Multilevel public funding for small business innovation: a review of US state SBIR match programs

Abstract

US State governments invest in early-stage innovative activity as an economic development strategy. Nevertheless, attention directed at the public sector’s role in this capacity has been placed on federal policy actions overlooking the growing role of states. The primary aims of this paper are two-fold: (1) to articulate the motivations for multilevel public support for small business innovative activity, placing emphasis on state level incentives directed towards entrepreneurial activity; and (2) to empirically evaluate the State Match Phase I (SMP-I) program. The SMP-I program is a diffuse state level policy designed to complement the federal Small Business Innovation Research (SBIR) program by offering noncompetitive matching funds to the state’s successful SBIR Phase I recipients. This offers an opportunity to examine the marginal impact of public R&D given the state intervention. This paper employs a state and year fixed effects model and considers two outcome variables—SBIR Phase II success rates and SBIR Phase I application activity. To account for industrial heterogeneity, the data are stratified by the federal mission agencies. Results from the empirical analysis indicate that the state match increases the Phase II success rates for firms participating in the National Science Foundation SBIR program.