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					Critical Analysis of Topical Issues in Russia’s
              Innovation System




                 Moscow, February 2006
     Science and technology commercialization project
               (EuropeAid /115381/C/SV/RU)




                                                        i
Critical Analysis of Topical Issues in Russia’s
              Innovation System


    Project Science and Technology Commercialisation Russian Federation,

                       Funded by the European Union

             Implemented by inno, AEA Technology, and TNO,
                  under the leadership of Peter Lindholm.

             Edited by Govert Gijsbers and Johannes Roseboom

                          with contributions from

                            Natalia Bondareva
                              Elena Lenchuk
                             Sergei Simaranov
                           Vadim Tsirenshchikov
                           Alexander Varshavsky
                              German Vlaskin
                              Vladimir Zinov
                             Natalia Zolotykh.




                                                                           ii
Table of contents

Acknowledgements
Executive Summary

1. Introduction
2. The Rise of Innovation Policy
   2.1. A brief history of innovation policy thinking and formulation
   2.2. The EU innovation policy initiative
   2.3. Russia‘s experience with innovation policy formulation and implementation
   2.4. Apparent differences in innovation practices and policies between the EU and Russia
   2.5. Key lessons for the Russian innovation policy
3. Regulatory Instruments to Support Innovation in the Private Sector
   3.1. Intellectual property rights legislation
   3.2. Market regulation: Competition and cooperation
   3.3. Use of standards and safety regulations
   3.4. Elimination of redundant and ineffective regulation
   3.5. Key lessons for the Russian innovation policy
4. Financing of Innovation Activities in Russia
   4.1. R&D funding trends and patterns
   4.2. Some recent R&D initiatives by major Russian corporations
   4.3. Tax incentives to promote innovation activities
   4.4. Venture capital investment in the sphere of innovation
   4.5. Conclusions and policy recommendations
5. Technology Transfer and Commercialization Practices
   5.1. Shifting public research results from ―for free‖ to ―IPR protected‖
   5.2. Key actors in the commercialisation of science and technology
       5.2.1. Russian industry
       5.2.2. International industry
       5.2.3. Consumers
       5.2.4. Government
       5.2.5. Universities and public research organizations
   5.3. The technology transfer and commercialisation process
   5.4. Organisations and instruments for technology transfer
       5.4.1. Joint research facilities
       5.4.2. Knowledge centres
       5.4.3. Spin-offs and techno centres
       5.4.4. Collaborative research projects
       5.4.5. Memoranda of understanding and research contracts
       5.4.6. Licensing of intellectual property
       5.4.7. Associations
       5.4.8. Other measures
   5.5. Key lessons for the Russian innovation policy
6. Public-Private Partnerships in Innovation
   6.1. Introduction
   6.2. Regulating public-private partnerships
   6.3. Sponsoring of new start-up companies
   6.4. Gearing public research to industrial innovation
   6.5. Creating public-private networks, platforms and clusters


                                                                                          iii
   6.6. Key lessons for the Russian innovation policy
7. The Roles of Public Research Organizations in Open Innovation Systems
   7.1. Introduction
   7.2. Research and innovation functions
   7.3. International trends in R&D and innovation
       7.3.1. Disappearing boundaries between fundamental and applied research
       7.3.2. Globalisation: A worldwide market for R&D
       7.3.3. Science: Emerging and converging technologies
       7.3.4. Users: Demand-driven innovation
       7.3.5. Transparency and accountability: ―See-through Science‖
       7.3.6. Governance: Towards networks and open innovation systems
   7.4. (Re)-positioning of public research organizations in open innovation systems
   7.5. Key lessons for the Russian innovation policy
8. Conclusions and recommendations
   8.1 Russia‘s innovation system and policy
   8.2 The regulatory framework for innovation
   8.3 Financing of innovation
   8.4 Technology Transfer & Commercialisation


Tables

Table 4.1: Domestic R&D Expenditures in Russia and Some Advanced OECD countries in
2003
Table 4.2: The Structure of Domestic R&D Expenditures by Funding Source, 1995-2003
Table 6.1: Examples of Public Support for the Start-up of Technology-Based Companies


Figures

Figure 4.1: Domestic R&D expenditures as a percentage of GDP in the European Union and
Russia, 1990-2002
Figure 5.1: FDI flows of the Russian Federation, 1993-2003
Figure 5.2: Industry composition of inward FDI stock in the Russian Federation, 2002
Figure 6.1: Timeline of major legislative actions affecting defence-related PPPs in the United
States
Figure 7.1: Positioning of German research organisations
Figure 8.1: From investing in knowledge to exploiting knowledge


Boxes

Box 2.1: Helsinki Workshop
Box 3.1: The role of IPR in the European Union
Box 3.2: A history of IPR in Russia
Box 3.3: The Bayh-Dole Act
Box 3.4: The patent system and the development of competition
Box 3.5: Evolution of quality control approaches
Box 3.6: Business sector rating of the efficiency of the state – an international comparison
Box 5.1: New technology: Make or buy?


                                                                                               iv
Box 5.2: Russian producers of consumer goods and services need new creative energy in
order to create unique products for the market and capture the hearts of customers.
Box 5.3: Mission statement of the M.I.T. Technology Licensing Office
Box 6.1: Weakness of corporate R&D in Russia
Box 6.2: Problems of ownership
Box 6.3: Working group on public-private partnerships
Box 6.4: The fund of funds, venture investment funds, and closed unit investment funds
Box 6.5: Start-ups from public research – lessons from case studies
Box 6.6: Mega projects
Box 7.1: Mechanisms to create network linkages between innovation system actors




                                                                                         v
Acknowledgements

This document is the result of hard work by many contributors. In addition to those listed on
the title page, we would like to thank project team members Jill Case, Svetlana Klessova, and
Oleg Luksha for assisting in developing and implementing the study. We also would like to
thank Olya Reusche and her team in providing excellent secretarial and administrative support
and in coordinating the translations.

The results and recommendations of this study were presented and discussed during an
Interim Policy Forum held in Moscow on 5 December 2005. We would very much like to
thank all the participants of this forum for their active participation in a very lively debate
during this forum. This feedback has greatly helped us in verifying and improving our
findings and recommendations.

Last but not least, we would like to thank Vladimir Ivanov for reviewing the document.




                                                                                             vi
Executive Summary

In recent years, Russia has moved from a narrow ―S&T policy perspective‖ that only looks at
the generation of new knowledge to a broader ―innovation policy perspective‖ that looks at
both the generation and application of new knowledge. The basic idea of a knowledge
economy is that the economic revenues created by knowledge are substantially bigger than the
investment going into the creation of that knowledge.

Regarding the generation of new knowledge, the study observed the following:

    Russia has still a good reputation in producing new knowledge as reflected in winning
     many Nobel prizes, scientific publications, etc.;
    DHowever, due to funding cuts, however, knowledge output has declined quite
     substantially during the 1990s;.
    Delayed restructuring of public research organizations has affected efficiency. There is
     a lot of dead wood – institutes that exist on paper but hardly produce anything
     worthwhile;.
    There is a huge motivation problem due to low salaries; and
    Hardly any new research staff has been appointed over the past 15 years, which has
     made that Russia is lacking behind in new science areas. In part this has been due to a
     drastic reduction in positions, but in part also due to low salaries. Becoming a researcher
     is not an attractive proposition at the moment.

Regarding the application of new knowledge, the study observed the following:

    Russia has a relatively poor record when it comes to turning knowledge into economic
     or social benefits. This is where the centrally planned economy tended to fail – during
     Soviet times investment levels in R&D were similar if not higher than in the EU but this
     did not lead to the production of superior, innovative consumer goods.
    Russia‘s economy has some important structural problems. Except for aerospace and
     defence, the economy has relatively few high-tech industries. In addition, Russia has
     only a small pool of SMEs from which new industries can emerge.
    Russia‘s innovation system is only slowly adjusting to a market economy. New modes
     of operation are needed. The supply of new knowledge should be driven more strongly
     by the needs and aspirations of the productive sector. And finally:
    Russia‘s innovation system is still strongly supply-driven rather than demand-driven.

The critical analysis presented in this paper focuses on the following more specific topics:

      The emergence of an innovation policy
      The regulatory framework to support innovation
      Financing of innovation activities
      Technology transfer and commercialization practices
      Public-private partnerships in innovation
      The roles of public research organizations in open innovation systems

Regarding the first topic, we try to contrast Russia‘s innovation policy with that of the
European Union. What stands out is that Russia still lacks a comprehensive national


                                                                                               vii
innovation policy that encompasses all the different actors within the system and seeks their
active participation. The most recent innovation policy document is still heavily biased
towards the public R&D sector and does not envisage much of an active role for the business
sector. Hence it pays little attention towards issues of relevance to the business sector, such
as appropriate legislation to protect own R&D and fair competition, financial incentives to
invest in innovation, and nurturing of new start-up companies.

Regarding the second topic, the study notices that Russia has made considerable progress in
bringing its regulatory framework up-to-standard with international practices. A patent law,
an anti-monopoly law, and improved technological and quality standards have been
introduced. Their effectiveness, however, is limited due to a lack of capacity and experience
to enforce them. In addition, the issue of who owns the IPR resulting from publicly financed
research has still to be resolved.

Regarding the third topic, the study notices that Russia has no tax incentive in place that
stimulates private investment in R&D. This is a point of concern, because Russian companies
invest far less in R&D than their European counterparts and hence some fiscal stimulus would
be more than welcome. The study notices that various instruments to stimulate new start-up
companies are in place, but the response to these instruments tends to be low.

Regarding the fourth topic, that of technology transfer and commercialization, the study
notices that Russia‘s innovation system is still weak when it comes to its orientation on the
market, both local and international. The notion that innovations in consumer good markets
cannot be steered from the top is only slowly settling in. Innovation requires organisation and
management, but at the same time it cannot be planned in advance in any detail. New ideas
can emerge anywhere in the value chain and there needs to be room for experimentation,
learning and adaptation.

Regarding the fifth topic, that of public-private partnerships, the study notices that there is a
large middle ground between the public sector and the private sector in the innovation sphere.
Most of Russia‘s research is taking place in the public sector, while the application of the new
knowledge that is being generated has to be applied mainly in the private sector. Hence, the
need for public-private partnerships is large and there are various examples of public-private
partnerships in the innovation sphere that have been introduced in Russia over the past 5-10
years. In practice, however, legal, administrative, and attitude problems have often frustrated
the development of successful partnerships. A deeper understanding of what holds such
partnerships back is dearly needed in order to develop improvements.

Regarding the sixth topic, the role of public research organizations, the study notices that
most public research organizations in Russia still operate in a technology-push mode and have
not taken on board the idea that they have to focus more actively on the research needs of the
productive sector and the society at large. At the same time, the study notices that mandates of
public research organizations all over the world have become a lot more fluid as traditional
dividing lines have faded. In the case of the Russian Academy of Sciences the study notices a
similar development. However, this development has not yet been reflected in the formal
mandate of the RAS, which still focuses exclusively on fundamental research. By giving the
RAS a substantially broader mandate, it will be better positioned to reposition itself
effectively in a highly dynamic innovation market.




                                                                                             viii
1. Introduction

By Govert Gijsbers and Johannes Roseboom

The transition from a centrally-planned economy to a market economy has been difficult for
Russia in many ways. In retrospect, for example, this transition has had major repercussions
for the Russian innovation system, many of which are only slowly being understood and acted
upon. New ways of interaction between the research sector and the production sector had to
be developed and adopted, while at the same time new demands for science and technology
(S&T) emerged. In addition, the traditional S&T system lost its monopoly as the sole provider
of new technologies. Despite a booming economy due to high oil prices at present, the
Russian economy continues to be weak in knowledge-intensive industries and in exploiting its
scientific capacity. It is the latter concern that this study tries to address.

This study is a critical analysis of a series of interrelated topics of relevance to the
development of Russia‘s innovation system, namely:

     The emergence of an innovation policy;
     The regulatory framework to support innovation;
     Financing of innovation activities;
     Technology transfer and commercialization practices;
     Public-private partnerships in innovation; and
     The roles of public research organizations in open innovation systems.

Each topic will be looked at in separate chapters both from a European and a Russian
perspective. To what extent does the Russian situation and practice differ from best practices
within the European Union? What can we learn from those differences and what should be
recommended as possible improvements to Russia.

Following this introduction, there will be seven chapters that will deal with each of the seven
topics listed above. The study will be concluded with a summary of all recommendations.




                                                                                             1
2. The Rise of Innovation Policy

By Alexander Varshavskiy, Vadim Tsirenshchikov, and Johannes Roseboom.

This chapter aims to provide a short introduction into innovation policy formulation in both
the European Union (section 2.2) and Russia (section 2.3) as well as to highlight salient
differences between the EU and Russia when it comes to innovation practices and policies
(section 2.4.). The least section (section 2.5) concludes with some recommendations. The
chapter starts, however, with a brief historical perspective on innovation policy thinking and
formulation (section 2.1).


2.1 A brief history of innovation policy thinking and formulation

Search the library for ―innovation policy‖ documents of before 1990 and you will find none or
very few. Since then, however, the number of documents with ―innovation policy‖ in their
title has soared.1 Much of this rise has been due to ―the innovation system school,‖ which
emerged in the academic literature in the late 1980s and early 1990s. Seldom, however, has an
academic concept been adopted by policymakers so rapidly. Apparently it provided an answer
to problems that policymakers across many countries were struggling with.

As of the early 1990s, the OECD has been an important promoter of the national innovation
system concept, which in turn induced many OECD countries to develop innovation policies.
While most of the attention during the first half of 1990s focused on spreading the concept as
such (for example in the form of international workshops and conferences),2 during the
second half of the 1990s and beyond the OECD has been coordinating more specific studies
focusing on specific aspects and problems of national innovation systems.

In most cases these studies use a benchmark approach, i.e. comparing how different countries
deal with particular problems and issues and what can be learned from it. This is a standard
approach for many OECD studies. OECD studies on innovation topics that have been
completed so far have been dealing with:

       Innovation policy and performance;
       Governance of innovation systems;
       Innovative clusters within national innovation systems;
       Mobility of skilled personnel in national innovation systems ;
       Innovative networks facilitating cooperation in national innovation systems;
       Patenting by the public sector; and
       Tax incentives for private R&D.

These OECD studies are usually widely circulated and often exert significant influence over
innovation policy discussions in OECD countries as well as in the rest of the world.

1
  Google alone gives you more than half a million hits on the word combination ―innovation policy,‖ but this is
still considerably less than the word combinations ―science policy‖ (3.1 million hits) or ―research policy‖ (2.6
million hits).
2
  Between 1992 and 1995, B-Å Lundvall, one of the leading scholars on national innovation systems, was deputy
director of the STI Directorate of the OECD.


                                                                                                              2
The next big breakthrough for innovation policy has been the Lisbon Strategy adopted by the
European Union in 2000. It constituted not only a major push for innovation policy
formulation at the EU level, but also spread the concept of innovation policy to all those EU
countries that hitherto had not paid much attention to it. Further details of the Lisbon Strategy
will be discussed in section 2.2.

The first attempts to formulate a Russian innovation policy dates back to 1997/98. However,
it never passed the State Duma and hence did not become formal policy. Since then, however,
the concept has moved up in importance. In March 2004, President Vladimir Putin addressed
a joint session of the Russian Security Council and the Presidium of the State Council on the
topic of Russia‘s national innovation system.


2.2 The EU innovation policy initiative

During the past decades, the European Union (EU) has made major strides towards further
economic and political integration of countries that only a few generations ago were at war
with each other. Perhaps the most important watershed events in this process in recent years
have been the introduction of the Euro by most EU members in 2002 and the expansion of the
EU with another 10 members in 2004.

But also on other fronts the EU has been trying to move forward, including that of a major
renewal of the European economy so that ―the EU will be the most competitive and dynamic
knowledge-driven economy in the world by 2010.‖ This initiative is also known as the Lisbon
Strategy, named after the city where the EU Heads of States and Governments approved this
strategy in March 2000.

The Lisbon Strategy aims at realising a ―knowledge economy‖ in Europe by encouraging
research, improving education policies, developing information technologies, and establishing
a favourable climate for innovation. In addition, the strategy aims at liberalizing the European
service, transport and energy markets. At the same time, it stresses the necessity to modernise
the European social model, by, among other things, increasing employment, reforming social
security systems, and fighting social exclusion. Sustainable development was added to the
agenda during the Stockholm summit in March 2001.

While addressing various issues, the Lisbon meeting became most well known for the fact
that the EU had formulated for the first time what could be called a ―European innovation
policy.‖3 This policy was further elaborated during the Barcelona summit in March 2002. It
was during that meeting that the EU leaders adopted the target that R&D investments as a
percentage of GDP should increase from 1.9% in 2000 to 3% by 2010. A pretty rather steep
increase by all measures, also because the largest part of it has to be generated by the business
sector.

After the Barcelona summit the guidelines and the specific measures of achieving its
objectives were widely discussed; representatives of EU institutes and European professional
associations, EU member-states and candidate-states as well as of the stakeholders from
business, public research organizations and finance took part in the discussion. Various
3
  An earlier attempt in the mid-1990s (the Green Paper on Innovation), never achieved the statute and
significance of the Lisbon Agenda. Probably the member countries were not ready yet to take innovation policy
on board.


                                                                                                                3
informational documents actively influenced their general guidelines and context. The essence
of the discussions was formulated in an EU information document ―Investing in Research: An
Action Plan for Europe‖ in 2003.4 The items of this plan were insistently recommended as
guidelines for concrete actions aimed at achieving ambitious goals set up by the Lisbon and
Barcelona summits. They included the following four sets of actions:

     A first set of actions aims at supporting the steps taken by EU countries and other
      stakeholders, ensuring that these steps are mutually consistent and that they form an
      effective mix of policy measures. This includes a process of coordination with and
      between Member States and acceding countries. It also entails creating a number of
      ―European technology platforms‖, which will bring together the main stakeholders –
      research organisations, industry, regulators, user groups, etc. – around key technologies,
      in order to devise and implement a common strategy for the development, the
      deployment and the use of these technologies in Europe.

     The second set of actions aims at improving public support to research and
      technological innovation. In order to invest in research in Europe, enterprises need to
      find here abundant and excellent teams of researchers, a strong public research well
      articulated with industry, and effective public financial support, including through fiscal
      measures. The action plan focuses on actions to improve the career of researchers, to
      bring public research and industry closer together, and to develop and exploit fully the
      potential of European and national public financial instruments. For example, the action
      plan asks public authorities to eliminate by 2005 the current rules and practices,
      attached to many public funding schemes, which prevent trans-European cooperation
      and technology transfer and thus reduce considerably the research and innovation
      opportunities available to the beneficiaries.

     A third set of actions addresses the necessary increase in the levels of public funding for
      research. Given the current economic downturn, it is all the more important to ensure
      that budgetary policies favour investments that will lead to higher sustainable growth in
      the future, among which research is a strong priority. Actions focus on encouraging and
      monitoring the redirection of public budgets, and on making full use of the possibilities
      for public support to industry offered by State aid rules and public procurement rules.
      For example, the action plan proposes to clarify and improve awareness of the types of
      public support that public authorities can use with no distortion to competition.

     Lastly, a fourth set of actions aims at improving the environment of research and
      technological innovation in Europe: intellectual property protection, regulation of
      product markets and related standards, competition rules, financial markets, the fiscal
      environment, and the treatment of research in companies‘ management and reporting
      practices. For example, the action plan sets the objective that every student in science,
      engineering and business should receive at least a basic training on intellectual property
      and technology transfer.

The implementation of this action plan, however, is largely left to the individual member
states, with the European Commission mainly in a supporting and coordinating role.
Implementation is expected to take place largely by means of an open co-ordination method,

4
 Commission of the European Communities. Investing in Research: An Action Plan for Europe. Brussels: CEC,
April 2003.


                                                                                                        4
which promotes the exchange of best practices and the use of scoreboards and peer pressure in
order to achieve the declared goals.

The open co-ordination method proposed by the European Commission (EC) to facilitate the
implementation of the Lisbon Strategy has been supported by the ―European Trendchart on
Innovation.‖5 This programme provides policy makers and managers of innovation support
schemes with summarised information and statistics on innovation policies, performances and
trends in EU Member States, and supports the exchange of good practice in this area through
workshops and publications. The programme comprises three components:

     An annual survey of progress on innovation policy formulation and implementation in
      each of the EU countries in order to monitor progress on the Lisbon Strategy;
     The European Innovation Scoreboard delivering aggregate statistical data to compare
      and analyse national innovation performances; and
     Reviewing existing innovation practices and policies across the EU with the aim of
      identifying ‗best practices.‘ For this purpose an on-line database on innovation policies
      across the EU has been developed, which provides access to a wealth of information on
      specific innovation policy measures in the various EU countries.

The reason the EC has chosen for an open co-ordination method is that it has no control over
the innovation policies of the member countries. The EC can only achieve improvements in
such policies through consensus building and peer pressure. This may not always look like a
very effective method, especially given the fact that the EU has made to date only very slow
progress on the Lisbon Strategy.6 For that matter the EC has recently reiterated its
commitment to the Lisbon Strategy and announced additional measures in order to reach the
goals of the strategy.7

Formally there is no single European innovation policy. The innovation policies of the
Member States and that of the Union are conducted in parallel but do not constitute
necessarily a coherent whole. Nevertheless, the EU action with regard to research and
innovation aims at boosting cooperation between the different EU countries within the context
of its successive S&T framework programmes (i.e., research projects eligible for EU funding
should always have partners in at least two different EU countries).

To facilitate further integration of the national research programmes into a real ―European
Research Area‖ (without insisting on a single European research policy – this is politically
still a bridge too far) the European Commission has set out to:

     Promote the development of "European centres of excellence" by networking leading
      edge research institutions across countries;
     Improve the coordination between national and European research programmes and
      foster closer relations between European research organisations;
     Make better use of instruments of indirect support to research, develop effective tools to
      protect intellectual property, encourage the creation of companies, and support risk
      capital investment;

5
  The Trendchart‘s main way of communication is through its website <<http://trendchart.cordis.lu>>
6
  See for example for an interesting discussion: Collignon, S., et al. The Lisbon strategy and the open method of
co-ordination: 12 recommendations for an effective multi-level strategy. Paris: Notre Europe, 2004.
7
  Commission of the European Communities. More Research and Innovation – Investing for Growth and
Employment: A Common Approach. Brussels: CEC, 2005.


                                                                                                                    5
       Support research needed for political decisions and to establish a common system of
        scientific and technical reference
       Step up the mobility of researchers, increase the place and role of women in research
        and to give the young a taste for careers in science.
       Reinforce the role of the regions in European research, to integrate the scientific
        communities of western and eastern Europe and to make Europe attractive to
        researchers from the rest of the world; and
       Tackle the questions of science and society in their European dimension and developing
        a shared vision of the ethical issues of science and technology.


2.3 Russia’s experience with innovation policy formulation and
implementation

Although Russia‘s first attempts to formulate a national innovation policy date back to
1997/98, in the early 1990s several initiatives were launched that took an explicit innovation
perspective in a desperate response to the structural changes taking place in the economy and
the dramatic decline in public R&D funding.

In April 1992, for example, the Supreme Council of the Russian Federation created an
Innovation Committee under the Higher Economic Committee of the Presidium of the
Supreme Council. It adopted the following definition of an innovation: ―Innovation (R&D) is
the creation and usage of an intellectual product, the development of new original ideas, and
the marketing of them at the stage of their practical implementation in a form of a ready-made
product‖ (the Innovation Committee Act dated from April 19, 1991 for N 448). However, the
creation of the committee did not result in the development of a national innovation policy as
such.

Other innovation-oriented initiatives during the early 1990s included:

       The adoption of the ―Patent Law of the Russian Federation‖ in September 1992 and the
        ―Law on the Intellectual Property and Adjacent Rights‖ in July 1993.8
       The creation of the Foundation for the Promotion of Small Enterprises in Science and
        Technology in 1994. In addition to supporting innovative enterprises directly, this
        foundation also provides support for: (a) educational courses for small enterprise; (b)
        some 26 innovation-technology centres across the country; and (c) researchers who
        want to start a new company. In 2003, it had a budget of RR 491 million.
       The adoption of the Federal Law N 88-ФЗ ―On Public Support for Small Business in the
        Russian Federation‖ in June 1995. It states, that the federal, regional and municipal
        programs of small business support should ensure the transfer of R&D results and
        innovations to small companies. The section ―Innovation and S&T Policy‖ was included
        into the Federal Program of ―Reforms and Development of the Russian Economy in
        1995-1997.‖ It specifies a need to develop legislation and regulations in S&T and
        innovation, to conduct a structural reform in the S&T sector and to promote investments
        in science and engineering.
       The adoption of the basic law ―On Science and Public Scientific and Technological
        Policy‖ in August 1996, after the Presidential election. These laws have become the
        core of the innovation activity legislation and regulations. The terms of the ―"Public
8
    Both laws have been revised twice since then. See chapter 3 for details.


                                                                                             6
     Innovation Policy of the Russian Federation‖" and the ―"Federal Innovation Policy‖"
     were introduced. Later ―"On a Special Administrative & Territorial Entity‖" (with
     amendments), and ―"On a Scientific Park in the Russian Federation‖" laws were
     adopted. Those laws had a great impact on innovation development.
    Also of major importance, was the issuing of the Presidential Decree N 963 ―On Public
     Policy on the Involvement of R&D Results and Intellectual Property in the Economy‖
     in July 1997.
    A Governmental Commission on Scientific Reforms was formed in 1997. It developed
     proposals on a radical updating of the industrial innovation policy concept. Russia‘s
     Ministry of Science started to develop a policy and to work out the corresponding
     measures on investment securing and guaranteeing mechanisms, on stimulation of the
     R&D transfer process financed from the budget, on development of an adequate
     innovation support infrastructure, on creation of venture capital system. It was agreed to
     create a special reserved fund within the federal budget (the Development Budget).
     However, the law ―On the Development Budget of the Russian Federation‖ accepted in
     November 1998 was suspended in 2003-2004.

As a whole, it is necessary to state, that during these years the major emphasis was given to
organisational measures, rather than the creation of norms and regulations in the innovation
sector. The legal support for innovation activities was not supplied, though new laws were
drafted. Thus, in January 1998, the federal law draft ―On Innovation Activity in the Russian
Federation‖ was approved by the State Duma, and then forwarded to the Russian Government
for approval. However, this draft had many discrepancies and consequently it was withdrawn.

In 1999, a second draft of the law ―On Innovation Activity and Public Innovation Policy,‖,
was developed. This draft was accepted for primary readings and passed its first reading by
the State Duma in June 1999. A second and third reading followed and the law was approved
by the Council of the Federation on 23 December 1999. However, on 3 January 2000 the law
was rejected by President Mr. V. Putin, the Nominal President of the Russian Federation.

The main reasons for this rejection were the following: (a) absence of clear definition of
innovation activity; (b) absence of characteristics of innovation products or technological
process to consider them new or modified without a doubt; (c) exclusion of the R&D,
designing and technological organisations from an innovation infrastructure; (d) a referral of
the innovation sector regulations to a shared jurisdiction of the Russian Federation and its
subject, in spite of the fact that all regulation management of activities is a federal prerogative
according to the clause 71 of the Russian Federation Constitution.

Later, in February 2000 the State Duma established a special commission to decide the further
destiny of the law. However, the President‘s representatives refused to participate in its work.
So, in June 2001 the State Duma Committee on Education and Science offered to stop any
debates on this law.

None of the leading experts and scientists was engaged in the development of this law of
national importance. This situation testified firstly, that it had been prepared by a small
working group of occasional experts, regardless of the Russian Academy of Science (RAS)
leading experts‘ and its branch institutes contribution. Secondly, the most profitable raw
materials industry had not been interested in the law, and thirdly, the scientists themselves
and, primarily the RAS management had not been active enough to put this law into life. It is



                                                                                                 7
necessary to note, that the law designing procedure did not include its obligatory reviewing by
the independent experts of the inter-disciplinary group.

At the beginning of 2000 a new version of the concept of the Russian innovation policy for
the period of 2001-2005 was formulated, as the time of action of the old concept for the
period of 1998-2001 was finished. The new draft covered legislation and regulatory support
problems in the innovation sector, stimulation measures on innovation and infrastructure
development, and the development of economic and financial mechanisms to speed up
innovation.

However, no serious positive success in innovation policy was achieved. Most of the official
bodies‘ suggestions on this problem did not entail the necessary measures.

 Box 2.1: Helsinki Workshop

 An important international workshop on Russia‘s innovation policy was held in Helsinki in 2001
 (organized by among others the OECD, the Finnish Academy of Sciences, and the Russian
 Ministry of Industry, Science and Technologies) which formulated the following policy
 messages:

     Russia‘s "innovation gap" could widen if institutional reforms are not taken to link the
      emerging innovation infrastructure to the science system and the development of a
      domestic market.
     The experience of OECD governments shows bridging the ―innovation gap‖ will require
      policies to reduce the market risks to innovation and incentives for technology
      commercialisation and the creation of innovative small firms.
     Strong and stable intellectual property rights are needed to be able to transform Russian
      knowledge into technology and innovation.
     The scope for mobilising Russia‘s stock of human resources for innovation remains limited
      due to a lack of research opportunities in the domestic business sector and an ageing
      research population in the public sector.
     Russia‘s venture capital market is growing but expanding finance for innovation and
      entrepreneurship requires increasing the share of domestic funds as well as tax and banking
      reforms.

