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Best Practices in Small-Business Technology Development Programs Helmut List Chairman Industrial Research and Development Advisory Council, Austria Dr. List opened the session by observing that technology development for small businesses is an important topic for both the United States and Europe. Deploying technology in small businesses is a highly effective way to enhance innovation, create jobs, and spur business growth. The Industrial Research and Development Advisory Council has been promoting ways to make the Fifth Framework Programme more accessible to small and medium enterprises (SMEs) TO in Europe. Recalling Ambassador Hugo Paemen's earlier comment that what fits for small business development on one side of the Atlantic may not fit on the other, Dr. List expressed the hope that this session would allow both sides to learn from one another. He stressed, however, that we should do more than compare notes on our respective experiences. We should begin the process of making transatlan- tic cooperation work for SMEs on both sides of the Atlantic. In the area of high-technology start-up companies, Dr. List said that the United States is the model for the world. Europe is trying to create an environ- ment in which small-business start-ups can thrive, and it hopes to draw lessons from the United States. A key feature of the U.S. environment is the availability of venture capital. Having capital available early in the innovation process is critical for SMEs. Although Europe has lagged the United States in developing a vibrant venture capital industry, Dr. List believes it is now making strides in this area. In broader terms, Dr. List said that there are two reasons for the growing importance of small businesses in the economy: The original equipment manufacturing (OEM) industry has been restruc 62

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 63 lured. OEMs are turning to smaller companies, with entire systems or subsystems being contracted out to small firms. . Technology and the shortening of product cycles have caused rapid changes in the market. These changes create opportunities for small firms, which can move more quickly than larger ones. Dr. List concluded that Europe and the United States must create stronger links between small businesses, universities, and government labs. Such a multidisciplinary approach could truly open new doors for small businesses. INDUSTRY-LABORATORY COOPERATION: THE AMTEX EXPERIMENT Jerry Cogan Millikan Research Dr. Cogan began his comments by describing a conference that the national laboratories held in 1992 that brought together industries that the labs had not dealt with in the past. The textile industry participated in the conference, although many people in the textile industry and the national labs wondered whether they could develop a meaningful relationship with the labs. The textile industry was largely unaware of the specific capabilities of the labs, other than knowing that U.S. national laboratories held a tremendous store of technology. At the confer- ence lab officials asked representatives from the textile industry to consider ways in which the textile industry and labs could become partners. Issues in Industry-Laboratory Partnerships A key question that laboratory officials posed to representatives from the textile industry was: How important is your industry to the overall economy? Dr. Cogan presented figures showing the size of the textile industry relative to the entire manufacturing sector. Although a very disaggregated industry, with ap- proximately 25,000 separate companies, the textile industry in 1992 had 9 per- cent, or 1.7 million, of all manufacturing jobs in the United States. The industry was, however, losing jobs and market share; from 1992 to 1996 the number of jobs in the textile industry fell from 1.7 million to 1.2 million. The industry was also losing market share to foreign producers. A second question raised was whether the U.S. textile industry could make effective use of laboratory technology. The answer was strongly affirmative. Dr. Cogan observed that heavy use of technology in the textile industry would come as no surprise to Europeans, because the European textile industry is very tech- nology intensive. From the U.S. perspective, when an industry is struggling to survive, as textiles have been, modernization is the strategy to undertake. The

