Global Good Practice in

Incubation Policy Development

and Implementation
Global Good Practice in
Incubation Policy Development
and Implementation

October 2010
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TABLE OF CONTENTS

LIST OF ACRONYMS 5

EXECUTIVE SUMMARY 9

1. BEST PRACTICE IN PUBLIC POLICY DEVELOPMENT 10

2. WHAT IS INCUBATION? 11
2.1 The Business Incubation Process 13

3. OBJECTIVES AND STRATEGIC PLANNING FOR BUSINESS INCUBATION 15

3.1. Promotion of new Business Sector, especially in Innovation and ICT 18
3.1.1. Cultural Industry Incubation 22
3.2. Part of major Industrial Restructuring 22
3.3. Introduction of Entrepreneurial Culture to Socially-excluded Groups 23
3.4. Objectives and Policy Mix 24

4. WIDER BUSINESS ENVIRONMENT FOR SMEs 26

5. FUNDING STRATEGIES FOR BUSINESS INCUBATION

AND SUSTAINABILITY 28
5.1. Sponsorship 28
5.2. Business Models 31

6. OWNERSHIP AND MANAGEMENT OF INCUBATORS 33

7. MONITORING AND APPRAISAL 37

8. KEY RECOMMENDATIONS 45
List of Acronyms

9MP Ninth Malaysian Plan Malaysia

AABI Asian Association of Business Incubation
AIDS Acquired Immune Deficiency Syndrome
AIN African Incubation Network
ANPROTEC National Association of Incubators and Science Parks Brazil
ASGI-SA Accelerated and Shared Growth Initiative of South Africa South Africa
BAS Business Advisory Services
BBBEE Broad Based Black Economic Empowerment South Africa
BIC Business Innovation Centre
BNDES Banco Nacional de Desenvolvimento Econômico e Social
[National Bank for Economic and Social Development] Brazil
BRICS Brazil, Russia, India, China and South Africa
CAPES Agency for support of graduate education Brazil
CDC Canterbury Development Corporation New Zealand
CEO Chief Operating Officer
CFC Centre for Research and Consulting on Management Vietnam
CIETEC Centro Incubador de Empresas Tecnológicas
[Incubation Centre for Technology-based Enterprises] Brazil
CII Canterbury Innovation Incubator New Zealand
CITI Cape Information Technology Initiative South Africa
CMC CMC Limited, a subsidiary of the Tata Group New Zealand
CMCTEC CMC Technology Export Centre as a joint venture with New Zealand
CNC Computer Numerical Control
CNI Confederação Nacional da Indústria [National Confederation of Industry] Brazil
CNPq National Research Council Brazil
CONSECTI Conselho Nacional de Secretários Estaduais para assuntos de CT&I
[National Council of the Secretariat for Science, Technology & Innovation] Brazil
CPPP Community Public Private Partnership Programme South Africa
CRI National Business Incubation Association New Zealand
CSES Centre for Strategy and Evaluation Services UK
CSIR Council for Scientific and Industrial Research South Africa
DBKL Kuala Lumpur City Hall Malaysia
DG Directorate General EU
DST Department of Science and Technology South Africa
DTBI Demonstration and Training Business Incubator South Africa
DTI Department of Trade and Industry South Africa
EDAs Economic Development Agencies
ELSBC East London Small Business Centre UK
EPU Economic Planning Unit Malaysia
EU European Union
EVTEs Technical and Economic Feasibility Studies Brazil
FAPEMIG Minas Gerais State Agency for Science and Technology Brazil
FAPESP Research Support Foundation of the State of São Paulo Brazil
FDI Foreign Direct Investments
FIESP Federation of Industries of the State of Sao Paulo Brazil
FINEP Financing Agency for Projects and Studies Brazil
FNDCT Fundo Nacional de Desenvolvimento Científico e Tecnológico
[Fund for Scientific and Technological Development] Brazil
FRST Foundation for Research, Science and Technology New Zealand
FTEs Full-time Equivalent Employees
FUNTEC Technological Fund Brazil
GBIN Global Network of Networks for Incubators
GDP Gross Domestic Product
GDS Gauteng Development Strategy South Africa
GEM Global Entrepreneurship Monitor
GNI Gross National Income
GPG Gauteng Provincial Government South Africa
HEA High-growth expectations early stage entrepreneurial activity index
HR Human Resources
HRD Human Resource Development
IAB Inter American Bank
IASP International Association of Science Parks
ICT Information & Communication Technology
IDU Incubator Development Unit New Zealand
IF Innovation Fund South Africa
IMS Integrated Manufacturing Strategy South Africa
INATEL Instituto Nacional de Telecomunicações Brazil
INZ Incubators New Zealand New Zealand
IP Intellectual Property
IPEN Nuclear and Energy Research Institute Brazil
IPO Initial Public Offering
IPT Institute of Technological Research Brazil
ISC Innovation Support Centre
ISP Incubator Support Programme New Zealand
ITCP Technological Incubator of Popular Cooperatives of the
Federal University of Rio de Janeiro Brazil
ITPDR Technological Incubator as Lever of Regional Development (program) Brazil
JICA Japan International Cooperation Agency
KHTP Kulim Hi-Tech Park Malaysia
LPS Local Productive Systems
M&E Monitoring and Evaluation
MACs Manufacturing Advice Centres South Africa
MAD Mobile Application Development (incubator) Malaysia
MARA Majlis Amanah Rakyat Malaysia
MARDI Malaysian Agriculture Research and Development Institute Malaysia
MAVCAP Malaysia Venture Capital Management Malaysia
MCT Ministry of Science and Technology Brazil
MDeC Multimedia Development Corporation Malaysia
MDIC Ministério do Desenvolvimento, Indústria e Comércio Exterior
[Ministry of Development, Industry and Foreign Trade] Brazil
MEIA Monitoring and Evaluation Impact assessment (infoDev)
MG Minas Gerais Brazil
MIRC MCA ICT Resource Centre Malaysia
MOHE Ministry of Higher Education Malaysia
MOSTI Ministry of Science, Technology and Innovation Malaysia
MSC Multimedia Super Corridor Malaysia
MTDC Malaysia Technology Development Corporation Malaysia
MYR Malaysian Ringgit Malaysia
NAMAC National Manufacturing Advisory Centre South Africa
NBIA National Business Incubation Association USA
NIDP National Incubator Development Programme Malaysia
NINA National Incubator Network Association Malaysia
NSI National System of Innovation South Africa
NSTEDB National Science & Technology Entrepreneurship Development Board India
NTTC National Technology Transfer Centre South Africa
NUS National University of Singapore
NZ New Zealand
NZD New Zealand Dollar New Zealand
NZTE New Zealand Trade and Enterprise New Zealand
NZVIF New Zealand Venture Investment Fund New Zealand
OECD Organisation for Economic Co-operation and Development
PDI Innovation Development Programme Brazil
PNI Programme for Support of Technological Parks and Incubators Brazil
PNI National Incubation Support Programme Brazil
PPP Public-Private Partnership
PRIME Primeira Empresa Inovadora (programme) Brazil
PROVE Vegetable Oil Recycling Programme Brazil
PUC Pontifícia Universidade Católica Brazil
PVL powerHouse Ventures Limited New Zealand
QMS Quality Management Services
R South African Rand South Africa
R$ Brazilian Real Brazil
R&D Research and Development
RD&I Research Development and Invvovation Brazil
RFID Radio Frequency Identification
RMI Rede Mineira de Inovação Brazil
RO Research Organisation
SA South Africa
SABTIA Southern African Business and Technology Incubation Association South Africa
SAPI Sistema de Acompanhamento de Parques Tecnológicos e
Incubadoras de Empresas
[Accompanying System for Technology Parks and Business Incubators] Brazil
SAQI SME support activities of the South African Quality Institute South Africa
SCTDE Science, Technology and Economic Development Secretary of
the State of São Paulo Brazil
SEBRAE Brazilian Micro and Small Business Support Service Brazil
SEDA Small Enterprise Development Agency South Africa
SET Science, Engineering and Technology
SETEC Secretaria de Desenvolvimento Tecnológico e Inovação
[Secretariat for Technology Development and Innovation] Brazil
SIRIM Standard and Research Institute of Malaysia Malaysia
SMART Specific Measurable Attainable Realistic Timely
SME Small and Medium-sized Enterprise
SMIDEC Small and Medium Industries Development Corporation Malaysia
SMME Small Micro and Medium Enterprise
SOHO Small Office / Home Office (sector)
SPII Sector Partnership for Industrial Innovation South Africa
SPV Special Purpose Vehicle
SSI Small Scale Industrial (sector)
STI Science, Technology and Innovation
STP SEDA Technology Programme South Africa
TAC Technology Advisory Centre South Africa
TBC Technology Business Centre
TDC Technology Development Cluster (program) Malaysia
TDC Technology Demonstration Centre
TESIP Tertiary Education Satellite Incubation Programme South Africa
TI Technology Incubator
TIH The Innovation Hub South Africa
TOPIC64 Training Online Programme on Information Technology
for Communities (project) Vietnam
TPM Technology Park Malaysia Malaysia
TWIB Technology for Women in Business Programme South Africa
UFRJ Federal University of Rio de Janeiro Brazil
UKBI United Kingdom Business Incubation UK
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
US / USA United States of America
USD United States Dollars
USP University of São Paulo Brazil
VC Venture Capital
Web-ADI Web Management System for Measuring Incubator Performance Brazil
1. Executive Summary
This paper was based on a desk review of the literature relating to best practice in public policy
supporting business incubation, supplemented by four national case studies covering Brazil, Ma-
laysia, New Zealand and South Africa. These country studies were prepared through engage-
ment of stakeholders, site visits and other sources of primary and secondary information collec-
tion.
In the context of the study, we focused on best practice in policy development, meaning that
public bodies should identify clear objectives and goals to be achieved within the resources avail-
able and take steps to measure and assess what has actually been achieved, allowing changes to
overcome unexpected barriers, as well as to identify and disseminate best practices to improve
overall performance.
The paper sets out a clear definition of business incubation and locates it as one of several
potential initiatives to provide direct support services to businesses. In addition the impact of all
types of SME support services is affected by the wider environment for business development
which is influenced in part by legislative and administrative policies of government. While
incubators can be used to help overcome some of the environmental barriers (i.e. overcoming
bureaucratic hurdles) and can act as pioneers in improving the business environment, they are no
substitute for necessary wider change to the system that governments are expected to undertake.
The services available within business incubators vary in relation to the specific objectives of
their establishment, the resources available, and the wider environment. Within this caveat we
offer a description of pre-incubation, incubation services and post incubation support to enable
the reader to clearly understand how incubation is differentiated from other SME
support programs. The definition indicates the high cost of providing incubator services and sug-
gests this is only justifiable in relation to the incubator helping to achieve high growth businesses
with low failure rates, unless there are strong social objectives that have to be taken into account
(i.e. helping socially excluded groups to launch businesses).
Governments have used incubation as part of a range of objectives to bring about change.
Evidence suggests that achieving objectives is only likely to happen if business incubation is part
of a wider transformation program. Within this context we give examples of incubation used to
encourage transfer of research and development into innovative new production, to introduce
ICT based activities to raise productivity in targeted sectors, to tackle industrial restructuring; to
enable new industries to be created or existing industries to be reinvigorated, and as part of
measures to include deprived communities into the mainstream of new business opportunities.
We review the funding approaches to business incubation, suggesting that it is more effective to
provide less than 100% of funding needs, especially after an initial launch period, ensuring some
commercial income and matching money from other sources.
As for clients funding needs, in some cases shortage of finance is a significant drag on an enter-
prises potential to succeed and grow rapidly. In many cases incubators have established with
public finance seed capital funds, guarantee funds and/or build significant networks with
business angels and venture capital funds to help overcome the financing problems of their cli-
ents. However, often the problem lies in a mismatch between the supply and demand side and
the need to improve their interaction, which can be promoted by the incubator.
9 Global Practice in Incubation Policy Development and Implementation
In most cases direct ownership by government ministry or a university has not proved to be a
successful approach. Whereas mixed ownership structures (public, private) encourage incubators
to make riskier direct investment in their clients and thus have proved to be more efficient. A
strong business mindset and/or disciplines for a public benefit with good networking of the
incubator and its clients are then important considerations in selecting the governance model.
Having specified the policy objectives of supporting business incubators it is critical that a good
monitoring and appraisal system is established to ensure that these relatively expensive facilities
achieve results that justify their support in relation to alternative methods of SME development
support. The systems should not only enable this cost-benefit analysis to take place, they should
also enable best practice to be identified and disseminated within the business incubation
network, and identify critical unexpected barriers to be overcome to achieve success.

