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(J. Martınez-de

Journal of Environmental Management 88 (2008) 1552–1561

www.elsevier.com/locate/jenvman

Environmental performance and spillover effects on productivity:Evidence from horticultural firms

Emilio Galdeano-Gomeza, Jose Cespedes-Lorenteb,�, Javier Martınez-del-Rıob

aDepartamento de Economıa Aplicada, Universidad de Almerıa, Canada de San Urbano s/n, 04120 Almerıa, SpainbDepartamento de Direccion y Gestion de Empresas, Universidad de Almerıa, La Canada de San Urbano, s/n, 04120 Almerıa, Spain

Received 17 January 2007; received in revised form 8 July 2007; accepted 31 July 2007

Available online 6 September 2007

Abstract

This study investigates the effect of environmental investment and related spillover effects on productivity in the agricultural sector by

using a panel data of horticultural firms in Andalusia (Southern Spain). The results indicate a positive relationship between firm

investment in environmental practices and productivity improvement, also showing the presence of positive environmental spillovers. In

a second-stage of analysis, the incidence of environmental factors in firm specific individual technical efficiency is estimated. This analysis

also shows the link between environmental knowledge diffusion and horticultural firms’ performance.

r 2007 Elsevier Ltd. All rights reserved.

Keywords: Environmental performance; Spillovers; Productivity; Cobb–Douglas function; Efficiency; Horticultural firms

1. Introduction

The increasing awareness of environmental problems asa result of economic activity has led to greater political andsocial demands on companies to reduce their environ-mental impact. One argument supporting the diffusion ofenvironmental innovations on a company level is the so-called ‘‘win–win hypothesis’’. According to this hypothesis,firms that increase their investment in environmentaltechnology can obtain a competitive advantage, whilereducing their negative environmental impact (Porter andvan der Linde, 1995).

Previous studies on environmental management strategyhas been based on theoretical approaches such as theresource-based view to argue that investment in greentechnology may foster the development of firm’s resourcesand capabilities which form the basis for a competitiveadvantage (Hart, 1997; Aragon-Correa and Sharma, 2003).For instance, Sharma and Vredenburg (1998) point out that

e front matter r 2007 Elsevier Ltd. All rights reserved.

nvman.2007.07.028

ing author. Tel.: +34950 015523; fax: +34 950 015178.

esses: galdeano@ual.es (E. Galdeano-Gomez),

s (J. Cespedes-Lorente), jamartin@ual.es

l-Rıo).

investment in proactive environmental practices (e.g. pollu-tion prevention) contributes to the development of valuablecapabilities such as innovation, organizational learning andstakeholder integration. Those organizations that developthese capabilities related to environmental management areable to obtain greater financial performance.Most of the above-mentioned studies assume that the

origin of capabilities associated with environmental invest-ment is internal, including complementary with other assetsor resources (e.g. innovation; see Christmann, 2000).Therefore, they do not analyse the moderating role of thecharacteristics of the companies’ environment (e.g. spil-lover effects in a network of companies) to explain therelationship between environmental investment and finan-cial performance (Aragon-Correa and Sharma, 2003). Oneimportant external factor that moderates the relationshipbetween environmental investment and firm performance isthe diffusion of knowledge associated to networks andindustrial agglomeration (spillover effects). As noted byMazzanti and Zoboli (2006), environmental innovationsare particularly important in local industrial frameworkssince they may give rise to a ‘‘double externality’’: (1) thereduction of environmental externalities (Jaffe et al., 2005)and (2) the typical R&D spillover effect.

ARTICLE IN PRESSE. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–1561 1553

Spillovers are usually connected with R&D stock asmain knowledge capital. In the framework of productivityanalysis, spillovers may be considered as another input ofthe knowledge production process of a firm, industry orcountry (e.g. Griliches, 1992; Mairesse and Mohnen, 2002).Likewise, spillover effects associated to the transfer ofenvironmental knowledge, which is facilitated by theproximity of firms operating in the same geographicalregion, may be considered as an input of a firm productionfunction.

Most studies on environmental management andspillovers tend to focus on the industrial sector. Never-theless, when the agricultural sector is considered, andespecially fresh consumption products (whose trans-formation for marketing is minimal), environmentalfactors may have important implications on theproduction function (McNally, 2002). In this line, someworks have related environmental practices and manage-ment as one of the main factor of innovation in recentyears (e.g. Chambers and Eisgruber, 1998; Brouwer et al.,2000).

The objective of our empirical analysis is to analyseenvironmental practices spillovers in horticultural firmsand their impact on firm’s productivity. To this end, we useinsights from previous works which stress the role ofinteraction between companies located in the samegeographical area (e.g. geographical clusters) in thedevelopment of resources and capabilities in two levels:the cluster or group of companies and the individualcompany (Tallman et al., 2004; McEvily and Zaheer, 1999;McEvily and Marcus, 2005). Whilst the knowledgeexchange through technology spillovers or informalexchange is critical to define performance at cluster level,the firm’s specific knowledge is critical to explain thegeneration of competitive advantage for individual firms(Tallman et al., 2004).

