BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS 197

Business Incubation and Enterprise

Support Systems in Restructuring
Countries 1
Rustam Lalkaka and Pier A. Abetti

After two decades of rapid growth, the United States business incubation industry has
reached maturity with 530 incubators. In contrast, growth is still increasing rapidly in
restructuring countries with industrializing and transitional economies, which have over 500
incubators. We present a situation analysis of incubators and enterprise support systems in
these countries, and discuss the key success factors, based on trends of convergence of all
initiatives into an integrated infrastructure. We then offer insights on strategically planning
for the future, and policy guidelines useful to governments, international organizations, and
local stakeholders that are planning, implementing and managing incubator projects in
restructuring countries.

Introduction Nations. Among this myriad of initiatives,

New Business Incubators and Enterprise

T he new forces for economic growth

worldwide are technological innovation
and entrepreneurship. After the collapse of the
Soviet Union and the transition from centrally
planned to market economies, it is widely
recognized that the private sector is the most
effective ambient for harnessing these forces,
in order to create wealth, generate employ-
ment and promote material and social well
being. In turn, entrepreneurial fast-growing
small and medium-sized enterprises are the
backbone of the private sector as they help
diversify the economy and offer a wide range
of goods and services both to national and
international markets (Vesper 1983, Harper
and Finnegan 1998). Therefore, both indus-
trialized and industrializing countries have
formulated strategies and policies for sup-
porting entrepreneurship development and
assisting small and medium enterprises in
acquiring modern technological resources
and management practices (Htun 1997).
These policies have been implemented in a
variety of financial and non-financial incen-
tive and support systems, offered by central
and local governments, foundations, business
organizations, universities and international
organizations, such as OECD, the European
Union and several agencies of the United
Support Systems have emerged worldwide
as highly effective methods for promotion of
decentralized economic growth from the
New forces for
economic growth
bottom up both in industrialized (Molnar
et al. 1997) and in transition and industrial-
izing economies (Lalkaka 1997a). In contrast,
top-down policies of centralized financial
incentives and protective policies for selecting
``winners and losers'' have been shown to be
counterproductive in some European coun-
tries (Levie 1993).
The infrastructure of New Business Incu-
bators and Enterprise Support Systems was
built up gradually in industrial countries
during the last two decades. It appears that
this movement has now reached maturity. In
contrast, rapid growth is now occurring in
restructuring countries, that is, in countries
with industrializing economies (such as
Brazil, China, Egypt, India, Malaysia, South
Africa, Korea, Taiwan R.O.C., etc.) and
transitional economies (such as Poland,
Hungary, Russia, Slovakia, Ukraine, Uzbeki-
stan, etc.). In parallel, we observe the emer-
gence of networks of enterprise support
systems. In some countries, particularly in
Asia, these systems are converging towards
an integrated infrastructure, whereas is some
other countries, for instance Russia and

