Federal Research: Observations on the Small Business Technology Transfer Program

Published by the Government Accountability Office on 1997-09-04.

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

                        United States General Accoimtmg Office   / '5^ZZ W

GAO                     Testimony
                        Before the Subcommittee on Technology
                        Committee on Science
                        House of Representatives

For Release on
Deliveiy Eiqpected at
10 a.m. EDT
                        FEDERAL RESEARCH
September 4,1997

                        Observations on the Small
                        Business Technology
                        Transfer Prograin
                        Statement by Susan Kladiva
                        Acting Associate Director
                        Energy, Resources, and Science Issues
                        Resources, Commumty, and Economic
                        Development Division

Madam Chair and Members ofthe Subcommittee:

We are pleased to he here today to discuss the results of our review of the
first-year ofthe Small Business Technology Transfer (STTR) Program's
implementation.^ In addition, we wiU be discussing our work in response
to the Subcommittee's recent request for information on companies that
have received multiple awards tmder the STTR Program and the Small
Business Innovation Research (sem) 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 researdi and
development (S&D) into new products. The STTR Program differsfix)mthe
SBIR Program primarily in requiring a company to form a partnership with
a nonprofit research institution. The Small Business Research and
Development Enhancement Act of 1992 established the STTR Program and
authorized it for 3 years, beginning infiscalyear 1994. The program was
subsequently extended throughfiscalyear 1997. Under the same 1992
legislation, the Congress also reauthorized the sem Program, which was
authorized in 1982 and served as the model for the STTR Program.

In our report on the STTR program, we discussed, among other issues, the
effect of STTR on SBIR and other agency R&D and the need for the STTR
Program. While we have not updated our work since 1996, our report
provided a concise picture ofthe program's basic issues. For our work on
multiple awardees, we obtained information on the profiles of companies
that had received STTR and/or SBIR awards sincefiscalyear 1990. We
obtained this information from the Small Business Administration (SBA)
and the agencies participating in both the STTR and SBIR prograins.

Our discussion today highlights the message of our 1996 report and
information on the multiple awardees. In summaiy. Madam Chair:

We reported that while agency ofBcials expressed differing views on the
effect of and the need for the STTR Program, all of the officials felt that the
program was not competing for quality proposals with the SBIR Program or
reducing the quality of the agencies' R&D in general in the first year of the
program. Furthermore, some officials noted potentially beneficial effects,
such as greater collaboration between small businesses and research
institutions in the SBIR Program. The similarity ofthe two programs,
however, raises three questions that are relevant in evaluating the need for
the STTR Program: (1) Is the technology originating primarily in the

'Federal Research: Preliminary Information on the Small Business Terhnolog.v Transfer Program
fGAO/BCED-96-19. Jan. 24, 1996)

PaRc I                                                                       (VA*),T-);ri;r>-!»7 :::!0
                     research institution as envisioned in the rationale for the program or is it
                     originating in the small business? (2) Is the mandatoiy collaboration
                     between the small business and the research institution effective in
                     transferring the technology to the marketplace? (3) Can the SBIR Program
                     accomplish the same objective without the collaboration required by the
                     STTR Program?

                   • Sincefiscalyear 1990, approximately 6,500 companies have received STTR
                     and/or SBIR awards from thefiveagencies that participate in both
                     programs. Ofthese con^anies, 383 companies, or about 6 percent, have
                     received a total of 10 or mor? STTR and/or SBIR awards. While two
                     conq>anies have received over 300 STTR and/or SBIR awards each, agency
                     officials reported that many other recent SBIR awardees had never received
                     an awardfiromtheir agencies. However, all of the companies that have
                     received 3 or more STTR awards have also received 5 or more SBIR awards.
                     Generally, the agencies have not collected information on the numl>er of
                     employees and the annual revenue ofthe companies that receive awards
                     and have limited information on the commercialization resulting fipom
                     these programs. It is important to note, however, that it may be too early
                     for companies that have received STTR awards to have achieved success in
                     commercializing the results of the STTR work.

J^a c\c0rn\ in d     ^ ® objectives of the STTR Program are to (1) stimulate technological
       ^             innovation, (2) use small businesses to meet federal R&D needs, and
                     (3) increase the private sector's commercialization of innovation derived
                     from federal R&D. 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 extemal budget for funding,
                     and a three-phase approach. To be eligible for an STTR or SBIR award, SBA'S
                     policy directives state that a small business must employ 500 or fewer
                     employees (including employees of subsidiaries and afGliates).

                     Five agencies—^the Department of Defense (DOD); the National
                     Aeronautics and Space Administration (NASA); the Department ofHealth
                     and Human Services and, particularly, its National Institutes ofHealth
                     (NIH); the Department of Energy (DOE); and the National Science
                     Foundation (NSF)—^participate in the STTR Program. Thesefiveagencies
                     also participate in the SBIR Program.- Each agency manages its own

                     -The other five SBIR agencies are the United States Department of Agriculture. Department of
                     Conunerce. Department of Education. Department of Transportation, and En\nronniental Protection

                     Pai^-;:                                                                    (; \ O A i ' - i ; r i - | > ;•? 2:to
programs, while SBA plays a central administrative role and Issues policy
directives and annual reports for each program.

