Innovating for Profit in Russia: Summary of a Workshop (2006)

Yury Rumyantsev, Aleksei Kholodov, and Andrei Kruglov

The goal of doubling the gross national product (GNP) by 2010, which was set forth by Russian President Vladimir Putin in his Address to the Federal Assembly in May 2003, can be achieved through the qualitative growth of industrial production. Stable annual GNP growth should remain at a level of more than 7.2 percent up to 2010.

It is known that the economic upsurge of 7.3 percent in 2003 was achieved primarily by the priority development of the fuel and energy complex (raw materials sector). An increase in the small business sector will provide for an additional 2-3 percent in growth; however, in 7-12 years this growth will stop due to the poor technological base. Companies will be unable to compete without new technologies.

The only solution is to develop the technological base by applying the potential of the defense complex and that of small businesses to commercialize these capabilities creating new developments and technologies.

The commercialization formula is simple:

Money 1→ Development → Commercialization → Money 2

Commercialization success that can be described by the formula Money2 − Money 1 > 0 is possible as a result of the following tasks:

1. Initial focus of the research process on addressing the economic and social needs of society.

2. Creation of mechanisms that facilitate the transfer of technologies from the research sector to users through

• creation of databases connecting new technological ideas and industrial needs

• creation of a network of technology brokers able to bridge the cultural gap between researchers with ready developments and industry, government, and those needing solutions

• development of technoparks and business incubators, including commercialization consulting centers in the fields of management, business planning, intellectual property, legislation, and so forth

• establishment of special technology transfer departments at universities and research and development (R&D) centers

• enhanced exchanges of personnel between the scientific community and industry on joint science and research projects

It is obvious that the problem of developing technologies and new kinds of products can be resolved mainly through the efforts of large science and industrial centers outfitted with adequate equipment and research infrastructure, as well as through the application of sufficient financial resources. The majority of technologies with potential commercial use are concentrated in the defense complex. Therefore, this field is the focus of enormous resources for commercialization. However, manufacturing of new products requires not only the money but also the skills to develop and produce competitive products in a short time frame while offering an acceptable price and meeting the needs of potential buyers. It is this stage, namely commercialization, that has been almost entirely absent. Some reasons for this include

• lack of motivation to commercialize the activity and to operate in the market, and a desire to obtain funding instead from federal and municipal budgets

• inappropriate enterprise structure to meet market requirements

• poor management and lack of expertise in the market

For these reasons, small innovative businesses are more suitable for the commercialization process. It is obvious that such companies should employ scientifically broad-minded managers who are keen on technological issues, but, on the other hand, also have practical expertise in operating in the market. As a rule, the creation of such “techno-brokers” is the main obstacle in commercialization.

Development of small innovative companies is especially urgent for cities like Snezhinsk because of their social and economic development. In particular,

lack of infrastructure including industrial facilities, energy, labor, and other resources, as well as the limited access regime in place in the city, make it inexpedient to set up mass production enterprises. On the other hand, the availability of the enormous science and technical potential of the All-Union Scientific Research Institute for Technical Physics (VNIITF) accumulated over 50 years—highly-qualified personnel, unique equipment, and specific technical culture—provides the prerequisites for the development of small innovative companies.

By now, Snezhinsk has already accumulated some experience in the field of commercialization. There are both successful and less successful examples. An analysis of the experience of Snezhinsk shows the following:

1. Attempts to fund commercialization from the enterprise’s own assets do not create efficient business.

2. Snezhinsk enterprises engaged in innovation do not usually have sufficient core assets, thus making involvement of venture capital unreasonable, because the share of co-founders becomes insignificant and leads practically to the loss of the business.

