The Impact of Business Incubation Centre on Regional Growth in Western China

Contents

Tables and Figures

Acronyms

1. Introduction
1.1 Introduction to the Topic and Main Question
1.2 Structure of the Thesis
1.3 Data, Sources and Methodology

2. The Concept of Business Incubation
2.1 The Roots of the Incubation Model
2.2 The Incubation Process

3. Forms of Incubation Centre’s
3.1 University Business Incubator
3.2 Business Innovation Centre
3.3 Independent Business Incubator
3.4 Corporate Business Incubator

4. Science & Technology Programs in China
4.1 Major Science and Technology Programs until Today
4.2 China’s Mission to become a High-Tech Nation

5. Business Incubation in China
5.1 Development of Incubators in China
5.2 Spreading of Incubators in China
5.3 Incubators in China’s West

6. China’s Need for Regional Development
6.1 Roots of China’s Regional Disparities
6.2 China’s Regional Disparities since 1949
6.3 Regional Disparities in the Post-Mao Period

7. Understanding Regional Growth
7.1 Elements of Regional Growth
7.1.1 Location
7.1.2 Infrastructure
7.1.3 Human Capital
7.1.4 Political Incentives
7.1.5 Investment

8. Regional Growth in Western China
8.1 Extension of the Infrastructure
8.2 Development of Human Capital
8.3 Attraction of FDI
8.3 Technology Advancement
8.4 Summary

9. Impact of Business Incubation Centers on Regional Growth
9.1 Incubators and Location
9.2 Impact of Technology Parks on a Regions Infrastructure
9.3 Human Capital Development due to Technology Incubators
9.4 The Role of Policy with Regards to Incubators

10. Concluding Remarks on the Relevance of Business Incubation Centers in Western China

References

Tables and Figures

Table 2.1 Cluster publications 1953-2004

Table 4.1 Previous Science & Technology Programs in China

Table 5.1 Incubators in China’s Regions based on SPICA-Directory

Table 6.1 GDP by Regions and Provinces 1980-2000

Table 8.1 Length of Transport Routes by Region in 2000 and 2008

Figures

Figure 2.1 Roots of the Cluster-Theory

Figure 2.2 Incubator Incubation Concept

Figure 6.1 China's Regions according to the 7th Five-Year-Plan

Figure 8.1 Distribution of China's Population and High Education

Acronyms

illustration not visible in this excerpt

1. Introduction

1.1 Introduction to the Topic and Main Question

China’s regions face huge gaps in economic development, especially the western provinces lack far behind the coastal provinces due to uneven political attention in the process of China’s run for becoming an industrial nation in the past decades and its location in the hinterland of the country. Since the beginning of the new millennium China’s western region receives special attention by the central government in terms of economic development. The main reason is that the population in China’s underdeveloped west is more and more unsatisfied with its situation. The eastern provinces and coastal regions have reached a relatively high level of development while a greater part of the western rural regions are underdeveloped, generating growth rates which cannot compete with those of the East and having no means to foster development on their own. During the prior 20 years the disparities between China’s West and the East were increasing entailing the thread of social instability and riots which is something the government in Beijing fears most.

Regional growth received tremendous scientific attention since the middle of the 20th century which resulted in various approaches and theories. Different patterns have been developed to artificially generate growth. Due to the observations made in the American Silicon Valley and northern Italy, where agglomeration of industries caused sustainable regional growth, the model of business incubation and technology parks was developed. Since then governments all over the world, from developed industrial nations as well as from emerging nations and developing countries, adapt this model to attract foreign direct investment (FDI), steer investment and foster regional growth in areas where it is demanded. Although business incubation centers are popular among policy makers, scholars have a critical attitude towards incubators and their outcome and doubts have been raised about their effectiveness as a regional development tool. Among the reasons for criticism is the fact that their growth has occurred due to attraction of firms from outside their host region rather than through the formation of new firms.^[1] One of the main questions this thesis is trying to give an answer to is: Are Business Incubation Centers and Science and technology parks a suitable tool to foster economical growth in Western China?

1.2 Structure of the Thesis

In course of this work I am going to examine if there is an impact of business incubators in the environment of Western China on regional development and to what degree incubators and their related forms contribute to it. To assess this complex topic appropriately and to understand all aspects linked to it, this thesis is split up in sections explaining the various fields related to it separately. First of all I am going to introduce the concept of business incubation beginning by illustrating the history and development of it. Following the roots of the business incubation model, I am going to introduce different forms of incubation models existing today and the typical process of business incubation. As business incubators are mostly found in the IT and high-tech sector today and China is striving to become a high-tech nation an illustration of China’s science and technology programs of the past is following. The establishment of business incubators and science and technology parks is an essential part of China’s efforts to catch up with developed industrial nations as innovation is an important factor for regional growth today. The introduction of China’s science and technology programs is succeeded by an assessment of China’s business incubators and their spreading among the country. I am going to continue the thesis with an explanation of China’s need for regional development, explaining the history and the causes of the disparities. The section is followed by a general approach on regional growth where I identify the most important factors needed to generate growth. The Chapter following the general approach on regional growth sets business incubator in relation to those factors I identified in the prior chapter. It is examined to what degree business incubators affect those factors and therefore contribute to regional growth. Finally I am examining the impact of business incubation centers and science and technology parks on regional growth in the environment of Western China.