In establishing the STTR Program, the legislation required each agency with
an extemal R&D budget in excess of $1 billion to set aside not less than 0.05
percent ofthat budget infiscal,year 1994, not less than 0.1 percent in fiscal
year 1995, and not less than 0.15 percent in fiscal year 1996 for the STTR
Program. The percentage remained at 0.15 when tiie program was
extended through fiscal year 1997. These s^encies expended about
$34 million in fiscal year 1995 and $62 million in fiscal year 1996 and plan
to spend about $62 million again in fiscal year 1997.

The legislation establishing the SBIR Program required each agency with an
external R&D budget in excess of $100 nullion to set aside a certain
percentage ofthis amount for the program. The percentage was increased
incrementally until it reached 1.25 percent in 1986. The program's 1992
reauthorization legislation increased funding to not less than 1.5 percent
for fiscal years 1993 and 1994, not less than 2 percent for fiscal years 1995
and 1996, and not less than 2.5 percent for fiscal year 1997 and thereafter.
Funding for fiscal year 1997 vriU be nearly $1 billion.

STTR and SBIR funding  is provided in two phases. Phase I is intended to
detennine the scientific and technical merit and feasibility of ideas; it
generally lasts about 1 year for STTR and 6 months for SBIR. Phase U further
develops the proposed ideas and generally lasts about 2 years. The 1992
reauthorization set the general limits for STTR awards at $100,000 and
$500,000, respectively. It also directed SBA to set the general limits on the
size of SBIR phase I and n awards at $100,000 and $750,000, respectively,
although awards may be for less than these amounts. A third phase for
STTR and SBIR projects, where appropriate, involves the continuation or
coinmercial application ofthe R&D without STTR or SBIR funds.

Although the two programs have many points in common, they differ in
one important resf ct. To be eligible for an STTR award, a small business
must collaborate with a nonprofit research institution such as a imiversity,
a federally funded research and development center, or other entity. This
collaboration is permitted under the SBIR program but is not mandatoiy.
This special STTR requirement, according to a 1992 House of
Representatives report,^ was to provide a more effective mechanism for
transferring new knowledge from research institutions to industry.

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

Cif;.' :i                                                                       (^VoT-lM i:If fl7
                         Agency officials expressed differing \iews on the effect of STTR on SBIR and
Agencies' Views          other agency R&D. For example, SBA officials contended that STTR was too
Differed on the Effect   small and too new a program to have any real effect on SBIR or on the
of and Need for the      broader range of agency research at the time of our report At the time of
                         our review, the officials pointed out that the program represented only
STTR Program             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
                         the Anny's STTR Program said that STTR was influencing SBIR in a beneficial
                         way. In his opinion, STTR is becoming known through hational conferences
                         and other means. Furthermore, he said that 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 STIR Program. In the 1992 House report, the Committee on
                         Small Business provi Jed two basic arguments in favor ofthe program.
                         First, the report stated that the program addresses a core problem in U.S.
                         econoinic competitiveness—^the inability to translate the nation's
                         worldwide leadership in science and engineering into technology and
                         commercial applications that will benefit the economy. Second, the report
                         stated that, although SBIR has tumed out to be remarkably effective at
                         commercializing ideas in the small business commimity, it is less effective
                         at fostering the commercialization of ideas that originate in universities,
                         federal laboratories, and nonprofit research institutions—a, goal of STTR.

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

                         First, is the technology originating in the research institution as envisioned
                         in the rationale for the program or is it originating in the small business?
                         The technology may originate in the research institution, the small
                         business, or a combination ofthe two. Under 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

                         VMif I                                                      ( ; A < ) / T - I ; ' : I ' ; ! > :»7-i:::ii
research institution and the smaU business as the source ofthe technology
bear directiy on the need fof the STTR Program. If a high percentage of the
ideas are originating with small businesses rather than with research
institutions, this would raise questions about the need for the program. On
the other hand, if a high percent£^e of ideas are originating with research
institutions, this would suggest that the program was achieving the first
step in moving ideasfromresearch institutions to small businesses.

Second, ifthe program is effective in moving ideasfromresearch
institutions to small businesses, then the next logical question is whether
their coUaboration is effective in moving the ideas to the marketplace. This
question can be approachedfromtwo directions: (1) short-term views of
how well the collaboration is working in general and (2) long-term data on
actual commercialization. Infoimation on how well the coUadsoration was
working was not available at thetimeof our report. Infonnation on actual
coinmercial outcomes will require a greater amount oftime before it can
be obtained. GeneraUy, 5 to 9 years are needed totiunan initial concept
into a marketable product.