2. Best Practice in Public Policy Development

The purpose of this report is to inform the debate about the relevance of Business Incubation to
the public policies of support to small and medium sized business (SME), which in turn is part of
public approaches to raising the performance of their economies. The issues we raise here are
relevant to national, regional and local government and those seeking to influence their policy
programs.
Specifically in this paper we address the policy objectives behind public sector support for busi-
ness incubation, exploring the different ways in which the concept has been used to achieve
different outcomes and identify from this the current best practice in policy formulation and
implementation for the different objectives of public policy.
In framing this paper we are seeking to identify the key issues in a ―best practice‖ approach to
policy making in business incubation and SME development more widely. Increasingly best
practice is being used to guide public policy making. This term is used to refer to two different
definitions of public policy development. For some it is defined as ―results oriented decision
making based upon empirical evidence1.‖ For others ―The term best practices relates to success-
ful initiatives or model projects that make an outstanding, sustainable, and innovative
contribution to the issue at hand2.‖ These two definitions of best practice are related to how gov-
ernment monitors and evaluates the impacts different policies achieve, relying on ―high quality
objective evidence about what works (Canon and Kilburn, 2003).‖ Other evaluations of impacts
achieved are more impressionistic and rely on experiential knowledge as well as on more
rigorous evaluations3.

1
Cannon, Jill S. and M. Rebecca Kilburn, 2003. ―Meeting Decision Makers‘ Needs for Evidence-Based Informa-
tion on Child and Family Policy,‖ Journal of Policy Analysis and Management, 22 (4): 665-668
2
Bendixsen, Synnøve & Paul de Guchteniere. 2003. “Best Practices in Immigration Services Planning.” Journal of
Policy Analysis & Management. 22(4): 677-682.
3
Schorr, Lisbeth & Patricia Auspos. 2003. ―Usable Information About What Works: Building a Broader and Deeper
Knowledge Base.‖ Journal of Policy Analysis & Management. 22(4): 669-676.

10 Global Practice in Incubation Policy Development and Implementation

In reality both approaches have their place and need to be balanced in identifying the impacts
achieved by public policy initiatives and learning how to improve them. This theme will surface
again in the final section of the paper on monitoring and appraisal. For both approaches it is key
to have a clear definition of what a particularly policy is to achieve, why it is important, how it
will be implemented and when it will take place (the initial period of public funding). The activ-
ity is then monitored to measuring what was actually achieved (quantitatively and qualitatively),
with this information then used to improve the impacts being achieved.

3. What is Incubation?
According to the EU Centre for Strategy & Evaluation Services: ―A business incubator is 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, and clustering and networking opportunities …[and]… a suc-
cessful business incubator will generate a steady flow of new businesses with above average job
and wealth creation potential …‖4
The UKBI (UK Business Incubation) definition states that: ―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 develop-
ment and change‖
Finally, if we consider the NBIA (National Business Incubation Association), ―business
incubation is 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. These services are usually developed or orchestrated by incubator management and
offered both in the business incubator and through its network of contacts. A business incuba-
tor‘s main goal is to produce successful firms that will leave the program financially viable and
freestanding. These incubator graduates have the potential to create jobs, revitalize
neighborhoods, commercialize new technologies, and strengthen local and national economies‖.
In general, a business incubator will focus on a range of services on clients that are designed to
help them launch well managed businesses. This mix of services is generally drawn from: ad-
ministrative services (photocopying, bookkeeping, etc); business advice services (coaching,
counseling, mentoring, training), technical services (technical advice, access to expensive equip-
ment, etc), finance raising, and networking opportunities (between clients, links to wider busi-
ness community). Other services (loan & venture capital funds, lobbying for special services/
bureaucratic treatment, etc.) are sometimes developed to help clients overcome specific problems
in the given business environment.
Clients can be resident, non-resident or affiliated to the incubator. The services targeted on
clients are costly in relation to many other types of business development services (training
programs, advice services) but are justified by supporters as ―investment in success‖ because the
concentrated support services should lead to higher survival and growth rates of incubated
businesses.

4
Source: Centre for Economic and Social Services 2002

11 Global Practice in Incubation Policy Development and Implementation

If clients are resident in the incubator, initially they pay a highly subsidized rent or enjoy a rent
free period. Subsequently, rents will rise to commercial levels sufficient to cover at least the
basic services they receive. After a specified period (2-4 years) clients are normally encouraged
to move on to external premises and make way for new clients.

It is often a stated intention that an incubator will become sustainable through commercial
income, though this is only achieved where the actual income has a realistic chance of covering
costs and other objectives do not mitigate against this. In case of resident clients, sustainability is
often linked to larger undertaking which can ensure consistent commercial rents.

Global practices show that success sharing models where the incubator takes an equity stake in
its clients, or a royalty on gross sales for a period, or both, can be a good way in pushing for
financial sustainability. Internationally, there are cases where incubator staff share in the success
of tenant companies by way of success pool performance schemes.

The main focus for incubators is of course on the mix of services provided to clients. However,
prior to a business incubator admitting a business as a new client there is often a need for a clear
pre-incubation program to support potential entrepreneurs define their business ideas and develop
their plans to the point where they can be evaluated as a potential client. Incubators commonly
provide ―hot desking5‖, short training programs and initial coaching sessions delivered at their
premises and often through small pre-incubation at distance where basic services are
supplemented by on-line support6, all as part of the pre incubation support programs. Following
the period of intense incubation support there also needs to be clear exit route for successful
businesses, including after-care services that ensure both a smooth transition, support for future
growth, such as internationalization, and ongoing linkages back to current and new clients of the
incubator. Where there are developed local commercial property markets exit is not normally a
problem area, however, in poorer regions of developed economies or in developing economies
exit can prove to be problematic and the exit strategy needs to clearly identify how successful
enterprises can leave incubation while remaining located in the area.

Many incubators are now confronting the issue of scaling operations efficiently, and increasingly
using the Internet to provide lower-cost services to a larger client base. This channel holds
particular promise in countries where Internet penetration is increasing and geography is cited as
a key barrier to client access to incubation services.

5
Normally a small room with desks & internet connected computers that potential entrepreneurs can use for short
periods of research and preparation of their business ideas. Permission to use the free facilities is for relatively short
periods that are only renewed if progress is being made and the facility is not abused.
6
The South African case study outlines the on-line coaching programmes provided by the countries incubators that
are linked to universities and colleagues through at a distance learning programmes.

12 Global Practice in Incubation Policy Development and Implementation

Many incubators in developing countries now use the Internet to provide some "virtual
incubation" services. These services are most likely to include information resources and web-
based toolkits, as well as access to email and the Internet, but incubators are increasingly
experimenting with more complex virtual and remote service offerings. Kharkov Technologies
in Ukraine, for example, offers distance learning, and The Semi-Virtual Incubator in Iran
provides technology incubation services to remote villages through a partnership with another
local incubator, the Yazd Technology Incubator and Science Park. ITCP in Brazil combines its
web-based training programs with a broader remote incubation model that also uses radio and
television to disseminate information in regions where literacy is a barrier to Internet usage.

3.1. The Business Incubation Process

The diagram below provides an overview of a typical business incubation process:

It should be clear from this brief description that Business Incubation is a targeted approach
providing a range of focused services on a relatively small number of businesses. In evaluating
public policy the results achieved by incubation needs to be considered alongside that of other
methods of delivering support services to new and existing enterprises.
The table7 below sets out a basic typology of the range of business services that could be
provided to SMEs.

7
infoDev: Innovation and Entrepreneurship in Developing Countries: Impact Assessment and Lessons Learnt from

13 Global Practice in Incubation Policy Development and Implementation

 Mechanism Target Firms Key Features
Business Develop-  Start-ups & SMEs  Broad business support, including training and
ment Services advisory services provided to individual
businesses on a demand-driven basis
 Often coordinates other service providers
 Focused on building capacity within the BDS
industry

Business Advisory  Start-ups & SMEs  Broad business support, including training and
Services advisory services
 Acts as primary service provider

Business  Start-ups and SMEs with high  Integrated mix of intensive strategic and
Incubation growth potential operational support provided to entrepreneurs and
businesses selected for their growth potential
 Focused on helping firms to manage risk and
build competitiveness through early, high-risk
growth stages
 Support typically ends when clients ‗graduate‘
by reaching particular milestones
 May be linked with educational or research
institutions

Technology and  Emerging and established  Focused on helping relatively mature businesses
Science Parks technology businesses, but may to accelerate their growth
target  May use incubation as way to source future
specific industries clients
 Usually linked to universities and R&D centres
 May be linked to national, cluster-driven
development strategies

Industrial Parks  Emerging and established  Support businesses to accelerate their growth
businesses, can be mixed but may  May include incubation facilities as way to source
target specific industries future clients
 May be linked to national, cluster-driven develop-
ment strategies

Industry Clusters  Related and supporting businesses  May be linked with educational or research
and other organizations linked by a institutions
shared value chain (vertical) or  May use incubation as way to source
shared final market (horizontal); future clients
 Concentrated in technology  May be linked to national competitiveness
industries strategies

7
infoDev: Innovation and Entrepreneurship in Developing Countries: Impact Assessment and Lessons Learnt from

14 Global Practice in Incubation Policy Development and Implementation

All these alternative approaches have their place in the provision of direct support services to
start-ups and SMEs. As well as for the direct service schemes, many of which might be sup-
ported by regional or local government as well as central government, Governments are also re-
sponsible for the design and operation of the legal and administrative environment that governs
the performance of enterprise8 and encouragement of entrepreneurship. All the possible business
support schemes outlined above, including business incubation, involve a degree of co-location
and take place within the environment created for business growth so that their relative success is
heavily influenced by the strengths and weaknesses that are present in this wider environment.
While reviewing the global incubation practices and preparing the four national case studies cov-
ering Brazil, Malaysia, New Zealand and South Africa, we have identified a number of key pol-
icy dimensions affecting the design and implementation of an incubation policy framework, i.e.:
■ Objectives for business incubation and service mix;
■ Wider business environment;
■ Funding strategies and sustainability;
■ Ownership and management;
■ Monitoring and appraisal.
In the following sections, we provide an overview of each policy dimension, based on the results
of the literature review and case studies outputs. In the final section, we include an indication of
key recommendations emerged from our research, which can contribute to the successful design
and implementation of incubation policies.

4. Objectives and Strategic Planning for Business Incubation

In both developed and developing economies, small and medium enterprises (SMEs) are consid-
ered crucial to fostering economic and social development and their growth is supported with a
wide range of policies as outlined above.
The failure rate of small new businesses in their initial years is high in both developed and devel-
oping economies. In part this reflects the competitive environment within which the businesses
are launched and also the effectiveness of the specific business idea. It is also a consequence of
the lack of experience of the entrepreneur who is launching the business and deficiencies in the
environment (i.e. shortage of capital, legal difficulties, lack of information, etc). A wide range of
initiatives are supported by governments to try and reduce business failure rates through address-
ing problems in the environment (i.e. special loan funds, removing legal obstacles, reducing gov-
ernment administrative procedures and speeding up their operation) and by assisting new entre-
preneurs to tackle their lack of experience (training programs, advisory and support services,
etc).

8
There are schemes available to measure the impact of the business environment on the ability of business to
develop and thrive, the best known of which are the World Banks ―Cost of Doing Business‖ http://
www.doingbusiness.org/ and the Global Entrepreneurship Monitor http://www.gemconsortium.org/default.aspx

15 Global Practice in Incubation Policy Development and Implementation

Business incubators provide focused support to entrepreneurs through a supportive environment
that helps them establish their business ideas and develop their concepts into market ready prod-
ucts, supports the acquisition of business knowledge, facilitates the raising of necessary finance,
introduces the entrepreneurs to business networks, all of which should substantially reduce the
level of failure. They not only allow new entrepreneurs to start their business by reducing the
related costs and risk but do also increase their chances of survival and success by building ca-
pacity and networks.
Business Incubators have attracted significant support from governments throughout the world
and in a wide variety of developmental contexts. According to the case studies drafted for New
Zealand, South Africa, Malaysia and Brazil the main objectives pursed by National Governments
through business incubation were the following:

BRASIL NEW ZEALAND MALAYSIA SOUTH AFRICA

Objectives Economic develop- Generate high tech, Technology transfer 1. Technology transfer and
ment, employment growth-oriented and and Innovation Innovation
generation internationally competi-
(targeting disadvan- tive exporting SMEs 2. Creation and develop-
taged groups) and ment of sustainable,
technology com- globally competitive
mercialization SMEs that contribute
towards the accelerated
growth of the South
Africa economy

3. Supporting selected
groups (i.e. women en-
trepreneurship)

Governments see in incubators both a powerful means for supporting SME growth and for ad-
dressing a variety of socio-economic needs, which include job creation, technology and innova-
tion transfer and thus competitiveness, local / regional development and restructuring, poverty
alleviation and integration of economically disadvantaged groups. Thus public policy in support
of incubation can have a number of different strategic focuses, each implying a different business
development culture that will be reflected in the key skills and services provided.
Usually incubators are designed and implemented to pursue defined objectives as a part of a
broader strategic framework (territorially orientated [regional strategy], or of particular policies
[job creation, social policies, competitiveness], or a combination of these factors)9. Best prac-
tices show the need to have a strong consistency between the incubator programs and the overall
economic development strategy. Where business incubation programs have been developed and
conceived for standalone goals, incubators have generally turned to be of limited use with few
sustainable results.

