Incubators A New Experiment in Small Business Development This is an article published in 1991 in the Indian Manager, (Journal of the School Management Studies, Cochin University of Science and Technology, Cochin, Kerala, India). Citation: Manalel, James (1991), Incubators--A New Experiment in Small Business Development, Indian Manager, Vol. XX, No.1, April-June, pp. 53-56. INCUBATORS - A NEW EXPERIMENT IN SMALL BUSINESS DEVELOPMENT JAMES MANALEL World over, particularly in developing countries, public policy is increasingly directed towards the promotion of small enterprises. The special place given for the small scale sector is obviously because of certain inherent advantages-both economic and noneconomic which they are believed to possess. As a result, a number of fiscal and financial incentives, subsidies, infrastructural facilities and other promotional measures are provided to small scale enterprises in order to offset their cost disadvantages or disadvantages due to factors arising out of their smallness and relative inexperience and lack of resources. In this paper it is proposed to discuss the potentialities of a new tool in small business development viz., the business incubators. The business incubator is a new concept in entrepreneurship and economic development that is fast spreading across Europe and the USA. Many organisations are experimenting with establishing small business incubators as integral parts of their business development strategies. Some universities, corporations, and community organizations are sponsoring incubator centres to create a nurturing environment for business ventures of experienced as well as fledgling entrepreneurs. The small business incubator is an enterprise development tool that performs a number of promotional and supporting roles 'with respect to small enterprises. These incubators typically use some large, often old, building to house the new small enterprises. Within the confines of such a building or even a section of a building, fledgling business are nurtured in the hope that healthy growing firms will eventually emerge out of them. What is an incubator? It is extremely difficult to define what exactly an incubator is because the services offered by different incubators are so diverse and each of them has their own special attractions. However, their purpose, wherever and in whatever form they are found, is to assist the start up and growth of small firms and hereby increase their chances of survival and further
growth. The sheltered environment of an incubator generally provides below-market rent, shared services and logistical support, and business consultancy assistance. Historical background The small business incubator concept is relatively new and has its roots in the belief that there are plenty of potential entrepreneurs who could succeed with the right environment. lts origin can be dated back to the mid-seventies, when several plant closings and massive layoffs had created a job crisis in many parts of UK. In 1975, facing the dilemma of 1,40,000 displaced workers, the British Steel Corporation (BSC) formed a subsidiary, the BSC Industry, to identify BSC properties for potential re-use by entrepreneurs who might create new jobs. The result was the Clyde Ironworks, Glasgow, Scotland. Set up in 1977, it successfully attracted fifty tenant enterprises and created 250 jobs within its first year. By 1982, the Clyde Incubator and others like it in similarly depressed areas were making news in the UK. Realising the potential for the incubator concept in the private sector and open market, BSC Industry director Paddy Naylor and two of his executives left to establish Job Creation Ltd, a- profit-making venture set up in 1980. Job Creation Ltd. has since diversified its operations to Ireland, Netherlands, West Germany and the USA. In the USA also similar experiments were going on even as early as 1950's- though on a much smaller scale. ln fact contemporary versions of incubator facilities came into existence in the U.S. only in the late 1970s. Services offered: At this juncture, it may be useful to point out the distinction between incubators and an allied concept viz., innovation centres. An incubator is generally considered to be a facility with adaptable space which may be leased on flexible terms and usually at a reduced rate. Support services such as typing, computer access, and warehousing may be available on an as-needed basis. Technical, financial and management assistance are also often available. Innovation centres, on the other hand, emphasise technical, financial and management assistance and do not provide physical space. However, a large majority of incubators offer a mix of both these facilities. There are many ways in which an incubator tries to create a "nurturing environment", and these involve providing assistance in overcoming the most common problems and obstacles facing small business. Many incubators provide space at below-market rates on flexible terms, access to shared equipment or services that might be unaffordable otherwise, elimination of building maintenance responsibilities and other reductions in overhead expenses. Some incubators provide financial counselling, while others provide loans, grants or other forms of seed capital in the amounts appropriate for start-up firm s individual needs. Most incubators limit the length of time a tenant may remain in the centre depending upon the need and circumstances. Generally, the period ranges from six months to two years.
