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1 COPYRIGHT AND CITATION CONSIDERATIONS FOR THIS THESIS/ DISSERTATION o Attribution You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. o NonCommercial You may not use the material for commercial purposes. o ShareAlike If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original. How to cite this thesis Surname, Initial(s). (2012) Title of the thesis or dissertation. PhD. (Chemistry)/ M.Sc. (Physics)/ M.A. (Philosophy)/M.Com. (Finance) etc. [Unpublished]: University of Johannesburg. Retrieved from: (Accessed: Date).

2 SMALL BUSINESS INCUBATORS IN SOUTH AFRICA: EMERGENCE, GEOGRAPHY AND LOCAL IMPACTS MUKOVHE MASUTHA i

3 Small Business Incubators in South Africa: Emergence, Geography and Local Impacts Mukhove Masutha Department of Geography, Environmental Management and Energy Studies, Faculty of Science, University of Johannesburg Supervisor: Prof Christian Myles Rogerson A Dissertation submitted to the Faculty of Science, University of Johannesburg, in fulfilment for the requirement of the degree of Master of Science in Geography Submitted October 2013 ii

4 DECLARATION I declare that this thesis is my own original work, conducted under the supervision of Prof. Christian Rogerson. It is submitted for the degree of Master of Science in the Faculty of Science at the University of Johannesburg. No part of this research has been submitted in the past, or is being submitted, for a degree or examination at any other university. iii

5 ACKNOWLEDGEMENTS I thank the lord almighty for blessing and protecting me every single day of my life. I d like to thank my supervisor, Professor Chris Rogerson, for his encouragement, support and guidance. A big thank you to Wendy Job for producing the maps. I thank Tracey McKay for her unconditional support on and off campus throghout the study. Thank you to my family for their love and support and for believing in me every step of the way. I am very grateful to the South African Students Congress (SASCO) for inspiring confidence and hope in me and thousands of other working class youth across South Africa. I am grateful to the Limpopo Provincial Government s Department of Economic Development, Environment and Tourism for funding my undergraduate studies, if it was not for that bursary, I would not be anywhere near an institution of higher learning. Thank you to the National Research Foundation for funding this study.a special thank you to all Thusanani Foundation volunteers and sponsors for their continued efforts to inspire hope in rural and township youth. Part of this dissertation has been used for presentations at the Society of South African Geographers Conference, University of Cape Town, in June I dedicate this work to my late brother Emmanuel Odionye, for always believing in me. Rest in Peace Ema! God is indeed with us! iv

6 ABSTRACT From as early as 1995, South Africa identified Small Medium and Micro Enterprises (SMMEs) as an important vehicle for economic growth, job creation and the alleviation of poverty and inequality. Despite the long-standing government commitment and increased support for the sector, South African SMMEs have not achieved the intended impact. South Africa s SMMEs continue to experience high mortality rates, with SMMEs failing to grow and create the expected employment opportunities. In response to the challenges of high SMMEs mortality and slow growth, South Africa has identified small business incubators as strategic tools in helping to grow the country s entrepreneurial base while reducing the high mortality of SMMEs. Incubators provide SMMEs with targeted infrastructural, technical and business support services during their early and most vulnerable stages of development. This research contributes to the limited body of literature and knowledge concerning the emergence, evolution, organization, geography and local impacts of South African business incubators since the mid 1990s to present day (2013). The study contributes to the international scholarship as one of the first detailed investigations conducted on the rapidly evolving business incubation movement in South Africa. The study is structured into 3 core themes. First, the research discusses core incubation concepts and analyzes the international litrature and experience of business incubation in both developed and developing countries. Second, the study tracks the emergence, evolution and development of South African business incubators from the mid-1990s to present day (2013). Finally, the study seeks to understand the organization, geography and local impacts of South African incubators (both public and private) using detailed interviews and case studies. v

7 LIST OF ACRONYMS AIN-African Incubator Network DED- Department of Ecenomic Development GEM-Global Entrepreneurial Monitor DTI-Department of Trade and Industry DST-Department of Science and Technology ISP-Incubation Support Programme SABTIA-South African Business Technology Incubation Association Seda-Small Enterprise Development SMMEs-Small Medium and Micro Enterprises STP-Seda Technology Programme SBU-Shanduka Black Umbrellas TEA-Total Early-Stage Entrepreneurial Activity NBIA-National Business Incubation Association PPP- Public Private Partnership UKBI-United Kingdom Business Incubation vi

8 TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION 1.1. Introduction Research Aims Research Methodology Research Structure 7 CHAPTER TWO: INTERNATIONAL LITERATURE AND PERSPECTIVE ON BUSINESS INCUBATION 2.1. Introduction Defining and Understanding the Concept of Business Incubation Objectives of Business Incubators The Incubation Process Distinguishing Characteristics of Business Incubators Types of Business Incubators Review of the International Literature and Experience of Business Incubation Conclusion 38 vii

9 CHAPTER THREE: THE EVOLUTION, DEVELOPMENT AND GEOGRAPHY OF BUSINESS INCUBATION IN SOUTH AFRICA 3.1. Introduction Broader SMME Development Policy Framework and Objectives in South Africa The Evolution and Development of Business Incubation in South Africa Profile of the Contemporary Status and Patterns of Business Incubators in South Africa Conclusion 73 CHAPTER FOUR: THE ANALYSIS OF BUSINESS INCUBATORS 4.1. Introduction Research Findings: National Survey of Incubators Research Findings: Five Case Studies Entrepreneurs in the Incubators Public Sector versus Private Sector Incubators: A Summary Comparison Conclusion 133 CHAPTER FIVE: CONCLUSIONS 5.1. Summary of Key Findings Policy Recommendations 143 viii

10 REFERENCES 148 APPENDIX Appendix 1: Incubator Manager Questionnaire Appendix 2: Incubatee Questionnaire ix

11 LIST OF TABLES Table 3.1: Number of Business Established by Sector,2005/ Table 3.2: Number of Jobs Created by Sector, 2005/ Table 3.3: Sub-National Government Support and Interventions to Assist Business Incubator Development in South Africa, 2010/ Table 3.4: National Data Base of All South African Business Incubators 63 Table 3.5: Geographic Distribution of Business Incubators by Small Towns/Cities, Townships and Rural Areas 72 Table 4.1: Number of Public Business Incubators by Years of Establishment 78 Table 4.2: Number of Private Business Incubators by Years of Establishment 79 Table 4.3: Number of SMMEs Currently Supported by Public Incubators 80 Table 4.4: Number of SMMEs Currently Supported by Private Incubators 81 Table 4.5: Percentage of Women-Owned SMMEs by Business Incubator 83 Table 4.6: Percentage of Black-Owned SMMEs by Business Incubator 84 Table 4.7: Number of Jobs Created by Public Business Incubators (2012) 86 Table 4.8: Number of Jobs Created by Private Business Incubators (2012) 87 Table 4.9: Number of Graduates from Public Business Incubators 88 Table 4.10: Number of Graduates from Private Business Incubators 89 Table 4.11: The Profile and Experience of Incubatees/Entrepreneurs 116 Table 4.12: The Institutional Environment and Core Objectives of Business Incubators 121 Table 4.13: Business Incubation Model: Private vs. Public Incubators 124 Table 4.14: South African Business Incubators: Sustainability Plans and Local Impacts 131 x

12 LIST OF FIGURES Figure 3.1: The Four Phases in the Evolution of Business Incubators in South Africa 44 Figure 3.2: South African Incubators by Sector of the Economy 66 Figure 3.3: Public Incubators by Sector of the Economy 67 Figure 3.4: Number of Private Incubators by Sector of the Economy 68 Figure 3.5: Number of Incubators by Province 69 Figure 3.6: Provincial Distribution of Different Institutional Forms of Business Incubators in South Africa 70 Figure 3.7: Local Distribution of Business Incubators in South Africa 71 xi

13 Chapter One Introduction 1.1 Introduction Writing his foreword on the White Paper on National Strategy for the Development and Promotion of Small Business (1995), then Minister of Trade and Industry, Trevor Manuel stated, With millions of South Africans unemployed and underemployed, the government has no option but to give its full attention to the task of job creation, and generating sustainable and equitable growth. Furthermore, he argued that, small, medium and microenterprises represent an important vehicle to address the challenges of job creation, economic growth and equity in our country. These words marked the beginning of post-apartheid South Africa s acknowledgement of the critical role of SMME development as a vehicle for economic growth, job creation and alleviation of poverty (DTI, 1995, 1998, 2008; Rogerson, 2004; SBP, 2009). Almost two decades after the democratic transition, South Africa remains one of the most socio-economically unequal societies in the world (Ndungu and Frye, 2008). Some observers argue that poverty; unemployment and inequality levels have reached a state of crisis and threaten the social and economic stability of one of Africa s youngest democracies (Fakir, 2009). In response to the triple challenge (i.e. poverty, unemployment and inequality) the South African Government has recommitted to the role of Small Medium and Micro Enterprises (SMMEs) as critical tool for achieving sustainable economic growth, creating 1

14 employment opportunities and alleviating poverty. It is significant that the national government s New Growth Path (NGP) and the National Development Plan (NDP), South Africa s blueprint for future development, both have identified the SMMEs sector as central to the realization of South Africa s vision Indeed, the National Development Plan Vision 2030 sets out a target of creating 11 million jobs by 2030, of which 90% are expected to come from SMMEs (Department of Economic Development, 2011;National Planning Commission, 2011; Ravjee, 2013). Despite the long-standing government commitment and increased support for the sector, South African SMMEs have not reached the intended impact that was anticipated (SBP, 2009; Timm, 2012; FinScope, 2010). Rather, the South African SMME economy continues to experience high mortality rates, with SMMEs failing to grow and create the expected employment opportunities (Herrington et al, 2008,2009,2010,11; World Economic Forum, 2011). The 2011 report that was produced by the Global Entrepreneurial Monitor (GEM) rated South Africa s total early-stage entrepreneurial activity (TEA) at 9.1 percent. Arguably, this rating of South Africa s early-stage entrepreneurial activity remains far lower than that of comparable emerging economies such as Brazil, Chile or Malaysia (Herrington et al., 2011; Timm,2012). The GEM report (2011) further notes that South Africa has one of the world s lowest SMMEs survival rate. In 2012, the Small Enterprise Development Agency (Seda) estimated that 80% of South Africa s Small medium and Micro Enterprises (SMMEs) fail in their first year of existence (Seda, 2012). In both developed and developing countries small business incubators have been identified as strategic tools in helping grow a country s entrepreneurial base while reducing the high mortality of SMMEs by providing them with targeted infrastructural, technical and business 2

15 support services during their early and most vulnerable stages of development (Buys and Mbewana, 2007; Ndabeni, 2008; Seda, 2010; STP, 2012; DTI, 2013). South Africa, through the Department of Trade and Industry, has identified business incubation as a viable tool to help SMMEs grow and become successful and globally competitive enterprises with potential to create jobs, alleviate poverty, empower previously marginalized groups and contribute to the growth of both local and national economies (InfoDev, 2010d; Ndabeni, 2008;Seda, 2010;Timm, 2012). International research concerning business incubation is still limited and remains in its infancy (Adkins, 2001). This is so largely due to the fact that the business incubation movement did not gain much recognition until the late 1980s and 1990s according to Adkins (2001) and Allen (1990). However, with the boom of information technology, the sharing of incubation best practice and increased government support, incubation research is gaining momentum rapidly around the world. One exception has been the South African case where very little research attention has been given to the role of business incubators as one of the ways in which the country might seek to energize its entrepreneurial base for developmental purposes (Buys and Mbewana, 2007;InfoDev, 2010a; Ndabeni, 2008). Overall, there is an important knowledge gap concerning business incubation in the country and in particular, little is known about the geography, organization and operations of business incubators across the country (Buys and Mbewana, 2007; InfoDev, 2010d). 3

