Summary

The small-business community has voiced concern that the ability of small businesses to be active in innovation is inhibited by a number of federal policies. Congress has responded with legislation that addresses both the question of declining industrial innovation and the issue of the ability of small businesses to be innovative. GAO developed a comprehensive picture of small-business innovation by showing what influences the environment within which small manufacturing businesses innovate and how these small businesses act as innovators in that environment.

Small business innovations are largely determined by their industry structure and other industry-specific variables. Small businesses are likely to be primary contributors in an industry where most firms are small and are likely to be complementary contributors who perform specialized innovative functions in more concentrated industries. Industry-specific factors that public policy can affect are the availability of resources, technological opportunity, and the balance between supply and demand. Within individual firms, the availability of resources and technological opportunity are most amenable to government policy influence. Based on optimum conditions for innovation, GAO developed criteria for judging the efficacy of federal initiatives intended to foster small-business innovation. Federal initiatives should encourage exploitation of technological opportunity, ensure managerial and technical capacity of individual firms, ensure the adequacy of financial and human resources throughout the innovative process, and promote innovation in technologies or industries in which small businesses can assemble requisite resources. GAO demonstrated the usefulness of these criteria by considering the design of several existing federal efforts to support the activities of small businesses as innovators. Federal efforts to influence economy-wide factors indicates that such efforts might be expected to affect the climate for innovation positively. Federal programs designed to provide funding or technical management assistance to small businesses should also meet the necessary criteria.