SPEAKERS CONTENTS INSERTS
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REAUTHORIZATION OF THE SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR)
THURSDAY, SEPTEMBER 4, 1997
House of Representatives,
Subcommittee on Technology,
Committee on Science,
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m., in room 2318, Rayburn House Office Building, Hon. Constance A. Morella, Chairwoman of the Subcommittee, presiding.
Mrs. MORELLA. I'm going to call to order the meeting of the Subcommittee on Technology of the Science Committee. Today the Subcommittee on Technology is meeting to consider the reauthorization of the Small Business Technology Transfer Program (STTR).
STTR is an off-shoot of the Small Business Innovation Research program, or SBIR. SBIR was created in 1982 to increase the participation of small, high-tech companies in federal R&D. This was done by requiring federal agencies with large R&D budgets to set aside, or tax, a percentage of their extramural budgets. Today, that percentage has reached 2.5%, totaling over a billion dollars a year for the SBIR program.
When SBIR was reauthorized in 1992, the reauthorization included the creation of the STTR program. STTR requires any agency with an extramural R&D budget in excess of $1 billion to set aside 0.15% of that budget for technology transfer from government to small business. This set-aside provides funding for ideas that are cooperatively researched and developed by a small business firm and research institution.
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Five agencies currently participate in the STTR program. They are the National Aeronautics and Space Administration, Department of Defense, National Institutes of Health, Department of Energy, and the National Science Foundation. In FY 1995, the STTR program issued a total of 260 awards, totaling over $33 million. By comparison, SBIR made over 4,000 awards totaling over $800 million in the same year.
While STTR and SBIR are vastly different in size, both programs have similar structures. The programs are divided into three phases. Phase I is the development stage of the idea. The award may be up to $100,000 in both programs. Phase II allows for further development of the most promising ideas from Phase I. These awards can be as much as $500,000 and up in the STTR program, and $750,000 in the SBIR program. The final phase, Phase III, is the commercialization of the product or service, or, the use of that product or service by the Federal Government. The STTR and SBIR set-asides are not used for Phase III grants.
So, the main difference between the two programs, is that STTR requires a research institution to be involved. STTR was designed to take ideas that originated in universities and laboratories, and develop them through a cooperative agreement with a small business entity. The SBIR program allows for such a collaboration on a smaller scale, but does not require it.
Since STTR is a relatively new program, limited data on its success is available. I believe that, for this hearing to be constructive, we need to not only look at the STTR program, but also its parent program, SBIR, which has been given over 37,000 projects and spent over $5.5 billion to date. In this way we can address issues that have developed in SBIR which may, or already have, arisen in the STTR program.
I am pleased that today the Subcommittee will have its chance to hear from this distinguished panel on both of these programs and I am looking forward to the panelists' insight on what, if any, changes should be made to STTR as we proceed with its reauthorization.
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There's a lot of that, half of it, put together SBIR and STTR, and this is a very knowledgeable group to whom I'm speaking. And right now I'd like to turn to our Ranking Member of the Subcommittee, the distinguished Mr. Gordon.
Mr. GORDON. Thank you, Madam Chair, and welcome back and welcome to everyone who is here today. Today's hearing is on an important kind of project for Small Business Technology Transfer Program, better known as STTR. I am pleased that the Subcommittee is playing a strong role in the authorization of this program. STTR began in FY 1994 as an attempt to better link the research capabilities of the universities and national laboratories, with the business sense and drive of the Nation's small business community. This is a worthy goal and the Committee played a leading role in the program's evolution. The STTR Program is generating strong support in Tennessee and other places where top-notch small businessmen are working to create new relationships with universities and national labs. In 1995 alone, Tennessee received a total of 48 STTR and SBIR Small Business Innovation Research awards, really a small percentage compared to the rest of the country, but still, it was very important for our State and I think some good research. Like many state and federal technology programs, it's too early to objectively evaluate the STTR program. Too many of these grantees are still in the beginning stages of their STTR efforts. It takes a number of years for a truly innovative concept to move from an idea to commercial product. We must wait until a significant number of STTR grantees that participate in all programs phases to do a full fledged evaluation of this program. However, I expect today's testimony will support the continuation of the STTR program for the balance of this century. Madam Chair, STTR may be new, but its sister program, SBIR, as you pointed out, which is 15 times its size and has been in business for 15 years, there are enough similarities between the programs that our experiences with SBIR, which is a fairly accurate prediction of where STTR is heading. Today, many of the same companies participate in both programs. Therefore, I look forward to hearing our witnesses views on some of the major issues which have faced the SBIR programs so that we can avoid repeating the mistakes of the past as we review and reauthorize the STTR program. Madam Chair, I look forward to working with you in reviewing and strengthening the STTR program and I want to join the Chair in welcoming everyone to this hearing and look forward to our witnesses' comments.
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Mrs. MORELLA. Thank you, Mr. Gordon. I want to acknowledge that Mr. Cannon is here from Utah. He said he does not have an opening statement and Mr. Bartlett, from Maryland, would you like to proceed with any opening statement?
Mr. BARTLETT. Thank you, very much. I have a prepared statement for the record. I'd just like to make a couple of brief comments. One is that I am the Subcommittee Chair of the Small Business Subcommittee on Government Programs and Oversight and this is one program that we're very enthusiastically supporting and so I commend you for convening this hearing today. The difference between STTR, the big difference, and SBIR, is that in the STTR program the researcher/inventor does not have to leave his academic post to pursue the commercial development of his idea. I wish that program had been around in another life when I was a researcher/inventor—I have been awarded—patents. I would have welcomed such a program as this because I did not want to leave the academic research world. But, I did have an interest in seeing that my ideas made the trip over into the commercial world. So, Madam Chair, I'm very pleased that you have convened this meeting and look forward to the reauthorization of STTR. Thank you.
Mrs. MORELLA. Thank you, Mr. Bartlett. I know of your interest in this program, so it's good that we have you on this Subcommittee, as well as Chairman of the Small Business Subcommittee. And, I now am delighted to recognize Ms. Rivers, the distinguished woman from Michigan. Ms. Stabenow, who is also from Michigan, do you have an opening statement?
Ms. STABENOW. Good morning, I would only like to comment that as a new Member of Congress, but formerly in the Michigan Legislature, where I chaired the Small Business Committee at one point, we were very supportive of the kinds of things that we're talking about today and I am looking foward to support the continuation of this kind of program. I know it's been very effective in partnering with a number of efforts in Michigan. Thank you.
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Mrs. MORELLA. Thank you, Ms. Stabenow. To our panelists, it is the policy of the Science Committee to swear in all its witnesses and so I will ask you if you would stand, raise your right hand. Do you all solemnly swear that the testimony that you're about to give is the truth, the whole truth, and nothing but the truth?
The record will indicate affirmative responses. Thank you.
I'm delighted to have as our witnesses Mr. Daniel Hill, the Assistant Administrator for Technology at the Small Business Administration right here in Washington, our capitol city; Dr. Wendy Baldwin who is certainly not new to us, and not new to me, who's the Deputy Director for Extramural Research for National Institutes of Health in Bethesda; Susan D. Kladiva is the Acting Assistant Director, Energy, Resources and Science Issues, at the General Accounting Office right here in our capitol city; Scott Wallsten, an Economist, Department of Economics, Stanford University, Stanford, California, who gets the award for coming the farthest; and Ann Eskesen who is the President of Innovation Development Institute in Swampscott, Massachusetts. And, I ask you if you would kindly confine your comments to not more than about 5 minutes and please note that the totality of your testimony will be included fully in the record. So, at this time to begin with Mr. Daniel Hill.
TESTIMONY OF DANIEL O. HILL, ASSISTANT ADMINISTRATOR FOR TECHNOLOGY, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC
Mr. HILL. Thank you, Madam Chairwoman. Good morning, Madam Chairwoman and distinguished members. Can you hear me out there? Good morning. It is my pleasure to appear before you today to discuss SBA's Small Business Technology Transfer Program, known as STTR. My name is Daniel Hill and I am the Assistant Administrator for Technology at the United States Small Business Administration. With your permission I would like to submit my full written testimony for the record and—sort of—my remarks this morning.
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As you know, small business is an important sector of our national economy employing 54 percent of the American work force. Studies show that small businesses are the leading source of innovations and that small firms produce twice as many innovations per employee as large firms. The Congress created this program and a small business innovation research program known as SBIR to ensure that the best and brightest entrepreneurial researchers in America would be part of vital federal research and development efforts that benefit our national defense, build safer highways and airports and contribute to our public health and safety. This has resulted in the Federal Government achieving the highest quality research to meet specific mission needs as well as an expansion of the Nation's industrial base. At the same time, it has enabled small businesses to grow, mature and create jobs for Americans by moving ideas from the drawing board to the marketplace. The innovations from these programs cover the scientific and technical spectrum from sophisticated concepts to practical consumer products and services. The General Accounting Office and others have studied these programs and generally awarded them high marks for quality and for commercialization success. For example, and among many others, a 1992 National Academy of Sciences report found that SBIR has proved important in providing a bridge across which companies can move from start-up to commercialization. They believe this program has significant merit and the program should be expanded so that more companies could participate in it.
A 1995 GAO study found that the quality of SBIR research proposals has kept pace with the program's initial expansion and another example, in 1997, a GAO study of the DOD SBIR program concluded that processes are in place to help ensure that quality research is being conducted, that competitive procedures are being followed and that the resulting products and processes are being used in military projects and programs.
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During the 1992 reauthorization of the SBIR program, the Congress designed a pilot program called the Small Business Technology Transfer Program known as STTR. Despite the successes of the SBIR program, the Congress felt that more could be done to link small businesses with creative ideas generated at universities, nonprofit scientific and educational institutions and federal laboratories. This collaboration, Congress hoped, would result in a better commercialization rate for federally sponsored research conducted at nonprofit organizations. This would mean that more goods and services would be introduced into the marketplace as a direct return on the research and development invested by the Federal Government. In its fourth year of operation, the STTR program is meeting those objectives.