16 1.2 Research Aims This study and its aims must be positioned within the changing policy environment of national government policy in South Africa which is giving a high priority to the business incubator movement. In line with government priority to support the development of SMMEs, the Department of Trade and Industry (DTI) established the Incubation Support Programme (ISP) in Through the ISP the South African government aims to partner with the private sector, labour and Community-based Organizations (CBOs) to establish a target of 250 new business incubators by 2015 (STP, 2012; Seda, 2013). The ISP marks the latest milestone in the evolution of South Africa s business incubation movement (DTI, 2013). Although the operations of business incubators have been shown to exhibit a promising performance as support mechanisms for SMMEs in emerging economies such as China and Brazil, the success of business incubators is neither automatic nor guaranteed (Adkins, 2009; Akcomak 2009; Buys and Mbewana, 2007; infodev, 2010a). The international experience reveals clearly that without carefully following appropriate incubation practices many business incubators fail due to poor management or poor planning (Adkins, 2009; Akcomak 2009; infodev, 2010a). Against this background of uneven performance of business incubators it is therefore important for South Africa to make a careful assessment on what might work for the local environment given the country s developmental context. In addition, it is critical that South Africa examine policy lessons from both the global incubation experience and its own experience of business incubation since 1995 (infodev, 2010a). This 4

17 said, currently, there is little published research on the experience of South Africa s business incubators (Ndabeni, 2008). Against this backcloth, the broad objective of this research investigation is to contribute to the limited body of literature and knowledge about the evolution, geography and current state of business incubators in South Africa. More broadly, the study aims to offer a contribution to the limited international and local scholarship on business incubators and represents one of the few empirical forays into the South African incubation movement. The specific objectives of this study are threefold: i. First, to examine and analyze the evolution and development of business incubators in South Africa from the early 1990s to the present-day (2013); ii. Second, to undertake a national audit of the spatial patterns and organization of business incubators in South Africa; and iii. Third, based on selected case studies to assess the local impacts of business incubators in South Africa. 5

18 1.3 Research Methodology The study was conducted through a variety of research approaches and use of different sources: First, interviews with key government incubation policy makers provided a detailed understanding of the history, evolution and the future direction of South Africa s incubation movement from the mid-1990s to present-day. A total of five interviews were held with current and former directors and managers of the Seda technology programme (STP). This includes an interview with Charles Wyeth, the first CEO of the initial incubation programme in South Africa, (the GODISA Incubation programme) 1. Second, the collection of SMME development policy documents and legislation on small business development helped track the development and milestones of South Africa s Incubation movement. This was supplemented by additional material which was gathered from the annual reports of the GODISA incubation programme, the Small Enterprise Development Agency (Seda) and the Seda Technology Programme (STP). 1 He is currently the head of incubation and SMMEs development at SASOL Chemcity. Mr Weyth provided valuable input on the history, evolution and current state of South Africa s business incubation movement. Mr Weyth is one of the few policy makers to have worked with both public and private incubators in South Africa. 6

19 Three, structured interviews were held with a total 50 incubator managers of both public and private incubators (Appendix 1). Telephonic interviews provided insight on the geography, profile and organization of both public and private incubators. Four, a further set of detailed structured interviews were held with incubator managers of five selected case study incubators (private and public). In addition, a total of 30 additional interviews were held with entrepreneurs/incubatees from public incubators (Appendix 2). It must be noted that incubatees/entrepreneurs in private incubators could not be interviewed due to the confidentiality contract signed between incubatees and the incubator management. Finally, secondary data was collected from some incubators website through Internet access. Data gathered through the internet was verified with the management of Seda and respective incubators. Overall, therefore, the findings of this research study reflect the triangulation of findings from the collection of documentary source material, internet sources and, most importantly, the undertaking of a total of 90 primary interviews with stakeholders, past and present, in the business incubator movement of South Africa. 1.4 Research Structure The dissertation comprises five uneven chapters of material, including this introductory chapter. The discussion on the evolution, geography and local impacts of business incubators in South Africa is organized into four further chapters of material. 7

20 Chapter Two looks at the international perspective on business incubation and is divided into several themes. The first provides a review of debates around the definition of the concept of business incubation. Second, the chapter provides insight into the objectives, processes and existing types of business incubators. In addition, a detailed analysis of business incubators distinguishing factors from other SMMEs development mechanisms is given. The third and the final theme of the chapter provide an analysis and review of existing literature and international experience of business incubators as a tool to nurture successful enterprises in both developed or industrialized regions (i.e. Europe, United States and Australia) and emerging economies such as Brazil, China, Malaysia and the African continent. Chapter Three begins the examination of business incubators in South Africa. It investigates the evolution and changing development of business incubation in South Africa from the period of the mid-1990s to the present day (2013). This chapter begins by locating the development of business incubators within an analysis of the broader SMME development policy framework and objectives in South Africa. The next section provides a detailed review and analysis of four significant milestones in the evolution and development of business incubation in South Africa relating to respectively the hives of industry programme, the Godisa Incubation Support Programme, the Seda Technology Programme and the Incubation Support Programme. The chapter then provides an overview of the uneven geographical distribution of business incubators and differentiates the roles of public sector versus private sector business incubators. Chapter Four deepens the empirical investigation by providing detailed empirical findings on the current profile, organization and geography of all business incubators in South Africa. 8

21 The results from extensive interviews are presented on Chapter four to give a fine grained picture and understanding of the profile, objectives, institutional structure, operational models, performance indicators, monitoring & evaluation and the local impacts of South Africa s business incubators. The analysis in this chapter further unpacks the differences between the groups of public as opposed to private sector incubators including through the presentation of five select case studies. Chapter Five is the concluding chapter of the dissertation and covers two central issues. First, it provides a summary of the key findings and contributions made by this original research investigation of business incubation in South Africa. The findings are positioned both within the local context and wider international experience and literature on business incubators. Second, based upon the key empirical findings which come out from the research, a set of policy recommendations are offered to further boost and maximize the impacts of the development of business incubators for the economic landscape of South Africa. 9

22 Chapter Two International Literature and Perspective on Business Incubation 2.1 Introduction In both developed and developing countries, small, medium and micro enterprises (SMMEs) have been identified as strategic tools to achieve sustainable economic growth, job creation, poverty alleviation and the reduction of inequalities (Akcomak, 2009; Chandra, 2009; InfoDev, 2010a). However, globally SMMEs continue to have a high mortality rate in their early and most vulnerable stages of existence. This is particularly the case in the developing world (Chandra and Wei, 2008; GEM, 2012). In response to this high mortality rate of small businesses in both developed and developing countries business incubation has been identified as a tool to help foster startups as well as to support existing SMMEs during their early stages of business development. Overall, the goal of business incubation is to create financially and operationally independent enterprises that are innovative and globally competitive. It is important to note that different countries have adopted business incubation for various reasons (Al-Mubaraki and Busler, 2011a; Chandra, 2009; InfoDev, 2010a; Sandheep and Wolfgang, 2011). The purpose of this chapter is to review and examine the international literature on business incubation. The chapter is divided into four sections of material. The first section provides a review of debates around the definition of the concept of business incubation. The second 10

23 section provides insight into the objectives, incubation processes and existing types of business incubators. In addition, a detailed analysis of business incubators distinguishing factors from other SMMEs development mechanisms is provided. Sections three and four of the chapter offer an analysis and review of existing literature and international experience of business incubators as a tool to nurture successful enterprises respectively in both developed countries (Section three) and in emerging economies (Section four). Overall, this chapter affords the essential context for the subsequent examination of business incubators in South Africa, which is examined in Chapters Three, Four and Five. 2.2 Defining and Understanding the Concept of Business Incubation It is important to note that the concept of business incubation has evolved over time and that business incubation is defined and often understood differently around the world (Akcomak, 2009; Al-Mubaraki and Busler, 2011a; Monkman, 2010). According to Hackett and Dilts (2004) most of the literature on business incubation suggests there is uniformity in the understanding of business incubators as strategic tools to achieve sustainable economic development through the creation and growth of globally competitive small enterprises. There is a general consensus among scholars that a business incubator is an organization that provides various targeted business support and technical support services aimed at growing emerging and small start-up business enterprises into financially and operationally independent enterprises (Adkins, 2009; Akcomak, 2009; infodev, 2010b). Notwithstanding this general understanding, business incubation is defined and understood differently by different institutions, countries and regions (Akcomak, 2009). 11

24 The European Union defines a business incubator as an organization that accelerates and systematizes the process of creating successful enterprises by providing them with a comprehensive and integrated range of support, including: incubator space, business support services, clustering and networking opportunities (Akcomak, 2009; Al-Mubaraki and Busler, 2011c; infodev, 2010a: 11). The European Union puts specific emphasis on speeding up of the incubation process in order to produce financially and operationally independent firms within a limited timeframe (InfoDev, 2010a). The definition by the UK Business Incubation (UKBI) resembles that of the European Union in most aspects, however there is specific emphasis on the distinctiveness and flexibility of the incubation process as compared to other enterprise development tools (Akcomak, 2009). According to the UKBI, business incubation is a unique and highly flexible combination of business development processes, infrastructure and people, designed to nurture and grow new and small businesses by supporting them through early stages of development and change (infodev, 2010a: 11). A third definition of business incubation is from the USA s National Business Incubation Association (NBIA) (InfoDev, 2010a). The NBIA defines business incubation as a business support process that accelerates the successful development of start-up and fledgling companies by providing entrepreneurs with an array of targeted resources and services (infodev, 2010a: 11). 2.3 Objectives of Business Incubators Business incubation has been adopted and supported for varying reasons around the world (Al-Mubarak and Busler, 2011b; Monkman, 2010;Barbero et al., 2012). Governments in both developed and developing countries have adopted and supported business incubation within 12

25 their various developmental contexts and in response to various developmental challenges (InfoDev, 2010a; Monkman, 2010). Although the reasons behind the establishment of business incubators by governments appear similar, each nation often has specific priorities, which are responding to the locally specific challenges that each government faces (InfoDev, 2010a). This said, issues of the contribution to job creation, poverty alleviation, technology transfer; acceleration of business growth; reducing the mortality rate of SMMEs; Empowerment of specific groups of entrepreneurs; creating value for various stakeholders; urban/rural regeneration and the revitalization of local and national economies appear common crosscutting motives behind most governments support for business incubators (Colombo and Delmastro, 2002;Monkman, 2010). 2.4 The Incubation Process According to infodev (2010a) a typical business incubator consists of a wide variety of business support services that are designed specifically to assist incubatees or clients to startup and grow small businesses into financially and operationally independent enterprises. Generally speaking, the services offered by business incubators to clients include: i. Administrative services (e.g. bookkeeping, Internet access, printing facilities,) ii. Business advice services (e.g. Couching, mentorship programmes, training programmes); iii. Technical support services (e.g. Technology transfer, Skills transfer, technical support, access to costly business equipment); iv. Access to finance; and, v. Networking opportunities and Marketing (InfoDev, 2010a; Nepal, 2006). 13

