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

Yevgeny A.Pashin *

Obninsk Center for Science and Technology

INTRODUCTION

Since 1991 an active process of new enterprise creation has been under way in Obninsk. About 6,000 firms under various forms of ownership have been created as of mid-2001. Of these, about 300 could be considered as being in the scientific-technical sphere based on various characteristics. Actually, today there are about 50 small- and medium-sized innovative enterprises operating in the market. Their fields of activity, including both development and production, vary widely: oxygen gas analyzers (Ekon Closed Joint-Stock Company), milk filters (Conversfilter Research and Production Enterprise), feed additives (Medbiopharm Research and Production Enterprise), car rear-view mirrors (Intech Limited Liability Company), information technologies (Modeling Systems Limited Liability Company), trace gas analyzers (Eridan-1 Science and Technology Center Limited Liability Company), thermal meters (Flow-Spectrum Research and Production Enterprise), pure gallium (Conversfilter), spraying technologies (Powder Spraying Center Limited Liability Company), microfiltration systems (Express-Eko Research and Production Enterprise), power electronics (EnergoElectrica Closed Joint-Stock Company), and aerosol filters for the nuclear industry (Obninsk Center for Science and Technology [OCST]). This list could be continued, but in general, the fields of activity of innovative enterprises are related to the basic areas of research of Obninsk institutes: the nuclear power industry,

* Translated from the Russian by Kelly Robbins.



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Page 88 Development of Small Innovative Companies in Obninsk to Serve the Russian Market Yevgeny A.Pashin * Obninsk Center for Science and Technology INTRODUCTION Since 1991 an active process of new enterprise creation has been under way in Obninsk. About 6,000 firms under various forms of ownership have been created as of mid-2001. Of these, about 300 could be considered as being in the scientific-technical sphere based on various characteristics. Actually, today there are about 50 small- and medium-sized innovative enterprises operating in the market. Their fields of activity, including both development and production, vary widely: oxygen gas analyzers (Ekon Closed Joint-Stock Company), milk filters (Conversfilter Research and Production Enterprise), feed additives (Medbiopharm Research and Production Enterprise), car rear-view mirrors (Intech Limited Liability Company), information technologies (Modeling Systems Limited Liability Company), trace gas analyzers (Eridan-1 Science and Technology Center Limited Liability Company), thermal meters (Flow-Spectrum Research and Production Enterprise), pure gallium (Conversfilter), spraying technologies (Powder Spraying Center Limited Liability Company), microfiltration systems (Express-Eko Research and Production Enterprise), power electronics (EnergoElectrica Closed Joint-Stock Company), and aerosol filters for the nuclear industry (Obninsk Center for Science and Technology [OCST]). This list could be continued, but in general, the fields of activity of innovative enterprises are related to the basic areas of research of Obninsk institutes: the nuclear power industry, * Translated from the Russian by Kelly Robbins.

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Page 89 nuclear equipment and radiation technologies, nonmetal materials technologies, ecology, medical radiology, and meteorology. Considering the successes and difficulties of innovative enterprises, we can see that they share many common problems of regular small enterprises but also have some specific ones. As an example, let us look at the following enterprises: Ekon, Conversfilter, Intech, Eridan-1, EnergoElectrica, and OCST. MAIN CONDITIONS FOR SUCCESS AND REASONS FOR PROBLEMS For all the above-mentioned enterprises, the primary condition for success was a combination of competitive technologies embodied in their products and the prices at which they offered these products on the market. However, these elements represent only part of the successes enjoyed by these companies. Let us briefly analyze each enterprise individually. First, let us look at EnergoElectrica, a closed joint-stock company that manufactures power electronics. The first reason for their success lies in their serious efforts to market their products. For about a year the enterprise operated with heavy losses, having devoted all its efforts to studying the market and searching for customers with the ability to pay. The second reason is the enormous amount of work the company devoted to developing high production standards and ensuring that its facilities were technologically well equipped, both of which are important since the enterprise is engaged in manufacturing electronic devices. However, being founded by a group of engineers, the company encountered the problem of lacking management experience in production issues. They are learning, but still mainly by their own mistakes. The next problem is the lack of qualified staff. To solve this problem, the company plans to set up a training minilaboratory with four to six computers. There they will provide highly tailored training for advanced undergraduate students from the local Institute of Nuclear and Power Engineering. In general, the enterprise is a success. They see their development prospects in the diversification of their products and the development of new and improved devices. The second enterprise, the OCST Closed Joint-Stock Company, is more a scientific enterprise than a production one. It was founded by the city's institutes to commercialize discoveries and inventions made in the city. Now, however, OCST has established a whole production section for manufacturing pilot samples of high-tech products: aerosol filters for the nuclear industry, water purification filters, devices for disinfecting medical wastes, and feed additives for removing radionuclides from livestock and raising their productivity. The history of OCST's production section features the same successes and failures as regular innovative