# Blackwell Publishers Ltd 1999. 108 Cowley Road, Oxford OX4 1JF
and 350 Main St, Malden, MA 02148, USA. Volume 8 Number 3 September 1999
198
Ukraine, these are still uncoordinated initia-
tives.
The objectives of this study are:
1. To compare the development, present
status, and accomplishments of New Busi-
ness Incubators in the United States and in
restructuring countries.
2. To present selected case studies of con-
vergence of Enterprise Support Systems in
some Asian countries, and of isolated
efforts in some post-communist nations.
3. To summarize the lessons learned in the
field and present policy guidelines useful
to practitioners who are planning, imple-
menting and managing similar projects,
sponsored by international, national, pub-
lic or private organizations.
Method
The authors have contributed to the creation
and development of this infrastructure for
entrepreneurship since 1987 in a series of feasi-
bility studies, business plans, implementation
actions, field work, and on-site and off-site
training courses, in the following countries:
Latin America and Caribbean: Mexico, Chile,
Colombia, Brazil, Puerto Rico, Jamaica,
Uruguay
Asia and Pacific Rim: China, South Korea,
Indonesia, India, Malaysia, Singapore,
Syria, Thailand, Taiwan, Turkey, Palestine
Territories
Africa: South Africa, Egypt, Mauritius,
Morocco
Transitional Economies: Poland, Romania,
Slovakia, Albania, Hungary, Russia,
Ukraine, Uzbekistan
The paper summarizes the results of our
past and ongoing field research based on:
(1) on-site interviews with central and local
government officials, economic development
officials, representatives and consultants of
national and international agencies, business
persons, politicians and opinion leaders;
(2) feedback from the incubator managers,
tenants and participants in the assisted
countries; (3) business plans and proposals
prepared by incubator managers, economic
development organizations and by the
authors.
New Business Incubators in the
United States
After two decades of rapid growth, the
United States business incubator industry
Volume 8 Number 3 September 1999
CREATIVITY AND INNOVATION MANAGEMENT
has reached maturity and some quantified
accomplishments:
1. A network of 530 incubators, the majority
of which are active members of the
National Business Incubator Association
(NBIA 1996a and 1996b).
2. A fair record of job creation and regional
economic growth at low cost and with a
good return on investments for supporters
(Molnar et al. 1997).
3. A synthesis of the best practices available
in the field, that can be translated into
guidelines for improving the probability of
success of new and existing incubators
(Rice and Matthews 1995, Tornatsky et al.
1995).
Results
The economic and social results of US busi-
ness incubators are summarized below,
according to a recent study conducted by
the University of Michigan, Ohio University,
the National Business Incubator Association
and Southern Technology Council (Molnar
et al. 1997).
1. Job Creation. Firms that participated in
Incubators reported that these had created,
on the average, 468 direct and 702 total
jobs. The majority (62%) of the direct jobs
were high value-added, since they were
created by R&D, technology and manu-
facturing enterprises.
2. Cost Effectiveness. The estimated public
subsidy cost per job created was $1,109.
3. Return on Investment. Local, state and
federal subsidies for incubators may be
considered as investments for generating
tax revenues from the companies assisted.
For a sample of 23 incubator firms, the
return in terms of tax revenues was almost
five dollars for every dollar invested.
4. Growth. By 1996 firms that participated in
incubator programs had grown by over
400 percent per year, with average annual
sales growth of $1,240,000 and employ-
ment growth of 3.7 jobs per year.
5. Survival. While the survival rate of new
companies after 4 years was only 37 to
70 percent (Timmons 1988), 87 percent of
firms graduated from incubators were still
in operation in 1996.
Given the high economic and social costs
of unemployment, business bankruptcies, or
closings, it may be concluded that incubators
represent an effective modality for creating
and sustaining high value-added jobs and tax
# Blackwell Publishers Ltd 1999
BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS
revenue, compared to financial subsidies and
incentives for attracting existing companies to
a specific location, a zero-sum game.
A good example of US Incubator and
Technology Park is the experience of Rensse-
laer Polytechnic Institute (RPI), a private
technological university. The origins of the
RPI Incubator go back to 1980, when re-
searchers started a solar power company in
the basement of an old building. The incu-
bator was formally opened in October 1982
and now includes two buildings, with a total
of 80,000 ft2 (7200 M2) of laboratories and
offices. In the last 16 years, more than 100
companies have been started at the incubator
and 85% have survived. Twenty-two compa-
nies are incubating now with 193 full time
employees and a higher number of part-time
employees, mostly graduate students. Total
direct employment created by the ``gradu-
ated'' companies is estimated at 1500+, with
total aggregate sales of over $175 million.
The RPI Technology Park was inaugur-
ated on vacant land in October 1983, one year
after the incubator. The total area is 1250 acres
(500 hectares), but only 450 acres (180 hec-
tares) are reserved for the tenants and park
management. Of these, 250 acres (100 hec-
tares) have been developed to date. There are
now 21 buildings for a total surface of 870,000
ft2 (80,000 M2), housing 50+ companies with
2100 employees. The great majority (90+%)
of these companies is actively involved with
RPI faculty and students in technical and
business management work, hiring students
part time and full time according to their
needs. It should be noted that the incubator
and the Technology Park were built and
operated with RPI's own funds, without
government grants and subsidies. While the
park is now financially self-sufficient, the
incubator's rental and service fees cover all
the operating costs except depreciation on the
two buildings.
While a large proportion of U.S. incubators
does receive direct or indirect subsidies, a
small number (approximately 20%) operate
on a for-profit basis. For example, the
Lexington Business Center in Elkhart, Indiana
has a prudent, no-frills operating approach,
which results into a 30 to 40% annual return
on investment (Tiedemann and Lalkaka
1998).
In the United States, enterprise support
systems are well developed but not always
fully utilized according to the ratings in
surveys of users (Lalkaka 1997a, p. 19). It is
the role of Incubator Managers to direct their
tenants and former graduates to the support
systems most suited to their needs, and assist
them in preparing the necessary paperwork
# Blackwell Publishers Ltd 1999
199
(McMullan 1988, Abetti and Savoy 1991).
Similar support systems are offered by the
European Union and by the member coun-
tries, again with varying levels of effective-
ness (Levie 1993, Koskinen and Virtanen
1998), and quite effectively for two Brazilian
technology incubators (Lalkaka and Shaffer
1999).