9
This is also confirmed by the Benchmarking Study for European Incubators undertaken by the ―Centre for Social
and Economic Study‖ in 2002.

16 Global Practice in Incubation Policy Development and Implementation

Strong consistency with overall economic goals needs then to be combined with a long term ap-
proach (on average at least 10+ years), needed to ensure the establishment and sustainability of
the incubation industry as well as the proper functioning of the business environment where incu-
bators operate.
Policy makers should consider a deeper investment in understanding the drivers of success in
particularly effective business incubation models. These investments should be followed with
pilot initiatives that seek to test the findings and replicate these models in a variety of environ-
ments.
In the four countries that we have considered for our case studies, incubation policy has a long
term approach and is usually part of clear strategic frameworks that have been developed and fur-
ther refined during the years. The need to update and to be flexible in targeting emerging needs
and/or weaknesses in the incubation system as well as to identify and replicate good local prac-
tices has turned out to be crucial in all cases.

BRASIL NEW ZEALAND MALAYSIA SOUTH AFRICA

Strategy The PNI (National Incubators are supported The National Incubator National Industrial
framework Incubation Support under the Incubator Sup- Development Frame- Policy was launched
Program) is designed port Program (ISP), work which led to the in January 2008 and
to support new incu- launched in 2001. Other establishment of a spe- foresees also small
bator creation and the programs supporting cific incubator support enterprise support.
expansion of existing enterprise development program in 2002. The Small Enterprise
ones. Incubation is are provided by New Development Agency
now well coordinated Zealand Trade and Enter- The 9th Malaysia Plan (SEDA) is in charge
within the SME sup- prise (NZTE) Incubator has made a significant of coordinating
port policy and the Development Unit (IDU) improvement in the SMEs support inter-
S&T Initiative, al- residing within NZTE. coordination between vention. Incubation
though it started as a incubation and SME policy was piloted in
bottom-up product of There is a good integra- development policy. 2001 through the
multi-polar initiatives tion of ISP into SME GODISA program
by a wide coalition of support systems and and is currently part
local promoters. RED strategies. of the STP (SEDA
Technology Pro-
PRIME is the most gram).
recent step towards an
increased support to
innovative SMEs with
high growth potential.

Incubation can also be included in the strategy framework for invigorating an industry cluster
that is already attractive within a country or a region. In this case, launching incubators in indus-
tries that are already of interest to the national or regional authorities tends to imply that the busi-
nesses in such an incubator will be able to draw on a wider array of support services and pro-
grams than otherwise. In addition, the incubator will serve a larger purpose than simply helping
a small subset of businesses in policy isolation. As a result, usually these incubators will not be
narrowly focused on niche sectors but have a mixed nature in order to ensure a critical mass of
deal flows.

17 Global Practice in Incubation Policy Development and Implementation

The incubator should plan to support businesses in an industry that is structurally and contextu-
ally feasible and attractive in the country or region in which it plans to operate. For example, a
biotech incubator focused on pharmaceuticals will struggle in a region where sufficient R&D
funding is absent. At the same time, the incubator must have a substantial feedstock of suitably
qualified and interested entrepreneurs. It is therefore useful to perform market research to iden-
tify the size and the requirements of their target market before proceeding too far in investing in
its final portfolio of resources and services.
In general, a feasibility study is an important and necessary step, to design the business incubator
and assess whether or not and how an incubator might be feasible. This is an important pre-
requisite for public support. The NBIA notes: ―Providing detailed answers to critical questions, a
feasibility study helps business incubator developers decide whether a business incubator will
prove effective in a particular setting, by determining if the proposed project has a solid market,
sound financial base, strong community support, and true champions. Beyond that a feasibility
study identifies obstacles that business incubator organizers might have to overcome and offers
options for surmounting them. It also may look at whether a proposed business incubator will
further a community‘s broader economic development goals.‖
A useful tool for anyone considering to set up an incubator is the ―Mixed-Use Incubator
Handbook: a Start-up Guide for Incubator Developers‖ published by infoDev. The handbook is
aimed at the context of developing countries to address the needs of these communities, which
are often radically different from those prevailing in Europe and the United States where educa-
tion, business training, and public institutional support belong to a more mature corporate envi-
ronment. It is designed to help developers think through all the issues involved in establishing an
incubator and outline a solid business plan to support the necessary fund raising.
We have set out here below the main different policy objectives pursued by governments through
support to business incubation.

4.1 Promotion of new Business Sector, especially in Innovation and ICT

Currently, incubators are more and more intended to provide a convergence of support, towards
creating growth-potential, technology based ventures. They are meant to promote technology
innovation through interaction with universities and research centers, introducing new ventures
to functioning clusters of high technology enterprises and direct advisory services for enterprises
initiating innovative products and services. Thus incubation becomes part of a wider program for
the encouragement of research and development (R&D) technology transfer and innovation and
can call on a wide range of support programs10.

10
The Brazilian case study illustrates a development path where the majority of incubators are sponsored by
Universities, linked to the business sector and financed by a variety of government programs. In Brazil these
incubators act as focal points of complex networks that bring together funding sources, researchers and enterprises to
encourage start-ups to take advantage of the research being undertaken in the country.

18 Global Practice in Incubation Policy Development and Implementation

In some cases the incubation aim has been to introduce to an economy new business services and
business models that are clearly required for the area to continue to compete successfully. ICT is
the classic model for this, where incubators have enabled a range of new ICT based commercial
business services (from bookkeeping to sales, to after sales services, servicing of ICT equipment
etc.) often tailoring available packages to specific needs or creating innovative delivery mecha-
nisms for service delivery, enabling other economic activities to gain efficiency and expand their
operations more rapidly. While such businesses were often based on tried and tested approaches
they have to innovate in service delivery, marketing, packaging and pricing to meet needs in dif-
ferent business environments, helping to build performance of other businesses, thus improving
competitiveness across a region.
The role of business incubation in these programs facilitates the intersection of innovation and
entrepreneurship thus having a particular powerful impact on the environment. The incubator
becomes a place where wages go up because these new firms must compete on human capital
and knowledge, where businesses grow from small to medium, and where local economies con-
nect themselves to global economies11. Their goal is not to support all start-ups, but rather those
with the capacity to scale and grow, sometimes called dynamic enterprises.
This mainstreaming of technology transfer and innovation can be seen both in developed and de-
veloping countries, as shown in the table below.

11
Audretsch, D.B. and R. Thurik, “Linking Entrepreneurship to Growth,” OECD Science, Technology and Industry
Working Papers, 2001/2

19 Global Practice in Incubation Policy Development and Implementation

 Promotion of new business sector, especially in innovation and ICT
Developed  Primary objective is to establish technological leadership of local SMEs and make the
economies local economy more competitive on international markets.

Technology transfer and ICT models developed:

 incubators can be more industry-specific in terms of technology field and consequently
marketing, information and training (specialized research-technology based incuba-
tion). Incubation is often included in a wider strategy for the development of technol-
ogy-based clusters, for instance focusing on automotive technologies, biotechnology,
electronics, new material, energy saving and environmental protection. This is quite
typical in the EU.
 incubators are established as general research-technology based business incubators
and have a mixed use. This is the case in the USA where the vast majority of tech incu-
bators are not established as specific to any particular industry.
 Business incubation with university relationship. A common path is the creation of
strong linkages with the university system to ensure a structured inflow of relevant re-
sources, information and new ideas, as well as of clients and spin-offs coming from
research centres and their staff12. In other cases, incubators are directly set up within or
by university campus to promote the research commercialization. This is very popular
in the USA.

Larger developing  Primary objective is to promote technology transfer and become knowledge based
countries economies.
(like Brazil and
South Africa) Technology transfer and ICT model developed:
 General research-technology based business incubators:
 initial focus on simple business incubators with technology as a central theme
 located in industrial estates or clusters
 linkages with the R&D institutions are gradually supported and developed
together with various related policies (incentives, tax structure, real estate
development, foreign direct investments, skill-development and education
programs)
 incubation may be sponsored to help build local services and suppliers, which
also helps localize ownership, to key industrial clusters13.
 Business incubation with university relationship. The Brazil case indicates the impor-
tance of the Universities to their model of business incubation. Essentially, the univer-
sity or academic institution has a role as a founder (as in Brazil) besides being a source
of resources such as research, expertise, space and/or funds.

Smaller less  Primary objective is to facilitate the introduction of appropriate new technologies to
developed their economies and building capacity to adapt and introduce technologies to their spe-
economies cific circumstances. This reflects the weak R&D infrastructure in the country.

Technology transfer and ICT models developed:

 ICT support services incubation
 Agri-business incubators14

12
A distinctive feature of TU/e Innovation Lab (high-tech start-ups) in the Netherlands is the concept of an incubator
representative in each university department. Their task is to screen new projects and identify potential even before
the researchers themselves become aware of it. Furthermore, some of the benefits of the creation of a spin-off com-
pany are returned to the department itself, which is an important incentive for the department‘s effort to scout new
projects. This ensures a powerful screening and scouting instrument.

20 Global Practice in Incubation Policy Development and Implementation

Although most business incubators share a commitment to supporting growth-oriented enter-
prises at the early stages of their development, there is a relevant diversity in incubator models
developed. This diversity reflects the need for a customized approach to effecting change in dis-
tinct, complex environments with different local barriers to innovation and entrepreneurship.
In general, success incubator programs, promoting new business sectors with a focus on innova-
tion and technology transfer need to be embedded in wider frameworks for technology transfer
and innovation development, usually implying15:

 The encouragement of applied R&D (i.e. grants for joint research between companies and
academic bodies);

 development of industrial clusters (financing training programs, encouraging joint activi-

ties etc);

 improve education/human capital (e.g. initiatives to strengthen skills of the work-force to

the new evolving technologies, e-learning and open education);

 creation of an adequate infrastructure like S&T parks or industrial parks providing high
quality services where firms in the new sectors can co-locate.

13
Malaysia’s economic growth has been critically supported by the electronics industry where international
companies have located since the 1960‘s in free zones, producing primarily for export. These have mainly been
―screwdriver industries‖ assembling parts produced elsewhere. Malaysia has struggled to maintain their place in the
global system for this industry as availability of cheap labor has declined but skilled labor, enabling progress up the
value chain has been scarce. Incubators, along with vocational education and training, R&D funding and other
measures have formed part of the strategy to improve the country‘s ability to support and facilitate growth of the
international electronics cluster.
14
Timbali Technology Incubator is the agricultural sector success story of the of the incubator fraternity in South
Africa, Timbali, formed in 2003 as a partnership between the South Africa Land Bank, Mbombela Flower Growers
and the South African Agricultural Research Council, has created an enabling environment where fledgling
apprentice farmers have the opportunity to develop independent, competitive Agri-businesses. Over the past three
years, Timbali has been instrumental in incubating more than a 100 Agri-related SME‘s, of which 97% are Black
owned businesses, and 62% of which are owned by women. The Timbali Technology Incubator was the category
winner in the Top Technology 100 Awards in South Africa for ―Social Innovation‖ in 2005. In 2006, Timbali again
qualified as a Top Technology 100 Company for 2006, and was a finalist for ―Leader in Empowerment.‖
15
This can be seen in several countries i.e. China, India, Brazil, South Africa, Israel, Sweden, Finland, where the
governments have launched multi-annual national plans for Science & Technology development placing the
establishment of technology/industry business oriented incubators within the creation of a comprehensive
infrastructure based on science & technology parks linked to R&D centre‘s and universities, a structured system of
incentives in favor of innovation and technology transfer activities as well as human resources development
initiatives.

