Small Business Innovation Research Program

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 designed to increase participation of small innovative
companies in federally funded R&D. Government agencies with R&D budgets of $100
million or more are required to set aside a portion of these funds to finance the SBIR
activity. Over $20.7 billion in awards have been made for more than 94,660 projects.
Extended several times, the program is currently scheduled to sunset on September 30,
2008. On April 23, 2008, H.R. 5819, a bill to reauthorize the SBIR program through

2010 and make changes to the effort, passed the House.¹

Program Description
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 government R&D activities. Agency SBIR programs guarantee this sector
a portion of the government’s R&D budget to compensate for what was viewed as a
preference for contracting with large firms.
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
applicable 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.

¹ For information on SBIR reauthorization activity in the 110^th Congress see CRS Report
RS22865, The Small Business Innovation Research Program: Reauthorization Efforts, by Wendy
H. Schacht.

The objectives of the SBIR program include stimulation of technological innovation
in the small business sector, increased use of this community to meet the government’s
R&D needs, 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 six 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 may 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 directed agencies to weigh commercial potential as an
additional factor in evaluating SBIR proposals.
As of FY2006, 11 departments have SBIR programs including the Departments of
Agriculture, Commerce, Defense (DOD), Education, Energy, Health and Human Services,
Homeland Security, and Transportation; 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) created 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 one or
more U.S. citizens or lawfully admitted permanent resident aliens. A rule change,
effective January 3, 2005, permits subsidiaries of SBIR-eligible companies to participate
as long as the parent company meets all SBIR requirements.
A pilot effort to encourage commercialization of university and federal laboratory
R&D by small companies was created by P.L. 102-564 and reauthorized several times
through FY2009. 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 up to $750,000 may be made for two years.
Currently funded by a set-aside of 0.3% of the extramural R&D budget of departments
that spend over $1 billion per year on this effort, the Departments of Energy, Defense, and
Health and Human Services, NASA, and NSF participate in the STTR program
Implementation
The Government Accountability Office (GAO; formerly the General Accounting
Office) 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 six-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% and 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.
A more recent report by GAO (June 2005) found that it is still difficult to adequately
“assess the performance of the SBIR program” although the effort appears to be achieving
its goal of “enhanced” participation of small business in the R&D enterprise. Utilizing
“commercialization” as a measure may not be sufficient because other agency goals were
being met such as research needs or expanded innovation. Success in the commercial
market did not take into account the R&D requirements of departments like DOD or
NASA. In a report the following year (October 2006), GAO noted that the agencies
reporting to the SBA did not always provide the necessary data in the format required by
SBA. GAO concluded that the “agencies need to strengthen [their] efforts to improve the
completeness, consistency, and accuracy of awards data.”
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 needed to bring the results of R&D to the commercial marketplace. These findings
were reiterated in testimony given by GAO in May and September 1997.
A June 2001 GAO study of all companies which received STTR awards between
FY1995 and FY1997 noted the participant’s belief that both the firms and the research
institutions contributed to expanded R&D although the private sector was more influential

in determining the direction of the research. The companies “...reported about $132
million in total sales and about $53 million in additional developmental funding.” They
identified 41 new patents and the creation of 12 new spin-off firms. Further, the awardees
preferred that the STTR program remain separate from the SBIR activity.
Awards
From its inception in FY1983 through FY2006, over 94,660 awards have been made
totaling more than $20.7 billion. Table 1 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 Table 2.
Table 1. SBIR Program: Dollars Awarded and Projects Funded
^Fi^s^c^al^Y^e^ar^Do^lla^{rs Aw}^a^r^{ded (}^m^illio^ns)^A^w^a^rds^P^h^a^s^e^I^P^ha^se^II^To^t^a^l^P^ha^se^I^P^ha^se^II^To^t^a^l^a
^F^Y¹⁹⁸³^44.5^—^44.5⁶⁸⁶^—⁶⁸⁶
^F^Y¹⁹⁸⁴^48.0^60.4^108.4⁹⁹⁹³³⁸^1,337
^F^Y¹⁹⁸⁵^69.1^130.0^199.1¹^,397⁴⁰⁷^1,804
^F^Y¹⁹⁸⁶^98.5^199.4^297.9¹^,945⁵⁶⁴^2,509
^F^Y¹⁹⁸⁷^109.6^240.9^350.5²^,189⁷⁶⁸^2,957
^F^Y¹⁹⁸⁸^101.9^284.9^389.1^a^2,013⁷¹¹^2,724
^F^Y¹⁹⁸⁹^107.7^321.7^431.9^a^2,137⁷⁴⁹^2,886
^F^Y¹⁹⁹⁰^118.1^341.8^460.7^a^2,346⁸³⁷^3,183
^F^Y¹⁹⁹¹^127.9^335.9^483.1^a^2,553⁷⁸⁸^3,341
^F^Y¹⁹⁹²^127.9^371.2^508.4^a^2,559⁹¹⁶^3,475
^F^Y¹⁹⁹³^154.0^490.7^698.0^a^2,898^1,141^4,039
^F^Y¹⁹⁹⁴^220.4^473.6^717.6^a^3,102⁹²⁸^4,030
^F^Y¹⁹⁹⁵^232.1^601.9^834.1^a^3,085^1,263^4,348
^F^Y¹⁹⁹⁶^228.9^645.8^916.3^a^2,841^1,191^4,032
^F^Y¹⁹⁹⁷^277.6^789.1¹^,106.7^a^3,371^1,404^4,775
^F^Y¹⁹⁹⁸^262.3^804.4¹^,066.7³^,022^1,320^4,342
^F^Y¹⁹⁹⁹^299.5^797.0¹^,096.5³^,334^1,256^4,590
^F^Y²⁰⁰⁰^302.0^888.2^b^1,190.2³^,166^1,330^4,496
^F^Y²⁰⁰¹^317.1^977.3¹^,294.4³^,215^1,533^4,748
^F^Y²⁰⁰²^411.5¹^,023.4^b^1,434.9⁴^,243^1,577^5,820
^F^Y²⁰⁰³^445.4¹^,214.7¹^,660.1⁴^,465^1,759^6,224
^F^Y²⁰⁰⁴^498.7¹^,368.7¹^,867.4⁴^,638^2,013⁶⁶⁵¹
^F^Y²⁰⁰⁵^461.2¹^,404.7¹^,865.9⁴^,300^1,871⁶¹⁷¹
^F^Y²⁰⁰⁶
^(prelⁱ^mⁱⁿ^ary⁾^411.2¹^,472.0¹^,883.2³^,836^2,026^5,862
^Source:^Sm^{all B}^u^sin^e^{ss A}^d^mⁱⁿⁱ^str^a^tioⁿ^Data.
^{a. In}^cl^u^d^es^m^odi^fⁱ^catⁱ^oⁿ^s^t^o^prevⁱ^o^u^s^aw^ards^an^{d f}^uⁿ^d^s^s^e^t^asⁱ^d^{e f}^o^{r propos}^al^sⁱⁿⁿ^e^g^o^tⁱ^a^tⁱ^oⁿ^.
^{b. Dollars}^oblig^{ated can}ⁱⁿ^clu^d^{e m}^odi^fⁱ^cation^s^{to prev}^iou^s^y^ear’^s^aw^ards