An outstanding example demonstrating the effectiveness of such collaboration can be seen in an STTR project at Altus Biologics. Under an ongoing DOD STTR project, Altus Biologics of Cambridge, MA is collaborating with Texas A&M and Ohio State on the development and commercialization of Cross-linked Enzyme Crystals. These materials can be used to detoxify chemical weapons stockpiles as well as equipment, clothing and people that have been exposed to chemical weapons. This technology also has broad agricultural applications in the detoxification of pesticides and insecticides. In Phase II of this project, which started earlier this year, the company is testing the materials on live agents.
According to the company, STTR is an excellent vehicle for development of this technology because the key expertise for preparation of the enzyme on this, this technology is based is at Texas A&M and Ohio State. The STTR project gave the company an efficient way to tap both the expertise and the technology at these universities without which this project could not have moved forward.
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In conclusion, the SBIR and STTR programs are vital to our Nation's research agenda and to the small business community. This fiscal year, approximately $1.1 billion under SBIR and $60 million under STTR will be awarded to small business research and development firms. Without these valuable programs it is unlikely that this level of participation and opportunity would exist for these firms and I believe that our national research programs would not receive the benefit of these highly innovative companies. These programs are not giveaways, but rather highly competitive awards that assist the Federal Government in meeting its specific mission needs. Further, as a result of these programs, there is a flow of innovative new products and services to the American marketplace.
For these reasons, the Administration strongly urges the Congress to extend the STTR program through the Year 2000 at its current level.
Thank you for inviting me to testify this morning and I will be happy to answer any questions you may have.
[The prepared statement of Mr. Hill follows:]
"The Official Committee record contains additional material here."
Mrs. MORELLA. Thank you, Mr. Hill, for your testimony. Please now recognize Dr. Baldwin. Thank you.
TESTIMONY OF WENDY BALDWIN, PH.D., DEPUTY DIRECTOR FOR EXTRAMURAL RESEARCH, NATIONAL INSTITUTES OF HEALTH, DEPARTMENT OF HEALTH AND HUMAN SERVICES
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Ms. BALDWIN. Thank you, Madam Chairwoman and members of the Committee. I am Wendy Baldwin, the Deputy Director for Extramural Research at the National Institutes of Health and on behalf of the Department of Health and Human Services, I'm pleased to appear before you today.
Due to the size of our Extramural program, we are the only component within the department participating in STTR. NIH, as we looked at external reviews of our SBIR program, had experienced the highest success rate in commercialization of the results of the research that were conducted under that program. We expect the STTR program to achieve similar results as it matures.
We view this program as a bridge or a tool to move between the basic research investment that we make and the application of that research. We have many examples of where we have seen that translation take place and I want to just tell you about just a couple of those.
We have had one case where we've had a swallowable electrode that has been used now for cardiac monitoring, so we've been able to see the effect of that program in clinical care in other areas of science and we're able to track that through scientific publications.
Another of our programs, which in fact, is a small component within the NIH, has found that investment in the SBIR program has generated tools that would make other research projects more efficient and less expensive. So, we found that we have to look at multiple outcomes for those programs.
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In the Cancer Institute, we have a grantee who developed a screening technique for telomerase activity. This is used for screening for cancers, in breast cancer primarily, but, in fact, this is such an important enzyme that we find that this is an achievement in that particular grant that's going to be applicable in many other areas relating to aging or cell division and cell death. A great deal of that work has been conducted under Phase I.
In the NIH we have tried to both be flexible in our use of these programs and also to mainstream these programs. While one of the indications of our flexibility has been our use of ''Fast-Track.'' We feel that we have to give our grantees and applicants a flexible approach to working with us.
And, yet, on the other hand, we feel that it's important that the applicants and these grantees be mainstreamed to be brought close to the basic research because they are really a bridge to that research.
For example, we subjected our SBIR applications and STTR applications to the same type of peer review that we do for all of our research projects. However, we do ensure that for those committees that are going to review small business applications, that we also have brought to those committees scientific experience and technical experience from members of the small business community. We feel that that's an important feature and we would hope to maintain this flexibility and also mainstream the innovation of this program into our broad investment base of research.
I'd like to have my full testimony submitted for the record and I'd be pleased to answer any questions that you have. Thank you.
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[The prepared statement and attachment of Ms. Baldwin follow:]
"The Official Committee record contains additional material here."
Mrs. MORELLA. Thank you, very much, Dr. Baldwin. Ms. Kladiva.
TESTIMONY OF SUSAN KLADIVA, ACTING ASSOCIATE DIRECTOR, ENERGY, RESOURCES, AND SCIENCE ISSUES, RESOURCES, COMMUNITY AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Ms. KLADIVA. Thank you, Madam Chairwoman and members of the Subcommittee. I am pleased to be here today to talk about the results of our work on the first year's implementation of the STTR program and on this Subcommittee's recent request for information on companies that have received multiple awards under the STTR and SBIR programs.
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 into new products. However, the programs differ primarily in that STTR requires a company to form a partnership with a nonprofit research institution such as a university.
In summary, Madam Chairwoman, we reported in 1996 that while officials at the five agencies participating in STTR expressed different views on the effect of and the need for the program, all believed that it was not competing with SBIR for quality proposals or reducing the quality of agency R&D in general. Furthermore, some officials noted potentially beneficial effects, such as greater collaboration between small businesses and research institutions in the SBIR program.
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The similarity of the two programs, however, raises a broader issue about the need for the STTR program. As you know, the rationale for the program is that there is research being done in universities and other research institutions that's not being translated into technology and commercial applications that benefit the economy. STTR uses small businesses as a vehicle to foster this commercialization.
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 or in the small business? Under STTR, the assumption is that the research institution will be the primary originator of the new concept. However, neither SBA nor the agencies have collected data to determine the extent to which the research institutions are providing the technologies. This information bears directly on the need for the STTR program.
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. Information on how well the collaborations are working was not available at the time of our report. And, information on actual commercial outcomes will require a greater amount of time to develop. Generally, 5 to 9 years are needed to turn an initial concept into a marketable product.
And finally, could the STTR program do what is needed? The rationale for STTR assumes that the collaborations between small business and research institutions are relatively rare in SBIR. However, a survey undertaken by NIH several years ago found that over half of the agency's SBIR proposals already involved such collaboration. On the other side, the Army SBIR program, which has had a lesser degree of involvement with universities and other research institutions in the past, said that STTR has been a stimulus in terms of getting these collaborations in place. Given the apparent variation from one agency to another and the lack of current data, no definite conclusion can be drawn at present about the need for STTR in forging new collaborations.
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On multiple awardees, since Fiscal Year 1990, approximately 6,500 companies have received awards from the five agencies that participated in both programs. Of these companies, 383, or about 6 percent, have received 10 or more awards. Two companies have received over 300 awards each, and another eight companies have received over 100 awards each from the programs. Approximately one-third of the companies that have received STTR awards have also received SBIR awards. In addition, 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 number of employees and the annual revenue of the companies that receive awards and have limited information on the commercialization resulting from these programs. As I noted earlier, it may be too soon to have achieved success in commercializing the results of STTR awards, but our work on the SBIR program in 1992 suggests a basis for some concern about multiple awardees, for the ability to produce commercial success.
In that work, we observed two key indicators of the program's commercial trends: total sales and additional funding for technical development. In comparing frequent winners—that is, those receiving 5 or more SBIR Phase II awards—with less frequent winners, we found that, in general, frequent winners were achieving lower levels of total sales per project and had obtained substantially less additional developmental funding per project from the private sector than companies with fewer awards.
Madam Chairwoman, this concludes my statement. I would be happy to respond to any questions you or members of the Subcommittee may have.
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[The prepared statement and attachment of Ms. Kladiva follow:]
"The Official Committee record contains additional material here."
Mrs. MORELLA. Thank you, very much. And, now, I'm pleased to recognize Mr. Wallsten.
TESTIMONY OF SCOTT J. WALLSTEN, ECONOMIST, DEPARTMENT OF ECONOMICS, STANFORD UNIVERSITY
Mr. WALLSTEN. Madam Chairwoman, I'd like to thank you and the members of the Subcommittee for inviting me here and giving me the privilege of testifying today. I am a Ph.D. candidate in economics at Stanford University and have been studying the SBIR program for several years. Recently I was commissioned by the Competitiveness Policy Council, a bipartisan federal advisory commission, to write a chapter about SBIR in a soon to be published book that endeavors to evaluate federal technology policies and initiatives. My testimony today draws heavily from that chapter and from my other SBIR related research.
It is widely recognized that the returns to investments in research and development tend to be far higher to society than to those who actually make the investments. Economics predicts and demonstrates that as a result, firms acting in their own best interests will invest less in R&D than they should from a national perspective. Ideally, a government program that is intended to correct this under investment would take risks by funding research that would not be funded privately. Such a program that solicits applications from firms should therefore fund potentially socially beneficial research projects that would not receive money elsewhere.
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Although one of SBIR's legislated goals is to increase innovation and commercialization in small firms, it is unlikely to meet this objective. SBIR guidelines mandate that agencies review proposals largely on their technical merits and potential for commercial success. In other words, the agencies are encouraged to use essentially the same funding criteria as a private investor instead of criteria designed to select socially beneficial projects from which other investors would shy away. Firms understand this review process and realize that they can increase the probability of receiving funding by proposing their most promising projects, not necessarily projects that would have difficulty attracting other investors. Because a government grant is cheaper than a loan, any rational firm, not just those with limited access to capital, will look to SBIR before it seeks other funding.
