Federal Research: The Small Business Technology Transfer Program

Published by the Government Accountability Office on 1997-05-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United States General Accounting Office

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

For Release
on Delivery
Expected at
                    FEDERAL RESEARCH
10:30 a.m. EDT
May 22, 1997
                    The Small Business
                    Technology Transfer
                    Statement by Susan D. Kladiva
                    Acting Associate Director,
                    Energy, Resources, and Science Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Subcommittee:

    We are pleased to be here today to discuss our review of the first-year
    implementation of the Small Business Technology Transfer (STTR) Pilot
    Program.1 The Small Business Research and Development Enhancement
    Act of 1992 established the program and authorized it for 3 years,
    beginning in fiscal year 1994.2 In the same 1992 legislation, the Congress
    also reauthorized the Small Business Innovation Research (SBIR) Program,
    which served as the model for the STTR Program. The two programs share
    similar goals, which emphasize the benefits of technological innovation
    and the ability of small businesses to transform the results of research and
    development (R&D) into new products. The STTR Program differs from SBIR
    primarily in requiring a company to form a partnership with a nonprofit
    research institution. Our report in January 1996 on the STTR program
    discussed the (1) quality and commercial potential of research proposals,
    (2) steps taken to avoid the conflict of interest that would arise if a party
    both submitted and evaluated STTR proposals, and (3) effect of and need
    for the STTR Program. While we have not updated our work since 1996, our
    report provided a concise picture of basic issues about the program.

    Our statement highlights the message of our 1996 report. In summary, Mr.

•   Federal agencies rated the quality and commercial potential of STTR
    research proposals favorably in the first year of the program. Technical
    experts generally concluded that the proposals called for high-quality
    research. As one example, the Department of Energy (DOE) rated the
    quality of the proposed research in all of its winning proposals as being
    among the top 10 percent of the research in the Department. At the time,
    however, the technical experts were somewhat cautious about the
    commercial potential.
•   The five agencies participating in the program have taken steps to avoid
    the potential conflicts that might arise if a federally funded R&D center
    formed a partnership with a company submitting an STTR proposal and
    then helped a federal agency judge the merits of its own and other
    proposals. For example, the Department of Defense (DOD) approved only
    two R&D centers as research partners and planned to evaluate future
    proposals on a case-by-case basis to ensure that conflicts of interest would
    not occur.

     Federal Research: Preliminary Information on the Small Business Technology Transfer Program
    (GAO/RCED-96-19, Jan. 24, 1996).
     The program was subsequently extended through fiscal year 1997.

    Page 1                                                                      GAO/T-RCED-97-157
             •   Agency officials expressed differing views on the effect of and need for the
                 STTR Program. The agencies provided no evidence in the first year of the
                 program to suggest that it was competing for quality proposals with the
                 SBIR Program or reducing the quality of agency R&D in general. Some
                 officials noted potentially beneficial effects, such as greater collaboration
                 between small businesses and research institutions in the SBIR Program.
                 The similarity of the two programs, however, raises three questions about
                 the need for the pilot program: (1) Is the technology originating primarily
                 in the research institution as envisioned in the rationale for the program or
                 is it originating in the small business? (2) Is the mandatory collaboration
                 between the small business and the research institution effective in
                 transferring the technology to the market place? (3) Can the SBIR Program
                 accomplish the same objective without the collaboration required by the
                 STTR Program?

                 The objectives of the STTR Program are to (1) stimulate technological
Background       innovation, (2) use small businesses to meet federal R&D needs, and
                 (3) increase the private sector’s commercialization of innovations derived
                 from federal R&D.

                 Five agencies participate in the STTR Program, including DOD, DOE, the
                 Department of Health and Human Services’ National Institutes of Health
                 (NIH), the National Aeronautics and Space Administration (NASA), and the
                 National Science Foundation (NSF). Each agency manages its own
                 program, while the Small Business Administration (SBA) plays a central
                 administrative role, issuing policy directives and annual reports for the

                 The legislation authorized each agency having an external R&D budget in
                 excess of $1 billion to set aside not less than 0.05 percent of that budget
                 for the STTR Program in fiscal year 1994, not less than 0.1 percent in fiscal
                 year 1995, and not less than 0.15 percent in fiscal year 1996.3 In the STTR
                 Program’s first year, the agencies expended about $19 million. Subsequent
                 to our report, they expended about $34 million in fiscal year 1995 and
                 $57 million in fiscal year 1996 for a cumulative total of about $110 million
                 in the first 3 years of the program.

                 The law established a three-phase structure for the program. The STTR
                 Program provides funding for phase-I and phase-II awards. Work in phase
                 I is intended to determine the scientific, technical, and commercial merit

                  The percentage remained at 0.15 when the program was extended through fiscal year 1997.

