The authors gratefully acknowledge a Business and International Education (BIE) grant and a matching grant from the College of Business, San Francisco State University in support of this study.

The Role of Strategic Alliances in Small and Medium Enterprise (SME) Export Performance

This paper focuses on the export performance of U.S. environmental technology (EnviroTech) firms, which are predominantly SMEs. We conceptualize and empirically test a model of perceived export performance contingent upon the perceived effectiveness of host country partner (HCP) alliances, export assistance, and trust in the HCP. We find that U.S. 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.

The recent history of U.S. firms in several industries such as automobiles, consumer electronics, and computer memory chips has demonstrated an important strategic lesson. U.S. 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 U.S. firms when they can no longer count on domestic growth. Therefore, U.S. 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 U.S. 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 (see Exhibit 1). 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 U.S. 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 U.S.. 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 U.S. EnviroTech industry. Exhibit 2 portrays the range of products and services being offered, as well as the types of end markets and Exhibit 3 further delineates the types of products/services within each environmental sector.

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 6% 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 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 to the next generation technologies that will meet increasingly more stringent air, water, and toxins standards.

In order to understand the importance of export markets to U.S. environmental firms, one has to consider the evolution of the industry as depicted in Exhibit 1. During the period 1970-1990, when strict U.S. 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.

Strategic alliances such as joint ventures, technology alliances, partnerships, marketing, and licensing agreements between domestic and host country partners reflect a portfolio of relationships being used by EnviroTech firms in their exporting endeavors. The formation of such host country alliances is virtually a necessary condition for U.S. 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, local 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. Using the empirical research setting of the California EnviroTech industry, the objective of this study is to develop and test a model linking the use of strategic alliances by SMEs to export performance.

A review of the extant literature provided the conceptual underpinnings for the hypotheses to be tested. They involve relationships between trust, export assistance, the perceived effectiveness of alliances with host country partners, and perceived export performance. A discussion of the results along with research and managerial implications of the study will also be presented.

Conceptual Framework and Hypotheses

For our conceptual framework, we focus on the network of three key players involved in the export of U.S. EnviroTech products and services. As shown in Exhibit 4, the U.S. 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).

The U.S. service provider is usually a U.S. government agency, trade association, or consulting firm that brings the U.S. exporter and HCP together and can also provide consulting, business planning, technical assistance or market research services (Human and Provan 1997). It may interact with either firm as a facilitator but does not engage in the exchange of goods and services of the exporter.

Such SME networks promote interdependencies in which members provide inputs and receive outputs from each other. They allow member firms to combine core competencies to accomplish specific organizational objectives that could not be accomplished individually (Human and Provan 1997). This is consistent with the resource dependence theory of organizational networks (Pfeffer and Salancik 1978). The relationship between network structure and organizational outcomes has often been assumed rather than studied directly (Human and Provan 1997). Thus, our motivation to study the impact of this network on perceived performance of the focal U.S. EnviroTech exporter.

Weaver, Dickson and Davies (1995) surveyed SMEs in the U.S. and reported that the large number involved in both international business and alliance activities clearly supported a relationship between internationalization and alliances. While observing that SME alliance activity was significant, growing, and produced profitable returns for most SMEs, Weaver and Dickson (1995) lamented the lack of information or help available to these organizations in facilitating the formation of alliance relationships. This should be the role of service providers like government export assistance agencies, trade associations, or consulting firms.

According to social exchange theory (Blau 1964), cooperative exchange relationships have an economic dimension and a social dimension. In our network conceptualization, the economic dimension includes the financial returns the focal exporter gets from the relationship with the HCP. The economic dimension also includes the export assistance provided by the service provider. Of central importance to the social dimension of alliances and networks 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. In an approach similar to Saxton (1997), we wish to investigate the value of export assistance as a resource and the impact of 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 U.S. EnviroTech exporter. The hypothesized model to be tested is presented in Exhibit 5.

Trust. Exporters enter into alliances with host country partners 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 U.S. exporter’s belief that the HCP has the knowledge, assets and skills required to perform according to expectations. Integrity is the U.S. 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 H1:             The greater the U.S. exporter’s trust in the Host Country Partner, the higher the perceived effectiveness of the exporter-HCP relationship.

