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Development of Small Innovative Companies in Snezhinsk to Serve the Russian Market

Aleksei A.Kholodov and Yury Rumyantsev *
Snezhinsk International Development Center

During the next 10 to 15 years, trends indicate that annual economic growth rates will generally average 3.5 to 4 percent worldwide. With growth rates of 2 to 3 percent annually, as is currently the case in Russia, the country will be lagging so far behind by the year 2010 that it will be doomed to trail behind the world economy for the next millennium.

What sort of growth rate is required for the next 25 years? Russia must have 6 to 8 percent annual gross domestic product growth, and in some industries, growth rates should be 16 to 18 percent annually.

The current 2 to 3 percent growth rate has been achieved by focusing top-priority development efforts on the fuel and energy complex (raw materials sector). Small business growth will provide for an annual rate of 4 to 6 percent, but in 7 to 12 years this growth will stop due to the underdevelopment of the technological base. Enterprises will not be able to compete without new technologies. The only path to follow lies in developing the technological base by using the potential of the defense complex and small business, potential that makes it possible to commercialize new inventions and technologies.

The commercialization formula is simple:

Funds1 → Development → Commercialization → Funds2. Successful commercialization as expressed by the condition Funds2—Funds1 > 0 is possible by pursuing the following objectives:

  • 1. initially focusing the research process on meeting the economic and social demands of society

* Translated from the Russian by Kelly Robbins.



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Page 68 Development of Small Innovative Companies in Snezhinsk to Serve the Russian Market Aleksei A.Kholodov and Yury Rumyantsev * Snezhinsk International Development Center During the next 10 to 15 years, trends indicate that annual economic growth rates will generally average 3.5 to 4 percent worldwide. With growth rates of 2 to 3 percent annually, as is currently the case in Russia, the country will be lagging so far behind by the year 2010 that it will be doomed to trail behind the world economy for the next millennium. What sort of growth rate is required for the next 25 years? Russia must have 6 to 8 percent annual gross domestic product growth, and in some industries, growth rates should be 16 to 18 percent annually. The current 2 to 3 percent growth rate has been achieved by focusing top-priority development efforts on the fuel and energy complex (raw materials sector). Small business growth will provide for an annual rate of 4 to 6 percent, but in 7 to 12 years this growth will stop due to the underdevelopment of the technological base. Enterprises will not be able to compete without new technologies. The only path to follow lies in developing the technological base by using the potential of the defense complex and small business, potential that makes it possible to commercialize new inventions and technologies. The commercialization formula is simple: Funds1 → Development → Commercialization → Funds2. Successful commercialization as expressed by the condition Funds2—Funds1 > 0 is possible by pursuing the following objectives: 1. initially focusing the research process on meeting the economic and social demands of society * Translated from the Russian by Kelly Robbins.

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Page 69 2. creating mechanisms facilitating technology transfer from the research sector to users by creating databases to link technical ideas and the needs of industry creating a network of technology brokers, namely those who can bridge the cultural gap between researchers who have something to offer and industry and government entities that need solutions to problems developing technoparks and incubators for entrepreneurial firms organizing special divisions responsible for technology transfer at universities and scientific-research centers providing incentives for exchanges of personnel between the scientific community and industry on joint research and development projects Undoubtedly the problem of developing technologies and new types of products is within the powers of the major research and production centers that are equipped with the appropriate research infrastructure. This effort also requires significant financial resources. The lion's share of potentially commercializable technologies is concentrated in the defense sector, and immense resources for conversion have been targeted in this field. However, experience has shown that manufacturing new products requires not only money, but also skill in handling all aspects of bringing competitive products to the market on a tight schedule and meeting the demands of the potential customer at an acceptable price. It is this stage— commercialization—that has been practically absent. There are a number of reasons for this, primarily including the following: lack of motivation for companies to commercialize and market their work and a desire to obtain stable funding from the federal and municipal budgets the structure of such enterprises, which does not meet market demands weak management and lack of experience in market conditions For these reasons, small innovative enterprises are best suited for commercialization. Obviously such enterprises must have managers who have both a technical background in the appropriate field and a fairly broad scientific outlook on the one hand and the necessary knowledge and practical skills for working under market conditions on the other. As a rule, it is the formation of such a class of “technology brokers” that represents the main obstacle to commercialization. The problem of developing small innovative firms is especially pressing for cities like Snezhinsk. This urgency is determined by socioeconomic development conditions in the city, namely the shortcomings in the city's infrastructure for energy, personnel, and other resources; the

