The Small Business Innovation Development Act of 1982 (P.L. 97-219) required that federal agencies provide special funds to support small business R&D that complemented the funding agency’s mission. This is called the Small Business Innovation Research (SBIR) program. Based on the premises, as stated in the Act, that “small business is the principal source of significant innovation in the Nation,” and small businesses are “among the most cost-effective performers of research and development and are particularly capable of developing research and development results into new products,” the Act lists its purposes for, among other things, establishing the SBIR program:

1. to stimulate technological innovation,

2. to use small businesses to meet federal research and development (R&D) needs,

3. to foster and encourage participation by minority and disadvantaged persons in technological innovation, and

4. to increase private-sector commercialized innovations derived from federal R&D.

The Small Business Innovation Research Program Reauthorization Act of 1992 gave reauthorization to the SBIR program because the program has “effectively stimulated the commercialization of technology development through federal research and development, benefiting both the public and private sectors of the Nation.”

In thinking about a program such as SBIR, economists and many policymakers see the generation of positive externalities (i.e., social benefits exceeding private ones) as an important rationale for the program (Lerner, 1999). The purpose of this paper is to examine that underlying premise. Is it in fact the case that the social benefits associated with SBIR-supported projects are greater than the private benefits? Stated alternatively, is there any empirical evidence to suggest that absent the SBIR program the private sector would underinvest in DoD-related technologies?

The remainder of this paper is as follows. In the second section, we present an economic rationale for public–private partnerships and generalize from it to posit a similar rationale for the selection of projects to be funded by SBIR program.¹ In the third section, we offer empirical evidence that the social returns from SBIR-supported projects are greater than the private returns, and that without the support of public funding, the socially valuable research would not have been undertaken. In the fourth section, we investigate, in a preliminary fashion, project-specific characteristics associated with the gap between the estimated social and private returns. Then, we offer concluding remarks.