 Source: Main policy messages from the Helsinki Seminar on Innovation Policy and the Valorisation of
 Science and Technology in Russia (Helsinki, 1-2 March 2001)


The Russian President in his Appeal to the Federal Assembly of the Russian Federation on 8
July 2000 stated that many national enterprises are not competitive, that Russia increasingly
depends on the export of raw materials, and that Russia loses its competitiveness in the global
market, which has become more competitive due to innovation.

In March 2002, the President of the Russian Federation set out new national S&T policy goals
that should gear the country towards an innovation-oriented path of development. A stage-by-
stage implementation plan was made. During the first stage (before 2006) the government will
focus on the clarification of legislation (including those to stimulate innovations) and on the
development of an appropriate national innovation system and its management. During the
second stage (till 2010) the government will complete the formation of the national innovation
system. The plan (S&T Development Guidelines until 2010 and beyond) was approved during
a joint session of the Russian Federation Security Council, the Presidium of the Russian State


                                                                                                       8
Council, and the Presidential Council on Science and High Technologies. Despite of a
number of disputable statements, to a certain degree, the Guidelines have included the
scientists and experts‘ recommendations.

According to the S&T Development Guidelines (2002), an increase in science financing from
the federal budget by the year 2010 will not cover the budget under-financing taken place in
the 1990s. Such financing also cannot ensure the cardinal changes of scientific activity
environment, and solving of national social and economic problems. It is necessary to
increase the role of the Russian Academy of Sciences and branch academies in conducting
public management and regulations in the scientific sphere along with a simultaneous
strengthening of public regulations of these academies‘ activities.9

In January 2003, the Government approved the ―Main Guidelines of the Public Investment
Policy in Science and Technology.‖ The Guidelines defined a system of measures ensuring an
effective use of public and private investment resources for the country‘s strategic goals. The
document identifies the fundamental science as strategic priority of society development and
defines the priority directions in science, technologies and engineering development and List
of critical. The document identifies the major goals and tasks of public policy, mechanisms
and methods of its realisation for the period before and after 2010, as well as priorities in
science, technologies and engineering development. It also sets the priorities for the
outstripping development of the fundamental science and important national innovation
projects.10 Later, in March 2003, the Ministry of Industry and Science was planning to bring
the concept of a national innovation system to the Governmental readings (a declaration of
Mr. Ilya Klebanov, Minister of Science and Industry). In September 2003, Mr. Klebanov
emphasised that the Russian Government intends to diversify the economy and make it more
innovation oriented. He stressed that the public program ―The Basis of the S&T Policy of the
Russian Federation till 2015‖ constituted nine fundamental goals and about 50 crucial
technologies.

The state should create and support an intellectual environment, save key R&D institutes and
upgrade the innovation infrastructure. The Minister informed on creation of technological
parks, R&D and industrial zones and technology transfer centres with regional authorities
participation. Along with this the Interdepartmental Economic Council was formed, with three
quarters of its members being business and science representatives and one fourth - the
officials of the different ministries. Venture investment fairs have been taken place. The
Minister also emphasised, that the key priority of the state now has been ―a creation of
conditions and environment for business development and reduction of barriers for open
market operations.‖

During 2003 and in the beginning of 2004, the President of the Russian Federation
emphasised in his speeches the role and value of R&D and high technologies activities in
Russia.

At a joint meeting of the Russian Security Council and the Presidium of the State Council on
24 February 2004, the topic of Russia‘s national innovation system was discussed. During
that meeting President Putin raised the following issues in his speech:



9
     http://stra.teg.ru/lenta/innovation/1055
10
     http://www.poisknews.ru


                                                                                             9
   Forming of a comprehensive state innovation policy is important for both the qualitative
    and quantitative growth of Russia‘s economy, industry, and science;
   The key problem is that our scientific inventions and discoveries do not turn into
    working capital, do not raise business interest of domestic investors, and do not bring
    significant income to the inventors;
   Science unclaimed by the market reflects ineffectively spending of state funds and is a
    real threat to Russia‘s national security;
   We should not see innovation policy as an instrument by which the state selects and
    supports a limited number of S&T projects or branches of the economy. Quite the
    opposite, an innovation policy should build new relations among science, business, and
    the state;
   We shall have to build an adequate infrastructure, which must include all necessary
    managerial, legal and institutional elements;
   We also need a long-term forecast of innovation development of both Russian and
    world economies to define where the S&T potential accumulated in Russia and world
    market trends are intersecting;
   The transfer of IPR has to be optimized, and a real mechanism for the motivation of
    scientific groups and has to be created. New legislation will set the balance of interests
    on the IPR among the state, research organisations and developers;
   We need to work on effective forms of state stimulation of innovation in the private
    sector; and
   We need to get rid faster of obsolete forms of preferentialism. A reasonable alternative
    is a maximal provision of economic freedom along with a simultaneous creation of
    competitive environment. Among the other means are: insurance and venture capital
    systems development, international technical cooperation, as well as active diplomatic
    support of Russian developers and high-tech companies in international markets

In the third quarter of 2004, new amendments to the earlier adopted laws (IPR …….), which
had encountered certain problems in their implication, were adopted. Besides, the Ministry of
Education and Science issued a draft of the Science Reform Conception, specifying basic
problems in the management of public R&D facilities and also problems of science
privatisation.

In October 2005 at a meeting of the Interdepartmental Commission on Scientific and
Innovation Activity, Mr. A. Fursenko, the Minister of Russian Education and Science once
again emphasised the necessity to create a new science and academic property management
model, which would be able to work under a strict control of a corporate community, together
with legislative and executive authorities and civil institutes. As to the stimulation measures,
in October, 2005, the it was declared about a creation of the Russian Investment Fund for
Technologies and Innovation was announced with a total budget of US$ 100 million (with a
Federal budget share of 75 % and Russian and foreign investors of 25 %).

As a whole, at present, similar to 1998 and 1999, more attention has again being paid to the
development of norms and legislation development, which, along with mistakes accounting of
the former period, can bring positive results in the future. In addition, implementation of
several investment projects, as well as erection of technoparks was begun.




                                                                                             10
2.4. Apparent differences in innovation practices and policies between
the EU and Russia

A key difference between the EU and Russia is the overall structure of the economy, which to
a large extent defines innovation practices and patterns.11 In addition, Russia still suffers from
the consequences of the privatization of large parts of its economy during the 1990s. The
latter has resulted in the following problems:

      the privatisation was carried out without taking into account the creation of an
       appropriate competitive environment, which is blocking the emergence of innovative
       new enterprises;
      destruction of industrial capacity, including many high-tech companies in the defence
       sector;
      the new proprietors are focused primarily on short-term goals and tasks; and
      private businesses prefer buying foreign technologies rather than investing in own
       R&D.12 In its turn, a simultaneous reduction of science budgets and low demand for
       science by private businesses rolled into one, resulting in the destruction of in particular
       applied R&D capacity.

Despite some promising signs of the Russian business sector becoming more actively engaged
in R&D in recent years, there is still a long way to go for Russian companies to match the
R&D intensity of the leading companies in the EU, USA and Japan. Unfortunately, the
Russian government is doing little to enhance business-sector involvement in R&D. This is in
contrast to most other industrialized countries, which usually operate several instruments
(including grants and tax deduction facilities) to support private-sector R&D. In some respect
this absence of government support can be explained by the dominance of the mining sector
in the Russian economy. This sector has little interest in such support as it is a low-tech
industry. This is in contrast to the EU, USA and Japan, where high-tech industries dominate
the economy.13

Further differences in innovation practices and polices between the EU and Russia consist of
the following:

      During the past 14 years Russia has experienced sharp cuts in public funding for R&D.
       Cuts that were considerably deeper than the contraction in GDP. Total R&D
       expenditures as a percentage of GDP more than halved between 1990 and 1998 (i.e.
       from 2.03% in 1990 to 0.95% in 1998), but has been rising since then to a level of
       1.27% of GDP in 2003. Both in relative and absolute terms, As a result of this, Russia‘s
       scientific and technological potential is considerable smaller today than it was in 1990.
       This has placed Russia at an even further distance from has contracted while that of the
       EU and other advanced economies in terms of innovative capacity and has expanded. –


11
   For example, the R&D/sales ratio of the mining industry is worldwide a lot lower (0.3-0.5 % of sales value)
than the R&D/sales ratio in high-tech industries such as electronics and pharmaceuticals (5-10% of sales value).
12
   It is necessary to take into account, however, that this factor is ambiguous: on the one hand, the new imported
equipment or technologies purchase is an indicator for innovation activity, and on the other hand, it undermines
the national scientific base and creates future problems for national innovation development.
13
   Petrakov, N. ―Transformation of property relations in Russia and the modernization of investment policy
approaches.‖ Chapter 6 in Innovation Way of Development in New Russia. Moscow: Nauka, 2005.


                                                                                                               11
       it is incomprehensible. This explains to some extent Russia‘s low share in the world
       market for high-technology products.

      In contrast to the European Union, Russia‘s R&D agenda tends to focus relatively
       heavily on basic or fundamental research. Moreover, Russia‘s R&D agenda is heavily
       biased towards engineering (62.7% of all researchers in 2003) and weak in social
       sciences and humanities (5.1% of all researchers in 2003).

      Small and medium-sized enterprises (SMEs) play a significantly lesser role in the
       economy in Russia (employing 25% of the workforce) than in the EU (employing 72%
       of the workforce).14 Moreover, SMEs in Russia are considered to be less innovative
       than their European counterparts.

      Large companies in the EU are characterised as being far more innovative than their
       Russian counterparts. In part this reflects a difference in specialisation (low-tech mining
       in Russia versus high-tech consumer goods and pharmaceuticals in Europe) and in part
       lower investment in R&D by Russian companies.

      The share of business-sector investment in R&D in Russia (estimated at 20.8% in 2003)
       is much less than the share in the EU (estimated at 56.2% in 2001).15 Business-sector
       shares in R&D investment are even higher for the USA (68.3% in 2001) and Japan
       (73.0%).

      The constraining factors in innovation processes in Russia differ from those in the EU.
       In Great Britain, for example, the reported constraining factors are the following: among
       the economic factors – the extremely high direct innovation costs and a problem of
       mobilizing financial support; among the domestic industrial production factors – a lack
       of a qualified personnel and some organisational problems; among the other factors – an
       influence of the standards and measures regulating a company‘s activity. For Russia, the
       principle constraint among the economic factors is a lack of internal operating and
       investment resources. A lack of public financial support is considered of second
       importance. As to the domestic industrial production factors, ten times less companies
       have picked up a lack of the qualified personnel than a lack of finance. Among the
       others the key factors are a low market demand for new products and insufficient
       legislation on innovation development growth.16.

      Until present, the Russian venture sector has remained weak. Today in Russia there are
       more than 40 financial institutions of direct and venture investments. According to the
       experts‘ estimations, the so-called venture investment in 1994-2005 has totalled $ 2.5
       billion.17. The Russian stock market is poorly advanced and there are no so-called
       ―business angels‖ – experienced businessmen and women investing their own money in
       private companies at their initial development stage. Because of the high risks in the
       Russian markets, the majority of the Russian venture funds only invest in companies
       that have already reached a manufacturing expansion stage or a stable production one.

14
   European Commission. SMEs in Europe 2003. Observatory of European SMEs No. 7. Bruxelles: European
Commission, 2004.
15
   See table 4.2, chapter 4.
16
   Varshavsky A. ―Problems and indicators of the innovation systems development‖ Chapter 9 in Innovation
Way of Development in New Russia. Moscow: Nauka, 2005.
17
   www.spbinvest.ru, June 6, 2003.


                                                                                                           12
2.5. Key Lessons for the Russian Innovation Policy

Based on the material presented in this chapter, the following key lessons for the Russian
innovation policy are proposed:

      Despite discussions for many years, Russia still lacks a comprehensive national
       innovation policy that encompasses all the different actors within the system. The most
       recent innovation policy draft document is still heavily biased towards the public R&D
       sector and does not envisage much of an active role for the business sector.18 Hence it
       pays little attention towards issues of relevance to the business sector, such as
       appropriate legislation to protect own R&D and fair competition, financial incentives to
       invest in innovation, and nurturing of new start-up companies.

      Public research organizations in Russia still tend to operate in a technology-push mode
       rather than a technology-demand mode. This frequently leads to technologies for which
       there is no client in the market and hence to a spillage of resources and effort. In order
       to minimize such problems in the future, decision-making processes regarding research
       priorities need to be altered drastically. The ultimate clients for new knowledge and
       technologies (businesses, government, and civil society) should be given a considerable
       greater say in setting research priorities and evaluating research outcomes.

      In comparison to their international rivals, Russian companies invest relatively little in
       their own R&D. The Russian government should set out an active campaign to stimulate
       private-sector investment in R&D and introduce measures (fiscal, grants, etc.) to do so.
       In addition, the government should significantly increase and improve its efforts in
       supporting old high-tech companies.

      Russia‘s public research (and education) system is rapidly loosing its reputation both
       within as well as outside Russia. The past 15 years can be characterized as a period of
       stagnation, decline, and a struggle for survival. Most importantly, the system has not
       been able to renew its staff and pursue new scientific areas. Drastic reforms are needed
       in order to reverse this development. Some measures have already been announced like
       a drastic increase of the salaries of researchers and professors, but also a sharp reduction
       in staff.

      To rejuvenate the public research system, there is an urgent need to bring considerable
       more young people into the research institutes. At the same, it is necessary to drop the
       idea of research as a life-time career. This does not mean that the option of a life-time
       career should be closed off, but it should no longer be the norm though after rather large
       transition period. This should result in a higher degree of job mobility of research staff,
       which helps to more around tacit knowledge throughout the innovation system. The
       idea about life-time career may be correct only after rather large transition period (by
       our estimates, about 8-10 years), first, to transfer knowledge from the oldest generation
       to the young people, and second, to have enough R&D personnel before young people,
       and second, to have enough scientists will be brought into the research institutes.
       Otherwise it will be destructive.


18
  Russian Federal Government, Main Policy Directions Regarding the Development of the Innovation System of
the Russian Federation up to 2010. Moscow, August 2005.


                                                                                                       13
      One suggestion made to finance a renaissance of Russian science is to introduce a
       specific levy to be paid by production and service companies to create a fund similar to
       the old Fund of Scientific and Technical Development. 19 Another option is to use some
       of the oil revenues.




19
  Timofeyeva, I. ―Fortov, an academician: Those who had immigrated, returned.‖ New newspaper, N 78 (1103)
20.10-23.10. 2005.


                                                                                                      14
3. Regulatory Instruments to Support Innovation in the Private
Sector

By Natalia Zolotykh.

3.1. Intellectual property rights legislation

The importance of intellectual property rights (IPR) has grown rapidly over the past few
decades due to a more intensive use of the instrument by the business sector and particularly
so in high-tech sectors such as biotechnology, electronics and pharmaceuticals. In addition,
due to increased international trade and globalization, companies more and more seek IPR
protection beyond their home market.

This tendency has been further strengthened by an increase in competition and a reduction of
the life cycle of products, which has accelerated the pace of innovation in many industries. In
addition, Western companies are increasingly (albeit on average still very modestly)
collaborating with third parties (other companies, but also public research organizations and
universities) in the S&T area in order to secure their technology needs.20 Such collaboration
can only succeed when there is clarity about who owns the IPR generated through such joint
efforts and how the benefits of the IPR are going to be shared.

In the current context, IPR acquire an exclusively important value, enabling both investors
and inventors to obtain benefits from commercialisation of patented R&D outputs. This
process also significantly influences the degree of diffusion of technologies. Increasingly,
companies not only take out IPR to protect their R&D results, but also to strengthen their
position in IPR negotiations with other companies as well as attracting potential investors.21


Because IPR protection has expanded (more countries) and improved (better court systems
and stronger enforcement) considerably over the past two decades, investing in R&D has
become more attractive for companies (and particularly so for those operating
internationally). This may explain to some extent why in Western countries R&D investments
by the business sector have grown so much faster than those by the public sector.


Speaking about the importance of IPR in innovation development, it should be taken into
account that many nations attempt to apply the IPR system also for the needs of the society in
general. So, on the one hand, opening newly created inventions for public knowledge, and on

20
   A recent survey across large European companies indicates that they outsource about 15% of their research
investment on average, of which two-thirds to other firms and one-third to public research organizations and
universities. [Source: European Commission. Monitoring Industrial Research: The pilot survey on business
trends in R&D investment. Brussels, European Commission, December 2005.]
21
   In 2002, more than 850,000 patent applications were filed with the USPTO, EPO and JPO, compared to
600,000 in 1992. The majority of applications refer to new areas of technologies, especially biotechnology and
ICT. In these industries IPR protection constitutes a core element of the business strategy. Nearly one third of all
patent applications filed refers to ICT industry, and over the last decade nearly a half of the increase in patenting
is due to ICT. The number of patent applications in the Russian Federation is still rather modest, but growing. In
2002, 29,225 patents were filed with the Russian patent office, of which 5,513 were from foreign applicants. In
2003, this number ran to 30,651 (of them 5,682 from foreign applicants). [Annual official publication of the
Federal Service for Intellectual Property, Patents and Trademarks (Rospatent); 2005.].


                                                                                                                 15
the other hand, providing their creators with a possibility to benefit from their commercial
utilisation. Public research organisations are provided with more incentives for patenting and
licensing of their inventions and for promoting the diffusion of technologies obtained as a
result of government-funded research.

  Box 3.1: The role of IPR in the European Union

  Innovation policies generally recognise IPR as one of the most important instruments for diffusion
  of technology and knowledge – a relationship between innovation and intellectual property rights
  is underlined by the European Commission. The first attempts of the European Commission to
  draft a sound innovation policy in the European Union, such as the Green Paper on Innovation
  Policy of 1995 and the First Action Plan on Innovation of 1996, underlined a necessity to provide
  researchers and businesses with adequate legal means for the protection and enforcement of
  intellectual property. These initiatives were continued by taking measures proposed in the First
  Action Plan on Innovation, including improvement of regulating conditions regarding IPRs.

  Innovation policy became one of the key policies of the EU with the adoption of the Lisbon
  Agenda in 2000. This agenda was further elaborated during the EU summit in Barcelona in 2002.
  The agenda strongly endorses an increase in enforcement of IPRs and in ensuring of better access
  to benefits offered for industry.

  Efficient use of IPRs by entrepreneurs is also a critical point in recent European industrial policy
  documents (―Industrial Policy in an Enlarged Europe‖ [2002] and ―Fostering structural change: an
  industrial policy for an enlarged Europe‖ [2004]). They recognize that well-developed conditions
  for intellectual property as a main condition of growth of competitiveness of European business.
  Encouragement of innovation through better knowledge and more efficient management of
  intellectual property is proposed in the coming draft ―Support Programme for Entrepreneurship
  and Enterprise Competitiveness (2006-2010)‖. Among others, the Programme includes a list of
  actions on development and ease of access for SMEs to information on IPRs and encouragement
  of creation or strengthening of services of support to assist enterprises in efficient management of
  their portfolio of intellectual property.


The innovation system of the Soviet Union had a number of peculiarities inherent to a planned
socialist economy, which predetermined all operations related to the creation and transfer of
S&T results. The innovation system of the Soviet Union was based on a system of state,
command management of all economic activities involving research institutes and industrial
enterprises. The cornerstone of this system was a state monopoly on the ownership, use and
disposal of property of these enterprises, including economic rights, information and results of
the scientific and technological activity and the IPR of these entities. Strict, centralised state
management of the R&D and technology transfer process as well as any IPRs resulting from
such research, excluded the development of market relations between innovation enterprises.
It also drastically reduced their interest in the creation of competitive research results and
their industrial utilisation, and worked against the development of international scientific and
technological co-operation.

The restructuring of the social and economic sphere, which began in the mid-1980s, was
accompanied by a rapid development of market relations. This required substantial changes in
the legislation of the USSR, including that related to IPR.

At the end of the 1980s and beginning of the 1990s, the Soviet Union adopted a whole block
of new legislative acts and special regulations in the areas of intellectual property, taxation,


                                                                                                     16
investment policy, restriction of monopolistic behaviour, stimulation of competition and
foreign economic relations, which differed markedly from the previous soviet legislation.

The USSR Law on Inventions of 1991 was truly revolutionary. After almost 70 years, the
state abolished the authorship certificate and its monopolistic right to all inventions created by
state organisations in favour of a form of patent protection of intellectual activity which gave
authors of inventions exclusive rights to ownership, use and disposal. There were no
restrictions on the transfer of patent rights to third persons, including foreigners.

During this period of time, there was a drastic decline in patent activity by public research
organizations, which was accompanied by a closing down of the patent and licensing
divisions of public research organisations. The transition to new methods of economic
management, which coincided with a sharp reduction in the state financing of R&D,
aggravated the situation. In spite of an apparent increase in the number of international licence
agreements, payments for licences plunged. Thus, the transition to a market economy in the
scientific and technological sphere, which was made more difficult by the absence of
adequate legal and economic mechanisms, was quite difficult for Soviet enterprises and for
the Soviet Union as a whole.22

At the end of 1992, a new set of laws regarding intellectual property was adopted by the
Russian Federation after the breaking up of the USSR during the preceding year. 23 The
provisions of these laws were adapted to meet as much as possible the high standards defined
in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement under the
WTO and were co-ordinated with most norms of international agreements and conventions.
These laws lay the foundation for Russia‘s legal system in the area of protection and use of
the results of scientific and technological activity.

In particular, the Patent Law24 established that an author,25 or any physical or legal entity
indicated by the author, can act as a patentee (irrespective of the source of financing), and, in
the case of an employee‘s invention, an employer, if not otherwise specified in the agreement
between the employer and the employee.

Official patent statistics show that the 1992 Patent Law had a stimulating effect on the patent
activity of Russian organisations. However, a survey of patent and licensing activities of
PROs, conducted in the framework of the OECD working group on innovations and


22
   Contrary to a widespread opinion, this period was exclusively difficult both for Soviet scientists and inventors.
Lacking the necessary knowledge, elementary experience and financial and legal support, including from the
organisations in which they worked, most of them were unable to make use of their legal right to their
intellectual property. Moreover, their attempts to enter the world technological market by themselves (owing to a
lack of demand backed by funds at home) were viewed negatively by foreign companies, which were unwilling
to spend time and money to acquire IP obviously burdened with the rights of third persons (notably the Soviet
Union itself). They were also viewed negatively by their own organisations, which felt that individuals
attempting to find an application for their inventions were selling at dumping prices scientific capital created by
a large team over a long period of time and disclosing confidential information with high commercial value.
23
   It included the following legislative acts: the Patent Law, Laws on Legal Protection of Computer Programmes
and Data Bases, on Legal Protection of Integrated Micro-Circuits Topologies, on Legal Protection of
Achievements in Breeding, on Copyrights and Allied Rights, on Trademarks, Service Marks and Appellations of
the Places of Origin of Goods.
24
   The Patent Law regulates relations related to inventions, utility models and industrial designs.
25
   An author of invention, utility model or industrial design is recognized a natural person, with creative work of
which they are created. (Article 7 of the Patent Law of the RF)


                                                                                                                17
Box 3.2: A history of IPR in Russia

Over the past 15 years, approaches towards issues of ownership, use and disposal of rights to
results of S&T activity changed repeatedly in Russia:

Before 1991: Rights of ownership, use and disposal to discoveries, inventions and work-
improvement proposals and industrial designs created using budget funds of the USSR belonged to
the state. This was certified with an author‘s certificate. Authors of invention had a right for
author‘s remuneration, the size of which was not large. The legal system of the USSR also
provided for obtaining a patent on an invention. However, this was possible only for those
inventions, which were created by authors independently, beyond the scope of their employment
assignments and using their own funds. In practice they were insignificant inventions, lacking
significant scientific and commercial value. Foreign companies had an opportunity to make a
choice between patents and author‘s certificates, provided that they created the invention
independently, without using funds from the Soviet Union budget. One should bear in mind that
under the existing foreign trade monopoly they were in any case to conclude an agreement with a
specialized state foreign trade organisation for marketing their goods within the Soviet Union.
Issues of protection and utilisation of joint inventions created by Soviet organisations and foreign
companies were regulated on the basis of special intergovernmental agreements. As a rule, these
agreements, provided for a need to obtain an author‘s certificate within the Soviet Union, and
patents outside.

From 1991 through 1992: A patentee is an author unless otherwise specified in an agreement
between an author and the organisation for which he works (Law of the USSR on Inventions). At
that time no serious restrictions were applied to the exclusive rights of the authors of inventions,
even when they created the invention in the course of their work as an employee. Only when an
employee voluntarily refused his right to a patent, the employer could start a process of becoming
the legal owner of the patent. As official data of patent information show such cases were rare. And
thus, the only right of an employer, mainly public research organisations but sometimes also
enterprises, was the right to use the employee‘s invention created using state budget funds, at its
own production facilities. Obviously, the majority of the public research organisations lacked
production facilities and hence were unable to utilise it or get any commercial return from it.

From 1992 till 1998: A patentee can be an author, any natural or legal person, indicated by an
author, and in case of employee‘s invention an employer, unless otherwise stipulated by an
agreement between an employer and an employee (Patent Law of the RF).

From 1998 through November 2005: Rights to results of S&T activity obtained using
government funds belong in principle to the Russian Federation (various Presidential Decrees).
Disposal of these rights can be carried out by the state customers on behalf of the Russian
Federation in the case of civil R&D. The rights to the results of intellectual activity of military,
special and dual purpose can only be disposed by the state customers upon coordination with the
Ministry of Justice as represented by the Federal Agency on legal protection of results of
intellectual activity of military, special and dual purpose.

From 2003 till present (Patent Law of the Russian Federation): The right to obtain a patent for an
invention, utility model or industrial design created when performing works under the state
contract (that is using budget funds) belongs to the performer (contractor) if the state contract does
not stipulate that this right belongs to the Russian Federation or an entity of the Russian Federation
on behalf of which that state customer acts.




                                                                                                    18
technological policy showed that the lack of clarity in matters of ownership and use of
intellectual property created with the use of both the Soviet Union budget and the Russian
Federation budget resources considerably complicated this process.26

Obviously, confusion regarding IPR ownership became one of the main impediments for
concluding agreements for the creation and transfer of S&T results between the Russian
research organisations (irrespective whether they were state-owned or private organisations)
and private legal or natural persons. Uncertainty over rights of ownership of ―previous‖ R&D
results created by using funds of the USSR budget did not encourage the private sector to
conclude agreements with Russian research organisations either.

In the legislation on intellectual property rights of 1992, participation of government entities
in relations regulated by the norms of these special legislative acts was not envisaged directly.
Before 2003, these issues were not directly defined either in the IPR laws or in other
legislative acts relating to R&D results developed by PROs, or with the use of federal budget
resources.27

The first targeted attempts to formulate key provisions of the state policy in respect of
ownership, use and transfer of intellectual property, created in the process of execution of
scientific research and experimental design works, developed from federal budget resources,
were made in the Russian Federation only at the end of the 1990s. One of the first steps in this
direction was a Presidential Decree ―On state policy for the introduction of results of
scientific technological activity and intellectual property objects in the sphere of S&T into
economic turnover‖ issued in 1998.28 In execution of this Presidential Decree, the Federal
Government adopted a ―Resolution on the use of the results of scientific and technological
activity‖ in September 1999.29

Approximately at the same time, legal acts were adopted that regulate the activities of
innovation process subjects (including public scientific research organizations) regarding the
introduction of the results of scientific research, experimental design and technological works
of military, special and dual purpose into economic, civil and legal turnover.30

26
   OECD. Turning Science into Business. Paris: OECD, 2003
27
   For example, the Law of the RF ―On Science and the State Scientific and Technological Policy‖ establishes
that the legislation of the Russian Federation determines the order in which the R&D results financed by the
federal budget (including patented inventions) of the Russian Academy of Sciences and the sectoral academies
of sciences are used. However, no legislative acts of this period contained provisions relating to R&D results
obtained fully or in part by state research organisations with the use of federal budget resources. At the same
time, according to the opinion of many experts, they were indirectly reflected in the Civil Code, and the Law
―On Information, Informatisation and Protection of Information.‖ For example, the Civil Code gives state clients
preference for obtaining rights to protectable results created in the course of scientific research, experimental
design and technological work. It should be specially noted that this norm of the Civil Code is a dispositive one,
and is used only when the participants do not define ownership rights and use of inventions in an agreement.
Although this aspect of the Civil Code does not directly relate to R&D results obtained with the use of federal
budget resources, many lawyers think that it can be used by analogy to obtain rights to intellectual property
obtained during the execution of scientific research and experimental design funded by the federal budget.
28
   Decree of the President of the Russian Federation ―On state policy for the introduction of results of scientific
technological activity and intellectual property objects in the sphere of S&T into economic turnover‖ of July 22,
1998, No. 863
29
   Resolution of the Government of the RF ―On the use of the results of scientific and technological activity.‖ Of
September 2, 1999, No. 982
30
   They include the Decree of the President of the Russian Federation ‗On legal protection of results of scientific
– research, experimental design and technological works of military, special and dual purpose‖ of May 14, 1998,


                                                                                                               19
Main provisions of these legal acts confirmed a tendency, that was already traced in
legislative acts adopted in the middle of the 1990-s, for recording the rights to the results of
scientific technological activity, obtained at the expense of the republican budget resources of
the RSFSR and resources of the federal budget with the Russian Federation, as well as
determined a strategic line for their disposal and use.

According to state policy, generally State Customers31 dispose of the above rights on behalf of
the Russian Federation, and in respect of rights to the results of intellectual activity of
military, special and dual purpose – the State Customers upon coordination with the Ministry
of Justice, represented by the Federal Agency for legal protection of results of intellectual
activity of military, special and dual purpose.

