Rustam Lalkaka, Ma Feng-Ling and Dinyar Lalkaka

Many developing countries and those in transition from command systems to market economies are characterized by insufficient business infrastructure, weak management and marketing skills, poor productivity of research and inadequate tools for its commercialization, high rates of inflation, taxes and interest, and limited financial resources. In addition, there are cultural constraints such as repressed creativity, reluctance to share information or delegate responsibility.

Yet, in order to mobilize the opportunities of the technological revolution and cope with the challenges of globalization now upon us, nations have to develop new strategies to stimulate innovation and entrepreneurship. Technology business incubators can help address some of these problems, as recent work in China has shown. The number of incubators is growing at a more rapid rate in developing countries, albeit over a smaller base, than in the industrial nations.

This note outlines the progress of business incubation in the Peoples Republic of China, reviews its effectiveness as an economic development tool, and points to some lessons emerging for practitioners operating under difficult business infrastructure conditions.

A. Business Incubation Industry in China

Since its start twelve years ago with impetus from the United Nations and strong support from Professor Song Jian, then head of the China State Science and Technology Commission, incubators have developed rapidly, both in quantity and quality. Today, this program is arguably the largest in the developing world and the third largest worldwide, after the USA and Germany. It has significant achievements (and some shortcomings) from which others can benefit. This model needs to be studied, especially as China is expected to become the world’s largest economy in terms of purchasing, power parity (PPP) in a few years. While, for instance, two years ago there were two million Internet users in China, this year there will be 20 million (almost one-fifth of the current U.S users). These developments offer many opportunities for learning and interaction.

Today there are some 127 incubators in China, located in every province, autonomous region and major city except Tibet and Qinghai. In addition there are another 64 organizations such as "software parks" that function much like incubators. Incubators have become an established feature of the technical and business infrastructure and continue to increase in number at the rate of one to two each month, see figure below.

As of end 1998, the 77 incubators included in the Torch Program, mostly representative of the first generation of incubators and almost all with a general technology focus, had:

• a total floor area of 884,000 sq.m., with 33 having space of over 10,000sqm each,
• 4,138 tenant firms in incubation,
• 1,316 graduate firms,

Tenants and graduates together had: total sales of some 10.1 billion yuan (about US$ 1.2 billion), and employed some 140,000 people.

Incubators Burgeoned in the 1990s

Salient features

Some characteristics of three incubators studied recently, including the oldest and newest, are summarized below. Tianjin Technology Incubator, among the oldest, is at the port city of Beijing, 100 km away; Tsinghua Pioneer Park (really an incubator) is linked to the foremost technical university in China at Beijing; and Hefei is a provincial capital.

Characteristics of three Chinese incubators

US $ 1 = approx. RMB 8.4

Types of Incubators

Based on our research, some 127 incubators and another 64 incubator-like organizations can be identified, for a total of 191 such entities as of year-end 1999.

Chinese Incubators ,1999

General Technology Incubators

These are the most common type in China. According to the relevant Torch regulations, priority technologies include: new materials, environmental technologies, electro-mechanical technologies, biotechnology, aerospace and information technologies (with 13 software parks as part of China's recent stress on IT).

Tenant companies are mostly spin-offs from universities, research institutes and state-owned enterprises. Ownership of the spin-offs typically remains with the parent institutions, which also provide the finance. However, in recent years there has been a slow but steady increase in the number of privately-owned tenant firms, drawn from various sectors of society including scientists leaving the state research institutions; they must raise financing from their own sources. As of year-end 1998, 111 of 127 (87%) incubators in China, had a general technology focus, while some focused on sectors such as biotechnology, pharmaceuticals, materials science and oceanography. In contrast, in the U.S. with about 600 incubators, about one-fourth had a technology focus (1998) although this proportion is rising in recent months.

