What are Business Incubators?
Business incubators are programs designed to accelerate the successful development of entrepreneurial companies through an array of business support resources and services, which are developed and orchestrated by both the incubator management and provided services (Business Incubators, 2010, Wikipedia). According to the National Business Incubators Association (NBIA), “Business incubation catalyzes the process of starting and growing companies, providing entrepreneurs with the expertise, networks, and tools they need to make their ventures successful” (Scaramuzzi, p. 4). Since the early 1980s, business incubators have played a significant role in improving declining communities within developed nations. For many developing countries, micro and small-scale enterprises account for the majority of firms that fuels economic growth. From a 2002 study, after two decades of stable growth, the U.S. business incubation industry has reached maturity and thus
“Created a total of 19,000 companies, 245,000 jobs, and numerous facilities with an average size of 16,000 square feet to host incubator operations. Furthermore, 75 percent of U.S. incubators are not-for-profit and 25 percent are for-profit, while 27 percent are academic-related. Most incubators in North America are located in urban or sub-urban areas, while 36 percent are located in rural areas. An estimated 87 percent of all firms that graduated from their incubators are still in business” (Scaramuzzi, p. 5).
Impressively, business incubators have a “failure rate below 10 percent over a three year period compare 60 to 80 percent for small business start-ups that are not enrolled in incubation” (Adegbite, p. 157). The intended purpose for business incubator programs is to diversify economies, commercialize technologies, create jobs, and generate wealth within the region.
Business Incubator Objectives
The concept behind business incubators is to assist entrepreneurs to develop their ideas from the first step of the business process to the final step (i.e. launch of the new enterprise). This kind of assistance provides small businesses with a comprehensive and integrated range of support services such as:
A. Incubator space in fully built-up factory buildings on flexible and affordable terms.
B. The provision of a comprehensive range of common services, including enterprise counseling and training, shared secretarial support, start up financing and assistance with product development and marketing.
C. Strict admission and exit rules, which are designed to ensure that the incubator concentrates its efforts on helping innovative, fast-growth business start-ups that are likely to have a significant impact on the local economy.
D. Professional management, which involves monitoring tenant businesses closely against their business plans, and ensuring that the incubator itself operates in a business-like fashion with the prospect of becoming financially self-sustaining.
E. “Hands on” assistance, including R&D advice and risk capital, usually through a network of external providers.
(Adegbite, p. 157-158)
In supporting entrepreneurs with a “one-stop” style service, which reduces overhead costs by sharing a facility, business incubators are able to significantly improve the survival and growth prospects of new start-up companies.
The majority of business incubators share a central work facility with an average of 20 to 25 start-up businesses enrolled in a 3 to 5 year business maturation program. In addition, a specialized team of advisors assist these businesses in financial advising, training, and provide a nurturing environment for tenant companies. The incubation programs have a “wide range of goals focused on economic development, generation of new jobs, marketing of research investments, property venture/real estate development, creating of entrepreneurship in transition economies, and development of export production” (Scaramuzzi, p. 5). Many of these incubators are sponsored by four different sources which are for-profit (companies), non-profit (public entities such as NGOs), universities, and governments from all levels (national, state, and local). The majority of incubators concentrate in technology and bio technology rather than social enterprises.
Strengths
One of the many other benefits about business incubators is that they speed up business development and quickly reduce uncertainty from the start. For an entrepreneur, “beating the clock means beating the competition…Successful incubators have understood this principle, and shelter entrepreneurs temporarily from outside tribulations so that they can focus on critical business building” (Carayannis and Von Zedtwitz, p. 105). Another benefit business incubators provide is that they promote innovation (R&D) and technology, which are important drivers of industrial success within a region. Business incubators can play a particularly
“important role as bridges and levers for the digital, economic, and knowledge divides around the world, allowing entrepreneurs to tap into markets and pools of expertise that may span the globe and also individuals that can add value from a remote location, to participate in such entrepreneurial ventures” (Carayannis and Von Zedtwitz, p. 106).
As a result, incubators are better suited for developing countries where it can help “bridge knowledge, digital, socio-political and even cultural divides and help increase the availability, awareness, accessibility and affordability of financial, human, intellectual, and even social capital which are the key ingredients of entrepreneurial success” (Caraynannis and Von Zedtwitz, p. 109).
