[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
               SMALL BUSINESS INNOVATION RESEARCH (SBIR)
                 PROGRAM OVERSIGHT AND REAUTHORIZATION

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON GOVERNMENT PROGRAMS
                             AND OVERSIGHT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                      WASHINGTON, DC, MAY 27, 1999

                               __________

                           Serial No. 106-16

                               __________

         Printed for the use of the Committee on Small Business


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 59-746                      WASHINGTON : 1999
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                      COMMITTEE ON SMALL BUSINESS

                  JAMES M. TALENT, Missouri, Chairman
LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD, 
DONALD A. MANZULLO, Illinois             California
ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
SUE W. KELLY, New York               BILL PASCRELL, New Jersey
STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN, 
DAVID M. McINTOSH, Indiana               Virgin Islands
RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
MARY BONO, California                MARK UDALL, Colorado
                                     SHELLEY BERKLEY, Nevada
                     Harry Katrichis, Chief Counsel
                  Michael Day, Minority Staff Director
                                 ------                                

           Subcommittee on Government Programs and Oversight

                 ROSCOE G. BARTLETT, Maryland, Chairman
MARY BONO, California                DANNY K. DAVIS, Illinois
MICHAEL P. FORBES, New York          RUBEN HINOJOSA, Texas
PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
RICK HILL, Montana
                        Nelson Crowther, Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 27, 1999.....................................     1

                               WITNESSES

Behar, Al, President, PICS, Inc..................................     3
Armstrong, Judith A., CEO, ADA Technologies, Inc.................     4
Haynes, Jacqueline, Owner, Intelligent Automation, Inc...........     6
Larson, Arvid, Co-Chair, American Association of Engineering 
  Societies R&D Task Force.......................................     9
Busch, Chris W., SBIR Consultant.................................    24
Hill, Daniel O., Assistant Administrator for Technology, U.S. 
  Small Business Administration..................................    26

                                APPENDIX

Opening statements:
    Bartlett, Hon. Roscoe........................................    33
Prepared statements:
    Behar, Al....................................................    35
    Armstrong, Judith A..........................................    38
    Haynes, Jacqueline...........................................    48
    Larson, Arvid................................................    55
    Hill, Daniel O...............................................    59
    Busch, Chris W...............................................    73
Additional material:
    Statement of Robert M. Pap, President and CEO, Accurate 
      Automation Corporation.....................................    91


    SMALL BUSINESS INNOVATION RESEARCH (SBIR) PROGRAM OVERSIGHT AND 
                            REAUTHORIZATION

                              ----------                              


                         THURSDAY, MAY 27, 1999

              House of Representatives,    
        Subcommittee on Government Programs
                                     and Oversight,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
room 2360, Rayburn House Office Building, Hon. Roscoe G. 
Bartlett (chairman of the Subcommittee) presiding.
    Chairman Bartlett. Good morning. Let me call our 
Subcommittee hearing to order and then immediately announce 
that we must recess. They have just called a vote. That was the 
bell that you heard and the two lights that you see on the 
clock up there. They have called a vote. So we will need to 
recess momentarily for the vote. It should take me about 10 or 
12 minutes to get to the vote and back again, if this is the 
only vote and if there are no announcements there.
    So we will stand in recess until this vote is ended.
    [Recess.]
    Chairman Bartlett. Our Subcommittee will reconvene.
    Good morning. Let me call the Subcommittee to order.
    It is a pleasure to welcome you to this hearing of the 
Subcommittee on Government Programs and Oversight of the House 
Small Business Committee. I would especially like to thank 
those of you who have traveled some distance to participate in 
this hearing.
    The hearing will examine the performance of the Small 
Business Innovation Research, SBIR, program which was signed 
into law by then President Ronald Reagan on July 2, 1982. It 
was most recently reauthorized in 1992 to extend through the 
end of fiscal year 2000.
    While the SBIR program enjoys bipartisan support because it 
has been successful, we have a responsibility to examine every 
government program for continued effectiveness and to consider 
ways in which they can be improved. I always want to make sure 
that the Federal government gets its money's worth from 
Americans' hard-earned tax dollars.
    The SBIR program fosters innovative research and 
development by small businesses and strengthens the country's 
technology base. The SBIR program has been credited with 
creating new jobs, increasing productivity and economic growth 
and helping combat inflation and stimulating exports. Small 
high-tech companies, as a group, have shown an ability 
unequaled by large businesses to produce new products, 
processes and technologies. The program finds widespread 
support among members of both parties.
    The hearing will provide program oversight and a basis for 
legislation reauthorizing the program. The Committee will 
examine recommendations for legislation and administrative 
changes that you may offer during the hearing. Your views 
concerning the present and future operation of this important 
program are most welcome.
    Again, welcome to our participants and guests. I look 
forward to hearing your comments on this most important 
program.
    I am pleased that we are joined by Mr. Hill and would ask 
if he has an opening statement.
    [Mr. Bartlett's statement may be found in the appendix.]
    Mr. Rick Hill. No, I don't have, Mr. Chairman.
    Chairman Bartlett. We will hold the record open for opening 
statements from all the members of the Subcommittee who wish to 
submit them. And I will stipulate before we begin that, without 
objection, all of your prepared remarks will be included in the 
record, and we would encourage you to summarize your remarks. 
That way, we will have adequate time for expanse during the 
question and answer exchange.
    I have read your testimony. I was particularly impressed 
that 50 percent of our witnesses are women. We have held 
several hearings on women-owned small businesses, and I was 
surprised to learn that women-owned small businesses are 
growing at twice the rate of male-owned small businesses.
    By the way, women-owned small businesses have a lower 
bankruptcy rate than male-owned small businesses. The bankers 
haven't figured that out yet, because women still have 
difficulty with access to capital.
    Women-owned small businesses are better employers. They are 
more compassionate, more sympathetic. They are more focused on 
their employees. That shouldn't surprise us either. Men and 
women are different. The military yet hasn't figured that out, 
but men and women are different.
    And so I am very pleased that 50 percent of our 
participants today are women. Because this is the fastest-
growing part of our economic community, particularly the 
fastest-growing part of our small business community.
    We are very pleased that you have been able to join us 
today. Mr. Al Behar, is that how you pronounce your name?
    Mr. Behar. Behar.
    Chairman Bartlett. President and CEO, Personal Improvement 
Computer Systems Incorporated; Dr. Judy Armstrong, President 
and CEO, ADA Technologies, Incorporated; Dr. Jacqueline Haynes, 
Vice President/Owner, Intelligent Automation Incorporated; and 
Dr. Arvid Larson, Co-chairman, AAES R&D Task Force.
    We will proceed with the testimony in the order in which I 
welcomed our witnesses. Mr. Behar.

    STATEMENT OF MR. AL BEHAR, PRESIDENT AND CEO, PERSONAL 
               IMPROVEMENT COMPUTER SYSTEMS, INC.

    Mr. Behar. Mr. Chairman, thank you for the opportunity to 
tell you our story and give you my input on the SBIR program. 
My testimony will focus on PICS's unique approach to tackling 
tobacco addiction and other health problems related to diet and 
exercise that face the United States and other industrial 
nations, the success that PICS has enjoyed thanks to the SBIR 
program and recommendations for its potential improvements.
    Before I get on with my testimony, I would like to express 
my appreciation to the SBIR program and its administrators at 
every level of the National Institutes of Health. In 
particular, Iwould like to acknowledge the fine work of Mr. 
Sonny Kreitman who, until his recent retirement, provided strong 
leadership to this program.
    I also would like to compliment Mr. Kreitman's successor, 
Ms. Jo Anne Goodnight. I have had the pleasure of meeting with 
Ms. Goodnight recently and am confident that she will do an 
excellent job coordinating the SBIR program.
    Finally, I would like to thank the NIH program officers and 
grants management staff for their advice on the full spectrum 
of issues that we have faced over the years.
    As you well know, tobacco addiction is the leading cause of 
premature death worldwide. Yet in the U.S. and Canada alone 
over 50 million people smoke and about 10 million people chew 
tobacco. Despite the vigorous anti-tobacco campaigns in both 
countries over the last 10 years, these numbers have remained 
virtually unchanged.
    The second leading cause of premature death in industrial 
nations is heart disease and strokes caused by combinations of 
obesity, elevated cholesterol, hypertension and diabetes, all 
of which are diet and exercise related.
    PICS' unique approach to tackling these major health 
problems has been the development of self-help programs that 
are implemented by hand-held computers. Today, our family of 
products help hundreds of thousands of people battle tobacco 
addiction, lose weight, control cholesterol and lower 
hypertension.
    PICS has developed two computer platforms, LifeSign and 
DietMate, which are used in a variety of products. LifeSign is 
a credit-card-sized computer that is the basis for four 
products that deal with the treatment of tobacco addiction: 
LifeSign for Adult Smokers, LifeSign for Pregnant Women, 
LifeSign for Dippers and Chewers, and most recently LifeSign 
for Teens and Young Adults.
    Our DietMate program, family of products, in fact, is based 
on a palm-size computer and comes in three versions: weight 
loss, cholesterol reduction, and high blood pressure treatment.
    Because of the scope of the problems that we address our 
work has enormous public health significance and enviable 
commercial potential. In fact, the combination of self-help 
convenience and hand-held portability coupled with the power of 
computers to personalize treatment yields uniquely efficacious 
products that are popular with users and are easy to 
disseminate widely and quickly. Clinical trials have shown that 
our LifeSign Stop Smoking program matches the efficacy of drug 
treatments at a fraction of their cost and without the risk of 
side effects. Not surprisingly, LifeSign and DietMate has sold 
over a million units worldwide and have generated over $100 
million in sales. To date, LifeSign has enjoyed success in the 
U.S., Canada, Latin America, Australia, Japan and numerous 
European countries.
    PICS employs about 20 full-time people and several 
consultants through outsourcing. We have been awarded three 
patents for our LifeSign and DietMate technology.
    The SBIR program has allowed PICS to engage in extensive 
product development that normally would be reserved only for 
large corporations. SBIR has helped us pioneer innovative 
approaches to major health problems which have earned us the 
respect of the scientific community, while allowing us to 
capitalize on our rigorous research efforts by commercializing 
our product ideas. Furthermore, the SBIR program has allowed us 
to maintain a degree of stability despite the many ups and 
downs experienced by small businesses.
    There is a great deal right with the SBIR program as 
currently administered. However, there are always opportunities 
to improve on a good thing.
    Over the last few months we have been working diligently 
with members of the NIH administrative staff in developing 
additional recommendations aimed at streamlining the 
application process and modernizing the review process. My more 
detailed recommendations are included in my written testimony.
    Here I would like to highlight one key recommendation 
related to Phase I funding. The present $100,000 limit on Phase 
I, although adequate for many fine projects, falls short of 
what is needed to attempt to tackle some of the more complex 
health issues that our society faces today, such as AIDS and 
cancer. In contrast, I have found the $750,000 limit on Phase 
II sufficient. Therefore, my recommendation is limited to 
increasing Phase I funding level to $200,000.
    In closing, I would like to thank you again for giving me 
the opportunity to express my opinion on the performance of the 
existing SBIR program and offer my recommendations for 
potential improvements. Thank you.
    Chairman Bartlett. Thank you very much.
    [Mr. Behar's statement may be found in the appendix.]
    Chairman Bartlett. Dr. Armstrong.