This study makes two main contributions. First, itstudies the relationship between firms’ environmentalmanagement and their individual financial performance(as measured by productivity), taking into account thedirect and moderating roles that the environmentalinnovation spillover effect has on the local agriculturalproduction framework. We assumed that heterogeneitycharacterizes the development of strategic capabilitiesrelated to environmental investment in companiesbelonging to the same geographical area and networkresources are assumed to form part of the origin of thesecapabilities (McEvily and Zaheer, 1999). Second, theempirical analysis centres on the agricultural sector, whichhas traditionally received scant attention in studies onenvironmental management and financial performance(Carpentier and Ervin, 2002). Analysis of this sector cancomplement previous studies by relating the strategiccharacteristics of companies dedicated to the productionand marketing of agricultural produce to the developmentof strategic capabilities associated with environmentalmanagement.

2. Environmental management in the agricultural and

horticultural sector

Environmental management and performance in theagricultural sector have received scant attention comparedto the industrial sector (Carpentier and Ervin, 2002). Thescale of firms, the nature of operations (diffuse pollution incomparison with larger industries), the relative lack ofenvironmental regulation and the voluntary character ofthe policy programs, among other factors, may explain thelack of studies on this topic. Nevertheless, the OECD(Organization of Economic Cooperation and Develop-ment), identifies five drivers that promote the implementa-tion of environmental practices in agri-business, includinggovernment policies and regulations, commercial andeconomic considerations, corporate image, codes of con-duct, and growing pressure from the financial/investmentcommunity (OECD, 1998). Carpentier and Ervin (2002)show six types of motivation: (1) improvement inproductivity associated to the creation of integratedproduction and marketing systems and other tasksnecessary to implement an environmental managementprogram (Esty and Porter, 1998, Reinhardt, 2000); (2)differentiating products to meet demand requirements (forexample, green consumers); (3) mitigating future environ-mental regulations; (4) strategically managing competitors(incurring additional costs to improve environmentalperformance may increase some firms’ profits if the actionscause competitors’ costs to rise even further than theirown); (5) capturing more value in the market, combiningcost reduction, product differentiation, and competitormanagement to shift market conditions and capture morevalue along the supply and marketing chains (Reinhardt,2000), and (6) managing risk and uncertainty moreeffectively.Evidence on most of these motivations is sparse in

agriculture (Cespedes and Galdeano, 2004). Only a fewrecent empirical studies have referred to environmentalmanagement in agri-business. A review of the empiricalevidence by the OECD (2001) concludes that overall thereappears to be a positive correlation between environmentaland commercial/financial performances. For example,Asmundson and Foerster (2001) show that companies thatinvest in business environmental management can do atleast as well economically as other companies. In capturingmore market value, Chambers and Eisgruber (1998)describe how farm managers lessened their ‘‘environmentalfootprint’’ by using diverse crop rotations, growingnitrogen sources, reducing or eliminating pesticides,protecting ground water, engaging in soil and productresidue testing, water reuse, recycling and composting.Horticultural firms from Andalusia, in Southern Spain

form the basis of our empirical analysis. Traditionally, thishorticultural system, based on greenhouses, has impliedintensive use of soil, water, fertilizers, insecticides, and rawmaterials (plastics, packaging, etc.) generating high levelsof waste. Environmental management control in Spanish

ARTICLE IN PRESSE. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–15611554

horticultural firms was intensified during the 1990s, whendifferent European Common Agricultural Policy pro-grammes were applied to environmental management.Representative horticultural firms in our empirical settinghave a cooperative or associative nature, and according toCommunity Regulation, they are classified as Organiza-tions of Producers (OP).1 The main objective of these firmsis to manipulate and commercialize their associates’(farmers) products in their warehouses and installationslinking the farming and marketing activities. They areproving to be key elements in the development ofenvironment-friendly practices due to their direct contactwith farmer members, which makes it easier to explainenvironmental regulation and to apply controls and audits.These entities can develop environmental investmentpractices, which result in increases in productivity, butwhich the growers as individuals would be unable to makedue to the small scale of their firms.

In addition, most of the OPs are integrated in localassociations. These and other organizations within theagricultural production system play different representa-tion roles of the collective (for instance, negotiating withpublic administrations the elaboration of incentive policiesfor the adoption of environmental practices), researchcentres, exports promotion, etc. These entities act as thecentral organization of a geographical cluster (McEvilyand Zaheer, 1999) and take on the tasks of training and thediffusion of information on ‘‘best practices’’(e.g. ofenvironmental and food quality).

Thus, a number of horticultural firms are increasing theirinvestment in the implementation of environmental man-agement practices, which are classified into two maingroups by the Andalusian Council of Agriculture. One setof investment aims at preventing environmental impactsthrough recycling vegetable and plastic waste, reducing theuse of fertilizers, monitoring pesticide concentrationthroughout the production process, diminishing soil pollu-tion and water consumption (Downward and Taylor,2007), etc. The other set of practices aims to instillecological principles in agricultural production throughthe implementation of integrated pest management, therenewal of irrigation systems, the implementation oftechnologies that prevent soil pollution (e.g. mesh nets toprevent the action of insects), as well as the introduction ofcontrol mechanisms for continual monitoring of soils,water, and waste.