21 Global Practice in Incubation Policy Development and Implementation

4.1.1. Cultural Industry Incubation
The focus of this section is on technology transfer and innovation, illustrating how the economic
growth objectives of government can be expressed in part through business incubation. Many
developed and some developing countries (i.e. Brazil, Malaysia) have set themselves the objec-
tive of becoming knowledge based economies, as have many developed countries i.e. European
Union Lisbon Agenda.
While this is the case the same concept of supporting innovation has been applied to the cultural
area where specialist incubators have been established, often linked to centers of academic excel-
lence in the performing and broadcasting arts, and designed to assist new artists establish success-
ful commercial businesses. For example the Cultural Industry Quarter in Sheffiel16 includes spe-
cialist music training courses at Red Tape Studio17, recording studios, incubator and workspace
services through creative exchange18.
Cultural incubators provide support for creativity based enterprises delivering services into
growth areas often linked to electronic media including television, broadcasting, electronic de-
sign, video, music, etc. Located within wider initiatives for cultural industries the incubators nur-
ture local talent and raise levels of creativity that influences the ability of all industries to inno-
vate.

4.2. Part of major Industrial Restructuring

Geographical areas tend to specialize in particular sectors because of locational and other advan-
tages, leading to employment and skill patterns that reinforce advantages and build the sector into
the areas major employer. However, if the industry situation changes the area can suffer major
problems of unemployment and economic decline. The area subject to such major industrial re-
structuring needs to develop new enterprises, often in new sectors, to try and replace failed major
employers. This requires both incentives for businesses to re-locate to the area and the encour-
agement of new business creation in the area, which could be in modernizing the dominant sector
or in application of local skills and talents to new activities19. The wider public policy to address
these restructuring issues usually includes financial incentives for relocation of existing busi-
nesses (tax credits, loans etc.) re-training programs for people facing redundancy and new differ-
ent skill training for new entrants and support for new business start-ups including the encour-
agement of entrepreneurship often in areas where SMEs are under-represented in the economy
(training, business advice, guarantee funds etc.)
Business incubators have been widely used as part of the policy mix tackling the restructuring of
a local economy. Such incubators have typically targeted people facing redundancy, providing a
mix of services emphasizing the development of business skills and entrepreneurship attitudes.
The aim is to assist people to build new enterprises based on existing skill sets and/or to reapply
their skills to new sectors, creating new growth businesses and role models for others.
16
http://www.ciq.org.uk/
17
http://www.redtape.org.uk/
18
http://www.ciq.org.uk/featured-projects/cesy/creative-exchange-overview/
19
The Sheffield Cultural Industry Quarter is a specific example where the failure of the steel, clothing and mining
industries led to rapid decline and rising unemployment. The focus on cultural industries enabled a new sector to be
created, providing new hope for young people and helping to regenerate local communities.

22 Global Practice in Incubation Policy Development and Implementation

This happened in the transition economies of Eastern European countries where the incubator
tool has been widely adopted to support SME and entrepreneurial skills development in order to
facilitate the process towards a market economy. Incubation programs helped also to absorb the
excess on the labor supply side and high level of unemployment resulting from the privatization
of state companies.
Currently, many developing countries facing the urgent need to restructure their economies and
address high unemployment rates in the context of rapidly growing young populations and in-
creasing globalization are using this incubation model. In order to focus on entrepreneurial skills
development and job creation, in ways that complement wider initiatives to improve opportuni-
ties for small enterprise development and growth and create labor friendly policies.
Usually, incubator programs aimed at major industrial restructuring foresees a mixed portfolio
business incubator targeting a range of sectors.
If there is a local development or competitiveness strategy, commonly sectors supported by the
incubators are aligned to it. This happened successfully with the generation of incubators funded
by the Structural Funds for the period 2002-2006 in Europe, which contributed to several local
regeneration and development initiatives. This is not the case of most Asian countries where
there is still the need to promote the design of local development and competitiveness plans
where incubators are adequately integrated.
In this type of incubator there is less emphasis on technical skills and more on developing entre-
preneurship and business management skills. Pre incubation services will emphasize business
training and coaching to build ideas and confidence with selection criteria focused more on the
sponsors‘ ability to successfully make the transition to self employment in productive enterprises
rather than innovation or new products. However, this model can also facilitate the germination
of new areas of competitive capacity and provide a focus of innovation in this regard.

4.3. Introduction of Entrepreneurial Culture to Socially-excluded Groups

Particular groups suffer disadvantages in a country that can lead to them becoming isolated from
main activities. Such groups, often an ethnic minority, become socially excluded, with poor
school attendance and qualifications, relatively high levels of unemployment, poor housing, high
incidence of poverty, higher crime levels, lower life expectancy etc. The outsider image and real
problems of such groups often lead to growing discrimination in employment and treatment by
service providers that reinforces' their social exclusion.
Governments need to develop a range of policy measures to try and tackle these problems of so-
cial exclusion including special training programs, anti discrimination laws, local infrastructure
investment etc. In some cases the policy mix has included efforts to raise the numbers of busi-
nesses created by the targeted group through special training programs, access to finance
schemes, purchasing policies of government agencies etc. designed to assist businesses owned
and managed by the target group to start and flourish.

23 Global Practice in Incubation Policy Development and Implementation

Business incubation programs have been established to target such groups, providing them with
strong mentoring services to help develop appropriate entrepreneurship behavior and manage-
ment skills necessary for their business to succeed. They may focus on socially valuable prod-
ucts and services and require significant investment in human capital and ―pre-incubation‖ activi-
ties.
In a similar way some incubators have been established to target potential businesses established
by unemployed young people, who are likely to need more mentoring to develop appropriate be-
havior and assistance to network successfully in the wider business community. Young people
not only lack life experience and resources, but for them getting equity and credit facilities can be
a big challenge. Thus this type of incubation programs often include relevant services and assis-
tance in covering the financing gap20.
More recently a number of incubators targeting women owned businesses have been created,
helping women to overcome discrimination in the wider environment.
Through the EQUAL program in Europe, incubators have been set up to support single mothers,
unskilled women or women from ethnic minorities, by providing longer and more flexible open-
ing hours, space for part-time working, longer incubation periods, access to public transport, se-
curity, and childcare.
Women business incubators have also been established in many developing countries where
women‘s‘ social status is seen as providing specific barriers to them establishing businesses, e.g.
the Tianjin Women‘s Business Incubator in China21, The Village Business Incubator in Syria22,
Women Business Incubator project of Turkey23.

3.4. Objectives and Policy Mix

Incubation objectives have an impact on the policy mix, i.e. the actual mix of services and how
they are delivered. Actually, the mix provided by the policy support must reflect the needs of the
target group, which are different for different objectives and, within each objective, must also be
tailored on the needs of the specific sector(s) and/or segment(s) targeted.

The table below presents incubation objectives and the related mix of services.

20
Sharek Youth Forum – You Business Support Unit (www.sharek.ps) is recent initiative to support young
Palestinians.
21
www.tjwbi.com
22
www.vbi-lattakia.org
23
www.kisgem.org

24 Global Practice in Incubation Policy Development and Implementation

25
Objective Pre-incubation phase Incubation phase After care phase
Promote new business A strong pre-incubation program is  Incubation services will include in addition When the client firm leaves the
sector, especially used to identify: to basic administrative services and incubation process, a growth facility
innovation and ICT  potential new product ideas networking both business and technical for graduated companies has proven
(creative resources: e.g., matching development support, providing guidance to be an added value for both the
researchers with entrepreneurs on financial management, marketing and graduated firm and current incubator
programs, business plan design including access in some cases to clients (see the case of China). Through
competitions, etc.), shared specialist equipment that new a growth facility such as an industrial
 identify funding opportunities for businesses only use sporadically while and technology park, the incubator can
the very early stage financing they develop their operation. stay in close contact with its graduated
(financial resources),  In order to avoid long term dependency firms thus maintaining a broader
 help the incubatees acquire basic and ensure the business is making network, of which client firms might
business understanding (human sufficiently rapid progress to justify their further benefit. Having a mixture of
resources: e.g. seminars for place in the incubator; regular reviews existing and newly established
researchers on entrepreneurship). are held to assess progress. companies within one building or park
The screening process for clients then  If the business development falls creates a more dynamic environment
focuses on the potential of the new significantly behind that forecast the of which all can benefit.
product and the ability of the business will be asked to make way for
sponsors to develop their business other clients who can make better use of
acumen the incubation services.
Part of major industrial Pre incubation services will  Within the incubator there is likely to be Post incubation support is likely to be
restructuring emphasize business training and little in the way of technical support apart required to manage the transition from
coaching to build ideas and from self employed specialists contracted the incubator supportive environment.
confidence with selection criteria to advise a specific business, and more

Global Practice in Incubation Policy Development and Implementation

focused more on the sponsors’ ability emphasis on development of good
to successfully make the transition to
self employment in productive business management and networking.
enterprises rather than innovation or
new products.
Introduction of The pre incubation program would  Support for the new businesses to network Post incubation support is likely to be
entrepreneurial culture emphasis training and coaching into the wider business environment is required to manage the transition from
to socially excluded services with incubation services important to establish trading links that go the incubator supportive environment.
groups focused on mentoring and coaching beyond the target group if most businesses
clients. are to become established and grow.
5. Wider Business Environment for SMEs
Ensuring an effective environment to encourage entrepreneurship and business development is a
critical issue for all market economies. Governments are increasingly putting efforts into ensur-
ing an effective environment for business growth, reducing unnecessary red tape, creating cir-
cumstances where fair competition can flourish, and addressing market failures in ensuring ac-
cess to finance and services.

Business Incubation is a sub-set of this wider range of policies adopted to create a facilitative en-
vironment for business creation and growth. As such the impact achieved by business incubation
policy is affected by the wider environment for business development in which it is placed. In
some cases problems in the wider environment can create circumstances where incubators are
unable to succeed in their central mission to help growth businesses.

Some incubators can have significant gaps in basic infrastructure. For example many incubators
in Africa have unreliable electricity supply. In other developing countries there are gaps in ICT
access and infrastructure.

Access to public and private R&D, market research and industry practices is an additional barrier
to innovation and entrepreneurship in many incubation environments, while a key weakness is
often a lack of incentives for entrepreneurial activity and innovation. In countries like Uzbeki-
stan, the tax incentives simply do not exist in the environment. In many developing countries,
the missing incentives include intellectual property laws that facilitate the commercialization of
ideas. Countries where the laws themselves can be cited as particular barriers include Thailand
and Iran, whereas in other countries, incubators lack of knowledge of intellectual property (IP)
laws or have to deal with the cumbersome process and high cost of securing a patent.

The bureaucratic challenges of starting a business can also be cited as a key challenge. Time and
costs for registering a company can be very high (i.e. up to almost 150 days). Financing gaps are
then typically recurring both in developed and developing countries.

In the very early stages, financing needs may vary significantly but are often compatible with
funds accessible through informal or traditional sources (e.g. micro and small and medium enter-
prises banks, MFI facilities, bootstrapping). Anyway, these sources do not always solve the
problem in the following business development stages and cannot address the financial require-
ments of ―high profile‖ innovative products and of many knowledge-based companies.

In these cases, sometimes there is a shortage due to underdeveloped supply side24 and/or the
challenge is compounded by high collateral requirements25. This is typical for example in coun-
tries with a weak ―equity culture‖ where debt financing is regarded as the main option and there
is the need to introduce financing tools that can offer guarantees replacing the collateral as well
as to promote progressively a wider use of equity and quasi-equity products.
24
According to the Monitoring and Evaluation Impact Study undertook by InfoDev on assisted incubators, more than
80% of grantees indicated that their clients are limited either because they cannot afford banking products or services
or because SME-appropriate offerings do not exist in their local business environment. This gap exists in all regions.
25
In Mauritius, for example, an innovative range of mechanisms exists to fund SMEs in the ICT sector, but clients of
the National Computer Board ICT Incubator Center report that the collateral requirements make these funds difficult
to access.

26 Global Practice in Incubation Policy Development and Implementation

However, often the problems lies in a mismatch between the supply and demand side and the
need to improve their interaction. In most countries, financial institutions do not have enough
information about the economics or financial parameters of clients and so they show a conserva-
tive attitude. On the other side, clients are often not very well prepared in approaching banks or
investments funds. They are unable to analyze the financial instruments available and to under-
stand which suites best their needs. Nevertheless, they cannot prepare a good business plan in
the most effective way.