    STATEMENT OF MS. JUDY ARMSTRONG, PRESIDENT AND CEO, ADA 
                       TECHNOLOGIES, INC.

    Ms. Armstrong. Chairman Bartlett, I want to thank you for 
the invitation to testify today. I will read an excerpt of my 
written testimony.
    My business, ADA, has been an active participant in the 
SBIR program since its award--first award in 1985. Today, ADA 
is a company of 35 scientists and engineers with annual sales 
of $4 million.
    I would like to spend my time giving you some background 
information on ADA, looking at its activities in light of the 
four purposes of the SBIR program, including some general 
comments on technology commercialization. Finally, based on my 
years of conversations with others interested in the program, I 
have three recommendations I would like to offer.
    From the first days ADA has searched hard to find the best 
researchers in the country for the areas in which we proposed 
to get SBIR funding. We talked to universities, professors, 
other small businesses and large businesses. Alliances with 
others have always been a key to our success.
    We learned to be profitable and to build infrastructure. We 
learned how to use government funds for our own R&D projects, 
giving us competitive advantage through ownership of a broader 
scope of intellectual property.
    We began to seek commercialization of innovative, 
proprietary technology as a path to faster growth and more net 
income and also as a means of adding value and providing 
benefits to our clients and the Nation.
    ADA's strategic focus today is to improve the lives of the 
world's populations through innovative technology. In the last 
5 years, ADA has produced two innovative technologies that we 
believe achieve this goal. In 1996, ADA Environmental Solutions 
was formed to help the Nation's utilities comply with the Clean 
Air Act Amendments while providing the Nation with the power it 
needs on an efficient basis. ADA sold ADA Environmental 
Solutions in a stock and cash deal valued at $8.3 million.
    ADA technology innovation has also been the genesis for 
Tek-Gear LLC of Jackson, Wyoming, now operating from Boulder, 
Colorado. Tek-Gear manufactures a datalogger,Trekker, which is 
being sold today to allow high school students to conduct efficient, 
state-of-the-art laboratory and field experiments.
    Among the technologies of the future from ADA are likely to 
be more efficient demand-defrost control units for the millions 
of industrial refrigerators, software modules and games to 
improve science learning by students of all ages, and cost-
effective mercury-control technology that will enable utilities 
to comply with future clean air amendments and requirements.
    Relative to the four purposes of the SBIR program, to 
stimulate innovation ADA has received nine patents and has one 
patent pending. The commercialization of our technology ties 
closely to these patents.
    We use small business to meet Federal research and 
development needs. ADA has worked closely with several DOE 
departments to help them meet their R&D needs. With SBIR 
funding, ADA has been able to pursue cost-effective techniques 
and to develop capabilities that will now assist the government 
with establishing reasonable environmental regulation. Early 
development of these advanced technologies by ADA allows the 
EPA and other government agencies to formulate strategies for 
managing the environment that have substantially lower costs 
and future investment needs while at the same time forming the 
basis for products that will meet the needs of the private 
sector.
    Purpose three, to foster and encourage participation by 
minority and disadvantaged persons and women-owned businesses. 
ADA has been woman-owned since its inception in 1985. I believe 
the SBIR program has allowed me, a mathematician, to approach 
technology innovation from a perspective that differs from that 
of the majority of scientists and engineers. I rely heavily on 
instinct, intuition, people skills and relationships in going 
about my business, all recognized characteristics of women in 
leadership roles. The Phase III commercialization activities 
needed for success come naturally to me and allow me to coach 
members of my staff to see the importance of people and 
relationships in the technology process.
    Purpose four, to increase private sector commercialization 
of innovations derived from Federal R&D. ADA's R&D activities 
have resulted in a return on investment to the Federal 
government of over 320 percent from commercial activity. The 
government has invested $6.6 million in ADA through the SBIR 
program, and ADA has returned over $21 million in matching 
funds from commercial industry.
    In closing, I have three recommendations that I would like 
to make. The first one is that the SBIR program has proven its 
success and requires no legislative changes. This highly 
competitive program works efficiently. I believe talented 
technologists with the will and commitment can use the SBIR 
program as it exists to prototype new ideas and attract funding 
to complete a commercial product. I do not believe the 
fundamentals of the program should be changed.
    Second, the program should be extended at least 10 years. 
The SBIR program has been dramatically successful meeting the 
goals set by Congress. I firmly believe this will continue.
    I expect two additional things to happen in the next few 
years. First, a new round of companies and technology champions 
will be created using the ever-increasing skills of the next 
generation of graduates from our universities and colleges. 
Second, a transition in ownership and leadership will occur in 
the companies already participating in the program. The next 10 
years will see many of those companies now meeting the purposes 
of the program formulating and implementing successful 
transitions to a new round of leaders.
    Third and last, a national mentoring program should be put 
in place. We need to reach out and get more businesses involved 
in the SBIR program to keep it highly competitive and 
successful. In my written testimony I speak to this in my story 
about SBIR Colorado, an organization that was operational in 
Colorado for 6 years. Mentoring entrepreneurs in areas that may 
not be collocated with a university or Federal laboratory will 
help achieve this goal.
    Again, I want to thank you for the opportunity to offer 
this testimony; and I will be happy to entertain any questions 
that you have.
    Chairman Bartlett. Thank you very much.
    [Ms. Armstrong's statement may be found in the appendix.]
    Chairman Bartlett. Dr. Haynes.

   STATEMENT OF DR. JACQUELINE HAYNES, VICE PRESIDENT/OWNER, 
                  INTELLIGENT AUTOMATION, INC.

    Dr. Jacqueline Haynes. Good morning, Mr. Chairman and 
members of the Subcommittee. My name is Jacqueline Haynes. I am 
the owner of Intelligent Automation Incorporated, a small 
business located nearby in Montgomery County, Maryland. It is 
an honor for me to address the Committee to discuss 
reauthorization of the SBIR program.
    I founded IAI with my husband, Leonard Haynes, 13 years 
ago, using an extra bedroom in our home as our office. You can 
imagine the DCAA auditor's surprise when he showed up there for 
our first audit. We have grown now to an organization of nearly 
50 technical staff, housed in an office building in Rockville, 
Maryland. We attract first-class engineers, computer scientists 
and social scientists from as far away as Taneytown and 
Frederick, Maryland, to the north and Springfield, Virginia, to 
the south. We also have small offices in Arizona and 
Connecticut; and we currently have subcontractors and 
consultants located in 11 other states.
    From its beginning, my business has grown through the SBIR 
program. Our government clients have found us to be quality 
partners in their R&D programs, and I believe that this quality 
accounts for the success we have experienced in winning Phase I 
and Phase II awards from many government agencies. And now we 
are experiencing success in transitioning many of the 
technologies originating from our SBIR work into the commercial 
sector by either licensing our technology or selling related 
products and services to and through large firms such as 
Motorola, Ford, American Airlines, Nichols Research and to law 
enforcement agencies throughout the U.S. and in many foreign 
countries.
    The SBIR program has been an engine of growth for us, and 
we have been very successful in achieving the goals of the SBIR 
program. We have grown from doing $160,000 in business our 
first year to a projected $6 million this year. We are an SBIR 
success story, but it doesn't end there. We reinvest nearly all 
the profits of our SBIR-related work into continued R&D and 
commercializing the technologies that we see have potential. 
Government agencies, taxpayers and the Nation's economy in 
general get a lot for their money from our work.
    Our business goal is to realize our profits from 
commercialization. SBIR funding is the means and the beginning, 
but not the end. Our first year, about 95 percent of our 
business came from the SBIR program. Now, approximately half 
our business is external to the SBIR program.
    In nearly every case our commercial business is the direct 
result of the technology we developed through the SBIR program. 
It is important to understand that many of the greatest success 
stories stemming from the SBIR program would never have seen 
the light of day had they been solely dependent on venture 
capital and other funding sources. My experience is thatventure 
capital will not fund creativity or innovative ideas if they don't lead 
directly to a near-term product. Good science takes time, and 
development takes many attempts, and financiers often don't understand 
that. The SBIR program is one of the few players accessible to small 
businesses in supporting high-risk innovation and creativity. Yet this 
is what leads to the new products that fuel our Nation's competitive 
edge.
    I would like to highlight now some of the major 
technological developments of my company that were made 
possible by the SBIR program, first in the area of forensics 
imaging technology.
    Based on SBIR-funded research, we have become a world 
leader in forensics imaging technology. Over half the crime 
labs in the United States and several foreign countries have 
our ballistics analysis system called RotoScan. This work began 
through a Phase I SBIR with BMDO where we developed a new type 
of neural net called a Fuzzy CMAC which turns out to be very 
useful for image analysis. We teamed with a company that is now 
part of Nichols Research to use this approach for automating 
matching of bullets retrieved from crime scenes to a data base 
of known gun signatures left on bullets. The resulting RotoScan 
is now one part of the FBI's Drugfire system. We have sold over 
110 RotoScan units that are located in crime labs throughout 
the U.S. and in many more foreign countries. Now with 
additional SBIR, non-SBIR and private commercial investment, we 
are developing a three-dimensional version of RotoScan which 
will yield major improvements in the technology and the role 
that it can play in forensic science.
    Also coming from our RotoScan success we received a 
contract, a non-SBIR contract, from the Drug Enforcement Agency 
and Nichols Research to build and design PillScan, which is a 
similar device for the forensic analysis of illegal and 
counterfeit drugs.
    We have also done work in hexapod precision devices. Using 
Phase I and Phase II SBIR funding from NSF to design a new 
class of high-speed, high-precision machine tools based on a 
hexapod-configured device called the Stewart Platform, we then 
transferred the technology we developed to Ingersoll Milling 
Machines who took a variant of this machine to market.
    We then extended our technology in hexapod systems to a new 
class of exercise and physical therapy machines. NASA has 
awarded us a Phase I and Phase II SBIR to use this hexapod 
technology for a new type of exercise equipment for astronauts 
on board the international space station. Our initial 
demonstration to NASA should take place within a few months, 
and we now are engaged in discussions with prospective home and 
health club exercise equipment manufacturers.
    We also work in the area of Internet technology. Here we 
began developing personalized methods of using hyper-media to 
optimize learning outcomes. Our unique approach--this lead to 
our unique approach for Internet search and navigation tools.
    Following SBIR-funded research, we developed a set of 
proprietary web tools and methods that has led us to build 
special-purpose web sites for government and commercial 
clients. Our technology uses an innovation we call the COOL 
link that personalizes each person's navigation through the web 
and is especially useful for web-based education and training 
applications.
    We are developing web sites and associated Internet 
technology for clients such as American Airlines and the Census 
Monitoring Board. We are using the same technologies to develop 
web-based intelligent transportation system training programs 
for a regional consortium.
    From these few examples you can see that the SBIR program 
has been very instrumental to our technological developments, 
our product development, our entry into the marketplace and our 
growth as a company. I know of other companies like mine that 
have benefited from this program; and these, in turn, benefit 
the Nation with the result of their work. The program has 
already proven to be successful in achieving its goals of 
promoting innovation and scientific development, encouraging 
entrepreneurship and giving government agencies a high-quality 
return on their R&D funds.
    Would I recommend reauthorization of the SBIR program? Of 
course. It is good for my company, it is good for the 
government agencies that participate, and it is good for the 
Nation. The success of the program to date speaks to its 
structural integrity so that significant changes to it are 
likely to be more damaging than helpful.
    Would I like the amount of the overall program to be 
increased? Certainly I would. Would I like individual contract 
amounts to be increased? Certainly I would--especially for 
Phase I.
    In closing, I would like to reiterate my strong support for 
the program. Two decades ago you may recall that America was 
falling behind the Japanese and European countries in a number 
of key technologies. Our competitiveness was in jeopardy. It 
was during this time period that the legislation initiating the 
SBIR program was first passed. I have no doubt that the SBIR 
program has played an important role in the resurgence of our 
Nation's technological prowess. Overall, the SBIR program is 
one that works for my firm and for many like it. My strongest 
suggestion is to reauthorize the program for the next 10 years 
of innovation in small businesses in America.
    Thank you.
    Chairman Bartlett. Thank you very much.
    [Dr. Haynes' statement may be found in the appendix.]
    Chairman Bartlett. Dr. Larson.

