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III PROCEEDINGS

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Welcomer Charles W. Wessner National Research Council Welcoming the symposium participants, Dr. Wessner introduced the day's activities as the first element in a program examining "Government-Industry Part- nerships for the Development of New Technologies." Being carried out under the aegis of the National Research Council's Board on Science, Technology and Eco- nomic Policy (STEP Board), direct responsibility for the meeting effort rests with a distinguished steering committee chaired by Gordon Moore, chairman emeritus of Intel Corporation; its membership includes Mark Myers, senior vice president of Xerox Corporation, leading our discussion today; William Spencer, chairman of SEMATECH; Gordon Binder, chairman of Amgen; Kenneth Flamm, senior fellow at The Brookings Institution and a speaker at the symposium; and other distinguished academics and industrialists. The basic objective of the Government-Industry Partnerships project, as char- acterized by Dr. Wessner, is to determine "best practice" in government-industry partnerships taking into account sectoral differences with respect to issues such as project selection, private-sector management, balanced technical contributions among participants, effective intellectual property protection, and policies to encourage the commercial exploitation of results. Neither the Government- Industry Partnerships project nor today's symposium would "engage in ideologi- cal discussions of whether the government should do what it has in fact done for the last 200 years," but would instead seek to review accomplishments, identify problems, and make specific, pragmatic suggestions. ~ This section summarizes the conference held at The National Academy of Sciences on February 28, 1998. 31

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32 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM In addition to the issue of best practice, the project will examine: the rationale and national benefits to be derived from government support to collaborative efforts by industry to bring new technologies to market; the principles that should guide such cooperation, demarcating the role and contribution of the public authorities; the different types of cooperative programs, including the rationale for strategic alliances among firms in sectors that are supported by publicly funded programs; and the sources of past successes and failures of government-industry coop- erative programs designed to support the development of U.S. industries based on promising new technologies. . . Also among the objectives of the project as a whole are: promoting cross-fertilization among U.S. government programs, which Dr. Wessner described as "very rare"; benchmarking U.S. practices against foreign practices, "not necessarily to emulate foreign practices but to understand on one hand, what the compe- tition is doing"; and on the other, identify opportunities for mutually ben- eficial cooperation; arriving at recommendations for improved American policymaking on national and international partnerships. Several interesting trends are behind the interest and growth in government partnerships. The cost of developing new technologies, the risks associated with such development, the dispersal of technological expertise, the corresponding "technological merge," and the difficulty for any one company to capture all the benefits, all point to the need for cooperation between industry and government at its various levels as the world enters the twenty-first century. To underscore the importance of government-industry collaboration, Dr. Wessner challenged the participants to "name one major, export-oriented industry in the United States that has not received very substantial assistance through its growth period from the government." Although it takes many forms some direct, some indirect- support for industry has pervaded the economy, especially in high-growth, high- technology sectors as semiconductors, computers, telecommunications, and air- craft. American markets are among the world's most dynamic, with levels of competition and innovation that have proved to be the source of remarkable eco- nomic growth. Recognizing the important, sometimes decisive role the govern- ment plays in devising a policy framework that supports innovation and sustains cooperation is essential for our continued success. Introducing Dr. Myers, a member of the STEP Board, Dr. Wessner described him as "responsible for some of the best technology coming out of American

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WELCOME 33 corporations today" as vice president for Corporate Research and Technology at Xerox. Recalling a recent visit to the research facility Xerox PARC in Palo Alto, Calif., Dr. Wessner said that he had left "impressed and encouraged about what the unique blend of American capitalism and supportive government policies has to offer" the next generation of Americas and the world.

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Symposium Introduction Mark Myers Xerox Corporation Speaking on behalf of the STEP Board, Dr. Myers welcomed the participants to the symposium on the Small Business Innovation Research (SBIR) program, extending particular recognition to White House representatives Dorothy Robyn of the National Economic Council and Duncan Moore of the Office of Science and Technology Policy (OSTP); Paul J. Hoeper of the U.S. Department of Defense (DoD); Martyn Evans, Shadow Minister for Science and Technology from Aus- tralia; and officials from other U.S. government agencies and the diplomatic corps. Noting the very strong attendance, Dr. Myers remarked that we could legitimately infer policy interest in the SBIR program as the source of "one of the best turn- outs" for a STEP Board event. The Need to Review SBIR Introducing the day's discussions, Dr. Myers stated that the symposium would review the types of benefits that the SBIR program "brings to small busi- ness in the United States in particular and [to] the American economy in general," which is in line with a perceived desire "to make such programs effective so that they can become even more useful in the future." Previewing the day' s program, he listed the following as among its goals: . reviewing the SBIR program's history and rationale, including some "common understandings and misunderstandings" surrounding it. In this connection, he expressed gratitude for the participation in the panel on "History and Current Legislative Perspective on the SBIR Program" of 34

