Sanjit Sengupta, Ph.D., is Associate Professor of Marketing, Richard M. Castaldi, Ph.D., is Professor of Management, and Murray Silverman, Ph.D., is Professor of Management, all at San Francisco State University. The authors gratefully acknowledge a Business and International Education (BIE) grant from the U.S. Department of Education, and a matching grant from the College of Business, San Francisco State University in support of this study. Address all correspondence to the first author at: Department of Marketing, San Francisco State University, 1600 Holloway Avenue, San Francisco, CA 94132.

This paper focuses on the export performance of US environmental technology (EnviroTech) firms, which are predominantly small and medium enterprises (SMEs). We conceptualize and empirically test a model of perceived export performance contingent upon the perceived effectiveness of host country partner (HCP) alliances, dependence, and trust in the HCP. We find that US SME EnviroTech firms contemplating exports need two critical ingredients for success. First, they must forge close, cooperative, long-term strategic alliances with HCPs for mutual benefit. And second, they must pay specific attention to building trust in the HCP in order to achieve greater success with the strategic alliance and exports. Though dependence on a host country partner increases the vulnerability of the exporter and detracts from an effective alliance, trust is the antidote that can neutralize the negative impact of dependence.

Post-World War II history of US industries, such as automobiles, consumer electronics, and computer memory chips, has demonstrated an important strategic lesson. US firms must engage global competitors in overseas markets, or there may be drastic consequences for domestic firms. Not only will domestic firms face stiffer foreign competition in home markets, they will cede the opportunity for the important first-mover advantage in many international markets. As Michael Porter stated, “A firm cannot sustain competitive advantage in international competition in the long run without exploiting and extending its home-based advantages with a global approach to strategy” [Porter (1990) p. 583]. Further, overseas markets provide growth for US firms when they can no longer count on domestic growth. Therefore, US firms need to become exporters (1) as an attractive growth opportunity; (2) as a first step towards increasing investment in overseas markets to counter global competition; and (3) as a way to sustain competitive advantages in domestic markets.

The US environmental technology (EnviroTech) industry is a relatively new industry, evolving over the past 25 years in response to the emergence of strict environmental regulation in this country. 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. The size of the US EnviroTech industry in 1994 was $170 billion, however growth is maturing (Environmental Business International Inc. 1996). Some growth, however, is expected to continue because 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.

As a result of the diversity of markets and technologies, the US. EnviroTech industry is comprised primarily of small and medium sized enterprises (SME’s) engaged in a broad range of activities. Barriers to entry are relatively low. It is estimated that there are 45,000 to 60,000 companies (not including water utilities) comprising the US EnviroTech industry. Table 1 portrays the different sectors within the industry and further delineates the types of products/services within each sector.

The global environmental market is huge, totaling $408 billion in 1994 (Environmental Business International Inc. 1996). In absolute terms in 1994, the US was the largest exporter with $10 billion in exports. However, in percentage terms, the US only exported 6% of its environmental products and services compared to Japan and Germany which both exported on the order of 20% of their environmental products and services. The US, Western Europe, and Japan have the largest environmental markets while Asia and Latin America have the highest projected growth rates. The types of products or services being demanded in developing countries tend to be those that help to build the environmental infrastructure, as compared to the developed countries which are looking for next generation technologies that will meet increasingly more stringent air, water, and toxins standards.

In order to understand the importance of export markets to US environmental firms, one has to consider the evolution of the industry as depicted in Table 2. During the period 1970-1990, when strict US regulations were driving the industry, small firms focused on the many local market opportunities. The industry growth rate was in the double digits. The regulatory environment slowed down in the early 1990’s. This was in part due to the success of regulation in the prior twenty years. As a result, industry demand leveled off. Of course this varied by sector within the environmental industry, with some sectors in serious decline while others remained viable or strong. Many firms had grown large enough to command a national presence, and others were formed to look beyond their local region in search of new opportunities. Many consolidations and acquisitions resulted in the ensuing shakeout of the industry.