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64 NEW VISTAS IN T^NSAT~IC SCIENCE AND TECHNOLOGY COOPERATION textile industry's efforts to modernize are reflected in investment data; the industry's capital investment is higher than that of other manufacturing industries and has been, on average, for the past 10 years. In short, the textile industry and the laboratories quickly realized, said Dr. Cogan, that lab-textile industry partnerships could be a "real win-win." Because the textile industry is so diffuse 25,000 separate firms it was necessary to find a way to organize a lab-industry partnership in a way to involve the entire indus- try. Fortunately, the industry was already organized for research when the lab partnership opportunity presented itself, with collaborative efforts under way at a number of universities. The industry had also organized a National Textile Center to conduct research. As a result of these initial contacts, the American Textile (AMTEX) Partner- ship was launched through a cooperative research and development agreement (CRADA) with the national laboratories. The CRADA covered a number of projects at the following national laboratories: Argonne, Brookhaven, Idaho, Lawrence Berkeley, Lawrence Livermore, Los Alamos, Oak Ridge, Pacific Northwest, Princeton, and Sandia. The Demand-Activated Manufacturing Architecture Project: Reducing Waste As an example of one lab-industry project under AMTEX, Dr. Cogan de- scribed the Demand-Activated Manufacturing Architecture (DAMA) project. DAMA is important to industry because it addresses waste. The waste of materi- als used in textile production represents a $45 billion problem annually for the industry; this amounts to 25 percent of U.S. retail apparel sales. DAMA's objec- tive is to reduce waste by using tools of electronic commerce to better manage inventory and advanced software and computers to reduce the time to market. In concluding Dr. Cogan listed several elements of the lab-industry partner- ship in textiles that he suggested may serve as lessons for other partnerships: involve all of the industry; have industry develop technology roadmaps; focus on precompetitive technologies (i.e., manufacturing process technologies and sys- tems); make sure that the partnership contributes to the core missions of the pub- lic partner; define the benefits for partners at the outset, including intellectual property rights; and capitalize on existing government resources so that govern- ment does not expand existing staff or facilities. LABORATORY PARTNERSHIPS WITH INDUSTRY Dan Hartley Sandia National Laboratories Dr. Hartley said that his remarks would focus on why the national laborato

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 65 ries seek partnerships with industry, what gives the labs the legal right to do so, and why the labs think it is important to have close ties with industry. Although the AMTEX partnership is important, he wished to address these broader issues. Increasing Cooperation with Industry Dr. Hartley characterized his job at Sandia as one of looking to the future of the lab, which in effect means increasing collaboration with industry. Looking at Sandia's mission historically, he noted that for 50 years its major mission has been to develop nuclear weapons for the Department of Defense (DOD). Starting in the 1970s, Sandia began to undertake other weapons missions for DOD; in the 1980s it turned to energy-related work for the U.S. Department of Energy (DOE). More recently it has focused on critical infrastructure issues and worked with other countries on handling nuclear materials. From the mid-1980s to the present, Sandia has been working more closely with private industry. Sandia's Core Mission In describing Sandia's traditional mission more fully, Dr. Hartley said that a typical nuclear missile contains about 6,000 parts. Sandia makes approximately 5,500 of those parts essentially everything but the nuclear components of a weapon. Livermore and Los Alamos labs make the nuclear devices for weaponry. Sandia's role in making over 5,000 parts gives the lab the same expertise as any large manufacturing firm, whether it is in consumer electronics or auto manufac- turing. The Push Toward Computer Simulation Changes in the law have led Sandia to rely more heavily on computer simu- lation in recent years. At one time the U.S. government could test a weapon by underground explosions in Nevada. That is now prohibited, so Sandia must turn to computer simulation to test weapons. This is known as Science-Based Stock- pile Stewardship and is a program managed by DOE. Sandia has also expanded into antiterrorism because the nature of worldwide threats has changed. Sandia makes a highly sensitive explosives detector that is used in airports. Another new component to the Sandia mission is in the disposi- tion of nuclear waste. Dr. Hartley said that Sandia designed a salt cavern in south- ern New Mexico in which low-level nuclear waste is stored. Infrastructure With respect to critical infrastructure, Sandia explores the survivability of major systems. As an example Dr. Hartley described Sandia's role in addressing

