*THE STATUS AND CHARACTERISTICS OF BUSINESS
INCUBATORS IN MALAYSIA
Fararishah Abdul Khalid, Salleh Yahya & Budi Suprapto
Universiti Teknikal Malaysia Melaka
[email protected]
[email protected]
[email protected]
Abstract
This paper provides a detailed overview of the Malaysian incubation system with
emphasis on type and characteristics of the incubators. The incubator industry has only
started in Malaysia some thirteen years ago and is now on its way to build a network of
incubators, aimed to support the economic growth of the country. Embarking in various
types of incubators, Malaysia is still at its learning curve, in pursuit of identifying the best
incubator model for the country. This paper reports the status and characteristics of the
incubators in Malaysia based on the respondents. Generally, the Malaysian incubators
can be categorized to three; namely, government-linked incubators, private-linked
incubators and university-linked incubators, with all varying objectives and
characteristics.
Keywords: Business incubators, characteristics, type
1.0 Introduction
The role of incubators as an economic driver through the creation of new employment
and introduction of new markets has gained much recognition in developing countries
including Malaysia. Generally, these are the main agendas behind the set-up of business
incubators worldwide as well as to promote the growth of small and medium sized
enterprises (SME). Malaysia, being a country that is still learning the ropes in charting
economic success relies on its SME industry to help bring up the value chain. These
SMEs especially the ones that are of technology based need a substantial amount of
funding and research and development to materialize its visions. Through the adoption of
the incubation model, SMEs could do away with many of the tedious start-up concerns
such as finding a suitable location for the business, basic necessities of an office, and
facilities for a new office.
In countries like the United States and China, the incubator programs have proven its
appeal in the result of numerous incubator set ups in both countries and the number of
graduate companies produced. In the United States for example, the incubation system
has been around for decades and as of now, the incubation industry itself is becoming
rather competitive on its own. In keeping up with the
In its effort to propagate the positive effects of incubation system including cost-saving
and shorter period for company set-up, Malaysia is keeping abreast with the latest
incubation practices made known by countries like the USA and the UK.
The change in the economic landscape in Malaysia has forced the nature of businesses to
shift to more technologically-based and knowledge-based businesses. Entrepreneurs
rising from these areas are becoming more prominent and recognized as new engines of
growth for Malaysia’s economy. The existence of incubators itself is an evidence to
support this notion.
Incubators provide a support system to new entrepreneurs not only in providing office
space and other office needs, but also in business advisory support including preparing a
business plan, opportunity to network with other entrepreneurs and upgrading the
business skills of the entrepreneurs. This clearly shows that the incubators provide a short
cut route for entrepreneurs and enable them to focus on their products.
This paper will look into the different types of incubators in Malaysia, its role, and the
services offered at these incubators to understand the effects of such assistance in
improving the operations of the incubator as a whole. The paper is structured to first
review past literatures which have discussed the different types of incubators worldwide,
along with the services offered. It then relates with the methodology adopted for this
study, followed by the findings. The discussion and conclusions sections will elaborate
on the more practical type of incubator suitable for accelerating the start-up of new
businesses and maximizing their growth potential.
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2.0 Literature review
Business Incubator Functions
The European Commission Enterprise Directorate-General (2002), in a benchmarking
business incubation survey, reports several business incubation functions which are
expected of an incubator. Provision of an office space is central to the incubator model.
The report suggested that European incubators generally have around 5,800 square
meters of space for tenants. This number is reported to have the capacity to accommodate
a total of 18 firms or tenants at any one time. Incubators should also set the type of
quality its business support services to the clients. Some incubators provide the services
at a charge while some include them in the rental fee.
An incubator’s role is primarily as an economic development tool for a region (Davidson,
2002). With the birth of businesses at the incubator, only then regional growth can be
stimulated. The incubator’s roles, among others, are to launch products developed by
entrepreneurs and acquire clients for the new businesses.
Davidson (2002) also adds that incubators’ purpose of existence is to reduce the risk of
startup or new company, the entrepreneur, the investors and for the region. Risks are
defined as involving uncertain outcomes or events which, in the context of entrepreneurs,
higher rewards translate to facing greater risks (Kuratko & Hodgetts, 2007).
The goal in setting up the incubator system in Malaysia encompasses all that, as well as
to nurture the process of development of the companies. By nurture, it means that the
incubators look after the needs of the new companies in terms of physical office space,
business advice and provisioning of network with potential clients, necessary for a
business to thrive.
