jacqueline lam, peter hills and richard welford...106 j. lam, p. hills and r. welford the...

Int. J. Innovation and Sustainable Development, Vol. 1, Nos. 1/2, 2005 103

Copyright © 2005 Inderscience Enterprises Ltd.

Ecological modernisation, environmental innovation and competitiveness: the case of public transport in Hong Kong

Jacqueline Lam,* Peter Hills and Richard Welford Corporate Environmental Governance Programme, The Centre of Urban Planning and Environmental Management, The University of Hong Kong, Pokfulam Road, Hong Kong SAR, China E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] *Corresponding author

Abstract: This paper focuses on the role of environmental innovation in the context of the development of ecological modernisation theory and as a driver for firms to gain competitive advantage in the market. While ecological modernisation theory offers a variety of theoretical and prescriptive viewpoints on the mechanisms through which modern societies respond to the environmental risks of industrialism, only limited attention has been given to issues of technological innovation and their implications for company competitiveness. Using the public transport sector in Hong Kong as a case study, this paper explores how transport operators have deployed environmental innovation as a means of enhancing their competitive position in the market thereby helping also to address significant local environmental concerns.

Keywords: environmental innovation; ecological modernisation; competitiveness; transport.

Reference to this paper should be made as follows: Lam, J., Hills, P. and Welford, R. (2005) ‘Ecological modernisation, environmental innovation and competitiveness: the case of public transport in Hong Kong’, Int. J. Innovation and Sustainable Development, Vol. 1, Nos. 1/2, pp.103–126.

Biographical notes: Jacqueline Lam is a PhD candidate at the Centre of Urban Planning and Environmental Management, the University of Hong Kong. She holds a MSc degree in Environmental Management from the same university. Her research interests include industrial transformation, ecological modernisation and environmental innovation. Her current research focuses on the strategies and policies for promoting environmental innovation in public transport industry in Hong Kong.

Peter Hills is Professor and Director of the Centre of Urban Planning and Environmental Management at the University of Hong Kong. He holds degrees from the University of London, York University (Toronto) and the University of Aston in Birmingham. He has acted as a consultant to international agencies including the UNDP, ILO and the Asian Development Bank. His major research and teaching interests relate to environmental policy, sustainability

104 J. Lam, P. Hills and R. Welford

studies and corporate environmental governance. He has published extensively in the fields of environmental policy, ecological modernisation and energy policy and planning.

Richard Welford is Director of the Corporate Environmental Governance Programme at the University of Hong Kong. He was formerly Professor of Corporate Environmental Management at the University of Huddersfield and Professor of Sustainable Management at the Norwegian School of Management. He has considerable expertise of international business and has lived in both Europe and Asia. He has worked for the Samsung Corporation in Korea and carried out research for the UN in South-East Asia. He currently advises the Swire Group and Cathay Pacific and has worked as a consultant to the MTR Corporation in Hong Kong.

1 Introduction

Ecological modernisation theory (EMT) offers a framework through which to explore and explain the manner in which societies address the ecological risks surrounding industrialism (Hajer, 1995; Lash et al., 1996; Mol and Sonnenfeld, 2000). It provides a variety of theoretical and prescriptive propositions through which to analyse emergent policy discourses as well as policy options for the transformation of modern industrial societies to enable them to better manage these risks (Gouldson et al., under review). Central to the concept of ecological modernisation (EM) is the idea of transformation – technical, social and institutional – and the EM project has been described as an attempt to ‘… formulate more general explanations of current transformations of environmental practices, discourses and institutions’ (Mol and Sonnenfeld, 2000, p.3).

The technical prescriptions embodied in EMT and their potential and actual outcomes have been extensively explored in the literature (see, for example, Jänicke et al., 1989; Simonis, 1989; Sonnenfeld, 2000). Processes of environmental reform reflecting transformations in the technological, social and institutional spheres are assumed to act as drivers that create a favourable and supportive context within which such prescriptions can be identified and deployed. Central to these processes is the concept of environmental innovation (Van Vliet, 2003) although much of the literature appears implicitly to treat innovation as an exogenous factor. Thus, while normative prescriptions as to what industrial systems need to do to embrace EM are frequently offered, these are often unsupported by evidence demonstrating why and how companies and organisations innovate. Clearly, it is not only necessary for technical solutions to be available but also the social and institutional transformations of the economic and regulatory institutions with which EMT also engages are essential to enhance innovation capabilities and to create an incentivised environment which makes technological innovation both possible and desirable (Kemp, 1997, 1999).

Without challenging or disrupting modes of capitalistic production and consumption, the EM model provides a starting point for business to actively engage in more radical environmental initiatives that extend beyond passive regulatory compliance. Furthermore, the development and adoption of new environmental technologies and innovations offer an opportunity to enhance business reputation and generate added value to services/products (Porter and van der Linde, 1995a).

