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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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Suggested Citation:"I. Preface." National Research Council. 1999. The Small Business Innovation Research Program: Challenges and Opportunities. Washington, DC: The National Academies Press. doi: 10.17226/9701.
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I PREFACE

Preface Dnven both by the exigencies of national defense and the requirements of transportation and communication across the American continent, the federal government has played an instrumental role in the development of new produc- tion techniques and technologies from the earliest years of the republic. To do so, the government has often turned to individual entrepreneurs with innovative ideas. For example, in 1798, the federal government laid the foundation for the first machine tool industry with a contract to the inventor, Eli Whitney, for inter- changeable musket parts.) A few decades later, in 1842, a hesitant Congress appropriated funds to demonstrate the feasibility of Samuel Morse's telegraphy Both men fostered significant innovations which led to whole new industnes. Despite Whitney's ultimate success and the enormous consequences of Morse's ground-breaking innovation, the appropriate role of the government in ~ Whitney missed his first delivery date and encountered substantial cost overruns. However, his invention of interchangeable parts, and the machine tools to make them, was ultimately successful. The muskets were delivered and the foundation of a new industry was in place. As early as the 1850s, the United States had begun to export specialized machine tools to the Enfield Arsenal in Great Britain. The British described the large-scale production of firearms, made with interchangeable parts, as "the American system of manufacturers" David C. Mowery and Nathan Rosenberg, Paths of Innovation: Technological Change in 20th Century America. Cambridge University Press, New York, 1998,p6. 2 For a discussion of Samuel Morse's 1837 application for a grant and the congressional debate, see Irwin Lebow, Information Highways and Byways. Institute of Electrical and Electronics Engineers, New York, 1995, pp. 9-12. For a more detailed account, see Robert Luther Thompson, Wiring a Continent: The History of the Telegraph Industry in the United States 1823-1836. Princeton Univer- sity Press, Princeton, N.J., 1947.

4 PREFACE the economy has remained a source of debate and discussion in the United States to this day. Perhaps the earliest articulation of the government's nurturing role with regard to the composition of the economy was Alexander Ham~lton's 1791 Report on Manufacturers in which he urged an activist approach by the federal government. At the time, Hamilton' s views were controversial, although subse- quent U.S. policy has largely reflected his beliefs. Dunng both the nineteenth and twentieth centunes, the federal government has had an enormous impact on the structure and composition of the economy through infrastructure development, regulation, procurement, and a vast array of policies to support industrial and agricultural development.3 Between World War I and World War II, these policies included support for the development of key industnes, which we would now call dual-use, such as radio and aircraft frames and engines. The requirements of World War II generated a huge increase in government procurement and support for high-technology industnes. At the industrial level, there were "major collaborative initiatives in pharmaceutical manufactunng, petrochemicals, synthetic rubber, and atomic weapons."4 An impressive array of weapons based on new technologies was developed during the war, ranging from radar and improved aircraft, to missiles and, not least, the atomic bomb. The government also played a central role in the creation of the first electronic digital computer, the ENIAC.5 Following the war, the federal government began to fund basic research at universities on a significant scale, first through the Office of Naval Research and later through the National Science Foundation.6 Dunng the Cold War, the United States continued to emphasize technological superiority as a means of ensuring U.S. secunty. Government funds and costplus contracts helped to support systems and enabling technologies such as semi- conductors and new matenals, radar, jet engines, missiles, and computer hard 3 Examples abound. The government played a key role in the development of the U.S. railway network, growth of agriculture through the Morrill Act (1862) and the agricultural extension service, and support of industry through the National Bureau of Standards (1901). See Richard gingham, Industrial Policy American Style: From Hamilton to HDTV. New York: M.E. Sharpe, 1998 for a . . . comprehensive review. 4 David Mowery, "Collaborative R&D: how effective is it?" Issues in Science and Technology. 1998, p. 37. 5 Kenneth Flamm, Creating the Computer. Washington, DC: The Brookings Institution, 1988, chapters 1-3. 6 The National Science Foundation was initially seen as the agency that would fund basic scientific research at universities after World War II. However, disagreements over the degree of Executive Branch control over the NSF delayed passage of its authorizing legislation until 1950, even though the concept for the agency was first put forth in 1945 in Vannevar Bush's report Science: The Endless Frontier. The Office of Naval Research bridged the gap in basic research funding during these years. For an account of the politics of the NSF's creation, see G. Pascal Zachary, Endless Frontier: Vannevar Bush, Engineer of the American Century, New York: The Free Press, 1997, pp. 231. See also Daniel Lee Kleinman, Politics on the Endless Frontier: Postwar Research Policy in the United States, Durham, NC: Duke University Press, 1995.

