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foreign partners
Page 148
The Role of Foreign Partners as
Investors or Customers in the Development of Small Innovative
Businesses in Snezhinsk
Vladimir V.Klimenko and Andrei G.Kruglov *
Snezhinsk City Administration
Opportunities for restructuring science-intensive industry in
Russia largely depend on the efficient operation of the innovation
chain from scientific idea to industrial technology to production
of goods that can attract solvent customers. For a number of
objective and subjective reasons, this chain is now broken in
Russia.
At the very beginning of the country's economic transition to
market relations, great hopes were pinned on possibilities for
using the scientific and technical achievements of Soviet science
and science-intensive industry in order to attract major
investments. These expectations were based on well-founded high
estimations of the scientific and technical potential of the USSR
and on the immense resource investments that had been made in the
scientific-technical sector of the economy (primarily in the
military-industrial complex and related spheres in both the Academy
of Sciences system and higher education).
Today it can be stated that all of these expectations have led to
practically nothing. In fact, there has been a brain drain of
relevant specialists to the United States, Europe, and other
countries. Counterpart investments have generally been connected
with the raw materials industries and the service sphere, with
minimal use of Russia's intellectual potential. There have been
practically no investments in the scientific-technical sector. The
main reason lies in the fact that this sector was arranged in an
absolutely non-market-oriented manner and actively resisted any
possible changes.
* Translated from the Russian by Kelly
Robbins.
Page 149
Major industrial enterprises categorically refused to change their
organizational structures, management systems, and technological
cycles, and as a result their products could not compete with foreign
analogues in terms of price and quality. Despite the enormous number
of brilliant scientific ideas that have been generated in research
institutions, there were no promising technologies or developments
that could be quickly produced and marketed in product form. As for
the small businesses that emerged in the late 1980s and early 1990s,
they were generally structures without their own facilities and
equipment, completely dependent on their landlords.
In recent years, Russian entrepreneurs have gained a much better
understanding of the requirements of potential investors and have made
more sober assessments of their proposals and capabilities. But
unfortunately, along with greater understanding of the situation among
potential participants in the investment process, new problems have
appeared in all segments of the innovation chain. Material resources
have been exhausted, equipment has become outdated, facilities have
fallen into disrepair, and financial reserves have been completely
drained. The technological foundation laid in Soviet times was largely
exhausted (some ideas and developments became obsolete, while the
developers of others either emigrated or shifted to different sectors
of the economy), with very weak efforts being made to restore and
augment it.
Regarding Snezhinsk, at first all activities concerned with
international relations were generally concentrated at the
city-forming enterprise. The main reason for this could be found in
the special regime and the undeveloped city infrastructure, which in
the past mainly fulfilled the function of supporting the operations of
the city-forming enterprise. In the early 1990s the city became
responsible for social issues, public utilities, and other matters,
and a growing number of enterprises involving private capital began to
appear, with most of them providing intermediary or retail and
wholesale trade services.
Only recently has some progress been seen in the development of small
businesses using conversion technologies and developments. This
process has been facilitated by the city administration's policies
in support of new production facilities and by the substantial
increase in the number of entrepreneurs owing to job cuts at the
city's main enterprise. The period from 1998 through 2000 saw the
appearance of a new source of investments in innovation-oriented
business in Snezhinsk, namely foreign investments. The Nuclear Cities
Initiative (NCI) is the main investor in Snezhinsk in this sphere.
A program for the accelerated creation of new jobs in
Snezhinsk has been established under NCI auspices.
Table 1 provides brief information on
projects proposed for implementation under the NCI framework in
accordance with Article 2 of the agreement.
Page 150
TABLE 1Proposed Projects
Required Funding (thousands of dollars)
Project
Total
2001
2002
2003
2004
2005
Number of jobs
Open computer center
120
Creation of a pharmaceutical packaging facility (project
cost: $360,000)
300
90
Development of telecommunications (project cost: $185,000)
120
20
Mechanical unit
90
12
Processing of semiprecious and precious stones
150
10
Development of bar-coding technologies
275
150
Positron tomography (PET) center
1500
50
Production of autonomous heating systems using Uran
boilers (project cost: $592,000)
150
100
Production of quick-to-assemble residential buildings
(project cost: $1,107,000)
400
250
Production of high temperature furnaces and heating
elements
75
12
Production of equipment for enhancing the mobility of the
disabled
120
24
Production of thermoplastics and disposable dishes
(project cost: $270,000)
150
20
Snezhinsk Energy-saving Company (project cost: $600,000)
600
60
Production of air purification systems (project cost:
$200,000)
200
20
Construction of box factory
350
Production of polymer asphalt-concrete mixtures (project
cost: $3,000,000)
500
30
Installation of automated unit for producing emulsified
asphalt (project cost: $360,000)
100
15
Page 151
TABLE 1 (continued)
Required Funding (thousands of dollars)
Project
Total
2001
2002
2003
2004
2005
Number of jobs
Production of metal-plastic pipes (project cost: $4,650,000)
2600
50
Design work on transport packing casks
200
35
Development of city telephone network
135
Production of radiation-resistant optic fibers
700
40
Water-jet cutting technology for decorative stone processing
250
10
TOTAL
1,603
One example that can be cited is the Spectrum-Conversion Research and Production Enterprise, a limited liability company. Its founders are the Snezhinsk City Administration and various private individuals. Its primary activities involve developing and manufacturing conversion-oriented products.
