Rural Development News-Fall 1998
Measuring the Success of
Economic Development Tools
Business Incubation in Wisconsin and Illinois is the first report in a series designed to compare traditional
economic development tools with new wave tools. The series is based on the project “Measuring the Success of Economic
Development Tools,” funded by the North Central Regional Center for Rural Development.
The project identified three categories of traditional economic development policies and four categories of new
wave economic development policies. One of these new policies or tools is business incubation, a strategy that
has become widely used in recent years. A business incubator is a building that has been designed or converted
to house small businesses and to provide tenants an affordable and supportive environment that will maximize their
chances of successfully “hatching” a small business.
The study was designed to gather information about this relatively new form of local economic development. The
researchers were interested in learning why firms chose to locate in incubators, how long they stayed, what incubator
services they found most useful, and how they felt about their overall incubator experience. The researchers were
also interested in evaluating the economic and social benefits of the incubator to the host community.
Indicators used to measure this include the number of jobs created, the wages paid, and whether people were hired
locally or from out of the area. In addition, the firms’ level of community involvement was measured by the amount
of time and money they donated to nonprofit activities in their community.
Surveys were sent to 146 current or former firms located in business incubators in Wisconsin and Illinois. Almost
30 percent of the surveys were completed and returned.
Respondents were evenly split between Wisconsin and Illinois and between current and former firms.
Characteristics of Incubator Firms
Almost two-thirds of the firms were start-up companies when they entered the incubator, and very few had been in
business more than five years, although there were several that were at least 10 years old. One-half of the firms
were in the service industry while one-third were engaged in manufacturing or other related activities.
As would be expected, most of these firms are quite small. The majority of current tenants have annual sales of
$200,000 or less, although a few reported sales of between $1 million and $2 million. The majority of the current
tenants have three or fewer employees. None of the businesses have more than 20 employees. In Wisconsin, the current
tenants pay 34 percent of their workers less than $7 per hour, while in Illinois only five percent of workers receive
less than $7 per hour.
On average, former tenants were about three years old when they left the incubator. The most frequent reason for
leaving was the need for more space. The former tenants employ an average of 14.6 workers. About one-half of the
firms have fewer than five employees. These firms generate annual sales of up to $15 million, with the majority
indicating sales of $750,000 or less. Most of the firms with sales of more than $1 million were located in Illinois.
Currently, former tenants in Wisconsin pay less than $7 per hour to 20 percent of their workers. In Illinois, only
six percent of these workers earn less than $7 an hour.
The Incubator Experience
Low costs, especially low rent, and the availability of support services were the two reasons for locating in the
incubator most often mentioned by the respondents. Other important factors were the location of the incubator and
the quality of the facilities.
Incubators offer their tenants a wide variety of services. Duplicating and telephone answering were the services
most often rated “important” or “very important.” Other highly rated services provided by the incubators were receptionists,
conference rooms and mail services. The opportunity to network with other tenants was also valued by many firms.
Of services not provided by the incubators, better computer support was the most frequently requested. An overwhelming
majority indicated that they were either “satisfied” or “very satisfied” with their experience in the incubator.
Connections to the Local Economy
Most of the employees of the current and former tenants live locally. More than one-half of the supplies and inputs
other than labor are purchased locally or in their state, while at least one-half of the goods and services produced
are sold outside of the community.
Conclusion
Based on the findings of this study, the researchers conclude that incubators provide a number of benefits to both
fledgling businesses and their host communities. While initially quite small, these firms have grown, resulting
in increased sales and employment. They benefit their communities by hiring labor locally and buying inputs locally.
Roughly one-half to two-thirds of sales are made outside the local community, indicating that these firms function
to some extent as “export” firms, thereby bringing dollars into the community. An important finding is that the
majority of incubator graduates have remained in the same community after leaving the incubator.
These firms have a modest level of involvement in community activities, which is probably related to their size.
However, their involvement has increased over time.
One of the biggest advantages for the firms is the low cost of actually locating in the incubator. This suggests
that an alternative form of business incubation known as an “incubator without walls,” where incubation services
are provided to small businesses located throughout the community, may be less viable.
Finally, a significant number of firms associated with incubators reported that they were satisfied with their
experience and considered it very beneficial to their development and subsequent success.
The authors are Gary Green, University of Wisconsin; John Gruidl, Western Illinois University; Steve Halebsky,
University of Wisconsin; and N.R. Sumathi, University of Wisconsin. For more information on this study contact
Gary Green, University of Wisconsin, 350 Agriculture Hall, 1450 Linden Dr., Madison, WI 53706; (608) 262-1510,
(608) 262-6022 fax, gpgreen@facstaff.wisc.edu.