Business Incubators: Boost Economic Growth in India

Business Incubators: Boost Economic Growth in India

Historically America has been known to be the center for innovation and entrepreneurship. India on the contrary has been an Agrarian nation till the 1960’s after which it’s markets were opened up encouraging entrepreneurial innovation. But it still has not reached the level of its economically comparative countries like China and Brazil. It is lagging behind in the field of technology and innovation. It is becoming a service-based industry. It has been depending on increase in capital stock and population growth for its increase in economic growth. Also for a while there has been a brain drain occurring in India, where it is losing its budding entrepreneurs, engineers, and scientists to richer nations like America and the UK. To prevent this loss of human capital and increase the factors of productivity like technology and innovation within India, it needs to focus on increasing entrepreneurship, and promoting Business Incubators to encourage the creation of new small businesses can do this.

Brief History of Incubators in India

Starting in the 1950’s the Indian government initiated many programs to leverage the technical talent that existed in India. It established prominent research universities and research institutes, provided tax exemptions to new ventures, and improving financial and capital markets. But still this network of institutions did not promote entrepreneurial growth, most entrepreneurs lack necessary capabilities to manage a business, and financial resources. Incubators movement took off in the 1980’s and was financed by the UN, but lacked government support. This trend has continued since and the incubator movement is not picking up in India. Currently there are about 50 incubators in India, 15 of which are Technology Business Incubators. Which is nothing when compared to other countries like the US (1200), China (400) and South Korea (300).

Human Capital and Brain Drain

India has about 8 scientists and technical personnel per 1000, which is quite low. But if you see the total number of technical personnel, it sums up to 10 million people, which is 10 times greater than most other countries. Thus we can see that India has a lot of human capital that can be tapped by Business Incubators.

But at the same time India loses its top engineers and scientists to foreign companies, as they are able to pay a higher salary to them. The UNDP estimates that India loses $2 billion a year because of the emigration of computer experts to the U.S. This can be reduced if Business Incubators encourage entrepreneurship and small business development, as people will be willing to stay in India if they own their own business.

Comparative Analysis Between Countries

The table below compares the level and type of business incubator’s that exist in Brazil, China, India and USA. Which gives us an idea on the current situation in India and how it can be improved.

	Brazil	China	India	USA
Population	194 million	1,338 million	1,170 million	311 million
No. of Incubators	400	500	50	1200
Strategic Focus	Mixed. Foster entrepreneurship, reduce unemployment, transfer technology	High-tech focus. Foster Entrepreneurship	High-tech focus but also traditional incubators to create ventures and jobs	High-tech focus but also traditional incubators to create ventures and jobs
Incubator Funding	Government, Businesses, Universities	Government	Government	Government, Businesses, Universities
Scale	Small (15-20 firms per incubator)	Big (60 firms per incubator)	Small and Smaller (<10 firms per incubator)	Big (60 firms per incubator), Bigger
Incubator Services	Tangible and (poor) Intangible	Mostly Tangible and (poor) Intangible	Tangible and (poor) Intangible	Tangible and Intangible
Incubator Management	Strong	Poor	Poor	Strong
Role of University	Very Active	Present	Present	Very Active
Institutional Environment	Developing	Weak but Developing	Weak but Developing	Developed
Culture	Risk-Averse	Risk-Averse	Risk-Averse	Risk-Taking

This shows us that compared to its economical peers; India’s Business Incubators Industry is not as well developed. Although it has 10 times the number of technical personnel as most other countries, it has almost 10 times lesser Business incubators. Therefore I feel that the government needs to invest more in these incubators so as to promote entrepreneurship and technical innovation.

Benefits of Business Incubators in India

•        Will reduce the social stigma associated with failure; as Indian culture considers failure more of a social stigma than other countries, Business Incubators will help this as they will guide inexperienced entrepreneurs and reduce their chances of failing.
•        Reduce Brain Drain; Business Incubators will increase the number of opportunities available within India for technical personnel and scientists and will encourage them to take the entrepreneurial path and stay in India
•        Promote Entrepreneurship and Innovation; as mentioned in my older posts, we know that business incubators promote entrepreneurship, which in turn promotes technical innovation.
•        Economic Growth, as explained earlier using the Solow Growth Model, in order for economic growth, capital and population growth are not enough. Business Incubators will help grow technical innovation, which will lead to economic growth.