During the second half of the nineties, strategic alliances such as joint ventures, technology / marketing partnerships, and licensing agreements between domestic firms and host country partners reflect a portfolio of collaborative relationships being used by EnviroTech firms in their exporting endeavors. The formation of such host country alliances is almost a necessary condition for US firms to compete in foreign markets. This is due to the fact that the customer of EnviroTech 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, know-how, and add value to customers as part of the localization desired of globalization.

There is extensive business and management literature on strategic alliances as they apply to large organizations. However, the development and application of these theories in the domain of SMEs is scant. This is particularly true in regard to the study of export performance. Weaver, Dickson and Davies (1995) reported that the large number of US SMEs involved in both international business and alliance activities clearly supported a relationship between internationalization and alliances. While observing that alliance activity was significant, growing, and profitable for most SMEs, Weaver and Dickson (1995) lamented the lack of information available to these organizations in facilitating the formation and management of alliance relationships. Using the empirical research setting of the California EnviroTech industry, the objective of this study is to develop and empirically test a model of perceived export performance contingent upon the perceived effectiveness of host country partner (HCP) alliances, dependence, and trust in the HCP.

A review of the extant literature will first be undertaken to provide the conceptual underpinnings for the hypotheses to be tested. These involve relationships between dependence, trust, the perceived effectiveness of alliances with host country partners, and perceived export performance. Then, the method used to collect and analyze the data will be presented, followed by a discussion of the results. Implications for research and management make up the final section of the paper.

For our conceptual framework, we focus on the dyad of two key players involved in the export of US EnviroTech products and services. As shown in Figure 1, the US exporter is the SME which sells EnviroTech products and services in an overseas market through a host country partner (HCP). This is a close relationship, a strategic alliance, where the two firms cooperate in business transactions for mutual benefit and competitive advantage over an extended time horizon. Our definition of an alliance follows that of Dickson and Weaver (1997), in which they state: “alliances...are structured agreements that establish exchange relationships between cooperating firms but do not involve a freestanding, wholly owned organizational entity” (page 404).

Such alliance dyads promote interdependencies in which partners provide inputs to, and receive outputs from, each other. They allow partner firms to combine core competencies to accomplish specific organizational objectives that could not be accomplished individually (Human and Provan 1997). For instance, the U.S. exporter (SME) may provide the know-how for the product or service while the host country partner (HCP) may provide sales and service support to customers. This is consistent with the resource dependence theory of organizational networks (Pfeffer and Salancik 1978).

According to social exchange theory (Blau 1964), cooperative exchange relationships have an economic dimension and a social dimension. In our conceptualization, the economic dimension has to do with the financial returns the focal exporter gets from the relationship with the HCP. The economic dimension thus creates a dependence of the US exporter (SME) on the HCP. Of central importance to the social dimension of alliances is the concept of trust (Noteboom, Berger and Noorderhaven 1997; Gulati 1995). Trust is a major tool of governance in the relationship between exporter and HCP. We wish to investigate the impact of dependence and trust on the perceived effectiveness of the relationship with the HCP. Further, we wish to explore the impact of the perceived effectiveness of the HCP relationship on perceived export performance for the focal US EnviroTech exporter. The hypothesized model to be tested is presented in Figure 2.

Dependence. Emerson (1962) conceptualized that dependence on an individual was directly related to the rewards obtained from that source and inversely related to the number of alternative sources of those rewards. Pfeffer and Salancik (1978) generalized this to organizational dependence as the degree to which a focal firm needs valuable resources that are not available from alternative partners. EnviroTech exporters (SMEs) are dependent on HCPs because: (1) HCPs help them generate revenues and profits, and (2) there are often few alternative firms to the HCP available in overseas export markets.

Dependence on the HCP creates a condition of vulnerability for the US exporter (SME). It raises the possibility that the HCP may act opportunistically and exploit the exporter. For instance, the HCP may compromise on the quality of service provided to customers in order to maximize its short-term profits while the exporter’s image suffers. Williamson (1975) calls this the “hold-up” problem in a “small-numbers bargaining” situation. Thus, US exporters (SMEs) facing dependence on the HCP are not likely to be satisfied with this situation. They will perceive highly dependent relationships to be less effective than others where there is less dependence. This leads to our first hypothesis:

Hypothesis H1:

