A knowledge based framework for business incubation
Transcrição
A knowledge based framework for business incubation
Paper to be presented at the DRUID Summer Conference 2006 on KNOWLEDGE, INNOVATION AND COMPETITIVENESS Copenhagen, Denmark, June 18-20, 2006 Knowledge specialization and transfer: A knowledge based framework for business incubation Andreas W.O. Böhringer University of Cologne Department of Economics and Business Administration [email protected] 2/28/2006 JEL - codes: M13, D83 A KBV framework for business incubation The entrepreneur has been described as the motor for innovation (Schumpeter 1950, Drucker 1985). At the same time Start-ups experience liabilities of smallness and newness, which might inhibit successful firm survival and growth. The concept of the business incubator has been proposed to counter these negative effects of market failure. Although the business incubator has been discussed for quite some time, theoretical reasoning has remained scarce. Especially the theoretical analyses on the level of the Start-up firm and its position within the incubator have received little attention. This conceptual paper is the first to introduce a knowledge based approach to answer the question of how and why the incubator adds value to the Start-up firm. I argue that the major advantage of the business incubator is its context for knowledge specialization, knowledge transfer and knowledge creation. The knowledge based view offers a sound theoretical basis for the analysis of the existence and role of the business incubator. The paper develops, on this theoretical basis, a dynamic framework for knowledge specialization and coordination, knowledge transfer and the boundaries of the incubator. I. Introduction Start-ups receive elaborated interest with policy makers and researchers alike. Young firms incorporate the potential for future innovation, industry development, job creation and tax revenue and are thus seen as the motor for economic growth and development. The downside of starting a business in an environment of high internal and external uncertainty is that young Start-ups experience high failure rates. Previous research has summarized the reasons for this phenomenon in the concepts of “liabilities of newness” and “liabilities of smallness” (Hannan and Freeman 1989, Stinchcombe 1965). Examples of disadvantages of young firms are diseconomies of scale, missing legitimacy with potential stakeholders and lack of managerial experience (Baysinger et al. 1981, Shepherd et al. 2000). One important tool for Start-up support and development is the Business Incubator. The concept of the business incubator is known for decades, but still lacks theoretical foundation. Researchers keep asking themselves why the business incubator can bee seen as an effective tool to 1) reduce fixed and search costs, 2) fasten learning and enable the development of organizational capabilities, and 3) provide credibility A KBV framework for business incubation to the young firm (Hackett and Dilts, 2004b). I offer a theoretical explanation for why incubators provide a place for learning and capability development, focusing on the second question asked. I will do so in firstly describing and defining the concept of the business incubator, secondly discussing the current state of business incubator research and developing the current research gap. The third part of the paper introduces the knowledge based view (KBV) as a theoretical base for the paper. I then develop a knowledge based approach to explain the concept of the business incubator and its boundaries. II. The business incubator Such as an incubator is used to breed chicken and to support early-born babies until they are strong enough to survive without constant medical support, it is the idea of the business incubator to shelter and support young and promising firms until they are strong enough to survive in rough markets on their own.1 Today the National Business Incubation Association (NBIA) reports about 1.000 incubators in North America (NBIA 2005), while the European Union identified 850 incubators within its borders in 2001 (ECEDG 2002). Phan et al. (2005) speak about 200 incubators in Asia. Definition Since the concept of the incubator has been introduced, scholars and practitioners have used different terms and categorizations for the many types of incubating organizations that have developed.2 Incubator organizations and similar concepts are labelled as technology or science park, innovation center, business accelerator, campuses, venture catalysts, venture service firms etc. (Halkides 2001, Hansen et al. 2000). I define an incubator as a local agglomeration of firms, usually within one building or in close proximity to it, in which an identifiable administrative entity (the incubator management) supports legally independent organizations during their Start-up and early growth phases. The contractual affiliation of the young company to the incubator is limited to the time it takes the young company to be able to survive on its 1 „incubare“ is Latin for „breeding“ The first incubator was opened in Batavia, NY in 1959, the first High-technology incubator was founded by the Rensselaer Polytechnic Institute in Troy, NY in the late 1970s (Halkides 2001). 2 A KBV framework for business incubation own, seizes to exist or exceeds a time limit set by the administrative entity. The incubators’ mission is to support the fast development of the incubatee to an economically independent organization. This is achieved through a nurturing environment created by providing various services on a comprehensive, one-stopshop basis (Bøllingthoft and Ulhøi 2005, ECEDG 2002, Phan et al. 2005).3 In this combination of new firm development competence, local agglomeration and financial and managerial resources the incubator represents a form of a dynamic network organization (Hackett and Dilts 2004b). While the first incubators were founded to revitalize run-down buildings or economically disadvantaged regions, today most incubators focus on the support of young firms in innovative, high-technology industries, e.g. IT, Biotechnology or Nanotechnology, due to the high potential policy makers and private investors associate with these innovative firms (Phan et al. 2005). Incubator types As divers as the terms and definitions are for the concept of the business incubator as divers are the categorizations of types of incubators (see for discussion on taxonomies Hackett and Dilts 2004b, von Zedwitz 2003). One dimension is that of the financial sponsor, which usually affects the objectives of the incubator. Publicly sponsored incubators, financed by city or regional development agencies, mainly focus on job creation and regional development (Carroll 1986, Kuratko and LaFollette 1987, Löftsen and Lindelöf 2002, Lumpkin and Ireland, 1988). Also, technology promotion is one goal of policy makers (Halkides 2001). University sponsored incubators aim mainly at commercialization of university research (Kuratko and LaFollette 1987, Rice 2002, Rothaermel and Thursby 2005), while investors such as venture capitalists (VC) seek to identify promising innovations