Another consideration in our empirical framework refersto the category of these environmental investments (i.e.‘‘preventive’’ or ‘‘end-of-pipe’’), since each type may havedifferent implications on the results (e.g. Sharma andVredenburg, 1998; Aragon-Correa and Sharma, 2003). In

1In the European agricultural model, expectations for attaining

sustainable and competitive agriculture lie to a great extent on the

cooperative sector’s ability to adapt to the new market conditions. In the

European Union (EU), cooperative entities are responsible for over 60%

of the harvest, handling and marketing of agricultural products, with a

turnover of approximately 210 000 million euros (GCAC, 2000).

our case, considering the characteristics of the activity inhorticultural firms (for example, diffuse pollution incomparison with larger industries, intensive use of specificnatural resources such as water and soil, etc.) investment in‘‘end-of-pipe’’ management practices are relatively low. Inaddition, the recent application of environmental manage-ment programs (and the voluntary nature of theiradoption) and the scale of firms have led to a proactiveapplication (e.g. Carpentier and Ervin, 2002). Thus, as wehave described, much of the environmental investment canbe considered as preventive practices.

3. Hypotheses

3.1. Environmental management and performance

There is a wide body of research addressing therelationship between environmental practices or capabil-ities and firms’ performance in different industries (e.g.Klassen and Whybark, 1999; Russo and Fouts, 1997;Schaltegger and Synnestvedt, 2002) and also in agriculturalcompanies (Nijkamp and Vindrini, 2002). The distinctionbetween cost and differentiation advantages can be usefulto discuss these effects in the horticultural sector (Shrivas-tava, 1995).Cost advantages typically arise from the adoption of

practices that improve the production process (Hart, 1995),increasing its efficiency and reducing input and wastedisposal costs (Hart, 1995; Shrivastava, 1995). As Christ-mann (2000; p. 664) pointed out, ‘‘these process-focusedpractices include redesigning of production processes to beless polluting, substituting less polluting inputs, recyclingby-products of processes, and innovating less pollutingprocesses’’. In horticulture typical examples of costadvantages from environmental practices are selling torecycling plants the plastic greenhouses are made of, theuse of smaller amounts of more accurate fertilizers andpesticides, improvements in the irrigation system in orderto save water, and avoiding product take-back costsderived from not fulfilling environmental standards (Eckerand Coote, 2005).Differentiation advantages typically arise from the

customers’ perception that the product is more valuable.Thus it usually depends on the fit of product characteristicsand market needs, and on companies’ ability to marketenvironmental characteristics of their products and ser-vices. Organic horticultural products are a typical exampleof value added by environmental practices. Environmen-tally sound agricultural products have better market access(Ecker and Coote, 2005), and customers perceive thoseproducts as healthier and fulfilling higher quality standards(Walley et al., 2000).Therefore, given the potential of environmental practices

in horticultural production to generate competitive ad-vantages and superior performance derived from productdifferentiation and cost advantages, we propose thefollowing hypothesis:

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Hypothesis 1. The stock of a horticultural firm’s invest-ments in environmental practices is positively related to itsperformance.

3.2. Knowledge spillovers and environmental management

practices

It has been suggested that geographical proximityincreases the probability of knowledge diffusion betweenorganizations (Maskell and Malmberg, 1999; Tallmanet al., 2004). Similar concepts have been proposed byresearchers to describe the development of specific knowl-edge in geographical clusters. For instance, constructs suchas ‘‘knowledge in the air’’ (Malmberg and Maskell, 2002),‘‘social capital’’ (Bowles and Gintis, 2002), ‘‘untradedinterdependencies’’ (Storper, 1997), or ‘‘learning networks’’(Maskell, 2001) have been suggested in the fields ofgeographical economy and business strategy to explainthe competitive advantages of industrial districts (Tallmanet al., 2004).

Storper (1997; p. 12) defines spillover effects as ‘‘rela-tions of interdependency between one type of knowledgeand another, whose frontiers change, (y) requiringinterpretation and communication’’. Spillovers are dy-namic processes of knowledge diffusion between differentorganizations. Interactive feed-back between actors playsan important role in those processes, making this knowl-edge evolve and improve through interactions over time.

Firms can gather tacit and explicit information throughformal and informal interactions with other organizationsin the area—and the people working in them—about issuessuch as technological paths followed by competitors or thesuccess or failure of tactical and strategic decisions ofcompetitors. Those interactions between managers andspecialized workers of different organizations may bedue to idiosyncratic circumstances derived from sharinggeographical location (Malmberg and Maskell, 2002;McEvily and Zaheer, 1999), e.g. casual personal relations,accidental personnel exchange, providing to the samecustomers and having the same providers, contacts withthe same local institutions—universities, regional associa-tions, public administrations, etc.—or attending industrymeetings and fairs.

Thus companies share tacit knowledge that is used in thedecision process (Maskell, 2001, Pouder and St John, 1996;Tallman et al., 2004). For example, if a company chooses atechnological option for an environmental problem whichturns out to be a failure, its competitors will probablyprefer another option, whose success or failure will also beknown by its rivals and providers in the same geographicalarea. Therefore, repeated interactions between all thecompanies in the industry, and the resulting spillovereffects, generate a collective ‘‘knowledge-in-the air’’ that iswidespread for the companies in the area, but is verydifficult to observe for firms located anywhere else (Tall-man et al., 2004; Pouder and St. John, 1996).

