Lahore Journal of Business

Volume 11, Issue 2,

Spring 2024

The Determinants of International Certification among

Manufacturing Firms in Pakistan

Farrukh Iqbal Aadil Nakhoda

Dean and Director (Retired) Assistant Professor
Institute of Business Administration, Karachi Institute of Business Administration, Karachi
Email: Fiqbal@iba.edu.pk Email: anakhoda@iba.edu.pk
(Corresponding Author)

Citation: Iqbal, F., & Nakhoda, A. (2024). The Determinants of International Certification
among Manufacturing Firms in Pakistan. The Lahore Journal of Business, 11(2), 1-28.
https://doi.org/10.35536/ljb.2024.v11.i2.a1

Abstract: This study investigates the factors that influence international certification among Pakistani
manufacturing firms. About a third of such firms in Pakistan hold one or more certificates related to
management or technical processes. The existing literature suggests that this demand is influenced by
factors such as sector of activity, market competition, human capital and information environment,
ownership type, and available resources. By analyzing a large, random sample of Pakistani manufacturing
firms, we find strong correlations between these factors and international certification. We also discover
that owner attitude, an aspect overlooked in previous studies, plays a role in the certification decision.
While our statistical model does not fully explain the determinants of certification for small firms, we do
find that certification is associated with increased profitability among small enterprises. This implies that
small enterprise development agencies can improve the effectiveness of their programs by considering
certification status as an additional criterion for allocating support funds. The results of our study have
policy implications related to exporting, staff training, diffusion of firm ownership, and enhanced
information access facilitated by modern technology tools.

Keywords: International certification, SME policy, product market competition, training,

information environment, ownership diffusion.
JEL Classification: L25, O14, O33.
Paper type: Research paper

Received: 3 December 2023 Revised: 31 January 2024 Accepted: 9 May 2024

Copyright:
The Lahore Journal of Business is an open access journal that distributes its articles under the
terms of the Creative Commons Attribution-NonCommercial-Noderivatives license
(http://creativecommons.org/licenses/by-nc-nd/4.0/): this licence permits non-commercial
re-use, distribution, and reproduction in any medium, provided the original work is properly
cited, and is not changed, transformed, or built upon in any way. With this Creative Commons
license in mind, the Lahore Journal of Business retains the right to publish an article upon
successful completion of the submission and approval process, along with the consent of the
author(s).

Conflict of interest:
The authors declare no conflict of interest.

Funding:
There is no funding for this research.
 The Determinants of International Certification among
Manufacturing Firms in Pakistan
1. Introduction

International certification, or simply certification, is a significant

feature of businesses operating in various industries and sectors (Medase
& Abdul Basit, 2023). It provides stakeholders, including regulators,
customers, employees, shareholders, and investors, with information
about a certified business's adherence to specific standards in its operations
and outputs (Cao & Prakash, 2011). Certification can be obtained for both
technical and management processes. Technical certification is often
required in sectors such as food, textile, leather, and chemicals, where
adherence to particular processes and product safety protocols is
necessary. In some cases, it may be mandatory, while in others, it is
optional, such as the voluntary adoption of eco-labels in certain industries
(Sharma & Rastogi, 2024).

On the other hand, management certification is available across a

wide range of sectors and is typically voluntary. Over the past few decades,
a management standard by the International Organization for
Standardization (ISO) known as ISO 9001 has gained popularity. This
standard focuses on aspects such as customer satisfaction, efficiency,
evidence-based decision-making, and relationship management. Globally,
the number of ISO 9001 certifications has doubled between 2000 and 2022,
reaching over a million. In Pakistan, the number of certifications has
quintupled during the same period, from 611 to 3,106 (see Figure 1).1

1 Global and Pakistan-specific data are taken from the International Organization for Standardization
(2022). The ISO family contains several management system standards, of which the most popular is
the ISO 9001. This accounts for approximately 40 percent of the total number of certifications. Other
standards pertain to the management of environmental impacts, information security, occupational
health, financial risk, social responsibility, and other aspects of modern business operations.

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 International Certification among Pakistani Firms

Figure 1: Number of ISO 9001 Certifications in Pakistan

3500
3000
Number of Certificates

2500
2000
1500
1000
500
0

2008
2000
2001
2002
2003
2004
2005
2006
2007

2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Year

Source: International Organization for Standardization (2022).

Information regarding the broader significance of certifications

among Pakistani firms is also available. A recent survey conducted by the
World Bank revealed that nearly one-third of registered manufacturing
firms in Pakistan hold at least one international certificate.2 This indicates
that certification is currently a significant characteristic of businesses in the
country and warrants further investigation. The objective of this study is
to analyze the factors driving Pakistani manufacturing firms to seek
certification.

Broadly speaking, a relevant theoretical framework for analyzing

these factors can be found in cost-benefit considerations (Adler & Posner,
2000). Firms will choose to become certified if they expect the benefits to
outweigh the costs. However, firms usually do not have prior knowledge of
all the financial costs and benefits associated with certification. In fact, some
important costs and benefits may not be monetary in nature (Islam et al.,
2015). Therefore, from an empirical standpoint, researchers need to associate
various factors present in the firm's decision-making environment with the
relevant costs and benefits, and then determine the statistical significance of
these factors in the certification decision.

2 This refers to the World Bank Enterprise Survey (WBES), which is carried out every few years for
many developing and some developed countries. It is confined to registered establishments and our
analysis is further confined to manufacturing firms. Any generalization from this sample should keep
these restrictions in mind. Unregistered, informal enterprises are not included in the sampled by the
WBES.

