
Degree of importance of pressures from domestic consumers in decisions 
to develop new products or services (the same as above) 
2.982 0.984 1 44.  Results  
Table 2 presents the results of the estimation of the CF model with and without the 
restriction of homogeneous treatment effects across the samples. The results of ordinary 
least squares (OLS) are also presented for the comparison purpose.   
 
The lower portion of the table shows the results of the selection equation which is 
common between the two CF models. It is found that the probability of acquiring 
international certification is greater for larger firms, possibly reflecting that the fixed 
cost of acquiring certification is a great obstacle for smaller firms. It is also found that 
firms inspected by external auditors tend to acquire international certification. In 
addition, the provision of training of production and nonproduction workers, and the 
presence of pressure in foreign markets and from domestic consumers will foster 
certification.  
 
The upper portion of Table 2 presents the results of the outcome equation. Among the 
slope coefficients, that for the share of foreign ownership is positive and significant in 
the CF models as is expected. The model of homogenous treatment effects impose 
01     and  01        in the CF model, implying a constant ATE and ATT. The ATE 
is estimated to be 0.428 as shown in Table 3.
1 This implies that certification will raise 
the share of export in total sales of a firm by 42.8%. This ATE is much larger than the 
coefficient for international standards (0.084) in the OLS model, illustrating that the 
OLS tends to under-estimate the effect of certification both by not randomizing the 
samples and by ignoring the effect of self-selection. The same inference applies to the 
previous studies that ignore the self-selection nature of certification.   
 
 
 
                                                 
1  The estimated ATE is statistically significant at the 1 percent level based on Wooldridge’s (2010) 
estimation procedure using OLS with the pooled samples.   Table 2. Results of the Heckman two-step estimation (N = 2164) 
Outcome equation 
(y=Share of export in total sales) 
Homogeneous 
treatment 
effect 
 
Heterogeneous 
treatment 
effect 
     OLS  
    Equation (2a)   Equation (2b)     
Foreign ownership  0.14365 *** 0.12742 *** 0.15333  ***  0.1617 ***
 (0.02174)   (0.03615)   (0.02441)     (0.0187)  
Firm size  0.00033   0.00082   0.00012     0.0014 ***
 (0.00026)   (0.00056)   (0.00029)     (0,0002)  
Firm age    -0.00002   0.00018   -0.00017     0.0003  
 (0.00031)   (0.00050)   (0.00035)     (0.0003)  
International  standards           0.0840 ***
           (0.0128)  
Constant -0.01696   0.33287 *** -0.01883     0.0137 ***
 (0.01445)   (0.08591)   (0.01602)     (0.0119)  
Selection equation (d=acquisition of 
international standards) 
        
Foreign ownership  0.05072           
 (0.09407)           
Firm size  0.00855 ***         
 (0.00096)           
Firm age    0.00238 *          
 (0.00129)           
R&D 0.16610           
 (0.44942)           
Auditors 0.22929 ***         
 (0.06895)           
Training of production workers  0.00391 ***         
 (0.00102)           
Training of non-production workers  0.00675 ***         
 (0.00135)           
Pressures from foreign market  0.12948 ***         
 (0.02713)           
Pressures from consumers  0.07813 **          
 (0.03243)           
Constant -1.98551 ***         
 (0.12716)           
,   0,1 j j      -0.22104 *** -0.18204 *** 0.25445 ***   
 (0.03271)   (0.04917)   (0.04302)      
Model 2  ( P-value)    248.47  (0)   14.84 (0)   42.44 (0)    
adj R
2=0.11
7
 
Note: Inside the parenthesis is standard error. “*”, “**”, and “***” denote 10, 5 and 1 percent 
significance. 
 
 
 In the model of heterogeneous treatment effects, the mean ATE is 0.449, which is close 
to that in the model of homogeneous treatment effects. Its low standard deviation 
(0.030) implies a low variation of the ATE that is caused by the observable factors. The 
ATE is higher for the manufacturing sector (0.456) than for the service sector (0.442) 
presumably because the former is more actively involved in export. Among the studied 
countries, Turkey holds the highest mean ATE (0.460), and Latvia holds the lowest 
mean ATE (0.436). The mean ATT is 0.833 with a moderate standard deviation (0.138). 
It is far larger than the mean ATE, and this difference is mainly accounted for by the 
selection effect.
2  The positive selection effect implies that firms that have unobservable 
advantage in export—for example, superior managerial skill and knowledge about 
consumer’s preference regarding certification—tend to acquire international standards. 
Those firms acquire certification knowing that they can potentially expand their sales in 
foreign market with it. 
 
 
Table 3. The estimated effect of international standards 
  Mean Std. Dev. Min  Max 
OLS     
 0.0840    
CF with homogeneous treatment effect      
ATE, ATT  0.4283   
CF with heterogeneous treatment effect    
ATE 0.4491 0.0297 0.3801 0.5343 
ATT  0.8330 0.1377 0.5140 1.2667 
 
Robustness of the results of the CF model regarding the treatment effect can be 
examined by comparing the current result with predicted results based on different 
subsample. We predict ATE and ATT for the 2005 and 2008/2009 subsamples using the 
model estimated using only the 2002 subsample. The mean predicted ATE is slightly 
higher—0.525 in 2005 and 0.531 in 2008/2009. In contrast, the mean predicted ATT is 
considerably high and beyond the upper limit—1.189 in 2005 and 1.126 in 2008/2009 
                                                 
2  The maximum ATT exceeds 1 because the standard calculation of the ATT does not impose bounds. although correlation between the current and predicted ATT is reasonably high (0.946 
in 2005 and 0.883 in 2008/2009). Thus, the degree of the endogeneity of certification is 
not constant over time, and it is weaker in the recent years, possibly reflecting the 
declining brand effect certification over time. 
 
5.  Conclusions 
This study evaluates the effect of international standards certification on firm’s export 
performance in Europe and Central Asia by applying the control function approach with 
endogenous treatment effect to firm-level data. Certification is found to increase export 
share in firm’s sales by 44.9% on average. The results demonstrate that ignoring the 
effect of self-selection of certification leads to a substantial bias in the estimated 
treatment effect.   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Effect of International Standards Certification on Firm-Level Exports: An Application of the Control Function Approach

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Effect of International Standards Certification on Firm-Level Exports: An Application of the Control Function Approach

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