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Federal Research: Observations on the Small Business Innovation Research Program (Testimony, 04/22/98, GAO/T-RCED-98-170).

As a nation competing in a global economy, the United States depends
heavily on innovation through research and development (R&D). Because
small business is a leading source of significant innovation, Congress
established the Small Business Innovation Research program in 1982.
Funding for the program, which was reauthorized in 1992, totaled about
$1 billion in fiscal year 1997. The related report (GAO/RCED-98-132)
discusses the following aspects of the program: (1) agencies' adherence
to statutory funding requirements, (2) agencies' audits of external R&D
budgets, (3) the effect of the application review process and funding
cycles on award recipients, (4) the extent of companies' project
activity after receiving program funding and agencies' techniques to
foster commercialization, (5) the number of multiple-award recipients
and the extent of their project-related activity after receiving program
funding, (6) the occurrence of funding for single-proposal awards, (7)
participation by women-owned businesses and socially and economically
disadvantaged businesses, (8) the program's promotion of the critical
technologies, (9) the extent to which foreign firms benefit from the
results of the program, and (10) the geographical distribution of
program awards.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-170
     TITLE:  Federal Research: Observations on the Small Business 
             Innovation Research Program
      DATE:  04/22/98
   SUBJECT:  Research program management
             Small business assistance
             Interagency relations
             Research and development
             Minority businesses
             Accountability
             Technology transfer
             Budget administration
IDENTIFIER:  Small Business Innovation Research Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Government Programs and Oversight,
Committee on Small Business, House of Representatives

For Release
on Delivery
Expected at
10 a.m.  EDT
Wednesday
April 22, 1998

FEDERAL RESEARCH - OBSERVATIONS ON
THE SMALL BUSINESS INNOVATION
RESEARCH PROGRAM

Statement of Susan D.  Kladiva
Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-170

GAO/RCED-98-170T


(141184)


Abbreviations
=============================================================== ABBREV

  DOD -
  DOE -
  NASA -
  NIH -
  NSF -
  R&D -
  SBA -
  SBIR -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss our review of the Small
Business Innovation Research (SBIR) program.\1 As a nation competing
in a global economy, the United States depends heavily on innovation
through research and development (R&D).  Because small business is a
principal source of significant innovation, the Congress established
the SBIR program in 1982.  The program was reauthorized in 1992 by
the Small Business Research and Development Enhancement Act,\2 to
expand and improve the SBIR program, to emphasize the program's goal
of increasing private sector commercialization of technology, to
increase small business participation in federal research and
development, and to improve the federal government's dissemination of
information concerning the program, particularly with regard to
program participation by women-owned small business concerns and by
socially and economically disadvantaged small business concerns.  Ten
federal agencies participate in the SBIR program.  Five of them--the
Department of Defense (DOD), the National Aeronautics and Space
Administration (NASA), the Department of Health and Human Services
and particularly its National Institutes of Health (NIH), the
Department of Energy (DOE), and the National Science Foundation
(NSF)--were included in our review.  Each agency manages its own
program, while the Small Business Administration (SBA) plays a
central administrative role, such as issuing policy directives and
annual reports for the program. 

In our April 1998 report we discussed

  -- Agencies' adherence to statutory funding requirements. 

  -- Agencies' audits of extramural (external) R&D budgets. 

  -- The effect of the application review process and funding cycles
     on award recipients. 

  -- The extent of companies' project activity after receiving SBIR
     funding and agencies' techniques to foster commercialization. 

  -- The number of multiple award recipients and the extent of
     project activity after receiving SBIR funding. 

  -- The occurrence of funding for single proposal awards. 

  -- Participation by women-owned business and socially and
     economically disadvantaged business. 

  -- SBIR's promotion of the critical technologies. 

  -- The extent foreign firms benefit from SBIR results. 

  -- The geographical distribution of SBIR awards. 