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66 NEW VISTAS IN T^NSAT~NTIC SCIENCE AND TECHNOLOGY COOPERATION Japan's concern about the construction of a nuclear power plant near a U.S. air base in Japan. The Japanese government was worried about the safety implica- tions of a potential crash of a U.S. plane into the reactor of the power plant. Using computer simulation technology, Sandia was able to assure Japan that a plane could not penetrate the reactor's wall and that a plane crashing into the reactor would be reduced "to powder" rather than cause a nuclear incident. Industry's Role Turning to industry's role in Sandia's mission, Dr. Hartley emphasized that it was crucial that Sandia work with industry. Such a relationship helps the labo- ratory keep abreast of new scientific and technical developments, and the lab shares in the gains, and costs, of collaboration with industry. To capture the rela- tionship, Dr. Hartley recalled a story regarding the Goodyear Tire Company when he was preparing congressional testimony. Dr. Hartley had asked Goodyear for a sentence or two to convey why it thought collaboration with Sandia was worth- while. A Goodyear official responded by saying: "Goodyear may have a job that requires A + B. Sandia may have a job that requires A + C. Why not work to- gether on A?" In sum, Dr. Hartley said that all of Sandia's missions can benefit from work with industry. In addition to lab-industry collaboration aiding Sandia in remaining on the cutting edge technically, Dr. Hartley noted that changes in federal law in recent years have encouraged collaboration. The Bayh-Dole Act, the Stevenson-Wydler Act, and the Federal Technology Transfer Act have all encouraged the national labs to work closely with the private sector. From the perspective of the private sector, Dr. Hartley identified two reasons why he believes industry turned to Sandia and other national labs: a concentration of world-class facilities and a businesslike culture, especially at Sandia. For 45 years Sandia was run by AT&T, and it has been run by Lockheed Martin for the past five years. This has given the lab an appreciation of how to cooperate with industry to carry out its mission. Dr. Hartley then provided an outline of Sandia's world-class facilities: . Microelectronics. Sandia's microelectronics facility houses a number of advanced projects, including one on microelectromechanical systems (MEMS). MEMS are tiny machines whose dimensions are as small as a red blood cell that can bring computing power to new applications. Intel is one of many industry partners working on MEMS at Sandia. Manufacturing. It takes world-class manufacturing capability to build the 5,000 parts that Sandia must make for its weapons mission. Sandia's manufacturing facility can serve as a model for industry. As one example Dr. Hartley pointed to Sandia's computer-aided design technology, which

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 67 enabled users to move from computer design to a three-dimensional struc- ture in one step. Robotics. Sandia has what may be the most modern robotics facility in the world. One project involves small robots that serve as "collective agents" in the battlefield as they look for intruders. Each robot perceives only a portion of the environment, so the robots must communicate with one another to collectively locate the intruder. Dr. Hartley also said that Sandia is working with Lockheed Martin to develop an intelligent robot for paint- ing aircraft that does not inadvertently punch through the aircraft body while painting. Teraf lop computer. This is part of DOE's Advanced Strategic Computing Initiative, and Sandia's teraflop computer, built by Intel, is the fastest computer in the world. The computer simulated the plume of the Shoe- maker comet before it struck Jupiter, and the simulation compared very well to the actual plume captured by the Hubbell telescope. Collaborating with Small Business In closing Dr. Hartley said that Sandia places great priority on engaging SMEs in the lab's activities. Sandia has logged over 1,300 small business "as- sists" and has over 300 CRADA partners. Sandia's CRADA partnerships are located in all regions of the country. Although the laboratory is open to increased cooperation, Dr. Hartley emphasized that Sandia does not engaged in "job shop- ping," that is, entering into partnerships just for the sake of doing so. Sandia believes in the value of partnerships but also that they must be done right and carefully specified ahead of time to be mutually beneficial. THE U.S. EXPERIENCE WITH THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM Joshua Lerner Harvard Business School Dr. Lerner began his remarks by observing that the growth of high-technol- ogy clusters in the United States (e.g., Silicon Valley, Route 128 in Boston) has generated a great deal of interest abroad in how to emulate such technology- driven successes. There is a strong and sensible intuition that high-technology industries are sources of job and income growth, although the precise mecha- nisms through which to foster such growth remain subject to debate. A key ques- tion Dr. Lerner proposed to address in his presentation is the role that public venture capital programs have played in developing clusters of high-technology economic activity in the United States. Dr. Lerner recalled some history of public venture capital efforts in the United

