COMMENT EXPANDING OPPORTUNITIES IN R&D AND HIGH-TECH MARKETING By Philip Speser, J.D., Ph.D. Recent empirical research has established the importance of marketing for high-technology companies, especially for small and mediumsized firms. For example, Robert Cooper's study of new product efforts by 103 industrial firms (Research Management, Nov./Dec. 1983) concluded: "Marketing resources appear to be the most critical in deciding a successful new product program....In contrast, the technological areas— engineering, R & D, and production-did not have nearly the direct impact on success as did marketing." The difficulty of marketing high-tech products is indicated by the high concentration of R & D in the U.S. R & D performance tends to be limited to a few large companies and universities, whose geographic locations have also been highly concentrated (see Table 1). In recent years, federal R & D funding decisions have tended to reinforce this concentration. For example, a greater proportion of federal R&D funding is awarded to large contractors than to small firms, whose R & D activities are mostly company funded. Firms with 25,000 or more employees account for over 80% of federal R&D contractors; firms with over 10,000 employees account for more than 90% of federal R & D contractors. The R & D facilities of these contractors are predominantly located in a few metropolitan areas the same areas in which most private-sector R & D occurs. Even R & D subcontracting tends to be highly concentrated within these same urban areas. The failure of the federal government to fully utilize the talents of smaller firms has had a number of unfortunate consequences. Research has consistently indicated that: Small R & D firms are the primary source of major innovations in the U.S.; These firms have one of the fastest net-growth rates in new employment, sales, exports, productivity, revenue, and tax dollars, and are highly cost-efficient in their R & D efforts; Conducting government R & D at small firms stimulates their formation and growth; Small firms receiving government R&D awards rapidly diversify into private-sector work; and, Innovation Development Act, P.L. 97-219, the share of federal R & D contracts awarded to small firms had been decreasing. Major consequences of the concentration of federal R & D include unnecessarily low rates of innovation, additional costs for federal and corporate R & D, and a lack of general economic spinoff benefits outside the boundaries of only a few municipalities. The Small Business Innovation Development Act, drafted to address these problems, was enacted and is being implemented with strong congressional and White House support. The law is simple and straightforward. It requires all major federal R & D agencies to set aside a small percentage of their funds for Small Business Innovation Research (SBIR) programs. Only firms with 500 or fewer employees can compete in these programs. SBIR programs must include three phases. SBA policy directives stipulate that small firms be invited to submit Phase I proposals on topics chosen by the soliciting agency (see Table 2), in accordance with the agency's own objectives. Given the breadth of agency interests, almost any R & D topic can be found within SBIR solicitations. The SBIR programs are designed to encourage cost-efficient federal R & D. Phase I allows agencies to explore a number of potential suppliers and approaches prior to committing large amounts of funding. Companies submitting the most scientifically and technically meritorious proposals are awarded between $30,000 and $50,000 to conduct a feasibility study on their approach to the topic. Those projects best able to demonstrate their viability can compete for a second funding phase of up to about $500,000. Because Phase I and Phase II are concerned with government objectives, this work is funded by the applicable federal agency. However, federal R & D frequently has spin-off applications in the private sector. Consequently, in the case of Phase II proposals of approximately equal scientific and technical merit, those that have attracted com Copywrite Advanced Technology Publ., inc. 14 LASER FOCUS/ELECTRO-OPTICS All rights reserved 1934 FEBRUARY 1984 mitments of follow-on private funding are given preference Phase III consists of the privately funded follow-on work. SBIR programs have stimulated innovation and creativity within the US. science and tech. nology system. These programs provide an excel. lent opportunity for larger companies, including major federal contractors, to diversify into pr. vate markets. Larger firms have provided seed capital, technical assistance, and contracts for Phase III funding contingent on successful.com. pletion of Phases I and II to small firms in exchange for the inclusion of relevant Phase III scientific technical goals in proposals for federally funded SBIR awards Venture capitalists have also utilized this approach, as it reduces the investors risk in subsidizing high-risk projects Because small firms can use up to 33% of subcon tract awards, numerous consulting ties between universities and firms seeking SBIR work have been established Federal agencies. larger