STATEMENT OF DR. ARVID LARSON, CO-CHAIRMAN, AAES R&D TASK FORCE

    Dr. Larson. Good morning, Mr. Chairman and member of the 
Subcommittee.
    My name is Arv Larson, and I am also the owner of a small 
business, but I am here today representing the American 
Association of Engineering Societies. As you know, the AAES is 
a federation of engineering societies dedicated to advancing 
the knowledge, understanding and practice of engineering. Its 
member societies represent more than 1 million engineers who 
work and practice in the United States. Many of these are 
employed by small businesses.
    I want to personally thank you for the opportunity to 
testify today in support of reauthorizing the SBIR program. I 
was quite privileged to be able to present my views in favor of 
this legislative initiative in 1982 when I testified during 
SBIR's first authorization hearing. In the intervening years, 
the SBIR program has found success far beyond what we initially 
envisioned. I am very pleased to see that those results of the 
efforts of the early SBIR advocates have proven beneficial. 
SBIR is now a thriving program providing essential assistance 
to small entrepreneurial companies. The demonstrated success of 
this program cannot be challenged.
    Mr. Chairman, my personal experience with the SBIR program 
is extensive. I have been involved with the high-technology 
small business community in both California and Virginia, and I 
have seen the value of this program in action. I got involved 
with the start-up of an entrepreneurial high-tech company in 
Sunnyvale, California. We were very fortunate in the 1980s to 
receive nearly a dozen SBIR Phase I and Phase II awards. From 
these we developed many products. We grew from a handful of 
entrepreneurs to an employment base of over 75 engineers and 
staff in a period of about 5 years.
    More recently, while I was a research professor at George 
Mason University in nearby Fairfax,Virginia, I was also 
Director of the Small Business Programs. I was involved with over 100 
small business high-technology companies in the Washington, D.C., area, 
many of these located in our small business incubator program.
    I worked with many of these small businesses in their 
development of proposals to receive Federal agency support 
through the SBIR program. I saw how critical the Phase I and 
Phase II awards were to the continuation of their 
entrepreneurial spirit. The relatively small investments made 
by the Federal government through these SBIR program awards 
were often the key factor in attracting venture capital and 
achieving business success. Due primarily to these SBIR awards, 
several of these firms were able to attain the necessary 
critical mass of a viable product base and technical staff. The 
SBIR program allowed these firms to become thriving tax-paying 
businesses within the national capital area. You have two of 
them here at the table with me.
    As you know, the SBIR program was originally enacted in 
1982 to increase the participation of small high-technology 
businesses in the Federal research enterprise. You also know, 
of course, that, historically speaking, small businesses have 
provided greater innovation than larger companies. 
Unfortunately, these entrepreneurial businesses often did not 
have the resources to access the myriad number of research 
grant agencies within the Federal government. For more than 15 
years, the SBIR program has successfully assisted these 
businesses through achieving the underlying goals of the 
program.
    Mr. Chairman, I am pleased to report to you that, based on 
my personal experience and those of other small business 
entrepreneurs that I deal with, the SBIR program is 
consistently meeting the goals of the originators of this 
program. SBIR is contributing to technology innovation. 
Agencies are utilizing small business to meet many of their 
research needs. In addition, the fruits of this Federal 
research investment are being brought into the marketplace via 
small business.
    The National Science Foundation has conducted studies of 
their own SBIR grant program. They have determined that since 
the inception of the program their investment of $350 million 
has accounted for nearly $2.7 billion in direct sales and more 
than 10,000 jobs created. That is a seven to one return on 
investment. As a taxpayer, I am very pleased to have the 
Federal government get that kind of return on investment.
    Another special focus of the SBIR program has been to 
provide greater outreach to minority-owned small high-
technology businesses, and I think also sitting here at the 
witness table are examples of that. Approximately 10 percent of 
all SBIR awards have consistently gone to minority-owned 
companies. It is clear that minority-owned businesses are 
actively participating in the program and thus have 
unparalleled access to the Federal research establishment.
    Technology transferred from Federal research into the 
marketplace under this program has been and continues to be 
effective. Ensuring that the fruits of Federal research are 
realized is vital to our economic well-being. The Small 
Business Administration estimates that over 30 percent of Phase 
II projects result in viable commercialized products or 
services.
    I think the bottom line here, Mr. Chairman, that is that 
SBIR is indeed a successful Federal program. I know that you 
and your colleagues are as supportive of this program as I am. 
I look forward to seeing the SBIR continue to foster innovative 
technologies that will make the quality of life of all 
Americans better. Most importantly, SBIR will continue to 
strengthen our economy by providing critically necessary 
innovation to allow us to compete in the competitive world 
marketplace and also provide high-technology employment 
opportunities to all of our citizens.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions.
    [Dr. Larson's statement may be found in the appendix.]
    Chairman Bartlett. Thank you all very much.
    Let me now yield to Mr. Hill for any comments or questions 
that he may have.
    Mr. Rick Hill. Well, thank you, Mr. Chairman; and I want to 
thank all the members of the panel for your testimony. It is 
very valuable.
    Let me say from the outset I am a strong, enthusiastic 
supporter of this program. You will probably sense that in the 
questions.
    One of the questions I have, however, is whether or not we 
have got in place sufficient tools to make sure that a 
sufficient proportion of awards are going into rural areas.
    I represent a rural State, as you all know; and we are 
trying to build some infrastructure into the State of Montana 
to create the benefits and opportunities that come from 
technology and the transfer of technology. So I would just 
start--is it Behar?
    Mr. Behar. Behar.
    Mr. Rick Hill. Good guess, huh--and then just go across the 
panel. Is the outreach program enough? Is it sufficiently 
funded and are there other things that we should do, is my 
question.
    Mr. Behar. Well, speaking from rural northern Virginia, I 
am not the right person to answer your question. I would 
commend any efforts to spread the SBIR program throughout the 
country. I don't believe that there is a monopoly on good 
ideas. But I confess, Mr. Hill, that I am not much of an expert 
on the topic, so I will yield to my colleagues.
    Ms. Armstrong. I have actually spent a fair amount of 
effort in mentoring other companies in the State of Colorado; 
and Colorado is perhaps an advantaged State because we have a 
lot of Federal activity there, a legacy of the Eisenhower 
presidency, so we are predisposed to success.
    But I will tell you that the mentoring has been very 
successful at getting others involved. In my written testimony 
I talked about the level of effort that went in, and it was a 
group of volunteers, and we did it all with only $10,000. I 
would tell you that there are mentoring things that could be 
done with a nationally funded program. I would also comment 
there is no better time to embark on such an effort with the 
Internet and the ability to communicate at long distance and 
virtually be beside each other.
    Tek-Gear was placed in Jackson, Wyoming, because the lead 
technologist on Tek-Gear who productized it lived there; and 
the effort was to have Tek-Gear run out of Jackson. The 
impediment to doing that was Federal Express and the ability to 
get turnaround on a one-day basis in Jackson, Wyoming. So there 
are limits to what you can do in remote areas, but there is no 
reason that R&D can't be carried on in those areas. And 
mentoring and using the support of people who know how to use 
the program and are willing to share that expertise with those 
individuals would be one way to make it happen.
    Mr. Rick Hill. I made note in your testimony about the 
issue of mentoring. Obviously, you are talking about other 
companies as well as university people.
    Ms. Armstrong. Absolutely.
    Mr. Rick Hill. Do you think there should be some reference 
to that in the reauthorization and, if so--I mean, obviously, 
you are recommending some appropriation for that purpose. You 
think that would be an important part of helping us move 
towards more success in rural areas for SBIR?
    Ms. Armstrong. I absolutely think that would be critical, 
and I think it is a very right time for those dollars to make a 
significant difference.
    Mr. Rick Hill. Thank you, Doctor.
    Dr. Haynes.
    Dr. Jacqueline Haynes. Well, my suggestions--well, first 
one comment that I have is that, to look at the impact of the 
SBIR program, you have to look down a level from the first-tier 
awards of Phase I and Phase II that are made to companies like 
mine. I mentioned that we have subcontractors and consultants 
in 11 other States. Over the course of our 13 years in 
business, I don't think we have had a subcontractor or 
consultant in Alaska or Hawaii, but I think we probably have in 
almost every other State, including Montana; and I think that 
is an important feature of small businesses and their need to 
network and partner with a whole lot of expertise in areas that 
is outside that of their own immediate staff.
    Secondly, I think that a mentoring program is a superb 
opportunity for SBIR companies like mine who have been 
successful to work with other companies, with other individuals 
who are even considering starting companies to kind of bring 
them into this way of doing business.
    For very small companies there is a financial burden to 
them that they can't really afford to do without some 
appropriation for that that covers at least the direct expense 
part of that kind of program.
    And the third thing that I would suggest is that there is--
a lot of the difficulty, a lot of the impediment to a start-up 
business in becoming a Federal contractor is just knowing how 
to go about doing that. If you are in a rural area, it is maybe 
not so easy to call up your local DCAA audit office that is 
only a few miles away and tell them that you would like to come 
over because you don't know if what you are doing is the right 
way to do it or not, and you would like some help to make sure 
that it is, and if you are in a rural area perhaps it is not so 
easy to do that.
    But using the Internet you could build a lot of 
infrastructure that would make a lot of that kind of support 
help available nationwide to anyone who wanted to participate, 
who wanted to find out what does an acceptable time sheet look 
like, what do I need to do for some of these other kinds of 
things.
    Mr. Rick Hill. Are you familiar with the outreach program 
that we--I think the change we made I think in the last 
Congress and we funded? Should the mentoring program in your 
judgment be made part of that or should it be--the genesis of 
that coming from the agencies that are contracting for 
research? Where do you think the genesis for that should come?
    Dr. Jacqueline Haynes. I think it should come from the 
agencies themselves. My experience is that some of the focus on 
the kind of university and universities mentoring small 
businesses isn't always real successful. They don't--the 
academics don't always kind of get it, what it is like to be in 
the marketplace.
    Mr. Rick Hill. Thank you.
    Dr. Larson.
    Dr. Larson. Well, I have to say that most of my personal 
experience comes from the rural areas of Santa Clara County, 
California, and Fairfax, Virginia. But I have also had the 
opportunity to participate in the small business community of 
the national level, and I know that most States have some form 
of a program to outreach to the small business community in 
various ways, often through the State university systems and 
incubators and various other endeavors at the local or State 
level.
    Outreach by the agencies is possible. I think what my 
colleagues have said on the panel is true--there are many 
impediments. The further away you get from large metropolitan 
areas and large State universities, the more difficult it is to 
deal with this. But I think mentoring programs do exist.
    I participated in a number of small business conference 
days around the country speaking on the SBIR and other 
opportunities such as the advanced technology programs with the 
Department of Commerce, which has a similar sort of outreach 
problem. There are many States and many congressional offices 
that have sponsored these outreach programs and special 
activities.
    I would like to say I also agree it should be done at the 
agency level. I think each program and each agency is 
sufficiently different that the special needs of the agency for 
specific research that they need should be accommodated.
    Mr. Rick Hill. Thank you. Thank you all very much.
    Thank you, Mr. Chairman.
    Chairman Bartlett. Thank you very much.
    This hearing is very meaningful to me personally. I didn't 
hold a prior political office. I didn't even run for this 
office until I was 65 years old. So I obviously had a prior 
life. I have a Ph.D. in science. I have 20 patents. I started 
and ran a small business. And where was SBIR when I needed them 
back in the 1960s? It would have been very helpful.
    The first question I had--and one of the nice things about 
letting others go first is that you have fewer questions to 
ask. The first general question I had to ask was about national 
mentoring as mentioned by Dr. Armstrong. And we have some rural 
areas in our district, three counties in Appalachia, that 
desperately need more input of this kind of capital. Since 
small business is more creative than large business, since most 
of our patents come from small businesses, clearly it is in our 
national security and in our national economic interest to 
encourage the kinds of programs that SBIR fosters. And so my 
first general question was going to be, how can we get the word 
out?
    I suspect that there are many, many entrepreneurs that 
don't even know that this program exists and don't know that 
there is this opportunity, and I think that that is a double 
loss. It is a loss to all of those entrepreneurs who can more 
quickly develop their businesses if they knew of this source of 
funding, and it is a major loss to our country because we are 
now denied the products and services that could be more quickly 
available or maybe they wouldn't be available at all to us 
without this source of capital. And how can we get this word 
out more broadly?
    You know, I don't know if there has been any surveys about 
how many small businesses in the technical areas even know that 
this program exists. I would suspect that it is not a big 
percentage that even know the program exists. How do we get the 
word out?
    You mentioned the agency should be involved. They are very 
comfortable working with the people they contract with already. 
It is tough to get these people to add new contractors because 
they are comfortable with the people they are working with. 
What role could the Small Business Administration play in this?
    Ms. Armstrong. I would comment that two things that created 