For underdeveloped nations, incubators such as Global-local Real & Virtual Incubator Networks (G-RVIN) can assist entrepreneurs to unlock and capture extensive added value in leveraging human, intellectual, and social capital. What is most important is that G-RVIN can contribute greatly to promote sustainable development towards the knowledge economy and overall society. In G-RVIN, “universities are vital to promote learning and training activities while NGOs and associations of consumers have the potential of guiding both the private and financial sector in the offer of proper and adequate services and products” (Carayannis and Von Zedtwtiz, p. 107). Furthermore, the four elements that make G-RVIN effective are awareness, availability, accessibility, and affordability which promote economic development in both developed and developing countries. The strength in using G-RVIN is that it uses both telecommunications and information technology (IT) to allow less privileged populations to be mentored and educated by private and public sector centers in developed countries via distance learning. The G-RVIN is a “suitable instrument to support diverse sectors of the economy, providing a reliable and replicable framework to foster development and should trigger significant knowledge, market, and network spillover effects within and across regions” (Carayannis and Von Zedtwitz, p. 108). Therefore, this access lets local entrepreneurs to feel empowered to acquire knowledge and skills to allow them to become specialized workers within their own rite and trade.
BRAZIL
An example of a successful business incubator in a developing country is Brazil. It is estimated that micro and small enterprises “account for 98 percent of the existing companies, employ about 60 percent of the active population, and contribute to 21 percent of the Brazilian GDP” (Scaramuzzi, p. 13). However, 80 percent of such companies tend to go out of business before the end of their first year “due to bureaucratic and administrative barriers, and lack of management skills” (Scaramuzzi, p. 13). In response to the high first year failure rates, Brazil’s Ministry of Science and Technology implemented a program named the National Enterprise Incubation Support Program (PNI). The program’s aim was to foster the creation of new incubators, and the consolidation and expansion of existing ones. Furthermore, PNI’s support to make the incubators successful came from several main components such as “technical assistance for incubator management and clients, marketing, technology, legal, administrative, and training services such as strategic planning, management, marketing, project preparation and management” (Scaramuzzi, p. 14). Additionally, the majority of the incubators are tied to universities or research centers which are located in or near the facilities.
The average number of tenants operating within Brazil’s incubators is between 6 to 15 companies. Below is a cost description for tenant companies that are responsible to operate within the incubators:
“Monthly leases paid by tenant companies generally range from R$ [R$ represents Brazilian monetary currency ] 100 to 200. Only 19 percent of tenant companies pay more than R$ 300. Services provided by incubators in Brazil include business orientation, general assistance, shared facilities, financial consulting, legal consulting and information systems/technical facilities. Annual operational costs of incubators in most cases range from R$ 50,000 to R$ 150,000, but 32 percent of incubators have costs exceeding R$ 151,000. Tenant companies cover only 19 percent of operational costs, while the rest are covered by the managing incubator entity [56 percent] or other sources” (Scaramuzzi, p. 15-16).
The average incubation time for most Brazilian tenant companies is between two to three years. Additionally, the main sectors of activities working within the facilities are “software and IT at 27 percent, telecommunications at 21 percent, mechanic and automation services at 12 percent, Internet and e-commerce at 9 percent, food at 4 percent, and bio-technologies at 3 percent” (Scaramuzzi, p. 16). A 2001 study surveyed 392 graduated companies, which was conducted and sponsored by both the Ministry of Science and Technology and the Euvaldo Lodi Institute, “indicated that only 39 out of the 392 companies contacted had gone out of business and graduated companies directly created over 5,000 jobs” (Scaramuzzi, p. 16). Half of them had revenues “exceeding R$ 500,000 per year and employed in the average 15 people if operating in the service sector, and 20 people if operating in the industrial sector” (Scaramuzzi, p. 16).
Weaknesses
Unfortunately, countries with the greatest need for entrepreneurship are also the most underdeveloped. Many of the problems persisting within developing countries are a shortage of a skilled labor force, high mortality rates, poverty, and social unrest. These problems can affect the productivity of business incubators. However, once incubation operations are set in motion, other problems can occur. An example is Nigeria, where the government heavily invested in building industrial business incubators to promote indigenous entrepreneurship. The incubators allowed enterprises to reside within the facility for up to 3 to 5 years for their business to develop and operate independently once they reached maturity. However, a large number of the tenants residing in the incubators did not leave the facility once they completed incubation. Many occupants expressed their reluctance to leave due to the low rentals rates within the units, which is less than half of the open market prices, and the government’s failure to provide suitable alternative locations. Yet, the majority of the tenants operating within the facilities are political appointees, not genuine entrepreneurs.