A good example is the Tianjin High Technology Innovation Center, located in the Technology Park, 110 km south-east of Beijing. Of 96 tenants (January 2000), 57 % are in computing/electronics, 18 % electro-mechanical, 11 % materials, 11 % biotechnology and 3 5 others. The incubator has contributed to the commercialization of some 300 research results, equivalent to almost 40 per year.

"International Business Incubators" (IBIs) are designed to assist both international and Chinese startup firms enter the Chinese and international markets respectively, and to promote cooperation between the two. While the traditional incubator serves only national ventures, the IBI is intended to facilitate small companies with significant technical products but with limited resources to enter a complex market such as China.

The feasibility study prepared by BTDS in cooperation with the Torch Office in March 1997. evaluated and selected eight existing technology incubation centers in order to transform these for mixed Chinese - foreign company use. These are:

North China: Beijing - Fengtai and Tianjin

East and Central China: Shanghai, Suzhou, Wuhan, Xian

Southwest China: Chengdu and Chongqing

The IBI Program expects to attract high-potential international and Chinese firms, to facilitate domestic and international networking As it is still early in their development, the IBIs have so far attracted returning Chinese scholars and a few international ventures. Relationships have been established with incubators in Russia, United States, Great Britain, Italy and Finland. IBIs are an innovative development – a contribution by China to the evolution of incubation the world over.

University Incubators are among the most promising and fastest growing new segment in the industry. Eight have been established to date, including by some of China's best-known universities such as Tsinghua University in Beijing. During our visit to Tsinghua in October 1999, we were impressed by the management arrangements and the high scientific capabilities of the tenant businesses. These are headed by faculty and students alike. Most are in IT-related businesses.

The best of China's university incubators provide a caliber of support and an entrepreneurial environment comparable to that of similar incubators in developed countries.

University Science & Technology Parks have also been increasing rapidly. Unlike university incubators, they cater to larger enterprises and provide modular manufacturing space. 34 have been established in 1998 and 1999. Sponsorship of the university S&T parks is by a combination of the universities, local governments, MoST and MoE.

"Overseas Chinese Scholars' Parks" are incubator-like institutions which provide a supportive environment for Chinese students returning home after advanced technical education. 28 Overseas Chinese Scholars' Parks have been established in the late 1990s; 11 of these were established by and share personnel and facilities with established incubators, while 17 are brand new facilities. Preliminary results in terms of quality of technologies commercialized, enterprise growth, etc., have been promising.

Non-Technology Incubators

While the earlier incubators were predominantly for commercializing innovations, this is changing. Now, an incubator in Tianjin focusing on enterprise creation by laid-off female factory workers, and sponsored by UNDP, AusAid and the Tianjin Women's Federation, is presently in the implementation stages. A second project sponsored by the Zhenjiang Economic Commission and focused on the creation of family businesses by laid-off factory workers is still in the planning stages.

Incubator Networks

Incubator networks composed of incubators in the same region or with the same focus are a new and flourishing phenomenon. To date, eight have been established, namely (1) Beijing Incubator Network, (2) Tianjin Incubator Network, (3) Shanghai Incubator Network, (4) Jiangsu Innovation Center Network, (5) Western China Innovation Center Network, (6) Five Northern Provinces/Regions Innovation Center Cooperation Net, (7) China International Business Incubator Network, and (8) Expatriate Enterprise Park Network. These networks are a useful means of mutual help, especially since there are limited other resources for incubator managers to rely on.

International linkages

At the Tianjin International Incubator Conference, 1996, the participants proposed that China take the lead in establishing a platform for developing country incubator planners and managers to inter-act and learn from each other through training courses, quarterly newsletter, incubator directory and other collaborative means.

Now, MOST together with the China Association for International S & T Cooperation is organizing annual International Training Workshop for Managers of Business Incubators in Shanghai. The Chinese side covers all training and living costs while the foreign participants meet their own travel costs. Thus, 20 to 30 incubator managers from a variety of countries learn from the Chinese practices and share their experiences.

