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The Role of Foreign Partners as
Investors or Customers in the Development of Small Innovative
Firms
Igor I.Rakosei*
Obninsk City Administration
Throughout the world, attracting external companies, including
those from abroad, is regarded as a key resource for regional
economic development. At present, conditions have developed in
Obninsk such that they could serve as a sufficient stimulus to
attract foreign strategic investors and partners. The creation of
those conditions was facilitated by the following factors:
long-standing scientific contacts between Obninsk
research institutes and international organizations and
foreign scientific centers in various fields
focused efforts to search for partners, as well as
support of projects having high priority in terms of
their importance for economic development
long and fruitful cooperation with Oak Ridge,
Tennessee, as our sister city
positive experience cooperating with the Eurasia
Foundation on diversified efforts to support
market-oriented economic reforms in Russia
successful teamwork on Tacis Program projects
participation in the project entitled
“Technological Cooperation Between Kaluga Oblast
and the Netherlands”
Of course this list of factors is not complete, with the most
important factor being the Program for the Development of Obninsk
as a
* Translated from the Russian by Kelly Robbins.
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Science City, which was adopted by the legislature and is now being
implemented.
Under the program, a set of measures is being carried out to attract
foreign companies, including the following specific activities:
creating a portfolio of investment proposals
preparing specialized informational materials about
Obninsk intended for foreign companies interested in
establishing or expanding their business in Russia
marketing the city of Obninsk to help promote it on the
Russian and international markets
preparing documentation on industrial sites available in
Obninsk and on other resources required for foreign
companies to establish their businesses
Unfortunately the city's authority to grant tax breaks is quite
limited. The only considerable tax benefit available under the present
tax law is that regarding the profits tax. Preferential rates on all
of the other taxes paid to the city treasury are so small as to make
any talk about their attractiveness meaningless.
If the project happens to be of a clearly regional character, however,
the situation could become more attractive as a result of additional
concessions on taxes payable to the oblast.
Thus, the maximum special exemption for the property tax (50 percent
of which goes to Kaluga Oblast and the other 50 percent to the city)
can be 100 percent. For the land tax (50 percent remains in Obninsk
and 30 percent goes to Kaluga), it will be 80 percent. With the
standard rate of 24 percent for the profits tax, the tax benefit for
it could reach 68.7 percent (2 percent goes to Obninsk and 14.5
percent to Kaluga).
Other measures within the city's powers include reducing the rate
for land rental or making buildings with the required infrastructure
available on advantageous terms.
At present, 13 joint ventures and 11 businesses with 100 percent
foreign capital are operating in the city. As a rule, these are small
businesses. Their activities are rather diversified, including the
production and bottling of mineral water (the POLLO firm), ketchup
production (MOSSPOL), footwear manufacturing (the Shafran limited
liability company), medical technologies and pharmaceuticals
(Vienna-Obninsk Biomedical Laboratory, the German Intensive Therapy
Clinic, Mir-Pharm), and others. In addition there are a number of
Russian firms operating in Obninsk that fill orders for foreign
customers, including such high-tech firms as Eridan, Ekon,
Converscenter, and Theseus.
Both positive and negative experience has been accumulated in the
implementation of international projects in the city. I shall cite two
ex
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amples of successfully operating high-tech companies whose experience
should be studied and replicated.
Cyco Software is the world's leader in the development of AutoCAD
and office automation systems. The company, which began operations in
1987, has now developed the most advanced of modern software products.
Cyco is a multinational corporation with its headquarters in the
Netherlands and branches all over the world. Located in Atlanta,
Georgia, Cyco International is responsible for sales, marketing, and
technical support in the Americas, Asia, and Australia. The
Cyco-Europe branch handles sales, marketing, and technical support in
Europe, the Middle East, and Africa. Finally, Cyco has created a
center for technology development in Russia in Obninsk called
Cyco-Russia.
Cyco-Russia's history began in the early 1990s. Cyco Software
management first visited Obninsk in 1991. They had received
information about the city from the Netherlands Ministry of Economic
Affairs and from some of their friends who had high-tech business
contacts with a subsidiary of the Russian State Research Center
Institute of Physics and Power Engineering (IPPE). Cyco Software
managers were looking for new ways of improving the company's
performance by involving professional programmers from Russia.
