4
Technology Transfer

This chapter addresses the efforts of Kazakhstani science and technology (S&T) specialists to develop new and improved goods and services that are of interest to private businesses, government enterprises and service organizations, and consumers, primarily in Kazakhstan but increasingly in other countries as well. The emphasis in this discussion is on the process of transferring technologies from the research and development (R&D) stage to their successful introduction into practice. Chapter 2 identified a number of research areas that offer particular promise for providing R&D results that should be of interest to organizations that can effectively take the results to the public- or private-sector marketplaces.

Transforming the results of R&D into practice is, of course, only one route for enhancing the technological capabilities of Kazakhstan-based organizations. In the near term the importing of foreign technologies and the modernization of technologies that are already in place in the country will undoubtedly be the dominant mechanisms in upgrading the nation’s capabilities. But commercialization and public-sector utilization of R&D results are gradually increasing their importance as routes to improving economic and social conditions.

While improving technological capabilities is a significant aspect of enhancing the economic competitiveness of Kazakhstan, other factors are also important. In particular, improved productivity using both old and new technologies is a key dimension. Also, sound marketing strategies are critical determinants of whether Kazakhstani products will penetrate global markets and command a greater share of local markets.



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Science and Technology in Kazakhstan: Current Status and Future Prospects 4 Technology Transfer This chapter addresses the efforts of Kazakhstani science and technology (S&T) specialists to develop new and improved goods and services that are of interest to private businesses, government enterprises and service organizations, and consumers, primarily in Kazakhstan but increasingly in other countries as well. The emphasis in this discussion is on the process of transferring technologies from the research and development (R&D) stage to their successful introduction into practice. Chapter 2 identified a number of research areas that offer particular promise for providing R&D results that should be of interest to organizations that can effectively take the results to the public- or private-sector marketplaces. Transforming the results of R&D into practice is, of course, only one route for enhancing the technological capabilities of Kazakhstan-based organizations. In the near term the importing of foreign technologies and the modernization of technologies that are already in place in the country will undoubtedly be the dominant mechanisms in upgrading the nation’s capabilities. But commercialization and public-sector utilization of R&D results are gradually increasing their importance as routes to improving economic and social conditions. While improving technological capabilities is a significant aspect of enhancing the economic competitiveness of Kazakhstan, other factors are also important. In particular, improved productivity using both old and new technologies is a key dimension. Also, sound marketing strategies are critical determinants of whether Kazakhstani products will penetrate global markets and command a greater share of local markets.

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Science and Technology in Kazakhstan: Current Status and Future Prospects INNOVATION IN KAZAKHSTAN Innovation encompasses R&D, but it is a broader concept, as discussed later in this chapter. In industrialized countries most technological innovations take place in the companies that produce goods and provide services. In continuing efforts to improve the competitiveness of their products, innovative companies usually make many small changes in their manufacturing processes and products, with the introduction of entirely new processes and products an infrequent occurrence. Similarly, the contributions of researchers and research laboratories to technological advancement also usually lead to modest improvements of products and services, although on occasion major R&D breakthroughs result in new processes and products. In Kazakhstan, innovative companies are few in number. In other settings in the country, particularly in local research laboratories external to the companies, most successful innovation efforts will probably be modest in scope. Technological breakthroughs will be rare in Kazakhstan as in most countries. A large portion of the R&D specialists in Kazakhstan carry out their activities at education and research organizations. A limited number work in the R&D or production departments of a few medium and large companies. Still others are entrepreneurs who have set up their own businesses to develop and market their ideas to other businesses, to government organizations, or directly to individual consumers. Many of these Kazakhstani specialists are competing against or co-operating with international providers of goods and services that are also seeking a share of the Kazakhstani and global markets for their technologies. The process of technology transfer in Kazakhstan is often described as a linear process involving the following steps: basic research, applied technology, design and development, and production. During Soviet times, different organizations were responsible for different steps. Resources to carry out each step were usually provided, and the customers for the results of each stage were well known. Seldom was there serious competition among different entities as the evolving technology was passed from organization to organization. Many Kazakhstani officials and specialists are now well aware that new approaches are needed to bring products to market from their origins in research laboratories or elsewhere. However, there is still a tendency to think of the process in terms of a linear model. Frequently, not enough attention is given to the essential personal interactions and to the related feedback among the participants involved in the entire chain of events if a new or improved process or product is to become a commercial success. In short, the Soviet government’s “requirement” that participants work together throughout the process has disappeared. Now, success depends on collaborative efforts that rest largely on personal confidence and trust among participants to overcome organizational barriers as well as technical problems.

