Incubators Are Popping Up Like Wildflowers…But Do They Actually Work?

More and more, business incubators resemble the roadside wildflowers that bloom in the Texas spring—they seem to be popping up everywhere.¹ Generally considered beneficial, they are often seeded by governments to promote economic activity. However, while the economic impact of wildflower tourism has been well documented, the economic and social impact of business incubators is far more opaque. Given the crucial need to support entrepreneurial ventures both domestically and in the developing world, it is critical to establish an approach based on holistic evidence that will leverage the potential of incubators to propel the small and growing business (SGB) sector most effectively.

Business incubators are programs designed to support early stage entrepreneurs by providing them with an array of business development services and access to potential investors. While all incubators have the common goal of supporting and launching viable SGBs into the economy, there is a wide variety of incubation models and a wider variety of business development services provided to participating firms. These services may include but are not limited to access to office space, connections to potential customers and investors, access to legal and accounting services, and business management advice.

Over the past decade, the business incubation field has experienced precipitous growth. A survey of business incubators showed that there were approximately two thousand incubators worldwide in 1998 and nearly seven thousand today. The majority of them are in North America and Europe, but businesses incubators in the developing world are growing rapidly. While no comprehensive studies are available, some estimate the annual growth rate of business incubators in the developing world to be over 20 percent.² Much of the growth stems from heavy public-sector investment in these incubators, which are, for the most part, nonprofit.³ For example, 54 percent of Brazilian incubators received financial support from the Ministry of Industry Development and Commerce,⁴ and the Indian government recently seeded a $6 million science and technology incubator as part of a larger project that aims to create many such incubators across the country. Infodev, the World Bank Group program designed to support incubators, was launched in 2002. This expanding program supports 242 incubators via its Incubator Support Center (iDisc) and provides research and direct funding to emerging-market incubators.⁵

Despite the rapid growth of these incubation programs, there is still little consensus about how successful they have been in catalyzing the growth and development of local entrepreneurs, let alone how this success should be defined and measured.

Most incubators in developing countries are nonprofit, thus traditional measures of financial success are ill-suited to evaluate their performance. Many scholars suggest the use of goal-oriented performance metrics, meaning that success can be defined by the extent to which an organization meets its goals. While this approach offers obvious benefits over financial metrics, it is subject to a deluge of semantic disagreements: What is the goal of an incubator? Do all incubators have the same goal? How do you compare a variety of incubation programs that have incongruent missions, models, and funding mechanisms? Even the most common performance statistic—survival of the incubated firms—can be problematic. According to some, the early termination of unsustainable businesses that are participating in incubation programs is beneficial to the economy, as resources will not be siphoned away from higher performing SGBs.⁶

Even if appropriate performance metrics can be established and it can be determined that incubators are generally performing well, the relative cost of these programs must be evaluated in order to determine if they are worthy of funding from the public and philanthropic sectors. Research focused on the public cost of incubators in the United States has been relatively inconclusive. Various studies have found the public cost per job created to be anywhere from $150to $12,000,⁷ but it is unclear how these figures would translate to a developing economy context. Given the lack of consistent findings and the lack of data available from emerging markets, much more research is required before we can claim that incubators are a worthwhile investment.

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