26 According to the infodev (2010a), there are three important stages in the incubation process, namely pre-incubation, incubation and after-care. Pre-incubation, stage one, is designed to assist potential incubatees develop their business ideas into an implementable business before they are admitted as new clients of the business incubator (Bergek and Norrman, 2008;Siegel et al., 2003). The second stage of incubation involves an intense process of the provision of all the necessary support services to ensure the graduation of as many small business enterprises as possible into successful firms (infodev, 2010a). The final stage is the postincubation stage, which is designed to facilitate a transition and integration of recent graduates into the outside business world for sustained growth and prosperity (AIN, 2010; Bergek and Norrman, 2008; Siegel et al, 2003). 2.5 Distinguishing Characteristics of Business Incubators Business incubation is sometimes confused with other mechanisms designed to provide support services to start-up and already operational enterprises (infodev, 2010a; NBIA, 2006). InfoDev (2010a: 13) emphasizes the specialized and targeted nature of incubation services as one of the critical factors that distinguishes business incubation from other SMMEs development initiatives. It is important to emphasize the uniqueness of business incubators by distinguishing them from similar business support schemes such as science parks/technology parks, knowledge parks, small business development centers, co-working spaces, business accelerators and industrial parks (Becker and Gassmann, 2006). Siegel et al (2003) and Phan et al (2005) also suggest that what distinguishes business incubators from other business support initiatives is their ability to integrate various targeted and specialized resources, skills, and services under one roof. Business incubators are more 14

27 than just structures put in places to limit the cost of starting business by providing access to affordable office space, support services and business advice (infodev, 2009;NBIA, 2006). According to Bollingtoft and Ulhoi (2005: 269) the purpose of business incubation is therefore to leverage entrepreneurial talent. In other words, unlike other business support schemes, business incubation is a deliberately designed mechanism aimed at realizing the maximum potential of all entrepreneurs and their start-up or already existing SMEs through supporting them with all necessary support mechanisms for a successful business to flourish and contribute to the economy through job creation and innovation (Bollingtoft and Ulhoi, 2005; infodev, 2009; NBIA, 2006). The core distinguishing characteristics of business incubators can be summarized as follows: The provision of a comprehensive and integrated business support service under one roof; Focused mentorship programmes aimed at supporting new start-ups get off the ground; A management team on site with the necessary expertise to resolve early stage threats to SMMEs through a network of professionals; Careful selection of new start ups through a pre-incubation process before an SMME is admitted into a business incubator; Provision of a conducive business environment at a heavily subsidized cost; Objective to become self-sustaining in the long run; Set-time period by which an incubatee must graduate and vacate the incubator; and, Post-incubation support for recent graduates to help integrate them into the unprotected environment (Chandra, 2007;Lalkaka and Bishop, 1996). 15

28 2.6 Types of Business Incubators Barbero et al. (2012) emphasize that business incubators can vary dependent upon their main objectives, ownership and management, funding strategies, type of incubatees, facilities, business model or services offered. Barbero et al. (2012) identifies the following different kinds of business incubators, which are distinguished by sponsors: i. For-profit property development venture, ii. iii. iv. Venture capitalism firms, Not-profit (e.g. economic development corporations) University incubators, and v. A combination of the above. Ownership and management: i. Public Sector/ Government ii. iii. Private Sector Public Private Partnership (PPP) Barbero et al. (2012) further categorizes business incubators according to their goals and the types of incubatees being incubated in that particular business incubator: i. Generalized or non-specialization incubators. Grows a variety of enterprises. Nonspecialized incubators objective is to promote sustainable industrial and economic growth through SMME development. ii. High tech or specialized incubators. This type of a business incubator pays specific attention to a single industrial activity with the main aim to advance and encourage technological- driven development (Lalkaka, 2003). iii. Sector-focused incubators (Al-Mubaraki and Busler, 2011b). 16

29 iv. Virtual incubators. This is an online type of a business incubator. Virtual incubators are growing rapidly in developing countries where incubation occurs through online activities such as video conferencing or distance learning (Al-Mubaraki and Busler, 2011a, 2011b). 2.7 Review of the international literature and experience of business incubation A key point to note when reviewing the experience of business incubation globally is that the incubation model and objectives of business incubators differ between developing and developed countries (Akcomak, 2009; InfoDev, 2010a). In reviewing the literature on business incubation, Chandra (2009) identifies four key environmental and incubator-level dimensions. These dimensions include the incubator institutional environment, the role of government in incubation, incubator model and incubator services offered to incubatees. In addition to the analyses of a brief history of business incubation in each respective region, this section will analyze the international perspectives business incubation. In particular, the review of international experience will look at both the record of business incubators in a cross section of both developed and developing countries with a framework guided by the four dimensions as identified by Chandra (2009). 17

30 2.7.1 Business incubation in the Developed World United States of America The United States of America (USA) enjoys the longest history of business incubation in the world (Adkins, 2009; Akcomak, 2009). It is generally agreed that the first business incubator was established in New York State at the Batavia industrial center in 1956 (Akcomak, 2009). Following the Batavia Industrial Center additional incubators were established in the United States in response to the decline of manufacturing industry and associated rising levels of unemployment due to factory closures (NBIA, 2006; Smilor and Gill, 1986). The USA also has the largest and fastest growing incubation industry in the world (Adkins, 2009; Akcomak, 2009). The period of the late 1980s and early 1990s represented a boom period for the growth of incubators in the United States. Overall, the number of American business incubators grew from only 26 in 1984 to over 285 business incubators by By the year 1994, the United States had 523 business incubators, which provided support to over 9000 clients (Adkins, 1994; Duff, 1994). The NBIA (2006) states that by 2006 the United States had over 1400 business incubators across the country, which represented approximately one third of all business incubators globally at the time. The institutional environment and the role played by various stakeholders in the United States fundamentally have shaped the incubation environment (Bhide, 2000;Chandra, 2009). The availability of start-up capital has been a key determinant of the success or failure of new startups and existing SMMEs. According to Chandra (2009) the success of business incubators and their incubatees in the United States is largely due to the availability of strong 18

31 financial institutions. The strength of institutions lowers the chances of market failure and reduces the costs of running a business. The strength of these institutions therefore, creates an environment, which is conducive for new and existing SMMEs to flourish (Bhide, 2000; Chandra, 2009). The broader objective of business incubators in the United States is to grow sustainable SMMEs in order to promote technology transfer, economic profitability and commercialization (Chandra, 2009). This is typical of many other developed nations, including Australia and New Zealand, which have adopted business incubation as a developmental tool. Incubation in the USA was also seen as strategic tool to create employment opportunities as well as to revitalize economically depressed communities following the demise of traditional industries, and in particular of manufacturing activities. It is, however, important to note that the objectives of business incubators in the United States can vary according to factors such as the form of incubation model, funding source and, most importantly, the extent to which government is involved (NBIA, 2006). The incubation movement in the United States largely is characterized by a variety of incubation models (NBIA, 2006). An incubator can be privately managed or government managed. A key feature to note in American incubators is that the majority of them are established by non-profit organizations to foster new and emerging enterprises in order to achieve technology transfer, create employment and, to revitalize economically depressed areas (Bhide, 2000, NBIA, 2006). Many of these incubators are linked to academic and research institutions such as Universities and community colleges (Al-Mubaraki and Busler, 2011a). 19

32 The role of government in business incubation differs from one country to another (InfoDev, 2010b). In the United States all levels of government (i.e. Federal, State and Local) are involved in business incubation in one-way or another (Chandra, 2009). While government at the level of state is predominantly responsible for funding, other levels of government play a supportive role in ensuring the success of the incubation program by sponsoring certain incubation activities (Adkins, 2009). Although government funds most of the incubators in the United States, additional incubator funding derives from the private sector and academic institutions (NBIA, 2006). Business incubators in the United States offer various incubation services to their diverse range of clients (NBIA, 2006; Adkins, 2009). Different types of incubators offer varying incubation services depending on their incubation model and objectives. For example, business incubators in the manufacturing sector focus mostly on offering technical services such as high tech equipment and machinery for to enhance productivity. Government funded business incubators are centrally focused upon achieving industry revitalization whereas university-linked business incubators offer services that are aligned to achieving technology transfer and innovation development. Services offered by business incubators to tenants include business advisory, mentoring, business networking, office space, and financial support (NBIA, 2006). Europe Although the history of business incubation in Europe dates back to the 1980s, the bulk of business incubators in Europe were established in the decades of the 1990s and 2000s (Goddard and Chouk, 2008). A study conducted by Aerts et al. (2007) revealed that over 80% 20

33 of the existing business incubators in Europe were founded between 1990 and Aerts et al. (2007) argue that the economic crisis in Europe impacted negatively on the continued development of business incubators after The decline in the rate of establishment of business incubators continues to limit the growth and impact of SMMEs on the European economy, and for some observers, one consequence is to make it less competitive (Goddard and Chouk, 2008). One study conducted by the Commission of the European Communities (2000) highlights that the European Union aspires to grow the most globally competitive economy by promoting innovation. The European Union has identified SMMEs as one of the main drivers behind its ambition to achieve a globally competitive economy through innovation (Aerts et al., 2007). Despite the European Union s ambitious plan, the small business failure rate in Europe remains high. According to Aerts et al. (2007) one out of every three SMMEs in Europe fail before reaching their second year of operation. As a result, small business incubators have been identified as strategic tools to counter this high SMME mortality rate and to promote innovation in Europe for global competitiveness (OECD, 2002). Different European business incubators emphasize different objectives on their mission statements (Aerts et al., 2007). None the less, in line with the aspirations of the European Union, the main core objective of most European business incubators is the accelerated growth of globally competitive local economies, igniting a culture of entrepreneurship, and the promotion of innovation (Aerts et al., 2007; Goddard and Chouk, 2008). Hackett and Dilts (2004) emphasize that the increased interest in global competitiveness is a recent phenomenon; the initial interest in business incubation has been mainly influenced by the imperative to create jobs. As more and more incubators have been initiated the sponsors have 21

34 influenced their objectives. For example, University-sponsored incubators have a particular focus upon research and development, technology transfer and innovation (Aerts et al., 2007). In an analogous manner to the United States, the majority of business incubators in Europe are non-profit entities (Aerts et al., 2007; Goddard and Chouk, 2008). A survey on European business incubators revealed that 70% of European business incubators are non-profit entities while the remaining 30% is constituted by business incubators established for profit purposes (Goddard and Chouk, 2008). Another important feature of European business incubators is that the majority is sector-specific or sector-focused. Aerts et al. (2007) state that the information and communication technology (ICT) sector is strongly represented amongst European business incubators. Indeed, few European incubators are focused upon traditional industries such as agriculture and manufacturing (Goddard and Chouk, 2008). In terms of incubator funding, European business incubators are mostly funded by their respective governments (OECD, 2002). National governments provide the bulk of the startup capital from the conception of the incubator. Whilst government funding is critical for the incubator to get off the ground, in moving forward an important role is assumed by academic institutions in Europe in guiding and shaping the subsequent incubation process. It is estimated that 71% of the incubation funding in Europe is provided by national and regional level of government (Aerts et al., 2007). However, to remain operationally and financially sustainable, many European business incubators rely also upon the rent and service fees generated from their clients (Aerts et al., 2007). 22

35 Australia In Australia the concept of business incubation was adopted in the early 1980s (Bhabra- Remedios and Cornelius, 2003; Burnett, 2009). Inspired by the successful track record of business incubators as a tool for small medium and micro enterprise development and local economic development, the incubation industry was immediately widely endorsed within the government and business circles (ANZABI, 2004). Initially, business incubators only existed in three Australian states and supported by local governments as well as regional economic development organizations. However, the success of these incubators led to the wider roll out of business incubators throughout Australia (Bhabra-Remedios and Cornelius, 2003). The success of business incubators in establishing and supporting successful SMMEs and their impact on the Local Economic Development triggered the official support and involvement of the Australian national government from 1991 (ANZABI, 2004). In parallel with the experience of the United States and much of Western Europe, most of the business incubators in Australia were established and continue to operate as not-for-profit entities that exist alongside a few profit-based business incubators (Dowling, 1997; Schaper and Lewer, 2009). Most of these incubators are based in already existing buildings that the national government purchases for dedicated use for business incubation. Few incubators have been built as greenfield property developments. (Schaper and Lewer, 2009). Business incubator managers are usually responsible for the efficient running and management of the incubators albeit informed by the not-for-profit spirit of Australian business incubators to help minimize the cost of the early stages of SMMEs in order to minimize the failure rate of SMMEs in their infant stages (Schaper and Lewer, 2009). 23

