Order Code 96-402 SPR
Updated December 9, 2002
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
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 FY2001, over $12 billion in awards have been made for
more than 64, 240 projects. The original program has been extended several times and
is currently scheduled to sunset on September 30, 2008.
The Small Business Innovation Research program is designed to increase the
participation of small, high technology firms in the federal R&D endeavor. Congressional
support for the initiative 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 under
represented in federal R&D activities. Agency SBIR programs guarantee this sector a
portion of the government’s research and development budget to compensate for what
was viewed as a preference for financing 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
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 law also requires creation of a Federal and State Technology (FAST) Partnership
Program to assist small businesses in meeting SBIR requirements.
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
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 STTR program.
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.
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 June 1999 GAO analysis reported that SBIR awards tend to be concentrated both
geographically and by firm despite widespread participation in the program. "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.
From its inception in FY1983 through FY2001, over 64,248 awards have been made
totaling more than $12 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
Dollars Awarded (millions)
*Includes modifications to previous awards and funds set aside for proposals in negotiation.
**Dollars obligated can include modifications to previous year’s awards
STTR Program: Dollars Awarded and Projects Funded
Dollars Awarded (millions)
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 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 108th Congress considers
the effects of the Small Business Innovation Research program.