The contribution of business incubators and technology stations to small enterprise development in South Africa

Abstract

This paper examines the contribution of small business incubators to the development and promotion of small medium and micro enterprises. The International Labour Organization argues that small business incubators are innovative instruments that are increasingly considered to be of prime importance in developing and promoting competitive small firms. The location of technology stations at universities of technology points to the importance of these universities in the development of technology-intensive small firms.

1. INTRODUCTION

Small medium and micro enterprises (SMMEs) are increasingly becoming a major feature of economic development policy in both developed and developing countries because of their labour-absorptive capacity and their contribution to poverty alleviation and employment creation (King, 1996; King & McGrath, 1999). While SMMEs are acknowledged for their contribution in addressing poverty and employment creation, particularly in times of shrinking public sector and big business, the conditions facing entrepreneurs, particularly in Africa, ‘make simply surviving a miracle’ (Steel, 1994:4). Indeed, Marsden (1992) describes SMMEs as pioneers of development that have flourished under supportive policy regimes but have managed to survive even in hostile environments. According to the United Nations Industrial Development Organization (UNIDO, 1997), small enterprises have flourished – due more perhaps to their inherent characteristics than to the government programmes to promote them. A first step towards achieving SMME growth is to accept that SMME entrepreneurs can be agents of change and growth, albeit that they cannot achieve this objective alone. Indeed, South Africa's SMMEs are acknowledged as having a significant role to play in achieving a variety of objectives: social (poverty alleviation), economic (employment creation, increased incomes, and economic growth), and political (black economic empowerment) (Department Of Trade & Industry, 1998; Philip, 2001). However, in both the developed and developing countries, many new ventures fail and only few survive and grow. A key challenge, therefore, is to transform the traditional ways of supporting small enterprises in order to increase their competitiveness and efficiency (International Labour Organization [ILO], no date; UNIDO, 1997). For this purpose, the present paper explores the significance of small business incubators for developing and promoting SMMEs. Incubators are a new hybrid type of economic development facility that combines features of entrepreneurship, business facilitation and real-estate development (Rice & Matthews, 1995; Australia & New Zealand Association of Business Incubators, 2003).

The paper is organised into two sections. Section 2 explores the international experience of small business incubators, including that of the ILO (no date, 2000). The section examines the historical development of modern incubators and provides a descriptive analysis of business incubators. Section 3 then examines the South African movement of business incubators. Overall, it is argued that small business incubators are innovative instruments that are increasingly considered to be of prime importance in developing and promoting competitive small firms.

2. INTERNATIONAL EXPERIENCE OF SMALL BUSINESS INCUBATORS

Throughout the developing world, SMME incubators are increasingly considered to be innovative instruments for developing and promoting competitive small firms. True competitiveness requires businesses that can establish strong positions in niche markets through innovative products and services. Such businesses in their start-up stage (when they are most vulnerable) are suitable candidates for incubation systems (United Nations Economic Commission for Europe [UNECE], 1999). In particular, business incubation is a dynamic process of business enterprise development designed to accelerate the growth and success of small firms through an array of business support resources and services (UNECE, 1999). The small business incubator's key objective is to produce successful small firms that will leave the programme financially viable and freestanding (UNECE, 1999). Accordingly, technology incubators nurture high-tech start-up businesses and present a technology-oriented variant of business incubators. Generally, technology business incubators are linked to technical universities or located close to other sources of technological support and require specific equipment (computing, testing, rapid prototyping) and other technical expertise. The purpose in this section is to examine the contribution of international scholarship on the subject of business incubators as innovative instruments for supporting small enterprise development.

2.1 Historical development of business incubators

Business incubation is a relatively recent and innovative system, derived from the earlier SMME support programmes, but with its own distinctive characteristics (UNIDO, 1997). The concept of nurturing start-up and early-stage SMMEs at managed workspaces appears to be straightforward, although it is complex in both structure and execution. Indeed, the approach is widely accepted but less well understood. Overall, business incubators provide local, on-the-spot diagnosis and treatment of business problems, dramatically lowering the early-stage failure rate.

The earliest business incubators, in their modern form, appeared in the UK in 1972 (Campbell & Allen, 1987). They emerged from two simultaneous movements – the subdivision of older vacant buildings by architects into ‘working communities’ of design-related firms with shared accommodation, services and management. These developments were collectively managed and set up to create an optimal working environment for individuals in these trades. The next wave of incubator development in the UK was in response to plant closures. In 1975 the British Steel Corporation established a wholly owned subsidiary, BSC (Industrial) Ltd, to help create jobs in steel closure areas where thousands of former steelworkers had been laid off (Campbell & Allen, 1987).