36 As compared to USA or Western Europe, another noticeable feature of Australian incubators is that there are few University or research institution linked business incubators (ANZABI, 2004). This situation is also in contrast to the experience of China (see below) where University or research institution-linked incubators are prominent and driven by the objective of transferring technology and innovation across communities (Schaper and Lewer, 2009). Overall, the record of Australian business incubators is that they emphasize helping SMMEs launch into successful firms but accord only limited attention to the commercialization of technologies (Gardner and Keynon, 1994) Business Incubation in the Developing World Malaysia Business incubation in Malaysia dates back to 1988 when the first small incubator unit was established by the Standard and Industrial Research Institute of Malaysia (SIRIM) (InfoDev, 2010b; Samah, 2010;Timm, 2012). Business incubation in Malaysia has evolved from a single incubator housed in run-down commercial shop-lots to a 2 million square feet space with the one of the best technology infrastructures in the world (InfoDev, 2010b; Mohd Saffar, 2009;Timm, 2012). Nevertheless, the industry gained momentum only a decade after the establishment of the first incubator. The evolution and expansion of business incubation in Malaysia has been consistent with the national government s growing emphasis on technological development and innovation. As a whole, Malaysia identified business incubation as one of the critical tools to aid the country s transition from a resource-based economy to a manufacturing economy (InfoDev, 2010b; Mohd Saffar, 2009). 24

37 According to Timm (2012), in order to fully understand Malaysia s business incubation movement, one needs to carefully understand the broader public policy framework of incubation activities and their strategic objectives. Malaysia s business incubators are centered on the following broader objectives: Start-ups and SMME development; Technology and Innovation development; Commercialization of research and development (R&D) results; To enhance SMMEs global competitiveness; Education and Training; and, Job creation (InfoDev, 2010b; Mohd Saffar, 2009) One of the most distinctive features of the Malaysian business incubation programme is that business incubation activities are fully integrated into the whole system of governance and national development strategy (InfoDev, 2010b). In Malaysia business incubation is the responsibility of seven ministries in government. These Ministries include the Ministry of Finance, Economic Planning Unit, Ministry of Science, technology and Innovation, Ministry of Agriculture and Agro-Industries, Ministry of Higher Education, Ministry of Arts, Culture and Heritage and Ministry of Rural Development. Overall, the Economic Planning Unit in the Department of the Prime Minister is responsible for the coordination and development of business incubation in the country. This indicates the support and significance attached to business incubation as a tool for local economic development, job creation and poverty alleviation in Malaysia (InfoDev, 2010b; Mohd Saffar, 2009; Timm, 2012). 25

38 Malaysia s incubation movement has progressed through three generations of business incubators (Saffar, 2009; Samah, 2010). The first generation model of a Malaysian incubator focused largely on the provision of real estate, shared facilities and reactive support to small start-ups and emerging small businesses. This model was prominent in the early 1990s. The second generation model added a system of pro-active business advisory support services to Malaysian Incubators from 1995 onwards. This model led to the establishment of more than 30 incubators, with the inclusion of three technology incubators. The third generation model of Malaysian incubators emerged in 1999 and emphasized the provision more incubation services to incubatees in order to curb the high mortality rate of small businesses in the earlier stages of operation. The third generation incubators included access to funding, mentoring, technology labs and improved access to advanced technological services for small businesses, as part of the business incubation package (Saffar, 2009; Samah, 2010). According to a study conducted by infodev (2010b), by the year 2010 Malaysia had a total of 106 incubators in operation. Of this total 97 are funded and directed by the Malaysian national (federal) government. It is observed that there is little local government involvement in business incubation in Malaysia. All public incubators are funded and directed by the federal government of Malaysia with the help of various ministries. As a result, business incubation in Malaysia is not only one of the prioritized economic development initiatives but it is embedded into the wider Malaysia national public policy and SMME support strategy (Saffar, 2009; Samah, 2010). 26

39 Malaysian Incubators are categorized into technology and non-technology or general business incubators. The majority of technology incubators are in the following sectors: ICT, multimedia, software development, advanced material, advanced engineering, automation or biotechnology (Jusoh, 2006 ; Saffar, 2009). The largest number of non-technology incubators focus on supporting small businesses in agriculture, tourism, and craftsmanship and general services. The Ministry of Science, Technology and Innovation is primarily responsible for technology-based incubators, while the Ministry of Agriculture focuses largely on general incubators (InfoDev, 2010b). The broader objectives of the Malaysian Incubation programme can be summarized as follows: To contribute to technology transfer and innovation; To help universities and R&D centers to commercialize their know-how; To help companies generate spin-off activities; To contribute to local competitiveness and job creation; and To help disadvantaged communities or individuals with tailor-made projects (Saffar, 2009; Samah, 2010; Timm, 2012). As mentioned above, by 2010 there were 106 business incubators in Malaysia, with an occupation rate of around 25 incubatees per incubator (InfoDev, 2010b). According to InfoDev (2010b) there was an estimated 2,650 incubatees operating by 2010 in Malaysian incubators. With each incubated SMME employing about 3.5 people it is calculated that the incubated SMMEs created approximately 9,250 jobs in The majority of these Malaysian incubators are technology based with the specific focus on the ICT, R&D and advanced manufacturing. While commercial banks remain the primary sources of finance, the 27

40 federal government has established special financial institutions in order to provide further funding to incubators (Saffar, 2009; Samah, 2010; Timm, 2012). Overall, one of the main factors behind the success of Malaysia s Incubation Programme is the strong support that incubators receive from the federal government and from the networks nurtured from this support (InfoDev, 2010b; Timm, 2012). This said, the extent of government support for incubation activities also has led to certain programmatic weaknesses due to some incubatees becoming over-reliant on government funding. Brazil In response to the socio-economic challenges of high levels of poverty, unemployment and inequalities, Brazil was one of the first developing countries to develop a small business incubation policy as a strategic tool (Etzkowitz et al., 2005). In common with many developing countries, Brazilian business start-ups were confronted by high mortality rate in their early stages of existence due to such challenges as financial constraints, lack of infrastructure and bureaucracy. Business incubation was adopted as a strategic tool to reduce high start-up mortality rates and correspondingly to address unemployment, poverty and inequality (Chandra, 2007). Brazil was one of the first developing countries to adopt the concept of business incubation in 1986 (Lalkaka and Bishop, 1996;Chandra, 2007; Chandra and Fealey, 2009). With rapid growth since 1986 the Brazilian business incubation movement is currently ranked as the fourth largest in the world. Currently, Brazil Is reported to have one of the most successful 28

41 incubation programmes in the developing world with over 400 business incubators nationwide (Chandra and Fealey, 2009; InfoDev, 2010c). The success of Brazil s incubation program has been attributed to multiple-stakeholder approach to business incubation that created an enabling environment for start-ups and already existing SMMEs to flourish (Chandra, 2007; Lalkaka, 2003; InfoDev, 2010c). Unlike many countries, business incubation in Brazil was initiated from the bottom-up. The stakeholders include all levels of government, NGOs, the private sector and, most importantly, institutions of higher learning (InfoDev, 2010c). According to Lalkaka and Bishop (1996) most Brazilian business incubators are situated in universities and research institutions. Indeed, Akcomak (2009: 15) estimates that over 80 per cent of the tenants were spin-offs from academia and other companies. Academic institutions not only helped establish business incubators in Brazil, but they also promoted the idea of business incubation as a powerful tool to empower SMMEs and local economies which led to rising awareness by policy makers of the relevance of incubators (Chandra, 2007;Etzkowitz et al., 2005). During the late 1980s it was recorded that Brazil s incubation industry met with major obstacles that were addressed by the enactment of legislation to forge an enabling environment for business incubators (Chandra, 2007;Lalkaka, 2001). The list of obstacles included poor infrastructure, low quality business advisory services and a lack of coordination between academic institution staff, which collectively retarded the progress of business incubators across Brazil (Chandra, 2007). This situation was changed fundamentally when Brazil established a coherent national strategy to manage incubation through the National Advanced Technology Enterprise Promoter Entity (ANPROTEC). The ANPROTEC agency coordinated the national strategy in support of business incubators nationally 29

42 (Oliveira and Menck, 2008). The activities of the ANPROTEC were further strengthened by laws such as Innovation Law of 2005 and the Science, Technology and Innovation Action Plan (STI Action Plan) (InfoDev, 2010c). The broad objective of Brazil s incubation programme is to achieve technology commercialization, economic development and job creation (Chandra, 2007;infoDev, 2010c). In common with many other developing economies, business incubation in Brazil has been allocated a role to specifically create jobs and alleviate poverty among disadvantaged and marginalized groups (Akcomak, 2009; Chandra, 2007; infodev, 2010a). Incubation models designed with these objectives are informed by local needs with local solutions (infodev, 2010c) In addition to this broader objective, Brazil, like many other developing countries aspires to develop into a knowledge-based economy (Chandra, 2007; Lalkaka, 2003). One notable feature of Brazil s business incubators is that the majority of business incubators are technology-based and focus specifically on growing and supporting technologicallyintensive SMMEs into successful high-tech firms (Lalkaka, 2003; Oliveira and Menck, 2008). Although there is focus upon traditional sectors of the Brazilian economy, such as furniture, agriculture and textiles, there is also a significant emphasis given to the development of technology based SMMEs. Technology based incubators are largely advocated for by academic institutions to promote innovation and thereby to create globally competitive SMMEs (Chandra, 2007; infodev, 2010c). The Brazilian incubation landscape is made up of various models and different types of incubators. Brazil s National Incubation Support Program categorizes Brazil s different types of business incubators as follows: technology-based incubators, traditional incubators, social 30

43 and cultural incubators and mixed incubators (InfoDev, 2010c). Traditional incubators are established to support those SMMEs operating in such sectors such as agriculture, furniture and shoe manufacture. Those SMMEs in such traditional sectors were supported primarily to promote job creation and regional and local economic development (Akcomak, 2009). By contrast, technology-based incubators support high-tech SMMEs and are mostly affiliated to universities. Although government largely supports traditional incubators the group of technology-based incubators have attracted support from a variety of stakeholders, which include federal government, private sector, industry and universities (InfoDev, 2010c). In addition to traditional incubators, social incubators were established to tackle high levels of unemployment (Akcomak, 2009; InfoDev, 2010c; Scaramuzzi, 2002). The Brazilian government partnered with academic institutions to promote economic growth and initiate jobs for marginalized communities. The group of, cultural incubators are supported by government in partnership with universities in order to promote Brazil s arts and culture as well as to create employment opportunities. The last type of incubation model in Brazil is the mixed incubator. Mixed incubators support SMMEs across both traditional sectors and ICT (information and communication technology).out of the national total of 400 incubators, 200 of these are technology business incubators, 80 are traditional incubators and the rest are social, cultural or mixed incubators (Scaramuzzi, 2002). It is evident that the Brazilian government assumes a vital role in the support for business incubators (Almeida, 2005; infodev, 2010c). The government s role in supporting business incubators is supplemented by the efforts of academic institutions and of the country s incubation associations. Chandra (2007) argues that this partnership approach to business incubator support is due largely to the shared objectives of government, universities and the 31

