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96-402: Small Business Innovation Research Program
Wendy H. Schacht
Specialist in Science and Technology
In 1982, the Small Business Innovation Development Act (P.L. 97-219) established small business innovation research (SBIR) programs within the major federal research and development (R&D) agencies. The intent of the effort was to increase government funding of small, high technology companies for the performance of R&D with commercial potential. Each federal department with an R&D budget of $100 million or more is required to set aside part of this amount to finance the SBIR activity. From its inception in FY1983 through FY1998, approximately $8.6 billion in awards have been made for 50,468 projects. The original program has been extended several times and is now scheduled to sunset October 1, 2000. H.R. 2392, as reported from the House Committee on Small Business and discharged from the House Committee on Science, would reauthorize the SBIR activity through September 30, 2007.
The Small Business Innovation Research program was originally mandated to increase the participation of small, high technology firms in the federal R&D endeavor. Congressional support was predicated upon the belief that while technology-based companies under 500 employees tended to be highly innovative, and innovation is essential to the economic well-being of the United States, these businesses were not receiving a sufficient share of government research support. To guarantee this sector a portion of the federal budget, agency SBIR programs were created to expand research and development opportunities for small companies. Funding for the effort was generated by a mandatory set-aside established to compensate for what was viewed as a federal preference for financing R&D in large corporations.
Current law requires that every federal department with an R&D budget of $100 million or more establish and operate an SBIR program. A set percentage of that agency's extramural research and development budget -- originally at 1.25%, now at 2.5% -- is to be used to support mission-related work in small companies. (It should be noted that P.L. 97-219 excluded appropriated funds for defense programs in the Department of Energy from that agency's extramural R&D calculations.) In addition, all departments with R&D spending above $20 million are directed to establish goals for financing small business R&D at levels higher than the previous year.
The objectives of the SBIR program include stimulation of technological innovation in the small business sector, increased use of this community to meet the R&D needs of the government, additional involvement of minority and disadvantaged individuals in the process, and expanded commercialization of the results of federally funded R&D. To achieve this, agency SBIR efforts involve a three-phase activity. In the first phase, awards up to $100,000 (for 6 months) are provided to evaluate a concept's scientific or technical merit and feasibility. The project must be of interest to and coincide with the mission of the supporting organization. Projects that demonstrate potential after the initial endeavor can compete for Phase II awards of up to $750,000 (lasting one-two years) to perform the principal R&D. Phase III funding, directed at the commercialization of the product or process, is expected to be generated in the private sector. Federal dollars may be used if the government perceives that the final technology or technique will meet public needs. P.L. 102-564, a subsequent 1992 reauthorization of the program, directed agencies to weigh commercial potential as an additional factor in evaluating SBIR proposals. This is to encourage funding of projects that may have market applicability rather than those which meet only the needs of the government.
Ten departments have SBIR programs including the Departments of Agriculture, Commerce, Defense (DOD), Education, Energy, Transportation, and Health and Human Services; the Environmental Protection Agency; the National Aeronautics and Space Administration (NASA); and the National Science Foundation (NSF). Each agency has developed SBIR activities reflective of that organization's management style. The departments individually identify R&D interests, administer program operations, and control the distribution of financial support. Funding can be disbursed in the form of contracts, grants, or cooperative agreements. Separate agency solicitations are issued at established times. Current authorization for the SBIR endeavor terminates ("sunsets") October 1, 2000.
Broad policy and guidelines have been established by the Small Business Administration (SBA) under which the individual departments operate their SBIR programs. These include easy, standard, and timely solicitations, simplified and standard funding processes, and minimized regulatory requirements. The SBA has responsibility for surveying, monitoring, and reporting to Congress on the conduct of the separate departmental activities. The criteria the Administration has developed for eligibility in the SBIR program include companies that are independently owned and operated; not dominant in the field of research proposed; for profit; the employer of 500 or less people; the primary employer of the principal investigator; and at least 51% owned by U.S. citizens or lawfully admitted permanent resident aliens. In addition, the SBA operates a computer system to link SBIR awardees with venture capital firms.