Our statement highlights the message of that report.  In summary, Mr. 
Chairman: 

It appears that agencies have adhered to the act's funding
requirements.  Agency program officials reported that they are not
using SBIR funds to pay for administrative costs of the program such
as salaries and support services used to process awards.  The program
officials also believe that they are adhering to the statutory
requirement to fund the program at 2.5 percent of agencies'
extramural research budget.  However, some officials believe that
agencies are using different interpretations of the "extramural
budget" definition, which may lead to incorrect calculations of their
extramural research budgets.  In our report, we recommended that the
Small Business Administration provide additional guidance to the
participating agencies on how to calculate their "extramural
budgets." The Small Business Administration concurred with our
recommendation. 

Of the five agencies that we reviewed, only two--NSF and NASA-- have
conducted audits of their extramural budgets.  In 1997, the Office of
Inspector General at NSF conducted an audit of the agency's
extramural budget and found that it contained over $100 million of
unallowable costs such as training and overhead.  DOD, NIH, and DOE
have not conducted any audits of their extramural R&D budgets nor do
they have plans to conduct any audits in the near future. 

While most of the SBIR officials we interviewed said that neither the
application review process nor current funding cycles have had an
adverse effect on award recipients' financial status or ability to
commercialize, some recipients have said that any interruption in
funding awards, for whatever reason, affects them negatively.  In
response to these concerns over the continuity of funding, most of
the participating SBIR agencies have established programs to minimize
funding gaps. 

Companies responding to GAO's and DOD's\3 surveys of award recipients
reported that approximately 50 percent of their projects had sales of
products or services related to the research or received additional
developmental funding after receiving SBIR funding.  In both surveys,
approximately 35 percent of the projects had resulted in sales of
products or services, and approximately 45 percent of the projects
received additional developmental funding.  In addition, the agencies
identified various techniques to foster the commercialization of
SBIR-funded technologies. 

We found that the number of companies receiving multiple awards,
which we defined as those phase I award recipients that also received
15 or more phase II awards in the preceding 5 years, had grown from
10 companies in 1989 to 17 in 1996.  Our analysis shows that
multiple-award recipients and non-multiple-award recipients
commercialized at almost identical rates. 

We found that agencies rarely fund research for a given solicitation
topic where only one proposal was received.  For example, DOD's SBIR
official reported that there were only three instances when a single
proposal was submitted for a given solicitation topic out of the
30,000 proposals that were received from various solicitations; none
of the cases resulted in an award. 

Of the five agencies that we examined, all reported engaging in
activities to foster the participation of women-owned or socially and
economically disadvantaged small businesses.  For example, all SBIR
program managers participate each year in a number of national and
regional small business conferences and workshops that are
specifically designed to foster increased participation by
women-owned and/or socially and economically disadvantaged small
businesses. 

All of the agencies' SBIR officials we interviewed believed that the
listings of critical technologies, as identified by DOD and the
National Critical Technologies Panel, are used in developing their
respective research topics or that the research being conducted falls
within one of the two lists.\4

We found little evidence of foreign firms, or U.S.  firms with
substantial foreign ownership interests, benefiting from technology
or products developed as a direct result of SBIR-funded research.  In
our 1992 report, we noted that fewer than 5 percent of the 1,457
respondents to our questionnaire said they had finalized licensing
agreements with companies or investors in foreign countries.  Only 1
percent reported manufacturing agreements.  These same questions were
included in the recent survey of DOD's award recipients, which
reported similar responses. 

A recent SBA study reported that one-third of the states received 85
percent of all SBIR awards and SBIR funds.\5 For fiscal year 1996, we
found that SBIR awards were concentrated in the states of California
and Massachusetts.  However, every state has at least two.  Previous
studies of SBIR have linked the concentration of awards to local
characteristics, such as the prevalence of small high-tech firms. 


--------------------
\1 Federal Research:  Observations on the Small Business Innovation
Research Program (GAO/RCED-98-132, Apr.  17, 1998). 

\2 P.L.102-564, Oct.  28, 1992. 

\3 The GAO survey was conducted in 1991 and the DOD survey was
conducted in 1996. 

\4 These lists indicate technologies that are critical to meeting
national needs such as competitiveness, defense, energy security, and
quality of life. 