44 industry. Over 80% of Brazil s business incubators are affiliated to an academic institution (InfoDev, 2010c). It is these multiple efforts in support of Brazil s business incubators that led to the enactment of Brazil s innovation law in 2005, which enables partnerships between academic institutions and the federal government in support for the creation of new SMMEs (Almeida, 2005; Chandra, 2007). The funding of business incubation efforts in Brazil derives from both the public and private sectors (Akcomak, 2009; Chandra, 2009; InfoDev, 2010c). Most incubation funding comes from SEBRAE, an agency established by the Brazilian federal government to offer support services to SMMEs. Business incubators receive funding from SEBRAE based on their performance in implementing their mandate. Additional incubation funding is sourced from corporations, provincial and local governments. Only a minority of Brazil s incubators receive royalties from their incubatees (InfoDev, 2010c). Universities provide the majority of business incubators with forms of non-monetary support (Chandra, 2009; Etzkowitz et al, 2005; InfoDev, 2010a). It is argued that business Incubators have made a significant contribution to local economic development and job creation in Brazil (Akcomak, 2009; Chandra, 2009; InfoDev, 2010c). Overall, Brazil s 400 business incubators have supported the development of over 1000 SMMEs and created employment opportunities for at least people. In addition, over 80% of incubated SMMEs survive their second year of existence as compared to only 50% of SMMEs outside of the incubators. Many argue that the success of Brazil s incubators can be largely attributed to a multiple stakeholder approach between government, private sector and universities and the synergy of these efforts. Another factor contributing to the success of Brazil s incubation programme is the application of local solutions to local problems. This 32

45 approach has proven to be critical to job creation and poverty alleviation through incubation of small local start-ups (InfoDev, 2010c). China Business incubation is a recent phenomenon in China (Rong, 2009; Chandra and Chao, 2011). The first business incubator in China was established at the Wuhan Donghu New Technology Innovation Center in 1987 (Chen, 2003;Rong, 2009). However, the country experienced rapid growth of business incubators with the opening of 100 incubators in the next decade. The idea of business incubation in China arose from National Government through the Minister of China Science and Technology Commission in 1986 (Rong, 2009). Rong (2009: 56) emphasizes that the Chinese government s commitment to the development of business incubators intensified when China launched its Torch Program, which aimed to commercialize, industrialize and internationalize the high-tech products in China. The implementation of the Torch program gave rise to the prominence of business incubators in China (Akcomak, 2009). As a whole the establishment of business incubators in China is viewed as successful and by 2008 China had 674 technology business incubators (Rong, 2009). The development of business incubators in China was a response to challenges commonly faced by SMMEs in the developing world. These challenges included lack of access to financial resources, poor managerial skills, lack of entrepreneurial culture, government bureaucracy and red tape (Harwit, 2002; Rong, 2009). In response to these challenges, Chinese incubators provide SMMEs with services to help them overcome the barriers created by the above-mentioned challenges by creating an enabling environment for SMMEs to 33

46 flourish. These services include business support services, business advisory and mentoring, networking opportunities and affordable office space (Harwit, 2002; Scaramuzzi, 2002). One of the key points to note about China s business incubators is the overwhelming support they receive from the Chinese government (Harwit, 2002; Rong 2009). It is this support that has enabled China s business incubators to expand at a rate unmatched by the rest of the developing world. Chinese incubators are big in size and cater for a plethora of newly established SMMEs. According to Scaramuzzi (2002) the average Chinese incubator incubates between 60 to 70 SMMEs annually, while the larger units incubate as many as 150 SMMEs at a time. Another important feature to note about the Chinese business incubators is the specific emphasis accorded to innovation and technology (Sun et al., 2005; Sonobe and Zhang, 2010). Business incubation in China has been adopted as a strategic policy instrument to promote a market for high tech SMMEs producing highly technological goods and services. The broader objective was to shift China s economy from a traditional economy to a highly technological driven economy through supporting high tech SMMEs for global competitiveness and economic growth (Sun et al., 2005). Technology incubators are supported and promoted by the Torch High Technology Industry Development Center (TORCH), which reports to China s Department of Science and technology. TORCH is responsible for China s modern business incubators infrastructure, training and skills development as well as the commercialization of technology through high tech SMMEs (Chandra and Chao, 2011). 34

47 As in Brazil, China has a variety of incubation models designed to respond to local challenges and to promote local economic development (Sun et al., 2005;Sonobe and Zhang, 2010). Rong (2009) identifies a unique incubation model, which has evolved in China, namely the International Business Incubator. China s international business incubators are based in the country s leading cities with the objective of promoting local SMMEs global competitiveness and exposing them to foreign markets. Further, the international business incubation model aims to attract the development of foreign SMMEs in China (Rong, 2010; Sonobe and Zhang, 2010; Tang et al., 2010). It is considered that China has one of the most successful business incubator movements in the developing world in terms of contribution to local economic development and small enterprise development (Rong, 2010; Tang et al., 2010). An important aspect about China is that most business incubators are technology business incubators (Rong, 2009). The country s business incubators have created over jobs countrywide. Importantly, business incubation in China has increased the survival rate of new SMMEs to 80%, compared to 30% survival rate of start-ups outside of the incubators. The incubation programme affords entrepreneurial opportunities to Chinese graduates from all over the world who intend to invest their skills in returning to China. This is pursued through China s Oversea Student Enterprise Park (Rong, 2010; Tang et al., 2010). These efforts are supplemented by the work of over 30 incubator associations that play a critical role in creating networks and sharing incubation best practice (Chandra, 2007;Rong, 2009). In a parallel with observations made about Malaysia, the weakness of the Chinese incubation movement is the overdependence of Chinese business incubators upon government funding (Akcomak, 2009; Chandra, 2007; Harwit, 2002; Rong 2009). This reliance on government by 35

48 the Chinese business incubators has resulted in major weaknesses in the Chinese business incubation industry (Harwit, 2002). Chief amongst these is the failure of many Chinese incubatees to graduate and become financially and operationally sustainable (Rong, 2009). This has led to what Akcomak (2009: 17) refers to as the risk-averse cultural values. The risk-averse cultural values are those values whereby tenants of business incubators remain and do not graduate in order to avoid the life outside the protection of a business incubator (Akcomak, 2009). Business Incubation in Africa Outside of the South African experience (discussed in Chapters 3, 4 and 5) it is generally agreed that business incubation in Africa is still in its infancy (AIN, 2010). In addition, it is observed that little research has been conducted on incubation activities in Africa. Since the establishment of the African Incubation Network (AIN) some progress has been made. The African Incubation Network was established in 2004 at the first global forum on business incubation that was held in India (AIN, 2010). The AIN s main objective is to establish solid networks in order to support and promote entrepreneurship and innovation in the African continent. The most recent Conference of the AIN was held in South Africa under the theme Celebrating Incubation in Africa. In a follow up meeting to the establishment of AIN in Accra (Ghana), the AIN resolved to: Create awareness and advocacy for incubation throughout the African continent; Understand country policy environments and advocate for incubation in the continent; Share incubation best practices and success stories throughout the African continent in order to promote business incubation in the continent; Establish a training programme for African Incubator Practitioners; and, 36

49 Support regional incubation workshops in the Africa (AIN, 2010). Since the establishment of the AIN, some progress in incubation development has spread to African countries such as Ghana, Mozambique, Angola, Kenya, Mauritius, Namibia, Rwanda, Senegal, Tanzania and Uganda. Currently the African Incubation Network has over 400 members across the continent (AIN, 2010). The African Incubation Network (AIN) (2010) admits that business incubation in Africa is still in its early stages of development. In 2010 the AIN reported that there were 38 business incubators situated across 14 countries of Sub-Saharan Africa. These incubators provide support to over 800 enterprises and have resulted in the creation of jobs. Current incubation efforts in African countries are focused on the following sectors namely, ICT, agro-processing, manufacturing and textiles. 2.8 Conclusion This chapter provided a review and examination of the international experience of business incubation it is clear from the literature that the concept of business incubation has its origins in developed countries. As the movement evolved, however, the concept and process of business incubation was applied and understood differently across the world. Business incubation has a presence in both the developed and developing world; however, it is clear that different countries have adopted business incubation for different reasons and objectives (Akcomak, 2009; Chandra, 2009; InfoDev, 2010b). In the global context despite being one of the most rapidly growing economies business incubation in Africa is still lagging far behind regions such as Asia and Europe (AIN, 2010). The one exceptional case in Africa is South Africa where business incubation has become an increasingly important phenomenon. 37

50 In Chapter Three the analysis begins of the South African experience of the establishment and evolution of business incubation. 38

51 Chapter Three The Evolution, Development and Geography of Business Incubation in South Africa 3.1 Introduction Business incubation is a phenomenon of recent occurrence in South Africa (Buys and Mbewana, 2007; Sandheep and Wolfgang, 2011). Nevertheless, over the past decade the business incubation industry of South Africa has expanded to become the largest in Africa (AIN, 2010;Ndabeni, 2008). There is general consensus that the origins of small business incubation policy in South Africa can be traced to the mid 1990s when the Small Business Development Corporation established its programme of hives of industry. These were essentially infrastructural development initiatives aimed at bridging the gap between big businesses and SMMEs. Most observers attribute the modern business incubator movement in South Africa to recent policy developments taking place post Undoubtedly, the largest expansion of business incubators has occurred since 2000 with the numbers of incubators expanding from three in 2004 to reach a total of 51 incubators by The primary purpose of this chapter is to track the evolution and development of business incubators as vehicles linked to the support of SMMEs in South Africa. The chapter aims to examine the evolution and development of business incubation in South Africa from the mid 1990s to present day (2013). The material presented in this chapter draws from a number of sources. First, the chapter draws from documentary sources in the form of an analysis of over 39

52 10 years of annual reports on South African business incubators, which were produced by the agencies and institutions responsible for business incubation in the country. Second, the discussion builds from a number of interviews, which were held with key stakeholders and policy makers within the South African incubation industry. Finally, the chapter also is sourced from the limited existing secondary material on South African business incubators (Sandheep and Wolfgang, 2011). The discussion is organized into three major parts of material. First, the chapter begins by locating the development of incubators within the wider contours of national government policy in South Africa to support the SMME sector. Second, following this the discussion turns to analyse the evolution of the business incubator movement in South Africa. The third section examines the profile and geographical distribution of business incubators in presentday (2013) South Africa. 3.2 Broader SMME Development Policy Framework and Objectives in South Africa South Africa s support and emphasis on the significance of Small Medium and Micro enterprises (SMMEs) dates back to 1995 when the Department of Trade and Industry (DTI) published the White Paper on National Strategy for the Development and Promotion of Small Business in South Africa (DTI, 1995; Rogerson,2004, 2012). The White Paper outlined the South African government s national policy and programmes to be implemented in order to support the SMME sector as one of the key drivers behind the economy (DTI, 1995). The White Paper was followed by the National Small Business Enabling Act 0f By 2005, the Department of Trade and Industry further revised the small business support policy and 40

53 this led to the issuing of the Integrated Strategy on the Promotion of Entrepreneurship and Small enterprises (InfoDev, 2010a). The efforts of the Department of Trade and Industry were and continue to be supplemented by inter-departmental initiatives aimed at promoting small enterprise development (InfoDev, 2010a). In particular, the Department of Science and Technology (DST) emerged as a key partner of the Department of Trade and Industry in the promotion of small enterprise development. The DST is credited for initiating in the early 2000s the small business incubation programme and technology stations programme, which was undertaken in partnership with the DTI. It is this programme (discussed in Section 3.3) which remains an important influence upon the contemporary landscape of South Africa small enterprise development (GODISA, 2005; STP, 2011/12). In addition to the DTI and the DST, other institutions and agencies set up by the South African government to offer support for small enterprise development in the country include: The Department of Tourism; Small Enterprise Development Agency (SEDA); Seda Technology Programme (STP); Khula Enterprise Finance; Technology Innovation Agency; National Empowerment Fund (NEF); and, Incubation Support Programme (ISP). 41