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Science and Technology in Kazakhstan: Current Status and Future Prospects INCREASING THE DEMAND FOR PRODUCTS OF R&D Transfer of technology is successful only if there is demand by specific paying customers for the technological innovation available. Demand may be for a new, better, safer, or cheaper process or product. Demand may exist before research or adaptation begins. Demand may evolve in parallel with R&D activity, or demand may emerge after a product is available for viewing, testing, or sale. Some Kazakhstani researchers contend that a latent demand for their products is reflected in global trends that indicate clear needs for their products. They believe that if their products have performance or cost attributes that are superior to the products of competitors, there will automatically be a global market. Therefore, they seek financial support from government or private-sector investors for their R&D efforts even though they have no indication of interest in their ideas by specific customers who would purchase their products. Clearly, an important aspect of marketing research is analysis of trends in the likely markets for products. But without linking research to the interests of specific customers, the likelihood of successful commercialization is not high. The government of Kazakhstan gives high priority to stimulating greater demand for innovative technologies by companies in Kazakhstan. Presumably, this increased demand is to be reflected in company investments in specific R&D activities at the beginning of, or at least early in, the R&D process. As previously mentioned, the government has set a goal of private-sector financing of 50 percent of the nation’s R&D budget by 2012, in comparison with 7 percent in 2005. A related goal calls for the private sector’s share of the R&D budget to increase eventually to 67 percent. This “market pull” approach contrasts with the “technology push” approach that is currently emphasized by most R&D organizations in Kazakhstan. Committee members observed numerous examples of technologies that have been developed by inventors which are sitting on shelves. Their achievements are awaiting paying clients to become interested in them; according to the inventors that the committee members met, this has seldom happened. Nevertheless, both “technology push” that engages potential customers as the R&D effort moves forward and “market pull” are important approaches in Kazakhstan. In both cases, customer involvement early in the R&D cycle is critical. As to public-sector markets for the products of R&D, various ministries are, of course, interested in high-quality and low-cost goods and services based on R&D efforts at home or abroad. Such goods and services can respond to public needs in many areas. Examples of areas include (1) upgrading governmental health care services, (2) assessing and cleaning up environmental problems, and (3) improving national communication systems. The recent record of the S&T community in meeting the needs of public-sector markets in Kazakhstan with local goods and services, in competition with

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Science and Technology in Kazakhstan: Current Status and Future Prospects imported products, appears inconsistent despite the legacy of successful Soviet efforts to use local scientific achievements to support government activities. Public-sector procurement officials usually prefer to use well-proven international products rather than rely on lesser-known local products when advanced technologies are involved. As one official stated, his ministry does not want Kazakhstan to become a testing ground for untested technologies. Thus, the role of foreign firms in transferring technology to Kazakhstan currently dominates efforts to acquire advanced technologies. Also, foreign assistance donors and other international partners usually rely on foreign rather than local expertise in designing projects that involve S&T. This use of foreign experts may introduce a bias toward selection of imported technologies in carrying out cooperative programs. To interest potential customers in the products of local R&D efforts, the quality of the R&D must be perceived to be high, particularly in comparison with foreign competitors. Chapters 2 and 3 of this report discuss steps to improve the quality of R&D efforts that are to be wellsprings of technologies to be transferred. Against this background, the government of Kazakhstan has developed a variety of new mechanisms to increase demand for R&D products that will lead to goods and services that can be commercialized. The commercialization “agents” include (1) Kazakhstani companies, (2) international companies that compensate Kazakhstani researchers for acquisition of their know-how, and (3) individual Kazakhstani entrepreneurs who market their own products either within the country or abroad. The funding mechanisms designed to support these efforts include the following: Kazakhstan Development Bank, which provides loans with payback periods of up to 30 years. Fund for support of small and medium enterprises, which provides grants to nurture promising technologies. Investment fund, which mobilizes venture funds both in Kazakhstan and abroad for promising approaches. Innovation fund, which supports entrepreneurs with particularly interesting ideas. Also, as discussed below, the government is promoting incubators, techno-parks in tax-free zones, technology transfer offices, government/industry matching grants for researchers, engineering centers, training programs concerning protection of intellectual property rights, and other approaches. But technological commercialization is a complicated process, particularly in a country with little history of market economics as the framework for commercial activity. According to Kazakhstani officials, the success of technological commercializa-

