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This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.

By Anna Lamin (Northeastern University) and Grigorios Livanis (Ohio University)/

Who Uses Third-Party Certifications?

Third-party (or external) certifications can authenticate the quality of products and/or services of a company. One example is ISO (International Organization for Standardization) certifications, which are commonly used worldwide.

Such external endorsements can show a consumer that a product or service is trustworthy, which can lead to increased sales for that company.

Companies use these certifications in different ways:

  1. Companies in developing markets often use these certifications to attract foreign consumers, especially those based in more economically advanced economies.
  2. Companies in economically advanced markets often use these certifications to increase their domestic customer base.
Liability of National Origin

Even though companies in both developing and advanced economies use third-party certifications, recent research suggests that companies in advanced economies tend to enjoy greater benefits from their adoption.

In short, external certifications seem to work better in advanced economies.

Why is this? It comes down to something called “liability of national origin.” Consumers tend to have perceptions about the company because of where it is headquartered. They may believe that weaker institutions and economic conditions in the company's home country lead to poorer-quality goods and services by local companies.

Unfortunately, this kind of negative bias can overshadow the information provided by external certifications.

It is important to note, however, that this distortion is less prominent for companies that operate in more established industries. 

Are Third-Party Certifications Worth It?

Recognizing the impacts of the “liability of national origin” bias is to recognize the limits of third-party certifications for companies based in developing countries. It is possible that the benefits are not worth the effort and cost of maintaining such certifications.

To evaluate their efficacy, companies should consider:

  • Location: Companies in economically advanced nations tend to do better with third-party certification.
  • Industry: Companies in well-established industries tend to do better with third-party certifications. For such companies, third-party certifications act as a more reliable source of information. 
  • Cost: For companies from developing economies with weak regulatory institutions and operating in less established or well-known industries, the value of third-party certifications is particularly weak.

While third-party certifications can be beneficial in ensuring quality of products and services, their efficacy is not consistent across companies from advanced versus developing countries.

Original Article

Lamin, A., & Livanis, G. 2020. Do third-party certifications work in a weak institutional environment? Journal of International Management, 26(2): 100742. https://doi.org/10.1016/j.intman.2020.100742

Contact

If you are interested in learning more about this work, contact Professor Lamin.