success in Colorado when we have held events and they have been 
sponsored by various entities, Representative Skaggs sponsored 
some, SBA has sponsored some, those people that are most well 
attended--there are two groups to which people are attracted. 
One of those groups is other winners. They love to hear success 
stories. So we need to get some mobility in terms of getting 
those stories out to everyone. Because if you hear someone who 
has done it, it makes it--it invigorates you to try even harder 
or exposes you to something you haven't heard of before. The 
two videotapes we created were disseminated widely in Colorado, 
and I think made a difference in the participation level 
throughout the state.
    The second group of people that are very attractive 
speakers are people from the venture capital or the monied 
community. People will always go to see someone like that speak 
in an effort to think, well, if I just had this money, I could 
get it here. So they are another group to involve in an 
outreach effort because they represent another source of 
capital, and perhaps they could be brought in to help with the 
process of getting the message out.
    And I would also comment that big business doesn't get it 
quite yet, and they could have a role to play in an outreach 
function as well if we can have them be better informed.
    Chairman Bartlett. Of course, our legislation requires that 
a certain percentage of this money go to this program, and much 
of that money goes through big business and to subcontractors. 
So there is an incentive there.
    Mr. Behar.
    Mr. Behar. Mr. Chairman, I would like to second some of the 
thoughts that have been aired by my colleagues here and add to 
them. I am aware that the SBIR program has gone now on a ``road 
show,'' if I may say, providing sessions about the SBIR program 
and encouraging people to come to those. I would encourage NIH 
to expand the ``road show'' as widely as possible and, of 
course, in rural areas where we would like to see more energy 
going to.
    The other one is probably the most obvious one, the 
Internet. I mean, we are all converts to the Internet. Every 
time I seek out government information I am, quite frankly, 
very impressed by the abundance of information on government 
programs on the Internet, and there is similarly high-quality 
information about the SBIR program.
    However, I think it can be spiced up by some of the ideas 
that Judith suggested earlier about success stories and have 
maybe some of us be involved in adding to these Internet sites 
so as to give us an opportunity to talk in the entrepreneur's 
language. I think the Internet is almost an ideal tool to 
bridge that gap of knowledge and of geography.
    I wanted to make a point here to Mr. Hill's earlier 
question that is somewhat relevant to this issue. Last Friday, 
my top-notch computer guy closed the door, and my heart sank. 
You know, any entrepreneur is aware of the feeling when you are 
very dependent on a person what happens on a Friday when they 
close the door. And, indeed, he told me that he and his wife 
had decided to move out to a rural area. So I must confess that 
upon hearing this thing and his commitment to stick with the 
company and its missions and only to want to have a change of 
venue, I was so very grateful. And, in fact, it is our 
contribution, if you want, to spicing up the rural areas with 
the seeds of entrepreneurship.
    There are two words to my morals. One is that we can spread 
the knowledge along the line of mentoring, as was said before, 
but the reality right now is that it is really not sinking in 
fast enough. Second, that the Internet has created a new world, 
one where, you know, virtual businesses can exist, where 
geography is not that important, and that we need to both 
foster it and use it in order to deal with issues like the one 
you brought up, gaps of information, gaps of geography, et 
cetera.
    Chairman Bartlett. Dr. Haynes.
    Dr. Jacqueline Haynes. In speaking to some other small 
businesses who don't participate in the SBIR program, one of 
the things that I have come across frequently is their 
misunderstanding of a key feature of the SBIR program. They 
have said that they don't participate because they don't want 
the government to own the technology that they develop, and 
they don't understand that one of the key features of the SBIR 
program is that the rights to the technology remain with the 
company that develops it.
    And I think that a better information campaign along with 
better--information campaign about the program in general 
should be very specific about that point and should--I think 
that there is some element of the small business community that 
is not participating in this program for the wrong reason.
    Chairman Bartlett. Is that information not obvious on the 
web site?
    Dr. Jacqueline Haynes. It appears obvious to me, but when 
you talk to people who perhaps have not gotten that piece of 
information, have not looked at the web site, have heard about 
it, maybe they haven't heard specifically about the SBIR 
program but their understanding is if you do any business with 
the government, the government owns everything. And they don't 
understand that this program is different, is very different in 
that respect.
    Chairman Bartlett. Historically, for government programs--
and I worked in the past on a lot of government programs in a 
lot of different venues--the government did everything. 
Nineteen of my 20 patents are government patents. But they had 
the wisdom then to at least give the inventor commercial 
rights. The government kept what is called shop rights. They 
could use the invention for any government purpose, not just 
the agency that helped you patent it, but any other government 
agency could use it. But in the commercial world the inventor 
had the commercial rights.
    Now if that hadn't been the case, I wouldn't have had one 
Federal patent because I would have had zero incentive to do 
that. And, you know, nobody other than the inventor is going to 
take the initiative to get the thing patented. My supervisor 
didn't know enough about it or have an interest or anything to 
get the thing patented. So this really was a very farsighted 
position on the part of the government that I worked in. I 
worked with the Defense Department, and 19 of my 20 patents are 
Navy patents.
    But there is this general perception that if you work for 
the government you don't have any rights. They take them all. 
So this is important. I guess we need to underscore that and 
put asterisks around it so that it is highlighted.
    Dr. Larson.
    Dr. Larson. Well, Mr. Chairman, I would like to second the 
remarks of all my colleagues here.
    In response to your question on how we can improve the 
outreach and the information transfer, I think the present 
programs that exist within a number of entities who are 
involved in this program on the Federal side, the State side, 
and the academic side, are very effective. I think there are a 
portion of people who will not participate in government 
programs--who don't want to hear how this program works--but I 
haven't really run into many of those. Once they understand the 
program, the information available is pretty effective.
    I think this information is available readily working 
through the various government agencies that have SBIR 
programs, and with the road shows that the SBA, many State 
governments, many State universities and, as I said earlier, 
the congressional offices have. I work with my own Congressman, 
Jim Moran, in his outreach to the small business community in 
northern Virginia, and we really have large crowds.
    They do like to hear success stories. They do like to hear 
how to do it. They want practical information. They don't want 
to spend a lot of time learning about another government 
program. But this is kind of a win-win situation. Most people 
when they do learn about SBIR are quite pleased with the way it 
can be used to the benefit of everyone.
    Chairman Bartlett. My particular interest, like Mr. Hill's, 
is rural areas. The secondlargest county geographically in 
Maryland is Garrett County. It has 28,000 people, and we have double 
digit unemployment. And there are a number of entrepreneurs there. And 
I am just not sure that in the more urban areas and suburban areas the 
communication lines are a whole lot more effective than in the rural 
areas that Mr. Hill and I represent. He is the only representative from 
Montana. That is a big district. My district is the biggest one in 
Maryland, but it is very small compared to his district.
    Yes, Dr. Larson.
    Dr. Larson. Well, Mr. Chairman, I am sure you work with the 
University of Maryland and their outreach program. I know they 
concentrate more on Baltimore and the urban Washington-area 
counties than possibly on rural Maryland.
    Chairman Bartlett. Well, we have Frostburg, which is a part 
of the university system, Frostburg State University. They do a 
good job. And we would like to see how the job can be done 
better.
    Dr. Larson. My experience in Virginia is with the Center of 
Innovative Technology. At the State level our administration 
has provided outreach to southwest Virginia, which is equally 
in Appalachia and has the same demographic characteristics as 
your counties. And I think it is fairly effective. They have a 
``bridge'' program, as it is called, that tries to couple the 
high-tech community in northern Virginia into southwest 
Virginia and build up partnerships with entrepreneurs in both 
areas. It seems to work.
    I think it varies from State to State, but every State I 
know of has some sort of outreach program.
    Chairman Bartlett. Mr. Hill, do you have a comment or 
question?
    Mr. Rick Hill. I never hesitate to swap stories when we 
talk about the size of my district. I have some counties there 
are larger than the State of Maryland with fewer than a 
thousand people in them. We are struggling just to make sure 
that they have access to the Internet. So there are some 
interesting challenges.
    If I could ask just one additional question, Mr. Chairman, 
one of the things I noticed working with companies that have 
had SBIR contracts, I think, Dr. Haynes, you talked about your 
company as a think-tank company. You created a company with 
that purpose. One of the things we seem to have some difficult 
is getting the technology licensed into a successful entity in 
our State. We want the spin-off jobs as well, potential. And 
the question I would ask would be two things.
    One, is there any barrier that exists now in the way 
agencies award these projects that create some sort of a 
barrier to commercialization or in any way? And if we could 
identify that. And then the next, are there any elements of 
this that would create a barrier to access to venture capital, 
would be the other question that I would ask. And then I guess 
the next question is, is it realistic to expect that the people 
who are contracting, doing SBIR projects, really do want to run 
commercial entities or really are they more interested in just 
doing research?
    If it would be possible for any one of you to address those 
three questions.
    Dr. Jacqueline Haynes. Let me start. Just in answer to your 
question--let me start with your last question first.
    Mr. Rick Hill. All right. Any order.
    Dr. Jacqueline Haynes. I think a company, an 
entrepreneurial company wants to have the commercial 
opportunities that the technology that they develop affords, if 
for no other reason than strictly for financial reasons. There 
are far greater profits than there are in the maybe 6.5 or 7 
percent that maybe you can squeeze out of governmental R&D 
contract. So there is certainly a strong financial incentive 
for doing that.
    On the other hand, when you have a company with a group of 
people whose primary culture is science, research, engineering, 
theory, those kinds of things, they don't--those people don't 
suddenly complete a project and become businessmen and women. 
They do what they do.
    So what you need is a company that can then grow to 
accommodate the commercial side of your business while you 
maintain this robust R&D environment. And having both of those 
things going on simultaneously in the business--in the size 
business that our company is evolving into now is a very 
exciting thing, very challenging. Because the concerns of R&D 
and science and the concerns of entrepreneurship and business, 
commercialization are related but not the same.
    That is one of the reasons that part of our approach has 
been to team with big companies that do the marketing, that--I 
mean, their expertise, where their forte is, is not in the R&D. 
It is on the commercial side. And those partnerships have been 
very successful for us maintaining kind of our core business 
for what we are good at doing, partnering with other people who 
are really good at what they are doing, and all of us 
benefiting from that kind of expertise. That is kind of how it 
has worked out best for us, I guess.
    He talked about access to venture capital. I think the 
program as it is provides--does not provide a disincentive to 
venture capitalists when venture capitalists understand what 
the program is. And there again, just as an example, one of our 
products in the educational area we took to a major educational 
publisher in New York, and we talked to them about it. And 
their first reaction was, we don't do anything with the 
government. We don't have any relationship with the Federal 
government. We don't want to have any relationship with the 
Federal government. We are not interested in a project that 
involves anything to do with the Federal government.
    They clearly didn't understand the nature of the program, 
that Federal government doesn't have their hands in the 
product. They were kind enough to support their research and 
wise enough to support their research, but the product is a 
spin-off from that and independent. It is very difficult to 
convince people of that at times.
    Mr. Rick Hill. Thank you. Thank you, Mr. Chairman, also for 
indulging me on another question. Thank you very much.
    Chairman Bartlett. Thank you very much. Hearings like this 
are a pleasure. Frequently our hearings are looking at programs 
that have major problems. There have been two GAO reviews of 
this program. Both of them have been very positive reviews.
    I wanted to turn for just a moment to your recommendations, 
which is a prime reason for our hearings. I have jotted down 
the recommendations as I read your testimony and as you talked.
    Dr. Behar recommended that we increase the funding for 
Phase I; and that was also repeated by Dr. Haynes, that we 
could probably use more funding in Phase I. Now one of you 
noted that in some of the particularly complicated high-tech 
areas that more funding was needed, but it wasn't true across 
the board. We may need help in crafting language--what we don't 
want to do is set up a program where everybody automatically 
gets $175,000 for Phase I. We would like the award to be 
commensurate with the challenge. So we may need help in doing 
that. The $750,000 for Phase II is adequate. Nobody questioned 
that.
    The 2.5 percent, the overall amount of money in the 
program, at least one of you mentioned you would like to see 
more money. I would like to see as much money as can be 
profitably used.I worked for big business, I worked for IBM, I 
worked for the government, I worked for universities, and I will tell 
you, you get more mileage for your dollar in universities. That is 
because you have slave labor there. Those of us who have Ph.D.s 
understand that.
    The next, small business, I think you get better payoff on 
your dollar invested than you do in big business. So I have no 
problem in supporting increasing, if it could be profitably 
used, the 2.5 percent. I just think that the Federal 
government--and the taxpayer, ultimately, because it is the 
