Preface:The obsession with grand scale projects is as damaging to the idea of innovative economic zones as the trend towards small-budget minimalism. Just one thing is missing: a program to build effective cooperation between research centers and private business companies.
The Role of the State and Business in Modernization
The problem of innovations and economic modernization remains a subject of heated debate in the public realm, as well as scholarly and policy circles in Russia. Initially a scholastic plan, it eventually became the major priority of the country’s economic policy for the foreseeable future. The crisis that gripped the world made the problem of economic
modernization especially acute in Russia as it pushed it to the sidelines in the group of countries aspiring to be among the world leaders.
Russia’s petrodollars, a decade-long premise for all socio-economic development projections, have proven to be a far too shaky foundation for taking a confident look in the future. The need for innovations which tentatively emerged in the industrial production has become ubiquitous in all sectors of the Russian economy.
Yet the very first attempts to readjust the industrial policy and make it an eager recipient of newest technologies ran into a hopelessly obsolete production system, practically insensitive to innovations. The problem of finding constructive solutions to radically modernize the economy presented itself in full magnitude, as the very possibility of Russia’s joining the club of highly developed states was challenged.
The Path to an Innovative Infrastructure
The realization of a liaison between innovations and modernization enables determining a set of priorities in the country’s economic development for years to come, both with regard to the system of state governance and business. Furthermore, pooling the country’s production forces for attaining global objectives would make it the first ever reason for Russia to renounce the old practice of setting private interests against public ones.
In supporting technological innovations, we should strictly adhere to the principle under which selection of such projects is the prerogative of private business, except for cases when it receives direct state orders to launch innovations in the fields outlined by the government as priority ones. Modern international experience shows that governmental support of innovations by devising “priority guidelines” in technological development is ineffective. The needs of the market are the main source of innovation priorities, and business knows these needs far better than the state.
Hence the creation of an innovative infrastructure comes to the forefront of the economic policy. This implies devising institutional mechanisms to translate innovative ideas and R&D into business projects and their proper funding. The key measures to create an innovative infrastructure are:
--- Developing an infrastructure for cooperation between research institutions and businesses. The present-day agencies, such as innovative technology centers and technology parks, are ineffective because working under direct order of business has not become a routine practice with them (as a result, research institutions often offer stale budget-funded developments to business, which are not what it really wants). Budget funding and taxation of research centers should be arranged so as to put science-business relations on a contractual basis;
--- Setting up venture capital funds to diversify the risks of innovation projects. Diversification is possible if a venture capital fund has considerable resources, large enough to finance many projects. In the present conditions, it would be expedient to set up a Russian fund of venture investments, with a capital of at least $400 to 500 million and the government’s stake of up to 50 percent. This pilot venture fund, if successful, would set an example for new venture capital funds created with private investors’ money;
--- Developing financial institutions. In the 1990s, the “new economy” sector in the member states of the Organization for Economic Cooperation and Development grew rapidly because pro-innovative companies of this sector had direct access to financial markets ready to extend loans. In Russia, the companies focusing on innovative projects are practically deprived of this opportunity due to the poor development of financial markets, where banks have little interest in giving long-term loans. Measures to reform the financial sector should necessarily agree with the objective of developing innovative business as a priority.
Business is a proactive participant in the innovative restructuring due to the very nature of innovations. In a nutshell, this is what one would like to buy: for one’s good, comfort, security, or simply for beauty, convenience and novelty.
The definition looks simplistic only at first glance. It is perfectly obvious that everybody has his own idea of novelty. For example, a perpetual motion machine would be an ideal innovation, but we realize that it cannot be built. Yet there is a steady demand for an economical, environmentally friendly, reliable, and effective engine and there is an army of specialists and inventors working on it. It is the market that decides which novelty is an innovation when it begins to buy it – preferably, in large amounts.
Yet it would be erroneous not to regard as an innovation whatever we cannot see with our eyes or feel with our hands, but which contributes to making new goods: materials, technologies, software, utility lines, and organizational, management and teaching techniques. Of course, the degree of novelty can only be determined at the expert level, but knowledge has long become an integral part of commodity production in the modern world.
Hence the first conclusion: a successful strategy of innovative
development, capable of giving a competitive edge to domestic manufacturers, boosting the GDP and raising the standard of living, should be based on defining the investment component of innovative activity.
R&D results and technological or organizational ideas cannot be called innovations if they have not been implemented in production. This applies to scientists’ discoveries, patents for inventions, or projects that cannot be implemented for lack of necessary market conditions. The main indicator of the market’s readiness to accept innovations is the desire of business to invest in these projects. In case of Russia’s inertia economy based on primary products, this readiness heavily depends on the government policy to support innovations with investments, which suggests creating incentives for innovative activity.
It follows from the above definition that the constant demand for novelties is the crucial characteristic of the innovative economy. It is the demand that sets reference points and incentives for innovative activity. From this point of view, the shift of innovative production to the corporate level is a sign of the time. Business, as an economic actor, has one unquestionable quality – it is closer to the market as it actually lives for its sake. Therefore, business is the mainspring of the market economy development that is embodied in innovations.
Despite the government’s efforts to create institutional conditions to stimulate innovative activities (tax incentives, technology development zones, technology parks, special foundations, etc) we see little innovative enthusiasm except for slogans and calls. In other words, innovations do not look increasingly appealing to business, and not just because of inertia thinking or limited planning perspective.
Innovations have not yet become a factor of production development (growth) as a result of an active investment policy in Russia. For a number of reasons, reducing production costs as the key factor to remain competitive has not become the primary concern of the Russian management. Consider the following figures: in 2009, Germany’s largest car-makers increased their liquidity reserves by almost twofold, as if the crisis or plunging profits had not affected them at all. Almost all these reserves – more than 50 billion euros – have been saved with the sole purpose of investing in the newest technologies and equipment to outperform rivals on the global market.
Epilogue: This article is provided by Vladimir Yevtushenkov. He is Chairman of the Committee on Scientific-Technological Innovations and High Technologies under the Russian Chamber of Commerce and Industry.