\5 An Analysis of the Distribution of SBIR Awards by States,
1983-1996, Small Business Administration Office of Advocacy (Jan. 
1998). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The Small Business Innovation Development Act of 1982\6 provided for
a three-phase program.  Phase I is intended to determine the
scientific and technical merit and feasibility of a proposed research
idea.  Work in phase II further develops the idea, taking into
consideration such things as the commercialization potential.  Phase
III generally involves the use of nonfederal funds for the commercial
application of a technology or non-SBIR federal funds for continued
R&D under government contracts. 

The Small Business Research and Development Enhancement Act of 1992
reauthorized the SBIR program through fiscal year 2000.  The act
emphasized the program's goal of increasing private sector
commercialization and provided for incremental increases in SBIR
funding up to not less than 2.5 percent of agencies' extramural R&D
budgets by fiscal year 1997.  Moreover, the act directed SBA to
modify its policy directive to reflect an increase in funding for
eligible small businesses, that is, businesses with 500 or fewer
employees.  This increased funding from $50,000 to $100,000 for phase
I and from $500,000 to $750,000 for phase II, with adjustments once
every 5 years for inflation and changes in the program. 


--------------------
\6 P.L.  97-219, July 22, 1982. 


   IT APPEARS THAT AGENCIES ARE
   ADHERING TO STATUTORY FUNDING
   REQUIREMENTS; HOWEVER, THE
   DEFINITION OF EXTRAMURAL R&D ON
   WHICH THE FUNDING LEVELS ARE
   BASED MAY NOT BE CONSISTENTLY
   APPLIED
---------------------------------------------------------- Chapter 0:2

The agencies' SBIR officials reported that they have adhered to the
act's requirement of not using SBIR funds to pay for the
administrative costs of the program, such as salaries and support
services used in processing awards.  However, they added that the
funding restriction has limited their ability to provide some needed
administrative support. 

The program officials also believe that they are adhering to the
statutory requirement to fund the program at 2.5 percent of agencies'
extramural research budget.  Some of the officials expressed concern
because they believe that agencies are using different
interpretations of the "extramural budget" definition.  This may lead
to incorrect calculations of their extramural research budgets.  For
example, according to DOD's SBIR program manager, all eight of DOD's
participating military departments and defense agencies that make up
the SBIR program have differing views on what each considers an
extramural activity and on the appropriate method for tracking
extramural R&D obligations.  As a result, the program and budget
staff have not always agreed on the dollar amount designated as the
extramural budget. 


   ONLY TWO OF THE AGENCIES WE
   REVIEWED HAVE CONDUCTED AUDITS
   OF THEIR EXTRAMURAL BUDGETS
---------------------------------------------------------- Chapter 0:3

Of the five agencies we reviewed, only two have recently audited
their extramural R&D budgets.  Both NSF and NASA conducted audits of
their extramural R&D budgets in fiscal year 1997.  DOD, DOE, and NIH
have not conducted any audits of their extramural R&D budgets nor do
they plan to conduct any audits in the near future. 

NSF's audit, which was performed by its Inspector General, concluded
that NSF was overestimating the size of its extramural R&D budget by
including unallowable costs, such as education, training, and
overhead.  NSF estimated that these unallowable costs totaled over
$100 million.  The Inspector General's audit report concluded that by
excluding these "unallowables," NSF will have reduced the funds
available for the SBIR program by approximately $13 million over a
5-year period. 

Likewise, NASA has completed a survey of fiscal year 1995 budget data
and is currently reviewing fiscal year 1996 data at its various field
centers.  NASA officials say this is an effort to (1) determine the
amount spent on R&D and (2) categorize the R&D as either intramural
or extramural activities. 


   APPLICATION REVIEW PROCESS AND
   CURRENT FUNDING CYCLES ARE NOT
   ADVERSELY AFFECTING RECIPIENTS'
   FINANCIAL STATUS OR THE
   COMMERCIALIZATION OF PROJECTS
---------------------------------------------------------- Chapter 0:4

Most of the SBIR officials we interviewed believed that neither the
application review process nor current funding cycles are having an
adverse effect on award recipients' financial status or their ability
to commercialize their projects.  Specifically, DOD, DOE, NSF, and
NASA stated that their respective review processes and funding cycles
have little to no adverse effect on the recipients' financial status
or the small companies' ability to commercialize their technologies. 
Furthermore, NIH believes that having three funding cycles in each
year has had a beneficial effect on applicants. 