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Science and Technology in Kazakhstan: Current Status and Future Prospects tion of new products has yet to be demonstrated on a significant scale in the country. SEARCHING FOR MARKETS Nevertheless, many Kazakhstani officials have a vision of a vibrant international market for high-technology products developed in the research laboratories of the country. However, only one to two international patents per 15,000 Kazakhstani scientists are filed annually. In the near term the domestic market will probably offer more realistic business opportunities for Kazakhstani organizations. When it comes to marketing S&T-intensive products internationally, Kazakhstani businesses that develop markets for their S&T-intensive products at home should be in a stronger position than those businesses operating internationally that do not have steady revenues from domestic sales. Markets in Russia, China, and other Central Asian countries will probably be more promising in the near term than markets in more distant lands. Kazakhstan is well known and respected in the region for its nuclear and space achievements. Kazakhstani companies enjoy close geographic proximity to these countries, and there are many educational and professional ties to possible customers. For some Kazakhstani companies, the Central Asian markets may provide a stepping stone to clients in Europe, Asia, and the western hemisphere. Some Kazakhstani businesses recognize the advantages of joining with foreign companies that have strong technical capabilities and well-developed international connections. At the same time, organizations from abroad may hesitate to invest in technology-intensive activities in Kazakhstan that are dependent on the use of local expertise and local connections. Some international companies may enter into contracts with Kazakhstani organizations in order to obtain components or technical services that support the operations of the international companies in the country or abroad, while satisfying local officials that they are doing their best to increase local content in their activities. The growing presence of oil companies offers significant potential in this area. In any event, Kazakhstani companies should stay abreast of the interests of foreign companies that have access to large S&T resources since these companies may become competitors or partners. BARRIERS TO TECHNOLOGY TRANSFER In 2004, at the request of the Ministry of Industry and Trade, the University of Texas at Austin carried out an assessment of the commercial potential of 35 technologies that had been developed by researchers in Kazakhstan. (Given the proprietary nature of these technologies, they are not itemized herein.) These technologies presumably reflect some of the country’s most promising research results. The findings of the assessment were mixed. A few of the technologies

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Science and Technology in Kazakhstan: Current Status and Future Prospects seemed worth pursuing, and efforts are under way to identify companies that would be interested in embracing the technologies in their manufacturing activities. But still ahead are the financial, organizational, production, and other realities of bringing technologies to market. Why have these and many other technologies been sitting on the shelf, as noted above? More broadly, why has the success rate of commercialization activities in Kazakhstan been low? Kazakhstani officials told the committee that in their view there are four problems: (1) lack of technologies with market potential, (2) lack of skilled entrepreneurs, (3) lack of methodologies for moving products from the laboratory to the marketplace, and (4) disinterest in modern technologies by businesses that profit by using low-cost labor and old technologies. The usual success rate of investments in still-to-be-proven technologies in the United States and other industrialized nations is also low, perhaps for other reasons. In Kazakhstan a higher success rate would probably emerge if the list of problems set forth below and in other sections of this chapter could be effectively addressed. Many research institutions perceive their missions as primarily supporting academic research that leads to scientific publications. Very few give priority to attracting customers for using the results of their research. There is a lack of strategic planning within research institutions and university-sponsored technology centers for effective use of core competencies not only to pursue research that leads to scientific publications but also to support activities that can succeed in the local and global markets. Applied research activities at some research institutes are distributed across a diverse range of topics, resulting in an absence of the critical mass that is essential for achievement of technological leadership in a specific field. For many years government support for R&D had been tied to defense needs, with a resulting mismatch of competencies of researchers and interests of potential commercial customers when defense orders terminated. At the same time, in Western countries space- and defense-related R&D has yielded numerous commercial technologies and products that are widely used for civilian purposes. There is a lack of technology transfer managers with experience working in a market economy. It is difficult for research institutes to persuade companies to outsource work to them when the companies have more highly qualified specialists than do the institutes in view of the higher pay levels of the companies. Returning to the theme of market pull, Kazakhstani researchers are oriented toward what they know best—research of interest to them—not toward addressing problems of interest to potential customers. It will take a major reorientation of activities and considerable time to develop many of the research competencies

