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The Role of Foreign Partners as Investors and Customers in the Development of Small Innovative Companies

Yelena S.Dyakova *

Fund for the Development of Conversion Enterprises

Vladimir I.Zhigalov

Russian Federal Nuclear Center-Scientific-Research Institute of Experimental Physics

This paper discusses specific examples of collaboration between foreign partners and small innovative companies in Sarov. New innovative firms began to be created as a result of defense cutbacks and subsequent layoffs of personnel employed by the main organizations in the city of Sarov, that is, the Russian Federal Nuclear Center-Scientific-Research Institute of Experimental Physics (VNIIEF) and the Avangard Electromechanical Plant. Addressing these problems requires a creative approach and funding from various sources.

At present there are several companies in Sarov that work with foreign partners as investors or customers.

The closed joint-stock company Titan was established in 1997. It is a high-tech enterprise that manufactures parts from titanium alloys with a variety of preset properties for use in the aircraft, automotive, chemical, and medical industries. The technical concept used by the company differs from conventional techniques used to manufacture titanium alloy parts. Based on hot pressing and vacuum thermal treatment, it considerably reduces costly raw material expenses and provides finished products with the required technical parameters.

The highly qualified specialists employed by the company have unique technical experience in thermal and mechanical treatment of titanium al

* Translated from the Russian by Kelly Robbins.



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Page 209 The Role of Foreign Partners as Investors and Customers in the Development of Small Innovative Companies Yelena S.Dyakova * Fund for the Development of Conversion Enterprises Vladimir I.Zhigalov Russian Federal Nuclear Center-Scientific-Research Institute of Experimental Physics This paper discusses specific examples of collaboration between foreign partners and small innovative companies in Sarov. New innovative firms began to be created as a result of defense cutbacks and subsequent layoffs of personnel employed by the main organizations in the city of Sarov, that is, the Russian Federal Nuclear Center-Scientific-Research Institute of Experimental Physics (VNIIEF) and the Avangard Electromechanical Plant. Addressing these problems requires a creative approach and funding from various sources. At present there are several companies in Sarov that work with foreign partners as investors or customers. The closed joint-stock company Titan was established in 1997. It is a high-tech enterprise that manufactures parts from titanium alloys with a variety of preset properties for use in the aircraft, automotive, chemical, and medical industries. The technical concept used by the company differs from conventional techniques used to manufacture titanium alloy parts. Based on hot pressing and vacuum thermal treatment, it considerably reduces costly raw material expenses and provides finished products with the required technical parameters. The highly qualified specialists employed by the company have unique technical experience in thermal and mechanical treatment of titanium al * Translated from the Russian by Kelly Robbins.

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Page 210 loys. This makes it economically feasible to manufacture components for orthopedic prosthetics, fasteners, and other items from titanium alloys. The company conducts business in the European and Russian markets. To date, its most important customers are Pertsch & Partner (Germany), Scanburg AB (Sweden), and Teb AB (Sweden). Titan currently employs about 120 people. The open joint-stock company Rehabilitation Center was founded in 1997 to develop and introduce into practice medical technologies, mainly diagnostic and prophylactic in nature. The company has several projects under way, two of which are funded by U.S. partners under the Nuclear Cities Initiative (NCI). These projects are aimed at creating a Laparoscopy Center (opened in July 2001) and a Telemedicine Center in Sarov. The partner (Medical College of Georgia) provided free delivery of the specialized laparascopic equipment and trained the new center's 12-person staff. In this particular case the foreign partner is an investor in the Russian enterprise. The Open Computer Center (OCC) is one of the first projects carried out under the NCI Program, opening on October 1, 1999. The firm has been accorded the status of a unitary state enterprise. The OCC project is related to defense conversion and was not started from scratch, but rather on the basis of the existing history of scientific collaboration between specialists from VNIIEF and colleagues from the U.S. national laboratories. A foundation for the project was also provided by research work done by VNIIEF scientists on projects for the International Science and Technology Center (ISTC) and work on developing software for microprocessors for Intel, among others. The main activities of OCC are the following: research on the development and improvement of physical and mathematical models to describe various physical processes research on the development and improvement of numerical methods creation of applied programs and software packages for the mathematical modeling of various processes Initially, collaboration with the foreign partner was pursued along two main lines: 1. funding for the establishment and further development of OCC (U.S. Department of Energy [DOE], Los Alamos National Laboratory) 2. development of software products in response to customer orders, as OCC is mainly oriented towards foreign markets, primarily the United States At present OCC has 76 fully equipped workstations, but the company plans to expand to a staff of 200.

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Page 211 The closed joint-stock company VNIIEF-STL was registered in Sarov in March 1999 and currently employs 100 people. It was established based on a contract between Intel and VNIIEF that has been in effect since 1993. For the most part the company develops and produces software ordered by Intel. Several of its products are of real commercial value and are actively marketed by Intel. Thus, in this case the foreign partner acts as a customer. The Diamond Processing Factory (ABP) was established in December 1993. The facility has been producing finished products since 1996, becoming profitable in late 1999 (in combination with its jewelry manufacturing unit). ABP's main foreign customer is the Belgian firm Diamond Manufacturing, which provides precursor materials. The company has gained experience in using foreign automated equipment for diamond cutting. Close collaboration with the Belgian partner not only has allowed them to gain this experience, but also has provided them with the main equipment for the automated processing section. Placing its confidence in long-term cooperation, the Belgian firm gave ABP the equipment so that the enterprise could learn more about its capabilities and refine its cutting technology. The equipment is currently in safekeeping with ABP until the decision is made to either purchase or return it. At present the company employs 180 people. The Perforator Production (PVA) enterprise was created in 1995. Oil and gas enterprises and mining companies currently use three main techniques for increasing their extraction output, that is, pumping liquid into the productive underground layers to squeeze out material to be extracted, creating artificial seismic effects, and perforating drill holes with explosive or electromechanical devices. The latter is now the most widely used, both because it is superior from an environmental standpoint and because it is less costly in technical and labor terms. Two perforator types—solid encased and with ribbon-shaped charges— are intended for the secondary opening of productive layers in vertical, slanted, horizontal, horizontally branched, and sharply distorted open-face oil and gas wells. PVA's customers include both Russian firms and companies from nearby foreign countries (Azerbaijan and Kazakhstan). The company currently employs about 140 people. PSIMVT is an enterprise that performs explosive welding of bimetallic and multilayer materials. Developed at VNIIEF, this technology makes it possible to weld any metals and alloys, with the strength of the weld along the entire contact surface being as strong as the mechanical strength of the precursors. Practically any combination of metals may be used as precursors as long as they are 0.5 to 10 millimeters thick with a surface area of 0.1 to 5 square meters. The compositions produced may be cut, flexed, rolled, stamped, welded, and so on.

