Business Incubators: Promoting Economic Growth

Business Incubators: Promoting Economic Growth

In the current economic downturn, economists and governments are looking for ways to enhance job creation, entrepreneurship, and innovation to get the economy back on track. Fareed Zakaria, host of CNN’s GPS talks about how ‘Innovation’ is the key to economic growth, and if any country wants to excel, it needs to innovate. But the fact is that already established companies are struggling to maintain their current business rather than come up with new ideas, thus innovation is left to the entrepreneurs and new businesses. But as we know that almost 50% of all small businesses fail within their first four years, thus we require Business Incubators to stimulate and support the creation of new small businesses while providing support so as to decrease the failure rate. Business Incubators offer the required boost to entrepreneurs and new businesses, and stimulate innovation and productivity. In this blog I am going to talk about why we need Business Incubators and how they promote innovation and entrepreneurship.

Why We Need Entrepreneurship: The Macroeconomic View

One of economics basic principles is the Solow Growth Model, also called the Golden Rule, which explains that if a country wants to have economic growth and increase its GDP per capita, then population growth and increase in capital stock are not enough. You need an increase in factors of productivity like technology, which is only possible from a combination of entrepreneurship and innovation. Thus we see that from the view of economists, Entrepreneurship is absolutely crucial to economic growth.

Solow Growth Model

Why Small Businesses are Good

• Small businesses are desirable because they employ local residents and foster indigenous entrepreneurs
• Small businesses often operate in areas of technological innovation or in artistic or creative areas where relatively few resources are required for business operation
• Small business development creates new local and regional economic capital
• In 2005, North American Incubators assisted more than 27,000 start-up businesses that provided full-time employment for more than 100,000 workers and generated annual revenue of more than $17 billion

We also know that all the big companies like Google, Apple, Wal-Mart had humble beginnings, and there were entrepreneurs who took a risk when they started these companies. Google was started at Stanford University as a research project, Apple started out in a Garage and Wal-Mart started as a small store in rural Arkansas. If those entrepreneurs hadn’t taken the leap, we wouldn’t have the top companies we have today. Entrepreneurship is a risky route to take and that’s why we have Business Incubators to nurture and support these start-ups so that they can survive and grow into the large profitable companies.

Business Incubators: A Brief History

The idea of business incubators originated from Batavia Industrial Center located in Batavia, New York (Brown et al., 2000). In 1959, Joseph Mancuso founded this center as a privately owned for- profit center out of economic necessity (Burger, 1999). At that time, tenants were allowed to rent building space based on their needs. They were also allowed to share the expenses of various office services. By using this strategy of expense-sharing based on needs, Mancuso hoped to find enough tenants to guarantee that the center would reach an occupancy rate that would generate profit for his investment. This idea was soon caught on as more and more people become aware of Mancuso’s business strategy and its potential impact on job creation in a community.

What are Business Incubators?

Business Incubators nurture the development of entrepreneurial companies, they help them survive and grow during their early stages. They provide businesses with business support services, cheap rent, and other resources tailored to their business, for a minimal cost, and in return take a small portion of equity in the business. The most common goal of incubation programs are creating jobs in the community, enhancing the community’s entrepreneurial climate, retaining businesses in a community, and building or accelerating growth in a local industry. New incubator programs have been forming in the U.S. at an annual rate of 8% to 10% for the past five years, and today there are approximately 1,200.

Typically a small business incubator begins with a facility/building offering a common location for new firms. Public subsidies allow below market rents for prospective firms. In addition to lower rents and co-location with other, typically similar, new businesses, the incubator includes an array of support services designed to meet the needs of small start-up firms often owned by inexperienced or first-time entrepreneurs. The most common operational form in North America is for incubators to be run by nonprofit organizations; 90% are structured in this manner. More specifically, 25% are sponsored by academic institutions, 16% by government entities, 15% by economic development organizations, and about 10% by for-profit entities (www.nbia.org)

The ultimate goal of a business incubator is for new businesses to start in the incubator and then move out when they grow too large or are stable enough to operate on their own. This opens up space for new firms to begin in the incubator. The incubators goal is to promote entrepreneurship and innovation by supporting new businesses.