Adaptation of Good International Practices
Rice and Matthews (1995) performed a
detailed study of the 20 best US Incubators
(out of a total of 500) and distilled good Good practice guide
practices that had contributed to the success
of these incubators. Naturally questions arise:
Can these practices be applied and trans-
ferred to incubators in restructuring coun-
tries? Can they be adapted to different local
environments?
An OECD study under the Local Economic
and Employment Development (LEED) pro-
gram, (OECD 1997) reviews experiments in
the US as well as Germany, France, United
Kingdom, Italy and Australia. As incubation
programs expand, they come in for closer
scrutiny and criticism. The assessment gen-
erally shows positive imports on improving
the survival rates of firms in the incubator
and on promoting regional economic devel-
opment. While the overall costs of state
support per job created compares favorably
with other public job creation programs, the
small number of firms created in incubators
raises important issues of scale and time
horizon. It is concluded that incubation is a
medium- to long-term undertaking.
From a theoretical viewpoint, entrepre-
neurs all over the world share similar visions,
commitments and beliefs, and therefore are
motivated by the same psychological, social
and economic factors (see, for instance,
Shane and Venkatamaran 1996, Vecsenyi
and Hisrich 1990, Hisrich and Grachev
1994). In addition, three quarters of incu-
bators in restructuring countries are techno-
logical incubators and modern technology is
essentially of western origin. Consequently,
we would expect many similar aspects and
common success factors in technological
entrepreneurship worldwide (Eisenhardt
and Forbes 1984, Moenaert, DeMeyer and
Clarysse 1994). From a practical viewpoint, a
large number of incubators in developing
countries have been assisted by experts from
western countries, and their managers were
trained in the West. Therefore, these man-
agers are in position to comprehend the
value of good western practices and adapt
these to the specific environment of their
incubators.
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200
Restructuring Countries
Support Systems for New Enterprises
Recent analyses in restructuring countries
indicate that the major obstacles from the view-
point of new enterprises are at the political,
economic, organizational and cultural levels.
These include high taxes, rents, wages, and
interest payments: the lack of telephones,
e-mail and office facilities; low demand for
products and competition from subsidized
State enterprises or foreign companies; bur-
densome regulations; and unfriendly policies
towards self-owned businesses. The process
of structural reform is less than ten years old,
and is still quite painful (Hisrich 1998). New
forms of support for venture creation can help
reduce the pain, the gestation period and
start-up costs, while greatly increasing the
chances of survival and success. The early
stage techno-businesses in these difficult
environments have to be provided access to
good infrastructure, management and knowl-
edge, all within the ever present need for
finance (Abetti 1992).
Infrastructure Support
To help address the scarcity of appropriate
space and support, a large number of in-
dustrial estates, special economic zones, and
technology parks are being developed. Their
defining characteristic is the availability of
prepared land and infrastructure support for
business and research purposes. While indus-
trial estates in some countries such as Turkey
have proved successful, in others they have
become high-cost, subsidized facilities with
inadequate returns. The Special Economic
Zones, such as Shenzhen in China, and Export
Processing Zones, such as Tan Thuan at Ho Chi
Minh City in Vietnam, have recorded good
foreign investment-led growth rates. They
serve to introduce new market policies in
the economies in transition. It is now recog-
nized, however, that these zones also tend to
raise wages and prices without commensu-
rate upgrading of local skills or technology.
As operations mature, they must move into
higher value goods and services based on
local innovations, and be expanded in back-
ward regions for more balanced growth.
At another level, industrial clusters for
garments, furniture, metalworking, etc. in
India, Indonesia, Chile and Brazil are expand-
ing rapidly. They start spontaneously, and
then benefit by local and state-sponsored
design, materials and marketing support.
In the inter-country arena, a dozen growth
triangles are forming in Southeast Asia in the
ASEAN framework, based on complementary
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CREATIVITY AND INNOVATION MANAGEMENT
skills, materials, and markets; such coopera-
tive investments are also now planned among
the SAARC countries of the Indian Ocean and
sub-continent.
Management Support
If the primary requirement is management
support, a business development center can
provide a range of counseling, training,
information and related services. These, how-
ever, need to be linked to financing and
technical resources to help the entrepreneurs
implement their plans. The United Nations-
assisted small business services program in
Romania is now being expanded to central
Asia. The pioneering Small Industry Service
Institute network in India used to be govern-
ment subsidized and run, with loss of effec-
tiveness over time as the service demands of
dynamic entrepreneurs overtook the supply
capacities of poorly remunerated civil ser-
vants. Now associations and chambers are
filling the breach. Emerging models, such
as SEBRAE in Brazil, and KOSGEB in Turkey
are more business oriented, cover the full
spectrum of support and require progres-
sive payments of the services received by
beneficiaries.
Technology Support
The former socialist countries had vast
research and technical education facilities,
now in decline due to paucity of financial
resources. However, the transfer of the con-
siderable body of scientific and technical
knowledge, often developed for military
purposes, has been more difficult and much
slower than expected. First, the conversion of
military, engineering and production facilities
(i.e. from tanks to refrigerators) was ineffec-
tive due to lack of business and marketing
know-how, high production costs, and es-
pecially the lack of entrepreneurs. Second, a
considerable amount of technology from
the research institutes was disembodied (on
paper) and the researchers did not have the
necessary skills to embody this knowledge into
products that would be competitive in the
world market even with the help of visiting
western experts. For instance, the planned
Helsinki, Finland and St. Petersburg, Russia
``Twin Incubators'' are still in the planning
stage after three years of discussions.
On the other hand, in most industrializing
countries the scientific bases are still weak
and the technology support generally needed
by technopreneurs is access to expertise
through proximity to technical universities
and the facilities at R, D & E institutes. They
especially need trade/technology information
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BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS 201