Tallman et al. (2004) argue that companies in geogra-phical clusters share firm specific and cluster specificknowledge that helps them to develop capabilities whichlead to superior performance compared to the firms notplaced in the geographical area.Bansal and Roth (2000) found positive externalities of

environmental practices in highly polluting industries.They suggest that if an industry implements environmentalpractices which go beyond pollution control and fulfillinglegal regulations, this industry can obtain competitiveadvantages resulting from a better reputation. Thus, ifmost agricultural companies in a geographical areaimplement environmental practices, all the firms in thearea—implementing environmental practices or not—could benefit from a better area-related reputation. Thecontrary also holds true. If most horticultural companies inthe area develop a negative reputation for massive use ofpesticides, no control of product quality or contamination,extensive use of highly polluting plastics and fertilizers,etc., all the companies in the region will suffer negative biasfrom customers.This argument is reinforced in the case of the ecological

production of horticultural products. Firstly, geographicalidentification of agricultural products is frequent. Thus apositive area-of-origin reputation might have an importantinfluence on performance. Secondly, besides their reputa-tion for not polluting the environment, organic foods arevery often associated by consumers with superior productquality, which is not always the case in other industries(e.g. chemical industries, auto-industry, paper, etc.).The geographical concentration of environmental horti-

cultural production supposes a bigger market for providersof technical solutions for environmental problems. Hence itimplies greater attention from them and better access to thebest solution available to the companies that are trying toimplement such practices. Industry concentration in ageographical area also makes more probable the flow ofknowledgeable employees and engineers from one com-pany to one another (e.g. Almeida and Kogut, 1999;Maskell, 2001), spreading valuable information andcapabilities about environmental management betweenorganizations.Maier and Finger (2004) suggest that organic agricultur-

al foods also tend to be challenged by marketing problemssuch as supply regularity and product labelling. Theseproblems can be better faced by a company if it issurrounded by many others in the same geographical areaproducing the same products. One single company cannotprovide a market every day, but many companies groupedtogether can guarantee constant supply, at least during theseason. Local companies can also reach agreements inorder to use a homogeneous style of labelling that can berecognized by wholesalers and consumers.All of these arguments suggest the following hypothesis:

Hypothesis 2. Environmental spillover effect is positivelyrelated to single horticultural firm’s performance.

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2These sample firms are quite homogeneous in size: the number of

workers ranges between 65 and 315.

E. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–15611556

An industry’s particular characteristics may moderatethe potential of environmental capabilities to generatecompetitive advantages for the company and thereforeimprove its performance. For example, environmentaluncertainty, complexity, and munificence (e.g. Aragon-Correa and Sharma, 2003; Russo and Fouts, 1997) havebeen studied as moderators of the effect of environmentalpractices on firms’ profitability.

Spillovers reduce uncertainty about the implementationof environmental practices in horticultural production.Consider an individual who would like to implement aconcrete environmental practice—e.g. pollinization bynatural means (bees) instead of ‘‘artificial’’ ones—and iswilling to risk at least one crop season to do so. Typicalissues he or she will confront include finding reliableproviders, finding information on which moment of theseason is the most appropriate, learning about optimalconditions for bees, uncertainty about the whole processproductivity, etc. Similar issues could arise with otherenvironmental practices, such as using natural compostinstead of industrial fertilizers or using little or no pesticideamounts. Without information on these issues, thisindividual would have to face considerable uncertainty,which diminishes the probability of implementation ofenvironmental practices (Aragon-Correa and Sharma, 2003).

If there is a greater number of surrounding firms in thearea, formal and informal networks will emerge (Inkpenand Tsang, 2005), producing a dissemination of informa-tion. This information can overcome hurdles and un-certainty for the introduction of environmental practices,resulting in wider and more efficient implementation, andleading better performance of local firms compared withthose located elsewhere.

McEvily and Zaheer (1999) and McEvily and Marcus(2005) found empirical support for the influence of formaland informal local networks of managerial contacts on thedevelopment of environmental management capabilitiesassociated with superior performance. Russo (2003) foundincreasing geographical concentration over time of windenergy companies in California, USA due to the develop-ment of social capital and industry-specific knowledge.

The dissemination of environmental knowledge onspecific practices within the network of horticulturalcompanies facilitates the development of ‘‘green compe-tencies’’ on this collective level. According to the particularcharacteristics of each company (e.g. presence of comple-mentary assets associated with environmental innovation),this general knowledge will be integrated with more or lessefficiency in such a way that green competencies at firmlevel which give rise to a competitive advantage can evolvewith varying degrees of intensity (Tallman et al., 2004).Thus, it is to be expected that horticultural companieswhich invest extensively in the implementation of environ-mental practices and therefore develop environmentalcapabilities can obtain greater benefit from the spread ofspecific environmental knowledge within the network. Thisdiscussion suggests that the environmental spillover effect

moderates the relationship between firm’s investment inenvironmental practices and performance.