A pilot effort designed to encourage commercialization of university and federal laboratory R&D by small companies was created by P.L. 102-564 and reauthorized through FY2001 by P.L. 105-135. The Small Business Technology Transfer program (STTR) provides funding for research proposals that are developed and executed cooperatively between a small firm and a scientist in a research organization and fall under the mission requirements of the federal funding agency. Up to $100,000 in Phase I financing is available for one year; Phase II awards of $500,000 may be made for two years. Financial support for this effort comes from a 0.15% set-aside of the R&D budgets of departments that spend over $1 billion per year on research and development. Five agencies are involved including the Departments of Energy, Defense, and Health and Human Services, NASA, and NSF.
The General Accounting Office (GAO) is legislatively directed to assess the implementation of the Small Business Innovation Development Act, as amended, and has issued a series of reports documenting its findings. A 1987 study explored the effectiveness of SBIR program procedures and found that both the evaluation and selection processes were sufficient to "reasonably" ensure awards were based on technical merit. It was also determined that the majority of agencies were not awarding Phase I grants and contracts within the 6-month time frame required by the SBA guidelines. Another GAO report the following month surveyed the participants and noted that most were "generally satisfied" with the administration of SBIR programs.
In 1989, GAO reported that agency heads found the SBIR effort to be beneficial and met the organization's R&D needs. Most indicated that the "... SBIR programs had developed new research areas, placed more emphasis on the application of research results, and led to wider use of small businesses as research performers." The study concluded that projects were, for the most part, of high quality. At DOD and NASA, however, SBIR efforts stressed R&D to meet agency mission requirements in contrast to other SBIR programs that focused on commercialization for private sector markets. All of the departments stated that SBIR projects, when compared with other research activities, had greater potential to result in new products and processes.
Testimony presented by GAO to the House Small Business Committee in October 1991, stated that the program "... clearly is doing what Congress asked it to do in achieving commercial sales and developmental funding from the private sector." An SBA study found that approximately one in four SBIR projects will result in the sale of new commercial products or processes. Another GAO report issued in May 1992, using the extent of Phase III follow-on funding as a measure of effectiveness, noted that despite a short time frame and the fact that many SBIR projects had not had sufficient time to mature into marketable technologies and techniques, "... the program is showing success in Phase III activity." Almost two-thirds of the projects already had sales or received additional funding totaling approximately $1.1 billion as of July 1991. The major portion of support was from the private sector.
The 1992 study also identified several issues for possible further congressional exploration. According to GAO, DOD placed less emphasis on commercialization than other agencies and utilized the SBIR program primarily to address the department's R&D needs. Questions were raised about the requirements for competitive bidding when companies looked to federal departments for Phase III contracts after successfully completing Phases I and II. GAO noted that clarification of the Competition in Contracting Act of 1984 (as amended) might be necessary. In addition, there was disagreement over whether the federal agency or the small firm should continue to work on technology development after the cessation of SBIR project funding. Of particular interest, GAO concluded that firms receiving multiple Phase II awards tended to have lower Phase III sales and less additional developmental support. The reasons for this remained unclear, but the suggestion was made that these companies may have focused on securing funds through SBIR awards rather than through commercialization of their R&D results.
A March 1995 GAO report found that multiple Phase II funding had become a problem, particularly at NSF, NASA, and DOD. Among the reasons cited were the failure of companies to identify identical proposals made elsewhere in violation of the mandatory certification procedure; uncertainty in definitions and guidelines concerning "similar" research; and lack of interagency mechanisms to exchange information on projects. Several recommendations were made to address duplication. According to GAO testimony presented in March 1996, the SBA has taken steps to implement these suggestions. The study also determined that the quality of the research appears to have "kept pace" with the program's expansion, although it was still too early to make a definitive judgment. Three factors supported this assessment including the substantive level of competition, the fact that the agencies identified more proposals as meritorious that could be funded, and appraisals by SBIR personnel in the five major agencies indicating that the quality of submissions remained high.