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 Farrukh Iqbal and Aadil Nakhoda

Other conceptual perspectives can also be found in the management

science literature. For instance, the institutional theory perspective suggests
that firms make decisions in order to conform to established business
practices within their industry or sector (DiMaggio & Powell, 1983;
Greenwood & Meyer, 2008). Another perspective considers firms to act
based on the managerial and financial resources available to them, which is
known as the resource-based perspective (Newbert, 2007). However, we
find it useful to view managerial decisions within a cost-benefit framework.
This is because many of the considerations highlighted by the institutional
and resource-based perspectives can also be incorporated into the cost-
benefit framework, especially if costs and benefits have both monetary and
nonmonetary aspects.

Turning to costs, it is important to note that certification is not free.

Firms that choose to become certified must not only pay for the relevant
proprietary standards, consultant assistance, and assessor visits, but also
allocate time and resources to modifying management or technical processes.
This may result in work disruption while implementing the new protocols.
In the case of technical certification, there may also be costs associated with
purchasing new equipment and potentially redesigning certain processes
(Biazzo & Bernardi, 2003). Furthermore, there may be nonmonetary costs
involved. For instance, committing to a particular management quality
standard means making decisions according to certain preset rules and
protocols. Some owners and senior managers may be concerned about the
loss of management control associated with this commitment. Therefore,
firms must carefully consider the likely costs in relation to the expected
benefits when deciding whether to pursue certification.

The benefits associated with certification can also be monetary or

nonmonetary. For instance, decision-makers within firms may believe that
certification will result in higher levels of approval from employees,
customers, investors, and other relevant stakeholders. Additionally,
compliance with industry norms and practices can lead to reputational
benefits (Tarí et al., 2012). Firms may even seek certification simply to
enhance their credentials if industry peers or market leaders possess it. On
the other hand, monetary objectives are also significant. Decision-makers
may believe that certification improves management practices, ultimately
leading to higher profits, sales, and returns on assets and equity (Tarí et al.,
2012). Monetary considerations also come into play if businesses require
certification to participate in certain tenders and procurement contracts.

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 International Certification among Pakistani Firms

What determines why some firms obtain certification from an

international body while others do not? The available literature on this topic
in Pakistan is limited and has its own shortcomings. These include the use
of nonrandom samples, focusing on specific sectors, and only considering a
narrow range of firm sizes (Masakure et al., 2011; Fatima, 2014). These
limitations make it difficult to generalize the findings for policy purposes.
However, we address these shortcomings by utilizing data from the latest
round of the World Bank Enterprise Survey (WBES) (World Bank, 2023).
This approach offers three advantages over the existing empirical literature
on Pakistan. First, it employs a random sampling methodology, allowing for
the generalization of results. Second, it includes firms of varying sizes,
enabling cross-scale comparisons. Third, it considers different industrial
sectors, allowing for the control of sector effects in the analysis. Additionally,
the WBES dataset provides detailed information that allows us to examine
multiple aspects of the certification decision.

The study is organized as follows. Section 2 presents a literature

review that focuses on studies examining different aspects of the decision to
obtain certification. Section 3 describes the methodology used to assess the
hypotheses developed from the literature review. Section 4 reports the
empirical findings for the key hypotheses and provides extended analyses.
Section 5 summarizes the results and discusses the policy implications,
while also acknowledging certain limitations of the study.

2. Literature Review

When conducting the literature review, we took into account that the
international certification types covered in the WBES dataset include both
technical and management processes, some of which may be mandatory,
while others are optional. One common feature is that the certification comes
from an international source rather than a domestic one. The literature review
reveals five broad categories of determinants of certification decisions. The
first category relates to the industry or sector to which the firm belongs. The
second focuses on the human capital and information available to the firm.
The third section examines ownership characteristics. The fourth considers
the resources available to the firm. The fifth category explores the potential
productivity or profit gains that could be derived from certification.

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 Farrukh Iqbal and Aadil Nakhoda

2.1. Industry Characteristics

One key empirical observation is that the propensity to acquire

international certification varies across industries. This is true not only in
Pakistan but globally as well. Figure 2 provides cross-industry data for
Pakistan, showing that five industries have certification rates greater than 50
percent, while five industries have rates less than or equal to 20 percent.3 The
certification rate is calculated by dividing the number of firms with any
international certification by the total number of firms in that industry. So,
why do these rates differ across industries?

The literature offers two main explanations. First, different

industries exhibit varying degrees of competition in the product market
(Pacheco et al., 2022). Firms facing intense competition may seek certification
to enhance their marketing or competitive advantage. This motivation can
be voluntary or due to pressure from business counterparts. For instance,
firms engaged in exporting face international competition and may feel the
need to signal to their business partners, especially importers, that they
follow good business practices and are reliable suppliers. Certification can
serve as a signal in such cases. Alternatively, importers may require
certification from their suppliers for similar reasons. Masakure et al. (2011)
find that the likelihood of certification among exporting firms in Pakistan, in
specific sectors, is influenced by external pressure from importers.

Second, industries vary in terms of the requirements for technical

regulations. Some industries are legally mandated to meet certain technical
regulations, while others may require certification as a prerequisite for
conducting business, particularly when dealing with important
counterparties such as governments or large firms (Pacheco et al., 2022). For
example, certain large firms may demand that subcontractors adhere to
specific quality standards to maintain their business relationships. The
institutional literature (Dos Santos et al., 2020) categorizes the pressures
faced by firms as coercive (when certification is mandated by law or
regulation), mimetic (when certification is pursued to emulate peers or
market leaders), or normative (when certification is pursued because it is
considered a norm in the industry or sector).