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Page 70 lack of sufficient production facilities; and the fact that Snezhinsk is a closed city, which makes the development of full-scale production facilities inexpedient. On the other hand, the enormous scientific-technical potential of the Russian Federal Nuclear Center-All-Russian Scientific-Research Institute for Technical Physics (VNIITF), having been accumulated during more than 40 years of operation, provides a good prerequisite for the development of small innovative companies. Other important factors include the presence of highly skilled personnel, unique equipment, and a certain cultural and technical environment that has been created in the city. EXAMPLES OF SUCCESSFUL BUSINESSES By now a number of enterprises have amassed a certain amount of work experience in the field of commercialization. The following examples of successful activity may be cited. The Home Closed Joint Stock Company works mainly on the production of energy-saving and heating equipment, assembly and installation of individual heating systems, and fulfillment of municipal orders in the public housing and utilities sector. It employs 19 people. In 1998 the enterprise started manufacturing Uran [Uranium] certified dual-flow heating boilers, which have heating efficiency ratings from 10 to 1,000 kW and operate on either natural gas or liquid fuel. The design for the boiler was developed by Home specialists working jointly with counterparts from the Coral Closed Joint Stock Company of Yekaterinburg. To date, an agreement has been signed with the Korean company Olympia to establish assembly production of small-power boilers from Korean components. In the field of energy conservation, Home specialists have developed and tested leakage detectors and automatic cutoff systems for natural gas utilities. But the bulk of its efforts are focused on carrying out municipal orders (production of benches, refuse bins, and fencing). This is primarily because the enterprise currently cannot operate on a commercially efficient basis solely by manufacturing the products it has developed. Its present production capacity is only one boiler per day. Therefore, Home has begun seeking investors to launch the production of heating equipment and energy-saving devices. An agreement has recently been signed with the Russian State Committee for Construction on granting a credit from the Energy Conservation Program. This loan, which is being guaranteed by the Snezhinsk City Administration, will be used to purchase $3 million worth of German equipment. Another successful enterprise is the Bars-70 Research and Production Association, a limited liability company. The main activities of this enterprise involve developing, designing, manufacturing, and installing industrial air and gas purification equipment using electroionizing filters and

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Page 71 cyclones. In addition, the enterprise renders services in applying polymeric powder coatings on metal, ceramics, and glassware. It employs 16 people. Thanks to their work experience, Bars-70 employees have in short order developed test samples of ionizing filters and tested their efficiency in practice. The sanitary-epidemiological service has recently authorized the use of these filters throughout Russia. Also, there is a license for carrying out start-up and adjustment work on gas purification equipment. The enterprise has developed its own original ionization, power supply, and precipitation units that are unlike models currently available on the market. Bars-70 has pioneered the development of the following devices: a “pulsing” power supply unit with adjustable voltage making it possible to increase efficiency and ozone levels multistage purification systems facilitating the quick design of compact systems meeting specific customer requirements but using standard component units To date, the enterprise has launched small-scale production of filtering equipment ranging from domestic filters to industrial ventilation systems (up to 20,000 cubic meters of purified air per hour). Design of filters for the transportation industry is another area of activity for the firm. An air purification system for use in railroad cars has been developed. This project has been discussed with a general customer, the Tver Railroad Car Plant, and it is under consideration by the Russian Ministry of Railway Transport. Filters produced by Bars-70 are being used at a number of enterprises in the Urals and Bashkiria and at the Chelyabinsk Oblast Sanitary-Epidemiological Station and Chelyabinsk regional hospital. The enterprise owes the success of its activities primarily to its fortunate selection of a market niche. The company built its marketing policy on the flexibility of the equipment it produces, which makes it possible to meet the requirements of specific customers to the greatest possible extent. At present, production capacity stands at three or four filters per month. To develop production further, design new models, and move them to the marketplace, the enterprise has purchased a powder paint line for applying polymer coatings, with this service to be offered to construction, industrial, and other organizations and to the general public. EXAMPLES OF UNSUCCESSFUL BUSINESSES The activities of the following enterprises can be cited as unsuccessful examples.

