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Research-Technology Management, 2001

Is Russia Developing a Commercial Culture for High Technology?

By Irina Dezhina and Loren Graham

Russia inherited from the Soviet Union a strong tradition in natural science and an impressive educational system devoted largely to the natural and technical sciences. What it did not inherit from the Soviet period and what it still does not possess today is an entrepreneurial and commercial culture fostering the transition of technical innovations into products that are competitive on the world market. But the painful beginnings of a new commercial culture of high technology, especially for small enterprises, is now visible.

In 1994 the Russian government created the Federal Fund for Assistance to Small Innovative Enterprises ("The Fund for Assistance"), which grants preferential credit (at 50% of the standard bank rate) to small innovating firms that are entering the market with high-tech products. In the last six years the Fund for Assistance has supported about 600 projects and has received a rate of return on its loans of between 50 and 70 percent. However, as a governmental foundation it has been rather conservative and has not supported the most risky stages of innovation.

In 1997 the Russian government, working together with the Fund for Assistance, announced plans to create the first venture capital fund, with the government providing 30% of the capital as an inducement for other potential participants. In March, 2000, this fund, named "The Russian Venture Foundation," was officially created by presidential decree and given a first government investment of $4 million. The Venture Foundation will be responsible for developing regional venture foundations. So far six regions of Russia are participating in this program: St. Petersburg, Samara, Saratov, Nizhny Novgorod, Novgorod, and Tatarstan.

In addition to the appearance of these new funding agencies, several new types of R&D organizations supporting small innovative firms have arisen. One of the most interesting, also promoted by the Fund for Assistance, is the Innovation Technology Centers (ITC's), where small innovative enterprises are literally located under one roof, in one building. By being in such close proximity the small innovating firms can benefit both from central services (lower rent than average, modern telecommunication networks, information support, consulting services) and also have better protection against crime through a central security service. Today there are 38 ITC's, financed from both federal and local sources (approximately 50% each).

However, there are a number of factors still hampering high tech business in Russia. They include: underfinancing of innovation, especially by private sources; the underdevelopment of a legal basis for private business; inadequate protection of intellectual property; and the continuing threats of crime and corruption.

These obstacles explain why the number of small innovative enterprises in Russia is actually decreasing, not increasing, declining from 38,800 in 1998 to 31,000 in April, 2000. The ability of the Fund for Assistance to halt this decline is limited by its modest financial resources; in 1999 it provided support only to 245 firms.

In order to assist managers of small firms overcome the formidable obstacles they face, the ITC's are supplying managerial training, a service also being provided by several foreign or international organizations, including the United Nations Industrial Development Organization (UNIDO), the Technical Assistance to the Commonwealth of Independent States (TACIS), the Eurasia Foundation, and the U.S. Civilian Research and Development Foundation (CRDF, which also helps U.S. companies locate scientists in the former Soviet Union with specific technical capabilities).

Some bright spots indicating that these domestic and foreign efforts might be slowly working are already evident. The most capable and best managed small high tech firms in Russia are surviving a Darwinian selection out of the rather large number which earlier jumped on the new bandwagon without proper preparation or realistic expectations. A group of survivors is emerging whose members are becoming stronger and stronger. Already the taxes paid by the most successful firms helped by the Fund for Assistance are approximately equal to the support provided by the government to small enterprises through this foundation. Several firms helped by this foundation are developing growing markets, both within Russia and abroad.

One is the enterprise "Potok Inter," which produces equipment used in medicine, pharmaceuticals and the food industry for cleansing and disinfecting air. This firm has US, Japanese, European, and Russian patents, and last year won the competition for equipping the International Space Station "Alpha."

Another rapidly growing area of high technology in Russia is information technology, especially offshore computer programming services for foreign firms. Although still quite small, the information technology sector in Russia is growing at a 10% annual rate, and a few firms have grown as rapidly as 50-60% a year. At an international collegiate programming contest in April, 2000, students from St. Petersburg won the gold and silver medals. Intel and Motorola have established centers in Moscow, with staffs of approximately 200 each, and they are planning to double that number soon. Intel is also expanding to regions outside Moscow, and recently opened facilities in Nizhny Novgorod.

These developments show that Russia today has considerable potential for high tech business. Both native firms and the foreign firms which work with them are beginning to find ways to succeed in a new commercial culture. It is now possible in carefully selected instances for U.S. companies to forge relationships with small skilled Russian teams. Good places to start looking for such possibilities might be the 38 ITC's, as well as the firms listed as "most successful" in the annual reports of the Fund for Assistance (there were 19 in the 1999 report), and, finally, the "Next Steps to the Market Program" of the CRDF. References to these sources are listed below.

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