1. S
outh Africa is going through
processes of development which
are relevant in most other African
countries, though it is somewhat
ahead in the longer-run evolution. One
such process is the creation of small busi-
ness incubators, as part of the wider evo-
lution of business clusters and enterprise
development.
Research undertaken at the University
of Stellenbosch Business School (USB)
has added a valuable contribution to the
growing range of studies on small busi-
ness clustering in developing and emerg-
ing countries. The USB study explores the
performance of the business incubators of
the Small Enterprise Development Agency
(SEDA) in South Africa, and sheds light
on factors that influence incubator success.
The need for proactive
clustering efforts
Africa is advancing steadily towards ur-
banisation and reduced reliance on subsist-
ence agriculture. In this development the
manufacturing or processing sector has to
play an increasingly important role. More-
over, in this and in all the other ‘emerging’
sectors more productive technologies and
business methods have to be introduced.
A further challenge is that the infrastruc-
ture – supply of water, electricity, road ac-
cess, storage facilities, transport, etc. – is
often poorly developed in rural and low-
density urban areas.
This is where the clustering of eco-
nomic activities, and in particular small
businesses, becomes critical for accelerated
development. Graphic 1 distinguishes five
types of clustering relevant for the evolu-
tion of modern economies.
The first phase – and still the one
most visible across Africa – includes the
clustering of mostly informal traders and
suppliers of transport, food and basic
leaders’ lab | consumer attitudes
picture:istock
Sandheep Ramluckan and Wolfgang Thomas
Raising
businesses
How are South Africa’s
government-subsidised small
business incubators doing at
nurturing start-up enterprises?
18 AGENDA No 2 | 2011 | www.usb.ac.za

2. USB Leaders’ Lab
online
Other USB Leaders’ Lab
articles and new research
may be found online at
www.usb.ac.za/LeadersLab
clothing around local markets, transport
interchanges or large enterprises such as
mines. These buzzing places provide scope
for ‘learning by observing competitors’,
the supply of specialised services (due to
the economies of scale), the integration
of small enterprises into larger ones, and
other processes of business development.
A slightly more advanced type of clus-
tering (category B) involves the evolution
of sector-specific accumulation of small
enterprises in a town,an area or a particular
location. This could evolve out of a fishing
area, around a mine or factory, or in a tour-
ist spot. These clusters are the forerunners
to the specialised industries and service-
sector niches that stimulated and shaped
much of Europe’s modern economies over
the past centuries.
Focusing more closely on specific
business places or clusters in buildings
or neighbourhoods, category C refers to
‘hives’ where anything between a dozen
and a few hundred small enterprises may
be accommodated. During the late 1980s
and early 1990s South Africa’s Small Busi-
ness Development Corporation established
about 45 such hives across the country to
stimulate small enterprises in a loosely
structured way.
A more tightly controlled, sector-
focused and systematically supported varia-
tion of the hive is the small business incuba-
tor (category D), which is the focus of the
USB study. A fifth category is a technopark
or science park where property developers
try to get a meaningful mix of small, me-
dium and larger firms in one area, driven by
general business principles, but enriched by
the inherent scope for fruitful cooperation
between the firms (and nearby institutions
like universities or research centres).
In the highly developed countries,much
of the focus in this field of clustering falls
on the last two variations – incubators and
science parks. In developing Africa the fo-
cus is still on the first two and evolving
hive strategies; incubators are rare, except
in larger cities or around specific sectors.
Yet, as the search grows for more effective
ways to strengthen viable and internation-
ally competitive activity clusters, the inter-
est in government- or donor-subsidised
incubators is likely to increase rapidly.
SEDA’s technology-focused
incubator programme
The roots of SEDA’s Technology Pro-
gramme (STP) go back to 2000, when the
Godisa Trust was established as a joint
initiative of the Department of Science
and Technology (DST), the Department
of Trade and Industry (DTI) and the Eu-
ropean Union (as donor agency), to de-
velop a national incubation framework. Its
aim was to enhance the capacity of small
enterprises by providing technology sup-
port at technology centres. Parallel to this,
CATEGORIES OF Small business-focused clustering processes
graphic 1
A. Spontaneous (informal) business clustering (e.g. at a market or river crossing)
B. Sector-focused clustering of small businesses in an area (e.g. fishing, transport,
food-processing, retailing)
C. Loosely structured clustering of small enterprises in a ‘hive’ or building complex
D. Small business incubator with formally structured support programmes
E. Technoparks, science parks or office parks
As the search
grows for more
effective ways to
strengthen viable
and internationally
competitive activity
clusters,the interest
in government- or
donor-subsidised
incubators is likely
to increase rapidly.
