Literature review would attempt an understanding of the basic concepts underlying the business incubation phenomenon. This section therefore, attempts to elucidate on the concepts of business incubation, business incubators, business incubation process and firm performance. The objective is to highlight and illuminate the concepts relevant to our understanding of the incubation phenomenon. The review gives us the opportunity to understand what the incubation phenomenon is, who or what an incubator is and most importantly, what the incubation process is.
The Campbell et al. (1985), Smilor (1987) and Hackett and Dilts (2004a) models of the incubation process provide a comprehensive perspective of what the incubation process is. The Campbell, Kendrick and Samuelson model is the first attempt at modeling the incubation process with Smilor extending the model by incorporating a network dimension to the model. Hackett and Dilts model gains input from the real options theory in explaining the incubation phenomenon. However, the success of any incubation program is dependent on the practices adopted by such an incubation program. Incubators size, age and local environment have an influence on its success. However, incubator’s best practice is perhaps the most important determinant of its success. Such understanding and exposition therefore, informs the decision to include same in this section.
Concept of business incubation and incubators
Business incubation is a unique institutional arrangement that is primarily concerned with developing entrepreneurial culture in a community. However, the onus remains on the entrepreneur to make the business survive, as they are prone to be affected by what Levakova (2012) calls the ‘incubator syndrome’. To Brooks (1988), the whole concept of incubation is attitudinal in that incubation fosters a community attitude of encouraging and supporting emerging firms to be successful with its success dependent on three fundamental factors: “an entrepreneurial and learning environment, ready access to monitors and investors, visibility in the marketplace” (European Commission, 2002). Levakova (2012).
The concept of business incubation is founded on the premise of increasing the survival and growth of firms by developing mechanisms that will ensure the early identification of those firms that have great potentials for success but are constrained by resources. The concept ensures that firms overcome what is called the liability of newness and the liability of smallness thereby creating innovative firms that are competitive, profitable and sustainable (Salvador & Rolfo, 2011). The incubation phenomenon is therefore, considered an enabling technology “that capacitate the functionality of critical and possibly strategic technologies” (Hackett & Dilts, 2004c). Generally, the incubation concept aims at achieving some fundamental objectives which include to create new jobs and businesses, foster a climate of entrepreneurship, commercialize technology, diversify, revitalize and accelerate growth of industry and local economies, reduce company mortality rate, reduce unemployment, increase university-incubation interaction and foster technology development (Bizzotto, 2003; Mutambi et al. 2010; Al-Mubaraki & Busler, 2011).
The objective of business incubation is achieved through business incubators. Incubators are major actors in the entrepreneurial ecosystem by linking talent, technology, capital and know-how (Todorovic & Moenter, 2010; Bejarano, 2012; Levakova, 2012; Al-Mubaraki et al. 2013). However, definitional challenges exist on what constitute business incubators or business incubation (Bergek & Norrman, 2008). Sources of this definitional challenge arise from the confusion of virtual incubators with traditional incubators that provide in-house tenancy, the inability to properly define the incubation process or define it but fail to identify with whom the incubation process occurs and the use of the terms such as science parks, technology centers etc. interchangeably (Bergek & Norrman, 2008; Hackett and Dilts, 2004a).
The general idea of what research scholars see as business incubators is that they are institutions concerned with speeding up the growth, financial and operational stability of entrepreneurial start-ups by offering them targeted services and support (EC, 2002; Bergek & Norrman, 2008; Mendoza, 2009; Levakova, 2012; Moreira et al. 2012; Masutha & Rogerson, 2014) with a strong emphasis on knowledge agglomeration, resource sharing, innovativeness and competitiveness by creating an environment which help start-ups deal with the challenges of entrepreneurial pursuit (Phan et al. 2005; Akcomak, 2009).