Other existing problems within Nigeria’s business incubator program were that none of the incubators operated on a commercial basis (i.e. not self financing) but rather depended on the government for financial support. Many of the incubators were managed weakly and were run more or less as departments of the Nigerian Supervising Ministry with all the red-tape and bureaucratic ineptitude. The section below extensively discusses Nigeria’s needs assessment for their business incubators:
NIGERIA’S BUSINESS INCUBATORS NEEDS ASSESSMENT
I. Inadequacy of numbers: For a country as big as Nigeria, it is quite apparent that the seven existing incubators [Nigeria’s had four industrial business incubators (located at Yaba, Matori, Isolo, and Uwani) and three technology business incubator centers (located at Lagos, Kano, and Aba)] are completely inadequate to meet the needs of small and medium scale entrepreneurs. Consequently there is a pressing need to establish more incubators all over the country.
II. Post-incubator location and refusal of tenant firms to vacate premises: The main reason given by tenants for refusing to move out is the failure of government to provide suitable alternative locations. Whatever may be the reason, there is need to ensure that appropriate policies are put in place to ensure a periodic turnover of tenants in order to facilitate new intakes so that the program can have the desired multiplier effect.
III. Public ownership and lack of private sector participation: Given the high level of potential demand for incubator units and dwindling public revenue, a major need to be addressed is the issue of private sector participation in the establishment and/or management of the incubators.
IV. Non-viability of existing incubators: Part of the problem stems from poor project conception and implementation as well as a failure to address squarely all the issues relevant to the establishment and the operation of such incubators within the Nigerian socio-political setting. Some of these issues relate to land ownership and cost of acquisition, provision and cost of infrastructure, cost of capital and inaccessibility to institutional credit.
V. Weak management structures: It should be emphasized that the key to the success of any incubator is the manager who is charged with the responsibility for its day to day management. Rather than be a passive administrator of the incubator, the manager must play a dynamic and pro-active role to ensure its long-term success and viability.
VI. Lack of objectivity in tenant admission: More often than not, tenants are offered admission on the basis of political connections rather than on merit and the potential commercial success of projects to be incubated. In some instances, genuine entrepreneurs are denied admission in favor of speculators, political appointees and top government functionaries. For the future, to ensure periodic turnover of graduation tenants, there is need to streamline admission procedures.
VII. Inadequate support services to tenant firms: Even in the newly established technology incubator centers, the level of support services offered to tenants is very meager. In order to guarantee the success of enterprises locating in the incubators, an array of support services should be provided in the following areas
a. Enterprise counseling and monitoring
b. Management training and assistance
c. Financial assistance and seed capital funding
d. Technical assistance
e. Marketing and promotion of products
f. Linkage with large scale enterprises, research institutes, universities, etc.
VIII. Inconsistent government policy and poor funding of the of the incubator program: A major reason for the inadequate number of incubators in the country is the inconsistency in government policy over the years, leading to serious underfunding of the incubator program.
IX. Failure to set challenging, but attainable goals: Closely related to the above is the failure to set realistic and clearly defined objectives backed with the required commitment and clearly defined objectives backed with the required commitment and resources to assure success. Consequently, no spectacular results have been recorded in the incubator development program in Nigeria. To ensure the success of the business incubator program in future, there is need to set clearly defined objectives especially as to what is feasible and achievable (given limited resources) within a defined time period – say five to 10 years.
(Adegbite, p. 163-164)
Recommendations
For business incubators to achieve in bringing both economic growth and social prosperity, we need to learn from both Brazil’s successes and Nigeria’s struggles. Below is a list of recommendations intended for Nigeria’s business incubators that can be used as a point of reference for other aspiring countries interested in using such methods.
RECOMMENDATIONS FOR A SUCCESSFUL BUSINESS INCUBATOR
- Ownership and sponsorship: All three tiers of government (Federal, State, and Local) should be involved. The Federal Government should play the role of facilitator and be responsible for broad policy matters and operational guidelines. On the hand the State and Local Governments should be encouraged to own and sponsor the establishment of business incubators in collaboration with interested parties. In addition, the universities should be encouraged to establish business incubators centers especially targeted at commercialization of R&D results.