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Page 72 The SnezhinskTechService Research and Production Association, a limited liability company, employs 43 people. The company's primary activity is the production of nipple watering systems for poultry farms. At the same time, it became involved in developing and producing non-invasive technical diagnostic systems for high-power transformer winding, as well as rendering diagnostic services on these devices. During their research efforts, they managed to find a technical solution that made it possible to provide qualitative evaluation of the winding press force. Pilot samples of these DIK-S2 units were produced, and some were sold. However, because of a lack of funds, all work in the diagnostic area was terminated in June 2001, and some staff members were fired. Poor management and insufficient market research were the most likely reasons for the failure. By selling equipment to the power supply systems, this enterprise deprived itself of the market for its own services. Equipment sales alone could not support the costs of this area of activity, as sales were low. This situation arose primarily because successful operation in the equipment market requires attestation and certification of the equipment, which must be then included in the official list of approved measuring devices. The enterprise needed enormous amounts of funds to meet these requirements; however, it did not take advantage of opportunities to raise funds from various federal targeted programs. The Pulse Closed Joint-Stock Company has a staff of five. Since 1991 this enterprise has been developing and manufacturing on a piece-by-piece basis medical equipment for use in functional diagnostic consulting centers. The types of equipment produced include hardware-software complexes used in cardiographic and stationary-cycle testing, vascular examination of limbs and the brain (rheography), and a number of procedures providing for enhanced diagnostics of the cardiovascular system. In 2000, work was initiated on the development of a new-generation 12-channel cardiorecorder for cardiodiagnostic and stationary-cycle stresstest systems and a portable 12-channel cardiograph (with capabilities for electrocardiogram [EKG] printout, storage of examination data, and data transfer via telephone line to a hospital for further analysis). The passage of legislation on medical equipment certification and the institution of a huge number of regulations by the Ministry of Health made it impossible for uncertified medical devices to be used. The procedures involved in obtaining the necessary permits are extremely cumbersome (taking more than a year), and the costs are beyond the capabilities of small innovative companies specializing in small-scale production. Thus, the enterprise cannot sell its uncertified products to get the money needed for certification. This negatively affects the interest of potential investors, who are not ready to make long-term investments in projects that already involve a high level of future risk because they involve putting new technologies into production.

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Page 73 An analysis of the current situation indicates the following: Attempts by companies to fund commercialization at their own expense do not lead to the creation of efficient business. As a rule, Snezhinsk enterprises dealing in innovations do not have significant fixed assets, which makes the use of venture capital unattractive because in this case the share of founder-initiators becomes insignificantly small and in fact leads to loss of the business. To date the most realistic funding sources for small business in Snezhinsk are the Snezhinsk Socioeconomic Development Fund, which supports projects that enhance the socioeconomic development of Snezhinsk, and the Foundation for the Support and Development of Entrepreneurship in Snezhinsk, which funds the development of small business. However, the chances are slim for obtaining a loan for innovation activity because of the high risks and long payback terms of such projects. Almost all funds are allocated to support businesses involving the service and retail spheres or the manufacture of foodstuffs and construction materials. For instance, Bars-70 got a loan only to set up its power paint line. Thus, the innovative enterprise had to diversify its own efforts and create several divisions in its structure: some purely innovation oriented, to carry out research and development, and others production oriented, to ensure the day-to-day viability and survival of the company. There is a functionally complete lack of any sort of government support. Informational isolation is a problem. Most closed-zone companies have no access to current information, without which it is impossible to run a business in the commercialization sphere. Lack of management experience and knowledge, both in business and commercialization, leads to wrong decisions. In a typical case, poor research into existing legislation, particularly in the field of certification and licensing, causes subsequent failure of the commercialization effort. The defense enterprise around which the city of Snezhinsk is based provides almost no support to innovative companies. In this situation, part of the above-mentioned problems can be solved by more active involvement in the various programs and initiatives aimed at developing innovation-oriented business offered through such mechanisms as the Snezhinsk International Development Center (IDC) Foundation. The IDC is a nonprofit organization that began rendering services to organizations and members of the public in Snezhinsk on June 14, 2000. IDC's activities are funded by the U.S. government under the Nuclear Cities Initiative (NCI) program. The main objective of the IDC is to provide support and assistance for entrepreneurial activity and the nongovernmental organization (NGO)

