APPENDIX

STATEMENT OF HON. JOHN R. THUNE

Good afternoon. It is a pleasure to welcome all our witnesses to this joint hearing between the Subcommittee on Rural Enterprises, Agriculture and Technology and the Subcommittee on Workforce, Empowerment and Government Programs.

Today's hearing has been called to discuss the Small Business Technology Transfer Program, which is up for reauthorization this year. The Technology Transfer Program, commonly known as STTR, was created in 1992 for the purpose of utilizing the vast reservoir of commercially promising ideas at our nation's research institutions.

Authorization for this important small business program expires in September, and it is the committee's intent to work with the Senate Small Business Committee to reauthorize this important program by September 30th of this year.

STTR is a competitive federal grant program that reserves a specific percentage of research and development dollars for small businesses and their nonprofit research institution partners.

Key to the success of STTR is that it requires a cooperative venture between a for-profit small business and a researcher from a university, federal laboratory or a nonprofit research institution for the purpose of developing commercially viable products from ideas spawned in a laboratory environment.

While the Small Business Administration is the coordinating agency for STTR, five federal departments and agencies actually implement STTR and designate research and development projects and accept proposals from the private sector.

These agencies-Department of Defense, Department of Energy, Department of Health and Human Services, National Science Foundation, and the National Aeronautics and Space Administration-reserve a portion of their R&D funds to award contracts to STTR partnerships.

This program has enjoyed a wide degree of success, and the small business and research communities are very supportive of its continuation. STTR has helped create new jobs and stimulate our economy by bringing new technologies to the marketplace and helping new business ventures develop into stable small businesses. As a Representative from a rural state, I can tell you that job creation is vital to the small communities in South Dakota. The establishment of just one new small business makes a huge difference on Main Street, USA. A small business with 100 employees in a town adds: 351 more people; 79 more school children; 97 more families; $490,000 more in bank deposits; $565,000 more in retail sales per year and over $1 million more in personal income per year.

I want to again thank the witnesses for appearing before the two subcommittees today, and we look forward to your testimony.

STATEMENT OF REPRESENTATIVE MILLENDER-MCDONALD

Good afternoon, Mr. Chairman. I am pleased to participate in this timely hearing on the Small Technology Transfer Program (STTR). Technology and its associated applications is the engine that is driving our economy. But it is important to remember that small businesses have fueled the recent economic expansion and they serve as the conduit to deliver goods and services in the 21st Century.

Virtually nothing we do on a daily basis remains unaffected by technological growth and or research and development. In our homes we use programmable microwaves in addition to advanced technology related to personal medical devices. Our cars have global positioning systems, and our portable phones allow us to access the Internet. Indeed, we have entered into a new and exciting frontier.

This new frontier must be navigated and that is our purpose today; to examine how the STTR program administered by the SBA is enabling and supporting the interests of our economy and small businesses. The STTR was designed to address

the lack of capital that small business research firms experience. It achieves this objective by partnering small firms with private research institutions, federally funded R&D centers, or non-profit organizations. I am particularly interested in determining what can be done to enhance partnerships between private research institutions and minority and female-owned small businesses.

As the September 30th deadline for reauthorization approaches for STTR, I am concerned about whether this program is doing enough to meet the needs of the small business research and development sector. I am very curious about why of the 864 STTR awards from FY 1994-FY 1998, only 13 or 1.5 percent were to womenowned businesses, and why only 2.8 percent went to minority-owned companies? While I acknowledge the strides that have been made regarding partnerships between Historically Black Colleges and Universities (HBCU's), Minority Institutions (MI's) and the SBA, so much more needs to be done.

Therefore, I am very interested in determining what has to happen in order to assist small businesses to gain access to opportunities that much larger businesses enjoy. I also want to explore why inner cities and rural communities are being left behind in the technology partnerships that are occurring.

I look forward to receiving answers to these questions and many others. Thank

you.

STATEMENT OF MAURICE SWINTON

Chairman and distinguished members of the subcommittees, thank you for inviting me here today. I am pleased to discuss the Small Business Technology Transfer (STTR) Program. I am Maurice Swinton, the Assistant Administrator for the Office of Technology, with responsibility for managing the STTR Program, the Small Business Innovation Research (SBIR) program and the newly authorized Federal and State Technology Partnership Program.

In 1992, the Congress enacted Public Law 102-564, which authorized the STTR program as a companion program to the SBIR program. Despite the success of the SBIR Program, Congress felt that more could be done to link small businesses with creative ideas at universities, non-profit scientific and educational institutions, and Federal laboratories. This collaboration would result in a better commercialization rate for Federally sponsored research conducted at non-profit institutions. Both programs (SBIR and STTR) share the same underlying philosophy-use Federally funded research and development requirements to promote technological innovation by small businesses and strengthen the American economy.

