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Chapter 21

Assessing Stat e - L ev e l Science and T e c h nol o g y P oli c i e s North Carolina’s Experience with SBIR State Matching Grants John Hardin, Lauren Lanahan, and Lukas C. Brun

Introduction State governments play a critical, yet understudied, role in supporting research and development (R & D) activity in the United States. Although the federal government makes up the vast majority of public support for R & D, state government R & D expenditures increased 11.3 percent between fiscal years 2010 and 2011, while federal expenditures increased by only 1 percent.1 State governments have directed increasing attention to R & D and innovative activities through science and technology policies and, more broadly, economic development policies to leverage economic benefits within their local jurisdictions. Recent research has found that innovative activity is spatially proximate—which is to say that innovation depends on nearby resources and produces intellectual and economic benefits that are concentrated within a geographic area (Hall, Jaffe, and Trajtenberg 2000; Greenstone, Hornbeck, and Moretti 2010). These local benefits of knowledge spillovers and agglomeration economies catalyze innovation and competitiveness, which have direct implications for regional economic activity and therefore are of growing interest to state 1

Sources: http://www.nsf.gov/statistics/infbrief/nsf14300/ and http://www.nsf.gov/statistics/infbrief/ nsf14307/#tab1.

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386 Competitiveness at the Local Level governments. “This has triggered a fundamental shift in public policy … towards a new set of enabling policies, implemented at the regional and local levels” (Audretsch 1998, 18). A recent 2013 report, Top Trends in State Economic Development,2 published by the National Governors Association, echoed this theme, emphasizing the role and capacity of state economic development strategies to bolster the building blocks for competitiveness and economic growth with the foundation premised on entrepreneurs and innovation, workforce, investment climate, business support, and a stronger connection between universities and the economy.3 While considerable attention has been placed on “public” investment in R & D, often conflating the terms “public” with “federal” investment, this chapter focuses on the increasing role of US states in R & D policy. Increased attention on state government activity offers great promise for this line of scholarship, given that state governments have greater flexibility to experiment with a range of policies to spur innovative activity. Improved understanding of state R & D actions places state policymakers in a fortuitous position to design R & D programs relevant to their states’ local capabilities, regional variation, and proximate research and economic climates (Feller 1997). This broad range of actions that spans both science and technology policies and economic development policies is not only a critical component of a region’s “innovation system,” it also offers a valuable lens for understanding the breadth and scale of the public’s role within the innovation process. This chapter discusses the increasing role of US state government policy in supporting R & D activity, paying particular attention to a small business innovation program in North Carolina (NC). The program provides support for promising early-stage R & D activity among small businesses, with the expectation that the investment will bolster innovation and the regional development. The next section highlights the growing role of state governments in this capacity by providing an overview of both state science and technology policies and economic development policies that aim to promote innovation and competitiveness. The third section provides a brief background on the federal Small Business Innovation Program (SBIR) program, which the NC small business program is designed to complement, and reviews a broad range of complementary government actions at the federal and state levels designed to improve the success rate of the SBIR program and promote innovation. The fourth section focuses on the One North Carolina Small Business Program, a state program designed to complement the SBIR program and promote early-stage innovation among small businesses. The state program serves as an illustrative policy to highlight the role and impact of state-level policies on innovation. Section 5 offers reflective conclusions about state R & D policy and regional competitiveness.

2 Source: http://www.nga.org/files/live/sites/NGA/files/pdf/2013/1308TopTrendsinStateEconDevPa per.pdf. 3 Source: http://www.nga.org/cms/home/nga-center-for-best-practices/center-publications/ page-ehsw-publications/col2-content/main-content-list/top-trends-in-state-economic-dev.html.