Another GAO study released in April 1998 noted that between 35-50% of SBIR projects had resulted in sales or additional private sector investment. Despite earlier indications of problems associated with multiple award winners, this report found that such firms have similar commercialization rates as single awardees. Critical technology lists were being used to determine agency solicitations and there was little evidence of participation by foreign firms. In addition, while several agencies had implemented programs to assure continuity in funding, there were suggestions of several possible inaccuracies in defining the extramural R&D budgets on which the set-aside is based.
The most recent GAO analysis, issued June 1999, reported that, despite participation in the SBIR program being widespread with an average 750 new companies submitting proposals annually, awards tend to be concentrated both geographically and by firm. "The 25 most frequent winners, which represent fewer than 1 percent of the companies in the program, received about 11 percent of the program's awards from fiscal year 1983 through fiscal year 1997." In addition, businesses in a small number of states, particularly California and Massachusetts, were awarded the most number of projects. The study also noted that while commercial potential is considered by all agencies, each has developed different evaluation approaches. However, other goals, including innovation and responsiveness to agency mission, still remain important in determining awards.
Implementation of the STTR program also has been evaluated. In a January 1996 report, GAO found that, in general, the federal agencies favorably rated the quality of the winning proposals (in the first year) and that, for the most part, the projects had commercial potential, although the costs might be high. The government had taken steps to avoid potential conflicts of interest between federal laboratories and departmental headquarters. There was no indication that this pilot effort was competing for proposals with the established SBIR activity or "... reducing the quality of the agencies' R&D in general." Instead it was credited for encouraging collaborative work. Yet, GAO noted that because the programs are so similar, there are questions whether or not a separate activity is necessary. Any real evaluation of success in technology transfer, however, could not be accomplished for several years because of the time necessary for bringing the results of R&D to the commercial marketplace. These findings were reiterated in published testimony given by GAO in May and September 1997.
From its inception in FY1983 through FY1998, the SBIR program has made 50,468 awards totaling approximately $8.6 billion. The table below summarizes the funding awarded and the number of projects selected for the SBIR program as provided by the Small Business Administration. Information on the Small Business Technology Transfer Pilot Project is contained in the subsequent chart.
SBIR Program: Dollars Awarded and Projects Funded
|Fiscal Year||Dollars Awarded (millions)||Awards|
|Phase I||Phase II||Total*||Phase I||Phase II||Total*|
*Includes modifications to previous awards and funds set aside for proposals in negotiation.
STTR Program: Dollars Awarded and Projects Funded
|Fiscal Year||Dollars Awarded (millions)||Awards|
|Phase I||Phase II||Total||Phase I||Phase II||Total|
Issues for Consideration
Authorization for the SBIR program sunsets October 1, 2000. H.R. 2392 would extend this activity through September 30, 2007. In exploring proposals to reauthorize the program, certain issues might be considered, including the use of a set-aside to fund the SBIR endeavor, a subject of intense discussion during the debate surrounding the initial legislation. While this mechanism was used to insure funding for small firms believed to be excluded from federal R&D contracts for various reasons, opponents argued that a set-aside interferes with the normal efficiency of the marketplace. It also was claimed that a set-aside circumvents the congressional budget process used to determine program priorities and budget allotments. In effect, the set-aside redirects money authorized and appropriated for one purpose or program and places it elsewhere.
As Congress makes decisions concerning allocation of federal resources, additional questions may be raised as to the effect of a set-aside. Does this distort the choices customarily made through the budget process which includes input from the executive and legislative branches as well as from outside research performers? Will this limit the agencies' ability to meet congressionally mandated goals? If the set-aside amount is increased as some have suggested, are there sufficient numbers of qualified firms to receive the additional funding generated? If not, would the number of awards to individual companies have to increase to meet spending requirements? Should this occur, what are the implications considering initial indications that companies with multiple awards may not be as successful in technology commercialization?
Other issues might be addressed. Have the problems identified by GAO associated with the duplication of awards been adequately resolved? Are the SBIR and STTR programs meeting their different mandated objectives or are they serving an identical purpose? Does the focus on commercialization raise concerns by those who argue that the government has no role in directly supporting industrial research and development? These and other questions may be explored as the 106th Congress considers any reauthorization of the Small Business Innovation Research program.