>
19www.usb.ac.za | AGENDA No 2 | 2011

3. leaders’ lab | consumer attitudes
graphic 2
activities and ‘outputs’ in these incubators.
The USB study reviews this literature and
shows how difficult objective measure-
ment actually is. Utilising the data devel-
oped by SEDA’s Technology Programmes,
it looks critically at a range of indicators
and how the performance in the different
incubators has varied over the three years
(2007/8, 2008/9 and 2009/10) for which
data are available. Graphic 3 summarises a
few of the indicators.
The results of the analysis are mixed.
Overall macro-indicators (SMMEs creat-
ed, turnover, employment) support that the
STP incubators have performed well, with
most of the key performance indicators
on an upward trend. Overall income and
SMMEs still in business showed a negative
trend, but that may have been the result of
the recession rather than incubator factors.
Measurable indicators about technology
transfer showed disappointing results, while
indicators for financial sustainability of the
incubators (dependency on DTI grants) are
more positive.
The statistical analysis of the data clearly
confirms what the experience in other parts
of the world has shown: some incubators
have performed extremely well (and as a re-
sult, propped up average performance values
for all), while several of the projects have
performed poorly.
Factors that shape
incubator performance
The reasons for poor performance are quite
diverse. A list of more distinct problem
areas that were deduced through in-depth
interviews with some of the problem cases
follows:
SEDA’s Technology Programme (STP) Incubators
the DTI established some incubators and
training centres which were later incorpor­
ated into the Godisa Trust.
The STP was created in 2006 to consoli­
date the business incubators or Technology
BusinessCentres(TBCs)thatreceivefinan­
cial support from national government. All
STP incubators (see Graphic 2) are now
comprehensively funded by the DTI, and
are registered as Section 21 (non-profit)
companies or trusts.
These incubators are tasked with address-
ing the following seven basic and generally
acknowledged needs of the accommodated
small enterprises:
n provide management support to the en-
terprises
n facilitate the acquisition and transfer of
technology
n promote adherence to quality standards
n improve the productivity of the enter-
prises
n strengthen the competitiveness of incuba-
tor firms
n promote entrepreneurial activity (with
particular focus on empowerment groups)
and, through all of this,
n reduce the relatively high failure rate of
start-up and emerging enterprises.
Assessing the performance
of the incubators
Worldwide, discussions about the role
and ‘success’ of small business incubators
have been shaped by efforts objectively to
measure different dimensions of SMME
Chemin Port Elizabeth Chemical industry
Furntech Cape Town; Johannesburg; Furniture
Mthatha; Umzimkulu;
White River; Durban; George
Stainless Steel Initiative Middelburg, Mpumalanga Stainless steel
Soshanguve
Manufacturing Centre
Soshanguve General manufacturing
Softstart Business
Technology Incubators
Pretoria; Durban Hi-tech
SEDA Construction Durban; Port Elizabeth; Construction
Incubators Mthatha; Dundee
Egoli Biotechnology Incubator Gauteng Biotechnology
Zenzele Technology Centre Randburg Mining
Mapfura-Makhura Incubator Limpopo Agriculture
Nelson Mandela ICT Incubator East London ICT
Timbali Technology Incubator Mpumalanga Agriculture (greenhouses)
Automotive Technology Centre Rosslyn; Gauteng Motor industry
Ekhuruleni Base Metals
Incubator
Ekhurhuleni; Gauteng Base metals
Platinum Incubator Rustenburg Platinum/jewellery
Essential Oils
Incubation Centre
Gauteng Agriculture
Downstream Aluminium
Centre of Technology
Richards Bay Aluminium industry
Sugar Cane Incubator Mpumalanga Agriculture
Afri-skill Development
and Training
Mpumalanga Agriculture
SEDA Agriculture, Mining and
Tooling Incubator
Bloemfontein Equipment and Tooling
Limpopo Jewellery Incubator Limpopo Jewellery
Measurable indicators
about technology
transfer showed
disappointing results,
while indicators for
financial sustainability
of the incubators
(dependency on DTI
grants) are more positive.
