Order Code 96-402 SPR
Updated December 5, 2001
CRS Report for Congress
Received through the CRS Web
Small Business Innovation Research Program
Wendy H. Schacht
Specialist in Science and Technology
Resources, Science, and Industry Division
Summary
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. Federal departments with an R&D budget of $100 million or more
are required to set aside part of this amount to finance the SBIR activity. From its
inception in FY1983 through FY2000, almost $11 billion in awards have been made for
over 59,500 projects. The original program has been extended several times and is
currently scheduled to sunset on September 30, 2008.
Program Description
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.
Congressional Research Service ˜ The Library of Congress

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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’s
SBIR activity reflects that organization’s management style. Individual departments select
R&D interests, administer program operations, and control financial support. Funding can
be disbursed in the form of contracts, grants, or cooperative agreements. Separate agency
solicitations are issued at established times.
The Small Business Administration (SBA) established broad policy and guidelines
under which individual departments operate SBIR programs. The agency monitors and
reports to Congress on the conduct of the separate departmental activities. Criteria 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. The SBA operates a
computer system to link SBIR awardees with venture capital firms. P.L. 106-554
mandated the establishment of two data bases, one accessible by the government and one
by the public, that provide information on the SBIR programs across the departments.
The legislation also requires creation of a Federal and State Technology (FAST)
Partnership Program to assist small businesses in meeting the requirements of the SBIR
activity.
A pilot effort designed to encourage commercialization of university and federal
laboratory R&D by small companies was created by P.L. 102-564, reauthorized through
FY2001 by P.L. 105-135, and extended through FY2009 by P.L. 107-50. 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

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on research and development. According to the provisions of P.L. 107-50, in FY2004 the
set-aside will increase to 0.3% and the amount of individual Phase II awards will increase
to $750,000. The Departments of Energy, Defense, and Health and Human Services,
NASA, and NSF participate in the program.
Implementation
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 found that both the
evaluation and selection processes were sufficient to “reasonably” insure 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 in 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 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.” As of July 1991,
almost two-thirds of the projects already had sales or received additional funding
(primarily from the private sector) totaling approximately $1.1 billion.
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. GAO also
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.

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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. GAO testimony presented
in March 1996 indicated that the SBA had taken steps to implement these suggestions.
The study also determined that the quality of research appeared to have “kept pace” with
the program’s expansion, although it was still too early to make a definitive judgment.
Factors supporting this assessment included the substantive level of competition, more
proposals deemed meritorious than could be funded by agencies, and appraisals by
departmental SBIR personnel indicating the high quality of submissions.
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. While several agencies had new programs to assure
continuity in funding, there were indications of possible inaccuracies in defining the
extramural R&D budgets upon which the set-aside is based.
The most recent GAO analysis issued in June 1999 reported that, despite participation
in the SBIR program being widespread, 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." 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. Other goals, including
innovation and responsiveness to agency mission, still remain important in determining
awards.
GAO also has evaluated the STTR program. A January 1996 report found that, in
general, federal agencies favorably rated the quality of winning proposals (in the first year)
and that most 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 testimony given by GAO in May and September 1997.

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Awards
From its inception in FY1983 through FY2000, over 59,500 awards have been made
totaling approximately $11 billion. The table below summarizes the funding and the
number of projects selected for the SBIR program as provided by the SBA; information
on the STTR program 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*
FY1983
44.5
—-
44.5
686
—-
686
FY1984
48.0
60.4
108.4
999
338
1,337
FY1985
69.1
130.0
199.1
1,397
407
1,804
FY1986
98.5
199.4
297.9
1,945
564
2,509
FY1987
109.6
240.9
350.5
2,189
768
2,957
FY1988
101.9
284.9
389.1*
2,013
711
2,724
FY1989
107.7
321.7
431.9*
2,137
749
2,886
FY1990
118.1
341.8
460.7*
2,346
837
3,183
FY1991
127.9
335.9
483.1*
2,553
788
3,341
FY1992
127.9
371.2
508.4*
2,559
916
3.475
FY1993
154.0
490.7
698.0*
2,898
1,141
4,039
FY1994
220.4
473.6
717.6*
3,102
928
4,030
FY1995
232.1
601.9
834.1*
3,085
1,263
4,348
FY1996
228.9
645.8
916.3*
2,841
1,191
4,032
FY1997
277.6
789.1
1,106.7*
3,371
1,404
4,775
FY1998
262.3
804.4
1,066.7
3,022
1,320
4,342
FY1999
299.5
797.0
1,096.5
3,334
1,256
4,590
FY2000
302.0
888.2**
1,190.2
3,166
1,330
4,496
*Includes modifications to previous awards and funds set aside for proposals in negotiation.
**Dollars obligated can include modifications to previous year’s awards

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STTR Program: Dollars Awarded and Projects Funded
Year
Dollars Awarded (millions)
Awards
Phase I
Phase II
Total
Phase I
Phase II
Total
FY1994
18.9
—
18.9
198
—
198
FY1995
23
10.7
33.7
238
22
260
FY1996
22.7
41.8
64.5
238
88
326
FY1997
24.2
44.9
69.1
260
89
349
FY1998
19.7
45.1
64.8
208
109
317
FY1999
24.3
40.6
64.9
251
78
329
FY2000
23.9
45.9
69.8
233
95
328
Issues for Consideration
P.L. 106-554 extended the authorization for the SBIR program through September
30, 2008. As Congress continues to assess this activity, certain issues might be
considered. The use of a set-aside was the 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 market efficiency. It also was
claimed that a set-aside circumvents the congressional budget process used to determine
program priorities and budget allotments.
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? 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?
One issue currently under debate is the extent to which program participants are
mandated to report activities and results. P.L. 106-554 places additional requirements on
companies to provide information. It remains to be seen how these requirements are
implemented. Other questions that might be addressed include whether 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 107th Congress
considers the effects of the Small Business Innovation Research program.

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