Contractors, irrespective of their organisational and legal form, including public
organisations, conducting scientific – research, experimental-design and technological works
for federal state purposes at the expense of federal budget resources, which results are related
to military, special and dual purpose technologies, can have a right to obtain a patent or other
certificate of protection (envisaged by the legislation of the RF), as well as a right to use the
results obtained only upon consent of the Ministry of Justice and the State Customer. The use
of the objects of intellectual property of civil purpose for securing federal state needs 32 is
made, as a rule, on a gratis non-exclusive license, granted upon State Customer‘s discretion.
Rights to IP objects in the sphere of science and technologies, obtained at the expense of
federal budget, can be transferred to third persons according to license agreements for
purposes not associated with securing federal state needs.

Theoretically, the conceptual provisions of the IPR policy and innovation strategy of the
government were directed towards creating conditions for preserving the intellectual potential
of the country and its effective use by securing rights and legitimate interests of all subjects of
legal relations, including the state, in the field of creation, legal protection and use of S&T
results.

However, world experience in this field was not taken into account when developing the
concept, as well as previous experience of the USSR. Serious drawbacks were created during
the drafting of these legal acts, aimed at obtaining a ―quick response‖ from domestic R&D
results in the world market, and not at the shaping of an efficient system of commercialisation
of inventions and the creation of competitive, science-intensive enterprises. In practice, they
did not contribute to the creation of a favourable innovation environment.



No. 556; and the Resolution of the Government of the RF ―On paramount measures for legal protection of the
interests of the state in the process of economic and civil legal turnover of the results of scientific research,
experimental design and technological works of military, special and dual purpose‖ of September 29, 1998 No.
1132.
31
   State Customer - a state body, having necessary investment resources (federal body of executive power), or an
organisation, endowed by a corresponding state body with the right to dispose of such resources (including a
federal enterprise, state establishment) (Article 764 of the Civil Code of the RF (as applied to agreements for the
execution of scientific-research, experimental-design and technological works, reference norm part 2 article 778
of the Civil Code of the RF); item 1 article 3 of the Federal law ―On deliveries of products for federal state
needs‖
32
   State needs (including federal state needs) are the needs of the Russian Federation in goods (works, services),
provided at the expense of federal budget resources and non-budget sources of financing, which are needed for
solution of tasks of life support, defence and security of the state and for implementation of federal target
programmes and interstate target programmes in which the Russian Federation participates


                                                                                                                20
     Box 3.3: The Bayh-Dole Act

     In 1980, the USA adopted a law, the Bayh-Dole Act, which became a landmark in legislation, and
     which gave a right to patent inventions and to grant licenses for them to companies-receivers of
     federal resources, allocated to R&D. The main motivation in favour of this law is stimulation of the
     use of scientific results financed by the state by way of transferring a property right from the state
     to universities and other contractors. Although academic patenting took place before the adoption
     of Bayh-Dole Act, it was not of a systemic character.

     Inspired by the example of the USA, almost all the other OECD countries introduced changes and
     provisions regulating financing of scientific research into labour legislation, permitting research
     institutes to file applications, own and license IP, created as a result of state financing. The main
     stress of legislative and political changes was made on the transfer of property rights from the state
     or from individual researchers to public research organisations, and on participation of inventors-
     scientists in revenues from commercialisation. It was substantiated by the fact that a property right
     of public research organisations, compared to individual researchers, gives a greater juridical
     certainty and strengthens formal and effective channels for technologies transfer. In addition to
     strengthening legislative and regulating frameworks for ownership and use of IP, the states
     encourage the development of patenting by other means, such as reduction of patent fees for filing
     application for universities and the support, often on a limited time basis, of the creation of
     technologies transfer bureaus or bureaus for court investigation for academic patents.

     The results of a recent OECD/PRO polling on patenting and licensing in public research
     organisations of the OECD countries show that the USA is far ahead of other OECD countries in
     academic patenting. In 2000, American universities and federal laboratories received about 8,000
     patents (5% from the total volume of patenting, and up to 15% in biotechnology). Academic
     patenting in other countries, measured by the number of patents issued to public research institutes,
     constituted from several hundred in Japan, Netherlands and Switzerland, up to almost 1000 patents,
     issued to public laboratories in Germany and research institutes in Korea in 2000-2001. However
     not all academic patents are licensed and not all patents bring profit. A majority of public research
     organisations sell only a small number of licenses per year (less than ten). Even in the USA, the
     average number for a university constitutes 24 license sales per year. Several leading research
     organisations in countries such as the USA, Germany and Switzerland can earn millions of dollars
     or euros from patent licensing, but for the large majority of universities and research organisations
     such revenues are a lot small smaller. Moreover, it is usually a few super powerful inventions that
     generate most of the revenues. Overall, revenues from patent licensing rarely constitute more than
     10% of the research budget.

     Source: OECD. Turning Science into Business: Patenting and Licensing at Public Research
     Organizations. Paris: OECD, 2003.


Early 2000s, efforts were undertaken in Russia for transferring a big scope of rights to R&D
results, created under state contracts, to the organisations-developers. In particular, changes
and amendments were introduced into the Patent Law of the Russian Federation, as well as
into other laws on IPR33, establishing that a right to obtain a patent for invention, utility model
or industrial design, created in the course of works under a state contract for federal state
needs or needs of a Russian Federation entity, belongs to an Executor (contractor), unless
otherwise established by the state contract, that this right belongs to the Russian Federation or
33
  Patent Law of the Russian Federation of September 23, 1992, No. 3517-1 (in the wording of the Federal Law
of February 07, 2003, No.22-FZ), Law of the Russian Federation ―On legal protection of computer programmes
and data bases‖ of September 23, 1992, No. 3523-1 (in the wording of the Federal Law of 24.12.2002 No. 177-
FZ), Law of the Russian Federation ―On legal protection of integrated micro-circuits topologies‖ of September
23, 1992, No. 3526-1 (in the wording of the Federal law of 09.07.2002 No. 82-FZ).


                                                                                                          21
the Russian federation entity, on behalf of which the state customer acts (item 1, article 9.1 of
the Patent Law).

These provisions could not be fully implemented in practice because existing Decrees of the
President, Resolutions of the Government and bylaws of the Russian Federation imposed an
obligation upon the state customers of recording the rights to the results of S&T activity,
created in the course of implementation of state contracts, as well as for disposal of these
rights on behalf of the Russian Federation.

At a meeting of the Government of the Russian Federation in 2004, the Ministry of Education
and Science made a proposal for implementation of a mechanism of distribution of rights to
the results of S&T activity, created at the expense of federal budget resources, based on
recording these rights with the organisations-executors. This so-called ―democratic‖ approach
supposed recording the rights to S&T results that are required for performing state functions
associated with defence and security with the Russian Federation in the framework of state
contracts (agreements). In other cases, these rights according to an agreement of the state
customer and organisation-executor are recorded with the organisation-executor or jointly
with the Russian Federation and organisation-executor. According to the opinion of the
Ministry of Finance and a number of federal bodies of executive power, including the
Ministry of Property Relations this wording is rather disputable and requires verification,
especially in application to the state establishments and unitary enterprises. In spite of a
serious opposition, the Government supported the proposal of the Ministry of Education and
Science as a whole and resolved to take the Order of disposal of rights to the results of S&T
activity, created at the expense of federal budget resources proposed by it as a basis and to
prepare amendments and changes to the existing legislative and normative legal acts together
with interested federal bodies of executive power and the Russian Academy of Sciences. This
most complicated work was planned to be finished in early 2005. However, until now federal
bodies of the executive power have not found a consensus on the basic provisions of the
concept.

The situation is more aggravated by a necessity to introduce appropriate amendments both in
common and special legislation of the Russian Federation, in particular to the Civil Code, the
Law on Exports Control, the Law on Deliveries of Goods for State Needs, as well as laws in
the field of IPR.

Joint funding of R&D (i.e., funding provided by several different sources) is extremely
widespread in world practice. Russia is not an exception to it and such form of funding is
widely used for example in uniting budget means of several state customers; budget and
private funds, as well as budget funds of state customer and a foreign investor, budget funds
and grants, etc.

Indirect funding, that is funding at the account of various funds of government ministries and
departments, receiving money from sources of federal budget for targeted (according to goals
and tasks defined in the charter of these funds) funding of R&D is also widely used in the
Russian Federation.

In spite of the fact that the legal acts reviewed by us so far do not directly include provisions
related to combined and indirect funding, analysis of these documents together with other




                                                                                              22
national legislative acts34 gives ground to state that scope of their use can be applied to cases
of indirect budget and combined funding. Moreover, provisions of these acts should be taken
into account even in case when a research work is 100% funded from out-budget sources (for
example, private firms). Even in this case, it is very likely that in the course of performing
R&D, the PROs will use and then transfer to the private client some previous intellectual
property created by them at the account of state budget funds, which, except for some cases,35
according to the above legal acts is the property of the Russian Federation.

In the existing legal environment of the Russian Federation, state contract provisions play an
exclusively important role as they can provide certain clarity into relations arising between the
State Customer and the Contractor (public research organisation), including in respect to
issues of ownership and disposal of intellectual property and transfer of it to third persons.
Since at present there is no model form of a state contract, obligatory for all state customers,
each of them has a right within the scope of their power and applicable legal system to
determine rights and obligations of a contractor regarding subjects of intellectual property
obtained at the account of federal budget funds.

In practice every state customer sticks to his own approach in determining of relations with
contractors in terms of ownership and disposal of rights to subjects of intellectual property
and records them in a state contract. In most cases state contracts concluded by different
federal bodies of the executive power significantly differ. Given this circumstance, it looks
reasonable to draft a model contract (agreement) for performing R&D for federal state needs.


3.2 Market regulation: Competition and cooperation

World experience clearly shows that one of the critical tasks of the state is the creation of
conditions aimed at ensuring competitiveness of business entities.

Fundamental norms of the Russian legislation in this area are formulated in item 1 Article 8
and item 2 Article 34 of the Constitution of the RF state the following:

        ―In the Russian Federation a unanimity of economic environment, free transition of
         goods, services and financial means, support of competitiveness, freedom of economic
         activity are guaranteed‖ (item 1 Article 8);
        ―Economic activity aimed at monopolization and unfair competition is not admitted‖
         (item 2 Article 34).

These common norms are specified and explained in special legislation.36 According to the
opinion of a number of experts the following main types of legislation can be distinguished in
the Russian Federation.

34
   In particular, Articles 244-255, 257-258, 769-778 of the Civil Code of the RF.
35
   According to the Resolution of the Government ―On use of results of S&T activity‖ rights for results of S&T
activity previously obtained at the account of funds of the Republican budget of RSFSR, the part of the state
budget of the USSR and means of the federal budget should be recorded in favour of the Russian Federation,
provided: (a) rights to such results are not included into property being privatized in an established manner; (b)
these results are not being subjects of exclusive rights of legal or natural persons; and (c) that for these results no
applications were filed for obtaining exclusive rights in an established manner.
36
   V. Novikov, Journal ―Economic Theory of Crimes and Punishment‖, No. 6, 2003.


                                                                                                                   23
First, this is a classic anti-trust legislation, which regulates the activity of firms owning a large
share of the market. The aim of anti-trust legislation is to limit activity of such firms in favour
of consumers, suppliers and competitors of business entity. The main acts in this area in the
Russian Federation are the Laws ―On Competition and Restriction of Monopolistic Activity in
Commodity Markets‖ and ―On Protection of Competition in the Market of Financial
Services.‖37

Second, this is a natural monopoly legislation establishing monopoly rights in a number of
―infrastructure‖ sectors, as well as peculiarities of disposal of ownership in these sectors.
Natural monopoly legislation differs from other similar types of non-pricing regulation by
declared purpose – by increasing economic efficiency. The most important law in this area in
the Russian Federation is Law ―On Natural Monopolies.‖

Third is legislation on fair competition, which prohibits actions of companies contradicting
common business practices, requirements of honesty, rationality and fairness. Examples of
these actions can be dissemination of false information about competitors, use of somebody‘s
intellectual property or disclosure of commercial secret. The purpose of legislation on fair
competition is to prevent harm, which is caused or may be caused to competitors.

Forth is the legislation against monopoly rights prohibiting either limiting granting by the
state of exclusive rights to perform certain actions to some business entities.

A specific peculiarity of anti-monopoly legislation is that with the aim to develop
competition, the state implicitly protects small and medium-sized businesses of being pushed
out of the market by unfair practices of large corporations. In many countries, but not in
Russia, support to SMEs is often also explicitly stated in the anti-monopoly or competition
legislation.38 The Canadian law on competition, for example, states that, among other goals, it
is aimed at ―ensuring of SMEs‘ possessing equitable possibilities to act in the Canadian
economy.‖

The German anti-monopoly law provides for certain privileges to SMEs, allowing
associations of small and medium-sized entrepreneurship to introduce recommendations on
agreed behaviour, which would allow them to compete better with large business, while large
business are not allowed to produce similar recommendations.

Another example of how anti-monopoly legislation is connected with the interests of SMEs is
the adoption in the USA of another famous act – amendments to the Clayton Act within the
context of Robinson-Patman Act. One of the key stresses of the Act was a prohibition of
pricing discrimination (charging different customers with different prices), except in those
cases when this difference is explained by differences in expenditures. This Act was drafted
by the U.S. Wholesale Grocers' Association and reflected concerns of the owners of small
stores with increasing competition of stores chains, which get significant discounts owing to
big volumes of purchase.39

37
   Because both laws have common conceptual basis, we get an opportunity to review problems of both laws by
the example of one of them: FZ ―On Competition and Restriction of Monopolistic Activity in Commodity
Markets.‖
38
   V. Novikov ―Russian Anti-Monopoly Regulation and Tasks of Sectoral Policy: Positive and Normative
Analysis‖, Moscow, 2004.
39
   See Caves Richard, American Industry: Structure, Conduct, Performance.


                                                                                                        24
The world experience shows that in all industrially developed countries legislation in the
sphere of innovations can be conventionally divided into two blocks. One of them, relating to
legal protection of technologies, is represented in the form of a package of laws on IP granting
a ―monopoly‖ exclusive right to S&T result protected by a patent. Another block, regulating
technologies transfer and providing control for the execution of contract and other relations is
represented by laws on competition, usually aimed at restricting such contractual
arrangements, which restrict the freedom of trade.

Laws of the United States of America, the European Union and Japan on competition have
much in common conceptually. However, their application and procedural requirements are
considerably different, especially in respect of interpretation and control for their execution.
Commonality of the main principles of legislative acts of USA, EU 40 and Japan in the field of
technologies transfer, however, does not exclude substantial differences in mechanisms of
their implementation for each of the above countries (groups of countries). Thus, for example,
laws on competition applicable in these countries are based on broad powers granted by the
law. However, if in the United States interpretation and control for the execution of these
groups of laws are related almost exclusively to the jurisdiction of court bodies, in the
European Union and Japan, it is administrative Agencies that interpret and control the
execution of laws, with the court bodies preserving supervision functions. In addition to that,
in the United States the scope and application of laws on competition are determined by the
analysis of court rulings. There exists a very insignificant number of resolutions of the US
government in this field while in the European Union and Japan all interested agencies issue
regulations, which provide for some sort of surety in observation of the law.

Laws on competition of the United States, European Union and Japan are united by the
common topic of restricting agreements for technology transfer in respect of those, who by
definition should contribute to competition. Usually, if license restrictions fall within the
frameworks of IPR, they are considered as developing a competition. However, there are
somewhat different definitions of what is included in the scope of rights to IP in each
jurisdiction; different definitions reflect unique priorities of each jurisdiction.

In the legal system of the Russian Federation there are no laws on competition in scientific
and technological sphere and technologies transfer; there are no special regulations in this
field.

A basic legislative act of the Russian Federation in this field is the Law ―On competition and
Restriction of Monopolistic Activity in Commodity Markets‖. This law does not extend to
relations associated with the objects of exclusive rights, except for the cases, if agreements
related to their use are aimed at restriction of competition or if acquiring, use and violation of
exclusive rights to the IP objects can bring about unfair competition.

In accordance with article 10 of this Law unfair competition is not permitted, which includes:


40
   In the European Union the technologies transfer includes both the laws of separate members of the Union, and
several provisions of the Treaty of Rome. As a whole a guiding principle of this Treaty is overcoming internal
trade barriers between member states. A free flow of goods within the European Union is extremely important.
In respect to the external world import/export barriers are treated in an absolutely different way. A method of the
European Union for the control of its anti-trust laws execution is considerably different from the methods of the
USA or Japan.


                                                                                                               25
    dissemination of false, inaccurate or distorted data, capable of causing damage to other
     economic entity, or bringing damage to his business reputation;
    bringing consumers into confusion regarding a character, method and place of
     manufacturing, consumer properties, quality and quantity of goods or their
     manufacturers;
    incorrect comparison by an economic entity of goods produced or sold by it with goods
     of other economic entities;
    selling, exchange or other introduction into turnover of goods with illegal use of results
     of intellectual activity and means of legal person‘s individualization, individualization
     of products, execution of work and services equated to them;
    receipt, use, disclosure of information constituting a commercial, service secret and a
     secret protected by law.

Unfair competition related to acquisition and use of exclusive rights to the means of legal
person‘s individualization, individualization of products, execution of work and services, is
not permissible.

This present law, although it creates certain legal frameworks for putting an end to unfair
competition, does not provide for regulation of relations in the field of developing
competition in the sphere of innovations because of the lack of norms, reflecting specific
peculiarities of relations in the field of intellectual activity.

Essential is a circumstance that this Law is only extended to relations affecting competition in
the commodity markets in the Russian Federation, and cannot be extended to relations arising
between physical persons who are not registered as entrepreneurs, as well as to relations
between an employee and employer.

Legislation in the field of intellectual property, especially a patent one, also does not provide
sufficient influence upon the development of civilized relations in scientific and technological
sphere as it does not contain norms regulating competition relations in application to the use
of IP objects in innovation activity and leaves wide possibilities for unfair competition of an
employee with respect to an employer and investor.

At present, risk, which is inherent to innovation activity, is substantially much higher in the
Russian Federation because of unfair competition between an employee and employer.
Legislative uncertainty in these matters, an absence of the notion of a ―conflict of interests in
scientific and technological sphere‖ are even more aggravated by widely spread secondary
occupancy of research sphere employees in Russia, which is revealed in wide spread practice
of simultaneous work of an employee for an employer and his competitor in a scientific and
technological sphere, to the detriment of the interests of the employer.

The above drawbacks of the Russian legislation bring about an increase of risk of investments
into scientific and technological and innovation activity, reduction of activity and scale of
innovation processes in the country, modernization of industry.

Thus, an utmost need in activation of innovation activity of public organisations makes it
necessary, inclusively, improvement of legislation in the direction of all possible stimulation
of scientific and technological and innovation activity on the basis of corresponding
regulation of competition relations. This task becomes more acute in connection with a



                                                                                              26
considerable growth of patent activity in the world and, correspondingly, a need for the search
of a balance in stimulation of creators of new technologies and regulation of competition.

 Box 3.4: The patent system and the development of competition

 It is recognized for long that the main drawback of patents is in their negative influence upon
 dissemination and competition. As patents are an exclusive right, creating a temporary monopoly, a
 patentee can establish a market value which is above a competitive price and limit a total volume
 of sales. Such negative influence upon competition can be increased, while the patentees try to
 strengthen their position when conducting negotiations with other companies, trying to block an
 access of competitors to the key technology, or vice versa, trying to avoid blocking by their
 competitors (Shapiro, 2002). Such strategic patenting started to develop during the last 15 years,
 especially in industrial electronics (Hall and Ziedonis, 2001).

 Nevertheless patents can also make a positive influence upon competition when they stimulate an
 access to the market and formation of companies. There are examples when minor companies
 could withstand their rights before larger companies thanks to their patent portfolio; there are
 examples when patents turned out to be a decisive condition for entrepreneurs when receiving
 resources from venture capitalists (Gans, Hsu and Stern, 2002). Moreover, patents can stimulate
 dissemination of technologies. Patenting means disclosure of inventions which in the opposite case
 would be kept secret. Industrial research shows that unwillingness of the companies to patent their
 inventions arises, mainly, because of fear to disclose information to their competitors. This is
 confirmed by the polling by OECD/BIAC concerning the use and perception of patents by business
 community, when questionnaires were sent to the companies of OECD countries in 2003, in which
 respondents indicated to the use of patents by them as sources of information (Sheehan, Guellec
 and Martinez, 2003). Patents also make transactions in the sphere of technologies easier: they can
 be bought and sold as property titles, or, more often, they are subordinated to license agreements,
 allowing licensees to use patented inventions in exchange for the payment of fees and royalty
 (Arora, Fosfuri and Gambardella, 2001; Vonortas, 2003). And at last, strengthening of technologies
 dissemination is an aim put by the state for encouragement of universities to patent their
 inventions, with the aim of issuing licenses for them to enterprises, which will provide for their
 further development and commercialization (OECD, 2003b).

 Source: OECD. Turning Science into Business: Patenting and Licensing at Public Research
 Organizations. Paris: OECD, 2003



3.3. Use of standards and safety regulation

Russia has introduced substantial changes related to the use of standards and safety
regulations in recent years. A legal basis for this was a law ―On technical regulation‖ adopted
in the end of 2002.

This law determines rights and obligations of actors in the process of technical regulation and
regulates relations arising in the following two basic cases:

    (1) the development, adoption, application and use of obligatory requirements to the
        products, production processes, operation, storage, transportation, realisation and
        utilisation; and
    (2) the development, adoption, application and use on a voluntary basis of
        requirements to products, production processes, operation, storage, transportation,


                                                                                                  27
           realization and utilization, execution of work and rendering services, and evaluation
           of correspondence.

The Law on technical regulation reflects the latest world standards in the field of certification.
It is based on a new approach, based not on a strict and obligatory use of technical regulations
in respect of a considerable assortment of goods and services, but on a new global approach,
imposing guarantees of securing quality and safety of products supplied to the market upon
suppliers, preserving a requirement of obligatory certification of a rather narrow group of
goods and services.41

According to this Law technical regulations are adopted with the aim of:

        protection of life or health of citizens, property of physical or legal persons, state or
         municipal property;
        protection of the environment, life or health of animals and plants; and
        prevention of actions misleading consumers.

Requirements of technical regulations cannot serve as an obstacle to entrepreneurship activity
to a greater extent than is strictly necessary for execution of the purposes of the Law on
technical regulation.

Standardization is one of the most important means of organising economic relations and,
through legal enforcement, serving to ensure that products enter the market under conditions
most preferable to both manufacturers and consumers. It is obvious that the emergence of
international standards is most favourable to the free circulation of goods and international
trade. Given this circumstance, the Russian companies producing for international markets
undertake all the necessary efforts to demonstrate that their products meet the main technical
requirements of the international standards.

Taking into account the particular importance of the issues of technical regulation and
voluntary certification, the government of the Russian Federation has created a Government
Commission on technical regulation.42 The main tasks of the Commission are:

      securing coordinated actions of federal bodies of executive power in implementation of
       the state policy in the sphere of technical regulation;
      consideration of issues related to evaluation of the state and ways of improving
       technical regulation;
      coordination of the activity of federal executive power bodies in securing
       correspondence of technical regulation to the interests of the Russian economy, a level
       of material and technological basis development and a level of scientific and
       technological development, as well as to international norms and rules;
      consideration of issues of the state of affairs in the field of accounting cases of causing
       harm to life or health of citizens, property of physical or legal persons, state or
       municipal property, environment, life or health of animals and plants with the account
       of the gravity of this harm due to violations of requirements of technical regulations;
41
   Safety of products, production processes, operation, storage, transportation, realization and utilization – is a
state in which there is no impermissible risk, related to causing harm to life and health of citizens, property of
physical or legal persons, state or municipal property, environment, life or health of animals and plants.
42
   Resolution of the Government of the Russian Federation of March 1, 2005, No.97.



                                                                                                               28
   preparation of proposals for the issues of improvement of legislative and other
    normative legal acts in the field of technical regulation;
   securing coordinated actions of federal executive power bodies in preparation of
    concepts of technical regulations, programme of development of technical regulations
    and other documents on technical regulation;
   organization of preparation of analytical materials in the sphere of technical regulation.

The Russian Federation closely interacts with the World Trade Organization (WTO) in this
field. WTO determined the main principles of standardization and correspondence evaluation,
they are stated in an Agreement on Technical Barriers to Trade (TBT Agreement). Based on
this Agreement, WTO members undertake to regulate markets in such a way that the trade
barrier effects are minimal. The main tasks of international cooperation in the field of
standards and evaluation of correspondence are: (a) reduction of the number of technical
obstacles to trade; and (b) prevention of appearance of new obstacles.

A close cooperation with the EU also contributes to the shaping of a new approach in Russia
towards standardization and safety regulation. The most important principle of the new
approach is to limit the number of legislative levers by a minimum set of requirements. These
requirements have a public importance and are called ―basic requirements‖. Basic
requirements include all the requirements, which the European legislative body has
recognized as necessary for solving the Directive‘s task.

The following schematic classification of the basic requirements can be made:

      Requirements stipulated by certain dangers in the use of products (physical and
       mechanical resistance, inflammability, etc.);
      Requirements related to the product and its characteristics (for example, related to the
       selection of materials, drafting, designing);
      Requirements determining the main task of protection, for example, by listing its
       elements.

The main requirements should be used in accordance with dangers and/or risks, characteristic
for a particular product. These requirements determine desirable results or take potential
dangers into account, but they do not set and envisage the way these results and dangers
would be taken into consideration in products specifications. Thus, in order to determine if the
product corresponds to the basic requirements, manufacturers should conduct a risk and/or
dangers analysis. This analysis should be documented and included into technical
documentation.

As a whole, cooperation in the sphere of standardization and evaluation of correspondence is
carried out in three directions:

      Programmes of technical support in the field of certification, standardization,
       metrology and quality.
      Protocols of European agreement on evaluation of correspondence and industrial
       products attestation (PECA)
      Mutual recognition agreement (MRA)

At present the EU carries out programmes of technical support in many countries, including
Russia, in the fields of:


                                                                                             29
          Standardization,
          Certification,
          Metrology
          Guaranteeing quality

     Box 3.5: Evolution of quality control approaches

     Beginning: Inspection (purpose – quality of products and services)

     1930s: Emphasis on quality control. Shift from the quality of products to the quality of
     technological processes.

     1950s: Introduction of the notion of quality guarantee, with an accent on guaranteeing the quality
     of organization: correctly organized companies with a due strategy and tactics proved their
     capability to provide good goods and services to their clients.

     Present time: Total quality management (TQM) approach. Quality management passed from
     being a concern to a small number of specialists only, to an issue that touches upon every
     employee of an organization. This idea found its expression in the so-called ―European quality
     strategy‖, advocating an attitude towards quality as a tool, which can be used by the participants of
     economic activity and bodies of state power both for confirmation of correspondence in the context
     of EU legislation, and for successful activity in one market and for raising competitiveness of
     industrial enterprises.

     * TQM is an approach to organization management that focuses on quality throughout the whole
     system and not only subsystems, isolated by processes or functional subdivisions. Companies or
     organizations that have adopted a TQM strategy continuously seek to improve the quality of their
     activities and by doing so continuously raise the value of their products and services for buyers, for
     the company and its members, as well as for the society as a whole.



3.4. Elimination of redundant and ineffective regulation

It is commonly known that the entrepreneurial climate existing in a country significantly
influences the development of innovation processes. Illustrative in this context is the idea of
small entrepreneurship being a catalyst of innovative development. According to results of the
all-Russian survey of conditions and factors of development of small business in different
regions of Russia,43 the own financial position, permissible expenditures of resources for
interaction with government (even taking into account corruption costs), and support of small
business by government in Russia, are rated by the Russian entrepreneurs as considerably
lesser constraints than the insecure legal environment and the costs for relations with market
regulators, which can be seen as transaction costs.44



43
   Report on the results of all-Russian survey ―Conditions and factors of development of small entrepreneurship
in regions of the RF‖, All-Russian Public Organisation ―Opora Russia‖ and the All-Russian Centre for Study of
Public Opinion, Moscow, 2005.
44
   Transaction costs mean costs – financial, timeframe, labour, etc. – of small business for communication with
representatives of control authorities, for overcoming administrative barriers, solving problems with government,
and in general for communication with all subjects having relation to market regulation.


                                                                                                              30
A reduction of transaction costs for SMEs means an increase in the efficiency of business,
which, in addition to other positive points, creates new jobs, increases investments in fixed
capital and as a consequence increases the taxable base. The burden of transaction costs for
SMEs in Russia is evidently great, both by objective indicators and by subjective self-
apprehension of entrepreneurs. For example, on average, a Russian small enterprise is
inspected by various inspection bodies approximately seven times a year. In comparison, in
Sweden there is on average only one check once in two years. Thus, excessive administrative
regulation is one of the main problems of development of small entrepreneurship in general,
and of innovation-based SMEs in particular.

It should be taken into account that excessive administrative regulation causes serious
economic damage to enterprises (financial costs for checks and overcoming of their
consequences, withdrawal of staff‘s efforts to provide inspectors with necessary materials,
finally, time spent not on business, etc.), but is also an invitation for corruption. This factor is
most significant for small businesses, because they are more sensitive to the size of the
transaction costs compared to medium-sized and large businesses. The latter usually have
(and specially allocate) resources to ―work with the state‖, which small business cannot allow.