3 The five industries with high certification rates are tobacco products; paper and paper products;
chemicals and chemical products; communication equipment; and medical, precision and optical
instruments. The five industries with low certification rates are tanning and dressing of leather; wood
and wood products; nonmetallic mineral products; basic metals; and fabricated metals.

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 International Certification among Pakistani Firms

Figure 2: Rates of international certification among Pakistani firms by

sector/industry

Source: World Bank Enterprise Survey for Pakistan (World Bank, 2023).

Bloom and Van Reenen (2010) highlight product market competition

as a driver of good management practices, with certification being one such
practice. Various studies have empirically confirmed a link between
certification and exporting. For example, Hudson and Orviska (2013) find
this association in a large sample of countries in Asia and Eastern Europe.
Similarly, Fikru (2014) in Ethiopia, Pekovic (2010) in France, Hayat et al.
(2018) in Pakistan, Goldor and Majumder (2022) in India, and Nguyen (2022)
in ASEAN countries all support these findings.

Shen and Qin (2011) find that other competition measures, such as
the number of rivals, also play a significant role in certification in China.
Choudhary et al. (2018) observe a connection between management quality
and exporting in Pakistan. However, the influence of industry classification
extends beyond product market competition. Masakure et al. (2011)
demonstrate that industry classification remains a crucial determinant of
international certification in their study focused on exporting firms in
Pakistan, even when controlling for market competition.

This situation may be attributed to specific regulations. In many

countries, certain certifications are legally required. These certifications
typically relate to the quality of a firm's product (such as processed foods) or
the safety of specific processes (such as the disposal of chemical effluents).
Additionally, certain government agencies or large companies may demand

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 Farrukh Iqbal and Aadil Nakhoda

international certifications for firms to participate in their procurement

tenders. While this practice is more of a business requirement aimed at
eliminating irrelevant bidders rather than a legal obligation, it is prevalent
in certain industries. Consequently, firms wishing to bid on government or
large corporate contracts within these industries would need to obtain the
relevant certifications. Based on the preceding discussion, we propose the
following hypotheses:

Hypothesis 1: Certification rates vary among firms in different industries.

Hypothesis 2: Product market competition has a positive impact on

certification rates.

2.2. Human Capital and the Information Environment

The demand for certification may, in part, be due to an information

issue: individuals who are more knowledgeable about the benefits of
certification are more likely to obtain it. This is where the human capital and
information environment within the firm become relevant. Firms with more
educated staff and managers are likely to be better informed about
certification. These firms have internal environments characterized by
multiple sources of information and transparent sharing norms.4 Fikru (2014)
confirms a link between certification and the education levels of managers.

Similarly, Goldor and Majumder (2022) and Nguyen (2022) find that
research and development (R&D) activity, which is closely linked to staff
education levels, is an important determinant of certification. The significance
of education in promoting the adoption of specific types of certification, such
as halal food certification, is reported by Rafiki and Wahab (2014) for
Indonesia. In the case of Pakistan, Choudhary et al. (2018) report a positive
connection between the education of managers and nonmanagers and
management quality, which is often associated with certification. A recent
overview of multiple studies by Valero (2021) confirms that human capital
generally encourages good management practices. Meanwhile, the relevance
of open information environments, such as company websites, social media
presence, and international connectivity, is supported by studies such as Fikru

4Note that some characteristics may fit more than one determinant category. For example, while we
have considered exporting under the category of competition, it may also fit under that of information
access and sharing. Exporting may expose firms to broader global networks of purchase agents,
design specialists and marketing experts who may share information on a wide range of management
and technical practices. Such information could well influence the decision to opt for certification.

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 International Certification among Pakistani Firms

(2014) for certification and Iqbal and Nakhoda (2024) for management
practices. Based on the above discussion, the following hypotheses are
formulated:

Hypothesis 3: Human capital has a positive impact on certification rates.

Hypothesis 4: An open information environment will have a positive

impact on certification rates.

2.3. Ownership Characteristics

Certification may be more appealing to certain types of firms

compared to others. For instance, firms with sole proprietors or a few
partners may not be inclined to disrupt established management practices,
which could be required if they were to adopt specific certification protocols.
Family firms often have succession practices where sons follow fathers as
chief executive officers without considering management ability. In such
firms, there might be an attitude of ‘owner knows best’ that works against
certification. Tsoutsoura (2021) provides evidence that firms with more
concentrated ownership are less likely to adopt modern management
practices. In the case of Pakistan, Choudhary et al. (2018) find better
management quality among public limited companies compared to those
owned by individuals or limited partnerships.

Some studies have found that foreign ownership plays a role similar
to diffused ownership. For example, Lafuente et al. (2010) report a much
higher likelihood of certification when multinational firms are the largest
shareholders. Fikru (2014) does not find such an effect for foreign ownership
among Ethiopian firms and notes that this may be due to the predominant
source of foreign ownership in the sample being developing countries such
as China, India, Lebanon, and Kenya. Owners and managers from these
countries are less likely to be exposed to certification and modern
management processes compared to those from developed countries, thus
making them less likely to adopt them.

However, there may be cases where owners possess more

progressive attitudes than one might imagine, based solely on ownership
type. Such attitudes may be reflected in their approach to worker training,
information sharing, or financial transparency. When information about
these practices is available, it can help clarify the nuances in the relationship
between ownership and certification. However, this topic has not been

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extensively explored in the literature. One study indirectly explores this link:
Gallego and Ramirez (2021) examine the association between workforce
stability, which can indicate owner attitudes towards retaining workers, and
the likelihood of certification. Based on the above discussion, we propose the
following hypotheses:

Hypothesis 5: Diffused ownership will positively impact certification rates.

Hypothesis 6: Progressive attitudes towards management will positively

impact certification rates.