through Internet (Jin, Yim and Mason 1998),
publications and travel to symposia and trade
expositions.
Business Incubation for New Venture
Creation
The business incubator, linked to a research
park and technical university, appears to
come closer to meeting the needs for holistic
approaches. Therefore, three-quarters of all
incubators (and tenant businesses) in indus-
trializing countries are focused on technology
(against about 40 percent in the US) and are
generally located at universities or research
parks. There is significant potential for
synergy between park and incubator if this
is expressly prepared from the outset. The
technology park generally focuses on re-
search and its commercial utilization: it is
essentially an enhanced real estate develop-
ment that takes advantage of proximity to
a source of significant intellectual capital,
conducive environment and associated infra-
structure. In contrast, the business incubator
concentrates on the process of small enter-
prise development, and is the microcosm of
work space plus support services, signifi-
cantly augmented by shared facilities and
assisted access to outside services and seed
capital. The incubator can thus become the
fulcrum for leveraging various types of
support.
The UN-sponsored assessment of the in-
cubators in seven industrializing countries
demonstrates that technology and business
incubators are beginning to make a significant
impact on economic development (Lalkaka
and Bishop 1996). The incubator character-
istics in the countries studied are summar-
ized in Table 1. These countries represent
more than half the incubators in the restruc-
turing world. What emerged from the data
available was a prototypical incubator of
2,300 square meter gross space, with 17
resident companies, 136 workers and sales
of almost US$ 1 million at the end of year 3.
By year 6, some 25 companies would be in
the incubator employing 600 persons, with 18
graduated enterprises. Such performance
could be raised to higher levels at a well-
designed and managed facility.
Culture and context Culture and
These are significant considerations in the context
planning and operation of incubators. In fact,
cultural differences provide strong prefer-
ences towards, and constraints against some
types of organizational structures, business
strategies and evaluation modalities that
differentiate across countries the types of
structures and characteristics prevailing in
local firms and other organizations (Abetti,
Hirvensalo and Kapij 1998).
In some countries of Southeast Asia, entre-
preneurs prefer to work in their households
assisted by family. This preference calls for
an ``open'' or ``out-wall'' incubator where
management serves tenants within the facility
and on an out-reach basis. In West Asia and
the Middle East, problems of secrecy and
``copy-cat'' entrepreneurism require special
measures to ensure confidentiality. In some
Islamic countries, incubators are being organ-
ized for the empowerment of women entre-
preneurs. In Latin America, university
professors may be stigmatized if they indulge