SBIR officials did say that some recipients had said that any
interruption in funding awards, for whatever reason, affects them
negatively.  One SBIR program manager stated that at DOD, most award
recipients often have no way of paying their research teams during a
funding gap.  As a result, ongoing research may be delayed, and the
"time-to-market"--that is the length of time from the point when
research is completed to the point when the results of the research
are commercialized--may be severely impaired, thus limiting a
company's commercial potential. 

As a result, most of the participating SBIR agencies have established
special programs and/or processes in an effort to mitigate any
adverse effect(s) caused by funding gaps.  One such effort is the
Fast Track Program, employed at DOD, whereby phase I award recipients
who are able to attract third-party funding are given the highest
priority in the processing of phase II awards.  At DOE and NIH, phase
I award recipients are allowed to submit phase II applications prior
to the completion of phase I.  NASA has established an electronic
SBIR management system to reduce the total processing time for awards
and is currently exploring the possibility of instituting a fast
track program similar to that of DOD. 


   PHASE III PARTICIPATION RATES
   CONTINUE AT PREVIOUSLY REPORTED
   LEVELS, WHILE AGENCIES'
   COMMERCIALIZATION TECHNIQUES
   VARY
---------------------------------------------------------- Chapter 0:5

The third phase of SBIR projects is expected to result in
commercialization or a continuation of the project's R&D.  In 1991,
we surveyed 2,090 phase II awards that had been made from 1984
through 1987 regarding their phase III activity.  In 1996, DOD
conducted its own survey, which closely followed our format.  DOD's
survey included all 2,828 of DOD's SBIR projects that received a
phase II award from 1984 through 1992. 

While analyzing the response data from our 1991 survey, we found that
approximately half of the phase II awards reported phase III activity
(e.g., sales and additional funding) while the other half had no
phase III activity.  (See table 1.) Overall, 515 responses, or 35
percent, indicated that their projects had resulted in sales of
products or processes, while 691, or 47 percent, had received
additional developmental funding.\7

Our analysis of DOD's 1996 survey responses showed that phase III
activity was occurring at similar rates to GAO's survey.  Our
analysis of these responses showed that 765 projects, or 53 percent,
reported that they were active in phase III at the time of the
survey, while the other half did not report any phase III activity. 
The DOD respondents indicated that 442 awards, or 32 percent, had
resulted in actual sales, while 588 reported the awards had resulted
in additional developmental funding. 



                                Table 1
                
                 Summary of Reported Phase III Activity

                                               GAO
Survey responses                  (governmentwide)                 DOD
------------------------------  ------------------  ------------------
Projects with phase III                        765                 653
 activity
Projects with sales                            515                 442
Projects with additional
 developmental funding                         691                 588
Projects with no phase III                     692                 711
 activity
======================================================================
Total                                        1,457               1,364
----------------------------------------------------------------------
Source:  GAO's 1991 survey data and DOD's 1996 survey data. 

Agencies are currently using various techniques to foster
commercialization, although there is little or no empirical evidence
suggesting how successful particular techniques have been.  For
example, in an attempt to get those companies with the greatest
potential for commercial success to the marketplace sooner, DOD has
instituted a Fast Track Program, whereby companies that are able to
attract outside commitments/capital for their research during phase I
are given higher priority in receiving a phase II award.  The Fast
Track Program not only helps speed these companies along this path
but also helps them attract outside capital early and on better terms
by allowing the companies to leverage SBIR funds.  In 1996, for
example, DOD's Fast Track participants were able to attract $25
million in outside investment. 