In addition, consistent with the review process, program success seems to be defined not by whether the program increases innovation or commercializations, but by whether it funds projects that achieve commercialization. The easiest way to ensure a high average commercialization rate, and thus meet this particular definition of success, is to fund research that would look promising to any investor, not just to the government. For example, compare SBIR to hypothetical federally funded job search program for Harvard MBAs. The job placement rate for program participants would be close to 100 percent and their starting salaries would be far higher than the national average. Despite these impressive statistics, we would recognize immediately that it was unlikely that the federal funds were responsible for this remarkable outcome. Likewise, the fact that SBIR funded a project that achieved commercialization does not mean that the outcome would not have occurred anyway.
The evaluations conducted by the General Accounting Office lend credence to this observation. They find that the quality and average commercialization rate of funded projects tends to be high. Although SBIR advocates assert that these studies prove the efficacy of the program, they do not. The reports show that projects funded by SBIR tend to be commercialized, but they do not show that SBIR funding was responsible for this commercialization. Indeed, if the review process does a good job of identifying proposals with the greatest chance of commercial success, then a reasonably large fraction of those projects should result in commercialized products.
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My own empirical study, which is designed to determine whether the awards themselves had any impact, is based on a dataset of SBIR award winners, rejected firms and firms that did not apply. Using econometric analysis, I found no positive impact of SBIR awards of a firm's research activities. I found that publicly traded firms, the only firms for which data on R&D spending are available, reduced growth in their own R&D expenditures by approximately the amount of the grants they received. An analysis of all firms in the data revealed that awards had no positive impact on either the number of employees or patents concurrent with winning awards. Economics suggests that awards would have such effects if the program actually increased innovation.
In addition, my data confirmed the common and well-known occurrences of firms consistently winning many awards. This phenomenon has at least two implications for program evaluation. The first is that it is difficult to define the typical firm in the program; it may be more useful to examine the typical award. For example, reporting that a large percentage of firms are new to the program in a given year would not be meaningful if the majority of awards went to firms that consistently win multiple awards. Likewise, reporting median employment for awardees is not meaningful if most awards go to a relatively small number of firms, which may have many more employees than those firms that win only one or two awards.
The second implication is on the interpretation of numbers of proposals. Since only 10 to 25 percent of Phase I proposals are funded, some firms must submit very large numbers of proposals in order to receive multiple awards. My dataset, which includes the number of proposals each firm submitted to NASA each year, confirms that companies to submit many proposals. Since the same firms may simply submit more applications each year, an increasing number of submissions does not necessarily indicate that the program is becoming more competitive or including more firms.
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These observations may be applicable to STTR as well, not only because it is so similar to SBIR, but also because many firms participate in both programs. A comparison of lists of all SBIR and STTR awards granted in 1995 reveals that about 60 percent of STTR funds went to firms that also won at least one SBIR award that year.
In sum, SBIR probably cannot meet the goal of increasing innovation and commercialization in small firms. Instead, its incentives and implementation ensure that funds will go to research that is likely to lead to a commercialized product, but that is unlikely to have needed SBIR in the first place. Many federal investments in R&D yield very high returns and are crucial for maintaining strong economic growth. SBIR, however, does not appear to represent such an investment.
That concludes my statement. I look forward to answering any questions the Committee might have.
[The prepared statement and attachment of Mr. Wallsten follow:]
"The Official Committee record contains additional material here."
Mrs. MORELLA. I am also going to allow the panel and also respond to comments from Mr. Wallsten. I'm pleased to recognize Ms. Eskesen.
TESTIMONY OF ANN ESKESEN, PRESIDENT, INNOVATION DEVELOPMENT INSTITUTE, SWAMSPCOTT, MA
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Ms. ESKESEN. Good morning, Madam Chairwoman. My name is Ann Eskesen. I'm with the Innovation Development Institute. I've been there since 1983—we're a very small group which helped create the SBIR program, but to some extent, I represent, among the people you are listening to today, the SBIR ''Corporate memory.'' And, what I'd like to focus my attentions to are, examining where the SBIR now is and, where, in some respects, I think we are going to have to go if we are going to sustain and maybe even enhance the continued effectiveness of this important national program. I think one of the most important observations to make is that the climate within which SBIR and STTR now function is fundamentally different from the climate that existed when the program was created and we are seeing a circumstance where what used to define the way America does business was competition, rigorous, energetic competition. The pressures of a whole lot of other factors now mean that competition is replaced by one of cooperation. And it is very distinctly obvious that the SBIR community, represents a pool of extraordinary verified talent into which many in the larger innovation system and that is the major corporations, universities, the financial resources, and others are now tapping.
I made a point before I put my testimony together to call a number of the agencies and some of the companies and to compile, very quick and dirty, but a list of the various organizations who are now regularly cooperating and collaborating on SBIR projects and, as you will see, it represents a significant percentage of the Fortune 500, International Fortune 100 companies and most of the major research institutions of the United States. It is very striking, for example, the controversy which surrounded the Section 211 which almost cost us the SBIR program in NIH last year. It was not the small business community that came to the defense of the SBIR program but rather the constituency that are the recipients of the regular grants. Many of them, in fact, are actually participants in the SBIR program as collaborators and cooperators with the researchers of SBIR and they're following those technologies through to completion. As one of them put it to me, it is not that we want to see all of NIH money used in that manner, but for the particular type of activity in which SBIR engages, is a form of—in which we all wish to collaborate.
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One of the most important translations we need to make to understand the present structure in which the SBIR program was activated is who now employs the technically trained. As a result of many of the same practices that changed the business climate, what we now find is that the major source of employment for the engineer and the scientifically in the United States is, in fact, now, the small firm.
Last year, for 1996, for the very first time, the combined employment of the university community and the nonprofit research community was, in fact, less of all scientific and engineering trends in the United States than the small business community.
What that means is that SBIR is following the talent. We do not have an SBIR program simply because these companies are small and are somehow left out. We have a much more self centered reason for funding these companies, they are the best and the brightest and the investment has been made to create capability which underpins our technology based community.
What I'd like to spend the majority of my 5 minutes on is where we now are and where I think we need to be going. I—companies when we are talking to them about SBIR participation, because it used to be that the grey hairs were on the podium as—the program managers and that it was the bright-eyed, bushy-tailed young people who were in the audience as potential SBIR applicants. Again, because of the restructuring of our economy, we find that the average age of SBIR involved companies and the individuals in these companies are young—the grey hairs are in the audience and increasingly we have a very young set of program managers. And, those program managers are stepping into large shoes and indeed, but the challenge now is to them, that they must maintain a track record of accomplishment that has defined the SBIR and STTR programs and at the same time recognize the changed conditions of SBIR and how in fact the program must be modified and will adapt to those new and changed circumstances.
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A couple of points I do want to make, I do not want to see the program tampered with in terms of the basic structure of the program. There is a good and strong reason why there was a Phase I application process followed by a gap and then a Phase II. That process enables extremely competent new companies to get into the program at a very important rate. It is about 30 to 40 percent of awards that are made each year are made to companies we have not seen before. The highest profile which in this class of companies normally represent was reduced because the amount of money at stake, less than $100,000 is a manageable amount of money.
I tell the companies that what they're doing with Phase I is we're giving them enough rope by which to hang themselves. If the project is not viable, if they are not competent, if the methodologies are not appropriate, it will show during the conduct of Phase I and the review process from Phase II takes credence very much of how and in what manner the work of Phase I was conducted. I would not like to see us remove that basic structure which has been so powerful a component to the effectiveness of the SBIR program.
I would also like to oppose the notion that there are somehow limits placed on this program. Any introduction of limits, whether they are geographic, numerical or otherwise, introduces into the notion of variables that is other than of pure technical competence. We compromise the integrity of the program to the extent that we remove that as the major criterion of selection. It is likely simply because more than twice as many projects, despite the increase of funding, are still recommended for funding than there is money to support, so all agencies are using various mechanisms to differentiate the awardees from those who simply get, this was a good job but not quite letters. And what I'd like to see us do is maintain the integrity of the program and not introduce other variables.
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Finally, what I'd like to look at are my areas of present concern. One of my major concerns is that we have shifted the focus to commercialization too extensively, to the detriment of understanding that the money for SBIR is fundamentally that of the agencies and the agencies concerns, in fact, have taken a back seat to the commercialization objectives. That, I think, is a problem and one that I think is one that we must discuss in some detail over the next several months during the reauthorization process.
What I'd also like to observe are in that same condition is that what we need to be looking at, too, is the relatively limited time frame works that are increasingly defining the selection of SBIR projects. By that I mean the raw talent, the long term, high risk prospective that was so characteristic of many SBIR projects in the 1980's seems to be less obvious during the 1990's. What we have done, effectively, is reduced because of our emphasis on commercialization in the near term, we've reduced the risks the companies and the agencies are often taking. I'd like to suggest the creation of a number of mechanisms that would support that, on ERISA type provision, for example, which would enable the agencies to take a small percentage of their money to invest in those high risk projects. I note, for example, that in many instances, the projects that we now applaud as being the most effective in the SBIR program of the 1980's would probably not now be funded in the 1990's.
I'd also just like to conclude with one or two observations about multiple winners. I am very concerned that the accusation is being leveled against companies, some of them large and some of them small, that they are not in fact, meeting the objectives of SBIR when their focus is to the needs of the agencies. Many of the agencies needs, in fact, are ones that preceded by some period the commercial application to all technology. Traditionally federal procurement has meant a niche market opportunity, a protection in inoculative facility during which the technology can, in fact, mature. And then in a reduced price, and in an improved condition, lead to the marketplace.