Each business environment has its own unique mix of gaps, and these differences are reflected in
the activities that incubators can undertake to support local entrepreneurs.

It is the case that incubation services can, and often do, help the specific businesses supported by
the incubator to overcome wider problems in the business environment, for instance:
 providing financing services (brokering loan arrangements, developing clients negotia-
tions skills, training and advisory programs to enhance investment readiness, in-house
loan schemes, seed funds, specific venture capital access, linking to business angels26);
 building stronger links between entrepreneurs and universities27 thus promoting the devel-
opment of the knowledge capital;
 accessing improved services from state owned or supported monopoly (i.e. overcoming
ICT access problems),
 overcoming bureaucratic delays in obtaining licenses and permits (creating special fast
track systems);
 working (formally and/or informally) to improve the regulatory environment for SMEs -
not only for their own clients, but also for the broader community of SMEs (e.g. regular
consultation with the government on SME and business environment issues)28.
Building on their reputation and network of relationships and collaborations, incubators can then
positively influence the environment dynamics. Many incubators are acting as effective pioneers
for change. ISST in Iran had a direct influence on the country‘s strategy and now is focusing on
knowledge-based development.

While this is the case business incubation is not a substitute for fixing significant problems in the
wider business environment, and incubators programs need to be complemented with wider SME
support initiatives addressing main constraints to enterprises development and growth. Public
authorities have to intervene with other public mechanisms to create favorable conditions in the
business environment, addressing financing and legal aspects relevant for new ventures.

26
Brazil has a very well developed network of business angels
27
The Genesis Institute in Brazil, for example, was founded with a mission to "transfer knowledge from the
University to Society," and it has succeeded in promoting a stronger culture and structure for entrepreneurialism for
students and faculty of the Catholic University of Rio
28
Yangling and Tianjin in China, ANPROTEC and RMI in Brazil, and TREC-STEP in India, are regularly consulted
by government on issues affecting the local business environment, particularly with respect to developing the SME
sector.

27 Global Practice in Incubation Policy Development and Implementation

Government leaders in countries such as Tunisia and Mauritius, for example, have made the
build-out of ICT infrastructure a national priority in recent years. Policymakers in developed
countries usually facilitates knowledge-sharing across sectors by creating stronger incentives for
commercialization and R&D.

There are then environments where governments are providing cohesive policy, regulatory and
legal frameworks that support the SME sector. For example, the investment in new technologies
development and R&D activities as well as the involvement in new business sectors have raised
some issues to governments in terms of intellectual property rights and the related economic and
social implications. Of course, a balance must be reached between the need to encourage re-
search and creation on the one hand and, on the other, the legitimate wish to make innovation and
culture freely available to all.

In Tunisia, for example, recent legislation that protects knowledge-based SMEs includes the
Telecommunications Code, the Electronic Business and Signature Law, and the Personal Data
Protection Law. The Indian government has also focused on the Small Scale Industrial (SSI)
sector as a driver of future growth and innovation through the National Science & Technology
Entrepreneurship Development Board (NSTEDB), established under the aegis of the Department
of Science & Technology to help promote knowledge driven and technology intensive enter-
prises. The Board has representations from socio-economic and scientific Ministries/
Departments and aims to promote and develop high-end entrepreneurship for S&T Manpower,
thus converting "job-seekers" into "job-generators" through Science & Technology (S&T) inter-
ventions.

Similarly, to overcome the shortage of available financial resources for new start-up companies,
governments have contributed with the provision of a variety of financing tools which cover all
the phases of the incubation process (loans, guarantee funds, venture capital). Initiatives are also
launched to improve the legislative and institutional framework and promote sound and function-
ing financial markets. However, it is also recommendable that governments pay attention to the
financial mismatch that can occur in their countries and that they compound incubators in pro-
moting the investment readiness of their clients by launching adequate training and advisory pro-
grams involving both the supply and demand sides.

6. Funding Strategies for Business Incubation and Sustainability

6.1. Sponsorship

Initial funding of the incubator programs is usually provided by public authorities.

There are some examples, especially from developed countries of private enterprises29 establish-
ing incubators, especially in the ICT industry, often requiring a proportion of the initial share
capital in exchange for space in the incubator.

29
Private establishment of incubators is common in USA, Australia and in many EU countries,. The New Zealand
case study identified investments of this sort and our Ghana research identified an incubator receiving financial
support from Barclay‘s Bank.

28 Global Practice in Incubation Policy Development and Implementation

Some large companies have also established incubators located at their premises where they en-
courage new starts as a way of building innovation linked to their businesses 30. Some large com-
panies have also provided sponsorship to incubators.

In the majority of EU countries, a funding mix based on the matching of national funding – usu-
ally up to a maximum of 50% of the operations – and other sources such as regional/local public
and private funding is the most common funding structure31. US incubation programs usually
start as local initiatives by economic development agencies. Following the initial preparations,
federal agencies are approached. Federal funding is usually limited to preparation and construc-
tion costs as well as research grants for client companies and is then compounded with other lo-
cal/private sources.

Where more than one funding source is required then a structure which enables the funding pro-
viders to meet and agree the overall strategy is sensible to avoid problems of overlaps or gaps in
the funding provision.

In some context, public authorities have entirely funded the incubation initiatives, primarily
where strong social objectives are involved, for example when supporting the participation of
socially excluded groups in business formation32. This is quite typical in the Middle East and
North Africa, Saudi Arabia and Thailand as well.

When sponsorship is in the form of grant aid from the government, resources can be allocated on
the basis of a long-term commitment (10 years and more in the Malaysian case for example).

In this case, interested applicants have to submit their request and negotiate the funding on an
annual basis.

Another option is to have grants in successive funding phases (3 to 5 years each on average, New
Zealand has annual phases, while South Africa 3 years grants). The end of phases usually coin-
cides with an evaluation exercise.

Grants usually cover the establishment of the incubator (infrastructure) and/or part of its opera-
tion (staff, external expertise).

A yearly grant is often provided for covering the costs of the staff (manager and secretary ser-
vice) and low costs facilities. Sometimes, special provisions are allocated to hire external exper-
tise for ad hoc consultancy to clients. From the case studies this includes grants for services to
clients and pre-incubation support (coaching, training programs etc.), finance within a wider
grant for R&D (e.g. university/private funded research), sponsorships (e.g. large businesses such
as banks, engineering companies, etc. providing financial support) and chargeable consultancy
activities of core staff.

30
Motorola, Coco Cola (2001), Panasonic (1999), Monsanto (1999), Intelligent Systems (1990), Reuters (2000) have
their own in-house business incubators to grow businesses related to their specific needs.
31
Centre for strategies and evaluation services
32
Malaysia is quite unusual in directly providing 100% grant funding to the incubators in the country. While
incubator rent income was estimated at 14% of running costs it was unclear how that money was used for additional
support services when 100% funding was being received from Government.

29 Global Practice in Incubation Policy Development and Implementation

Incubator initiatives are submitted for evaluation to the competent authority and need to include
information on the investment.

An individual incubator seeking grant funding must demonstrate that they have a clear strategy
and action plan to build a network of key stakeholders to embed the incubator within the neces-
sary commercial and financial networks required for clients to develop their business.

Usually, a feasibility study or business plan is requested including the industry sector chosen
based on competitive advantages, annual targets and outputs as well as details on the organiza-
tion and management of the incubation infrastructure. In some context, information requested on
incubators are carefully defined in order to judge the quality of the incubation initiatives and the
approval of the investment request leads to the financing but also to the issuing of an official cer-
tification. In that sense, the incubator becomes part of a network and is eligible for getting fur-
ther financing also in terms of grants that its clients can benefit from.

The experience in some developed countries like Finland and Israel shows that part of public
sources can be devoted to supporting the development of client projects and is made available in
the form of grants or soft loans. The incubator project grants procedure starts when an entrepre-
neur makes his/her application to an incubator. If the project proposal is accepted, it is submitted
to the incubator fund where it is screened again. If the screening is positive, the incubator gets
the funding for supporting the project for a fixed period of time (on average for 2 years). The
funds usually provide a part of the total budget (it can reaches the 85% of the total); the remain-
ing part should be covered by the entrepreneur. There are usually fixed funding ceilings per
project.

The table below summarizes the sponsorship structure in the four case studies analyzed.

Brazil New Zealand Malaysia South Africa

Period of grant Varies between Annual basis (award Open-ended long term 3 year grant period
funding different funds & and renewal based on funding. but annual
schemes but typically merit; assessment adjustment against
for short periods. made on the quality performance targets.
of their operation and
impact). By 2014,
incubators have to
be self-sufficient.

% of funding It was determined Incubator Awards 100% (the Government Variable percentages
provided that public authorities mechanism: annual covers both start-up and
and agencies contrib- merit-based grant to running costs + large
ute approximately to approved incubators contribution (almost
35% of the costs of covering up to 50% 50%) to venture capital
setting up an incuba- of their running costs. funds (MAVCAP).
tor. There are eligibility
criteria for awards.

30 Global Practice in Incubation Policy Development and Implementation

6.2. Business Models
According to a report commissioned by the European Commission which benchmarked business
incubators33, incubators are more likely to succeed when supported by a broadly-based partner-
ship of public and private sector sponsors. Particularly in the initial stages, public sector funding
is critical to ensure that incubators become operational.
As incubators become established, external support can decline or cease, so that incubators have
to identify sustainable, flexible revenue streams for their organizations to survive and perform
effectively. Only in very few circumstances are incubators not expected to achieve financial sus-
tainability. This for example happens in Finland where financial sustainability is considered in
contrast with the incubators role and where funds are given directly to clients.
Lalkaka and Shaffer (1999) define the concept of financial sustainability as being able to con-
tinue to achieve positive cash flows in the future.
There is a view on financial sustainability saying that business incubators are established to men-
tor and guide start-up companies to a position of health and financial viability so they should
themselves be striving to achieve the same. Another view says that government should not fund
incubators unless a specific market failure exists.
There are few examples of incubators reaching financial sustainability. In developing economies
most of incubators are not in a position to cover all operating costs with earned revenues or re-
turn on client investment in the short-term. In Malaysia, incubators are dependent on Govern-
ment funding and there are few incentives to develop self-sustainable financial models, while in
South Africa few steps have been taken in terms of sustainability but there is a wide recognition
about its importance and the willingness to make soon progress to implement it.
Looking at global practices, incubators use a mix of the following business models to manage
their revenues streams.

33
Centre for Strategy and Evaluation service (2002)

31 Global Practice in Incubation Policy Development and Implementation

 BUSINESS DESCRIPTION
MODEL
Rent model Rental charges to clients can be source of funds, though incubators need to achieve a signifi-
cant size before this becomes a major income source. Rent in many incubators in USA,
China, Brazil and other countries is the main income source (up to 40%) and can make incu-
bators self-sustainable if large enough. In South Africa, incubators gets 20-30% of their
revenues from rents. Sometimes initial rental are subsidized.

In most cases public grants are provided directly to the incubator but in some cases (i.e.
Slovenia34) grants towards rents are given to incubator clients, helping to focus the incubator
staff on the need to attract sufficient clients to fill the space available.
The level of rent subsidy usually declines over time to near market-related levels. The bene-
fits of this strategy are to gradually introduce commercial discipline to clients, to counter
charges that clients compete with non-incubated businesses with an unfair advantage, and to
make a progressively growing contribution towards the financial sustainability of the incu-
bator.
Equity model Incubators can take minority stakes (2-6 %) in incubated businesses, often in return for free
and low rent periods, enabling future income from dividend payments. An additional equity
(e.g. 1-2%) may be further added for additional periods spent in the incubators. The relative
smallness of the incubator‘s shareholding means there are many opportunities for it to liqui-
date its position. To work, the equity model requires scale and portfolio quality.

This is the model mainly developed in New Zealand and it is also becoming adopted in Bra-
zil, by university based incubators. Australia introduced an ambitious version of this model
whereby incubators took up to 45 percent equity in their tenant companies. These incuba-
tors only incubated ICT companies.
As for China, it represents a special variation of the model as it is the central government
that is funding the incubators but also taking equity in their tenant companies.
Royalty model According to this model revenues earned by the client will legitimate a royalty payment for
the incubator. Usually the royalty is at around 5% of the revenue and is limited in time (on
average 5 years).