54 Since the White Paper on National Strategy for the Development and Promotion of Small Business in South Africa, government s small enterprise development efforts have sought to achieve the following objectives: To alleviate poverty by creating opportunities for marginalized communities to generate income through SMMEs; To reduce high unemployment by creating sustainable employment opportunities through the empowerment of SMMEs; To achieve a transformative redistribution of wealth, income and opportunities in order to reduce socio-economic inequality; To strengthen cohesion and cooperation between SMMEs through the creation and maintaining of networks; To bridge the gap between SMMEs and big business; and, To empower previously marginalized groups. I.e. Blacks, Women, Youth and, disabled South Africans (DTI, 1995; Buys and Mbewana, 2007). It was observed that while there is strong recognition and acknowledgement of the importance and relevance of the SMME sector for achieving sustainable economic growth, job creation and subsequently alleviating poverty within the South African government, most SMMEs still fail to remain in business and close down during their early stages of existence because of various reasons (GEM, 2011; Ndabeni, 2008; Timm, 2012). According to the Small Enterprise Development Agency (Seda) (2010) 80% of South Africa s Small Medium and Micro Enterprises (SMMEs) fail in their first year of existence. The South African Government has indicated its commitment to support SMMEs throughout their early stages of existence to minimize their costs of doing business while increasing their chances of survival. 42

55 The national government isolated business incubation as one viable tool to help SMMEs grow and become successful enterprises (Ndabeni, 2008; Seda, 2010;Timm, 2012) In particular, since the beginning of his term of office in 2009 South Africa s Minister of Trade and Industry (DTI), Minister Rob Davies, has emphasized the significance of business incubators as one of Government s main tools to promote broader economic participation, to uplift the country's entrepreneurial base and encourage start-up activities of small business (DTI, 2012; Seda, 2012). In line with this government priority, the Department of Trade and Industry (DTI) established the Incubation Support Programme (ISP) in The ISP marks the latest milestone in the evolution of South Africa s business incubation movement. Through the ISP the South African government aims to partner with the private sector, labour and Community-based Organizations (CBOs) in establishing a targeted 250 new business incubators by 2015 (STP, 2012; Seda, 2013). Having positioned the business incubator movement within the development of SMME policy in South Africa, the next section turns in detail to examine the evolution and development of business incubators in the country. 3.3 The Evolution and Development of Business Incubation in South Africa Four different phases in the evolution of business incubation in South Africa must be recognized. In understanding the evolution of business incubation in South Africa this part of the chapter first examines its historical origins in the work of the (former) Small Business Development Corporation in the 1990s. Second, the discussion turns to the so-termed GODISA programme that was launched in A third phase in the development of business incubation in South Africa begins in 2006 with the activities of the SEDA Technology Programme (STP). Finally, the fourth phase in the development of business 43

56 incubators is marked by the launch in 2012 by the Department of Trade and Industry of the Incubation Support Programme (ISP). The Hives of Industry (SBDC) Godisa Incubation Progamme (DTI, DST and EU) Seda Technology Programme (Seda) Incubation Support Programme (ISP) (DTI) Figure 3.1 The four phases in the evolution of business incubators in South Africa The four phases in the evolution of business incubation in South Africa are shown schematically on Figure 3.1. The details of this evolution are now presented The Hives of Industry Most analysts locate the origins of the idea of business incubation in South Africa to the period of the mid-1990s (Ndabeni, 2008). In 1995, the Small Business Development Corporation (SBDC) established what became known as the hives of industry (Sandheep and Wolfgang, 2011). These hives of industry were infrastructural initiatives and established in order to bridge the gap in opportunities for growth between small and big businesses in South Africa. 44

57 The majority of the hives were sited in old factories and other old premises that were secured and funded by the SBDC (Buys and Mbewana, 2007). These buildings provided the muchneeded accommodation to emerging SMMEs at a highly subsidized rent. In addition to cheap office space, the hives provided SMMEs with collective services in terms of affordable bookkeeping, electricity, telecommunications and storage facilities. Business support services such as business and legal advice, access to finance and training were also provided to SMMEs (InfoDev, 2010a). The hives further attempted to incorporate SMMEs into the big businesses supply chain through a process of sub-contracting. Despite having similar attributes to business incubators, Buys and Mbewana (2007) argue, however, that the SBDC hives did not fit into the description of an incubator critically because of the fact that graduation out of the premises was not mandatory for the tenants. As was made clear in Chapter Two, the issue of graduation is of central importance for the activity of international business incubation (Chandra, 2007; InfoDev, 2010a) GODISA Incubation Programme A second milestone in the development of business incubation is South Africa was the establishment of the so-termed GODISA Programme in the year 2000 (Buys and Mbewana, 2007; Sandheep and Wolfgang, 2011). The term GODISA is a Setswana word for helping grow. The GODISA programme was an outcome of the merging of a number of existing small business development organisations. These organisations included: inter alia, the National Technology Transfer Center (NTTC), the Technology Advisory Centre (TAC), the Technology for Women in Business (TWIB), the SME support activities of the South African Quality Institute (SAQI) and the GODISA trust (Buys and Mbewana, 2007). According to 45

58 Cassim (2001), the GODISA Programme marked an important phase in which South Africa began to consolidate its business incubation efforts for small enterprise development. GODISA was established through a partnership between South Africa s Department of Trade and Industry (DTI), Department of Science and Technology (DST) and the European Union (EU). Under the leadership of its first Chief Executive Officer, Mr Charles Wyeth, GODISA ushered in a new era of small enterprise development in South Africa (Buys and Mbewana, 2007; Godisa, 2004/5; InfoDev, 2010d; Sandheep and Wolfgang, 2011). An important feature to note about the GODISA programme is that, unlike other small enterprise development initiatives, it was a multiple stakeholder-supported initiative (InfoDev, 2010d). The GODISA stakeholders included: Non-Governmental Organisations (NGOs), the private sector, as well as local, provincial and national levels of government (Buys and Mbewana, 2007;GODISA, 2004/5;InfoDev 2010a). Several observers argue that it was this multiple stakeholder approach to small enterprise development and the synergies between various stakeholders that underpinned the success of the GODISA programme (Ravjee, 2013). In line with its multiple stakeholder approach, the GODISA Programme reported to the Minister of Science and Technology and a Board of Trustees (GODISA, 2004/5). It is significant to note that this Board of Trustees comprised of seven individuals representing various sectors; three representatives were drawn from the Department of Trade and Industry, one from Private Sector and three from the Department of Science and Technology s Technology sub-programme, where the idea for GODISA was born (GODISA, 2004/5). In its first annual report of 2004/5, the GODISA Programme listed its broad objectives as follows: 46

59 To establish Technology Business Centers such as Incubators, Innovation Centers, Technology Demonstration Centers or Hybrid Centers with an aim of accelerating the development of technology-based small enterprises; To promote technology transfer/diffusion within the SMMEs sector of the local economy; To enhance a culture of entrepreneurship and innovation thinking through effective and efficient business center processes; To facilitate effective, efficient and economical technological and business skills and knowledge in centers; To establish and maintain networks among centers, as well as with other similar organisations; To promote economic growth and the creation of employment opportunities through technological innovation; To provide services such as training, consultation, business advice and other services necessary for the effective, efficient and economical functioning of centers; and To improve the standards through benchmarking and research (GODISA, 2004/5; InfoDev, 2010d). The objectives of the GODISA programme were targeted to address South Africa s triple challenges of unemployment, inequality and poverty (GODISA, 2004/5). In the 2005 GODISA annual report, the Chairperson of the Board of Trustees reported that GODISA s primary aim was the desire to achieve maximum impact in small enterprise creation through technology transfer and diffusion. The approach taken by the GODISA programme was based on the creation and support for competitive SMMEs with a technology focus (Buys 47

60 and Mbewana, 2007). The underpinning premise was that a technological intervention would boost the capacity of South African SMMEs (GODISA, 2004/5). GODISA initiated a series of business incubation projects which were aimed at enhancing the participation of previously marginalized groups in sectors that were historically dominated by white entrepreneurs (Buys and Mbewana, 2007). The Biomedical and Biotechnology sectors were specifically targeted by the GODISA programme. Enterprise development initiatives would be put in place to ensure economic transformation in these particular sectors in line with the South African government s efforts to enforce Black Economic Empowerment (BEE) (GODISA, 2004/5). The GODISA programme was tasked with the development of a national business incubation framework. Through its experimentation with various incubation models, the GODISA programme was mandated to evolve a sustainable business incubation model for South Africa (GODISA, 2004/5). Such an incubation model had to take into account the developing nature of the South African economy and the necessary support required by the struggling South African SMME sector (Sandheep and Wolfgang, 2011) The GODISA Programme experimentation was initiated and structured through the establishment of four pilot initiatives. These are detailed below: a. Technology Demonstration Center (TDC) The first GODISA programme was the setting up of Technology Demonstration Centers to provide appropriate technologies, equipment and knowledge to foster the establishment and upgrading of existing SMMEs. The Zenzele technology demonstration center was the first 48

61 Technology Demonstration center to be established under the GODISA Programme (Buys and Mbewana, 2007; Ndabeni, 2008; GODISA, 2004/5). b. Technology Incubator (TI) The second initiative was that of technology incubators that provided a variety of business support services to create an enabling environment favourable to the establishment of new start-ups and the accelerated growth of existing SMMEs.The first technology Incubator established under the GODISA Programme was the Softstart Technology Incubator (GODISA, 2004/5). In addition to Softstart Business Incubator, GODISA further established five additional business incubators. These were Acorn Technology Incubator, Bodibeng Technology Incubator, The South African Chemical Technology Incubator (CHEMIN), Egoli Bio Technology Incubator and Timbali Technology Incubator (GODISA, 2004/5). c. Innovation Support Center (ISC) A third area of work was GODISA s Innovation Support Centers which sought to boost the commercialization and transfer of technologies to start-ups and existing SMMEs in order to increase their competitiveness and sustainability. The first such Innovation Support Center established under the GODISA Programme was in Kwazulu-Natal (Buys and Mbewana, 2007; Ndabeni, 2008; GODISA, 2004/5). d. Hybrid Centers The last element was the initiation by GODISA of Hybrid Centers, which resembled a combination of the Innovation Support Center, the Technology Demonstration Center and the Technology Incubators (GODISA, 2004/5) 49

62 The core of the GODISA programme was centered upon the activities of the six technology incubators, which are discussed further below. a. Softstart Technology Incubator Softstart technology incubator was the first technology business incubator established by the GODISA Programme. Softstart was implemented in partnership with the Council for Scientific and Industrial Research (CSIR), the University of Pretoria and Pretoria Technikon (Buys and Mbewana, 2007). Softstart provided infrastructural and business support services to assist the start-up and growth of small businesses in the ICT sector. Softstart further provided technologically advanced facilities at a highly subsidized rate. b. Acorn technology incubator The Acorn technology incubator was a technology incubator which focused on developing start-ups and existing SMMEs within the biomedical, bioengineering and biotechnology sectors. Acorn was a registered section 21 company based in the Western Cape, providing infrastructural and business support services to small businesses in the life science sector. Acorn aimed at establishing and supporting financially and operationally independent SMMEs in the arena of life sciences through the facilitation of access to funding and on-site business incubation. In particular, Acorn provided incubatees with business support services such as office space, administrative services, commercial and technical services, business mentoring and financial modeling (GODISA, 2004/5). 50

