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Page 223

Small Innovative Business in the Nuclear Cities

Aleksandr P.Sorokin *

Obninsk City Science and Technology Council and Russian Federal Nuclear Center—Institute for Physics and Power Engineering

As highlighted in government documents such as the comprehensive program for the development and state support of innovative business, the regulation of innovation-oriented processes is subordinate to tasks of preserving scientific-technical potential and mobilizing it for the structural reorganization of the economy.

The formation of market relations in the scientific-technical sphere is carried out through the following actions:

  • supporting and developing the infrastructure for innovative business

  • encouraging competition by attracting financial resources and using them in a focused and efficient manner to implement innovation programs and projects aimed at creating capacities for the production of science-intensive products

To these ends, measures are being carried out at the regional and industry levels aimed at

  • increasing innovation activity in the scientific-technical and industrial spheres

  • promoting qualitative changes in the organizational structures of these sectors

* Translated from the Russian by Kelly Robbins.



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Page 223 Small Innovative Business in the Nuclear Cities Aleksandr P.Sorokin * Obninsk City Science and Technology Council and Russian Federal Nuclear Center—Institute for Physics and Power Engineering As highlighted in government documents such as the comprehensive program for the development and state support of innovative business, the regulation of innovation-oriented processes is subordinate to tasks of preserving scientific-technical potential and mobilizing it for the structural reorganization of the economy. The formation of market relations in the scientific-technical sphere is carried out through the following actions: supporting and developing the infrastructure for innovative business encouraging competition by attracting financial resources and using them in a focused and efficient manner to implement innovation programs and projects aimed at creating capacities for the production of science-intensive products To these ends, measures are being carried out at the regional and industry levels aimed at increasing innovation activity in the scientific-technical and industrial spheres promoting qualitative changes in the organizational structures of these sectors * Translated from the Russian by Kelly Robbins.

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Page 224 increasing the innovation-oriented returns derived from research efforts creating additional funding sources for science fostering a competitive environment filling the market with goods and services increasing employment opportunities for the population by attracting laid-off scientific personnel to the innovative business sector developing a system of services for the innovation sphere The role of the state lies in creating the following elements: favorable conditions for entrepreneurial innovation activity through the concentration of small amounts of resources in points of growth science and technology parks innovation centers business incubators special legal and regulatory acts aimed at supporting activity in the scientific-technical services sphere Unfortunately support programs have remained only on paper. Matters have not yet reached the point of radical reform of the scientific-technical sphere (the formation of joint-stock companies), a situation that can be considered an unrealized opportunity. Without the widespread practice of establishing participatory stock-based ventures in the scientific-technical sphere, the problem of the development of innovation-oriented business takes on great urgency. The nuclear cities provide a cross-section view of the high-tech sphere in general. The cities of the Russian Ministry of Atomic Energy (Minatom) have accumulated a great deal of scientific-technical potential supported by a powerful industrial base and an enormous amount of operational experience in areas requiring specific knowledge and skills. With the new economic reforms, these cities have faced a serious problem: how to use their potential effectively how to form successfully operating businesses on the basis of the innovative technologies they have produced how to provide employment for the highly skilled workers who have lost their jobs at the main defense enterprises as a result of cuts in defense orders and the diversification of the firms' activities The situation in the closed nuclear cities has essentially been no less harsh than in other science- and technology-oriented cities (science cities).

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Page 225 About 10,000 Obninsk residents work outside the city, and science has served as a donor promoting economic development not only for the city but also for the region in general. Minatom pursues a targeted policy of promoting major defense conversion activities and implementing large projects. This policy is aimed at supporting conversion and enterprise restructuring and reducing and subsequently eliminating defense-related activities. This policy is well justified. To achieve results within an optimal period of time, Minatom must focus on carrying out just such major projects that are directly oriented towards conversion and associated with the primary activity of the enterprises. However, insufficient attention is being paid to the conversion activities that may be small in scope but might result in very successful businesses based on high technologies developed at the enterprises. Following are several objective preconditions for the development of small innovative business in the nuclear cities: 1. the great amount of scientific-technical potential amassed during the operations of the main enterprises in these cities developments in various fields of science and engineering highly professional engineers and scientists well-organized industrial base 2. a well-developed system for professional training 3. a well-developed financial infrastructure 4. good social welfare conditions for city residents. City budget expenditures per resident are several times higher than in nearby regions, and the social protection system is operating. 5. acceptable living conditions. Public utilities and other elements of the urban infrastructure are maintained at a good level. Work is constantly being done to repair and renovate utility lines, plant and maintain trees, and otherwise clean and beautify the city. There is a well-established intra- and intercity transportation system, and the telephone system is well developed. Residents of the cities never face the problem of having their water or power supplies switched off. The task of the city administrations and the enterprises lies in utilizing this potential and creating successfully operating businesses on the basis of innovative technologies and products. Despite the lack of favorable conditions for bringing innovation potential to bear, this process is beginning to become active, as directly confirmed by the examples cited. In addition, the examples also illustrate that much depends on efforts and initiatives at the local level.

