Do foreign product standards matter? Impacts on costs for developing country exporters

Abstract

We estimate the impact on production costs of firms in developing countries from conforming to regulations imposed by major importing countries, using firm-level data from 16 developing countries. The findings indicate that standards increase variable production costs by requiring additional labor and capital. A 1% increase in initial investment to meet foreign compliance costs raises variable costs by between 0.06 and 0.13%. Fixed costs of compliance are non-trivial, averaging about 4.7% of annual variable costs. The cost impacts might be an important determinant of export success for firms in developing countries. The results may provide one indication of the potential barriers to trade facilitation that technical regulations can pose.

Keywords:

• standards
• regulations
• compliance
• translog costs

JEL Codes:

• F1
• L15

Acknowledgements

The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. We are indebted to Johannes Moenius and to seminar participants at Georgia State University and the Kiel Institute of World Economics for their comments. This research is part of a broader project on trade costs and facilitation at the World Bank supported through a Trust Fund of the UK Department for International Development (DFID). The findings and conclusions here do not necessarily represent the views of the UK government or DFID.

Notes

1. See the case studies in Wilson and Abiola (2003).

2. The terms “standards” and “standards and technical regulations” are used interchangeably throughout this paper. The WTO provides a clear distinction between standards and technical regulations; the former are voluntary and the latter are mandatory technical requirements. In many practical cases “standards” cover mandatory technical requirements.

3. See the discussion in Maskus, Wilson, and Otsuki (2001).

4. Our data are insufficient for analyzing demand for compliance. Such an analysis would require data on unit prices of products that comply with standards and those that do not in each export market. These data are not currently available.

5. We assume that the firm’s compliance with any domestic standard is a sunk cost and does not affect its decision to meet the foreign requirement.

6. See Berndt and Hesse (1986), Morrison (1988), and Badulescu (2003) for further discussion. Badulescu sets out a similar specification in which R&D is a quasi-fixed input across countries.

7. Ideally we would want to estimate firm-level fixed effects and fully flexible quadratic terms between these effects and all cost-related variables in order to permit factor biases in technical differences. This is not feasible given the degrees of freedom available.

8. In our particular case, the separability condition is written as , , or , .

9. Wilson and Otsuki (2002) describe this survey in detail.

10. The survey also asked two questions about measures of recurrent labor costs, which we do not employ in this paper.

11. This selection procedure raises a significant concern about selectivity bias. To control for this, we included in supplemental regressions a dummy variable taking on the value of 1 for firms that answered all three categories and a value of zero otherwise. This made virtually no difference in the results.

12. The maximum number of observations included in these regressions was 159. This loss in observations is largely due to the low response to the questions regarding compliance with the foreign standards and technical regulations.

13. In this case, the sample size falls to 96.