Hypothesis 3. The industry investment in environmentalpractices in the region, moderates the relationship betweena single horticultural firm’s investment in environmentalpractices and its performance.

4. Methods

4.1. Sample

The empirical analysis has been based on balanced paneldata using the annual financial reports of 56 farming-marketing cooperatives located in Andalusia (South ofSpain), over the period 1995–2002.2 Horticultural produc-tion of this region is representative of Spanish horticulture(particularly for vegetables) and it accounts for 33% of thetotal national volume. In terms of output the sampleaccounts for 62% of regional production and 20% ofnational horticultural production, taking the averagefigures of the period under study.

4.2. Empirical model

Due to the specific characteristics of horticultural firms, weargue that a horticultural firm’s production function includesenvironmental performance and the related spillovers as themain components in the development of new technologiesand management methods. We assume that the productionfunction can be approximated by a Cobb–Douglas functionexpanded here with a measure of knowledge capital (see, forinstance, Mairesse and Hall, 1996):

Y it ¼ AeltCaitL

bitK

gite�it, (1)

where Y is a measure of output (value added in this case), C isthe physical capital (usually plant and equipment), L is ameasure of labour (as hours worked) and K is the knowledgecapital (which can include the correspondent of the firm andspillovers); the subscripts refer to the firm i and the currentyear t; l is the rate of disembodied exogenous technicalchange (the time trend lt is usually replaced by time dummiesin the estimation); a, b and g, the corresponding elasticities ofthe three defined inputs, and e is the random error term forthe equation, reflecting the effect of unknown factors,differences in technologies across firms and other distur-bances.Taking logs of Eq. (1), the equation to estimate is

yit ¼ aþ ltþ acit þ blit þ gkit þ �it. (2)

The exogenous variations of environmental spillover caninfluence the environmental investment decision of a firmand then have an impact on productivity. When the effectof knowledge spillover to firm i from an external source istaken into account, it is partly determined by firms and

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4Another approach widely used is the Generalized Method of Moments.

Nevertheless, for the sake of simplicity in estimations we consider that

‘long-difference’ may be a feasible remedial method.5We only consider the influence of the explanatory variables of the

production function due to the main objective of the present work, i.e. the

inference and the influences of environmental investment and spillover

E. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–1561 1557

serves as an endogenous variable (Jaffe et al., 1995; Chenand Yang, 2005; Adams, 2006). Thus, the expression for Kit

(now KEit) should be a function including investment inenvironmental practices (as knowledge) and environmentalspillover shown as follows:

KEit ¼ f ðEPit;ESitÞ, (3)

where EPit is the stock of knowledge capital generated byfirm i indexed by environmental investment, and ESit is theenvironmental spillover from other firms in the sameindustry. Since the interactive effect between EPit and ESit

is unknown, following the approach of Basant and Fikkert(1996), we adopt a general functional form for knowledgeKEit and modify the production function in Eq. (1) as follows:

Y it ¼ AelteKEitCaitL

bitK

gite�it, (4)

where the stock of environmental knowledge, KEit, takes thegeneralized Leontief linear functional form as follows (Basantand Fikkert, 1996; Chen and Yang, 2005):

KEit ¼ gepðEPitÞ1=2þ gesðESitÞ

1=2þ gepsðEPitÞ

1=2ðESitÞ

1=2.

(5)

Here we have three new parameters, gep, ges and geps,related to environmental factors. As regards environmentalspillovers, we can consider ges as ‘‘direct effect’’ while gepsreflects an ‘‘indirect effect’’ (moderation effect) on productiv-ity (Chen and Yang, 2005).

To implement the estimation, taking logs of Eq. (4) andsubstituting for KEit from Eq. (5) we obtain the followingform3:

yit ¼ aþ ltþ acit þ blit þ gcpðEPitÞ1=2

þ gepsðEPitÞ1=2ðESitÞ

1=2þ �it. ð6Þ

Here cit and lit represent the natural logarithms of Cit andLit, respectively.

On exploring the relationship between environmentalknowledge and productivity growth, we allow for theexistence of individual effects, which are potentiallycorrelated with the right-hand side regressors. The errorterm may be decomposed as

�it ¼ mi þ xit, (7)

where mi stands for the firm (time-invariant) specific effectthat accounts for the possible heterogeneity across firms(for example, in their technological efficiency), whereas xit

is a white noise error term and reflects temporary effectswith finite moments, and in particular: E(xit) ¼ E(xitxjs) ¼0 for t 6¼ s and i 6¼ j.