Export Assistance. Most SMEs start out by serving the domestic market and gradually move into exports (Madsen 1989). There is a general reluctance to get involved in exporting due, in part, to a lack of export-specific knowledge and information. One of the key success factors for exporting is export planning (Barringer, Macy and Wortman 1996). Such planning may help a firm assess the potential of its export environment and mitigate inhibitions about the complexities, uncertainties, risks and cultural barriers involved in exporting. Since many SMEs lack the resources to undertake such planning on their own, a service provider like a government agency, trade association, or a consulting firm could complement their efforts. Such service organizations can provide valuable assistance to the exporter in assessing market potential, forecasting demand, finding host country partners, understanding overseas laws and procedures. Export assistance will likely improve the business relations between the exporter and its host country partner.

Kotabe and Czinkota (1992) report that there is a wide discrepancy between the export assistance needs of SMEs and public sector export assistance programs. They suggest ways for reducing this gap and increasing the effectiveness of such programs. Similarly, Kedia and Chhokar (1996) suggest that many export promotion programs from both the private and public sector are ineffective due to the low level of awareness of these programs by the SMEs. Public sector export programs were also examined by Cavusgil and Yeoh (1994) who found them to be ineffective and “...mistargeted efforts with vague objectives and vague understanding of user needs” (page 83).

In contrast, Barringer, Macy and Wortman (1996) found that a positive relationship exists between export planning and performance. Moini (1998) also found that SMEs in various stages of their export experience received or expected to receive benefits from government export programs. Positive support for governmental assistance programs were also reported by Howard and Herremans (1988) in their study of successful exporters. As the literature is equivocal on the value of export assistance programs, we wish to test the following hypothesis:

Hypothesis H2:             The greater the value of export assistance provided to the exporter, the higher the perceived effectiveness of the exporter-HCP relationship.

Perceived Effectiveness of HCP Relationship. Perceived effectiveness is the U.S. 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 U.S. 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. Data on objective performance is often considered proprietary and exporters may not wish to share this with researchers. Therefore, we chose perceived performance of U.S. exporters as our final 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. Most overseas environmental projects are contracted with foreign governments, further enhancing the importance of an HCP. This leads to our third and final hypothesis:

Hypothesis H3:             The greater the perceived effectiveness of the exporter-HCP relationship, the higher the perceived performance of the U.S. exporter.

Method

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. 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.

The four major constructs in our model were operationalized using multiple item Likert scales with Cronbach’s alpha exceeding the threshold 0.7 value (Exhibit 6). 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 13 items constituting the independent variables, trust in HCP, export assistance, 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.

Results

The results of our hypotheses-testing are presented in Exhibit 7 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 trust in HCP is strongly related (p=.05) to perceived effectiveness of the HCP relationship (H1), however, there is no significant relationship between export assistance and perceived effectiveness (H2). In column 3 we find that perceived effectiveness of the HCP relationship is strongly related (p=.01) to the perceived performance of U.S. 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 U.S. 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 low adjusted R-square for the first regression indicates omitted variables, the fact that perceived effectiveness of the HCP relationship, relative magnitude of exports and number of years of export experience, together explain a third of the variance in perceived performance of U.S. exporter, is impressive.

Implications for Research and Management

A major contribution of our study is to document the important role of strategic alliances in the performance of U.S. 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 important role of trust in strategic alliances between SME exporters and their HCPs. Trust in the host country partner has to do with the ability, integrity and benevolence of the partner firm in the export market. 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.

Contrary to our hypothesis, we did not find any significant relationship between export assistance and perceived effectiveness of the HCP relationship. The extant literature has mixed findings about the benefits of export assistance and our study seems to indicate they are of limited value.

U.S. 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 trust and export assistance, such as organizational culture and compatibility, differences in size, structure and processes, as well as environmental factors such as uncertainty. We did not find evidence to support the hypothesized positive relationship between export assistance and perceived effectiveness of the HCP relationship. This may require better data in future studies. 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

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Exhibit 4
Conceptual Framework

Exhibit 5
Hypothesized Model

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Exhibit 6
Variable Operationalizations and Reliabilities

¹Response scale for these items went from 1=Strongly Disagree to 5=Strongly Agree.
²Response scale for these items went from 1=Very Low Value to 5=Very High Value.
³Response scale for these items went from 1=Extremely Dissatisfied to 5=Extremely Satisfied.
^Rreverse-coded response

Exhibit 7
Ordinary Least Squares (OLS) Model Estimation

Numbers in cells outside parentheses are standardized beta coefficients; numbers inside parentheses are t-statistics.
^asignificant at p=0.01
^bsignificant at p=0.05
^csignificant at p=0.10