Organizational sponsorship and the economics of place: How regional urbanization and localization shape incubator outcomes

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Author Information : Alejandro Amezcua (Syracuse University)
Tiago Ratinho (IESEG School of Management)
Larry Plummer (Western University)
Parvathi Jayamohan (Salem State University)

Year of Publication : Journal of Business Venturing (2019)

Summary of Findings : The longevity of an incubated firm highly depends on the urban scale and the concentration of its industry in its home location, when compared to the survival of its non-incubated peers. Independently, neither of these conditions extends the life of an incubated start-up. Hence, incubated start-ups tend to survive longer in rural areas and in communities where a firm’s industry is not well established. However, when considering urban scale and industry concentration in conjunction, the effects of incubation change significantly.

Research Questions : Are the effects of incubation affected by urban scale and the concentration of industries in a place?

What we know : Urban economists have long argued that urbanization is beneficial to new ventures. Hoover and Vernon (1959) first formulated the “urban incubator hypothesis” in their seminal study of New York City's economy. This hypothesis predicts that urban centers are most advantageous to the establishment and survival of new ventures despite their higher operating costs. Ongoing research empirically shows that urbanization economies boost the productivity of small manufacturers. Similarly, Almeida and Kogut (1997) conclude that knowledge-intensive new ventures are particularly dependent on knowledge spillovers to the point that these firms use these spillovers as a substitute for their own internal R&D activities. In a study of new ventures entering the Greek manufacturing industry, Fotopoulos and Louri (2000) conclude that indeed spatial concentration leads to higher chances of survival. Similarly, Shaver and Flyer (2000) found that small firms are more likely to seek co-location due to their lack of capabilities.

Novel Findings : Our study sheds new light on why organizational sponsorship (OS) is often met with varying levels of success in promoting new venture survival. We see that specific regional characteristics determine the type of OS mechanisms that are most beneficial. Thus, for instance, simply mimicking successful incubators in one region may not lead to success for incubators in other regions. Furthermore, we see that OS is counterproductive in regions with low urbanization and high localization. Together, these findings suggest that policy-makers need to consider the specific constraints faced by entrepreneurs in different regions before they seek to promote entrepreneurship through OS. It also stresses the need for entrepreneurs to do due diligence prior to joining an incubator.

Implications for Practice : This study shows that entrepreneurs need to consider carefully how OS is likely to benefit them in their particular environment. Our findings clearly show that incubation—while in general beneficial to new firms—is not always most helpful in all settings. New ventures in highly urbanized environments should consider carefully the benefits of OS since the outcomes regarding survival are not favorable. Further, new ventures need to consider carefully the level of industry localization because it appears that OS is less effective when the startup faces high levels of industry localization. In other words, incubation as a form of OS is not able to buffer new ventures from greater resource competition, adds little value in bridging firms to locally abundant industry-specific resources, or both. However, new ventures stand to gain from sponsorship in an urbanized and highly localized environment because, in this setting, the curating of resources has a positive impact on survival. These contingencies to this form of OS suggest that entrepreneurs need to be more deliberate in accepting this form of support and gauge it with the local condition of urbanization and localization.

Implications for Policy: The findings reveal important implications for regional economic development policy. Business incubators are a vehicle for economic prosperity if designed and operated in harmony with the local economic conditions that incubated firms inevitably experience. Despite the general claim that business incubators are universally beneficial to startups, this study shows that the economic realities in the surrounding environment may be more powerful than the incubator's intervention. Further, the article exposes which incubation mechanisms are more beneficial to start-ups in each regional environment

Implications for Society: A need exists to temper the public enthusiasm for sponsoring new ventures using business incubation, as we learn why its
effectiveness is not universal and how to maximize its benefits.

Implications on Research: This study is among the first ones to show the effects of OS in the form of business incubation in different local environments.

Abstract : Organizational sponsorship impacts new venture emergence and survival prospects by shaping the relationship between new ventures and their surrounding environment. While extant literature offers an explanation as to why heterogeneity in the effectiveness of sponsorship emerges based on the sponsor's characteristics, current theorizing largely overlooks how sponsorship interacts with local economic conditions. This study introduces insights from urban economics to extend organizational sponsorship theory by showing how different types of agglomeration economies affect the effectiveness of organizational sponsorship. We test our hypotheses with a comprehensive database that includes over 46,000 sponsored and non-sponsored firms in the years 1997–2007. Our results reveal organizational sponsorship delays new venture exit when urbanization levels are low, localization is low, and both urbanization and localization are high.

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Organizational sponsorship delays new venture exit when urbanization levels are low, localization is low, and both urbanization and localization are high.

Alejandro Amezcua

Assistant Professor of Entrepreneurship at Martin J. Whitman School of Management at Syracuse University
Alejandro S. Amezcua, Ph.D. is an assistant professor of entrepreneurship at the Whitman School of Management at Syracuse University. He researches new venture strategy by adapting theories on organizational sponsorship and population ecology to evaluate whether new ventures that accept government support outperform their peers.
Alejandro Amezcua
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