Federal Research: The Small Business Technology Transfer Program
(Testimony, 05/22/97, GAO/T-RCED-97-157).

GAO discussed its review of the first-year implementation of the Small
Business Technology Transfer (STTR) Pilot Program.

GAO noted that: (1) federal agencies rated the quality and commercial
potential of STTR research proposals favorably in the first year of the
program; (2) technical experts generally concluded that the proposals
called for high-quality research; (3) as one example, the Department of
Energy rated the quality of the proposed research in all of its winning
proposals as being among the top 10 percent of the research in the
Department; (4) at the time, however, the technical experts were
somewhat cautious about the commercial potential; (5) the five agencies
participating in the program have taken steps to avoid the potential
conflicts that might arise if a federally funded research and
development (R&D) center formed a partnership with a company submitting
a STTR proposal and then helped a federal agency judge the merits of its
own and other proposals; (6) for example, the Department of Defense
approved only two R&D centers as research partners and planned to
evaluate future proposals on a case-by-case basis to ensure that
conflicts of interest would not occur; (7) agency officials expressed
differing views on the effect of and need for the STTR Program; (8) the
agencies provided no evidence in the first year of the program to
suggest that it was competing for quality proposals with the Small
Business Innovation Research (SBIR) Program or reducing the quality of
agency R&D in general; (9) some officials noted potentially beneficial
effects, such as greater collaboration between small businesses and
research institutions in the SBIR Program; (10) the similarity of the
two programs, however, raises three questions about the need for the
pilot program: (a) is the technology originating primarily in the
research institution as envisioned in the rationale for the program or
is it originating in the small business? (b) is the mandatory
collaboration between small business and the research institution
effective in transferring the technology to the market place? and (c)
can the SBIR Program accomplish the same objective without the
collaboration required by the STTR Program?

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-97-157
     TITLE:  Federal Research: The Small Business Technology Transfer 
             Program
      DATE:  05/22/97
   SUBJECT:  Small business assistance
             Technology transfer
             Research and development
             Conflict of interest
             Non-profit organizations
             Research and development facilities
             Research programs
             Research grants
             Technical proposal evaluation
IDENTIFIER:  Small Business Innovation Research Program
             Small Business Technology Transfer Pilot Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Government Programs and
Oversight, Committee on Small Business,
House of Representatives

For Release
on Delivery
Expected at
10:30 a.m.  EDT
Thursday
May 22, 1997

FEDERAL RESEARCH - THE SMALL
BUSINESS
TECHNOLOGY TRANSFER PROGRAM

Statement by Susan D.  Kladiva
Acting Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-157

GAO/RCED-97-157T


(141047)


Abbreviations
=============================================================== ABBREV

  STTR -
  SBIR -
  R&D -
  DOE -
  DOD -
  NASA -
  NSF -
  SBA -
  NIH -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss our review of the
first-year implementation of the Small Business Technology Transfer
(STTR) Pilot Program.\1 The Small Business Research and Development
Enhancement Act of 1992 established the program and authorized it for
3 years, beginning in fiscal year 1994.\2 In the same 1992
legislation, the Congress also reauthorized the Small Business
Innovation Research (SBIR) Program, which served as the model for the
STTR Program.  The two programs share similar goals, which emphasize
the benefits of technological innovation and the ability of small
businesses to transform the results of research and development (R&D)
into new products.  The STTR Program differs from SBIR primarily in
requiring a company to form a partnership with a nonprofit research
institution.  Our report in January 1996 on the STTR program
discussed the (1) quality and commercial potential of research
proposals, (2) steps taken to avoid the conflict of interest that
would arise if a party both submitted and evaluated STTR proposals,
and (3) effect of and need for the STTR Program.  While we have not
updated our work since 1996, our report provided a concise picture of
basic issues about the program. 

Our statement highlights the message of our 1996 report.  In summary,
Mr.  Chairman: 

  Federal agencies rated the quality and commercial potential of STTR
     research proposals favorably in the first year of the program. 
     Technical experts generally concluded that the proposals called
     for high-quality research.  As one example, the Department of
     Energy (DOE) rated the quality of the proposed research in all
     of its winning proposals as being among the top 10 percent of
     the research in the Department.  At the time, however, the
     technical experts were somewhat cautious about the commercial
     potential. 

