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Analysis & Opinion
08.06.11 Innovation Slowdown
By Tai Adelaja

Russia's innovation economy is on a bumpy ride due to corruption, bureaucracy and a lingering Soviet mindset, a new study has found. Current innovation policy places too much emphasis on high technology to the neglect of large parts of the Russian economy, according to a study prepared by the Organization for Economic Cooperation and Development (OECD) at the behest of Russia's Ministry of Education and Science.

Since assuming office in 2008, President Dmitry Medvedev has spearheaded efforts to end Russia’s natural resource dependence and transform the country into a knowledge-based economy. At the top of the president's modernization agenda is the creation of the Skolkovo Innovation hub – Russia’s answer to Silicon Valley – which is currently under construction near Moscow. But Russia is having a hard time getting innovation fired up in Skolkovo, the OECD report said. The Kremlin’s efforts are being undermined by such factors as high levels of corruption, a lack of competition, low levels of research and development (R&D) and innovation activities in firms. Russia’s perennial problems – weak infrastructures and horse-and-buggy regulations are not helping matters either.

One of the weak points in Russia’s innovation strategy is the low emphasis placed on low-tech and service industries, said the report, which was presented in Moscow on Monday by experts from OECD Directorate for Science, Technology and Industry (DSTI). The report faults Russia for the absence of role models of successful entrepreneurs that could attract soft investments crucial to transforming its resource-based economy into an innovative one. The report praised the code of intellectual property rights, which entered into force on January 1, 2008, as being in line with legislation in most developed countries, but noted that problems of enforcement remain. These include a lack of transparency in court decisions, especially concerning copyright.

Russia's innovation processes also suffer from a noxious combination of fast-track transformation and the resilience of some former institutional arrangements and mindsets inherited from the Soviet milieu, the report said. Unlike China, where a gradual modification of the overall politico-economic framework was accompanied by faster and more radical microeconomic structural reforms, Russia’s market-oriented mechanisms for the allocation of economic resources still coexist with old-style socio-political networks and loyalties. "Russia has not yet entirely overcome the legacy whereby each task, strategic for the society, was entrusted to dedicated institutions according to a strict division of labor," said the report’s authors.

But Russia’s struggle with Soviet socio-economic legacy and mindset is only part of the story. The Kremlin’s latest efforts to reform are often frustrated by active resistance from established groups or institutional inertia, the report said. The innovation process is distorted by the strategies pursued by some powerful actors, including those who have inherited capabilities but resist their upgrading and redeployment, fearing that this would weaken their institutional position. “Those who have built economic and political influence through rent-seeking behavior have shown no pressing need to invest in new innovation-related competencies,” the authors said.

Despite the high share of the corporate sector in research and development, Russia’s innovation system does not operate under a firm-centered paradigm, according to the report. This runs counter to the practice in the most advanced innovation systems, where firms that operate on competitive markets are the main locus of innovation activities. Part of the problem, the report says, is that the majority of technology-oriented enterprises in Russia are driven by market incentives only to a limited extent, and are insufficiently submitted to market disciplines.

To boost demand for innovative products and services – which typically comes from larger firms – Russia needs to enhance the innovativeness of large firms through structural reforms of state-owned enterprises. The government should also improve standards of transparency and disclosure in such firms, which often dominate their industry sector in Russia, the authors said. Partial privatization of state-owned enterprises would provide them with greater access to foreign know-how and accelerate the country’s modernization agenda, the report said.

Boosting public spending on research and development would also help, the authors claim. Russia’s spending on research and development as a percentage of GDP stood at only 1.03 percent in 2008, down from a peak of 1.28 percent in 2003. This compares to an OECD average of 2.33 percent. Even so, much of this funding is still allocated without adequate accountability or performance goals, the report said. Improving priorities for innovation funding and targeting of resources would increase value for money and enable more firms to benefit from investment in public R&D. Stronger market competition would also encourage more firms to invest in innovation, particularly small and medium-sized companies. Further reforms of the public administration, cutting red tape and improving financial sector regulations would also foster the creation of start-ups, the report said.

As the largest economy outside the World Trade Organization (WTO), Russia has been losing out on the opportunities created by the adoption of open innovation models by many foreign firms in the context of the rapid globalization of R&D and technological activities. A quantum leap is needed in this area, said the authors of the report. Joining WTO and OECD would help Russia channel its resources to areas in which international competitiveness significantly increases growth potential, the report said. WTO membership would also enable Russia to take advantage of fast-growing global markets in engineering services, such as aerospace, software, and information and communication technologies.

On the upside, the report praised the recent efforts "in creating or empowering agents of positive change," including research and educational organizations, adding that such a process “has brought the country closer to what could be a turning point in the development of an efficient national innovation system," albeit with distinctively Russian characteristics. The authors urged Russia to build on its strong base of public research institutes in science and engineering and the recent high-level political commitment to innovation, which has helped target research and development resources more effectively.
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