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If I can conclude with a simple anecdote, all of us have heard the story about James Watt and his development of the steam engine. The steam engine we all think of as being a propulsion, a transport endeavor. But, in fact, for 100 years, it found its effective usage down in mines, leaking like a sieve, but pumping the water out of the mines. In that 100-year period, the technology which was necessary to tighten up the steam engine developed and 100 years later, as a result of that experience in the mines, it became possible for that technology to be used as transportation, horizontally.
What I'm really trying to say here is that we have two very important tasks we must address. One is the needs of the Federal Government which are different from those of the private sector and the other is to understand that we must still be funding the very high risk that we formerly were doing.
I'm pleased to have been invited here today and I will, of course, be happy to answer any questions.
[The prepared statement and attachment of Ms. Eskesen follow:]
"The Official Committee record contains additional material here."
Mrs. MORELLA. Thank you, Ms. Eskesen. We felt your testimony was important. And we're ready to vote. And we did give you a little more time for your statement. We're going to adjourn now for about 15 minutes to go over and vote in terms of whether we should adjourn the Congress and we should be back then to fire away some questions. Thank you all, very much.
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[Pause]
Mrs. MORELLA. I'm going to defer to my good friend Mr. Bartlett to open up the questioning since he has a members only meeting coming up. Mr. Bartlett.
Mr. BARTLETT. My enthusiastic support of STTR needs to be put in context. I had when I came to Congress and have after being here 5 years now some serious reservations about whether or not the Federal Government should be in the role of venture capitalists, that if the Federal Government is going to be in the role of venture capitalists then STTR is a good program. But I still have that fundamental concern about whether or not the Congress and the Federal Government should be in the role of venture capitalists.
That brings me to my questions of Mr. Wallsten and Ms. Eskesen. I gather, Mr. Wallsten, that your studies have indicated that there is a high probability that the commercialization of the projects that were funded by SBIR are presumably those that are funded by STTR, the much newer program, that they probably would have been commercialized anyhow, that those who sought these funds simply saw this as a cheaper source of venture capital than conventional venture capital, so to speak.
Mr. WALLSTEN. I think that's a fair conclusion of what I found. I found that these awards—when you control for other aspects like—how much a film has historically done—where they're located that the work.
Mr. BARTLETT. And Ms. Eskesen, one of your concerns I gather was that these programs that encourage commercialization to not be pursued at the expense of the basic objectives of the agencies involved.
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Ms. ESKESEN. I would not believe quite as strongly as that, but I head in that direction. I, for example, have just done a fair amount of work with NASA and it's very clear that the—as a result of a G.A. study in 1991—Congressional testimony that followed it where they were severely chastised for their relative lack of commercial achievement resulted in NASA literally being willing to fund projects that may not have been to the essential needs of NASA when they in fact offered potential commercial projects. And the concern that I have is that at the time when we are cutting back on the resources available for R&D in the United States it is inappropriate that we should be extending those resources for purposes that are not central to the needs of the agency.
Now, having said that, many of the projects that are funded can in fact meet the needs of the agency and then subsequently be commercialized and I think the trend is whether we wish to have it or not in that direction——
Mr. BARTLETT. I appreciate the testimony of all of the panelists. I would remind them that when I came to the Congress we were talking about directing basic research and having been a basic researcher for a number of years I asked pray tell me what is directed basic research, and their response was that directed basic research is research with a societal payoff and I said pray tell how does one determine that. I'm sure that Madam Curie when she made her first observations of radiation had no idea as to what societal payoffs would accrue to those early observations. I have a feeling in terms of basic research and also technology advancement, whenever you're doing basic research there will be societal payoffs. It is impossible to predict ahead of time where the societal payoff will be and if you find enough good basic research there will be societal payoff. And I think that it's also true that when you have agencies that are pushing the envelope like DOD and NASA that there will be commercialization. It is absolutely unavoidable. And I think that I in some measure agree with your compelling statement that we shouldn't be forcing, cajoling agencies into promoting commercialization if that is to the detriment of the basic goals of that agency. We needn't fear that there will be commercialization if we are truly pushing the technology envelope. There will be commercialization following that. Well, thank you much Madam Chairwoman for recognizing. I need to go now to a Members only meeting on encryption, may I just restate my basic premise, and that is that I'm not sure that the Federal Government is the proper source of venture capital. The people in the venture capital business should be strongly supporting STTR.
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Mrs. MORELLA. Thank you, Mr. Bartlett. I'm glad you used as your example Madam Curie. Mr. Hill, the significant purpose of STTR is to commercialize ideas that originate in our Nation's research institutions, and I'm going to ask you, do most of the ideas that you see the STTR grants actually originate from the research institutions? If not, then where do they come from?
Mr. HILL. I'd be happy to answer that. Before I do that, though, I would like to respond to Mr. Wallsten's remarks.
Mrs. MORELLA. Okay.
Mr. HILL. Earlier this summer I was asked to review Mr. Wallsten's paper and at that point I sent the paper out for a peer review to a number of leaders in technology transfer issues, among them Dr. Zoltan Ox at the University of Maryland, Dr. Fred Carpodine, Assistant Dean at the School of Economics at Georgia Tech, and asked them to review his paper. They reported back to me that there were serious flaws in his methodology and his assumptions, which I think are important to bring to the attention of this Committee.
At that time I also responded to Mr. Wallsten with copies of all their comments and I sent that to Mr. Wallsten and it has not been answered. I see no recognition of the concerns that were raised in his testimony today. I'd like to for the record submit my response to Mr. Wallsten's paper earlier this summer at this time.
Mrs. MORELLA. Without objection it will be included in the record.
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Mr. HILL. To just specifically go into some of the issues, Mr. Wallsten selected a population to study that we think is based on flawed methodology. It's based on what data is available, but when he studies only publicly-held small-business firms, he excluded a majority of the STTR firms in the program. Less than 15 percent of STTR firms are publicly held. So, it's a faulty methodology to take a publicly-held firm and say that's a typical STTR firm. In fact, publicly-held firms are awash with money, if I may use that slogan, and are able to do some of the things that Mr. Wallsten was saying.
Another key concern we had with his methodology was that he picked a very short time period in which to study the success and outcomes for those firms. He picked a 3-year period. As we've heard today, as we've seen in other studies, a typical research development project cycles from 5 to 7 to 9 to 10 years. Dr. Josh Lerner, a professor at Harvard University who has issued a recent paper on the STTR program, did a study over a 10-year period and his conclusions are quite different than Mr. Wallsten's. I'd like to at this time with your permission submit Dr. Josh Lerner's paper for the record as well.
Mrs. MORELLA. Without objection it will be included in the record.
Mr. HILL. We also felt that Mr. Wallsten had biased his approach in his study by studying with a misconception of the program that it was established by this Congress as a business development tool for small businesses, if you will. He cites in his paper that it's a substitute for underinvestment by small investment companies. If you read the report language in 1982 and 1992, it's just the opposite. The Congress intended this program to allow quality small R&D firms to participate and assist Federal Government agencies to meet their established research and development mission needs. In other words, these are not give-aways. These are not make-work programs. It's not a substitute. It's not a program whereby an agency will come up with something that is going to be socially or commercially beneficial and then they put out a proposal. These are part of their long-term R&D missions and it's the small business has a legitimate role in meeting those mission needs.
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We also thought that he elaborated too far on that. And in fact, several times in his paper he specifically addressed that. Those are concerns. In my written response to Mr. Wallsten we elaborate on those quite clearly and from leading experts in the field and I would just ask the Committee to view that in the totality of 15 years of successes under the SBIR program and the benefit it's had for the small business community.
Mrs. MORELLA. I would let Mr. Wallsten respond. I did want to ask you though, this is a part of the objective on the STTR and SBIR to assist companies who do not otherwise be engaged in that research pursuit?
Mr. HILL. Our view at the SBA is, and in reading the report language, is that no, SBIR, the strength and the success of SBIR has gone as Dr. Baldwin testified to the strength of the peer review and competitive nature of the program. Only the best, the highest-quality firms win awards.
Mrs. MORELLA. Mr. Wallsten.
Mr. WALLSTEN. Okay, I'll respond to each point in turn. First, yes, I did get the peer review. Well, actually, it was reviewed by Mr. Hill's peers. I wasn't too surprised by their responses, actually. Most everyone was associated with the advocacy of the Small Business Administration, who read or reviewed my paper. Let me just go directly then to the issues. First, their claim that there is a sample bias, that this conclusion is based on public firms, publicly-traded firms. That was a small part of the data. In fact, small firms were about 15 percent of my data set as well, just those delivered a very dramatic effect. Those are the only firms for which R&D spending are available and I found sort of a dollar for dollar crowd out, but this conclusion was backed up by the other 85% of the firms in the sample, when I found no effects of unemployment and patents concurrent with awards. And the time period is short, but small firms tend to base their employment on their expected profitability because scientists and engineers are not easy to hire and fire, and there's much economic evidence in support of this. And patents are generally made concurrent with R&D spending, and patenting tends to track expenditures. I didn't find any facts on either of those measures as well, through the whole sample.
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The second point I'd like to talk about is Josh Lerner's paper. And I think he's a great economist, and I like him a lot, but the paper doesn't exactly say what it's being claimed to say. In fact, he finds that overall SBIR awards did not have an impact on firms sales or employment. Firms that receive Phase II awards and were located in geographic areas with venture activity, venture capital activity, grew more than did other firms. But then, if you look in the tables in the back, you also find coefficient estimates that firms that received Phase II awards and were located in geographic areas with venture capital activities and industries that received venture capital financing grew less than did the other firms. There's an additional sort of econometrics issue I would take, and that you don't exactly control for, causality issues, don't know which way the causality goes. Are the awards causing these firms to grow faster or is it that firms that were going to grow faster got the awards?