  The five agencies participating in the program have taken steps to
     avoid the potential conflicts that might arise if a federally
     funded R&D center formed a partnership with a company submitting
     an STTR proposal and then helped a federal agency judge the
     merits of its own and other proposals.  For example, the
     Department of Defense (DOD) approved only two R&D centers as
     research partners and planned to evaluate future proposals on a
     case-by-case basis to ensure that conflicts of interest would
     not occur. 

  Agency officials expressed differing views on the effect of and
     need for the STTR Program.  The agencies provided no evidence in
     the first year of the program to suggest that it was competing
     for quality proposals with the SBIR Program or reducing the
     quality of agency R&D in general.  Some officials noted
     potentially beneficial effects, such as greater collaboration
     between small businesses and research institutions in the SBIR
     Program.  The similarity of the two programs, however, raises
     three questions about the need for the pilot program:  (1) Is
     the technology originating primarily in the research institution
     as envisioned in the rationale for the program or is it
     originating in the small business?  (2) Is the mandatory
     collaboration between the small business and the research
     institution effective in transferring the technology to the
     market place?  (3) Can the SBIR Program accomplish the same
     objective without the collaboration required by the STTR
     Program? 


--------------------
\1 Federal Research:  Preliminary Information on the Small Business
Technology Transfer Program (GAO/RCED-96-19, Jan.  24, 1996). 

\2 The program was subsequently extended through fiscal year 1997. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The objectives of the STTR Program are to (1) stimulate technological
innovation, (2) use small businesses to meet federal R&D needs, and
(3) increase the private sector's commercialization of innovations
derived from federal R&D. 

Five agencies participate in the STTR Program, including DOD, DOE,
the Department of Health and Human Services' National Institutes of
Health (NIH), the National Aeronautics and Space Administration
(NASA), and the National Science Foundation (NSF).  Each agency
manages its own program, while the Small Business Administration
(SBA) plays a central administrative role, issuing policy directives
and annual reports for the program. 

The legislation authorized each agency having an external R&D budget
in excess of $1 billion to set aside not less than 0.05 percent of
that budget for the STTR Program in fiscal year 1994, not less than
0.1 percent in fiscal year 1995, and not less than 0.15 percent in
fiscal year 1996.\3 In the STTR Program's first year, the agencies
expended about $19 million.  Subsequent to our report, they expended
about $34 million in fiscal year 1995 and $57 million in fiscal year
1996 for a cumulative total of about $110 million in the first 3
years of the program. 

The law established a three-phase structure for the program.  The
STTR Program provides funding for phase-I and phase-II awards.  Work
in phase I is intended to determine the scientific, technical, and
commercial merit and feasibility of ideas; the work is generally not
to exceed 1 year.  Work in phase II further develops the proposed
ideas and is generally not to exceed 2 years.  The statute generally
limits the size of awards in phases I and II to $100,000 and
$500,000, respectively.  In its first 3 years, the program made 674
phase-I and 110 phase-II awards.  A third phase for STTR projects,
where appropriate, involves the continuation or commercial
application of the R&D.  Unlike phases I and II, phase III has no
general time limits.  Phase III cannot receive STTR funds, but it can
receive federal non-STTR and private-sector funds. 

The STTR Program is closely modeled on the SBIR Program, which was
established in 1982.  The two programs share similar goals and other
basic features, including participation by many of the same agencies,
the use of a percentage of the external budget for funding, and a
three-phase approach. 

However, the two programs differ in one important respect.  In order
to be eligible for an STTR award, a small business must collaborate
with a nonprofit research institution, such as a university, a
federally funded R&D center, or other entity.  This collaboration is
permitted under the SBIR Program but is not mandatory.  This special
STTR requirement, according to a 1992 report,\4 was to provide a more
effective mechanism for transferring new knowledge from research
institutions to industry.  In its first 3 years, the program has made
613 awards involving universities, 112 involving federally funded R&D
centers, and 69 awards involving other nonprofit R&D institutions. 