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Science and Technology in Kazakhstan: Current Status and Future Prospects of interest to potential customers. At the same time, the research leadership in Kazakhstan has limited experience in marketing the products of research and seldom has a realistic strategic vision of how research efforts can respond to customer needs in a sustainable fashion. Approaches Advocated by the Ministry of Industry and Trade Recognizing the foregoing and other shortcomings in Kazakhstani capabilities to carry out effective technology transfer activities, the World Bank and the Ministry of Industry and Trade (MIT) have been developing the following approaches: Coaching entrepreneurs in how to talk to investors. Teaching university and scientific institute managers how to commercialize technology, protect intellectual property, negotiate joint ventures, and look for strategic partners. Conducting technology audits to identify technologies that have the potential for commercial success. Providing business and technology commercialization expertise to the entrepreneurs in the techno-parks and incubators that have been established. Assisting firms in developing commercialization strategies—licensing, joint ventures, and strategic partnerships, for example. Marketing technologies at international fairs and helping to strengthen linkages between research institutes and (1) private companies and (2) international research institutes.1 The committee supports these activities. However, as previously noted, considerable attention should also be given to linking researchers with potential users early in the R&D cycle. This approach should reduce the difficulty in finding markets for products that have been developed by researchers. In addition, the National Innovation Fund of MIT plans to implement the following grant programs to address some of the problems cited above: A precommercialization program to determine the commercial feasibility of ideas. A program to support joint research by research institutions and industry with industrial partners providing in-kind contributions. A program to support joint research between Kazakhstani research institutions and international research centers with the centers supporting their share of the activities. 1 Project Information Document, Technology and Competitiveness Project, Report #AB2105, World Bank, March 24, 2006, provided by the World Bank to the committee, July 2006.

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Science and Technology in Kazakhstan: Current Status and Future Prospects A program to defray the costs of patenting inventions with commercial potential in North America, Europe, and Asia. A program to help Kazakhstani scientists obtain on-the-job experience in converting research into new products and services by working in foreign companies’ research laboratories.2 These approaches are all quite appropriate and should enhance the capabilities of the participants while also establishing models to be emulated by others. Again, the committee emphasizes the importance of researchers knowing the specific needs of the customer for research results—including technical specifications and cost constraints—early in the R&D cycle. Therefore, the committee suggests a program whereby researchers work closely with companies in Kazakhstan to help both the companies and the researchers understand whether and how the researchers can respond to the needs of the companies. Such an approach is under way to a limited extent in the minerals and electrical generation industries, according to scientists in Almaty. TECHNO-PARKS, INCUBATORS, AND TECHNOLOGY TRANSFER OFFICES The Center for Engineering and Transfer of Technology of MIT has plans to establish 12 incubators, seven regional techno-parks, and six national techno-parks in the near future. Each incubator is to be housed on the premises of a university and is to provide for up to three years a variety of consulting services to new companies with an emphasis on financial, marketing, and legal advice. Meanwhile, techno-parks will provide physical infrastructure and consulting services for companies of any age. National techno-parks are to be dedicated to specified branches of industrial development (e.g., information technology). The residents of national techno-parks will have a variety of services and economic benefits. Committee members visited the recently opened Alatau Information Technology Park in a special economic zone near Almaty. According to the director, the park had quickly committed 80 percent of its available space to a variety of companies, including Microsoft, Hewlett Packard, Siemens, Cisco Systems, and Kazakhtelecom. The park offers manufacturing, exhibition, and residential space as well as communication and security services. The tax benefits include exemptions from corporate tax, customs duties on imports and exports, value-added tax, and land and property taxes. Also, firms with 100 percent foreign ownership are welcome, and there are no restrictions on capital investments. While the enthusiasm and plans of the director are impressive, government officials have reportedly been disappointed that to date there have been no manufacturing activities at the site. The resident companies apparently are using the 2 National Innovation Fund, brochure, 2005, Almaty.

