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

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.Executive Summary.Organizational sponsorship (OS) is an institutional arrangement whereby private or public entities provide assistance to new firm ventures. Since young firms face low survival chances at birth, it is assumed that any assistance such firms receive is to their advantage. However, very little research supports this assumption (Clayton et al., 2018; Dutt et al., 2016). It is in this context that we examine the impact of OS in different regional environments. Specifically, we look at the interplay between business incubation, a ubiquitous form of OS, urbanization, the city-scale of the region in which the firm is founded, and localization, the presence of same-industry firms in the region, in determining new venture survival. By exploring this interaction, we identify how the efficacy of OS varies in differing environmental circumstances. Additionally, it provides a better understanding of the specific OS mechanisms that are most likely to promote new venture survival depending on regional characteristics.For the purposes of our study, we combine insights from OS and agglomeration literatures. Specifically, we look at the interplay between the bridging, buffering and curating functions of OS with the externalities that arise from urbanization and localization. We consider the regional characteristics that provide new ventures with positive agglomeration externalities of input sharing, quick and quality matching with resource providers, and knowledge spillovers. Similarly, we also consider regional characteristics that give rise to negative externalities of rising costs and congestion. Thus, we identify urbanization and localization scenarios in which new ventures are most in need of buffering from competition, in the form of financial aid and subsidies, and scenarios where new ventures need to be bridged or curated with non-monetary resources such as accountants, lawyers, or industry-specific suppliers and investors. That is, we identify founding environments in which OS functions are most valuable.We test our hypothesis on a population of US business incubators operating between 1997 and 2007. To study the impact of OS at different levels of urbanization and localization, we compare the probability of exit by incubated new ventures with that of a control group of non-incubated new ventures in the same county. We find that incubators are most effective in improving the survival of new ventures when both localization and urbanization in the founding environment are low or when both are high.By linking OS literature with agglomeration literature our study identifies the conditions under which OS is most effective and finds that it is most effective when mitigating the lows of resource-deprived environments or the highs of a hyper-competitive landscape. We also extend the theoretical link between these two streams of literature by identifying the critical role of the OS function of curating in a highly localized and urbanized environment.Our study sheds new light on why 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.