The U.S. government’s research and development efforts should promote small experiments because if they fail, we learn something; and when they succeed, we can build on that success. Likewise, Congress needs to act now to keep one of the smallest and most successful R&D programs from disappearing Sept. 30 to ensure continued progress and access to critical industries and technologies.
The Small Business Innovation Research program, or SBIR — perhaps the preeminent research and development program in the federal government — makes modest R&D grants to small businesses. This approach has delivered results. For example, a 2019 Defense Department study found SBIR delivered a 22-to-1 return on investment, $28 billion in sales to the military and $347 billion in economic impact over 23 years. And 16% of new drugs that made a significant advance over available medicines came from SBIR awards by the National Institutes of Health.
There are two reasons given for Congress’ failure to reauthorize the 40-year-old program: national security and so-called SBIR mills.
Given that the Defense Department documented cases when foreign governments used SBIR status to target investments in critical technologies, Congress and the relevant agencies should revisit the application of Committee on Foreign Investment in the United States reviews to investment in these firms.
However, when it comes to SBIR mills — companies that repeatedly win early-stage grants — we should proceed with caution. With $3.9 billion in 2022 R&D awarded through the SBIR program, Congress and agencies need to ensure taxpayer dollars are protected. However, the frequency with which a small business participates in the program is not itself a reliable metric for gauging abuse of the program.
Current Senate proposals restrict eligibility based on the ratio of federal contract dollars to SBIR grant dollars over the life of the firm, or the ratio of gross revenue to SBIR grants over a five-year period. If enacted, the DoD estimates between 47% and 95% of current SBIR participants would be excluded from the program, including companies successfully received prime contracts based on their SBIR work.
The Defense Department opposes these proposals and cautions that the delay in reauthorization “will cause irreparable harm to the small business community and have an adverse impact on national security.” It also means agencies will no longer be able to make awards they deem in the best interest of the government. They will need to forgo follow-up research projects or other proposals they deem to be for the best R&D in order to make awards to new companies.
Proponents of these restrictions point to a 2014 Air Force study for the proposition that “the more SBIR … awards companies received, the less likely they were to successfully commercialize their products.” However, the study demonstrated that companies with 100 awards averaged commercialization returns of about $2 million per award, or roughly $200 million. Companies with one to four awards averaged returns of about $10 million per award, or $10-40 million.
While the latter group had higher returns per contract, the ultimate benefit from the former is substantially higher. While many of the individual Phase II awards were unsuccessful, the R&D ultimately delivered successful results.
The 2019 Defense Department study found over 23 years that 58% of Phase II awards resulted in contracts with sales, meaning 42% did not. The important question is: What was learned from those failures?
Rather than trying to legislate a formula for how many times modern day inventors are allowed to fail, Congress should make it easier to fund the most meritorious R&D proposals. It can do so in two ways. First, Congress should encourage agencies to share the outcomes from past awards to promote collaboration and create a common foundation for future R&D. Currently, the SBIR.gov database only provides information on R&D proposals rather than outcomes; information on results is poorly documented and rarely shared, to the detriment of overall innovation.
Second, to promote new entrants to the R&D space, Congress should increase the use of open topics for early-stage SBIR awards. Rather than asking applicants how to solve a specific problem, open topics ask what R&D could benefit a particular agency or program. While conventional SBIR topics attract firms with expertise in grant-writing as well as R&D, open topics are more likely to attract smaller companies that have never participated in government contracting. By encouraging the use of open topics, Congress would mitigate the advantage of companies that prioritize grant-writing expertise over substantive R&D.
Notably, the Defense Department has announced that unless Congress acts, it will no longer be able to purchase the successful technologies that came out of the SBIR program without issuing new contracts. In a race for global technological superiority, this is time and money the department can ill-afford to lose. It will also dissuade contracting officers and businesses from relying on the program.
SBIR awards should be based on merit and promote national security, transparency and innovation. A formula attempting to quantify how many times a business may iterate its innovation to achieve success is dangerous because it takes away the ability of an agency to judge whether sufficient progress is being made. Congress should reauthorize the program now.
Emily Murphy is a senior fellow with the Center for Government Contracting at George Mason University. She most recently served as administrator for the U.S. General Services Administration.
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