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«Incubator Age and Incubation Time: Determinants of Firm Survival after Graduation? Michael Schwartz November 2008 No. 14 IWH-Diskussionspapiere ...»

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Institut für Halle Institute for Economic Research

Wirtschaftsforschung Halle

Incubator Age and Incubation Time:

Determinants of Firm Survival after Graduation?

Michael Schwartz

November 2008 No. 14

IWH-Diskussionspapiere

IWH-Discussion Papers

Incubator Age and Incubation Time:

Determinants of Firm Survival after Graduation?

Michael Schwartz

November 2008 No. 14

IWH __________________________________________________________________

Author: Michael Schwartz Institut für Wirtschaftsforschung Halle Abteilung Stadtökonomik Michael.Schwartz@iwh-halle.de Tel.: (0345) 7753-794 The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of the IWH. The papers represent preliminary work and are circulated to encourage discussion with the author. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the author.

Comments and suggestions on the methods and results presented are welcome.

IWH-Discussion Papers are indexed in RePEc-Econpapers and in ECONIS.

Herausgeber:

INSTITUT FÜR WIRTSCHAFTSFORSCHUNG HALLE – IWH

Prof. Dr. Ulrich Blum (Präsident), Dr. Hubert Gabrisch (Forschungsdirektor) Das IWH ist Mitglied der Leibniz-Gemeinschaft Hausanschrift: Kleine Märkerstraße 8, 06108 Halle (Saale) Postanschrift: Postfach 11 03 61, 06017 Halle (Saale) Telefon: (0345) 77 53-60 Telefax: (0345) 77 53-8 20 Internetadresse: http://www.iwh-halle.de 2 IWH-Diskussionspapiere 14/2008 __________________________________________________________________ IWH

Incubator Age and Incubation Time:

Determinants of Firm Survival after Graduation?

Abstract On the basis of a sample of 149 graduate firms from five German technology oriented business incubators, this article contributes to incubator/incubation literature by investigating the effects of the age of the business incubators and the firms’ incubation time in securing long-term survival of the firms after leaving the incubator facilities. The empirical findings from Cox-proportional hazards regression and parametric accelerated failure time models reveal a statistically negative impact for both variables incubator age and incubation time on post-graduation firm survival. One possible explanation for these results is that, when incubator managers become increasingly involved in various regional development activities (e.g. coaching of regional network initiatives), this may reduce the effectiveness of incubator support and therefore the survival chances of firms.

Keywords: Firm survival; Hazard rates; Business incubators; Local technology policy JEL Classification: C41, L25, L26, O38 IWH-Diskussionspapiere 14/2008 IWH __________________________________________________________________

Incubator Age and Incubation Time:

Determinants of Firm Survival after Graduation?

Zusammenfassung Basierend auf einer Datenbasis von insgesamt 149 ehemalig durch Technologie- und Gründerzentren geförderten Unternehmen wird untersucht, inwiefern ein Zusammenhang zwischen der Aufenthaltsdauer der Unternehmen in den Zentren sowie dem Betriebsalter der Zentren und der langfristigen Überlebensfähigkeit der Unternehmen nach dem Auszug besteht. Eine derartige Untersuchung liegt bislang nicht vor. Die empirischen Ergebnisse eines Cox-proportionalen Hazard Modells sowie verschiedener Accelerated Failure Time Modelle zeigen statistisch signifikant negative Effekte beider Faktoren auf die Überlebensfähigkeit der untersuchten Unternehmen. Eine mögliche Erklärung mag sich darin finden lassen, dass eine zunehmende Wahrnehmung regionalwirtschaftlicher Aufgaben der Technologie- und Gründerzentren (beispielsweise Betreuung von Netzwerkinitiativen) die Effektivität einer Förderung hinsichtlich der Überlebensfähigkeit der unterstützten Unternehmen mindert. Das Diskussionspapier schließt mit wirtschaftspolitischen Empfehlungen.

Schlagworte: Technologiezentren; Gründerzentren; Überleben; Überlebenszeitanalyse;

Förderung

–  –  –

Incubator Age and Incubation Time:

Determinants of Firm Survival after Graduation?

1. Introduction Among the variety of publicly funded policy initiatives that focus on the promotion of entrepreneurship, new venture creation and development, business incubators (BIs), and science parks alike, have attracted a great deal of attention (see e.g. Hackett and Dilts 2004 for a systematic review). The United Kingdom Business Incubation (2004) defines

the process of business incubation as:

“(…) a unique and highly flexible combination of business development processes, infrastructure and people designed to nurture new and small businesses by supporting them through the early stages of development and change.".

As part of this process, one of the primary objectives of these initiatives (sometimes also termed innovation centre, enterprise development centre, technology centre, to name just a few examples) is the promotion of long-term survivability of their supported firms (Hannon 2005; McAdam and Marlow 2007).





However, one of the key question, whether BIs, or specific elements of BI support respectively, in fact play a significant role in securing long-term firm survival still remains unanswered so far. In particular, insufficient attention has been paid to what happens to the firms when they leave the incubator organizations, i.e. after they graduate. Do they survive at all? As pointed out by several authors in the recent years, especially empirical investigations that go beyond the initial incubation period are crucial for the understanding of the overall usefulness of BI support (e.g. Colombo and Delmastro 2002; Hannon and Chaplin 2003; Hackett and Dilts 2004; Peña 2004). Rothaermel and Thursby (2005a) recently argue in an analogous manner, pointing to the fact that successful and timely graduation is an important milestone in incubator firms´ development, but they simultaneously warn that this is certainly no guarantee of subsequent success.