In the US, the development of business incubators has three historical roots. The first began with efforts to redevelop inner-city blighted areas. These efforts were later extended to include distressed areas throughout the Midwest and Northeast. The second started (as early as 1973) as an experiment funded by the National Science Foundation to foster entrepreneurship education, the development of new technologies in existing companies, and the establishment and nurturing of new businesses and innovation at major universities. The third grew from the initiatives of several successful individual entrepreneurs or groups of investors who sought to transfer their own new venture experiences to start-up companies through an environment conducive to successful technological innovation and commercialisation (Campbell & Allen, 1987:80).

The use of business incubators as a development tool continued in the early 1980s as city and local governments and non-profit organisations in declining urban, small town and rural areas, either on their own or in partnership with other local public and private organisations, started business incubators (Campbell & Allen, 1987; Rice & Matthews, 1995; Richards, 2002). Throughout the Northeast and Midwest, these incubators were spurred by plant closures and high unemployment in many cases. The resulting business incubators were often targeted toward new labour-intensive and industrial companies (Campbell & Allen, 1987).

An important historical root of business incubators was the effort to enhance innovation and entrepreneurship through university-related incubators or innovation centres (ILO, no date). The Republic of Korea has 300 technology incubators, most of them connected with the Korean government and cooperating with universities and schools throughout the country (Richards, 2002). Research conducted by Campbell and Allen (1987) indicates that university incubators are more likely to have research and development firms, while public facilities are more suitable for light manufacturing and private facilities tend to have retail tenants. Rents have followed a predictable pattern, with private facilities charging the most and including the fewest services, universities charging one-third less but including more services, and public incubators charging the least rent and including about the same number of services as university-sponsored ones. Employment growth has been slightly higher in university incubators, followed by public ones and then private ones. Highly rated as a positive influence on aspects of the tenant's business were the availability of business services, interaction with other firms, and management services. For those located in university incubators, interaction with the university was rated as highly positive.

A particular trend in contrast with earlier incubator research was the development by universities of purpose-built incubator facilities. One-third of the operating incubators were located in buildings specifically designed for that purpose, while one-half were renovated structures (Campbell & Allen, 1987). Overall, the historical development of incubators indicates that the business incubator industry has already achieved a place in local economic development strategy as an element of the entrepreneurial assistance programme (ILO, 2000). Accordingly, new applications of this concept are being redefined and becoming more specialised. For example, some incubators are open only to technology-based companies; others are reserved only for a minority, such as women, or youth entrepreneurs; still others are specific to a particular industry; and still others seek to diversify the local industrial base. This heterogeneity makes it difficult to draw meaningful conclusions about them as a group. What is clear from the international experience is that the majority of business incubators have been developed through the collaborative efforts of public, private, and university sectors.

An interesting emerging system is the International Enterprise Center, which brings under a single aegis the full range of support services for the development of knowledge-based businesses, with links to universities, research institutes, venture capital and international joint ventures. This trend is already evident in the convergence of support mechanisms at business incubators in Southeast Asia (UNIDO, 1997). From this historical analysis, it can be discerned that a new generation of incubator system will provide services not only to selected tenants within its walls but increasingly on an outreach basis to existing small businesses in their own premises and businesses graduated from the incubator (Edelman, 1997; UNIDO, 1997). Indeed, incubators in the expanding national programme outside Java in Indonesia serve more people ‘out-wall’ through outreach services than ‘in-wall’ within the premises (UNIDO, 1997).

2.2 Descriptive analysis of business incubators

The business incubation modality has developed in response to the needs for effective business support strategies. Workspaces, financing, shared equipment and networks of contacts to customers, suppliers, governments and delivery agents provide the basis for a proactive, decentralised programme. Business incubators provide, therefore, start-up and fledgling companies with hands-on business and management assistance, affordable space and shared support services (UNECE, 1999; ILO, 2000). They are an alternative to the office at home or long-term lease. The services of a business incubator usually include:

• A network of relationships with other business owners who provide support for each other and who may become customers or suppliers.

• Financing assistance, such as help in obtaining a bank loan or gaining access to state funds.

• Business and technical assistance through a combination of in-house expertise and a network of community support.

• Shared business services, such as telephone answering, book-keeping, word processing and other secretarial services, reception services and access to fax, copy machines, computers and business libraries.

• Flexible space and flexible leases, often at below market rates.

Business incubators are generally operated by universities, private-sector business, economic development agencies and local governments. They are often targeted to service the needs of light manufacturing and service firms, and those developing new products or engaged in research and development (ILO, no date; UNECE, 1999). Figures 1 and 2 show some benefits that accrue from business incubators and some factors that contribute to their success.

