Despite the growing literature on business incubators, very little existing research focus on the incubation process (Hackett and Dilts 2004a) even when the NBIA identified it as a more important factor than the physical facility and the incubator’s configuration in determining success rate (2006b). Campbell et al. (1985) implicitly described the incubation process as being composed of four major activities, namely the diagnosis of needs, selection and monitoring, capital investment, and the provision of access to expert networks. Unfortunately, they did not elaborate further on each of the major activities nor did they propose a set of theories for it. Hackett and Dilts (2004b), on the other hand, proposed as a starting point, an incubation process model that is based on the theory of real options (For more information on the theory of real options, see Copeland 2002 and McGrath 1999). They state that the initial investment in an approved incubation applicant is a form of option creation while staged investments after each evaluation period is a form of option exercise. They further state that the process of incubation, similar to option creation and exercise, “confer future decision rights, preferential access to opportunities, access to a potentially valuable upside, and the ability to contain downside risk by limiting the cost of failure to the sunk cost of constructing the option, minus any remaining option value” (Hackett and Dilts 2004b). They then expressed their theory as follows:
BIP = f(SP + M&BAI + RM)
- BIP = business incubation performance;
- SP = selection performance;
- M&BAI = monitoring and business assistance intensity; and
- RM = resource munificence.
Thus Hackett and Dilts’ (2004b) real-options driven theory of business incubation states that the performance of a business incubator is determined by its ability to create options through the selection of “weak-but-promising” firms, as well as its ability to exercise those same options through monitoring, counselling, and infusion of resources, while controlling the cost of failure via stage-gate investments and forced exits of non-performing firms.
From this point onwards, I will be examining aspects of the incubator-incubation concept in better detail using the incubator-incubation concept map and real-options driven incubation model of Hackett and Dilts (2004a; 2004b). Stay tuned!
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