- Legal status: For incubators promoted by the private sector, these should be incorporated as limited liability companies, and should be profit making in order to guarantee an acceptable return on capital employed to justify the investment.
- Size of incubator centers: In order to reach a critical mass and have the desired impact, it is recommended that the incubators should be designed to accommodate between 20 and 50 tenants.
- Linkage with industrial estates: Where possible the incubator centers should be located near or within an industrial estate in order to minimize start up costs. The possibility of using abandoned factory buildings and warehouses in such estates should also be explored.
- Post incubation location: Plots of land in dedicated industrial estates should be set aside for allocation to graduating tenants from the incubators.
- Coordination with other Small Medium Enterprises (SME) support institutions: The activities of relevant government agencies such as Industrial Development Centers, Entrepreneurship Development Programs, Research Institutes, Development Finance Institutions, and etc. should be coordinated with the incubator development program in order to maximize results. Thus the business incubator centers should not be regarded as enclaves but rather as an integral part of the efforts being made for the development of small and medium enterprises.
- Management of incubators: Management should be from the private sector instead of the public sector. The key to success of the incubator center is the Incubator Manager who will be responsible for its day-to-day management, long term development and viability.
- Admission and exit of tenant firms: There should be well laid down criteria for admission of tenants, in order to maximize the economic benefits accruable from the establishment of such centers. Similarly, exit rules must be clearly spelt out in the tenancy agreement in order to facilitate a steady flow of tenants out of the centre at the end of the incubation period.
- Potential for self financing: Proposed incubator centers must have the potential for self-financing within five years of their establishment. Consequently the income and expenditure profiles of each proposed incubator center should be closely scrutinized in order to achieve this objective.
- Subsidization of rent and other facilities: This should only be for the first two to three years of admission into the center. Thereafter, market determined rates should apply in order to expose tenants to the realities of the market place.
- Cooperation with large scale firms: This should be encouraged in order to promote linkages and opportunities for sub-contracting between SMEs located within the center and large scale enterprises operating in the locality.
- Opportunity for outright purchase of incubator units: In view of the reluctance of a large number of tenants to move out of the incubator centers, arising partly out of the prohibitive cost of erecting factory building beyond the financial resources of SME entrepreneurs, consideration should be given to the option of outright purchase of incubator units by the tenants. This could be done under deferred payment arrangements. However, the selling price of the units should be close to market values in order to generate funds to build additional incubators units to meet the pressing needs of new SME start ups for factory space.
(Adegbite, p. 164-166)
Concerns
EDUCATION AND ICT INFRASTRUCTURE
For business incubators to function effectively, the governments within developing nations must overcome the numerous obstacles that can jeopardize the positive effectiveness within the incubation program. For developing countries to flourish in the global market, it is important that they invest their resources within its own population. Adam Smith considered human capital (the accumulation of training, education, and knowledge of workers) as an important foundation for the development of a strong national labor force. Smith argues
“Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise of that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit” (Smith, on-line).
Even though Brazil has been an example in having a successful business incubator program, this has not diminished the poverty that is widespread throughout the country due to the lack of investment towards their social infrastructure and unequal distribution of income.
Furthermore, education can also contribute in developing a country’s Information and Communications Technologies (ICT) infrastructure which successful business incubators are dependent on. However, many developing nations lack within this area thus creating a digital divide. The digital divide is the gap between those who have access to ICT and those who do not. Consequently, the digital divide harms developing nations from obtaining knowledge-based information that can benefit development and help them compete within the global markets. To close the gap within the digital divide, basic education is the fundamental solution for poor countries to develop. Hence, technology itself will not solve the social discrepancies within these societies. The internet is “not in itself an education, does not teach literacy, and requires highly-developed skills to access and interpret information” (Cullen, p. 312). Without adequate education, it would be hard for an individual to fully understand the dual capabilities of a computer and the use of the internet.