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Page 90 enterprises. Let us look at the successful field of aerosol filter production. The reason for OCST's success is that by relying on the powerful team of researchers from the State Science Center—Institute of Physics and Power Engineering (IPPE), the enterprise could offer consumers filters that significantly exceeded currently available filters on a number of parameters. Having a research and development base, the enterprises will soon be able to offer next-generation systems. This competitive advantage, combined with its price policy, will allow the firm to be ahead of its competitors for a long time to come. This enterprise has successfully solved intellectual property questions with IPPE thanks to a special licensing agreement. The main difficulty that OCST encountered is the extremely aggressive practices of its competitors. Being unable to beat OCST on quality, they use every possible means of discrediting the firm's products in the eyes of the consumer. At present the enterprise is developing a policy of countermeasures to neutralize the actions of its competitors. Today OCST produces more filters than a number of other innovative enterprises combined. Therefore, they plan to spin off this product line into a separate enterprise; but to do this, they must first increase their standing in the Russian market. Despite these positive notes, the enterprise also provides some examples of actions that were not completely successful, especially with regard to the production of water purification filters. Having applied advanced technology based on research to create purification systems for submarine heat exchangers, the company devoted its efforts to producing single filters for household use. However, although in general this market is quite large, the prices turned out to be too high for the average Russian customer, and the design was not completely perfected. Sales of filters for large-volume corporate use were much more successful. Hence, the enterprise is currently focusing its efforts on obtaining certification for its high-capacity filters. The third enterprise under consideration is Conversfilter. It is a young enterprise, only one year old. It develops and manufactures milk filters. The enterprise got a successful start thanks to the financial support of OCST, one of its founders. OCST allocated some of its profits to provide a loan to the enterprise with a rate 50 percent less than that offered by the Obninsk Fund for the Support of Small Business. As a result, the enterprise could create the necessary stockpile of materials for its first months of operation. Also, OCST rented office and production space to the firm at a low rate. The company sells its product rather actively to Belarussian farms. However, the enterprise has encountered serious problems in selling its products in Russia, even though there are no similar filters on the market. In fact, Belarus has established strict standards for the purity of milk, while Russia abolished such standards back in the revolutionary period. The majority of farms do not care about the quality of the milk

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Page 91 they produce, as it is bought regardless of quality. Therefore, the company managers have to pursue a policy of explaining the situation to regional agricultural departments. Recently, the company has placed its hopes on the major dairies, since they have all set up their own dairy farms, and the market economy requires quality products along the entire production chain. Sample batches of filters have recently been supplied to the dairies for testing. Considering the difficulties encountered in selling its milk filters, the enterprise ties its prospects for future development to the diversification of its product line (filters for wine, oil, etc.). The next enterprise to be considered is the Ekon Closed Joint-Stock Company, a manufacturer of hard electrolyte gas analyzers for monitoring boiler exhaust gases. Established in 1997, its customers are power, metallurgical, and oil- and gas-processing plants and glass and ceramics factories. The enterprise has relied mainly on the effective performance and quality of the devices it manufactures. Pursuing an active marketing policy, the company is slowly but surely expanding its customer base both at home and abroad. However, in export sales, the company is encountering a number of problems with customs operations. Involving external consultants is very expensive, which is why the board of directors is focusing its efforts on hiring a specialist in this area, as export shipments are increasing. Another serious problem faced by the enterprise is the shortage of production and office space and the high cost of its existing space. To solve this problem, they are studying opportunities for building facilities of their own. The constant growth of account reporting is having a negative impact on the enterprise's operations, so they are now taking measures to automate their accounting systems. Expansion of sales to Europe led to the problem of International Organization for Standardization (ISO) certification of the products. Therefore, preliminary work is under way to prepare certification agreements with licensing companies and to search for investors. Having scientists and researchers on staff, Ekon links possibilities for its further development with a number of objectives: developing new products, improving quality and decreasing costs, expanding production, and obtaining certification of their products according to international standards to facilitate entry into foreign markets. The last innovative enterprise to be considered is the Eridan-1 Science and Technology Center. This enterprise began work on the innovation project Trace Gas Analyzers in 1995, but these efforts especially accelerated in 1998– 1999 thanks to financial support from the Sberbank savings bank, which provided targeted credits not only for export orders, but also for the entire project itself. When the first Sberbank loans were obtained, the key role was played by the Obninsk Fund for the Support of Small Business, which operates under the auspices of the city administration. The fund provided guarantees and risked its own assets for the benefit of the enterprise.