3. The most practical sources for raising small business investments in Snezhinsk are as follows:

• the Snezhinsk Foundation for Social and Economic Development, which funds projects aimed at social and economic development; it mainly provides loans to enterprises to procure fixed assets, such as equipment or renovations

• the Snezhinsk Foundation for Support and Development of Entrepreneurship, which provides loans to increase the operating capital of small businesses, mainly entrepreneurs and companies, using their fixed assets as collateral

• international nonproliferation programs, namely the U.S. Nuclear Cities Initiative (NCI) and the United Kingdom-Russian Federation Closed Nuclear Cities Partnership; these programs finance the establishment or development of commercial enterprises in order to create alternative jobs for employees downsized from VNIITF

However, it is unlikely that innovation activity will receive a loan or grant, as such activity is quite risky and has long pay-back terms. Almost all funds are provided for the support of businesses in the services, retail, food, and construction materials spheres. This means that an innovative enterprise must scatter its efforts and have several departments in its structure: purely innovative ones carrying out development work; and industrial ones providing for the company’s current activity and survival.

4. Isolation. Most companies in closed nuclear cities have no access to up-to-date information, which is essential for doing business in the field of commercialization.

5. There is a lack of experience and knowledge in management, business operations, and commercialization issues, which cause poor decisions. It is typical for enterprises to underestimate the commercialization stage and focus their efforts on the technical aspects of product development, which eventually leads to a lack of assets and failure of the activity.

6. Poor knowledge of patent legislation and, as a result, neglect of intellectual property rights issues. This makes the development unattractive for the investor or allows it to be freely used by other enterprises.

7. Snezhinsk’s city-forming enterprise [VNIITF] has no opportunities to support other innovative businesses besides its own projects or subsidiary companies.

Some of the problems mentioned here may be resolved by more active participation by entities like the Foundation “International Development Center Snezhinsk” (IDC) in various programs and initiatives aimed at developing innovations.

The IDC is a non-profit organization that began rendering its services on June 14, 2000. The IDC’s activities are funded by the U.S. government through the NCI Program. The IDC’s main objective is to support the business and the non-commercial sectors in Snezhinsk and their integration into the market economy. Over the course of its existence, the IDC has rendered more that 10,300 consulting and office services to its clients, which include public, municipal, and private entities, non-governmental organizations, and individuals. Some of IDC’s clients are Snezhinsk companies implementing conversion projects co-funded by international non-proliferation programs.

In order to fulfill its mission, the IDC strives for partner relations with organizations that could be helpful in its aforementioned activities. Today, the IDC cooperates with the Snezhinsk Foundation for Social and Economic Development, the Snezhinsk Foundation for Support and Development of Entrepreneurship, and the Snezhinsk Employment Center.

During the four years of its operations, the IDC has succeeded in supporting Snezhinsk business development in the following areas.

Today, the IDC is almost the only organization in Snezhinsk that arranges training activities to assist entrepreneurs and managers in various fields of activity. Seminars are arranged and conducted both by IDC employees and trainers invited from the leading universities and business schools of Moscow and St. Petersburg. The IDC organizes its own seminars on such topics as basic computer skills, Internet and information searches, English, and so forth. All told, about 820 students have taken part in these seminars. Invited trainers have led seminars on “Effective Sales,” “Quality Management,” “Logistics,” “Finance and Competi-

tion,” “Personnel Management,” and others. More than 1,070 students have participated in these seminars.

The IDC operates on a project basis. The launch of each new project is preceded by a stage in which business needs are identified and marketing and economic research is conducted.

The IDC is currently implementing three of its own projects, namely the Language Center, the Urals Business Center (UBC), and the Licensing, Certification, and Patenting (LCP) Project.

The Language Center project is self-sustaining. The project is aimed at overcoming language barriers in the international activities of Snezhinsk entrepreneurs and other citizens. The project began in December 2001, and after six months its student enrollment had reached 165. A total of 200 students in 20 groups learned English during the 2003-2004 academic year, including 65 employees of Strela, Ltd., a company implementing scientific and innovation projects. Besides Strela, Ltd., the Language Center works with four other corporate clients.

The IDC runs an Internet project called the Urals Business Center. The project was initiated to create better promotional opportunities for Snezhinsk enterprises that sell their goods and services outside the city by means of the Internet. The first version of the UBC website was registered and published in June 2002. Today, the site hosts the web pages of 14 companies. In addition, the site presents information on four innovation conversion projects operated by Snezhinsk citizens.

The LCP Project began in October 2002 for the purpose of overcoming administrative obstacles in the field of licensing, certification, and protection of intellectual property rights. The IDC provides advisory support for Snezhinsk business people regarding legal issues and helps them obtain licenses and certificates required for particular kinds of business activity. The IDC has signed three contracts to provide consulting services with regard to licensing.