As the royalty can undermine the financial management of clients that are in their start-up
phase thus needing sources, it might happen that incubators agree to postpone payments at
when companies can afford them. This type of model requires then a lot of trust, communi-
cation, and exchange between the parties. New Zealand has three incubators currently using
the royalty model, two of which adopt the equity model too.
Deferred Debt In this model the services provided to the client are valued, along with incubator‘s over-
model heads, and then charged in the incubation fee. The client has up to 10 years to pay back the
debt to the incubator. Once the client has left the incubator and/or when it has reached an
agreed financial target, the total debt due to the incubator is fixed and the repayment can
start. Repayment can be in a lump sum or partial payments.

Apart from the business models identified above, global practices show a great creativeness and a
number of interesting initiatives (mainly related to the delivery of paid services) developed by
incubators around the world in order to target the financial sustainability issue.

34 See http://www.worldbank.org/urban/local/toolkit/docs/m3/lm/module-3-lm-9.pdf for a case study of Slovene

incubation

32 Global Practice in Incubation Policy Development and Implementation

A high-technology incubator in Belo Horizonte (Brazil) plans to develop revenue sources from
consulting and other high-value services to clients also outside the incubator to reduce its reli-
ance on rental income.

As per InfoDev reports, Parquesoft in Colombia, for example, negotiates sales on behalf of its
entrepreneurs, collecting 10% of fee for the service, and Kharkov Technologies charges a mem-
bership fee to new virtual clients. Others are providing services to non-incubating clients such as
training or consulting, or as in BusyInternet's case, running ancillary businesses such as an ISP, a

The case of Biominas in Belo Horizonte35

―Biominas, a biotech-focused incubator in Belo Horizonte, provides an example of innovative

financing which also contributes to financial support for promising new ventures. The incubator
has started a program with the Inter-American Bank (IAB) to finance new companies in Brazil.
IAB gives the incubator grant money of $200,000 to $1 million to invest in promising new firms.
The program allows the incubator to invest money in its more promising firms with the return on
investment reinvested in other companies. This particular incubator had financed 12 companies
through the IAB program, and has also started a seed capital program in partnership with FINEP
and FAPEMIG (Minas Gerais State Agency for Science and Technology) of R10 million
(US$4.382 million) to invest as seed capital in early-stage biotech ventures, with the incubator
taking a 25–30 per cent stake in the venture in return for its investment.‖

bar and a restaurant.

7. Ownership and Management of Incubators

In this section we consider the key issue of ownership and management of incubators from the
viewpoint of public policy.
In many countries the first wave of incubators have been established and managed by the govern-
ments, either nationally or locally. With few exceptions, this ownership pattern has proved dys-
functional.
Publicly owned incubators have generally been too cautious and employed people without suffi-
cient business experience to deliver the level of services required. Managers of public owned
incubators tend to be more focused on bureaucratic aspects and devote less time for engagement
with clients or tend to link incubator clients with sources of financial assistance and can be less
selective in entry procedures. In Malaysia part of the reform process launched since 1999 was
aimed at overcoming the lack of experience of part of the incubator managers of public funded
incubators, who were considered as bureaucrats with little knowledge in entrepreneurship.

35
Aruna Chandra ―Business incubation in Brazil: creating an environment for new ventures‖ (Belo Horizonte
interview, 2006).

33 Global Practice in Incubation Policy Development and Implementation

As a result most of new start-ups were going out of business, showing a lack of support to their
activities and sometimes poor entry procedures.
A lack of managerial skills can also be found also in university environments where disfunction-
alties are often compounded by part-time management which further undermines the needed fo-
cus on the incubatees and on efficiency (e.g. lessons from Thailand and India). Whereas mixed
ownership structures (public, private) encourage incubators to make riskier direct investment in
their clients and thus to be more efficient in selection of ideas (Chandra and He, 2008).
The government role is essentially to develop the technical infrastructure, policy framework and
initial finance and to help catalyze the venture creation process, but experience shows that the
establishment of public private partnership (PPP) based incubators contributes to maximizing the
positive effects of the incubation experience.
Several countries, for instance Brazil, South Africa, India, Thailand, Finland and Turkey, have
promoted governmental mechanism favoring PPP based incubators. Some countries, for exam-
ple Israel, have opted for privatization programs for state owned incubators, attracting private
financial entities as well as strategic actors within specific sectors to be owners of incubators and
to operate them in a more efficient way. This has brought higher success rates; both in raising
funding for projects during the incubation period and after graduation, as well as enhanced qual-
ity of the management teams within the incubators. About 65% of the privatization program‘s
graduated projects have successfully attracted private investments compared with 45% in the
original program. In the same way, the corporatization of government-funded technology parks
and research institutes has managed to change the mindset of incubator managers towards being
more business-minded and profit-oriented.
Incubators are expected to enable their clients to integrate with the commercial, financial and re-
search networks that are critical for the growth and success of their business. Equally, incubators
needs to be integrated into the same networks to build their reputation and support for their ac-
tivities. Consequently, incubator require clearly defined mechanisms to ensure they are net-
worked with key stakeholders and are clearly recognized as a centre of expertise within appropri-
ate networks.
In many cases, either the ownership or the governance structure is used to construct a public pri-
vate partnership that facilitates the incubator and its clients networking with key stakeholders36.
Sometimes, incubator programs encourage important institutions to engage in incubation projects
and select incubators for grant funding using evaluation criteria that include effective networking
arrangements. In other cases, some restrictions are imposed. For example, the program may re-
quire that at least one of the owners is an academic institution or that incubators demonstrate a
well functioning cooperation with universities.
The main problem is to decide who does what and build an appropriate level of trust and shared
vision. This implies measures to introduce the incubation concept and its advantages to all part-
ners involved and reach an overall consensus on incubator program objectives.

36
In other cases an advisory committee is used to achieve the same effect.

34 Global Practice in Incubation Policy Development and Implementation

Workshops can be organized with relevant institutions to invite foreign experts from bench-
marked countries to provide training and exchange experience about successful PPP in business
incubation, thus inducing the establishment of similar initiatives. Relevant institutions can be
involved in sectoral strategy working groups created for the identification of projects (including
incubation) that can be financed through public sources.
The next table summarizes the ownership and partnership structures adopted in the four countries
of our case studies. The observed formal legal structures, ranging from internal department,
through to private company, to NGO, etc, reflects the different legal options available.

Brazil New Zealand Malaysia South Africa

Ownership / Mixed partnerships Generally stand- National authori- All the incubators are regis-
Partnership as required by the alone commercial ties, universities, tered as independent entities,
structure specific project. entities, owned by voluntary organiza- being either not-for-profit
Government works universities or re- tions. companies or trusts, and re-
in tandem with gional economic port to STP.
industry and uni- development agen-
versities. cies A small num-
ber are joint ven-
tures between these
organisations and
national, multi-
national compa-
nies.

Because of different ownership models, business incubators‘ management and leadership styles
vary. When the owner is a government agency, the incubator is usually established according to
the public institution model with a director appointed to manage the incubator and take care of its
functioning. Incubators established on the basis of a public-private partnership are also usually
set up according to the prevailing corporate style and culture, creating a board appointing a gen-
eral manager.
Currently, some newly-established government-sponsored business incubators are also following
a more corporate style. A combination of a board of directors and a manager appears more likely
to be a successful mix for the management of an incubator. In this way the board can be focused
on the incubators formulation and implementation of strategy and hold a clear overview of pro-
gress against the targets set., while the manger can take care of the day-to-day management and
engage more with clients. To this aim, a clear division between the governing committee and day
-to-day management is essential and the governing committee maybe be overseen, as in New
Zealand, by a central monitoring body.
The initial leadership of the incubator is critical to the success of the initiative. Experience
shows that dynamic, entrepreneurial managers are crucial to set the course of an incubator, while
cautious, overly academic or bureaucratic managers generally fail to produce high-impact initia-
tives.

35 Global Practice in Incubation Policy Development and Implementation

Day-to-day management is clearly delegated to a manager with the appropriate business skills
and experience plus management expertise. The incubator manager is responsible for the deliv-
ery of the service mix to clients, marketing programs to attract clients and responding to needs as
they occur. Other staff should be working under his/her direction.
The management of the incubator should be carried out like the incubator itself is a company
with its own cost and profit constraints to be respected and for which the manager takes responsi-
bility. The incubator is designed to assist companies to become fast growth businesses which
inevitably requires the clients to adopt a clear commercial orientation. It is difficult to conceive
how an incubator which is not commercially oriented itself would be able to create such an orien-
tation in its clients.
Equally, the terms and conditions of employment should ensure there is an award system that
encourages success with a clear system for replacement if success is not forthcoming. One of
the most significant reasons for the failure of incubators is the appointment of inappropriate peo-
ple into key positions. This can be caused because the employment package reflects considera-
tions of the public sector not relevant to the post (i.e. pay structure, grades and terms of employ-
ment appropriate for a public servant on an internal career path), or because the post becomes
part of an appointment system where the needs of the incubator are not central to the decision,
(i.e. part of wider career paths for civil servants, etc).
In all selected countries examined in our study, a corporate style prevails or has been introduced
in the day-to-day management, as can be seen in the table below.

Brazil New Zealand Malaysia South Africa

Management Mixed partnerships Generally stand- National authori- All the incubators are regis-
Structure as required by the alone commercial ties, universities, tered as independent entities,
specific project. entities, owned by voluntary organiza- being either not-for-profit
Government works universities or re- tions. companies or trusts, and re-
in tandem with gional economic port to STP.
industry and uni- development agen-
versities. cies A small num-
ber are joint ven-
tures between these
organisations and
national, multi-
national compa-
nies.

36 Global Practice in Incubation Policy Development and Implementation

Whatever the ownership and management structure it is important that the public sector is clear
about its objectives, the level of finance to be provided and the outcomes expected. This enables
the development of clear performance measures (see below) and also for periodic bids to be
made for future public support.
Program designers should place particular emphasis on recruiting and empowering strong man-
agers to drive the management of business incubators.
Donors should consider investing more directly in leadership development of incubator manag-
ers, including capacity building for high potential individuals, global networking and knowledge-
building opportunities, and disseminating effective strategies for recruiting and retaining talent in
the incubation sector.
8. Monitoring and Appraisal
At the start of this paper we raised issues relating to the best practice approach. Central to best
practice is the need to clearly define policy and program objectives in operational terms, enabling
clear monitoring of outputs and appraisal of the impacts actually achieved, enabling identifica-
tion of the process leading to success which can be further improved and replicated as necessary.
Programs designed to implement the objectives of government within best practice should be de-
fined as a set of goals to be achieved with the resources available. Such goals should follow
SMART principles; these are that the program should be: specific, measurable, attainable, realis-
tic and timely37. Monitoring and appraisal systems are then easy to define and relate to the
―measurable‖ part of the SMART definition, enabling both implementers and policy makers to
see the real progress being made in achieving the policy goals.
The design of a monitoring and appraisal system for a business incubation program is therefore
critical to identify unexpected problems that are preventing successful outcomes and to identify
where further improvements can be made. The matrix adopted should clearly reflect the objec-
tives and goals of the program without placing unnecessary strain on the incubators resources.
Within this framework monitoring should be used to regularly measure ongoing process in im-
plementing the specific policy goals with the measures designed to effectively capture key quan-
titative measurements of performance, allowing policy makers to evaluate what is being achieved
against the clear goals they have set, both for individual incubators and for the program as a
whole. It also allows for evaluation of incubation against other policy options for the promotion

37
Specific - To set a specific goal you should be able to answer the six "W" questions:
*Who: Who is involved?
*What: What do I want to accomplish?
*Where: Identify a location.
*When: Establish a time frame.
*Which: Identify requirements and constraints.
Measurable – refers to the need to establish concrete criteria for measuring progress toward the attainment of each
goal you set. The measurements should be easy to collect and relate directly to the goals to be achieved. When you
measure your progress, you stay on track, reach target dates, and know the effort required to reach your goal.
Attainable – Goals should be clearly defined and achievable within a specific period for them to be attainable.
Realistic - To be realistic, a goal must represent an objective that implementers are both willing and able to work.
Timely - A goal should be grounded within a time frame. With no time frame tied to it there's no sense of urgency.

