Effect of ISO Certification on Managerial Efficiency and Financial Performance: An Empirical Study of Manufacturing Firms, The

International Journal of Management, Mar 2008 by Lee, Yao-Chun, Hu, Jin-Li, Ko, Jia-Fu

ISO 14000 is a set of standards that firms have to satisfy for certification. The aim of the standards is to improve the performance of firms, especially with respect to the environment. This paper studies 96 listed firms in four major categories of Taiwan's manufacturing industry that obtained ISO 14000 certification during 1997-1999 period. Data envelopment analysis (DEA) and Wilcoxon signed-rank test are used to analyze the firms 'managerial efficiency and financial performance. It is found that ISO 14000 can be an effective strategy for Taiwan's manufacturing firms to improve their managerial efficiencies and maintain competitiveness. Moreover, it is never too late for a firm to be ISO 14000 certified.

Introduction

Ever since the Rio Declaration and Agenda 21 were set as milestone agreements at the Brazil Rio Earth Summit of Rio de Janeiro in 1992, global environmental protection has attracted worldwide attention. The United Nations has already required countries from all over the world to formally clarify their environmental goals in order to reduce waste and save energy. Every country, enterprise group, and individual should not regard the Rio Declaration as a general environmental event, but rather must take concrete environmental control tactics in order to reduce the chance that various kinds of environmental problems could take place. This height of environmental consciousness means entrepreneurs must undertake the responsibility of environmental protection.

The above trend has led entrepreneurs to introduce environmental management into their competitive strategy by implementing an environmental management system in order to seek environmental and economical performance. Thus, to answer the new trend of international environmental protection, the ISO (International Organization for Standardization) introduced a set of environmental standards in 1996: ISO 14000 is intended to assess a company's performance in terms of environmental responsibility. Initially, ISO 14000 began as a program of voluntary guidelines and certification. The standards for certification bear upon three major areas: (1) Management systems - systems development and integration of environmental responsibilities into firms' planning. (2) Operations - consumption of natural resources and energy. (3) Environmental systems - measuring, assessing, and managing emissions, effluents, and other waste streams.

Proponents hope that ISO 14000 will receive the same high interest that ISO 9000 standards have in the international business community, resulting in firms giving more attention to environmental responsibilities (Stevenson 2002). The ISO 14000 family is primarily concerned with 'environmental management'. Its main spirit is for "the organization to minimize harmful effects on the environment caused by its activities, and to achieve continual improvement of its environmental performance (ISO 2004)." The vast majority of ISO standards are highly specific to a particular product, material, or process. Until April 2005, there were 88,800 firms obtained ISO 14001 certification in the world (Tsujii 2005). Taiwan was ranked 14th in the world according to the total amount of ISO 14000 certified firms. In Asia, Taiwan only lags behind Japan, China, South Korea, and India. The ISO 14000 environmental management system certification seems to have already won global and local credibility.

Since the early 1990s, Taiwan's government has been actively helping domestic firms to be ISO 14000 certified in order to increase their international competitiveness. Therefore, ISO 14000 certification has been officially used as an environmental as well as an industrial policy instrument in Taiwan. Firms recognize that there are competitive advantages in the ISO 14000 series from process and product improvement. They see the advantages as occurring not only in material re-use and recycling, but also in integrating the enterprise resources. ISO 14000 encourages firms to develop environmental management systems that are suitable for their own choices of environmental practices, such as less harmful raw materials, using cleaner production technology, and carrying on the green image in design and green production, etc. Methods of pollution prevention and saving resources reduce the unfavorable impacts on global ecology and resources that come from production. With ISO 14000 certification, enterprises can promote both their environmental and production performances.

Most literatures about ISO 14000 discuss the motivations and the advantages of obtaining ISO certification. These literatures point out that the most advantages obtaining ISO certification are on improving environmental, non-environmental performance and enterprise image. Handfield and Melnyk (1996), Melnyk and Smith (1996), Bansal and Roth (2000), Fryxel and Szeto (2002), Berthelot et al. (2003), and Fryxell et al. (2004) are focus on the motivations of ISO 14000 certification. Chin and Pun (1998), Montabon et al. (2000), Corbett and Russo (2001), Kwon et al. (2002), ISO (2002), and Bansal and Hunter (2003) discuss the environmental and non-environmental advantages of ISO 14000 certification. However, the discussions about operational efficiency or financial performance are lacks. The major approach compared perceived performance measures by questionnaires even if they have referred. There is no existing literature studying the ISO 14000 certification using real financial data. To the best of our knowledge, this paper is one of the first efforts to apply data envelopment analysis (DEA) to ascertain the benefits of ISO 14000. Therefore, this paper wants to look for other side benefits that are useful operational strategies for firms through computing and comparing efficiency or financial performance.