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Can Use of International Standards Improve Total Factor Productivity?

March 14, 2017
Cheng Hong

In the context of new normal, China is facing severe developments situations, such as shortage of labor and rising costs, incremental constraints of resources and environment, weakening traditional driving forces of economic growth etc. Not only enterprises at micro level but also the whole economy at macro level calls for a new driving force of economic growth to achieve transformation and upgrading and sustainable development. The new driving force targeted is total factor productivity, a new indicator of Chinese economy.


What is total factor productivity? It is defined as extra productivity in addition to constant inputs of labor and capital and other traditionally measured factors. In other words, if a firm keeps investing on labor and capital as it used to, a 10% growth is added to the original basis due to its emphasis on technology, management, human capital and quality, and then the newly-added 10% belongs to total productivity growth.


It is widely discussed how total factor productivity should be improved and many experts and scholars put forward their own views and proposals. At macro level, upgrading allocation of resources is a way to improve total productivity. For example, workers are transferring from agricultural industries of lower total factor productivity to non-agricultural industries of higher total factor productivity. Most developed countries improved their total factor productivity in such a way during the early period of development, so did China in its past 30 years. However, as the rural surplus manpower is decreasing, its marginal efficiency is lowering as well.


Since macro-level approaches do not apply any more, researchers’ attention is drawn to micro-level for solutions. Specifically, micro level involves enterprises. Enterprises can try various methods such as increasing R&D investment, introducing new technologies, developing new products, or improving management and overall efficiency, or motivating employees’ activeness and creativity etc. As we know, intangible factors involving technologies, management, and human capital are effective ways to improve total factor productivity as long as their functions are well used. However, how can each enterprise choose the most suitable factors most applying to its own development? And how should it apply these factors to upgrading quality and efficiency? By which standard and what kind of policies should the government make to promote the development of enterprises? These are essential questions we need to answer. 


Considering these questions, I and my research team made a study and analysis based on China Employer-Employee Survey (CEES) data and obtained a basic conclusion in the article titled “Does the use of international standards increase productivity? --Evidence from 2015 China Employer-Employee Survey” which was published in Journal of International Trade (Issue 1, 2017).

Through the analysis of the CEES data, we found that the use of international standards has a significant, positive casual effect on improving an enterprise’s total factor productivity. With the same investment on capital and labor, the enterprises using international standards have a 13.7% to 22.4% higher total factor productivity than that of those enterprises not using international standards. 


Some people simply equal use of international standards to enterprises’ purchasing one or more documents of standards from the standard organizations, or obtaining standard certification by certain payment. Such an understanding is one-sided and harmful. Use of international standards cannot be simply regarded as “borrowing”, but should be taken as engaging enterprises in upgrading production technologies, enhancing internal management, and even improving preferences and policies for recruiting talents to meet the standards. For instance, the enterprises using international standards tend to employ talents with higher English proficiency, or with work experience in applying international standards in foreign companies. Therefore, it is no wonder that enterprises using international standards have obtained technology, management and optimal structure of human capital.


In fact, both using standards and certification by standards are enterprise-oriented services. In order to promote this kind of production service to flourish, in view of the government, we should encourage competition in such sectors, namely to encourage standard service industry to embrace the market; we should establish policies and rewards favoring use of international standards to encourage enterprises improve total factor productivity; we should foster standard service institutions providing enterprise-oriented standard public services and set up platforms for standard inquiry, translation and consulting; we should promote the mutual accreditation of standards with main trade partners, reducing standard barriers our enterprises face in the international market; we should encourage enterprises to quickly transform intellectual property-owned technologies into international standards.  


Actually, in recent years, state-owned certification institutions have already started market-oriented reform and a certain amount of achievements been achieved. The next step is to deepen the transformation of such institutions and strengthen Chinese enterprises’ power of voice in the international market.