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68 NEW VISTAS IN T^NSAT~IC SCIENCE AND TECHNOLOGY COOPERATION States, noting that U.S. public venture capital programs have historically been sizable. From 1958 to 1969 the Small Business Investment Corporation (SBIC) provided $3 billion to small firms, which was three times the sum provided by private venture capital firms. In 1995 small business financing programs pro- vided $2.4 billion in funding, compared with $3.9 billion provided by private venture capital funds to small businesses. Beyond the size of public venture capi- tal programs, they have been reputed to be important to the early success of well- known companies, such as Apple, Chiron, Compaq, FedEx, and Intel. Moreover, public venture capital programs have served as training grounds for private ven- ture capitalists. Many leading figures in the U.S. venture capital industry were part of the SBIC program of the 1960s. Dr. Lerner noted that countries with vibrant venture capital sectors, such as Israel, Singapore, and Taiwan, each have public venture capital programs as complements. The association between public venture capital programs and private venture capital does not establish causality; it may be a historical accident that public venture capital programs and the development of clusters of high-technology U.S. firms have coincided with one another. However, if it is not a historical accident, it is necessary to explore the mechanisms by which public venture capital pro- grams are translated into innovative behavior in the economy. To address these issues Dr. Lerner proposed to examine the Small Business Innovation Research (SBIR) program. The SBIR program was enacted in 1982 and requires that federal agencies with extramural R&D budgets in excess of $100 million set aside a portion of their budgets for awards to small business. Initially, 1.25 percent of the agencies' R&D budget was to be set aside for SBIR; this figure was increased to 2.5 percent in 1992. For fiscal year 1996 the 2.5 percent set-aside resulted in $1.1 billion in funding for the SBIR program. Dr. Lerner described two theoretical motivations for government assistance to small business: . . R&D spillovers. In generating the know-how that underpins new technol- ogy, knowledge usually flows somewhat freely among a technical or sci- entific community. A firm investing in technology therefore cannot cap- ture all of the knowledge that goes into creating a new product or process. In economists' parlance, such a positive externality is a social good but leads to underinvestment in knowledge by a private firm. Government assistance is thus justified to make up for the underinvestment. Information asymmetries. A high-technology entrepreneur will usually know a great deal more about a technology and its market potential than a banker who may be considering extending a loan to the entrepreneur. A venture capitalist can serve an intermediary function between banker and entrepreneur. In other words, the venture capitalist provides a signal to the banker by investing (or not) in a small high-technology start-up firm. Such certification by a venture capitalist is useful, but venture capitalists fund

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 69 only a small fraction of start-ups. Public venture capital programs can fill this gap and serve as an additional certification mechanism for private capital markets. Even with the theoretical benefits of government assistance, Dr. Lerner raised the issue of potential problems in public venture capital programs. Distortions could exist if public venture capital programs favor certain entrepreneurs who may have well-established channels to policymakers. Officials in public venture capital programs may also give grants to firms destined for success, so that pro- grams are judged positively when they are assessed. Before discussing the results of his study, Dr. Lerner said that it is generally thought that the SBIR program functions well. The dispersed nature of the pro- gram is a virtue. SBIR is spread out among 11 agencies, and grants are usually no more than $750,000, small enough by federal standards to attract little attention. Agencies, moreover, have taken steps to keep political interference to a minimum in allocating awards. However, there have been concerns raised about the pro- gram, and they fall into two categories: Regional distribution. SBIR awards have gone predominantly to areas with a concentration of private venture capital, such as California and Massachusetts. Some believe that there should be a wider geographic dis- tribution of awards. . Clustering of awards by institutions. Some organizations win a large num- ber of awards, suggesting that winning awards has become an end in it- self, as opposed to commercializing new technology. In his study Dr. Lerner examined the long-term impacts of the program, rather than relying solely on anecdotes for evaluation. He looked at 1,435 small firms over a 10-year period, with some firms being SBIR awarders and others being nonawardees with characteristics that were similar to the awarders. The SBIR program itself is very competitive, with about 5 percent of applicants winning grants; although firms with fewer than 500 employees are eligible, awarders tend to be much smaller than that. Dr. Lerner's analysis showed that: . SBIR awarders experienced stronger job growth over time than nonawardees. Employment at SBIR awarders grew by 26 employees on average over the 10-year time horizon of his study versus job growth of 6 employees on average among nonawardees. SBIR awards went to regions with active venture capital sectors, such as California and Massachusetts. The first few SBIR awards have the strongest impact on job growth, with later awards showing little effect.