The Congress has expressed concern about the potential conflicts of
interest resulting from the role of R&D centers in the program.  For
example, a conflict might arise if a center and a small business
submitted an STTR proposal as partners, and at the same time, the
center helped the agency judge its own and other proposals.  As a
result, the Congress required agencies to take steps to avoid these
potential conflicts of interest. 


--------------------
\3 The percentage remained at 0.15 when the program was extended
through fiscal year 1997. 

\4 H.R.  Rep.  No.  554, 102nd Cong., 2nd Sess., pt.  1 (1992).  The
report accompanied H.R.  4400, a predecessor to the bill (S.  2941)
that was enacted. 


   QUALITY RESEARCH PROPOSALS
   CHARACTERIZED THE STTR PROGRAM
---------------------------------------------------------- Chapter 0:2

The agencies' technical evaluations of STTR proposals, which served
as the basis for the selection of the winning proposals, showed
favorable views of the quality of proposed research.  Evaluations of
the commercial potential were also favorable but occasionally
expressed concern about the cost of products and other potential
problems. 

We reviewed all of the evaluations for each of the 206 winning STTR
proposals in fiscal year 1994, the first year in which awards were
made.  The evaluations characterized the research as among the top 10
percent of research in certain agencies and as "cutting edge." Many
proposals were awarded perfect scores.  Generally, the agencies found
the quality of proposed research to be excellent.  For example, DOE
rated the quality of research in all of its winning proposals as
being among the top 10 percent of all research in the agency.  Of the
48 winning proposals in NIH, 14 were judged outstanding, 31
excellent, 2 very good, and only 1 good.  There were none in NIH's
"acceptable" (or lowest fundable) category.  In general, DOD rated
its 105 winning proposals highly.  Of NASA's 21 winning proposals, 11
were considered above average, and 8 were judged as being among the
top 10 percent of all NASA proposals for comparable R&D.  NSF
considered the quality of research for its winning proposals to be
excellent. 

As part of our review of the quality of STTR research proposals, we
also examined the technical evaluations of their commercial
potential.  These evaluations were generally favorable but somewhat
cautious in view of the newness of the program and the innovation or
risk associated with many of the proposed projects.  In addition, in
some cases there were concerns about the cost of the product that
might result or the limited size of its potential market. 


   AGENCIES HAVE TAKEN STEPS TO
   AVOID POTENTIAL CONFLICTS OF
   INTEREST IN THE STTR PROGRAM
---------------------------------------------------------- Chapter 0:3

In our report, we found that the five federal agencies with STTR
programs have taken steps to avoid potential problems relating to
conflict of interest with federally funded R&D centers.  Such
conflicts could occur if a center formed a partnership with a company
submitting an STTR proposal and then helped a federal agency judge
the merits of its own and other proposals.  DOD, DOE, and NIH have
specific policies intended to prevent such conflicts, while NASA and
NSF have more general procedures to avoid them.  Under DOD's policy,
for example, only two R&D centers were approved as research partners
for its STTR awardees.  In fact, the Air Force had to rescind some
awards because the proposed research partners (certain DOD
laboratories) were ineligible to participate.  According to the
director of DOD's STTR Program, future proposals will be evaluated on
a case-by-case basis to ensure that conflicts of interest do not
occur. 

DOD and DOE, which accounted for 29 of the 32 awards involving
centers during the first year of the program, have also taken steps
to prevent centers from using privileged information in preparing
STTR proposals.  For example, DOE's policy prohibits agency staff
members from requesting or receiving assistance from personnel in
research institutions that are eligible to participate in the STTR
Program when preparing technical topics for the STTR solicitation. 
This policy is intended to prevent research institutions from using
their expertise to influence DOE's choice of STTR research topics. 
Otherwise, research institutions could acquire a significant
advantage by designing topics to match their expertise and then
preparing a proposal in the same area. 


   VIEWS DIFFERED ON THE EFFECT OF
   AND NEED FOR THE STTR PROGRAM
---------------------------------------------------------- Chapter 0:4

Agency officials expressed differing views on the effect of STTR on
SBIR and other agency R&D.  For example, SBA officials contended that
STTR was too small and too new a program to have any real effect on
SBIR or on the broader range of agency research at the time of our
report.  The officials pointed out that the program represented only
0.05 percent of each agency's external R&D budget during its first
year and that it was only 1 year old. 