Table 1. Industrializing Country Incubators (1996)

Country Incubators Sample Average Building Tenants Employees

Total Investment Net M2 Firms
US$ 000

Brazil 42 16 n/a 810 10 55

China 73 31 454 4,702 36 727
Czech R. 27 17 n/a 5,756 26 105
Mexico 10 6 526 676 6 n/a
Nigeria 2 2 n/a 1,871 7 38
Poland 19 19 n/a 1,813 15 88
Turkey 5 2 568 951 16 72

OVERALL 143 93 496 3169 24 359

Note: n/a = not available

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202
in crass commercial activities. Unless the
planners and managers are sensitive and
responsive to these cultural preferences or
constraints, the incubator is doomed to fail-
ure. Understanding of such cultural differ-
ences greatly facilitates the collaboration of
companies in incubators of different coun-
tries. For instance, the development of soft-
ware by Ukrainian software factories
originating in the Kiev and L'viv incubators
and the commercialization of their software
in the United States by a company located
in the Rensselaer Incubator (Kapij and Abetti
1997).
Cases of Convergence or Divergence
The imperative of bringing enterprise support
mechanisms under a single aegis to optimize
effectiveness has been well appreciated in
some Asian situations, as demonstrated by
the cases of Malaysia, China, Uzbekistan,
South Africa, Egypt, and Ukraine.
Brazil
Starting in the mid-1980s, the National Scien-
tific and Technological Development Council
(CNPq) initiated the Technological Inno-
vation Program. Growth accelerated in 1993
and Brazil now has 74 business incubators,
mostly in the South and Southeast. As of
August 1998, these incubators housed 614
small enterprises, employing 2,700 persons,
and had graduated 226 companies. The tenant
businesses are in the fields of computer
software development (33%), specialized ser-
vices and consulting (17%), electronics and
telecommunications (14%), biotechnology,
pharmaceuticals and fine chemistry (9%),
precision mechanics and automation (8%),
clothing and leather products (7%), food
products (5%) and other product or service
markets (15%) (Guedes and Filartigas, 1998).
During 1998, the major sources of public
financial support for Brazil's incubation pro-
grams were SEBRAE (40% of respondents),
city governments (17%), CNPq (14%), and
Financeiro de Estudos e Projectos (FINEP,
18%). The significant SEBRAE support is both
a blessing and a potential danger: if this
funding is curtailed as a result of federal
government austerity measures, many of
Brazil's business incubation programs will
be severely challenged, as happened in
Mexico (Lalkaka and Shaffer 1999).
``Bolsistas,'' government-funded research
interns, are an important source of direct
subsidy to incubated enterprises that helps to
reduce personnel costs, while providing
students with practical work experience.
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CREATIVITY AND INNOVATION MANAGEMENT
These are university graduates, technicians,
and engineers involved in specific research
and development projects for incubated enter-
prises. Their salaries are paid by agencies
such as CNPq and FINEP. The 1998 ANPRO-
TEC survey indicated that 11.8 percent of the
employees in incubated enterprises, including
6.8 percent of the entrepreneurs themselves,
are ``bolsistas.'' Some state governments, such
as Minas Gerais and Sao Paulo, also provide
support for business incubators parks
through their respective Foundations for
the Support of Research in Science and
Technology.
More than 30 Brazilian universities, cover-
ing one-fifth of the total college students
participate in incubator projects, mainly in
technological fields. Another feature in Brazil
is the involvement of the private sector:
among the largest sponsors of incubators are
federal-state agencies and private not-for-
profit organizations (40 percent of total). For
instance, the Federation of Industries for the
State of Sao Paulo (FIESP) now runs a dozen
business incubators as its contribution to
entrepreneurial venture development in the
state.
Malaysia
In Malaysia the recent financial set back has
hardly deterred the overall drive to move
from an investment-led economy to an
innovation-driven system. The Technology
Park Malaysia (TPM) inaugurated in 1996
covers 120 acres and involves a state invest-
ment of US$ 80 million. Located 10 km from
Kuala Lumpur, it is in the vicinity of five
universities, eight national research institutes
and the emerging Multimedia Super Corri-
dor, TPM comprises well-designed innova-
tion±incubation±enterprise houses, a central
resources hub and R & D lots, together with
excellent residential, recreational and related
facilities. The integration of support services
includes a modern prototype production
center, quality control laboratories and a
venture capital fund under park manage-
ment. A further investment of US$ 88 million
is planned to expand TPM to 700 acres in the
next four years, and it is being corporatized
under public-private leadership.
To enhance the benefits of convergence, the
organization links the incubator and park
under one director of technology who reports
directly to the managing director. Further, a
single national association covers both parks
and incubators in Malaysia, a linkage strategy
adopted also at associations in other indus-
trializing countries such as China, Indonesia,
Brazil and Mexico.
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BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS
China
Among industrializing countries, the largest
incubator program is in China with 85
incubators. From a modest beginning in the
80s with assistance from the United Nations,
the Chinese incubators have graduated over
200 enterprises, expanding their contribution
to economic restructuring. The incubators are
non-profit, state-owned corporations, report-
ing to some combination of the provincial/
municipal Science and Technology Commit-
tees and local economic development zone.
Two-thirds of the entrepreneurs come from
adjacent universities and technical institutes.
The direct government role is limited to seed
funding. A number of incubators manage
local investment funds, provide loan guaran-
tees and equity (risk) investments for their
tenants. Often attractive subsidies, including
free land, help to reduce capital costs while
flexibility in leasing commercial space has
raised operating revenues, with resultant
surpluses for reinvestment in new buildings.
While the TORCH program provides the
policy guidelines and CASTIP serves as the
incubator association, the planning and man-
agement responsibility is left to local agencies.
Measures are underway to make the incu-
bators more autonomous, with for-profit
corporate status. Eight of the 85 have now
been transformed to International Business
Incubators, where small foreign high-tech
companies will be assisted to enter the
complex Chinese market, while Chinese
tenants will be helped on joint-venturing
and exporting their products and technolo-
gies. These successes should not obscure the
difficulties identified by local management:
insufficient assistance to tenant companies,
low levels of local technological development,
weak incubator center management or fre-
quent reassignment of managers, inability to
develop value-adding advisory and training
services, and undefined standards for tenant
entry and exit.
Uzbekistan
As the Government of Uzbekistan forces the
pace of transforming its 70-year command
system to a market economy, the business
incubator program is helping to overcome the
hindrances encountered by start-up self-
owned businesses, including problems of
cumbersome registration, high taxes, inade-
quate banking, materials procurement, and