Trust. Exporters (SMEs) enter into alliances with HCPs to share the risks of market development and to increase the speed of market entry. In addition to these external risks, there is the internal risk that one partner may opportunistically exploit the dependence of the other partner. Thus, alliances inherently are fraught with mutual dependence and coordination problems. Trust can play a major role in reducing these internal risks associated with alliances (Noteboom , Berger and Noorderhaven 1997). The exporter’s trust in the HCP can reduce the need for extensive specification and monitoring of contracts, provide flexibility to adapt to changing market conditions, and promote cooperation. Moreover, when alliance partners trust one another, they are more likely to “react to adversity with measured responses and they are less likely to behave rashly when the business shows signs of weakness” (Spekman, Isabella, MacAvoy, and Forbes; page 16).

Mayer, Davis and Schoorman (1995) suggest three dimensions of trust. Ability or competence is the US exporter’s belief that the HCP has the knowledge, assets and skills required to perform according to expectations. Integrity is the US exporter’s belief that the HCP will adhere to a set of congruent moral and ethical business principles. Finally, benevolence is the exporter’s belief that the HCP will only undertake actions to help the exporter and not undertake any actions detrimental to the latter’s interest. Noteboom, Berger and Noorderhaven (1997) found that trust reduces the risk of opportunistic exploitation by a partner. The relationship marketing perspective (Morgan and Hunt 1994) has established that trust leads to commitment, which leads to successful business relationships. In fact, Barney and Hansen (1994) posit that “...trust, in economic exchange, can be a source of competitive advantage” (page 188). This leads to our first hypothesis:

Hypothesis H2:

Perceived Effectiveness of HCP Relationship. Perceived effectiveness is the US exporter’s perception of the degree to which the alliance with the HCP has been productive, worthwhile and satisfying (Van De Ven and Ferry 1980). Satisfaction with the partner and satisfaction with the financial returns from the alliance are important aspects of perceived effectiveness.

Perceived Performance of US Exporter. Existing literature suggests that both subjective and objective dimensions of export performance are important (Naidu and Prasad 1994). Subjective performance uses managerial assessments of outcomes compared to predetermined goals and objectives, while objective performance includes measures of sales, sales growth or profitability. In the context of organizational effectiveness and performance, Cameron and Whetten (1981) found that subjective performance criteria were often the best. Further, objective performance data is often considered proprietary and would be difficult to collect. Therefore, we chose perceived performance of US exporters as our second dependent variable.

One of the major contributions of our model is that perceived effectiveness of the HCP relationship is related to perceived performance of exporters. Interviews with executives in the EnviroTech industry, industry experts from trade and governmental associations, and industry consultants strongly suggested that strategic alliances with host country partners were not only important but a critical factor for a successful export project. The knowledge, assets and skills of the HCP are a valuable resource that can make or break the exporter’s performance in the overseas market. This leads to our third and final hypothesis:

Hypothesis H3:

Industry Focus. To control for potential industry effects this study focused exclusively on a single industry, EnviroTech. As stated by Dess, Ireland and Hitt (1990): “...strategic management researchers do not control consistently for possible industry effects on their results” (page 7). Their analysis of 40 most frequently cited strategic management studies published during 1980-1988 supports their conclusion. In fact, Dess, Ireland and Hitt (1990) recommend single industry studies as one of three methods available to obviate the potentially confounding effects of multiple industry studies. This approach is also favored by Cavusgil (1984) particularly when investigating export behavior. Although single industry studies are high in internal validity, care must still be exercised to account for heterogeneity within the industry. Also, single industry studies lack the generalizability found in multiple industry studies. We restricted our data collection efforts to EnviroTech firms in California to minimize heterogeneity within our sample.

Data Collection. We used three sources of data to generate the sampling frame for our study. Starting with the California Environmental Technologies and Services Directory, published by California EPA, we first identified all the EnviroTech firms in the San Francisco Bay Area, numbering 451. This was supplemented by a list of 80 EnviroTech firms in the Los Angeles area from the California Business Register database maintained by the World Trade Center Association. Finally, an environmental consultant provided us fax access to approximately 100 EnviroTech companies in the San Diego area. Firms on the San Francisco and Los Angeles lists were contacted by phone in order to update address and contact person information. Our total sampling frame was thus made up of about 631 firms.

