IN SEARCH OF GREENER PASTURES:
THE SAN FRANCISCO BAY AREA ENVIRONMENTAL TECHNOLOGY INDUSTRY

 

 

Richard Castaldi
Murray Silverman
Sanjit Sengupta

 

College of Business
San Francisco State University
1600 Holloway Avenue
San Francisco, CA 94132
Phone: 415 338-1016
Fax: 415 338-0501
Email: sengupta@sfsu.edu

 

October, 1998

 

Management Review, Vol. 11, No.2, 1999.

 

IN SEARCH OF GREENER PASTURES:
THE SAN FRANCISCO BAY AREA ENVIRONMENTAL TECHNOLOGY INDUSTRY

The U.S. environmental technology industry is a relatively new industry, evolving over the past 25 years in response to the emergence of strict environmental regulations. Government at the federal, state and local levels promulgated a complex web of regulations governing air, water, waste and toxins. These regulations created opportunities for specialized firms to offer services and equipment that mitigate, control, monitor or prevent detrimental impacts on the natural environment. New technologies are required continuously to meet increased regulatory standards or self-imposed standards, reduce compliance costs, or incorporate environmental technologies into integrated production systems.

The size of the U.S. environmental industry in 1994 was $170 billion (Environmental Business International Inc. 1996). Environmental technology firms are defined as those that manufacture environmental equipment (e.g. air pollution control equipment, instruments that measure pollution) and those that provide services (e.g. hazardous waste management, remediation services, consulting and engineering). As a result of the diversity of markets and technologies, the environmental technology industry is comprised primarily of small and medium sized firms engaged in a broad range of activities. Barriers to entry are relatively low. It is estimated that there are 55,300 companies comprising the U.S. environmental industry (Environmental Business International Inc.1996).

The global environmental market is huge, totaling $408 billion in 1994 (Environmental Business International Inc. 1996). In absolute terms, the U.S. is the largest exporter with $10 billion in exports. However, in percentage terms, the U.S. only exports 5% of its environmental products and services compared to Japan and Germany which both export on the order of 20% of their environmental products and services. The U.S., Western Europe and Japan have the largest environmental markets. However, Asia at 14% and Latin America at 12% have the highest projected growth rates (Environmental Business International Inc.1996). Generally, the types of products or services being demanded in the developing countries tend to be those that help to build the environmental infrastructure as compared to the developing countries which are looking to the next generation technologies that will meet increasingly more stringent air, water and toxic standards. While Japan and Germany are very strong international competitors to U.S. firms, each has strengths in specific sectors. For example, Japan leads in air pollution control technology, Germany in pollution abatement equipment, principally water treatment, and the U.S. in waste management technologies.

California's environmental regulations are more stringent than most other states. As a result, California firms have developed leading edge technologies to respond to these regulatory requirements. The Bay Area's environmental technology industry has the potential to attain global stature as a center of environmental excellence because of its unique strengths. First, the Bay area has the second largest concentration of environmental companies in California after Orange county. In addition, the environmental technology industry often builds on the technical know-how of the Bay Area's high-technology base and its world class research universities. Lastly, the Bay Area's vigilant environmental groups help to ensure that the environmental technology industry stays in tune with a wide range of stakeholders.

As the developing countries of South Asia embrace economic liberalization, US firms, especially small and medium-sized businesses, need to be well-positioned to capitalize on these emerging new opportunities. The U. S. government has made the environmental technology industry a priority area for export assistance with the creation of the Environmental Technologies Export (ETE) office in 1994 within the Department of Commerce. Export markets can provide growth for the industry that it can no longer count on domestically (Cavusgil and Yeoh 1994). Therefore, this study investigates the export assistance needs of US environmental technology firms located in the San Francisco Bay area.

Under the auspices of a grant from the U.S. Department of Education, the San Francisco State University College of Business initiated, in the of Fall 1996, an action-research project intended to assist small and medium sized San Francisco Bay Area environmental technology companies in their export activities.