PREFACE s ware and software.7 In the post-Cold War period, the evolution of the American economy continues to be profoundly marked by the interaction of government- funded research and innovative entrepreneurs. Government support in areas such as microelectronics, robotics, biotechnology, the human genome, and the devel- opment of ARPANET, the forerunner of today' s Internet, are providing the un- derpinnings of a new economy. Individual entrepreneurs and researchers often played leading roles in developing new approaches and new businesses to exploit these research investments.8 Despite the important role the U.S. government has played in the develop- ment of the American economy, there is little consensus concerning the principle of government participation and there is often considerable debate about the ap- propriate mechanisms of participation. At the same time, in light of the rising costs, substantial risks and the breadth of potential applications of new technolo- gies, some believe that a supportive policy framework by the government is nec- essary if new, welfare-enhancing and wealth-generating technologies are to be developed and brought to the market. Since 1991 the National Research Council's Board on Science, Technology, and Economic Policy (STEP) has undertaken a program of activities to improve policy makers' understanding of the interconnections of science, technology, and economic policy and their importance for the American economy and its inter- national competitive position. The Board's activities have corresponded with increased policy recognition of the importance of technology to economic growth. The new economic growth theory emphasizes the role of technology creation, which is believed to be characterized by significant growth externalities.9 A con- sequence of the renewed appreciation of growth externalities is recognition of the economic geography of economic development. With growth externalities com- ing about in part from the exchanges of knowledge among innovators, certain regions become centers for particular types of high growth activities. Innovators are able to take advantage of the tacit knowledge available in such centers to address technology and other business development issues.~° In addition, some economists have suggested limitations to traditional trade theory, particularly with respect to the reality of imperfect international competi 7 For an excellent review of the role of government support in nurturing the computer industry, see National Research Council, Funding a Revolution: Government Support for Computing Research, National Academies Press, Washington, D.C., 1999. ~ David B. Audretsch and Roy Thurik, Innovation, Industry, Evolution, and Employment. Cam- bridge University Press, 1999. 9 Paul Romer, "Endogenous technological change," Journal of Political Economy, Vol. 98, 1990, p. 71-102. See also Gene Grossman and Elhanan Helpman, Innovation and Growth in the Global Economy, Cambridge, Mass., MIT Press, 1993. is Paul Krugman, Geography and Trade, Cambridge, Mass., MIT Press, 1991, p . 23, points out how the British economist Alfred Marshall initially observed in his classic Principles of Economics how geographic clusters of specific economic activities arose from the exchange of "tacit" knowledge among business people.

6 PREFACE tion.l1 Recent economic analysis suggests that high-technology is often char- actenzed by increasing rather than decreasing returns, justifying to some the propo- sition that governments can capture permanent advantage in key industries by pro- viding relatively small, but potentially decisive support to bring national industries up the leaning curve and down the cost curve. The increasing recognition of the dynamic element of technological innovation, in particular its cumulative nature, has provided an intellectual underpinning for strategic trade concepts that emphasize the dynamic nature of international competition in high-technology industnes.l2 PROJECT ORIGINS The growth in government programs to support high technology industry within national economies and their impact on international science and technol- ogy cooperation and on the multilateral trading system are of considerable inter- est worldwide. Accordingly, these topics were taken up by STEP in a study earned out in conjunction with the Hamburg Institute for Economic Research and the Institute for World Economics in Kiel which produced the 1996 report, Con- flict and Cooperation in National Competition for High-Technology Industry. One of the principal recommendations for further work emerging from that study was a call for an analysis of the principles of effective cooperation in technology development, to include lessons from national and international consortia, in- cluding eligibility standards and assessments of what new cooperative mecha- nisms might be developed to meet the challenges of international cooperation in high-technology products.~3 In many high-technology industnes, the burgeoning development costs for new technologies, the dispersal of technological expertise, and the growing importance of regulatory and environmental issues have provided powerful in- centives for public-pnvate cooperation. Notwithstanding the unsettled policy environment in Washington, collaborative programs have steadily expanded.~4 ii Paul Krugman, Rethinking International Trade, Cambridge, Mass., MIT Press, 1990. i2 For a discussion of governments' efforts to capture new technologies and the industries they spawn for their national economies, see National Research Council, Conflict and Cooperation in National Competition for High-Technology Industry, National Academy Press, Washington, D.C. 1996, pp. 28-40. For a critique of these efforts, see Paul Krugman, Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations. New York: W.W. Norton, 1995. i3 The summary report of the project (National Research Council, op.cit.) recommends further analytical work concerning principles for effective cooperation in technology development (see Rec- ommendation 24, p. 8). More recently, David Mowery has noted the rapid expansion of collaborative activities and emphasized the need for comprehensive assessment. David Mowery, "Collaborative R&D: how effective is it?" op. cit., p. 44. i4 In addition to programs such as SBIR, SEMATECH, and ATP, other legislative initiatives sought to encourage cooperation and improve the payoff from federal R&D. Examples include the Stevenson- Wydler Technology Innovation Act (1980), the Bayh-Dole University and Small Business Patent Act (1980), the National Cooperative Research Act (1984), and the Federal Technology Transfer Act (1986).