2.4. Resources Available to the Firm

Even if firms do not expect financial gains from certification, some

may still pursue it for reputational reasons, to signal their virtue, or to
emulate prominent or respected firms, among other nonpecuniary
objectives. It is reasonable to assume that firms with greater discretionary
resources are more likely to engage in such preferences compared to those
with fewer resources. Firm size and productivity can serve as indicators of
the availability of discretionary resources. Therefore, we anticipate that
larger or more productive firms are more likely to adopt certification
compared to smaller or less productive firms. Several studies support this
expectation. For example, Shen and Qin (2011) demonstrate a positive
association between firm size and the voluntary implementation of
environmental schemes in their sample of Chinese firms.

Similarly, Hudson and Orviska (2013) examine a large sample

(almost 12,000 firms) from Asian and Eastern European countries and find
that the likelihood of certification increases with firm size. Hayat et al. (2020)
report similar results for both firm size and profitability as determinants of
the adoption of eco-labels among their sample of textile firms in Pakistan.
Choudhary et al. (2018) also observe a positive correlation between
management scores (reflecting management quality) and firm size.
However, Fikru (2014) notes that firm size does not have a significant
influence once export orientation, international connectivity, credit
availability, and managers' human capital are controlled for. This may be
partly attributed to the collinearity often observed between firm size and the
other included determinants. Based on the above discussion, we propose the
following hypothesis:

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 International Certification among Pakistani Firms

Hypothesis 7: Greater discretionary resources will positively impact

certification rates.

2.5. Pecuniary Benefits of Certification

The discussion above regarding the connection between resources

and the decision to pursue certification raises concerns that resources and
certification may be interrelated. In other words, while having more
resources may increase the likelihood of certification, certification itself
might also lead to outcomes that expand the available resources for the
company. This would occur if certification has a positive impact on
productivity and profitability. Therefore, the interpretation of any empirical
results obtained regarding the link between resources and certification
depends on the significance of the issue of endogeneity.

The literature on the pecuniary motivation for management

certification presents two dilemmas. Firstly, it does not find consistent
results supporting a positive link. A comprehensive meta-review (Sfreddo
et al., 2021) reveals that less than half the studies in the sample show a
statistically significant positive correlation between ISO 9001 certification
and business performance.5 Secondly, few studies have attempted to
account for the possibility of endogeneity.6 However, this issue is not further
addressed in this research.

2.6. Hypotheses for Testing

The hypotheses tested in this study are summarized in Table 1

below:

5 For Pakistan, Choudary et al. (2018) report a positive impact of management quality on firm-level
productivity (from a large random-sample survey) but do not account for the possible reverse
causation highlighted here. Another relevant study is Masakure et al. (2011), which finds export sales
to be positively correlated with certification. Other studies, such as Fatima (2014), find positive links
but are limited by small, nonrandom samples.
6 Dick et al. (2008) investigate endogeneity and report that better-performing firms often select

themselves into certification status. Similarly, using time-series data, Martínez‐Costa and Martínez‐
Lorente (2007) find that better-performing firms opt for certification at higher rates than less well-
performing firms. Goedhuys and Mohnen (2017) undertake a two-stage econometric procedure to
address the endogeneity question for a large sample of African countries. They find a rather large
impact of certification on productivity.

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Table 1: Summary of hypotheses

Hypothesis 1 Certification rates vary across firms in different industries.
Hypothesis 2 Product market competition has a positive impact on certification rates.
Hypothesis 3 Human capital has a positive impact on certification rates.
Hypothesis 4 An open information environment will have a positive impact on
certification rates.
Hypothesis 5 Diffused ownership will positively impact certification rates.
Hypothesis 6 Progressive attitudes toward management will positively impact
certification rates.
Hypothesis 7 Greater discretionary resources will positively impact certification rates.

3. Empirical Methodology

3.1. Analytical Approach

The analysis in this study is conducted in four stages. First, we

identify plausible independent variables that allow us to test the hypotheses
mentioned above. Second, we perform a regression with a set of these
variables and the firm's certification status, referring to this as our basic
statistical model. Third, we perform a regression with an alternative set of
independent variables and certification to determine the robustness of our
basic model. Fourth, we disaggregate the sample by firm size to gain a better
understanding of how our statistical model functions for large versus small
firms. In all regressions, we incorporate fixed effects for industries and
regions. This enables us to account for industry and regional variations
caused by unobserved factors and obtain more precise estimates for the
coefficients of the other variables.

Since the dependent variable, international certification, is binary,

we employ the probit econometric procedure to estimate the relevant
regressions.7 We utilize Stata, a popular statistical application software, to
conduct the regressions. Our approach effectively involves modeling the
determinants of certification as a single equation that can be estimated
through multiple regression techniques. We do not model a structural
equation system involving additional endogenous variables due to
insufficient information to identify each relationship separately.

7 Probit regression is called for when the dependent or outcome variable is binary. In such cases, the
more popular regression technique of ordinary least squares cannot be used because it generates
residuals that violate the assumptions of heteroskedasticity and normal distribution of errors, thereby
rendering invalid standard error calculations and conventional hypothesis tests.

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 International Certification among Pakistani Firms

3.2. WBES Dataset

The WBES dataset is suitable for our analytical objectives because

it is based on a random sample survey of registered firms, covers a
significant number of firms of different sizes, allowing for a deeper
analysis of subsamples, and is stratified by industrial sector and
geographical region, which enables control over industry-specific and
region-specific effects. The survey cycle for Pakistan in 2022/23 covers
both manufacturing and service firms, with the former coming from 22
sectors (see Appendix) and five regions.