Additionally, DOD, in conjunction with NSF and SBA, sponsors three
national SBIR conferences annually.  These conferences introduce
small businesses to SBIR and assist SBIR participants in the
preparation of SBIR proposals, business planning, strategic
partnering, market research, the protection of intellectual property,
and other skills needed for the successful development and
commercialization of SBIR technologies. 

DOE's Commercialization Assistance Program provides phase II award
recipients with individualized assistance in preparing business plans
and presentation materials to potential partners or investors.  This
program culminates in a Commercialization Opportunity Forum, which
helps link SBIR phase II award recipients with potential partners and
investors. 

NSF provides (1) its phase I award recipients with in-depth training
on how to market to government agencies and (2) its phase I and II
award recipients with instructional guides on how to commercialize
their research.  Similarly, NASA assists its SBIR participants
through numerous workshops and forums that provide companies with
information on how to expand their business.  NASA also provides
opportunities for SBIR companies to showcase their technologies to
larger governmental and commercial audiences.  Moreover, NASA has
established an SBIR homepage on the Internet to help promote its SBIR
technologies and SBIR firms and has utilized several of its
publications as a way for SBIR companies to make their technologies
known to broader audiences. 


--------------------
\7 Figures do not add to 100 percent because some projects may have
reported both types of activity. 


   MULTIPLE-AWARD RECIPIENTS
   COMMERCIALIZE AT RATES SIMILAR
   TO THOSE OF NON-MULTIPLE-AWARD
   RECIPIENTS
---------------------------------------------------------- Chapter 0:6

Using SBA's data, we identified phase I award recipients who had
received 15 or more phase II awards in the preceding 5 years.  On the
basis of survey data from both GAO's and DOD's surveys, we compared
the commercialization rates as well as the rates at which projects
received additional developmental funding for these multiple-award
recipients with the non-multiple-award recipients.  This comparison
of the phase III activity is summarized in table 2.  This analysis
shows that the multiple-award recipients and the non-multiple-award
recipients are commercializing at comparable rates. 



                                Table 2
                
                Comparison of Multiple-Award Recipients
                   and Non-Multiple-Award Recipients

                                               GAO
Survey Responses                  (governmentwide)                 DOD
------------------------------  ------------------  ------------------
Projects by multiple-award                     200                 261
 recipients
Projects by non-multiple-                     1257                1103
 award recipients
Commercialization rates for                   40.5                40.2
 multiple-award recipients
Commercialization rates for                   40.3                39.3
 non-multiple-award recipients
----------------------------------------------------------------------
Source:  GAO's 1991 survey data and DOD's 1996 survey data. 

According to both surveys, multiple-award recipients receive
additional developmental funding at higher rates than the
non-multiple-award recipients.  However, the average levels of sales
and additional developmental funding for the multiple-award
recipients are lower than those for non-multiple-award recipients. 


   SOLICITATIONS RARELY RESULT IN
   SINGLE-PROPOSALS
---------------------------------------------------------- Chapter 0:7

When an agency funds research for a given solicitation topic where
only one proposal was received, it may appear that there was a lack
of competition.  The majority of the SBIR officials we interviewed
indicated that receiving a single proposal for a given solicitation
topic is extremely rare.  DOD reported that from 1992-96 there were
only three instances when a single proposal was submitted for a given
solicitation topic out of 30,000 proposals that were received for
various solicitations.  DOD's SBIR official did state, however, that
none of the cases resulted in an award. 

Both DOE's and NASA's SBIR officials reported that they did not
receive any single proposals for this time period.  Moreover, NASA's
SBIR officials stated that their policy is to revise a solicitation
topic/subtopic if it receives fewer than 10 proposals or to drop the
topic/subtopic from the solicitation. 


