By Rasika Jayawardhana
(The author works in the IT Division of DFCC Bank and is reading for a Masters degree in Business Administration)
The development of information and communication technology [ICT] has accelerated the dynamism of the global business environment. ICT now plays a decisive role in business and it is a critical success factor in the highly competitive global business environment.
This change has caused a total paradigm shift of business thinking which is based on knowledge workers. The global business structures have changed from tall bureaucratic structures to flat informal ones.
With this transition the role played by small and medium enterprises [SMEs] towards national economic growth is becoming more important. The development of ICT has caused a situation where the border between the national and global economy is fast narrowing.
Thus SMEs play a major role in deciding the future success of Sri Lanka in the global context. Technology Business Incubators [TBI] are considered to be a very effective tool for the development of SMEs with special reference to ICT-related ventures.
Internet and e-mail use has grown steadily during the three years from 1998 to 2000 with a growth of 35 percent and 59 percent in 1999 and 2000 respectively. This can be considered as a positive sign of growth of computer literacy as well as knowledge acquisition.
What is a TBI?
Before looking at the vital role of the TBIs for the development of SMEs, it is best to understand what a TBI is. The word "incubator" is defined as "an apparatus with a chamber used to provide controlled environmental conditions especially for the cultivation of the micro-organisms or the care and protection of premature or sick babies".
The same definition interpreted from a business environment perspective can be viewed as: "an organisation which provides a controlled environment to nurture a start-up or small business venture into a self-sufficient operational entity".
The business incubators are used to nurture the start-ups and infantventures to enable them to face fierce competition in the open business environment.
The incubated ventures have to leave the incubator at graduation, when they have achieved self-sufficiency in their operations.
The period of incubation would vary from incubator to incubator. Some of the factors that determine the period of incubation are the industry environment and complexity of the venture operations.
Services of TBIs
Technology business incubators in their mission to help start-up business ventures provide a multitude of value-added services to the tenant ventures nurtured by the incubator.
Almost all business incubators provide the necessary physical space and infrastructure for the operations of the incubatees (i.e. the ventures incubated by the incubator). For example, "ConceptNursery.com", Sri Lanka's first technology business incubator provides the incubatees with office space, furniture and dedicated communication links for a very nominal charge.
Business advice and guidance is one of the major criteria for profitable operations of a start-up business venture. The TBIs provide these services from seed idea generation to graduation of the venture as a self-sufficient entity. Even subsequent to graduation of the venture, the links with the incubator enable them to obtain the necessary guidance.
The performance of incubated ventures is continuously monitored. This enables early detection of deviations from the original plan and helps to streamline venture operations. Incubatees greatly benefit by the exposure to the network of the TBI. Using this network the incubated ventures can develop their own business network of contacts. The network consists of other incubated ventures, which are internal, as well as other stakeholders of the TBI who are external.
The incubated ventures also benefit through the expertise of the network in specialised areas. This partnership building process plays a major beneficial role in the total incubation cycle.
The shared services and resources provided by the incubators reduce the overall cost of the incubated ventures. The incubators usually provide legal, accounting, auditing, marketing and secretarial services.
The incubatees also have access to shared resources such as fax machines, computer labs, meeting rooms, and auditoriums.
Conventional banks do not fund projects with high risks. Thus start-ups and SMEs find it difficult to find funding to expand and operate their businesses. This includes both capital investments as well as working capital infusions. The incubators provide funding for the ventures nurtured by them through their network of funding institutions, which mainly consists of venture capital funds and angel investors.
Benefits
Stakeholders derive several benefits with the development of SMEs through technology business incubation. The main stakeholders identified here are the government, corporate sector, universities and research institutions and the tenant ventures.
Government
The increase of the number of SMEs fostered by technology business incubation would invariably contribute to the overall growth in the national economy. With the increase in the number of ventures there will be positive effects on employment generation, both direct as well as indirect. The growth in national production would result in an increase in domestic trade as well as GDP. This whole process will lead to creation of wealth and thereby enhance economic development.
SMEs would significantly contribute to government revenue by means of taxation, such as corporate tax, sales and revenue-based taxes and tariffs. Even though SMEs are entitled to tax benefits at the early phases of the venture life cycle, from a long term perspective the government could expect a growth of revenue through taxation.
The development of ICT sector will result in the improvement of the infrastructure of the country, which is one of the major factors that attract foreign capital inflows. Infrastructure is not just telephone lines, Internet Service Providers, electricity and roads but also computer literacy and acquaintance with the ICT environment. The standard of infrastructure in Sri Lanka is low compared with other Asian countries. The national infrastructure does not cater to the demand for high technology-based venture development. Thus TBI would provide opportunities to create a positive national business climate.
Corporate sector
The corporate sector will benefit from the technology acquisition through technology-based venture development and creation. With the increase in TBIs and incubatees, the corporate sector will have better investment opportunities with higher Return on Investment (ROI). These investments can be at the start-up point of the ventures as well as the graduation point where the ventures would be looking for funds for expansion of their operations.
Research institutions
The main benefit to the universities and research institutions is the commercialisation of their research. Universities with engineering faculties can benefit by the creation of technology-driven ventures. With the availability of more information, the demand for R&D will also be on the increase. This is mainly due to the growing need for developing new products as well as strategies for managing the ventures profitably.
Incubatees
The incubated ventures are the primary beneficiary of technology business incubation. The access to the diversified network of the incubator community is a major benefit. The incubation reduces the risks faced by the incubated ventures. The low risk factor is one of the main advantages for the start-ups. The incubators would have their own mechanisms for monitoring the performance of the incubatees. On the other hand, the success of the TBI itself is measured by the number of ventures incubated successfully.
