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Luncheon Address Congressman Tom Davis (R-Va.) Rep. Davis began by recapitulating the changes in the composition of Congress that have taken place over the past few years, observing that neither the Democratic nor the Republican party has won the entire confidence of the Ameri- can people. However, the agreement on balancing the federal budget demon- strates that the parties have started to work together. He noted that many in the audience now know roughly where their agencies will stand in the budgetary process over the coming five years, in contrast to the recent past when changes every two years on Capitol Hill or in the White House kept uncertainty high. Now that Congress has shifted and the American people have adjusted, govern- ment is starting to change, he said, pointing to the bipartisan Klinger-Cohen procurement bill passed two years ago and to the fact that "the administration and Congress are starting to work in partnership." THE GLOBAL ECONOMY AND THE INFORMATION AGE Referring to a statement by the historian Arthur Schlesinger, Jr., that the most important event of the current century has been the invention of the micro- chip, and after listing the changes that the development of information technol- ogy has brought to business practices over the past two decades, Rep. Davis stressed that the economy of the Information Age can be understood only in global terms. The United States feels the impact both of what happens in other nations' domestic economies and of competition in the international marketplace com- petition that is particularly significant in the area of technology. It is because of its role in "propositioning American goods and services and technologies so that 76

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LUNCHEON ADDRESS 77 the United States will be competitive in a worldwide economic environment," he said, that the SBIR program is so important. Endorsing the thesis put forward in The Third Wave by Alvin and Heidi Toffler that the major advances in civilization occur when radical, if not revolu- tionary, technological changes transform society Rep. Davis concurred in their judgment that the world is now on the verge of an information revolution. "'The industries that have moved into the center of the economy in the last 40 years have as their business the production and distribution of knowledge and informa- tion rather than the production and distribution of things,"' he said, quoting Peter Drucker. The new society, a niche society rather than a mass society, will be characterized by specialization and market segmentation. Rep. Davis views con- gressional actions making "radical changes in the way we do business" in the fields of immigration, taxes, telecommunications, and federal procurement as in line with the arrival of the Information Age. Particularly with the globalization of the economy, enlightened leaders of both political parties recognize that government must change many things it has done in the past, something successful companies in business and industry are also recognizing. With new inventions appearing almost daily and new research constantly making old products obsolete, policymakers interested in welcoming the future must be flexible; rigid regulation and excessive taxation are "the worst way to encourage the growth of dynamic, forward-looking industries." In this changing environment, in which society is constantly "going back to the source" and encouraging innovation, programs such as SBIR that add a small amount of federal dollars to private-sector resources make a great deal of sense. THE IMPORTANCE OF SBIR Currently, more than 6,000 small businesses are involved in the SBIR and the Small Business Technology Transfer (STTR) programs today, and 750 to 1,000 new companies become involved each year. More technically trained em- ployees work in the small business sector than in nonprofit research firms and universities combined. Pointing to the diversity of emphasis displayed by SBIR and STTR, Rep. Davis praised the programs for sponsoring projects in "every conceivable arena of scientific and technical investigation offering truly leading- edge technologies." Small businesses in general represent an extraordinary pool of competence and talent; SBIR companies have used the opportunities provided by the program to identify and develop essential, innovative products not only to their own benefit but to that of the nation. THE GEOGRAPHIC DISTRIBUTION OF AWARDS Rejecting the notion that the distribution of SBIR awards should be influ- enced by state quotas, Rep. Davis stressed the importance of building a critical

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78 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM mass of companies and pointed to areas of concentrated technological activity such as Silicon Valley, Rt. 128, Seattle, Austin, North Carolina's Research Triangle, and northern Virginia. This last area, where his own district lies, today employs more people in the high-technology sector than does Silicon Valley. Such concentration supports not only a salary structure that draws talent but the "constant training and retraining" needed for success; spreading resources around the country would sacrifice many of the efficiencies characteristic of those areas where a critical mass exists. Areas that "have not woken up to the Third Wave and what is needed to start bringing these industries and building that critical mass" and which, he pointed out, are thus not benefiting from the SBIR pro- gram "get their fair share of the federal budget in many other subsidy areas." The success of the SBIR program derives from the fact that it does not involve the government picking winners and losers artificially, Rep. Davis said. The program is, instead, a competition of ideas, and it is directed at the small business sector because that is where so much innovation comes from. He warned against complacency; dwindling R&D resources would mean greater competition for whatever research funding is available. And with the current wave of mergers resulting in larger and larger companies, it is vital that the government maintain a pipeline to the innovations that emanate from small businesses. The health of the nation's industrialized economy is fundamentally grounded in successfully con- verting basic research from the laboratory into technological advancements in the marketplace. The SBIR program affords the government and, eventually, the private sector access to talent and leading-edge innovation for which they other- wise might not receive development funding because benefits spread to the economy through commercialization. Rep. Davis praised the "fly-before-you-buy" approach inherent in the three- phase structure of the SBIR and STTR programs, which provides small busi- nesses adequate funds for an advanced technology demonstration of their concepts before commitment is made to the technology. In addition, opportunities for follow-on procurements offered through the programs ensure small businesses' enthusiastic participation. Because they are unable to compete with larger com- panies that sell established products, small firms may die without innovation. The U.S. economy cannot stand still in a world that constantly demands something better, more advanced, and less expensive. It must draw on small businesses to help drive and disseminate innovation. THE FOCUS ON COMMERCIALIZATION Referring to the concern that some firms, after winning awards in Phase I and Phase II, do not proceed to Phase III, Rep. Davis said that he does not consider SBIR's success rate a "major problem," even if it merits continued discussion. In fact, he called the SBIR and STTR programs "most successful" in focusing on commercialization, which is what helps the nation over the long term, and he

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LUNCHEON ADDRESS 79 pointed to a "growing consensus" in Congress that they should be kept in place. He called the 2.5 percent of R&D budgets now set aside for SBIR "adequate for the task," expressing his opinion that the size of the total federal R&D expendi- ture is a more significant figure. Federal R&D spending is currently not as high as it should be if the United States is to maintain its dominance of the world economy in the next century. "The government is going to have to continue to take some leadership role," he said, "but, most important, to incentivize the pri- vate sector and give them the tools they need to move ahead." Unlike the federal laboratories, for which commercialization is far from a primary goal, the SBIR program must continue to focus on commercial success, whether in the context of selling to the government or the commercial sector. Stressing the program's value, he urged members of the audience to continue communicating and work- ing with legislators to refine and improve it in the future.