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Page 74 sector in Snezhinsk during the course of integration into the market economy. Since the IDC began operating, 78 clients have been registered, of which 55 percent are involved in business and 45 percent work in the social sphere. IDC's clients include state, municipal, and private enterprises and organizations, nongovernmental associations, nonprofit companies, and private persons. Organizations that play a significant role in Snezhinsk also can be found among IDC's clients, namely, the Academician E.A. Zababakhin Russian Federal Nuclear Center-All-Russian Scientific-Research Institute of Technical Physics, the Snezhinsk Physical-Technical Institute, the NGO Women of Closed Administrative-Territorial Zones, and departments of the Snezhinsk City Administration. With the aim of effectively achieving its goals, the IDC strives to establish and strengthen partner relationships with organizations that could help promote the center's mission. To date, partner relations have been established and cooperation is under way with the Snezhinsk Socioeconomic Development Fund and the Foundation for the Support and Development of Entrepreneurship in Snezhinsk, as well as with the following organizations: Snezhinsk City Employment Center, which provides retraining and job placement services for unemployed citizens LT-Resource Limited Liability Company, which provides support for investment projects carried out in the city with funding from the external sources During the year it has been in operation, the IDC has attained certain successes in supporting Snezhinsk business. TRAINING Currently the IDC is the only organization in Snezhinsk that provides targeted training to assist entrepreneurs and managers in various types of activity of both a commercial and nonprofit nature. The IDC is an Authorized Training Center for Pro-Invest-IT, a company that is a Russian leader in the sphere of business planning automation. Thus, the IDC is authorized to provide basic and advanced training for specialists from various industries in financial planning and analysis, marketing, and market forecasting. In addition to providing training using its own staff resources, the IDC has also attracted external organizations and trainers. In this regard, the IDC has actively sought seminar subjects that would interest both the business and nonprofit sectors in Snezhinsk, and it has selected instruc

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Page 75 tors who could conduct the most effective seminars. Examples of such business seminars that were unanimously well received include the following: “Contemporary Information Technologies.” Participants were acquainted with up-to-date information resources, particularly the Questel-Orbit and Lexis-Nexis systems, developed skills in creating information research scenarios to optimize search efforts, and familiarized themselves with specific operating features of Lexis-Nexis. The skills gained have allowed VNIITF employees to perform expanded searches under the Neutron Therapy public project, which is of social value for the city. “Efficient Sales.” This 64-hour seminar was conducted by a trainer from the Stockholm School of Economics in St. Petersburg. The seminar curriculum included three units: Increasing Sales Efficiency, Business Management, and Marketing. The methods suggested have been successfully tested in practice. Above all, the IDC is an active participant in the Snezhinsk Employment Program. In accordance with a partnership agreement signed with the Snezhinsk City Employment Center, the IDC regularly conducts courses on basic computer skills and seminars on the legal basics of business. A total of 32 people have received training under this program. Overall, 38 seminars, courses, and training sessions have been arranged by the IDC since it began operations, with 20 of the activities being led by instructors from the IDC staff. As a result, 395 people have received training. Over the next year the IDC plans to expand the number of regular seminars on such subjects as management, marketing, and computer-aided design/computer-aided manufacturing (CAD/CAM) and to continue organizing seminars with external trainers on such subjects as certification and licensing, contemporary information technologies, and applied marketing. SERVICES The day-to-day work of IDC involves providing services to support and develop business and the nonprofit sector in Snezhinsk. The center provides business administration capabilities that are often unavailable to entrepreneurs and managers of conversion-oriented production facilities and public works projects. Since its establishment the IDC has rendered services in about 3,000 cases. Consulting activity is one of the most efficient contributions in support of project managers in various fields. The center has all the necessary prerequisites for such activity at its disposal. The IDC staff includes specialist practitioners in the law, accountancy, economic and finance, sci