taxpayer's money will get better mileage for that. All of you 
who made recommendations suggested that we extend it for 
another 10 years, and that if it ain't broke, don't fix it.
    Dr. Armstrong said that we didn't need any changes in the 
program, and I think that changing just for the sake of change 
could be counterproductive. I think it was Dr. Larson who 
mentioned that it could be counterproductive doing that.
    Dr. Behar, you market an aid to help people stop smoking.
    Mr. Behar. That is correct, sir.
    Chairman Bartlett. I wonder how often you have thought 
about some of the inconsistencies in our society. The taxpayers 
help you develop the technology for that device through an SBIR 
contract. Those same taxpayers through government programs 
support the growth of tobacco. And that those same taxpayers, 
through their elected representatives, permit the tobacco 
industry to advertise, enticing more and more of our young 
people to begin smoking. I know that the more people who smoke, 
the bigger your business grows; but I suspect that you wish 
that you had fewer demands for your product. How do we, as a 
society, deal with this?
    Mr. Behar. Well, Mr. Chairman, this irony is one that I 
have lived with for the last 16 years. Coming from the 
beautiful State of Virginia, one that is known for a great deal 
of things including the lowest tax on cigarettes of any State 
and a State that has committed minimal funds for tobacco 
control, I am especially or acutely aware of this big 
contradiction.
    As to the solutions, let me first allay any fears that we 
are going out of business. As I indicated in my testimony, when 
I got first in the business in 1994 there were 50 million 
people who smoked and there are still 50 million people now. I 
recently read a research that unless something really 
dramatically happens--and nobody anticipates it--it is expected 
to be so until the year 2030. So I don't think any of our 
shareholders have got to be very fearful of our business going 
away.
    The flip side of this is what do we do as a society to 
control this. The reality is this: About 6,000 kids attempt 
smoking each and every day; 3,000 of them get hooked; and about 
1,000 of them, as we know, are likely to die from a smoking-
related disease. This is what is fueling the problem.
    Now, unless we find the means of dealing with this issue, 
we will forever have this 50 million problem to deal with; and 
I am very pleased that one of the SBIR-funded grants has 
produced a product which is a program that is designed 
especially for kids.
    One of the issues that pertain to smoking and kids is that, 
unlike the world of adults, where there is a plethora of 
products--I mean the nicotine gums and patches and what have 
you. There is nothing like that for kids. In fact those 
products are not allowed to be used by kids. And so, 
consequently, when kids try to quit--and it is a myth that they 
don't. Most of us adults think that kids think that they will 
live forever, and they don't try to quit. The fact is that 
about 70 percent of them try to quit and try to quit 
repeatedly. And when they do so, they quit smoking cold turkey. 
Cold turkey didn't work for adults, and it is not going to work 
for kids.
    So the answer lies here in redoubling our efforts in 
finding effective means to deal with prevention and to deal 
with cessation, and I am very proud of fact that my company is 
engaged in both of them.
    Mr. Chairman, I can speak in great lengths about this 
topic, but I would not like to monopolize this issue here, and 
will yield to my colleagues.
    Chairman Bartlett. Well, thank you very much.
    I carry a copy of the Constitution. I am very much aware of 
the enormous safeguards that are assured us in the amendments, 
particularly the first 10 amendments, the Bill of Rights. But I 
would tell you our forefathers never envisioned that you would 
have unbridled expression of those rights. You cannot yell 
``fire, fire'' in a crowded theater. You ought to be able to do 
that under the first amendment right of free speech. But 
everybody understands that you can't yell ``fire, fire'' in a 
crowded theater if there isn't any fire because people may get 
hurt in their rush to the door.
    Let me use that same logic, if I can't yell ``fire, fire'' 
in a crowded theater because I may get hurt trying to get out, 
then you can't advertise cigarettes to my children because they 
are going to get hurt if they smoke cigarettes. Now, I don't 
think that is censorship. I think that is sanity. But we are 
not there yet. Thank you very much.
    Dr. Armstrong, you mentioned that in your testimony, 
written testimony, that you do some work with power stack 
scrubbers. Is this physical equipment or software equipment?
    Ms. Armstrong. ADA is a very hands-on company, and we work 
with full-scale equipment in power plants around the country 
constantly testing and prototyping technology on slipstreams 
from those power plants. So we have hundreds of thousands of 
dollars worth of equipment that we ship around the United 
States that do testing. So we have people and we have equipment 
deployed in many locations. The technology that we spun out was 
a flue gas conditioning technology where we injected a spray 
into the stack to change the properties of the stack gas. So it 
is real, physical, hand-on technology.
    Chairman Bartlett. You change the properties so that they 
are more easily scrubbed?
    Ms. Armstrong. We changed the physical property of the ash 
so it is more easily collected by the APC collection devices.
    Chairman Bartlett. That is what I mean by scrubbing. The 
device that you held in your hand, the Trekker, is that how you 
pronounce it? The Trekker device, this does what?
    Ms. Armstrong. It is a datalogger for high school science. 
It is very simple to use. It will get students accustomed to 
using instrumentation to do science, as opposed to using a 
pencil and paper and writing things down. It can connect to a 
computer MacIntosh or PC, and they can learn to use 
spreadsheets to look at the quality of the data. So it is 
really an education tool to teach students in the high school, 
and we are moving it toward the middle school, the skills that 
they need to have for the next generation of jobs.
    Chairman Bartlett. You mentioned also that you were 
developing science games.
    Ms. Armstrong. Um-hmm.
    Chairman Bartlett. That might compete with the violent 
games that are being sold to our young people.
    Ms. Armstrong. That is very true. We have some funding from 
NIH, and we are developing--and this is the entrepreneurship 
piece--we have people who are developing those for educational 
purposes, for the life sciences, to be used in the schools. The 
particular individuals doing it have developed successfully 
commercial games. So at night they are taking what we are doing 
for NIH and they are working to see if they can convert it into 
a commercial gamewhich will be to their personal benefit.
    Chairman Bartlett. I wish you all the luck with that.
    The industry that tells us that all the filth and violence 
that they immerse our kids in doesn't affect the kids. It is 
the same industry that tells the people who advertise on them 
that the public is really going to be moved and changed by 
their advertising.
    Now they can't have it both ways. Either the advertising 
does no good at all or, if it does what they claim it does for 
the people who pay them for advertising, then our kids are 
affected by the filth and violence that they see. So, you know, 
good luck with those games.
    Ms. Armstrong. Thank you very much.
    I will comment, my son graduated from Columbine High 
School, so I appreciate your comments.
    Chairman Bartlett. That was my first comment when asked by 
a reporter, did I have any thoughts of that? Yes, were you 
surprised? Our kids are immersed in a sea of filth and violence 
and what those two boys acted out is what all of our kids see a 
dozen times a day on television and movies and in their video 
games.
    You know, the Bible says, by beholding you become changed. 
And if our industry didn't believe that, they wouldn't be able 
to sell advertising. If they didn't believe that the listeners 
by beholding their advertising are going to be changed in their 
buying habits, they wouldn't be able to sell any advertising, 
would they?
    You know, as I said before, this isn't censorship, this is 
sanity; and I don't know how we get there because we aren't 
there yet.
    Dr. Haynes, I noted that you noted that you have employees 
from Taneytown and Frederick. Our people have a good work 
ethic. I am sure that they are some of your better employees.
    Dr. Jacqueline Haynes. They definitely are.
    Chairman Bartlett. I was intrigued by your impulse radio 
that doesn't need the frequencies which are becoming crowded. 
And we have a necessary intrusion of government into this 
industry because we have to share limited air waves. Just very 
briefly, how does impulse radio work?
    Dr. Jacqueline Haynes. Well, that is not part of my area of 
technical expertise, but my husband is here, and that is part 
of his technical area of expertise. So perhaps he can answer 
that question.
    Chairman Bartlett. I would be pleased.
    Dr. Leonard Haynes. Thank you, Mr. Chairman.
    Impulse radio was developed by a company called Time Domain 
Corporation in Huntsville, Alabama. They have a number of 
patents. There has been a number of interests in other 
companies that have started working in that area. Lawrence 
Livermore Laboratory has also done work in that area. We became 
tied up with Time Domain Corporation via the SBIR program where 
we had proposed to use that technology in some projects for the 
Army and the Air Force. Those projects have gone along 
extremely well.
    Now, to answer your specific question, most radio trans--
all radio transmission to date has been waves. We all hear 
radio waves. A radio wave is a continuous thing.
    Impulse radio no longer uses waves, it just uses impulses. 
It is a pulse and then a little later a pulse and then, later 
than that, a pulse. And if you create these pulses in the right 
way, they can transmit information. So you are no longer 
transmitting waves, you are just transmitting impulses.
    If you say, well, what frequency is being transmitted, the 
best answer, without going into a lot of technical detail, is 
all frequencies simultaneously are being transmitted. And if 
you say, well, how did that work? Again, without going into 
great detail, because we can now build clocks, electronic 
clocks that are so very accurate down to picoseconds, 10 to the 
minus 12 seconds, you can now find these pulses in what is 
generally just noise.
    The technology is quite outstanding in its potential. For 
example, a typical cell phone like I have here has about a half 
hour of transmit time; and it is because when it is on and 
transmitting there is continuous energy being transmitted, 
continuous waves. A cell phone made of impulse radio would have 
a typical transmit time of 500 hours. Why? Because it transmits 
this short pulse, and then it doesn't transmit anything for a 
long time. Then it transmits another pulse. By a long time, we 
mean a few microseconds that between pulses that are a 
nanosecond wide.
    Chairman Bartlett. It is like a strobe as compared to an 
ordinary floodlight.
    Dr. Leonard Haynes. You can think of it that way, yeah. If 
you had a strobe light sending out flashes and you sent them 
out in a sequence and if you knew exactly when to look for the 
strobe, even if it was a bright sunny day, if you knew exactly 
when to look, you would be able to distinguish the strobes.
    And there is a very touchy issue with the FAA and the FCC 
who are denying the request to be able to produce these kind of 
radios because, in theory, they transmit at all frequencies. So 
the first question is, well, do they disturb anyone else? The 
answer is no. In fact, we have done tests where we take a hair 
dryer and the energy out of the hair dryer is 20 times the 
energy out of these pulses. But yet the FCC says, well, the 
hair dryer is accidentally transmitting this radiation, your 
radios are intentionally transmitting them, so we are not going 
to authorize you. And that doesn't really make sense.
    Next criticism is, well, if there were thousands of these 
radios, maybe it would start interfering with things. Well, if 
you say--Time Domain did an experiment where they put their 
transmitter right in the same box as a GPS receiver, which is 
about the most sensitive electronics, they operate at very low 
signal-to-noise ratios. And it didn't hurt the GPS receiver at 
all even though the transmitter, this impulse transmitter, was 
right in the same box. So, anyway, over the next few years we 
will see--you can't deny progress. You can't have laws that are 
contradictory to the realities of physics and the need for more 
spectrum, and there will be more concern over this.
    I have just finished a proposal to the National Science 
Foundation to look at the basic mathematics of this. Because 
even the current mathematics are not adequate to deal with 
impulse radio. What is the furia transform of a pulse? Well, it 
is all frequencies. But the furia transform says they last for 
minus infinity to plus infinity in time.
    Now we know that is not true. A pulse now, not going to 
still see the effect of it a week from now. I mean, it doesn't 
even make sense. But yet that is the way--the traditional ways 
to deal with radios and frequencies and things like that 
mathematics is based on that.
    Anyway, that is--I hope that is not too much of an answer.
    Chairman Bartlett. No, no, it is not too much. I come from 
a science background, and I appreciate it.
    We have a number of lights on the board. We will find out 
what they mean. Because my beeper hasn't gone off. It means we 
are in recess.
    Nature has been exploiting a similar capability of this for 
a long time. A bat, for instance, in a forest of a million 
twittering leaves can single out, with its echo ranging, a 
single insect and hone in on it to catch it. And a porpoise, by 
echo location in the water, can differentiate between afake ham 
and a real ham simply by feeling it with this echo ranging. So these 
are all pulse kinds of things that nature has been exploiting, and this 
is an exciting new technology that we will watch with interest.
    Dr. Larson, I noted with much interest that you were here 
at the beginning, you testified, in 1982 when the program 
started; and I think in your written testimony you said that it 
has exceeded your fondest expectations.
    Dr. Larson. Yes. I worked with Roland Tibbetts from the 
National Science Foundation and Congressman Bedell and Senator 
Rudman in the early 1980s to help create this program.
    Chairman Bartlett. You also mentioned NSF reviews of their 
program which showed 11 successful returns. Have other agencies 
done similar reviews? Or do we have only the GAO reports as an 
overall assessment of these?
    Dr. Larson. The various GAO reports do look at it agency by 
agency. I am not aware of other agencies that have done this, 
although they certainly may exist.
    Chairman Bartlett. Well, I want to thank all of you very 
much for your testimony and your contribution, and we are just 
happy that this hearing can focus on positive things, that we 
only need to do a few things to improve the program, that we 
didn't have any major glitches that we have to correct. Let me 
thank this panel and ask the next panel if they will take their 
places at the table. Thank you very much.
    We will welcome our second panel, Dr. Busch from Montana 
and Mr. Daniel Hill, Assistant Administrator, Small Business 
Administration. We will have a chance with this panel to focus 
in more detail on some of the concerns that were raised in our 
first panel that is about how do we involve more rural America 
in this program.
    Welcome and thank you for coming to our hearing.
    We will hear now from Dr. Busch. 