accessing credit and business support. With
political support at the highest level and
initial UN assistance, three pilots were started
at Tashkent and Samarkand in mid-1995. A
year later, the Republic Business Incubator
# Blackwell Publishers Ltd 1999
203
Network has been expanded to 23 incubators
serving 365 tenant businesses with estimated
production value of about US$ 5 million. The
Incubator program is being used effectively to
create private businesses and leverage small,
enterprise-friendly policies.
South Africa
There has been a network of facilities called
``hives of industry'' for many years, estab-
lished by the Small Business Development
Corporation. A new development is the start
of an incubator at Johannesburg by a large
corporation ± South African Breweries ± to
help provide alternative livelihoods to their
laid-off employees. A technology incubator at
Technikon Natal, Durban will empower pre-
viously disadvantaged communities, by ex-
tending their technical education through
hands-on experience to become employers,
not just employees. State agencies ± NTSIKA
and KHULA ± are establishing three pilot
Local Industrial Parks comprising business
incubators and multi-tenant buildings.
Ukraine
In contrast to the above cases of convergence,
the situation in Ukraine is still difficult for
local entrepreneurs and the various inter-
national, national and local initiatives are
neither coordinated or integrated. From 1991
to 1996, Rensselaer Polytechnic Institute has
been proactively involved in developing
technological entrepreneurship in Ukraine.
Through international cooperation between
private and public institutions in the United
States and universities and start-up private
firms in Ukraine, the infrastructure was built
up with two New Business Incubators in Kyiv
and L'viv and a joint venture for technology
transfer and commercialization. About 150
Ukrainian entrepreneurs were trained in
Ukraine and USA, and courses were also
given to ``train the trainers'' with a Ukrainian-
English casebook (Abetti and Rice 1995). As a
result of this six-year effort, funds in excess of
one million dollars were raised, and about
30 companies have been created in Ukraine.
The Incubators in Kyiv and L'viv are now
self-supporting, under Ukrainian managers,
and offer services to approximately ten
companies. Four software factories are now
developing and delivering software programs
to the USA through a joint US-Ukrainian
venture, Software Factory International, man-
aged by a graduate of the L'viv incubator.
First founded in the RPI Incubator, head-
quarters have now moved to Ukraine, thanks
to improved communications with the United
States, the Internet and E-commerce.
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204
From the initial efforts in 1991, the Ukrai-
nian incubator development team continued
to face many difficulties in Ukraine and in
USA. In Ukraine, it was difficult to identify
the potential sponsors and facilitators for the
Incubators at the national and local level.
Once these sponsors were identified and
apparently convinced, or at least persuaded
not to obstruct the project, they would
disappear due to political upheavals. Their
successors were uncommitted and often
hostile to projects approved by their former
political rivals. In the United States an effort
was made to contact all possible sources of
funds and assistance: business angels of
Ukrainian descent, American-Ukrainian asso-
ciations, government agencies such as USIS
and USAID, foundations such as the Eurasia
foundation, even multi-national companies,
such as Apple. The US effort finally was
discontinued due in large measure to the lack
of congruence with the university value and
reward system.
The driving force for this joint venture in
international cooperation was the shift from the
administrative domain (government agencies
and universities) to the entrepreneurial domain,
that is two self-sustaining incubators, man-
aged by entrepreneurs, and a for-profit
technology transfer and commercialization
company in the United States.
As may be seen from the above seven cases,
incubators in restructuring countries are a
study in contrasts, each catering to its own
potential entrepreneurs, in a given cultural
milieu, conditioned by the available infra-
structure and policy framework. The incuba-
tion process is a recent phenomenon, still
evolving. Three-quarters of the incubators are
less than six years old, but they are increasing
rapidly. Rapid growth invites critical atten-
tion: the incubator concept is praised as a
useful tool for creating enterprises and
damned as an expensive fad that does little
for economic development. Thus it is too
early to collect, analyze and summarize
reliable data on the performance and econom-
ic contributions of these incubators, as was
done only in 1997 for US incubators.
Key Success Factors
We have developed the key success factors
for incubators and related enterprise support
systems in restructuring countries from two
sources: (1) field experience of the authors in
establishing new incubator programs in 20
restructuring countries, (2) application and
adaptation of US experience and best prac-
tices to restructuring countries.
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CREATIVITY AND INNOVATION MANAGEMENT
The determinant factors that contribute to
the ultimate economic, social and political
success of a new business incubator evolve
with the four stages through which the
incubator develops from the initial design to
sustained operation, as shown in Table 2.
Experience indicates that in restructuring
countries, which earmarked investment and
working capital, the preparatory steps (A and
B) take about 6±9 months; further 2 or 3 years
may be needed to establish a self-sustaining
incubator (steps C and D). Without patient
and continuing support from the state and
community over the whole program cycle,
developing sustainable performance and
having positive impact on economic develop-
ment will become difficult.
Assessment of Effectiveness
Hitherto empirical evidence to support the
effectiveness or ineffectiveness of incubators
in restructuring countries was still lacking.
The UNDP / UNIDO / OAS ± sponsored
assessment of the role of business incubators
has provided the basis for examining implica-
tions and impact in the difficult environments
(Lalkaka 1997b). The task is difficult in the
industrializing countries, given both the
infancy of incubators and the apparent lack
of either local will or resources to mount the
required systematic data collection activity.
Incubator performance can be assessed
against its specific mission and objectives.
Profiles of incubators in an entire country can
only give a broad impression at one point in
time. Such a ``snapshot'' is insufficient for the
assessment of a number of disparate dynamic
processes operating in unique local environ-
ments. A serious evaluation of benefits and
costs should include:
. Enterprises created by incubator and in-
creased success rate through the incubation
process, measured by numbers of firms
incubated and number of discontinued
businesses
. Jobs generated in the incubator, measured
by employment years through the end of
year 3
. Jobs and economic activity created by
companies after leaving the incubator
(graduates), measured by employment
years and value added or sales through
the end of year 6
. Public (subsidy) investments in establish-
ment and initial operations
. Research commercialized through devel-
opment work by firms at the incubator,
measured in numbers of projects and
economic activity
# Blackwell Publishers Ltd 1999
BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS 205