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Assessing State-Level Science and Technology Policies 387

Relevant Literature Although the literature on state-level R & D policy is relatively scant, Sapolsky (1971) was among the first to discuss state governments within this context. Notably, in reaction to a series of events, including Sputnik, the subsequent federal influx of R & D investment, and the creation of federal-level science policy advisory positions, states demonstrated initial interest in R & D in the late 1950s and early 1960s by establishing state science advisory bodies. New York was the first in 1959; within the following decade, 46 states followed suit (1971). During the 1980s, and throughout the next two decades, theoretical and policy attention on strategies that stimulate the innovative capabilities of regions accelerated (Oerlemans, Meeus, and Kenis 2007). The “geography of innovation” literature (Feldman 1994; Audretsch and Feldman 1996) investigates both why and the extent to which knowledge spillovers are bounded by geography. This line of literature finds that knowledge produced by a small group of firms and universities investing in research and technology development is transmitted through regionally proximate face-to-face communication, facilitating the innovation efforts of other organizations, and stimulating regional economic growth (Oerlemans, Meeus, and Kenis 2007). During this time, associated literatures on new industrial districts (Markusen 1996), innovative milieu (Aydalot and Keeble 1988), new industrial spaces (Storper 1995; 1997), regional innovation systems (Lundvall 1992), and the learning region (Morgan 1997) also studied how colocated actors organized regional networks to enhance competitiveness. Policy strategies seeking to improve the innovative capabilities of regions also emerged during this period. These “territorial innovation models” (Moulaert and Sekia 2003) sought ways to develop human capital, infrastructure, regional educational and regulatory institutions, and quality of production factors as the main ingredients for regional growth (Oerlemans, Meeus, and Kenis 2007). Complementing these regional economic development initiatives, state-level science and technology programs were part of the policy portfolio seeking to improve the capabilities of regions. Plosila (2004) advanced this discussion in his historical overview of state science and technology (S & T) programs, classifying the evolution of state programs into three stages. The first, in the 1960s–1970s, placed emphasis on bolstering S & T programs; the second, in the 1980s, marked a notable shift toward increased linkages between state S & T programs and economic development policies; and the third, in the 1990s, marked an increased interest in forming technology alliances and trade associations in addition to a stronger linkage between S & T and economic planning. Subsequent research on state science policy has traced the continued attention and strategic state policymaking to promote regional competitiveness and economic development. State policies directed toward innovation have ranged widely from R & D tax incentives (Wilson 2009), to nanotechnology-focused programs (Woolley and Rottner 2008), to a broad portfolio of university-based R & D programs (Feldman, Lanahan,

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388 Competitiveness at the Local Level and Lendel 2013; Feldman and Lanahan 2013; Hearn and Lacey 2014), and open innovation policies among states with lagging R & D capacity (Mayer 2010). This growing body of scholarship recognizes the critical role that state governments have come to play to promote local competitiveness by investing in factors stimulating innovation and R & D. R & D benefits may certainly extend beyond state bounds, yet state interest is tied to the geographically concentrated component of innovation and its subsequent economic benefits. In sum, while there has been considerable discussion over the role of federal R & D for innovation, state governments arguably also have a strong responsibility to invest in R & D, which the literature is beginning to explore.

The Federal SBIR Program Established by the Small Business Innovation Development Act of 1982 and reauthorized multiple times since, the SBIR program requires federal agencies with annual extramural R & D budgets in excess of $100 million to set aside 2.8 percent of their R & D funds for the program for FY 2014.4 Eleven agencies5 participate in this program, offering competitive grant funds to small businesses via two phases of funding that support R & D having high potential for commercialization: Phase I—Proof of Concept and Phase II—Development.6 The size of award increases in size, from $150,000 for the Phase I award, to approximately $1,000,000 for the Phase II award. Only firms that have secured a Phase I award are eligible to apply for the larger Phase II funding.7 Among federal programs to support US small business early-stage innovative activity, the federal SBIR program stands as the largest, totaling over $30 billion in awards as of 2012.8