Typology of Sponsors

Incubator sponsorship in China is undergoing an evolution, from exclusive sponsorship by the MoST's Torch Program to a more pluralistic pattern. In the initial stage (1987-1994), direct sponsors were mainly (1) the Provincial and Municipal Science & Technology Commissions (which are part of the MoST structure), and (2) the High Technology Enterprise Zones (also part of the MoST structure). After 1997, institutions such as universities also became sponsors of Torch incubators.

Sponsorship Pattern of Torch Incubators

Sponsorship has moved down to lower administrative levels instead of Provincial and Municipal S&T Commissions, incubators are increasingly sponsored by County and District S&T Commissions. The university incubators and university S&T parks come under the purview of MoE. The Returned Student Parks are under the aegis of the Ministry of Personnel.

The Tianjin and Zhenjiang incubators for laid-off workers are sponsored by the Tianjin Women's Federation and the Zhenjiang Economic Commission, respectively, breaking completely with the conventional model of Chinese technology incubators, and independent of the Torch program.

Two incubators sponsored by a public-private partnership of local government and private enterprises were established in 1999. One is the Nanjing Private Technology Innovation Center, organized by local government but funded by private enterprises, and run on a for-profit basis. Other signs of diversification of sponsorship include incubators sponsored solely by a private company in Tianjin, a state-owned enterprise in Beijing and a private Hong Kong company in Beijing.

1. Financing of China Incubators

Current and emerging forms of incubator sponsorship and financing are shown below.

• Government-sponsored, fully subsidized or self-financing: Fully sponsored and financed by the government. Token fees or no fees collected from tenants. In the most common form of government sponsorship, however, Government puts up all or most of initial investment, and the incubator is expected to become fully self-sustaining after an initial period, typically 2-3 years.
• University-sponsored, self financing: University-sponsored incubators typically charge relatively low fees which cover only a portion of their operating costs, with ongoing subsidization by the university.
• State Owned Enterprise-sponsored: Incubators in this category are established by SOEs (e.g., the Shanghai High Technology Development Zone Corporation) with an economic development mandate. The incubators are expected to perform a social function, but also to be economically viable. Some are motivated simply by the economic return from the incubator itself or the opportunity to commercialize technologies, invest in promising startups, etc.
• Public-private, self-financing: Typically sponsored and funded by both government and private firms. Some privately sponsored incubators are run strictly as a for-profit business.

Objectives of Incubator Program

As with sponsors, the objectives of China's incubators have changed and diversified over time. The primary objective has been to commercialize technical innovations.

Prior to China's economic reforms starting in the late 1970s, there were few structural mechanisms to move S&T research results out of the laboratory. In the absence of a market economy, enterprises were not market-driven and had little incentive to innovate or utilize new technologies. Likewise, in the absence of intellectual property rights, research institutes had little to gain by transforming research into marketable products.

With the transition to a market economy, this situation was no longer acceptable. By 1987, incubators were seen as an important means of bridging the gap between R&D and of creating favorable micro-environments in the face of the earlier unfavorable macro-environment. There is arguably a better justification for investing in incubators in a transitional economy until such time as the evolution to a market economy is completed.

While the vitality of collectively-owned township and village enterprises has been the primary force behind China's fast economic growth over the last twenty years, entrepreneurship received official sanction and encouragement from the government only recently. Starting in 1998, the government has implemented measures to foster both entrepreneurship and small enterprises. In the second decade of the Chinese incubator program, we expect that the objectives of small enterprise promotion, employment generation and empowerment will gain importance. At the same time, the NewMedia and Internet technologies will call for innovative new incubation structures, to identify innovators and accelerate their path to riches.

Organization

The Torch Program Office of MoST is responsible for organizing, developing, financing and guiding China's official technology incubator program. Provincial, county, municipal and district Science and Technology Commissions are responsible for implementing the program and establishing incubators in their local jurisdiction. In addition, National-Level High Technology Development Zones are also promoting technology incubators.

