Russian industrial firms: Absorptive Capacity and State Innovation Policy VI Knowledge Economy Forum: Technology Acquisition and Knowledge Networks VI Knowledge Economy Forum: Technology Acquisition and Knowledge Networks April 2007, Cambridge, UK Boris Kuznetsov, Yuri Simachev Higher School of Economics, Interdepartmental Analytical Center, Moscow

2 Main issues: Technology transfer and innovation policy in Russia: short historical background Russia now: R&D, innovation, productivity:quiet crisis of manufacturing against the background of economic growth Innovation activity of Russian industrial firms: Why dont they innovate? Options for innovation policy: What can the State do? Technology transfer and innovation policy in Russia: short historical background Russia now: R&D, innovation, productivity:quiet crisis of manufacturing against the background of economic growth Innovation activity of Russian industrial firms: Why dont they innovate? Options for innovation policy: What can the State do?

3 Data sources Survey of competitiveness of large&medium manufacturing industrial firms: 1000 manufacturing firms, 49 regions, Higher School of Economics and World Bank ; Survey of R&D organizations: 180 R&D institutes, Moscow, Interdepartmental Analytical Center, 2006; Survey of innovation activity of large&medium industrial firms: 570 industrial firms, All-Russia representative sample, Interdepartmental Analytical Center, Institute for Economi of Transition 2005; Survey of competitiveness of large&medium manufacturing industrial firms: 1000 manufacturing firms, 49 regions, Higher School of Economics and World Bank ; Survey of R&D organizations: 180 R&D institutes, Moscow, Interdepartmental Analytical Center, 2006; Survey of innovation activity of large&medium industrial firms: 570 industrial firms, All-Russia representative sample, Interdepartmental Analytical Center, Institute for Economi of Transition 2005;

4 Specific features of Russian innovation system Soviet time inheritance Large-scale R&D sphere, separated from industry Applied research and development concentrated in a few high- tech sectors Both industry and R&D sector isolated from the rest of the World Industrial enterprises functioned in non-competitive environment and had no in-build innovation incentives 1990-ies inheritance Privatization by itself in the monopolized economy did not created incentives to innovate Changes in the States priorities led to deep crisis of applied research and of high-tech sectors Growth of the 2000-ies was based on better management of the existing resources (capacities, labor) and oil revenues – not on innovations Soviet time inheritance Large-scale R&D sphere, separated from industry Applied research and development concentrated in a few high- tech sectors Both industry and R&D sector isolated from the rest of the World Industrial enterprises functioned in non-competitive environment and had no in-build innovation incentives 1990-ies inheritance Privatization by itself in the monopolized economy did not created incentives to innovate Changes in the States priorities led to deep crisis of applied research and of high-tech sectors Growth of the 2000-ies was based on better management of the existing resources (capacities, labor) and oil revenues – not on innovations

5 Total factor productivity in manufacturing: Russia versus other countries (Russia=100)

6 Export: volume and structure

7 Share of manufacturing industries in total industrial VA

8 Russian manufacturing industry is loosing competitive battle not only to other countries but to other sectors of Russian economy as well. Russian industry is very much segmented: along with highly efficient firms each industry includes a significant share of highly inefficient ones. The inefficient enterprises are being protected by high entry barriers: Large territory and isolated regional markets A lot of specific niche markets Cheap energy Cheap accumulated fixed capital Unfavorable investment climate Russian manufacturing industry is loosing competitive battle not only to other countries but to other sectors of Russian economy as well. Russian industry is very much segmented: along with highly efficient firms each industry includes a significant share of highly inefficient ones. The inefficient enterprises are being protected by high entry barriers: Large territory and isolated regional markets A lot of specific niche markets Cheap energy Cheap accumulated fixed capital Unfavorable investment climate All those factors are of transient nature and cannot provide for sustainable growth

9 Innovation activity: Russia vs. EU

10 Innovation and investment activity of firms 26% of firms had neither R&D nor investments

11 Factors of innovation activity Competitive pressure Globalization: Export Import of materials and details FDI Strategy Financial situation Competitive pressure Globalization: Export Import of materials and details FDI Strategy Financial situation

12 Regression result (industry controlled)

13 Conclusions from empirical testing The lack of competition has strong negative influence on innovation. Competition with other national producers has a positive impact only on some innovations mostly concerned with lowering costs of production. Strong competition with foreign producers significantly and positively influence innovations. International trade has a positive impact on innovation activity of a firm. Influence is strong for export and positive while weak for purchasing imported materials and details. FDI has no or insignificant impact on innovations in general and negative impact on R&D activity. Firms with strategy oriented on new markets and integration into global economy are more active in innovations. Size of a firm do matter: additional efforts needed for facilitating innovations at medium-sized and small firms. The lack of competition has strong negative influence on innovation. Competition with other national producers has a positive impact only on some innovations mostly concerned with lowering costs of production. Strong competition with foreign producers significantly and positively influence innovations. International trade has a positive impact on innovation activity of a firm. Influence is strong for export and positive while weak for purchasing imported materials and details. FDI has no or insignificant impact on innovations in general and negative impact on R&D activity. Firms with strategy oriented on new markets and integration into global economy are more active in innovations. Size of a firm do matter: additional efforts needed for facilitating innovations at medium-sized and small firms.