An additional point to make about this paper is that it is based on awards made in the first 3 years in the program which is was much, much smaller than it is now. Josh Lerner himself noted that one concern is whether political pressures will lead to a deterioration of the SBIR's program effectiveness over time.
Now, finally, the issue of whether this is commercialization or agency need. That's really a good point and one I did not discuss in my testimony. The first thing I would say about that is that economics doesn't have anything to say about whether a certain group, in this case small business, is entitled to a minimum share of federal dollars, so I'm not going to comment on that. The second is that commercialization. It's wrong to downplay the importance of commercialization currently, at least, in the SBIR program. It's one of the most heavily advertised aspects of the program and the solicitation materials mandates that firms include in their proposal a description of the commercial potential of their ideas. And while it's true that SBIR supports work prior to a decision to go forward with commercialization, it's also true that projected on the basis of their commercial promise. The SBA itself in its 1994 ''State of Small Business'' report calls commercialization the keystone of the program.
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Now, finally to address this point directly, it doesn't seem to be the case that agencies really find SBIR-funded research as useful as they do research funded through the normal grants process. In 1992 and 1995 NASA protested the SBIR increase. The Nuclear Regulatory Commission has dropped out of the program now that its extramural R&D budget has fallen below $100 million. If the agencies actually believe that this is an efficient way to get the work done, then they would be unlikely to protest these increases and drop out as soon as they're eligible to.
Now, I think an additional test of this might be that if SBIR proponents truly believe that SBIR helps the agencies do their jobs better and they believe that the agencies recognize this, then nobody would object to changing the law to say that agencies are allowed to spend up to 2+ percent of their budgets on these grants rather than they have to spend. If agencies like it they would do it but it's unlikely that we'll be hearing such proposals. I think that's enough.
Mrs. MORELLA. That leads me to Dr. Baldwin. Would NIH continue to set aside the .15 percent for STTR if the minimum set-aside requirement were reduced?
Ms. BALDWIN. Right now I know we have many applications in the STTR arena that people like to see paid. We have a lot of support and a lot of interest in those STTR applications. It's very hard to say what someone would do if you completely change the metric on there. All I can say is that I would at the—satisfaction with those applications and whether people see that as being complementary to the basic research that we already support. I realize there are some agency differences and NASA has been frequently used—as sort of an example of how SBIR/STTR is used. And yet at NIH there's a lot more attention of other outcome measures besides commercialization. You look at publications, you look at whether the outcome is used in other research, whether it finds its way in the clinical application not just partialization. And I only point that out because we also have, I believe, the highest commercialization rate and I suspect that that's because we've made a point to keep the SBIR/STTR activities closely aligned with the basic research and so that it can be Bridge. And we also subject it to the same rigorous peer review that we do for our basic research.
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Mrs. MORELLA. Some small businesses have had some concerns about the time lapse between Phase I and Phase II, and NIH, you mentioned this in your statement you have the fast track. Do you find that experience has been successful and maybe other agencies should adopt that policy?
Ms. BALDWIN. I would say that it's been successful, but it's very small.
Mrs. MORELLA. How does it work?
Ms. BALDWIN. Well, this would allow an applicant to come in with their Phase I and Phase II applications at the same time, and it basically sets the stage to eliminate the gap in funding between Phase I and Phase II. Now, our position has been that there are multiple ways to minimize that gap between Phase I and Phase II and in January we held a meeting(see footnote 1) and particularly discussed that point to point out the other options that are there. Clearly again there's a problem for some, and that for some of our applicants they do appreciate having a strategy so that they can move more quickly to Phase II. I would say that's the kind of flexibility that we would definitely want to retain in a program, but it's never going to be the main way that the program operates. For many, many of our grantees they need the Phase I time, we need a chance to assess what they've done, they need a chance to sort of fully make realization of what that investment has brought them and then come in with a Phase II. On the other hand, I don't like to see a one-size-fits-all strategy. Where we can have some appropriate flexibility so that for a company that's already got some investments outside of the federal sector, to have them come in and move ahead more quickly. To have a company that's able to come in, put Phase I and Phase II together to allow that. We would like to see that flexibility available to us.
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Mrs. MORELLA. Ms. Kladiva, in your testimony, I think you note, that frequent Phase II award winners have had less success commercializing than one time winners.
Ms. KLADIVA. Based on work that we reported on in 1992 when we were looking at companies that had received five or more Phase II SBIR awards during the first 4 years of the program going from 1984 through 1987, so we were taking it a little early in the program, and comparing them to the companies that had received less than 5 Phase II SBIR awards in the same period, what we found was is that the frequent award winners had a lower rate of commercial success when you define it in the context of total sales of projects and in the further development support that had been received from the private sector.
Mrs. MORELLA. I'm going to defer now to my colleagues for any questions they may have. I do want you to know that we're going to be doing a mark-up on this bill very shortly. So if you have any strong feelings about changes beyond what you have already suggested I hope that you'll get them to us. I have a feeling that most of you feel that we should do a reauthorization maybe with some changes, but nothing drastic. And that we should certainly consider the rationale for the kind of program as we look at what Mr. Wallsten just said, why we have the program.
Mr. GORDON. In 1995 over 50 percent of the grants went to five States. Because of the concern of the concentration of grants to certain companies and certain States, the Senate has proposed setting aside a portion of the grants for those States that have not been receiving what you might say a fair share portion of the grants, and I wanted to get your thoughts. Mr. Hill, what are your thoughts about some process in that regard?
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Mr. HILL. At this point we've looked at that phenomenon as well and what you're saying is an accurate statement. We're a little leery to rush to move into an area where, by geographic quotas, we're distributing the awards as opposed to the way it works now where it's subject to a very rigorous peer review and the best proposal wins regardless of where it's from. We're concerned about the geographical distribution as Members of the Senate and I'm sure the Members of the House are. At the SBA we feel there are many, many, very successful, high-quality technology firms in other parts of the country who may not be as aware of these programs as the ones who have been in the program historically since the beginning and we've initiated some major outreach efforts. This fall we have a multi-State midwest conference and Dr. Baldwin is joining me in that effort to get the word out to that area of the country and we hope to use that as a model to move to other areas and we're hoping that by getting the word out and telling quality small businesses about the opportunities here that we change that geographical mix.
Mr. GORDON. Dr. Baldwin, do you have any comments?
Ms. BALDWIN. Yes. We've looked at where our SBIR investments are and where our basic research investments are, and I think the area we might be concerned in is if we see a State where we've got a large investment in basic research and we don't see as much small business activity. But I agree with Mr. Hill that our strategy would be to go and do some outreach in those areas. To set targets by geographic area for us, I think, would be out of synch with the idea that what we want to do is see that small business grow. They have to grow in conjunction where the investments are in basic research to meet the NIH goals.
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Mr. GORDON. Ms. Kladiva, would you like to comment?
Ms. KLADIVA. As we have been looking at the multiple awardees, that one of the factors of concern or consideration, my belief in fact, that all of the agencies that have participated in these programs are indicating that they have more quality proposals than they have funding to support. One of the factors in making the award consideration could indeed be geographical distribution. But I would also suggest that given that it is a competitive program and that the focus is on funding the most meritorious research proposals, then I would also suggest that the set-aside may not be the best way to accomplish that.
Mr. GORDON. Do you award these in terms of a point system, you know, the awards made by a point system?
Ms. BALDWIN. Yes. We have a competitive peer review for the applications and then the funding decision is made on that basis.
Mr. GORDON. You might think something about the points for underserved areas and with a threshold of what you might call qualified and not qualified applicants, that might be on approach to take a look. Let me also ask this just quickly. With the ATP program when you go into the second phase you've got a business plan you have to show that you have made some effort to find funding elsewhere. Is there a thought to use that kind of model for the STTR program?
Mr. HILL. Not at this time. Again, it goes back to what we view is the propose of the program which is to have quality small businesses assist federal agencies in meeting their federal R&D mission needs. This is not a business-development program where small firms need a boost to get into the business and should graduate. What we're looking for is the highest-quality small businesses and they should have business plans in place. We're not looking to view this is a business-development program.
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Mr. GORDON. Well, if they, I mean, you still want them to be successful. So I don't see why a business plan would be out of order.
Mr. HILL. We don't think it's out of order. I would just speculate that a majority of the successful SBIR firms have business plans in place. At the SBA we constantly are harping at small businesses that they should plan their work and work their plan, and we do think a business plan is the cornerstone to the success of any small business. I just feel very strongly that the quality of small businesses participating in the SBIR program demonstrate that many of them understand this and have this in effect and I'm not aware of a need to institute a business-development component of the plan.
Mrs. MORELLA. If I could interject.
Mr. GORDON. I think my time just ran out. I'm sorry.
Mrs. MORELLA. I'll give you an opportunity to quickly respond.
Ms. ESKESEN. I think there is a direct correlation fairly substantially between the availability of the technical competency of the region and the SBIR awards are going. But there's also a very other—interesting, very other correlation and that is in States which have instituted very strong SBIR support, which ultimately includes the development of an effective business plan, there is a very obvious improvement, not only in the number of applications that have been made, but the quality and the receipt of award in those States. As some States have done an extraordinarily good job of doing that, others are somewhat behind in their ability, and I think a lot of the effort that is being made to improve the SBIR participation is focusing to the quality of support in the States and the combination of that activity with the EPA and that is the NSF. That is an approach that is extraordinarily effective in——
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Mrs. MORELLA. I'm going to recognize now Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Madam Chair, and I especially want to thank you for holding this hearing. I do regret that more of our members can't be here. Unfortunately, it seems that our staff thinks it's their job to schedule even more meetings than we have time for, so we're always so appreciative when we get distinguished folks like you coming in and talking to us especially for people like me because sometimes I feel like I don't know enough to ask a good question, but let me start from the beginning because I do believe in research and I happen to represent a district where research is extremely important. As a matter of fact, there's a little medical group in my district that has been very involved in research for many, many years. And for most of those years, when they develop something new they would just give it to the public free. For example, cortisone was developed in my district and it was literally given to the world for free, and whatever that ultimately may have been worth commercially, I think is subject to some speculation, but it was a rather significant thing, and that's true of an awful lot of other developments. But recently they have come up with their own system to recover or at least get some—on some of the things that are developed. I guess my first question that I guess I'm not real clear in, and perhaps Mr. Hill you can clarify the difference between the SBIR, the STTR and ATP. Where do the three collide?