4 https://www.federalregister.gov/articles/2012/08/06/2012-18119/small-business-innovation-researchprogram-policy-directive. 5 The 11 federal agencies that participate in the SBIR program include Department of Agriculture, Department of Commerce (National Oceanic and Atmospheric Administration and National Institutes of Standards and Technology), Department of Defense, Department of Education, Department of Energy, Department of Health and Human Services, Department of Homeland Security, Department of Transportation, Environmental Protection Agency, National Aeronautics and Space Administration, and National Science Foundation. 6 This includes a third phase, Phase III—Commercialization; however no federal funds are obligated for this portion of the program. Additional information about the SBIR and STTR programs is available at SBIR.gov. 7 Small Business Technology Transfer (STTR) is another program that expands funding opportunities in the federal innovation research and development arena. Established in 1992 and modeled after the SBIR program, STTR is a smaller program, with five participating federal agencies, and a number of awards and funding level that vary, by year, typically between 10 and 15 percent of the SBIR level. The unique feature of the STTR program is the requirement for the small business to formally collaborate with a research institution. For the purposes of this chapter, the STTR program is not discussed separately, though occasionally, as discussed below, it is grouped with the SBIR program. 8 Derived from data on awards available at sbir.gov.

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Assessing State-Level Science and Technology Policies 389 The purpose of the SBIR program is to “strengthen the role of the small, innovative firms in federally funded research and development, and to utilize Federal research and development as a base for technological innovation to meet agency needs and to contribute to the growth and strength of the Nation’s economy” (1982 Statute).9 Public financial support in this capacity has been justified as a response to the underinvestment from the private sector, given the uncertainty and inherent riskiness with innovation (Arrow 1962). The SBIR’s programmatic attention to small firms is particularly warranted because the innovation spillover effects are “likely to be more severe for small firms [because] they do not have the same level of market power or legal resources to protect the economic returns to new innovations” (Cooper 2003, 148). The SBIR program has received notable accolades in identifying small firms with innovative potential (Lerner 2000; Audretsch 2003; Toole and Czarnitski 2007; Wessner 2008; Ege 2009; Link and Scott 2010; Keller and Block 2012). Benefits include increased sales, employment, follow-on financing, innovative output, the attraction of talent, a “certification effect” signaling to potential investors high-quality research and technology, a “demonstration effect” inducing others to innovate, and enhanced property rights protection. However, the positive outcomes of the SBIR program are not uniformly distributed across all projects, but rather are contingent on a series of factors, including regional levels of venture activity, the presence of star scientists on the project, and prior ownership of intellectual property.10

Programs Complementing the SBIR Program Within the United States, three broad types of federal and state programs have emerged to complement these SBIR program—federal programs, federal and state partnerships, and state initiatives.11 We briefly review, in turn, each type of policy complementing the federal SBIR program. 9 The SBIR was one in a cluster of legislation in the early 1980s seeking to address American competitiveness, in particular the concern that the United States was losing its historic advantage in developing and commercializing new technologies necessary to maintain global leadership in productivity. The Bayh-Dole Act of 1980, the R & D tax credit of 1981, the SBIR program of 1982, and the National Cooperative Research Act of 1984 were created to address the malaise in the American economy by providing incentives to spur innovation, particularly for small businesses. Link and Scott 2010 explore in greater detail the history of the SBIR program than can be developed here. 10 While the balance of the evidence points to the program’s ability to promote innovation, Wallsten (2000) finds that growing firms tend to secure SBIR awards, rather than attributing firm growth to the SBIR program. 11 The impacts of the program have been documented in the scholarship and extend further into the policy realm. Countries like Sweden, Russia, the United Kingdom, the Netherlands, Japan, Korea, and Taiwan have followed suit and adopted SBIR-like programs to cultivate an innovation system and promote economic competition (Wessner 2008).