In this way, the possibility of existing individual effects(mi), whether fixed or random, can be considered in theeconometric analysis of panel data. The suitability ofdealing with these effects as fixed or as random depends ontheir correlation or not with the explanatory variables. If

3Nevertheless, the variables of environmental knowledge are not taken

in logarithms and this specification does not lend itself to the constraint of

constant returns to scale (Chen and Yang, 2005).

the mi presents the above-mentioned correlation, the OLS(ordinary least squares) estimator is inconsistent and theWG (within group) estimator should be considered; in sucha case, the mi constitutes a whole of additional coefficients(within group) in the model. If the mi represents a randomvariable (independent of explanatory variables) the OLSestimator would be consistent but inefficient because theerror term is not white noise, and the GLS (generalizedleast squares) estimator should be suitable.Another important issue is that the estimations of

production function are often affected by biases due bothto simultaneity and to measurement errors in the inputs. Inorder to get the robust estimation of standard errors wecan use the ‘‘long-difference’’ approach developed byGriliches and Hausman (1986).4 This consists of regressingthe log difference of firm’s output between the starting andending period of the ‘‘long’’ log difference in levels ofcapital input, labour input, and environmental knowledgevariables. This will be applied in each estimation method.In a second-stage, it is worth here estimating the

individual fixed effect to determine the incidence on theefficiency of each firm (especially the impact of environ-mental variables).To this end, we can consider a linear estimation method

of mi (Novales, 1996):

mi ¼ ½s2m=ðTs2m þ s2� Þ� � 1T ðyi � X ibÞ, (8)

where T is the sample period number (t ¼ 1, y, T), 1’T is acolumn vector (inverse) constituted by T ones, Xi is theexplanatory variable vector and b represents the parametervector estimated. This estimation can be interpreted as aresidual proportion of GLS assigned to mi and determinedby the relative variances sm

2 and se2 (whose values are

given through GLS and WG estimations).When the mi estimations are obtained, they may be used

as technical efficiency measures (TE) making the followingnormalisation in which TE of firm i is bounded in the [0,1]interval:

TEi ¼ expðmi �maxmjÞ (9)

where max mj is the maximum sample of the estimated fixedeffects, and m2 is the estimated fixed effect of firm i. Inorder to determine the impact of different inputs con-sidered, we suggest a linear model as follows5:

TEi ¼ y0 þ y1ci þ y2li þ y3ðEPiÞ1=2

þ y4ðESiÞ1=2þ y5ðEPÞ1=2ðESiÞ

1=2þ vi, ð10Þ

effects. An appropriate extension related to TE would be to consider other

exogenous variables that determine the (in)efficiency of the firm, which can

be considered in a first-stage approach (e.g. Battese and Coelli, 1995) or in

a second-stage approach (e.g. Sickles, 2005).

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Table 1

Descriptive statistics of variables

E. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–15611558

where ci, li, EPi and ESi are the firm means (i ¼ 1,...56) inthe analysed period.6

Variables Mean Standard

deviation

Minimum Maximum

ln VA 3.26 4.08 0.97 5.22

ln C 5.81 8.23 2.13 11.39

ln L 7.39 5.64 3.05 9.82

(ES)1/2 25.02 41.29 11.52 63.96

(EP)1/2 179.21 92.16 113.04 204.07

(EP)1/2(ES)1/2 4572.70 1527.03 2858.13 5382.11

Number of observations ¼ 448. The variables in levels are measured in

thousands of euros, except hours worked (L).

4.3. Variables specification

In Eq. (6) the dependent variable, y, denotes a valueadded (VA) as firm’s output.7 This has been obtained fromthe gross value added (value of sales minus purchases,mainly the farmers’ production and packaging materials).The VA has been corrected for inflation using the outputdeflator constructed from the sector data contained in theNational Accounts of Spain (base year 1995).

The capital stock, C, is a constructed estimate ofequipment and plant, also adjusted for inflation. Thelabour input, L, is calculated from the total hours workedin each year.8 In this case we have considered the existenceof workers specialized in environmental management(technicians, engineers, etc.) of the firms analysed. In orderto avoid excess environmental investment elasticity (aspointed out by Mairesse and Hall, 1996, regarding R&Delasticity) we have corrected the labour measure.

To construct the variable EP, we can consider theaccumulative effect on the value added, as is usual forR&D expenditures. Following this methodology, the EP asstock for period t, is obtained from the annual expenditureon environmental practices in the period t plus theaccumulative expenditure up to period t�1, applying adeflator (Z): EPit ¼ AEPit+(1 � Z) EPi(t�1).

This can be developed as follows (Hall and Mairesse,1995):

EPi1 ¼ AEPi0 þ ð1� ZÞAEPið�1Þ

þ ð1� ZÞ2AEPið�2Þ þ . . . ¼ AEPil=ðgi þ ZÞ, ð11Þ

where g represents the growth rate of environmentalexpenditure. As regards the deflator, Z, assuming that thedepreciation may be different in comparison with tradi-tional R&D capital, we opt to follow recent works onenvironmental input in Spanish firms (Garces and Galve,2001) who apply a deflator of 10%, considering two laggedyears.

In constructing the environmental spillover, ES, weadopt a similar method to EP, measuring the investmentsin environmental practices by Andalusian horticultural

6In this Eq. (10) we assume that ni � IN (0,sn2) and the regression

function of the estimated firm’s individual effects (time-invariant),mi , as

well as the TEi, are linear in the means of all the characteristics in the

inputs of production function (cross-section of firms), although they are

independent of their time-variant inputs (i.e. for all i and t), relaxing the

possible endogeneity problem (Novales, 1996). These assumptions can be

considered reasonable especially when WG panel data estimators are used,

as the correlation of the inputs with error term is corrected by demeaning

all explanatory variables (e.g. Garces and Galve, 2001).7We use the value added as dependant variable, as a better indicator of

the environmental quality incorporated to the final product (Tyteca et al.,

2002).8We opt for this measure due to the important seasonality in the number

of employees in this sector, especially in handling workers.

firms other than firm i in this sector, as follows:ESit ¼ SJ

j ¼ 1 EPjt 8 j 6¼ i.