Table 2. Key Success Factors for Incubators in Restructuring Countries

A. In the preparatory process:

. Reconnaissance surveys to selected locations during which potential stakeholders are
briefed frankly on probable benefits and costs of starting and sustaining an incubator
. Local consultants who are familiar with local conditions
. Careful identification of a strong sponsor to take local implementation responsibility
. Resolution of issues concerning feasibility, particularly analyses of the entrepreneurial
pool of potential tenants, linkages to universities, the support services network, the
availability of suitable (vacant) building space, and financial cash flow estimates
. Commitment by state agencies at the central, provincial, and city levels to provide policy
and financial support for investment as well as initial operation expenses.
B. In the implementation process:
. Forming a strong management board with advisory groups
. Appropriate legal persona for the incubator
. Careful selection, training at home and abroad, proper remuneration of managers
. Screening of the technical business and market potential of tenants
. Prudent capital expenditures on building renovation and furnishing
. Promotional campaign to mobilize community support
. Sound international technical assistance to supplement local skills
C. The start of initial operations requires:
. Access to equity, credit and royalty facilities by tenants
. Involvement of private sector, through subcontracting and other arrangements
. Continuing programs for improving management skills of incubator staff and tenants
. Links to other SME programs and support systems in the country
. Exchanges of information and bench marking through incubator associations
D. The sustainability of incubator operations calls for:
. Proactive pursuit of business opportunities at home and abroad
. Imaginative ways of raising income through corporate memberships, appropriate fees for
securing finance, equity/royalty in tenant companies
. An objective evaluation of the incubator experience, and replication as warranted
. Political stability, macro-economic policy structure and regulatory framework that
encourage entrepreneurship and stimulate the market for new goods and services.

. Surveys of tenant assessment of assistance characterization and performance measure-

received, measured in response rate and
evaluation of specific activities
. Sustainability of the incubator, measured
by revenue and cost performance to plan,
including break-even as appropriate
. Taxes and other ``social'' contributions
measured by property, income, employ-
ment and other direct tax revenues attri-
butable to incubator, tenants and graduates
. Capacity building and changes in mind-
set, enhanced culture of research ± indus-
try linkages and entrepreneurship devel-
opment
. Changes in state policies to enhance sup-
port for private entrepreneurial activity.
Only some of the above loops can be
quantified in an initial review (and reality is
far more complex than depicted). But con-
sciousness among sponsors on improved
ment, can be expected to result in better
explication of the benefits and impacts of this
and alternative modalities. These measures
have to be applied at the time tenant-
businesses generally graduate from the in-
cubator (say average 3 years) and reach a
level of maturity (say at least another 3 years
after graduation). Finally, the above benefits
need to relate to real costs, measured as
benefit/cost ratios or as a discounted cash
stream.
Planning Strategically for the Future
The business incubation industry is two
decades old in the United States and Europe,
but less than half as old in restructuring
countries. It certainly should learn from
mistakes of SME support systems of the past,

