In the April 23, 2008 Issue:

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 Wholly New SBIR Program Passes House, 368-43
To paraphrase an old automobile ad campaign, the SBIR program reauthorized for two years by the U.S. House of Representatives on Wednesday is not your father’s SBIR program as it was created and sustained for the past 25 years. Nor would it be the same, smaller STTR program if the bill becomes law.
 
H.R. 5819 means bigger awards, but fewer awards. It means more flexibility as to when research projects can enter the SBIR/STTR process. It clarifies and expands eligibility to include companies owned by venture capital firms. It opens up significant subcontracting opportunities. It has, for the first time, requirements to give preferences in SBIR/STTR awards to companies based on geographic and demographic considerations.
 
Also reauthorized in the bill is a dramatically changed Federal and State Technology Partnership (FAST). FAST would make two-year matching grants of up to $250,000 to support state SBIR/STTR outreach and proposal assistance. An amendment introduced by Rep Carney (R-PA) that was passed by voice vote, requires the Small Business Administration (SBA) to give preference in making FAST awards to proposals involving Small Business Development Centers that are certified by the SBA to assist technology companies (SBTDCs).
 
Whether or not the program is improved or impaired by all of the proposed changes is a matter of debate among members of Congress, the broader SBIR community, and other entities serving as champions and opponents on specific elements of the bill. Whether it means more innovation or less remains to be seen over the two years of its authorization.
 
Regardless of one’s opinion of the changes, SSTI believes the result, if H.R. 5819 in its current form is also approved by the Senate and signed by the president, should lead state and local TBED organizations to reassess and revise their strategies to assist prospective SBIR and STTR applicants.
 
Bigger SBIR/STTR Awards
H.R. 5819, as amended and passed by the House, loosens many long-standing structural elements of the SBIR program and its award process. First, H.R. 5819 triples the sizes of SBIR and STTR Phase I and Phase II awards to $300,000 and $2.2 million, respectively. This marks the first official increase in the award sizes in 15 years, although the National Institutes of Health (NIH) and components of the Department of Defense have exceeded the limits on some individual awards for several years.
 
The bill also requires agencies to issue at least two solicitations for proposals each year.
 
Larger award sizes and more solicitation cycles should make the program attractive to more companies and researchers, potentially increasing the number of SBIR and STTR applications submitted and demand for state Phase 0 grants to develop proposals. 
 
Drastic Reduction in Total Number of Awards
The bill also will result in far fewer awards – perhaps less than 40 percent of the current number of awards – since the House also turned down an attempt to increase the 2.5 percent set-aside requirement that funds the individual federal agencies’ SBIR programs and the 0.5 percent STTR set-aside.
 
Opposition to the larger pools of SBIR/STTR funding was raised by NIH and several associations serving universities, medical research hospitals and related institutions. Rep. Ehlers (R-MI) amendment to eliminate proposed increases of 0.5 percent for SBIR and 0.1 percent for STTR passed on a voice vote.
 
A significant drop in the number of awards is likely to create challenges for small businesses that have utilized SBIR awards as seed funding. State Phase 0 awards may then go for naught, unless states also consider developing alternative mechanisms to SBIR for those projects found to be of scientific or technological merit but not funded by the federal agencies. The number of SBIR Phase I proposals should gradually decline as the odds of winning an award become less desirable.
 
More Flexibility for When Research Projects Enter SBIR/STTR Programs
Both SBIR and STTR program grants have traditionally followed a rigid two-phase cycle. All companies entered the program through short-term Phase I grants for proof-of-concept research. Only Phase I awardees are eligible to compete for the larger, longer-term Phase II grants. That changes dramatically with the House-passed bill. 
 
H.R. 5819 grants considerable flexibility to the award structure for both STTR and SBIR such that it: 1.) allows companies to enter the program at either Phase I or Phase II; 2.) allows companies to win Phase II awards in an agency different than the one that funded the Phase I;  3.) allows companies to win sequential Phase II awards for the same project; 4.) allows companies to win Phase II awards as quickly as possible when the agency deems appropriate, including at the beginning of the Phase I; and 5.) allows agencies to waive the minimum work requirements for small business concern or research institution participation.
 