Besides its own projects, the IDC supports activities funded by the NCI program, in particular, those operated by Strela, Ltd., the Preform Plant, Ltd., the Snezhinka Paint Production Plant, SEST, Ltd., ITECH Company, and others. The IDC offers quite a wide range of services from routine economic solutions and staff training to business plan estimates, market research, translation and interpretation services, and advertising material development.

The IDC is helpful in the creation of new, efficient enterprises in Snezhinsk. For instance, the IDC was directly involved in setting up a new company in the city, Raster-Technology, Ltd. As a matter of fact, Raster-Technology is a group of companies, which includes a main office in Moscow and affiliated industrial enterprises located in Obninsk, Samara, St. Petersburg, and Novosibirsk. The company specializes in the production of sophisticated, high-tech tools for package manufacturing. In the spring of 2002, the IDC helped to register Raster-Technology in Snezhinsk, assisted in its staff recruitment campaign, and provided resources on a paid basis, namely an equipped workstation, Internet access, and communications. In 2003, this company managed to get funding from the U.K.-Russian Federation Closed Nuclear Cities Partnership and purchased industrial facilities (a former municipal printing shop). It is now setting up the production of stamping dies in Snezhinsk. By the end of 2004, 20 jobs will have been created for highly skilled employees. Moreover, the project also saved the jobs of about 30 people who had worked for the municipal printing shop.

The IDC provides intensive support to innovation activities. For example, since 2002 the IDC has consulted for participants in the Russian Innovations Contest sponsored by the Audi Company and Expert magazine. Snezhinsk has submitted seven projects to the contest, four in 2002 and three in 2003. Of these seven, six were developed by the IDC. This allows Snezhinsk inventors to present their ideas to a broader audience. For instance, the project “Portable Mobile Robot with Locomotion Capabilities along Vertical Surfaces” received free promotion in the central mass media when information on the project was published in the Russian magazine Expert in 2002.

In 2004, the Foundation for Assistance to Small Innovative Business initiated a new federal program entitled START. The main purpose of this program is to help scientists, engineers, technicians, and students who are striving to develop and produce new goods or render services based on research activity. The START program assumes that new, science-intensive companies will be established for these purposes. It is estimated that it will take three years for a small innovative company to come into being and create a new product niche. START provides

financial support to innovations during the first three years, with the funds provided in stages on an annual basis. The IDC helped eight Snezhinsk projects prepare their applications for the START program. Three projects received funding for the first annual stage in the amount of 750,000 rubles each.

The IDC helps Snezhinsk enterprises in their promotional activities. For instance, jointly with the Snezhinsk city government, the IDC arranged and funded the participation of Snezhinsk enterprises in the Moscow exhibition “High Technologies of the Defense Complex—2001.” More than 300 companies representing 22 Russian regions and countries of the Commonwealth of Independent States took part in the event. Six Snezhinsk enterprises participated in the exhibition, including VNIITF, Spektr-Conversion, Ltd., and others.

The IDC provided organizational support to Snezhinsk companies that participated in the exhibition “Partnerships for Prosperity and Security,” which was held in November 2004 in Philadelphia, Pennsylvania.

The IDC helped to arrange more than 20 visits by U.S. delegations. The IDC is an informational and advisory resource for foreign partners. Time has proven that the International Development Center has become an efficient tool for enhancing the business climate in the city of Snezhinsk. In our opinion, IDC involvement in implementing projects to create alternative jobs and introduce new technologies substantially increases the effectiveness of investments and shortens project time lines.

How can the IDC be helpful in commercialization?

1. Through the development and expert assessment of innovation projects from the standpoint of commercialization potential and economic efficiency; the creation of a database of promising projects; the promotion and hosting of projects on the Internet; and by other means.

2. Through consulting and business planning for investment projects.

3. Through consulting on legislation, particularly with regard to intellectual property rights.

4. By identifying and holding preliminary negotiations with investors and strategic partners.

5. By analyzing target market segments for projected innovative products.

This page intentionally left blank.