The Small Business Innovation Research Program An Assessment of the Department of Defense Fast Track Initiative (2000) / Chapter Skim
Currently Skimming:
Estimates of the Social Returns to Small Business Innovation Research Projects
Estimates of the Social Returns to Small Business Innovation Research Projects
Pages 275-290
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 275... ...
. the funded companies would not have undertaken the R&D without public support because the private return that they perceived they would earn would be less than the minimum accepted rate of return required for private financing of the projects, the estimated lower bound on the social benefits associated with the funded research is greater than the estimated private returns if there were no public support in terms of the average rates of return on the investments, 84 percent for society compared to 25 percent for the private investors, and the magnitude of the difference between the social and private returns does not vary significantly, on average, between Fast Track and non-Fast Track projects.
|
From page 276... ...
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.
|
From page 277... ...
However, the Economic Report did not expand on how to correct for market failure, much less discuss appropriate policy mechanisms for doing so.
|
From page 278... ...
Facing high risk both technical and market risk not faced by society or simply because society has a longer time horizon than the decision makers of individual firms, a private firm discounts future returns at a higher rate than does society. Therefore, the private firm values future returns less and, from society' s perspective, will invest too little in R&D.
|
From page 279... ...
FIGURE 1 Gap between social and private rates of return to R&D projects.
|
From page 280... ...
The gap between social and private returns is larger than in the case of project C; neither project will be adequately funded by the private firm. To address this market failure, the government has two alternative policy mechanisms.
|
From page 281... ...
From each, we collected information that allowed us to calculate a lower-bound for the prospective expected social rate of return associated with each project and to compare that prospective expected social return to both the expected private return to the firm had it pursued the project in the absence of SBIR support and the expected private return expected by the firm with its SBIR support. Our analysis clearly indicates that the SBIR is funding projects like project A in Figure 1 and, given such funding, the project has become similar to project C
|
From page 282... ...
Each of those two samples was selected for the purpose of comparing Fast Track projects to non-Fast Track projects in each region. In addition to those projects, other projects were identified on the basis of early responses to a broad-based mail survey conducted for the DoD by Peter Cahill, as discussed by Audretsch et al.
|
From page 283... ...
We ignore consumer surplus in our calculations of the prospective expected social returns, thus motivating our claim that our estimates are lower-bound estimates. Second, some of the profits generated by the innovations will be captured by other firms.
|
From page 284... ...
Again, it is a lower bound because consumer surplus has not been measured. The expected private rate of return without SBIR support is the solution to i in Eq.
|
From page 285... ...
Office of Management and Budget to use a real discount of 7 percent for constant-dollar benefit-to-cost analyses of proposed investments and regulations, we find that, clearly, a nominal social rate of return of 84 percent is above that rate and thus is socially worthwhile.4 We also can calculate the expected private rate of return with SBIR support for each of the 44 projects as the solution to i in Eq.
|
From page 286... ...
Based on the sample of 44 projects, the average gap between the lowerbound social rate of return and the estimated private rate of return without SBIR funding support is 59 percent. TABLE 4 Descriptive Statistics on Variables (N= 44)
|
From page 287... ...
. INTERPROJECT DIFFERENCES IN THE GAP BETWEEN SOCIAL AND PRIVATE RETURNS On the basis of the estimation of the preceding equations, we calculated for each project the gap between the lower-bound social rate of return and the private rate of return without SBIR funding support.
|
From page 288... ...
A priori, we expected higher prospective estimated social rates of return among Fast Track projects because these are the projects that have attracted outside investors at an early state in the research in anticipation that they were projects that were closer to commercialization. This same reasoning implies a priori that these companies also would have a greater private rate of return without SBIR funding support.
|
From page 289... ...
With the SBIR program in place, the pursuit of SBIR funding probably would be a path of least resistance. However, if the research would have occurred without the public funding, the estimated upper bound and hence the average of the upper and lower bounds for the expected private returns would be too low, and the actual lower bounds for the social rates of return would be even higher than we have estimated.
|
From page 290... ...
1999. "An Assessment of the Small Business Innovation Research Program in New England: Fast-Track Compared with non-Fast Track Projects," this volume.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.