Ecological modernisation, environmental innovation and competitiveness 105

This paper explores some of these issues surrounding technological innovation within the framework of EMT but seeks to extend the discussion to incorporate explicit consideration of the motives, or drivers, for technological innovation within companies, both large and small. It does so in the context of a case study of the public transport sector in Hong Kong. As in all major cities, transport plays a critical role in Hong Kong, not only as a key economic sector but also as a major source of pollution which impacts negatively on environmental quality. In recent years, a number of environmental innovations have been introduced into various subsectors of the local public transport system. Some have been driven and facilitated by new environmental policy initiatives from government while others have been adopted by companies themselves in what we argue is an attempt to enhance their competitive position by moving beyond basic environmental compliance requirements.

The discussion is structured in the following way. Firstly, we overview the main elements of EMT and link this with observations regarding the nature of competitiveness and how this might be reinforced and enhanced by the adoption of environmental innovations. We then move on discuss the context for our case study, examining some of the principal features of Hong Kong, its environmental situation and the role of public transport in the city. We then present the findings of a case study which investigates drivers for environmental innovation among public transport operators as well as the barriers that inhibit the adoption of innovations, particularly among smaller operators. Finally, we draw conclusions on our theoretical discussion of the linkages between EMT and competitiveness and practical lessons that can be learned from environmental innovation in the public transport sector in Hong Kong.

2 Conceptual background: ecological modernisation and environmental innovation

Emerging in Western Europe in the 1980s, EMT represents a body of social theory that focuses on relations between the environment, modes of production and consumption, institutional structures and social actors. Unlike counter-productivity theories or demodernisation theses, EM basically argues that the most effective and appropriate way to address the ecological crisis is through a constant and continuing process of technical, institutional and social transformation within the framework of the existing capitalist system (Cohen, 1997; Gouldson and Murphy, 1997; Mol, 2001; Mol and Sonnenfeld, 2000). As Hunold and Dryzek (2001, pp.3–4) observe:

“[The] idea is to solve environmental problems by making capitalism less wasteful and thus more sustainable, while retaining the basic system of capitalist production and consumption. The approach to environmental problems is therefore efficiency-oriented.”

EMT embodies two key propositions. Firstly, the environment has been emancipated from the economic sphere. That is, ecological rationality is no longer subordinate to economic imperatives. It has become an independent domain having an equal status (Mol, 1996). Secondly, the environmental movement has become a major political force. Environmental interests and concerns have been demarginalised and have become instead a mainstream movement. As Mol (1996, p.311) argues: “… [EM] emphasizes and analyzes the emerging active and reflexive redesign of central institutions of modernity, on the basis of environmental criteria”.


The recognition of the fundamental importance of the ecological dimension is seen as a logical, necessary and inevitable stage in the development of the industrialism and capitalism, with technology and technological innovations acting as drivers for socio-ecological change (Spaargaren and Mol, 1993). Environmental innovation serves as a mechanism to bring about ecological restructuring through the transformation of production and consumption processes. Environment and economic growth are no longer counter-positioned because as Porter and van der Linde (1995b) argue, environmental innovation can result in the more efficient use of resources and add value to products thereby helping industries and businesses to become more profitable and competitive.

The technical and operational dimensions of EM have been discussed extensively in the literature (Gouldson and Murphy, 1997; Jänicke et al., 1989; Simonis, 1989; Sonnenfeld, 2000). EM is associated with a reliance on clean technology, recycling and renewable resources. Sonnenfeld (2000) distinguishes between immediate and long-term objectives of EM, with the former including waste reduction and elimination, resource recovery and reuse and dematerialisation and the latter resource conservation and clean production. Gouldson and Murphy (1997) argue that the primary objective of EM is to reduce the rate of environmental damage caused per unit of output thereby increasing the environmental efficiency of the economy.

Mol and Sonnenfeld (2000) identify five principal themes that reflect the core of EM research:

1 the changing role of science and technology, which are seen not only as contributors to the ecological crisis but also as offering solutions to it

2 the role of market dynamics and economic agents in ecological restructuring and reform processes

3 the changing role of the state, the emergence of supranational institutions and the move away from command-and-control regulation to decentralised, flexible and consensual governance modes

4 the changing role and importance of social movements that are no longer marginalised but which are increasingly involved in public and private decision-making on environmental reform

5 the emergence of new ideologies and changes in discursive practices, which reject the neglect of the environment or counter-positioning of economic and environmental interests.

