BOX 2-1

Downward Bias in the Estimation of the Impact of the SBA Directive

Assessing the impact of the SBA exclusion of majority venture-funded firms is difficult because obtaining data on the ownership structure of companies, especially private-held small firms, is hard to do. This assessment therefore relies on a sample of firms that received Phase II SBIR awards during the period 1992-2002 (before the directive was issued). The use of such data is likely to yield a downward bias in the estimate of the effects of the SBA exclusion for two reasons:

  • Recent shift of venture capital to the biotechnology sector. The life sciences and biotechnology were relatively embryonic industries during the sample period (before 2002). More importantly, venture capital started shifting towards biotechnology and life sciences after the Internet bubble burst in 2001.a Thus, the number and proportion of small life science-based firms receiving venture funding may be much higher than can be captured from data focused on the 1992-2002 period.

  • Venture funding barred as biotechnology firms matured. Leading papers in the economics of innovation literature point out that technological and product development opportunities (and thus, commercialization of research) become more prevalent as an industry matures.b Venture funding is focused mainly on product development. This implies that it is likely that the SBA ruling may be excluding a higher percentage of firms in this sector as the industry matures.

  

aDouglas P. Lee and Mark D. Dibner, “The Rise of Venture Capital and Biotechnology in the US and Europe,” Nature Biotechnology, 23:672-676, 2005.

  

bOn product innovation and commercialization in a wide variety of industries, see Edwin Mansfield, “Academic Research and Industrial Innovation: An Update of Empirical Findings,” Research Policy, 26(7-8):773-776, April 1998.

2.3
CASE STUDY AND OTHER DATA

One final area of analysis concerns the impact of the ruling on the biotech industry itself. As noted earlier, BIO and other groups have claimed that the exclusion of venture funded companies from SBIR will result in a critical “gap” in the funding flow, one that may prevent important discoveries from being commercialized.

To substantiate these claims, BIO conducted telephone and Internet surveys of its “emerging company” membership—defined as firms with fewer than 350 employees and no marketable products.23 The surveys suggest that a large

23

BIO appears to have contacted all 650 firms that make up its emerging company membership, with a response rate of about 41 percent. BIO provided no additional background information about the surveys. For a description of the surveys, see Appendix E of this report.



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