ANALYSIS
Business Incubation and the Absence of Markets?
Why publicly funded incubation and SME support instruments struggle to produce durable market integration
Reference point
Humala, Heidi S.; Olafsen, Ellen; Schandera, Stefan (2014)
This feature uses the above study as a temporal reference point.
It does not reproduce the evaluation. It examines why core observations documented by 2014 remain structurally valid today.
Published: January 2026
Head note
Business incubation has been a central policy instrument in transition and emerging economies for more than three decades.
Despite repeated redesigns, new labels, and sustained public funding, its contribution to durable market integration remains limited.
While this feature focuses on business incubation, the structural patterns described are not specific to incubators. They apply more broadly to publicly funded SME support instruments, including grant schemes, acceleration programs, and voucher-based support.
The question is not whether these instruments are well intentioned, but why weak market outcomes persist even where their structural limits have long been documented
1. What business incubation was supposed to achieve
Publicly funded business incubation programs were designed to compensate for missing market functions.
In transition economies of the 1990s and early 2000s, incubators, technoparks, and business innovation centers were introduced as substitutes for mechanisms that functioning markets normally provide: early customer access, exposure to competition, financing discipline, and learning through failure.
The underlying assumption was linear and widely shared:
temporary public support → firm maturation → market entry → self-sustaining growth.
This assumption underestimated the role of enforced market feedback.
Support was treated as transitional, while in practice it became structural.
2. Business incubation in transition economies since the 1990s
Business incubation is not a recent policy experiment.
In Eastern Europe, Central Asia, and comparable transition contexts, publicly funded incubation structures have existed since the early post-socialist period. Throughout the 1990s and 2000s, most initiatives were:
- publicly financed,
- donor-designed or donor-influenced,
- institutionally embedded in universities or local authorities,
- weakly connected to paying customers and industrial demand.
By the late 2000s, private initiatives began to emerge—often selective, sector-specific, and network-driven. A structural split became visible:
- public programs emphasized participation, capacity building, and inclusion,
- private initiatives emphasized demand, revenue, and selection pressure.
Public incubation did not disappear. It became institutionalized, frequently sustained by international donor funding and weak local ownership.
3. Incentive structures in publicly funded incubation programs
The core issue is not competence, but accountability.
Publicly funded incubation programs operate within layered incentive structures:
- donors and ministries fund programs, not firms,
- implementing agencies report upward, not to markets,
- incubator management is rewarded for delivery, not post-support firm survival,
- participating firms optimize for program access, not customer validation.
Market integration is assumed as a downstream effect.
It is rarely enforced as a condition.
No actor in the system bears direct responsibility for failure once public support ends.
4. Activity metrics vs. market integration
Where market feedback is weak, administrative metrics take its place.
Common indicators include:
- number of startups supported,
- trainings delivered,
- events organized,
- graduation rates.
These metrics are politically legible and administratively convenient.
They are also largely decoupled from market performance.
Revenue generation, repeat customers, integration into supply chains, or survival without subsidies are harder to measure and harder to attribute. As a result, activity becomes a proxy for impact.
This is not a measurement error.
It is a rational response to funding and reporting incentives.
5. Sustainability in business incubation programs
Program survival vs. firm survival
In many evaluations, sustainability refers to the continuity of the incubation entity itself.
The implicit question becomes whether the incubator can secure follow-up funding, not whether supported firms remain viable once public support ends.
The World Bank / infoDev evaluation from 2014 already noted that long-term financial sustainability beyond public funding remained limited for many incubated firms, even where short-term outputs appeared positive.
An incubator can be institutionally sustainable while producing firms that are not.
6. Graduation without market transition
Graduation is frequently treated as success.
In practice, it often marks the end of eligibility rather than the beginning of exposure to competitive markets. Many firms exit incubation environments without secured demand, without financing discipline, and without meaningful market validation.
Graduation becomes a procedural milestone, not an economic one.
The structural gap between protected environments and real markets remains.
7. Why publicly funded incubation programs persist
Public incubation programs rarely fail in institutional terms.
They persist because:
- budgets are renewed based on activity delivery,
- termination carries political and reputational cost,
- learning would require acknowledging structural limits rather than implementation flaws.
Programs are adapted, renamed, or reframed—but rarely discontinued.
The system optimizes for continuity, not correction.
8. Business incubation as a proxy for SME funding instruments
Business incubation is a particularly visible case of a broader pattern.
Similar incentive dynamics apply across publicly funded SME support instruments, including grant schemes, acceleration programs, and subsidized financing tools. The common features are:
- output-oriented reporting,
- weak coupling to real demand,
- limited exit logic at instrument level.
If an instrument cannot fail institutionally, it cannot enforce market discipline.
Incubation makes this visible because it concentrates these dynamics in one place.
9. What was already visible by 2014
Structural limits of business incubation
By the early 2010s, the core limitations of publicly funded business incubation models were already documented:
- weak demand-side integration,
- limited post-support sustainability,
- high dependence on public funding,
- poor correlation between activity metrics and market outcomes.
These are not context-specific findings.
They are structural properties of incentive-driven instruments operating without enforced market feedback.
Their persistence today reflects not a lack of evidence, but a lack of incentive to act on it.
10. Implications for market-oriented SME policy
For decision-makers, the relevant question is not whether business incubation “works,” but under which conditions publicly funded SME instruments can plausibly translate into market integration.
Any serious assessment must ask:
- who bears the cost of failure once public support ends,
- which actors are accountable to paying customers,
- when market feedback overrides program logic,
- what would cause the instrument itself to stop.
If these questions cannot be answered structurally, the instrument remains an activity framework—not a market integration mechanism.
References
Humala, Heidi S.; Olafsen, Ellen; Schandera, Stefan (2014).
An evaluation and impact assessment of business incubation models in Eastern Europe and Central Asia : an infoDev study of nine business incubators in Armenia, Belarus, Kazakhstan, Poland, Romania, the Russian Federation, Serbia, and Turkey (English).
Washington, DC : World Bank Group.
http://documents.worldbank.org/curated/en/192561468143364613
© 2025 Stefan Schandera. All rights reserved.
This feature reflects analytical interpretations based on field observations and publicly available information.
It does not constitute policy or investment advice.
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