1.3 Data, Sources and Methodology

This thesis refers to various sources including scientific books, newspaper articles, data available on the internet as well as scientific articles in common journals. The latter provided most information on the topic as the research efforts in incubators as a development tool for regional growth is relatively new in the academic field. Research in agglomeration and clustering of industries is subject of research since the 1920’s when Alfred Marshall was the first who concerned himself with the topic. Scientific interest remained in observation of the processes taking place in natural industrial clusters until the late 1980’s when first efforts were undertaken to artificially create those. Business incubators, in particular in today’s form of technology incubators, are a younger phenomenon and their effects on growth are hardly to determine especially as they are of different forms and trying to breed new ventures in diverse environments. Hence literature on the specific topic is sparely existent. Therefore scientific articles published in related research journals were my preferred source and point of kick off for this thesis.

Furthermore I used data and numbers published by various Chinese governmental bodies. The Chinese Statistical Yearbook of various years was helpful in documenting the Chinese government’s efforts in building up the western Chinese infrastructure. I took data published by Ministry of Science and Technology (MOST) and related committees to illustrate China’s Science and Technology efforts. In addition papers from the Organisation for Economic Co-operation and Development (OECD) contributed to this work as they helped to understand the process of attracting foreign direct investment. Scientific Books on clusters, regional growth, China’s regional disparities, Chinese economy and the Chinese science and technology sector filled the gaps in between.

There is one issue and the source I used related to it which has to be mentioned. While assessing the actual situation of business incubators in China today, I faced big problems finding reliable information. Neither the responsible official bodies nor the associations the incubators are organized in were able to supply with exact numbers or data on the incubators existing up-to-date in China. In the end I used the most comprehensive data collection I was able to find which is the so called SPICA-directory. According to Chinese officials China hosted about 550 business incubators and technology parks in 2005. The directory I used is up-to-date and lists 168 incubators. Of course the directory does not cover all of the incubators operating in China at the moment, but I concluded that the incubators listed in the directory are of relevance as they managed to find their way into that international listing I used and therefore may be of interest for foreign investors. In the end attracting FDI is one of the important factors concerning their mission to generate regional growth. Chapter 5 gives further information on the issue of lacking incubator data in China and how I processed the numbers available.

In the course of this Thesis I often refer to business incubators as technology parks. Today business incubators are usually based in science and technology parks as the tenants located in it are mostly active in the field of information technology (IT) and high-tech. The term tenant is used for firms located in technology parks and incubators undergoing the process of incubation.

2. The Concept of Business Incubation

2.1 The Roots of the Incubation Model

The scientific foundations of today’s Business Incubators date back to the year 1920 when Alfred Marshall was the first economist concerning oneself with clustering of industries in one locality. He realized that small and medium enterprises (SME) in an industrial district often were affiliated with each other along the value creation chain. SME located in an industrial district use comprehensive strategies to achieve common purposes. This interdependence of the companies leads to knowledge spillovers, competition and therefore foster innovation within the industrial district. According to Marshall three important factors contribute to the concentration of industries: fast flow of information which leads to knowledge spillovers, a capable labor market and linkages to a strong local market. Marshall assumed that geographical concentration of industries automatically creates externalities from which the surrounding region would benefit. In addition Marshall found out that within an industrial district not just a purpose community of the companies was given, he identified social ties between distinct actors. During the 20th century several other economists recessed Marshall’s theory- among them Kenneth Arrow (1962) and Paul M. Romer (1986). Their scientific results, along with the ones of Marshall, became known as the MAR-Theory. MAR-Theory states that geographically localized knowledge spillover entail external economies and may result in increasing returns on investment and therefore a long-run growth in the host region it is located in.^[2]

Until the 1970s very few economists did research on industrial agglomeration, but it came back to the attention of economists because of processes noticed in the north-east of Italy. Due to concentration, specializing and strong networking firms in the area were able to compete with foreign low-price competitors. The outcome was a highly specialized economical structure and a dynamic agglomeration process in the area. The revival in coherence with the so called “Third Italy” led to new approaches in the field of industrial districts.^[3]

In 1986 GREMI (Groupe de Recherche Européen sur les Milieux Innovateurs), a French research group of social scientists focusing on networks, picked up MAR-Theory as well as studies about the agglomeration of firms in Italy and came up with the concept of Innovative Milieus. The initial idea of GREMI was that innovation neither is created within just one firm nor in a larger business environment, but through the integration of both and therefore through an efficient form of networking. According to GREMI members of an innovative milieu share a common course of action as well as similar culture of technology. To provide an efficient network its actors should come from diverse fields like politics, education, research and of course business. The innovative milieu’s strength is the overlapping of personal and business networks as well as its openness to outward actors and the ability to integrate them if necessary or desired.^{[4] [5]}