First-ever Requirements to Skew Competition toward Rural Areas, Depressed Areas, Vets and Energy-efficient Companies
For 25 years, SBIR has managed to remain a grant program based entirely on open competition to make award decisions. Over those years, there has been concern about the distribution of awards geographically and demographically. The House heard those concerns and included language in the bill that states, “Federal agencies shall give priority to applications so as to increase the number of SBIR and STTR award recipients from rural areas.’’
 
In addition, Rep. Boswell (D-IA) and Rep. Sutton (D-OH) introduced an amendment that passed by voice vote and states, “Federal agencies shall give priority to applications from companies located in geographic areas that, as determined by the Administrator, have lost a major source of employment.”
 
Another amendment introduced by Rep. Sutton and passed on voice vote states, “Federal agencies shall give priority to applications from veterans … so as to increase the number of SBIR and STTR award recipients who are veterans.”
 
The fourth preference in SBIR/STTR award selection, added by an amendment from Rep. Matheson (D-UT), also applies to FAST recipients. The language requires federal agencies to give priority to applications “from organizations that are making significant contributions towards energy efficiency, including organizations that are making efforts to reduce their carbon footprint or are carbon neutral.”
 
What’s Next?
Without some form of reauthorization passing before Sept. 30, 2008, the SBIR program expires. The program's reauthorization is uncertain with the White House issuing a veto threat, according to the April 22 Congressional Quarterly Today. CSPAN reported in a voice over during the floor action on SBIR that the White House considers SBIR a tax or budget cut on the R&D budgets of the 11 participating federal agencies.
 
H.R. 5819 now moves to the Senate for its consideration, where it is likely to move to the Senate Committee on Small Business and Entrepreneurship.
 
H.R. 5819, as passed, will be available by searching the bill number at: http://thomas.loc.gov/

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Brookings-ITIF Call for National Innovation Foundation, More Cluster Funding
With the goal of helping frame innovation policy for the next Administration, the Brookings Institution and the Information Technology and Innovation Foundation (ITIF) released two reports today calling on the federal government to respond to America’s slipping leadership in commercial innovation. Together, the reports argue that without fundamentally new and different federal interventions, the U.S. lead in innovation will continue to shrink.
 
In Boosting Productivity, Innovation, and Growth through a National Innovation Foundation, Brookings and ITIF researchers recommend that the federal government reorganize and augment its diffuse current activities by establishing a National Innovation Foundation (NIF) – a lean, nimble and collaborative organization designed to work with businesses and other organizations in support of their innovation activities. Optimally, the report suggests NIF would have an annual appropriation of $1 billion to $2 billion annually.
 
NIF is proposed to engage in the following activities:

“In a highly competitive global economy, innovation is essential because it drives our economic growth and provides good jobs, but we are slipping on innovation in part because federal policy is poorly organized to promote it,” said Rob Atkinson, president of ITIF and co-author of the NIF report.
 
Atkinson observes that while other advanced and developing nations are implementing smart, aggressive national strategies to stimulate commercial innovation, the U.S. lacks a strategy, invests little in innovation-promotion efforts, and provides limited support to the effective, but under-funded, innovation efforts of state and local governments.
 
In Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies, Brookings scholars further describe the need for a federal cluster grant program to stimulate competitive regional cluster initiatives across the nation.
 
Brookings argues industry clusters – geographic concentrations of interconnected firms and supporting industries – are underutilized in promoting growth. On this front, some states, including Arizona, Connecticut, Iowa, Oregon, Texas and Washington, have launched their own regional cluster initiative programs.
 
However, federal programs do little to support competitive regions in general and competitive clusters in particular, the authors assert. In fact, federal efforts to support regional economic development are, for the most part, ad hoc, insufficient, uncoordinated and diffuse, Brookings argues. The authors identified no fewer than 250 separate federal programs in 2006 that they consider as supporting economic development. Spread across 14 different agencies, together these programs cost the federal government almost $77 billion. Among these programs, only a small number work with regional clusters, and they cost less than 1 percent of the total federal economic development spending. 
 
“It’s time for the federal government to act as a true partner to state, local, and industry leaders who are working to advance the nation’s prosperity,” Atkinson contends. In this vein, the two reports offer detailed recommendations on how the nation should step up its promotion of innovation.
 
