Economic Value of Standardization
This study looked at the overall impact of standardization on international trade, growth and productivity and the Canadian economy. It also comprises a series of in-depth interviews with senior executives on the value of standardization for their organization.
1. Benefits for the economy
A microeconomic review of research and publications evaluating the impact of standards on:
- International trade
- Growth and productivity
- The economy
2. Benefits for companies
This part summarizes the outcomes of interviews with senior executives from the private and public sectors. They provide qualitative data on the benefits of participation in the standard development process, the impact of standardization on competitiveness, innovation and new product development.
3. Two case histories
1. Review of Literature and Empirical work
Between 1981 and 2004 standardization accounted for 17% of labour productivity (output/hour worked) increase. This corresponds to a 9% growth rate in real GDP.
Without the increase in standardization over the study period, the real GDP economic output in 2004 would have been USD 62 billion lower.
Economic Impact of Standardization
Compatibility emerges as one of the most significant reasons for the evolution of standardization. The economic benefit of standards increases as the number of users of a given product or service increases. The benefit of owning the first telephone was relatively minimal and increased exponentially as more people owned telephones.
The economic benefits of compatibility standards are substantial. NASA has announced that all future moon operations will use metric measurements. This will increase compatibility with other space agencies. In turn this will facilitate repairs in case of an emergency by allowing the use of spare parts from a wide range of global suppliers.
Minimum admissible attributes
Providing minimum requirements with regard to safety and quality, standards can help lower transaction and search costs. They also diminish the effort invested in quality evaluations, increase international trade performance and reduce related costs.
Technical reference standards include ways to “measure” and “grade” products. They provide clear rules with respect to the provision of information and product descriptions and allow for larger operations on a more efficient scale, which in turn lower costs. This reduces variety and provides economies of scale. It also furnishes more certainty about the future direction of the industry and reduces the risk involved in research and development.
Standards impact international trade in three ways:
- By providing information on quality they improve the possibility of non-price competition and lead to a better trade performance.
- International standards improve compatibility, product information and the ability to measure.
- This in turn helps reduce the need to produce local market variations.
Uniquely national standards may include genuine preferences of domestic consumers, which could provide valuable information for competitors. However, purely national standards may inhibit international trade because they include preferences of the local consumer that may not have a significant impact on international markets.
Economic Growth and Productivity
Recent studies done in Europe have concluded that standards have had a positive impact
on the economy and have played an important role in improving labour productivity.
The Importance of the Age of Standards
Standards have an important impact on innovation by providing information and reducing uncertainty thus mitigating the risk of R&D investment. When standards are either very old or very new, however, they can sometimes constrain innovation.
When standards are very old, they can loose their relevance and lock innovators into out-dated systems.
Very new standards
When standards are very new, they can limit innovation because innovators are still learning about these standards and their impact.
Most international standards today are developed in such a way as to leave maximum freedom for technical development by stating requirements concerning performance rather than design or descriptive characteristics. This avoids the danger of being locked into a technology.
15 senior executives from the private and public sectors were interviewed to provide qualitative insights into their participation in standard development. Among others, the interviewees answered the following questions:
• benefits of participating in the standards development process;
• the strategic importance of standards;
• the development of new markets;
• cost savings;
• public safety;
• challenges to standardization.
Summary of overall findings
Most interviewees were fairly knowledgeable about standards although this knowledge
was often narrowly defined and limited to their specific business area. Few interviewees were able to quantify these benefits in an economic way. Some were reluctant to disclose detailed situations that benefited their organizations because of competitive or proprietary concerns.
Key benefits mentioned included:
- Standardization establishes a level playing field for businesses
- Participation in the standard development process is important in influencing the direction of standards
- Standards support continuous improvement, innovation and new product development
- Quality management standards bolster and validate credibility with customers
- Standards facilitate trade and new market development
- They improve productivity, reduce costs and improve public safety
Reasons cited for participating in standard development processes:
- Create a demand for higher quality and technically superior products
- Early and increased awareness of product compliance needs
- Obtain exposure to what other companies are doing in the field
- Tailor product design or help set standards that other competitors have to equal
- Benefit from the technical and professional interaction with others
- Access to intellectual capital and in-kind contributions from other industry participants
- Cost savings – it would be expensive/difficult for an individual company to develop standards singlehandedly
Tips on participation in standard development processes:
- On-going representation is important
- Participation in working groups provides the greatest value because they share and exchange information and that is where technical decisions are made
- Smaller businesses can benefit considerably by enjoying access to information they would not normally receive
- There is no need to be present at every meeting to hear what is going on
Here are quotations from major corporations:
“3M’s factories benefit in the long run from employee involvement in the standards development process because employees have a pragmatic approach to the development
of standards which makes it easier to implement them in our production facilities.”