37 Global Practice in Incubation Policy Development and Implementation

of specific objectives. The key issue for the design of ongoing monitoring program is to design
clear unambiguous measures that:
 Clearly relate to the program‘s goals
 Are easy to collect
 Allow for comparative performance within the incubation program and with other forms
of business support targeted to the same objective.
Appraisal is then a different form of evaluation, being designed to identify how implementers are
achieving or failing to achieve the goals set. The appraisal system should include qualitative as
well as quantitative measures designed to identify and disseminate the key features that lead to
superior performance. Thus an appraisal should look at the program‘s objectives and how these
have been formulated as clear implementable goals and how incubators have approached these
goals. Another key function is to identify and support improvement strategies. Where a moni-
toring system is regular, ongoing and collected by the organizations in the program, appraisals
are best undertaken at specific points in the multi-annual program by an external reference group
and conducted through qualitative measures i.e. face-to-face interviews, focus groups etc. in ad-
dition to an analysis of the quantitative information to identify key issues in improving the pro-
gram.

Of course government policy makers are not the only group to benefit from monitoring and ap-
praisal systems. Other stakeholders that can benefit from the monitoring and appraisal system
include:

 the incubator manager who, through regular measurement of outputs and performance,
can evaluate activities and incrementally try and achieve improvements in all processes;
 the management committee which can use the monitoring system to evaluate the perform-
ance of the manager and staff in achieving the organization‘s objectives, proactively iden-
tifying policy adjustments to improve performance;
 the potential clients of an incubator which can use monitoring information to identify the
benefits they should obtain through being granted a tenancy;
 investors, customers and network partners of incubator clients that can use the monitoring
information to evaluate how reliable incubator clients are likely to be as customers, sup-
pliers or partners.

38 Global Practice in Incubation Policy Development and Implementation

 BRASIL NEW ZEALAND MALAYSIA SOUTH AFRICA
Monitoring A track record of Incubators are required Government does not STP makes use of
and annual reviews to carry out formal M&E aggregated data from
appraisal by governing activities. Incubator each of its incubators
 report statistics on a
system bodies and asso- management does it and reports on a quar-
regular basis
ciations could informally. Systems to terly basis on the fol-
 undergo annual
not be found. monitor companies lowing parameters:
capability assess- once they have exited
Some surveys ments and perform-  The number of
are not currently in
are carried out ance benchmarking new companies
place.
including data conducted by the registered
on performance, IDU (which play a Economic Planning  Survival rates of
graduated com- part in annual fund- Unit of Prime Minis- new companies
panies, sectors of ing decisions) ter‘s Dept. has  Growth in turn-
activities, but on  collect performance launched an impact over of new com-
a sporadic basis. data from former assessment study. panies
tenants for five  # of black em-
years post-exit. ployees
Intermediate evaluations  # of female em-
carried out by the Gov- ployees
ernment in 2004 (for  # of clients
identifying best prac- graduating from
tices) and 2008 (on sur- the incubator per
vival rates, sustainability annum.
and update on interme-
diate objectives).

A good monitoring and appraisal system needs to identify a set of performance indicators that
collectively reflect the benefits expected by all these stakeholders, as well as government policy
makers, ensuring that, in total, the information collected does not place too heavy a burden on the
administration and management of the incubator.
In many countries, incubator managers are usually requested by incubator program coordinators
to submit regular reporting on their activities. Standard templates and adequate MIS are in place,
like in the case of New Zealand where a computer based system is used to collect regular statis-
tics reports form incubators. Evaluation are organized on a mid-term base and commissioned to
an external panel of experts who make a judgment on the basis of information available, as well
as on the results of interviews to main stakeholders and client companies, including graduates.
However, collection of data can represent a challenge in some countries, especially where moni-
toring requirements are not designed at the outset or altered radically during the life of the pro-
gram. Sometimes, data on individual graduate companies cannot be easily found, as balance ac-
counts are not available on public sources or because companies are reluctant to share informa-
tion and fill in questionnaires.

39 Global Practice in Incubation Policy Development and Implementation

Some incubators are not keen on soliciting feedback from their clients and/or on reporting on
their activities and there are no incentives or countermeasures to ensure data collection. How-
ever the recent experience shows that incubator networks can help in the collection exercise by
making available alternative tools38.
New Zealand offers a good practice too, as incubators are contractually bound to collect data on
graduates for 5 years after their graduation. According to global practices, mainly two aspects are
assessed through the monitoring and appraisal exercise:

1) The incubator outputs

In most programs, quantitative data are regularly collected to monitor incubators admini-
stration and running activities. Information varies country by country, however they usu-
ally cover main outputs of the incubation process, including the establishment and opera-
tional phase (e.g. financial performance, number of incubated clients, etc) and the key
incubation functions and delivery (e.g. occupancy and average length of tenancy, ratio of
incubator personnel to clients, number of successful graduated companies, etc). The
monitoring of the incubation process is usually undertaken by the sponsor but sometimes
is also an internal function carried out by the incubator management (continuous internal
auditing) which can also be useful to produce important marketing materials on incubator
activities to be divulgated.
This type of data only offers a quantitative picture of the situation, without identifying
why things are going in a certain way and what lessons can be learned. The assessment
of the incubation process often requires to be integrated with qualitative data and inter-
views with incubator managers39 and clients to better understand the possible problems
and define an action plan to improve performance. For example, if the average length of
tenancy is very high with respect to the planned timeframe, this could be a result of bad
scouting and screening practices and/or poor support programs delivered to clients, re-
quiring the incubator to implement improvements in the service mix and management.
Alternatively, the reason for longer than expected tenancy periods might be linked to a
shortage of suitable policy or other aspects of the business environment, requiring action
by external bodies rather than improvement of incubator services. To this purpose, feed-
back from companies can be extremely useful. Incubator managers can provide good in-
sights to the ―input‖ and ―process‖ aspects of their operations, but they will rarely provide
the basis for an in-depth understanding of outputs and impact in the way direct beneficiar-
ies can. Monitoring of companies both when they are in the incubator and after they
graduate, is recognized both as a best practice and a necessary complement of the incuba-
tor process assessment40.

38
Best Practices in terms of monitoring clients can be found in several European countries. The Centre d‘Entreprises
Héraclès in Belgium is a good example of post-incubation monitoring: here a strong effort is made to keep in touch
with companies after they have left with an annual follow up asking for basic information such as numbers of jobs.
The incubators objective in doing this follow up is to ensure that the incubator has information on outputs. But it
also provides information to continue networking activities. The ADT in Germany is also planning to undertake a
national follow-up survey of technology centre graduates.
39
As it is done in the case of New Zealand on a regular annual base.
40
For the importance of this approach see the benchmarking study of business incubation in Europe carried out by
the Centre for Strategy and Evaluation Services in 2002.

40 Global Practice in Incubation Policy Development and Implementation

 What do incubator managers need from data? Based on NBIA (US National Business In-
cubation Association) research team members work, it appears that there are two types of
information that program managers find valuable: (1) understanding how well they are
doing performance-wise compared to peer programs elsewhere; and (2) understanding
what they can do differently to improve their performance with clients.
Achieving those objectives requires to go through a benchmarking exercise that allows to:
(1) characterize the performance of a national sample of business incubators; (2) use the
data to identify both exemplary and low performing incubators, as well as to inform par-
ticipating incubators of their standing relative to peers; and (3) expand the understanding
of incubator best practices in a wide variety of activity domains, particularly their inter-
relationships and relationship with performance outcomes.
Incubators can be then encouraged to benchmark themselves against best practices and
thus progressively update their performance to achieve excellence. It should be noted
that this approach has been applied with some success in several programs including as-
sistance programs for small manufacturing companies (Luria, 2000) and university-
industry technology transfer schemes.
Currently, exchange of practices is promoted mostly as part of incubator associations
which are also involved in launching benchmarking initiatives usually funded by national
government, as in the case of NBIA. Practices on incubator spaces management are al-
most standardized. However, benchmarking should be confined to a specific environ-
ment as good practices change from economy to economy and need to be adapted and
identified according to different contexts.
The focus on benchmarking exercises is more and more focused on identifying best prac-
tices in business services delivery, especially entrepreneurial training, financing and tech-
nology support and business-like incubator management. Benchmarking does not try to
underestimate the importance of understanding what can be improved by maximizing the
exchange of information with the clients. A hand-on approach with regular surveys of
clients (as in the BIC in Genoa - Italy) aimed at judging their performance but also at
gauging SME demand for specific services or checking lacks in the existing service deliv-
ery system remains a valuable practice.

41 Global Practice in Incubation Policy Development and Implementation

CSES recommendations in seeking to achieve best practice at an operational level:

 Ensuring that incubator operations are integrated into wider regional (technology) development
strategies and supported by broadly based partnerships;

 Clearly defining the target market and adopting admission criteria that focus on projects where an
incubator can genuinely add value;

 Placing particular emphasis on developing high quality business support services (entrepreneurial
training, business advice, technology support, financing, etc);

 Ensuring that incubators are managed in a business-like manner with the aim of maximising value
for money;

 Developing ‘virtual’ incubation services so that more businesses can benefit and job and wealth
creation effects are retained in local economies through after-care/graduate networking.

At the initiative of DG Enterprise, a major European Union-wide benchmarking program has been prepared
and carried out by the Centre for Strategy and Evaluation Services. These are the benchmarking parameters
proposed:

Incubator Set-up Benchmark

% of revenue from public subsidies 25%
Incubator space 2,000 – 4,000 msq
Number of incubator clients 20-30
Incubator Functions Benchmark
Incubator occupancy rate 85%
Length of tenancy 3 years
Number of management staff 2 managers
Ratio of incubator staff to clients 1:10 to 1:20
% of managers’time advising clients 50%
Evaluating Services and Impacts Benchmark
Survivial rates of client firms 85%
Average growth in client turnover 25%
Cost per job (gross) €4,000 to 8,000

2) The incubator impact

Incubator performance is evaluated against incubator program strategic objectives. In
this case, key performance indicators are closely linked to the initial goal for which the
incubator was set-up. Sometimes there is confusion between indicators the adopted and
objectives.

42 Global Practice in Incubation Policy Development and Implementation

 Usually exit rates, jobs created and business survival rates are indicators adopted to assess
impact regardless of the final goals of the incubation initiative. Incubator programs that
support a new business sector should be assessed by indicators outlining the growth of
graduated companies more than job creation, like the turnover, taxes paid, average salary/
new job created, and the amount of private equity attracted, as well as funds raised by the
companies. The amount of private equity attracted gives an indication of the market
value created by the new companies. The turnover shows the actual revenues and ex-
penses of the newly established companies, their development and their contribution to
the regional economy. If the main objective is to restructure the economy and re-launch
an entrepreneurial spirit, then the number of new enterprises created becomes the most
relevant indicator. Finally, an incubator conceived to promote social inclusion should not
be judged with respect to profitability parameters but on the basis of job created and en-
trepreneurship attitudes encouraged among the targeted communities. The table below
shows suggestions provided by NBIA41 in deciding what data to collect to evaluate the
impact of different types of incubators.

WHAT TO COLLECT (source NBIA)

Special-Focus Incubators
No. of women employed by clients and graduates
No. of minorities employed by client and graduates
No. of low-income residents employed by clients and graduates
Value of local goods and services purchased in the community by incubator clients and graduates
Technology or University affiliated incubators
No. of technologies commercialised into new products or services by client and graduate firms
No. of student, faculty, and staff-initiated businesses
No. of student employed by incubator clients and graduates
No. of students securing internships at client and graduate firms
No. of university graduates permanently employed in client and graduates
Royalty/licensing revenues gained from client and graduates
Equity investment returns gained from client and graduates

Looking at our case studies, South Africa has developed a set of parameters to evaluate incuba-
tors impact. They are meant to investigate if progresses have been made in terms of:

■ Improving the business performance, profitability and survival rate of newly established
technology based SMMEs (e.g. new SMMEs created, % of SMMEs surviving after 1st
and 2nd year),

■ Promotion of Black Economic and Women Empowerment and (e.g. % of black owned
SMMEs established, % of black empowered SMMEs established; number of woman-
owned projects initiated)

■ Promotion of economic growth and employment creation (e.g. jobs – direct and indirect –
created)

41
The National Business Incubation Association is a private, nonprofit 501(c)(3) membership organization based in
Athens, Ohio,.USA.