 Box 3.6: Business sector rating of the efficiency of the state – an international comparison

 The Institute for Management Development publishes annually the World Competitiveness
 Yearbook. In its 2005 edition, it presented a global survey on state efficiency from the perspective
 of the business sector. It defines state efficiency as follows: the degree of perception by companies
 of the state innovation policy, i.e. the framework conditions established by the government, which
 form the environment for their work and generation of innovation. The following criteria to assess
 ―state efficiency‖ were used:

         • State financing
         • Fiscal policy: what is the general taxation burden, taxation burden on companies,
         property taxes and indirect taxes, and the cost of one workplace;
         • Institutional conditions: to what degree efficient and transparent mechanisms of
         government management exists, and to what degree economic mechanisms stable in policy
         making;
         • Legislation in entrepreneurship area: to what degree incentives provided to business
         (national and foreign) are transparent and fair, and whether it is easy for business to
         develop;
         • Social conditions: to what degree equity in a society is developed and whether people feel
         safe themselves in a society.

 Based on these criteria, Russia ranked on 46th place out of the 58 countries surveyed. Hong Kong,
 Singapore, Finland, Estonia, and the Slovak Republic rank among the best performing countries.
 Only Slovenia, Greece, Poland, Brazil, and Italy rank lower than Russia.

 Source: Institute for Management Development (IMD). World Competitiveness Yearbook 2005.
 Lausanne, Switzerland: IMD, 2005.

Another problem, in most cases related to excessive administrative regulation, is bribery of
government officials. Excessive administration often gives rise to (with legitimate means)
insuperable obstacles for an entrepreneur, which he eventually overcomes with the help of
unlawful payments. Bribery, in the opinion of respondents of the IMD survey (see box 3.6), is
widely used in Russia.


                                                                                                     31
The above conclusions fully correspond to an assessment by the World Bank. According to
this assessment most Russian SMEs strive to become more active in terms of innovation
compared to large firms. Their share in R&D in overall innovation activity is bigger than of
the larger ones. However, the number of SMEs is still too low to produce tangible impact on
the total demand for S&T products. Moreover, entrepreneurial/innovation infrastructure –
taxes, capital and financial markets, administrative barriers – prevent the emergence of a
dynamic sector of small and medium-sized businesses. As a result, SMEs are still unable to
become a real engine of innovation activity, as is the case in most OECD countries.

Given the above, one may come to the conclusion that in the field of small entrepreneurship
there is excessive state regulation, which cost much to small business and the nation‘s
economy in general. The impact of it is the same as in the case of the inefficient court system:
loss of economic efficiency due to unproductive costs, which might be avoided under other
conditions. This also means the following: the social and economic impact from practical
steps on reduction of transaction costs of small business will be extremely tangible, and
within a short term.

Obviously, elimination of administrative barriers is a paramount point, but it is certainly not
the only obstacle on the way towards more innovative entrepreneurship in Russia. Based on
experiences in the rest of the world, innovation processes in Russia could be boosted
significantly by eliminating restrictions on the creation of new start-up companies by public
research organisations, simplifying procedures of their creation and liquidation, as well as
developing mechanisms of private-public partnership.


3.5. Key lessons for the Russian innovation policy

The Russian Federation has undoubtedly made considerable efforts to develop its national
innovation system, some of the most important components of which are the state policies on:
(a) matters of ownership, use and disposal of intellectual property; (b) developing competition
and restricting unfair competition; and (c) elimination of administrative barriers.

Study of innovation processes in the Russian Federation, in particular concerning the
involvement of intellectual property into economic turnover, has demonstrated that these
mechanisms of regulation and stimulation of innovation activity are less than optimal and that
there is a lack of legal, organisational and economic measures ensuring possibility of their
practical application in Russia.

Thus, some mechanisms to regulate and stimulate innovation activity, relating, for example,
to granting an employee considerable rights to the results of intellectual activity created in the
performance of his employment obligations, were borrowed from practices of other countries
without considering the appropriateness of their application to Russia. Other general
mechanisms for granting organisations greater rights to intellectual property created by them,
along with measures for putting an end to unfair competition in the scientific and
technological sphere, have not yet been implemented. This increases the technological lag of
Russian industry and to a great extent deprives the scientific and technological sphere of
further guides to potential development. This negatively affects the topicality of research for
industry and the possibilities for further commercialisation of R&D. The substantially lower
level of innovation in Russian enterprises, compared to analogous enterprises of the countries



                                                                                               32
of the European Union, the United States and Japan, is a serious obstacle for Russia for
international co-operation in the sphere of innovation.

This situation is even more aggravated by a lack of efficient national programmes aimed at
the support of existing and creation of new small innovative companies. Efforts undertaken by
federal bodies of executive power responsible for this field of activity are not the part of
systemic policy. They are of fragmental nature and are not supported by relevant resources.45

Further modification of the national innovation system is one of the most important tasks of
the Russian Federation. The achievement of this goal is impossible without the creation of an
effective system of financing, creation, protection and use of intellectual property, including
that created with the use of federal budget resources, aimed at activating the modernisation of
industry and the commercialisation of scientific and technological results. It also requires the
development of related measures for the implementation of this system.

The creation of this system will require Russia to eliminate uncertainty in matters of
ownership, use and disposal of intellectual property created with the use of federal budget
resources and to adopt the necessary legal, organisational and economic measures to
encourage the use of intellectual property for economic return. There is an evident need for a
clear determination of rights and obligations of all participants in legal relations in the field of
financing, creation, protection and use of the results of intellectual activity, including the
Russian Federation.

It is obvious that no matter how good the legislation and legal standards, the exercise of
intellectual property rights will not be effective if the state‘s system for controlling the
observation of rights granted by law is weak and there are no measures to enforce these rights.
For this reason, a special place should be given in the state policy to the improvement of
enforcement. Piracy in the field of audio and video products, computer programmes and
databases, which raises risks of international sanctions against Russia, has unfortunately put
the matters of protection of rights of owners of intellectual property into the background. At
the same time, this problem will become more acute unless adequate measures are adopted by
the state.




45
   This conclusion comes both from ―Main Policy Directions Regarding the Development of the Russian
Innovation System for the Period till 2010‖ adopted by the Government in August 2005 and proposals on the
development of innovation infrastructure presented in materials of the Council on Competitiveness and
Entrepreneurship.


                                                                                                      33
4. Financing of Innovation Activities in Russia

By Elena Lenchuk and German Vlaskin

This chapter looks at the financing of innovation in Russia. It starts off with an overview of
R&D investment trends and patterns in Russia and makes a comparison with Western
countries (section 4.1). One thing that stands out very clearly is the relative underinvestment
in own R&D by the business sector in the Russian Federation. This is being further illustrated
in section 4.2, which discusses the R&D and innovation activities by some selected Russian
corporations.

The second half of the chapter looks more at the instruments the Russian government is (or
could) be using to stimulate innovation in the business sector. Most specifically it discusses
tax facilities for R&D and start-up companies (section 4.3) and the availability of venture
capital for high-tech, start-up companies (section 4.4). The concluding section of this chapter
(section 4.5) will provide some suggestions of how the financing of innovation in Russia
could be improved.


4.1 R&D funding trends and patterns

According to the available statistical data, the funding of the Russian research system sharply
decreased after 1990 following the collapse of the economy due to the dismantling of the
centrally planned economy (figure 4.1). In 2003, the latest year for which data are available,
domestic R&D expenditures amounted to RR 169.9 billion (US$ 5.7 billion), which in real
terms was less than half the investment in 1990. Also in terms of R&D intensity (i.e., R&D
expenditures as a percentage of GDP) a sharp and dramatic decline took place from 2.03% in
1990 to 0.85% in 1995. Since then this ratio has recovered slowly to 1.28% in 2003. While in
1990 the R&D intensity ratio of the Russian Federation was comparable to that of the leading
OECD countries, now the Russian Federation is closer to countries that have a relatively low
R&D intensity like Hungary, Poland, Portugal, and Spain.


          2,5

           2

          1,5
                                                                                 ЕС
                                                                                 Россия
           1

          0,5

           0
                1990     1993    1995     1998     2000     2001    2002



Figure 4.1: Domestic R&D expenditures as a percentage of GDP in the European Union and
Russia, 1990-2002




                                                                                            34
Not only in relative terms, but also in absolute terms the level of R&D investment in the
Russian Federation is many times lower than in for example Germany, Japan, and the USA
(table 4.1). For example, R&D expenditure per capita in Russia is only one-tenth of the level
spent in the USA.

Table 4.1: Domestic R&D Expenditures in Russia and Some Advanced OECD Countries in
2003

Countries                    Total R&D expenditure            R&D expenditure as          R&D expenditure per
                                                                percentage of GDP                         capita
                     (billion international dollars)*                           (%)     (international dollars)*
Russia                                           16.8                          1.28                         98.6
USA                                            277.1                           2.67                        977.7
Germany                                          54.4                          2.50                        660.0
Japan                                          106.9                           3.12                        838.4
Sweden                                           10.2                          4.27                      1149.0
Source: OECD. Main Science and Technology Indicators. Paris: OECD, May 2005: р. 18-19.
* The exchange rate used in this international comparison is not the market exchange rate but a purchasing
power parity index. As a result, the Russian figures in dollars are several times higher than when the market
exchange rate would have been used.

At one point in time, the Russian Science Law stipulated that the civilian R&D budget should
be equivalent to at least 4% of the total federal budget. In recent years, however, the civilian
R&D budget reached at best 1.6-1.8% of the total federal budget, reflecting the relatively low
priority the government has been giving to R&D. There are, however, modest signs of
improvement – the civil R&D budget reached 1.9% of the total federal budget in 2005 and is
expected to improve its share even further in 2006. It is, however, still substantially lower
than the government R&D spending in advanced market economies, which is in the order of
4-5% of the government budget,

With limited incentives for the business sector to invest in R&D, state expenditures remain
the dominant funding source of funding for R&D in Russia (table 4.2). Its share even
increased during the past five years from 49.9% in 1999 up to 58.4% in 2003. The civil R&D
budget in 2003 was equivalent to RR 46.8 billion, representing 28% of total domestic R&D
expenditures. This suggests that the state budget for military R&D was slightly more than that
for civilian R&D in 2003.46

Public research organisations and to a lesser extent institutions of higher learning seem to
generate a significant amount of own income, which they are allowed to keep and use for
R&D activities. Such income can come from the sales of products and services or of renting
out office space, etc..

So-called ―non-budgeted Foundations‖ also constitute an important, but declining source of
income. These foundations operate outside the formal budget as they are funded by
―voluntary‖ taxes raised in specific industries and hence their label ―non-budgeted‖. The
instrument originates from the Soviet times when industry-specific R&D was funded on the
basis of a levy paid by all production units in that industry, proportional to their turnover. Of
these levies, 25% were allocated to the Russian Fund of Technology Development (RFTD),
which is supposed to fund research on inter-sectoral issues and on new technology areas. The

46
  This estimate is based on the difference between total government R&D expenditures and the civilian R&D
expenditures.


                                                                                                             35
other 75% of the collected levies were to finance R&D that is of relevance to that specific
industry, often at industry-owned research facilities. In 2002, some 90 of these ―non-budgeted
R&D Foundations‖ were registered of which 28 under government agencies and the rest
under industry associations, unions, and businesses. With the tax reform of 2002, however,
the system of specific levies was replaced by a system that allowed companies to choose to
pay a contribution (not exceeding 0.5% of their gross return) to the RFTD or a sector-specific
foundation of their choice and which they can deduct from their taxable profit. As a
consequence, the resources going to these non-budget foundation has contracted sharply (see
table 4.2) and brought many of the foundations on the brink of complete collapse. This is very
much affecting applied research in many industries at the moment.

Table 4.2: The Structure of Domestic R&D Expenditures by Funding Source, 1995-2003

Funding source                             1995           1997           1999            2001           2003
                                                                  (percentage)
Resources from the state budget            60.5            59.6           49.9           56.2            58.4

Resources from enterprises                 17.4            15.5           15.7           19.6            20.1

Resources from non-profit                   0.1             0.8           0.04             0.2            0.1
making organisations
Own resources of scientific                10.6            10.6            6.9           10.1             9.6
organisations
Resources from non-budgeted                 6.7             6.0            6.9             5.2            2.7
Foundations
Own resources of Institutions of            0.1             0.1            0.2             0.1            0.1
Higher Learning
Resources from foreign sources              4.6             7.4           16.9             8.6            9.0

Source: Science of Russia in 2004. Мoscow: ЦИСН, 2004: p. 75.

Foreign sources of income figure quite prominently among the resources available for R&D
in Russia. Particularly in 1999, the year directly after the financial crisis, the share of foreign
funding was exceptionally high.

The state resources are mostly spent to support state R&D centres and institutes, to form
various budget funds,47 and to finance (in the form of state contracts) R&D activities
conducted in the framework of long-term target programs. Only a small proportion of the state
R&D budget is channelled to the business sector in the form of state contracts and mainly to a
very narrow circle of companies working in areas of strategic interest to the State (e.g., in the
defence and space industries).

The share of the business sector in total R&D funding in Russia has improved somewhat from
15% in 1997 to 20% in 2003. Compared to the advanced Western countries, however, this is
still a rather low figure – the share of the business sector in R&D funding in the EU was in
2001 on average 56% and in the USA 68%. When it comes to the implementation of R&D,
the business sector shares in the EU and the USA are even higher (i.e., 65% and 74%
respectively).48 In Russia, it is just the reverse – the amount of R&D contracted out by the
business sector is believed to be larger than the public contracts and subsidies spilling in.

47
   Most importantly the Russian Fund for Basic Research, the Russian Fund for Humanities, and the Foundation
for Promoting Small High-tech Companies.
48
   OECD. Main Science and Technology Indicators. Paris: OECD, May 2005: р.26.


                                                                                                          36
Own resources are reported to be the main source of financing innovation activities in the
industry in Russia (86% in 2002 and 89% in 2003).49 The remainder is made up by small
contributions coming from various sources, including federal and local governments and
foreign sources. Commercial loans do not play a role of any significance in financing
innovation activities in Russia. This is in part due to the underdevelopment of the Russian
banking system. However, also in Western countries most banks tend to shy away from
financing such activities. They usually lack the expertise to assess the risks involved.50

What is characteristic for the OECD countries is that a relatively small group of large
corporations are good for a disproportionably large share of total business R&D activity. 51
The advantages of large corporations in the innovation sphere are quite obvious. These
corporations can afford large-scale expensive projects; they are able to conduct multipurpose
research uniting researchers and experts from various disciplines and to finance the parallel
development of several alternative innovations, whereby commercially success projects can
compensate for those that are a failure. The volumes and priorities of R&D in the corporate
sector are almost completely determined by the tasks of maintaining the competitiveness of its
products on domestic and international markets. For a number of industries, solving these
tasks requires concentrating enormous resources in the R&D sector.

To illustrate the argument: There are 25 multinational corporations based in Europe that each
spent more than € 1 billion on R&D in 2004. Total R&D expenditures by these 25
corporations amounted to € 62 billion.52 In comparison, the largest Russian corporations are
believed to spend in the order of € 50-80 million a year on R&D.53


4.2 Some recent R&D initiatives by major Russian corporations

After a long period of instability, large Russian companies are finally starting to pay more
attention to innovation and to strengthen their R&D capacity. As a result, the share of the
business sector in domestic R&D funding grew from 17.4% in 1995 to 20.1% in 2003.
Nevertheless, this is still very much insufficient in view of the business sector‘s possibilities
and tasks, and the weak competitiveness of its products.

It should be mentioned that of all Russian economic sectors, the situation is the most
favourable in the fuel and energy complex. Many of its companies and enterprises, having
completed the processes of privatization and consolidation, started optimizing their internal
organizational structure, including, among other things, the establishment of R&D
departments. As a result, the oil companies ranked highest in terms of innovation activity with
a score of 33%, against 9.8% for the industry as a whole in 2002.54 The chemical industry,


49
   Наука России в цифрах 2004. М., ЦИСН, 2004, с.165
50
   European Commission – Enterprise Directorate-General. Funding of New Technology-Based Firms by
Commercial Banks in Europe. Luxembourg: Office for Official Publications of the European Communities,
2000.
51
   Large corporations make up for 75% of R&D expenditures in the business sector in the EU and 65% in the
USA.
52
   European Commission. Monitoring Industrial Research: The 2004 Industrial R&D Investment Scoreboard.
Brussels: European Communities, 2005
53
   See: Ivanova, I., and J. Roseboom. A Functional Analysis of the Russian Innovation System: Roles and
Responsibilities of Key Stakeholders. Moscow: EU S&T Commercialisation Project, 2006 for details.
54
   МЭИМО, 2005, №7, с.42


                                                                                                            37
closely connected with oil and gas production, scored second with 26% of the companies
being active innovators.55

What united the oil and gas companies was the acknowledgement of the necessity to operate
their own R&D centres and their refusal to continue to support the sectoral research institutes
stemming from the Soviet era. As a result, these latter research institutes were privatized and
incorporated into the oil companies.

The past year also saw a number of substantial initiatives by the business sector to contract
out R&D to public research institutes and universities.

Joint-stock financial corporation Sistema and its member companies (Concern RTI-Systems,
Concern Research Centre, and Sistema-Telecom), for example, announced that it had signed
an agreement with the Bauman Moscow State Technical University and the RAS Institute of
Radio-engineering and Electronics. According to this agreement, the companies and the
higher education institutions involved will jointly develop the innovation infrastructure and
implement science-intensive projects, including the expertise of R&D findings meant to
identify commercially promising projects, and receiving patent protection for the R&D
findings being used.

The Siberian Branch of RAS and the Krasnoyarsk Mining and Chemical Plant signed a RR 25
million contract for 2005-2008. Six institutes of the Siberian Branch of RAS will take part in
R&D works in the interests of the plant.

The works on the contract between RAS and Norilsk Nickel continued. There is a plan to
establish, on the basis of the Joint Institute of Catalysis of the Siberian Branch of RAS, a
research centre Norilsk Palladium to implement a research program aimed at the creation and
industrial use of high-tech materials. At the next stage, Norilsk Nickel will play the role of a
venture capitalist and continue supporting successful projects on a long-term basis.

According to data collected by CRSC, the purchase of machines and equipment accounted for
49% of the Russian enterprises‘ expenditures on innovations in 2003. At the same time, only
18.3% of all the funds spent on innovations were used to buy new technologies (out of which
10.5% to buy patents and licenses).56 This indicates that private industrial companies show
basically no demand for technological innovations and play no crucial role in the selection
and industrial implementation of technologies, which process is the basis of the innovation
policy. There is practically no correlation, characteristic of a normal competitive environment,
between an increase in the sales of private companies and that of funds invested in R&D.

For the above reasons, the level of innovation activity is still low, though it tends to increase.
According to Goskomstat (the Federal State Statistic Service), in 2003 the percentage of
innovation active enterprises was 10.3% and the percentage of expenditures on technological
innovations only 3.7%. It is also reflected in Russia‘s dismal share (0.3-0.5%) in the
international trade of non-defence, knowledge-based products. The big players in these
markets are the USA (with a share of 36%), Japan (30%), Germany (17%) and China (6%).



55
   In recent years, several innovation studies have been published, but each using different parameters to measure
innovativeness. Hence the results from these different studies are not comparable.
56
   CRSC. Science in Russia. Moscow: CRSC, 2004.


                                                                                                               38
4.3 Tax incentives to promote innovation activities

In addition to direct subsidies, an important instrument the state can use to stimulate
innovation is the tax system. In general, three clusters of tax instruments to stimulate
innovation can be identified:

       tax exemptions for public and private-non-profit R&D organizations (VAT, property
        and land taxes, import taxes on scientific equipment, etc.);
       tax incentives to stimulate companies to invest more in R&D; and
       tax incentives for new start-up companies.

From a national perspective, the first type of tax exemption is not really much of a stimulus
for additional investment in R&D. If public or private-non-profit R&D organizations should
have to pay such taxes, then their income should be raised by the government (the recipient of
those taxes) with an equal amount. The only advantage of these tax exemptions is that the
overall cost structure of public research organizations can be kept somewhat lower. In Russia,
like in many other countries, public R&D institutions and universities are exempted from
value-added taxation (VAT). This applies to research funded by the government, but also to
contract research for third parties like businesses. Profit taxation does not apply to public
research organisations and universities either as they have no profit-making objective. Before
the tax reform of 2001/2002, public research organisations and universities enjoyed several
other tax exemptions, such as an exemption on property and land taxes.

The latter two types of tax instruments are of considerable more interest as they actually have
the potential to stimulate innovation. They are also the primary focus of discussion in the
OECD countries.57

Tax instruments to stimulate R&D investment in the business sector related to income or
profit taxes fall basically into two categories:

      1. Tax allowances: In this case firms investing in R&D are allowed to deduct more from
         their taxable income or profit than they actually spend on R&D (by multiplying those
         expenditures with a certain factor, say 1.1 or 1.3); and
      2. Tax credits: In this case firms investing in R&D are allowed to deduct a specified
         percentage of R&D expenditures from their payable income or profit tax.

There are two other distinctions between allowances and credits: (i) the value of a tax
allowance depends on the corporate income or profit tax rate, while a tax credit does not; and
(ii) unused tax allowances may be carried forward to offset future tax under normal carry-
forward-of-losses provisions, while the carry forward of unused tax credits requires the
creation of a special pool to track unused credits. Among OECD countries, there has been a
notable shift from R&D tax allowances towards R&D tax credits in recent years.

There are various further variations on these two instruments. One is to allow only the
increase in R&D expenditures over the previous year for tax relieve. This is, for example, the
case in France and the USA. The idea being that the instrument should only support the
additional R&D effort of a company and not the total R&D effort. Another variation, is to
single out only particular R&D costs for tax relieve. In the Netherlands, for example, only

57
     OECD. Tax Incentives for Research and Development: Trends and Issues. Paris: OECD, 2002.


                                                                                                39
R&D labour costs are given support. This is in an attempt to stop large multinationals to
transfer their research to countries with lower labour costs. Again another variation is to give
companies the tax credit in cash, irrespective of whether they make a profit or not (this is, for
example, the case in Canada).

A special case of tax allowances is the depreciation of capital goods used for R&D. Most
OECD countries allow companies to write off scientific equipment and machinery faster than
normal production equipment and machinery.

Before the tax reform of 2000-2002, some form of tax relief for R&D expenditures by
companies existed in Russia. However, it was highly complicated and required accreditation
by the Ministry of S&T. The tax reform eliminated this tax privilege and instead introduced
the following rules for deducting R&D expenditures from taxable income:


     1. Companies are allowed to write off R&D expenditures in three equal instalments over
        three years;58
     2. All R&D expenditures whether they relate to own in-house R&D, joint R&D with
        other parties, outsourced R&D (i.e., contract R&D), or contributions to non-budget
        R&D foundations can be charged; and
     3. A requirement is that the R&D has yielded positive results that are used by the
        company. If not, only 70% of the R&D expenditures can be deducted.59

The outcome of this new tax law was that, as of 2002, there was effectively no specific R&D
tax privilege under the profit taxation law of Russia. On the contrary, when the R&D is not
successful companies can only deduct 70% of the costs from their taxable income. This is
very much a disincentive to companies to invest in R&D. It also creates legal disputes on
when to consider an R&D investment as unsuccessful. Moreover, it induces companies not to
book R&D expenditures as such. In 2005, the government decided to loosen up these
restrictions somewhat and proposed the period over which R&D expenditures can be
deducted to be reduced to two years if successful and three years if not successful and for the
full 100%. These new rules (Tax code 06.06.2005 N 58-ФЗ) will come into force as of
January 2006.

However, a year earlier (i.e. 2004), the Russian government issued the following investment
tax credit rule, stating that:

             ―An organization can be granted an investment credit provided that it implements R&D
        works, modernizes its own production facilities or carries out promotional or innovation
        activities, including creation or modernization of the techniques in operation and invention of
        new types of materials. In this case the organization is allowed to reduce its tax payments
        within the agreed period of time and the agreed limits, paying out the credit and the accrued
        interest at regular intervals. Such credit can reach 30% of the cost of purchased equipment. If
        an organization carries out promotional and innovation activities, the size of the investment
        credit is determined by an agreement between the authorized agency and this organization.‖
        (Tax code: 29.07.2004 N 95-ФЗ)



58
   It is not clear why the government has opted for such a cumbersome rule – just deduct R&D costs in the year
that they are spent seems to be a lot easier.
59
   OECD. STI Outlook 2002 – Country Response to Policy Questionnaire: Russia. Paris, OECD, 2002.


                                                                                                             40
Our interpretation of this article is that an investment in new production or R&D equipment is
eligible for an investment tax credit up to 30% of the purchasing costs. However, the article
does not specify the exact percentage. Apparently this percentage is variable. For example, for
companies located in technoparks or in science cities this percentage can be higher than
normal.

The third type of tax instrument is to support new start-up companies. In this area there are
usually many different instruments, including direct and indirect subsidies as well as tax-
based ones. Examples of tax-based instruments to stimulate start-up companies in the OECD
countries are:

     1. A special tax deduction allowance or credit for start-up companies during the first few
        years or just a full-out tax exemption (i.e., tax holiday);
     2. Accelerated write-off of (high-tech) capital investments; and
     3. Exemption of capital gain taxes in case of lending to small companies.60

In Russia, start-up companies can make use of the following facilities:

     1. Their profits allocated for the construction, reconstruction and renovation of capital
        assets, as well as for the assimilation of new machines and technologies, are exempt
        from taxation.
     2. Leasing payments by small enterprises are exempted from VAT.
     3. A simplified taxation scheme is applied to start-up enterprises, which means that they
        are allowed to write off up to 50% of the initial value of capital assets with the
        operating time of more than three years as depreciation costs in the first year of the
        assets‘ life.
     4. Since the tax reform of 2002, small enterprises and independent entrepreneurs in the
        Russian Federation (with a turnover of less than RR 15 million) do not have to pay
        value-added taxes and only pay 6% profit tax instead of the normal 24%. This has
        made starting up a small business a lot more attractive, but it also created a major
        hurdle for small companies that wish to expand. Pass the RR 15 million threshold and
        you end up not only with paying a lot more taxes, but also with a lot more
        administration for the value-added taxes. Hence the instrument tends to stimulate
        companies to stay small rather than expand.61

Recently the law on technoparks (scientific and innovation centres on the basis of state R&D
institutes, meant to integrate science with small entrepreneurship) was passed. This law
stipulates considerable tax credits for small enterprises registered on the territory of the parks.
They will pay a profit tax at the rate of one fourth of the normal tax rate. The enterprises
involved in experimental production will benefit from single social tax reductions (this tax
rate for such enterprises is estimated at 14%).

To attract investment into businesses in the R&D sphere, similar privileges are also granted to
the enterprises working on the territory of science cities. The respective law of the Moscow
region, for example, exempts science cities in this region from up to 50% of profit tax due to

60
   In the Netherlands this is known as the ―Aunt Agatha‖ financing arrangement. This instrument intends to
stimulate private individuals to lend their money to small businesses. A similar construct is also being used to
stimulate investments into ―green‖ projects.
61
   Firestone, J.R. ―Small and midsize business in Russia, why institutional investors should care and what to look
for.‖ Russian Investment Review Vol. 4, No. 3 (Autumn 2005).


                                                                                                               41
the region in case the profit is obtained from selling research and/or R&D products. This
exemption is granted if the said products account for not less than 20% of the total sales
volume. The regional law also stipulates reduction of the property tax imposed on such
enterprises by the region. In addition, this law guarantees a 4% reduction of the profit tax paid
to the region by companies with not less than 50% of knowledge-based products in their total
output.


4.4 Venture capital investment in the sphere of innovation

Venture (or risk) capital: equity invested temporarily in the form of shares of a
company by a specialised firm in the hope of a return on investment that is both large
and speedy, on a par with the level of risk taken. Venture capital firms invest both in
start-ups and growing businesses.

The availability of risk or venture capital is increasingly seen as one of the crucial factors in
boosting economic growth. Particularly in high-tech industries, such as semiconductor
electronics, computer engineering, information technologies, and biotechnology, the
availability of venture capital has been a determining factor for start-up companies in
succeeding through their early phases of development. Being such a crucial factor to
economic success, making such venture capital available has turned into an industry in itself.
Over the past decade venture business has accumulated € 46 billion of long-term capital
worldwide. At present, the number of companies invested in exceeds 200 thousand. In the 20
countries of Western Europe there are 500 venture capital funds with a total annual
investment volume of € 14.5 billion.62.

In Russia, too, the development of venture financing is vital for the growth of its high-tech
industries. Attraction of venture capital into the Russian economy is essential to foster the
creation of a competitive technological basis in Russia, which is important for the country‘s
economic growth in general.

Though the history of venture capital provision in Russia started more than a decade ago, it is
still supported mostly by foreign venture capital funds. In addition, their investment in the
Russian high-tech sector is quite insignificant (it does not exceed 5% of the total volume of
direct investment).

The government‘s first effective effort to change this situation and to attract venture capital of
domestic investors into high-tech industries was the establishment of the Venture Capital
Innovation Fund (VCIF) in 2000. This fund is the first Russian ―fund of funds‖, meant to take
part in setting up venture investment institutions on the basis of Russian and foreign capital. It
gave impetus to the creation of the following domestic venture funds in Russia during 2003-
2004:

       1. In 2003, the Alfa-Group, a banking conglomerate, announced the establishment of a
          20-million-dollar venture fund, named ―The Russian Technologies.‖ It will focus on
          new start-ups in the sphere of biotechnology and new materials. The intention is to
          invest in 10-15 firms, about US$ 1-3 million each. The financing is to be increased in
          case the results are good.63

62
     http://www.russia-today.ru/2003/no_22/22_economics_2.htm
63
     Kommersant, 28 May 2003.