20 AGENDA No 2 | 2011 | www.usb.ac.za
Centre Place Sector focus

4. Sandheep Ramluckan conducted this study
at the University of Stellenbosch Business
School (USB) as his Master’s in Development
Finance research project under the supervision of
Prof WolfgangThomas. His thesis, An explora-
tory case study on the performance of the SEDA
Business Incubators in South Africa, was pre-
sented in December 2010.
Sandheep
Ramluckan
Prof Wolfgang
Thomas
Key performance indicators of the STP incubators
graphic 3
This study is an example of the type
of research stimulated by the on­
going research programme of the
USB’s Learning Lab on Corporate
engagement at the Bottom of the
Pyramid. This should also include
incubators developed by corporates
for small enterprises (e.g. located
in a township) that supply products
or services to them. The capital cost
could be covered by the corporates
as part of the input costs for the
outsourced products. An example
might be a food-franchising corporate
that facilitates the establishment
of an urban agriculture incubator
along the principles of ‘contract
farming’. Thus the challenges of
BEE, small business support, incu-
bation and corporate development
engagement could be tackled jointly.
n Incubators need dedicated, professionally
competent managers who are ‘passionate’
about the incubator and its incubatees.
n Management needs to be proactive in
training and skills transfer, adapted to the
incubatees’sector needs.
n Incubators have to be adequately resourced
at all times.
n The incubation period (usually 2 – 3 years)
may have to be extended (to 4 – 5 years) in
some sectors,particularly ones like mining
where administrative processes are slow
and cumbersome.
n More attention needs to be given to post-
incubation support to firms that have left
the incubator.
n Incubators might benefit if (some) suc-
cessful firms are allowed to remain in the
incubator after‘graduation’– to function as
a positive catalyst for other trainee-firms.
n High-tech incubators usually have a
higher success rate, inter alia owing to
the relatively better training of incuba-
tees (e.g. in the biotechnology, ICT and
chemical sectors).
n Construction incubators suffer from the
extensive absence of SMME staff from
the centre (since they work at the con-
struction sites).
n Agriculture-focused incubators are high-
risk, given the many variables that influ-
ence the performance of farmers.
n The availability and commitment of men-
tors and coaches can be critical for the
success of incubators.
n The ability of incubators to acquire ma-
chinery and equipment which incubatees
cannot afford to acquire can also be a
critical success factor (e.g. in the cloth-
ing sector).
n Incorporation of the franchise model in
incubator practices may help to overcome
routine problems of small business devel-
opment and ease the training challenge.
Further research challenges
The USB study focuses on a particular cate­
gory of incubators – those funded by DTI
– but it clearly shows the great diversity of
centres and their performance. This tells us
that many more studies need to be undertak-
en in this field: in-depth case studies of spe-
cific (successful or failed) incubators, group
studies focusing on specific sectors, incuba-
tors in specific regions or towns, and lessons
to be learned from incubator efforts in other
African countries. Equally important are
comparisons between the operational per-
formance of publicly as opposed to privately
funded incubators.
Number of new SMMEs created 438 during the years 2007 – 2010
New jobs created in the 29 incubators From 0 – 46 in 2007/8 to 8 – 1 048 in 2009/10
New start-up firms facilitated in
the different incubators
Up to 65 in 2007/8 and up to 75 in 2009/10
Number of SMMEs actively supported Up to 50 – 85 in the incubators
‘Graduated’ firms leaving incubators Up to 14 per incubator in 2007/8 and up to 12 in
2009/10
Total SMME turnover in the respective
financial year (per incubator)
Increase from up to R10m in 2007/8,
R60m in 2008/9 and R80m in 2009/10
Foreign exchange earned Sharp drop in 2008/9 due to the global recession
Women-owned SMMEs established 29% of new SMMEs in 2007 and 36% in 2010
Black-owned SMMEs created Increase from 75 in 2008 to 183 in 2010
Clients still in business
(averages for the incubators)
76% after one year and 57% after two years
indicator outcome
21www.usb.ac.za | AGENDA No 2 | 2011