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Правительство Российской Федерации

Федеральное государственное автономное образовательное учреждение высшегопрофессиональногообразования

"Национальныйисследовательскийуниверситет

ВЫПУСКНАЯКВАЛИФИКАЦИОННАЯРАБОТА

Натему: «Adaptive Strategies of Business Incubators during Economic Crises in Russia».

Савенков Е.С.

Москва, 2016г.

TABLE OF CONTENTS

Abstract

• INTRODUCTION
• LITERATURE REVIEW
• Evolution of Business Incubation concept
• Defining a business incubator and incubation process
• Measuring the performance of business incubators
• Screening Practices
• Networking
• Quality of Management
• Incubation process and its elements
• Strategic management in non-profit organizations
• Impact of economic recession on SMEs and NPOs
• Adaptive strategies in response to economic downturn
• METHODOLOGY
• CASE STUDY
• Peculiarities of Business Incubators in Russia
• State of affairs in the business incubator in 2014
• Crisis effects on the incubator
• Adaptation strategies of the BI HSE during the crisis
• DISCUSSION AND CONCLUSIONS
• REFERENCES


Abstract

Many studies have considered business incubators regarding their role in supporting small innovative companies, however, despite this attention, previous research has insufficiently covered the issue of incubating process and business incubator strategy. This study attempts to empirically provide insights into the nature of patterns and strategies of adaptation that business incubators in Russia initiate during economic downturns. The problem of incubator strategy adaptation during recessions has been totally neglected in prior studies. This research uses the method of a case study and argues that business incubators are highly dependent on external environment, and its strategy should be coherent with theeconomic situation in the country and government policy to meet expectations of stakeholders. Results from a case study of the HSE business incubator illustrate that the incubator employs certain patterns of strategy adaptation to the present economic recession in Russia particularly taking a pro-active position in fighting the crisis and focusing on elaborating more flexible incubation model with shorter incubation programs and less rigorous screening practices.

INTRODUCTION

This study aims at revealing the empirical evidence of adaptation patterns and strategies that business incubators in Russia undertake during economic crises.

Within this general purpose of the research, the following questions will be addressed:

· Challenges in measurement of incubator-incubatee success

· The impact of economic downturns on non-profit and for-profit organizations

· Existing incubation models and their features

· The development of strategic management in NPOs

· Adaptation strategies of business incubators in hostile economic environment

As only one BI is considered in the empirical part of this investigation, the generalization of the revealed adaptation practices to other Russian BIs is beyond the scope of the present research. This paper is, for the most part, a case study, which intends to evaluate the ascertained problem empirically under specific conditions of the HSE BI. Another serious limitation deals with the developing stage in incubation industry in Russia. There does not exist a commonly accepted theoretical framework on how the incubation process should be performed. This deficiency also provides some serious difficulties that cannot be overcome in this study. However, both limitations mentioned seem possible to combat in the future research.

This study might significantly contribute to the understanding of the nature of business incubation industry and identify its blind spots. As this research puts a greater emphasis on the strategy of BIs during economic crises, its findings might be of practical value for anyone who is involved in managing a BI. This practical impact is one of the main goals of the study since BIs' activities rely heavily on the economic situation in the country. Additional knowledge on how to adapt BI's strategy to economic crises could raise a particular interest to this issue within the business incubation society and stay relevant for another 3-5 years.

The present research contains parts in the literature review section from the previous paper called `Analysis of Business Incubators Role in Developing, Sustaining and Motivation of Start-ups' written by the author.

LITERATURE REVIEW

Evolution of Business Incubation concept

It is accepted that the first incubator was created in New York in 1959 and was called the Batavia Industrial Centre (Theodorakopoulos et al., 2014). After that several papers were published which proclaimed business incubators as a vehicle for economic development. This significantly increased its popularity, and business incubators started to appear in America. However, the diffusion was slow during the 60s and 70s. People did not still understand why they might need an incubator. However, there were the 80s and there came crucial changes in the U.S. legal system regarding intellectual property rights protection and understanding the importance of innovation (Hackett and Dilts, 2004). Since this raised the popularity of business incubators, there appeared a need for an official organization that would be a representative of all incubators. At that time, NBIA was created in the early 80s and the incubation industry started racing. The most significant period in incubation development took place during the late 90s, the era of dot-coms. There was a high demand for technology incubators because the media at that time convinced people that incubators were “capable of incubating and taking public infinitely scaleable, dot-com e-business start-ups less than a year after entering the incubator” (Hackett and Dilts, 2004, p. 58). However, those dreams never came true and the dot-com collapseof the year of 2000 seriously damaged the incubation industry. Europe, for example, was in such a condition of “frustration” for a long time after the crisis of 2000. By 2007, there were only 7% of existing incubators that were founded after 2000 (Hackett and Dilts, 2004). This situation is quite understandable as incubators were seen to be an instrument of entrepreneurship development, and when an instrument shows its uselessness,it is not easy to fix it. However, we can state that “rumors of the demise of the incubator-incubation concept are greatly exaggerated” (Hackett and Dilts, 2004, p. 59). The idea of a business incubator, as the history showed,can survive in economic crises and effectively adapt to the new after-recession business environment which is proved by the growing popularity of business incubators worldwide. Today there are more than 2000 incubators in Europe and America (Bruneel et al., 2014) and more than 200 in Russia (Ernst & Young, 2014). Then why do incubators appeal to the stakeholders of innovation, such as entrepreneurs, venture capital funds, governments and universities? From my point of view, this question has a strong psychological aspect. Both fledgling companies, governments and other stakeholders of innovation seek to find something that would make their lives easier and their work more efficient. Incubator in this situation represents a place which accumulates resources including knowledge, people, anatmosphere that might come in very handy for those who are to develop entrepreneurship in the region. That is why if there is even a vague chance for help many people and organizationswill use the opportunity especially in times of a recession.