Major types of incubators from around the world
Many literatures have dwelled on the typical types of incubators that exist in some parts
of the world such as USA, Germany, UK and Israel. Table 1 below displays four types of
organizational forms of incubators.
Table 1: Types of organizational forms of incubators
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Public or not-for-profit incubators
Sponsored by government and non-profit
organizations, whose primary purpose is to
promote economic development
Run by venture and seed capital investment
groups, or by corporations and real estate
development partnerships. These incubators
generally seek a return on their investment,
often through a stake in the firm, further
development, royalties, etc.
Which share characteristics of the first two
types, but also have objectives in faculty
development, and creating business spinoffs from faculty research
Which are joint efforts between government
or other non-profit agencies and a private
developer. These offer the advantage that
government funding can often be secured to
support private sector expertise and
financing
Private incubators
Academic-related incubators
Public/private incubators
(Source: Lakshminarayanan, 2004)
In addition to the types of incubators listed above, Lalkaka (1997) acknowledges a few
other types of incubators such as the foreign sponsor’s type incubator where this type of
facility mainly focuses on international collaborations, both on the financial technological
platforms with aims to facilitate the entry of small foreign businesses, including returned
expatriates, into local markets. Additionally, this type of incubator facility offers
complementary programs which support the export of local manufactures.
A special purpose incubator also exists in some parts of the world like Israel, South
Africa and Uzbekistan where the incubator set-up is mainly to empower new immigrants,
women and other disadvantages communities. Recent trends have also shown the
emerging of single business incubators which focus on a special sub-sector such as
biotechnology.
Lalkaka (1997), in his report for the UNIDO SME program, outlines several
distinguishing incubator characteristics which include:
• a managed work space providing shared facilities, focused advisory services, and interaction among tenants, available frequently on short-notice and with the requirement for
neither demonstrated financial resources nor a long-term commitment;
• a small management team with core competencies to provide early diagnosis and
treatment or referral for business threats and opportunities through a wide network of
professionals and friends in the local community;
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• careful selection of 20 - 25 start-up groups entering the incubator, their nurturing,
growth and graduation after 2 to 3 years. The selection and focused help, of course,
account for the greater survival rate (two or three times greater of incubated businesses
compared to those outside;
• the business incubator itself runs as a business, with the perspective of becoming selfsupporting when operations are fully established;
• initial support, however, almost always provided by central or state governments, in the
form of a low (or no) rent vacant building and operating subsidy, until rents and fees
from tenants match operating expenses;
• in addition to nurturing tenants within the incubator, outreach assistance may also be
10 provided to businesses in their own premises. But if it has no tenant within its walls to
benefit by interaction and focused attention, then it is like a traditional small business
development center and lacks the defining features of an incubator;
In China, incubators are diversified comprising of general technology business incubators
which are the mainstay of incubators, specialized technology business incubators,
University-related S&T parks, incubators for returned overseas scholars (IROS),
international business incubators (IBI) and incubators set up by state-owned enterprises
(SOE incubators) (Ma et al., 1997)
Unlike the general technology business incubators, the specialized technology business
incubators target at transformation of scientific achievements and cultivation of SMEs of
a special technology field with the support of universities or R&D institutes. In this type
of set-up, emphasis is more on the design, use of incubation space and services with
expertise orientation in terms of technology field, marketing, information and training.
This is to help serve tenant companies grow and have sound business skills. Examples of
specialized technology incubators more often focus on developing software, new
material, bio-medical, cmos (complementary metal oxide semiconductor) chips, energysaving and environmental protection and telecommunications. (Ling et al., xxxx)
The university-related S&T parks are generally quite straightforward in their set-up
where these parks are usually located within the premise of the university to take
advantage of technology resources in universities. The scientific achievements obtained
from the universities will be used to generate ideas for products that will eventually be
commercialized and foster SMEs built by universities or technology enterprises.
In the business world, performance measurement is a crucial practice. It has been done
for many years and it various methods. The real idea behind measuring performance is to
gauge how well has a particular strategy worked. It can also be used as a tool to suggest
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other ways to improve certain aspects of the business or management. Several authors
offered a variation of definitions for performance measurement.
