Preface:The obsession with grand scale projects is as damaging to the idea of innovative economic zones as the trend towards small-budget

minimalism. For example, the projects to set up Science Towns provide for all kinds of measures – from improving the public transport infrastructure to developing pedestrian walkways in neighborhoods. Just one thing is missing: a program to build effective cooperation between research centers and private business companies.

 

1.What is happening in Russia?

The natural (and not so natural) monopolies simply hiked their tariffs, increasing the non-manufacturing costs, which frustrates any efforts to bring forward and implement innovative projects. This drive to lower one’s production costs by no means can expand to the field of innovations, not with the complete uncertainty of the business environment.

 

Hence the second conclusion: due to the above circumstances, the government policy of direct investment support of innovations should become the critical factor to compensate for – and ultimately remove – the shortcomings of the existing environment of innovative activity.

Admittedly, Russia has never formulated the principles of this policy since the start of economic reforms, while the few measures aimed at

supporting innovations have proven ineffective.

 

2. Reasons for ineffective innovations

There are several reasons behind this situation:

- The government policy to support innovations has long been associated with the financial support of mostly state research institutions. The criteria for funding did not match the necessity to encourage research centers to seek innovative partnership with private business;

 

- In determining the priorities in the policy to support innovations, the government focused on “strategically significant vectors” of technological development, planning to amass budget resources there. Such an approach actually made the government a substitute for market mechanisms, both in selecting innovative projects that qualified for financial support and the sources of funding. The meager financial resources allocated for a few separate projects could not yield national scale results in principle; 

 

- As the government attempted to directly fund innovative projects, it did not pay enough attention to stimulating private business to boost

investments in innovations. Due to the persistent uncertainly of the economic environment, and a lack of the mechanisms of large-scale venture capital funding of the innovative sector, Russia has few chances to launch a stable self-sufficient innovative process with incentives emerging in the business sector. This means the government’s efforts to “nudge” innovative projects are unavailing: innovative activity tends to degenerate once the government scales down its support; 

 

- A lack of dialogue between government bodies and business people led to many different interpretations of the basic issues of state support of innovations. As a result, the attempts to produce a legal basis for the principles underlying government support ran into the problem of obscure legal formulations, and were largely declarative.

 

3.Obvious progress in Russia

At the same time, Russia has made obvious progress – both in terms of the government’s attention to innovations, and its efforts to bridge the gap between science and business and help transform the intellectual achievements of domestic researchers and designers into a competitive product by world standards. This makes groundwork for fruitful cooperation between the government and business in determining the promising policy guidelines to support innovations. 

 

The Government Commission on High Technologies and Innovations chaired by the Prime Minister confirmed the allocation of 1.1 trillion rubles for research, innovative projects and federal targeted programs in 2010, and announced a benchmark fourfold increase in the funding of government

procurements of innovative products.

 

4. What funds for innovation?

A logical question arises: What funds should and can the government tap to support the innovative sector of the national economy? This issue is

particularly topical today, as the work on the key tax policy guidelines and the next budget has entered an active phase.

 

Until now, federal target programs have been the only instrument of government support of business strategies. Poor implementation of a majority of these programs in 2009 forced the government to significantly reduce their number and suspend several of them. The approved and partially implemented target programs need one trillion rubles of investments, and another 500 billion rubles are required to implement the presidential and government “innovative modernization” initiatives.

 

Privatization is often used as a money-raising instrument. However, due to a downturn in this field, the Ministry for Economic Development and Trade doubts it will provide for necessary replenishment of the budget items intended for funding federal target programs. 

 

Apparently, the government will not do without mobilizing the resources of business.A popular assumption is that business can only be motivated with budget money, but this is not so. In innovative business, other mechanisms play a far larger role. Russia does have these mechanisms, but their operation has been tentative so far.

 

5. Clusters requirements

Clusters are groups of associated, closely interacting companies, whose joint investments help develop and launch innovations that give a

competitive edge on the market. A successful development of clusters requires:

 

- establishing economic and scientific/technological ties between companies; 

 

- combining cooperation between companies with competition that stimulates continuous search for innovations, with a view to increasing

effectiveness and strengthening competitive advantages;

 

- generating a considerable and steady demand for products of a large number of companies operating in the same sector of the economy or

associated sectors, which are brought together by similar technological processes, or in the sectors united by vertical economic ties;

 

- “attracting” financial, consulting, research/educational, and logistics services necessary for the companies operating within clusters. 