and to gain profit from the growing value of equity shares, e.g. with an IPO (Allen and McCluskey 1990, Lumpkin and Ireland 1988). Similarly, corporations set up incubators to either develop intrapreneurial ideas independent from the daily business or to support 3 Note that this definition does not include the „virtual incubator“, which is defined by Hansen et al. (2000) as “an incubator that does not offer physical space for incubates”. Here, consistent with most other incubation studies, the agglomeration at a physical space shall be an important dimension of the incubator definition. A KBV framework for business incubation external young firms which seem to provide future strategic potential for new business or business extensions (Hansen et al. 2000). Another dimension is that of a possible focus of the incubator. Such a focus can be on a specific technology (e.g. biotechnology-incubators) or on a specific stage of company development (Campbell et al. 1985, Halkides 2001). The most important distinction is to be made between for-profit and non-profit incubators (von Zedwitz 2003). While VC-based and corporate incubators by definition are profit oriented, other incubators are either organized as for-profit or nonprofit. For-profit incubators have in recent years, especially during the “dot.com”boom received quite some attention with researchers and the media, but in reality only a very small minority of incubators are for-profit (about 10%) (NBIA 2005, Stevens et al. 2005). In the discussion of taxonomies of business incubators, some authors include a “mixed” or hybrid category (e.g. Rice 2002), because in praxi “not two incubators are exactly alike” (Bøllingthoft and Ulhøi 2005: 270). Most incubators are some form of collaboration of sponsors with multiple interests in the support of young firms (Phan et al. 2005). Thus, aside from the for-profit vs. non-profit dimension, most existing incubators are hybrids. Incubator services The definition of the incubator includes the notion of a comprehensive set of services for the Start-up. These services are the core of support and offered as a combination of material and immaterial services (Sternberg 1989). Material services include office space and facility management, often at below market rate and on flexible terms, shared office services and administrative support, such as secretarial and postal services (Albert et al. 2002, ECEDG 2002, Lumpkin and Ireland 1988, Mian 1996). Funding or support in the search for financing is also included in the incubators services (Hansen et al. 2000, Löfsten and Lindelöf 2002). Immaterial services include training, coaching, consulting and professional services such as business, technological and legal advice (Albert et al. 2002, ECEDG 2002, Hansen et al. 2000). As an information intermediary the incubator offers access to a network of partner firms for business and financial assistance (Mian 1996, Vedovello and Godinho 2003). Network contacts internal to the incubator between the individual incubatees A KBV framework for business incubation foster the development of a certain “innovative milieu”, encouraged or even managed by incubator management (Lichtenstein 1992, Lumpkin and Ireland 1988). Finally, the affiliation with a known and successful incubator provides Start-ups with increased visibility and legitimacy (Bakouros et al. 2002, Rice 1992). Incubator value added In providing this combination of services incubators seek to add value to the supported firms by 1) reducing fixed and search costs, 2) fastening learning and enabling the development of organizational capabilities, and 3) providing credibility (Albert et al. 2002, Allen and McCluskey 1990, Hackett and Dilts 2004b, Rice 2002). Research has found differing results of value addition. Colombo and Delmastro (2002), for example, found evidence of value added and faster growth of new technology based firm in Italy. Ferguson and Olofsson (2004) proved a higher survival rate for firms in Swedish science parks than for off-park firms. In studying the cost effectiveness of incubators in Finland, Abetti (2004) found that government funding per job created in incubators was well below welfare costs per person in Finland. On the other side, some studies question the value of incubators (Allen and McCluskey 1990, Mian 1996). Westhead (1997) showed that the number of patents and new products were not differing significantly between firms on and off science parks. Roper (1999), in evaluating the Israeli Technology Incubation Program, found little evidence for value added and cost effectiveness. Stevens et al. (2005) discuss evidence that for-profit incubators have been less successful in developing start-ups than other incubator types. III. Incubator research Streams of incubator research Research to define, describe and to explain the value addition and management of incubators is just as old as the concept itself. First, Economists and Scientists in regional development searched for the effects of incubators on regional development and employment (e.g. Carroll 1986). The next generation of incubation research used more levels of success measures. On the regional level, jobs generated, regional A KBV framework for business incubation innovativeness, founding activity and tax revenues were measured. On the firm level survival and sales and employee growth were discussed. Recently, scholars have focused on the management of for-profit incubators (e.g. Hansen et al. 2000) or on university incubators (Mian 1996, Rothaermel and Thursby 2005, Siegel et al. 2003). Research on the level of the incubatee and of the interaction within the incubator is still sparse, although studies have shown the importance of this level of analyses for incubation success (Rice 2002). During recent years, scholars also returned to categorizing the incubator concepts (e.g. von Zedtwitz 2003). Research gaps in incubator research During the many years of incubator research, scholars have pointed out the need for a theoretical foundation of the incubator concept, but the discussion on theoretical approaches has started seriously only very recently. Special issues of Journal of Business Venturing, Research Policy (on university-based technology initatives) in 2005 and the Journal of Technology Transfer in 2004 offer an interesting overview on the existing research, discuss a list of existing theories and whether their application may contribute to the understanding of the business incubator.4 These theories still wait for application to the concept of business incubation, with some notable exceptions. Rice (2002) defined business incubation as a co-production process. Stevens et al. (2005) were among the first to empirically test theory based hypotheses on business incubation in a quantitative study. In testing hypotheses derived from resource assembly theory, social capital approaches and the legitimacy argument, they only found evidence for the legitimacy-based view as an effective impact from incubators. Others have mainly used case study approaches to illustrate the applicability of theoretical approaches (e.g. recently Bøllingthoft and Ulhøi (2005) in discussing social capital theory and Tötterman and Sten (2005) in applying a Social Capital framework). Hackett and Dilts (2004a) conceptually develop a realoption approach to explain the raison d’ètre for business incubators, while others have called for the application of agency theory in studying the relationships between incubator management and incubatees and between incubator stakeholders and incubation management (Phan et al. 2005). 