                 Page 2                                                                      GAO/T-RCED-97-157
and feasibility of ideas; the work is generally not to exceed 1 year. Work in
phase II further develops the proposed ideas and is generally not to
exceed 2 years. The statute generally limits the size of awards in phases I
and II to $100,000 and $500,000, respectively. In its first 3 years, the
program made 674 phase-I and 110 phase-II awards. A third phase for STTR
projects, where appropriate, involves the continuation or commercial
application of the R&D. Unlike phases I and II, phase III has no general time
limits. Phase III cannot receive STTR funds, but it can receive federal
non-STTR and private-sector funds.

The STTR Program is closely modeled on the SBIR Program, which was
established in 1982. The two programs share similar goals and other basic
features, including participation by many of the same agencies, the use of
a percentage of the external budget for funding, and a three-phase

However, the two programs differ in one important respect. In order to be
eligible for an STTR award, a small business must collaborate with a
nonprofit research institution, such as a university, a federally funded R&D
center, or other entity. This collaboration is permitted under the SBIR
Program but is not mandatory. This special STTR requirement, according to
a 1992 report,4 was to provide a more effective mechanism for transferring
new knowledge from research institutions to industry. In its first 3 years,
the program has made 613 awards involving universities, 112 involving
federally funded R&D centers, and 69 awards involving other nonprofit R&D

The Congress has expressed concern about the potential conflicts of
interest resulting from the role of R&D centers in the program. For
example, a conflict might arise if a center and a small business submitted
an STTR proposal as partners, and at the same time, the center helped the
agency judge its own and other proposals. As a result, the Congress
required agencies to take steps to avoid these potential conflicts of

 H.R. Rep. No. 554, 102nd Cong., 2nd Sess., pt. 1 (1992). The report accompanied H.R. 4400, a
predecessor to the bill (S. 2941) that was enacted.

Page 3                                                                          GAO/T-RCED-97-157
                         The agencies’ technical evaluations of STTR proposals, which served as the
Quality Research         basis for the selection of the winning proposals, showed favorable views
Proposals                of the quality of proposed research. Evaluations of the commercial
Characterized the        potential were also favorable but occasionally expressed concern about
                         the cost of products and other potential problems.
STTR Program
                         We reviewed all of the evaluations for each of the 206 winning STTR
                         proposals in fiscal year 1994, the first year in which awards were made.
                         The evaluations characterized the research as among the top 10 percent of
                         research in certain agencies and as “cutting edge.” Many proposals were
                         awarded perfect scores. Generally, the agencies found the quality of
                         proposed research to be excellent. For example, DOE rated the quality of
                         research in all of its winning proposals as being among the top 10 percent
                         of all research in the agency. Of the 48 winning proposals in NIH, 14 were
                         judged outstanding, 31 excellent, 2 very good, and only 1 good. There were
                         none in NIH’s “acceptable” (or lowest fundable) category. In general, DOD
                         rated its 105 winning proposals highly. Of NASA’s 21 winning proposals, 11
                         were considered above average, and 8 were judged as being among the top
                         10 percent of all NASA proposals for comparable R&D. NSF considered the
                         quality of research for its winning proposals to be excellent.

                         As part of our review of the quality of STTR research proposals, we also
                         examined the technical evaluations of their commercial potential. These
                         evaluations were generally favorable but somewhat cautious in view of the
                         newness of the program and the innovation or risk associated with many
                         of the proposed projects. In addition, in some cases there were concerns
                         about the cost of the product that might result or the limited size of its
                         potential market.

                         In our report, we found that the five federal agencies with STTR programs
Agencies Have Taken      have taken steps to avoid potential problems relating to conflict of interest
Steps to Avoid           with federally funded R&D centers. Such conflicts could occur if a center
Potential Conflicts of   formed a partnership with a company submitting an STTR proposal and
                         then helped a federal agency judge the merits of its own and other
Interest in the STTR     proposals. DOD, DOE, and NIH have specific policies intended to prevent
Program                  such conflicts, while NASA and NSF have more general procedures to avoid
                         them. Under DOD’s policy, for example, only two R&D centers were
                         approved as research partners for its STTR awardees. In fact, the Air Force
                         had to rescind some awards because the proposed research partners
                         (certain DOD laboratories) were ineligible to participate. According to the

                         Page 4                                                      GAO/T-RCED-97-157
                         director of DOD’s STTR Program, future proposals will be evaluated on a
                         case-by-case basis to ensure that conflicts of interest do not occur.

                         DOD and DOE, which accounted for 29 of the 32 awards involving centers
                         during the first year of the program, have also taken steps to prevent
                         centers from using privileged information in preparing STTR proposals. For
                         example, DOE’s policy prohibits agency staff members from requesting or
                         receiving assistance from personnel in research institutions that are
                         eligible to participate in the STTR Program when preparing technical topics
                         for the STTR solicitation. This policy is intended to prevent research
                         institutions from using their expertise to influence DOE’s choice of STTR
                         research topics. Otherwise, research institutions could acquire a
                         significant advantage by designing topics to match their expertise and then
                         preparing a proposal in the same area.