 

Motivating investments in innovations is a far more complex and larger task than budget injections in this or that branch of the economy. It requires support of new forms of private-state partnership, such as the establishment of functional clusters. Their objective is simple: to consolidate functionally-related companies, not the companies operating in various branches of the economy within a given region. The crucial integrating function belongs to investments.

 

It is the clusters buoyed by investments that can create favorable conditions for interaction between different branches of industry, as a juncture of various branches of knowledge and production. Clusters can provide for the accelerated commissioning of developments in mass production,disseminate innovative approaches, ideas, and solutions for new tasks, and the competent and professional management of all these processes.

 

6. Two conclusions

A close look at the above conditions provides for two important conclusions, which have long become essential for the world practice of industrial policy.

 

First, it is impossible to enforce clusters with administrative levers, without taking into account the real prospects for their economic activities. The fact that several companies of a given branch use or go by the same technologies does not imply that they will form a viable cluster – they need to develop cooperation and include a sector of services in it. None of these targets can be met through administrative decisions, without objective market prerequisites. Furthermore, excessive administrative measures of regulation may create additional obstacles to innovative clusters, become a straightjacket for business, not the breeding ground.

 

Second, the key factor to secure an atmosphere of confidence and a large and steady demand is the inclusion of large companies in clusters. In innovative clusters, large companies play a dual role: as investors attracting banks and subcontractors to implement their projects, and generators of demand for the services of innovative companies of small and medium business, by providing orders and markets for their intellectual developments. Conversely, the clusters comprising only small and medium innovative companies do not have many chances to develop dynamically in a transition economy, above all, because they have no access to large investments and are unable to generate a steady demand for products of associated branches.

 

The administrative system of clusters is practically free from corruption – too many parties are interested in the common results of activity and the sharing of preferences is too transparent, being encumbered by high risks (developers, manufacturers and sellers do not know in advance if they will be able to reach their goals). Contractual relations between all the participants in innovative processes are an effective instrument to mobilize investments and divide functions: a scientist or developer of an innovation can often cope with their tasks well, but they may have a poor knowledge of market laws. No wonder commercialization of research results is a topical issue: inventing something or creating a product prototype does not yet make it an innovation. When it appears on the market and is in demand, the goal is as good as reached.

 

Government investment in such functional clusters would help resolve another important task, namely involving regional authorities in shaping and implementing the innovative policy. Admittedly, there is a large gap between the setting the objectives of the innovative policy at the federal level and introducing it into the regional governance system. The Russian Ministry for Economic Development and Trade is expected to come up with a program to support clusters, under which regional authorities will stimulate the production of innovative products with subsidies. Of course, there is a danger of lapsing into administrative frenzy and enforcing a formal participation in the cluster for the sake of drawing extra budget funds. Yet thanks to partnership with business, it is easier to neutralize this threat than ignore the opportunity to mobilize small and medium businesses in regions.

 

It is important to avoid the errors made during the establishment of special economic zones, technology parks and the so-called Science Towns that were supposed to form business incubators geared for innovations. In a majority of cases, we deal with the extremes – the attempts to set up small budget centers of innovative development whose beggarly working conditions scare off potential investors, or the ambitious projects to create "innovative infrastructure” which in actual fact have nothing to do with the development of innovative activity.

 

A shocking example is the Ministry for Economic Development and Trade’s program to set up business incubators: it often offers rundown buildings that used to accommodate industrial companies, consumer services and even secondary schools. Perhaps, office floors in such buildings can look attractive to firms that have grown from “shuttle trade” business or some innovative companies set up by the people with little business experience. By definition, they can have no systemic innovative effect on the economy.

 

The situation with Russian technology parks is as unimpressive. One might think these projects aim to create a sort of “innovative ghettos” to bring together sidelined scientists and designers, rather than modern research and design centers. The international practice in this field is markedly different. For example, Brazilian architect Paulo Mendes da Rocha, the 2006 laureate of the world’s architectural prize, is working on the technology park project for the Spanish university of Vigo. This fact conspicuously shows the significance and the level of prestige the technology park founders are hoping to attain before the leading world companies. But Russian builders of business incubators and technology parks have to think about estimating the degree of wear and accident risks of buildings they have been given as a startup for “innovative infrastructure,” not about inviting the best world specialists.

 

The obsession with grand scale projects is as damaging to the idea of innovative economic zones as the trend towards small-budget minimalism. For example, the projects to set up Science Towns provide for all kinds of measures – from improving the public transport infrastructure to developing pedestrian walkways in neighborhoods. Just one thing is missing: a program to build effective cooperation between research centers and private business companies.

 

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.