PREFACE 7 Dunng the Reagan administration, the Small Business Innovation Research pro- gram (SBIR) was created as a way to use the innovative capacity of small business as a means of using federal R&D dollars more effectively. To meet unprec- edented challenges in the semiconductor industry, the SEMATECH consortium was established, although only after much debate.~5 In the Bush administration, Congress first funded the Advanced Technology Program (ATP) in the National Institute of Standards and Technology and the Advanced Battery Consortium was created. The Clinton administration came to office with an emphasis on civilian technology programs, substantially expanding the ATP and creating the Technol- ogy Reinvestment Program (TRP), and the Partnership for the Next Generation Vehicle (PNGV).~6 The rapid expansion of these cooperative programs encoun- tered significant opposition, rekindling the national debate on the appropriate role of the government in fostering new technologies. Indeed, broader philosophical questions about the appropriate role for government in collaborating with indus- try have tended to obscure the need for policy makers to draw lessons from current and previous collaborative efforts. Given the considerable change in federal research and development budgets since the end of the Cold War, and the reduced role of many centralized laborato- nes in the private sector, government-industry collaboration is of growing impor- tance, yet it has seen remarkably little objective analysis. At one level, analysis may contribute to a better appreciation of the role of collaboration between government and industry in the development of the U.S. economy. Wnting twenty years ago, one well-known American economist observed that Americans are still remarkably uninformed about their long history of policies aimed at stimu- lating innovation.~7 Today, many Americans appreciate the contribution of tech i5 For a review of SEMATECH, see the National Research Council, 1996, op.cit., pp. 141-151. For one of the most comprehensive assessments of SEMATECH, see John B. Horrigan, "Cooperating Competitors: A Comparison of MCC and SEMATECH," monograph, National Research Council, Washington, D.C. forthcoming. is For an analysis of ATP, see Christopher T. Hill, "The Advanced Technology Program: opportu- nities for enhancement," in Lewis Branscomb and James Keller, eds. Investing in Innovation: Creat- ing a Research and Innovation Policy. Cambridge, Mass., MIT Press, 1998, pp. 143-173. For an excellent analysis of the TRP, see Jay Stowsky, "Politics and Policy: The Technology Reinvestment Program and the Dilemmas of Dual Use." Mimeo, University of California, 1996. See also, Linda R. Cohen, "Dual-use and the Technology Reinvestment Project." in Branscomb and Keller, op.cit., pp. 174- 193. For PNGV, see National Research Council, Review of the Research Program of the Partner- ship for a New Generation of Vehicles: Third Report. Washington, D.C.: The National Academy Press, 1997. See Effectiveness of the United States Advanced Battery Consortium as a Government- Industry Partnership, National Academy Press, Washington, D.C. 1998. i7 Otis L. Graham, Losing Time: The Industrial Policy Debate. Harvard University Press, Cam- bridge, Mass., 1992, p. 250. Graham cites Richard Nelson's observations at the end of the Carter Administration. The situation may not have improved. Writing in 1994, James Fallows makes a similar observation (see Looking into the Sun: The Rise of the New East Asian Economic and Political System. New York: Pantheon Books, 1994, p. 196). See also Thomas McCraw's "Mercantilism and the market: antecedents of American industrial policy," in The Politics of Industrial Policy, Claude E.