Based on field interviews with EnviroTech firm executives, government assistance industry experts, and a review of the relevant literature, we designed, developed, and pretested a six page survey questionnaire to collect data on the variables outlined in the previous section. This survey was mailed to senior executives in 531 firms in San Francisco and Los Angeles, and faxed to the 100 firms in San Diego. Forty-four surveys were returned as undeliverable, resulting in a reduced sampling frame of 587 firms.

The number of usable returned surveys was 119, giving us an effective response rate of about 20%. Data from the surveys was coded and entered into an Excel spreadsheet. Of the 119 sample firms, 75 were exporters and 39 were non-exporters. Of the 75 exporters, 57 had strategic alliances with HCPs. For this paper, we use only the exporter sub-sample that have alliances with HCPs (n=57). Further, we use only a subset of the variables in our original questionnaire. SPSS statistical software was used to perform the Ordinary Least Squares (OLS) Regression to test our hypotheses. Seventy-six percent of our sample firms have annual sales of less than $25 million, confirming that these are indeed SMEs.

The four major constructs in our model were operationalized using multiple item Likert scales with Cronbach’s alpha exceeding the threshold 0.7 value (Table 3). In addition, we used two single-item variables, number of years of export experience and relative magnitude of exports, as co-variates for the purpose of statistical control. The 12 items constituting the independent variables, dependence, trust in HCP, number of years of export experience and relative magnitude of exports, were subjected to an exploratory factor analysis. The relatively clean loadings of items onto 4 distinct factors provided evidence of convergent and discriminant validity. A correlation matrix among the 6 variables of our model together with variable means and standard deviations is shown in Table 4.

Results

The results of our hypotheses-testing are presented in Table 5 using OLS regression. Hypotheses H1 and H2 are tested in column 2 and hypothesis H3 is tested in column 3. In column 2 we see that dependence is negatively related (p=.05) to perceived effectiveness of the HCP relationship (H1), and trust is positively related (p=.01) to perceived effectiveness (H2). In column 3 we find that perceived effectiveness of the HCP relationship is positively related (p=.01) to the perceived performance of US exporter, as expected (H3). We also find a positive significant though weak (p=.10) relationship between the relative magnitude of exports and perceived performance of US exporter. Although we did not formulate a hypothesis for this variable, this result is quite interesting. It provides evidence that those firms that export more seem to be performing better, supporting the principle of increasing returns to scale in export performance. While the adjusted R-square for both regressions seems adequate for such a parsimonious model, clearly there are omitted variables which could further explain the variance in perceived effectiveness of the HCP relationship and perceived performance of the US exporter. Comparing the standardized beta coefficients of the dependence and trust variables in column 2, we find that trust has a greater positive impact on the perceived effectiveness of the HCP relationship than dependence has a negative impact.

Implications for Research and Management

A major contribution of our study is to document the important role of strategic alliances in the performance of US SME EnviroTech exporters. In our sample, 76% of the firms use alliances with HCPs in overseas markets. Further, we find a strong, positive relationship between effectiveness of HCP alliances and export performance. The key to achieving satisfactory export performance is to develop, nurture and maintain satisfactory relationships with host country partners in export markets.

A second, major contribution of our study is to highlight the importance of dependence and trust in strategic alliances between SME exporters and their HCPs. Dependence and trust work in opposite directions with regard to alliance effectiveness. Alliances inevitably make the SME exporter dependent on the HCP and this is viewed as having a negative impact on the effectiveness of the alliance. However, trust can counterbalance the negative impact of dependence. While dependence may be a preexisting condition for the formation of the alliance, trust is the coordination mechanism to allay the fears of the SME exporter, resulting in an effective alliance. To the extent that the exporter trusts the HCP in the overseas market, it will perceive its business relationship with the HCP as better. The positive relationship between trust and perceived effectiveness of HCP alliances reinforces findings from the extant strategic alliance literature, most of which has focused on large Fortune 500 or Fortune 1000 firms. The replication and extension of this result to SME exporters is noteworthy.