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70 NEW VISTAS IN T^NSAT~NTIC SCIENCE AND TECHNOLOGY COOPERATION Overall, Dr. Lerner concluded that the SBIR program has had a positive impact on high-technology start-ups that have won SBIR awards. There is room, however, for fine-tuning implementation of the program. With the SBIR program scheduled for congressional reauthorization in 1999, Dr. Lerner said that there would be an opportunity to consider improvements. Comments from the Audience A participant observed that Dr. Lerner had talked about the private return to participation in SBIR by firms but not the government's return. Dr. Lerner was asked to comment on the government's return from the SBIR program. In re- sponse, he acknowledged that his focus on the private return is a limitation of his analysis. There is, however, great difficulty in assessing social returns because it is hard to separate the portion of investment activity that would have occurred in SBIR awarders from the portion that the program induced. Even if a good bit of the investment activity would have taken place without SBIR, Dr. Lerner said that the R&D spillovers generated by SBIR firms would be an additional benefit. Dieter Seltzer, director of the Fraunhofer Institute, in Erlangen-Nurnberg, asked for examples of how SBIR awards work in agencies. Dr. Lerner commented on the tremendous diversity among agency approaches to implementation and SBIR awarders. With respect to implementation, agencies such as DOD and the National Aeronautics and Space Administration use SBIR as a procurement tool for technologies with very specific purposes. Other agencies, while adhering to SBIR's mandate to carry out agency missions, may fund technologies with longer time horizons before payoff. Regarding diversity, Dr. Lerner said that SBIR awards run a wide gamut of technologies, in contrast to venture capitalists, who tend to fund a narrower range of "hot" technologies, such as Internet technologies today. A participant asked whether it was possible to compare the results of SBIR with those of venture capitalists. Although he had not done a systematic compari- son, Dr. Lerner's strong suspicion was that firms funded by venture capitalists perform better than those funded by SBIR. Venture capital-funded firms undergo strict scrutiny, and only a small fraction of companies seeking venture capital receive it. It is important to recognize that the goals of SBIR differ from those of venture capitalists, given SBIR's focus on agency missions. In fact, Dr. Lerner added, there might be a great concern if SBIR focused only on biotechnology firms, as many venture capitalists do today, as opposed to the wide variety of firms that the SBIR funds.

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 71 THE EU EXPERIENCE WITH SMALL- AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT Patrice Laget European Commission Dr. Laget observed that SMEs are important to economic development in Europe and that the European Commission (EC) has tried to focus on what can be done on a community level to increase access to new technologies among SMEs. SMEs are in an increasingly competitive international economic environment but often lack the research and development (R&D) capacity to stay current with the latest technologies. In previewing his remarks Dr. Laget said his focus would be on the EC's program to aid SMEs, the result of a survey of SMEs that participate in EC programs, and how SMEs may be able to benefit from the U.S.-European Union science and technology (S&T) agreement. The EC's program to stimulate technology access for SMEs involves three efforts to support SME R&D activity and access: collaborative research, in which SMEs participate and conduct R&D in a consortium setting using government, university, or private industrial labs (this a share-cost approach by which the EC provides some funding); cooperative research, in which two or more SMEs use EC funds to outsource R&D to a third party; and exploratory research, in which SMEs are given small grants for early- stage R&D. Program Design The EC recognizes that there are different types of SMEs with different needs. Some SMEs are very small start-ups that are developing technology but are far from commercialization. Others are technology followers, which may not innovate but need quick access to cutting-edge technologies. Finally, there are technology users, which integrate new technologies into production processes for their goods or services. Dr. Laget also observed that SMEs usually are oriented to the local level, as opposed to operating across borders. The EC is sensitive to local concerns and tries to focus on how it can have a positive impact on the business environment for SMEs. It is important to have intelligent coordination among localities, the EC, and member states. To meet this goal, the EC, through quarterly meetings, attempts to ensure equal access among all members of the EC to information about programs to aid SMEs. In addition to providing programmatic information, the meetings facilitate communication among SMEs in the various member states.

