enable firms to do the research proposed in Phase I. Current Phase I awards normally have a maximum of $100,000 and Phase II awards have a maximum of $750,000, although these ceilings may be exceeded at the discretion of the program managers. Phase III awards do not actually involve SBIR funds. The terminology is used to describe situations in which actual production for agency use is funded through the continuation of a successful SBIR project.

The rationale for aid to small businesses generally relies on claims of discrimination in capital markets. The discrimination in capital markets is frequently called statistical discrimination. The fact that statistics indicate small businesses typically have higher default rates than large businesses is used to deny the loan to a small business applicant. Statistical discrimination leads to social inefficiency because small firms have less access to capital than they would if information were perfect.

When it created the SBIR program, Congress was also concerned with discrimination in government procurement. The concern here is with research productivity, i.e., a budget that relies heavily on large business results in lower productivity for research and development than would a budget that increases small business participation. Much of the mission-essential research carried out by government agencies is in areas that are highly innovative. In the industries in which small firms may have an advantage, it is sensible technology policy for the government to target some of its R&D funds on small firms.

The Fast Track Initiative—The 1996 Fast Track Initiative of DoD represents a continuation of the shift in emphasis in the SBIR award process toward commercial success. Under Fast Track firms with Phase I contracts which can interest outside investors in committing funds to further the development of the project increase their chances of obtaining Phase II funding and are eligible for bridge funding between Phase I and Phase II. The increase in the importance of commercial success is clear. A firm that does a piece of research that increases knowledge of a government laboratory provides a useful service to the government by aiding the ongoing research of the laboratory. Such a firm will, however, not be able to attract outside investors, so it will not be eligible for Fast Track. Fast Track is reserved for firms that are likely to be commercial successes through producing a product or service that can be directly sold, or whose product or service holds sufficient commercial promise that outside investors are willing to invest in its further development.

Fast Track fits a particular model of small business. It is designed for a small business that has technical expertise and a desire to use that technical expertise to develop a product or service that it can sell, either in the commercial marketplace or as a government contractor, or both. This firm has no particular desire to be a small business. There are two other types of firms that participate in the SBIR program. First, some successful small businesses have no desire to be big busi nesses. These firms are not growth-oriented. Some of these were created started