Figure 1: Benefits of technology incubators

Figure 2: Factors contributing to the success of business incubators

Finally, business incubators have become popular instruments of small-business promotion. For example, in 1993 there were 500 of them in the US (Besser, 1996), 85 in China, 30 in Finland, more than 200 in Germany, 60 in Russia, more than 20 in the Czech Republic, 35 in Hungary and more than 55 in Poland (UNECE, 1999). This popularity is usually based on the perceived minimisation of costs or the quest to minimise costs. The costs of the physical space, maintenance, telephone, answering services, office staff, equipment and supplies and resource libraries are shared, and the services of business consultants, trainers, accountants, and other experts are available to the individual businesses at a fraction of the ‘go it alone’ cost (Besser, 1996). Low-interest loans are sometimes provided for equipment and material purchases, and employee training is sometimes available through special government arrangements with the local university. However, there is more to incubation than cutting expenses. Networking between business owners is an important feature. Business owners learn from each other and support each other both professionally and personally. These factors help new businesses to stay alive and prosper.

3. UNDERSTANDING THE SMALL BUSINESS INCUBATION MOVEMENT IN SOUTH AFRICA

In South Africa, the incubation process is a recent phenomenon and is still evolving. Nevertheless, the limited literature in South Africa provides important insights into the nature and workings of business incubators in the country. This section identifies some key elements of the business incubation movement in South Africa and highlights some insights from the available literature.

The increasing number of business incubators shows that the right kind of business environment is increasingly acknowledged as an important factor contributing to the success of competitive SMMEs and diversified local economy (Lalkaka, no date). Indeed, technology incubators are emerging as a new form of venture creation and a way to promote SMMEs. The South African situation is characterised by two incubation movements, technology stations and business incubators. Both have been established to stimulate economic growth, particularly in the high-tech SMME sector.

The technology stations programme was developed by the Department of Science and Technology to strengthen and accelerate the interaction between technikons and SMMEs. The technology stations' activities include, inter alia, research, development and application of new technologies, technology transfer, troubleshooting, quality advisory service, product development, simulated production units, testing services and secondment of staff and students (Business Referral & Information Network, 2004). Table 1 presents the existing technology stations in South Africa. In particular, the table shows that universities of technology are becoming increasingly responsive to the long-term needs of industry and SMMEs. Another important observation is that the creation of new jobs in a knowledge-based economy can be seen as a decentralised process that can be carried out by small firms and local universities.

Table 1: Schematic representation of technology stations in South Africa

Technology station/technikon	Focus	Province
Technikon Pretoria	Electronics and electrical engineering	Gauteng
Peninsula Technikon	Clothing and textiles technology	Western Cape
Free State Technikon	Metals and manufacturing	Free State
Port Elizabeth Technikon	Automotive components	Eastern Cape
North West Technikon	Chemistry and chemical engineering	North West
Vaal Triangle Technikon	Composite materials	Gauteng
Mangosuthu Technikon	Chemistry and chemical engineering	KwaZulu-Natal
Technikon Northern Gauteng	Automotive	Gauteng

Technology incubators focus on the physical facilities and incubation. Their key objectives are economic growth, sustainable employment, technological innovation and technology transfer, and making South African SMMEs internationally competitive. An important element of the incubation movement in South Africa is the Godisa programme (Setswana – ‘nurturing or helping to grow’), a South African initiative located at the Council for Scientific and Industrial Research campus of the University of Pretoria. The programme is made up of Godisa Centres, which comprise a Pilot Innovation Support Centre, a Pilot Technology Demonstration Centre and several technology incubators (Table 2). The technology demonstration centres are dedicated to selected manufacturing sectors with the purpose of encouraging the existing SMMEs and entrepreneurs and helping them upgrade their technologies (Godisa, 2004). The Godisa Programme targets technology support interventions through a number of technology incubators that address the SMMEs' technology needs. The overall purpose of the programme is to improve enterprise performance and profitability and to reduce enterprise mortality (Burns, 2001).