Constraints
Start-ups and existing SME ventures face several constraints in their day-to-day business operations and find it difficult to keep the establishment a going concern, especially amidst fierce domestic and global competition.
The non-availability of technological knowledge and expertise are major constraints face by the start-up ventures. For the survival of business ventures it is mandatory to be hi-tech as well as cost-effective.
The complex nature of the modern business environment calls for best management practices, which are not quite evident in the small and medium sized enterprises. Non-availability of services such as business development consultancy aggravates this problem faced by the SME initiators. Even in the event such services are available the cost factor does not permit the SMEs to obtain such services.
Obtaining funds for the start-up ventures is a major constraint faced by this sector. Conventional banks offer higher interest rates or require collateral. It is not feasible for the SMEs and start-up ventures to borrow funds satisfying these requirements. On the other hand, due to non-availability of information and knowledge in this area, SMEs and start-up ventures have limited access to funding.
This is the information age. The information intensity of business decision making is growing rapidly and the provision of information depends on how well the information capturing and dissemination processes are designed. In this context the TBIs play a significant contributory role. In Sri Lanka a main constraint faced by the SME sectors is the non-availability of information and limited access to available information.
The dependence of hi-tech ventures on infrastructure is very high. But Sri Lanka's national level infrastructure facilities cannot be rated as satisfactory.
Different stakeholders have to play different roles for the development of technology business incubation.
Infrastructure
Providing proper infrastructure facilities is mandatory for the development of business establishments in any country. The government has to play a critical role in providing infrastructure facilities and constantly upgrading them. The overall policies formulated by the government have to be conducive to development of SMEs and supportive in creating start-up ventures. Promoting an environment with trouble free regulation by minimising red tape in government establishments is another mandatory step towards developing this sector. E-governance concepts and practices could be introduced to government-run institutions in order to expedite government services provided to the SMEs.
The government policy formulation bodies should develop a national policy for the development of SMEs and start-up ventures using TBIs.
The government has to form a team consisting of people from different interest groups to develop a detailed national policy for development of SMEs and creation of new business ventures through technology business incubation. The team has to comprise of a cross section of stakeholders from relevant government ministries, existing technology business incubators, universities and research institutions, financial institutions, international agencies and other interest groups.
The government could also look at the possibility of exploiting the opportunities to promote investments within the region. The South Asian Association for Regional Co-operation and the Indo-Lanka Free Trade Agreement could be exploited to promote knowledge spill-over through high technology-based Foreign Direct Investments [FDI].
This intra-regional collaboration could subsequently be extended into inter-regional collaboration.
India has identified the growth potential in this sector and resolved to develop technology business incubation in their "Bangalore Declaration". This declaration was made on the 31st of January 2001 at the First International Workshop on Technology Business Incubators in Bangalore, India.
The universities and research institutions have to play a vital role in developing SMEs through TBI. Universities can provide their expert knowledge on commercialisation of technology research as well as advice on the operation of and management of SMEs and start-ups.
The universities and research institutions should also act as entrepreneurial think-tanks. This could be implemented by conducting regular workshops and seminars on entrepreneurial skills as well as promoting their graduates to take on the start-up ventures and developing them with the knowledge and skills transferred during the courses followed at the university. Universities and research institutions should create links and joint programmes with the incubators and other related organisations in order to look at the industry requirements so that they produce graduates to cater to the requirements of the nation.
With a faculty of knowledge workers universities could provide technical assistance and business development consultancy services to the development of new and existing ventures. Universities and research institutions should collaborate with similar institutions abroad, leading to the development of a network of research teams.
Financial Institutions
One of the main problems faced by the SMEs and other start-ups is funding. The banks would not like to act as angel investors, as they do not want to get exposed to risky ventures.
The number of firms and venture capital funding activity has virtually stagnated in the recent past. The number of venture capital companies remains unchanged at seven, while total funds invested in 2000 was Rs. 1,705 million - a nine percent increase over the previous year.
Venture capital institutions should look at the areas of investment with higher ROI and promote the investment through TBIs. Also, development banks should fund start-up ventures. Banks and other funding institutions should have collaborative programmes with the TBIs for information transfer on the tenant companies of the incubators.
These programmes will be beneficial to both the funding institutions (since there will be better investments in the technology-based ventures) as well as the incubated ventures (as they will have better access to funds for development). In order to minimise the risk, funding institutions can look at the option of getting into the management of the TBIs through board representation.
With the new credit lines coming in from other countries, banks could negotiate for the allocation of a proportion of the funding for the development of SMEs and also some of the funds to be channelled through TBIs to their incubatees.
Entrepreneurs
Successful entrepreneurs should share their knowledge and experience with the incubated ventures. This knowledge sharing has to be organised by the TBI by means of seminars and workshops. The TBI should use its network of resources for promoting the information sharing process.
The entrepreneurs can provide relevant data to the SMEs and start-ups, which will develop their decision making abilities by maintaining a database.
The exchange of data should not be considered as a threat, but should be viewed as an opportunity, since the existing establishments could also get information using the TBI database which in turn becomes a mutually beneficial activity.
Public and private partnerships could be promoted for the development of the TBI industry.
The concept of industry clusters has to be developed amongst the entrepreneurial community. These cohesive partnerships with a common objective would have a synergetic impact on the development of TBIs in Sri Lanka. Joint ventures with foreign expertise have to be promoted to bring in both capital and knowledge to the country.
NGOs
International organisations should promote technology business incubation as a strategy for developing SMEs. These organisations could channel the resources of developed nations, where there is ample expertise and experience on TBIs. This channelling can be arranged by means of collaboration at national level.
These resources will be both capital as well as knowledge. The international funding institutions should promote investments on promoting TBI for SME development with a special focus on developing countries, with the objective of narrowing the gap between the developed and developing economies.
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