In the unstable economic conditions of the early 1990s, doing business
in Russia seemed very risky, but such factors as the availability of a
highly skilled workforce and relatively low costs compared with
Western countries tipped the balance. Cyco gave trial projects to a
few Russian programmers, and the results were very good. So Cyco
realized that it had found the right people in the right place. That
was how their cooperation began. The Cyco-Russia company was founded
in 1994.
The partnership has proven mutually beneficial. The Dutch company
recruited highly qualified Obninsk programmers at relatively low
salaries and in this way solved its human resources problem. In turn,
the city acquired a new stable and disciplined taxpayer in the
Cyco-Russia company, and Russian specialists got jobs in their fields
appropriate for their high qualifications.
Today Cyco-Russia is a full-fledged high-tech company with several
dozen employees. Thanks to the high quality of their work,
Cyco-Russia's specialists are increasingly relied upon by the
Dutch partners, with the company taking on an increasing number of
projects as it develops and grows.
The Obninsk City Administration appreciates the fact that the Dutch
company invested in the city's economy during such a difficult
period, so it is now giving Cyco-Russia its full support and
assistance.
It should be mentioned that the creation of companies like Cyco-Russia
is entirely in keeping with the Program for the Development of Obninsk
as a Science City. The key idea of the program is to minimize the
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dependence of the city's economy on the federal budget. Obninsk is
striving to commercialize its scientific and economic potential by
stimulating modern production and services. Meanwhile, preference is
given to developing small- and medium-sized high-tech businesses.
Cyco-Russia can serve as an example of real international cooperation
in the high-tech field and a graphic demonstration of the potential
for successful investments by foreign companies in Obninsk.
Another example of successful cooperation is the firm SSI/Russia,
which was registered in Obninsk in July 1993. The company's full name
is “Subsidiary of the California Corporation SSI/Russia.”
The company was organized on the initiative of former IPPE employees
Yury Belogortsev and Alfred Mirzagitov. In early 1992 Yury Belogortsev
won a contest organized in Moscow by an American foundation supporting
beginning Russian entrepreneurs. Contestants who passed all three
rounds of the contest were given the opportunity to go to the United
States for a one-month internship in an American company. That was how
Yury Belogortsev got to know George Rothbart, president of the
California company Software Science, Inc. In the process of learning
more about the work of the American company, the first contract was
signed, and it was carried out so successfully that the Software
Science management decided to open a new branch using a team of
programmers from Obninsk. As a result, SSI/Russia, a business with 100
percent foreign capital, was incorporated.
The firm is engaged in the development of different software products
used in the following areas:
database management systems
office applications
software for end users (shrink-wrap software)
telecommunication systems based on Transition Control
Protocol/ Internet Protocol (TCP/IP), including wireless
technologies
online data acquisition and processing systems
web sites, including e-commerce sites
Since the firm was founded, it has been oriented entirely to the
American market. All products and systems have been developed for
American companies and individuals, and the parent firm in California
is responsible for routine contacts with customers and technical
support for its software products. The use of the entire spectrum of
modern telecommunications technologies, such as the Internet,
IP-telephony, remote paging, and cellular telecommunications helps to
eliminate any inconveniences related to the two companies being in
different time zones and located so far apart. In fact, the company
takes advantage of the 11-hour time difference in solving urgent
problems for clients—for example, work on those
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problems can go on 24 hours a day. This is particularly important for
online projects, such as one of the most popular American sites for
selling cars, www.carsmart.com. The project is the pride of
the company. It was developed for the AIN Corporation, starting from
scratch in 1996 and continuing with site maintenance over the past
five years. In January 2000 the project was bought by AutoByTel for
$20 million.
Other examples of successful projects include the following:
a real-time system for tracking financial transactions of
ticket vending machines and gauging passenger flows in San
Francisco subway stations (the customer was Bay Area Rapid
Transfer)
a worldwide technical support notification system for the
Amdahl Corporation
unique radiomodems with automatic packet routing (Dynamic
Forward Routing) for the firm CommUniqueWireless
There have been a number of problems (organizational, technical,
personnel related) encountered during the formation and development
phase at this company.