Most of these incubators are also flexible in the types of businesses accepted as tenants, though some do restrict their tenants to high-tech or to manufacturing enterprises only. Most tenants are new, start-up businesses, though some of them are spin-offs from established firms or University research. Some others locate their units temporarily in incubators while preparing to move to new facilities. Incubators also provide greater visibility for the tenant in market place and in many cases, provide built-in customers and a support net work. Businesses within a given incubator often give each other business or have shared experiences, thus supporting one another. Incubators may also insulate new businesses from the constraints and pressures of time and cost. Many new firms, especially those in high -tech, have long periods of research and development before their products are marketable. Till they have perfected their production technique and made the necessary marketing arrangements, an incubator may be the most convenient and conducive situation for them. Regarding the effectiveness of the incubator organisations, studies made in the US have shown a higher survival rate among small enterprises in the incubators than those small firms which have not been 'incubated'. Similarly, most of the tenants were found to be appreciative of the services provided by the incubator managers. In fact some even wanted them to provide more and newer services such as in planning. As a result, the Small Business Administration (SBA) of the USA has already recognised the role of these incubators and is taking an active part in the development of incubators. Experiments in India In India although we do not have the type of incubators described above, we have already experimented quite successfully with a similar concept viz., Technology Park. The first technology park was established in the Stanford University of USA in 1950. However, the movement picked up momentum only from the 1980s. The science and technology park is a device which provides a high class infrastructure and environment in the vicinity of higher education institutions where qualified scientists and engineers are provided the necessary facilities and encouragement "to commercialise the results of their research. Thus these technology parks besides encouraging research also act as nurseries for new entrepreneurs. In India the Science and Technology Entrepreneurs Parks (STEP) were sponsored by the Department of Science and Technology of the Government of India in 1983. There are now 14 Science and Technology Entrepreneurs Parks (STEP) and 12 Science and Technology Entrepreneurship Development Projects (STEDs) mainly attached to the Regional Engineering Colleges. Some of the activities of the STEPs in entrepreneurship development include provision of infrastructural facilities for the science and technology entrepreneurs such as administrative block, training block, campus accommodation, nursery sheds, and
industrial R & D sheds. They also have central facilities blocks which provide quality control and R & D labs, stores and go-downs, fabrication and maintenance workshops, computer facilities, and common utilities and facilities like effluent treatment plant etc. Apart from STEP and STED, there have also been a few other successful attempts such as the Ranchi experiment initiated in 1978 by the Small Industry Research and Development Organisation of the Birla Institute of Technology, Ranchi. However, almost all of these have been designed for promoting technology oriented enterprises and have mostly concentrated on technically qualified entrepreneurs. In most cases the emphasis was more on technology development and transfer. Hence they do not provide the same type of services as are provided by the incubator houses we have described earlier. Scope for Incubators in India It is a well-known fact that in most of the developing countries small entrepreneurs suffer all sorts of handicaps, of which technology is only one among many. It is also clearly established that the most difficult period in the life cycle of small enterprises is the initial years - that is the first two, to three years. Studies have also shown that the highest mortality rate among small enterprises is among the infant units. Hence it would be a worthwhile proposition to think of popularising and promoting incubators for small enterprises. These incubators unlike the Technology Parks may provide services to all types of business firms, helping the fledgling units to successfully tide over the problems of infancy. A large number of these problems arise from the relative inexperience of the promoters and hence the services of incubator-manager experts will be of great assistance to them during their infancy, It is not necessary that these incubator houses be state-sponsored or controlled by government organisations. In fact, if it is, then there is every chance that it will become just another of those promotional organisations of which there is no dearth in this country. The experience of units in our industrial estates, have shown that often units outside the estates had better economic performance. In fact, if we want to promote self reliant and vibrant small scale enterprises we better teach them to be efficient and economic right from the start. Hence it would be better to treat these incubator organisations as business propositions, whether sponsored by Government or public institutions or by private organisations. Of course, it is admitted that there is a need for subsidisation of the cost of services in the case of several of the small start-up firms. While the government should provide the necessary subsidy for deserving cases, it should in no case lead to a situation of spoonfeeding, for that would be the surest way to kill those units. Services should be offered only at a price, even though sometimes it is subsidised. In other words, the subsidised service should not lead to wastage and inefficiency on the part of the recipients. Incubator services should be available for only a limited period, say for two or three years, after which the unit
should automatically move out of the incubator house and the privileges of low priced services discontinued. Further services, if required, may be provided at commercial rates. Perhaps this type of a helping hand is what our budding entrepreneurs require to sustain and support them and to stimulate newer talents in to the arena. References: 1. Hornaday, John A., Shils, Edward B., Timmons, J.A., and Vesper, K.H., (Ed.) Frontiers of Entrepreneurship Research, Centre for Entrepreneurial Studies, Babson College, Massachusetts, 1985. 2. Fry, Fred L., The Role of Incubators in Small Business planning, American Journal of Small Business, Vol.11, No.1. Summer, 1986 pp. 61-61 3. Naik, B.M., Technology Park and lts Relevance to India", Financial Express., 9 th November, 1989. 4. Naik, B.M., "Science and Technology Entrepreneur's park (STEP), The Economic Times. September 20, 1988. 5. Carr, Marilyn, Developing Small-Scale Industries in India - An Integrated Approach (The experience of the Birla Institute of Technology s Small Industry Scheme), Intermediate Technology Publications Ltd, London. 1981.