The study was designed to obtain the following information about the targeted Bay Area Environmental Technology firms: (a) their current level of export activity, (b) barriers to exporting, (c) the factors that lead to export success, (d) the need and potential of strategic alliances to enhance export opportunities for small firms, and (e) the perceived assistance needs of both exporting and non-exporting firms.

We first needed to identify the environmental technology firms in the Bay Area. We started with the California Environmental Technologies and Services Directory, published by California EPA. This directory, compiled in 1993, was the only systematically assembled database available. Using this database, all firms in the six county Bay Area were contacted by phone in order to update address and contact person information. This process resulted in a list of 360 firms. Also, a work in process list for a new 1997 directory being compiled by the Environmental Export Program at California Trade and Commerce was used to add 50 firms that were not on the original database. Together these constituted a population of 410 firms in the target industry.

Based on field interviews with environmental technology firm executives, government assistance industry experts and a review of the relevant literature, we designed, developed and pretested a six page mail survey questionnaire to address the information needs outlined in the previous section. This survey was mailed in April 1997 to the 410 firms in the population. Thirty-five packets were returned as undeliverable, resulting in a population size of 375 firms.

The initial response rate was 17.0%. We conducted a phone follow-up to firms that did not respond to encourage them to participate in the study. This raised the response rate to 25.6% with a total number of 95 usable surveys returned. Data from the surveys was coded and entered into an Excel spreadsheet. SPSS statistical software was used to prepare the tabulations in his paper.

RESULTS

Table 1 shows the variety of products and services offered by San Francisco Bay Area environmental technology firms. A higher proportion of firms offer services rather than equipment. It is clear that there is a large concentration of environmental consulting and engineering firms in the San Francisco Bay Area.

Table 2 shows that the San Francisco Bay Area Environmental Technology industry is characterized by small firms (66% under $5 million revenue) who have been in business a number of years (94% over 5 years). About 58% of our sample firms had a history of export activities.

The profile of the 55 exporting firms in our sample (Table 3) shows them to be small and medium firms (66% under $10 million revenue) which have been in business a long time (67% over 10 years). They have a good deal of export experience (60% exported for 4 or more years; 56% exported to 4 or more countries). While their level of export activity is higher than the national average (58% earn more than 5% of their annual revenue from exports), we ask why this cannot be increased further given the export opportunities for the industry discussed earlier.

Asia was the largest market for San Francisco Bay Area environmental technology firms in the Bay Area in 1997 (Table 3). Table 4 shows the Southeast Asian countries of the Philippines, Thailand, Hong Kong and Malaysia were attractive as well as Japan. It is noteworthy that the only South Asian country to figure in this list is India.

In our survey, non-exporting firms were asked 10 questions about the reasons they did not export. For each question, they responded on a 5 point Likert scale going from 1 (strongly disagree) to 5 (strongly agree). A principal component factor analysis on these 10 items yielded a two factor solution. We labeled these “External” and “Internal” barriers to exporting. Table 5 shows the external barriers to exporting were rated higher in importance to the internal barriers. The major barriers non-exporters face are a lack of knowledge of export procedures, export opportunities and risks, and export assistance including access to capital. Of lesser though not insignificant importance are the internal barriers to exporting. Some non-exporters feel they are not ready for exports in terms of their size, type of business, and strategic objectives.

What do environmental technology firms believe to be the key success factors in exporting? In order to explore this question, firms were asked to rate the relative importance of 13 items in relation to export success. These items were factor analyzed to see if any themes emerged reflecting a consistent viewpoint among firms in the industry regarding the key success factors. Table 6 shows that five critical success factors emerged as themes in the analysis. These factors in priority order are alliances, understanding country markets, in-house staff, financing, and participation in trade missions. Having alliances and working effectively with partners in export countries is considered to be the most critical success factor for exporters. Understanding country markets, or becoming familiar with a specific country, its culture, work habits, and language is also considered to be very important for export success.