We constructed a working sample of 751 observations by focusing

only on manufacturing firms and using only firms for which data was
available for all variables of interest. The WBES dataset contains information
on various firm characteristics, including, but not limited to, the value of
sales, total costs, the use of different types of labor, management practices,
financial resources and relationships, interactions with foreign markets,
technologies and investors, interactions with government agencies, access to
infrastructure services such as electricity and the internet, the nature of
competition faced, and the nature of ownership (World Bank, 2023).

3.3. Dependent Variable

The dependent variable in the study is international certification,

which refers exclusively to internationally recognized certifications.
Examples include the International Organization for Standardization (ISO)
for manufacturing and services, Hazard Analysis and Critical Control Point
(HACCP) for food (especially seafood and juices), and the American
Association of Textiles, Chemists and Colorists (AATCC) for textiles.
Certificates that are granted only at the national level and not recognized in
international markets are not included.

3.4. Independent Variables

Competition. To assess the effects of competition on certification,

some studies have used information about whether a firm exports its
products and the number of competitors it faces. For an export proxy, we
use direct exports, which refers to the sale of goods where the immediate
recipient is outside the country's borders. We identify a firm as an exporter
if it directly exports a certain fraction of its products. Additionally, as an
alternative proxy, we use informal competition, which occurs when a firm

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 Farrukh Iqbal and Aadil Nakhoda

competes against informal and unregistered businesses. We expect positive

signs for both variables, as both increase competition for the firm.

Human capital. Since we do not have sufficient information on the

education levels of staff and managers in our database, we use the age of the
firm as a measure of its accumulated human capital. Firms that have been
operating for many years are likely to have built networks and
communication channels with peers, customers, and stakeholders, allowing
them to gain a better reputation or other benefits from certification. As an
alternative proxy, we use manager experience, which refers to the number
of years of experience the top manager has in the relevant sector where the
firm currently operates. We expect positive signs for both the age of the firm
and manager experience.

Information environment. Useful information about certification can

be shared through business networks and other channels of contact with
peers, customers, and even staff. In modern times, having a website and a
social media presence could indicate the quality of a firm's information
acquisition and sharing process. Therefore, we use the variable ‘website’ to
differentiate between firms' information environments. We expect a positive
relationship between having a website and certification.

Diffusion of ownership. The idea is to differentiate between different

types of ownership that indicate the likelihood of owners adhering to
traditional or modern management styles. Diffused forms of ownership,
such as those found in companies with shareholders, are more open to
modern management practices compared to concentrated forms found in
sole proprietorships or partnerships. In our sample, we measure this
through the variable ‘shareholding,’ which refers to firms with external
shareholders, whether their shares are publicly or privately traded.
Alternatively, we also consider the proportion of the firm owned by its
largest shareholder. This largest owner could be an individual, company,
government agency, domestic or foreign. If a shareholder has a dominant
share, they are more likely to have a dominant role in decision-making and
be resistant to adopting new management or technical processes. We expect
a positive coefficient for shareholding and a negative coefficient for the
largest owner share.

Attitudes of owners. Regardless of the level of control exerted, some

owners may have progressive attitudes towards certification, viewing it as a
way to enhance the firm's reputation or retain workers and customers. We

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 International Certification among Pakistani Firms

use two measures to determine which owners might have progressive

attitudes: voluntary submission to external audits and offering formal
training to workers. Most of the firms in our sample are not publicly listed
or are composed of private shareholding companies, so they are not required
to undergo mandatory audits. However, if they choose to have audits done
(firm audited), it suggests that their owners have an interest in transparency.

As an alternative measure, we consider formal training. Formal

training has a structured curriculum and may include classroom work,
seminars, lectures, workshops, and audio-visual presentations and
demonstrations. Firms that offer formal training to their workers
demonstrate a positive attitude towards worker satisfaction and skill
development, which should also translate into positive attitudes towards
certification. We expect positive coefficients for both measures.

Resources available. Several variables can serve as proxies for the

availability of discretionary resources. One such variable we use is firm size,
which is measured by the number of permanent full-time workers employed
by the establishment at the end of the last fiscal year, encompassing all staff,
including managers, who have been contracted for one or more fiscal years
or have a guaranteed renewal of employment or an open-ended contract.
Even workers on third-party contracts are included if they work for a full
year. As an alternative, we consider access to finance. This reflects whether
a firm has access to overdraft facilities that can expand its pool of available
resources.8 An overdraft facility is a flexible account from which firms can
automatically borrow if their account balance becomes negative. The firm
incurs fees and pays interest on the amount borrowed. We expect both
variables to have a positive relationship with certification.

Industry practice. Our database does not contain any information

about specific regulations or practices that may be applicable to different
industries. However, we account for variations between industries by using
industry-fixed effects in our statistical model. Additionally, we consider
whether the firm holds a foreign license. A foreign licensee is expected to
adhere to the terms specified by the licensing company, which likely
includes compliance with international standards for the relevant industry
in order to protect the licensing company's reputation. The possession of an
international certification may indicate that the firm will comply with

8Using data from a sample of 64 countries, Pietrovito (2020) shows that financially constrained firms
are less likely to possess environmental and quality management certifications.

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 Farrukh Iqbal and Aadil Nakhoda

industry practices. We anticipate a positive coefficient for the variable

indicating foreign licensees.9

Table 2 summarizes the variables used in the basic model, including

both the dependent and independent variables.

