Study shows business incubators have significant economic impact.

The results of the largest study ever conducted on business incubation show that these support programs for entrepreneurial firms have impressive, measurable impacts on the companies they serve.

In addition, experts are calling business incubators a "best value" in economic development, based on low program costs and high return on investment to communities.

"Business incubation programs treat entrepreneurial companies as important community and national resources, and they provide assistance that ensures company success," said Dinah Adkins, executive director of the National Business Incubation Association (NBIA) based in Athens, Ohio. "This study should convince communities that if they don't already have a business incubation program, they'll want to start thinking about one."

The study, completed in October, was conducted by the University of Michigan, NBIA, Ohio University and the Southern Technology Council under a grant from the U.S. Department of Commerce Economic Development Administration. It examined the impacts of business incubators, which house very early stage companies and provide on-site management and a full array of business planning, management and financial services.

Entrepreneurial companies stay in an incubator for an average of two to three years, then graduate to become free-standing, the research concluded. Some of the most important results of the study which enlisted incubator companies, graduates, managers and stakeholders - show how effective business incubators are.

Incubator companies experience very healthy growth, the study shows. The average firm's sales increased by more than 400 percent from the time it entered until the time it left the incubator. In addition, the average annual growth in sales per firm in all types of incubators was $239,535.

Business incubation programs also produce graduate firms with high survival rates. A reported 87 percent of incubated companies that fulfilled program graduation requirements are still in business.

Business incubation programs create new jobs for a low subsidy cost and a good return on investment, according to the study. The estimated cost per job created in relation to public grants was $1,109. It's not uncommon for the cost per job of other job-generating economic development programs to be three to six times higher.

Most firms that graduate from business incubators - an average of 84 percent remain in their communities, the study concludes, and business incubation programs assist companies that create many new jobs. In 1996, incubators reported on average that their firms had created 468 jobs directly and 234 additional "spin-off" jobs in the community for a total of 702 jobs. Despite their early stage, most incubator firms provide employee benefits.

Incubators contribute to their client companies' success and expand community resources, increasing early-stage capital, access to entrepreneurship education, and other sources of help to young companies.

Business incubation programs also improve local community image, according to the report.

Earlier studies and surveys had suggested that business incubation was a successful economic development strategy. "The anecdotal information said the same thing, but there had been no large-scale, national study of the industry to confirm that," said research team member Larry Molnar, director of the EDA University Center for Economic Diversification at the University of Michigan Business School in Ann Arbor.

In addition to surveying companies, incubation professionals and community stakeholders, the research team conducted a macro-economic study in four communities to analyze the expanded impacts of incubators, such as how many direct and community spin-off or "indirect" jobs they add and what effect they have on the tax base.

The return on investment was clearly healthy, the results showed. "Looking at the operating subsidies these incubators received and the jobs and local taxes they produced, we estimate the return on public investment at $4.96 for every $1 of public operating subsidies," said Molnar. This calculation did not include state or federal taxes, he noted.

"The numbers make it clear that business incubators add considerable resources to not take resources from-their communities," Molnar said.

The research team confirmed another important fact about incubators: They are not all alike. Although some impacts were similar regardless of incubator type, other impacts related directly to an incubator's mission and goals.

"For instance, firms in all types of business incubators had similar average increases in their annual gross revenues. But firms from technology incubators created more jobs than other types of incubators," said team member Lou Tornatzky, director of the Southern Technology Council at Research Triangle Park, NC.

Incubators that are focused on low-income people and minorities were rated high by their community stakeholders in assisting minorities and women business owners and enhancing the business climate. The study divided incubators into three main categories according to the main types of firms served: mixed-use, technology and empowerment/neighborhood revitalization. There are many other sub-types, though, including manufacturing, arts, software, kitchen and multimedia incubators.

The research analysis also led investigators to formulate policy recommendations. They urged incubation program sponsors at all levels to, among other things: invest more heavily in incubators as a major tool in economic development; target their investments to the best program type for their community resources; and seek evidence that any program they support adheres to the authentic definition of an incubator and strives to institute best practices.

They also charged the business incubation industry with developing standard impact measures and distributing to incubators a simple toolkit, developed by the researchers, that will make data collection easy at the local level.

"Adding these measures to incubators' total evaluation process will help them track their growth and effectiveness," said team member Hugh Sherman, assistant professor of policy and strategy at the management systems department of Ohio University in Athens. "It will also allow the industry to create a national database, making it possible to study and improve the business incubation process in years to come."

This study was designed to be a preliminary one. "NBIA plans to roll it out and collect and analyze information from an even broader sample of incubators. We will be locating resources to do so in the near future," Adkins said.

For now, though, this study provides the evidence that many have sought. "While a variety of development strategies are aimed at attracting existing firms to a region, business incubation is geared primarily to creating new firms and new jobs," Molnar said. "In an economy where new businesses are creating far more jobs than existing corporations, it's important for communities to have business creation strategies in place. This study should make potential supporters of incubators eager to test the feasibility of an incubator in their areas."

A relatively new concept in economic development circles, business incubation has grown markedly - from 12 programs in 1980 to nearly 600 in North America today.

For further information on the study or to obtain a copy of the book, to be published in November, contact NBIA, 20 East Circle Drive, Suite 190, Athens, Ohio 45701, or call [phone].