January 2000

By Monica Kearns

Business incubation is about growing businesses from scratch. Rather than trying to attract businesses, the incubation approach emphasizes creating and retaining new jobs by tapping the workforce and other economic resources already within a state. Incubation programs provide physical office space and a full array of business services to start-up companies. Each incubator client-or company housed in the incubator-gets its own office space, generally with a low-cost, flexible lease. At the same time, all the incubator clients share office resources such as conference rooms, administrative staff telephone system/phone answering, and Internet access so that their overhead costs can be minimized.

One of the most important shared resources incubators offer is a team of specialized staff who help run the incubator and offer business planning, management and financial services to the clients. Through this staff, the client firms receive technical assistance with marketing, accounting and finance, networking, finding sources of financing, and linking to universities and colleges. The goal is to provide guidance so clients can "graduate" from the incubator and stand successfully on their own.

Business incubators are a relatively new economic development idea: In 1980 only 12 programs operated in North America, but that number increased to nearly 600 in 1998, according to the National Business Incubation Association. The average firm stays with an incubator for two to three years. Although only 20 percent to 50 percent of emerging U.S. businesses succeed within their first five to seven years of operation, the association reports that an average of 87 percent of incubator graduates are successful.

Most incubators serve an average of 20 start-up firms. Nearly half are in cities, 36 percent are in rural areas, and 19 percent are in suburbs. About half host a variety of businesses that can range from small manufacturing to services to high tech. Yet incubators can be structured to encourage growth in particular economic sectors. For instance, 25 percent of incubators are geared toward high tech firms. The incubators can also be set up to achieve more socially oriented economic development goals- microenterprise incubators help the poor to become self-employed, and empowerment incubators target women and minority-owned businesses. Likewise, they can focus on rural or low-income urban areas and offer the chance to renovate vacant or aging buildings.

State governments or nonprofit organizations fund roughly half of business incubators. Most stare-funded incubators focus on technology development. Universities and colleges are the next largest incubator sponsors, supporting 27 percent of the total. Eight percent are funded by private, for-profit interests that invest in the tenant firms in hopes of gaining a profit from successful graduates. Sixteen percent are jointly funded by public and private sources.since their programs were established in the early 1 980s. Georgia's annual appropriation to its incubator program is approximately $2.3 million, and North Carolina allocated $3.5 million to its incubator in 1998. Ohio contributed $9.5 million to its incubators from 1987 to 1998. In Pennsylvania, the state gives each incubator about $45,000 a year for a total of roughly $1 million.

Since the 1980s, most states have passed legislation establishing incubator programs, but funding tends to fluctuate. Departments of economic development are usually the source of state assis-tance, but this can vary depending on the nature of the incubator. States also can take a tax-incentive approach to encouraging the development of privately sponsored incubators. For example, Oklahoma offers state income tax exemptions for incubators up to 10 years from their inception. In addition, client businesses of incubators are exempt from state income taxes for three years.

Several studies have documented the effectiveness of incubators. Pennsylvania recently commis-sioned a study of its Ben Franklin Partnership, a program administered by university-affiliated technology centers, which in turn fund a variety of economic development programs, including incubators. The study showed that for every $1 of state investment in the program $14 of addi-tional state income was generated. Furthermore, firms-including incubator tenants-receiving Ben Franklin Partnership funds employed an average of five more people each year than they would have without the funding. The Ohio Department of Development estimates that the Edison Technology Incubators created 336 new businesses and 2,272 jobs between 1987 and 1998. And tenants of the Advanced Technology Development Center incubator in Atlanta generated $351 million in revenues and provided 4,100 jobs during 1998.

But not every type of incubator is suited for every community. Arkansas established seven technol-ogy incubators in the 1980s, but only one survives. The Genesis Incubator at the University of Arkansas at Fayetteville thrives because of its association with the university, while the others lacked this connection to technical expertise. Business incubators are, in effect, like businesses- they need stable funding, clear planning and strong management to succeed.

Selected References
Annarino, Alex. The Complete Guide to Federal & State Support ofBusiness Incubation. Athens, Ohio: National Business Incubation Association, 1998.

Burger, Frederick. "Business Incubators: How Successful Are They?" Area Development Online, accessed Feb. 4, 1999; http://www.area-development.comlfeatures/incuba.htm; Internet.

National Business Incubation Association Web site, accessed Oct. 7, 1999,www.nbia.org; Internet.

Nexus Associates, Inc. (of Belmont, Mass.) A Record ofAchievement: The Economic Impact of the Ben Franklin Partnership Executive Summary, 1999, available from www.benfranklin.org, accessed Nov. 2, 1999; Internet.

University of Michigan, National Business Incubation Association, Ohio University and Southern Technology Council, Business Incubation Works: The Results of the Impact of Incubator In vest-ments Study. Athens, Ohio: National Business Incubation Association, August 1997.

Contacts for More Information
Monica Kearns National Conference of State Legislatures
NCSL-Denver
(303) 830-2200, ext. 234
monica.kearns@ncsl.org


© 1999, National Conference of State Legislatures. All rights reserved.
Reprinted by NBIA with Permission