Mr. HILL. Let me tell you the difference between the SBIR and the STTR which are the two SBA programs. The SBIR program created in 1982 was an effort by the Congress focused on a problem that it started in 1978. Congress had studied federal R&D expenditures and focused and found a pattern of excluding small businesses without solid justification. It was safer, if you will, to award contracts to large universities and large companies but not as productive. The Congress at that time wisely chose to direct agencies to include small businesses, recognizing they were the most cost-efficient, highly-innovative source for R&D efforts.
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The SBIR program is a program tailored to small business where the principal investigator must be employed by the small business and the majority of the work must be performed at the small business. Under STTR in 1992 when they reauthorized the SBIR program, Congress hoped to do a little better in this area and they wanted to bring the ideas from the universities to the marketplace and they hoped to do that by collaboration with the small business community and the university community. Under STTR, the principal investigator may be employed by the university and up to, I forget the percentage, but up to 40 percent of the work can be performed by the university which is a significant amount. So, the university has a better stake in the STTR program than in the SBIR program.
Mr. GUTKNECHT. And how about ATP?
Mr. HILL. I'm not as familiar with the Advanced Technology Program which is a Department of Commerce program.
Mr. GUTKNECHT. It's completely separate. Back to my original point, and as I say, I do really believe that research is important. I also understand there's risk. I mean, there are some things that up end up, being you know, don't bear any fruit. But there are some that bear some very profitable fruit. I'm wondering do we have a methodology, whether it's royalties or whatever, do we have a, how does the Federal Government in return for our investment on behalf of the taxpayers, what kind of return do we get and is there a way that we can get licensing arrangements or whatever?
Mr. HILL. Under the programs the government retains the right royalty-free to use the technology that's developed for the life of the technology. However, the Congress has decreed, and we think it's a good idea, that small business owns the intellectual property that's developed. So, we have a royalty-free use of the technology, but the small business may patent that technology and they may license it, they may sell it. Does that answer your question?
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Mr. GUTKNECHT. That answers my question. That's not exactly the answer I wanted. What do you think about that? Do you think that's a good policy? Anybody on the panel can talk about that.
Ms. BALDWIN. Let me try to give you a little bit of the NIH perspective on that one, the Bayh-Dole Act is the legislative framework for who has the rights and the data and prior to the Bayh-Dole Act, in fact, the government took claim to inventions that were developed under federal funding. But it was observed that the government was not very effective in taking those inventions to market and so they might hold that patent but it was a very low rate of actually turning them into products that were out on the market. The Bayh-Dole Act really shifted that. It does give us continued, as Mr. Hill has said, royalty-free use for our use of these inventions, but it does put some requirements on the part of the patent holder then to actually commercialize and take that product to market. So, it protects the person who is the entity that has made the invention, and it actually fulfills to the broader purpose which is to ensure that that invention actually gets out on the market. So, I think most of us certainly at NIH would view that as having been a successful change or shift.
Mr. GUTKNECHT. Mr. Wallsten, can you comment on that?
Mr. WALLSTEN. I don't have——
Ms. ESKESEN. If I can interject a very different perspective on this, prior to, as Dr. Baldwin points out, prior to 1982 and the Bayh-Dole Act, all of the patent rights were in fact in the hands of the Federal Government. A program in which the patent rights are retained with the companies when those companies are small is critical because if you remove from the company the ability to exploit its technology you are really removing the guts of that company, a huge disincentive for them to be involved in this program and to be involved in general, in an activity of this type. I think the payoff for the Federal Government, as for the States, comes in the impact of having created jobs in a State and an atmosphere in the State, jobs that are in many cases of significant salary levels. I am not an economist and the statistics escape me specifically, but there is a significant multiplier effect that goes with the job that is $60- or $70,000 a year which is typical for a researcher that creates a capability in that local economy that is fairly dramatic. We're currently, with some small funding from the SBA, trying to encourage the States and the local communities to do that type of assessment in order to make determination of what has been the impact of the availability of SBIR dollars in their constituencies and in their communities, and some of the stories, albeit yet anecdotal, are really very interesting. In areas where there has been corporate downsizing, companies are being formed with SBIR dollars, that often involve people who would otherwise be relatively unemployable because they're often older workers that other companies would not take. Defense downsizing has resulted in the availability of space in a geographic region that is now being utilized for the purposes of small companies of this type. So, these are a little bit more difficult metrics to attribute directly to the SBIR program, but they are in fact I think possibly a payoff that comes from supporting that type of effort.
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Ms. KLADIVA. And if I might just add that in the context of measuring the impact of the federal investment in R&D in general, it's a very difficult prospect. Certainly the amount of money that's going into research is an indication of how much research is being done and the Federal Government is funding close to $60 billion a year. But it's much more difficult to determine what the output of that research investment is in the sense of how do we go about measuring it. Some of the output measures would be the number of patents that are issued, number of publications and peer review journals. But in terms of measuring the actual results of that investment, it's very difficult. The Research Round Table is now wrestling with that issue on a broader basis in trying to respond to the requirements of the Results Act which are going to place the requirement upon agencies that they establish goals and objectives and that they demonstrate results vis-a-vis those goals and objectives and expenditures.
Mrs. MORELLA. Good point.
Mr. WALLSTEN. Could I make one more comment?
Mrs. MORELLA. Maybe a brief comment.
Mr. WALLSTEN. I want to also say I mean, clearly it's very difficult to measure the returns to R&D, although they tend to be quite high. It's also important in the case of SBIR, if you are going to the cost-benefit analysis of the program to recognize that one of the costs is in research that's not funded if it's a set-aside program and it's not increased funding for research, there are, each year, well this year it will be $1.1 billion that doesn't go to something else.
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Mrs. MORELLA. Thank you. Mr. Gutknect. I want to recognize the very patient Ms. Rivers from Michigan for her round of questioning.
Ms. RIVERS. Thank you, Madam Chair. Before I get to my main group of questions which really have to do really with whether or not this program displaces private investment that would naturally go on in the absence of it, I have a question. You just mentioned, Mr. Wallsten the idea that one of the things we have to consider is that if this project wins then this project loses, therefore that should count as a loss. Well, we do the same thing with private and public investment. If the public invests and the private invests somewhere else is that a benefit?
Mr. WALLSTEN. If you're causing the total amount of investment to go up, then it is a benefit.
Ms. RIVERS. So, you're saying that at the end of the year there is investment money that could go to R&D—unused because of this program?
Mr. WALLSTEN. Federal money you mean, or anywhere.
Ms. RIVERS. No, no, private money.
Mr. WALLSTEN. Private financiers, it's unlikely that money is going unused, but it's not going for research. Statistically small firms when they are deciding their R&D budgets based on their expected long-term profitability and shocks, you know, sort of infusions of cash might be invested in other things. But investments in physical have a much higher variation than investments in research.
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Ms. RIVERS. The question that I have about the potential displacement of, or the potential displacement is I'm very interested in the methodology you use to determine that. Specifically, I'm very interested in the empirical evidence you have that would point to specific funding sources for specific projects. In other words, were you able to identify a pool of patient capital that's willing to go into high-risk investment that would have been available to Company B if they had asked?
Mr. WALLSTEN. That's not exactly what I did. I looked at firms and their indicators of their investment in research and I looked to see whether an investment by SBIR had a noticeable impact on that and it didn't.
Ms. RIVERS. So, you don't have any empirical evidence?
Mr. WALLSTEN. No, I had empirical evidence that SBIR did not cause any firms to increase their innovation in any way.
Ms. RIVERS. Did you take into consideration whether the project that was being applied for in an SBIR functioned qualitatively in any way different than the other things they had funded. Was it a higher risk, did it take more capital? What factors did you consider when you looked at previous investment by the company and any given project?
Mr. WALLSTEN. I can't look at individual projects, per se. What I can do is look at the effects of the firm and the awards did not seem to have any effect on the firm. When you look at the previous analyses of the program they tend to say that the commercialization rate was high, but they don't try to identify any particular effect of the award.
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Ms. RIVERS. So, what you're saying is that the public investment which is key to a project you are evaluating based on company spending as opposed to the project, you are evaluating based on company spending as opposed to the project? You are using a different determinant than the Federal Government is for making a decision. In other words, the Federal Government decides whether the project has value. You say you couldn't look at any of the elements of the project, you could only look at what the firm had spent previously. So, you really have no way of knowing whether any particular project would be the kind of the caliber and kind that the company had invested in previously?
Mr. WALLSTEN. Well, if the firm had—if this caused the firm to increase its innovation, we would expect to see some effect on these broader metrics of innovation. And if in fact the firm is doing some sort of research for the government instead of doing a project for the private sector, well, that has its own implications. That means the government is directly crowding out private work and work that would have occurred otherwise isn't.
Ms. RIVERS. One of the things we've heard in previous testimonies on programs of this nature from entrepreneurs is that they are intimately, intimately familiar with funding sources in their area. It is very clear to them what they can get funded and what they can't get funded, and the programs that they bring or the proposals that they bring for federal funding are ones that they are not able to fund, they're too high risk, they're too, there are problems in terms of getting private money or investing stockholder money. What would you say to that?