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390 Competitiveness at the Local Level Federal programs: A cohort of subsequent federal programs12 have been designed to complement the federal SBIR program and assist small businesses. These programs include the Department of Energy’s Clean Energy Alliance Partnership13 and the Industry and Growth Forum,14 the National Aeronautics and Space Administration’s Space Alliance Technology Outreach Program (SATOP),15 the National Institutes of Standards and Technology’s “Nanofab” Lab,16 and the National Institute of Health’s Niche Assessment Program.17 While each program is unique in design, they overlap in their shared mission to provide assistance to small businesses—in terms of incubator access, technical assistance, and access to resources. The NIH Niche Assessment Program, in particular, provides support for SBIR awardees, while the others offer services for a broader set of small businesses. Federal and state partnerships: The second cohort of policies includes federal and state policies that stem largely from two federal programs that require state-level participation to ensure greater equity of the distribution of federal SBIR awards. These include the Small Business Administration’s Federal and State Technology Partnership (FAST) and the Rural Outreach Program (ROP). Both were established in 2000,18 although ROP no longer has funding. The FAST program specifically aims to strengthen the technological competitiveness of small business concerns in every state, providing initial funds that must be met with a nonfederal match (often from the state government).19All states are eligible to participate in the program; however, competitive funds vary based on the level of SBIR activity in the state.20 The ROP was similar to FAST, yet only “eligible states,” as determined by their lagging SBIR performance, qualified for the program’s cooperative agreements. While the FAST and ROP programs have been subject to tenuous funding since 2000, these programs have served as a catalyst for state governments to offer outreach programs for their own SBIR community. Programs like Hawaii’s High Technology Development Corporation, Indiana’s 21st Century Fund, Mississippi’s FAST Program, and even New Hampshire’s NH Inspires Innovation program provide support services in terms of technical expertise, one-on-one mentoring, and workshops for SBIR applicants. Additionally, programs that include Louisiana’s SBIR/STTR Phase Zero Part I program, Missouri’s Technology Incentive Program, and South Carolina’s Phase 0 Program provide seed funding for the SBIR proposal preparation stage. While not an exhaustive 12 http://www.sba.gov/community/blogs/community-blogs/small-business-cents/help-start-ups-p

art-3-technical-assistance-prog. 13 http://cleanenergyalliance.com/. 14 http://www.industrygrowthforum.org/. 15 https://www.spacetechsolutions.com/letmeknowform.asp. 16 http://www.cnst.nist.gov/nanofab/nanofab.html. 17 http://grants.nih.gov/grants/funding/nap.htm. 18 Established by the Small Business Innovation Research Program Reauthorization Act of 2000, Public Law 106-554. 19 All proposals must include a letter of endorsement from the governor or governor’s designee to be eligible. 20 Leading states qualify for a 1:1 match of nonfederal funds; lagging states qualify for a 1:2 match; and intermediate states qualify for a 3:4 match.

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Assessing State-Level Science and Technology Policies 391 review of all the state programs, this brief list illustrates state interest outside of the federal domain. State-level initiatives: The third set of policies includes state-level initiatives designed to complement the federal SBIR and directly support local innovation. Programs like North Carolina’s One NC Small Business Program, the Kansas Bioscience Authority, and Kentucky’s SBIR/STTR Matching Funds program offer a state noncompetitive match ranging from $30,000 to $150,000 to successful Phase I recipients to aid the technical aspects of the program and assist them as they compete for the larger Phase II award.21 These SBIR matching programs stand in contrast to the state programs mentioned above, given that they are more aggressive state programs that provide direct investment for small firm early-stage innovative activity. In total, 14 states have established a publicly funded matching program offering noncompetitive grants to successful Phase I recipients (Lanahan and Feldman 2013). These states offer grants that are intended to support technical aspects of an innovative venture for firms who have demonstrated potential by securing the federal SBIR award. New York was the first state to adopt the program in 1984, followed by Hawaii and Oklahoma in 1989. It was not until after the two most recent federal SBIR reauthorizations in 2000 and 2011, respectively, that state governments increased the rate of policy adoption. Figure 21.1 highlights the 14 states with a publicly funded matching program, indicating the active policy years for each state. While these matching programs share the feature of providing noncompetitive funds for successful Phase I recipients, the size of the match varies not only between states but annually as well. Kentucky’s SBIR/STTR Matching Funds Program and New York’s NYSTAR offered up to a 1:1 match, while the Kansas Bioscience Authority Program and Illinois’ Department of Commerce and Economic Opportunity were limited to a 1:2 match. Connecticut requires supplemental funding from a third party, and the One NC Small Business Program ranges from $30,000 to $100,000, contingent on availability of funds. Despite the range in the size of these matches, this state policy activity is illustrative of a growing commitment among states to support programs that directly bolster innovation and local competitive advantage. Moreover, as of 2014, additional states, including Alabama, Nevada, and Rhode Island, have publicly expressed interest in establishing a matching program in the near future. Scholarly attention on the impacts of small business innovation programs has been generally directed to the federal SBIR program, with few exceptions (Lanahan and Feldman 2013; Lanahan 2013). In 2012, however, North Carolina completed a comprehensive assessment of its state matching program. The next section reports the findings of an in-depth survey undertaken in 2012 to assess the impacts of the One NC Small