1990 Michael E. Porter came up with the Cluster-Theory in his scientific work on the comparative advantage of nations. His work was a more modern approach on industrial concentration and took globalization into consideration. He tried to ascertain why countries with similar factor-conditions specialize in diverse fields. While Marshall’s industrial districts concentrated on SME and their intraregional function to serve a more local market, Porter’s cluster could include firms of larger scale which are able to act on a global level while benefiting of a cluster’s environment. Furthermore Porter highlights that clusters contrary to industrial districts actively integrate institutions like research institutes and universities to improve their competiveness. In the early work of Marshall the focus is pointed on the benefits of cooperation and linkages between the actors within an industrial district while Porter’s work stresses the importance of competition between the different actors of a cluster to improve their ability to compete. According to Porter processes within a cluster lead to an increase of productivity, influence the speed of innovation and give incentives for the foundations of new companies.^[6]

The following figure shows a chronological development of the approaches and concepts of industrial districts:

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Figure 2.1 Roots of the Cluster-Theory

(Modified from Gutgesell (2006, p.35))

Next to the industrial districts of Third Italy another famous example for technology parks and industry clusters developed mainly by chance in the U.S. – the Silicon Valley. Beginning of the 1950’s Stanford University owned land in the southern part of the San Francisco Bay Area in Northern California and desired to make money from it. As the University was not allowed to sell the land because of imposed conditions by Leland Stanford (founder of Stanford University) it created the Stanford Industrial Park in 1951 and the Stanford Research Park in 1954 aiming to lease the land to interested companies or persons. Soon after the establishment of Stanford Research Park first firms settled, among them Hewlett Packard which was an ambitious young technology company founded by two Stanford graduates in 1939. The given environment (cheap business space and already settled, well-known technology firms as well as high qualified workers coming from the nearby University) was attractive to followers and served as a motivator for subsequent tenants. In the course of time the region developed and the number of innovations made in the area increased significantly.^[7]

After observing the processes taken place in Italy and in the U.S., economists and politicians concluded that similar developments may be initiated through appropriate measures in other regions as well. To fully understand what measures have to be taken to create an artificial cluster many economists concerned themselves with the topic. The following Table shows the number of articles, published in scholarly journals within the social sciences with the term 'cluster’, its synonyms, or its more distant cousins in the title or in the abstract from 1953-2004 and clarifies the increasing academically interest in the field.

illustration not visible in this excerpt

Table 2.1 Cluster publications 1953-2004

(Modified from Maskell, Kebir (2005, p.5))

As new ventures often fail during their early stages economists concluded that next to conditions like cheap business space, high qualified workers and an innovative milieu in the cluster’s area, supportive organizations should be created to provide new start-ups with the assistance they need to establish their business. One might assume that the failure of ventures is part of today’s business world and it is healthy for the market as it regulates itself, but there are interest groups which are driven by different thinking. Politicians keep an eye on the next vote and have to fulfill the demand of their voters for growth and a flourishing economy while private investors might believe that it is desirable to help weak but promising firms to avoid failure until they are able to survive on their own. Provide business assistance for start-ups as mentioned above is called breeding or incubating. Hacket and Dilts define business incubators as follows:^[8]

We define business incubator as a shared office space facility that seeks to provide it’s incubates (i.e. ‘‘portfolio-’’ or ‘‘client-’’ or ‘‘tenant-companies’’) with a strategic, value-adding intervention system (i.e. business incubation) of monitoring and business assistance. This system controls and links resources with the objective of facilitating the successful new venture development of the incubates while simultaneously containing the cost of their potential failure.^[9]

In general, evaluations of business incubators have shown a positive impact in terms of firm survival. In Australia for example is the failure rate of tenants located in an incubator within the first year about 8% while the nation’s average of failures among companies not located in incubators is about 32%. ^[10]

2.2 The Incubation Process

Every Business Incubator has an incubation strategy and a program the incubating entrepreneur is mentioned to run through. Incubators aim at assisting the incubates during the early stages of their business to prevent failure. Part of the incubation strategy issued by the incubation centre is the eventual absent of the tenants from the incubator at the end of the incubation process. According to Hacket and Dilts the incubation process of an Incubator necessarily includes at least the following main elements: incubatee selection, monitoring and assistance while infusing resources and finally the absent from the incubator after having established a self containing business.^[11]

illustration not visible in this excerpt

Figure 2.2 Incubator Incubation Concept

(Source: Hacket and Dilts(2004), p.47)

[...]

^[1] C.f. OECD(1999) p.11

^[2] C.f. Hu(2007), p.76f

^[3] C.f. Gutgesell (2006), p.37

^[4] C.f. Schuler(2008), p.22f

^[5] C.f. Asheim, Cooke, Martin (2006), p.14

^[6] C.f. Gutgesell (2006), p.23-25

^[7] C.f. Christopher Lécuyer (2007), p.1-13

^[8] C.f. Hacket and Dilts(2004), p.41-43

^[9] C.f. Hacket and Dilts(2004), p.41

^[10] C.f. OECD(1999), p.10

^[11] C.f. Hacket and Dilts(2004), p.44