companies, and universities are learning-with the help of federal SBIR funds that good ideas and products can be developed anywhere With modern communica tions and transportation, commercial and con. sulung ties no longer have to be locally restricted By providing a national focal point for innova. tors, SBIR programs are demonstrating that only the marketplace the physical location of net. working centers for high-technology inputs and outputs will be geographically concentrated in the emerging high-tech economy Suppliers, including individual members of an R & D team. can be located anywhere so long as they are able to market their ideas, skills, and products in one or more of these high-tech marketplaces Smail and medium-sized firms and universities can explore new opportunities in federal and commer. cial markets by sending key personnel to, or retaining reputable representation within, one of the few high-tech marketplaces Regardless of the location of their facilities or the precise nature of their products and services. SBIR programs offer new R & D and marketing opportunities for high-tech firms If actively pur. sued. these opportunities can stimulate corporate, local, and national growth 16 ACER FOCUSELECTRO CFTCS FEBRUARY CA Senator RUDMAN. We will now hear from Ms. Ann Eskesen. You were with Bentley College for some time, if I am correct, and you are now in the private sector with your institute. We would love to hear your testimony. STATEMENT OF ANN ESKESEN, PRESIDENT, INNOVATION DEVELOPMENT INSTITUTE Ms. ESKESEN. Thank you, Senator Rudman. First, may I thank you for the opportunity to present testimony before this committee on the implementation of Public Law 97-219. My testimony is very detailed and has a considerable amount of statistical information, and I am sure you will be relieved to know that I am not going to give you all of that. As you point out, my name is Ann Eskesen. I am president of the Innovation Development Institute, which is a small firm specializing in small business development issues. In the capacity as chairman of the Innovation Committee of SBANE, I was very much involved in the passage of the SBIR legislation, and since then, if anything, I have been even more involved in its implementation, addressing specifically the effective use of the program by technology-based small firms in many parts of the country. There were many who opposed passage of the legislation with some real expressed concerns. Those concerns were real, but it gives me a tremendous pleasure today to be able to point to the considerable achievement of the last 20 months. The competency of applicant small firms has been well demonstrated. The competition for awards has been energetic, and the process for implementation has been noticeably free of serious incidents. There obviously have been problems, and given the diversity that defines the program and those involved, the small business person and the Federal administrator alike; there are going to be more. In broad terms, however, I think the achievement has been considerable. But I want to make sure that people recognize where some of these achievements were: In the agencies that were particularly concerned about passage of the legislation, I am pleased that competent and skilled administrators were appointed to manage the program. That was a very important factor. An obvious effort is being made to develop quality topics and to outline the expectations and procedures of the particular agencies. The structure has been such that there has been a great deal of cross-referencing between the agencies as to what the program involves in terms of administrative activity. The lines of communication between small business advocates and agency personnel has been open and bidirectional. Many days have been spent on the road by program administrators responding to the request that they participate in the several SBIR conferences and briefings that have been held all over the country attended, as you pointed out, by in excess of 8,000 people. As one who was often part of that traveling road show, I can tell you that we got to know each other very well and that the effort involved there, and that expended in laying the groundwork for effective implementation was considerable. I want now to move to the second part of my testimony and some specific analysis of program activity. For convenience's sake, if I can turn these on, I will put these up on the viewgraph. Unfortunately, I am a little close and therefore it is not going to be very clear. Senator RUDMAN. We can see that all right now. Ms. ESKESEN. All right. In the 10 agencies making phase I awards last year-NSF was only just recently announced even though their solicitation came out with the other 10 agencies-in those 10 agencies a total of 674 projects were selected for funding. When you consider multiple awards, that involved a total of 497 firms; 395 were in receipt of single awards and 102 firms received multiples. This Vu-Graph references the grouping of the awards by the particular States. As you will notice, and as you have already heard, California and Massachusetts, already strong in the preceding NSF