ORGANIZATIONAL PROBLEMS
It was hard to overcome the differences in business models of the
American and Russian enterprises, with each having different
accounting systems and different business cultures. Added to that
were difficulties that are very hard to explain to the American
partners, such as frequent changes in tax legislation, bureaucratic
hindrances in the economy and customs procedures, and so on. It
would take quite a while to list all the problems and ways of
solving them, especially considering the specifics of the type of
production involved (e.g., the nonmaterial nature of the end
product, which led to certain conflicts with tax inspectors who
could not understand how work could be sent over the Internet
without making out customs declarations and so forth). In addition
mention should be made of the rather heavy demands made of workers
at the subsidiary with regard to their knowledge of the English
language, as all correspondence, negotiations, and software systems
development is done in English.
TECHNICAL PROBLEMS
The first technical problem was poor communications channels
between Russian and American partners, including mail, electronic
communications, and transportation. All of those problems were
gradually resolved as the market economy developed in Russia. As a
result, we now have a very good system for accessing the Internet
(Obninsk has a fiber
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optic network for Internet access with 4.5 Megabit bandwidth), a
reasonably good mail service (DHL, FedEx), and conventional ways of
solving transportation problems (provided that you have a visa, you
can get to the customer within 48–72 hours).
PERSONNEL-RELATED PROBLEMS
In 1993 it was not at all difficult to find a skilled programmer
for a specific project. Today the search could take a good deal of
time owing to easier access to the European and North American job
markets, as well as the influence of Moscow, the nearby
megalopolis. Nevertheless, Obninsk still has considerable
intellectual resources for handling most software development
problems.
In its early days the subsidiary employed four programmers, but now
the number of employees ranges from six to eight depending on the
volume of work. The subsidiary operates steadily, and personnel
turnover is low. In the near future, SSI/Russia will be considering
options for expanding cooperation with information technology
companies in Europe in order to diversify its market and smooth out
workload fluctuations caused by the American market.
The availability of highly qualified personnel with the necessary
skills and knowledge, the absence of language barriers in
communications not only among management but also with
rank-and-file workers, and accessible opportunities for
familiarization with current experience all contributed to the
success of the companies mentioned above.
And yet we also have an example of how a well-prepared major
investment project was ruined by the unprofessional actions of
regional politicians.
During 1995–1998, work was done to promote a major
Russian-Dutch agrarian project involving the creation of
Protva-Agro, a sales and service company that was registered in
Obninsk in 1998 (its initial capital was about 25 million new
rubles).
The project was supposed to introduce modern agricultural
technologies for growing crops in the Obninsk area as well as
create a specialized sales network. Implementation of the project
would have helped to create new jobs not only in the cultivation
and sale of agricultural produce but also in the necessary
processing infrastructure.
The financing plan amounted to more than $10 million in foreign
investments (about $4 million from the World Bank for a period of
10 years and about $6 million in the form of a loan from a Dutch
bank guaranteed by the Netherlands government). It had been fully
worked out and approved by all interested organizations.
Unfortunately, in May 1998 the Kaluga Oblast Legislative Assembly
refused to serve as a guarantor of the project, thus causing it to
be completely shut down and, in the
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process, undermining the image of Kaluga Oblast as a region capable of
attracting foreign investments.
Another international project should also be mentioned. In February
1999 the Regional Agency for the Promotion of Investments and
Technologies (RAPIT) was founded in Obninsk as a component of the
international project entitled “Technological Cooperation
between Kaluga Oblast and the Netherlands.” This project
represents a joint initiative of the Netherlands government, the
Kaluga Oblast government, and the Obninsk City Administration. The
Netherlands is represented by a number of Dutch companies that had won
the right to implement the project in a 1998 tender announced by the
SENTER Agency of the Netherlands Ministry of Economic Affairs.
The main goals of the project were to support the development of
small- and medium-sized high-tech enterprises in Kaluga Oblast and to
establish mutually advantageous business contacts between enterprises
in the Netherlands and Kaluga Oblast. These goals are in complete
accord with those of the program to develop Obninsk as a science city.