These thematic strands in EM research, while undoubtedly reflected in the literature, do nonetheless obscure the inherent diversity of the interpretations and theorisations associated with the term (Hills et al., 2003). Christoff (1996) argues that the usefulness of EM as a concept is blurred by competing definitions. He offers the concept of a continuum from weak to strong EM with the position of various interpretations along this continuum reflecting “… their likely efficacy in promoting enduring ecologically sustainable transformations and outcomes across a range of issues and institutions” (Christoff, 1996, p.490). Weak EM is economistic, technological and instrumental. It addresses issues at the national level and is unitary or hegemonic in character. It is also technocratic and closed. Strong EM, in contrast, is ecological in emphasis, systemic and


institutional. It is communicative, deliberative and democratic and also possesses an international orientation with an emphasis on diversification.

Environmental innovation is central to the theory of EM. The technological dimension of environmental innovation has been considered as the key driver creating changes in production (and consumption) processes for the realisation of EM (Huber, 1982, 1985; Gouldson and Murphy, 1998; Mol and Sonnenfeld, 2000; Murphy and Gouldson, 2000). Only recently has the EM literature started to address social and institutional innovations (Freier, 2000; Kuntze et al., 1998; Murphy, 2001; Sprenger et al., 1999). Institutional innovation is defined here as new norms and behaviour which private or public institutions adopt to stimulate technological, social and institutional environmental innovation during processes of ecological restructuring. As Sprenger et al. (1999) observe, institutional innovation represents “… [the] emergence and creation of new rules which use incentives or obstacles to stimulate more technological, social, or even further institutional environmental innovation by social actors, including economic subjects”. Institutional innovation may also include changes in property rights and market structures which take into account the true costs of environmental entities such as air, water and land (Klemmer, 1999 cited in Freier, 2000).

Murphy and Gouldson (2000, p.35) define innovation as “the search for and discovery, experimentation, development, imitation and adoption of new products, new processes and new organizational set-ups”. Environmental innovation produces transformations of practices and cultures in institutions and societies, as well as improvements in economic and environmental performance (Freier, 2000). Institutional transformation relates to the reflexivity of social institutions, such as government and industry, in response to environmental problems. EM is predicated on the transformation of institutions of modernity, both public and private. One of the goals of transformation is to overcome the environmental crisis through institutional change. In other words, industrial transformation has occurred as a result of reflexivity and the reorganisation of industrial society in its attempt to overcome the ecological crisis (Mol, 1994, 1996; Mol, 2001; Spaargaren and Mol, 1993, cited in Murphy, 2000). An example of institutional transformation is the change that took place in the Dutch chemical industry in response to environmental pressures (Mol, 1995). On a theoretical note, Mol (1995) concluded that transformations in both economic institutions such as private industries, and non-economic institutions such as the state, and even science and technology, occur as a result of their adoption of characteristics which result in divergence from their productivity-oriented predecessors.

Discussions of environmental innovation often focus on the types of change that can effectively transform polluting industries into ones that are environmentally efficient as well as cost-efficient. Murphy and Gouldson (2000) distinguish between two types of innovation: radical and incremental, which differ in the types of changes involved. Radical innovation represents discontinuous change and the introduction of new technologies and techniques, whereas incremental innovation involves gradual improvement of existing technologies and techniques. Taking public transport in Hong Kong as an example, the introduction of LPG taxis and minibuses in Hong Kong is a radical innovation. The introduction of LPG technology for the taxi and minibus sector represents discontinuous change as the old diesel systems are phased out. New LPG fuelling infrastructure had to be set up to support the change and a new set of competencies and techniques are required for the maintenance of LPG engines.


As Murphy and Gouldson (2000) argue, while radical innovations often rely on incremental improvements for their success, incremental innovations must eventually encounter diminishing marginal returns as they encounter both economic and technical limits. Hence, the periodic introduction of radical or discontinuous change is a prerequisite for successful phases of incremental innovation. However, the introduction of a radical technology into one part of an existing production system requires far reaching adjustments to other parts of the system to ensure overall system compatibility. Radical innovation may therefore be an expensive and less attractive option to financially constrained and cost-sensitive businesses where consequently there is often a preference for incremental innovation (Gouldson and Murphy,1998; Murphy and Gouldson, 2000).

Environmental innovation can also be classified by the approach taken. On the one hand, we can use technologies at the source to tackle the causes of environmental problems. The aim here is to prevent the production of waste, pollution and/or degradation (i.e. a preventative approach). On the other hand, we can deal with the undesired environmental consequences of particular processes after pollution has occurred. In the latter case reactive measures are taken to mitigate pollution, waste and/or environmental degradation, for example, through the application of end-of-pipe technologies (IES, 1999).

In this paper, practices that take environmental consequences into account in the design process and control them at source are regarded as ‘preventative’. On the other hand, practices which are end-of-pipe measures to mitigate environmental impacts are considered as ‘reactive’.