What were the early incubators like and how did they change over the years? The answer depends on the side which we look at the issue from. We consider types of services that incubators provided at certain periods of time as a proxy for thedevelopment of business incubation concept.

There's a widely spread opinion that the evolution of business incubators can be divided into three stages on the basis of time periods. The first period took place in 1980-1990, the second term - 1991-2000 and the third one is 2001 - to date. These periods are characterized by different sets of services that most of the incubators offered their tenants to use. The first generation of incubators represented a rather simple system that put an emphasis only on cheap office space and shared facilities like aphotocopier, meeting rooms, kitchen and other things. In the 1990s there came an understanding that incubators had a greater potential than being just a shared office space. Various advisory and support services, and early stage networking were introduced to the industry of incubation. The beginning of the 21^st century was marked by deepening and developing those non-trivial services that appeared in the 1990s: the institution of mentoring and different educational programs started to play a more important role in incubator activities. Regarding services available to tenants, we know much about certain services they get but there's no data about what quality these services are (Allen and McCluskey, 1990). We have empirical evidence for European incubators in 2007 and we can say that more than 80% of surveyed incubators offered only four types of services (Aerts, Matthyssens and Vandenbempt, 2007). These were conference facilities (96%), networking (88%), business planning (86%) and Internet (85%) despite the fact that it is commonly accepted today that business incubator is not just a co-working where marketing advice, assistance in raising capital, pre-incubation, managerial training are left apart. This fact might seem quite surprising and, to some extent, illogical, though to grasp the whole picture and get a balanced understanding of the topic, we have to distinguish between different types of incubators that aim at various missions and have to considerdifferent stakeholders. We will soon discuss this matter in detail. However, at this point it is reasonable to bring up a connection between the evolution of business incubators in time and their strategic responses to challenges posed by theexternal environment and the major objective of the present research. The process of development of business incubator concept represents its flexible nature and a strong ability to change to be more efficient.One of the widely spread opinions about crises is that they are times that create opportunities for creative destruction (Schumpeter, 1943) which mean that crises force organizations to adjust.Business incubators are of particular academic and practical interest because they cannot be unequivocally classified as commercial or non-profit organizations and, therefore, it is not clear which methods, techniques and ploys incubators employ to adapt their strategy to the changing environments. Consequently, the central point of the study is to empirically elucidate patterns of strategic movements of business incubators during economic crises. In order to do this, first of all, we have to understand what business incubator is like from a variety of angles.

Defining a business incubator and incubation process

If we consider literature concerning business incubators we will see that many authors discussed this concept and tried to find out the nature of business incubators and whether this institution can be useful in entrepreneurship development.

However, we also find quite a number of contradictions and differences in understanding that make the analysis more complicated and topic blurred. The fundamental thing here which is worth discussing and taking into consideration is the definition of thebusiness incubator as a term. There is no commonly accepted definition of a business incubator. Nicholas Theodorakopoulos with colleagues made an effort to track how the term “business incubator” was understood in the period from 1985 to 2014 (Theodorakopoulos et al., 2014). Differences are so significant that truly it will not be a mistake to call those definitions totally different names. Experts call incubators a “facility”, “environment”, “shared office-space”, “organization” and other names. We have chosen two definitions that seem adequate to the present study andmy personal understanding of this term. The first one was proposed by Allen D. and Bazan E. (1990) where they see an incubator as a “network or organization providing skills, knowledge and motivation, real estate experience, provision of business and shared services”. The other one is suggested by Hughes et al. (2007): “A business incubator is a facility that houses young, small firms to help them develop quickly into competitive business”. These two definitions are quite different in their emphasis. Allen and Bazan see the main goal of incubators in providing services while Hughes with colleagues highlights the broader mission of a business incubator which revolves around various business support processes and management activities. The situation like this only proves that the incubating issue is still underdeveloped and quite controversial. Every researcher has to choose or create an appropriate definition of a business incubator that would suit the goals of the study. These differences in understanding of the concept create the heterogeneity in the literature and hinder the researchers from a holistic view of the problems pertaining to the topic of business incubation.