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Page 76 ence and technology, and humanitarian fields. All IDC employees are university graduates, and two have doctorate degrees. The following types of consulting services are provided: onetime consultations consulting during project development informational searches for clients or partners conclusions and recommendations on various aspects of projects In the course of this type of activity, the IDC has carried out four market research studies and prepared four business plans, six feasibility studies, and three proposals to the International Science and Technology Center (ISTC). The IDC has invested in and organized a new enterprise that produces wall and paving stones. To date, this project has resulted in the creation of two new jobs. Consulting and expert support has been provided at all stages of implementation of this project. With technical support from IDC, Bars-70 has won a tender and received an order for the development and delivery of air-purification systems for zinc-plating lines at the Thermoantikov company in the city of Ufa. IDC's plans for the current year include arranging foreign language courses on a continual regularly scheduled basis creating an information center that will include an electronic library of databases on various fields of activity and will provide access to world databases via the Internet implementing the Open Design Bureau project to provide enterprises engaged in developing and producing complex new products with opportunities to work with up-to-date CAD/CAM software, search for orders for design work, and improve the professional skills of designers working on civilian projects INTERNATIONAL ACTIVITY The international activity of the IDC has been focused on supporting American NCI participants and the Snezhinsk business and social sector in enhancing mutual understanding, expanding contacts in search of potential partners, and disseminating information on various programs in the spheres of business, education, and public affairs. In this regard, the IDC has provided the American and Russian sides with operative and reliable information on joint activities, prepared reference materials and reports at the request of organizations participating in NCI programs, helped arrange and stage visits by American delegations, and participated in various other Russian-American activities.

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Page 77 The IDC initiated the inclusion of four projects developed by Snezhinsk enterprises in the Accelerated Conversion Plan for the city that was prepared under the NCI program. During the visit of an American delegation in November 2000, the center arranged a tour of enterprises included in the plan for Ronald Nesse, senior project manager at the Pacific-Northwest National Laboratory, who is a member of the IDC Board of Trustees. Onsite meetings with senior managers of the enterprises familiarized Nesse with Snezhinsk business achievements and allowed him to make a more realistic evaluation of the current situation. IDC INITIATIVES To increase the efficiency of its efforts aimed at developing a favorable socioeconomic climate, the IDC has undertaken a number of initiatives. The center has developed and arranged its own website: www.snezhinsk.ru/idc . The website is available in both Russian and English and includes all basic information about the IDC's activities. The site also provides informational resources to assist business and social programs, including announcements of grant programs, plans for IDC activities, and Internet resources (exhibitions, customs legislation, patent and information systems, joint programs). The website is frequently updated, thus providing operative information for users. The IDC has arranged a number of activities aimed at supporting Snezhinsk business and science-technical projects, including the following: The IDC organized and cofunded (with the Snezhinsk City Administration) the participation of Snezhinsk enterprises in the exhibition High Technologies of the Defense Complex—2001, which took place in Moscow at the Expocenter on Krasnaya Presnya. More than 300 enterprises from 22 Russian regions and NIS countries took part in the exhibition. The closed zones were represented by two cities, Snezhinsk and Tryokhgorny. Six enterprises represented Snezhinsk: the Avangard Research and Production Association, Home, Bars-70, SnezhinskTechService, the Spectrum-Conversion Research and Production Association, and VNIITF. The status of the forum was extremely high, which produced high attendance and thus gave Snezhinsk enterprises a good opportunity for efficiently addressing the problem of finding partners and customers, advertising and promoting their products, and doing related market research. September 24–27, 2000, the IDC held a meeting on telemedicine in conjunction with an international conference on medical research issues. The meeting allowed representatives of Snezhinsk business and conversion activities to present their projects.

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Page 78 Thus, the IDC is today a well-developed structure with all the resources needed for contemporary business activity. It can provide substantial assistance and facilitate efforts under various international programs as well as in all other cases of interaction with foreign partners. To this end, the IDC offers the following: For Snezhinsk Enterprises: access to external information using IDC resources, including the Internet and databases on various market segments, legislation, funding sources (foundations, investment structures, etc.), possible strategic partners, equipment, and so on targeted training focused on support for entrepreneurs and managers in various fields of activity of both a commercial and nonprofit nature consulting and expert support in preparing and implementing projects assistance in making contacts with foreign partners IDC equipment and services for use in proposal preparation For External Partners: contacts with Snezhinsk business evaluation of the attractiveness of projects and of the resources available for their implementation selection and preparation of project proposals in accordance with customer requirements continuous supervision of project preparation and implementation operative and reliable information on joint activities assistance to foreign partners in various aspects of activity communication facilities, office services, and other IDC resources for foreign partners while in Snezhinsk