What Works in Business Incubation?

About the Author

Jonathan Morgan

Jonathan Morgan is a School of Government faculty member.

Jonathan Morgan is a School of Government faculty member.

This is the first in a series of blog posts focused on the topic of “What Works in Economic Development.”[1] Upcoming posts will discuss the latest information regarding what we know about the effectiveness of various economic development strategies.  This initial post in the series examines the efficacy of business incubation as a way to create jobs and support entrepreneurs, and highlights a new research study that identifies some of the best practices associated with this particular strategy.

Many communities utilize business incubators as a core component of providing support for fledgling entrepreneurs and start-up firms.  Business incubation programs typically consist of a physical space[2] that houses budding firms and will provide a range of support services such as managerial and technical assistance, bookkeeping and accounting, financial capital access, networking opportunities, and linkages to external resources and strategic partners.  While a traditional incubator requires a building, the emphasis is placed on the business support services rather than on the physical space itself.  The idea is to enable young start-up companies to co-locate and share core services, technologies, and equipment, and to gain access to the financing and technical assistance needed to grow.

Business incubation programs seek to promote economic development by graduating firms that are equipped to create jobs and boost local economies.   There is some case study research and anecdotal evidence that business incubators can be useful in creating jobs and improving business survival and growth rates.[3] However, concerns about how business incubators can achieve long-term financial self-sustainability remain.

The U.S. Department of Commerce Economic Development Administration (EDA) recently funded a study of the relationship between incubator practices and client outcomes.  The study is based on a national survey of business incubator managers and employed advanced statistical methods to determine if there is a causal relationship between how an incubator operates and how client companies perform.  The final report, “Incubating Success: Incubation Practices that Lead to Successful New Ventures”, was published in late 2011 and includes an extensive review of the previous research on business incubation along with its new findings.

The findings suggest that business incubation, when done well, does indeed contribute to entrepreneurial success.  The findings highlight the importance of an incubator’s programming, management practices, advisory board composition, budget, and level of public sector support.  The study findings also indicate that the incubator programs that systematically monitor and track client outcome data tend to perform better.  The study recommends tracking the following outcome measures over time:

  • Jobs created by incubator clients and graduates
  • Revenues of incubator clients and graduates
  • Annual number of graduates
  • Survival rates of graduate firms
  • Retention of graduate firms in the incubator’s host region

The researchers used the study findings to create a web-based tool that practitioners can use to see how their incubation program compares to industry best practices.

[1] Researchers at Cleveland State University conducted a comprehensive review of the literature on the topic and published a report in 2002 titled “What Works in Economic Development Practice? An Evaluation of Strategies and Tools”.

[2] A “virtual” incubator (without walls) is also a possibility.

[3] See Ziona Austrian and Jill Norton, “What Works in Economic Development Practice? An Evaluation of Strategies and Tools”, Cleveland State University, 2002.

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