5. Estimation and results

Descriptive statistics are shown in Table 1.The OLS, WG and GLS regressions have been

previously estimated in order to select the most suitableestimation. The econometric programme used is Limdep

(vs. 7.0); several groups of firms have been made by thisprogramme for WG estimator, selecting a model with fivegroups (based on F and likelihood ratio tests) which show amore homogeneous behaviour in the sample of firms. WG(R2-adjusted ¼ 0.857) performs the estimation better thanOLS (R2-adjusted ¼ 0.693) and GLS (R2-adjusted ¼ 0.649)estimations.9 Taking as reference the Breusch-Pagan testwe have to assume the existence of firm’s individualeffects,10 and considering the value of Lagrange multiplierratio (Lagrange multiplier ¼ 118.45; p ¼ 0.000) these canrepresent a relevant differentiation across sample. Hauss-man test (chi-square ¼ 19.24; p ¼ 0.0028) supports thehypothesis that these effects are firm’s fixed effects. Wetherefore focus on the results of WG estimators.Table 2 shows WG estimation of three models. Model 1

excludes the spillovers variables; Model 2 excludes theinteraction term (moderation effect), and Model 3 includesall regressors.Results suggest the physical capital (C) has a positive

impact on the value added, although the result (0.227) israther low compared to other analyses in the Spanish orinternational context.11 This coefficient is certainly higherfor the OLS and GLS estimations, so it indicates that partof the capital variable impact may be reflected in the firm’sindividual effects, mi, in the WG estimation.

9These results are available upon request.10Despite the mentioned homogeneity in firm size and performance in

the sample, the results reveal that there are possible differences in the

corporate culture, the know-how, technological opportunity or other

factors, particularly efficiency, which affect input use specificity.11In analyses of industrial sector from different countries (USA, France,

Japan...), this parameter is about 0.3 (Mairesse and Hall, 1996; Wakelin,

2001, among others). In the case of Spain, for instance, Raymond (1989)

obtains an elasticity of 0.389, on consolidate data in the country economy.

ARTICLE IN PRESS

Table 2

Within group (WG) estimations (dependant variable: ln VA)

Estimation Model 1 Model 2 Model 3

ln C 0.364***(4.012) 0.285*** (3.216) 0.227***(2.451)

ln L 0.071** 1.863) 0.064** (1.951) 0.058* (1.749)

(EP)1/2 0.127*** (2.619) 0.103*** (2.711) 0.099***(2.538)

(ES)1/2 – 0.087** (1.965) 0.083** (1.892)

(EP)1/2(ES)1/2 – – 0.071** (1.795)

R2 (adjusted) 0.736 0.794 0.857

D R2 – 0.058 0.063

F-test for D R2 – 4.021** 5.862***

Observations 448 448 448

Notes: t-tests are reported in parentheses. *** Significant at 1%;**

significant at 5%; * significant at 10%. All the regressions are carried out

including the dummy temporal variables, from 1996 to 2002 (the omitted

variable corresponds to 1995).

Table 3

Technical efficiency regressions (dependant variable: TEi)

Explanatory variables Model 4 Model 5 Model 6

Constant 2.306***(7.219) 1.825***(6.381) 1.178***(5.206)

ln C 0.205*** (3.026) 0.134*** (2.822) 0.119*** (2.614)

ln L 0.050*(1.753) 0.049*(1.740) 0.025(0.851)

(EP)1/2 0.081***(2.708) 0.051**(2.208) 0.062***(2.570)

(ES)1/2 – 0.035**(1.912) 0.033**(1.847)

(EP)1/2(ES)1/2 – – 0.029*(1.651)

R2 (adjusted) 0.527 0.609 0.648

DR2 – 0.082 0.039

F-test for D R2 – 4.319** 2.925*

Observations 56 56 56

Notes: t-tests are reported in parentheses. *** Significant at 1%; **

significant at 5%; * significant at 10%.

E. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–1561 1559

The labour coefficient is positive and significant, but theparameters (in the three estimations) also reflect less impactthan the referenced studies. This is probably due to theadjustment made to avoid simultaneity (in hours worked)with the environmental performance variable.

A significant (po0.01) positive relationship is observedbetween value added and firm’s environmental investment,supporting Hypothesis 1. Consistently with Hypothesis 2,spillover effects increase (po0.05) firm value added. Theestimated relationship between the interaction term andproductivity is significant (po0.05) and positive (Model 3).Additionally, the increase in R2 from models 2 to 3 is highlysignificant (po0.01). These results support Hypothesis 3.

To determine the environmental variables incidence onthe efficiency of each firm, the individual fixed effect isestimated. Thus, the normalized technical efficiencies havebeen estimated (Eq. (9)). Results of regression are shown inTable 3.