The STTR program is structured in three phases similar to SBIR with a few minor differences. Phase I in the STTR program is to evaluate the scientific, technical and commercial merit of an idea, funded at $100,000 and is generally for a one year period, as opposed to $100,000 and six months in the SBIR program. Phase II in the STTR program funds phase I projects that have the most potential for further development. Phase II award funding is $500,000 and the project duration period for 2 years, instead of $750,000 for phase II and same project duration period in the SBIR program. Under Phase III, no Federal STTR funding is provided. Private sector support is used to bring the innovation to the commercial marketplace. The 10 participating agencies in the SBIR program have research and development budgets greater than $100 million, and are required to reserve 2.5% for their SBIR programs. Conversely, the 5 agencies participating in the STTR program have research and development budgets greater than $1 billion, and must reserve .15% for their STTR programs.

Unlike the SBIR program, the STTR program involves cooperative research and development performed jointly by a small business and a research institution. Research institutions eligible to partner with a small business in the STTR program include universities and colleges, non-profit research centers, or federally funded research and development centers (FFRDC's). Although the conduct of the project is a cooperative research and development venture, the small business exercises overall management, control, and responsibility for the project.

Participating agencies must ensure that the small business manages and controls the funding agreement pursuant to a business plan that provides for the commercialization of the technology being funded. The small businesses must negotiate a written agreement with the research institution covering allocation of intellectual property rights and, if any, rights to carry out follow-on-research, development, and commercialization. To facilitate this process, participating Federal agencies and SBA make sample model agreements available to the small business.

In establishing STTR, Congress intended to create a vehicle for moving ideas from research institutions to the market, where they can benefit the U.S. economy and,

at the same time, serve the mission need of the sponsoring federal agency. In its eighth year of operation, the STTR program continues to meet these objectives and has had an impact on innovation and commercialization of products and services. In FY 1999, participating agencies issued 329 awards to small technology firms totaling over $64 million. For the past 4 years, the STTR program has provided an average of $65 million annually for small businesses and their research partners to accomplish the research and development needs of the participating agencies. Since the inception of the program, over $198 million has been awarded to 1,157 small businesses. These firms provide jobs and economic growth in most states.

Since the inception of the STTR program, just over 250 universities across the United States have partnered with small innovative firms to conduct research for a STTR funded project. The SBA now makes this information available to the public through the agency's Technology Resources Network database (TechNet). Small businesses can search for research partners that possess unique technical capabilities to team with to submit a proposal to the STTR funding agencies. The SBA plays an important role as the coordinating agency for the STTR program. We help the five agencies implement the program, review their progress, and report annually to Congress on program activities.

SBA is also the information link to research topics being proposed by the Federal agencies. We collect solicitation information from the agencies and publish quarterly updates in a Pre-Solicitation announcement. The topics and anticipated release and closing dates for this information can be accessed from the SBA's website.

SBA also has been very successful in working with the states through the Rural Outreach Program. This program provided 25 states an opportunity to receive grant funding to support statewide efforts to increase their participation levels in the programs. These states met the criteria established in Public Law 105-135, as states that received less than $5 million in funding during fiscal year 1995. They also showed a low participation rate in the SBIR and STTR programs. A list of the 25 states is attached.

SBA has also been very successful through its initiative to increase the participation levels of small disadvantaged businesses and minority educational institutions in the programs. The SBA, along with our Federal cosponsors-Defense Advanced Research Projects Agency, and the Environmental Protection Agency-has provided a series of SBIR and STTR seminars and workshops for small disadvantaged businesses and minority institutions. To date, four seminars have been conducted with the participation of 30 minority universities and 75 small disadvantaged businesses. The initiative has provided grants to four minority institutions to serve as mentors in their respective states to encourage small disadvantaged businesses to participate in the programs, using preliminary competitions in which the research topics are taken from actual Federal agency STTR and SBIR solicitations. The firms prepare proposals, and submit them to the minority institution for evaluation. Firms can then receive awards up to $1,000 for the submission of a successful proposal. After the firm has completed the critique recommended by the minority institution, the proposal is submitted to the Federal agency issuing the topic. We began this process in August 2000, and to date 12 proposals have been submitted to the SBIR and STTR programs, and five have been funded by one of the participating Federal agencies. As you can see in one year, we have achieved a 40% success rate in proposal submissions through this initiative. We anticipate a higher success rate in the coming years.

Assessments of the program have been favorable. For example, the 1996 review by the United States General Accounting Office (GAO) made the following statement: "technical evaluations of STTR proposals showed favorable views of the quality of the proposed research and commercial potential. For research quality, the evaluations (1) awarded perfect scores to many proposals, (2) rated proposals among the top 10 percent of research in certain agencies, (3) described some proposals as "cutting edge", and (4) generally found the quality to be excellent for commercial potential, the evaluations arrived at similarly favorable conclusions."