A possible reason for such a controversymight lie within classification problems related to business incubators. These organizations can be for-profit or non-profit, funded by thegovernment, university or commercial organization, provide different services for tenants and can be mixed. It is reasonable to consider the origins of these classifications and what they depend on. Aerts K., Matthyssens P., Vandenbempt K. (2007) distinguish three groups of stakeholders that are connected with business incubation. These are incubators, innovators and governments. Depending on the group of stakeholders that is prevailing within a certain incubator goals and structure will differ significantly. Incubator can financially benefit from the success of its tenants. In this case we are talking about afor-profit organization which has its share in startups. Innovators can be both fledgling entrepreneurs and investors who seek for new ideas. On the part of entrepreneurs they look for quality services provided by incubator and they also demand as much freedom as they can get. Investors are interested in reducing their risks. Consequently, they wish to cooperate with incubators and assess this cooperation according to clear criteria of effectiveness. Finally, thegovernmentaims at entirely different things. Government's missions in thecapitalist world are to develop entrepreneurship in the country, create jobs and improve its regional economies. Practically, thegovernment takes on investing duties. However, unlike other investors, thegovernment expects to get something more than simply money in return, some more long-term issues including increasing budget revenues, creating a free economy, raising the quality of life of its citizens. It is quite clear that since there are different stakeholders then there should be different types of incubators in order to meet expectations of their beneficiaries. Since most of the business incubators are not entirely commercial or non-profit the proportion of stakeholders' influence varies considerably from one incubator to another. If put under scrutiny almost any business incubator can represent a unique type because it contains an idiosyncratic mixture of stakeholders, facilities, tenants, local peculiarities and many other things.

Another deficiency in the extant literature deals with ways of putting incubation into practice or organizing the incubating process. In other words, there is limited research on business incubation models that would describe and assess methods that could be employedto develop, sustain and motivate a startup, which is a final product of business incubation.

Hackett and Dilts (2004) remark that a certain paradox exists in the literature because official organizations like NBIA proclaim that the incubation process is much greater than the incubation facility (Adkins, 2001) while most of the studies related to business incubators are confined to simply facilities that are provided for the tenants. The present research is largely focused on the incubation process rather than services provided for tenants since my particular interest lies in incubators' strategies and methods for reaching their goals. This reveals one of the central problems of the research that deals with the measurement of incubators success.

Measuring the performance of business incubators

Since business incubators often have more than one group of stakeholders the problem of evaluating incubator's success becomes significantly more complex.

Since we have already discussed the existing controversies in the definition of a business incubator and its variability in the situation of different stakeholders it is evident that success factors of incubators will also be different. However, there were efforts to create a universal list of criteria that should be taken into consideration when assessing business incubators. For example, Smilor R. and Gill M. (1986) made up a list of ten business incubator success factors. The list is: “on-site business expertise, access to financing and capitalization, in-kind financial support, community support, entrepreneurial networks, entrepreneurial education, perception of success, selection process for tenants, ties with a university and a concise programme with clear policies, procedures and milestones” (Theodorakopoulos et al., 2014, p.608). This list of criteria is more than innovative among other papers that deal with incubation criteria of effectiveness. Smilor and Gill tried to abstract away from “the numbers” like survival rate, thenumber of tenants, investors and experts, thenumber of jobs created and so on. These figures seem to be more illustrative at first view, but they miss on the dynamic nature of business incubators and the startups located in them (Phan et al, 2005) and neglect soft value-added contributions like psychological support, educational seminars and so on (Mian, 1996). However, you cannot see real problems and advantages of incubators behind those figures. A little example might help here. Discussing a survival rate of incubator graduates we can operate, for instance, with the statistics that were collected by NBIA in their report “Business Incubation Works” in 1997. The statistics say that 87 percent of all graduates of all incubators that are members of NBIA are still in business. First of all, what does it mean? Practically nothing if not compared with other figures. It would be kind of interesting to see what the numbers among non-incubated startups are. However, in real life it is almost impossible to get these figures compared due to different time periods, different methodology and different scale. However, we do have some statistics on thesurvival rate of non-incubated firms. U.S. Small Business Administration's Office of Advocacy has these statistics that say that “about half of all new establishments survive five years or more and about one-third survives ten years or more”

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Figure 1. Survival of startups in the USA. Source: sba.gov

Suppose we manage to compare these sets of statistics. However, there is no practical use in this. At least the present research is aimed at those factors that can be considered as the components of business incubator's long-run strategy and that can be reconsidered, changed, improved, repositioned in order to meet the expectations of stakeholders. I believe that quantitative indicators can only be seen as the secondary goals that an incubator is pursuing. Any number needs to be compared to be admitted as the ultimate aim, and the latter example of survival rate shows that it is almost impossible to reason one or another desired level because the fundamental factors of comparison differ. That is why I decided to use the Smilor and Gill list as a basis for understanding the business incubation process, and I chose three factors that seem to be the most important in a long-range incubator development. Iwill talk about screening practices, networking, and quality of management in incubators.

Screening Practices