Design of prosthetic legs. In every country there is an urgent demand for prosthetic equipment. In the United States alone, there are 260,000 disabled persons who have had one or both legs amputated, and this figure increases by 40,000 annually. These disabilities cost a billion dollars annually just to provide for the initial needs of the patients. The problem is even more urgent in the countries of the Commonwealth of Independent States than it is in the United States. Funding has been provided by the Initiatives for Proliferation Prevention (IPP) program of the U.S. Department of Energy (DOE) and by the National Center for Medical Rehabilitation Research (NCMRR) of the U.S. National Institutes of Health (NIH).
High-temperature furnace and heating elements. The All-Russian Scientific-Research Institute of Technical Physics (VNIITF) has developed expertise in designing and manufacturing high-temperature furnaces and related heating elements. Personnel with such skills are continuing this work with Spectrum-Conversion, and the company plans to commercialize these developments.
Processing of semiprecious and precious stones. There is an enormous amount of low-grade ore that includes stones similar to precious and semiprecious stones used in jewelry. Spectrum-Conversion has demonstrated its ability to select and improve the quality of some of these
Page 152
stones. They have developed processes that include appropriate
temperature, pressure, vacuum, and atmosphere (various gases) needed
to increase the value of the stones (for example, by increasing the
brightness or changing the color from dark to light). This process
produces an attractive increase in the value of the stones. For
instance, unprocessed cubic zirconium stones initially costing $1 per
carat could be sold at a price of $30 per carat after processing. The
first stage of the project will involve the processing and sale of
perfected stones. The second stage will entail obtaining a safety
license for the processing of such precious stones as sapphires and
low-grade emeralds (grade 3). The second stage will also include the
training of four people in stone cutting and polishing.
Production of automobile parts jointly with Kirkham
Motorsports and the Kansas City Plant.
Commercial development of bar-coding
technologies. The enterprise Identification
Technologies Company (ITECH), which was founded in 2000 under
an agreement between the City Administration and Oak Ridge
Laboratory, also obtained assistance from NCI. The enterprise
supplies the Russian market with identification equipment
produced by such American companies as InfoSight Corporation
and Telesis for the marking of various products.
The first General Agreement under NCI, # 17B–99380V, was signed
between the Snezhinsk City Administration and Oak Ridge National
Laboratory on January 25, 2000, for more than $2 million. Creation of
the company was based on the following objectives:
distribution and installation of advanced technologies for
automated accounting of materials and products at
enterprises in the region and around the country as a
whole
creation of additional jobs in the city on this basis
Plans called for these objectives to be pursued in three stages. In
the first stage, the main emphasis was on selecting foreign partners
that produced the equipment the region needed for the marking and
automated identification of materials. The necessary dealership or
representation agreements were to be signed regarding the delivery of
the required equipment and materials. This stage also included
training sales and service personnel, conducting market research
studies and an advertising campaign, and establishing contacts with
potential customers.
In the second stage, plans called for focusing on the creation of
conditions for guaranteed after-sales service of installed equipment.
The production facilities were to be developed, and staff members from
client organizations were to be trained on operating and maintaining
the purchased equipment.
Page 153
In the third stage, the production of certain types of equipment was
to be established onsite. The number of people employed at the
enterprise was to reach 150 by the time this stage was completed.
At present, almost all tasks planned for the first stage have been
fulfilled. The necessary agreements have been signed with a number of
leading U.S. producers of identification technologies (Intermec,
Telesis, InfoSight, Hersh). An advertising campaign was launched in
the Urals region. Company personnel are being trained at the
headquarters of the equipment producers.
Organization of production of Uran heating
boilers. This project involves the organization
of serial production of autonomous heating systems based
on Uran boilers. In the initial stage, plans call for
producing 10-kW–1,000-kW heating boilers that will
operate on natural gas or liquid fuel. The anticipated
output will be 1,250 200-kW boilers per year. The system
includes a boiler, fuel burner device, automatic safety
and control system, circulation pump, and offset
thermostat regulator (for small-power boilers).
Municipal Internet infrastructure and new
opportunities for business. This project includes
the creation of a municipal Internet infrastructure that
will link city organizations by means of a computer
network. The approximate cost of the project is $200,000.
The new municipal Internet infrastructure will produce the
following positive results:
It will preserve jobs or create new ones at enterprises
selling and installing computer and communications
equipment.
It will create a new sector of the job market in
Snezhinsk: Internet design and software companies,
electronic business, news services, and library and
consulting services.
It will make it possible to move forward on projects with
Oracle (creation of a centralized municipal data storage
facility) and Lucent Technologies (sale of equipment for
the telecommunications sector).
