Third-Party Certification in a Weak Institutional Environment

Abstract

We investigate the performance effects of third-party certifications in a weak institutional environment, arguing that in such an environment the informational value of third-party certifications is contingent on industry legitimacy. Firms in weak institutional environments often obtain certifications to appeal to foreign audiences. But these audiences hold negative evaluations of firms from weak institutional settings, judging them as being of poor quality due to their geographic origin. We argue that in the absence of industry legitimation, these negative evaluations greatly diminish the informational value of certifications, such that they do not provide value to the firm. However, as the industry legitimizes, it increases the salience of the industry over the institutional context. Audiences see the industry first, not the weak institutional environment. Here, third-party certifications become a basis for differentiating among firms and thereby help improve firm performance. We use the first decade post-liberalization of the Indian software industry, 1992-2003, to test our hypotheses. Based on a sample of 792 firms, we find support for our arguments suggesting that in weak institutional environments certification alone is not enough for firms to overcome the stigma of their origins; it needs to be accompanied by industry-level processes.