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Mr. WALLSTEN. Well, first I think that there is sort of an incentive compatability problem with just asking these firms whether this SBIR money is useful to them. Some companies receive millions of dollars a year—basically free money and then you ask, was it useful to you? And they say, yes. And you know that's not a great big surprise.
Ms. RIVERS. That wasn't what I said actually. What I said was, respond to the idea that there are some projects that companies will not be funded privately, or it will be very difficult. Do you think that's an untrue statement?
Mr. WALLSTEN. No, I believe that's a true statement, but that doesn't mean that perhaps they should be funded.
Ms. RIVERS. OK, thank you was that my bell I just heard.
Mrs. MORELLA. You've waited. If you have a fast question.
Ms. RIVERS. I have a, well, I've, I'd like Ms. Kladiva to speak to any GAO evidence on displacement of, what would be likely funding by the Federal Government? Is the Federal Government displacing private funding?
Ms. KLADIVA. We had not looked at that issue.
Ms. RIVERS. OK, thank you.
Ms. BALDWIN. Could I comment just at a very gross level? Certainly the recent history shows an increase in private investment in the biomedical research arena, so, at the most aggregate level, I certainly wouldn't have any evidence for displacement.
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Mrs. MORELLA. Mr. Davis from the great State of Virginia.
Mr. DAVIS. Thank you. Let me just note that venture capital of the Silicon Valley is far different than it is in other high tech areas of the country. They have attracted investors there. In Northern Virginia we have 1,800 high-technology companies, but the venture capitalists are just starting to move in there. We have some great companies headquartered there. SAIC has more people in Fairfax than they've got in San Diego. Computer Science Corporation has more in Fairfax than they have in El Segundo, their headquarters. But it's been much more difficult, and just intuitively I would say anecdotally the companies that I have seen benefit from the SBIR program, we have a number of them, never would have been able to have found private capital to do what is happening here. I was interested, I really enjoyed the Wallsten study. Because it's a little bit different from all the other studies. So, and that's important—I think we have not overseen these programs up here and given review. We've kind of given them a pass from year to year. I think it's important that we sit back and decide are we getting our dollars worth. Just a couple questions. First of all, I wanted to ask Mr. Hill, I wasn't here for everything else, I had a couple of markups earlier this morning. SBIR does allow nonparticipating agencies to voluntarily join the program. How many agencies have voluntarily joined the program since 1983?
Mr. HILL. None.
Mr. DAVIS. Is that because this program is not attracting if government doesn't step in and say do it?
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Mr. HILL. No. As I said earlier, what we found back in 1978 and 1980 probably holds true today, it's easier for those contract officers to make an easy call and give the contract to a big business such as IBM or a university, whereas they're hesitant to go to small businesses. It's not a problem limited only to the SBIR program. It's a problem we face at SBA across our procurement spectrum for small businesses.
Mr. DAVIS. Part of it is marketing too, that some of the larger companies have a huge presence and they're out there and there is a certain reliability factor tried, true and tested, that you don't get. Now, the Wallsten study, the interesting thing I noted is that you do note that there has been a positive effect on the number of patents awarded to these companies over time. Is that fair? That's the way I read it.
Mr. WALLSTEN. Are you reading a 1995 paper?
Mr. DAVIS. Yeah.
Mr. WALLSTEN. Yeah? Actually, with kind of doing the analysis a proper way, I'll find, I don't find any impacts on patents when I control for previous research, previous patents that the firm has. Firms patenting——
Mr. DAVIS. See that, I mean, and it may be, and I have to go back and look at the criteria. I just know companies that I've seen come up in Northern Virginia never would have had the opportunities without this program to go ahead and now are doing business as a competitor, I'll go back and look at it. But you don't see any effect on the number of patents these firms have?
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Mr. WALLSTEN. No—not in newer research.
Mr. DAVIS. Do you have, intuitively or objectively, any analysis that shows that they would have been able to attract private investment given the fact they were a small company?
Mr. WALLSTEN. It seems to be the firms that win the most awards are firms that have the strongest history of doing research already.
Mr. DAVIS. Can you break that down regionally? Because again, I would just say your area, Stanford, I think, has probably sucked up more dollars—than probably any other university in the country, or very close to it. But outside of the Bay Area, have you found that the capital has been as available as it has been, I mean, do you control for that?
Mr. WALLSTEN. Actually I use geographic variables as controls——
Mr. DAVIS. And what do you find?
Mr. WALLSTEN. Well, I use them as controls—as to where the money may be going since most—probably not most, but a good deal of the money is going to the Bay Area, to route 123—and using those control variables, that's one of the ways in which we find there is no effect on patents or employment.
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Mr. DAVIS. But, let me understand. If you're in the Bay Area near 123—you probably have the availability and access to capital that you don't have if you're in the Washington area and you don't have if you're in Research Triangle, or do you disagree with that?
Mr. WALLSTEN. I'm not sure. I haven't thought about that enough.
Mr. DAVIS. But would you compare patents before and after in the Research Triangle, patents before and after in Austin, patents before and after?
Mr. WALLSTEN. Right. Yes, these are——
Mr. DAVIS. And you don't see any effect at all.
Mr. WALLSTEN. No.
Mr. DAVIS. Anyone else have any other comments?
Mr. HILL. I don't have specific figures on SBIR or STTR firms on patents, but I have general figures on small business and universities. In 1994 universities received $17 billion for federal R&D funds and produced 1,700 patents. Compare that to small businesses, which received only $3.4 billion but produced 22,000 patents. Clearly, the innovations and ideas are coming out of small businesses.
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Mr. DAVIS. Yeah, I tend to agree. I think it's a good debate. I think we need to get everything out and come and sit down and figure it out, and look at it and decide where we want to go. But my inclination would be to extend the program for a period of time and get some more data, particularly the STTR. Yes, ma'am?
Ms. ESKESEN. If I can underscore again the inadequacies of Mr. Wallsten's study by the fact that he focuses on such a narrowly-defined group of the SBIR community. I would concur absolutely with Ms. Rivers' assessment here, the major percentage of companies involved in SBIR have no other alternative way of funding the type of work they do in SBIR. Anecdotally, we are very clearly seeing something between 20 to 25 percent of the companies literally opening the doors of their companies with SBIR and/or adding to their staffs somebody they could not otherwise afford. There is a whole type of activity.
Mr. DAVIS. I tend to agree with that. I think, though, that Mr. Wallsten—the data that was available to him that is publicly available probably wasn't available from those firms. Is that fair?
Mr. WALLSTEN. Yeah, I think that's true.
Mr. DAVIS. So, you're both right in a sense.
Mr. WALLSTEN. Well, it's not true that the data are as limited as is being claimed. Certainly I mean the most dramatic piece of evidence came from these publicly-traded firms, but that was also only 15% of the firms in my sample. The employment and patent effect was everybody.
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Mr. DAVIS. I guess in the end you go with the people you know and businesses you know and I represent Northern Virginia and the businesses that benefit from that are businesses that frankly would not have had access to capital and they've not only told me that and I've looked at their growth rates and some of the patents and the businesses, and it's been a very good program for some of these companies. Yeah?
Mr. HILL. I was just handed a note. At the SBA we do have a number of studies on the capital issue and the venture capital issue and I'd be happy to provide that to you.
Mr. DAVIS. If we could make this part of the record I think that would be very, very helpful.
Mrs. MORELLA. Without objection.
Mr. DAVIS. Well, thank you all. Appreciate the spirited discussion.
Mrs. MORELLA. I'd like to recognize now Mr. McHale from the great State of Pennsylvania.
Mr. MCHALE. We've now started a tradition here as to how we recognize members. I'm the first member who is not recognized as being great. Madam Chair, I thank you. My question for follow-up on those presented by my friend and colleague, Mr. Davis, this is not an area where I pretend to have any great expertise. My questions will be for Mr. Hill and Mr. Wallsten to hopefully get a contrasting view. Mr. Hill, I was not here for your direct testimony, but I have read it in its entirety, and in your presentation you provide a summary overview of a number of case studies that were successful in terms of STTR. What I'm going to ask each of you to do is this. Mr. Hill, would you select the best case study either return to commercialization or venture capital, however you choose to define it, the best success example you can provide for STTR with a brief analysis of why that particular case study was so successful. Then also I ask you to critique that success. And then similarly I'm going to turn to Mr. Wallsten and simply ask what's the worst horror story that you can recount and why did it turn out to be so unsuccessful, and ask Mr. Hill to comment on that. So, why don't we begin with Mr. Hill. Give us a success story, Mr. Wallsten if you would then critique that case study.
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Mr. HILL. And you want to focus in a success story for STTR, not SBIR?
Mr. MCHALE. That's correct.
Mrs. MORELLA. In 100 words or less.
Mr. HILL. The program is fairly new so success stories aren't as involved. They're still evolving, if you will, but we do have several. In my opening comments I talked about the company up in Massachusetts, Altus Biologics, and I spoke about that. I'd like to just repeat that very quickly if I can find it here. Altus is an outstanding success story because it demonstrates that the objectives that Congress set out for the STTR program are being met. Congress intended this to be a pilot program that would complement the much larger SBIR program in the hopes of bringing ideas from the university nonprofit arena, marry them with entrepreneurial expertise in the small business and bring them to the marketplace. Altus has done that. In Altus' situation, we're finding it's probably consistent with other firms as well. They didn't just partner with one university. They went out and partnered with more than one. And in the case of Altus Biologics in Cambridge, Massachusetts, they partnered with Texas A&M and Ohio State on the development and commercialization of cross-linked enzyme crystals, and these materials are used to detoxify chemical weapons stockpiles as well as equipment, clothing and people that have been exposed to chemical weapons. They are currently in the Phase II of this project. The program is fairly new. A number of the firms are still in the Phase II area, and they're testing the materials on live agents. From the company we have heard that it's an excellent vehicle. STTR is an excellent vehicle for development of this technology because the key expertise lay at Ohio State and Texas A&M.