Besides the international programs, commercial relations with foreign
partners in the innovation business sector are developing extremely
poorly, if not worse. Initial experience has been accumulated by
Diapason, which began actively working with Chinese enterprises in
1992. Diapason was founded by private individuals in the aim of
profiting from the implementation of scientific-technical projects in
the area of environmental protection. To commercialize its
developments, the company began shipping tractors to China. As payment
for the equipment, the company received shipments of consumer goods,
which were then sold in the Urals region. The company operated
successfully from 1992 to 1995. The company invested part of the
profits from its commercial activity into the
Page 154
promotion of its developments. Agreements to create new
scientific-technical products were signed and implemented with
companies from Snezhinsk, Chelyabinsk, and Yekaterinburg. The
imposition of new customs legislation made shipments to China
unprofitable. The company redirected its efforts to the Russian
market, but the market situation made it impossible to invest
considerable funds in promoting and organizing production of the new
developments. As a result, Diapason ceased active operations in 1995.
SnezhinskTechService is another enterprise that has worked with
foreign partners. For a long time this company has specialized in
producing nipple watering systems of its own design for poultry farms.
In addition, the company designs and sells equipment and provides
services for high-capacity transformer diagnostics. Last year,
SnezhinskTechService signed a contract with a firm from the United
Arab Emirates in the amount of $30,000. Under this contract, the
company supplies watering systems to enterprises in Uzbekistan. To
date, only $8,000 has been paid on the contract.
An 18-month epic in the initiative of cooperation with the University
of New Mexico technoparks program in fact brought no results for the
Russian side. All appropriated funds were used in the United States.
As a result, no response has been received on any of the joint
projects that were discussed.
Another enterprise, Pulse, tried to obtain support from NCI for its
project involving the development of automated portable cardiographs
for use in telemedicine. Negotiations have been held, and the project
was discussed at the telemedicine session of the international meeting
on medical research issues (September 24–27, 2001). The project
was included as a top-priority element of the medical section of the
Snezhinsk accelerated conversion plan, but it has nevertheless
remained only on paper.
A positive example of cooperation with foreign partners should also be
mentioned. With the active support of the Foundation for
Russian-American Economic Cooperation and the U.S. Department of
Energy, the Snezhinsk City Administration established the Snezhinsk
International Development Center (IDC) Foundation in 2000. We would
like to note that the foundation was involved in joint efforts to
organize the exhibition High Technologies of the Defense Complex 2001,
which was held in Moscow at the Expocenter on Krasnaya Presnya. More
than 300 enterprises from 22 Russian regions and Commonwealth of
Independent States (CIS) countries took part. The closed
administrative-territorial zones were represented by two cities,
Snezhinsk and Tryokhgorny. Six enterprises represented Snezhinsk:
Avangard, Home, Bars-70, SnezhinskTechService, Spectrum-Conversion,
and VNIITF. The extremely high status of the forum led to high
attendance, which gave the Snezhinsk enterprises a
Page 155
good opportunity for seeking partners and customers, advertising and
promoting their products, and conducting related market research.
An analysis of the current situation indicates that
Owing to the lack of resources, attempts by project
initiators to finance commercialization at their own
expense do not lead to the creation of efficient
businesses. There are few chances for obtaining loans
because of the high risks associated with innovation
activity without any financial support.
Participation in various joint programs is currently the
most realistic way of attracting foreign partners in the
innovation-oriented small business sector.
Unfortunately, a certain degree of success has been
achieved to date only in cases involving the funding of
state- or city-owned enterprises. This can be explained by
the following reasons:
Risk. Investments in private enterprises are more risky if
they are not backed with guarantees from the city
administration or city-forming enterprise. However,
private Western capital also has no intentions of relying
on state or municipal enterprises.
Varying objectives. The primary goal of the city
administration is to create or preserve jobs in order to
address the employment problem, which corresponds to the
missions of most programs that provide support. The goal
of private entrepreneurs is to create and develop an
efficient business that makes a profit. However, striving
to create a significant number of jobs without considering
business efficiency itself often leads to the appearance
of “investment-addicted” companies that perish
as soon as investment “injections” cease.
The effectiveness of support programs is reduced by existing
restrictions and barriers, namely
As a rule, the amount of support provided for a particular
area is not enough to commercialize innovations. Most of
the funds remain in the territory of the foreign partner.
Discussion and coordination of a list of projects proposed
for funding require a long period of time (up to several
years). This substantially decreases the appeal of such
support, especially for innovative businesses, because the
life spans of competitive advantages in the market are not
lengthy.
Projects are being carefully worked out and subjected to
expert evaluation of their economic viability and
efficiency. In most cases a project represents merely an
application for funding rather than a real business plan.
Issues connected with the demand for future products or
Page 156
services in the market are often poorly considered. In submitting a
business idea for consideration, project initiators proceed from the
available capabilities of a particular enterprise or region and not
from market demand. In other words, they are trying to produce what
they can, but not what consumers will buy.
There is a lack of full supervision of the project, including
regular assessments of the efficiency of investments.
There is a lack of expertise in management and an absence of
communication skills in dealing with foreign partners.