        STATEMENT OF MR. CHRIS W. BUSCH, RONAN, MONTANA

    Mr. Busch. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify at this hearing about the SBIR program. 
I have strong convictions about its merits based on my 
experience with it as a small business person and currently as 
an agent of SBIR outreach in the northern Rocky Mountain 
States, primarily Montana and Wyoming.
    My SBIR outreach work aims to help small businesses with 
all aspects of the SBIR competition process. The SBIR program 
is highly competitive, and I believe this is a key factor in 
the success of the program. We must protect this characteristic 
as we go forward.
    Rural States have a special need for the technology-based 
businesses enabled by the SBIR program. These businesses 
provide for future economic growth, offer high-quality job 
opportunities for young people and university graduates and 
help retain intellectual resources within these States. Indeed, 
this process is already working in Montana and Wyoming and 
other rural States through SBIR program awards.
    Historically, rural State small businesses have not fared 
well in the SBIR competition process. I believe we need to do a 
better job of promoting the SBIR program in these States. It 
continues to surprise me how many high-quality candidate 
businesses we find who have not yet heard about the SBIR 
program opportunity. Effective SBIR outreach will engage these 
businesses and break down real barriers to SBIR competition in 
rural States.
    During the past 3 years, I have participated in an 
aggressive and exciting SBIR outreach program in Wyoming called 
the Wyoming SBIR Initiative. Our activities include workshops, 
one on one monitoring, written communications, networking 
opportunities and a so-called Phase 0 program to help enable 
successful competition.
    We are very pleased and proud of the results obtained with 
the Wyoming SBIR Initiative. The number of annual Phase I 
awards has increased from three in 1995 to five in 1997 to 11 
so far in calendar year 1999. We believe this is conclusive 
evidence that effective SBIR outreach does work. But there is 
much more work to be done in Wyoming, and our outreach work 
must continue. A similar program is getting under way in 
Montana, where we will focus our energies on a highly effective 
SBIR outreach program.
    The SBA Office of Technology, under the leadership of Dan 
Hill, presently is implementing an SBIR outreach program for 
States that underperform in the SBIR competition. I believe it 
is very important that the SBA outreach program be continued 
and that the funding for it be increased.
    Federal SBIR agency personnel are vital partners in 
effective SBIR outreach. Examples of key activities include 
participation in SBIR conferences and workshops, site visits to 
SBIR winner facilities and commercialization assistance.
    We must ensure that Federal agency representatives have 
necessary resources to adequately support effective SBIR 
outreach.
    At the National Science Foundation, the EPSCoR program 
office provides funding for high-quality SBIR proposals from 
EPSCoR States that fall below the so-called pay line that the 
NSF SBIR program provides. In this way, high-quality proposals 
from these States are funded that otherwise would not be. This 
gives small businesses from these States a second chance to win 
and helps them over the initial barrier of capturing their 
first SBIR award. I suggest that other agency SBIR programs 
consider an initiative similar to this.
    I would like to offer five recommendations for your 
consideration.
    First, give highest priority to reauthorization in this 
session of Congress of the SBIR program essentially as it 
exists.
    Second, continue and expand the SBA SBIR outreach program. 
I believe it is very important to keep this program competitive 
to ensure that effective SBIR outreach is provided as a result.
    Third, allocate a portion of the SBIR program funds at each 
of the 10 participating agencies for SBIR outreach and 
assistance. A major part of these resources should be used in 
underperforming States, including rural States.
    Fourth, I encourage that the mechanism used by NSF to fund 
the high-quality proposal from underperforming States be 
considered by other agencies.
    And, finally, I think it important to establish a uniform 
and consistent method for agencies to calculate their 
extramural budget in determining their SBIR allocations.
    Thank you very much.
    [Mr. Busch's statement may be found in the appendix.]
    Chairman Bartlett. Thank you very much.
    Mr. Hill.