In conclusion, I would like to say that Business Incubators are a key factor in encouraging economic growth. And if India wants to increase its rate of growth, it cannot solely depend on increase in capital stock and population. It needs to promote technical innovation and productivity, and it can do it by funding more Business Incubators.

Business Incubators: How they help Start-Up

Business Incubators: How they help Start-Ups

Startup Life Cycle

The chart above illustrates the typical life cycle of a startup business. Entrepreneurs generally start of without any capital, using their personal savings and taking loans from friends and family. They rely on Angels and Business Incubators to help them out in their early phases. After they have a solid product, they get funding from venture capital and private equity firms. Eventually they go public so that their initial investors can recoup their investments.

From the start-up life cycle we see that Business Incubators help businesses in the early stages of their life cycle, when they have minimal capital, no resources or connections and inexperienced entrepreneurs leading them. This is because start-ups require to be nurtured and supported. Business Incubators offer both Tangible and Intangible Services to new startup firms.

Tangible Services:

•      Shared equipment such as copy machines, phones, faxes, computers and internet access;
•         Shared common spaces – conference rooms and lounges – for meetings with clients, and more informal interactions with other incubator tenants;
•        Shared business services such as computing, secretarial, accounting, marketing, and legal services;
•        Assistance with basic business activities such as marketing plans, joint promotion, business plans, financial systems, bookkeeping etc;
•        Greater flexibility with the timings and amounts of rent and other payments; are more sensitive to the businesses needs;
•        Joint purchasing of business supplies and other business components

Intangible Services:

•        Guidance to inexperienced entrepreneurs, Incubators are generally run by experienced entrepreneurs or academics who have knowledge in the field;
•        Assistance in securing start-up capital; Incubators have a proven track record with Venture Capital firms and a reputation to maintain;
•        Ability for business owners to act as a support system; Incubators have multiple start-ups and the entrepreneurs can learn and gain experience from each other;
•        Networking Activities provide linkages with investors and strategic partners.

Business Incubators offer these services to start-ups at a reduced or subsidized cost. They often also invest a small amount of capital in the businesses they incubate for a small amount of equity. The small businesses take part in incubators because they have no experience in entrepreneurship and have limited capital on their hand. But all the business incubators differ from each other in the type of businesses they accept and the services they offer.

Successful Incubators

Y-Combinator: It offers more intangible services in the form of guidance and advice and access to capital. They offer almost $150,000 to entrants for an equity stake of 6-12% depending on the company. It has a lot of successful alumni from its program like, Airbnb and   DropBox, which is valued at $4 billion.

TechStars: Offers a 12-week intensive mentoring program where it guides and advises the participants. At the end of the program it also has a demo day for the participants in front of a lot of prospective investors.

500 Start-Ups: Has an excellent network of 160 international mentors, and also invests $50,000 in seed money in the accepted participants.

Thus we see that different Business Incubators have different offerings and strategies with which they help new businesses. But there are also problems with the concept of incubation.

Possible Problems

Financing: Arranging adequate financing for an incubator is critical, as most incubators are not self-sufficient and don’t become for at least 10 years.

Nature of Incubator: An Incubator can be focused only in one area of expertise, therefore might not be able to help with regards to giving advice and providing the adequate facilities.

Time Limits for Tenants: Most of the times the incubator programs have time limits till when the company can stay with the Incubator. Sometimes they let a company out before it is ready, which eventually leads to the company failing.

Give False Hope: Sometimes incubators take in entrepreneurs who do not have an idea that will work. This might give the entrepreneur false hope that his idea is valid and the company might end up failing.

The key objectives of business incubators are to promote entrepreneurial activity, encourage technology transfer, and stimulate economic development in the local community. Incubators also have other value-added contributions like:

• To reduce start-up costs and early stage operational costs, and risk of doing business by providing a protective environment for start-ups.
• Promote regional technology development policy. Incubators are used as effective policy tools in various countries for reducing unemployment, and new job and venture creation.
• Enhancing University – Industry collaboration via University Incubators.
• Stimulating networking among firms, tenant firms and entrepreneurs can benefit from peer group effects.
• Reversing or preventing brain drain. Israel used incubators to absorb the immigration of 11,000 high-skilled scientists from Russia in the 1990’s. China created “Innovation Parks for Returned Scholars” to attract students and researchers who live abroad.

In these tough times, business incubators are gaining greater popularity here in the United States as communities are looking toward entrepreneurship and small business development to diversify their communities. Increasingly we are seeing communities’ business incubators as part of a larger business incubator network that provides a cohesive, integrated target network to promote economic development goals of a region.