14 Why Industry and Science do not see each other: Low demand for R&D services and results is very much due to the lack of innovation infrastructure Both sides would like more stimulus from the state and more information about the available opportunities. Industrial firms with experience of outsourcing of R&D services are more pessimistic than those without the experience: 29% against 18% complain about low quality, 29% against 15% complain about the lack of complex services R&D institutions agree with lack of complex services but note also the problem of Intellectual Property Rights. 1 –No obstacles 2- Imported technologies are better and cheaper 3- R&D organizations are not oriented on clients needs 4- R&D organizations do not provide all the necessary services 5- Low quality of results 6- High prices of R&D services 7 – No state policy facilitating the purchase of technologies 8 – Lack of information about R&D results and new technologies 9 – IPR belong to the state 10 – Negative and unjust picture of Russian R&D in the media

15 Obstacles for cooperation with R&D sphere

16 State dominance in R&D support lead to lower incentive to commercialize and restructure

17 What can the Government do? Current trends in policy Special zones type of innovation policy: Creating high-tech production zones and technological parks Special state programs for high-tech industries (aircraft, shipbuilding, etc.) State programs for specific technologies (nanotechnology, biotechnology) Creating innovation institutes for commercialization of technology (State Venture company) Tax-related measures to facilitate R&D in industry Current trends in policy Special zones type of innovation policy: Creating high-tech production zones and technological parks Special state programs for high-tech industries (aircraft, shipbuilding, etc.) State programs for specific technologies (nanotechnology, biotechnology) Creating innovation institutes for commercialization of technology (State Venture company) Tax-related measures to facilitate R&D in industry

18 Testing efficiency of innovation policy measures 3 to 2 years period to depreciate R&D 100% of unsuccessful R&D depreciation profit tax-base down by 30-40% of surplus R&D subsidies for contracts between industrial firms and Russian R&D organization up to 30% of the contract; co-financing by the state (up to 50%) the large-scale R&D project on the principle of risk and profits sharing; subsidies of patenting and (keeping valid) patents abroad; investment premium up to 10% of investments into fixed assets state loans or state guarantees for importing new technologies from abroad 3 to 2 years period to depreciate R&D 100% of unsuccessful R&D depreciation profit tax-base down by 30-40% of surplus R&D subsidies for contracts between industrial firms and Russian R&D organization up to 30% of the contract; co-financing by the state (up to 50%) the large-scale R&D project on the principle of risk and profits sharing; subsidies of patenting and (keeping valid) patents abroad; investment premium up to 10% of investments into fixed assets state loans or state guarantees for importing new technologies from abroad

19 Response rate for different incentives

20 Conclusions (1) Firms work in competitive environment. BUT: Firms oriented on internal market and competing with compatriots do not differ much in their innovation strategies from monopolistic firms. Integration into the world economy and orientation on expansion to new markets corresponds with higher innovation activity. Any kind of active protectionist policy would only facilitate the conservation of the current situation. Financially bad-off firms are mostly passive both in investments and innovation. This group should be stimulated to go out of markets. Firms work in competitive environment. BUT: Firms oriented on internal market and competing with compatriots do not differ much in their innovation strategies from monopolistic firms. Integration into the world economy and orientation on expansion to new markets corresponds with higher innovation activity. Any kind of active protectionist policy would only facilitate the conservation of the current situation. Financially bad-off firms are mostly passive both in investments and innovation. This group should be stimulated to go out of markets.

21 Conclusions (2) The major obstacles in relatively low co- operation between national R&D system and industrial firms concerns low level of information (i.e. R&D institution should be pushed to more active commercialization of their results) and no state policy to low risks of large innovation projects. Considering responses of different groups to incentives the State policy should be aimed at solving two tasks: to create more incentives for leaders to be more innovative; and to involve more firms from the group oriented exclusively on imitation strategy into active innovations of conducting R&D to create new products and new technologies. The major obstacles in relatively low co- operation between national R&D system and industrial firms concerns low level of information (i.e. R&D institution should be pushed to more active commercialization of their results) and no state policy to low risks of large innovation projects. Considering responses of different groups to incentives the State policy should be aimed at solving two tasks: to create more incentives for leaders to be more innovative; and to involve more firms from the group oriented exclusively on imitation strategy into active innovations of conducting R&D to create new products and new technologies.

22 Conclusions (3) Russian state policy towards innovations suffers not so much from the lack of resources but rather from the lack of institutions and instruments that would stimulate demand for innovations and R&D on the side of business. The most demanded changes in innovation policy are tax R&D-related measures: lowering tax base in case of increase of R&D expenditures and depreciation of R&D expenditures for unsuccessful R&D. Also, high demand is for lowing innovation risks through state co-financing of large-scale innovation projects. The last measure is important, in particular, for firms not currently active in their own R&D. Russian state policy towards innovations suffers not so much from the lack of resources but rather from the lack of institutions and instruments that would stimulate demand for innovations and R&D on the side of business. The most demanded changes in innovation policy are tax R&D-related measures: lowering tax base in case of increase of R&D expenditures and depreciation of R&D expenditures for unsuccessful R&D. Also, high demand is for lowing innovation risks through state co-financing of large-scale innovation projects. The last measure is important, in particular, for firms not currently active in their own R&D.

23 Thank you for attention