21 Most of these programs provide matching funds for both SBIR and STTR grants. Because the differences between the SBIR program and the STTR program are not relevant for the purposes of this chapter, the term “state matching program” is used here to refer to programs that provide matching funds for SBIR grants, STTR grants, or both.

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392 Competitiveness at the Local Level

2012 2008–2011 1984–1991 2011

2005–2009

2007– 2008 2003

1989 2004 1989

2006

2012

2012 2006–2011

Figure 21.1 Map of 14 States with a Publicly Funded Matching Program, Indicating the Active Policy Years for Each State

Business Program. This survey presents the most comprehensive assessment to date of a state matching program.

One NC Small Business Program In 2005, North Carolina established the One NC Small Business Program (NC General Statute §143B-437.81). In doing so, lawmakers modified an existing grant program focused on recruiting larger companies to the state—the One NC Program—by broadening and realigning it to include aggressive and comprehensive financial support for small high-technology businesses already within the state. Modeled after similar SBIR matching programs in other states, the One NC Small Business Program has four core objectives, as outlined in its statutory guidelines22: 1. Increase the amount of federal research dollars received by NC small businesses 2. Help NC small businesses bridge the funding gap period between the final Phase I payment and the first Phase II payment in the federal SBIR/STTR program 3. Increase the intensity of the research conducted under Phase I, making NC small businesses more competitive in the competition for Phase II funds 4. Encourage the establishment and growth of high-quality, advanced technology small businesses in NC 22 http://www.nccommerce.com/scitech/grant-programs/one-nc-small-business-program.

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Assessing State-Level Science and Technology Policies 393 To accomplish these objectives, the program, which is administered by the North Carolina Board of Science & Technology (BST), provides state matching grants up to a maximum of $100,000 to a NC business that received a federal SBIR/STTR Phase I award. Matching grants are disbursed in two stages. Stage 1 awards 75 percent of the total match, and is disbursed when proof of Phase I award is provided to the BST. Stage 2 awards the remaining 25 percent of the total match, and is disbursed upon completion of the Phase I project and submission of the Phase II application to the federal agency.23 This two-stage award structure is designed to provide sufficient funding to strengthen the Phase I project work, and then to reserve a portion to assist the small business during the transition period between the completion of the Phase I project and the initiation of the Phase II project. During spring 2012, as part of a legislatively required organizational and programmatic review, BST staff conducted a comprehensive survey of the program’s grantees to assess the impact of the state’s SBIR matching funds.24 The BST staff were expressly interested in the independent impacts of the state matching grant above and beyond the initial impacts of the federal SBIR/STTR grant. Thus, while the survey was modeled after the survey methodology used in An Assessment of the SBIR Program (Wessner 2008), a congressionally mandated study of the federal SBIR program, conducted by the National Research Council of the National Academy of Sciences, its questions were explicitly designed to measure, to the extent possible, the independent impacts of the state funding.25 The findings presented below—drawing upon the program’s baseline information, routine reports, and the 2012 assessment survey—offer valuable insights into the impacts that a state-level matching-grant program can have on promoting local competitiveness.26