Other factors also influence a company’s decision to adopt an environmental technology. These include its technological capabilities (Corral, 2002), the price and performance of different technological options, users’ knowledge about product characteristics and management’s perception of the risks related to uncertainties about the economic and financial consequences of adoption. Furthermore, regulatory pressures in the form of tighter environmental standards may also drive technology adoption in some cases (Kemp, 1997).

Enhanced competitiveness is central to many of the debates within the EM field, yet the issue is seldom addressed explicitly. Competition in terms of quality of product or service is not new. Traditional economic theory focuses on competition through the price mechanism. Schumpeterian theory, however, recognises that competition in capitalist systems is a more complex and dynamic process. Schumpeter (1942, p.84) argues that:

“… competition from the new commodity, the new technology, the new source of supply, the new type of organization, is one which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives”

Schumpeter maintains that this type of competition can expand output and bring down prices in the long run. The approach places greater emphasis on invention, innovation and technological progress to obtain price and quality advantage. Competitive behaviour other than price cutting, which includes improvements in the goods and services produced, are often decisive for the firm’s long-term success. Under Schumpeterian competition, environmental innovation potentially serves as an important means to improve the quality of products and services, enabling them to become more environmentally efficient.


Porter (1985) defines cost and quality advantage and explains how this can be achieved. Competitive advantage is defined as the value that a company holds to become an above average performer in the industry, by creating a product or service value to customers that is superior to its competitors. Superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic strategies for gaining competitive advantage. The first is cost leadership, and the second, differentiation. A firm seeks ways of differentiating its products and services by providing something unique which is valuable to its buyers/customers beyond simply offering a lower price (Porter 1986, p.120). Differentiation can, for example, be based on the product itself, the delivery system through which it is sold, or the marketing approach employed. While cost reduction is often regarded as a useful business competitive strategy, competition by means of differentiation is equally important.

We argue, therefore, that there is a need to give greater weight to the importance of different forms of competition within the overall framework of EMT. The notion of competition must also be explicitly linked with the adoption of environmental innovations by businesses for it is these innovations that are typically seen as a key driver in the process of EM.

We now move on to explore some of these issues at the interface between EMT, environmental innovation and competition in the context of a case study of public transport operators in Hong Kong.

3 Hong Kong: environment and transport

The Hong Kong SAR of the People’s Republic of China extends over an area of approximately 1100 km2 on the eastern side of the Pearl River estuary adjoining Guangdong Province in southern China. It has a population of 6.8 million people (end 2003). Formerly a British colony, the HKSAR was established on 1 July 1997 following the restoration of the territory’s sovereignty and administration to China by the UK.

Although Hong Kong experienced a variety of economic difficulties following the onset of the Asian financial crisis in mid-1997, the economy has recovered strongly since late 2003. The territory remains one of the wealthiest economies in the world. In 2003, its per capita GDP stood at US$23,300 and was the second highest in Asia after Japan. It is essentially a trading economy with a strong external orientation (Government of the Hong Kong SAR, 2003). As various commentators observe, economic prosperity in Hong Kong has brought with it substantial environmental costs. These include serious air quality problems, widespread marine pollution, noise pollution, a serious solid waste disposal problem, and habitat loss and degradation (Barron and Steinbrecher, 1999; Welford et al., forthcoming).

Transport, and particularly local road transport, has long been recognised as a key influence on the quality of Hong Kong’s environment (Hung, 2001). There has been widespread and growing concern about declining air quality and the potential threat that it presents to Hong Kong’s objective of positioning itself as ‘Asia’s World City’ (Tung, 1999). Transport has also figured prominently in local debates surrounding sustainable development (Barron and Steinbrecher, 1999; Barron et al., 2002).


Road transport accounts for a substantial proportion of air pollutant emissions (in particular PM, NOx and CO) as well as a significant share of greenhouse gas emissions (Environmental Protection Department, 2004a).

One important characteristic of Hong Kong’s road transport fleet has been a heavy reliance on diesel-powered vehicles (Environmental Protection Department, 2004b). In 1999, it was estimated that diesel vehicles accounted for 30% of the total road vehicle fleet. The figures for the UK and the USA were far lower at 10% and 4%, respectively. Furthermore, diesel vehicles in Hong Kong accounted for some 70% of total vehicles kilometres travelled and 98% of particulates and 75% of nitrogen oxide emissions from vehicular sources. Diesel emissions, and particularly respirable suspended particulates, have become a significant public health concern (Kwok, 2000).

During the early- and mid-1990s, various attempts were made to tackle the problem of diesel vehicular emissions – primarily through a proposed diesel to petrol switching policy – but these enjoyed little success (Gouldson, et al., under review). This option was eventually dropped in 1996. Government then proceeded to focus its attention on various technical measures to control diesel emissions. These included the use of particulate traps on light diesel vehicles, trial studies of diesel catalysts on buses and heavy goods vehicles, the introduction of ultra-low sulphur diesel fuel, and, in 1997–98, a one-year trial of taxis fuelled by liquefied petroleum gas (LPG).