In having strong cognitive skills, an individual enhances their “ability to perform standard tasks and efficiently learn new tasks, receive and process new information, communicate and coordinate activities with one another, evaluate and adjust to changed circumstances, adopt new technologies, and bring new innovations in the production of technology” (Lau, Jamison, and Louat, p. 2). With a highly skilled population, nations can venture into research and development (R&D) to create new innovations and to improve the living conditions within their environment. The relationship between education and R&D is that
“Education relates to the development and adoption of new technology in several ways. A substantial proportion of both basic and applied research is carried out within educational institutions. Educated people are more likely to become innovators than people with less schooling. The non-monetary benefits of technological change include the availability of new materials, processes, products, and services, in particular information services, which, in turn, improve living conditions for all members of society” (Vila, p. 26).
Through R&D activities, it creates a demand for local engineers and scientists who better understand the issues affecting the region. As a result, developing countries such as India have built strong technological capabilities within the IT sector. Furthermore, local R&D can help create inexpensive products (i.e. computers, telephones, and internet access) for indigenous people to consume, thus creating a domestic market demand.
With the ability to conduct R&D, developing nations become less dependent on foreign assistance. Due to its policies and investments in education, local experts are capable to solve their country’s problems their own way. An example is how engineers from India began using digital phone lines to reach remote Indian villages:
“First, electromechanical switching was ill-suited to the Indian climate and to Indian conditions. With few available telephones, most lines were intensively used, and electromechanical equipment was much more likely than digital to malfunction from overuse. Electromechanical switches are also more vulnerable to dust and moisture. Second, the development of digital technology would help build native industries in electronics, software, and related fields. Moreover, India needed one piece of digital equipment that no other country manufactured, but one that many developing nations could use” (James, p. 36).
Education helped Indian engineers to create an innovative piece of digital equipment. As a result of social investment, India has become one of the fastest growing economic nations in the world. For the year 2006, India accounted for 1.2% of world trade where exports and imports were up by 16% and 18.06% from the previous year (Datt, Ruddar & Sundharam, p. 767). With a large number of young and educated people fluent in English, India has transformed into a major exporter of highly skilled workers within financial services, biotechnology, and software engineering. As a result, many foreign companies will recognize a population filled with high skill-workers and its estimated returns by investing and outsourcing their operations to that nation thus creating jobs and economic growth.
FUNDING
For business incubators to operate, funding plays a critical role. As previously mention, the majority of sponsors for business incubators come from the for-profit sector such as technology and bio-technology. On the other hand, very little funding goes to artisan/low-tech enterprises were the majority population in the developing world depend on to survive. With a global economic crisis, many companies are cutting back in their donations or not interested in investing into projects with no capital return. Consequently, this creates a dilemma due to the fact that without proper funding, future incubation projects will not commence, existing incubators will limit the numbers of tenets to be enrolled, or programs would cease operations, therefore closures of facilities. Financial sponsors must be made aware of the devastating effects it will have on growth within the developing world if incubator programs were ceased. It is important for incubator managers to understand the current dilemma but to remain proactive in finding alternative monetary sources.
Comparing Policy Options
Nonetheless, innovative development programs can still pave the way for future growth within impoverished countries. Some may view that business incubators are a better alternative than microloans but an argument can be made that that the two ideas can complement one another. Microloans, part of microfinance, are very small loans designed to spur entrepreneurship to individuals living in extreme poverty. These loans are provided to individuals who lack collateral, steady employment and a verifiable credit history, and minimal qualifications to gain access to traditional credit. However, business incubators have proven that it can advise, assist, and educate individuals in starting a successful business that will not fail within the first year. In regards to microloans, no type of business assistance is provided to the entrepreneur, which can put the startup enterprise in a position for failure within the first year. For this reason, it is important that business incubator managers are proactive to merge a meaningful relationship with micro-lending institutions, such as Grameen Bank, in creating programs to assist potential entrepreneurs to succeed in bringing growth into the developing world. However, more research is needed to look into alternative methods for development.
Conclusion
It is evident that business incubator programs can have a significant effect in bringing economic growth to the developing world. Yet, the most important part is that these programs can help contribute in providing a sense of hope for those living within the region. From both Brazil and Nigeria’s experience, in assisting small businesses to mature, they were able to create jobs and generate fresh capital. With a combination of effective policies, ethical and transparent governments, and business incentives, many developing countries can compete within the global economy and receive foreign private investments rather than foreign aid. As a result, the local population can experience an improvement in their quality of life due to the opportunities created by business incubators.
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