 STATEMENT OF MR. DANIEL HILL, ASSISTANT ADMINISTRATOR, OFFICE 
          OF TECHNOLOGY, SMALL BUSINESS ADMINISTRATION

    Mr. Daniel Hill. Thank you, Mr. Chairman. It is a pleasure 
and an honor to appear again before you on this very valuable 
program. I am happy to be here, and good morning. And it is 
good to see Congressman Hill again. We were just in Montana 
together recently on an SBIR outreach program.
    Thank you for inviting me to appear before you today to 
discuss the U.S. Small Businesses Administration's Small 
Business Innovation Research program, otherwise knows as SBIR. 
My name is Daniel Hill, and I am the Assistant Administrator 
for the Office of Technology at the SBA.
    The SBIR program was created in 1982 with the following 
objectives in mind: to strengthen the role of the small, 
innovative firms in federally funded research and development 
and to utilize Federal research and development as a base for 
technological innovation to meet agency needs and to contribute 
to the growth and the strength of the Nation's economy.
    Recent data from the National Science Foundation provide 
evidence that the small business role in innovation and the 
economy is likely to increase in the future. As we know, our 
economy is increasingly knowledge-based, where future 
competitiveness is determined by the quality of the human 
resource base of technically trained and skilled personnel. NSF 
data show that the human resource base, the technical 
intellectual capital needed for future innovation, appears to 
be moving from large business to small business.
    A recent NSF study concludes, and I quote, ``the employment 
of full-time equivalent research and development scientists and 
engineers rose almost twice as fast between 1995 and 1996 at 
small companies as at larger ones, 18 percent versus 10 
percent, according to a 1997 national survey of R&D-performing 
firms.'' End of quote.
    This data show the trend continuing from 1997 to 1998 with 
a 14 percent increase for small firms and only a 6 percent 
change for larger firms.
    Another NSF study shows that as many recent college 
graduates with degrees in science or engineering are entering 
small firms as are entering large firms and that this amount 
far exceeds the number going into other institutions such as 
universities, non-profits, or government. These data show that 
the SBIR program helps the Federal procurement process focus on 
a sector of the economy with a growing innovation capacity.
    The 10 Federal agencies in the SBIR program have very 
different research and development needs. Some seek the 
development of new products or processes to meet their program 
needs. Others focus more on building the research and science 
base in specific fields. The SBIR program has resulted in high-
quality research and development for these agencies. The 
flexibility in the program design has enabled agencies to 
manage their programs to effectively meet their mission 
objectives.
    Most evaluations of the SBIR program to date have focused 
on the success of participating firms in commercializing the 
results of their R&D. For example, a 1992 study by the General 
Accounting Office found that the program is showing success in 
Phase III--commercialization activity--and that SBIR 
expenditures of $956 million over the period 1984 to 1987 had 
generated $471 million in sales of new commercial products and 
$646 million in additional development funding as of July, 
1991.
    Studies by the Department of Defense and the SBA, using the 
same methodology as the GAO and applying it to all SBIR 
agencies, found that the average Phase II SBIR project over the 
period 1984 to 1993--funded at an average of about $500,000--
had generated $955,000 in sales and attracted about $625,000 in 
additional, non-SBIR funding as of 1998.
    A Harvard University study found that SBIR awardees grew 
significantly faster--whether measured by sales or employment--
than a matched set of firms over a 10-year period. This study 
found this to be true in geographical areas that had existing 
considerable venture capital activity.
    These analysts are quick to point out that any commercial 
success attributed to these projects adds value to the economy 
over and above the research they performed for the agency.
    By making R&D funds available to small innovative firms, 
the SBIR program takes advantage of an underutilized economic 
and social resource--the small, flexible, innovative firm. Such 
a firm is willing to take the risk needed to transform a new 
idea into an innovation and to take that idea from the drawing 
board to the marketplace.
    Studies and anecdotal evidence tell us that small firms 
have a number of advantages over large firms when it comes to 
innovations, such as greater flexibility, closer contact with 
customers and potential end-users, and a greater willingness to 
engage in high-risk R&D projects. These qualities have made 
small firms the leaders in industrial innovation, producing 
more innovations per employee and per dollar spent on R&D than 
larger firms. In fact, large corporations in innovation-
intensive industries try to achieve some of the advantages of 
small firm organization through new business models using semi-
autonomous research and business units.
    Further evidence of the advantage of small innovative firms 
is the important role being played by small start-up businesses 
in the development of emerging high-tech industries such as 
biotechnology and information technologies.
    But the many advantages and efficiencies of small 
innovative firms are not fully realized in our economy because 
of the obstacles they naturally face in raising capital.
    Capital markets do not have the information needed to make 
sufficient investments in the high quality but risky small firm 
products that could lead to significant and socially beneficial 
innovations. The SBIR program funds those types of projects by 
providing high-risk patient capital that is not otherwise 
available in the market.
    The impact of the SBIR program goes well beyond the 
outcomes of new product innovation and firm growth. At a recent 
symposium conducted by the National Academy of Sciences Board 
on Science, Technology and Economic Policy, a team of 
researchers reported their findings from extensive case studies 
of SBIR recipients. At the day-long conference, the researchers 
reported finding a number of examples of start-up firms that 
said they would not have started their company at all if it had 
not been for the SBIR program. In one study it was reported 
that fully half of the firms surveyed said the existence of the 
SBIR program influenced their decision to start the company.
    In addition, a study has found that SBIR start-up firms 
have had the effect of encouraging colleagues to seek funding 
to start other firms. One-third of the firms in one case study 
said their SBIR experience had encouraged their colleagues to 
form their own innovation-oriented firms.
    There are other indirect benefits of the SBIR program to 
the recipient firms. These indirect benefits include increasing 
staff skills, retaining or hiring valuable researchers, 
increasing the credibility and financial stability of the firm, 
enabling new collaborative arrangements with others and 
influencing other R&D activities of the firm.
    In summary, the SBIR program is working; and it is working 
well. It is achieving its congressionally mandated goals.
    I would like to, for the record, also state that a large 
part of the SBIR's program success is clearly due to the skill, 
dedication and ingenuity of the program managers and the other 
Federaland State officials administering the program. It has 
been my pleasure to work with these officials. They are some of the 
best and brightest officials working in the government.
    Many of them are here today; and, with your indulgence, Mr. 
Chairman, I would like to recognize them publicly and thank 
them on behalf of the administration. We have with us today--if 
they would just stand and remain standing until I finish--Jon 
Baron from the Department of Defense, who happens to be 
accompanied and supported by his Mom today; Joanne Goodnight 
from the National Institutes of Health; Teresa Perez from the 
Department of Defense; Carl Ray from NASA; Bob Norwood from 
NASA; Dr. Charles Cleveland from the Department of Agriculture; 
Dr. Kesh Narayanan from the National Science Foundation; 
Ritchie Coryell from the National Science Foundation. And we 
are very fortunate. We have two alumni: Sonny Kreitman, 
formerly with NIH; and Carl Nelson, formerly with DOD.
    Mr. Chairman, these are the very best career civil servants 
you find in the government; and they are the ones who make this 
program work. Thank you all very much.
    An important aspect of the program is its unique and 
flexible design. It enables each agency to fill its diverse set 
of needs and, at the same time, reach a broad range of small 
businesses.
    Credit must finally, however, go to the small businesses 
themselves who have performed so well in this program. We heard 
from just four of the many, many successful small businesses; 
and we heard of their risk-taking, their innovative approach, 
their ability and creativity. They are the true stars of this 
program and to them goes the real credit for the program. It 
enables the Federal government to keep pace with 
transformations in the economy while supporting a dynamic and 
innovative small business sector that will be the foundation of 
the economy in the 21st century. We support, as the 
administration supports, the continuation of this successful 
program.
    Thank you for inviting me to discuss the program with you, 
and I will be happy to answer any questions you might have.
    Chairman Bartlett. Thank you very much for your testimony.
    [Mr. Hill's statement may be found in the appendix.]
    Chairman Bartlett. The previous bells were going into 
recess and the present bells I think are coming back into 
session on the floor. So we can continue with our hearing.
    Mr. Hill, let me turn to you for our questions and 
comments.
    Mr. Rick Hill. Thank you, Mr. Chairman; and it is nice to 
see you again, Mr. Hill, Dr. Busch, and all those program 
directors. I think almost all of those, if not all of those 
folks, were in Montana just about 10 days ago or so I think; 
and it is good to see you here.
    I don't have a lot of questions for you, but let me just 
compliment you on the work that you did there and the work that 
you are doing, particularly you Dr. Busch, in Montana.
    In your testimony, Dr. Busch, you made the comment about 
the highly competitive nature of the program in keeping that as 
an element of the program. I presume what you are saying there 
is that you don't want to modify the program to have mandatory 
set-asides for this purpose or the other purpose. I mean, this 