Table 2: Technology incubators in South Africa

Incubator	Focus	Province
Gauteng Software Incubator	Software	Gauteng
Acorn Incubator	Life science technologies	Western Cape
Brainworks Incubator	ICT and electronics	Gauteng
eGoli Biotechnology Incubator	Commercialisation of life sciences research, products, services and technology platforms	Gauteng
South African Chemical Technology Incubator	Downstream chemical manufacturing SMMEs	Eastern Cape
Timbhale Incubator	Export-based cut flower and nutriceuticals	Mpumalanga
University of Pretoria Technology Incubator	High-technology	Gauteng
Innovation Hub	High-technology and start-up companies at the leading edge of the new economy	Gauteng
Mpumalanga Stainless Steel Initiative	Manufacturing	Mpumalanga
KwaZulu-Natal Innovation Support Centre	Technology commercialisation, skills development	KwaZulu-Natal
Zenzele Technology Demonstration Centre	Small-scale mining	Gauteng

In South Africa, the most advanced business incubator is the Innovation Hub, which focuses on high-technology entrepreneurs and start-up companies at the leading edge of the new economy (Business Referral & Information Network, 2004). The Gauteng Provincial Government, through the Blue IQ initiative, announced in 2000 that the Innovation Hub would be developed as one of the major projects to stimulate economic growth in the province. The initiative was launched in February 2000 and the Innovation Hub started operating in December 2000. It is the first internationally accredited science park in Africa, a high-tech cluster that creates an environment where international businesses can access a regional centre of knowledge creation (Innovation Hub, 2006). Overall, it builds on best practice to create the essence of a science park while providing a gateway for local businesses to launch into the world of global interconnectivity successfully.

Its sectoral focus is spread across information and communication technology, biosciences, electronics, and advanced materials and manufacturing. The services and facilities it offers are a variety of office sizes; flexible leases; site security and access control; parking; a digital telephone system; data connectivity; post handling, telefax and photocopy facilities; reception and secretarial support; a canteen facility; meeting rooms and presentation equipment; management advisory and mentoring services; business support services; an introduction to business networks and markets; assistance in accessing technical expertise, and venture capital or finance; participation in a high-tech cluster; and market visibility by means of corporate advertising (Innovation Hub, 2006).

Supporting the technology incubation movement are government departments (the Department of Trade & Industry and the Department of Science & Technology), institutions of higher learning, and donor support from the European Union. As in the cases described in the international literature, the majority of business incubators in South Africa are linked to academic institutions of higher learning or research parks (Lalkaka, no date). The National Research Foundation and the Council for Scientific and Industrial Research are involved in implementing the technology incubators. All of the technology stations are located at universities of technology – the Tshwane University of Technology hosts three of them. The universities of technology have considerable potential for supporting innovation since they have ‘practice oriented staff’, specialised technical and scientific equipment and tailor-made training courses. The geographic proximity to universities allows tenants easy access to technical facilities, students, faculty members, research laboratories and libraries (Kumar & Kumar, 1997). The technology incubation movement allows for the optimum utilisation of intellectual capital and infrastructure conducive to promoting scientific research.

An element of support also described in the international literature is the importance of links between universities and industry. Indeed, the three technology stations at Tshwane University of Technology are increasingly linked to industry. Bringing industry interests into university projects contributes to the placement of university graduates in industrial settings where their education and training is effectively used. Further, the cooperation between industry and educational institutions enables universities to move from basic to applied research (Giesecke, 1999). Overall, the collaborative efforts between government, research institutions and universities of technology are encouraging. In particular, collaborative relationships are expected to promote economic development, job creation, technology transfer and innovation.

Overall, the increasing number of business incubators in South Africa shows that the right kind of business environment is increasingly being acknowledged as an important factor contributing to the success of SMMEs and the local economy. Likewise, the number of technology stations is evidence of the importance of know-how and technology transfer between the universities and SMMEs. In sum, these business development instruments are proving to be cost-effective ways of helping to start technology-based enterprises.

4. CONCLUSION

The future growth of a modern small-business sector requires renewed efforts to improve production methods, to raise quality and to shift to value-added products and services through modern design and technological innovations. It also requires a special focus on support systems that provide integrated services for production, management, marketing and finance (ILO, no date). The business incubators provide a good platform for the convergence mechanisms for supporting knowledge-based enterprises, both before and after their incubation. Incubator assessments carried out by the United Nations Development Programme in Brazil, the Czech Republic, the People's Republic of China, Mexico, Nigeria, Poland and Turkey point to the potential of incubators for creating innovative enterprises, greatly increasing their chances of survival and success, generating jobs directly while firms are still within the incubator and even larger employment when they graduate and grow, and at the same time promoting the commercialisation of research, fostering skills for entrepreneurship and influencing national policies for small enterprise development (UNIDO, 1997). Finally, links between business incubators and universities are important. Likewise, the involvement of private-sector corporations is encouraging (UNIDO, 1997). Overall, it is worth noting that business incubators do not replace entrepreneurial initiatives, but create better conditions for entrepreneurship.

Acknowledgments

The author wishes to thank Professor Mario Scerri sincerely for his guidance, criticisms and encouragement.