23

The program’s guidelines require that the applicants must also fulfill several other requirements, such as be a for-profit small business with its principal place of business in NC, meet all federal SBIR/ STTR program eligibility requirements that are applicable to the relevant federal solicitation, have received an official notification of federal SBIR/STTR program Phase I SBIR or STTR award, certify that at least 51 percent the activity conducted under the Phase I research and subsequent Phase II effort, if awarded, will be performed in NC, etc. For additional detail, see http://www.nccommerce.com/scitech/ grant-programs/one-nc-small-business-program. 24 http://www.nccommerce.com/Portals/6/Documents/Resources/OST_Continuation_Review_ Report_Final.pdf. 25 Efforts to measure the independent impact of the state funding took two forms: (1) Likert-Scale questions on which grantees rated their level of their agreement or disagreement with statements focused on the extent to which the program achieves its stated objectives and (2) preprogram and postprogram counts of relevant factors (e.g., employment, follow-on funding, collaboration with universities) paired with corresponding Likert-Scale questions on which grantees rated their level of their agreement or disagreement with statements addressing the extent to which the state matching grant contributed to increases in those factors, independent of the federal funding. 26 Baseline demographic data are available for all 245 matching grants awarded between 2006 and 2012; responses to the 2012 survey are available for 200 (82 percent) of the matching grants.

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394 Competitiveness at the Local Level

Program Impacts The NC small businesses receiving the state matching grants expend the funds in a number of ways. The majority of the funds, 53 percent, is used to cover the wages and salaries of the small businesses’ employees. Twelve percent of the expenditures support research-related equipment, 10 percent for supplies, 6 percent each for facility rental and consultant fees, and 2 percent for computer software. The remaining 11 percent cover other costs, such as patent and legal fees or consultant fees; these are expenses not allowable under the SBIR program as shown in table 21.1 below. Of note, many grantees cite the greater flexibility of the state funds in contrast to the restrictions placed with the federal SBIR funds as one of the state matching program’s most important benefits. It enables them to pay for a broader array of product and services that are vital to their commercialization efforts. In terms of impacts, at the broadest level, the grantees indicate the program’s funds are highly effective in enabling them to achieve the program’s four core objectives. As indicated in Figure 21.2, with respect to the program’s first objective—increasing the amount of federal research dollars received by NC small businesses—73 percent of the grantees strongly agree, and 14 percent moderately agree, that the state matching funds helped them receive federal research dollars. As for the program’s second objective—helping bridge the funding gap between Phase I and II funds—83 percent of grantees strongly agree, and 12 percent moderately agree, that the state matching funds helped them bridge the funding gap. Turning to the program’s third objective—increasing the intensity of the research conducted under Phase I to make them more competitive for Phase II funding—77 percent of businesses strongly agree, and 13 percent moderately agree, that the state matching funds helped them be more competitive. With respect to the program’s fourth objective—encouraging the establishment and growth of high-quality, advanced technology small businesses in NC—82 percent of businesses strongly agree, and 12 percent moderately agree, that the state matching funds encourage the development and growth of advanced technology firms. Table 21.1 One NC Small Business Program, Use of Funds, FY 06-11 Use

Matching $

Wages and salaries Equipment Supplies Facility rental Consultant fees Computer software Other

$8,862,142 $1,984,994 $1,637,191 $1,000,130 $941,646 $370,991 $1,843,635

Total

$16,640,729

% of Total 53% 12% 10% 6% 6% 2% 11% 100%

Source: Hardin 2012.