Prompted by a number of serious air pollution episodes in 1998–1999 and the negative local and international publicity surrounding them, in June 1999 the Government pressed ahead with a more aggressive programme to improve air quality in Hong Kong (Advisory Council on the Environment, 1999). The objective of the programme is to reduce particulate emissions from vehicles by 80% by the end of 2005, and nitrogen oxide emissions by 30%. Its principal elements include:

• adopting tighter fuel and vehicle emission standards

• adopting cleaner alternatives to diesel where practicable

• controlling emissions from the remaining diesels with devices that trap pollutants

• strengthening vehicle emission inspections and enforcement against smoky vehicles and

• promoting better vehicle maintenance and eco-driving habits.

To encourage rapid switching of the 18,000 diesel taxis to environmentally cleaner vehicles, the government provided a one-off grant of HK$40,000 for each diesel taxi replaced with one that uses LPG in a subsidy programme starting in August 2000. The programme was completed at the end of 2003. By then, almost all – about 99.8% – taxis had switched to LPG. LPG prices have also been capped, ensuring that taxi operating costs will be reduced by approximately HK$45,000 each year (Advisory Council on the Environment, 2000).

In August 2002, the government started to offer incentives to encourage the early replacement of the 6000 diesel public light buses with LPG or electric ones. Owners are being offered a one-off grant of HK$60,000 or HK$80,000 for each diesel public light


bus that is replaced with an LPG or electric one, respectively. For diesel private light buses, each replacement LPG vehicle is exempted from the first registration tax. Electric vehicles are already exempted from first registration tax. By the end of 2003, nearly 80% of newly registered public light buses were LPG fuelled.

From 1999 to the end of 2003, these and other measures (e.g. the use of catalytic converters or particulate traps on pre-Euro standard light diesel vehicles, the introduction of ultra-low sulphur diesel (ULSD) and the implementation of Euro III emission standards in January 2001) contributed to a 13% reduction in particulates and a 23% reduction in nitrogen oxides levels on the street (Environmental Protection Department, 2004b). While these improvements are significant, there remains concern that possible increases in the volume of road traffic predicted in major strategic studies such as the Third Comprehensive Transport Study (Transport Department, 1999) may result in a further deterioration in air quality by 2016. Clearly, Hong Kong has much ground to make-up if it has to move towards a more sustainable transport strategy.

Nonetheless, there is a case to be made in support of the development of such a strategy. Indeed, in some important respects, Hong Kong is well-placed to move towards such a strategy, at least insofar as passenger transport is concerned. The principal reason is that car ownership levels remain relatively low (Cullinane, 2003). Public transport accounts for over 70% of all motorised trips (Gilbert, 2003). In 2004, Hong Kong recorded an average of 11,185,000 public transport trips per day. The majority of the daily passenger trips occur by franchised bus (38.6%), railway (31.4%), public light bus (14.8%) and taxis (11.7%) (Transport Department, 2004). Thus, environmental initiatives and innovations in the public transport sector have an important role to play in the framing of any sustainable development strategy for Hong Kong.

The basic characteristics of the major public transport operators in Hong Kong are shown in Table 1. These include three major franchised public bus companies (Citybus, KMB and NWFB); two rail companies (KCRC and MTRC), public light buses including the regulated green minibuses and the non-regulated red minibuses, together with the licensed taxi fleets. Table 1 indicates that fuel consumption and repair and maintenance account for a significant share of the total operating costs (ranging from 10% to 30%). Therefore, technological improvements that target reductions in energy and material consumption and improve mechanical performance can enhance company profitability, bringing about environmental benefits and improving company competitiveness.

While major public transport operators in Hong Kong have demonstrated an ability and willingness to innovate both technically and institutionally, small and medium enterprise (SME) operators, such as taxis and public light buses, currently lack the capacity to support continuous innovation. Their innovative behaviour is essentially a reaction to government initiatives. The passivity may be attributable to a variety of financial, organisational and resource constraints. Financially, the adoption of green innovative practices often requires high investment costs over the short-term. However, the financial benefits tend to accrue over the longer term. Organisationally, management may hesitate to embrace innovation due to a lack of confidence and managerial capacity. The operational features of public transport SMEs are relatively inflexible and this can make it difficult to adapt to change within the existing operational system. Finally, limited access to resources such as technical information and technological expertise may also create resistance to environmental innovation.