63 c. Bodibeng Technology Incubator. A third GODISA foundation was the Bodibeng Technology Incubator (BTI), which was a virtual incubator and assisted SMMEs in Information, Communications and Electronics Technology (ICT&E). The incubator was based in Johannesburg. BTI sought to establish a virtual network of entrepreneurs by providing tailor-made business support services in order to connect technology-based SMMEs in the Information, Communication and Electronics sectors with the global business community so as to promote global competitiveness. BTI was implemented in partnership with a number of academic institutions including the (then) University of Potchefstroom, Rand Afrikaans University (RAU), University of the Witwatersrand and the Holland TSM Business School. BTI was subsequently merged with the Softstart incubator to form SoftstartBTI incubator (GODISA, 2004/5). d. Timbali Technology Incubator The Timbali Technology Incubator is another of the earliest small business incubators which was established by the GODISA incubation programme. Based in the Mbombela region of Mpumalanga province, the Timbali (SiSwati name for flower ) incubator supported the start-up and growth of small and emerging farmers in the cut flower market (Buys and Mbewana, 2007; GODISA, 2004/5). This type of technology incubator marked a departure from GODISA s early focus on the biomedical sector. e. The South African Chemical Technology Incubator (Chemin) CHEMIN is a further technology business incubator to support the start-up and growth of small enterprises in the downstream chemical industry. Although the Chemin s headquarters were in Port Elizabeth, the incubator always coordinated and implemented projects on a nationwide basis. Chemin operated in partnership with the Port Elizabeth municipality, Sasol 51

64 Chemcity, Council for Scientific and Industrial Research (CSIR), Merisol, Chemical Marketing and Consulting services and CHP Associates (Buys and Mbewana, 2007; Ndabeni, 2008). f. egoli Bio technology incubator The sixth GODISA technology incubator was egoli Bio which is a technology business incubator supporting the start-up and growth of SMMEs in the biotechnology sector through the commercialization and transfer of technology. The incubator assists SMMEs in the commercialization of biosciences research, technology platforms, products and services. Other services provided by egoli Biotechnology incubator include a technology intensive and collaborative working environment, infrastructural support, and strategic commercial and legal advice and mentoring. The egoli Bio incubator is based in Pretoria (Buys and Mbewana, 2007; Ndabeni, 2008). Overall, an important feature about the GODISA early Incubation programme was the emphasis given to the development of partnerships with local government municipalities as well as with departments of provincial governments (GODISA, 2005;Ravjee, 2012). In addition to the pilot centers, the GODISA Programme further established more technology incubators in partnership with various local government municipalities. During the year 2005 GODISA partnered with the Limpopo provincial government and the EThekwini Municipality in establishing new technology business incubators (GODISA, 2005). The GODISA programme recorded several achievements during the 2004/5 financial year. During the 2004/5 financial year, 83.9% of the SMMEs supported by the GODISA Programme survived their first year of existence. This number increased to a 93% survival 52

65 rate during the 2005/6 financial year. The GODISA incubation programme further recorded a survival rate of 80.3% for SMMEs in their second year of existence. This performance was in marked contrast to the state of SMMEs outside of the GODISA technology incubators. At the time the mortality rate of SMMEs outside of the business incubation programme stood at over 80%, with some sectors recording an SMME mortality rate of close to 90% in their first year of existence (GODISA, 2004/5; GODISA, 2005/6). Overall, the CEO of GODISA, Mr. Charles Wyeth, attributed this success rate to business incubators making a significant and positive impact on the survival rate and growth of technology-based SMMEs in South Africa, under the theme turning 8 in 10 failures into 8 in 10 successes (GODISA, 2004/5; GODISA, 2005/6). During the 2004/5 period the GODISA Programme provided support to a total of 280 SMMEs. Almost all of these SMMEs were technology-based SMMEs in the Information and Communication Technology (ICT) sector. Most infrastructural and business support was provided in partnership with academic institutions such as the Tshwane University of Technology (TUT). During the 2005/6 financial year, however, in addition to the ICT sector, the GODISA programme began to broaden the range of sectors for support to include Agriculture, Mining, Life Sciences and Biotechnology (GODISA, 2005/6). 53

66 Table 3.1: Number of Businesses Established by Sector 2005/2006 Number of Businesses Established per Sector Life Sciences 2 ICT 14 Chemicals 8 Biotech 3 Agri-Bus 20 Mining 6 (Source: GODISA, 2005/6) This broadening of the sectoral engagement of GODISA is indexed on Table 3.1 which shows for 2005/6 the numbers of businesses established with GODISA support in different sectors of the economy. It shows that by 2006 the business support to agricultural businesses had become the largest number in terms of actual SMMEs followed by ICTs, the traditional focus for GODISA operations. Table 3.2: Number of Jobs created by Sector 2005/6 Total Number of Jobs Created per Sector Life Sciences 56 ICT 161 Chemicals 109 Biotech 111 Agri-Bus 167 Mining 220 (Source: GODISA, 2005/6) 54

67 Table 3.2 reveals the breakdown of job creation by sector through the support provided by GODISA to business incubation. It reveals the growth of support to mining, agricultural businesses as well as ICT. In line with the GODISA Programme objective to create employment opportunities, the 280 SMMEs supported during the 2004/5 period resulted in the creation of a total of 820 jobs by 2006 (GODISA, 2005/6). As a whole it must be understood that the period in which the GODISA programme was in operation, it laid solid foundations for a wider roll out of business incubators in South Africa post-2006 in support of the national objectives to build a robust SMME economy SEDA Technology Programme (STP) In March 2006 the Department of Trade and Industry (DTI) together with the Department of Science and Technology merged the GODISA Programme with the National Technology Transfer Center (NTTC), the Technology for Women in Business Programme (TWIB) and Technology Advisory Center (TAC) (AIN, 2013; InfoDev, 2010d). The merger of these organisations resulted in the formation of the SEDA Technology Programme (STP). In 2008, the South African Quality Institute (SAQI) was also integrated into the SEDA Technology Programme (STP). The merging of these different organisations was part of the South African Government s plan to consolidate and rationalize small enterprise development activities throughout government departments and various state agencies (GODISA 2005/6; Ramluckan and Wolfgang, 2011). According to InfoDev (2010d) the merger of these organisations was further influenced by the South African Government s intention to increase the contribution of SMMEs into the national economy. 55

68 The formation of STP marked a new phase in the evolution of business incubators in South Africa. The STP was established to support strategically the South African government s efforts to achieve economic growth, job creation and the alleviation of poverty and to reduce the rising socio-economic inequalities (Ndabeni, 2008; AIN, 2010; InfoDev, 2010d). The STP executes this responsibility through establishment and strengthening of structures and institutions which are aimed at supporting the start up and growth of SMMEs, particularly those owned by previously marginalized groups (i.e. Blacks, Women, Youth and the disabled) (AIN, 2010; InfoDev, 2010d; STP 2011/12; SEDA, 2011/12).The STP s mission is defined as follows: Increase accessibility to, and utility of, technologies and technical support for small enterprises; Facilitate the acquisition, development and transfer of technology to small enterprises, particularly those operating in the so-termed second economy ; Facilitate the establishment of women-owned small enterprises; Promote the use of Quality Systems and Standards by small enterprises; Improve small enterprise performance and productivity; Enhance small enterprise profitability and growth; Improve small enterprise competitiveness; and, Reduce small enterprise failure rates (Info Dev, 2010d: 18) In order to achieve its objectives the STP established three separate divisions, namely the Business Incubation Division, the Quality Assurance Division and the Technology Transfer Division (AIN, 2010; InfoDev, 2010d; Ramluckan and Wolfgang, 2011). The business incubation division is responsible for the establishment of new business incubators and for 56

69 strengthening existing incubators. The quality assurance division ensures the provision of training, accreditation and quality control and assessment services to start-ups and existing SMMEs. The technology transfer division complements these activities by providing SMMEs with the latest technologies and training in order to improve their productivity and competency (AIN, 2010). Overall, the activity of business incubation is at the heart of the STP s efforts to create financially and operationally sustainable SMMEs. The STP s network of business incubators seeks to provide infrastructural and business support services which are tailored to afford an enabling environment for South African SMMEs to grow and become operationally and financially independent businesses (Ndabeni 2008; Ramluckan and Wolfgang, 2011). This represents a continuation of the goals of business incubators as initiated under the GODISA programme. The STP reports to the Small Enterprise Development Agency (SEDA), an agency of the Department of Trade and Industry. The Department of Trade and Industry (DTI) founded the Small Enterprise Development Agency in December 2004 through the merger of existing organisations involved in small enterprise development, namely Ntsika Enterprise Promotion Agency, National Manufacturing Advisory Centre (NAMAC) and the Community Public Private Partnership Programme (CPPP) (Ndabeni, 2008; SEDA, 2011/12). One of the main achievements of the STP has been to oversee the expansion of public sector business incubators to a total of 42 incubators by 2012 (AIN, 2010; STP, 2012; Seda, 2013). All 42 public incubators are government owned and managed through the Small Enterprise Development Agency (Seda) (Ravjee, 2013). Seda reports to the DTI in line with the DTI s 57

70 budget procedures for agencies. All these incubators are registered as independent entities, either as a Section 21 or a Non-Profit company or trust. Members of the company or trust are responsible for the appointment of non-executive directors and an incubator manager manages the incubator (InfoDev, 2010d: 20). Interviews with SEDA officials revealed that the average incubation process takes a period of approximately three years. The three year period is the norm but can vary as it was made clear that in certain sectors the infant businesses require more time before the incubatees are ready for graduation. All the SMMEs in incubators go though the three critical stages of pre-incubation, incubation and post- Incubation or post-graduation, which are accompanied by appropriate, support interventions (Ravjee, 2010). In terms of the type of incubators favoured in the STP, the central focus has been upon public sector support for sector-specific forms of incubators. This continues the trend that was established in the GODISA programme. Several performance indicators point to the positive performance of the STP. First, and most critically, the business incubators have reduced the high mortality rate of SMMEs. It is estimated that the STP incubators achieved and maintained a survival rate of eight out of ten SMMEs as compared to a national rate of failure of eight out of ten SMMEs which were not receiving support from business incubators. In other words, 80% of SMMEs under STP s Incubators survive their first year of existence (AIN, 2010). Other positive indicators relate to job creation as the STP incubators created an estimated total of jobs between the years 2004 and 2009 (AIN, 2010). During this period the STP incubators established 1010 SMMEs and supported a total of 1900 SMMEs (AIN, 2010). Of this total, government s emphasis upon assisting disadvantaged groups is mirrored in the statistics that 81% of all businesses supported by the STP incubators are black-owned (AIN, 2010). Women own, however, only 36% of the SMMEs supported by 58

71 STP incubators (AIN, 2010), a finding that suggests that the programme has under-performed in respect of objectives to empower women-owned small business (AIN, 2010; STP, 2011/12) The Incubation Support Programme (ISP) The fourth and most recent phase in the evolution of business incubators in South Africa as part of national government SMME programming was launched in During 2012 the National Department of Trade and Industry (DTI) launched the Incubation Support Programme (ISP). The ISP marks the latest phase in the evolution and development of business incubation in South Africa. The ISP further confirms the South African government s long-term commitment to business incubation as a vehicle to create sustainable enterprise. According to the DTI (2012) the primary objective of the newly established ISP is to create successful enterprises with the potential to create employment opportunities and revitalize and strengthen both local and national economies. The ISP further aims to broaden economic participation by ensuring that incubated SMMEs graduate into the mainstream economy. At the heart of the ISP is the notion of public-private-partnerships (PPP). Through the ISP government has called on big business to partner and participate meaningfully in SMMEs development through skills transfer, supplier development and marketing opportunities. The DTI has identified public-private-partnerships as critical to promoting broader economic participation, uplifting South Africa s entrepreneurial base and encourage start up activities (DTI, 2012). 59