43 Global Practice in Incubation Policy Development and Implementation

Data are collected on a quarterly basis. These data are also used to evaluate the cost effective-
ness of the incubator programs, whose measurement requires impact appraisal42-43. Incubators
are clearly expensive investments in both capital and running cost terms, focusing business sup-
port services on a small number of clients and require a higher per capita cost when compared to
other types of SME support (i.e. basic business training and advice services). The cost per job of
incubation is also lower when compared to other initiatives to support employment. For exam-
ple, in Australia, incubation is more than five times less costly per sustainable job created than
other job or enterprise creation programs, and this figure is quite similar elsewhere.
Justifying public expenditure in incubation programs requires that their relatively higher costs are
outweighed by the results achieved. As described above, this can be in terms of social impacts
(i.e. youth unemployment, empowerment of target groups, etc) or economic impacts through jobs
created, additional growth, extra taxes generated or through creation of long term changes in the
economy that will bring about a desired transformation (i.e. from manufacturing to innovation).
Only when this is supported by evidence, then donors and policymakers can consider incubation
an effective and measurable part of both an economic development and a national social impact
strategy.
According to the infoDev‘s Monitoring and Evaluation Impact assessment (MEIA) study, incu-
bators report significant economic and social impacts. Associations have the largest client reach:
for instance the clients of ANPROTEC, the national incubator association in Brazil, have helped
to create more than 5,500 sustainable new businesses and 28,000 jobs. The University of Guada-
lajara has created more than 6000 new jobs, and TWBI in China reports more than 3300 staff
employed by its clients, many in high-skilled graduate and post-graduate research and develop-
ment initiatives. Many of these impacts are also being achieved in areas where unemployment is
endemic. Clients of Incoval in Ecuador employ an average of 3 to 6 people directly (plus others
indirectly) in an environment where grantees reported that 11% of the population is unemployed
and an estimated 50% are "underemployed" in jobs that are below their skill level. About half of
grantees estimate that their clients will create up to 100 new jobs in the next two years.
If this was not the case then the entrepreneurs benefiting from selective support would gain at the
expense of the country and alternative support programs would need to be considered44.

42
Historically, NBIA member incubators have reported that 87 percent of all graduate firms are still in business.
NBIA has undertaken several important studies to evaluate the cost-effectiveness of incubation in USA and has also
developed a toolkit to facilitate the collection of relevant data from incubator managers. https://www.nbia.org/
impact/index.php
43
In Finland, the Otaniemi Science Park carried out a study to demonstrate the cost-effectiveness of a sectorally
target incubation program. Over the past 10 years, 450 new companies have been created of whom 200 have
graduated. The total number of jobs created over the ten year period was 5,000 direct jobs. The combined salaries of
both employees in client and „graduate‟ firms were an estimated 150 million euro (generating annual taxes of 50
million euro). When compared with an annual public subsidy of 0.5 – 0.7 million euro towards the incubator‟s
operational costs, this resulted as a highly favorable return on investment (CSES 2002).
44
In the USA, it has been estimated that incubators have assisted until now more than 35,000 start-up companies.
These companies have provided full time employment for nearly 82,000 workers and generated annual earnings of
more than $7 billion. Publicly supported incubators created jobs at a cost of about $1,100 each, whereas other
publicly supported job creation mechanisms commonly cost more than $10,000 per job created.

44 Global Practice in Incubation Policy Development and Implementation

The MEIA study outlines also that the tangible economic/social impact of incubators is not lim-
ited to businesses and jobs. Many incubators are also impacting their broader community's
knowledge and skills. TWBI's small business training program has reached more than 20,000
women since its inception, and TREC-STEP has reached more than 15,000 people through train-
ing programs and partnership activities, in addition to launching more than 160 core entrepre-
neurs. Incubators also indicate that their clients are contributing to the economy by paying a va-
riety of regular taxes.
In general, business incubators are widely regarded by governments as a cost-effective approach
to reach several economic development goals and this is confirmed by several studies. However,
as Lalkaka also noted45, performances of individual incubators in both developed and developing
countries differ markedly, depending on the quality of infrastructure, type of the sponsors, and a
variety of other external and internal factors. As a consequence, assessments can be carried out
and lead to the evidence of effectiveness and sustainability. But, these results have to be always
considered in relation to local conditions.
In general, incubators can be seen as powerful instruments but highly sensitive to local environ-
mental features and to the unique entrepreneurial ecosystem in which they are applied. For this
reason, in some contexts incubator performance assessment is integrated with an evaluation of
the surrounding environment in terms of status and improvements of entrepreneurial culture and
skills, regulatory framework, incentive system.

9. Key Recommendations
Following the review of the global situation and the four case studies, as well as the analysis of
the identified key policy dimensions, a number of key recommendations have been identified for
the design and implementation of an incubation program:

1. Consistency between objectives and the broader strategic framework

 Incubators should not be treated as stand-alone operations and should not be con-
ceived for stand-alone goals. Incubators are designed and implemented to pursue defined
objectives as part of a broader strategic framework (territorially orientated [regional strat-
egy] or of particular policies [job creation, social policies, competitiveness] or a combina-
tion of these factors).
 Strong consistency with overall economic goals needs then to be combined with a
long term approach (on average at least 10+ years), which is needed to ensure the estab-
lishment and sustainability of the incubation industry as well as the proper functioning of
the business environment where incubators operate.
 Policy makers should consider a deeper investment in understanding the drivers of
success in particularly effective business incubation models. These investments should
be followed with pilot initiatives that seek to test the findings and replicate these models
in a variety of environments.

45
Lalkaka 2002

45 Global Practice in Incubation Policy Development and Implementation

 2. Consistency between objectives pursued and suitable service mix
Incubators can be established to meet a range of public sector objectives, from social in-
clusion to fostering growth of innovative businesses. Incubators need to design a range of
services tailored on their target groups. As well as the basic administrative services de-
signed to reduce operational costs of clients, a mix of business (training, coaching, men-
toring) and technical (production advice, access to specific equipment, etc) services are
required to meet the needs of their target group. The actual service mix should reflect an
analysis of the needs of clients for the specific objectives of the incubator.

3. Stakeholder support
The involvement and support of stakeholders (consisting of sponsors drawn from the
business community, government, the local society, venture capital providers, entrepre-
neurs, etc) and incubator management are vital for incubator success. It is important that
there is clarity, consistency and cooperation from all stakeholders. There should be con-
sensus on a mission that defines the incubator‘s role in the community and quantifiable
objectives to achieve the mission. Incubator programs should develop stakeholder sup-
port, including a resource network and capacity building initiatives.

4. Investing in Pre-incubation

 A pre-incubation program to assist potential entrepreneurs to develop their ideas and

learn basic business skills through a mixture of training and coaching is critical to ensur-
ing that the incubator takes on clients close to business launch.
 Incubator clients should be selected through clear evaluation criteria appropriate to the
objectives of the incubator. Pre-incubation should help potential entrepreneurs to prepare
their applications, but should not be a guarantee of acceptance.

 In public policy terms this means incubators should set out a clear strategy for pre-
incubation, indicating numbers to be involved, how they are supported and expected
numbers and time periods to generate clear clients. A clear and transparent set of selec-
tion criteria to be applied to applicants must be defined and communicated at an early
stage. It should reflect the objectives of the incubator and its target market.

5. Address gaps in the Business Environment

 In addition to services designed to meet the needs of individual clients, incubators are of-
ten asked to develop services or to intervene in order to address weaknesses in the busi-
ness environment. Incubators need to analyze the local business environment and pro-
pose solutions to any particular problem faced by their clients if successful growth busi-
nesses are going to be successfully launched.

46 Global Practice in Incubation Policy Development and Implementation

  Incubators should build on their reputation and network of relationships and collabora-
tions in order to positively influence the business environment dynamics. Nevertheless,
existing weaknesses in the regulatory and enterprise support frameworks should be tar-
geted also at government level through the adoption of adequate initiatives supporting
SME activities. Policymakers may also take into consideration the opinions of incubator
associations when identifying main strategic priorities.

6. Commercial approach

 When the incubators are designed to improve the growth and success rates of new busi-
nesses, they need to be focused on satisfying the needs of clients and delivering high
value cost effective services to enhance the clients‘ commercial focus. As such the incu-
bator should adopt the same business-like approach to their operation.

 The policy framework needs to encourage a business mindset and/or discipline for a pub-
lic benefit in line with the set objectives and assess the performance of incubators in those
terms. This has an impact also on the funding policy adopted.

 The grant application process should require clear business and action plans from the ap-
plicant incubators, along with measurable performance outputs in terms of clients, finan-
cial sources etc. that indicate the commercial intention and expected achievement.

7. Ensuring elements of competition and merit in grants assignments

 Public support can be important in the early stages of incubation programs. However,
governments are suggested to ensure the efficient use of funds. This can be achieved
through the organization of open competitive rounds for grant funds, which can contrib-
ute also to develop a commercial approach of applicants.
 Then, keeping funded incubators accountable for their performance also contributes to
ensure efficiency in incubation management.
 Introducing an element of competition into the provision of grant supported services has
also been demonstrated to greatly improve performance in most instances.

8. Financial sustainability

 A financial self-sustainability goal can be encouraged and actively promoted as it will

also contribute to an efficient management of the incubator. The benefit of this strategy
is to gradually introduce commercial discipline to clients. To achieve sustainability, incu-
bators often need to develop a range of alternative funding sources, both public and pri-
vate.
 Initial public funding can be granted but then should decline in favor of other funding
models (commercial income, equity in incubated companies, royalties, etc).

47 Global Practice in Incubation Policy Development and Implementation

 When applying to grant funds, incubators can also be asked to indicate which funding
model they intend to adopt in the longer term.

9. Networking and Public Private Partnerships

 Partner networks contribute to incubator successes through sharing the wisdom reaped
from both achievements and failures, and help expanding market opportunities for entre-
preneurs and graduates. These networks typically include universities, R&D centres,
industrial contacts, financial institutions and professional service providers such as law-
yers, accountants, marketing specialists, venture capitalists, angel investors, and
volunteers.
 An incubator needs to have clearly defined mechanisms to ensure that it and its clients
are in contact with key stakeholders in important networks, and that the incubator is
clearly recognized as a centre of expertise within these networks.
 Strong cross-sector partnerships – or PPPs – can create important value for incubators by
filling gaps in the organization's service model, mitigating operational risk and creating a
platform for influencing the broader business environment. PPP models should be pro-
moted either in the ownership or in the governance of incubators.
 Associations can also play a relevant role in creating networks among members.

10. Incubator Manager

 An effective, committed, knowledgeable incubator manager and staff are critical to the
effectiveness of an incubator. The manager in particular needs to be able to lead the sup-
port team, manage the incubator‘s important networks, understand the business needs of
clients and pre-incubation businesses, as well as support the staff of the incubator in de-
livering effective services to meet these needs. Failure to employ a suitably skilled and
motivated manager is one of the key reasons for the failure of an incubator.
 The business plan for an incubator should preferably set out the qualifications and ex-
perience of the proposed manager. At the very least a clear personnel specification, job
description and recruitment and selection system should be spelled out in advance of
funding. Policies that unrealistically limit salaries, appoint managers on the basis of per-
formance in government or other bureaucracies, or recruitment not based on competitive
criteria, are very unlikely to lead to successful incubators. Donors should consider in-
vesting more directly in leadership development of incubator managers, including capac-
ity building for high potential individuals, global networking and knowledge-building
opportunities, and disseminating effective strategies for recruiting and retaining talent in
the incubation sector.
11. Monitoring and Appraisal

 The design of a monitoring and appraisal system for a business incubation program is
critical to identifying unexpected problems that are preventing successful outcomes and
where further improvements can be made, as well as to tracing best practices to share
within the incubator network.
 The introduction of indicators of performance as a part of a monitoring and appraisal
system is also important to ensure the achievements of concrete results as well as to al-
low a constant program improvement.
 Constant internal monitoring should be carried out also by incubator managers.
 Benchmarking exercises can be helpful to incubator managers for understanding how
well they are doing performance-wise compared to peer programs elsewhere – in the
country or even worldwide – and in understanding what they can do differently to im-
prove their performance with clients.
About infoDev

infoDev is global development financing program

among international development agencies,
coordinated and served by an expert Secretariat
housed at the World Bank Group, one of its key
donors and founders. It acts as a neutral convener
of dialogue, and as a coordinator of joint action
among bilateral and multilateral donors—
supporting global sharing of information on ICT
for development (ICT4D), and helping to reduce
duplication of efforts and investments. infoDev
also forms partnerships with public and private-
sector organizations who are innovators in the
field of ICT4D. The infoDev Secretariat is
housed in the Global ICT Department (GICT) of
the World Bank Group.

For additional information about this study or

more general information on infoDev, please visit
www.infodev.org/publications or contact
us at info@infodev.org or tel: +1.202.473.4868.
Information for Development Program (infoDev)
1818 H Street NW
Washington, D.C. 20433
Phone: +1 202 458 4070
Fax: +1 202 522 3186
www.infodev.org