Performance measurement
Gomez-Mejia et al. (2005) said that data used to determine performance levels can be
classified as objective or subjective. Objective performance data would quantify things
like pieces produced, amount of downtime, time to complete task, and so on while
subjective performance usually involves human judgment such as a supervisor’s
judgment of overall performance levels or a manager’s assessment of the safety level of
the work environment. Gomez-Mejia et al. (2005) also adds that there are three types of
control that managers can exercise which include feedforward control, concurrent control
and feedback control, deployed at the input, throughput and output stages of an
operations management model respectively.
Other definitions of performance measurement include translating a strategy into concrete
objectives, communicating the objectives to employees, guiding and focusing employees’
efforts towards achieving these objectives, controlling whether or not the strategic
objectives are reached, using double-loop learning to challenge the validity of the
strategy itself, and visualizing how individual employee’s efforts contribute to the overall
business objectives (Kaplan and Norton, 1996; Lo¨nnqvist, 2002; Neely, 1998; Simons,
2000).
Lakshminarayanan (2004) highlighted that in developed countries would usually base the
incubator performance on number of jobs created, firms graduated, their survival rate,
profits of tenant firms, taxes paid, and number of new technologies and patents marketed.
Another model raised by Lakshminarayanan which was earlier developed by Mian used
three sets of indicators, namely, performance outcomes, management policies and their
effectiveness as well as value-adds. He also said that for a developing country like
Malaysia, the performance assessment should be made by taking into consideration the
immediate and long-term socio-economic benefits.
3.0 Methodology
The study uses questionnaire method to solicit answers from the respondents. The
questionnaire is divided to four sections, namely organizational profile, performance
metrics, determinants of success and innovation and commercialization. In the first
section, information pertaining to the incubators and incubatees are gathered through
identification of the type of incubator they are associated with and the industry they
belong to. To obtain information regarding the characteristics of a particular type of
incubator, the questionnaire seeks the objectives of the incubators and the sort of services
being offered.
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The section on performance metrics seeks to understand the practice of measuring
performance of incubators by the respondents. A list of all possible performance
measurement methods are given to the respondents and they are asked to rate the
importance of each method. In the third section, respondents are asked to rate on a scale
of 1 (least important) to 5 (most important) which factors they perceive as important for
incubator success. The types and characteristics of incubators will then be related to the
performance metrics adopted by the respective incubators.
A total of 6 incubators and 44 incubatees participated in this study which represents about
50 percent of the incubator community in Malaysia. Questionnaire were distributed in
person and collected back on the same day.
4.0 Findings
Table 2: Types and characteristics of incubators in Malaysia
Type
Governmentlinked
incubators
Characteristics
-
Private-linked
incubators
-
-
maximum length of stay two years
receive subsidies from government and rental of
incubators
provide pre-incubation services, business planning
and forming a company
provide training to develop business skills, help
with e-business and other aspects of ICT
give advice on development of new products and
services and so on. Broadband services and PABX
phone lines have also been the norm in many
incubators in Malaysia.
for profit incubators where tenants’ rental and
businesses form part of their funds.
Provide office space, office services, provision for
financial channels, encourage R&D
commercialization, and assistance in starting-up
and accelerating growth of new businesses
performance measurement reflected on the cost
savings due to incubator resources, growth in
expertise or experience of staff
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Percentage
42%
36%
Universitylinked
incubators
-
-
-
to activate and promote the acceleration of the
commercialization activities of both the local
universities and research institutions
aims to create entrepreneurial culture and
atmosphere and encourage R&D commercialization
of products
performance measurement is based on total number
of graduated tenants, number of products
commercialized, number of businesses created and
number of intellectual property rights obtained
22%
The findings tell us that there are generally three types of incubators in Malaysia which
include government-linked incubators, private-linked incubators and university-linked
incubators with varying industry specializations. The collective numbers of incubators
which exist in Malaysia as of December 2007 have climbed to 17 incubators (MDeC,
2007).
Government-linked incubators
Incubators categorized under this category are guided and coordinated by the
government’s initiatives to see more entrepreneurs originating from the bumiputera
group. Most of the incubators in Malaysia fall under this category as development of
SMEs have always been one of the major concerns of the government. The incubators
mainly receive subsidies from government and rental of incubators as their sources of
funding. In the recent planning of RMK-9, a sum of RM 228.3 million has been allocated
for the commercialization of technology, specifically for technology development and
incubator program. The incubatees of this type of incubators mainly consist of start ups
and branch of existing firms. They are also bounded to a contract which stipulates the
maximum length of stay to two years.