In contrast to the view that STTR's effect was very limited, the
manager of Army's STTR Program said that STTR was influencing SBIR in
a beneficial way.  In his opinion, STTR is becoming known through
national conferences and other means.  Furthermore, small businesses
are realizing that they have more credibility and chance of winning
an award by collaborating with a university or other research
institution.  He believes that the STTR Program has also led to more
collaboration in SBIR.  In general, according to the program manager,
STTR is a promising program that may be as successful as the SBIR
Program. 

The similarity of the two programs, however, raises a broader issue
about the need for the STTR Program.  In the 1992 House report, the
Committee on Small Business provided two basic arguments in favor of
the program.  First, the report stated that the program addresses a
core problem in U.S.  economic competitiveness:  the inability to
translate its worldwide leadership in science and engineering into
technology and commercial applications that benefit the economy. 
Second, the report stated that, although SBIR has turned out to be
remarkably effective at commercializing ideas in the small business
community, it is less effective at fostering the commercialization of
ideas that originate in universities, federal laboratories, and
nonprofit research institutions. 

The rationale for the program, which points to certain weaknesses in
SBIR and potential strengths in STTR, suggests three questions that
are relevant in evaluating the need for STTR. 

First, is the technology originating primarily in the research
institution as envisioned in the rationale for the program or is it
originating in the small business?  The technology may originate with
the research institution, the small business, or a combination of the
two.  In the STTR Program, the assumption is that the research
institution will be the primary originator of the new concept. 
However, data to determine the extent to which research institutions
are providing the technologies were not available.  Neither SBA nor
the agencies had collected this information.  The relative roles of
the research institution and the small business as the source of the
technology bear directly on the need for the STTR Program.  If a high
percentage of the ideas are originating with small businesses rather
than with research institutions, this finding would raise questions
about the need for the program.  On the other hand, if a high
percentage of ideas are originating with research institutions, this
finding would suggest that the program was achieving the first step
in moving ideas from research institutions to small businesses. 

Second, if the program is effective in moving ideas from research
institutions to small businesses, then the next logical question is
whether their collaboration is effective in moving the ideas to the
marketplace.  This question can be approached from two directions: 
(1) short-term views of how well the collaboration is working in
general and (2) long-term data on actual commercialization. 
Information on how well the collaboration was working was not
available at the time of our report but could now be developed with
the additional years of program experience.  Information on actual
commercial outcomes will require a greater amount of time before it
can be obtained.  Generally, 5 to 9 years are needed to turn an
initial concept into a marketable product. 

Third, because one important difference between the two programs is
that the STTR Program makes a small business/research institution
collaboration mandatory, the question arises whether the SBIR Program
could accomplish the objective of transferring technology from
research institutions to the private sector without mandatory
collaboration.  The rationale for the STTR Program tends to assume
that such collaborations were relatively rare in the SBIR Program. 
However, NIH's Program manager told us that, in an SBIR survey
undertaken by NIH several years ago, collaboration between small
businesses and universities was already evident in well over half of
NIH's SBIR projects.  By contrast, the manager of Army's program
believed that STTR's impact will be greater in the Army than in
agencies such as NIH because the Army has had a lesser degree of
involvement with universities and other research institutions in the
past.  Given the apparent variation from one agency to another and
the lack of current data, no definite conclusion can be drawn at
present concerning the need for STTR in forging new collaborations. 


-------------------------------------------------------- Chapter 0:4.1

In summary, the quality of the STTR Program appeared favorable at the
time of our report, although it was too early to make a conclusive
judgment about the commercial potential of the research.  In
addition, the agencies took steps to address potential conflicts of
interest.  Overall, the indicators relating to STTR in its first year
provided evidence of a potentially promising program.  However, at
the time of our report, we could not determine whether the program
was meeting a unique need or duplicating the accomplishments of the
SBIR Program.  Several key questions relating to the transfer of
technology from research institutions to the marketplace are relevant
in determining the need for the STTR Program. 

Mr.  Chairman, this concludes our statement.  I would be happy to
respond to any questions you or the members of the Subcommittee may
have. 

*** End of document. ***