Table 2: Variables used in Basic Model

Determinant Proxy used Definition

category
International Internationally This variable is coded as a binary variable that
certification recognized takes the value 1 if any international certification
certifications is possessed and 0 otherwise.
Competition Exporter This is coded as a binary variable that takes the
value 1 if the response for direct export is a
positive number and 0 otherwise.
Human capital Age of firm This is calculated as the difference between the
year of the survey (2022) and the year in which the
company began operation.
Information Owns a website This item is coded as 1 if the establishment has its
environment own website and maintains a social media account
and 0 otherwise.
Diffusion of Shareholding We coded public listed companies and private
ownership listed companies as 1, referring to diffused
ownership, and sole proprietorship, partnership
and limited partnership as 0, referring to
concentrated ownership.
Owner attitude Firm audited This item is coded 1 if the firm's financial
statements are checked and certified by an
external auditor and 0 otherwise.
Resources Firm size This refers to the number of permanent full-time
available workers employed by the establishment at the end
of the last fiscal year, covering all staff (including
managers) that are contracted for one or more
fiscal years or have a guaranteed renewal of
employment or an open-ended contract.
Industry practice Foreign licensee We code this item as 1 if the establishment
formally licenses any technology from a foreign-
owned company and 0 if the establishment does
not license any foreign technology through a
formal agreement.

9 While we use foreign licensee status as an indicator of industry practice, it may also be used to
denote other characteristics or outcomes. Thus, Goel and Nelson (2020) use it as an indicator of firm
conduct, concluding that international certification promotes such licensing as well as R&D
spending.

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 International Certification among Pakistani Firms

Table 3 summarizes the variables used in the alternative model,

including both the dependent and independent variables.

Table 3: Variables used in Alternative Model

Determinant Proxy used Definition

category
International Internationally This variable is coded as a binary variable that
certification recognized takes the value 1 if any international certification is
certifications possessed and 0 otherwise.
Competition Informal Respondents are asked to indicate whether their
competition establishment competes against informal and
unregistered businesses. We code this item as 1 if
the answer is yes and 0 if the answer is no.
Human capital Manager This refers to the years of experience of the firm's
experience top manager in the sector in which the
establishment presently operates.
Information Owns a website This item is coded as 1 if the establishment has its
environment own website and maintains a social media account
and 0 otherwise.
Diffusion of Largest owner This refers to the percentage share of the largest
ownership share owner of the firm.
Owner attitude Formal training This item is coded 1 if the firm offers formal
training to its staff and 0 otherwise.
Resources Access to Access to finance is coded 1 if the establishment
available finance has an overdraft facility.
Industry practice Foreign licensee We code this item as 1 if the establishment
formally licenses any technology from a foreign-
owned company and 0 if the establishment does
not license any foreign technology through a
formal agreement.

4. Results and Discussion

4.1. Summary Statistics

Table 4 presents descriptive statistics for the entire sample as well as

subsamples of large and small firms. Large firms are defined as those with
20 or more workers, while small firms are defined as those with fewer than
20 workers. The following findings are noteworthy: (a) larger firms have a
certification rate almost twice that of small firms, with 35 percent versus 19
percent, but even a 19 percent certification rate may be considered high for
small firms in a low-income country like Pakistan; (b) the gap between large
and small firms is significant for characteristics such as exporting, audits,

16 The Lahore Journal of Business

 Farrukh Iqbal and Aadil Nakhoda

becoming shareholding companies, and offering formal training; and (c)

even small firms operate websites, with an average rate of 35 percent.

The differences in means suggest that it would be valuable to analyze

the behavior of these two groups separately. This is done after presenting
the main results. Any observations with missing values for any of the listed
variables are excluded from our final sample.

Table 4: Summary Statistics

All firms Large firms Small firms

International certification 0.31 0.35 0.19
Exporter 0.14 0.18 0.02
Age of firm 26.86 28.03 23.42
Firm audited 0.29 0.34 0.12
Owns a website 0.54 0.60 0.35
Shareholding 0.05 0.07 0
Firm size (workers) 126 165 11
Informal competition 0.37 0.34 0.46
Manager experience (years) 17.53 17.60 17.29
Formal training 0.10 0.13 0
Largest owner share (%) 81 78 90
Access to finance 0.47 0.51 0.34
Foreign licensee 0.08 0.09 0.03

Note: Only means are shown in the table because most variables are binary. For nonbinary
variables, standard deviations are as follows for the full sample: age of firm = 16, firm size
= 348, manager experience = 10, largest owner share = 26.

4.2. Regression Results for Basic and Alternative Models

The first column of results in Table 5 corresponds to our basic

statistical model. Every independent variable, which represents categories
that the literature has shown to be important determinants of certification, is
statistically significant and aligned with the expected signs. This provides
strong support for our model, particularly considering that some variables
are likely to be correlated with each other.

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 International Certification among Pakistani Firms

Table 5: Determinants of certification: Basic and Alternative Models

Determinant Category Basic Model Alternative Model

Dep. variable = international certification
Competition 0.29*** -0.03
(0.07) (0.04)
Human capital 0.08** 0.06**
(0.03) (0.03)
Information environment 0.22*** 0.30***
(0.04) (0.04)
Ownership diffusion 0.42*** 0.001
(0.13) (0.04)
Owner attitude 0.08* 0.22***
(0.05) (0.07)
Resources available 0.05*** 0.13***
(0.02) (0.04)
Industry practice 0.15** 0.22***
(0.08) (0.09)
Number of observations 728 751

Note: Specific empirical proxies used for the basic and alternative models are shown in
Tables 2 and 3. The probit regression technique is employed, and marginal effects are
reported with robust standard errors in parentheses. Levels of statistical significance are
denoted by asterisks as follows: *** p < 0.01, ** p < 0.05, * p < 0.1. Industry and region fixed
effects are applied, but their results are not shown in the tables to conserve space. The
goodness of fit is measured by pseudo-R-squared values of 0.38 for the basic model and 0.3
for the alternative model, both of which are higher than the standard reference value of 0.2.