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Assessing State-Level Science and Technology Policies 395 Objective 1: Increase the Amount of Federal Research Dollars Received by NC Small Businesses 1. Strongly Disagree 0%

1. Strongly Disagree

2. Moderately Disagree 0%

3. Slightly Disagree 1%

5%

5. Slightly Agree 6. Moderately Agree

0%

2. Moderately Disagree 1%

3. Slightly Disagree 0% 4. Neutral

Objective 2: Help NC Small Businesses Bridge Funding Gap Period between Final Phase I Payment and First Phase II Payment

8% 14%

7. Strongly Agree

2% 3%

6. Moderately Agree 73%

Objective 3: Increase Intensity of Research Conducted under Phase I, Making NC Small Businesses More competitive in Competition for Phase II Funds

10%

7. Strongly Agree

83%

Objective 4: Encourage Establishment and Growth of High-Quality, Advanced Technology Small Businesses in NC 1. Strongly Disagree 0% 2. Moderately Disagree 1%

1. Strongly Disagree 0% 2. Moderately Disagree 0% 3. Slightly Disagree 0% 4. Neutral 1% 5. Slightly Agree 9% 6. Moderately Agree 13% 7. Strongly Agree

4. Neutral 5. Slightly Agree

3. Slightly Disagree 0% 4. Neutral 5. Slightly Agree 6. Moderately Agree 77%

7. Strongly Agree

2% 4% 12% 82%

Figure 21.2 Grantee Assessment of One NC Small Business Program’s Effectiveness in Meeting Program’s Four Core Objectives

In terms of additional quantifiable impacts of the state matching grant, above and beyond the program’s four core objectives, the survey identified four in particular. They are summarized in table 21.2 and described below. Increased Phase II Award Rate: Prior to the program’s inception, the Phase II award rate for North Carolina small businesses was 50 percent or lower. Among the small businesses receiving matching grants and completing the survey, however, the Phase II award rate was 56 percent, or at least six percentage points higher, resulting in a total of $73,313,803 in follow-on Phase II SBIR/STTR awards. Because the composition of the set of preprogram businesses and the size of the federal SBIR program are not identical to the composition of the set of businesses participating in the program, the increased Phase II award rate may not be due entirely to the impact of the program. However, 68 percent of the grantees strongly agree, and 15 percent moderately agree, that the state matching grant helped their business be more competitive in the competition for Phase II funds, indicating the importance of the state matching grant.27 27

This question was distinct from the question above addressing the extent to which the program achieves its second core objective. Specifically, this question asked the grantees to rate the extent to which state matching grant helped their company be more competitive in the competition for Phase II funds. Additionally, in two related questions, 68 percent of grantees strongly agreed, and 17 percent moderately agreed, that the state matching grant helped them to complete the Phase I project on time, and 74 percent of grantees strongly agreed, and 15 percent moderately agreed, that the state matching grant helped them to achieve the goals of the Phase I project, respectively.

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396 Competitiveness at the Local Level Table 21.2 Summary of One NC Small Business Program Impacts Increased Phase II award rates by approximately 6 percent Increased employment by approximately 10 percent Increased collaboration with institutions of higher education for a majority of grantees Increased follow-on funding across several sources Source: Hardin 2012.

Increased employment: To a limited but notable degree, the program also contributed to increasing the number of jobs the small businesses create and retain. Specifically, the survey respondents noted that the state matching grants contributed to the creation of a total of 241 new jobs and retained 246 exiting jobs.28 In total, the estimated net employment impact of the state grants is 487 jobs, or 20 percent of the small businesses’ workforce at the time of award. Given that the small businesses devote 53 percent of the grant funds to wages and salaries, that makes the cost per job created/retained slightly more than $18,000, a competitive amount among state-level economic development programs as shown in table 21.3 below.29 Improved collaboration with institutions of higher education: The program also improves the small businesses’ collaborations with higher education research institutions. This is a notable finding, as research indicates that collaborative activity bolsters spillovers and agglomeration economies that can promote competitive advantage (Chesbrough 2006; Gulbranson and Audretsch 2008; Block and Keller 2009). Of the 59 percent of grantee businesses that collaborated with a university or college, 49 percent strongly agreed, and 22 percent moderately agreed, that the state matching funds enhanced the scope or quality of their partnership with a university or college. Of those partnerships, 91 percent were with a college or university within North Carolina, suggesting additional local benefits of the state matching grant. Additional funding received: Collectively, the 200 small businesses completing the survey indicate receiving more than $85 million dollars of follow-on funding to directly support the development and commercialization of the products and services they developed with the initial federal and state funding. This is in addition to $73,313,803 in follow-on Phase II SBIR/STTR awards noted above and captured elsewhere in the survey.30 Thus, combined with the follow-on Phase II SBIR/STTR