# Blackwell Publishers Ltd 1999 Volume 8 Number 3 September 1999

206
and re-define its role for the difficult times
ahead. The discernible trends for enterprise
support systems, including incubators, are
outlined below, although there is no clear
consensus on where the industry is heading.
The technology orientation, so evident in
industrializing countries, will continue. The
galloping developments in informatics, com-
munications, biotechnology, robotics, space
and advanced materials will provide new
opportunities. Of particular interest to re-
structuring countries are the recent explo-
sions of the Internet, E-commerce and all
related services. The world is now becoming
a ``global village'' with immediate on-line
access to information retrieval and processing
wherever it is located. Computing and com-
munication costs are decreasing continually.
This fact opens up new possibilities for world-
wide E-commerce by entrepreneurial firms in
restructuring countries, provided these com-
ply with the professional, technical, quality
and ethical standards now prevalent in the
industrialized countries. Tech-related enter-
prises can be expected to grow rapidly,
calling for the more strategic services of an
``Innovation Center.'' Concurrently, there are
emerging opportunities for blending ad-
vanced techniques with traditional processes,
as in agriculture, textiles, energy conservation
and environment protection. Stronger link-
ages will be needed to technology sources and
users, to universities, corporations and public
research, with locations in physical and
structural proximity to technology parks and
industrial estates.
Special purpose incubator designs are emerg-
ing for women entrepreneurs (in Jordan), and
for single-disciplines such as software (in
India), agri-business (in Indonesia) and bio-
technology (in Brazil). A bottom-up regional
development focus for the future will call for
better use of local agri-based resources and
skills, higher value added in light engineering
and chemicals, garments and artisanal goods,
for both export and domestic markets. Crea-
tion of incubator hubs with satellite systems
will provide scale economics, wider outreach
and lower costs. Innovative systems such as
the franchising of incubator technology itself
will emerge. The ``third generation incubator''
will operate both within walls and outside
through outreach, providing both pre-incuba-
tion and post-incubation survives.
With regard to financing incubator devel-
opment, some governments, as in China and
Malaysia, have recognized the need for
providing the initial funds as a social invest-
ment. But many have yet to be persuaded
that this is a proper use of public funds. The
private sector has generally been absent from
Volume 8 Number 3 September 1999
CREATIVITY AND INNOVATION MANAGEMENT
the incubator scene, with the notable excep-
tion of Federation of Industry Sao Paulo
(FIESP) which has started and runs some 20
incubators. Corporate involvement usually
focuses on mentoring of individual entrepre-
neurial tenants, sub-contracting of goods and
services, spin-offs for special intrapreneurial
activities. Once the incubator has established
credibility, participation can be through equity
investment and know-how licensing at tenant
companies. The vagaries of future state
support budgets will put pressure on attain-
ing financial sustainability, through enhanced
professionalism, performance bench-mark-
ing, increased private sector involvement
and creative resource mobilization.
These trends will impose greater responsi-
bilities on the incubator managing board, and
the management and staff. The incubator
professional for year 2000 will have to be
technologically versatile, totally computer
literate, with higher-end financial manage-
ment, marketing and inter-personal skills and
full immersion in community affairs. This
renaissance person, more likely a woman,
will have to be fully accredited and better
remunerated.
The emerging International Business Incu-
bator will serve both indigenous and inter-
national small companies. Incubators and
their tenant-businesses will have to link up
within countries and reach out across
borders, in mutual self-interest. National
associations of business incubators and tech-
nology parks have been operating in Mexico,
Brazil, China and now in Malaysia, Egypt,
Indonesia, Russia, Hungary, Poland and
Czech Republic. Such associations may
federate within multi-country regional group-
ings, such as NBIA in North America, EBN
in Europe, ADT in Germany and the former
Soviet Union, or in a global international
association.
While growth of incubator numbers in
industrial countries is slowing down, expan-
sion in industrializing and re-structuring
countries will continue at the rate of 10±15
percent annually, that is, one new incubator
added each week until the present 500
incubators double in the next five years. Such
growth will come from countries which are
now establishing incubators and variants.
Candidates include: Egypt, Morocco, Tunisia,
Syria, Palestine, Lebanon, Jordan, South
Africa, Kenya, Senegal, Tanzania, Zimbabwe,
India, Pakistan, Sri Lanka, Vietnam, Slovenia,
Myanmar, Thailand, Iran, Colombia, Ecuador,
Albania, Bulgaria, Romania, and several
central Asian countries. Further, some coun-
tries such as China plan significant expansion
of their programs, while in others, major
# Blackwell Publishers Ltd 1999
BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS
enhancements of existing operations are
underway, such as in Brazil, India, Turkey,
Malaysia, Mexico, and Uzbekistan.
In conclusion, the future calls for enhanced
professionalism in incubator design and
operation, including development of specia-
list-managers, creative forms of financing,
and bench-marking of performance as we
have seen is happening in industrialized
countries. Also, incubators everywhere will
continue to operate under increased pressure
to achieve economic sustainability as govern-
ment funding for such operations looks
increasingly unreliable.
Lessons Learned
Lessons have been learned, sometimes the
hard way, on supporting the start, survival
and successful growth of technology ventures
in the restructuring countries. The existing
park and incubator operations in some Asian
countries and the trends towards convergence
in China, Malaysia, Uzbekistan and Taiwan
point to the driving forces which make for
success. Good practices from the international
incubation experience indicate policy guide-
lines that governments and stakeholders
should endorse and the adaptations they
should make to mobilize these driving forces,
as outlined below.
Fundamental principles of successful busi-
ness incubation (Rice and Matthews 1995)
and suggested adaptations to restructuring
countries are as follows.
A. Principle: Focus the energy and re-
sources of the incubator on
developing the companies
within the incubator.
Adaptation: New jo b s a n d ec on o m i c
growth are created by com-
panies, not by the incubator
administration. In some coun-
tries the tendency is to spend
most of the effort on preparing
plans (which is relatively
easy), rather than implemen-
tation with the companies
(which is difficult).
B. Principle: Manage the incubators as a
business and develop a self-
sustaining business operation.
Adaptation: In restructuring countries, the
funding by governments and
donors is sporadic, and bu-
reaucrats are not business or-
iented. The Incubator Director
should be an entrepreneur
with proven experience.
# Blackwell Publishers Ltd 1999
207
C. Principle: Develop a sophisticated array
of services and programs tar-
geted to the needs of the
companies. Enhanced
Adaptation: This principle is a corollary of professionalism
A above. For restructuring needed
countries these services and
programs may first come from
international organizations,
but should be rapidly trans-
ferred to the local staff.
These principles are the basis for the follow-
ing ten good practices and their adaptation to
restructuring countries.
1. Practice: Commit to the core principles
of business incubation as first
step.
Adaptation: In order to avoid misunder-
standings and conflicts, the
core principles must be clearly
explained to all the stake-
holders of the incubator and
their agreement and commit-
ment obtained as early as
possible
2. Practice: Collect and assess key infor-
mation to decide whether the
incubator is feasible or not.
Adaptation: In many countries, information
is often incomplete and biased.
It also may be overoptimistic,
in order to ``sell'' the project
and obtain funds.
3. Practice: Structure the incubator to be
financially self-sustainable
after initial support.
Adaptation: In most situations, financial
sustainability is difficult to
achieve unless anchor tenants
and state subsidies are ob-
tained for the first 5 years.
4. Practice: Structure the organization to
minimize governance and
maximize assistance to incu-
bator companies.
Adaptation: In some countries there is a
tendency to grow bureaucracy
and provide poor service. The
concept of incubation as a
nurturing and value-adding
process must be pursued from
the start.
5. Practice: Engage stakeholders to help
companies and support incu-
bator operations.
Adaptation: Most entrepreneurs in restruc-
turing countries are good at
networking, but this process
should be also managed by
Volume 8 Number 3 September 1999
208
enlisting possible academic,
government, private and inter-
national support.
6. Practice: Recruit staff who will manage
the incubator as a business and
a director who has the capacity
to help companies grow.
Adaptation: As was done in Ukraine, there
could be ``twin'' directors of an
incubator, a foreign expert and
a local manager. The latter
would take over as soon as
ready. Training of incubator
staff would be done at com-
parable, well-established incu-
bators, and locally by trainers
familiar with the best prac-
tices.
7. Practice: Choose a location and building
that will enable the incubator
to generate sufficient revenue
and support business incuba-
tion.
Adaptation: The building should be of
quality, conveniently located
and well equipped (telephone
exchange, computers, copiers,
faxes, satellite communica-
tions) in order to attract inter-
national or national anchor
tenants, who will subsidize
the incubator companies.
8. Practice: Select companies that pro-
vide revenue and have the
potential to grow and create
jobs in knowledge-based,
value-added ventures.
Adaptation: The incubator director must
resist political pressure from
stakeholders to recruit com-
panies that do not meet these
criteria. Business plans and the
personality and reliability of
the entrepreneurs should be
rigorously evaluated. A mar-
keting effort is needed to re-
cruit international and national
anchors.
9. Practice: Customize the delivery of
assistance and address the
developmental needs of each
company.
Adaptation: The incubator staff will be
mostly local in order to under-
stand the specific needs of the
companies, but will be trained
in the good practices abroad.
International advisors may
also assist the companies and
monitor the work in the start-
up period.
Volume 8 Number 3 September 1999
CREATIVITY AND INNOVATION MANAGEMENT
10. Practice: Engage in continuous evalu-
ation and improvement as the
incubator progresses and the
needs of client companies
change over time.
Adaptation: Careful monitoring of progress
should be done monthly by the
staff and by the board. Devi-
ations from the plan should be
promptly identified and cor-
rected. Importantly, the effec-
tiveness, impact, outreach and
sustainability of the incubator
should be critically evaluated
by sponsors and management.
Conclusion
Business incubation and enterprise support
systems have expanded rapidly the world
over, with the growing recognition that
modern small businesses are now the real
engines of economic progress. But the expan-
sion in support centers, particularly in busi-
ness incubators, has been at even faster rate in
the restructuring countries. While difficult to
quantify, their social and economic impacts
are now becoming manifest in the transition
economies as well as in industrializing coun-
tries. Nevertheless, the quality and value
added by these systems show great variations
from country to country and even with the
same country. The next step will be to
benchmark the results obtained, by compar-
ing incubator and tech parks within this
group of countries and with established
incubators and parks in industrialized coun-
tries.
It can be said that the incubation process
has been more art than science. Now as this
modality has entered its second decade, the
`why' behind the `how' and `what' is begin-
ning to be researched. In most country
situations, the diverse methods of creating
and growing enterprises have to be brought
together through the convergence of the
driving and nurturing agencies, including
venture capital and knowledge bases such
as universities and research parks. Without
such flexible and integrated response to the
challenge of globalization, the managed
work-space and support systems may lose
their effectiveness, their relevance, and their
very reason for existence.
Note
1. A shorter version of this paper was presented
at the Eighteenth Annual Entrepreneurship
Research Conference, Gent, Belgium; May 1998.
# Blackwell Publishers Ltd 1999
BUSINESS INCUBATION AND ENTERPRISE SUPPORT SYSTEMS
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Volume 8 Number 3 September 1999