Summary: The Influence of Standards on the Nordic Economies
A new study shows that standards have a significant impact on growth in the Nordic economies, both in terms of labor productivity and GDP. This is a summary of the study.
The world is in need of further, sustainable growth. Ever since the Austrian economist Joseph Schumpeter’s seminal work in the 1930s, it has been recognized that innovation in products and processes is a prerequisite for long term economic growth. To ensure persistent economic growth over time, it is however not sufficient to create new knowledge through research and development.
The knowledge must also be spread and applied by a broad group of companies and institutions. Standards that are developed in consensus with the participation of companies are an effective means for spreading and applying knowledge, and in turn creating benefits for the wider economy.
In this report, we study the impact of voluntary consensus standards on economic growth in the five Nordic countries: Sweden, Finland, Norway, Denmark and Iceland. We address the topic using different complementary approaches:
Macroeconomic approach: Econometric estimation of a productivity model including stock of standards as an explanatory variable covering all five Nordic countries over a time span of nearly 40 years.
Company level approach: A comprehensive business survey on the benefits of standardization covering 1,179 Nordic companies with prior experience from the use of standards. Case studies based on in-depth interviews with companies in different industries and countries throughout the Nordic region.
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Key findings from the study
We find that standardization has contributed to increased labour productivity in all of the Nordic countries. In particular, the econometric study shows that:
- Doubling the stock of standards is associated with an increase of 10.5 percent in labour productivity across the Nordic countries. This estimate is close to a consensus estimate from previous international studies applying similar methodologies. The positive association between stock of standards and increased productivity is statistically significant, both when we consider the Nordic region as a single entity, as well as when we estimate the relation for each country individually.
- Given the average growth in stock of standards in the Nordic countries of 6.8 percent during the period studied (1976-2014), standardization is associated with an annual increase in labour productivity of 0.7 percent per year of a total average growth of 1,8 percent. This result suggests that standardization is associated with as much as 39 percent of the labour productivity growth and 28 percent of GDP growth in the Nordic countries during the period.
We also perform separate estimations for selected industries across the Nordic countries. The most reliable results are found within the construction sector. We find that doubling the stock of standards available for the construction sector is associated with an increase in labour productivity of 6.9 percent within the sector. Given the annual growth rate in the stock of standards relevant for the sector during the estimation period 1976-2014, standardization is associated with an annual increase in labour productivity of 0.6 percent within the construction sector.
The above-mentioned findings should be interpreted with caution. Standards are used as a proxy for the dissemination of knowledge within the economy and should therefore be regarded as an important indicator of a broader infrastructure supporting that process. Standardization plays a symbiotic and complementary role with factors such as rules and regulations and technological development, only partly controlled for in the estimation model. While standards are central to this process, they form part of a broader architecture and it is therefore necessary to treat the findings as upper bound estimates.
Company level approach
The business survey covers companies from eight different sectors; five sectors in each country. Iceland is an exception here as it only has respondents from three sectors of the economy. The survey provides a detailed explanation of the high positive association between productivity and standardization observed at the macro level. Moreover, the survey reveals that following and applying standards is an important part of Nordic companies’ business plans, which gives a strong indication that standards also will be important for future economic development. In particular, the business survey shows that:
- The most important reason for companies to use standards is to improve market access (34 percent of respondents), improve product/service quality (32 percent of respondents) as well as reduce risk (26 percent of respondents).
- Companies experience similar benefits of standards independently of which country they operate from. This result is consistent with the findings from the macroeconomic impact analysis.
- A large majority of the companies (87 percent) consider standardization an important part of their future business plans. This supports the hypothesis that standardization is an important business tool in the modern economy.
- Three out of four firms (73 percent) consider benefits to exceed costs of standards, while 18 percent say that benefits equal costs. In general, the larger the company, the more likely it is to experience that the benefits of using and implementing standards exceed costs.
Sales, marketing and market access
The respondents confirm that standards are an important means of improving sales and market access for Nordic companies. In particular:
- 85 percent of respondents agree with the statement that standards create trust and confidence with customers.
- Three out of four companies report that standards improve the quality of their products and services (74 percent) and that standards simplify the communication between producer and customer (72 percent).
- 69 percent of exporting companies find that standards simplify their exporting of goods and services. Standards appear just as important for facilitating exports for small exporting companies as for larger exporting companies.