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Page 92 Eridan-1 is encountering significant difficulties in the further development of export activity and the implementation of the trace gas analyzer project for three reasons. First, all its loans are short term, lasting generally three to four months but no more than one year. With such short loan periods, there can be no question of long-term innovation projects or any long-term development. Second, the interest rate is rather high, so the loan can be paid back only with highly profitable projects. Third, opportunities for placing material assets as collateral are very limited. The point is that, according to the completely justifiable demands of the commercial banks, of which Sberbank is one, a company must provide collateral in the form of an asset that could be liquidated if necessary. To produce any instruments or equipment that could be sold or given as collateral, a company needs credits to carry out all the work necessary to transfer an idea or a patent into certified manufactured products—devices, equipment, or technological processes. So, the enterprise is caught in a vicious circle. The bank has no right to lend to any enterprise without collateral, and innovative enterprises most often lack it. The lack of solid collateral often hinders the rapid development of Eridan-1. They were able to obtain loans only on the basis of the devices and equipment they owned, which were insignificant in cost, or special targeted loans for export orders under contracts with certified letters of credit. To achieve optimal growth, they need much more credit. With regard to the investment project on trace gas analyzers and other devices, which could be profitably produced and sold, the enterprise must have even more of its own assets or an independent sponsor, both of which are very difficult to find. The problem can be solved by giving unsecured venture capital loans to innovative enterprises with a good credit history, well-founded market prospects, and good financial and staff capabilities. However, doing this involves many difficulties. It is very hard for a small company to place its equity in a stock exchange (due to the underdeveloped stock market in Russia), and there are no serious private investors who want to get involved in this most interesting work of seeking, selecting, and supporting innovation projects. This evidently occurs because many serious investors underestimate the economic efficiency of innovation projects and their ability to bring potentially high profits. THE MOST IMPORTANT LESSONS In 2000–2001 an analysis of the overall status of innovation activity was conducted in four Russian cities, including Obninsk, within the framework of the Tacis Innovation Centers and Science Cities project. The study highlighted the main problems in the city that currently complicate

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Page 93 or hinder the commercialization of products, services, and technologies. These problems included the following: lack of working laws on intellectual property negative attitudes on commercialization among a number of research institute directors (the institutional owners of intellectual property) and the failure to focus on commercial results when conducting research and development work lack of specialists in the field of commercialization and other professional staff for innovative companies and projects insufficient entrepreneurial initiative among the authors of projects high financial barriers in the search for necessary facilities, equipment, and so forth lack of business incubators for innovative companies the Russian mentality (innovative companies wish to carry out their activities by themselves to the maximum possible extent) distrust of innovative companies in the quality of work and prices charged by innovation infrastructure enterprises low overall level of entrepreneurial culture Among the problems that hinder the operation and growth of small-and medium-sized technology-based enterprises are the following: lack of sufficient operating capital for research and development activities, equipment upgrades, and capital construction aimed at expanding production and improving product quality lack of necessary office and manufacturing space insufficient awareness among firms of information about the innovation infrastructure in the city and its capabilities the high cost and not always high quality of consulting services unsettled issues of intellectual property Based on a survey of small enterprises, estimates were made of the need for various services, including in the areas of technological development, business development, financial issues, information support, and start-up support. The survey indicated that only 10 services on the list were of interest to less than 25 percent of respondents: consultation on matters of selling or buying licenses, preparation of documents for privatization and postprivatization, consultation on resolving nonpayment issues, estimation of the value of property and company assets, restructuring, technology audits, consultation on technology transfer issues, consultation on securities operations and the stock market, and training on issues of crisis management and the securities market. Table 1 shows estimated needs for services among small enterprises based on the results of a survey of 44 such firms.

