Time to quit building business incubators

Entrepreneur is a funny French word that describes the men and women who serve as the spark to economic activity.

Without entrepreneurs the economy simply doesn’t grow, so the activity of entrepreneurs has long been of interest to researchers, and there is an abundance of public policies designed to increase the share of people who behave like entrepreneurs and influence where they locate.

Sadly, there’s more than a little disconnect between research and policy. Let me explain.

Most universities teach entrepreneurship, and Indiana has long enjoyed a reputation both for research and innovative teaching in this area.

Today, the research clearly suggests that the myriad programs offered by business colleges can enhance entrepreneurship skill and success. This could improve both business education and the overall economy, which are certainly relevant measures of success.

In contrast, direct policy efforts designed to attract entrepreneurs to a particular city or town have been heavily criticized within the research and failed miserably in practice.

Over the past couple of decades, cities and towns have been in a rush to create new, often costly lures for entrepreneurs. Twenty years ago they were called business incubators, 10 years ago they were called co-working spaces and over the past five years they’ve been called maker’s spaces.

These new names lend an air of sophistication and allure to what is really subsidized rental space for new businesses. But, the real question do they work? And for whom?

Tenants of these facilities clearly benefit from their presence. But, this comes typically at a cost to taxpayers.

A typical example is now at the center of controversy in Muncie. MadJax, a thrice re-named maker’s space finds itself essentially bankrupt. Now its management team (comprised of several public officials) is asking for $200,000 a year for the next 20 years through tax increment financing (TIF).

For readers who don’t know, TIF is property taxes captured from other sources. This doesn’t sound too onerous a payment, until one looks at the opportunity cost of this funding.

In Muncie’s case, the new maker’s space will be financed with about $80,000 a year “captured” from Muncie Community Schools, with the rest lost to other local governments. This is the cost of the adventure, but what about the supposed benefits to other local residents? Won’t this maker’s space lead to economic growth and jobs of the future?

No. Not only does the bulk of research on the local economic effect of incubators, co-working spaces and maker’s spaces find no effect on the local economy, but evidence here in Indiana is even more damning. In the decade and a half that Muncie’s been in the incubator business, the city lost 10 percent of its business.

Over that time we’ve added a co-working space, a maker’s space and a new planned one at Ball State. Worse still, the MadJax tenants all moved from other privately held locations that are now vacant. So, there are losers in this economic development game.

This story is much the same elsewhere around the state. Despite major entrepreneurship programs, only one county with a research university has enjoyed business establishment growth over the past decade — Tippecanoe. All of these other locations have business incubators, co-working spaces and makers places galore.

The simple and intuitive fact about entrepreneurs is that these folks, more than almost anyone else, can locate wherever they wish. So, the places that attract them are naturally the same types of places that attract other folks. Think fast-growing, dynamic, suburban counties or centers of engineering and innovation.

This doesn’t mean that a co-working space, maker’s place or incubator won’t make money and thrive. What it means is that these places won’t make the local economy any better. The much-touted success of any of these places is really no different than a surfer taking credit for the wave. That is as true in Fishers as it is in Hartford City.

So, what should a community do? If the private sector wishes to finance an incubator, maker’s space or co-working space, welcome it with open arms. If you have done a great deal to make your community attractive, have good, well-funded schools, safe neighborhoods and streets, then consider a co-working space as an amenity and judge the investment in that light.

If your schools are troubled and face financial hardship, if you have a crime or substance abuse problem or have a huge number of abandoned homes, or are losing population, you have more pressing demands for tax dollars. And no matter who you are, for goodness sake’s don’t build a second one.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University.