Having experienced in-house staff dedicated to exports was rated the third most important factor. Access to financing for export activities was the next most important factor. And participating in trade missions and technical demonstrations was rated lowest in importance compared to the other factors. The low importance attached to trade missions and demonstrations seems counter intuitive. Trade missions, if designed appropriately, offer an opportunity to establish alliances and better understand country markets which are the two most important export success factors. One explanation is that firms in the industry have not had favorable experiences through participating in trade missions and technical demonstrations. Another alternative explanation is that many firms may not have participated in trade missions and therefore, do not recognize their value. Unfortunately, we did not ask any questions about the extent of participation in or experience with trade missions and are therefore unable to resolve this issue.

A wide range of strategic alliances were used in exporting by firms in our survey, as shown in Table 7. Joint ventures with small companies in export markets was the most common form of alliance followed by long-term marketing agreements. This may be due to the fact that the customer of environmental technology products and services is often a local or national government agency that requires local participation. Moreover, the differences in legal, political and social environments in most foreign countries also necessitates the knowledge and "connections" of host country partners. Such alliances provide immediate local presence and knowledge of the local market.

We further investigated how satisfied exporting firms were with their host country partner relationships. Companies were asked to rate their satisfaction with their host country partner as well as the financial returns associated with the relationship (Table 8). The good news is that there are relatively low levels of dissatisfaction - only 4% were dissatisfied with the relationship in general and only 2% were dissatisfied with the financial returns. Our concern is that only about 44% of the firms were satisfied or extremely satisfied. We need to better understand why satisfaction levels were not higher, and help firms better manage strategic alliances with host country partners.

Finally, we examined the overall satisfaction of export firms with exports. Table 9 shows only about half the exporting firms in our sample were satisfied or extremely satisfied with their export experience and with the financial return from exports. This may be due to our earlier finding that satisfaction with host country partner alliances for exports is low. Low satisfaction with host country partner alliances can adversely affect satisfaction levels with the overall export experience.

The results of this study indicate that San Francisco Bay Area Environmental Technology firms have a strong interest in exporting to Asia. Asian countries, including India, can benefit from the expertise of these firms, particularly in the area of solid waste management. With the prevailing economic climate in Asia, India remains a relatively more attractive market than the Southeast Asian countries of the Philippines, Thailand, Malaysia, or Indonesia. However, a number of steps need to be taken to facilitate export efforts of San Francisco Bay Area Environmental Technology firms.

Firms without export experience have a wide range of information needs in order to overcome external barriers. External barriers to exports have been discovered by researchers in other industries as well (Bauerschmidt, Sullivan and Gillespie 1985). Non-exporting firms want information about the ‘ropes and procedures’ associated with selling in foreign markets, they are unsure as to where to find the best export market opportunities, and they want to know more about the types of export assistance that are available. For these firms, obtaining relevant information can involve many blind alleys, and it can be time consuming and costly. Many of these firms may not realize that there is a well equipped, broad based infrastructure of public sector service organizations that can assist them in accessing the information they need. These barriers can be directly addressed through informational sessions and programs. Service providers to the environmental technology industry can play a significant role here in moving these firms to export readiness and to becoming exporters.

For experienced exporters our concern was that close to 50% of the exporting firms felt either neutral or dissatisfied about their export experience and associated financial returns. These firms need to recognize from the outset that effective host country partner alliances are critical to their success and ultimate satisfaction with their export endeavors. The importance of strategic alliances for exports has been documented by others (Lorinc 1990). A number of visits over a period of time will probably have to be made to a target country market to understand local markets, customs and business practices, and especially to meet prospective partners. Partner selection and the management of the alliance relationship over time will play a major role in achieving success. In new markets, exporting firms should seek assistance from public sector service providers to assist them in networking and establishing relationships with potential partners. Assessment of potential partners should include an exploration of mutual expectations regarding the working relationship. Effort and skill will have to be put into building trust in these relationships.