72 The ISP became effective in September 2012 and is to be administered for a period of 10 years until In 2012 the DTI announced an ambitious target of establishing 250 business incubators by The ISP is to function on a grant system. Approved incubators will qualify for a maximum of R10 million per year support for a period of three years. According to the DTI (2012) the Incubation Support Programme will cover the following costs: Business development services (e.g. business advisory, couching and mentoring, training, facilitation of funding, production efficiency and improvement, quality and standards acquisition);. Market access; Machinery, equipment and tools; Infrastructure linked to incubator (i.e. buildings and furniture); Feasibility studies for establishing and expanding incubators; Product or service development; Information and Communication Technology (ICT); and Operational Costs. The ISP builds upon and further deepens a multi-stakeholder approach to business incubation development (Ravjee, 2010), which can be traced back to the GODISA period. Business incubation in contemporary South Africa is executed through the DTI playing a leading role in partnership with universities, Private Sector, industry leaders, labour, community based organizations, Incubation Associations and Provincial and Local Government. The leading associations are South African Technology Business Incubation Association (SABTIA), the African Incubation Network (AIN) and the National Business Incubation Association. Private sector involvement is manifest in the establishment by nine private business incubators by The major private sector actors in the landscape of business incubation 60

73 are Shanduka Black Umbrellas, Raizcorp, Aurik, Sasol Chemcity, Maxum (Innovation Hub) and Bandwidth Barn. Table 3.3. Sub-national Government Support and Interventions to Assist Business Incubator Development in South Africa, 2010/2011 Province Provincial and Local Government Involvement: Eastern Cape Alfred Nzo District Municipality has been involved in furniture manufacturing incubation as well as Agro-processing in the Eastern Cape. Nelson Mandela Metropolitan Municipality has been involved in incubation in the construction and ICT sectors in the Eastern Cape Free State Gauteng No local or provincial government involvement The City of Tshwane is involved in Manufacturing and Automotive industry incubators. Ekurhuleni Metropolitan Municipality is involved in Lepharo Incubator. The City of Tshwane also supported the setting up of private incubator in Tshwane. KwaZulu- Natal Umzinyathi district municipality is involved in Agri-Skills and construction Incubators. ethekwini Metropolitan Municipality is also involved with furniture manufacturing and construction incubators. Limpopo The provincial department of agriculture is involved in Agri-Skills and bio-fuels incubators Mpumalanga The stainless steel Incubator receives infrastructural support from the Mpumalanga Economic Growth Agency Northern Seda in talks with the Sol Plaaitjie district municipality to establish 61

74 Cape North West an incubator in the Northern Cape Bojanala West District Municipality involved with the Platinum incubator Western No local or Provincial government involvement Cape (Source: STP, 2010/11). Finally, at sub-national levels of government, a number of provincial and local government authorities have become engaged and increasingly active in the support of the development of business incubators (see Table 3.3). It is observed that participation by sub-national government has been limited and uneven. Moreover, by 2012 no involvement was recorded by provincial or local governments in the provinces of Western Cape or Free State (STP, 2010/11). 3.4 Profile of the Contemporary Status and Patterns of Business Incubators in South Africa The previous two sections of discussion have traced respectively the role of business incubators as part of the evolving structure of national government support for SMME development in South Africa and the different phases in the evolution of business incubators from the hives of industry, through the GODISA programme, through the STP initiatives and finally to the energetic roll out of business incubators as part of the ISP. It was noted that changes had occurred over time in the approach to business incubators with growing focus upon the need for partnerships. 62

75 In this final section of the chapter the aim is to provide a profile of the contemporary state of business incubators in South Africa. This profile will examine variously the different agencies involved in establishing business incubators, the different sectors that business incubators are targeting, and the emerging geography of business incubators as part of the SMME landscape in South Africa. Table 3.4: National Database of all South African Business Incubators SEDA (Public) Incubators (2013) Name of Incubator Location Sector 1. Chemin (Port Elizabeth) Port Elizabeth, Eastern Cape Chemicals Industry 2. Chemin (Durban) Durban, Kwazulu Natal Chemicals Industry 3. Chemin (East London) East London, Eastern Cape Chemicals Industry 4. Downstream Aluminium Centre for Richard's Bay, KwaZulu- Aluminium fabrication & Technology (DACT) Natal casting 5. EgoliBio Pretoria, Gauteng Bio & Life Sciences 6. Ekurhuleni Jewellery Incubator East Rand, Gauteng Jewellery 7. Furntech Durban Durban, KwaZulu-Natal Furniture Manufacturing 8. Furntech George George, Western Cape Furniture Manufacturing 9. Furntech Head Office - Cape Town Cape Town, Western Cape Furniture Manufacturing 10. Furntech Johannesburg Johannesburg, Gauteng Furniture Manufacturing 11. Furntech Mthatha Mthatha, Eastern Cape Furniture manufacturing 12. Furntech Umzimkhulu Umzimkhulu, KwaZulu-Natal Furniture Manufacturing 13. Furntech White River White River, Mpumalanga Furniture Manufacturing 14. Global Jewellery Academy Lenasia, Gauteng Jewellery 15. Innovation Technology Business Durban, Kwazulu Natal Mixed-Use High tech Incubator (Invo Tech) 16. Lepharo Springs, Gauteng Copper, Zinc and Base Metals 17. Mapfura Makhura Incubator (MMI) Marble Hall, Limpopo Bio-fuels plant production & processing 63

76 18. Mpumalanga Agri-skills Development & Training (MASDT), Nelspruit 19. Mpumalanga Stainless Steel Initiative (MSI) 20. Seda Agricultural & Mining Tooling Incubator (SAMTI) 21. Seda Alfred Nzo Agro Manufacturing Incubator (SANAMI) 22. Seda Atlantis Renewable Business Incubator (SEREBI) 23. Seda Automotive Technology Centre (SATEC) 24. Seda Construction Incubator (SCI), Dundee 25. Seda Construction Incubator (SCI), Durban 26. Seda Construction Incubator (SCI), Kwa-Mashu 27. Seda Construction Incubator (SCI), Mthatha 28. Seda Construction Incubator (SCI), Port Elizabeth 29. Seda DUT Technology Incubator (SDTI) 30. Seda Essential Oils Business Incubator (SEOBI) 31. Seda Essential Oils Business Incubator (SEOBI) Nkandla 32. Seda Limpopo Jewellery Incubator (SLJI) 33. Seda Nelson Mandela Bay ICT Incubator (SNMBICTI) Nelspruit, Mpumalanga Agricultural Capacity Building Middelburg, Mpumalanga Stainless Steel Processing Bloemfontein, Free State Mining & Agricultural tooling Mount Ayliff, Eastern Cape Agro Processing Atlantis, Western Cape Renewable Energy Rosslyn, Gauteng Automotive Industry Dundee, KwaZulu-Natal Construction Durban, KwaZulu-Natal Construction Building & Civil Kwa-Mashu, KwaZulu-Natal Construction Mthatha, Eastern Cape Construction Port Elizabeth, Eastern Cape Construction Durban, KwaZulu-Natal Mixed use High-Tech Pretoria, Gauteng Essential Oils-plant cultivation & oil distillation Nkandla, Kwazulu-Ntala Essential Oils-plant cultivation & oil distillation Polokwane, Limpopo Jewellery manufacturing Port Elizabeth, Eastern Cape ICT 34. Seda Northern Cape Diamond and Kimberly, Northern Cape Jewellery 64

77 Jewellery Incubator 35. Seda Platinum Incubator (SPI) Rustenburg, North-West Platinum Jewellery 36. Seda Sugar Cane Incubator SESUCI) Nelspruit, Mpumalanga Sugar cane-plant cultivation & sales 37. Seed Container Park (Secopa) Diepkloof, Gauteng Mix Manufacturing 38. SmartExchange Durban, Kwazulu Natal Mixed 39. SoftstartBTI (SBTI) Midrand, Gauteng ICT 40. Soshanguve Manufacturing Technology Soshanguve, Gauteng Low-cost small scale Demonstration Centre (SMTDC) manufacturing 41. Timbali Nelspruit, Mpumalanga Floriculture 42. Zenzele Technology Demonstration Randburg, Gauteng Small scale Mining Centre Private Incubators: 1. Raizcorp Johannesburg, Gauteng Mixed 2. Shanduka Black Umbrellas (Cape Cape Town, Western Cape Mixed Town) 3. Shanduka Black Umbrellas (Durban) Durban, Kwazulu Natal Mixed 4. Shanduka Black Umbrellas Johannesburg, Gauteng Mixed (Johannesburg) 5. Shanduka Black Umbrellas (Pretoria) Pretoria, Gauteng Mixed 6. SASOL Chem City Johannesburg, Gauteng Chemicals 7. Bandwidth Barn Cape Town, Western Cape ICT 8. Maxum (Innovation Hub) Pretoria, Gauteng ICT 9. Aurik Business Incubator Johannesburg, Gauteng Mixed (Source: Author) In terms of numbers of incubators by 2013 the audit of national incubators reveals a total of 51 functioning incubators. This figure represents a marked growth in the numbers of South African business incubators from a total of only four by 2004, to 37 by 2011 to 51 by Table 3.4 shows the list of incubators and reveals that the majority of the 51 business 65

78 incubators are established the public sector. Of the national total of incubators 42 or 82 percent are public sector driven through the activities of SEDA. The remaining nine incubators or 18 percent are private sector operations. In the international perspective of business incubator development as discussed in Chapter Two, it is apparent that the public sector has been strongly dominant in the growth trajectory of the business incubator movement in the country.. Indeed, it is only in recent years that a set of parallel private sector driven incubators have made their appearance. Automative Industry Bio and Life Sciences Agriculture and Agro- Processing Chemicals Industry Manufa cturing Renewable Energy Mixed Use Small Scale Mining ICT Jewellery Construction Manufacturing Chemic als Industr y Constru ction Total Jewelle ry ICT Agricult ure and Agro- Process ing Small Scale Mining Mixed Use Bio and Life Science s Number of Incubators by Sector Automa tive Industr y Renewa ble Energy Series Total Figure 3.2: South African incubators by sector of the economy (Source: Author) 66

79 Figure 3.2 shows the sectoral focus of business incubators in South Africa. A number of points can be observed. First, that 84 percent of business incubators (43 in total) are sectorally specific and only 8 incubators can be described as mixed in terms of the business category of incubatees. Second, in terms of sectoral focus, currently the largest number of functioning incubators are linked to manufacturing sectors with the largest individual sectors being those of furniture, agro-processing and chemicals. Other manufacturing activities in which sector specific incubators have been established include the production of Jewellery, aluminum fabrication, and stainless steel. Three, beyond manufacturing linked incubators there are several which are dedicated to support other sectors such as ICT, construction and small-scale mining. Finally, in agriculture there is support for both floriculture and the production of essential oils. Public Incubators by Sector of the Economy Renewable Energy Bio and Life Sciences Small Scale Mining ICT Construction Manufacturing Chemi Manuf cals Constr Jewelle acturin Indust uction ry g ry ICT Agricul ture and Agro- Proces sing Small Scale Mining Mixed Use Bio and Life Scienc es Autom ative Indust ry Renew able Total Energy Series Number of Incubators by Sector Figure 3.3: Public Incubators by Sector of the Economy (Source: Author) 67

80 Number of Incubators Private incubators by Sector of the Economy Mixed Use ICT Chemical Industry Series Number of Incubators by sector Figure 3.4: Number of Private Incubators by Sector of the Economy (Source: Author) Figures 3.3 and 3.4 reveal respectively the sectoral distribution or focus of respectively the groups of public sector versus private sector incubators. A comparison of Figures 3.3 and 3.4 reveals that significant differences exist between the focus of public sector as opposed to private sector operated business incubators in South Africa. Three points are of note. Firstly, 95 percent of public sector incubators are sector-specific with only two of the 42 incubators functioning as mixed incubators. Second, by contrast, two-thirds of the private sector incubators are mixed and only three sector-dedicated incubators have been initiated by the private sector. Third, of the large group of public sector incubators initiated by SEDA, the majority are linked to manufacturing activity and agro-processing. 68