Why Incubators are in the Future for Municipal Economic Development

Of all the ways that municipal governments try to stimulate economic growth, business incubators are going to become increasingly important. Every economic review by every level of government highlights a set of challenges that business incubators can address. Innovation, competitiveness, management skills, and access to capital are all central to the incubation experience. Jobs, GDP, and tax revenue are measurable outputs from a modest investment of public funds.

This is red meat economic development. Incubators foster sustainable new companies that generate lasting employment for the cities that spawn them. They aren’t just scatter-shot inducements like R&D tax credits, property tax abatement schemes, or accelerated infrastructure spending. These are all forms of foregone and rebated tax revenue that may be appropriate tools for the senior levels of government trying to create growth by remote control from national and provincial capitals. But cities don’t have the taxing powers needed to hose money at their economic problems, and cities can act with the immediacy and dexterity required to accomplish more with less.

These are lofty claims for one form of investment over many others, and in reality, many business incubators fail to meet expectation. Lately NetGain has been looking at the performance of incubators from the perspectives of clients in different sectors and evaluating success in different jurisdictions. Among the lessons we’ve learned is that most incubators don’t achieve their full potential. But even an underperforming incubator can have a more positive economic impact, dollar for dollar, than broad based tax abatement or rebate schemes.

Of course, we’ve seen dismal outcomes too, but unlike other program and policy approaches to economic development, the investments are relatively low, problems can be quickly corrected, and resources can be redeployed. These too are characteristics of well-designed incubators.

Business incubators have always had a solid theoretical rationale. But we feel that they are practically suited to new realities of municipal economic development in a time of budget constraint. We need cost effective schemes that work on real life business fundamentals, that grow companies and lasting employment, tradable goods and valued services, and that nurture local entrepreneurs. Blankets of incentive schemes and stimulus spending have been exposed for the debt-makers that they are. Necessary though they may be at certain times, they are different in kind from targeted investment in rigorous business incubators.

In short, we’ve learned that business incubators are good for cities in hard times. And if the hard times aren’t here, just wait for the next budget cycle.

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