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72 NEW VISTAS IN T^NSAT~IC SCIENCE AND TECHNOLOGY COOPERATION Rules for SME Programs To take advantage of EC technology programs for SMEs, at least two SMEs from two member states must join together to obtain grants for exploratory re- search (the grants are on the order of $50,0001. For collaborative research two or more SMEs should be prime contractors to conduct R&D. For cooperative R&D at least four SMEs from at least two member states must identify a technology need that is then outsourced to industrial, government, or university labs. SMEs share the cost of research on a 50-50 basis, with the EC matching SME contribu- tions up to $1 million. Large companies can be involved in these programs. Survey Results of SMEs Participating in the Fourth Framework Programme Of SMEs involved in assistance programs for SMEs, 70 percent were first- time participants. In cost-share (cooperative) R&D projects, 50 percent of com- panies are SMEs, whereas the remainder are large business firms. For SMEs receiving exploratory grants, 70 percent reported subsequent success in receiving collaborative research grants based on exploratory work. There has been an increase in the number of SMEs participating in EU re- search programs. From the Third Framework Programme to the Fourth Frame- work Programme, the number of SMEs in collaborative research doubled. There was also a dramatic increase in the number involved with cooperative research. Cooperative research programs are used mainly by newcomers to the EU SME programs; such firms need cutting-edge technologies but do not have the resources to develop technologies themselves. Participants in cooperative R&D programs generally increase their contacts with other SMEs. Dr. Laget identified other lessons from EU work with SMEs. It is rare, for example, for SMEs that have participated in EU cooperative R&D programs to involve themselves with local or regional cooperative R&D programs. Such SMEs seem to prefer working with the KU, and this may indicate an interest in working in the framework of the new U.S.-EU S&T agreement. Furthermore, promoting flows of information with and among SMEs is critical. SMEs report that the pro- cess of obtaining funds from the EU functions well but that there are "internal" barriers to the use of R&D generated in EU programs. In conclusion, Dr. Laget said that with the large number of SME programs in the United States and Europe it would be interesting to compare programs in the remainder of the session.

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 73 DISCUSSANTS Jon Baron U.S. Department of Defense SBIR Program Mr. Baron said that his remarks would focus on the presentation of Dr. Lerner, expand on and clarify some of Dr. Lerner's points, and comment gener- ally on efforts to fund small business development in the United States. Mr. Baron noted that most studies of the SBIR program, whether by academics or the U.S. General Accounting Office, have taken a favorable view of the program. Dr. Lerner's work on the SBIR is regarded as one of the best such studies because it takes a systematic and empirical look at SBIR-funded firms and a comparable set of firms that received no SBIR support. Mr. Baron also expressed the belief that Dr. Lerner approached his study without any bias or preconceptions about the program. Mr. Baron then made several points to supplement the presentation of Dr. Lerner. SBIR Versus Venture Capital Mr. Baron pointed out that SBIR funding differs from traditional venture capital financing because it funds technology feasibility studies; this is a much earlier stage of development activity than a venture capitalist typically funds. Mr. Baron recounted the three phases of the SBIR program funding: Phase I: a six-month feasibility study that explores the likelihood that a technology may pay off; Phase II: an award of up to $750,000 that funds the development of a prototype if Phase I yields promising results; and Phase III: a matching award to Phase II recipients that is conditioned on awarders demonstrating that they have raised funds from the private sec- tor or elsewhere in the government to develop the technology further. Purpose of the SBIR While noting that the broad purpose of the SBIR program is to develop tech- nologies to help meet agency missions, Mr. Baron observed that there are differ- ences across agencies with respect to purpose. Some agencies may place empha- sis on economic development objectives in disbursing SBIR grants. For the DOD, SBIR is seen as a means to improve defense capabilities. As an example, Mr. Baron cited the development of "savvy tag" technology as a way to better track military materials. A Silicon Valley start-up received an SBIR award several years ago to develop a radio transceiver, about the size of a