US SME EnviroTech firms contemplating exports need two critical ingredients for success. First, instead of appointing arms’-length distributors or sales agents in overseas markets, they must forge close, cooperative, long-term strategic alliances for mutual benefit. Further, they must pay specific attention to building trust in the HCP by choosing compatible partners with convergence in strategic goals. They must put in place people and processes which facilitate information sharing, communication and reciprocity.

Forming strategic alliances with trustworthy partners in overseas markets is a critical step towards globalization of exporting firms. But SME EnviroTech firms face two problems in this regard. First, they require a paradigm shift in their thinking, away from traditional, adversarial relationships with distributors or sales agents, and towards long-term cooperative alliances with HCPs. They need training to think in terms of long-term strategic partnerships, and develop knowledge, skills and capabilities in the areas of negotiations, contract law, trust-building, and shared governance. Second, SME firms often lack information about qualified potential partners in overseas markets and need help in contacting them. Maintaining country-specific databases of potential partners and arranging trade missions are useful activities that export assistance agencies ought to begin or continue to build.

This study is not without limitations. We have developed and tested a parsimonious model to explain effectiveness of HCP relationships and export performance. Clearly, future research should investigate the impact of independent variables in addition to dependence and trust, such as organizational culture and compatibility, differences in size, structure and processes, as well as environmental factors such as uncertainty. Our sample size of 57 SME EnviroTech exporters with HCP alliances is modest. However, this should not deter future researchers given that HCP alliances for exports is a fairly new, emerging phenomenon in the domain of SMEs. We hope this study will stimulate new ideas for future research on the role and utilization of strategic alliances by SMEs in their exporting endeavors.

References

Barney, J. B., and Mark H. Hansen. (1994). Trustworthiness as a Source of Competitive Advantage. Strategic Management Journal, 15, 175-190.

Blau, Peter M. (1964). Exchange and Power in Social Life. New York: Wiley.

Cameron, Kim S., and David A. Whetten. (1981). Perceptions of Organizational Effectiveness over Organizational Life Cycles. Administrative Science Quarterly, 26 (4), 525-544.

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

Dess, Gregory G., Duane Ireland and Michael A. Hitt. (1990). Industry Effects and Strategic Management Research. Journal of Management, 16 (1), 7-27.

Dickson, Pat H. and K. Mark Weaver. (1997). Environmental Determinants and Individual-Level Moderators of Alliance Use. Academy of Management Journal, 40 (2), 404-425.

Emerson, Richard M. (1962). Power-Dependence Relations. American Sociological Review, 27 (February), 31-41.

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

Human, Sherrie E. and Keith G. Provan. (1997). An Emergent Theory of Structure and Outcomes in Small-Firm Strategic Manufacturing Networks. Academy of Management Journal, 40 (2), 368-403.

Roger C. Mayer, James H. Davis and David F. Schoorman. (1995). An Integrative Model of Organizational Trust. The Academy of Management Review, 20 (3), 709-734.

Robert M. Morgan and Shelby D. Hunt. (1994). The Commitment-Trust Theory of Relationship Marketing. Journal of Marketing, 58 (July), 20-38.

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

Noteboom, Bart, Hans Berger and Niels G. Noorderhaven. (1997). Effects of Trust and Governance on Relational Risk. Academy of Management Journal, 40 (2), 308-338.

Pfeffer, Jefferey and Gerald Salancik. (1978). The External Control of Organizations: A Resource Dependence Perspective. New York: Harper & Row.

Porter, Michael E. (1990). The Competitive Advantage of Nations. New York: Free Press.

Spekman, Robert E., L. Isabella, T. MacAvoy, and T. Forbes III. (1997). Alliance and Partnership Strategies: A Guide to Managing Successful Alliances. Lexington, MA: ICEDR.

Van De Ven, Andrew H. and Diane L. Ferry. (1980). Measuring and Assessing Organizations. New York: John Wiley & Sons.

Weaver, K. Mark, Pat H. Dickson, and Leslie Davies. (1995). SME Based Strategic Alliances: Marriages of Necessity, Convenience or True Love?. Working Paper, The University of Alabama (June).

Williamson, Oliver E. (1975). Markets and Hierarchies. New York: The Free Press.