Management of innovations: present day features and prospects in Russia

The whole world today speaks about innovations due to the fact that society is on the brink of the fourth industrial revolution. Russia is not an exception; it has made innovation a top priority for the development and economic growth. It needs to be emphasized that the Russian innovation system is vertical, which means that the micro level of innovational development, or the involvement of innovations in the business process, depends directly on the macro level, or the regulation of innovations. As a result, the macro level will be the cornerstone of this essay. This topic is extremely actual and practical, especially in current crisis.

The path from invention to innovation lies within the system of public and political institutions, which have not encouraged ideas being brought to life over in the past. Despite Russian scientists not being innovatively behind their European counterparts, even being first to make some discoveries, they have found themselves in difficulties when attempting to move beyond the actual product to the mass market. The foreign scientist Loren Graham says that Russian inventors often emigrated from Russia, that they didn’t find recognition in their homeland, and that they often died in poverty [1]. Today the Russian government is full of determination to improve this situation, but internal arguments have appeared regarding the best way to transform Russian innovation.

In 2011, the Russian government made the first serious step and formed a ten-year strategy concerning Innovative Development [2], including forming the basic elements of the innovative ecosystem. Institutions of development and innovative infrastructure have been created; such examples include the Russian Venture Company (RVK), and Skolkovo Innovation Centre, founded in 2010. A state-owned enterprise entitled the Development of Industry Fund and the Agency of Strategic Initiatives have also been established. As a result, today Russian venture market has not only been created but has also exceeded the European venture market in terms of volume, being worth over 1 billion dollars [3]. In 2015, a national technology initiative was announced [4], which includes changes in regulatory regulations, in fiscal and professional policy, and in the ways in which innovative companies work and are rewarded.

The fact that Russia has developed its innovative institutions considerably can also be proved by international ratings. For instance, on the Global Innovation Index[1] (GII), Russia has risen 16 places since 2010 [5], currently ranking 48th out of 143. In GII terms, Russia has the strongest position in Human Capital and Research, and is ranked 26th. It also needs to be mentioned that Russia has dramatically improved its knowledge and technology outputs, and the number of both patent requests for inventions, and the number of scientific publications have increased. However, there are some problems, which can often be found in Russia if we look at market sophistication, such as credit, investment and competition. According to the Bloomberg Innovation Index[2] (BII), Russia is in 14th place [6]. China is the only county, which exceeds Russia among BRICS, taking 29th place in GII, although in BII, Russia overtakes China, mainly because of the level of education. As a result, GII seems to be more objective.

Picture 1. GDP per hour worked, USD, constant prices, 2010 PPPs. The source: Statistics of organization for economic co-operation and development

If we look at statistics alone, Russian innovations have become reality, a fact which is difficult to deny, but on the other hand, if we look at labor index and productivity, we can see that there are problems in Russia’s innovation sphere. For example, labor productivity in Russia is approximately three times lower than that in the USA suggesting that somewhere along the line Russian innovation isn’t working [7]. It means that it is not time for innovation, but for modernization, which means concentrating on buying innovations instead of creating them. On the other hand, judging technological lag solely by using an average of labor productivity among many different companies is incorrect. For example, when a company thinks about innovative improvements, the first thing that they should do is to research the market and look at their competitors, which are different depending on the type and size of company. Only after this, they look at the economy within the country. According to research carried out by McKinsey, the level of technological lag is completely different in different spheres [8]. Consequently, while for some companies modernization is the best answer, others look for innovation. This model of so called «catch-up development» is the best way for companies looking for modernization, but worse for those looking for innovation. Splitting companies into these two groups, one where innovation is needed or one where modernization is needed, is an impossible task for a government. It is a task for companies on the free market. Thus, it is logical to ask why the Russian government insists on keeping a vertical system of innovative management, creating demand for innovations through the use of regulations [9]. There is an opinion that all innovative clusters worldwide were founded with either part or full use of government money. We can take Silicon Valley in the USA, Israel and Finland as examples; the first inspiring the creation of Skolkovo and the last two inspiring the creation of RVK. However, an inspired project started to support innovative businesses, also known as Small Business Innovation Research, cannot be called successful. Moreover, even if the government’s plan of supporting innovative business is successful, there is a probability that alternative investment could be more effective.