“If we did not have people serving on the standards development committees, things sometimes crept into the regulations that produced a disadvantage to us. This was one of the main reasons we continue to be involved in the standards development process. Also, as a technology leader, GE did not want something to come up that blocked our advancement in the technology.”
Strategic Importance of Standards
Here the interviewees were asked about the strategic importance of standards for their companies.
Summary of comments:
- Standards can help to convince customers of the quality of a product or processes. They also assist in qualifying potential suppliers and business partners.
- Standards allow to set a level playing field, so businesses which want to provide a safe product that is ethically produced know that domestic and international competitors are required to follow the same rules.
- Companies know what is required for a product to enter worldwide markets.
- Standards can help improve a company’s performance and product lines. It is not enough just to conform to the voluntary standards established by the industry or to comply with existing best practices.
Additional quotes supporting the importance of standards (to be place on the side):
Canadian Manufacturers and Exporters Association:
“In some cases if you don’t meet the standard, you don’t do business, so one could argue that 100% of your business depends on your ability to meet that standard.”
Underwriters Laboratories of Canada:
“Sometimes business groups really push ULC to agree on standards because they have a significant need and want a level playing field. Standards do not favour a particular manufacturer, but apply equally to everyone.”
Trade and New Market Development
Interviewees felt that while international harmonization may be the ideal state it may not always be possible or appropriate. However, where international standardization is the appropriate approach, it clearly increases the free flow of goods and services. The optimum is one standard, one test, one certification. The appropriate use of international standards levels the playing field for all and improves the free flow of goods and services.
Globalization with new trade agreements, and shifting trends in world demand and supply are creating new demand for standards. The increasing rate of technological change has increased the demand for interoperability of standards.
With new producers and consumers entering the system - many from countries with very different levels of development - standardization needs to adapt to changes in the world economy.
Interviewees underlined that when companies think of standardization as part of the continuous improvement process for business, there can be huge savings. Product quality gets better and waste levels go down. Standardized processes help improve quality, increase productivity and reduce costs.
Cost savings from standardization tend to be more pronounced when production volumes are high. However, even customized products may benefit, for example, through the use of standardized components and standardized performance tests.
In standards development much expertise is provided on a low cost of participation basis. The process is transparent and open and usually means that the buy-in to a standard is significant. Although standards development is sometimes described as slow, it is, in fact, much faster than the development of a regulation.
Facilitating the Client Supplier Relationship
Almost all interviewees agreed that one of the major advantages of standardization was
improved interoperability. Standardization facilitates the development of global supply chains and offers a broader range of choices than would otherwise be available.
Manufacturers across the globe are able to specify a standard in a bid solicitation or purchase requisition and then accept or reject bids or products based on that standard.
Facilitating Innovation and Research and Development (R&D)
Standards are extremely helpful in new product development. They provide a base of knowledge for such things as documentation and performance information.
Standards are the building blocks and the basis for continuous improvement, but they are only helpful if they are not treated as procedures or rigid documents with which one has to comply.
Benefits to Public Safety/ Liability/ Public Interest
Standardization simplifies things. Complexity is what leads to mistakes and mistakes cause accidents.
Safety and the prevention of adverse incidents have been concerns of the standards development community for many years. But increasingly other societal priorities are being added. These priorities affect every aspect of the life cycle of a product ─ from its inception to its retirement and eventual destruction. More and more there is a tendency to consider all aspects of a product’s life cycle when standards are developed. Such tendencies are in the long-term interest of the public.
Challenges to Standardization in the Future
Individual interviewees expressed their concern about declining levels of participation in the
development of standards. They felt that companies are missing out on the very real advantages of participating in the standards development process, advantages