                         Agency officials expressed differing views on the effect of STTR on SBIR and
Views Differed on the    other agency R&D. For example, SBA officials contended that STTR was too
Effect of and Need for   small and too new a program to have any real effect on SBIR or on the
the STTR Program         broader range of agency research at the time of our report. The officials
                         pointed out that the program represented only 0.05 percent of each
                         agency’s external R&D budget during its first year and that it was only 1
                         year old.

                         In contrast to the view that STTR’s effect was very limited, the manager of
                         Army’s STTR Program said that STTR was influencing SBIR in a beneficial
                         way. In his opinion, STTR is becoming known through national conferences
                         and other means. Furthermore, small businesses are realizing that they
                         have more credibility and chance of winning an award by collaborating
                         with a university or other research institution. He believes that the STTR
                         Program has also led to more collaboration in SBIR. In general, according
                         to the program manager, STTR is a promising program that may be as
                         successful as the SBIR Program.

                         The similarity of the two programs, however, raises a broader issue about
                         the need for the STTR Program. In the 1992 House report, the Committee on
                         Small Business provided two basic arguments in favor of the program.
                         First, the report stated that the program addresses a core problem in U.S.
                         economic competitiveness: the inability to translate its worldwide
                         leadership in science and engineering into technology and commercial
                         applications that benefit the economy. Second, the report stated that,
                         although SBIR has turned out to be remarkably effective at commercializing

                         Page 5                                                     GAO/T-RCED-97-157
ideas in the small business community, it is less effective at fostering the
commercialization of ideas that originate in universities, federal
laboratories, and nonprofit research institutions.

The rationale for the program, which points to certain weaknesses in SBIR
and potential strengths in STTR, suggests three questions that are relevant
in evaluating the need for STTR.

First, is the technology originating primarily in the research institution as
envisioned in the rationale for the program or is it originating in the small
business? The technology may originate with the research institution, the
small business, or a combination of the two. In the STTR Program, the
assumption is that the research institution will be the primary originator of
the new concept. However, data to determine the extent to which research
institutions are providing the technologies were not available. Neither SBA
nor the agencies had collected this information. The relative roles of the
research institution and the small business as the source of the technology
bear directly on the need for the STTR Program. If a high percentage of the
ideas are originating with small businesses rather than with research
institutions, this finding would raise questions about the need for the
program. On the other hand, if a high percentage of ideas are originating
with research institutions, this finding would suggest that the program was
achieving the first step in moving ideas from research institutions to small

Second, if the program is effective in moving ideas from research
institutions to small businesses, then the next logical question is whether
their collaboration is effective in moving the ideas to the marketplace. This
question can be approached from two directions: (1) short-term views of
how well the collaboration is working in general and (2) long-term data on
actual commercialization. Information on how well the collaboration was
working was not available at the time of our report but could now be
developed with the additional years of program experience. Information
on actual commercial outcomes will require a greater amount of time
before it can be obtained. Generally, 5 to 9 years are needed to turn an
initial concept into a marketable product.

Third, because one important difference between the two programs is that
the STTR Program makes a small business/research institution
collaboration mandatory, the question arises whether the SBIR Program
could accomplish the objective of transferring technology from research
institutions to the private sector without mandatory collaboration. The

Page 6                                                      GAO/T-RCED-97-157
           rationale for the STTR Program tends to assume that such collaborations
           were relatively rare in the SBIR Program. However, NIH’s Program manager
           told us that, in an SBIR survey undertaken by NIH several years ago,
           collaboration between small businesses and universities was already
           evident in well over half of NIH’s SBIR projects. By contrast, the manager of
           Army’s program believed that STTR’s impact will be greater in the Army
           than in agencies such as NIH because the Army has had a lesser degree of
           involvement with universities and other research institutions in the past.
           Given the apparent variation from one agency to another and the lack of
           current data, no definite conclusion can be drawn at present concerning
           the need for STTR in forging new collaborations.

           In summary, the quality of the STTR Program appeared favorable at the
           time of our report, although it was too early to make a conclusive
           judgment about the commercial potential of the research. In addition, the
           agencies took steps to address potential conflicts of interest. Overall, the
           indicators relating to STTR in its first year provided evidence of a
           potentially promising program. However, at the time of our report, we
           could not determine whether the program was meeting a unique need or
           duplicating the accomplishments of the SBIR Program. Several key
           questions relating to the transfer of technology from research institutions
           to the marketplace are relevant in determining the need for the STTR

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

(141047)   Page 7                                                      GAO/T-RCED-97-157
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