This study indicates that public sector service providers have a major role in assisting environmental technology firms through their programs and activities. An important but potentially overlooked service that can be provided by public sector organizations is assisting firms in assessing their export readiness. Many firms face internal barriers and are not ready for exporting (Cavusgil 1984; Roth 1992; Lyles et al 1993; Naidu and Prasad 1994; Campbell 1996). Public sector agencies can assess, diagnose and advise firms accordingly. Such firms need to be screened out from taking up further resources that need to be focused on export-ready firms.

Public sector service providers should help export-ready firms overcome external barriers such as a lack of information about the ‘ropes and procedures’ associated with selling in foreign markets, the types of export assistance that are available, and where to find the best export market opportunities. Valued information is available, but firms may not know it is available or how to access it. It would be helpful if there was a central location where firms could go with their questions and information needs, and be directed to the appropriate service providers or resources.

Another area where service providers can play an important value added role relates to host country alliances. Service providers can facilitate increased understanding of the important role of these alliances, what it takes to make them work effectively, and they can assist firms in the process of finding appropriate partners. They can develop and maintain current databases of potential partners in export markets and provide training to export-ready firms to better select partners and manage such alliances.

The Government of India can draw parallel policy implications from this study so as to attract Bay Area environmental technology firms to participate in its environmental clean up efforts, a priority area for its citizens. Given the importance of host country strategic alliances uncovered by this study, they need to develop, maintain and disseminate current databases of potential alliance partners in India to help new Bay Area exporters understand the nuances of the Indian market.

Bauerschmidt, Alan, Daniel Sullivan, and Kate Gillespie (1985), “Common Factors Underlying Barriers to Export: Studies in the U.S. Paper Industry,” Journal of International Business Strategies, Fall, 111-122.

Campbell, Alexandra J. (1996), “The Effects of Internal Firm Barriers on the Export Behavior of Small Firms in a Free Trade Environment,” July, 50-58.

Cavusgil, S. Tamer (1984), “Differences Among Exporting Firms Based on Their Degree of Internationalization,” Journal of Business Research, 12, 195-208.

Cavusgil, S. Tamer, and Poh-Lin Yeoh, “Public Sector Promotion of U.S. Export Activity: A Review and Directions for the Future,” Journal of Public Policy & Marketing, 13 (1), 76-84.

Environmental Business International Inc. (1996), “The Global Environmental Industry: A Market and Needs Assessment,” Environmental Business International Inc., San Diego.

Lyles, Marjorie A., Inga S. Baird, J. Burdeane Orris, and Donald F. Kuratko (1993), “Formalized Planning in Small Business: Increasing Strategic Choices,” Journal of Small Business Management, April, 38-50.

Lorinc, John (1990), “Selling to the world strategically: Strategic alliances can magnify your export clout-and you don't even have to leave home,” Canadian business, 63 (11), 126.

Naidu, G. M. and V. K. Prasad (1994), “Predictors of Export Strategy and Performance of Small and Medium Firms,” Journal of Business Research, 31, 107-115.

Roth, K. (1992), “International Configuration and Coordination Archetypes for Medium-Sized Firms in Global Industries,” Journal of International Business Strategies, 23, 533-549.

¹ Column total exceeds 100% because some firms classify themselves in more than one sector. Sample size=95 firms.

¹ Mean factor score is computed from a 5 point Likert scale going from 1=Strongly disagree to 5=Strongly agree. Sample size=45 non-exporting firms.

¹ Mean factor score is computed from a 5 point Likert scale going from 1=Strongly disagree to 5=Strongly agree. Sample size=55 exporting firms.

¹ Column total exceeds 100% because some firms use more than one type of alliance. Sample size=55 exporting firms.