Sponsors do not play an active role in the governance of incubators. As a result, the concept of a fiduciary Board of Directors, bringing together various sponsors/investors and actively overseeing the work of the incubator management, is largely absent. Again, signs of change have begun to appear. The public-private partnerships at the new Nanjing and Chengdu incubators have established fiduciary Boards that participate actively in supervising operations. The Tianjin incubator for laid-off women workers is establishing an advisory board which will include representatives from a variety of organizations.

Management

Given their typically large size, Chinese incubators are generally lightly staffed, average, about 16 staff per incubator. Some 36 incubators had a staff of 10 or less, 9 had staffs of between 11 and 20, 9 between 21 and 30 and only 5 had a staff of 31 or more.

The organization structures of Chinese incubators vary, but they are typically headed by a Director, and include an Enterprise Department, responsible for services to tenant enterprises, a Real Estate Management Department, responsible for routine management of services in the main building, a Finance Department, responsible for bookkeeping and financial services for both the incubator and its tenants, and a General Office, responsible for office and secretarial services.

Typical Organization Structure

B. Effectiveness as an economic development tool

How does one judge the quantitative economic and financial effectiveness of Chinese incubators? What has been the government's return on its investment in the program? While detailed statistics for all Chinese incubators are not available, we do have good data for 77 incubators tracked by the Torch Program. In 1998, these incubators had an average floor space of 11,475 sq m, 54 tenants and 896 employees. Each had an average of 17 graduate companies, that employed 612 persons (at graduation). Tenant sales amounted to equivalent of about US $9.5 million average, with profits of about $625,000.

Data on the total cumulative investment (subsidy) by all levels of government in these 77 incubators through 1998 is imperfect, but the information available indicates that this figure is RMB 1,256,294,000, equivalent to about US $ 150 million. On a static basis (i.e., lacking in time series data on taxes paid by tenants, and abstracting from the present value of that income stream), government tax receipts from incubated enterprises would pay for the entire investment through 1998 in the 77 incubators in about five years. This excludes the additional value of the social benefits e.g., the number of direct and indirect jobs created, the induced increase in taxes paid by suppliers and customers, the promotion of an innovation culture and the value of the technological productsa nd services brought to market.

Surveys of limited samples of sponsors and tenants at Tianjin, Tsinghua and Hefei indicated overall satisfaction at the performance of these facilities.

Strengths and weaknesses

Strong government leadership in an era when market forces were still in the early stages of development has been the main determinant of the performance of China's incubation program. This has been both the source of many its strengths and of its weaknesses.

1. Strengths

• The size of the incubation program is impressive. No other developing country has been able to marshal the commitment and resources necessary (over US$ 150 million) to develop such a large network in the relatively short span of a dozen years.
• Significant numbers of enterprises, sales and jobs have been created, technologies commercialized and taxes generated. This is due in part to the heritage of centuries of scientific prowess and entrepreneurial energy. Further, after initial subsidy, Chinese incubators are generally required to become self sufficient on an operating basis.
• Chinese incubators have also been a means of creating cultural change. They have made contributions to bridging the gap between publicly-funded research and the marketplace, fostering entrepreneurial attitudes, and facilitating the re-entry of Chinese scholars from abroad..
• CASTIP, the incubator association, has been effective in promoting continuous interaction and learning opportunities among the managers of Chinese incubators. It has been active in promoting regular exchanges with incubator associations and professionals internationally. Managers have participated in conferences and training abroad and now invite developing country managers for annual courses in Shanghai.
• The program has been dynamic and continues to evolve. There has been a willingness to learn from mistakes and from the experience of other countries. It is changing its operating style from a ‘socialist incubator’ to a ‘market incubator with Chinese characteristics’. It has pioneered in such fields as the IBI and equity in tenant companies.Also, some of the best incubators such as Xian, Tsinghua and Beijing-Fengtai now have women as managers.