Bringing a network dimension to the concept, Weinberg (1991) views incubators as inter-organizational or social partnership organizations that are concerned with addressing “socially-relevant” purposes by harnessing the strength from diverse organizations. Mian (1996) and Bollingtoft and Ulhoi (2005) championed the concept of a network incubator “based on territorial synergy, physical proximity, relational symbiosis and economies of scale” with the overall aim of leveraging entrepreneurial initiative and know-how in creating and operating successful companies. In their contribution, Bergek and Norrman (2008) observe that research scholars disagree on whether a business incubator is an organization or a general term likened to an entrepreneurial support environment. To scholars such as Brooks (1988), Weinberg et al., (1991), Lalkaka (2001), and Phan et al. (2005), incubators are registered organizations that provide affordable office space, offering targeted support services with the sole purpose of nurturing small fledgling firms into healthy businesses.
Concept of business incubation process
Business incubation program, as a tool for promoting innovation and economic development (Bergek & Norrman, 2008; Al-Mubaraki & Busler, 2011), is designed to be capable of adding value to incubated companies with the intent of increasing the survival rates of such incubated companies (Bizzotto, 2003; Moreira et al. 2012). The value adding activities are generally regarded as the business incubation process with several models developed to explain the phenomenon. Bergek and Norrman (2008) cautions on the limited scope to which most of the incubation models are conceived as focusing primarily on results neglecting the interrelationship of the value added activities to other incubator activities.
Earlier researchers of the incubation phenomenon such as Campbell et al. (1985) are acknowledged as the first to develop a business incubation process model. The Campbell, Kendrick and Samuelson model has four basic ‘services’ or value addition activities, foci areas where incubators contribute to firm performance. The value addition activities starts with diagnosis of needs, which is applied to prospective incubatee’s new business proposals. When the diagnosis is successful, the successful companies selected for incubation (called incubator tenants) are monitored. The incubator tenants also enjoy additional value addition activities by way of capital investment and access to expert networks with the prospect of venture capital. The tenants then graduate from the incubation program as successful growth ventures or businesses. Hackett and Dilts (2004b), Moreira et al. (2012) in critiquing the model observes that the model is developed with the fundamental assumption that all incubated companies will survive. The Campbell model is further limited to private incubators only with it not considering the capabilities of the potential entrepreneurs, environmental barriers and a lack of a selection criterion in the selection of potential incubatees.
Smilor (1987) extended the Campbell model with an emphasis on the external environment (incubator affiliation and support systems) to the neglect of the internal processes occurring inside the incubator. He conceptualizes the incubator as a system that confers ‘structure’ and ‘credibility’ on incubatees while controlling a set of assistive resources. The incubator operates a network of support ‘services’ or value-addition activities with affiliation to the private sector, universities, government and non-profit. The incubator has internal support ‘services’ or value-addition activities in four basic ways: secretarial, administrative, business expertise and facilities. Both the external and internal support systems are designed to achieve the following objectives: economic development, technology diversification, job creation, profits, viable companies and successful products.
A model of business incubation process as developed by Hackett and Dilts (2004a) is based on the concept of ‘black-box’. The process is primarily concerned with what happens inside the incubator (its internal dynamism) with a link to its environment. The Hackett and Dilts model conceives business incubation as the selection of incubatees from pool munificence of prospective candidates who ‘enter’ into the black box of incubation. The incubatees undergo value addition activities in three ways: selection performance (which is also an aspect of selecting prospective incubatees), monitoring and business assistance intensity and resource munificence. The incubatees are then outputted from the ‘black-box’ of incubation as graduated companies having an outcome that is either success or failure. The Hackett and Dilts model has control variables of population size, state of the economy, incubator size, and incubator level of development. In summary, their business incubation process model comprises three fundamental activities: selecting weak but promising firms to be admitted to the incubation program, monitoring and assisting those that would be successful and lastly providing the requisite resources to help them develop and graduate from the incubation program as financially viable and freestanding firms.
To them selection performance refers to the degree to which the incubator behaves like an ‘ideal type’ venture capitalist when selecting emerging organizations for admission to the incubator. The selection from the pool munificence of candidate companies is done taking into consideration four characteristics: managerial characteristics, market characteristics, product characteristics and financial characteristics. It means candidate companies need to be evaluated in the light of these characteristics. Monitoring and business assistance intensity is also another value-addition activity or service offered by an incubator. As defined by Hackett and Dilts, monitoring and business assistance intensity is the degree to which the incubator observes and helps incubatees with the development of their ventures including helping them to learn from low-cost failures and containing the cost of potential failure. This is achieved through time intensity of assistance provided, comprehensiveness of the assistance provided and the quality of assistance provided. The last value addition services of the Hackett and Dilts model is what they call resource munificence which they define as the relative abundance of incubator resources, measured by the following: resource availability, resource equality and resource utilization.
