A knowledge based framework for business incubation

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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.
In summary, I have shown that for the majority of business incubators in todays fast
changing world, the knowledge based view offers valuable insights for the
management of and the research on business incubation. It can be shown that
A KBV framework for business incubation
business incubators add value to Start-up firms because they create a place and
dynamic context for knowledge specialization and learning.
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