4 See Hackett and Dilts (2004a) for a discussion of a number of theoretical approaches and Hackett and Dilts (2004b) in another short summary of theoretical approaches that are used or may be used in incubation research. A KBV framework for business incubation In summarizing the state of incubation research Hackett and Dilts (2004b) conclude that still “most of this research is atheoretical … and theory is the lifeblood of any research area. If the area of incubator-incubation research is to advance in a theoretically meaningful manner beyond simple lists of critical success factors, then we must turn our attention from ‘what’ are the most important factors to ‘how’ and ‘why’ and ‘in what context’… these factors are interrelated.” Phan et al. (2005) in their overview of the literature state that theoretical approaches should ask “Why incubators and science parks are uniquely able to solve these types of market failure?”(p. 176). And the ECEDG calls for a better understanding “why some incubators appear to perform better then others” (2002: 18). Phan et al. (2005) suspect that the reason for the quite limited number of theoretical attempts to explain the concept of the business incubator might be that most incubators are non-profit organizations: “This renders standard economic explanation assumption invalid or in need of substantial modification” (p. 168). They also suggest that there might not be a general theory of business incubation. Given the number of existing theories that are discussed for application to the incubator concept it may well be fruitful first to test which existing approaches can contribute to our understanding of the concept. In answering these calls, this paper applies an existing theoretical approach, the Knowledge Based View (KBV). I argue that the incubator adds value to Start-up firms by fastening learning and enabling the development of organizational capabilities and that this value addition can be explained through a knowledge-based approach. In discussing the specific advantages of the business incubator, researchers need to disclose on which level of analysis the concept is discussed. Since there are some insights on the national, regional and university level, Phan et al. (2005) call for a focus on the incubator and incubatee level of analysis. Incubators, as differing as their goals may be, aim at supporting the successful development of start-ups. Therefore, the level of analysis applied here is that of the incubatee and its connection to incubator management, as these agents build the incubator. A KBV framework for business incubation IV. The knowledge Based View The knowledge based view evolved from the Resource Based View (RBV) of the firm (Connor and Prahalad 1996). It enhances this approach by integrating insights from several streams of research such as organizational learning, organizational capabilities, innovation and evolutionary concepts (Grant and Baden-Fuller 1995, Grant 1996a). In the RBV, rents are not generated alone by the environmental factors faced by the firm, but from the specific combination of scarce and valuable resources internal to the firm. The firm is then a bundle of resources and superior performance can be achieved by the unique combination and management of this resource bundle (Grant 1991, Peteraf 1993, Wernerfelt 1984). The RBV was developed further by integrating the concept of dynamic capabilities (Teece and Pisano 1994, Teece et al. 1997). Dynamic capabilities are defined by the ability to source, build and reconfigure competencies and resources internal and external to the firm to flexibly react to dynamic market changes (Eisenhardt and Martin 2000, Teece et al. 1997). Combining and enhancing these approaches the KBV identifies knowledge as the main and most important resource of the firm and the dynamic management of this resource as the main objective of firm strategy and organization (Grant 1996a, Liebeskind 1996, Kogut and Zander 1992). The KBV has been discussed as a theory of strategy (Boisot 1998, Grant 1996a) and a theory of the firm and organization, explaining the specialization in and transfer of knowledge internal to and between firms.5 Or: „an emerging theory of the existence, organization and competitive advantage of the firm which based upon the role of firms in creating, storing and applying knowledge” (Grant and Baden-Fuller 1995: 17). Eisenhardt and Santos (2002) provide a comprehensive overview on the different streams of KBV research, concluding that “KBV offers a number of useful and empirically-grounded insights into the multiple-level social processes through which knowledge is sourced, transferred, and integrated, within and across organization” (2002:140). Central to the KBV is the differentiation of types of knowledge. Several distinctions of knowledge have been proposed in recent literature, supported by thorough philosophical discussion of the concept itself (Kogut and Zander 1992, Spender 1996). For the goal of this paper, we follow the definition proposed by Liebeskind (1996: 94): Knowledge is “information whose validity has been established through 5 see Argote (1999) for an extensive discussion of different levels of and studies on knowledge transfer A KBV framework for business incubation tests of proof.” The most widely used categorization of knowledge in the conversation of KBV is along an epistemological dimension, differentiating between tacit and explicit knowledge (Nonaka 1994). Polanyi has introduced the idea of implicit (or tacit) knowledge, which is described as that “knowing how”, personal knowledge that cannot easily be articulated by the holder of the knowledge (Polanyi 1966). Tacit knowledge is described as difficult to codify, to articulate and to transfer, contextspecific, hard to confirm and to convey (Haas and Hansen 2005, Nonaka 1994, Smith et al. 2005, Spender 1996, Teece 1998). Explicit knowledge, on the other side, is defined as codified, easily translated facts and information or “knowledge about” (Smith et al. 2005, Spender 1996, Nonaka 1994) and not specific or idiosyncratic to the firm or person possessing it (Ambrosini and Bowmann 2001). While some define these two types of knowledge as distinct concepts, Spender (1996) and others argue that tacit and explicit knowledge are the two extremes on the same dimension with knowledge as a continuum: knowledge can be more or less tacit (Jasimuddin et al. 2005, Zollo and Winter 2002). From a strategic point of view tacit knowledge is the most relevant form of knowledge. Tacit knowledge is by definition more complex and immobile, since it is embedded in the individual agent and in complex organizational routines. This leads to the limited imitability of the tacit knowledge and to