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Mr. MCHALE. How many jobs were created?
Mr. HILL. I don't have that information with me. I'd be happy to query the company and provide that for you.
Mr. MCHALE. Was the success in that case commercialization or was it access to venture capital? Is there any way you can summarize that?
Mr. HILL. The success that I would say at this stage is that the Department of Defense has a real need, as we all know from reading the stories on the Persian Gulf War, to deal with chemical weapons. This is another example of why these programs work so well.
Mr. MCHALE. All right.
Mr. HILL. The Department of Defense has a real need. The company working with the universities is responding to that real need, which will also have applications in agricultural instances as well. I think one of the differences I have that's key with Mr. Wallsten is his continued assertions that these are make-work programs, that someone is sitting at the Department of Defense and saying we're not going to do valuable R&D work. We are now only going to do work that small businesses can do.
Mr. MCHALE. All right why don't we give Mr. Wallsten a chance to comment for himself. How do you argue with the—success as cited—in this particular case study.
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Mr. WALLSTEN. Well, first I just want to say that clearly there are going to be lots of companies that succeeded because of these awards. But when you're talking about thousands of awards you need to look at the bigger picture instead of just anecdotes. But I'll go along with this and look at the same example—I think the military probably has a really good idea of what it needs, probably better than the SBA does. And research work on detoxification of chemical weapons I'm sure is something that the military would find regardless of whether there was STTR or not. And if you want to take the example of a worst-case scenario, then we could say that perhaps this company is doing this project instead of something else in the private sector, or if this company didn't exist it's only just because of an STTR award. These are very highly-trained, very creative people working there that might be doing something else. And so then these funds are going to a project that would have been done anyway. Meanwhile, these people are not working on something that would be done in the private sector. And because this is a set-aside program, this money not only means that federal, if the Federal Government has to set aside a certain amount for this program, the company itself is doing less than it would otherwise. And so the worst-case scenario is that it's doing something it would have done otherwise, and it's—and it causing a net reduction in R&D spending
Mr. MCHALE. I understand your criticism. In the brief time I have remaining is there a horror story you would bring to our attention where funding went into this program and was was clearly not applied in a very effective way?
Mr. WALLSTEN. No. I mean—in my mind, sort of what I describe as a horror story since R&D expenditures in general are so important, but I, you know, I don't have an example.
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Mr. MCHALE. Final comment, Mr. Hill?
Mr. HILL. I have another example I'd like to give real quick. It comes to us from the Department of Defense as well from a firm in Bally, Pennsylvania, Bally Ribbon Mills, in collaboration with the University of Delaware, on a defense STTR project has developed a matrix composite material for use in aircraft fuselage both military and commercial, subway cars, bridges and other infrastructures. The composite has the same strength as the metals currently used, but is one-third the weight. The project is now finishing Phase II and already the company has received $100,000 in commercial orders from Lockheed Martin and Rockwell as well expressions of interest from a number of other potential customers including the Port Authority of New York. The company expects the market for this material to be in the tens of millions of dollars or more. I would suspect individuals at Texas A&M, Ohio State, and the University of Delaware would take umbrage with Mr. Wallsten's comments that, yes this work could be done more efficiently somewhere else. I think these are cutting-edge technologies that are coming out of universities marrying up with the entrepreneurial expertise of small businesses and as a result we're finding R&D work that not only meets mission needs but has successful commercialization potential.
Mr. MCHALE. Mr. Hill, thank you—I think if there is—respectfully suggested to Mr. Wallsten, if there is any flaw in your analysis I think that it too narrowly reflects the unique world of—Palo Alto and nearby facilities in terms of commercialization and venture capital. I have a district not very far from Bally, Pennsylvania. We're a fairly sophisticated area and we, too, have venture capital, but the opportunities are not nearly what are routinely made available in the Silicone Valley and I think the comments by Mr. Hill and those earlier by my colleague Mr. Davis are absolutely correct in terms of bringing opportunities to other, more diverse, areas of the country. Madam Chair, I thank you very much.
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Mrs. MORELLA. Thank you, Mr. McHale. I guess all politics is local. I just want to ask I guess Ms. Kladiva and Mr. Hill, is the fact that the STTR program allows for the 1 year phase-in versus SBIR with the—6 month, affect adversly the funding level.
Mr. HILL. The 1-year period or Phase I as opposed to 6 months, for SBIR; I believe was originally intended to allow more time for the small business and the universities to work on the partnership and the ideas. You asked earlier, and I'm sorry I didn't respond to your question, do ideas solely come from, we have no hard data on that, but the information I do receive from the agencies and from the small business communities in conversations I have indicates that it's hard to say that an idea originates in the university, partnerships then formed and then that goes to an STTR award. What generally happens is an STTR solicitation is issued by a participating agency, a small business sees that, says I think I can work on that, I need to get some help from Texas A&M or Ohio State or other universities. And then the ideas to do that, once that partnership is formed, then those ideas are what actually become the genesis of the STTR award. I think that's the beauty and the benefit of the program.
Mrs. MORELLA. The researcher, yeah.
Mr. HILL. We have no hard data.
Ms. KLADIVA. Madam Chair, we talked with each of the five agencies that participate in the STTR program and SBIR program too and talked with them about the phasing in and whether the Phase I is necessary or whether that could be skipped to go directly to Phase II and would that have any impact on the quality of the research proposals that we'd be funding. And each of the agencies, with the exception of NIH, indicated that they would oppose skipping a Phase I and moving directly to Phase II primarily because of the importance that they saw in moving through Phase I and actually having the opportunity for the companies to demonstrate the feasibility of their proposals, and also an opportunity for the agencies to have a look at the capability of the company before they consider proceeding to Phase II. And the difficulties they felt they would encounter if they were trying to judge the merits of proposals that had skipped Phase I at the same time they were judging the proposals that are applying for Phase II after they've been through Phase I. So, they saw some difficulties with that. NIH indicated, and maybe Dr. Baldwin maybe should amplify this, that under certain circumstances where the company had demonstrated the feasibility of the proposal that they would be willing to skip directly to Phase II.
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Mrs. MORELLA. If you'd like to comment Dr. Baldwin? We had heard that there was this funding gap that occurred where you had the 6-month period for Phase I.
Ms. BALDWIN. There are a number of ways to deal with the gap. But if I could specifically respond to the question of would we see a value to allow some applicants to go directly to Phase II, I think you have accurately portrayed certainly our position there. I don't think that would ever become the predominant or even the typical strategy for funding of an SBIR or an STTR, but it's the kind of flexibility that I think would fit well within the NIH portfolio, and let me put that in the context of what we're doing in our extramural programs. We're in a reinvention laboratory under the National Performance Review. We have found many situations where if we're able to pilot ideas, if we're able to try some alternatives, we can find out in fact where that's a practice that does benefit us and benefit the applicant as well, and that's the kind of flexibility that I think we would be able to manage well within the SBIR and the STTR programs as well.
Mrs. MORELLA. One final question. I'm going to ask each of you in 30 seconds or less to tell me for the record what is the main purpose of STTR. There's nothing statutorily indicating and you hear all kinds of comments. What is the main purpose of STTR?
Mr. HILL. Dr. Baldwin says, ''You go first.''
Mrs. MORELLA. I know. I don't blame her.
Mr. HILL. It's our view that the STTR program was created and designed by the Congress as a vehicle to bring ideas for the nonprofit research community, universities, federal labs that may be federal owned but company run, to marry those with the entrepreneurial expertise of small business so that we have a better return on federal investment in terms of commercialization, and most importantly in my view, meeting federal agencies' R&D mission needs.
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Mrs. MORELLA. Thank you. Dr. Baldwin.
Ms. BALDWIN. I would have to agree with that and say that for the NIH it is particularly that link between our research investment, basic research and biomedicine, and the opportunity to see that research move out into applications and out into broader applicability.
Ms. KLADIVA. And we see it as taking the U.S. world leadership in science and engineering that exists through our nonprofit institutions such as universities and federally-funded research and development centers and moving that out into the private sector so that it benefits the economy as a whole. So, we see the commercialization component of that as being very important.
Mrs. MORELLA. Mr. Wallsten.
Mr. WALLSTEN. Well, I know a lot more about SBIR than I do about STTR so my comments should be interpreted in that way. I guess I'll comment on what it seems to be rather than what it's supposed to be. Since 1995, 60 percent of STTR funds went to firms that also won SBIR awards. It seems to be a way that these same firms can benefit from additional federal dollars.
Mrs. MORELLA. Ms. Eskesen.
Ms. ESKESEN. In my testimony I noted in my written testimony that SBIR and STTR are in many ways a mirror for what is going on in the larger business and research communities, and I think STTR is similarly a mirror. It is an effort for us, at a time when resources are declining, in availability to exploit most efficiently the cross-institutional activity that really defines the most effective research endeavor. The day of the individual inventor and researcher whether that's in the university lab or in the basement of their home as an entrepreneur is long gone. It is our ability in a rapidly-accelerating technology application arena to ensure that those who are doing this work are in fact working with each other in the most efficient way.
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Mrs. MORELLA. I thank you very much. Thank you all very much. Remember, if you have any suggestions please get them to us as quickly as possible and we may, with your permission, forward a few other questions to you—thank you all very much. The hearing is now adjourned.
[Whereupon, at 12:18 p.m., the hearing was adjourned.]
[The following material was received for the record.]
"The Official Committee record contains additional material here."
(Footnote 1 return)
Information on SBIR and STTR may be found at http://www.nih.gov/grants/funding/sbir.htm.