The Unexpected Consequences of Private Regulatory Standards

When people decide to buy or sell a product, they need to agree on its price. To make that decision, they have to assess the quality and utility of the product, depending on its features. This is where product standards or product specifications come in. They describe the product’s technical features, its physical appearance, and how it was produced.

Without such standards, it is difficult to engage in commercial transactions. As a result, market actors “demand” these standards. But the issue is, who will “supply” them? Standards have properties of public goods—once developed, anybody can adopt the standards without having to pay for them, which leads to the free-rider problem and under-provision of the standards; hence, there is a market failure in the standards market. Governments are often charged with supplying public goods. Therefore, one would expect that governmental bodies will step in to supply product standards.

What is less appreciated is that most technical standards are developed by quasi-private national bodies. Examples include the American National Standards Institute, Standardization Administration of China, South African Bureau of Standards, the British Standards Institution, and the Deutsche Institut für Normung. At the global level, the International Organization for Standardization (ISO) is the preeminent standard setting body, working as a network of 162 national standards setting bodies. Established in 1947, the ISO has developed over 22,000 standards to date.

ISO standards are of two kinds: products standards and management system standards. The former pertain to product characteristics, while the latter pertain to production and management processes involved in producing these products. The ISO’s quality management standard, ISO 9001, is the most widely adopted  management standard in the world. Launched 30 years ago in 1987, ISO 9001 provides management system guidelines for firms to improve the quality of their products. Firms are audited by an accredited third-party auditor to ensure that they have adopted ISO-quality systems. After the audit, firms may be ISO 9001 certified. Given the marketing recognition of this certification, firms often advertise it on their corporate websites and product labels.

ISO 9001 has a compelling functional logic. It corrects a market failure rooted in the lack of an internationally recognized mechanism for sellers to assure the quality of their products and for buyers to believe such claims. The ISO 9001 “brand” allows buyers to differentiate higher-quality products from lower-quality ones. For the certified firms, ISO 9001 serves two functions. Internally, it helps improve the firm’s quality management and eventually its product quality. Externally, it provides the firm with a mechanism or an international brand to signal its commitment to quality. As of 2017, over one million organizations in over 170 countries are ISO 9001-certified.

There is extensive literature on the extent to which ISO 9001 improves product quality and, in turn, firms’ profitability. But ISO 9001 has  “unintended” effects as well, one of which is to improve workplace safety. The reason for this positive externality is straightforward. Suppose a firm has a disorganized workplace, which leads to poor quality of its products. These workplace issues probably also lead the firm to ignore employee safety and cause accidents and injuries. If this firm were to adopt ISO 9001 standards to improve the quality of its products, it could also reap an unexpected, second dividend of a safer workplace.

We tested this expectation empirically. Our analysis of a panel dataset comprising 92 countries for the period from 1993 to 2012 suggests that all else equal, a 1 percent increase in the country-level ISO 9001 certification count is associated with up to a 0.13 percent decrease in fatal occupational injury rate. This effect is substantial because ISO 9001 certificates have grown, on average, by 20 percent annually for the period of our study. All else equal, an economy that has experienced a 20 percent increase in the uptake of ISO 9001 could expect a 2.6 percent decline in the fatal occupational injury rate, all else equal.

Private standards also have a curious relationship with the public regulatory environment. We find that private pledges might offset some of the ill-effects of the lax public regulatory environment. Take the case of environmental protection. Although the United States has withdrawn from the Paris Agreement, major U.S. companies have pledged to continue support for climate action. A similar story is found in the context of workplace safety in the Global South where countries poorly enforce their workplace laws. Suppose a firm in such a country were to join ISO 9001. How might this impact its workplace safety, given that government inspectors are not enforcing workplace safety laws? Our statistical analysis shows that the effect of ISO 9001 is even stronger on workplace safety where governmental efforts to protect worker rights are weak and where the respect for the rule of law is low. This is because there is a low-hanging fruit in workplace safety, and the firm is able to make dramatic improvements due to ISO 9001.

Of course, these changes are predicated on local firms’ joining the private standard in the first place. As the literature suggests, local firms can be motivated to join ISO 9001 if their buyers located in developed countries want them to do so, since those buyers probably want some assurance about product quality. Yet their support for ISO 9001 has an unexpected positive spillover for workers in exporting countries: safety and fewer accidents. Although free trade is under attack from populist politicians who want to protect jobs, through supply chain linkages,  free trade can facilitate the spread of private standards that reduce workplace accidents.

With the Trump Administration committed to a regulatory rollback, private standards offer one way to counter the ill effects of such a rollback. Quality and environmental standards are obvious examples. Because these standards impose costs on firms, stakeholders must create incentives for firms to subscribe to them. Moreover, these standards can influence what firms do and how they do it in unexpected ways, as the case of ISO 9001 and workplace safety illustrates.

Sijeong Lim is Assistant Professor in the Department of Political Science at University of Amsterdam and a member of the Political Economy and Transnational Governance (PETGOV) programme group.

Aseem Prakash is the Walker Family Professor for the College of Arts and Sciences, the Founding Director of the Center for Environmental Politics, and a Professor in the Department of Political Science at the University of Washington.