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Page 226 In each of the nuclear cities, dozens of science-intensive conversion projects have been carried out at the city-forming enterprises. Small innovative businesses are not yet making a defining contribution to the economy of these cities, but their impact is beginning to be felt. Figures for small business-related employment, high-tech production output, and tax revenues have already climbed far above the single digits as percentages of overall indicators for the research and production sector as a whole. The city-forming enterprises play a very significant role in developing small high-tech businesses. For example, this is illustrated by the activities of VNIIEF-Conversion, an open joint-stock company founded by the Russian Federal Nuclear Center-Scientific-Research Institute of Experimental Physics (VNIIEF) in cooperation with Minatom and the Sarov City Administration. VNIIEF-Conversion is a sort of holding company that manages conversion projects that have evolved to the point of operating as independent legal entities. A great deal of focused work is being done in the closed nuclear cities and substantial experience has been accumulated regarding support for the development of small innovative businesses. Such development measures may be divided somewhat conditionally into three groups: 1. Normative: development of programs to support small innovative businesses various types of activities resolutions on investment activity 2. Financial: investment zone (Zheleznogorsk) funds and foundations (municipal, nongovernmental, etc.) tax incentives use of lines of credit venture capital activity (Zarechny, at the regional level), and so forth 3. Organizational: international support programs (Nuclear Cities, Tacis, etc.) creation of an infrastructure for innovation activity (technoparks, business incubators, industrial zones) training and professional development programs exchanges of operational experience (conferences, seminars, etc.).

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Page 227 The difficult and unstable nature of the economic and political situation, the crisis phenomena in the Russian economy, and the long and drawn out economic reform process have occasioned a number of serious problems facing the innovation business: There is a lack of targeted stable sources of financing for innovation projects and conversion activities. Financing of these activities is carried out unsystematically, on a case-by-case basis, mainly with money from special Minatom funds. There is also no mechanism for commercializing projects and creating effectively functioning enterprises on their basis. The majority of projects stall at the research and development or experimental sample stage. The market infrastructure is underdeveloped and consistent sources of market information are lacking. The legislative and regulatory base is unstable and imperfect: problems in the tax sphere (frequently changing rates and collection provisions), causing difficulties in predicting costs difficulties for innovative businesses, including commercialization of intellectual property hindrances to the quick and efficient development and implementation of targeted joint programs at various levels (federal and regional, interregional, regional and local, especially involving the closed administrative-territorial zones) The economy is highly bureaucratized, with much overlap between the authorities of government and regulatory agencies and a complex system for obtaining permits and certifications. Industrial equipment throughout the country is substantially obsolete and physically deteriorated. Russia and its various regions have low investment appeal. Foreign investors are extremely reluctant to invest in new fields of activity, especially in the regions. There are not enough experts able to meet current market demands (marketing, analysis of current market conditions, development of marketing strategies, sales, and midlevel management). The communications infrastructure is outdated and of poor quality. The structural units manufacturing high-tech products lack independence and are in need of restructuring. In the course of carrying out innovation projects, individual enterprises encounter a large number of very specific problems, the most ur

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Page 228 gent of which is that of obtaining investments in the necessary amount and for the necessary duration. Even today the Russian banking system offers unfavorable loan conditions for the implementation of investment projects: high interest rates no system of long-term investment loans with reduced servicing requirements impossible collateral requirements How should the strategy for developing small innovative businesses be approached? 1. the targeted program approach (focused on scientific-technical development priorities) 2. selective support (competitive selection) 3. market regulation (orientation to solvent demand) What role should be played by regulation at the federal, regional, and industry levels? Innovation strategy within each industry should be designed with an eye to setting technological development priorities in order to determine the areas that should receive priority financing creating an intellectual and informational infrastructure for innovation project design creating conditions for the development of innovation-oriented management updating the legislative base for the innovation sphere restructuring the scientific sphere with special focus on the innovation sector and the search for the most effective projects The fact that innovation activity involves representatives of various specialties and various government agencies complicates coordination efforts. It seems that creating a working group (“brain center”) could accelerate the process of creating a strategy for the development of small innovative businesses, including the following: principles for the restructuring of the science sector measures for intensifying innovation activity at the intersection of science and industry sources of financing

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Page 229 A systematic analysis of the information contained in reports presented at this seminar specifies steps that seem necessary for the development of innovation activity in the nuclear cities: 1. Innovation activity should be supported at the federal level, including passage of a federal law and accompanying regulations governing innovation processes. A mechanism for the implementation of state innovation policy should also be created. 2. A focused policy is needed for maintaining and stimulating the development of innovative technologies and products developed at the city-forming enterprises. These projects should be developed separately but with the active participation of the base enterprises, which provide the premises, equipment, and specialists. Minatom should provide targeted support and incentives. 3. The innovation infrastructure, including technology incubators, technoparks, and innovation zones, requires targeted support and development. Such structures should be provided with special tax incentives. 4. Targeted investment funds should be created with support from the federal budget (Minatom) for the development of small conversion-oriented and innovative activities. Procedures for obtaining support from these funds should be simplified. Financing should be of a strictly focused nature with investment results to be closely monitored. 5. Innovation-oriented venture capital funds should be established. They would participate as investors in projects involving increased risks and long recoupment periods. 6. Simplified procedures should be instituted for transferring state property into other forms of ownership, including opportunities for price reductions during the sale or leasing of property if it is connected with innovation-oriented activities. A mechanism should be developed for transferring equipment and production facilities on favorable terms if they are to be used in promising conversion-related activities. 7. An enterprise restructuring program should be developed, with separate activities to be spun off into separate independent enterprises.