Third, because one important difference between the two programs is that
the STTR Program makes a smaU business/research institution
collaboration mandatory, the foUowing question arises: Can the SBIR
Program accomplish the objective of transfening technology from
research institutions to the private sector without mandatoiy
collaboration? The rationale for the STTR Program tends to assume that
such collaborations were relatively rare in the SBIR Program. However,
HiH's Program Manager told us that, in an SBIR survey undertaken by NIH
several years ago, collaboration between smaU businesses and univiersities
was already evident in weU over half of NIH'S SBIR projects. By contrast, the
manager of Army's prograins beUeved that STTR'S unpact wiU be greater in
the Army than in agencies such as NIH because the Army has had a lesser
degree of coUaboration with universities and other research institutions in
the past. Given the apparent variation from one agency to another and the
lack ofcurrent data, no definite conclusion can be drawn at present
conceming the need for STTR in forging new coUaborations.

\-:if;t   :'>                                              i;,io/!M><'l::!!''«7-
                      Sincefiscalyear 1990,383 companies have received a total of 10 or more
Profile Data on       STTR and/or SBIR awards from the five agencies that participate in both of
Companies That Have   the award programs. Two companies have received over 300 STTR and/or
Received Multiple     SBIR awards each, and another eight companies have received over 100
                      awards each from both of the prograins. Approximately one-third ofthe
STTR and/or SBIR      companies that have received STTR awards have also received SBIR awards
Awards                sincefiscalyear 1990. In addition, aU ofthe companies that have received
                      three or more STTR awards have also receivedfiveor more SBIR awards.

                      On the other hand, many companies have received only a few awards. For
                      example, DOD reported that from 1983 through 1995,61 percent ofits
                      phase n SBIR awardees received only one phase n award from DOD, and
                      92 percent ofits phase n SBIR awardees receivedfiveor fewer phase n
                      awards from DOD. NSF and DOE reported that almost 25 percent of recent
                      SBIR awardees had never received an award from these agencies before.
                      The Program Manager for the SBIR and STTR programs at NASA reported that
                      multiple awardees have been a smaU proportion of the overaU set 6f award

                      Generally, the agencies have not coUected information on the number of
                      employees or the annual revenue ofthe companies that have received STTR
                      and/or SBIR awards. However, in a survey ofthe companies that have
                      received DOD phase II SBIR awards prior tofiscalyear 1993, DOD obtained
                      this infoimation from some ofthe respondents who received the most
                      phase n awards. Of the 29 companies responding to a question on the
                      company's size, the range wasfiromas few as 7 employees to over 500
                      employees.^ Annual revenues also varied for the 17 compaiues that
                      reported their annual revenue for 1996. Ofthese, 11 companies reported
                      revenues of between $5 miUion and $19.99 miUion. Four companies
                      reported annual revenues of over $20 miUion, and the remainder reported
                      revenues of under $5 miUion.

                      Limited infonnation is avaUable on the commercialization success ofthe
                      companies that have received STTR and/or SBIR awards. For one thing, it
                      may be too early for companies that have received STTR awards to have
                      achieved success in commercializing the results of the STTR work because
                      it can take many years for a research project to achieve results. However,
                      various studies have reported mixed results on the commercialization
                      success of companies that have received multiple SBIR awards. In 1992, we
                      reported that a comparison of frequent winners—^those receivingfiveor

                      'Three companies reported that they currently have over 500 employees; however, at the time they
                      roceived phase !1 SBIR awards from DOD. these companies had SOO or lower employees.

                      l':)i;c ti                                                                    <..\o/;;-),'.< ' i - j t - n :
           more SBIR phase n awards—^with lessfrequentwinners showed that, in
           general,frequentwinners were achieving lower levels oftotal sales per
           project.^ In addition,frequentwinners had obtained substantially less
           additional developmental fimding per projectfromthe private sector than
           companies with one to four awards. A recent analysis by DOD confinns our
           finding. SpecificaUy, survey results indicate that companies that had
           received nine or more phase n awards were less successful in
           commercializing the results of their research than companies that had
           received fewer thanfiveawards. The reasons for this remain unclear, DOD
           has noted, however, that there are some individual exceptions. A few
           frequent award winners have been successful in commercializing the
           results oftheir research.

           DOE, on the other hand, stated that there does not appear to be a
           relationship between the number of DOE phase n SBIR awards received by a
           company and the company's success in commercializing the results ofits
           research, DOE'S approach for evaluating commercialization success'is to
           queiy companies about the products that they have developed, DOE asks
           SBIR awardees which SBIR projects contributed to the development ofa
           particular product. Using this measure of commercialization success, DOE
           has found that companies that have received more than ten phase n SBIR
           awardsfromDOE have received approxiinately the same amount of phase
           m funding on the average as companies that have received less than five
           awards, NASA reported that it has incomplete information on companies'
           commercialization success but stated that avaUable data indicate that
           commercialization rates are about the same for multiple awardees as they
           are for companies that have received fewer awards.

           This concludes my statement. I would be happy to respond to any
           questions that you or the Members ofthe Subcommittee may have.

           "'Federal Research: Small Business Innovation Research Shows Success but Can Be Strengthened
           (GAO/RCED-92-37. March 30, 1992).

(MIIIH;)   P.-iMo 7                                                                    <.;A<V1-|;(:|':I)'t7-2:50
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