1. Weaknesses

• The program has had a narrow organisational base in the MoST's Torch Program. Little effort was made to create "ownership" by the communities in which incubators are located. Governance continues to be a weak link. Now, the imperative of economic development of the Western Region requires special measures to develop incubation for sustainable livelihoods where the business infrastructure is still weak.
• It has had a near-exclusive concentration on technology enterprises. The potential of incubators to address other social and economic issues has not yet been explored, and because the program is "owned" by the Torch (high technology) Program, the interest in extending its scope to new target groups has been slow in developing.
• Women and minorities are poorly represented. For the average person in the street with a bright entrepreneurial idea, it is generally still difficult to gain admission to an incubator simply on the strength of a good business plan.
• Again, the program is heavily focused on the "hardware" aspects of incubators. Physical space and facilities have had priority, to the detriment of the "software", i.e., quality business support. Importance of soft services is only now being recognized.
• The program has not been immune from the dynamics of politics. Local "empire building" is an important driver of the program. This skews the effectiveness of investment in the program, for example, by reinforcing the emphasis on bricks and mortar (from which empires can be built) and the relative neglect of services (less suited to the demonstration of local clout).
• Incubator managements are generally composed of civil servants who have little or no entrepreneurial experience. This further limits the quality of the "soft" business support services they can provide to their tenants.
• The services that are provided in-house are typically not on a cost-recovery basis. This limits their quality and sustainability. This of course is true in many developing countries where entrepreneurs have no personal savings and where they expect that all support from a government sponsored program must come free of charge.
• There is as yet no coherent national policy framework for incubator development. The policy treatment of incubators by local governments in terms of legal status, taxation, etc., varies widely. Few guidelines in terms of feasibility study templates, operations manuals, evaluation criteria, etc., exist. As in some other countries, incubators are launched and operated primarily on the basis of "intuition."

It must be acknowledged, however, that as the Chinese incubation program matures, it is in the process of purposefully addressing these issues. In terms of rapid expansion, the program has been outstanding. Qualitatively, incubators in China — as elsewhere — have much to do to enhance their performance. The China incubator planners are well aware of the actions needed.

C. Making Incubation Work

The strengths and weaknesses outlined above - based on our long involvement with the China program and this study – indicate some of the reasons why incubation works in China (and how it might work even better). This also offers some guidelines for decision making on starting and operating business incubator programs in other developing and restructuring countries. The lessons emerging are summarized below:

1. Commit to the core principles of venture creation with business incubation as one catalytic component of a national small enterprise development strategy. Enterprises (and employment) are created by companies, mainly through individual initiatives, and the appropriate role for governments is to develop the business infrastructure, supportive policies, trouble-free regulations and the requisite demand, for this to happen. The challenge is now to adapt incubation towards contributing to economic development in the western region of China.
2. Recognize that traditional business incubators – like other development services, in developing and OECD countries – require significant state support/subsidy, with the prospect of becoming reasonably self-sustaining at maturity. In turn, incubators do provide a variety of benefits: nurturing early-stage ventures to survival and success, diversifying the regional economy, and taking innovations to the market, with consequent direct and indirect employment, taxes, exports and economic growth. Benefits not readily quantifiable include promotion of entrepreneurship and networking cultures. In addition, in China (unlike the situation in many other developing countries), the government at all levels understands the basic incubation concept, has committed continuing ‘patient’ resources, and is generally satisfied with the results.
3. Do the homework, starting with survey of the demand for incubation services, analysis of the feasibility and business plan, identification of committed sponsors and realistic objectives, choice of the type of incubation facility needed, and mobilization of stakeholders and community consensus. This preparatory work then offers the best chances for future success, as in the case of the Tsinghua incubator. Without structuring operations for future sustainability, an incubator would continue to struggle and perhaps fail when the public subsidy inevitably declines in future. As incubation now serves a variety of functions, not just technology commercialization, better use has to be made of incubators for regional and rural development, for empowerment and alternative livelihoods, and other special purposes.
4. Choose a location and building that will facilitate the incubation process and enable the incubator to generate sufficient revenues. Recognize also that an incubator is not a real estate operation with big buildings and hardware, but essentially a nurturing environment. In most countries it is difficult to find a vacant space or finance to construct a new building. In China, on the other hand, the political and prestige considerations have resulted in vast buildings, which create commercial revenues but often at the sacrifice of value-adding support services for tenants.
5. Structure the incubator governance and organization to minimize interference and maximize assistance to the tenant companies. This in turn requires the careful selection of managers with entrepreneurial experience, their hands-on training at home and abroad, remuneration (and incentives) that reward performance. Researchers, professors or government officials do not usually make good incubator managers. Entrepreneurs, and especially, women entrepreneurs, often do. The Chinese managers have come mostly from local governments, partly because private business has emerged only recently and because massive state support comes with some strings attached.
6. Select early-stage companies with the potential to grow and create good jobs, and organize services specific to needs. In developing country situations, potential ‘incubatees’ have poor business management/marketing skills and limited finances. This requires that incubator managements take special pre-incubation/probation/post-graduation measures as well as consider variants of franchising of business concepts and vouchers for services. Many Chinese incubators now take equity in selected tenant companies and plan future venture capital operations.
7. Re-engineer the incubation process to take advantage of the exponential growth of Internet applications. In the US, Internet and New-media incubators have emerged recently where venture capital and consulting companies identify innovations and rush them rapidly to the capital markets, not in 2 to 3 years as in the traditional incubators but in 2 to 3 months in the new "accelerators". The advanced developing countries (China, India, Brazil, Malaysia, Egypt included) need to adapt these revolutionary trends.

