Incubators – a way to create growth?
This report by Growth Analysis studies the impact of incubators on innovation and growth in incubated companies.
Sweden established its first incubators in the 1990s. In 2003 a national government financed incubator program was established. The turnover of the program amounted to 1,2 billion SEK between 2003 and 2014, where 800 million SEK was financed by government.
This report presents a comprehensive and longitudinal analysis of the impact of incubators in Sweden. This is done with new and unique microdata, a survey of national and international research literature on the impact of incubators as well as interviews with representatives from various incubators in Sweden. The purpose has been to discuss the future strategic direction of the program.
We note that the government’s objectives for the program have changed over time. Initially the objective was to promote commercialization of ideas from research and in particular from academia. Over time this has changed and new generations of the program have prioritized growth prospects of new entrepreneurial companies to a higher extent.
The statistical analysis analyzes entrepreneurial growth and innovation of incubated companies and compares it with a matched sample of non-incubated firms over a five-year period after incubation. We find that the impact on growth of incubated companies relative to the control group is limited, which is a result also found in recent international research analyzing the impact of incubation on growth. On the other hand, we have found evidence that the incubator processes promote a higher degree of innovation compared to a control group.
Thus, our results and international research has shown that the expectations of promoting entrepreneurial firm growth by incubators is limited in a time period of 5 to 6 years after incubation relative to a control group. The objective of promoting rapid growth in incubated firms might thus be seen as somewhat misdirected. The objective should be to promote innovation and not growth.
Economic theory suggest that the state should promote ideas and innovations which have a reasonable private rate of return and a high degree of knowledge spillover. A high degree of spillover creates a gap between the private rate of return on an investment and the social rate of return. Thus, the role of government through incubators is to promote areas with high potential knowledge spillover in order to increase the potential for long-term economic growth. The report discusses which types of ideas create spillovers and some of the related market failures for these ideas when it comes to realizing growth prospects.
The areas with large spillover potential mentioned in the academic literature are: research related ideas, ideas related to advanced manufacturing and ideas related to energy and environmental technologies.
A challenge with research based ideas is that the researcher typically has limited experience of building a company. Commercialization of research results often requires a combination of different research discoveries, and hence research based ideas need more time before the company can leave the incubator. The six months to three years in an incubator that is common for firms focused on fast growth is a relatively short time period for research based ideas.
Manufacturing based ideas often meet market barriers and challenges, such as the need for complementary competences, before having a product ready for market entry. The competence needed can be related to material specification, tool-design and production technique. When launching a new product to the market, repeated tests and experiments are needed, making the process of finalizing the product costlier and more time-consuming for manufacturing companies than for many service based ideas. A common problem is to find suppliers who are interested in a product development process, which enables the company to produce the first lines of the products both during and after incubation. Demonstrators, test-facilities, labs and large established manufacturing companies with R&D-departments make important collaborators for the incubated company.
Ideas based on energy and environmental technologies often demand close collaboration with universities before they can be established on the market. These markets also involve large barriers to establish a new product, for example difficulties with competing on markets where large investments have already been made in existing products, often fossil based solutions. Another challenge is that the relative prices for fossil based solutions compared to renewable energy are not large enough to develop a sufficient demand for sustainable solutions which may slow market entry.
We argue in this report that the social rate of return can be large, especially in the long run, for ideas based on research, manufacturing, energy and environmental technology since they have a greater potential for spillover of knowledge compared to ideas focusing on fast short term growth.
Based on the analysis in this report, the following recommendations are made for the government to take into account when designing future incubator programs:
- A larger priority should be on selecting ideas into incubators with a high knowledge spillover potential which our analysis has shown to be ideas with an origin in research and innovation.
- The incubators which are financed by government should to a higher extent select ideas into incubators that have more challenging entry processes to markets. These are: ideas from science and research, manufacturing and energy- and environmental technology.
- An increased focus on these types of ideas would involve more knowledge links to and co-operation with various actors in the surrounding ecosystem. It will also involve more access to capital at later stages of the development cycle.
- In the report we have shown various results of long time trends of the development and impact of incubators. Our analysis has shown modern incubators to be part of a larger local and regional ecosystem. Thus, future evaluation of incubators has to acknowledge this. Successful growth and innovation by incubated companies are dependent on the functioning of the entire ecosystem.