                                                                                               42
     2. In the same year the finance-investment company LEADING, together with
        Techsnabexport and VCIF (the Russian ―fund of funds‖), registered the Venture Fund
        ―Technological Capital.‖ Its initial working capital is US$ 11 million. Most of it is
        meant for companies in their seed, start-up and early stages and working in the sphere
        of high technologies (first of all, nanotechnologies, biotechnologies, and new
        materials).

     3. In August 2003, the Moscow-based holding company Optima created an investment
        fund with the expected volume of US$ 7.5 million and run by Sovelektro Ltd..The
        objective of the fund is to invest in small technology-oriented companies based in
        Moscow, Saint-Petersburg and Nizhni Novgorod.64

     4. In March 2004, the Aerospace Equipment Corporation, with the help of VCIF, formed
        ―The Innovation Venture Capital Fund of the Aerospace and Defence Industry‖. The
        fund has US$ 10 million of primary assets and invests mostly in small technological
        enterprises whose fields of activity correspond to those of the corporation‘s member
        enterprises. It is noteworthy that the Aerospace Equipment holding company has
        already succeeded in the sphere of corporate venture capital investment. One of its
        most successful investment projects is the PayCash company with US$ 20 million
        invested by the Corporation (at the moment, the company is preparing its IPO for
        NASDAQ).65

An important step meant to attract venture capital to Russia‘s innovation sector was the
organization of five all-Russian venture capital fairs. Dozens of companies, selected from a
large number of candidates, made presentations for investors and consulting organizations at
those fairs.

In general, Russia seems to gradually gain experience in venture investment, the sign of
which being an increase in the number of new venture capital funds, including domestic ones,
and in the volume of venture investment. However, these positive developments in the
Russian venture business are only relative. In spite of the efforts made by the government, the
total volume of the Russian venture capital market remains extremely low. According to
estimates, the share of domestic capital in the venture market is slightly more than 1%.
Presently, the venture capital pool available for Russian businesses is about US$ 40-60
million. This is only a fraction of the amount available in the USA.66

It is to be noted that venture capital funds invest not only in high-tech industries, because the
existing preferences are difficult to change. The distribution of investment among industries
shows that investors remain conservative as for their priorities. The major part of investment
is meant for the traditional sectors with clear market prospects. On the whole, it is the
classical scheme of direct investment distribution: investors tend to finance the sectors of the
―first cycle‖, that is, those closer to consumers.

It is noteworthy that in 2002-2004 Russia began to develop its own national model of venture
investment, which accumulates Russian capital. Its distinctive feature is the formation of
venture capital funds predominantly by large financial industrial groups, concerns and holding


64
   www.rvca.ru
65
   www.icsti.su
66
   Expert, No. 23 (23 June 2003): p. 49.


                                                                                              43
companies in the framework of large-scale companies. Yet the traditional model implies the
establishment of captive and semi-captive funds.

These funds basically focus on identifying, selecting and financing investment projects within
the main activities of large corporations. The financial assets for high-risk projects get
reserved and a structural unit within the company is established to run it. Later on this
particular unit will be responsible for the efficiency of the given company‘s venture
investments. The representatives of such companies involved in venture investment are
currently focusing on organizational, law and tax issues.

In this case, the system of risk financing deals with the new technology-based businesses (not
the corporate R&D). The advantage of such funds is the fact that the running companies can
rely on the whole resource basis of the financial industrial group during the raising of the
capital and forecasting the development of the companies invested in. This undoubtedly
creates sufficient competitive advantages for newly formed businesses. This model almost
fully eliminates the risk of market bankruptcy, because in addition to the controlling
functions, investors take over a significant part of risks.

There is no doubt that the developing model of venture investment using Russian capital
allows for a certain step towards growth of innovation activity. Nevertheless, this model
should not be overestimated. One of its greatest drawbacks is an extremely limited number of
technological companies able to get support from venture capital. It is so because in the
framework of the existing model only support for innovation projects within large financial
industrial groups, holding companies and corporations is provided. Moreover, since captive
funds are closed, the number of potential venture investors is considerably restricted. It is
impossible to attract pension funds, insurance companies, and business angels to venture
investment within the framework of this model.

Russian banks, like banks all over the world, show almost no interest in venture investment.
The cases of banks financing science-intensive projects are few. Besides, they deal not with
the fundamentally new types of products and promising technologies, but mostly with well-
proven traditional techniques – civil airplanes, river and sea crafts, and medical equipment.

Extending government guarantees to investments in venture capital projects could be of great
potential benefit to this sphere. These guarantees would enable banks to lower the risk profile
of these projects. Being able to write off losses made on venture capital projects, is another
way to stimulate banks to enter this section of the capital market.

The opportunities of other potential sources of venture capital, such as pension funds and
insurance companies, are also quite limited, the main reason for that being the imperfection of
the Russian legislation.

Another factor that hampers the development of the venture industry in Russia is the low birth
rate of new innovative enterprises. The number of new high-tech enterprises is not growing,
in spite of an increase in the number of technoparks and innovation and technology centres in
Russia. Russia counted only 22,700 small innovative companies, which accounted for only
2.5% of the total number of small enterprises in 2003.67 It is obvious that under these
circumstances the traditional venture capital funds face difficulties in finding actively growing

67
     Russian Research Institute of Economy, Politics and Law


                                                                                              44
small and medium-sized enterprises attractive for direct venture investment. Another serious
obstacle to venture investment growth in Russia is low liquidity of venture investments,
basically due to the underdeveloped stock market, which is a crucial instrument for the free
exit of venture funds from the companies they invested in.

Unfortunately, this problem has not been solved yet. At all stages of the development of
venture industry and direct investments, repeated efforts have been made to trade on the
Russian Stock Exchange for an Initial Public Offering (IPO), but only few of them were a
success. Nowadays, successful exits with the help of IPO are rare, with only solitary instances
of high-tech companies having accomplished such exits. For example, the first successful IPO
in Russia was that of the RosBusinessConsulting Holding Company. It was introduced on two
stock exchanges – RTS and MMVB – using the Mezzanine mechanism for venture
investment. The company managed to sell 16% of its ordinary shares for US$ 13 million.

On the whole, estimating the possibilities for using Russian capital as a source for venture
funds, we can assume that with the appropriate governmental support for the above-
mentioned financial institutes, its share in venture capital will certainly grow.

It is also worth mentioning that the role of the government at the start-up stage of venture
business development is of paramount importance. When the government directly participates
in the creation of venture capital funds, it reduces risks for private investors and gives impetus
to the attraction of the private capital to the venture industry. This form of the start-up stage
governmental support proved to be effective in almost all countries.

The prospects of the Russian economy‘s transition to the innovative way of development will
basically depend on several factors, including the government‘s scientific and technical policy
providing for a continuous growth of investment into fundamental and applied R&D in the
top-priority spheres, an increase in the research activity of the business sector, and the
strengthening of the institutions crucial for achieving this increase (banks, financial markets,
tax system, patent and insurance organizations, companies specializing in export promotion,
etc.).

Unless Russia creates the system able to effectively stimulate growth in the investment and
innovation activities, it is difficult to expect the successful realization of the new scientific
and technical policy in the country and its transition to the innovative pattern of growth. All
these issues require sufficiently more attention than they have at present, and to solve them,
much more effective actions are needed.


4.5 Conclusions and policy recommendations

R&D expenditures in Russia sharply declined during the 1990s and only recently have started
to recover again. In the mean time, the Russian economy has very much diversified its sources
of innovation and has become highly dependent on the import of technology and of high-tech
consumer goods. With the foreseen recovery of R&D funding in the near future, Russia hopes
that it once again can play a lead role in the development of new technologies and innovations
and in the high-tech industries of the future. It has to take place, however, in a different world
and in a different economic setting than during the 1970s or 1980s.




                                                                                               45
One of the most outstanding differences is that R&D investments throughout the world are
increasingly being controlled by large corporations and that they are leading innovation. This
has generally shifted the role of government from initiator and implementer of innovation to
that of supporter and facilitator. The Russian Federation is just at the beginning of this shift in
balance. Nevertheless, we noted already several examples of large Russian corporations that
have adopted a more active R&D strategy and are building up their own R&D capacity.

Advancing this particular shift as well as boosting the volume of R&D investment requires
that the Russian Federation stimulates R&D investment by companies. While most OECD
countries have a tax facility to stimulate business R&D, the Russian Federation has none at
the moment. It existed for a while during the 1990s, but was abolished in 2001/2002 because
the facility was overly complex, open to fraud and did not fit a more streamlined and
simplified tax system. Nevertheless, we think that a special tax facility for R&D expenditures
by businesses is warranted.

Based on experiences in Europe and North America, our suggestion would be to allow
companies to charge all their R&D costs in the current year and to introduce a tax credit that
also can be paid out when a company does not make a profit. 68 The advantage of such a credit
is that the subsidy provided can be calculated and predicted in advance and hence can have a
real impact on R&D investment decisions. Moreover, the facility is more likely to support
start-up companies and companies that are going through a difficult restructuring phase when
they are not making any profit. A further amendment could be to give small- and medium-
sized companies a higher tax credit than large companies.

In addition to several general tax measures for small start-up companies, there also some
specific tax facilities for companies that are part of ―technoparks‖ or ―science cities.” Overall,
the tax facilities in place to stimulate start-up companies look comparable with those in
Western countries. Apparently, there are other factors at play that keep the number of new
high-tech startup companies in Russia down.

One such factor is the underdevelopment of a venture capital market. This is a problem with
which also many European countries struggle. In that sense, one of the strongholds of the
American innovation system is a relatively well-functioning venture capital market. Private
venture capital providers do not only provide capital but usually also expertise and experience
– something that is often far more critical than just capital. This is exactly the weakness of
most public venture capital facilities – they lack real business expertise and experience.




68
     Both Canada and the UK have experience with cash credits.


                                                                                                46
5. Technology Transfer and Commercialization Practices
By Sergei Simaranov, Vladimir Zinov, Johannes Roseboom, and Govert Gijsbers

Technology transfer is a key element of any innovation system, the importance of which can
hardly be overestimated. Through the technology transfer process, knowledge and
technologies are converted into specific new products and services that contribute to
economic growth and to meeting social needs.

This chapter starts by addressing the changing nature of research results from being freely
available knowledge to IPR protected knowledge. Next it discusses the roles of the different
types of organizations in innovation and technology transfer. Then, following a brief
description of the technology transfer process, specific instruments and mechanisms are
discussed. Finally, conclusions are presented focusing on the relevance of the findings for the
Russian innovation system.


5.1 Shifting public research results from “for free” to “IPR protected”

Intellectual property rights (IPR) at par with international standards have been introduced in
the Russian Federation in recent years as part of the country‘s transition towards a market
economy as well as its aspiration to become a member of the WTO (see chapter 3). IPR
enforcement, however, is still rather problematic. IPR can be granted by the Federal Agency
for Intellectual Property, Patents and Trademarks (Rospatent) in the form of copyrights,
patents and trademarks.

Patent legislation grants private individuals, companies and other organizations IPR to
inventions that they made and that they have registered with Rospatent. Such IPR usually
exist of a temporarily monopoly (in the case of Russia 10-20 years depending on the type of
invention) of exploiting such invention. Therefore, patent legislation is foremost an important
instrument to promote private investment in R&D as it secures a right to its benefits.

The logic of public research organizations taking out IPR on inventions that are financed with
public money seems to be a contradiction to many people. Nevertheless, there is a worldwide
tendency in this direction since the introduction of the Bayh-Dole Act in the USA in 1980. To
understand the logic, we will have to briefly discuss this Act.

The key problems the Bayh-Dole Act tried to tackle were:

   (a) Lack of transparency and consistency regarding ownership of research results (the
       funding agency, the research organization, the researcher, or the public in general?);
   (b) The low number of patents generated by government-funded R&D; and
   (c) A low level of exploitation of those patents.

The latter two indicators were seen as a sign that government-funded R&D (a large part of it
being basic research) failed to have much of an economic impact in the USA. The Bayh-Dole
Act tried to solve this problem by arguing that:




                                                                                            47
     (a) Universities and public research organizations should own the IPR on the inventions
         stemming from publicly funded R&D;69
     (b) Universities and public research organizations should actively pursue taking out IPR
         whenever possible and economically sensible; and
     (c) Universities and public research organizations should actively market their IPR with
         interested US-based companies or use it as a base for new start-up companies.

The act was foremost intended to enhance the economic impact of government-funded R&D.
That it created an additional source of income for universities and public research
organizations was only a side effect. Moreover, a large part of that additional income is to be
spent on taking out patents and the commercialization of the IPR.70 The Act also did not
intend (as many seem to believe) to shift the balance between basic and applied research, and
there are few signs that it actually did.71 What matters most, however, is the positive
economic impact of the Bayh-Dole Act in bringing considerably more innovations to the
market per dollar invested in public R&D, creating more jobs and higher income.

The apparent success of the Bayh-Dole Act meant that the policy started to be copied and
introduced in Europe during the 1990s. Also in Russia the commercialization of research
results has become one of the new strategic directions of state research organizations and will,
once the necessary legislation has been adopted, allow them to receive extra revenues from
the transfer of IPR.

Some representatives of scientific circles, however, fear that an overly strong focus on
commercialization of research results will destroy a proper balance between the social and
economic objectives of government-financed research. In their opinion it might have a bad
influence on several factors connected with the use of research results ordered by the
government, including:

        the dissemination of research results for educational and scientific purposes;
        the capability of research organizations to focus their research on national priorities;
        the preservation of independent and objective research defending the public interest;
        the organization of state research structures and scientific programmes; and
        the conditions of competitiveness and cooperation both in academic organizations and
         in the private sector.

For example, integrity of the research is the first responsibility of a scientist and personal
financial interest is his second interest. Potential conflicts arise in attempt to personal
enrichment and because of unfair use of equipment, experience and information of state
scientific organizations.




69
   Nevertheless, the government has retained the right to take such ownership back under certain circumstances.
70
   Running patent-application offices and technology transfer and commercialization centres can be quite costly.
Apparently, only a few large American universities and public research organizations seem to make a real net
profit out of their IPR.
71
   The argument being that the search for IPR revenues would steer the research agenda in the applied direction.
However, the potential for generating IPR revenue seems to have exerted little influence over the choice of
research programmes and projects, because this is in the USA largely steered by the government funding
agencies and not by the implementing agencies.


                                                                                                              48
The protection of research materials by means of non-disclosure increases and this will slow
down the process of knowledge dissemination. Researchers will refuse to share information
and materials in order to protect their own financial interests.

Publications of the research results are usually postponed for over 6 months to have an
opportunity to apply for patenting. Business clients of research ask scientists to hold back
publications, till the time when they have applied for patenting. They often ask for the
research to be kept a secret for a long time due to commercial competition.

According to the facts there is a big difference in objectivity of the medicine research,
depending on whether the research group got support from the industry, or not. It increases
the concerns about the fact that financial profits compromise professional opinions of a
researcher and/or his independence in development, elaboration and report on the research.

At the same time wider and more intensive use of research results by the industry, that
finances science more actively than the government, is an obvious characteristic of the present
stage of the economic development. The partnership between research organizations and
industry at the stage of pre-commercialization becomes very important.

Such a partnership is based on a division of IPR between industry and a public research
organization. Clear rules and a strong legislative basis for the protection of IPR created by
public research organizations has become increasingly important for the industry for getting
the revenues from the investments in new products.

For the universities and state research organizations, IPR protection grants them royalty
income when companies want to use the patent. Moreover, because patents are to be recorded
publicly, the research that underpins the patent is available to other researchers. Such research
cannot be published, however, until the patenting process has been completed. This can take
sometimes a long time. However, this is still better than using secrecy as some business
companies may do for their own R&D.

There is considerable evidence that the transfer of IPR to scientific institutions does not
automatically lead to favourable revenues in the business sector or in the research institutes.
Still it is obvious that the licensing of patents facilitates the development and
commercialization of research results. It creates revenue flows to universities and public
organizations, new investments, new products, processes and services, employment and also
tax payments. A favourable part of the revenues from licensing is reinvested in education and
research activities of the institutes.

It is obligatory for scientific organizations to follow the rules and separate commercial
interests from scientific and educational duties in order to protect them from being distorted.
This is considered standard practice when scientists make contracts with the business sector.
However, it is less preferable when the public research organization or its bigger part is used
by only one private company. Public scientific organizations, while selling the results of their
research, at the same time are to guarantee to the society that they keep their scientific area
open and encourage publications and dissemination of knowledge. The following agreements
can solve such contradiction:

    transfer of the IPR in case of joint work:



                                                                                              49
    limits of contract confidentiality, within which research cannot be published or
     disclosed;
    to give the right of first analysis of new inventions to private companies; and
    research allowed by means of right (for example, right for inventions created while
     improving licensed technologies).

It is for research organizations to decide what they are to do with their opportunities, to set the
ways of research disclosure, how to pay rewards, to identify principles and procedures
connected with conflicts of interest, etc. According to foreign and national practice, the most
difficult is the initial phase, which includes identification of commercially important research
results, defining optimum form of their commercialization, as well as organizational,
legislative and informational support.

In each particular case the dominating idea is to observe the interests of researchers and
research institutions while interacting with commercialization partners. It is necessary to solve
most problems in the initial phase. Specialized departments of scientific organizations, which
will provide legislative, organizational and informational support of research results
commercialization, play a particular role.

However, of crucial importance to public research organizations and universities is that they
can assume IPR for research results that were financed by the state budget. Unfortunately in
the Russian Federation such provision has been in discussion for many years now (see chapter
3). For now the government has these rights for research results and in most cases it cannot
introduce them to the market.

Much debated in the Russian context is also the idea that researchers themselves should be
given the right to take out IPR on their own research, instead of the organization that employs
them or that has financed the research. The argument is that this would constitute the best
guarantee that the research will be exploited commercially. Others, however, argue that most
researchers lack the necessary commercial ―know-how‖ or financial resources to turn an
invention into a profitable enterprise. Moreover, there is the fundamental question of why a
researcher should benefit disproportionally when he or she is already receiving a salary. The
more common way in the USA and most European countries, nowadays, is to give researchers
a bonus (usually in the form of a small proportion of the royalty revenues) for patents
generated by them. IPR ownership, however, remains with the institute or the financing
agency.


5.2. Key actors in the commercialisation of science and technology
A number of key actors may be distinguished with regards to technology transfer in the
Russian innovation system.

5.2.1 Russian industry

The industrial sector is one of the major producers and users of innovations. Companies
innovate for two main reasons: The first and most important one is competition. A fear to lag
behind the competitors and a desire to outperform them is a key driver for innovation. The
second reason for companies to introduce innovations is adoption of stricter legislation in
ecological, energy saving sector as well as other standards set in national or international
markets.


                                                                                                50
At present some qualitative changes are taking place in many Russian industries. Until
recently many businesses were mainly engaged in non-productive activities such as property
redistribution and asset trading. Industrial companies were used to a model of selling there
products on the basis of production costs profit margin. In an unsatured market with unmet
demand this was an accepted way of doing business. In many cases the success of Russian
companies was built on cheap energy and the free utilization of former Soviet production
facilities that had been transferred to industry. Later, competition by foreign companies
started to cause problems. At present, the old production facilities can no longer compete, the
prices of oil and other raw materials are much higher, and markets have opened up to
international competition. In this situation increased production costs could no longer be
passed on to consumers. While some companies have been able to adjust to a more
competitive international regime, many have not been able to make the transition. Some of the
main problems faced by Russian industry are:

      a need to increase the quality of the manufacturing goods;
      a need to improve and develop production processes;
      a need to offer new, more advanced customer-oriented products; and
      a need to reduce the cost of the manufacturing products.

Many companies do not lack financial resources to achieve these objectives. The problem is
mainly a lack of knowledge of how to solve these problems. Two general strategies may be
used in a complementary manner to achieve the objectives: ―make‖ or ―buy‖. These are
elaborated in Box 5.1.

5.2.2 International industry

International companies can play two main roles in the research commercialisation process:
they may be users of Russian technology or providers of technology to Russian companies.

Companies in the USA, the EU and Japan usually work at the forefront of scientific and
technical progress and demand the most advanced technologies. At present it is very difficult
to find Russian technology that can be readily introduced in companies in advanced countries.
But at the same time such companies in advanced countries keep an interest in generic,
prospective Russian technologies to be further developed and adapted for use in their
production processes. These technologies, after acquisition from Russia, will need to be
further developed by R&D teams in the user company. This process requires effective
protection of respective IPR of the different parties involved. To achieve IPR protection it is
important for the Russian technology providers to develop at least a prototype or laboratory
model that can be protected. Two problems that Russian technology providers face in their
contacts with companies in developed economies are:

       Identifying and establishing relationships with companies that may be interested in
        using Russian technology; and
       Effective organisation and management of the R&D team work to achieve goals in an
        agreed-upon time.




                                                                                            51
     Box 5. 1 New Technology: Make or Buy?

     Just like any other product or service new technology can be obtained in one of two ways:
     companies may develop new technology themselves or they may buy it from another company that
     owns the intellectual property or from a research organisation (nationally or internationally) that
     may have it readily available or that can develop it. Whether to make or buy should be a decision
     based on considerations of capacity and cost. The two strategies are of a complementary nature.

     The Make Option. Development of new technologies in Russia is a complex process for a number
     of reasons. Firstly, there are differences in understanding of what is a technology. For a scientist
     new technology is the knowledge of how to make something. For the company technology is an
     opportunity to produce new goods. There is a gap between the two points of view. Secondly, the
     future of new products in the market remains unclear due to a researcher‘s orientation to scientific
     interests instead of that on market demand for new products. Russian companies address these
     problems usually in one of the following ways. First, they may establish or expand an R&D
     department. This is feasible for large companies. In-house R&D departments are usually good at
     solving existing problems and making incremental improvements. They tend to be less good at the
     development of entirely new products, which requires research inputs at the beginning of the
     technology development chain.

     The Buy Option. Technology may be obtained from national or international research institutes,
     universities and companies. Traditionally, most research work is done by research institutes and
     universities. Small innovative companies represent a new form of introducing R&D into the
     manufacturing and business sector. The small high-tech enterprise is often business oriented and
     has advanced technologies, sometimes at prototype level.
     Modern western equipment and technologies may also be obtained from international companies.
     Upgrading of production facilities to international standards is seen by many Russian companies as
     the cure for all their problems. This is however, not the case as upgrading is a necessary, but not a
     sufficient condition for competitiveness in increasingly competitive international markets.
     Installing certified equipment and mastering the modern standard technologies, Russian enterprises
     begin to compete with the western ones on the price and quality, which has never been one of
     Russia‘s strongest characteristics.



Traditionally, Russian industry transferred technology to developing country companies,
which did not require the most advanced technology, but where more interested in price.
These days, however, the market for knowledge and technology is becoming increasingly a
global one with developing countries aiming for the best available technologies as well.
Upgrading quality to be able to sell globally will be the only strategy for Russian industry to
transfer technology abroad.

The second role that advanced country companies may play in the Russian innovation system
is to provide new technology, described in Box 5.1 as the ―buy‖ option. Between 1994 and
1997 foreign direct investment (FDI) in Russia expanded rapidly, with FDI inflows peaking to
an amount US$ 5 billion in 1997 (see figure 1). During the financial crisis of 1998 and the
years immediately after, however, FDI inflows stagnated around US$ 3 billion and between
2000 and 2002 the FDI outflow exceeded the FDI inflow. After 2002, FDI inflows and
outflows increased sharply again. In 2004, the FDI inflow reached some US$ 11.7 billion,
while the FDI outflow was US$ 9.6 billion.72 For the first time since 1999, FDI inflow

72
     UNCTAD. World Investment Report 2005. New York and Geneva: UNCTAD, 2005.


                                                                                                        52
exceeded the FDI outflow. Investors have been drawn to Russia in search of three main
assets: natural resources, new markets and efficiency.73 Resource seeking investments
concentrate in the oil and gas sectors. Market seeking FDI focuses on food, beverages,
tobacco, and telecoms. The size of this type of investment is limited by the relatively low
purchasing power of Russian consumers in general. Most of it is concentrated in the main
urban area of Moscow. More recently, Russia has attracted more technology-based,
efficiency-type projects, mostly in the automobile industry (Volvo, General Motors‘s joint
venture with AvtoVAZ, and Renault.)




According to UNCTAD, Russia‘s greatest untapped potential lies in efficiency-seeking FDI.
With its technological capabilities and labour skills, Russia could become a major
international engineering hub. So far however, under exclusively local ownership, most of its
industries have failed to link up with technology and knowledge flows in the world economy.
Changing that situation will depend partly on the success of measures aimed at improving the
business environment, the stability of the economy, and the rule of law.

5.2.3. Consumers
Consumers are the end-users of innovative products. The Russian innovation system in the
past was not really oriented towards the needs of consumers. Rather it addressed the needs of
natural resource industries, heavy industry, and the defence sector. When the economy started
to open up in the 1990s, Russian consumer good companies rapidly lost market share to
brands produced by foreign companies. Figure 2 below shows that 60% of inward FDI stock
in Russia is now in three mainly consumer oriented sector: food, beverages, tobacco, services
and transport and communications.

Consumer-oriented innovations are still a very small market in Russia, but in recent years
innovative local companies are rapidly expanding both in producing innovative product and in
more sophisticated marketing of their products to different types of consumers (see Box 5.2).




73
     UNCTAD. Foreign Direct Investment in Russia: Is it taking off? New York and Geneva: UNCTAD, 2003.


                                                                                                         53
 Box 5.2: Russian producers of consumer goods and services need new creative energy in
 order to create unique products for the market and capture the hearts of customers.

 The Russian market for consumer innovations is still tiny, equal to a few hundredths of a percent of
 European markets. Putting out some new kind of straightforward chocolate bar along the lines of
 Twix every quarter — first with dark chocolate, then with ginger — was an impossible task for
 Russian companies until very recently. ―Creating a new product requires remarkable human and
 financial resources from the company. First of all, creative people capable of setting long-playing
 consumer trends are always rare. Secondly, even if you have ideas that could become the core of a
 trend, this still does not guarantee your company a monopoly, as creating a new product based on
 these ideas and the lengthy process of bringing it to market require four to five times more
 investment on the part of the company than goes into regular products,‖ argues Dmitry Smirnov,
 director of marketing at Wimm-Bill-Dann, the Russian leader in dairy products and juices.

 Product innovations have primarily taken place at major Russian companies such as Wimm-Bill-
 Dann, Russky Product and Nidan Foods, predominantly manufacturers of food products that felt
 the slowdown in their markets and increased competition before other companies. Some Russian
 companies have even started to outpace foreign companies in their creation of new products.
 ―Anyway, we know the tastes of Russian consumers better,‖ says Smirnov. ―A year ago, an
 imported product called Mazhitel did poorly on the Russian market, because Russians found the
 combination of milk and juice strange. But they are crazy about the combination of yoghurt and
 juice, and we used this to create our new product, Neo.‖ In 2004, all major Russian manufacturing
 companies announced that expanding their range of innovative products was their main market
 strategy.

 Source: Lina Kalyanina and Lilia Moskalenko (http://www.gateway2russia.com/st/art_215786.php)


5.2.4 Government

The Russian Government acts as customer of innovative products in order to fulfil its tasks of
ensuring the country‘s security and addressing social and other issues. The mechanism of the


                                                                                                   54
technology commercialisation is being realised through Government procurement, where
orders are placed with companies to deliver innovative products. Often the development of
such products involves the participation of academic or specialized institutions and other IP
owners in the beginning of the R&D process and of manufacturers towards the end of the
technology development process. If the product to be developed is complex, it is important to
involve companies from the beginning to obtain their inputs into the process at an early stage,
so that costly mistakes can be avoided.

With the Russian economy becoming more open, the role of Government procurement as a
source of innovation is likely to become smaller, though in areas such as defence and
aerospace it may continue to play an important role.

5.2.5 Universities and public research organisations

In most European countries, universities and university-based research institutes traditionally
conduct fundamental research, while PROs focus more on the applied end of the research
spectrum, i.e. converting fundamental knowledge from the universities into prototypes and
processes that may be used by industry. However, in many European countries this traditional
division of labour between universities and PROs is disappearing as universities are becoming
more entrepreneurial and market-oriented (e.g., by setting up their own spin-off companies to
commercialize research results), while PROs and high-tech companies increasingly undertake
longer-term strategic research.

In Russia, however, fundamental research has traditionally been the exclusive domain of the
Russian Academy of Sciences (RAS) and two sectoral academies: the Russian Academy of
Agricultural Sciences and the Russian Academy of Medical Sciences. Universities in Russia
have, until recently, played only a minor role in research – being it fundamental or applied.
Translating fundamental knowledge into prototypes and processes was during Soviet times
the responsibility of an extensive network of branch research organizations and design
bureaux. Much of this capacity, however, has disappeared after the dismantling of the
centrally planned economy. This has left a large void, which the RAS has partially tried to fill.
Hence, the actual research portfolio of the RAS is far beyond its official mandate to conduct
fundamental research. While the government seems to insist that the RAS privatizes or spins
off all its applied research activities and focuses on fundamental research only, the other
option is to officially open up the mandate of the RAS and let it reposition itself in the R&D
market. The latter would be more in line with experiences in Europe and elsewhere, where
the strict organizational division between applied and fundamental research organizations is
disappearing. The flip-side of opening up the RAS mandate is that at the same time it should
give up its monopoly on fundamental research in Russia. Other research organizations should
be allowed to compete for fundamental research resources. Such an element of competition
should help to boost the quality and efficiency of research in Russia.

Another major difficulty regarding applied research is that the mechanisms to collect
business-sector contributions are in major disarray. Non-budget funding sources have
declined sharply in recent years (see chapter 4). It is necessary to reverse this development.