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INTRODUCTION . 35 Roland Tibbetts, former Program Manager of the SBIR program at the National Science Foundation; reviewing the "best research that's been done" on SBIR. He pointed to the presence of Josh Lerner of Harvard Business School who would be presenting his recent analysis of the SBIR program under the heading of "Research Perspectives on the SBIR"; and examining successful outcomes of SBIR awards, with a focus on elements that have contributed to their success and that might contribute to the success of future awards. He thanked Dr. Robyn for agreeing to moderate the symposium's panel on "Case Studies" designed to bring the views of industry directly into the discussion. Identifying Challenges to SBIR's Effectiveness Dr. Myers emphasized, however, that the symposium would not limit its scope to the accomplishments of the SBIR program, which he said have been many, but also would identify challenges it faces. "Clearly, no program is per- fect," he stated. "Indeed, coming from the private sector, I can assure you that perfection that is, always getting it right-exists neither in the public nor the private sector." The key in the private sector is to do better than the competition over time in serving one's customers, he noted, whereas the key in the public sector is "to serve the citizens and to ensure worthwhile return on investments . . . and to constantly find ways to improve them." Rep. Tom Davis (R-Va.), who serves on the House Committee on Science and the House Committee on Trans- portation, would offer thoughts on how to improve the SBIR program, as well as on its importance in furthering innovation in the U.S. economy. Dr. Myers pointed to the presence of such "expert practitioners" as Carl Nelson, formerly of the Ballistic Missile Defense Organization, on the panel titled "Program Challenges Operational Views," to be led by Dan Hill, the Small Business Administration's Assistant Administrator for Technology. He expressed his particular enthusiasm, as "someone who is responsible for research and development (R&D) in a large corporation," for the panel on what he called the "thorny questions" of "Improving Assessment and Selection," to be moderated by Dan Roos of the Massachusetts Institute of Technology. Dr. Myers observed that some might wonder why a discussion of the Advanced Technology Program (ATP), which is managed by the National Institute of Standards and Technology, is included in a program on SBIR. The answer is that one of the objectives of the Government-Industry Partnerships project is to learn from the experience of different U.S. and foreign technology development programs. "This cross-fertilization, we believe, will prove quite valuable," he said. Similarly, the day's program would draw on the experience of two of the largest SBIR programs, those of the National Institutes of Health and those of the Department of Defense, which some believe have significantly different objec

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36 INTRODUCTION fives and measures of accomplishment. Their comparison is intended to lead the panel to suggest ways of improving understanding of the different agency require- ments, the metrics for success, and the overall performance of the SBIR program. To have a down-to-earth reaction to the day's discussion, the final panel, "Obser- vations and Policy Issues: Agency Perspectives," includes program managers from some of the largest SBIR programs. Pointing out that "some of the best experts in the country on the development of new technologies in a small business, entrepreneurial environment" were in attendance, Dr. Myers said that he looked forward to a "rich exchange of views." He then introduced Dr. Moore, the Associate Director of Technology at the White House Office of Science and Technology Policy, noting that the two have known one another for many years as fellow residents of Rochester. Dr. Moore's career includes service as professor of optical engineering at the University of Rochester, as director of the Institute of Optics and dean of engineering and applied sciences at that institution, and as founder and president of Gradient Lens Corporation of Rochester.

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Opening Remarks Duncan Moore White House Office of Science and Technology Policy The Contribution of High-Tech Firms to the Economy Dr. Moore, introducing himself as a winner of SBIR awards from both the NSF and the DoD, stated that he would talk about his personal experiences with the program. First, however, he wished to put forward the contention that the U.S. technical community has not taken enough credit for the reduction of the federal budget deficit. This community has invested in R&D for the past 50 years, developing the engine that has created the country's economic growth. This investment has contributed to a large number of jobs, particularly in the last decade, that has increased the amount of wages paid and, therefore, taxes collected. He pointed to an unemployment rate that he said was at "almost an all-time low"; significantly, although the national jobless rate is at about 4.7 percent, it is at about 1.9 percent for those with college degrees. Vigorous demand for university-trained workers is contributing to the continued growth of the Ameri- can economy. He noted the fading of the conventional wisdom of a half-decade ago that "the United States was great at basic science we won the Nobel prizes but Japan was much better at taking these ideas to product." This has changed. Although economic difficulties in Japan may account for part of the change, another reason is that U.S. programs have been created at the federal and, in particular, the state level to address the questions: "How do we get the ideas out of the universities into the marketplace?" and "How do we create jobs locally?" Reminding the audience that economic development is in the end always "a local . . . not a federal game," he pointed to the political imperative faced by mayors, county commissioners, and state legislators to create jobs. 37