28

The exact wording of the survey question was as follows: “How many jobs per category, if any, did your business create with the state matching grant? How many jobs per category, if any, did your business retain with the state matching grant? Do not include jobs created or retained by the original Phase I SBIR/ STTR award or other funding.” 29 This figure is derived by dividing the total amount of state matching grant funds devoted to wages and salaries ($8,862,142) by the total number of jobs created or retained (487). 30 The SBIR/STTR funding listed in table 21.4 pertains to other SBIR/STTR funds, such as a Phase I grant that resulted from the work of the Phase I grant originally matched by the One NC Small Business Program.

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Assessing State-Level Science and Technology Policies 397 Table 21.3 Number of Employees in Businesses Awarded Matching Grants under the One NC Small Business Program Type Professional/scientific Management Technical/technician Skilled labor Unskilled labor Other Total

# of employees (at time of award)

# of employees (at end of award period)

1,278 441 417 176 21 60

1,398 458 475 195 40 68

2,393

2,634


Table 21.4 One NC Small Business Program: Additional Funding Directly for Technology Developed during Project, FY 06-11 Additional funding Colleges/universities Foreign investment Nonprofit Non-SBIR/STTR federal Other domestic company Other private equity Personal funds of company SBIR/STTR federal funding State or local governments US venture capital Your own company Total

Count 83 76 62 103 116 97 97 95 88 87 102 1,006

Dollars $600,000 $125,000 $435,000 $21,326,825 $10,948,403 $11,613,000 $905,084 $28,608,219 $1,807,250 $6,700,000 $2,237,500 $85,306,281


funding noted above, the total amount of additional funding the businesses received amounts to $158,620,084. For every $1 the state provides to the small businesses with matching grants,31 they receive an additional $9.5 dollars from other sources. While not all of that follow-on funding can be attributed to the state matching grants—notably, the Phase I federal funding contributes to the follow-on funding as well—the grantees report that the state grants play a significant role. Specifically, 54 percent of grantees strongly agree, and 11 percent moderately agree, that the state matching grant helped them receive additional funding from one or more additional 31 $16.6 million total.

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398 Competitiveness at the Local Level sources, indicating the additional impact of the state matching grant, independent of the federal SBIR grant. The survey also captured hundreds of testimonials from the program’s grantees, of which the following three are representative: I launched my company specifically because I knew that if we landed one federally funded Phase I effort, the state would match it. This early-stage support helped us pay personnel, achieve all of the goals of the Phase I project, and generate preliminary data that helped us obtain the larger Phase II grant. It also helped us establish business infrastructure. Our company couldn’t have proceeded without the state matching monies. To do the R&D, input from consultants in the field is needed but could not be budgeted for in the federal grant, so the NC match grant helped us obtain the guidance needed to be more competitive in the Phase II application.

These testimonials underscore the supplemental, targeted impact of the state matching grants, attesting to the value of state support for local technology commercialization efforts.

Conclusion This chapter focused on state government innovation policies, paying particular attention to the range of state policy programs complementing the federal Small Business Innovation Research (SBIR) program, which serves as the largest federal program supporting US small business early-stage innovative activity. Focusing specifically on one such state-level SBIR matching grant program, the One NC Small Business program, it presents the results from a recent survey assessing the efficacy of that program. The survey finds evidence that the state matching grants offer notable benefits for the local economy, including increased award rates, greater employment among small businesses, enhanced follow-on funding, and improved collaborations with institutions of higher education. While the literature has generally focused on assessing the impacts of the federal SBIR program, this chapter offers a unique and more detailed perspective on how the public sector can promote economic development by supporting science and technology programs that increase regional spillover effects.

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