In this context, the Shanghai DotCom Business Accelerator has just been established as a China-US joint-venture with strong partners, namely, the Jiaotong University (China’s premier technical institution) Withub Incubator, the Tianjin High Technology Innovation Center, Shanghai Webb Consulting, and Business & Technology Development Strategies LLC, New York.

8. Develop a range of counseling services, capacity-building and entrepreneurship development programs, and networking opportunities targeted to the needs of the tenants and affiliates. The success of the incubator has to be measured by the success of its companies, and the key to success is good services. Importantly, these services must be paid for through affordable fees, if they are to be efficient and sustainable. In China – and most restructuring/developing countries – it is expected that such services from government or donor sponsored agencies must come free, without fee. This mentality is changing, but slowly.
9. Promote the convergence of support for new venture creation, with the incubator serving as the platform where university, technology park, venture capital, private business and publicly-funded research come together, one reinforcing the other. Good examples of such synergy are the Technology Park Malaysia (which started operations with an innovation/incubation/enterprise center as the core, and provision for tech-based enterprises clustering around it)
10. Create the associations, chambers, clubs and other structures which can play an advocacy role in promoting the interests of incubators and their members among decision-makers, provide a platform for exchanges of experiences, expertise, training and trade opportunities, both within the country and with counterparts internationally. CASTIP performs these functions very well in China and abroad. Informal networks and NGOs, with some initial, external support, can be strengthened to help entrepreneures learn from each other and help themselves.
11. Finally, engage in continuous monitoring and evaluation of incubator programs, with actions to improve performance and better serve the members as their needs change. The increasing emphasis from donors and sponsors on effectiveness, impact and sustainability calls for serious efforts to collect and analyze data on incubators and their tenants/graduates, in order to enhance operations and justify the state subsidy provided. Components of such monitoring should be the bench-marking of performance (especially for a large program such as China’s), Survey of the changing needs of tenants, and their opinions on services provided.

Conclusion

In China, the first phase of the transition to a market economy is largely over. The incubator program has served as a means of facilitating this. It now needs to re-position itself to meet the changing needs of the new global environment. Whatever that role is, Chinese incubators a decade from now, like China itself, will be more diverse and decentralized than they are today. Moreover, given the strong base that now exists, this incubation program can be expected to continue to serve as a reasonably effective tool of technological innovation and economic development.