Where Industry and Security Intersect
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Most AT companies participating in the survey obtained funds for research and development from internal resources as opposed to outside entities such as banks, venture capitalists, or state and federal government grant programs. Developing a product for a very small market with the inherent cost premiums of small production runs — and selling it to a segment of the population with limited financial means — can make it difficult to attract venture capital.
Nevertheless, it appears from survey data that many U.S. AT companies are able to attract substantial outside capital to fund R&D when they have the right product idea. These manufacturers are mostly small firms and represent a minority of this segment of the AT industry. The use of outside funding by mid-size companies is tiny — and nonexistent in the case of large AT firms.
For the 1997-1999 period, no large company that participated in BIS’ survey reported using external funding sources to support R&D programs. Total R&D expenditures reported by this group were flat in 1997 and 1998 at $41.3 million and $41.9 million, respectively; R&D spending in 1999 exceeded $50 million.35 In these three years, the largest firms showed increasing ability to support R&D with internal funds.
Fewer than 10 percent of mid- and small-size companies responding to survey questions reported using external funding in the 1997-1999 period. Of the $12.8 million in R&D expenditures reported by mid-size companies for 1997, just $574,000 came from external sources.
In 1998, only two of 23 mid-size firms (8.7 percent of companies) reported obtaining outside funding for R&D — $350,000. This was just 2.6 percent of the $13.4 million spent on R&D by mid-size companies that year. For 1999, use of external funds by mid-size AT companies for R&D fell to $245,000 as overall R&D spending for the group increased to $15.9 million.
In terms of utilization of external funding sources to drive R&D programs, it seems that small companies lead. And in many instances, these small companies sought large leverages on limited internal R&D funds. In 1998, one company spent $19,000 of internal funds, but obtained about $555,000 in outside funding; the firm’s revenues for that year totaled $800,000.
Sixteen small companies reported raising $3.5 million in 1999 to support their R&D operations, a figure that represents 10.5 percent of the $33.3 million spent overall on R&D by small AT companies. In 1998, 15 small firms reported obtaining $2.6 million in funding for R&D, which was about 7.6 percent of total small-company R&D expenditures ($34.2 million) reported by survey participants. Similarly, in 1997, 13 small AT companies raised $2.5 million from external sources to support R&D — about 7.1 percent of the $35 million R&D outlays reported for 1997 by survey participants.
Just why AT companies, both large and small, don’t make greater use of outside funding resources cannot be explained by the data obtained in the BIS survey. Based on written comments on financing issues provided by survey participants, it appears there is both a desire and a need by many AT companies to access outside capital sources.Many smaller companies, however, may not be aware of the full extent of the portfolio of private sector funding opportunities that exists — or know how to go about obtaining that funding.
Beyond securing direct funding from financial houses, there also is some evidence that AT companies are not fully cognizant of ongoing federal and state grant and partnership activities that might directly, or indirectly, support their R&D efforts. These include consulting services, partnering opportunities, and grant programs at the Departments of Defense and Energy, National Science Foundation, National Aeronautics and Space Administration, National Institute of Standards and Technology, and the Small Business Administration.
The use of the Small Business Innovation Research (SBIR) grants by U.S. AT companies is a case in point. This competitive award program may be the largest single source of federal government funds available to U.S. AT companies. Some smaller initiatives, such as National Institute on Disability and Rehabilitation Research’s (NIDRR) Field Initiated Projects program,36 are also sources of assistance.
All for-profit U.S. businesses employing fewer than 500 persons are eligible to compete for SBIR grants of up to $250,000; funding can span several years through SBIR Phase I and Phase II grants.37 Only 14 percent of all survey respondents (52 companies), however, applied for SBIR funding for years 1997-1999.
SBIR rules restricting applications to companies with less than 500 employees do not appear to be a significant barrier in this industry. No more than 10 companies participating in the BIS survey appear to have been affected by the SBIR employment base ceiling.
The low participation rate by U.S. AT manufacturers cannot be attributed to a lack of success in winning SBIR grants. For the three-year period, survey participants reported submitting 181 grant applications — and winning 80 separate grants under a competitive process. This is a higher-than-normal success rate (44 percent) for companies competing for SBIR grants.
The SBIR grants covered a range of AT-related fields, including: hearing, sight, mobility, environmental controls, communication software solutions, sensory aids, orthotics/prosthetics, and aids to daily living. Agencies awarding grants for AT product-related R&D were the Departments of Agriculture, Defense, Education, Health and Human Services (HHS), and Transportation (DOT); and the National Science Foundation (NSF).
HHS was the largest single dispenser of SBIR grants to respondent AT companies with 92 awards, followed by Education, 28; NSF, 26; Agriculture, 15; DOD, 5; and DOT, 5. Incredibly, no AT company participating in the survey reported applying for SBIR grants from either of two federal science and technology giants — the Department of Energy (DOE) and the National Aeronautics and Space Administration (NASA). Although there are many activities resident at federal laboratories and engineering and technology centers that are applicable to AT companies, it may be that: 1) much of the industry is unaware of these institutions’ vast capabilities; or 2) the SBIR opportunities available at DOE and NASA are of little practical value to AT companies.
Specific feedback from a handful of surveys does not offer clear clues as to why more AT firms do not pursue grants. One company was very positive about the program, stating that it enabled research and development on several products incorporating the latest in technology. Another company, however, was critical of SBIR proposal reviewers, suggesting they were more inclined to approve and partner with entities having strong academic affiliation rather than businesses prepared to develop products adaptable to the medical reimbursement environment.
A related program that U.S. AT companies rarely take advantage of is the Small Business Technology Transfer Program (STTR).38 Just two companies reported receiving awards in the 1997-99 period, Phase I grants totaling $100,000 and Phase II grants of $284,000. The STTR program may not be as attractive to AT companies because it requires collaboration with outside organizations. This can involve greater effort and may raise concerns about protecting intellectual property. Survey data do not provide any explanation for the low level of use of STTR by AT companies.
Several AT companies participating in the survey suggested that federal and state governments increase both the number of grants that are awarded and the total amount of funds available for R&D grants in programs that would support the development of AT technologies. In addition, companies stated that increased availability of low-interest loans to finance R&D would be helpful.
35 Total R&D expenditures cited for large, medium, and small companies understate actual reported industry expenditures for R&D. Not all companies that participated in BIS’s survey provided data on their R&D expenditures.
36 Field-initiated (FI) projects must further one or both of the following purposes: (a) develop methods, procedures and rehabilitation technology that maximize the full inclusion and integration into society, employment, independent living, family support and economic and social self-sufficiency of individuals with disabilities, especially individuals with the most severe disabilities; or (b) improve the effectiveness of services authorized under the Act. FI projects carry out either research activities or development activities. [More information on NIDRR research]
37 Under SBIR’s
Phase I program companies must establish “proof of concept” to
demonstrate the merits of the work; Phase II funding is awarded only after
Phase I work is judged to be successful. The SBIR program was established
in 1982 under the Small Business Innovation Development Act to stimulate technological
innovation; encourage disadvantaged and minority persons engaged in technological
innovation; and increase commercialization of inventions derived from federal
research and development programs.
38 A program through which federal agencies fund cooperative R&D projects involving a small business and a university; an approved, contractor operated, federally funded research and development center; or a nonprofit research institution.