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Science and Technology in Kazakhstan: Current Status and Future Prospects park for warehouse storage space, thereby taking advantage of the economic incentives while contributing little to economic development of the country. Given the Kazakhstani government’s disappointment, it seems likely that steps will be taken to encourage the resident companies to broaden their activities if they are to receive economic benefits. This experience underscores the importance of offering carefully designed tax incentives that result in increased R&D activity and do not simply provide opportunities for companies to reduce costs without investments in R&D. The committee visited a second techno-park in Karaganda. This is an impressive new facility with considerable office space and office equipment. Companies are just beginning to move into the facility, and it is too early to assess the likelihood of success. The leadership of the techno-park is well versed in the problems of bringing new technologies to the market, and local support for its activities is strong. A number of universities and research centers seem to be aware of the need to have well-trained technology transfer specialists. Yet the committee did not encounter such specialists during its visits to many universities and centers. The role of such specialists is repeatedly mentioned in government documents. The committee considers such specialists to be particularly important as the research centers and universities struggle to relate to market needs and to navigate the many legal, financial, and other issues that arise in moving technologies toward commercialization. As a starting point, brief training in technology transfer coupled with visits to technology transfer offices in Europe or the United States by aspiring Kazakhstani technology transfer officers should be easy to organize and are recommended, provided the participants in these visits have been clearly designated to assume important technology transfer positions in their home institutions. Technology transfer is a complicated process, and continuing education and experience are necessary if specialists are to be effective. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS The government of Kazakhstan has made considerable progress in modernizing the legal basis for patents, copyrights, and trademarks. The system that is now in place seems to have satisfied the requirements for entry into the World Trade Organization. A variety of training programs are conducted on a regular basis to familiarize specialists from a variety of organizations with the procedures for protecting intellectual property. Of course, the patent system is in an early stage of development, with only a limited number of active patents; development of the system will be an important aspect of efforts to improve the technological competitiveness of the country. Of particular interest is the recent enactment of legislation that provides a new basis for allocating property rights for products developed using funds provided by the government. This legislation has some similarities to the Bayh-Dole legislation in the United States. The rights for commercial purposes now belong

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Science and Technology in Kazakhstan: Current Status and Future Prospects to the performing organizations, which in turn compensate inventors, with the government entitled to use the rights at no cost for its own noncommercial purposes. Also, the government has “march-in” authority to revoke the ownership of a patent if the patented technology is not exploited during a five-year period. There are still several aspects of this approach that deserve attention. They include: Retroactivity—ownership of technologies developed with government funding in years preceding enactment of the new legislation. Awareness—educational efforts to inform potential inventors and research institutions of the new legislation. Enforcement—ensuring the effectiveness of administrative and judicial procedures to resolve disputes over ownership in infringement cases.3 INNOVATING FOR PROFIT The foregoing discussion of technology transfer mechanisms and programs reflects key elements of the innovation system that should help the private sector become a more important engine of economic growth for the country by achieving a number of key goals of the government. These interrelated goals should include (1) to increase the share of GDP (gross domestic product) attributable to industrial activities; (2) to increase the export of value-added commodities based on the nation’s natural resources; (3) to maximize fulfillment of domestic market needs with items produced in Kazakhstan; (4) to increase employment opportunities; and (5) to utilize labor, materials, and capital more efficiently as the result of technological achievements. While the government’s many programs to address the challenges of innovating for profit are admirable, some approaches deserve greater attention. For example, an increasing number of small and medium-size firms should play key roles in advancing technologies. But current laws and programs do not provide incentives for innovating firms; they are treated the same as noninnovators. Also, the transfer of technology and technology-intensive components from small and medium-size firms to large enterprises warrants greater attention. Modernization of traditional industries should not be neglected in the quest for high-technology approaches. A program to support leasing of production equipment by small and medium firms in their early stages of formation should be considered. Finally, providing incentives for young scientists and engineers to become risk-taking entrepreneurs can be important. All elements of the process of innovation should be considered, and the government has made a good start in this regard. More active engagement of the 3 For an overview of the patent and trademark system that is evolving, see Annual Report 2005, National Institute for Intellectual Property, Ministry of Justice, Astana, 2006.