Table 2. STTR Program: Dollars Awarded and Projects Funded
^Fis^c^al^Do^lla^{rs Aw}^a^r^{ded (}^m^illio^ns)^A^w^a^rds
^Yea^r^P^h^a^s^e^I^P^ha^se^II^To^t^a^l^P^ha^se^I^P^ha^se^II^To^t^a^l
^F^Y¹⁹⁹⁴^18.9^—^18.9¹⁹⁸^—¹⁹⁸
^F^Y¹⁹⁹⁵²³^10.7^33.7²³⁸²²²⁶⁰
^F^Y¹⁹⁹⁶^22.7^41.8^64.5²³⁸⁸⁸³²⁶
^F^Y¹⁹⁹⁷^24.2^44.9^69.1²⁶⁰⁸⁹³⁴⁹
^F^Y¹⁹⁹⁸^19.7^45.1^64.8²⁰⁸¹⁰⁹³¹⁷
^F^Y¹⁹⁹⁹^24.3^40.6^64.9²⁵¹⁷⁸³²⁹
^F^Y²⁰⁰⁰^23.9^45.9^69.8²³³⁹⁵³²⁸
^F^Y²⁰⁰¹^24.2^53.2^77.4²²⁴¹¹³³³⁷
^F^Y²⁰⁰²^36.4^55.4^91.8³⁵⁶¹¹⁴⁴⁷⁰
^F^Y²⁰⁰³^41.1^50.7^91.8³⁹⁷¹¹¹⁵⁰⁸
^F^Y²⁰⁰⁴^79.7^110.3¹⁹⁰⁶⁷⁴¹⁹⁵⁸⁶⁹
^F^Y²⁰⁰⁵^73.9^146.4^220.3⁶¹¹²²¹⁸³²
^F^Y²⁰⁰⁶
^(prelⁱ^mⁱⁿ^ary⁾^74.0^152.3^226.3⁶⁴⁴²³⁴⁸⁷⁸
^Source:^Sm^{all B}^u^sin^e^{ss A}^d^mⁱⁿⁱ^str^a^tioⁿ^d^a^ta.
Issues for Consideration
Certain issues might be considered if the program is to be reauthorized. Initially,
debate centered on the use of a set-aside: proponents urged its use to guarantee
participation of small firms in federal R&D contracts while opponents argued that a set-
aside interferes with normal market efficiency and circumvents the congressional budget
process used to determine program priorities and budget allotments.
Existing regulations require at least 51% ownership by an individual or individuals.
However, some experts argue participation by small firms that are majority-owned by
venture capital companies should be permitted. Proponents of this change maintain that,
particularly in the biotechnology sector, the most innovative companies are not able to use
the SBIR program because they do not meet this ownership criteria. Opponents of
altering the eligibility requirements argue that the program is designed to provide financial
assistance where venture capital is not available. They assert that the program’s objective
is to bring new concepts to the point where private sector investment is feasible.
An additional concern is the extent to which program participants are mandated to
report activities and results. P.L. 106-554 placed added requirements on companies to
provide information; it remains to be determined if these requirements have been
successfully implemented. Other issues that might be addressed include whether the
problems identified by GAO associated with the duplication of awards has 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^th
110 Congress considers possible reauthorization of the Small Business Innovation
Research program.