The results show that physical capital (C) is positivelyrelated to individual efficiency (po0.01). In a relative sense,the estimated parameter value may complement the oneobtained previously (model 3). If we consider the sum ofboth, 0.356 (as the addition of the temporal variability andthe individual fixed effect obtained with models 3 and 6),this value is similar to that obtained in previous studies(e.g. Wakelin, 2001). The coefficient of labour variable (L)is positive but not significant in model 6.

Regarding environmental variables, the EP variable hasa positive and significant impact on managerial efficiencyconsidering the three models (4,5, and 6), although thisimpact is less than the effect on productivity obtainedpreviously. The whole impact (temporal variability andfirm’s fixed effect) reaches a value of 0.153, considering thecomplete models 3 and 6. This value can be consideredrelatively high in comparison with other related studies,but this may be associated with the horticultural firms’adaptation to new environmental requirements.

The environmental spillover variables indicate that thereis a positive and significant spillover direct effect (ES),improving the estimation’s efficiency (from models 4 to 5).

These results support Hypothesis 2. The estimations ofmodel 6 indicate that the inclusion of the interaction effectalso improve the coefficient of determination, although theimpact (in terms of parameter significance) is relatively lowin comparison with productivity estimations. Thus, we candeduce that the moderation effect of environmental spil-lover has more impact on value added (productivity) thanon individual efficiency, which can be partially affectedwhen a greater intensification of environmental expendi-ture takes place in the sector. These results supportHypothesis 3.

6. Discussion and conclusions

In this paper the concept of spillover effects is applied toassess the ability of investment in environmental practicesto influence horticultural firms performance.Our results show that the stock of a firm’s investments in

environmental practices is positively related to its perfor-mance (value added), supporting studies on the same issuein other industries (Klassen and Whybark, 1999; Russoand Fouts, 1997) and in the agricultural industry inparticular (Nijkamp and Vindigni, 2002; Shrivastava,1994). They also confirm that total industry investment inenvironmental practices in the region is positively related toan individual firm’s performance, obtaining empiricalevidence of the influence of spillover effects on competi-tiveness. Finally, empirical evidence has also been obtainedshowing the total investment in the sector on environ-mental practices has a slight but significant moderatingeffect on the relationship between firm-level investment inenvironmental practices and performance.The findings about the role of spillover effects within the

industry, and therefore outside the company, in generatingcompetitive advantages based on environmental capabil-ities has major implications for future research both in thefield of environmental management strategy (e.g. Aragon-Correa and Sharma, 2003), and for the study of industryagglomerations and geographical clusters (e.g. Maskell,2001).

ARTICLE IN PRESSE. Galdeano-Gomez et al. / Journal of Environmental Management 88 (2008) 1552–15611560

By providing evidence on a business sector which hastraditionally been afforded a secondary role in studies onenvironmental management, the present study shows thatthe development of strategic capabilities associate withenvironmental management is not exclusive to large-scaleindustrial companies. Horticultural companies character-ized by, among other factors, their relatively small size andlittle experience of applying environmental practices canalso generate green competitive advantages. These advan-tages are favoured by the inclusion of companies within aregional network, via which knowledge of the most suitableenvironmental practices can be diffused.

There are some limitations of this study, which mayencourage further work. One of these is its focus on a singleindustry in a given geographical area, which affects thegeneralizability of the findings. Although other researchworks have studied the dissemination of innovationcapabilities by the spillover effects in different industries(Almeida and Kogut, 1999; Audretsch and Feldman,1996), researches should interpret these results with carewhen extrapolating them to other organizational contexts,with different levels of uncertainty and different regulatory,competitive and technological conditions.

The intense consumption of natural resources by mosthorticultural firms affects their ability to generate valueand to develop environmental resources through theimplementation of environmental practices. For instance,most firms in this sample are high consumers of water,which is at a premium in the region (Downward andTaylor, 2007). Therefore, there are good opportunities toimprove organizational efficiency through reductions inconsumption of natural resources. We argue that deployingenvironmental protection measures in these highly inten-sive agricultural firms may produce greater benefits thanthose obtained by traditional agricultural firms (Cespedesand Galdeano, 2004). Horticultural firms are as yet recentadopters of environmental protection practices. Thus, firmsin our sample that deploy environmental managementpractices may be regarded as proactive and first movers inenvironmental issues.

As well as the possibility to obtain competitive advan-tages from the increase in environmental investment, otherconclusions on management practices can be drawn fromthe present work. In particular, the effect of industrialagglomeration should be borne in mind by managers whentaking decisions on location. This is especially true in theseindustries in which environmental proactivity is related tothe generation of sustainable competitive advantages. Ourresults show that spillover effects moderate the relationshipbetween investment in environmental practices and perfor-mance in horticultural firms. The profitability of investingin this type of capabilities will therefore depend on thelocation of said investment among other factors. Forpublic administrations, this article suggests the importanceof encouraging environmental awareness (Tallman et al.,2004) and resources and competitive capabilities on a localor regional level. It also highlights the importance of

encouraging spillovers effects by means of tools such ascontact networks (e.g. McEvily and Zaheer, 1999; McEvilyand Marcus, 2005), business associations (McEvily andZaheer, 1999), the transfer of qualified staff amongorganizations (Almeida and Kogut, 1999), or the compa-nies’ capacity to imitate (Maskell and Malmberg, 1999;Maskell, 2001).

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