                                                                                              55
5.3. The technology transfer and commercialisation process


Traditionally, the Russian innovation system followed the Soviet classical innovation
approach which may be characterised as a technology push model and went through the
following phases in a sequential manner: R&D, pilot production, industrial production, and
marketing.
Due to the risks and the complex nature of this process the majority of attempts did not reach
the marketing stage. This model works only if there is a guaranteed demand for the product, a
situation that only occurs in highly regulated markets or when the government is the
purchaser. In an open market economy, however, the innovation development chain is more
complex. It does not normally start with R&D, but with an assessment of business
opportunities. This demand pull model includes a number of stages from idea to the
marketable products: Business opportunities screening, preliminary evaluation of the market
(Pre-marketing), preliminary technical evaluation, marketing research, business / financial
analysis, product development, design and technological documentation (only at this stage the
R&D works start), internal product testing, market testing, pilot production, pre- production
stage business analysis, starting of production, market entry.

The technology push model has several disadvantages. First, it requires a broad investment in
a large number of potential innovation processes, only a few of which are likely to make it to
the market; this will be a very expensive approach. Therefore, innovation should be much
more closely linked to demand in the market place. Second, technology push focuses attention
on the early research stages of the innovation activity with the risk that the research work
becomes an objective in itself. Third, the technology process essentially starts from zero and
ignores lessons learned elsewhere.

In Russia the technology push model to research commercialisation can be seen at work in the
Technology Transfer Centres at institutes and universities. One of the basic tasks of the
Technology Transfer Centres consists of "project packaging", i.e. turning research into
business projects using international standards. But the Technology Transfer Centres
marketed badly packaged as well as well packaged technologies. These only occasionally
found a potential buyer. For successful commercialisation there is a need to base the
technology transfer process much more strongly on market demand.

Not only in Russia, but worldwide innovation systems are experimenting with how to
organize the innovation process and how to integrate the possibilities of new technology with
demand in the market. The general consensus that emerges is that:

      Innovation can originate in any part of the value chain;
      It is therefore difficult to plan innovation;
      Innovation needs considerable freedom and interaction by many partners; and
      There is a need to move to much more open types of innovation systems.

The following section addresses the two main and complementary ways to improve the
transfer of technology and speeding up the innovation process. The first involves setting up
new organisations (or ―organisational arrangements‖ such as network and partnerships) to
bring together existing organisations for the purpose of technology transfer. The second
involves the creation of effective instruments and mechanisms that govern and support the


                                                                                           56
interaction between innovation organisations. These include, for example intellectual property
licensing arrangements, the use of contracts and others. In practice the two approaches often
go together: in order to license technology in an effective manner many universities and
research institutes have established technology licensing offices or technology transfer
offices.


5.4 Organisations and instruments for technology transfer

Internationally, a number of approaches have been used to speed up the transfer of
technology, including collaborative R&D, joint research facilities, knowledge centres and
spin-off and start-up companies. There are also a number of instruments that can be used in
technology management and transfer to establish effective working relations between
innovation partners.

5.4.1. Joint research facilities

The establishment of joint research facilities is an important tool to transfer technology which
often involves research institutes, companies and government agencies. To commercialise a
technology developed at a research institute it is often critical that its further development
take place outside the research centre as well as outside the company. Joint research facilities
could be real physical structures, or may be virtual centres.

An example of establishing joint research facilities is the collaborative work on shared labs
between the TNO (The Netherlands Applied Research Organisation) and the Russian
Academy of Sciences (RAS). The creation of Shared Labs means formalization on a more
permanent basis of an already existing cooperation between TNO and R&D institutes in
Russia, with the ultimate goal to commercialize the results of joint R&D activities. Joint R&D
is based on a cooperation plan, which includes agreed projects under implementation or in
preparation. A stepwise approach was taken, focusing initially on a few promising projects
and technologies (e.g. separation technologies and safer energetics). Joint patents have
already been filed in some cases, and the establishment of spinout companies is under
consideration to commercialize these patents. Non-commercial foundations will be
established to govern the shared labs with TNO and the relevant Russian partners as founders.
There will be a consortium agreement and the legal entities will be registered in the
Netherlands. Partners from Academia and Industry will be involved, and funding
organizations will participate in the Advisory Board.

One of the lessons learned from earlier collaborative research is that a step-wise approach is
needed because it is difficult to get all the details right in advance planning. Both
organizations have already ample experience in cooperation with each other, also on the
personal level (10 year history) before formalization was planned. Another lesson is that an
important success factor is a strong focus on results that can be commercialized in the market.
Finally, complementarity is important, which in the case of the shared labs means a strong
Russia scientific base, which is complementary to TNO‘s knowledge position, as well as an
important TNO position in the relevant markets.

Another approach to establishing joint research facilities is to concentrate a critical mass of
talent from the science and commercial field in close proximity. Science parks may include a
variety of different technologies while some clusters focus on a specific field. Good examples


                                                                                             57
are the Medicon Valley cluster in the Øresund Region (Copenhagen, Denmark and Malmö,
Sweden) which includes seven science parks and which focuses on world class R&D
activities in the life sciences. Medicon Valley involves hospitals, universities, public research
institutions, industry and investors. A formal network - Medicon Valley Academy - for these
players in Medicon Valley facilitates interaction between many different kinds of life science
related companies. This interaction ensures a dynamic environment of innovation and
knowledge sharing and the constant formation of spin-offs.

To speed up the generation and dissemination of new technologies and to promote the idea of
―open innovation‖, the Philips Electronic Company of Eindhoven, the Netherlands recently
converted the Philips Research Laboratories of which it was the sole user to a High Tech
Campus, where it not only invited its collaborators, but also its competitors (such as IBM) to
establish research facilities. So far more than 35 companies and research organisations have
established themselves at the campus.

5.4.2 Knowledge Centres

Knowledge Centres are virtual organisations designed to bring together expertise from a
number of disciplines and organisations to develop or commercialise new technology. An
example of such an organizational arrangement, in this case a partnership, is the Integrated
System Approach Petroleum Production (ISAPP), where a number of institutes Shell
Petroleum, Technical University of Delft and TNO together invest in joint research in
upstream oil and gas production technology. The programme aims to increase hydrocarbon
recovery through the application of innovative reservoir development and management
technologies (―smart wells‖). Together, the three partners have the critical mass, background,
technology position, infrastructure and ambition to become a main contributor in the
development of the required integration technology. However, cooperation with Shell and its
industrial partners is essential to this development work. Cooperation in ISAPP aims to ensure
a joint approach capable of advancing the required technology, skills and work processes
from infancy to maturation at oil company's operating units. Key elements in the cooperation
are:

      Focus through orientation on demand
      Long-term cooperation (> 5 years)
      Joint program management = direct connections
      Critical mass
      Development of concrete applications
      Exploitation of IP
      Expansion with other industrial partners

Considerable attention has been given to the preparation of the necessary memoranda of
understanding (MoUs) including the proposal document, the terms of cooperation
(governance), the financial support by parties, non-disclosure agreements, publication rights,
IP-rights, duration and legal aspects.

Funding is shared between TNO (45%), TUD (25%), Shell (20%) and others (10%). In ISAPP
all IP rights are with TNO, with Shell having exclusive use rights on new technology for five
years for proprietary technology. IP on other technology may be exploited outside ISAPP.




                                                                                              58
5.4.3 Spin-offs and techno starters

Spin-off companies have become an important tool in research commercialization. The
underlying rationale is that the environment and incentives at universities and research
institutes are not appropriate or conducive to product innovation in the market. Many
universities and Research and Technology Organisations (RTOs) have policies to
commercialize ‗mature technologies‘ that have gone beyond the research stage in the form of
new companies. The spin-off companies, in the literature also referred to as New Technology
Based Firms (NTBF), are often supported by the mother organization in a variety of ways
including the IPR to the technology developed, office and production space, investment
capital, research support, etc.

According to Clarysse et al.74 the number of NBTFs in Europe is growing faster than that of
other start-up companies. Also their chances of survival and their growth rates in terms of
employment and turnover are higher than that of non-high-technology firms. The potential of
NTBFs has also attracted the interest of governments, especially in Europe. NTBFs are
considered as an important actor in solving the innovation paradox,75 as they combine science
and business by commercialising high tech knowledge in new firms. In 2000, the European
Commission stimulated European Member States to do more to improve the environment for
the creation and rapid development of NTBFs.76 Reviews of the set of commercialisation
instruments present in Europe show that most European Member States have several equity
finance support schemes, such as public investment in venture capital funds, public guarantee
schemes, and public seed financing. Most countries also have policy instruments installed to
support university spin-offs as well as to provide business support services, such as
facilitating consulting experts and provision of special physical facilities.

In Russia small innovative companies have been created, as a rule, upon the researchers and
developers initiative. They make a decision to start a business, to see a new technology being
implemented or to begin their independent scientific career. Small innovative companies
occupy an intermediate niche between science and industry. In case of success a small
enterprise may grow as an independent company, or it may be bought by a large company.

In Russia many small innovative businesses were established in the economic transition
period in the mid 1990s. This was a time when traditional markets and business models went
into decline and new opportunities presented themselves. Many researchers, out of necessity
or to explore new opportunities put money into a small research-based company.

As a rule, the peak of small innovative business development takes place in a transition period
of the economic development: new markets come into life, and the enterprising people start
new small companies to compete with others and to take advantages of the arising
opportunities. Or the other side, the traditional markets are being decreased, and the most
vigorous people do not want to fall into depression together with the rest ones. A company


74
   Clarysse, B., J.J. Degroof, and A. Heirman (2000) Analysis of the Typical Growth Path of Technology-Based
Companies in Life Sciences and Information Technology, and the role of different sources of innovation
financing, EIMS study as part of the Innovation Programme commissioned by the European Commission,
Enterprise Directorate General, Luxembourg: Office for Official Publications of the European Communities
75
   The term innovation paradox is used to describe the fact that although research may be of high quality, this
knowledge generated is not sufficiently commercialised.
76
   European Commission (2000) Communication from the Commission to the Council and the European
Parliament: Innovation in a knowledge-driven environment, COM(2000) 567 final


                                                                                                              59
was usually headed by a leading scientist, under whose guidance the scientific results were
planned to be introduced in this start-up company.

In Russia creating high tech start-ups has been an uphill battle in most cases. Most technology
for commercialisation rests with public sector research organisations (PROs). A key issue is
that property right of PROs are not very well established, making it very difficult for them to
transfer ownership of a technology to a private entity, such as a spin-off company. The result
is that many established spin-off companies are dormant, while venture capital funds
supported by the State and by international donors such as EBRD are not very effective in
creating new companies. A more detailed discussion of this issue can be found in chapter 6.

5.4.4 Collaborative research projects

Research increasingly involves more than one organization, and a comprehensive approach to
collaborative R&D will involve the three processes of technology acquisition, technology
development, and technology transfer. Collaborative R&D projects can offer many benefits
including the possibility to: (a) undertake large research projects that an individual
organization may not be able to undertake and finance alone (economies scale); (b) undertake
research projects that are too complex for a single organization and require the combined
expertise of different partners (economies of scope): and (c) spread the risk that is inherent in
R&D activities.

While collaborative R&D holds considerable promise, there are probably more examples of
failure than of success. The main reason is that successful cooperation requires much attention
to detail, including partner expectations, partnership objectives, strategies, responsibilities,
sharing of costs and benefits, ownerships and IPR. Also, collaborative R&D is often focused
too much on the research end of the innovation spectrum. But when executed well,
collaborative research can be an effective way of generating, adapting, and disseminating new
technology. Collaborative research can be undertaken on a project-by-project basis or may be
part of a more systematic cooperation arrangement. In the USA, for example, publicly funded
collaborative research is often governed through Cooperative Research and Development
Agreements (CRADAs) that enable the public research lab to collaborate with industry,
academia and the non-profit sector.

5.4.5 Memoranda of understanding and research contracts

A Memorandum of Understanding (MOU), sometimes also referred to as a Letter of Intent, is
usually an informal, non-legally binding agreement that establishes the ground rules for
collaboration between partners. It is often used as a first step to reach more comprehensive
agreements for the transfer of technology or for doing contract research. As such it describes
the intentions of the participants to the MOU and provides rules for their behaviour during the
period of negotiations that lead up to the signing of an agreement or a contract. Sometimes an
MOU does including binding agreements, e.g. agreeing not to talk to other potential partners
while present negotiations are going on.

An important mechanism to transfer knowledge and technology is through the provision of
contract research services for clients. These may be public or private sector clients and may
involve long-term or short-term contracts. Many Contract Research Organisations (CROs)
focus exclusively on performing this kind of research.



                                                                                              60
The research contract is a legally binding document and governs the interaction between the
research organizations, companies and others involved in the R&D process. Many
organizations have standard formats for use in contract research projects. These work well in
‗standard‘ situations, but large and complex projects will often require tailor-made contracts.

5.4.6 Licensing of intellectual property

The protection and licensing of intellectual property is a key element of the management and
transfer of technology. Research organisations have to develop a strategy for the management
of their intellectual property and put in place the appropriate documentation such as non-
disclosure agreements for collaborative research projects.

Intellectual property covers patents, copyrights, trade marks, utility models, designs and other
similar statutory rights. Where the research leading to the patent was financed by the research
institute itself, the intellectual property usually rests with the organization, with the researcher
receiving a royalty. A more complicated situation occurs when the research is fully or
partially funded by the Government or a private sector client.

When the client pays the full cost of the project, the intellectual property rights of specific
information and the results obtained by the research organisation in the frame of the R&D
contract are normally attributed to the client. In such a case the research organisation should
obtain a non-exclusive free license for its own use.

When the client does not pay the full cost of the project (e.g., jointly funded project), the
intellectual property rights of specific information and results as well as rights to inventions
should be decided upon in the contract or in an additional agreement reached before finishing
the project. In such a case, the client is normally awarded a non-exclusive license to use the
results within his own sector of activity. A research organization may want to safeguard its
core technologies so that they do not become the property of the client. In such cases, special
clauses should be incorporated into the contract so that no misunderstanding between the
client and the research organisation arises.

To handle complex situations that may arise in dealing with intellectual property, many
universities and research institutes have established Technology Licensing Offices or
Technology Transfer Offices. These offices ensure that all aspects of IP licensing are
managed adequately in order to protect IPR, increase revenue and contribute to innovation –
see for example the mission statement of the Technology Licensing Office of the
Massachusetts Institute of Technology in Box 5.3. The introduction of the Bayh-Dole Act in
the USA has been the most important factor behind the establishment of technology licensing
offices at American universities and PROs (see chapter 3).

5.4.7 Associations

Technology transfer faces special problems when it deals with small companies. On the one
hand, it is difficult for research organisations to address the innovation needs of a very large
number of small and medium sized enterprises (SME‘s). On the other hand, small high-tech
companies or institutions face difficulties in marketing their technology to large industrial
companies because of problems of communications, unfamiliarity, or lack of trust.




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Box 5.3: Mission Statement M.I.T. Technology Licensing Office

The mission of the Massachusetts Institute of Technology (M.I.T.) Technology Licensing Office is
to benefit the public by moving results of M.I.T. research into societal use via technology
licensing, through a process which is: (a) consistent with academic principles; (b) demonstrates a
concern for the welfare of students and faculty; and (c) conforms to the highest ethical standards.

This process will benefit the public by creating new products and promoting economic
development.
In addition, it will help M.I.T. to:

      show tangible benefits of taxpayers' support for fundamental research
      attract faculty and students;
      generate industrial support of research
      generate discretionary income
      generate new job opportunities for graduates

We will continue to be a world class model of excellence in university technology licensing.


It will therefore be useful to create Associations which would represent the interests of many
small innovative businesses and institutes either as users of new technology or as high-tech
providers of technology. Associations or Branch Centres have a number of advantages. They
provide an adequate partner representing the interests of a number of small companies in a
sector. Associations will have better understanding of market needs compared to that of
institutes and small companies. By developing and selling innovations to the customers, the
Branch Centres could integrate all infrastructure elements into a unified, strongly market
oriented system. Finally they may help address issues of IP protection.

5.4.8 Other measures

Some other instruments used to facilitate the transfer of technology include:

   Personnel exchange: Personnel exchange is an important mechanism in the technology
    transfer process. It can take many different forms such as joint appointments,
    outpostings, visiting scientists, etc. Agreements will be needed to ensure that costs and
    benefits are properly arranged.
   User facilities agreements: These agreements allow companies or universities access to
    the research facilities of the institute, specifying the terms and conditions of such use.
    This is especially important if the institute has some unique research infrastructure that
    other parties (industry or universities) may need to use.
   Seed money: Small research funding of innovative research and technology transfer
    activities with other organizations can help to explore promising ideas. It is important
    for a research organization to have a fund to support these kinds of activities in a
    flexible manner.
   Information dissemination: In addition to generating technology outputs, publicly
    funded research institutes need to provide different types of information to clients,
    financiers and the general public. This includes scientific information, administrative
    information, program and project performance information and information for the
    general public. A large number of information channels and mechanism are available:


                                                                                                      62
     research reports, scientific journals, annual reports, brochures, newsletters, conferences,
     trade fairs, the internet, etc. It is important for research organisations to develop a
     systematic approach to the management of different types of information.


5.5. Key lessons for the Russian innovation policy

An innovation system perspective is a useful model to discuss technology transfer issues.

   1. The Russian innovation system should essentially be created as an open system,
      oriented to the global innovative market. To be effective, the Russian innovation
      system will have to address the challenges of globalization and growing competition
      in world markets.

   2. The basic strategic goals of innovation system should be to improve the
      competitiveness of Russian industry in the external and domestic markets, and to
      address national economic and social problems. An effective innovation system should
      not only build on Russia‘s traditional strengths in engineering, defence and aerospace,
      but should increasingly address demands of consumers and other end-users.

   3. A key issue in technology transfer is the need to address the discrepancy between the
      supply of knowledge and technology by the Russian research system and the needs of
      Russian industry and society.

   4. Another important issue in improving technology transfer lies in improving the level
      of interaction among all actors in the innovation system. This interaction should be
      focused at achieving innovation system development goals. This interaction should be
      transparent and measurable.

   5. A key condition for turning knowledge into a commercial product is a clear and
      transparent system of IPR. This is true for knowledge that is generated by own
      resources as well as for knowledge that is generated on the basis of public funding.
      Ambiguity regarding ownership of the latter in Russia, affects the process of
      technology transfer from PROs to business enterprises negatively as well as the
      creation of technology-based, spin-off companies.

   6. Innovation requires organisation and management, but at the same time it cannot be
      planned in advance in any detail. New ideas can emerge anywhere in the value chain
      and there needs to be room for experimentation, learning and adaptation. The best
      combination of technology transfer organisations and instruments on the local
      situation and the capabilities of the participating organisations.

   7. Special policies and programs will be needed to address the needs of small companies
      which include both SMEs that will use the technology and small start-up companies
      that are seeking markets for their knowledge and technologies.

   8. Similarly, special attention is needed to international markets. Effective marketing of
      Russian technology is difficult for individual companies for a variety of reasons,
      including lack of qualified staff, lack of marketing knowledge and differences in
      languages and business culture. Organisational, marketing and promotion efforts to


                                                                                             63
   support Russian technology exports are a key element of a technology transfer
   strategy.

9. ―The more money we spend on science, the more we understand that the main
   problems lay not only in its financing, but in a necessity of its better management.‖
   (Speech made by President V. Putin at the Council on Science, Technologies and
   Education meeting in October, 2004).




                                                                                     64
6. Public-Private Partnerships in Innovation

By Natalia Zolotykh

6.1 Introduction

During Soviet times (i.e., before 1992), the Russian innovation system had a whole number of
specific features inherent to a planned socialist economy. The backbone of this system was a
monopoly of the state to ownership, use and disposal of property of practically all enterprises,
including the intellectual property rights to R&D results.

According to the new Constitution of the Russian Federation,77 however, private,
governmental, municipal and other types of ownership are recognized and equally protected.
The civil law is based on the recognition of equality of all participants of the relations
regulated by it, immunity of ownership, and freedom of agreement.78 These provisions of the
Russian legislation form the legal foundation for the development of public-private
partnerships (PPP) in the Russian Federation. Notwithstanding that the Russian Federation
initiated official PPP programmes only in 2005, a number of programmes launched by the
Russian government at the end of the last century can be referred to as PPPs according to
formal criteria.79 These programmes vary by forms and goals. The analysis shows that in the
overwhelming majority of cases, the goals of these programmes are close to traditional
research programmes, however, the realization of the programmes would be more efficiently
implemented with the participation of representatives of private business.

The programmes are aimed at the achievement of the following main goals:

        specific support of small and medium-sized innovation enterprises;
        development of market-oriented cluster research;
        stirring up of the process of transfer of the results of R&D, created at state-owned
         organisations with the use of federal budget funds;
        bringing the results of scientific activity developed in the public sector to the market;
        encouragement of the creation of start-ups and spin-offs by public organisations;
        encouragement of initiatives in setting up networks; and
        international cooperation.
77
   Item 2, Article 8, Constitution of the Russian Federation
78
   Article 1, Civil Code
79
   Taking into account the circumstance that the Russian legal system does not include a definition of the term
―Public-Private Partnership,‖ in the framework of this review we shall use this term in the sense determined by
the OECD Committee for Scientific and Technological Policy (see: Public/Private Partnerships for Innovation:
Policy Rationale, Trends and Issues; OECD, 2003). In essence, this definition contains six basic features, which
characterize public-private partnership, namely: (1)Parties to a partnership should be represented by both public
and private sectors of the economy; (2) Relations of the parties to a public-private partnership should be recorded
in official documents (agreements, contracts, etc.); (3) Relations of the parties to a public-private partnership
should be a partnership, that is equal by nature; (4) Parties to a public-private partnership should have common
goals and an explicitly defined state interest; (5) Parties to a public-private partnership should join their
contributions for the achievement of common goals; and (6) Parties to a public-private partnership should share
expenses and risks between themselves, as well as participate in the utilisation of developed results.




                                                                                                                65
Nowadays, most OECD countries are showing an increased interest in the development of
PPP programmes for innovation and recognise the importance of such partnerships as a policy
tool, which is increasingly reflected in their budget allocations, legislation and programme
design. Many governments have made promotion of partnerships and co-operation between
the public and private sectors a very explicit priority objective. In Canada, for example, as
early as 1994, all federal activities were reviewed with a view to bringing about the most
effective and cost-efficient way of delivering programmes and services. In New Zealand, the
importance of public sector partnering with the private sector has recently been emphasised in
the policy agenda, and new partnership programmes were established in recent budgets.
Austria's K-Plus Competence Centre Programme, which aims at bridging the gap between
fundamental research and industry, is considered the centrepiece of its innovation policy.

In many OECD countries, public-private partnerships are accounting for a growing share of
public S&T budgets. For example, in the Netherlands, there are four major public-private
partnership programmes, which together account for about 11% of the total S&T budget of
the government. The Icelandic Research Council is operating four partnership programmes,
absorbing 18% of its budget. Funds for Australia's Co-operative Research Centres (CRC)
have increased from about 3% of Australia‘s national S&T budget in 1995/96 to an estimated
8% in 2002. However, there are other OECD countries where the PPP approach has not been
so widely adopted and which have not made intensive efforts yet to link the public and private
research communities.80


6.2. Regulating public-private partnerships

Today, a partnership of the state with the private business sector is one of the key components
of the new innovation policy of Russia. However, realisation of this mechanism in practice is
accompanied in Russia by a number of serious problems. An important difference between
Russia and most OECD countries is the structure of its research sector, characterized by an
evident prevailing of public research institutes and design bureaus and a very modest research
capacity located at universities and research departments of private businesses. In most OECD
countries one finds the opposite – most research is performed by educational research
organisations and laboratories owned by private industrial companies. Also in terms of
funding, this difference persists. While in the OECD countries on average 35% of the R&D
funding is provided by the government, in Russia this is more that 58%.

On the one hand, under conditions of moderate economic growth and insignificant private
R&D funding on a national scale, government funding allows to preserve a considerable
research potential in Russia. On the other hand, however, the predominance of public research
organisations (PROs) also creates serious impediments on innovation, as PROs show
insufficient interest in the commercialization of R&D results and their transfer to industry.

Expectations of a greater role of the private sector in determining and financing research
priorities for PROs are yet to become true. The demand for public R&D by the Russian
business sector is low, also because of a relative predominance of low-tech mining industries.
A rather small number of SMEs compared to other developed countries participating in
innovation process should be also noted.

80
     Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues; OECD, 2003.



                                                                                                    66
     Box 6.1: Weakness of corporate R&D in Russia

     The Achilles‘ heel of the Russian innovation system is the weakness of corporate R&D, despite
     some encouraging developments over the last two to three years. The efforts to transfer near-
     market research from public organisations to business firms, to promote the creation of technology-
     based firms, to encourage private investment in R&D, and to attract R&D-intensive foreign
     investment have not been entirely successful. The reasons are many but the fact is that business
     enterprises contributed no more than 20 per cent of total R&D expenditure in 2002. In addition,
     although the empirical evidence is weak, a reasonable guess is that the domestic business sector
     (private firms as well as state-controlled manufacturing and service enterprises) is mainly involved
     in the development part of R&D and has a stronger propensity than its Western counterparts to
     import R&D, as embodied in equipment. This has important implications for domestic producers of
     such equipment as they find it hard to devise and finance a survival strategy through technological
     upgrading and thus to sustain an ambitious R&D agenda. They are too large, with deterrent
     liabilities, to attract foreign investors. Apart from liquidation, their only perspective may be to
     transform themselves into breeding places for new small enterprises that try to match selected parts
     of their research and technological portfolio with market opportunities. This process of course
     entails the loss of quite large portions of such portfolio, unless it is complemented by the
     privatisation of those lines of business with market potential, which are beyond the capabilities of
     small new firms.

     Source: OECD. Fostering Public-Private Partnership for Innovation in Russia. Paris: OECD, 2005


Favourable framework conditions being prerequisites for efficient regulation of PPP
mechanisms are the certainty of efficient co-operation between public and private sectors that
operate with different motives and goals under different legal and cultural environments.81
International experience shows that formation of such conditions supposes a necessity of use
of relevant legal, organisational and economic instruments.



81
  Studies conducted in Russia (see OECD. Fostering Public-Private Partnership for Innovation in Russia. Paris:
OECD, 2005) and OECD countries (see OECD. Public/Private Partnerships for Innovation: Policy Rationale,
Trends and Issues. Paris: OECD, 2003) show that as a rule motivation of participation of private sector of
economy in partnership is explained by possibilities of gaining more profit and new possibilities for the
development of innovation business. However, private companies can also join a public-private partnership with
more specific motivations, in particular, for providing an access to state financing; access to R&D results of
public sector and its infrastructure, as well as information and equipment.
     Motivation of participation of government sector in partnership is stipulated both by general, and specific
purposes. Conventionally, the general purposes include: (i) economic growth and ensuring competitiveness of
research products and services, (ii) encouragement of innovation activity of high-tech products and services
producers; (iii) creation of new science intensive firms and support of small and medium-sized innovation
enterprises; (iv) attraction of non-budget sources of financing; and (v) promotion of efficiency of state
expenditures for R&D. More specific purposes include: (i) development of key technologies for federal state
needs; (ii) introduction into economic turn over and commercialization of R& D results, developed with the use
of state budget resources; and (iii) infrastructure development.
     Representatives of government and private sectors of economy can act as partners at all stages of innovation
process, including the stage of decision making on conducting research, preparation of documentation for
participation in a competition, financing research and development, performing research, project management
and commercialization of its results. However, in practice, government sector, represented by public research
organisations, as a rule shows more activity at the stage of research and development, and the private one - at the
stages of project management.



                                                                                                               67
In many OECD countries, favourable legal and institutional frameworks for PPPs in the
innovation sphere have developed over a long period. Figure 1 gives the example of the
gradual building of the legal framework for PPPs in the United States, where a comprehensive
institutional framework now exists for a wide range of PPPs, within which Cooperative
Research and Development Agreements (CRADAs)82 feature as a key initiative.




Over the last few years, several OECD governments have introduced quite radical reforms to
facilitate PPPs for innovation.83 In the Czech Republic, a country with no previous legislation
concerning public support for private R&D, new legislation was introduced that allowed
regional entities to support PPPs in R&D in June 2001. In Italy, various legislative acts were
introduced during the 1990s that explicitly promote PPPs in the innovation sphere. One of the
main goals of the newly launched National Research Plan is to provide opportunities to
achieve inter-sectoral co-ordination, critical mass, coherence, and complementarity among all
players of PPP programmes for innovation. It also aims to establish Centres of Excellence
through PPPs for innovation. In France, the 1999 Law on Innovation removed many of the
regulatory obstacles in the field of PPP regulation. The law provides incentives for
researchers to participate in the creation of spin-off firms and facilitates the mobility of
researchers to such firms. It enables universities and public research organisations to set up
incubators and introduces organisational innovations to better manage their relations with the
private sector and simplifies the creation of subsidiary firms specialised in early-stage
financing and capital-risk. Also in Japan various new laws have been introduced to facilitate
PPP in the innovation sphere since the mid-1990s. The S&T Basic Law enacted in 1995, for
example, created the conditions for private companies to entrust more research projects to

82
   A CRADA is a written agreement between a private company and a government agency to work together on a
project. Created as a result of the Stevenson-Wydler Technology Innovation Act of 1980, as amended by the
Federal Technology Transfer Act of 1986, a CRADA allows the Federal government and non-Federal partners to
optimize their resources, share technical expertise in a protected environment, share intellectual property
emerging from the effort, and speed the commercialization of federally developed technology.
83
   OECD. Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues. Paris: OECD,
2003.