potential for sustained competitive advantage (Grant 1996b). McEvily and Chakravarthy (2002) empirically show that tacit knowledge acts as an imitation barrier for large performance gains. The production of goods and services requires the combination of different knowledge domains. Due to limited capacity for information processing the individual is not able to possess all knowledge necessary for the production and distribution of complex products and services (Grant and Baden-Fuller 1995). Markets are inefficient in the combination and integration of knowledge. In the case of explicit knowledge the knowledge owner has to reveal her knowledge to the potential buyer, thus allowing the potential buyer to integrate the knowledge in question without having to pay for it (Grant 1996a). In the case of tacit knowledge transfer in the market is nearly impossible due to its complexity, un-codifiability and context specificity. The firm, in contrast, provides a common context to more efficiently transfer tacit knowledge (Kogut and Zander 1996). Firms, more efficiently than markets, allow for knowledge specialisation advantages but at the same time for the A KBV framework for business incubation integration and coordination of knowledge and thus for learning (Decarolis and Deeds 1999, Demsetz 1991, Kogut and Zander 1992, Spender 1996). V. The problem of knowledge specialization in the small firm While technology- and product-knowledge is the main basis of the new firm, Start-ups are often characterized by knowledge deficits in managerial, market and administrative know-how (Terpstra and Olson 1993, Monck et al. 1988, Oldsman 1996). This is especially true in knowledge intensive industries such as biotechnology and information technology. Entrepreneurs usually start with one product or with the focus on one production technology, not with all knowledge necessary for successful firm foundation and growth. But what is the reason that the hero entrepreneur or entrepreneurial team that is hoped for in the literature, integrating all positive aspects for managing a successful company, is so seldom found? A basic assumption of the knowledge based view is that knowledge is the key productive resource of the firm and that this is especially true for tacit knowledge (Grant and Baden-Fuller 1995). Grant and Baden-Fuller also points out that knowledge is acquired and, in the case of tacit knowledge, is stored by individuals. But individuals have limited cognitive abilities, therefore breadth of knowledge can only be achieved by reduction in the depth of knowledge (Demsetz 1991). It is then efficient for individuals to specialize on specific knowledge for knowledge creation (Kogut and Zander 1992, Grant 1996a). Firms efficiently integrate the different specialized knowledge needed in the production of goods and services (Grant and Baden-Fuller 1995). Knowledge, just as other assets is subject to economies of scale and scope. Therefore, to fully exploit the advantages of knowledge specialization, firms need a minimum scale. Most emerging firms and Start-ups are just not big enough to hire the many specialists needed for managing the founding and early growth of the firm (Penrose 1995). And there is an extensive range of know-how needed. Legal regulations and requirements, management tools, the building of a company profile, market analysis, the search for employees, capital, suppliers and customers, etc. are some of the requirements that hit the founding team all at the same time. For the Start-up it is inefficient to integrate all specialized knowledge needed. Individual’s knowledge would only be used partially in the case of knowledge which is not critical for technology development. The indivisibility of resources would A KBV framework for business incubation lead to costly unused competencies in the new firm. Without the minimum size needed for efficient knowledge integration (Oldsman 1996), Start up firms have to rely on the market, strategic alliances or existing social relations to source necessary knowledge (Baum et al. 2000, Yli-Renko et al. 2001). I have argued that the market does not provide an efficient solution for the sourcing of tacit knowledge. Social relations and alliances in contrast have been described as one major source for entrepreneurs for support (Kale et al. 2000, Zahra and Filatotchev 2004), but the time consuming search for the right partner in the market leads to high search costs due to the high uncertainty where potential partners are located and which services they provide at what quality (Oldsman 1996). Also, new ventures are themselves a partner with a highly uncertain future and limited legitimacy. Potential partners may therefore be reluctant to commit themselves to an intensive cooperation and will provide services only at higher prices (Hannan and Freeman 1989). VI. Knowledge specialization effects in the incubator Intermediate solutions which are positioned „between“ market and hierarchy, such as networks, alliances, etc., might provide two knowledge sourcing strategies (Grant and Baden-Fuller 2004). A knowledge accessing strategy supports increased knowledge specialization on the side of both partners while offering access to this specialized knowledge. The second approach is a knowledge acquisition strategy, where the cooperation aims to integrate the partner’s knowledge (Grant and Baden-Fuller, 2004). The business incubator as a form of networked quasi-integration firstly allows for a knowledge accessing strategy for the young firms in order to fully exploit specialization effects. In early phases of company growth, the incubator allows the Start-up to concentrate on the development of the firms main technological capabilities. Incubator management then specializes on complementary knowledge which is similarly needed by all Start-up firms or at least similarly needed by that number of young firms that allows for an efficient provision of that resource within the incubator. Some of this knowledge can just be outsourced to incubator management, since the incubatee might have no long term need for acquisition. An example is knowledge about firm formation or business plan competitions. Other knowledge might still be important for the young firm in later stages of development but might just distract the A KBV framework for business incubation entrepreneurial team from other important issues. One example is public financial support programmes for young firms. The scanning of the large number of different programmes that is offered by countries, regions, and cities could use up most of the time of an entrepreneur. Incubator management specializes in such services for the young and small firm. This specialized knowledge not only allows for economies of scale and scope but also for learning curve effects, since incubators continuously support young Start-up companies. In using incubator services, the young firm is able to substantially reduce search-, legitimacy- and other transaction costs which it would face in establishing a network of its own. Given the newness of the entrepreneurial team it can be assumed that, where there are not already proven contacts to