United States General Accounting Office

GAO Testimony

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

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.

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.

Page 1 GAO/T-RCED-97-157
• 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?

Background 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

3

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

Page 2 GAO/T-RCED-97-157
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.

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.

Page 3 GAO/T-RCED-97-157
Quality Research

Proposals

Characterized the

STTR Program

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

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

Page 4 GAO/T-RCED-97-157
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

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

Page 5 GAO/T-RCED-97-157
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

Page 6 GAO/T-RCED-97-157
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.

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.

(141047) Page 7 GAO/T-RCED-97-157
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