Saturday, April 17, 2010

Profit, Loss, and Proliferation

Russia’s Plans for Jumpstarting Innovation
by Molly Cernicek and Cheryl Rofer

Andrew E. Kramer of the NY Times reports that the Russian government is building the first new scientific city since the collapse of the Soviet Union. “iGorod” – the innovation city, being developed in suburban Skolkovo outside Moscow. The city’s goal will be to incubate scientific ideas into profitable companies. The plan attempts to build technology ventures around universities within the Soviet model of scientific cities. Russia’s Silicon Valley? More than a bit premature, but definitely an important experiment for a country that has let its competency in science and engineering decay for over two decades as it focused heavily on natural resource production.

Soviet scientists designed and built nuclear weapons, supersonic jets, and sophisticated satellites. Their scientific publications and textbooks were renowned globally, especially in theoretical physics and mathematics. Today, Russian scientists continue to lead their fields and win prestigious medals, awards and funding. Unfortunately for Russia, most of them live and work outside of Russia.

Russia’s technical force suffered significant brain drain in the 1990s – not to rogue nations as many feared, but to the West for well-paying jobs. The UNESCO Science Report 2005 estimates that between 1990 and 2002 Russian research and other academic activities lost 1,072,500 technical employees, or by 55.2 percent.

A 2008 Russian Academy of Sciences report (pdf) supports UN estimates and adds more troubling data:
* Research expenditures have fallen 5 times over 18 years nearing the investment level of developing countries;
* The average age of those working at Russian enterprises is over 50;
* 50-74% of capital assets have been in operation past 20 years, far more than the average expected lifetime of 9 years for most equipment;
* High tech development has fallen back 10-20 years depending on the field, although there are some areas where Russia has maintained competencies (nuclear engineering, rocket and space industry, and aircraft)
* Russia controls 0.2 - 0.3% of the global market bringing in $6-$9B total in yearly revenues.

During Vladimir Putin’s presidency, it was assumed that rapid privatization of industry would lead to industrial funding of R&D in Russian universities to make up for their severe budget cuts. Instead, foreign companies rushed in to sell their products, many in sectors the Russians might have grown themselves, such as pharmaceuticals, aviation products and automobiles.

President Dmitry Medvedev’s strategy “Innovation, Investment, Education, and Modernization” is intended to consolidate the high school system, develop specialized high schools, create vocational schools, increase funding and scholarships to universities, recruit more foreign students, lure back Russian scientists who have emigrated, and educate thousands of new professors and students. The high oil prices of 2008 allowed these plans to be started. The collapse of oil prices has slowed their progress.

The challenges are immense:

Entrepreneurialism. The most innovative entrepreneurs operate well outside the law or outside the country. Successful oligarchs have money, but are unlikely to have experience building a business from scratch. The Soviet culture squashed any entrepreneurial activity. The post-Soviet culture is far from accepting entrepreneurs.
Education. The average age of a professor in Russia is now approximately 60 years. (UNESCO). Many of the scientists who left Russia in the 1990s were between twenty and forty years old. The professors’ technical degrees and experience in their fields are decades old.
Research and Development. Russian research has stagnated for the past two decades. The institutes are full of scientists waiting for their pensions.
Managers. Technologists who emigrated had the intra-preneurial skills necessary to envision, sell and manage projects - skills desperately needed within the country’s fledging high tech private sector.
Industry-University Collaboration. The Soviet university system’s close connection with the institutes and laboratories was severed when financial support was reduced in the 1990s. Opportunities were curtailed for students’ field experience and internships that usually led to a career. The connections between the university system and military-industrial complex had substituted for a private-sector role in scientific progress and innovation. There are no obvious career paths for many technical graduates.
Corruption. Transparency International’s 2008 Corruption Perception Index lists Russia at 147 out of 180 nations, tied with Bangladesh, Kenya and Syria. The Russian government has reported that corrupt officials pocket approximately $120 billion or one-third of the government’s annual budget. Many Russians believe it is closer to two-thirds. High-tech startups find that they are levied random and high “taxes,” charged more than others for general products and services, and may anger someone in upper-management in a competing scientific institute with strong connections to government officials.
Qualified Employees. Companies struggle to find employees with modern educations in technology fields and who can excel in a corporate environment. More jobs exist than bodies to fill them, given Russia’s declining population.
Labor Mobility. Renting is not a big business as people prefer to sell an apartment before they buy a new one. Multigenerational families still live together. Companies first look for qualified workers in their location. If a company must look further away for qualified employees, the issues of commuting and living nearby can keep a qualified prospective employee out of consideration.
Business rental space. Almost impossible to find. Expensive to rent. More expensive to heat.
Customs. It is very difficult and expensive to import machinery and components necessary for production. Selling a Russian-made product outside Russia’s borders is even more challenging.

The biggest challenge to President Medvedev is time. By the time a project like iGorod is finished, the rest of the world could have developed two or three new generations of global technology breakthroughs in the city’s technology fields (which revolve around solar energy at the moment). Russia needs to develop and implement plans with much shorter time-spans if it has any chance of gaining domestic, let alone global high tech market share. There is still an expectation that the biggest projects involved with the biggest institutions will bear the most fruit.

It would be interesting to see what would happen if the government took a tiny percent of what it will cost to build iGorod and held a contest that brought out entrepreneurs (Russian and non-Russian) residing in Russia to show their technology developments and then fund good ideas at $50K each for 6 months. After 6 months, fund as many of the successful businesses as possible to keep them developing their technologies inside Russia for the next two years. Repeat and expand the contest every year.

Without an environment friendly to and supportive of entrepreneurs, no innovation city will succeed. The government should take advantage of those already working inside Russia on innovative research and ideas. Many independent scientists and engineers are working hidden in nooks and crannies, building products and finding customers in and outside of Russia. These are the people who already have real results and customers. They should be sought out for their expertise in technology development and strategy within Russia and encouraged to expand their businesses and markets.

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