The downsides of specialization: the impact of business incubator's specialization on startups' R&D efficiency and venture capital financing

Business incubation is a combination of business development processes, infrastructure, and people which is intended to nurture new businesses through their early stages. Before joining an incubator, many startups attempt to find a good‐fit incubator, but the incubator actually decides which startups are in its portfolio. We investigated the impact of incubator specialization – the percentage of competitors in the same incubator – on the startups' R&D efficiency. We measured R&D efficiency as the ratio of the number of the current year's applied patents of a startup divided by its R&D expenditure in the previous year. By analyzing survey data from startups positioned in incubators in China over a 3‐year period, we found that greater incubator specialization decreases startups' R&D efficiency, and through which incubator specialization indirectly decreases the startups' venture capital funding. The incubator's specialization is less likely to reduce R&D efficiency in startups where the startup has greater specialized technical knowledge.