and DOD programs, had a significant presence in this year's program too, taking a total of 256 of the available awards and, by total of award not by dollar amount, 37.98 percent of the total funding. At the other extreme, there were 9 States who received no awards at all; 15, 1 to 4; 8, 5, to 9; 5, 10 to 14; 8, 15 to 24, and 4, between 25 and 50. This VU-Graph shows the same information but broken out by State. The information one is extremely difficult to read on the screen but I did include it in my written testimony. Much more interesting than simply looking at the numbers, a thought was to make some comparison between what we would have expected particular States to do and what they actually did. So, I calculated how many awards different areas of the country would be expected to receive, and how many they actually received, and looked at the difference between these two figures. Particularly interesting in this regard was the achievement of seven States that quite literally came from nowhere. Alabama, Arizona, Illinois, Indiana, New Jersey, Tennessee, and Virginia were States where previously they had had very little representation in the SBIR program, and yet this year showed a significant advance. For example, in the State of Alabama, by a startling 500 percent; from nothing-approximately 2 awards previously—to 15 that were received under this year's program. By way of comment that is not in my testimony, I think one of the reasons for that is that the nature of the program is significantly different now. That is both an achievement and a problem. The achievement is, that we now have a broader range of interests that includes many engineering-based companies as opposed to the science-based companies that previously defined the NSF and DOD programs. The problem, however, is that that perception of the programs is not yet transmitted to many who would be participants. We are finding, for example, that a common perception of the program is that it is all sophisticated, high-tech. It is true that a percentage of the awards made will be to that type of company. However, it is also increasingly obvious that many of the awards being made are to the problem oriented engineering-based companies. In many of these firms, proposal writing experience is less well developed. These are skills that they have to learn and in many instances, if they do not recognize the program is no longer now excusively high-tech, and if they have not yet developed those skills, there is going to be a lead time before they begin to get involved in the program. I have in addition-though I will not show it here-a calculated award rate for the number of submissions in particular States compared with the number of awards that they actually received, but the findings of that calculation are interesting. It is apparent, for example, that the State of California is playing a numbers game-with all due respect to specific California firms. Firms in the State are submitting approximately twice the number of proposals to receive approximately the same number of awards as are being received in Massachussetts. It is important to stress that quality, not quantity, is the essence of the program here. In that vein, it is also interesting to look very particularly at the competitive award rates within the particular agencies. This VuGraph serves to make two points: First of all, to demonstrate the considerable competitiveness of this program. This is by no means a program in which you just get in and you are competing against a few. You are competing against a lot, and they are very good. However, the more important point I want to make here is to draw your attention to the concern I have about the serious problem developing in the smaller agencies-specifically, the difference between the amount of money that they have, and the number of proposals they receive, and the small awards that they are being able to make. This particular Vu-Graph and the chart that I have in my testimony was prepared before the actual awards were made. In fact, what has happened is that the differential has become even more pronounced. In the larger agencies they have increased the number of awards that they were able to make, and in the smaller agencies they have actually come in at the lower end of the limits on their awards. In consequence, we have a serious problem. For example, in the Department of Transportation, quite literally now a participating firm is in a situation of competing, 60 submitted proposals for 1 received award. In the larger agencies, therefore, you have―― Senator RUDMAN. Before you take that chart down, there is another inference that you can draw from that. I recall very vividly sitting here several years ago and having a rather intensive discussion with witnesses at that time from NIH who essentially said that they really ought to be excluded from the program because they really did not believe that there were people out there that were qualified to submit any kinds of proposals at all. We took polite-some might say impolite-exception to that. We had a fair amount of evidence, substantiated, which you now show us on that chart. If I have the right number |