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74 NEW VISTAS IN T^NSAT~IC SCIENCE AND TECHNOLOGY COOPERATION deck of cards, to track military cargo anywhere in the world. Keeping track of military cargo has traditionally been very difficult, and such difficulties often result in costly waste. During the Persian Gulf War, the U.S. General Accounting Office estimated that such waste cost $2.7 billion. DOD has estimated that savvy tags could have saved $2 billion of that waste. Today, all U.S. shipments to Bosnia use savvy tags, and the tracking of cargo has improved dramatically. Selection Challenges An ongoing challenge to the SBIR program is weighing technological prom- ise against business capabilities. DOD is very good at assessing the scientific merits and technological potential of an idea but is less skilled at scrutinizing business plans and assessing market potential. From internal reviews DOD has found that many companies have excellent R&D capabilities, but their ideas of- ten do not make it to the market because of a lack of business sophistication. Fast Track Program Mr. Baron said that the Fast Track program had been developed to address selection challenges that DOD has faced with SBIR. Under Fast-Track proce- dures, applicants have a greater chance of winning Phase II funding if they have received third-party funding (e.g., from a venture capitalist or other private fi- nancing). Such financing sends a strong signal to DOD that, beyond the technical merits, the SBIR-funded technology has marketplace potential. The Fast Track program has brought a new set of companies into the SBIR program, and Mr. Baron noted the National Research Council is working on a study assessing the program. Attilio Stajano DGIII, European Commission Mr. Stajano opened his remarks by complementing Dr. Laget's presentation and reiterating the importance of integrating SMEs into the EU's R&D Frame- work Programme. He noted that in the Fourth Framework Programme, about one-third of all research funds went to SMEs. With respect to communications and information technologies, Mr. Stajano said that the European program to promote information technology, ESPRIT, had fostered over 100,000 person- hours of cross-border R&D since 1983. This has created an environment in which scientists and industrialists, from small and large companies, have been able to develop business solutions using information technologies. Mr. Stajano listed four conditions that are necessary for successful economic relationships between scientists, engineers, and small businesses:

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BEST PRACTICES IN SMALL-BUSINESS TECHNOLOGY DEVELOPMENT PROGRAMS 75 Networks. Creating linkages between scientists and industrialists, as ESPRIT has done, is important. Such networks must be dynamic but long lived enough to produce results. Development of business solutions. It is one thing for cooperative pro- grams to generate scientific breakthroughs, but it is important for such breakthroughs to be translated into products or processes that help build market share for participants. Ties with universities. In citing the "Cambridge University" effect, Mr. Stajano noted the importance of developing an entrepreneurial spirit among university professors. Financial support. Early-stage financing is crucial to SME development, and Mr. Stajano said that ESPRIT has worked to provide early-stage fi- nancing to SMEs. . In concluding, Mr. Stajano said that promoting visibility of small business is another way in which governments can help. ESPRIT, working cooperatively with the U.S. Department of Commerce, plans to bring approximately 200 Euro- pean SMEs to Texas in April 1999 to meet with 200 U.S. counterparts on joint electronic commerce ventures. By working to build such transatlantic connec- tions, governments can help build vibrant small-business sectors in regional economies.