The second column in Table 5 presents the results of analyzing an

alternative set of empirical proxies (listed in Table 3). Five variables are now
statistically significant, including three new proxies. This suggests that our
model is reasonably robust when it comes to variable choices. However, not
every alternative proxy is significant. For example, informal competition
does not seem to provide sufficiently distinctive information about the
competitive context of the firm, as also found by Nguyen (2022).
Additionally, the share of the largest owner does not appear to convey
adequate information about ownership diffusion.

Assessing the results across both models, the four largest marginal
impacts come from whether the firm has shareholders (β = 0.42, p < 0.01),
is an exporter (β = 0.29, p < 0.01), has a website presence (β = 0.30, p < 0.01),
and offers training to its workers (β = 0.22, p < 0.01). This suggests that
policies aimed at broadening ownership, promoting exporting, facilitating
the use of social media and information technology, and encouraging staff

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 Farrukh Iqbal and Aadil Nakhoda

training are likely to have the most significant impact on the adoption of
international certifications.

Some of our results align with those found in previous studies. For
example, earlier studies commonly note ownership diffusion and exporting
as drivers of certification (for example, Lafuente et al., 2010; Hudson &
Orviska, 2013). Some results strengthen the existing evidence. For example,
the results regarding the information environment (website and social
media) contribute to the limited number of studies (for example, Fikru, 2014)
that have previously reported on this topic. Some results open up new
avenues for further research.

Our two proxies for capturing owner attitudes, firm audit, and
training, are statistically significant. This holds true even in the presence of
a variable reflecting ownership diffusion (shareholding), which suggests
that it is useful to differentiate between ownership type and owner attitude.
To the best of our knowledge, such a distinction has not been made in the
existing literature. Our results suggest that this may prove a useful area for
further inquiry.

4.3. Extension: Disaggregation by Firm Size

We now extend the analysis to consider the determinants of

certification for two groups of firms based on size: small and large. We
define small firms as those with fewer than 20 workers and large firms as
those with 20 or more workers.10 The results for the basic model are
presented in Table 6. They indicate that our statistical model works well
for large firms but not for small firms.11 All included independent variables
are statistically significant for large firms, while only two are significant for
small firms.

Surprisingly, even within the subset of small firms, there is enough

variation to make size an important factor in certification. Perhaps even
more surprising is the finding that the information environment,
represented here by the presence of a firm's website and social media, is

10 We divide the sample into these categories because we are particularly interested in whether our
model works for small firms. We have also tried a version in which small and medium firms are
grouped together and larger firms are then defined as those with 100 workers or more. Adding
medium firms to the smaller size category does not improve the fit of the model for that category.
11 The ownership diffusion variable does not return a result for small firms because no small firm is

classified as a shareholding company.

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 International Certification among Pakistani Firms

associated with a positive attitude toward certification. Both these results

suggest that within the small firm subgroup, there exists a subset that has
a more progressive and dynamic profile. We further explore this group by
examining how profitability among small firms varies based on
certification status.

Table 6: Determinants of Certification: Basic Model by Firm Size

Determinant Category Large firms Small firms

Dep. variable = international certification
Competition 0.29*** 0.05
(0.08) (0.11)
Human capital 0.11** 0.01
(0.04) (0.02)
Information environment 0.24*** 0.08**
(0.04) (0.04)
Ownership diffusion 0.43*** -
(0.12) -
Owner attitude 0.10* 0.03
(0.05) (0.05)
Resources available 0.06** 0.04*
(0.03) (0.02)
Industry practice 0.19* 0.01
(0.10) (0.07)
Number of observations 543 138

Note: The specific empirical proxies used for the basic model are shown in Table 2. The
probit regression technique is applied, and marginal effects are reported with robust
standard errors in parentheses. Levels of statistical confidence are represented by asterisks
as follows: *** p < 0.01, ** p < 0.05, * p < 0.1. Industry and region fixed effects are applied,
but their results are not shown in the tables to save space. The goodness of fit is measured
by pseudo-R-squared values of 0.35 for larger firms and 0.52 for small firms, both of which
are higher than the standard reference value of 0.2.

4.4. Extension: Certification and Small Firm Support Policy

Close to one-fifth of small firms (19 percent) in our sample possess

international certification (see Table 4). Although our statistical model
cannot explain this well, some aspects may be explored through a
nonparametric approach. For example, we can examine whether certified
firms are concentrated among the best-performing small firms. To do so, we
use value added per worker. This is calculated as the difference between
revenues from sales and all costs incurred in production divided by the
number of workers (World Bank, 2023).

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 Farrukh Iqbal and Aadil Nakhoda

Figure 3 shows how the rate of certification (on the vertical axis)
varies among small firms ranked by the quantile of profitability as
measured by value added per worker (on the horizontal axis). We observe
that profitability and rates of certification rise together. The top quantile
has a certification rate approximately five times that of the bottom quantile.
Regardless of the direction of causality, that is, whether certification causes
higher profits or vice versa, this finding provides guidance for policies
aimed at small firms. Since higher profits improve the odds of firm
survival, the above finding suggests that the chances of survival increase
with certification among small firms. Thus, policymakers can use
certification status as a marker to identify which firms are more likely to
survive and which are more likely to fail. Consequently, policymakers can
allocate government support funds and initiatives to firms that are more
likely to survive.

Figure 3: Certification and Profitability among Small Firms

Source: Authors’ calculations from the WBES dataset. Profitability is measured by value
added per worker, with the bottom 25 percent of firms shown as Quantile 1 and the top 25
percent as Quantile 4.