Table 1 Statistical profile of public transport operators in Hong Kong


To achieve continuous environmental innovation, new policy instruments should aim to enhance the capability of companies to innovate. To promote the wider adoption of environmental innovations companies must acquire a new set of capabilities to overcome barriers and to adopt and manage innovative solutions, instead of simply passively meeting compliance requirements. Measures such as management training, building awareness of new environmental technologies and business–university partnerships may therefore become crucial (Jones and Tilley, 2003; Kemp, 1997).

To achieve sustainable transport, new policies which seek to motivate companies and enhance their capacities to move beyond compliance to develop and/or adopt innovative environmental measures are therefore critical. These policies, we argue, must also seek to ensure that companies ultimately benefit from engaging in these innovative and sustainable measures by deriving competitive advantage in transport markets.

4 Environmental innovation in the public transport sector in Hong Kong

In Hong Kong, the government has put in place a regulatory framework to avoid excessive and wasteful competition while ensuring quality transport services. The basic objective is to avoid excessive duplication of services by operators on particular routes and along key transport corridors (Transport Branch, 1990; Transport Bureau, 1999; Transport Department, 1999). Government regulates the provision of public transport services using a franchise and service licensing system. Environmental performance is now used as a criterion for bidding. This has motivated operators to different degrees to actively improve their environmental performance to maintain their existing franchises or service licenses and compete for new ones.

Government intervention therefore means that public transport does not function in a totally free market. Competition in the public transport sector can be broadly characterised in terms of competition in the market and competition for the market. The former refers to competition between modes, between groups of operators or between individual operators to compete for their relative share of transport services in the market. For example, there is some routing competition among CityBus and NWFB on Hong Kong Island, as well as some pricing and routing competition between buses and the MTRC in the urban areas. Competition for the market refers to the form of competition that takes place through competitive tendering for franchises to gain an exclusive right to serve individual routes or an entire network (Gwilliam, 1998). Competitors therefore have to engage in competitive bidding for franchises, operating rights, quantity licenses and quality licenses for the future market (Wan, 2003).

Under this regulatory framework, to qualify as a public transport service provider, public transport operators have to fulfil various performance requirements. These include meeting environmental obligations which now form part of the requirements for obtaining franchises, operating rights or service licenses. As routes and fares are determined in consultation with the Government’s Transport Department, operators cannot compete directly in terms of pricing and routing in the transport market. Rather, the ability to commit to and excel in quality service has become one of the essential requirements for the franchised bus and public light bus companies to secure market licenses. Unlike regulatory compliance, the evaluation is not about whether a specific standard is fulfilled. Rather, the authority compares the performance of the bidders. To outperform others, a bidder will not be satisfied with meeting minimum standards


because these may also be achieved by other competitors. As a result, the bidder may be encouraged to demonstrate a superior level of environmental performance. Competition for market licenses is therefore achieved by performance competition, including environmental performance. For instance, although there is no specific requirement for railway operators to meet environmental obligations – other than those existing under relevant environmental legislation (e.g. in relation to noise and the preparation of EIAs for new projects) – upgrading overall environmental performance is likely to enhance their performance portfolio and strengthen their position when bidding for new operating rights. In the case of franchised buses, performance competition is a fundamental element in tender competition, in particular for the allocation of new routes. In 2003, new franchise conditions were introduced requiring franchised bus companies to adopt commercially available improved environmental technologies in their new buses. Operators who adopt environmentally friendly measures will be better placed to secure the right to operate new bus route packages (ETWB, 2003).

Thus, within such a regulatory framework there are incentives for public transport operators to adopt environmental innovations. Environmental innovation has become a potential differentiation strategy for public transport companies to compete for market licenses (see Table 2). By adopting environmental innovations transport operators that can demonstrate a commitment to higher standards of environmental performance are able to differentiate their service quality and thereby improve their competitiveness.

A survey of transport operators conducted in 2003 (Lam, 2003) indicates that all rail companies, most public bus companies, 75% of public light bus companies and 40% of taxi companies strongly agree or agree that environmental innovation is an important differentiation strategy. It appears, therefore, that there are incentives to adopt environmental innovations as part of a service differentiation strategy. Furthermore, operators identify three main advantages associated with the adoption of such innovations: increased customer satisfaction, reductions in emissions and enhanced company reputation.

An interview (Lam, 2004) with a bus company representative revealed that the company was committed to provide an environmentally friendly service to enhance its professionalism and service quality, with the benefits of gaining customer satisfaction and an enhanced reputation. Its commitment to higher standards of environmental performance, for example, the eco-driveline, subsequently improved its environmental efficiency and helped the company to differentiate its service from its counterparts. Furthermore, investing in new environmental technologies has made the company more competitive. As the company representative observed:

“Many people asked, “Why do you want to be environmental-friendly?” Because we want to make the bus the passengers’ preferred mode of transport … 20 years ago, no one took pride in working in a bus company. No respect. No professionalism. But now we are proud of it. If you are a passenger, will you get on a polluting bus? It is difficult.”