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Page 94 TABLE 1 Needs for Services among Small Enterprises Service Percentage of Enterprises Needing the Service In technological development (audit, expert review, etc.) 10 In business development: Product promotion 40 Market research 40 Legal support 40 Patent and licensing support 40 Business planning and investment projecting 30 Certification 50 Consultation on restructuring issues 5 Organization of advertising and public relations companies 40 Assistance in staff recruiting 40 Educational and training activity 20 In company finance: Promotion for external financing 70 Tax optimization 20 Consulting on arrangement of financial activity and accounting, auditing 40 Credits and preferential loans 50 In information support for innovative business: Databases on regulations 10 Information on standards and patents 10 Partner searches, access to information about demand and supply 50 Automation and information technologies 15 Web design and other Internet-related services 40 Organization and holding of seminars and conferences 10 At the company startup stage: Assistance in organizing start-up funding 100 Consultation on issues of company establishment 20 Supply of space for companies 100 Support for activities in the initial period 80 Equipment supply 50 Other activities aimed at supporting innovative companies and authors of innovation projects: Project management 5 Pilot production 10 Design and graphics 30 Construction and maintenance of office and manufacturing space 30 Editing and publishing 30

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Page 95 The survey has shown that among the most necessary services for small enterprises are the following: assistance in seeking customers and subcontractors, assistance in obtaining certification and standardization of products and services, and provision of information about the market, competitors, and potential customers. About a quarter of the companies surveyed consider the following services to be necessary for their development and are ready to pay for them: computer networks; Internet service; publishing and advertising services; provision of information about new technologies; assistance with business law and taxation issues; preparation of patent and trademark applications; organization of exhibitions, presentations, and business meetings; assistance with licensing; personnel recruitment; patent searches; and training in accounting. Payment for other types of services is possible only with support (50 percent) either from existing funds or from city, oblast, or federal government sources. The quantitative need of small enterprises for the services is as follows: low interest rate loans (10–15 percent): in the sum of up to 100 million rubles annually experienced specialists: up to 150 persons per year rental of office and manufacturing space with information infrastructure: up to 3,000 square meters ACTIVITIES AIMED AT IMPROVING BUSINESS OPPORTUNITIES In the opinion of innovation infrastructure specialists and the innovative companies themselves, a number of effective measures should be taken to assist in the development of high-tech business and promote the transfer of high technologies into production to earn profits in the market environment in the coming years: provide incentives for research and production companies that produce marketable science-intensive products that conserve state resources. To do this, it is necessary to work out criteria for tax cuts according to the marketability of the product and the economic impact of its introduction. institute certain incentives for the rental or purchase of production facilities and equipment, as well as incentives regarding communications and utility services invest in the advertising and exhibition activities of such companies train personnel for the innovation sphere with knowledge of effective methods for managing innovative enterprises and promoting new technologies and products to the market

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Page 96 create marketing structures that could promote the most marketable products of high-tech companies and finance these structures from city and regional budgets create conditions under which innovative companies can receive consulting services on preferential terms. This can be done by giving subsidies to the most professional enterprises making up the innovation infrastructure of the city. For example, such subsidies could be paid from the Obninsk Science City Program. ensure that new commercially advantageous projects are discovered and promoted for financing create an effective legal mechanism for transferring new technologies from research institutions to small high-tech enterprises develop a mechanism for insuring the venture capital of investors, high-tech product developers, and manufacturers create an attractive investment climate in the city to attract outside investors.