outside sources in existence, the long-term experience of the incubator will provide qualitatively better and more reliable services and partners than the entrepreneur might find herself.6 VII. From knowledge coordination to learning in the incubator I have argued that the business incubator offers the advantage of efficiently providing specialized knowledge to a number of firms in similar situations. But, as Grant (1996a) points out, specialization advantage is just one side of the story. Specialized knowledge will only lead to value addition if it is combined in the production of goods and services with other specialized knowledge. If the young firm does only outsource specific supporting functions to the incubator, it will never be able to develop the different competencies to survive on its own. For the firm to develop competitive advantage, a superior product alone is not enough. Firms need to develop organizational capabilities which allow for the efficient exploitation of internal and external resources and dynamic capabilities for the reconfiguration of its organizational capabilities. To be of strategic relevance, such capabilities can not be grounded in external sources alone but are based on long term internal development. Therefore, the young firm needs to develop or acquire knowledge resources that it might need in later stages. Business incubators do not only provide access to their specialized knowledge but also provide the context for knowledge acquisition (Peters et al. 2004), allowing for a knowledge acquisition strategy, the second advantage 6 Let aside the higher bargaining power of the incubator as a whole in comparison to the single Startup firm. A KBV framework for business incubation networks provide (Grant and Baden-Fuller, 2004). The incubator can therefore be described as an organizational mode of quasi-integration that dynamically provides knowledge specialization and coordination and knowledge transfer, with changing emphasis during the process of the growth of the young firm. With the growth of the firm incubator services, such as coaching or training, aim for the increasing acquisition of knowledge on the side of the incubatee, reducing the amount of knowledge substituted by incubator management and allowing for the development of new knowledge and learning capabilities on the side of the young firm. An organizational mode to support the coordination of specialized knowledge, the transfer of knowledge and the creation of new knowledge needs to come close to the mechanisms the firm offers for knowledge transfer and application. I show in the following that the business incubator concept integrates specific characteristics which allow for knowledge integration and transfer superior to other network solutions and the market. Connor and Prahalad (1996) argue that the advantage of the firm over the market for knowledge application builds on the effects of knowledge substitution and flexibility. In the firm, the manager substitutes for part of knowledge an employer needs for doing her job, in that the manager has the right to advice the employee to fulfil a task without the need for the employee to fully understand why the task needs to be done. This limits the need to transfer knowledge. The flexibility effect economizes on the cost of re-contracting, since employment contracts do allow for adjustments of employee’s responsibilities. Grant (1996a) names four mechanisms which in this hierarchical system of the firm are used to efficiently integrate the knowledge of the organizations members. 1) Rules and directives translate tacit knowledge into explicit knowledge in the form of plans, programmes, schedules, communication systems etc., 2) sequencing divides tasks into relatively independent work packages, thus reducing the need to access all knowledge relevant for overall task completion, 3) routines, as learned and automated reaction to stimuli substitutes for coordination and 4) group problem solving applies for the coordination of more complex tasks. Grant (1996a: 118) points out: „Once firms are viewed as institutions for integrating knowledge, a major part of which is tacit and can be exercised only by those who possess it, then hierarchical coordination fails“, therefore it is not the topdown hierarchy of authority which builds the basis for the development of rules and directives, but specialists’ role definition. A KBV framework for business incubation If incubators do not employ authority-based relationships, which help to efficiently apply rules, directives and routines (Grant and Baden-Fuller 2004) and if the above mentioned formal coordination mechanisms, which are needed for knowledge integration, but do not support the transfer of tacit knowledge, how is the incubator a concept for the cooperation of specialized agents for efficient knowledge transfer and thus learning? I argue that the incubator forms a voluntaristic social community, which provides a context for knowledge integration, learning and safeguards against opportunistic behaviour. This is achieved through the combination of spatial agglomeration, frequent and long term interaction, the level of common knowledge, goal congruence and identity. Spatial agglomeration The importance of proximity for successful knowledge coordination and transfer has been discussed in various fields of research (Almeida et al. 2003, Keeble and Wilkinson 1999, Porter 1998, Pouder and St.John 1996, Staber 1996). Especially for the coordination and transfer of tacit and strategically important knowledge proximity is crucial (Oinas and van Gils 2001, Athanassiou and Nigh 2000). The concept of the business incubator, defined as a spatial agglomeration of Start-ups, additionally often close to additional network partners, such as universities or research centres, clearly uses this insight (Phillimore 1999). Frequent and long term interaction Tacit knowledge is context specific and socially constructed and can only be transferred or learned in its context of development or application in working practices (Brown and Duguid 1991, Eisenhardt and Santos 2002). Members of the incubator experience an extended history of interaction with each other, while the specialization and close proximity increase frequent interaction, not only on a professional, but also on a social basis. Incubator management or a neighbouring Start-up firm are just the easiest way to go for advice or to exchange opinions about the firm and its development. Additionally, incubators usually provide meeting opportunities, such as a cafeteria and joint lectures and programmes on topics A KBV framework for business incubation interesting for all young firms in the incubator. These incubator characteristics build the basis for the development of frequent and social interaction, and thus for the development of common routines and social rules and for exchange of both explicit and tacit knowledge (Cavusgil et al. 2003). The level of common knowledge Knowledge specialization is most efficient when the knowledge needed for the production of a good or service each party involved possesses is distinct from that of others. But for coordination, some