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Page 212 The pulsed welding technique is suited to the types of parts and the industries where previous methods of joining different types of materials were not always successful. Conventional welding based on melting entails great difficulties that are exacerbated by significant differences in the physical properties of the materials being welded. Joining different types of metals mechanically (using bolts and rivets) does not always produce reliable high-quality structures. The new explosive welding technique eliminates all these drawbacks. Conditions produced in solid phase welding (plating) are far more favorable for successfully joining different types of metals, thus substantially reducing the high temperature effect on the materials that is characteristic of the majority of melt welding methods. Bimetallic articles are remarkable for the following characteristics: the high strength of the weld over the entire contact surface (not less than that of the metals welded together) the large number of layers that can be included (up to 50) improved physical and chemical properties increased rigidity cost efficiency Bimetallic articles are suitable for various applications and may differ in size, configuration, number of welded layers, materials used, and other customer-tailored characteristics. The customers for these products are Russian companies as well as firms from Finland, Chile, and Canada. At present the facility employs 70 people. Thus, from the aforementioned examples, it is obvious that foreign partners may effectively act as investors or customers. If the decision is made that cooperation should be pursued and that investments would be appropriate, the average investment of a foreign partner in a small innovative firm in Sarov is $200,000. As a rule the money invested goes into the main assets of the company. It should be mentioned that almost every project mentioned was cofinanced by the Russian side (the Russian Ministry of Atomic Energy [Minatom], the Fund for the Development of Conversion Enterprises, the Sarov city budget). Foreign investors commonly stress the importance of cofinancing, sometimes even making it a necessary condition of their involvement. One motivating factor in resolving financing issues for projects in Sarov is the desire to develop and accelerate the defense conversion process at VNIIEF and Avangard. In addition, there is a need to create companies that would benefit from scientific and technical potential of VNIIEF and carry out the necessary work at a lower cost than at foreign firms. As for customer-oriented collaboration, typical orders bring in from $10,000 to $300,000. The quality of the products or services is an important element in guaranteeing regular orders in the future. In this regard,

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Page 213 companies in Sarov, as well as elsewhere in Russia, must resolve the problem of getting their products certified according to international ISO-9000 standards (Titan, for example). A foreign partner may also render consulting services in addition to the basic focus of the contract. Several points on successes and difficulties in working with foreign partners should be mentioned. Success depends upon such factors as strong foreign customer not much funding required to develop a prototype pre-assembled staff with a good amount of scientific-technical work already complete Difficulties and subsequent slow growth are caused by the following factors: major expenses for marketing and seeking real partners, especially in the Western market lack of funding for relatively expensive intellectual property protection in the Western market obligatory certification in compliance with Western standards unfair competition Let us analyze the successes and difficulties encountered by the aforementioned companies in their work with foreign partners (see Table 1). Following are the most important lessons learned by the aforementioned companies: 1. Financial management problems may occur. All of the firms encountered these difficulties, which explain the long developmental stages of ABP and Perforators Production before they reached the break-even point. 2. Orders can be irregular, even if a foreign partner exists. The Titan plant faced this problem, which leads to inefficient operations and a lack of cash flow. This is why the company is active in the Russian market as well, where the orders are not so lucrative but more stable. 3. Difficulties associated with market research can arise. This is an issue for all companies that lack strong customers. 4. Certification under international standards and protection of intellectual property rights abroad can be complicated. 5. Access to funding may be difficult. For example, two and a half years passed from the time the foreign partner decided to finance the laparoscopy and telemedicine projects until the time the investments were actually received, even though there was cofinancing from the Russian

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Page 214 TABLE 1 Successes and Difficulties Faced by Sarov Companies in Dealing with Foreign Partners Company Successes Difficulties Developmental Stage Rehabilitation Center Attraction of foreign investors Commercialization Past investment stage; not yet self-sustaining Titan Orders of foreign customers ISO-9000 certification, market study, unfair competition Past investment stage; near break-even point OCC Attraction of foreign investors Market study, intellectual property protection in Western market Past investment stage; not yet at break-even VNIIEF-STL Strong foreign customer Intellectual property protection in Western market Past investment stage; self-sustaining ABP Strong foreign customer/investor Market expansion, turnover capital required, unfair competition Past investment stage; self-sustaining Perforators Foreign customer Market expansion Past investment stage; self-sustaining PSIMIVT Foreign customer Market expansion Investment stage close to completion; sales started

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Page 215 side. In addition, standard bank loans are unavailable for companies in the investment stage. Today we have sufficient practical experience working with foreign investors and customers that we are in a position to create new firms. However, in our view, this process also requires the support of international funds and foundations for the closed administrative-territorial zones.