   ALL OF THE AGENCIES PROMOTE
   PROGRAM PARTICIPATION BY
   WOMEN-OWNED AND SOCIALLY AND
   ECONOMICALLY DISADVANTAGED
   SMALL BUSINESSES
---------------------------------------------------------- Chapter 0:8

One of the purposes of the 1992 act was to improve the federal
government's dissemination of information concerning the SBIR
program, particularly with regard to program participation by
women-owned small businesses and by socially and economically
disadvantaged small businesses.  All of the agencies we reviewed
reported participating in activities targeted at women-owned or
socially and economically disadvantaged small businesses.  All SBIR
program managers participate each year in a number of regional small
business conferences and workshops that are specifically designed to
foster increased participation in the SBIR program by women-owned and
socially and economically disadvantaged small businesses.  The SBIR
managers also participate in national SBIR conferences that feature
sessions on R&D and procurement opportunities in the federal
government that are available to socially and economically
disadvantaged companies. 


   SBIR PROGRAMS PROMOTE THE
   CRITICAL TECHNOLOGIES
---------------------------------------------------------- Chapter 0:9

Most of the SBIR agency officials we interviewed stated that they use
the two listings of critical technologies as identified by DOD and
the National Critical Technologies Panel in developing their
respective research topics.  The other agencies believed that the
research being conducted falls within one of the two lists.  At DOE,
for example, research topics are developed by the DOE technical
programs that contribute to SBIR.  In DOE's annual call for topics,
SBIR offices are instructed to give special consideration to topics
that further one or more of the national critical technologies. 
DOE's analysis of the topics that appeared in its fiscal year 1995
solicitation revealed that 75 percent of the subtopics listed
contributed to one or more of the national critical technologies. 
Likewise, NASA's research topics, developed by its SBIR offices,
reflect the agency's priorities that are originally developed in
accordance with the nationally identified critical technologies.  At
DOD, SBIR topics that do not support one of the critical technologies
identified by DOD will not be included in DOD's solicitation. 

Both NIH and NSF believe that their solicitation topics naturally
fall within one of the lists.  According to NIH's SBIR official,
although research topics are not developed with these critical
technologies in mind, their mission usually fits within these topics. 
For example, research involving biomedical and behavioral issues is
very broad and can be applied to similar technologies defined by the
National Critical Technologies Panel.  NSF's SBIR official echoes the
sentiments of NIH.  According to this official, although NSF has not
attempted to match topics with the listing of critical technologies,
it believes that the topics, by their very nature, fall within the
two lists. 


   THERE IS LITTLE EVIDENCE OF
   FOREIGN INTEREST IN SBIR
   PROJECTS
--------------------------------------------------------- Chapter 0:10

According to our 1991 survey and DOD's 1996 survey, SBIR projects
result in little business-related activity with foreign firms.  For
example, our 1991 survey found that 4.6 percent of the respondents
reported licensing agreements with foreign firms and that 6 percent
reported marketing agreements with foreign firms.  It should also be
remembered that both of these agreements refer to activities where
the U.S.  firm is receiving benefits from the SBIR technology and
still maintaining rights to the technology.  Sales of the technology
or rights to the technology occurred at a much lower rate, 1.5
percent, according to our survey.  The DOD survey showed similar
results.  These data showed that less than 2 percent of the
respondents had finalized licensing agreements with foreign firms and
that approximately 2.5 percent had finalized marketing agreements
with foreign firms.  Sales of the technology or the rights to the
technology developed with SBIR funds occurred only 0.4 percent of the
time. 


   GEOGRAPHIC DISTRIBUTION OF SBIR
   AWARDS
--------------------------------------------------------- Chapter 0:11

A recent SBA study stated that one-third of the states received 85
percent of all SBIR awards and SBIR funds.  In fiscal year 1996, the
states of California and Massachusetts had the highest concentrations
of awards, 904 awards for a total of $207 million and 628 awards for
a total of $148 million, respectively.  However, each state has
received at least two awards, and in 1996, the total SBIR amounts
received by states ranged from $120,000 to $207 million.  The SBA
study points out that 17 states receive the bulk of U.S.  R&D
expenditures, venture capital investments, and academic research
funds.  Hence, the study observes that the number of small high-tech
firms in a state, its R&D resources, and venture capital are
important factors in the distribution and success of SBIR awards. 


------------------------------------------------------- Chapter 0:11.1

Mr.  Chairman, this concludes my statement.  I would be happy to
respond to any questions you or the members of the Subcommittee may
have. 


*** End of document. ***