is quality science and that is what we want to accomplish.
    Mr. Busch. Yes, having been a small business person, as you 
were, Congressman Hill, I love the competitive environment. I 
think it is really a key cornerstone of the SBIR program, that 
it has been so highly competitive over the years. I think the 
numbers are roughly one in eight, on average, that is proposals 
accepted for award. That is very competitive.
    Only the highest-quality proposals are funded, and there 
are many high-quality proposals that go unfunded. So I think it 
is really essential to keep that element in the program.
    I think there has been a lot of discussion about mentoring 
and outreach today. The whole purpose of that, as I see it, is 
to try to level the playing field a bit for those who have some 
barriers not present elsewhere so that they, too, can have an 
equal shot at this competitive process.
    Mr. Rick Hill. With respect to mentoring, do you have some 
specific recommendation there that we might do in the 
reauthorization process to urge that along or do you have----
    Mr. Busch. Well, I think the program, Congressman Hill, 
that you, along with Senator Burns, helped push through last 
year as part of the SBA authorization bill that I referred to 
earlier, and that Dan Hill is now implementing at SBA is just 
an excellent model.
    Mr. Rick Hill. That is enough? I said, is that enough? That 
is enough? No. That is a question.
    Mr. Busch. I think it is a very good program. It is very 
lean, if you talk to the State folks who are very anxious to 
compete if the program. I do think the funds need to be 
increased.
    I want to emphasize that that program should stay 
competitive. Too many programs have gone noncompetitive, and 
their effectiveness goes down with it. So I think that program 
should be very effective.
    As I mentioned, the agencies have to be key partners in 
this outreach process. So that led to my recommendation that 
consideration for resources be provided to them that they can 
join with the States in this outreach activity.
    Some of the earlier witnesses suggested that the agency 
should have primary responsibility for outreach. While I think 
they are a key element, I think it would be a mistake not to 
have the States take the lead in the SBIR outreach and buy into 
it through a match requirement as is implemented in the current 
SBA SBIR outreach program. The States have to want this, and 
they have to pull this outreach wagon. Pushing it from the 
Federal side alone, I am convinced, will not work.
    Mr. Rick Hill. Mr. Hill, do the agencies just meet or do 
they currently exceed the targeted levels, the percentage 
targeted levels?
    Mr. Daniel Hill. Let me preface this, when the SBIR program 
was created in 1982, Senator Rudman in the report language 
urged the agencies not to work to the rule. In other words, 
when the percentage was enacted back then it was very low and 
when it is increased, his fear was that research and 
development work that had already gone on in small business 
would then decline and they would only do up to the mark set 
under the SBIR program. And, in fact, that is what has 
happened. They do work to the mark, and they do make their 
intended budget marks as far as they report it to us.
    There is an ongoing debate and, as I have reported before 
and the GAO has reported, as the various agencies develop their 
SBIR funding limits or ceilings each year it turns out that 
each agency does it a little differently. We have had many 
concerns about that over the years at the SBA; and we have, 
working with the GAO and with this Committee, tried to resolve 
those issues.
    It is still an outstanding issue. Agencies are still, 
despite our best efforts, calculating their budget in different 
ways and different fashions. We have sent letters to the Chief 
Financial Officers at each agency. We have asked for guidance 
from the GAO and the committees. But this is still an 
outstanding issue.
    Mr. Rick Hill. Is that something we ought to address in 
reauthorization here in the Congress?
    Mr. Daniel Hill.  I am not sure it needs to be addressed by 
legislation, although it is beginning to appear that way. We 
have been struggling with this for a number of years now. And 
we want you to know, clearly, we don't want more money than we 
are supposed to have. I mean, we clearly would love to have 25 
percent, not 2.5 percent. But, clearly, there needs to be a 
level playing field across the agency lines.
    Mr. Rick Hill.  And does that also make the argument for 
that Congress should perhaps consider increasing that 
percentage?
    Mr. Daniel Hill.  At this point, I am not in a position 
representing the administration to urge you to do that. But 
there are a lot of considerations that would fall into that 
thinking, yes.
    Mr. Rick Hill.  The other recommendations--increasing the 
level for Phase I, do you think that--do you agree with the 
recommendations?
    Mr. Daniel Hill.  Well, I would like to study that.
    Currently, the agencies have the ability to do that on a 
case-by-case basis. I am aware of only one agency that is 
currently doing that. I would be interested in looking at that. 
I agree with Chris and what we heard on the earlier panel. The 
program ain't broke. Let's not try and fix it.
    There are a number of authorities vested in the SBA through 
the issuance of our policy directives that gives me the 
latitude to investigate and rule on issues such as this, and I 
have favorably reviewed and approved requests to exceed the 
limits. I have also reviewed favorably requests when you are 
doing a Phase I at one agency; you don't need to repeat it at a 
different agency to stay in the program.
    So my view right now is, although I have heard today from 
the witnesses, there is not a clamor or demand out there that 
has come to me on this. I am certainly willing to look at it if 
demand seems to rise. But, currently, we are handling it on a 
case-by-case basis; and, in most cases, I am approving those 
requests.
    Mr. Rick Hill. Thank you very much,
    Mr. Hill.
    I have some more questions, but I guess we have to go to 
the floor. Is that correct?
    Chairman Bartlett. We will have to go to the floor in a few 
minutes, and when we run out of time here we may submit 
additional questions to you to be answered for the record for 
both panels.
    You mentioned Dr. Busch, that more funding was needed. Is 
that just for the outreach rather than the whole program?
    Mr. Busch. Yes, that is what I intended to convey.
    Chairman Bartlett. It is more funds for outreach.
    You also mentioned something--I noted in your prepared 
testimony and you also mentioned it in your oral testimony--
that we needed to have some uniformity in calculating 
extramural budgets. Do you think that some of the agencies are 
using calculations that underestimate the amount of monies that 
this 2.5 percent are applied to?
    Mr. Busch. I think it is quite generally accepted that many 
agencies would like to reduce the SBIR set-aside if there was a 
way to do so. And I think--I don't have any hard evidence, but 
I believe it is true that there are some actions which had the 
net result of reducing the SBIR's set-aside in some agencies.
    Chairman Bartlett. Is there something that we need to do in 
reauthorization that would assure uniformity in computing the 
extramural budgets?
    Mr. Busch. I am really not qualified to give an intelligent 
answer to that, Mr. Chairman. The April, 1998, GAO report spoke 
to this issue; and Dan Hill is much more on top of that than I 
am. I would defer to Mr. Hill.
    Chairman Bartlett. But if legislatively there is something 
we could do there, it is probably something we ought to look 
at, in your view.
    Mr. Busch. If that is required, I would very much like to 
see it.
    Chairman Bartlett. Mr. Hill is shaking his head in assent, 
also. So that is one thing we will ask the staff to look at in 
potential changes in reauthorization.
    Mr. Hill, you mentioned research goals, companies' research 
goals. Are you talking about basic research or are you talking 
about the research in R&D?
    Mr. Daniel Hill. For small businesses, most of the work is 
in applied R&D, not in basic research.
    Chairman Bartlett. So the research you are referring to is 
the research in R&D.
    As you know, our country, as a major industrialized 
country, commits a smaller percentage of its GDP to basic 
research and to R&D than any of our economic competitors. This 
ultimately will be very hurtful in terms of economic 
competitiveness. If you don't do the basic research, you don't 
have the R&D. If you don't have the R&D, you don't have the 
products. My question is, could we help in a small way to 
correct this deficiency in our country by increasing this 
percentage from 2.5? Because I think, almost by definition, all 
of this money is going for R&D, is that not correct?
    Mr. Daniel Hill. There is a limit in the authorizing 
legislation on the amount of basic research that may be 
performed by small businesses under the SBIR, and we are not 
allowed to exceed that limit. But certainly a rising tide would 
raise all boats.
    I would like for the record to say that the SBA--in years 
past, there has been this huge debate: Do we fund universities 
more? Do we fund small businesses more? Do we fund big 
businesses more? Our view at the SBA is that basic research and 
R&D research is so important and critical to the economic 
development and sustained growth that we ought to be looking at 
all of them. And instead of arguing over who gets what piece of 
the pie we feel very strongly that pie needs to be bigger. I 
couldn't agree with you more.
    Chairman Bartlett. Essentially all of the money in the SBIR 
program would go under the heading of R&D.
    Mr. Daniel Hill. No. There is a small percentage of it that 
is allowed for basic research.
    Chairman Bartlett. Okay. But it all goes for basic research 
and R&D, but most of it R&D.
    Mr. Daniel Hill. Yes.
    Chairman Bartlett. So if we were to increase the 
percentage, that would then put more money in research and R&D, 
which we really need to do. Because I think you understand and 
most of the people in this area understand that, unless we do 
that, we will have increasing future problems in economic 
competitiveness. Ultimately, it becomes a national security 
issue. Because unless we are doing more basic research and more 
R&D, we will not continue to have the world's foremost 
military. So there are lots of reasons to put more money in 
this area.
    Mr. Daniel Hill. Yes, sir.
    Chairman Bartlett. Mr. Hill, have you additional questions?
    I want to thank both panels very much for your 
contribution; and the Committee will be in adjournment.
    [Whereupon, at 12:15 p.m., the Subcommittee was adjourned.]

                                APPENDIX

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