Boosting Productivity, Innovation, and Growth through a National Innovation Foundation may be accessed at either of two websites: http://www.itif.org/ or http://www.brookings.edu/papers/2008/04_federal_role_atkinson_wial.aspx
 
Clusters and Competitiveness: A New Federal Role for Stimulating Regional Economies is available at: http://www.brookings.edu/papers/2008/04_competitiveness_reamer.aspx
 
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Research Initiatives Slated for Funding in Approved State Budgets
Lawmakers in Georgia and Maryland approved action earlier this month on several TBED-related measures for the upcoming fiscal year. Highlights of the approved budgets are outlined below.
 
Georgia
Lawmakers committed $2.5 million, half of Gov. Sonny Perdue’s recommendation, to create the Georgia Research Alliance venture capital initiative to speed commercialization of university derived technologies to the marketplace. Earlier this year, Gov. Perdue asked legislators to provide $5 million to the Advanced Technology Development Center (ATDC) in FY09 that would be matched with $5 million in existing funds and pooled with $30 million in private funds (see the Jan. 30, 2008 issue of the Digest).
 
Lawmakers reduced by half funding for the Georgia Youth Science and Technology program, which aims to increase interest and enthusiasm in science and technology among elementary and middle school teachers and students. The program is slated to receive $250,000 in FY09.
 
The FY 2009 approved budget is available at: http://www.legis.state.ga.us/legis/2007_08/house/budget/reports/FY_2009_Bill_Final_Conf_Cmte_.pdf
 
Maryland
The state will provide ongoing support of $19 million for stem cell research grants in the upcoming fiscal year – an issue that divided the two legislative chambers throughout the 2008 session. Gov. Martin O’Malley recommended $23 million for the Stem Cell Research Fund earlier this year (see the Jan. 23, 2008 issue of the Digest). Lawmakers reached a compromise toward the session’s end, providing $19 million with the possibility of an additional $1 million from tax collections, if it becomes available.
 
Lawmakers fully funded Gov. O’Malley’s request to provide $6 million for tax credits to encourage investment in biotechnology firms and $2.4 million for the Nanotech Biotechnology Initiative Fund within the Department of Business and Economic Development (DBED).
 
The Maryland Economic Development Assistance Authority Fund business assistance funding, includes $3 million for operating and capital grants for the development of nanobiotechnology research under a competitive process to be developed in consultation with TEDCO, according to budget documents.
 
Lawmakers removed a $2 million appropriation for the Rural Broadband Assistance Fund within the Division of Financing and instead requested a report from DBED to the budget committees on the rural broadband project, including the status of all project phases, the use of state funds received, potential sources of private funding, and estimates for project completion. The budget committees will have 45 days to review the report and consider the $2 million transfer to the Rural Broadband Assistance Fund from the Maryland Economic Development Assistance Authority Fund.
 
The FY09 budget maintains for a third consecutive year a tuition freeze for in-state undergraduates at public universities and increases community college funding by 9 percent or $21.2 million. Additional higher education initiatives slated for funding include $15.5 million to address workforce shortage areas and research needs, $3 million for Defense Base Closure and Realignment-related workforce programs (the same level recommended by the governor), and $1.7 million for Regional Higher Education Centers. The Maryland Industrial Partnerships program is slated to receive $1 million within the Educational Grants appropriation under the Maryland Higher Education Commission.
 
The FY 2009 operating budget (SB 90) is available at: http://mlis.state.md.us/2008rs/bills/sb/sb0090e.pdf

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Recent Research
Could Sudden Doubling of Federal Physical Science Research Funding Undermine U.S. Competitiveness Goals?
Last year, Congress authorized $5.9 billion in new spending on research, education and entrepreneurship as part of the Bush Administration’s decade-long $50 billion American Competitiveness Initiative (ACI). Though Congress did not appropriate a significant amount of new funding to match this authorization, many remain committed to the goals of the ACI. This initiative would double federal funding over 10 years for research within agencies such as the National Science Foundation (NSF), the Department of Energy (DOE) Office of Science and the National Institute of Standards and Technology. A recent study, however, finds the speed proposed for reaching these goals, while well-intentioned, may be a mistake.
 