common understanding is needed. For effective knowledge transfer, this knowledge overlap might even have to be bigger than for knowledge coordination. Kogut and Zander (1992) and Lane and Lubatkin (1998) argue that a common stock of technical and organizational knowledge facilitates the transfer of knowledge, due to better understanding between the parties. Similar education, experiences and competences of the partners involved leads to a better understanding of the language and concepts of each other. On the other hand, nor incubatees nor incubator management need knowledge they already possess. Therefore, incubator management is usually specialized on knowledge complementary to the technological knowledge incubatees base their firms on. But often, if a technology specialist is not part of the incubator management team (e.g. as is often the case in incubators that specialize on a specific industry), members of the advisory board provide technological background to support mutual understanding between the parties involved. The long-term interaction between incubator management and incubatee additionally supports the development of common understanding through shared experiences, language and meaning. Goal congruence The coordination of specialized knowledge in the incubator is made possible through - mostly informal - mechanisms. But for the transfer of knowledge close cooperation is necessary. Grant (1996a: 112) points out that the main problem in cooperation is “reconciling the conflicting goals of organizational members”. Most incubators are non-profit entities. Their goals, such as the increase in regional competitiveness, tax returns, reduction of unemployment and increase in more qualified jobs are in the same direction that those of long term growth and development young firms follow. A KBV framework for business incubation Where incubator sponsors and management focus more on short-term returns or aim at the appropriation of the incubatees’ core knowledge, incubators may experience conflicting goals between incubatees and incubator management, thus experiencing less motivation to fully cooperate on the side of the incubatee.7 The incubator as „identity“ The KBV argues that the firm is superior to the market in that it builds a voluntaristic social community, which provides a context for knowledge integration and learning. Especially the teaching of tacit knowledge requires frequent interaction through a common language or code (Kogut and Zander 1992). In their 1996-paper Kogut and Zander stress that it is the “identity” of this social community, which structures knowledge coordination and learning. Where individuals identify themselves with an entity, they are motivated to take over a role as a part of the community towards a common goal. Identity includes the development and acceptance of conventions and routines, the development of trust and thus allows for knowledge integration and transfer and the reduction of opportunistic behaviour. The business incubator as a concept holds some important characteristics which lead to the development of a community with an identity of its own. Firstly, Start-up firms usually join the incubator on a voluntary basis, which implies that they already accept that they lack some knowledge for (more) successful growth, therefore accepting some role differentiation in the cooperation. Secondly, incubator management, through its business concept and the experience with other incubatees, defines its role as a provider of specialized knowledge about solutions for early growth stage problems, as an information intermediary and a network broker. Thirdly, the agglomeration of young firms, experiencing similar problems motivates the exchange of experience and fulfils the psychological need for social contacts with individuals in a similar context. If, fourthly, the Start-up firm does not fear opportunistic behaviour from its partners in the incubator, the combination of all these factors leads to a form of quasi-integration and the development of identity. The more the members of the incubator identify with the 7 Most authors that discuss business incubation in the context of economic theories argue for agency problems with the incubatee as the agent and the incubator management as the principal. From the standpoint of the incubatee this might just be reversed: the Start-up firm selects an incubator to receive support for further development and has to make sure that its core knowledge is not appropriated by the incubator management in order to be given to other Start-ups or third parties. A KBV framework for business incubation incubator, the more likely will strong ties, common accepted conventions and routines and trust emerge between the agents (Kogut and Zander 1996). VIII. Summarizing incubator characteristics for knowledge coordination and learning The combination and interaction of spatial agglomeration, frequent and long term interaction, the level of common knowledge, goal congruence and identity provides the basis for knowledge integration, learning and the reduction of opportunistic behaviour. I will summarize this relationship in the following. Incubator effects in coordination and learning The members of the incubator are legally independent organizations. This implies that some mechanisms the firm offers for knowledge integration and learning are not applicable. The incubator as a form of network organization on the other side offers the flexibility for specialization of knowledge where not all knowledge is needed by both agents, but also for the transfer of knowledge which is complementary to the knowledge of the other agent and crucial for independent operations in the long run. The incubator concepts does so by combining a set of factors which support both knowledge coordination, learning and even the development new knowledge. The self-enforcing interplay between close proximity, long term commitment, frequent interaction, goal congruence and identity forms a social community, quite similar to that of the firm, where commonly accepted conventions and routines evolve and where common symbols and language are shared. Rules, routines and shared language and understanding have been described as efficient mechanisms for knowledge integration, while - additionally - close, long-term interaction and social identifying increase the insight into working practices and contexts which build the basis for the development and understanding of tacit knowledge. This combination builds a context of its own, facilitating the development of new knowledge, appropriable by the member firms (Nonaka 1994). This picture of the social community of incubation provides a sound theoretical explanation of the superiority of the concept of the business incubator above other solutions that do not integrate the characteristics described (such as the market, the A KBV framework for business incubation search for individual network partners or support programs which focus on single transactions or support services). But this picture could look to optimistic, since social bonds might not alone be strong enough to explain the existence of the incubator (Foss 1996). Opportunism and Learning Although some important contributions to the KBV have argued for the explanatory power of this theoretical approach without the notion of opportunism (Conner and Prahalad 1996, Kogut and Zander 1996), it can not be ignored as an important restricting force in the cooperation of agents (Foss and Foss 1999). We therefore include in our basic assumptions the possibility and motivation of opportunistic behaviour of individuals. Opportunistic behaviour is efficiently reduced by the firm through hierarchical contracting and formal and social control mechanisms (Grant 1996a). This is more difficult in network modes of organization and thus in the incubator. Not every transaction during the time of cooperation can be defined specifically, increasing the costs for formal contracting and re-contracting. Informal, self-inforcing safeguards, based on trust and relational embeddedness are more efficient in long-term alliances, because of self-monitoring, the avoidance of contracting costs and low adjustment costs over time (Dyer and Singh 1998). The incubator provides the contextual factors for the reduction of opportunistic behaviour through firstly, the close interaction and social relationship within its boundaries, as described above. The emerging trust facilitates inter-firm learning (Kale et al. 2000). It develops in long-term relationships, but also because the behaviour of all parties is highly visible to everyone at least within the agglomeration and because the cooperation is aimed at a long term relationship. Thus opportunistic behaviour may work out once, but in the log run would lead to sub-optimal results for all parties or to early termination of the cooperation (Grant and Baden-Fuller 2004). Secondly, goal congruence reduces opportunistic behaviour and enhances motivation for cooperation (Grant 1996a). Start-up firms might be reluctant to share their technological knowledge, achievements and problems with incubator management, especially in industries where first mover advantage is crucial. This might inhibit the development of close, frequent and personal interaction in the first place. Where incubator management can A KBV framework for business incubation use knowledge about the Start-up firm to acquire large parts of the rents the knowledge of the firm allows for, incubatees might never be willing to cooperate with incubator management in the specialization, integration and transfer of knowledge (Nickerson and Zenger 2004). Goal congruence of both parties involved reduces this problem. This might explain why researchers have found for-profit incubators and incubators designed to integrate young firm’s technology to be less successful than non-profit incubators (Stevens et al. 2005). IX. Boundaries of incubation So far we have discussed the advantages of the business incubator concept for the development of Start-up firms. There remains the question where the boundaries of the incubator should be. Since the incubator is comprised of legally independent firms and defined by the contractual agreement of incubator membership, its internal and external boundaries could be defined along legal these definitions. But for an efficient dynamic organization of specialization and integration this segmentation is too simple. So, we need to define three boundaries: Where is the border between incubate and incubator management? Where is the boundary between the incubator (mainly incubator management) and its network? And finally: What is the time limitation for incubatees’ incubator membership? Incubator and incubator management Grant and Baden-Fuller (2004) argue that it is most efficient for the firm to concentrate on its core capabilities, i.e. those capabilities that lead to competitive advantage (Leonard-Barton 1992). The source of competitive advantage seldom is technological knowledge alone, but a complex combination of different functional knowledge. This combination is not in existence from the day of firm foundation but develops over time. Start-ups first focus on the technological knowledge which differentiates its product or service from that of other solutions available. The small size of the firm does not allow for efficient specialization on complementary knowledge, e.g. managerial, marketing, strategic and logistical knowledge. This is especially true for high technology Start-ups, which focus more on technological questions and R&D tasks due to personal motivation and the high complexity of the A KBV framework for business incubation technology employed. The Start-up in the incubator will therefore focus on the development of its product or service, “outsourcing” all activities to the business incubator management, where the young firm’s small size does not allow for efficient specialization. Incubator management will focus on that knowledge, where its specialization effects (i.e. economies of scale and scope of generation and application of knowledge) are higher than those that can be achieved by the individual incubatee. This is the case where indivisibilities of tasks exist and where these tasks are needed by more than one incubatee. The division of knowledge between incubatee and incubator management is not static because it is crucial that the young firm integrates the knowledge necessary for long term success gradually over the time of incubator support. With the growth of the firm and the consolidation of the core technological knowledge more and more tasks can be efficiently provided within the firm, e.g. once firm size allows for the costs of a specialist to pay off. Then, the boundary between incubator management and incubatee is the size of the Start-up management team to provide enough cognitive capability to efficiently integrate functional tasks without sacrificing core knowledge and the efficiency of provision of indivisible tasks. The partner network Incubators will also rely on a broad network because it is more likely that novel information will be accessed through a number of arm’s length relationships rather than through relationships characterized by strong relational ties described above, which facilitate the integration and transfer of tacit knowledge (Dyer and Singh 1998). For the access to a broader network incubator management takes over an intermediary role providing a bridging tie to possible partners (McEvily and Zaheer 1999). The second question is then to decide which knowledge should be provided by incubator management and where incubator management should rely on a network of partners, which is often described as an important success factor for the business incubator (Mian 1996, Vedovello and Godinho 2003). Firstly, if it is not only inefficient for the Start-up to integrate a specific task, but also for incubator management, then the incubator will use its network. Secondly, and more importantly, it is only efficient for the incubator to source knowledge from external providers where that knowledge A KBV framework for business incubation is in explicit form. Tacit knowledge which calls for strong ties to be transferred will more likely be provided within the incubator. Knowledge which can be clearly