8 PREFACE nology to the current period of robust economic growth. Yet there is little evidence that Americans are aware of the key contributions of federal support for technological innovation, from radio to the Internet. Leaving aside the desirability of having a better understanding of the role of partnerships in fostering new technologies, one compelling argument for assess- ment is the simple fact that government intervention in the market is fraught with nsk. There are cases of major success, such as federal support to the computer or semiconductor industnes, where the Department of Defense served as a source of R&D and as a reliable, early buyer of products.~9 There are also cases of major frustration. Landmarks would include projects such as the Supersonic Transport and the Synfuels Corporation.20 Regular assessment is vital to ensure continued technical viability, though cost-shanng requirements can be an effective safe- guard. Assessment can also help avoid "political capture" of projects, especially large commercial demonstration efforts.2i Even successful collaborations face the challenge of adapting programs to rapidly changing technologies.22 Assess- ment thus becomes a means of keeping programs relevant. Assessment can also have the virtue of reminding policymakers of the need for humility before the "black box" of innovation. As one observer notes, "expenence argues for hedged commitments, constant reappraisal, maintenance of options, pluralism of advice and decision makers."23 From an international perspective, understanding the benefits and challenges Barfield and William A. Schambra, eds., American Enterprise Institute for Public Policy Research, Washington, D.C., 1986, pp. 33-62. i~ For a review of support for computing and the Internet, see National Research Council, Funding a Revolution: Government Support for Computing Research, National Academies Press, Washing- ton, D.C., 1999, op. cit. Chapter 7. i9 Ibid. See also Graham, op.cit., p. 2. 20See Linda R. Cohen and Roger G. Noll, The Technology Pork Barrel, The Brookings Institu- tion, Washington, D.C., 1991, pp. 97, 178, 259-320, 217-258. An interesting review of technology development programs, mainly from the 1970s, the analysis is less negative than the title suggests. Indeed, the volume identifies some successful R&D projects such as the photovoltaic electricity pro- gram. The recent analyses by the Academies of government support for the computing also provide a valuable perspective on the importance and success of sustained government support. 21 Cohen and Noll stress that political capture by distributive congressional politics and industrial interests are one of the principal risks for government-supported commercialization projects. In cases such as the Supersonic Transport project, they extensively document the disconnect between declin- ing technical feasibility and increasing political support (see op.cit., p. VII and pp. 242-257. 22 One of the strengths of SEMATECH was its ability to redefine goals in the face of changing conditions. See National Research Council, 1996, Conflict and Cooperation, p. 148. See also Grindley, et. al., "SEMATECH and collaborative research: lessons in the design of high-technology consortia." Journal of Policy Analysis and Management, 1994, p. 724 and Peter Grindley and Will- iam Spencer, "SEMATECH after five years: high-tech consortia and U.S. competitiveness," Califor- nia Management Review. Vol. 35, no. 4, pp. 9-33 and Horrigan, "Cooperating Competitors," op. cit. 23 Otis Graham, op.cit., p. 251. Graham is referring to work by Richard R. Nelson in Government and Technological Progress, Pergamon Press, New York, 1982, p. 454-455.

PREFACE 9 of these programs is also important insofar as they have been, and remain, a central element in the national development strategies of both industrial and industrializing countries. Governments have shown a great deal of imagination in their choice of mechanisms designed to support industry. They have adopted a wide range of policies from trade regulations designed to protect domestic products from foreign competition to tax rebates intended to stimulate the export of selected domestic products. They provide government R&D funding for enterprises of particular interest, and sometimes give overt support through direct grants, loans, and equity investments or more opaque support through mecha- nisms such as tax deferral.24 Data collected by the Paris-based Organization for Economic Cooperation and Development (OECD) suggest that worldwide gov- ernment expenditures on support for high-technology industries involve signifi- cant resources and are increasingly focused on what policy makers consider to be strategic industries.25 The United States is an active, if unavowed, participant in this global compe- tition, at both the state and the federal level. Indeed, the United States has a remarkably wide range of public-private partnerships in high-technology sec- tors.26 In addition to the well-known cases mentioned above, there are public- private consortia of many types. They can be classified in a number of ways, such as by the economic objective of the partnership, that is, to leverage the social benefits associated with federal R&D activity, to enhance the position of a na- tional industry, or to deploy industrial R&D to meet military or other government missions.27 The program taken up in this symposium, the Small Business Inno- vation Research Program (SBIR), falls under the latter category. PROJECT STEERING COMMITTEE The continual importance of government-industry collaboration underscores the need for better understanding of the opportunities and limitations of these programs and the conditions most likely to ensure success. Reflecting the interest of policy makers in this topic, the STEP Board initiated the project on "Govern- ment-Industry Partnerships for the Development of New Technologies," which 24 National Research Council, 1996, op.cit., Box B., pp. 39-40. 25 Ibid. Concerning support for small business, the OECD gives a positive review of U.S. pro- grams. See OECD, Technology, Productivity, and Job Creation: Best Policy Practices., Paris: OECD, 1997. P. 21. 26 See Chris Coburn and Dan Bergland, Partnerships. Batelle Press, Columbus, Ohio, 1995. 27 See Albert Link, "Public/Private Partnerships as a Tool to Support Industrial R&D: Experiences in the United States." Paper prepared for the working group on Innovation and Technology Policy of the OECD Committee for Science and Technology Policy, Paris, 1998, p. 20. Partnerships can also be differentiated by the nature of public support. Some partnerships involve a direct transfer of funds to an industry consortium. Others focus on the shared use of infrastructure, such as laboratory facilities.