In their paper, What if Congress Doubled R&D Spending on the Physical Sciences?, Richard Freeman and John Van Reenen argue that rapid increases in funding for R&D are substantially less effective in improving U.S. competitiveness than steady long-term increases. They examine the consequences of the federal government's effort between 1998 and 2003 to improve the U.S. standing in the life sciences by doubling the research budget of the National Institutes of Health (NIH). Freeman and Reenen find that much of the benefit of this increased funding was undermined by the cost of instituting many new programs and expenditures at once and then readjusting after NIH spending plateaued, which it has done since 2005.
 
In 1998, a bipartisan coalition in Congress pushed for a large increase in federal research spending, particularly at NIH. With the Clinton Administration's support, annual NIH spending grew from about $14 billion in 1998 to $27 billion in 2003. When this rapid acceleration of spending ended, the rate of increase fell to 3 percent in 2004, and continued to fall to 0 percent in 2007. Measured in constant dollars against the Biomedical R&D Price Index, the 0 percent increase in 2007 was equivalent to a 10.9 percent drop in spending. The result is fewer grants being made and decreased overall spending on research.
 
There were several consequences that arose in the wake of this sudden rise and fall in spending. First, as the number of grants rose, researchers submitted a larger number of applications. After the funding surge ended, however, the number of grants awarded decreased, but the applications did not. The result was a large drop in the rate of successful applications. When researchers found that more applications were being denied, many began submitting multiple applications for a single research project. This put a much greater burden on grant evaluators, who were swamped with applications. For researchers, who depend on new and continuing grants to sustain their work, the change led to widespread cuts among research staffs.
 
Second, the consequences disproportionately impacted younger researchers who had entered the field during the years of increased spending. During the years of increasing spending, principal investigators hired a larger number of postdoctoral research and graduate students. Once the number of grants fell, these younger researchers were often the first to be eliminated. Others, who had finished their training during the period of increased spending, found limited opportunities in the job market. Given the current concerns about retiring older researchers and the lack of younger workers to take their place, sudden changes in funding levels can be highly detrimental to competitiveness.
 
Freeman and Van Reenen argue that the NIH initiative would have been more successful if funding had been slowly increased over 30 years, even if the total spending during that time would be less than it was with a sudden increase over a few years. Steady increases allow agencies to initiate projects one-at-a-time and provide a more dependable stream of research funding. The authors acknowledge that long-term steady increases over time can be more difficult to implement politically. They suggest that one option to help support grant-dependent research through times of inconsistent funding would be to include extra overhead for stabilization within research grants. These funds could provide bridge support once for researchers when R&D spending slows down.
 
What if Congress Doubled R&D Spending on the Physical Sciences? was presented by John Van Reenen and Richard Freeman at the National Bureau of Economic Research's (NBER) Conference on Innovation Policy and the Economy on April 15, 2008, in Washington, D.C. The paper will be published as part of the Conference Report, which will be available in the future on the NBER website: http://www.nber.org/
 
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Florida Leverages Advantages in Biotech to Prepare for Space Shuttle’s Demise
The end of the space shuttle program in 2010 has many state and local governments uncertain about the future of the aerospace industry. A recent NASA report estimated that as many as 10,000 contractor jobs could be lost at spaceflight centers across the country by the time the program ceases operation. Florida's John F. Kennedy Space Center would be the hardest hit, with as many as 80 percent of its current workforce lost in the next 2-3 years. To prepare for that loss, the state has begun a campaign to reorient its aerospace industry by supporting companies focused on the next generation of spaceflight technologies. This will include leveraging Florida's significant presence in life sciences research to support the development of technologies that will be particularly vital with the rise of private, manned space launches and space tourism.
 
Last week, Florida Governor Charlie Crist announced a new partnership between the state and SPACEHAB Inc., a leading provider of commercial space services such as satellite launch processing and the design of modules that improve living conditions on spacecraft. SPACEHAB will collaborate with the state to support a new space-based, biotech corridor anchored at the Space Life Science Laboratory at Kennedy Space Center. The first priority of the new corridor will be to develop a space-based infectious disease model to help ensure the health and safety of space travelers.
 