                                                                                                        68
universities. In addition, researchers of national universities were allowed to take technical
consulting as a side job. In 1998, the Law for Promoting University-Industry Technology
Transfer was introduced resulting in the establishment of Technology Licensing
Organisations (TLOs). In 1999, the Law on Special Measures for Industrial Revitalisation, the
Japanese version of the Bayh-Dole Act, made it possible for the contractors of government
research projects to have IPR resulting from the research. In April 2000, the Law to
Strengthen Industrial Technical Ability removed the regulatory barriers for teachers or
researchers in national and public universities to work also as executives of private
companies. The law also facilitated budget transfer from the private sector to national and
public universities, and allowed TLOs to use the campus of national universities.

At present, the legal system of the Russian Federation lacks any special legislation acts
supporting the development of public-private partnerships. Moreover, a whole number of
provisions of the Russian legislation restrains the development of PPP for innovation. The
most significant ones are issues related to the participation of the public research sector in
such programmes, as well as ownership and disposal of intellectual property created with the
use of the federal budget means. Whether the above problems should be regulated in a special
legislative act (e.g., in the Law on Technology Transfer, which is currently being discussed),
or that they should be reflected in amendments to already existing legislative acts,84 is not of a
principle nature. The main thing is to create incentives for private companies and PROs to
participate in PPPs and remove legal restrictions for this participation, some of which are
described below.

Under the current legal conditions, the Russian Federation along with other players of civil
and legal relations can become the subjects of public-private partnerships. According to the
applicable legislation, the Russian Federation and the Russian Federation entities can enter
into civil relations similar to citizens and legal entities.85 Bodies of state power within the
framework of their jurisdiction can by their actions acquire and exercise economic and
personal non-economic rights and obligations on behalf of the Russian Federation and the
Russian Federation entities.86 The Ministries (for example, the Ministry of Education and
Science, the Ministry of Industry and Energy), Federal Services (for example, the Federal
Service for Intellectual Property, Patents and Trademarks, the Federal Service for Supervision
in Education and Science), as well as the Federal Agencies (for example, the Federal Agency
on Science and Innovation, the Federal Agency on Education, the Federal Agency on
Industry) and others, provided they have a relevant authority, can represent interests of the
Russian Federation as state bodies.87

Public research organizations in the Russian Federation operate under various different legal
forms, the two most important ones being: (1) State unitary enterprise, and (2) State
establishment.

The most widespread form of a public research organisation is that of a ―state unitary
enterprise.‖88 The specific feature of a unitary enterprise is a lack of ownership rights to

84
   For example the Civil Code, the Law on deliveries of goods for federal state needs, and a bloc of laws on
intellectual property.
85
    Article 124, Civil Code.
86
   Item 1, Article 125, Civil Code.
87
   Decree of the President of the RF ―On a System and a Structure of Federal Bodies of Executive Power‖ of 9
March 2004.
88
   Article 113, Civil Code.


                                                                                                               69
assigned state property, which it may own only by the right of economic or operative
management. The state unitary enterprises operate like commercial organisations. Since state
unitary enterprises are created and operated based on a single form of ownership – the public
one, their founders are the government (the Federation entity).

Another widespread form of public research organisations is a ―state establishment,‖ which is
a non-profit organisation, created by an owner for carrying out managerial, social, cultural
and other functions of a non-profit nature and funded fully or partially by this owner.89 The
property recorded in favour of a state establishment90 is not being in its ownership, but its
operative management.

The law forbids a state establishment to assign or dispose in another way of property obtained
from or funded by the state.91 However, if the property was obtained from or funded by
others, for example from own income92 or from sponsors, then the state establishment has the
right to use such property as it wishes, including the disposal of it.93

     Box 6.2: Problems of ownership

     The key issue is that in the Russian law there is no definition of “independent disposal” – as a
     right in rem (i.e., rights of the founder (in the current case the owner) of a legal person to its
     property). Since the nature of such right is not defined, at present there exist diametrically opposite
     approaches to the issue of the content of rights of establishments to dispose property recorded to
     them by the owners and acquired by means of entrepreneurial or other profitable activity.

     One of such approaches totally excludes a possibility of having a right of ownership by the
     establishment by virtue of the construction of a legal entity, not being the owner of property.

     Another approach states that a lawmaker, having introduced in the legal use a right of the
     establishment to independent disposal of property and failing to define it, in fact recognized the
     establishment‘s right of ownership for property and profits acquired by the establishment by
     allowed entrepreneurial activity, since legal rights of the establishment regarding such property are
     equal to legal rights of the owner.

     Within the context of this study it is important to note that raising the issue of presence of rights of
     ownership for the results of intellectual activity, created by state establishments and state
     enterprises, is considered by some federal bodies of executive power, which includes in particular,
     the Ministry of Finance, as rather disputable. Lack of clarity in the issues of ownership of rights to
     the results of intellectual activity created at the account of and using federal budget means and
     correspondingly, mechanisms of transfer of these results are one of the serious barriers of
     development of public-private partnerships in innovation sphere (these issues are described in more
     detail in Chapter 3). The situation is more complicated by lack in the Russian legislation of
     relevant instruments on regulation of relations in the field of fair competition and mechanisms of
     preventing unfair competition in S&T (see Chapter 3).




89
   Article 9, Federal Law ―On Non-Commercial Organisations‖.
90
   Article 120, Civil Code and Article 296, Civil Code.
91
   Article 298, Item 1, Civil Code.
92
   This situation is possible only in case when an establishment in accordance with its statutory documents has a
right to carry out profitable activity.
93
   Article 298, Item 2, Civil Code.


                                                                                                              70
Since the overwhelming majority of the research organisations in Russia have the status of
state unitary enterprise or state establishment, the Russian research system as a whole
experiences serious restrictions on issues such as transferring R&D results and the creation of
new companies. This creates serious impediments to the commercialisation of S&T outputs
produced by public research organizations and prevents the development of public-private
partnerships.

There is recently a clear tendency to reduce the number of state unitary enterprises based on
the right of economic management by the Government of the Russian Federation. Many of
them are going to be restructured, liquidated or sold off as property complexes, or used for the
creation of federal state establishments on the basis of property recorded to them.94

Functions and degree of participation of state unitary enterprises, state establishments and
state corporations in public-private partnership can vary substantially. State establishments,
being non-profit organizations, as a rule have no significant motivations to develop PPPs.
State enterprises, which because of the commercial nature of their activities are more adapted
to market conditions, experience a greater need in establishing partnership relations with
private companies.

The legal system of the Russian Federation provides for the creation of organisations with
mixed public-private forms of property. In this case there are all grounds to assert that public-
private partnership takes place both inside these organisations and out of their frameworks.
The most widespread example of such scientific organisation is a joint stock company,95 in
which a ―golden share‖ or a control package of shares can be recorded with the ―state‖. Target
financing of work and programmes is allocated to such joint stock companies.

Financial and industrial groups for the time being did not find a wide application in the
innovation field. Meantime, this organisational and legal form seems a rather prospective
form for the development of public-private partnership. It represents an integrity of legal
persons acting as a main or a subsidiary company, aiming at technological or economic
integration for implementation of investment and other projects and programmes, in order to
promote competitiveness and expand sales markets for goods and services, etc. Founders of
the group can be legal persons: commercial and non-profit organisations, including foreign
ones. Involvement of organisations, carrying out activities in the field of production of goods
and services, as well as banks or other credit organisations among participants of the group is
mandatory. State unitary enterprises can be participants of the group upon the consent and
according to procedure, determined by an owner of property. Thus, a composition of financial
and industrial group is rather expanded and it can include representatives both of the public
sector of economy, and the private one.

A special place among potential players of a public-private partnership is occupied by the
Russian Academy of Sciences (RAS), possessing a considerable scientific and technological
potential, concentrated at institutes, laboratories, enterprises and organisations, reported to the
RAS. RAS, on the one hand, is a public organisation, but on the other hand, some federal
property has been given to it and its subordinated organisations. Thus, RAS and its institutes,
establishments and organisations subordinated to it, possess a special legal status and they

94
   ―Civil Law‖, Vol. 1, under the editorship of Doctor of Law, Professor A.P. Sergeev, Yu.K. Tolstoy, Moscow,
2002.
95
   Article 96, Civil Code.


                                                                                                           71
actively cooperate with the state on the matters of their activity. Most research organisations
established by RAS have a status of a state establishment, with all rights and obligations
arising from that.

The above organisational and legal forms of organisations are far from covering all diversity
of bodies that can participate in public-private partnership on behalf of the state. For
example, non-profit partnerships96 and autonomous non-profit organisations97 have a
considerable potential for participation in public-private partnerships. These organisations,
being in general non-profit ones, nevertheless allow carrying out entrepreneurial activities and
uniting players of different sectors of the economy.

A considerable role in the formation of public-private partnerships in Russia is played by
foundations, including state ones, representing non-profit organisations without membership,
created on the basis of voluntary property contributions for the achievement of publicly useful
goals.

Participants of a public-private partnership on behalf of the private sector of the
economy can be citizens and legal entities, represented by both commercial and non-profit
organisations, except those founded by the state.

It should be specially emphasized that in spite of the variety of forms of state organisations
and enterprises of mixed forms of ownership, each of them, irrespective of organisational
form (state establishment, fund, unitary enterprise, etc.) inevitably face problems of
ownership and use of intellectual property, by virtue of uncertainties existing in legislation,
which were described in Chapter 3. Issues related to IPRs are determined rather by sources of
financing and constituting agreement with the Federal body of executive power, establishing
it, than by form of organisation. Obviously, terms of these agreements can significantly vary
depending the goals of the organisation and the functions of the founder, which may be
represented, for example by RAS, the Ministry of Defence, the Federal Agency on Science
and Innovations, the Federal Agency on Education, and the Federal Agency on Industry.

The variety of functions and organisational and legal forms of public-private partnership
players on behalf of the state predetermines the necessity of developing not only of a legal
framework of interaction of private and public sectors of economy, but special organisational
mechanisms of management of public-private partnership for innovation in Russia, providing
for the balance of interests of all its players, including the state.

The first steps in this direction were determined in a draft Programme of social and economic
development of the Russian Federation for a mid-term perspective (2006-2008). A section
devoted to public-private partnerships defines areas of interaction between the state and
business. Impetus to intensification of use of PPP mechanisms would be the development of
legislation on concessions, expansion of mechanisms of providing of budget guaranties on
commercial risks, and allowing/ensuring the inflow of private capital into the development of
social and industrial infrastructure. It is proposed to significantly increase the scale of
programmes aimed at increasing the competitiveness of domestic enterprises –
encouragement of non-raw material exports, development of venture financing, technology
commercialisation, increasing level of industrial design. The pre-requisite of success of such

96
     Article 8, Law of the Russian Federation ―On Non-Commercial Organisations.‖
97
     Article 10, Law of the Russian Federation ―On Non-Commercial Organisations.‖


                                                                                             72
programmes would be an introduction of norms of mandatory involvement in their formation,
co-funding and assessment of effectiveness of sectoral business associations (see also Box 3).

One of the specific peculiarities of PPP programmes currently implemented in Russia is that
the federal bodies of executive power usually act as initiators of programmes, funding parties,
state customers, as well as bodies forming state establishments, enterprises, funds and
organisations of mixed forms of ownership.


 Box 6.3: Working group on public-private partnerships

 A considerable attention to issues of development of PPP mechanisms is paid at present by the
 Council for Competitiveness and Entrepreneurship under the Government of the Russian
 Federation, within the framework of which a special working group was created with the aim of:
 (a) developing mechanisms to enable efficient interaction between the state and business in the
 area (i.e., PPP mechanisms); and (b) realising specific business projects.

 At present, the Working Group has prepared draft proposals ―On Priority Directions of
 Development of Public-private Partnerships as a Mechanism of Increasing Economy
 Competitiveness‖, as well as presented specific business projects. Among them in the innovation
 sphere are the following:

     Venture Investment Funds financing science-based innovation projects;
     Fund of Funds (the Fund, co-funding selected on competitive basis venture investment
      funds, financing science-based innovation projects formed by private investors)
     Special Economic Areas, including industrial and production and technical and
      introduction special economic areas,
     Industrial clusters in the area of electronics, microelectronics and information and
      telecommunication technologies on the basis of innovation and industrial complex of the
      Moscow State Institute of Electronic Technique (Zelenograd). And in the area of
      optoelectronics on the basis of innovation and industrial complex ―Svetlana‖ (St.
      Petersburg).
     Technology Transfer Centres and Innovation Technological Centres.

 Source: Report of Council for Competitiveness and Entrepreneurship under the Government of
 the Russian Federation, Moscow, Russia, September 2005.



The most evident example of organisation of a process of regulation of a public-private
partnership for innovation is the pilot programme on mega projects. The basic principles of
this programme are:

   Open involvement of private business in the selection of priorities of innovation
    development of specific industries while preserving government‘s prerogative of
    determining a list of these industries;
   Voluntary refusal of the state of the status of the principal beneficiary under the project
    in favour of its participants (contractors), including in terms of IPRs;
   Co-financing (parity participation) of the state and contractors of the project in the costs
    for its performance; and
   Orientation of contractors of the project towards creation and commercialisation of S&T
    outputs of the project.


                                                                                              73
The basic instruments of the programme are:

      Official participation of top managers of big private business and scientific society in
       review and selection of prospective innovation projects;
      Limitation in the government contracts on the project realisation of the government
       rights to use its results exclusively by scope of state needs;
      Division in the government contract on the project realisation of works funded out of
       budget and non-budget means (with a budget portion not exceeding 50%); and
      Inclusion in the contract of the contractors‘ obligations of the project to ensure a five-
       time increase of volumes of sale of the products manufactured over the amount of
       budget means under the project.

Basic approaches to project management comprise:

      Involvement of independent experts, including those representing the private sector, at
       the stage of assessment and selection of mega projects;
      Introduction of a unified system of quantitative indicators of planned efficiency of the
       project and procedures of their reasonable revision;
      Introduction of a special procedure of the use of rights to the created objects of
       intellectual property, assuming assigning of all rights to intellectual property obtained
       within the framework of realisation of the present mega projects, to the organisation-
       contractor;
      Support the projects by involvement of independent professional consulting companies,
       selected by competition, services of which would be covered out of federal budget; and
      Monitoring of financial and economic indicators of project performance.


6.3. Sponsoring of new start-up companies

In order to diversify the Russian economy towards more knowledge-intensive industries, it is
essential to stimulate the establishment of new start-up companies, and in particular those that
create new high-tech products and markets. This task becomes even more critical in the light
of the upcoming reorganisation of public research organisations, which may radically change
the Russian R&D system.98

In many instances, high-tech start-ups are based on a public-private partnership (i.e., a public
research organisation providing the technology and a private investor providing the financial
and managerial inputs) and in that way manage to ―fit‖ successfully into the ―innovation
chain,‖ which considerably enhances their chances to survive in comparison to isolated
private companies.

Unfortunately, high-tech start-ups on the basis of a public-private partnership are still quite
rare in Russia. Due to insufficient guaranties with respect to the legitimacy of start-ups
created by public research organisations as well as the uncertainty regarding IPR ownership,
private investors in Russia estimate their risks of investing in such start-ups as extremely high.

98
   According to the ―Concept of participation of the Russian Federation in management of public organisations
carrying out activity in the field of science‖ issued by the Ministry of Education and Science, by 2008 of the
more than 2,000 organisations currently involved in R&D, only 400-700 should remain in the public domain. Of
them, 100-200 should be oriented towards R&D, and 300-500 should provide services in the field of science.


                                                                                                           74
This means a missed opportunity for Russia in terms of new jobs and in terms of cementing
productive links between the research, industrial and financial sectors of the economy.

However, along with all its attractiveness, promotion of start-ups in Russia cannot receive
further development and wide diffusion due to significant limitations of creation of new
companies imposed on public institutions by applicable legislation (see 6.2), uncertainty in
terms of rights for results of intellectual activity, obtained using federal budget means, as well
as lack of development of start (seed) and venture financing tools.

The sole, but still very faint source of start (seed) financing of the process of creation of new
scientific and technological companies is the Fund for support of S&T enterprises. The
programmes realised by this Fund, are the pioneer ones for Russia and get ambiguous
assessment among research and education communities. Some of them express serious
concern that support of individuals-inventors and encouragement of their activity on creation
of small companies lack efficiency, and in practice result in conflict of interests between a
research institute (in which the inventions were created using government funding) and a
scientist, since the institute‘s staff not only do not see any output of such activity, but are even
concerned that a number of commercially promising research of the institute could be
―blocked‖ by patents owned by these inventors.

The first business angels appeared in Russia only relatively recently. At present, it is difficult
to estimate their number or their input into high-tech start-ups. However, some Russian
experts have estimated that an average business angel is prepared to invest upto one million
US Dollars in a start-up company.99 The million is accumulated within several years in
portions of US$ 50,000 to US$ 200,000. Most Russian business angels, however, have little
or no knowledge about high-tech products and markets. As a result, the high-tech startups that
they invest in often fail and apparently many Russian business angels have been loosing
money rather than earning it.100. In spite of this circumstance, many venture capital funds
collaborate closely with business angels. Representatives of the Fund of Russian
Technologies, for example, state that they refuse the idea of working directly with inventors
and scientists as partners and prefer companies having an angel investor.

The second stage of the development of a small enterprise, in the initial phase of growth, is
usually supported by venture funds, which finance projects possessing commercial
attractiveness. However, a Russian venture capital market for investment in high-tech
companies is only just emerging and still largely underdeveloped. It lacks efficient managing
companies, specialists on technology assessment, protection and transfer of intellectual
property, etc. In addition, the small size of most Russian innovation projects has not attracted
large Russian investors so far.

Venture funds operating in the territory of the Russian Federation can be conventionally
divided into four main groups101:

      1. Funds of the European Fund for Reconstruction and Development. Their capital
         is fully or partially formed by the European Bank for Reconstruction and
         Development (EBRD) with participation of other international financial organisations.
      2. Venture funds formed by the EBRD, with co-financing by other funds.
99
   Juri Amosov, Venture capitalism from origins to the present, St.-Petersburg, 2005.
100
    Juri Amosov, Venture capitalism from origins to the present, St.-Petersburg, 2005.
101
    Venture Investment, A.I. Gorsky, Association of Direct and Venture Investment, 2005.


                                                                                                 75
  3. State-supported Funds, but in which also corporative and private investors
     participate (see box 6.4 for an overview). It should be noted that many OECD
     countries have similar venture capital programmes financed by the government. In
     addition, the World Bank provides financing for venture capital programmes within
     the context of projects of technology commercialisation/ development of industrial
     technologies in Turkey and Croatia, as well as in many Asian and Latin American
     countries. As a rule, such programmes also propose a wide choice of financial tools
     designed for encouragement of technological modernisation of local enterprises,
     creation of more close relations between enterprises of local industry and research
     institutes, etc.

Box 6.4: The fund of funds, venture investment funds, and closed unit investment funds

At present, the development of venture funds supported by the state is the focal point of the
Russian government. One of the initiatives currently being reviewed by the Council on
Competitiveness and Entrepreneurship under the Government of the Russian Federation is creation
of the ―Fund of Funds.‖* The concept of the Fund of Funds is that it stimulates the creation of new
venture capital funds for technology-based companies. It does so, by joining private investors that
are prepared to put capital into these funds. The exact proportions between public and private
funding and other details are agreed upon upfront. In principle, however, the Fund of Funds
provides financial support on the same commercial terms as other private investors and all profits
and losses are to be shared on a strictly proportional basis. It is assumed that the Fund of Fund
helps to reduce risks and enhances the minimal volume of private capital necessary for the creation
of venture funds targeting technology-based companies.

To develop Venture Investment Funds (VIFs) the following measures are proposed:
    Increase of charter capital;
    Granting a right to increase maximal share of investment made by it in the capital of
      supported venture funds from 10 to 49%; and
    Providing to investors funds created with VIFs participation of options to redeem shares
      owned by it with the aim to increase ―investment lever.‖

Proposed costs for the federal budget in 2006 are in the order of RR 1.5-3.0 billion (decision on
inclusion into the draft federal budget has not been made yet).

Another Russian initiative to create venture investment funds to finance science-based innovation
projects are Closed Unit Investment Funds (CUIFs). They are established by entities of the
Russian Federation to finance small innovative enterprises. Regions having won a competition for
establishing a CUIF get a subsidy for the creation of a non-profit organisation – the fund. The
minimal charter capital of the fund is RR 140 million. Then a competition among managing
companies is held, which have to come with private investors who will invest at least another RR
140 million. CUIFs can only invest in small innovative companies. The state will not claim to
make investment decisions. The decisions will be made by representatives of the private sector,
risking their money.

*Resolution of the Government of the Russian Federation of March 10, 2000 No. 362-r.


  4. Private funds. This group includes about 20 funds, the total declared capital of which
     is equal to not less than US$ 2.2 billion. The composition of this group of funds is
     rather varied both in terms of the size of capital and geographical focus. Most funds do
     not limit themselves to Russia only, but target a wider circle of neighbouring
     countries, including Eastern European ones. These private funds make their decisions


                                                                                                 76
          completely independently from the government. Their capital is being provided by
          private corporations and investors. The principal objective of these funds is to obtain
          the highest possible return on the invested capital, while keeping risks at an acceptable
          level. Therefore, reasons for uncertainty of their position concerning activity in Russia
          are clearly obvious: high risks related to political and economic instability; lack of a
          well-developed stock market; weak judiciary system; customs tariffs and restrictions,
          etc. At the same time, however, Russia‘s rapidly growing economy and great potential
          continues to keep many investors interested in Russia as an investment opportunity.

In recent years, considerable experience has been accumulated in many countries in the
financing of start-up companies at their early stages using PPP mechanisms (see table 6.1).102
In particular, a number of countries have launched special programmes to remedy market
failures that impede early stage financing of innovative projects. This is quite a different
approach from that of grant-based programmes, in that governments are now a supplier of
equity capital for innovation. For Russian experiences with high-tech start-up companies see
Box 6.5.

Table 6.1: Examples of Public Support for the Start-up of Technology-based Companies

Country           Programme                                                                          Budget
Finland           The Finnish National Fund for Research and Development (SITRA) and the
                  National Technology Agency (TEKES) have set up the PreSeed service that
                  aims at improving the conditions for the commercialisation of technology
                  projects by offering venture capital funding for companies that use innovative
                  technology. Its background was the government‘s recognition of a weakly
                  developed venture capital industry, the low proportion of SMEs innovating
                  in-house, and the low proportion of new market capitalisation. The PreSeed
                  service has two sections: LIKSA and INTRO. The LIKSA is a joint finance
                  package that can be used to obtain information and services related to
                  commercialisation of technology. It provides a faster qualitative picture of
                  business as a basis for further assessment. The INTRO service ensures the
                  efficient presentation of start-up companies to both institutional and private
                  investors. The newly launched PreSeed programme aims to improve the
                  conditions for the commercialisation of technology projects and open venture
                  capital funding for companies that use new technologies.
France            Technological Research Teams, launched in 1999, conduct medium-term
                  research in partnership with industry, SMEs in particular.
Germany           The Innovation Competence for SMEs programme (PRO INNO), launched in
                  1999, supports co-operative R&D projects and exchange of researchers based
                  on co-operation contracts involving SMEs and public research institutes,
                  including foreign firms and public organisations.
Iceland           The New Business Venture Fund was established in 1997 with the merger of           ISK 50
                  a few sectoral funds. The Fund has signed a contract with the Research             million
                  Council for co-operation in encouraging spin-offs, and has also formed in
                  collaboration with the University of Iceland a programme to transform R&D
                  results into new firms. The Icelandic Technology Institute has a subsidiary,
                  IMPRA, which supports entrepreneurs and SMEs. IMPRA operates an
                  Incubator and runs the Innovation Relay Centre to facilitate co-operation
                  between Icelandic and European companies with an emphasis on technology
                  transfer.
New Zealand       The Venture Investment Fund, established in 2001/02, is to supply early stage      NZD 100
                  venture capital that is to be a parent fund to be used in partnership with         million
                  private venture capital. It is also intended to facilitate the commercialisation

102
   OECD. Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues. Paris: OECD,
2003.


                                                                                                               77
Country            Programme                                                                         Budget
                   of ideas from publicly funded research institutes, universities and the private
                   sector.
Slovak Republic    The Innovation Fund, set up by the Ministry of Economy in 1998, is a non-         SKK 50
                   profit organisation that makes repayable loans to firms seeking financial         million
                   resource to apply R&D results for innovation. The Fund, originally operating
                   with a capital of SKK 50 million, supported six projects totalling SKK 38.8
                   million over 1998-99 and provided support for a further 6 projects totalling
                   SKK 20.3 million in 2001.

Sweden             A new program, VINST (research co-operation for smaller high tech
                   companies) was created in order to encourage smaller high-tech companies to
                   co-operate with researchers at universities and research institutes in the
                   development of next generation products.
Source: various sources.



6.4. Gearing public research to industrial innovation

The Russian innovation system is still very much dominated by a technology-push approach
to innovation in which researchers decide on research priorities rather than the ultimate users
of the knowledge and new technology. This frequently leads to the generation of knowledge
and technology for which there is no concrete demand in the economy, while at the same
urgent demands are not being met.103 Just to illustrate this difference in approach, let us have
a look at two recent Russian government initiatives to improve the innovation process: (1)
The creation of ―Technology Transfer Centres‖ (TTCs); and (2) The creation of mega
projects. The latter is a good example of a technology-demand approach, while the former
still has all the characteristics of a technology-push approach.

6.4.1 The technology-push approach

The ―innovation gap‖ between research and industry is the weakest point of the Russian
innovation system. The survey conducted in Russia in 2002-2003 within the framework of an
OECD project clearly demonstrated the lack of real incentives and practical possibility of
commercialisation of S&T outputs created by PROs.104

The basic sources of this problem are the following:

       Lack of corresponding legal and organisational and economic mechanisms applied by
        the state to provide incentives to organisations on the protection and commercialisation
        of obtained R&D results;
       Lack of coherent government policy in the matters of possession, use and disposal of
        intellectual property using federal budget means;
       Undeveloped infrastructure in the field of R&D commercialisation; and
       Lack of development of financial and credit institutes.


103
   The Russian import of technology has been very high over the past decade.
104
    The survey is based on indicators of innovation and patenting and licensing activity of PROs, presented in
answers to a questionnaire for technology transfer offices, analysis of legal system of the Russian Federation in
this field, based on applicable legal acts and results of questionnaire study of the federal bodies of executive
power, as well as information obtained in the course of individual interviews with representatives of public,
research and entrepreneurial communities of the Russian Federation.


                                                                                                               78
Box 6.5: Start-ups from public research – lessons from case studies

The OECD mission visited two sites where the main two Russian models of start-up from public
research were implemented: start-ups from the Institutes of the Academy of Sciences (in the
science town of Chernogolovka) and start-ups from a formerly large high-tech state-owned
enterprise (Svetlana in St. Petersburg, which used to be the largest electronic company in the
country). They are both active in the creation of new technology based firms (NTBFs) and are
acting as ‗incubators‘ for such companies. They can even transform themselves into an innovation
centre (e.g. the Innovation-Technology Centre of St Petersburg Regional Foundation for Scientific
and Technological Development that is hosted within the premises of Svetlana) that can attract new
firms based on outside knowledge. Svetlana can indeed be regarded as a holding company of new
businesses. One key enabling factor is the possession of unused land, buildings and equipment as a
result of the substantial decline in funding and the loss of customers, as in the case of Svetlana.

Businesses spun out have a number of advantages:
   Premises provided at cheap rents.
   Free use of institute facilities.
   Access to know-how and results of research.
   Public sector R&D contracts (including engineering and software development).

Outputs of the spin-out businesses included:
   Novel materials, many of which are for research use.
   Specialised engineering components and products.
   Small scale production of devices.
   Software development and customisation of software licensed from abroad for Russian
     customers

A collection of small scale businesses selling in niches or highly specialised markets. In some
cases licenses had been granted to foreign companies. Production is on laboratory or small
workshop scale. Some of the businesses appear to have good technological contacts with overseas
companies.
Because of the advantages listed above these businesses remained attached to the institutes which
spawned them. Institute directors in turn see them as a means retaining staff on the premises and
increasing their remuneration and providing an excuse to retain land premises and facilities which
would otherwise be wholly or partly redundant. Institute directors are often either shareholders or
non-executive directors.

An important reason why commercial exploitation of research results has taken this form is that
both the physical and intellectual property possessed by Institutes (and state enterprises like
Svetlana) belong to the Russian Federation and cannot be transferred to private enterprises without
special permission of the owner.

These two models seem to have some limitations. First, Institutes may not have adequate
incentives to transfer knowledge and technology to a wider group of New Technology Based
Firms, including those originating elsewhere. Acting as a holding company/incubator for daughter
companies creates conflicts of interest which may preclude this role. Means should be found of
separating the institutes‘ scientific role from their incubator role without destroying the valuable
links from the former to the latter. Second, in the case of Svetlana, the very cheap rents for
expensive land and office spaces may create unfair competition with other sound initiatives, may
not represent the best economic use of these public assets and, furthermore, may delay the
necessary decisions regarding the privatisation or dismantling of the remaining research and
manufacturing activities of the state-owned company.

Source: OECD. Fostering Public-Private Partnership for Innovation in Russia. Paris: OECD,
2005.

                                                                                                  79
Apparently, the analysis did not point to the possibility that the technology or knowledge
generated by PROs only very partially matches the needs of the business sector.

Aggregated information represented in the survey, enabled the Russian government to
comprehensively evaluate the existing situation and, with the help of OECD policy
recommendations, to develop a system of legal, organisational and economic measures aimed
at the creation of a favourable innovation environment and encouraging the commercialisation
of R&D outputs generated by PROs and universities using federal budgets.