10 PREFACE has benefited from broad support among federal agencies. These include the U.S. Department of Defense, the U.S. Department of Energy, the National Science Foundation, the National Cancer Institute, the National Aeronautics and Space Administration, the National Institute of Standards and Technology, as well as a diverse group of private corporations. To carry out this analysis, the STEP Board has assembled a distinguished multidisciplinary steering committee for govern- ment-industry partnerships, listed in the front of this report. The comm~ttee's principal tasks are to provide overall direction and relevant expertise in the as- sessment of the issues raised by the project. At the conclusion of the project, the steering committee will develop a consensus report outlining their findings and recommendations on the issues reviewed by the project. As a basis for the consensus report, the steering committee has undertaken to commission research and convene a series of fact-finding meetings in the form of workshops, symposia, and conferences as a means of informing its deliberations. This symposium, and the proceedings reported here, represent one element of this fact finding effort. It was the first in a series of fact-finding meetings convened under the auspices of the STEP Board and under the direction of the steering committee. A number of distinguished individuals deserve recognition for their willing- ness to review this report. These individuals were chosen for their diverse per- spectives and technical expertise, in accordance with procedures approved by the NRC' s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making the published report as sound as possible and to ensure that the report meets institu- tional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the reviewers for their participation in the review process: James Turner, House Science Committee; Robert B. Archibald, The College of William and Mary; David B. Audretsch, Indiana University; Albert N. Link, University of North Carolina at Greensboro; John T. Scott, Dartmouth College; and Peter Cahill, BTRTC. We are especially grateful for the contributions of the Review Coordinator, Gerald Dinneen. A1- though these individuals have provided constructive comments and suggestions, it must be emphasized that responsibility for the final content of this report rests entirely with the STEP Board and the NRC. 28 Other volumes in this series include a companion volume on SBIR entitled The Small Business Innovation Research Program: An Assessment of DoD's Fast Track Initiative, National Academy Press, Washington, D.C., 1999; A Review of the Sandia Science and Technology Park Initiative. National Academy Press, Washington, D.C., 1999; and The Advanced Technology Program: Chal- lenges and Opportunities, National Academy Press, 1999. With respect to international cooperation, the series includes New Vistas in Transatlantic Science and Technology Cooperation, National Academy Press, Washington, D.C., 1999.

PREFACE 11 Given the quality and number of presentations at this symposium, summariz- ing the proceedings was a challenge. Every effort was made to capture the main points made during presentations and ensuing discussions, within the constraints imposed by the nature of a symposium summary. We apologize in advance for inadvertent errors and omissions in the summary. We also take this opportunity to thank our speakers and participants for making their experience and expertise available to the Academies and our project. Finally, we emphasize that the pro- ceedings that follow do not make findings or recommendations; rather, they seek to capture the different perspectives of the participants and observers of the SBIR program. Charles W. Wessner

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Small businesses have increasingly been recognized as a source of innovation, and one way in which the Federal government encourages such innovation is through the Small Business Innovation Research program. SBIR sets aside 2.5 percent of federal agencies' R&D budgets for R&D grants to small business. Although the program's budget was nearly $1.2 billion in 1998, SBIR has been subject to relatively little outside review. As part of the STEP's ongoing project on Government-Industry Partnerships, the Board convened policymakers, academic researchers, and representatives from small business to discuss the program's history and rationale, review existing research, and identify areas for further research and program improvements.

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