Space Florida, a special district created by the state legislature in 2006 to promote the state's aerospace industry, will provide capital investment to support the new initiative and will give companies access to research facilities at the Space Life Science Lab. The agency also will help companies enter the aerospace/biotech market by facilitating partnerships with other companies and government agencies and other types of business assistance. SPACEHAB has active agreements in place with many international space organizations, such as the Japan Aerospace Exploration Agency, which Florida hopes to use to provide markets for these new companies and increase the state's profile as a global aerospace and biotech leader.
 
This latest effort will leverage Florida's substantial investment in the life sciences sector over the past few years. In addition to high-profile recruitment of the Scripps Research Institute, the Max Planck Institute of Bioimaging, the Torrey Pines Institute for Medical Studies, and the creation of the Miami Institute for Human Genomics, the state has also been increasing its investment in life science research at its universities. In 2007, the University of Florida received a record $583 million in research funding, including a 92 percent increase in state funding. Much of this new funding was directed to the university's Health Science Center, which has helped to expand the state's life science research presence into the central and northern areas of the state.
 
The new aerospace/biotech initiative also will complement Space Florida's ongoing effort to attract private aerospace companies to the state. Earlier this month, Governor Crist announced that the agency was aggressively pursuing more than 50 space-related firms for the state's commercial space market, particularly the Space Coast. Though many of these companies develop technologies for space launch and vehicle design, the agency is now targeting companies involved in space-related services, products and technologies for improving living conditions in space.
 
Find out more about these initiatives at: http://www.SpaceFlorida.gov

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$5M Investment Breathes Life into Tennessee TBED Program
A strong research base, a climate where entrepreneurs can thrive, access to risk capital, and a network of partner organizations have long been considered by policymakers and practitioners the formula for success and sustainability in technology-based economy. The Tennessee Technology Development Corporation (TTDC) unveiled its new strategic plan last week, leveraging these resources to build the state’s economic development portfolio by strengthening the science and technology sectors.
 
The new plan is TTDC’s solution to creating and implementing an innovation-based competitiveness agenda with a statewide scope – a task handed down by the Tennessee Department of Economic and Community Development this year with a $5 million investment.
 
The strategic plan calls for the creation of four new boards, each comprised of members of the TTDC board of directors and individuals recognized as experts in scientific research, entrepreneurship, and capital formation in rural and urban communities. They include:

In March, TTDC also launched a new Phase 0 program to provide Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) assistance to high-tech and biotech companies throughout the state. The Phase 0 program is funded with an initial $100,000 and provides up to $4,000 in funding for qualified businesses that need assistance applying for the federal SBIR/STTR grants. The money is to improve the quality and competitiveness of Phase I proposals. TTDC hopes to remove the barriers for emerging companies applying for the grants who are often held back by lack of financial resources and industry connections.
 
A press release outlining TTDC’s strategic plan is available at: http://www.tntechnology.org/

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Fuel Efficiency, Alternative Fuels Are a Top Concern for Americans, Survey Shows
When given a list of seven technology categories to possibly target and invest money and resources over the next 10 years, 37 percent of U.S. respondents selected “fuel efficiency and alternative fuels” as their leading choice, according to a national survey commissioned by the Fairfax County Economic Development Authority (FCEDA) in Virginia. The remaining choices provided by the survey, which was conducted in March 2008, were as follows (ranked by overall popularity):

While pursuing green energy strategies may be the top choice for respondents as a whole, slight differences appear within the survey’s demographic groups. About 33 percent of women selected medical technologies as their top choice, making it the highest category for women. This was followed by 30 percent of women naming fuel efficiency and alternative fuels as being the highest priority. Forty-three percent of men selected fuel efficiency and alternative fuels as their top priority.
 
For 46 percent of college graduates, fuel efficiency and alternative fuels was their top choice. Comparatively, this same priority was ranked first by only 31 percent of those with a high school degree or less – with medical technologies being favored instead. In addition, the older survey participants were, the more they selected fuel efficiency and alternative fuels as their top choice. It was the top priority for 42 percent of those 55 and older, 37 percent of 35-to-54-year-olds, and 31 percent for 18-to-34-year-olds.
 
The press release for the survey, which contains information about polling on the same question in the U.K., is available at: http://www.fairfaxcountyeda.org/08releases/apr03-08.htm. The results from the U.K. reverse the top two priorities of fuels and medicine but closely parallel the U.S. responses, otherwise.

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