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Science and Technology in Kazakhstan: Current Status and Future Prospects government in the activities of the Organisation for Economic Co-operation and Development should help key officials understand the experience of industrialized countries in this area. Various types of statistical data that are advocated by that organization can be helpful in providing overviews of progress. For example, it is important to understand why companies become interested in innovating. Some of the traditional reasons are as follows: To replace products that are being phased out. To extend product range. To maintain traditional market share. To create new markets. To reduce labor costs. To reduce material costs. To reduce energy costs. To improve working conditions. To accelerate production rates. To improve product quality. To reduce environmental damage. To improve customer service. The steps that companies may take to support innovation include the following: R&D. Acquisition of patent rights and licenses. Acquisition of nonpatent licenses. Industrial design. Trial production and testing. Training of personnel. Market research. Acquisition of machinery and equipment. Partnering to develop precompetitive technology. Joint ventures to acquire technological knowledge. The response of the private sector to these and other issues should be analyzed regularly by the Kazakhstani government in its efforts to promote innovation throughout the entire industrial base of the country. The government has defined innovation as “the result of scientific and technical activity involving intellectual property whose introduction into different spheres of production and management of society improves economic effectiveness and/or has social or ecological significance.”4 Now the challenge is to maximize such results. 4 State Support of Innovation Activities, Law #135-III ZRK, Chapter 1, March 23, 2006.

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Science and Technology in Kazakhstan: Current Status and Future Prospects THE HUMAN DIMENSION In summary, technology transfer takes place between two or more organizations with the common goal of developing a useful product or service that can be sold in the public or private marketplace. At the same time, however, the interactions involve individuals who may be in vastly different institutional settings, and their perspectives on the challenge of commercialization may be significantly different. Thus, it is imperative that they develop a strong relationship that enables them to focus their energies on achieving a positive outcome. Collaboration is most effective when it is carried out on a continuing basis covering a variety of products. As noted above, the linear model that depicts the movement of an idea from basic research to a successful product or service is often used in theoretical discussions to emphasize the different steps in the process of commercializing a product or service, but the steps are not usually discrete and the overall process is not so simple. Many deviations from the model, often linked to the human dimension of innovating for profit, are characteristic of successful endeavors. Furthermore, the process of developing a product does not necessarily lead to a successful business, and the failure rate of new businesses is substantial. There are many examples in Western countries and Japan of successful technology transfer of ideas into commercial products that began in universities and research laboratories. Kazakhstani research managers and technology transfer specialists could benefit significantly from familiarization with the histories of a variety of examples of successful technology transfer and also with the reasons that other efforts failed. Of particular interest are steps that were taken to cope with unplanned developments in the innovation cycle and measures that reduced problems when it was necessary to deviate from planned activities. International experts could, of course, visit Kazakhstan and recount the details of a variety of efforts that illustrate many of the pitfalls and responses in the commercialization process. This type of training would be of particular value if it were a long-term process wherein the foreign experts would become very familiar with local conditions. Also of value would be visits by key Kazakhstani specialists to laboratories and technology transfer centers abroad that have particularly good track records in bringing their products to market. They should also visit organizations that have successfully assisted government agencies in incorporating new goods and services into their public-sector programs. Such visits should include time in different geographic regions since successes or failures in many cases are a result of local circumstances. The human dimension is key. The talent needed to successfully bring about technology transfer is in short supply, particularly in Kazakhstan, which has little modern experience in this area.