Literature Review
2.2 The Role of Business Incubators in Economic Development
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market, the Chinese Business Incubators (BIs) in this research mainly refer to
Technology Business Incubators.
2.2 The Role of Business Incubators in Economic Development
A great deal of studies have discussed the role of BIs’ in different scopes and
purposes in the history of economic and social development. This section reviews the
roles of BIs which are mostly discussed.
Creating Employment Opportunities. After the stagnation of the U.S. economy
during the 1970s - 1980s, BIs were effectively used as a new economic development
tool since they offered low-cost services, reduced overhead costs and time devoted to
non-value-adding activities (De Cleyn & Festel, 2016).
More and more policymakers realize that investment in entrepreneurial support
infrastructure is important. According to a study conducted for the U.S. Department of
Commerce Economic Development Administration (U.S. EDA, 2011), BIs provide
communities with significantly greater results at less cost than do any other types of
public works infrastructure project. It showed that incubators provide up to 20 times
more jobs than community infrastructure projects. As a result, BIs need to be a part of
the job creation equation.
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BIs in the EU make a significant contribution to job creation. A research cited that
United Kingdom Business Incubation (UKBI) runs more than 300 BIs operated in the
U.K. and directly support 12,000 companies while 40,000 additional firms experience
indirect benefits from this support, creating more than 50,000 jobs in the nation (Dee et
al., 2011). In addition, a report from the Centre for Strategy & Evaluation Services
(CSES, 2002) studied that till 2002, some 40,000 new (net) jobs were generated each
year by BIs, and the growth of BIs also create indirect effects on employment. The
study also estimated a ratio of 1:1.5 for direct:indirect job creation from incubatees.
Nowadays, BIs have become a popular tool for local economic development and
employment. Monkman (2010), the former President & CEO of National Business
Incubation Association (NBIA), also viewed that the most common goals of BIs are
creating jobs in a community, enhancing a community’s entrepreneurial climate,
retaining businesses in a community, building or accelerating growth in a local industry,
and diversifying local economies.
Supporting SMEs and Entrepreneurs. In recent years, entrepreneurship has
re-emerged as an important component underlying economic growth around the world.
Wong et al. (2005) indicates that the trend toward an entrepreneurial society is
accelerating. Entrepreneurship development is perceived to have a positive impact on
economic growth, which can be locally fostered through BIs (Lesákova, 2012). Craig
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et al. (2004) also emphasized that small businesses are important to economic vibrancy,
employment growth and wealth creation for almost all economies. Al-Mubaraki and
Busler (2011a) examined 10 case studies of BIs in developing countries, and found that
BIs are an effective and innovative tool in supporting the startup businesses.
It is generally accepted that SMEs lack the necessary resources to effectively scale
up and grow their businesses. Yet BIs offer some of the greatest opportunities for
innovation, employment and value creation. Dichter et al. (2010) have shown that BIs
can be an effective tool for supporting local innovation, new business creation, and can
reduce SME failure rates substantially. Experience in Israel has demonstrated that one
of the right support incubating system in creating SMEs’ is the use of BIs with business
support, which was really promoting Israel’s GDP (OECD,2010a; Berry, 2009).
In Europe, Aernoudt (2004) argued that BIs are bridging the entrepreneurial gap
and exploring how the region can become more business friendly. In addition, a study
emphasized that BIs are the place where the incubation activities are carried out, and
where entrepreneurs and the existing SMEs would find a suitable place, in terms of
facilities and expertise, to address their needs, develop their business ideas and
transform them into sustainable realities (Dichter et al., 2010).
In addition, BIs were sufficient to stimulate the growth of new companies as their
activities have proven to be very successful within entrepreneurship-friendly
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environment. To get the funding from investors, BIs assist ventures to transfer scientific
and technological achievements, as well as to prepare to bear the risk inherent in early
stage technology development (De Cleyn & Festel, 2016).
The chairman of UKBI, Russell (2010), considered that BIs have an above average
chance of success as the innovators and entrepreneurs could better prepare to turn their
business ideas into successful startups. He indicated that BIs environments reduce the
risk of business failures. Furthermore, BIs practitioners report generally showed that
more than 85 per cent of all firms that exited from their BIs are still in business, compare
with a standard survival rate for startups of around 50 per cent.
Ogutu and Kihonge (2015) examined countries such as the U.S., China, and
Germany, found that the countries with high economic growth have the highest number
of BIs, and the number of incubators a country has influenced the country's GDP very
strongly. Their findings indicated that there was a very strong connection between the
amount of BIs and the economic growth of a country, and showed that BIs have a great
amount of influence over the entrepreneurship development.
Promoting Innovation Creation. Incubation is a strategic tool of enterprise
development and economic growth, it provides a leap from imitation to innovation
(Lalkaka, 1997). Al-Mubaraki and Busler (2011b) found that one of the important
benefits of BIs is the pace of innovation as the potential applications of BIs including
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promoting the establishment and long term survival of new ventures that will likely
lead to a significant increase in job creation as well as promoting a climate of innovation
and entrepreneurial spirit.
Regarding the importance of innovation in today’s world, the White House (2010)
of the U.S. indicated that the 21st century will be shaped and built by technologies and
innovation because the innovation will create new jobs and catalyze broadly shared
economic growth. One of their strategies is to encourage high-growth and
innovation-based entrepreneurship as it is essential for entrepreneurs continue to create new and
vibrant businesses that lead to new jobs and economic growth. It is clear that supporting
innovation creation is an important economic tool, and it is one of the significant roles
of BIs program.
Promoting Technology Transfer and Commercialization. Another role of BIs
is designed to help bridge the gap between knowledge and innovation in order to let the
research innovation to the marketplace, which promotes transformation of scientific
and technological achievements (Lesákova, 2012). Peters et al. (2004) argued that BIs
are to act as an intermediary or mediator between incubatees and relevant critical
systems. An OECD report (2010b) indicated that BIs have the ability to transfer the
knowledge from universities to industries. In addition, a study indicated that research
facilities at universities and public research institutions start to transfer their research
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findings and commercialize their intellectual property (IP), which have led to a growth
of incubators (De Cleyn & Festel, 2016). The above studies have shown that BIs can
convert research ideas and research results into sustainable businesses.
In general, stimulation of technology transfer and research commercialization are
generally considered as important components in goal portfolio of incubators activities,
especially in the case of BIs and science parks (Grimaldi & Grandi, 2005). In addition,
BIs can create a sound ecosystem between universities and researches. BIs in
not-for-profit university science parks have been the recipients of business income tax
concessions, which is thought that this will encourage universities to undertake more
research and technology transfer, thereby accumulating more funding to reinvest in
R&D (Su et al., 2011).
Revitalizing neighborhoods. Monkman (2010) found that BIs and incubatees are
playing an increasingly important role in developing and transforming economies,
which have shown positive impact in the community and improved the local climate
for entrepreneurship to create jobs. Many communities are recognizing the need to help
local residents build new businesses from the ground up through BIs. In addition, the
majority of BIs stay within the community after graduation as more and more
policymakers provide incentive mechanisms in encouraging entrepreneurship. BIs
nurture entrepreneurs who create enterprises, some of incubatees create direct and
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indirect employment after leaving BIs. Their incomes and assets in turn contribute to
economic growth.
Moreover, the Silicon Valley in the U.S., Tel Aviv in Israel, and Zhongguancun
in China are surrounded by universities, S&T and innovation parks as they encourage
their partnerships with graduates to start new businesses with innovative ideas (Ogutu
& Kihonge, 2015; Liefner et al, 2006). It is clearly that any forms/models of BIs have
capacity to stir development in the surrounding neighborhood.