Hackett and Dilts define the outcome of the incubation process as five mutually exclusive outcome states “measured in terms of incubatee growth and financial performance at the time of incubatee exit.” The outcome states are: the incubatee is surviving and growing profitably, the incubatee is surviving and growing and is on a path toward profitability, the incubatee is surviving but is not growing and is not profitable or is only marginally profitable, incubatee operations were terminated while still in the incubator but losses were minimized and incubatee operations were terminated while still in the incubator and the losses were large.
Concept of firm performance
The concept of firm performance and its measurement has bases in the fields of economics, management and accounting (Tangen, 2004). The simple objective of performance measurement is to ascertain how well an organization is functioning and is being managed given a set of criteria and standards. A broader view of the concept ensures that the interest of the organization’s publics is considered with effectiveness and efficiency being the two fundamental dimensions of performance (Moullin, 2003; Khan et al. 2011).
Neely, Gregory and Platts (2005) define a performance measurement system as the process of quantifying the effectiveness and efficiency of an organization. To Khan et al. (2011), performance measurement is the process of assigning “value to objects or events in such a way as to represent quantities, qualities or categories of an attribute.” The quantification of the performance of organizations has been based traditionally on financial criteria with dimensions such as annual sales, annual profit, number of clients, and growth among others. However, supporters of the multiple-objective school argue that performance measurements should incorporate the different stakeholders of an organization – a systemic perspective (Malina & Selto, 2004; Wu, 2009). Kennerley and Neely (2003) therefore, submit “that financial performance measures are historical in nature, provide little indication of future performance, encourage short termism, are internal rather than externally focused with little regard for competitors and customers.” Contemporary performance measurement systems have therefore, being expanded to include both financial and non-financial criteria (Laitinen & Chong, 2006) making it multidimensional in nature.
Performance measurement in incubation literature is also multidimensional. There is no acceptable performance measure in incubation literature (Phan et al. 2005) leading to incubator researchers using different performance measures. Furthermore, the definitional challenge of what incubators are has also contributed to compounding the problem of identifying a single acceptable measure of performance in incubation literature. From review of business incubation literature, the following performance indices are used: revenues, finance, venture capital funds, graduation from incubation program, firm survival, networking activity, innovative firms, organizational or firm growth, job creation, sales growth, profitability, patents registered, number of patents application, alliance, technology transfer, employment growth, technology growth or development, research and development productivity, ability to share knowledge and technology and high-tech employment.
Summary of literature review
Business incubation is a policy tool that facilitates entrepreneurial development by creatively initiating and implementing programs that focus on providing targeted resources and services. These services, which are designed to add value to entrepreneurial ventures, are structured to provide targeted and specific benefits for the incubated businesses. The Campbell, Kendrick and Samuelson, Smilor and Hackett and Dilts models of value addition activities by incubators focus on providing targeted services to firms that are selected from a pool of prospective firms. Selection is an important element of the incubation process, which is an activity distinct to incubators and this activity is present in the three models discussed in this review. The Campbell, Kendrick and Samuelson and Hackett and Dilts model focus on internal network of support provided for the selected firms for incubation while the Smilor model focus more on the external network of support from government, universities, non-profit and the private sector. In all of the models, the business incubation support infrastructure is in the form of resources, expert networks, business, secretarial, and administrative support and capital investment.
Earlier research studies on the incubation phenomenon are generally classified as incubator development studies, incubation configuration studies, incubatee development studies, incubator-incubation impact studies and studies that theorize about incubators-incubation (Hackett & Dilts, 2004a). However, the focus of this review addresses the following questions: does the value addition activities by business incubators have any impact on the firm performance? In other words, does business incubation process have any influence on the performance of the incubated or graduated firms? In what specific ways does the performance of the incubatees or graduated firms impacted? What performance measure is most impacted by the business incubation process? These are the questions this review hopes to achieve.