As any other type of incubators, the government-linked incubators offer a range of
services to the incubatees. The in-house professional services include among others, preincubation services, business planning and forming a company, training to develop
business skills, help with e-business and other aspects of ICT, advice on development of
new products and services and so on. Broadband services and PABX phone lines have
also been the norm in many incubators in Malaysia.
Generally, the management team of incubators oversees the needs of the incubatees by
providing advice and assistance to tenant companies. Besides that, networking
opportunities also arise with other incubators and business support organizations. The
management team also looks into the routine management of incubator affairs, which
takes about 70 per cent of a working week. The management team has to some extent
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experienced the business world on their own as they have either set up or managed firms
of their own or worked in businesses prior to working at the incubator. Some have also
previously worked for public authorities/agencies or universities, have experience in
advising start up and small firms and participated in training that is relevant to business
incubation.
The management sees a few characteristics of the incubators that may pose as an
attraction to the tenant companies such as availability of professional business support
services, the opportunity to cluster and network with similar businesses, favorable
location and image brought by the incubators and the quality, price and flexible terms
offered to the tenants.
When asked about the reasons for leaving the incubators, many incubators said that
tenants are only permitted to stay at the incubator for a fixed period of time to allow other
companies to occupy the space. Other reasons for leaving the incubators include the
companies’ expansion which requires more room and better and cheaper premises found
elsewhere.
In proving its objective as an economic development tool, the incubators have
contributed considerably to the local development by creating new, high quality
businesses, especially in the technology-type businesses. This had indirectly opened up
more employment opportunities and wealth creation possibilities for many. Entrepreneurs
whom before have limited knowledge on new product development has equally benefited
from the services provided at the incubators, thus improving the competitiveness of
existing businesses. Subsequently, this has become a stepping stone for more companies
to set their path internationally.
Performance measures within the government-linked incubators are based on a few
indicators. Some of the more widely used indicators are the number of current tenants,
number of commercialized products, number of employees, number of business created,
and number of new jobs created.
Private linked incubators
Private linked incubators are gaining popularity in the Malaysian incubator industry.
Unlike the government-linked incubators, this type of incubators is for profit incubators
where tenants’ rental and businesses form part of their funds. Their objectives are
manifold, among which include provision of office space, office services, provision for
financial channels, encourage R&D commercialization, and assistance in starting-up and
accelerating growth of new businesses. Other objectives include creating new jobs,
providing management guidance, helping in tenant development plans, and enhancing
entrepreneurial competencies.
The origins of for-profit incubators arrived after realizing that business incubators also
have a great deal of commercial value and have the potential to be used as profitable
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business enterprises. This was thought of on the basis of the incubators’ ability to foster
the growth of its tenants, and discovering the latent potential of the enterprises’
entrepreneurs, and the enterprises’ market value fostered would increase the incubator’s
value. In this incubation model, both incubator and incubated enterprises seek to make
progress which would translate in economic benefits to both parties. The relationship
between incubator and tenants are not only restricted to give-and-take services, but also
have the give-and-take investment relationship (Ma et al., 1999). During the incubation
process, incubators invest in the tenants both in terms of actual capital and services. As
the tenants begin to develop, they will start repaying the business incubator. The
management of business incubation can also be seen as a profitable company model as
new incubators need the knowledge and experience of these experts to start a new
incubator.
For private-linked incubators, the performance measurement is reflected on the cost
savings due to incubator resources, growth in expertise or experience of staff rather than
number of tenants or total number of graduated tenants like the government-linked
incubators.
University-linked incubators
This concept of incubator generally operates to commercialize research outputs of
researches conducted at the universities. In China for example, the university-related
S&T parks are set up by universities to take advantage of technology resources in the
universities with the mission to transfer scientific achievements and encourage business
generation by universities or technology enterprises that have university linkages (Ma et
al. 1997). As of now, there are 22 university-related S&T parks at the national level set
up in China.
In Malaysia, a center known as the Technology Incubation Centre was established to
strengthen linkages between universities/research institutions and industries. This center
is embodied under the government’s technology development cluster (TDC) program. On
of the main objectives of this program is to activate and promote the acceleration of the
commercialization activities of both the local universities and research institutions.