Quantitative measures of program success are essential, but they often don't tell the whole story. A closer look at specific STTR cases shows us that the returns on our public investment in the STTR partnerships are multifaceted. For example, under the Air Force STTR program, Magnetic Imaging Technologies Inc. of Durham, North Carolina has developed a Magnetic Resonance Imaging (MRI) technology, originated by a Princeton University physics professor, that creates images based on gas, rather than liquid (as under the existing MRI technology). Thus, for the first time, this technology enables clear imaging of the ventilation in a patient's lungsa major breakthrough in the diagnosis of lung diseases and disorders, including, for DoD, chemical weapons' exposure of soldiers during battle. The company initially attracted over $1 million in outside investment to match DoD's funding of $600,000,

including a cash investment form the individual who headed General Electric's development of the initial MRI technology 20 years ago. The company has since attracted more than $15 million in additional private investment, and was recently acquired by Nycomed Amersham, Inc., a world leader in diagnostic imaging. The technology is now undergoing clinical trials. If successful, data from these trials will be used to support an application to the Food and Drug Administration for marketing approval. The market size exceeds $100 million.

Authority for the STTR program expires on September 30th of this year. The Administration supports reauthorization of the program for a three-year duration, and no increase to the percentage set aside for the program. The Administration would also support an increase in the phase II awarded level to $750,000.

Thank you for the opportunity to appear before you today. I will be happy to answer any questions you may have.

ELIGIBLE STATES FOR THE RURAL OUTREACH PROGRAM

(1) Alaska, (2) Arkansas, (3) Delaware, (4) District of Columbia, (5) Hawaii, (6) Idaho, (7) Indiana, (8) Iowa, (9) Kentucky, (10) Louisiana, (11) Maine, (12) Mississippi, (13) Missouri, (14) Montana, (15) Nebraska, (16) Nevada, (17) North Dakota, (18) Oklahoma, (19) Puerto Rico, (20) Rhode Island, (21) South Carolina, (22) South Dakota, (23) Vermont, (24) West Virginia, (25) Wyoming.

TESTIMONY OF THE DIRECTOR, OFFICE OF SMALL AND DISADVANTAGED BUSINESS UTILIZATION, OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY & LOGISTICS

Mr. CHAIRMAN and MEMBERS OF THE COMMITTEE: Thank you for the opportunity to appear before you today, as the Department of Defense (DOD) representative, to discuss the Department's Small Business Technology Transfer (STTR) program, the STTR program, first authorized to expend funds in 1994 as a pilot program, funds mission-oriented cooperative R&D projects between a small technology company and a research institution (i.e., university, federally-funded R&D center, or nonprofit research institution). It thus attempts to join together two powerful forces for technological progress: the entrepreneurial talents of small technology companies and the innovative ideas of the R&D scientists and engineers in U.S. research institutions. These STTR partnerships may be a unique and effective vehicle for moving ideas from research institutions to the market, where they can improve the performance and affordability of our defense systems as well as benefit the U.S. economy.

U.S. research institutions represent a vast, and often untapped, technology resource, thus the potential benefit of involving them in our R&D is enormous. Our nation's research institutions employ a significant number of scientists and engineers in the United States, and perform billions of dollars in R&D each year. Their efforts have contributed significantly to our nation's leadership in basic research and many areas of applied research. They have also generated the research breakthroughs that made the United States a military superpower in the post-world war II era.

The scientists and engineers in these institutions often recognize that their research has important commercial or military applications, but have few efficient mechanisms to pursue these applications. Regular research grants generally fund more basic research; furthermore, these researchers can only participate in the larger SBIR program in a consulting or minor subcontracting role as long as they remain primarily employed at the research institution. Consequently, many potential commercial and military applications languish in the research laboratory.

Although STTR involves the significant participation of research institutions, it is still very much a small business program. It is also a highly promising program, serving as a unique and effective vehicle for harnessing ideas and expertise in our nation's research institutions for the benefit of the U.S. military and the U.S. economy.

There are many examples of successful STTR projects that offer promising benefits for our military capabilities and improvements to the economy through commercialization of technology developed under the STTR program.

Since 1997, when current SÎTR funding levels became effective, the DOD STTR program funding has remained relatively stable with FY 2001 funding experiencing a slight increase. However, the number of proposals submitted in response to our identified R&D needs decreased significantly starting in FY 2000 and continuing in FY 2001. We are not sure why the number of proposals submitted under the STTR program is declining but have identified the situation as a matter for examination.