“At the time when the 6-speed gearbox was introduced, the technology was new to the industry. We cooperated with a German supplier. We provided actual testing. It was deployed in different routes that have different speed requirements. The strength of “Eco Driveline” is that it can adapt to different speeds and is fuel-efficient. Our experience has been featured in journals. The experience resulted in a win–win situation in various parties, including suppliers, manufacturers, commuters, bus companies, etc.”


Table 2 Types of competition for the market and the potential to compete through environmental innovation measures


“If the issue is considered from a broader perspective, there is, in fact, no conflict in environmental technology and the bus business. For example, environmental technology may be more expensive. However, it often means better efficiency. In the long run, the company can gain more by investing in better technology.”

The MTRC is a major public transport operator that is widely regarded as reflecting best practice in many of its management and business approaches. The development of the new management and knowledge systems, as well as best environmental, social and other practices, have produced benefits in environmental efficiency, cost reductions, and improvements in corporate reputation that can be translated into improvements in quality, performance and competitiveness, and create potential sources of differentiation and competitive advantage (MTRC, 2004).

A corporation-wide environmental management system (EMS) has been established since 1997 and other environmental measures such as the introduction of regenerative braking technology introduced, resulting in improvements in various areas, including reductions in traction energy per train-kilometer, the percentage of wastes recycled and in oil recovery. These have resulted in improved environmental efficiency as well as cost reductions (MTRC, 2004).

A risk management approach has been adopted with special emphasis on corporate social responsibility, staff motivation and skill improvement, safety and environmental compliance. The objective is to manage more effectively social and environmental risks which may translate into business costs as well as improving corporate reputation and optimising stakeholder values (MTRC, 2004).

Table 3 indicates that various environmental innovations have been introduced in the public transport sector in Hong Kong. These range from technological products and processes to organisational and managerial innovations and include both ‘radical’ and ‘incremental’ transformations. The approaches adopted comprise both preventative and reactive measures.

The eco-initiatives that rail and franchised bus operators have introduced are more diversified in type than those employed by public light buses and taxis. Rail and bus companies work closely with vehicle manufacturers so that they can integrate improved environmental technology into vehicles at the design stage. Rail and bus companies have also placed greater emphasis on organisational innovation, for example, ISO14001 and staff training.

In contrast, small- or medium-sized light bus and taxi operators possess far more limited resources for environmental innovation. They are mostly passive recipients of technology provided by vehicle manufacturers and have little negotiating power. Their major concern is basic maintenance for day-to-day operations and regulatory compliance. Although we have seen some more radical changes in the light bus and taxi sectors in recent years, these operators have relied on the government to take the lead through new policy initiatives and the provision of financial subsidies to foster technological innovation. The shift from diesel to LPG-driven taxis and more recently, public light buses, has been accomplished primarily because of a fundamental change in environmental policy which has been reflected in government’s willingness to offer substantial subsidies to facilitate fuel switching. We have argued elsewhere (Gouldson et al., under review) that this is also an important manifestation of policy learning on the part of government itself and that this too should be seen as an important driver of EM.


Table 3 Major environmental innovation initiatives adopted by public transport operators


The response of taxi and public light bus operators is also indicative of the predicament facing SMEs in the transport sector, and indeed in other parts of the economy. Incentives to innovate are typically limited. Technical innovations may be adopted if conditions conducive to such change are created, as in the case of subsidised fuel switching. However, broader organisational innovations are more difficult to promote and sustain among SMEs.

The environmental innovations adopted by best practice companies including the railway corporations and the franchise bus companies are shown in Tables 4 and 5. With regard to the franchised bus sector, KMB has engaged with a wider range of technological, organisational and managerial innovations. CityBus has focused primarily on technological options. Similarly, the environmental innovations adopted by the MTRC are more extensive than those associated with the KCRC. The MTRC is widely regarded as one of the most environmentally proactive companies in Hong Kong and has endeavoured to embed awareness of sustainable development principles at the strategic level within its senior management. The Corporation produces an annual sustainability report which is widely seen as representing best practice in the field in Hong Kong. The perceived incentives governing the innovation decisions of these various major operators are shown in Table 6. These indicate that the adoption of environmental innovations is driven by a variety of internal factors, such as corporate values and corporate social responsibility, and external factors, such as corporate reputation and leadership, customer satisfaction and reductions in emissions level.

Environmental innovation can therefore help transport operators supply improved service quality for customers, in terms of cleaner and quieter commuting services. This superior value becomes the competitive advantage of the company. It has been argued above that best practice companies such as MTRC and KMB have adopted various environmental innovations to provide cleaner and less polluting public transport services. This helps them to differentiate their transport services from the competition thereby securing a competitive advantage (Porter, 1985). They can also be benefited from the provision of ‘greener’ services through the enhancement of the company’s reputation, which may further reinforce brand differentiation and strengthen their competitive position.

