Unanticipated consequences: concerns about the sale of taxpayer-funded technologies to foreign entities

ABSTRACTAn unanticipated consequence from the U.S. Small Business Innovation Research (SBIR) program is the propensity of U.S. firms to sell their SBIR-funded and developed technology rights to foreign entities. While such sales are factually documented in reports from both the U.S. National Academies and from the Department of Defense, the U.S. Congress has only recently shown concern about such activity. Using project-level data, we document the extent of foreign sales of technology rights. We also highlight the role of foreign development funding during the commercialization phase. Our statistical analysis finds a positive association between the probability of selling technology rights to foreign firms or investors and the receipt of foreign development funding. This finding might be a bellwether to the U.S. Congress and to other countries that have adopted programs that mirror the U.S. program.KEYWORDS: SBIR programsale of technology rightsforeign development fundingR&DJEL CODES: H11H32H44 Authorship Contribution StatementBoth authors contributed equally at all stages of this study.Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 See https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions.2 This act is one of a number of Congressional responses to the productivity slowdown in the economy that began in the early – to mid-1970 and raised its head again in the early 1980s.3 See also Bastiat (original Citation1848, Citation1995, 1) who wrote: ‘There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.'4 Unanticipated consequences associated with a legislated subsidy, such as the SBIR program, are not necessarily at odds with the concept of government failure for which the rules set by government are too broad (Dolfsma Citation2011).5 These countries, and the date of the enabling legislation, are: Republic of Turkey (1995), Australia (1996), Brazil (1997), South Korea (1998), Japan (1999), Taiwan (1999), United Kingdom (2001), The Netherlands (2004), and New Zealand (2012). A detailed summary of the programs in each of these countries is forthcoming in a special issue of Annals of Science and Technology Policy.6 For example, Cunningham and Link (Citation2021, 40) wrote that a comparable program in the United Kingdom is the Small Business Research Initiative (SBRI), and it was initiated in 2001 to mirror the U.S. SBIR program. The authors’ claim that the UK program was initially a ‘major failure' but it was revised and re-initiated to support technological development amongst UK firms.7 Link and Scott (Citation2012, 375) examined this issue more broadly, but in a purely descriptive manner, and they conclude that ‘the technologies associated with those projects are not, to a pronounced extent, benefiting foreign firms … ' In this paper we focus on one specific aspect of technology transfer and relate project characteristics to such transfers; and, rather than considering the relative importance of domestic versus foreign interactions, we start from the notion that any transfers may be seen an unanticipated consequence and may be viewed as undesirable.8 See Table 4.13 and other appended tables in NRC (Citation2009).9 Specifically see Figure 7.1 and other appended tables in NRC (Citation2008).10 In addition to the DOD and DOE reports (NRC Citation2009; Citation2008), the NRC published similar studies for NASA, the National Institutes of Health, and the National Science Foundation. In each of those reports there is mention of the sale of technology rights to foreign firms.11 These events were also reported in The Wall Street Journal (O’Keeffe Citation2022 may 8).12 The term sale of technology rights refers to any information relating to a technology that is not covered by a patent or patent application, including without limitation technical and non-technical information, know-how, methods, processes, procedures, compositions, devices, formulae, protocols, techniques, software, designs, drawings, plans, diagrams, specifications, data, the results of tests or assays, and all other information relating to the technology (https://www.lawinsider.com/dictionary/technology-rights). The sale of technology rights to a foreign firm and investor is, broadly speaking, a form of technology transfer, be it unlikely the anticipated transfer of technology that the authors of the Act of 1982 had in mind. Recently, there has been much emphasis on the per se domestic transfer of publicly funded technology for the commonweal motivated by President Barack Obama’s Citation2011 Presidential Memorandum – Accelerating Technology Transfer and Commercialization of Federal Research in Support of High-Growth Businesses and by President Donald Trump’s President’s Management Agenda (Citation2018).13 ‘In Phase I, an agency solicits contract proposals or grant applications to conduct feasibility-related experimental or theoretical research or research and development (R/R&D) related to agency requirements. Phase I grants are intended to determine ‘the scientific and technical merit and feasibility of ideas that appear to have commercial potential.’ Phase II grants are intended to further R/R&D efforts initiated in Phase I that meet particular program needs and that exhibit potential for commercial application. In general, only Phase I grant recipients are eligible for Phase II grants. Phase II awards are to be based on the results achieved in Phase I (when applicable) and the scientific and technical merit and commercial potential of the project proposed in Phase II as evidenced by: the small business concern’s record of successfully commercializing SBIR or other research; the existence of second phase funding commitments from private sector or non-SBIR funding sources; the existence of third phase, follow-on commitments for the subject of the research; and the presence of other indicators of the commercial potential of the idea' Gallo (Citation2022, 4–5).14 See footnote 13 above.15 Eleven public-sector agencies and organizations currently participate in the SBIR program. They are (alphabetically): the Departments of Agriculture (USDA), Commerce (DOC), Defense (DOD), Education (ED), Energy (DOE), Health and Human Services (HHS), Homeland Security (DHS), Transportation (DOT), and the Environmental Protection Agency (EPA), National Aeronautics and Space Administration (NASA), and the National Science Foundation (NSF). A recent detailed discussion of the SBIR program is in Link and van Hasselt (Citation2023).16 In addition to the number of employees, there are three other eligibility requirements. The firm must be organized for profit, have a business location in the United States, and be more than 50% owned and controlled by one or more individuals who are citizens or permanent resident aliens of the United States (or by other small business concerns that are each more than 50% owned and controlled by one or more individuals who are citizens or permanent resident aliens of the United States). See the Code of Federal Regulations (13 CFR § 121.702). See also Gallo (Citation2022).17 As of November 2021, the legislated upper limit on the 6-month Phase I projects is $275,766 without an agency seeking a waiver from the Small Business Administration, and the upper limit on the 2-year Phase II projects is $1,838,436 without an agency seeking a waiver from the Small Business Administration (Gallo Citation2022).18 Point (3) currently reads: ‘(3) Foster and encourage participation in innovation and entrepreneurship by women and socially or economically disadvantaged persons.’19 This Act also extended the Small Business Technology Transfer (STTR) program, which began in 1992. See Link (Citation2023).20 In the Continued Evaluation by the National Academy of Sciences, of the National Defense Authorization Act for Fiscal Year 2012 (Public Law 112–81), Congress again charged the NRC to study the SBIR and STTR programs. What resulted was a 2011 Database and a 2014 Database, which are described in Link and van Hasselt (Citation2023). The 2005 Database was used for this paper because it contains information on the Phase II award amount. That information is not available in the 2011 Database or the 2014 Database in order to ensure confidentially of the responding firms.21 In our analysis, we consider both finalized and on-going negotiation to be technology sales.22 The number of independent variables is limited by available information in the NRC database. However, the variables considered are generally those that other authors who study the SBIR program have used. See Link and van Hasselt (Citation2023).23 The NRC database does not contain information to permit a study of the relationship between the foreign Phase III investor in the Phase II technology and the firm or investor to whom the technology rights are sold.24 Recognizing that the dependent variable occurs infrequently in the data (see Tables 1 and 3), we also considered a ‘rare events' logit model using the penalized likelihood approach due to Firth (Citation1993) and implemented in Stata using firthlogit (Coveney Citation2008). Coefficient estimates and average partial effects, available from the authors on request, are similar to the results presented in Tables 5 and 6.25 We also explored the role played by the amount of foreign investment. We included an indicator variable for positive foreign Phase III funding less than or equal to $500,000 and a second variable for investments greater than $500,000. The estimated parameters were positive and statistically significant at the 10 and 5 percent level, respectively, with a larger estimated effect for the larger investment category. We did not include these results in the main analysis because we do not know the timing of the investments and are therefore unable to accurately convert the nominal dollar amounts to real amounts; for those analyses we converted to real using the award year. These results are available from the authors on request.26 In order to improve legibility, the vertical scale differs between the figures.27 Although the empirical analysis presented and discussed in this paper relates to the SBIR program, future research should also consider a similar analysis for Phase II STTR projects.28 The Bayh-Dole Act of 1980 (Public Law 96-5170) includes the provision of march-in rights. ‘The Bayh-Dole Act also provides federal agencies with ‘march-in rights. March-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent to grant a ‘nonexclusive, partially exclusive, or exclusive license’ to a ‘responsible applicant or applicants’ (CRS Citation2016, 1). In other words, the federal government can relicense, under specified circumstances, any patent that results from federally supported research.Additional informationFundingNo extramural funding supported this study.