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                        University of Wisconsin - Extension
                     Center for Community Economic Development

                           COMMUNITY ECONOMICS NEWSLETTER
No. 253                                                           November 1997
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                Economic and Fiscal Impacts of a Business Incubator
                    by Deborah M. Markley & Kevin T. McNamara /1


Primary responsibility for designing and implementing economic development
strategies during the 1990s rests with state and local governments and
community leaders.  There is a recognition that not all communities can grow
through industrial recruitment, attraction of retirees, and development of
recreational resources. State and local policy makers are exploring a range of
policy options to support business survival and growth.  This Community
Economics Newsletter describes an evaluation of one option, the business
incubator: a locally based institution created to encourage and support new
business development.  While the number of business incubators in the United
States has increased rapidly from 200 in 1986 to 530 by 1994, there has been
little systematic evaluation of the impacts generated by business incubators.

Incubators provide a shared facility for start-up and young firms.  Tenant
firms benefit from business assistance services, networking opportunities, and
flexible, below-market rental space.  Incubators provide tangible benefits to
firms, such as lower operating costs and access to services, as well as
intangible benefits, such as moral support, advice from other tenants, and
access to information.  Tenant and graduate firms provide economic and fiscal
benefits to the local community through the creation of jobs and income and
the payment of state and local taxes.

A 1994 survey by the National Business Incubators Association found that new
incubators (less than two years old) are small, averaging 27,000 square feet
of floor space, and rely on local funding.  Start-up time for the incubator
averaged 18 months. More than half either did or expected to operate without a
public subsidy.  Start-up costs for incubators using renovated facilities,
including first-year operating costs, averaged $888,000.

In general, studies measuring the impacts of incubators examine factors such
as jobs created by incubator tenants and graduates, product innovation, number
of new business starts, success rates of incubator firms, and location in the
incubator service area after graduation.  These studies found higher success
rates for incubated firms than they did for most new businesses.  Most firms
stayed in the community after graduation--a fact that suggests that the
benefits of the incubator tend to remain within the community.  Job creation
per incubator firm is relatively small--fewer than 10 employees--but tends to
increase over time.  Incubators are best viewed as a long-term economic
development strategy, and both short- and long-run impacts must be considered.

State and local policy makers must choose appropriate economic development
strategies for their communities.  To make informed choices, they must compare
the relative impacts of an array of development strategies.  It is possible,
based on the impact analysis completed for the Decator, IL and Hutchinson, KS
incubators, to compare the cost of creating jobs through the incubator to the
cost per job associated with the recruitment of major manufacturing plants--a
primary focus of most state economic development programs.  In a review of
several industrial 

locations involving automobile manufacturing plants, Milward and Newman found
that the cost per job created ranged from a low of $11,000 at the Nissan plant
in Smyra, TN, to a high of $50,588 in the Subaru-Isuzu plant in Lafayette,
IN.2  The cost per job created in the Decator, IL incubator, over its seven
years of operation, was $6,580, considering only the 319 direct jobs created
by the incubator, as was done in the industrial recruitment study.  In
Hutchinson, KS, 50 jobs were created over seven years at a cost of $8,400 per
job.

Although these figures cannot be generalized to all communities, the
comparison suggests how the costs of job creation through a successful
incubator compare favorably to those associated with the successful
recruitment of a major manufacturer.  This information should be useful to
policy makers as they continue to allocate scarce resources among competing
economic development strategies.  It must be noted that, of the thousands of
communities competing for automobile manufacturing facilities during the
1980s, only six had the appropriate mix of factors leading to successful
recruitment of the firms discussed by Milward and Newman, whereas a
community’s potential for successfully creating jobs by establishing a
business incubator is much greater.

As communities and counties explore the option of job creation for low-income
residents, the support environment and shared services found in an incubator
may increase the prospects of creating sustained self-employment potential
over scattered site business starts.  Incubators represent a positive way to
re-cycle older buildings, but the support services including the incubator
manager is a key to continued success.

 
                                                                    Ron Shaffer
                                                Community Development Economist


1.  Drawn from Deborah M. Markley and Kevin T. McNamara, "Business 
Incubators: A Local Development Option," Choices, 3rd qtr. 1995: 13-16.

2.  H. Brinton Milward and Heidi Hosbach Newman, “State Incentive Packages 
and the Industrial Location Decision,” Economic Development Quarterly 3 
(1989): 203-22.