Ecological restructuring can rarely, if ever, be achieved by adopting a single environmental innovation. This may be particularly so with organisational and managerial innovations. Non-environmentally friendly practices and cultures cannot be changed overnight. Learning is necessary for a green culture and innovative practices to take root (Ulhoi, 2003, p.9)

“Learning is broadly about the refinement and development of new assumptions, beliefs and frames of reference that have a potential for changing behaviour thus leading to different consequences of this behaviour.”

It is necessary for companies to learn from both their own and others’ experiences and it is essential that learning does not take place only within the companies but also between the companies. It is also worthy to note that learning does not constrain itself merely to formal organisational settings such as organisations, but develops through various forms of networks (Ulhoi, 2003). Ecological restructuring, therefore, involves a process of continuous environmental transformation.


Table 4 Types of environmental innovation initiatives undertaken by the franchised bus sector


Table 5 Types of environmental innovation initiatives undertaken by the railway sector


Table 6 Incentives/drivers governing environmental innovation decisions in franchised buses and railway companies


How can such continuous transformations be promoted? Self-awareness and recognition of the potential benefits of being environmentally friendly are clearly significant factors. An example of this is the MTRC, whose engagement in environmental initiatives is driven by its own corporate values and a clear sense of corporate social responsibility. This is also evident among some of the franchised bus companies in Hong Kong. Transformations can also be promoted through conventional command-and-control policy initiatives for the environment. Companies must adopt innovative measures to comply with new regulatory requirements. However, this is often the least flexible and least cost-effective way of upgrading the environmental performance of companies. Companies face different financial and resource constraints and the cost of compliance varies from one to another. Another approach is to use an incentive-based policy. An example of this is the setting up of a regulatory system, as in Hong Kong, which uses environmental improvement as a criterion for access to the market and where, as a consequence, companies are motivated to improve their environmental performance in order to maintain or gain access to the market.

5 Conclusion: ecological modernisation, competitiveness and environmental innovation

We argue that EM and Schumpeterian principles of competition are compatible with each other. Environmental innovation potentially becomes a common objective for the realisation of EM and the pursuit of competitive advantage. Continuous environmental innovation helps businesses realise the goal of EM by improving resource productivity and environmental efficiency. At the same time, it can potentially serve as a differentiation strategy for companies, thereby yielding a competitive advantage. This will occur so long as the costs of differentiation are perceived as being lower than the benefits derived from improvements in environmental performance.

However, it also appears to us that the drive towards superior environmental performance which potentially is an aspect for quality competition tends to be constrained by management and customer barriers. To achieve the goal of EM, appropriate policy initiatives that encourage the adoption of environmental innovations as a differentiation strategy are required. Despite the potential long-term benefits of using environmental innovation as a driver for service differentiation, there is often considerable managerial inertia which impedes the adoption of such innovations. This is due to the very nature of environmental initiatives which often require significant financial outlays over the short-term while benefits are not enjoyed until later (Gouldson and Murphy, 1998). Furthermore, to many consumers, the benefits of environmental innovations and the improvements in environmental quality that they yield (e.g. reductions in emissions) are often less direct and more difficult to measure. This contrasts with more observable and measurable benefits offered by transport operators such as increased comfort and frequency and reliability of service. Thus, it is likely that companies seeking competitive advantage may tend to view environmental improvement as a less effective differentiation strategy as compared with other aspects of performance.

To motivate companies to improve their environmental performance in general, a policy that raises the priority of the environment among other factors of competition in their business is essential. The success in motivating Hong Kong’s franchised bus companies to engage in environment innovation is attributable to the fact that the


licensing system has reprioritised the environment as a competitive advantage within the business. Higher standards of environmental performance will also serve to increase the entry costs for new competitors and this reprioritisation of the environmental dimension also obliges operators to internalise at least some of the environmental costs associated with their operations.

The success of environmental innovation among some public transport operators in Hong Kong is in some respects unexpected. The key lies essentially in the integration of environment performance in transport market competition policy. The reprioritisation of the environment as a performance criterion in the allocation of business opportunities in the market also implies that greater emphasis should be placed on cooperative modes of environmental governance. Other facilitative and incentive-based policy instruments targeted at empowering the innovation capabilities of the businesses and reducing the costs associated with adopting environmental innovations are necessary to help transport operators overcome the financial, organisational and technical barriers to innovation.

Acknowledgements

The research on which this paper is based is funded in part by the Hong Kong Research Grants Council under grants No. HKU7202/02H and HKU7305/03H.

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