Understanding the Incentives for Small Businesses to Participate in the Acquisition Process for R&D Intensive Products

Abstract

This report studies the incentives that small businesses face when they participate in the procurement process for R&D-intensive products through the Department of Defense Small Business Innovation Research (SBIR) program. This program allows firms to compete over a set of phases to develop and then deliver research on a narrowly defined product. Given firms are selected over these phases for successively larger prizes, the SBIR program potentially provides strong internal incentives to succeed within each narrow topic. However, it may also provide strong external incentives, perhaps by preparing firms to compete successfully for non-SBIR contracts or by making firms seem attractive to potential acquirors. Using contract-level data, this report concludes that there are likely strong internal incentives within the SBIR program but finds less evidence for strong external incentives. Moreover, the timing of SBIR contracts relative to other contracts suggests that firms use SBIR and other contracts as substitutes rather than SBIR as a training ground to “graduate” to other contracts. Strong internal incentives suggest that the DoD could incentivize more firms to enter the procurement process by changing the structure of the SBIR program itself rather than changing the broader defense procurement ecosystem.