Among the centers which have been developed under this program include the UPMMTDC Technology Center which specializes in ICT, Multimedia and Agri-Bio, the
UKM-MTDC Technology Center whose core strength is biotechnology and UTMMTDC Technology Center which specializes in advanced engineering and life sciences.
Other university-linked incubators are also involved in the electrical and electronics as
well as the machinery and equipment industries. The typical incubation period for this
type of incubator is usually 3 years. There are two types of business model at these
university-linked incubators which are technology garage unit and enterprise unit.
Tenants that fall under the garage unit have the flexibility of staying at the incubator for a
minimum stay of 6 months and a maximum stay of 24 months while for the enterprise
unit, the period of stay ranges from 12 months to 36 months. However, extension of stay
is allowed by the incubator for tenants who fail to graduate within three years. In other
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cases, tenants are asked to vacate the incubators as have been agreed by them when they
entered the incubators.
University-linked incubators also face a fair share of challenges as other types of
incubators. They are mostly concern about ensuring tenants’ ability to sustain their
businesses upon leaving the incubators. A second concern is in the shortage of good
talent in the incubator management team. Other challenges include matters related to
improving incubator management, tenants not meeting the incubation targets, operational
issues and lack of innovation in product development.
To be an incubatee or tenant at this type of incubator, MTDC imposes a few criteria
which will ensure company’s success upon joining the incubator program. Among others,
the tenants need to be incorporated under the Companies Act 1965, at least 60 per cent of
the equity is held by Malaysians, collaborations with local universities or research
institutions must be made and companies must be in operations for at least 3 months.
To match with the objectives of the university-linked incubators, which are to create
entrepreneurial culture and atmosphere and encourage R&D commercialization of
products, the method of measuring performance in type of incubators is somewhat
different compared to the other two types. More importance are being stressed on total
number of graduated tenants, number of products commercialized, number of businesses
created and number of intellectual property rights obtained.
Lalkaka (1997) recognized the predominance of research/university incubators in
developing countries as it provides a locus for trained personnel to become an
entrepreneur who will extract technological possibilities to meet market needs and
opportunities.
6.0 Conclusions
Based on the data obtained from the questionnaire, it is clearly noted that Malaysia has
indeed recognized the strength of incubators as an economic development tool. With
three distinctive types of incubators, Malaysia is paving its way to creating more
opportunities for start-ups in various industries including machinery and equipment,
textiles and apparel, food processing, ICT, and biotechnology.
The government-linked incubator, which was the first type of incubator established, is
still growing with a total of 6 incubators. Private-linked incubators have grown to a total
of 10 incubators over the last 10 years while university-linked incubators have also
grown its figure to 5 incubators nationwide.
Overall, the incubation system in Malaysia has shown great developments over the last
10 years with the number of incubators reflecting a positive growth. In efforts to continue
the promising future of the incubation system in Malaysia, more can be done in terms of
identifying good incubation practices both by the management as well as the tenants.
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Perhaps one of the areas that require some attention within the incubation system is the
competence level of the management team. It has been widely argued that the current
needs of incubators have evolved from its basic requirements to manage incubatees’
needs for office space arrangements, to more sophisticated services such as business
advisory services including assistance in writing up business plans, networking and
intellectual property rights assistance. Hence, there is an increasing trend in incorporating
more competent incubator managers and those with experience in running a business.
The incubation system also requires more “value adding” services and one with the right
configuration in order to realize the objectives of incubation system. The stakeholders
must also understand the needs of the incubators and their tenants. With a sound
appreciation of the business, optimum flow of resources will lead to the accelerated
growth of the tenants.
Additionally, business development strategy in this industry should be integrated as a key
element in conducting further study on the incubation system. This is also to accelerate
and support the growth of SMEs industry. This is possible with the building of an
incubator network nationwide which sees the distribution of knowledge and experiential
sharing amongst the incubators.
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Ma et al., 1997, Promoting business and technology incubation for improved
competitiveness of small and medium-sized industries through application of
modern and efficient technologies in china
Davidson, A. 2002, An incubator for foreign companies hoping to hatch in the USA,
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Gomez-Mejia, L.R., Balkin, D.B. and Cardy, R.L., 2005, Management, Second Edition,
McGraw Hill, pp. 669-670
Lalkaka, 1997, Lessons from international experience for the promotion of business
incubation systems in emerging economies, Small Medium Enterprises Program,
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European Commission Enterprise Directorate General, 2002, Center for Strategy and
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