This finding has important policy implications for how firms are
selected for small-firm support programs. In Pakistan, such programs
typically offer benefits such as subsidized credit, loan guarantees, and
business development services. Small and medium firms are selected for
these programs based on size, assets or turnover. However, the funds
available for support are typically insufficient to cover all those who qualify.
As a result, the available support funds are rationed by the designated
agencies responsible for implementing the programs, such as commercial

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 International Certification among Pakistani Firms

banks, the Small and Medium Enterprise Development Authority, and, in

some cases, the Ministry of Science and Technology.

Certification status offers a rational way to select among applicants.

If certification status is included as an additional criterion for program
eligibility, the number of eligible firms would decrease and the bulk of
support funds would be allocated to firms that are more likely to survive.
This would make the support programs more effective since support would
be directed to firms that persist over time, creating jobs and incomes for a
longer period.12

5. Conclusion

This study makes a unique contribution in terms of its topic and

scope. While previous studies have focused mainly on the impact of
certification on profits or business performance, only a few have explored
why Pakistani firms choose to become certified. This study stands out as it
uses a national random sample database that covers various industrial
sectors and firm sizes. Previous studies have typically concentrated on
specific sectors and firm sizes, often relying on nonrandom samples. In
relation to the hypotheses, we can summarize our findings as follows. Firms
are more inclined to seek international certification if they operate in
competitive environments, have well-qualified human capital, and foster an
open information-sharing culture. Moreover, firms are also more likely to
pursue certification if their ownership is dispersed, their owners adopt a
progressive management philosophy, and they have discretionary resources
at their disposal. Some of these findings carry significant policy implications.
For instance, promoting exports not only has macroeconomic advantages,
such as generating foreign exchange, but also microeconomic benefits, such
as fostering improved management and compliance with international
production, marketing, and payment standards.

Similarly, promoting an open information-sharing culture yields

comparable benefits. In this regard, the imposition of taxes on mobile phone
and internet communications, as currently practiced in Pakistan, should be
reconsidered. This becomes even more vital when considering that
information technology tools drive even small firms to seek certification.
Lastly, priority should be given to advancing professional management

12 Note that while it is difficult for a small enterprise development agency to observe the true profit
performance of small firms, it is much easier to determine if they possess international certification.
If there is doubt, this can be further checked directly through the certificate issuing authority.

22 The Lahore Journal of Business

 Farrukh Iqbal and Aadil Nakhoda

through dispersed ownership, such as encouraging companies to go public.

Unfortunately, Pakistan has lagged behind in this area for many years, with
limited and stagnant rates of public listing.13

When analyzing the distribution of international certification among

small firms, we discover a strong correlation with profitability. The higher
the certification rate, the higher is the value added per worker. This suggests
that small firm development agencies can utilize certification status as an
indicator of the potential success of their beneficiaries. By directing their
limited funds towards small businesses that have achieved international
certification, they can enhance the likelihood that their support will lead to
job creation and sustained incomes.

However, it is important to consider the empirical results and their

policy implications in light of potential statistical or conceptual limitations.
We do not interpret our findings as asserting that specific variables are
crucial in the decision to pursue certification, but rather that certain
categories of determinants are significant. Each of these categories can be
represented by various specific variables, and we have presented results
for two sets of such variables, which are reflected in our basic and
alternative models.

While the existing literature had guided our selection of specific

variables, other variables could have been considered as well. Additionally,
the chosen variables may fit into more than one category of determinants,
and this should also be taken into account when assessing specific results.
Finally, it is worth noting that we did not address the issue of endogeneity
in this paper. Independent variables that reflect the pecuniary impact of
certification on profits or productivity raise concerns about the direction of
causality. These issues have not been definitively addressed in the literature
so far, and therefore, future research can explore this issue further.

Acknowledgement

The authors would like to acknowledge Heman Das Lohano for providing
thoughtful comments and feedback on this research study.

13 The website of the Pakistan Stock Exchange shows the total number of listed companies for each of
the last five years as follows: 534 in 2019, 531 in 2020, 533 in 2021, 531 in 2022, and 523 in 2023. For
a country with approximately 200,000 registered companies, this represents a very low rate of listing.

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 International Certification among Pakistani Firms

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Appendix

Annex 1: Industries and Regions covered in the WBES for Pakistan

Industries are defined using ISIC Rev. 3.1

Code Description
15 Manufacture of food products and beverages
16 Manufacture of tobacco products
17 Manufacture of textiles
18 Manufacture of wearing apparel, except fur apparel
19 Tanning and dressing of leather; manufacture of luggage, handbags, saddlery,
harness and footwear
20 Manufacture of wood and of products of wood and cork, except furniture;
manufacture of articles of straw and plaiting materials
21 Manufacture of paper and paper products
22 Publishing, printing and reproduction of recorded media
23 Manufacture of coke, refined petroleum products and nuclear fuel
24 Manufacture of chemicals and chemical products
25 Manufacture of rubber and plastics products
26 Manufacture of other nonmetallic mineral products
27 Manufacture of basic metals
28 Manufacture of fabricated metal products, except machinery and equipment
29 Manufacture of machinery and equipment n.e.c.
30 Manufacture of office, accounting and computing machinery
31 Manufacture of electrical machinery and apparatus n.e.c.
32 Manufacture of radio, television and communication equipment and apparatus
33 Manufacture of medical, precision and optical instruments, watches and clocks
34 Manufacture of motor vehicles, trailers and semitrailers
35 Manufacture of other transport equipment
36 Manufacture of furniture; manufacturing n.e.c.

Regions: Balochistan, Islamabad, Khyber Pakhtunkhwa, Punjab and Sindh.

28 The Lahore Journal of Business