The first step to prove if government interventions is needed to determine the market’s negative influence on the innovative sphere. For example, the institutions of development work effectively in countries where there are few to no regulations and there are certain risks relating to the country. Such institutions can help investors to reduce uncertainty, and at the same time to create regulation. Institutions then have the opportunity to become the link between government and business. Consequently, from this point of view and according to GII’s report about the weaknesses of innovative development in Russia [10], the Russian government’s strategy of developing innovation is suitable, especially during today’s economic crisis.

To sum up, Russia has created:

− tax benefits for innovative industry [11];

− institutes of development.

However, talking about Russia’s future in the sphere of innovation, it needs to be mentioned that achieving a level of innovative development comparable with industrialized countries seems uncertain due to the following reasons:

− an undeveloped judicial system [14];

− An unpredictable monetary policy;

− the country’s fiscal policy;

− keeping a vertical innovative system.

The undeveloped judicial system seen in Russia at present can’t protect business. In turn, market uncertainty and associated risks increase dramatically. An unpredictable monetary policy also leads businesses to avoid the investment costs connected with innovation, while high inflation risks and a high interest rate encourage investors to look for highly-profitable projects. The attempt to refinance the Russian budget through raising taxes returns us to previous government promises to keep tax at one level, which means that it is quite difficult for businesses to trust the government. The most institutional and global problem for the Russian government is the vertical system of innovative development. Without switching to a market model of innovative development, Russia won’t be able to boast of being home to new Silicon Valley.

In conclusion, Russia has completed its first serious steps towards becoming a country whose businesses create innovative trends worldwide, however there is still long way ahead. It could be argued that the measures described above would only work while there is no regulation and risks are high. Creating an innovative model of development can only be formed by switching to free market mechanisms to create innovative products. Without it, Russian businesses will be poorly involved in innovation development.

Appendix 1: Global Innovation Index

Appendix 2: Bloomberg Innovation Index

References:

1. Loren Graham. «Lonely ideas. Can Russia compete».
2. Official website of the Russian government, the program of innovative development — http://government.ru/docs/17169/
3. Russian association of venture investment, annual report, 2015 — http://www.rvca.ru/rus/resource/library/rvca-yearbook/
4. Agency of strategic initiatives, about national technology initiative — https://asi.ru/nti/
5. Global Innovative Index, annual report, «Effective Innovation Policies for Development», 2015 — https://www.globalinnovationindex.org/userfiles/file/reportpdf/GII-2015-v5.pdf
6. Bloomberg Innovation INDEX — http://www.bloomberg.com/graphics/2015-innovative-countries/
7. Statistics of organization for economic co-operation and development — http://stats.oecd.org/Index.aspx?DataSetCode=PDB_LV
8. Mckinsey&Company, McKinsey Global Institute, report «Effective Russia», 2009 — http://gtmarket.ru/files/news/1986/MGI_Effective_Russia_Productivity_Growth_as_the_Foundation_2009.pdf
9. The informational source «Vedomosti», «The Ministry of Economic Development passed through a law requiring 87 state companies to buy innovations according to a schedule» — http://www.vedomosti.ru/economics/articles/2016/02/29/631706-innovatsii-grafiku.
10. Global Innovative Index «Effective Innovation Policies for Development», report, 2015 — https://www.globalinnovationindex.org/userfiles/file/reportpdf/GII-2015-v5.pdf
11. Skolkovo. «Tax benefits for project participants in questions and answers», 2015.
12. A state-owned enterprise entitled the Development of Industry Fund «The Program of Project Financing» — http://frprf.ru/gospodderzhka/programma-proektnogo-finansirovaniya/#s28
13. A state-owned enterprise entitled the Development of Industry Fund «The program of subsidizing of the interest rate on realization of new investment projects» — http://frprf.ru/gospodderzhka/subsidirovanie-protsentnoy-stavki-na-realizatsiyu-novykh-investitsionnykh-proektov/#s28
14. The Center of Social Technologies «There is no cultural politics» http://gtmarket.ru/laboratory/expertize/2008/1707)
15. The informational source «Slon.ru», «If you don’t have money, you have freedom and thoughts»: https://slon.ru/posts/69550

[1] Appendix 1

[2] Appendix 2