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38 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM Another lesson from recent experience is that, given the diversity of needs among both geographical and industrial sectors, no one program is appropriate for all circumstances. For example, policymakers have recognized that "biotech is very different from automobiles," yet both may face challenges requiring partnering.) The emphasis on spin-offs, whether of jobs or companies, has evolved into emphasis on partnering. "The implication of 'spinoff' is, that an idea is conceived and it is hoped that a company will develop from that idea," Dr. Moore explained, "whereas 'partnership' implies that the partnership is going to be there for a longer period of time than it would in the case of when an idea is transferred to a new company." He pointed to such programs as SBIR, ATP, NSF' s Experimental Program to Stimulate Research, and the Experimental Program to Stimulate Technology, the latter being designed to help the 17 states that have attracted lower-than-average amounts of research funding. Initial skepticism on the part of Dr. Moore, as a resident of New York State, toward programs aimed at helping smaller states has given way to strong support. The belief that "economic survival is based on having good R&D and having good universities in your home state," as well as the desire "that all regions of the country move forward," must be backed, he said, by "processes" allowing states with fewer resources "to move forward in these wonderful economic times." He noted that SBIR's total annual budget represents a "relatively small number of dollars as a percent of total R&D": At about $1.1 billion, it amounts to between 2 and 3 percent of the federal R&D portfolio, depending on how the portfolio is calculated. Personal Experience with SBIR Dr. Moore then summarized the experience with SBIR awards he had gained through his own company, founded in 1980. He recalled turning to the program in the technology development stage, after finding neither venture capitalists nor banks willing to back a firm without a product. A New York State program that offered funding to help winners of Phase I SBIR grants bridge the gap to Phase II made the SBIR program more attractive to Dr. Moore; his firm submitted two SBIR proposals to the NSF, and both eventually won funding. The Phase I - Phase II Gap Nonetheless, to stay in business, the "huge" gap between Phase I and Phase II caused his firm to take consulting jobs and other work that were not part of the ~ For a review of one such program, see Review of the Research Program of the Partnership for a New Generation of Vehicles (PNG V): Fifth Report, National Academy Press, Washington, D.C., 1999.

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OPENING REMARKS 39 firm's main mission. There were other difficulties: Corporate and personnel changes disrupted agreements the firm had made to work with large corporations on Phase III of both of its SBIR projects, and a shift in the market undermined a third arrangement. Dr. Moore called on his experience to compare the NSF's SBIR program with that of the DoD, to which his firm turned at a later stage. From the comments he received on his proposals to NSF, he concluded that the ideas the reviewers favored were "further from the product . . . They're looking at the five-, ten-year ideas, not the ones that are going to be products 18 months from then." He characterized DoD's SBIR program as "very directed" in comparison: His firm pursued work in one of the DoD program's categories, and the DoD would have been guaranteed as a customer had the Cold War not ended. Dr. Moore's technology finally yielded a product in 1995, 26 years after he had begun research on it. Key SBIR Issues Dr. Moore then highlighted a number of issues often discussed in relation to the SBIR program: . SBIR mills: Some companies are alleged to exist entirely for the purpose of winning grants while lacking any serious intent to commercialize. Speaking personally rather than on behalf of the White House, he advo- cated that firms should first write their business plans, then indicate how SBIR-backed research might fit with the plans; R&D tax credits versus SBIR: Dr. Moore noted that a tax credit would have been of no value to his firm, which was not generating profit and "needed the cash flow" to make payroll; and Universities versus SBIR: Opposition from academics who see money that goes to SBIR as reducing funds available for their research was char- acterized by Dr. Moore as "very short sighted." SBIR grants offer profes- sors and students an "ideal" opportunity for spinning off a company, and the university community should be looking at the program in a positive light "as part of economic development."2 Employment Generation: Dr. Moore also stressed the employment gen- eration that is derived from the small business community. For example, Small Business Administration figures show that companies with fewer than 500 employees contributed 10.5 million jobs to the U.S. economy from 1991 to 1995. In the same period, employment in companies with 2 See Audretsch, David B. et al., "Does the SBIR Foster Entrepreneurial Behavior? Evidence from Indiana." In The Small Business Innovation Research Program: Assessing DoD's Fast Track Initia- tive, National Academy Press, 1999.

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40 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM more than 500 employees fell by 3.2 million. Underscoring the Clinton administration' s support for the SBIR program, Dr. Moore welcomed this effort to review the program, noting that "every program can benefit from continuous improvement," a principle he called "part of the business cli- mate today."