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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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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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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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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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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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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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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.
Representative terms from entire chapter:
foreign partners