Nearly half of the respondents report that standards have helped them to increase sales, either by gaining new customers or increasing sales to existing customers. As much as two out of five companies report that standards have helped them gain new customers, while one out of six companies reports that standards help them gain new customers both in the domestic market as well as in the international market. This result is supported by in-depth interviews where companies across sectors emphasize that following standards often is a requirement for gaining market access. Our findings show that standards are just as important for small as for large companies in gaining new customers.
Ability and willingness to develop innovative solutions
The survey reveals a clear rejection of the notion that standardization is an impediment to innovation. Moreover:
- When asked whether standards prevent their company from developing innovative technology, only 14 percent of the companies responded positively to this claim.
- In fact, six out of ten respondents emphasize standards as a good means to follow technical developments. The result is robust across sectors, although regarded as particularly important by companies operating within Seafood and fisheries (73 percent), ICT (67 percent) and Trade (65 percent).
Production and supply chain efficiency
Improvements in production efficiency can be achieved within the boundaries of the company, or it can be done in other parts of the value chain:
- 59 percent of respondents emphasize that standards simplify purchasing and tendering processes, thus increasing efficiency and saving costs. This gain from standards is also supported by the in-depth interviews with companies. Standards contribute to reduced operating costs over time by building a floor for the minimum requirements on the tenderers.
- Consequently, standards are particularly important in sectors with complex tendering processes where the quality of the product or service is hard to assess in advance, such as the petroleum, healthcare and construction industries. In these sectors standards’ positive effect on simplifying tendering processes is emphasized by about 70 percent of the respondents. In sectors with more transparent products, such as Trade, Seafood and fisheries and Manufacturing, only about 45 percent of respondents consider this benefit important.
- Production errors or receiving a poor-quality product from sub-contractors can be costly. 65 percent of the respondents point out that standards reduce the risk of manufacturing errors within the company. The same share of respondents also say that standards raise the quality of subcontractors. The result is robust across sectors.
- Half of the respondents, independently of sector affiliation, emphasize that by implementing and following standards they reduce their company’s negative environmental impact.
- 84 percent of respondents report that standards help them comply with regulations. Simplifying procedures to achieve compliance saves the company administrative costs. In addition, following the standard helps the company signal compliance with regulations to the market. The more regulated the sector is, the larger the benefits of following standards that help the companies comply with these regulations. Thus, in the petroleum and the healthcare sectors a respective 94 and 89 percent of the respondents answer that standards help them comply with regulations.
Participation in standardization work
The work of developing new formal standards is organized in projects run by committees. The committee work is facilitated by national or international standardization organizations. The committees are composed of relevant stakeholders for the given topic, including companies within the industry, other experts and public authorities. Results from the survey show that:
The three main benefits from participating in this work are:
- Possibility to influence standards at the sector level (82 percent)
- Networking with other experts (75 percent)
- Anticipating changes at an early stage (73 percent)
The result is robust across sectors.
The survey sample shows that larger companies (250 employees or more) are twice as likely to participate in the work of developing new standards as smaller companies (less than 50 employees). Some smaller companies emphasize that the standardization work is dominated by the larger companies, and thus that the interests of the smaller companies are not sufficiently reflected in the standards. The contrary argument from some of the companies participating in the work is that there are too many companies free-riding on the efforts of others.
There is a tendency that those who participate in standardization work have a more favourable view on standardization: 90 percent of companies participating in standardization work report that standards are an important part of their future plans, compared to 84 percent of the non-participating respondents. Moreover, 88 percent of participating companies report that standards create trust and confidence with customers, compared to 83 percent of the non-participating respondents.
Overall, standardization has undoubtedly improved economic performance, facilitated improved user experiences, and contributed to safer and more environmentally friendly work environments. Since the beginning of the 2000s, the growth rate of the stock of standards managed by the Nordic standardization organizations has been steadily decreasing. In the period 2000 to 2009 the average growth rate in stock of standards was about 7 percent, while in the period 2010 to 2014 it has been 3 percent.
Still, we do not expect a smaller impulse on productivity growth from standardization in the future. An important reason why the positive association between growth in standards and productivity is so robust across countries in the past is most likely that the use of standards addresses specific recurring problems in the market. As technological development continues, yielding new industries with innovative products and solutions, new recurring problems will arise. In fact, as markets and technological development continue to change more rapidly than ever before, there is reason to believe that the importance of standards and their coordinating role in the market is more likely to increase in the time to come.
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