expressed in a product ready to use is efficiently provided by markets. Still, there are advantages for the incubatee to access that knowledge through incubator management. Incubator management usually has more knowledge about possible network partners, therefore reducing time and costs for partner search and can economize on economies of scale, where that explicit knowledge is needed by more than one incubatee. An example is a patent lawyer. It is not efficient to include one in the incubator management team, but the incubator can due to its long term experience select an effective lawyer and might even be able to negotiate a better deal for its incubatees then a single Start-up could do. Limitation to incubator membership If the incubator provides an efficient organizational mode for successful Start-up development and growth, why should the membership of the individual incubatee be limited in time? And how long should that time frame be? I have shown that in task division it is efficient to centralize knowledge for the solution to common Start-up problems with incubator management. In early stages of company growth almost all firms struggle with the search for capital, questions of organization, search for strategic partners, customers and suppliers, the fulfilment of legal and tax requirements, etc. With the growth and success of the individual firm the problems individualize and the advantages of common problem solution diminish. Also, with the growth of the firm there comes a time, when the minimum efficiency scale is reached which allows for the integration of all relevant knowledge (Penrose 1995) and the management of an individual network. A third reason for diminishing advantages of incubator membership after a period of time are learning effects internal to the firm. Once the most important events in the firm’s history (i.e. times of crises, successfully implemented R&D projects and first product introductions) have been experienced with the support of the incubator - the firm should have build up enough competence to handle similar situations without the need to coordinate support within the incubator. Then the individual firm has developed the managerial resources necessary to independently fully exploit the existing technological resources A KBV framework for business incubation (Penrose 1995). In the words of Grant and Baden-Fuller (1995), the point of separation occurs when the firms product and knowledge domain match. X. Conclusion The concept of the business incubator has been used for decades as an effective instrument to support the regeneration of regions and the development of young firms. Today it is especially employed to provide the right mix of supportive services to high technology firms, which face high developmental risk combined with stark need for financial and managerial support. Cities, regional and national governments, venture capital firms and large corporations use the concept of the business incubator to support the fastened development of entrepreneurs and entrepreneurial teams to gain first mover advantages in promising industries. Despite of its importance in entrepreneurial support, research in business incubation has remained mostly descriptive and anecdotal. Only very recently, scholars have started to discuss theoretical foundations for the concept of the business incubator. Recent research has pointed out that there still exists a wide theoretical gap on the question why incubators should exist. This conceptual paper adds one, but one important, step to close this gap. I have developed a knowledge based approach to explain why the incubator is an advantageous concept for successful Start-up development. Knowledge is the most important resource of the firm and those young firms that manage to integrate, apply and update the knowledge needed to develop competitive capabilities will develop a basis for long term economic success.8 I have based my argumentation on four assumptions. Firstly, knowledge (especially tacit knowledge) is the most important resource of the firm and knowledge is difficult to trade in markets (Grant 1996a). Secondly, knowledge is subject to efficiencies of scale and scope. Thirdly, Start-up firms lack some important knowledge resources, experience efficiency deficit in integrating the missing resources and do have disadvantages to access this knowledge in partner networks. Fourthly, opportunistic behaviour of agents has to be expected and its likelihood of occurrence influences the motivation for cooperation. 8 I do not reject that there might also be cost advantages for the Start-up if the incubator offers material services at subsidized rates. But, as I have argued above, immaterial should have by far a higher impact on the successful long term development of the young firm. A KBV framework for business incubation Based on these assumptions, I have shown that the business incubator offers the advantage of specialized knowledge, knowledge transfer and the creation of knowledge. The business incubator builds a social community organized by common conventions and routines which are based on trust and a common identity. This environment facilitates the coordination of specialized knowledge and the transfer especially of tacit knowledge. In addition to that, the incubator acts as an intermediary offering one single, specialized access to a broad network of explicit knowledge, reducing search time and transaction costs for member incubatees. The context of knowledge transfer, provided by the incubator, differs from a market and intermediate solutions in that it limits threats of opportunistic behaviour and more efficiently allows for the development of long term relationship under close spatial proximity, supporting both the coordination and transfer of tacit knowledge. Finally, I have argued for a dynamic approach of business incubation, where the long-term relationship and the increasing shared context facilitates a shift from knowledge outsourcing to knowledge coordination to knowledge transfer and learning and to the creation of new knowledge in order to develop a self-preserving, successful firm. To efficiently manage the process of incubation, we have applied the arguments developed so far to identify to decide for the boundaries internal and external to the incubator. These boundaries are to be drawn around changing specialization advantages and the differing requirements for the efficient transfer of different forms of information and knowledge. The analysis of this paper focused on the micro-level of the incubator-incubatee dyad. It may not provide a sole theoretical base for the many questions that incubator managers and researchers face in the operation and application of the incubator concept, but it may build a basis for the further discussion of the concept of the business incubator on the level of the very focus of the concept: the incubatee level. Our argumentation has focused on business incubators, but its insights might also be useful for the effective and efficient management of cross-functional project management internal to the firm. 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