But, unfortunately the lack of necessary data on former tenant firms (e.g. firm address after the graduation) constrains appropriate research designs. Hence, research on (postgraduation) issues (i.e. organizational growth, or network persistency) has been mostly restricted to surviving firms only, which leads to a considerably survivor bias (Hackett and Dilts 2004). Specifically, little is known about the survival or exit dynamics of firms after leaving the BIs or science parks, and what are the support-specific factors that actually determine the probability of survival/failure after the graduation.

IWH-Diskussionspapiere 14/2008 IWH __________________________________________________________________

In addressing the crucial issue of post-graduation survival, using techniques of survival analysis (Cox proportional hazards regression and accelerated failure time models), this article attempts to contribute to the incubator/incubation literature by investigating the determinants that shape the hazard function and determine the duration of survival of 149 graduate firms from five German technology oriented BIs in the post-graduation period. More specifically, this article focuses on two core questions that are discussed in the literature: First, does the length of the stay in the incubator, i.e. incubation time, and therefore the time in which the tenant firms potentially benefit from the BI support in fact play a key role in securing long-term survivability after leaving the incubator facilities? And second, how does the age of the incubator organization itself affect the probability of firm survival after the graduation? The answers to these questions are highly relevant for policy makers and incubator managers that are engaged in the establishment of BIs and the configuration of the support process itself.

This article is organized as follows. Section 2 contains a review of previous empirical evidence regarding the effects of BIs and science parks on firm performance, especially with respect to survival and failure of BI/science parks firms (after the graduation). Section 3 first describes the data set and outlines briefly the methods that are used in the empirical part of this article. In a second step, variables are explained and, on the basis of prior research and empirical results, hypothesis according to the two central research questions are derived. Section 4 presents the research findings. The final Section 5 discusses the empirical results in detail and includes implications for BI managers and local policy makers.

–  –  –

2. Business Incubators, Science Parks and Firm Performance – a Review of Empirical Evidence Although, there is an extant and growing body of literature, regarding the impact of being located in a science park or BI, no final conclusion is possible as to whether these instruments are effective and efficient policy tools for the promotion of young (technology based) firms. More importantly, only few authors have investigated survival of incubated firms. This section provides a literature review, comprising empirical studies that link incubator/science park location and performance variables of supported firms, with a particular focus on survivability of BI and science park firms.

Even though recent empirical studies portray an ambivalent picture, studies investigating the performance differences between firms located on and off science parks or BIs show that firms located on those facilities have higher growth rates in terms of employment and sales (Colombo and Delmastro 2002; Löfsten and Lindelöf 2002; Ferguson and Olofsson 2004) and a wider market distribution (Löfsten and Lindelöf 2003) than comparable firms not located on BIs/science parks.

In a study of 114 firms in Spanish BIs, Peña (2004) investigates the relationship between firm growth and, among other variables, incubation-specific factors. From the incubation-specific determinants that were included in the analysis (business assistance programs, cost savings from cheap rental space and equipment, networking activities between the tenant companies, external networking), management training and assistance was identified as the only significant variable to explain incubator firm growth (in terms of employment). Comparable results are found by Steinkühler (1994), who was the first author in Germany investigating the development of BI graduates (35 surviving firms).

He finds a positive impact on firm growth of the provision of business assistance during the incubation period. Furthermore, according to his results, the support by the BI management in the acquisition of capital as well as help regarding the establishment of business contacts influences firm growth positively. He also reports significantly higher growth for firms that stayed longer in the incubators.

Few differences between on- and off-park companies are found, when innovation activities are examined. Colombo and Delmastro (2002) investigate the innovative activity of firms located on/off Italian science parks based on various input and output measures (e.g. R&D intensity, patent activity) and find only small differences between the two groups. This confirms research by Westhead (1997), who finds no significant differences for innovation measures (e.g. R&D expenditures, patent or copyright applications) between tenant companies and off-park firms in UK science parks. For Swedish science parks, Lindelöf and Löfsten (2004) report that, regarding the outcomes of innovation processes, technological innovations (measured through product development) occur more often outside science parks. In contrast to this result, Squicciarini (2007) finds a higher patent activity for Finnish on-park firms.

IWH-Diskussionspapiere 14/2008 IWH __________________________________________________________________

Survival of Incubator Firms Building on the comprehensive survey data of British science park firms by Monck et al.

(1988), Storey and Strange (1992) investigate the survival of 183 tenant firms. 16.9% of the firms originally interviewed by Monck et al. (1988) are identified as failures. Since the original survey in 1986, 68 firms have graduated form their science park location. In 1990 only 31 of these graduates could be identified by Storey and Strange (1992) to be still in business. Similar results are given by Westhead and Storey (1994), who investigate performance differences between 183 firms located on science parks and a control group of 101 non-science parks firms. Over a period of six years 38% of the on-park firms but only 32% of the off-park firms are considered failures. Furthermore, if a difference is made between managed and non-managed science parks, where a managed science park has a full time on-site manager (Westhead and Storey 1994), it is interesting to note that the failure rate is lower for non-managed science parks (24% in comparison to 33%) (Westhead and Batstone 1999).

In contrast to the result of Westhead and Storey (1994), Ferguson and Olofsson (2004) find that Swedish science parks firms have higher survival rates than comparable offpark firms. In their study, the authors investigate the survival of 30 new technology based firms located on Swedish science parks and compare the findings with survival rates of 36 comparable off-park firms. After a period of seven years 93.3% of the firms that originally have been located on science parks were still in operation, but only 66.7% of the off-park firms. Eleven firms graduated successfully from the science parks and none of them failed.



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