POSITIVE RESULTS
For the first time, we have succeeded in establishing
long-term business relations with the investment
institutions of the Netherlands. This partnership
offers good prospects for the further cooperation with
the International Science Cities Foundation (ISCF),
which is engaged in providing venture financing for
Russian high-tech companies and fostering the further
development of joint enterprises that have received
financing. Other opportunities involve continuing
business contacts within the
“business-to-business” project and
attracting the Dutch-American Investment Fund SEAF to
Obninsk.
This activity is supported by the authorities on both
sides—the Obninsk City Administration and the
Netherlands government via the SENTER Agency. This
creates the most favorable conditions and guarantees,
which is undoubtedly important in securing high-risk
start-up financing for newly created enterprises.
Despite the difficulties in the initial phase, the past
three months since the arrival of a new team in RAPIT
have seen the completion of a plan for the investment
of Dutch capital in Russian-Dutch joint ventures,
taking into account the particularities of Russian and
Dutch legislation. Since June 2001, two joint venture
agreements have been concluded. Entrepreneurs from
Obninsk, Balabanovo, and Maloyaroslavets have submitted
preliminary applications and business plans for five
new projects, including the following:
Tandem—painting chambers for vehicles; Winter
Harvest—mobile greenhouses with new technology
for vegetable growing; Cartridge Plus—refilling
of all types of cartridges, and so on.
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RAPIT would not like to restrict its activity only to
collaboration with the Netherlands, so it is expanding the
bounds of its contacts. For example, preparatory work is
already under way to identify investment opportunities in Oak
Ridge, Tennessee.
NEGATIVE EXPERIENCE
Because of the lengthy procedures for project
financing, the ISCF was not able to finance all the
projects as planned in the project terms of reference.
The scope of RAPIT's activities has been limited
primarily to Obninsk.
The effort to create a business incubator in Obninsk
was launched only in the final stage of the project.
Despite the very careful selection of RAPIT staff (four
persons), the team disintegrated by spring 2001. Having
acquired new knowledge and skills and having completed
training in the Czech Republic and the Netherlands,
they essentially split into two groups. This was
largely due to the unconstructive and generally willful
actions of the former director of RAPIT, who was not
able to establish a normal working relationship with
the representative of the Dutch consortium. This
situation could not fail to affect the quality of the
staff's work and their relations with the Dutch
partners.
Even so, there is a positive aspect that speaks to the level of
training of the staff. One of the staff members who left RAPIT,
Andrei Perekhrest, is currently the director of Cyco-Russia, while
another, Oleg Shershakov, is a senior manager with the financial
company StoraEnso. However, even the negative results have positive
significance, as they represent important lessons from which the
correct conclusions must be drawn. The new RAPIT staff has made a
thorough analysis of the agency's activities during the first two
years of its operations. Serious corrections have been made, taking
into account the negative experience and the mistakes that were
made.
PROSPECTS
RAPIT participates in the implementation of the Program
for the Development of Obninsk as a Science City. The
directors of the program have approved projects
involving the joint participation of RAPIT and the
Franco-Russian Institute of Business Administration
(FRIDAS) in developing the international marketing plan
for Obninsk and creating the website “Investors
Guide.”
An application is being prepared for participation in a
joint project entitled “Development and Creation
of a Package of Presentation and
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Informational Materials Aimed at Attracting Foreign Investments to
Obninsk on the Basis of Analyzing and Adapting the Experience of Oak
Ridge in Promoting Itself in the Innovation Technology Market.”
A public relations project on the development of the Obninsk
investment infrastructure using the technopark model is also
being prepared.
There are opportunities for participation in the selection
and placement of small innovation-oriented enterprises in the
business incubator.
A joint project is being prepared for collaboration between
the Chambers of Commerce of Obninsk and Oak Ridge.
It would be wrong to say that joint enterprises and firms
with 100 percent foreign capital contribute substantially to
the city's economy. We are still in a preliminary phase. Of
course, the legislative basis for stimulating foreign
investments must first of all be strengthened at the federal
level.
At the same time, the city is doing a great deal in this area within
the scope of its authority, as you have heard. We hope the number of
positive examples of international cooperation will increase with each
passing year.
Representative terms from entire chapter:
foreign companies