Within the framework of this programme, the former Ministry of Industry, Science and
Technologies, together with the Ministry of Education and the Russian Academy of Sciences,
decided in 2003 to create six pilot Technology Transfer Centres (TTCs) for
commercialisation of R&D outputs, obtained using federal budget means, in six different
federal districts.

The TTCs were selected by open competition for the right to conclude government contracts,
announced by the former Ministry of Industry, Science and Technologies. It was supposed that
public organisations of different organisational and legal forms from different regions of
Russia should take part in the competition. As a result of the competition TTC proposals of
the following six entities were selected:

      the public research centre of the North-Western federal district;
      the state university of the Volga region federal district;
      the state university of the Southern federal district;
      the institute of the Russian Academy of Sciences of the Siberian federal district;
      the institute of the Russian Academy of Sciences of the Ural federal district;
      the institute of the Russian Academy of Sciences of the Central federal district.

Realisation of these projects is to promote integration of science and industry of the region, by
intensification of a process of technology transfer, creation of new technological companies,
preventing unfair competition and ―drain‖ of scientific information, as well as creation of new
jobs.

To implement the projects, a legally independent entity capable to carry out the following
functions, should be established:

    Conduct selection and assessment of the projects having commercial potential;
    Conduct patenting research;
    Provide protection of different types of intellectual property (inventions, utility models,
     industrial designs, trademarks and service marks, computer programmes, databases and
     integrated microcircuits technologies) and know-how;
    Provide drafting of license agreements, contracts on engineering and consulting
     services, agreements on S&T and industrial collaboration, etc.;
    Conduct assessment of intellectual inputs in the created joint ventures;
    Render legal assistance in case of infringement of patent holders rights and unfair
     competition; and
    Conduct management of the created firms for commercialisation of R&D outputs.




                                                                                              80
The total budget of the TTC programme in 2003 was rather limited – RR 18 million (less than
€ 600,000), that is RR 3 million for each project. However, a mandatory condition of the
competition was that the TTC programme contribution should be at least matched with an
equal amount of contributions from other sources (Ministries and departments of the Russian
Federation, local budgets, own funds, private funds, etc.). Attracting contributions from the
private sector of the economy is to be preferred.

Based on the experience of pilot projects, the intention was to develop mechanisms to facilitate the
interaction between all the actors involved, including TTCs, research and industrial organisations, as
well as other players representing the non-government sector of the economy. Special attention is to
be paid to the practical working out of conditions, forms and methods of public-private interaction
on technology transfer, within the scope of development of this infrastructure segment.

To perform monitoring and render information, consultation and legal support of activity of TTCs, mostly
located far from each other and far from the large research and industrial centres of Moscow and St.
Petersburg, a rather-new-for-Russia mechanism of online support was set up.

Review of the initial stages of the TTC programme clearly revealed that legal restrictions on
the transfer of research outputs and IPRs from PROs to TTCs (two separate legal entities)
imposed substantial limitations on the whole model.

The experience of the first year programme‘s operation revealed that within the framework of
existing Russian legislative system, it would be simpler to organise TTCs in the form of a
division or affiliate of a PRO. On the other hand, to ensure efficient work of TTCs, it is
necessary to provide it with sufficient independence in decision-making and management of
its property and IPRs, which requires the creation of a TTC in the form of an independent
legal entity.

Given this circumstance, the Ministry of Education and Science made appropriate changes to
the programme, which were reflected in conditions of a call in 2005 specifying as a main
criterion of assessment of TTC‘s activity not its organizational and legal form but a number of
successfully commercialised technologies with increasing result. Simultaneously, the Ministry
of Education and Science, made a presentation at the session of the Russian Government, with
a proposal to develop a complex system of measures on creation of legal conditions of
technology transfer from PROs to the entrepreneurial sector of the economy (see chapter 3).

6.4.2 The technology-demand model

The ―mega projects‖ programme, launched by the former Ministry of Industry and Science in
2003, is another interesting form of innovative public-private partnership in Russia. The basic
concept of the mega projects programme is to develop an alternative to the existing forms of
state support to sectoral and academic sciences. The programme aims at a greater economic
and social impact of public R&D investments through a stronger involvement of the private
industry in all aspects of the realisation of large innovation projects, including their selection,
financing and implementation. Within the framework of each mega project a complete
innovation cycle of ―applied research – development – utilisation and bringing the product in
the market‖ is to be realized within 3-4 years. This means that only relatively ―mature‖
technologies can pass the selection procedure (see Box 6.6).




                                                                                                     81
The main economic goal of the mega projects programme is to strengthen the competitive
position of domestic companies in domestic and foreign markets. The projects should solve
key problems of competitiveness, including a more efficient use of inputs (in particular
energy), production flexibility, and more value-added per product produced.

To reduce terms of realisation and working out of mechanisms of creation of competitive
products within the framework of these projects, development works were carried out using
federal budget means, and in parallel the work on organisation of industrial manufacturing
and sale of finished goods was implemented, using own and raised funds of companies
involved in these projects.

 Box 6.6: Mega projects

 All selected mega projects can be conventionally divided into two types: object-targeted and
 subject-targeted. Object-targeted mega projects are supposed to lead to a new level of technologies
 of production of specific complex types of products, such as:
     scanning probe microscopes of nanometric resolution;
     steam and gas energy installations with capacity exceeding 58%;
     IR matrix photoelectron modules;
     automobile diesels meeting requirements of EURO-3, etc.

 Subject-targeted projects propose the development and adaptation of a new generation of basic
 technologies for production of a wide range of different products, such as:
     fire-proof graphite materials and semi-products;
     high cold-resistance steels with improved welding capacity;
     synthetic optical and dielectric crystals; and
     genetically modified seeds.

 Based on the results of marketing research, the estimated volume of sales of products produced
 within the framework of the 12 selected mega projects will yield about RR 23 billion by 2007. The
 total costs of the projects are estimated at RR 8 billion, of which RR 4 billion provided by the
 Federal Government. The share of non-budget means in the total financing of mega projects is
 given in the table below:

 “Mega projects”: Raising of Non-Budget Means in 2003.

 Share of non-budget          Number              Chief contractors
 means in financing (%)       of projects
 Less 25%                     4                   RAS Institutes

 25% - 50%                    4                   Branch research institutes (public and
                                                  private)
 Above 50%                    4                   Non-government integrated research
                                                  and production structures



Moreover, analysis of realisation of the programme of mega projects, confirmed the
following:

   Domestic industrial capital is not yet sufficiently targeted towards an innovation mode
    of development and an increase of business competitiveness;



                                                                                                  82
       Innovation-targeted industrial capital has a choice of selection of a technology
        developer and takes a collaboration with domestic industrial and academic science as an
        additional risk factor;
       Economic availability of domestic technologies does not fully compensate for the lack
        of guaranty in obtaining the required S&T output; and
       The public innovation system operating under the conditions of a transitional economy
        should undertake functions of the ―incubator‖ of domestic technologies and mechanisms
        of their commercialisation.

In 2004, the newly formed Minister of Education and Science continued realisation and
further promotion of a large-scale programme of mega projects, playing an extremely
important role in establishing of public-private partnership in Russia.

6.4.3 Experiences in other countries

PPP programmes encouraging close contacts between research and industrial sectors of the
economy and targeting public research at industrial innovation are common in all industrially
developed states.105

In particular, the Co-operative Research Centres (CRC) programme of Australia introduced in
the early 1990s has developed into a significant PPP programme, which currently supports 64
CRCs. CRCs undertake collaborative research and education programmes with a strong focus
on commercial and other applications bringing together researchers from universities, the
public sector and business. Selection rounds are conducted at regular intervals to replace or
renew CRCs when they reach the end of their contract with the government. France has
recently introduced new programmes to strengthen collaboration among research
organisations, universities, and industry. In July 2001, the government accredited fifteen
National Centres for Technological Research (CNRTs). The CNRTs foster co-operation
between public research laboratories and the research centres of large industrial groups and
high-tech SMEs. They are funded under contracts between central government and the
regions. In the Netherlands, the concept of Technological Top Institutes (TTIs) was launched
in 1996. TTIs are virtual institutes bringing together researchers sitting in different
companies, public research organisations, and universities. The industry is closely involved in
defining the long-term strategies of these new institutes.

Many OECD countries have already been operating PPP programmes that support R&D
consortia and project-based collaborative R&D between public and private actors for a long
time. In Norway, for instance, the User-Oriented Industrial R&D Support scheme (UOR) has
its roots in the 1960s. In the United States, Federal R&D initiatives have provided for many
years funding to support R&D collaboration among public and private sector organisations in
IT and biotechnology. More recent initiatives include clean coal research, nanotechnology,
and fuel-cell technology. In the United Kingdom, the LINK scheme, established in the late
1980s, continues to play an important role in promoting research partnerships between
businesses and universities and other research organisations. With 1500 projects and total
eligible costs of over GBP 1 billion, participants to LINK have included over 200 research
organisations including almost every UK university, and over 200 companies, more than half
of which are SMEs.


105
      Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues; OECD, 2003.


                                                                                                     83
6.5. Creating public-private networks, platforms and clusters

Creation of clusters and formation of networks using PPP mechanisms is probably the area of
innovation policy that is characterized by the most dynamic development. One of the trends
clearly observed at present, is an active involvement of local governments, as well as
strengthening of regional innovation systems.

The overwhelming majority of European countries initiated cluster programmes in mid-
1990.106 Finland, for example, initiated an Inter-Ministerial Cluster Research Programme in
1996. The programme aims to transfer and accumulate knowledge in chosen fields, create
new and permanent co-operation structures, improve the co-operative ability of the whole
research system, and increase the relevance and flexibility of innovation activities. More
recently, Norway has launched the IT-Fornebu, which aims at stimulating the ICT cluster. It
intends to develop a major R&D IT-centre with close ties between higher education sector
and the IT-oriented business as a core of a new cluster in the Oslo Region with both national
and international links. An original feature of this cluster is the close involvement of venture
capital and companies in the build-up of the ‗Knowledge Centre‘.

New Zealand launched a new pilot programme to promote 15 different types of clusters in
2001. The programme provides a variety of services including training, consulting, and
funding assistance. The Portuguese PROINOV programme, launched in 2001, promotes the
development of innovative clusters in key areas. The Portuguese cluster policy aims to
promote co-operation and interface between firms, entrepreneurial associations, higher
education, research institutes, and financial institutions. So far, several potential partnerships
for innovative clusters have been identified. Starting with FY2002 budget, the Japanese
government established a new programme to create innovative clusters in selected regions.
The clusters involve universities, public research institutions, other research institutions and
R&D companies as well as the regional governments.

In Iceland, a formal health sector cluster organisation, the Health Technology Forum, was set
up in March 2000 by the Research Council to strengthen the collaboration between public
institutions and private sector companies, and promote the growth of health-related start-ups
and help existing enterprises reach global markets. The cluster strategy of the National
Research Council of Canada has successfully encouraged the development of globally
competitive innovation clusters in several communities by working in partnership with other
government departments at federal, provincial and municipal levels, universities and the
private sector. In December 2000, a Cluster Conference was organised to help firms, research
institutes and intermediate organisations to identify interesting cluster projects. In 2001
cluster monitoring and technology roadmaps were conducted to intensify the formation and
exchange of strategic information in close co-operation with all relevant actors.

Russia initiated the development of research clusters oriented towards markets in 2000 (see Box
6.7). One of the major large-scale programmes of public-private partnership in this direction is
a non-budget interdepartmental innovation programme ―Biotechnology for Medicine and
Agriculture.‖ A legal ground for realisation of this programme was an agreement signed in
2001 by four Russian ministries – the Ministry of Industry, Science and Technologies, the
Ministry of Public Health, the Ministry of Agriculture, and the Ministry of Education. Later
the agreement was joined by the Russian Academy of Sciences, the Russian Academy of

106
      Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues; OECD, 2003.


                                                                                                     84
Medical Sciences and the Russian Academy of Agricultural Sciences as well as research,
commercial and financial organisations of various forms of ownership.

Among the strategic objectives of this programme the following should be emphasized:

   Creation of a system and mechanisms of non-budget financing of priority scientific
    developments and innovation projects, their industrial development and
    commercialisation; and
   Ensuring an increase in Russia‘s export potential, including biotechnological products,
    intellectual property and capital.

The programme promotes a partnership between companies of public and private sectors of
economy at all stages of the innovation process. It provides public financing at the pre-
competition stage of R&D and industrial commercialisation of outputs with the help of
market-oriented private entities. The importance of this experience also implies that the
Programme enables the state and commercial organisations of various forms of ownership to
co-operate productively at all stages of innovation cycle, from development of technical
specifications to the production of competitive, high-level biotechnological products.

So far, the programme has already brought together about 300 biotechnological projects,
performed by academic institutes, research and industrial organisations. The forms of
collaboration within the Programme are diverse. In some cases, commercial development of
the most significant and promising R&D requires creation of commercial scientific and
industrial entities, which will bring research outputs to the stage of organisation of a
biotechnological production. It is remarkable that the programme is open to both national and
international participants.

The Programme is administered by interdepartmental Coordination Council, composed of
leading scientists, entrepreneurs and investors, representatives of biotechnological companies
and federal bodies of executive power. The Council selects, develops and finances investment
projects. To ensure efficient attraction of investment in the programme, its participants have
established a non-profit partnership the ―Biotechnological Consortium on Medicine and
Agriculture (Consortium ―BIOMAC‖). This Consortium consolidates principal Russian
manufacturers of biotechnological products (such as joint-stock companies Bioproduct and
Rosagrobioprom, PharmaDon Ltd.) and financiers (banks NIKoil, Lanta-bank, joint-stock
companies KRT BIOTECH, a Union of industrial corporations ―Rosindustry‖). The
Consortium‘s activities are aimed at the creation of various forms of non-budget financing
(venture financing, direct investment, favourable crediting, etc.) of science-intensive
innovation developments.

The Programme creates a common information space for researchers and developers,
manufacturers and investors. It makes possible for researchers and developers in priority
fields to get access to state support, for investors – to invest in highly profitable high-tech
production, for manufacturers – to launch competitive, high-quality biotechnological
products. Box 6.7 provides further details of on emerging and latent innovative clusters in
Russia.




                                                                                            85
Box 6.7: Emerging and latent innovative clusters in Russia

Main geographical locations: Moscow and St. Petersburg are the most important centres of the
clustering process. In these cities many potential clusters are developing, which cover nearly all the
industries and technologies in which Russia is somehow competitive. They include optics,
nanotechnologies, nuclear technologies, energy technologies, shipbuilding, laser technologies,
biotechnologies (primarily in pharmaceutics), information technologies (mathematical modelling,
speech recognition and production systems, as well as those for text and image, information security,
etc.), development of new materials (in particular, special alloys and polymers), space technologies,
technologies of personal safety, a whole range of specialized technologies in the field of prospecting
and extraction of mineral wealth, and of course military technologies.

Many other large cities represent the ―home base‖ for one or several industry technologies: for
example Ekaterinburg (metallurgy), Nizhni Novgorod (car industry, shipbuilding), Perm
(petrochemistry), Samara (space technologies and car industry), Voronezh (aviation technologies), etc.

Several science towns (small towns with high concentration of R&D activity in certain fields) are very
important generators of knowledge and could become a center of science-intensive clusters:
    Nuclear technologies – Dubna, Obninsk, Protvino, Sosnovy Bor, etc.
    Biotechnologies – Krasnoobsk, Obolensk, Puschino, Koltsovo.
    Space and rocket techs – Korolev, Himki, Reutov, Ubileini, Krasnoznamensk, Zvezdni, etc.
    Aviation – Zhukovski, Lytkarino.
    Radioelectronics and microelectronics – Frjazino, Zelenograd.
    Defence industries – Krasnoarmeisk, Klimovsk, and many others.
    Fundamental science – Chernogolovka, Troitsk, Town of Novosibirsk RAS Science Center.

10 closed towns specialized in military related research and production should be mentioned
separately. They in fact represent ―strong and very cohesive clusters‖ but work under public
procurement only. They are Sarov, Ozerk, Snezhinsk, Lesnoy, Zarechni, Zelenogorsk, Zheleznogorsk,
Trehgorni, Novouralsk, and Seversk.

Sectoral clusters in specific locations:
    St. Petersburg optics and optoelectronics cluster (ITMO, LOMO, State Optical Institute).
    St. Petersburg power engineering cluster (―Power Machines‖, State technical university,
      Polzunov CKTI etc).
    St. Petersburg shipbuilding cluster (Admiralteiskie Shipyards, Baltijski Zavod, Severnays
      Shipyard, Krylov CNII, CKB Rubin, NPO Almaz etc.)
    St. Petersburg IT cluster (technical universities and many specialized small and medium-sized
      companies).
    Moscow space technology cluster (Moscow aviation Institute, Moscow state technical
      university named after Bauman, Institute for Space Research, Tracking Headquarters, Energia
      corporation, Design Bureau Himmash).
    Moscow radioelectronics cluster (Moscow institute for electronics, radio technology and
      automatics, Moscow State Technical University named after Bauman, Technical University for
      Communications and Informatics).
    Ekaterinburg metallurgy and metal working cluster (Uralmash, Urals Politecnical Institute).
    Tatarstan oil processing cluster (KazanOrgsintez, Nizhnekamskneftehim, Nizhnekamskshina,
      Tatneft, Kazan State University).
    Zelenograd electronics cluster (Zelenograd Science and Technology Park, Moscow State
      Institute for Electronics, AFK Systema).
    Dubna nuclear studies and instrumentation cluster (Institute for Nuclear Studies, Dubna
      Machine Building Plant, Instrumentation Plant Tensor, NII Atoll).
    Koltsovo biotech cluster (Center for biotechnologies Vector, Novosibirsk State University).

Source: OECD. Fostering Public-Private Partnership for Innovation in Russia. Paris: OECD, 2005.
                                                                                                 86
The potentially wide-ranging impact of innovation networks and co-operative interactions has
received increasing attention in many OECD countries.107 Over the past few years, several
countries have initiated new programmes, which aim explicitly at building innovation
networks. Some programmes are targeted toward specific sectors and regions, and others are
focused on SMEs.

Canada‘s Networks of Centres of Excellence (NCE) are virtual research institutes that link
Canada's strengths in areas of importance to partners who can develop commercial
opportunities and improve quality of life. In fiscal year 1999-2000, a total of 563 companies,
138 provincial and federal government departments and agencies, 46 hospitals, 98
universities, and more than 266 other organisations from Canada and abroad were involved in
the NCE program. The active involvement of industry provides stimulating training
environments and employment opportunities for students. In February 2000, the government
announced funding of US$ 52 million over four years for the creation of three new networks.
In 2001, additional support was announced for four new NCEs in the area of automobile,
language and literacy research, water, and stem cell genomics and therapeutics. The 22
networks fall into five general areas: health and biotechnology; information technology;
natural resources; infrastructure; and education.

In Germany, the National Genome Research Network was initiated in December 2000 to
combat disease by pooling, networking and expanding the resources of the most efficient
partners from science and industry. The central goals to achieve through this network include:
the establishment of a critical mass of staff and infrastructure; new resources in the form of
high-throughput techniques and platform technologies; an effective mechanism for
prioritising and focusing research topics; and technology transfer to industry. In Eastern
Germany, a new programme, Network Management East (NEMO) will be started in 2002.
This measure shall sustain the organisation of regional networks of SMEs and research
institutes by competent technological and economic management support. With the help of
external network managers, the SMEs and start-ups suffering from the lack of own
competence will be able to take advantage of R&D-co-operation with other enterprises or
research institutes.

France was also very active in building innovation networks. Between 1999 and 2001, the
government provided funding for fifteen Technological Research and Innovation Networks in
the areas of environment, life sciences, information and computer technologies and
telecommunications. Their main purpose is to enhance the transfer of upstream research to
industry, accelerate the use of new ICTs, structure research policy and uphold comparative
advantages in strategic sectors of the economy. The Swiss Network for Innovation was
established in late 1999. Its goal is to support tertiary education institutions in their
technology transfer activities. All cantonal universities, the federal institutes of technology,
the universities of applied sciences, other research institutes as well as private companies are
members of the network.

Russia started to develop networks recently. In particular, this relates to creation of a network
of national information and analytical centres on advanced directions of science to monitor
world and Russian S&T potential. Creation of networks, especially between research sector
and industry should become a part of systemic policy of the nation. Creation of networks


107
      OECD. Public/Private Partnerships for Innovation: Policy Rationale, Trends and Issues. Paris: OECD, 2003.


                                                                                                             87
would encourage formation of new PPP programmes. Participation of foreign companies with
a relevant protection of national interests should be encouraged.


6.6 Key lessons for the Russian innovation policy

In a market economy, the control of the state over innovation processes is limited, as much
depends on the actions of the non-governmental (private) sector of economy, including their
demand for public R&D. Therefore, a partnership of the private and public sectors of the
economy should become a key component of Russia‘s new innovation policy. If implemented
correctly, it will ensure more benefits from investment in public research and create
favourable prerequisites for a sustainable process of innovation and economic growth.

Analysis presented in this chapter shows that the role of PPPs in innovation policy is different
in different countries, but there is a clear rise in its importance and impact on innovation. The
importance of PPPs as an effective and efficient tool for the realisation of innovation policy
goals is now widely recognized and which is reflected in budget allocations, legislative
initiatives, and the development of new programmes.

In many countries, the development of partnerships and the cooperation between public and
private sectors is considered a priority task of the government. As a result, many obstacles on
the way to effective public-private partnerships in the sphere of innovation have been
eliminated. This has created the conditions for researchers to participate in technology-based
start-ups, facilitated by effective seed money and venture financing. Many countries created
necessary legal and organisational mechanisms encouraging private companies to conclude
R&D agreements with public universities and research institutes, which in turn got an
opportunity to provide technical consulting and be employed as executives in private
companies. Creation of relations in the national innovation system has become a priority of
policy of many states, and public-private partnerships – basic policy instrument.

It should be acknowledged that Russia is still behind in the development of legal,
organisational and economic, and financial mechanisms of realisation of PPPs for innovation.
In spite that today the Russian legal system provides possibilities to use new legal,
organisational and economic and financial tools to support PPPs programmes, the federal
bodies of executive power in practice possess rather limited possibilities to apply them.

Thus, new large-scale initiatives of Russia on development of PPPs in significant degree are
blocked by legislative barriers and use of conservative (bureaucratic) administrative tools,
which are not capable to ensure sustainable development in modern economic environment.
Private enterprises, operating in a rigid market environment, rapidly loose interest in the
development of PPPs when they face legal and administrative barriers that turn participation
in such partnerships into a risk. This is why that in spite of that the first PPP projects in Russia
date back to the 1990s, they still are not widespread.

It should be noted that PPP programmes initiated by the government are actively
complemented with a significant number of PPP initiatives originating from the bottom. The
goals of these programmes are varied.108 This tendency is a sign of the viability of the
108
    An example to this is an agreement concluded in 2003 for two years between ―Norilskiy Nikel‖ and the
Russian Academy of Sciences on cooperation in the field of hydrogen energy. During the first stage of this
cooperation RAS will get 40 Million US Dollars per year for R&D carried out in its institutes.


                                                                                                       88
concept, which should not be suppressed by inadequate attempts from the government to
introduce rigid models of partnerships. Most likely, the bottom-up initiatives should be
―arranged by means of encouraging‖ of the best and be united by a catalyst programme to
form synergy in specific areas.

A transition of federal executive power bodies to the use of new economic tools, adequate to
the tasks and goals set, will permit not only to deepen public-private partnership, but also to
overcome substantial differences of culture between government and business, to introduce
progressive management methods into the public sector, and to counteract against risk of
ineffective bureaucratic organisation of innovation processes.




                                                                                            89
7. The Roles of Public Research Organizations in Open Innovation
Systems

By Govert Gijsbers

―In the 1990s, science systems in nearly all OECD countries experienced increasing pressures
for change. These pressures reflect new challenges that go beyond the important issue of
ensuring sustained funding for the research enterprise, and need to be addressed in the broader
perspective of the governance of science systems. This includes the decision-making
processes for priority setting, funding, the management of research institutions and the
assessment of their performance in terms of contribution to knowledge creation, economic
growth and responses to societal needs. Main challenges are: responding to a more diverse set
of stakeholders, exploiting emerging opportunities, and ensuring the long-term sustainability
of the research enterprise.‖109

―The key survival skill will not be conducting R&D so much as creating innovation.
Increasingly R&D will be the ―make‖ option in a ―make or buy‖ world. More technology than
ever before will be available for license or exchange, and internal R&D departments will have
to compete effectively with these external sources.‖110


7.1. Introduction

At the beginning of the 21st century, private and public research departments and
organisations alike find themselves in a situation of great uncertainty. Many corporations have
abolished central corporate research departments, bringing R&D directly under their business
units to ensure short term delivery of new technology, products and services that is relevant to
the needs of the business units. Public research organizations worldwide have seen their
budgets reduced (sometimes very dramatically), while universities and private laboratories
have emerged on the scene as competitors. Public research organisations have increasingly
come under scrutiny for lack of impact and relevance to a country‘s economic and social
needs.

This chapter argues that public research organizations find themselves in an environment that
is changing rapidly — from a traditional hierarchical science and technology system to a
much more open innovation landscape. In this new innovation landscape traditional roles and
positions of actors disappear, while new ones emerge. This causes problems of adjustment.

This chapter will first discuss the research and innovation functions that must be performed,
followed by a presentation of the changing international innovation landscape through a
discussion of key trends. It will conclude by assessing the changing position of public
research organisations in open innovation systems and the implications for Russia‘s
innovation system.


109
  OECD. Governance of Public Research. Paris: OECD, 2005.
110
  Foster, R. N. ―Managing technological innovation for the next 25 years.‖ In: Research-Technology
Management Vol. 43, No. 1 (January-February 2000): 29-45.



                                                                                                     90
7.2 Research and innovation functions

Traditionally, public research organizations were seen to perform three different types of
research functions:

         Advancing the scientific frontier – basic research;
         Advancing new technology areas – strategic / mission oriented research; and
         Advancing the application of new knowledge and technology – applied research,
          technology transfer and commercialization.

This classification of activities is explicitly or implicitly based on what is known as the ―linear
model of innovation‖. The linear model of innovation sees a straightforward progression from
fundamental to applied and adaptive research, to technology transfer and the adoption and
diffusion of innovations.111 But, while the linear model has been pronounced dead for many
years, it refuses to go away – presumably because it is such a strong generalization that has
been ―institutionalized‖ in the organizational setup of research in many countries, with
separate institutes for basic and applied research.

Already in the 1930s the father of innovation theory, the Austrian economist Alfred
Schumpeter distinguished innovations from inventions and defined innovations as any ―new
combination‖ of existing or new technologies and practices. Innovations include new
products, new processes, new distribution methods, new ways of operating in markets, and
new management practices and organizational structures.

With such a broad definition of innovation, research appears to be neither a necessary, nor a
sufficient condition for innovation. That is, innovations are often produced without any
(formal) research while, on the other hand, research does not automatically lead to innovation.
In fact, most research organizations and public sector development organizations have
realized that research does not automatically produce innovation and have therefore stressed
the need for ―technology transfer‖ programs. But in most cases these activities have been
treated as ―add-ons‖ to the research process, which was seen as the main engine driving the
broader innovation process.

The relevance of the science push model has particularly been questioned as many
innovations appear to originate outside research systems. Innovations are also the result of the
active searching and learning behaviour of technology users; they are produced by
manufacturers of machinery and equipment, and they are heavily influenced by Government
through pricing policies and regulatory standard (e.g. the European GSM standard for mobile
telephony).

In conclusion it may be stated that the linear model is replaced by a ―multiple sources of
innovation model‖ which holds that innovations may emerge anywhere in the innovation
system. While research continues to be an important driver of innovation it is no longer the
only one. In this context there is a need to review the traditional role of research

111
   In fact, the linear model of innovation has come in two different flavours: science push and demand pull. The
science push model has been quite dominant, so much so that the linear model has been often been equated with
the science push model. Economists such as Giovanni Dosi have argued for many years that innovation is
increasingly driven by scientific breakthroughs. Others like von Hippel have emphasized the role of lead users
(e.g. manufacturers) in demanding innovations as solutions to their problems.



                                                                                                             91
organisations. Using a multiple sources of innovation model has major implications for the
type of activities undertaken and for the way in which they are best organized.


7.3 International trends in R&D and innovation

In a rapidly changing environment the research and technology transfer tasks will be
performed in a different manner. This section reviews some of the main trends and
developments that shape the changing innovation landscape.

7.3.1 Disappearing boundaries between fundamental and applied research

In many countries the knowledge infrastructure is organized according to the linear model.
Academia and public research institutes are responsible for fundamental science, applied
research organisations112 transfer the results of fundamental research into technologies that
can be used by the productive sector, which develops new products and brings them to the
market. In many countries in the EU and in the USA however, this traditional division of
labour between the different research actors is challenged.

Increasingly, universities and fundamental research institutes are encouraged to become more
entrepreneurial and move into the area of applied research and sometimes even product
development. Conversely, private sector companies undertake very advanced types of
research especially in the ICT, biotechnology and other new fields. The traditional boundaries
between fundamental and applied science are disappearing rapidly and all research institutes
(universities, institutes and company labs alike) will have to learn to cover the whole
knowledge chain, either alone or by establishing very strong and effective partnerships with
other organisations.

The result of the fading boundaries between different types of research and the need to cover
the whole knowledge chain is what could be called ´institutional convergence´. It means that
the actors in R&D including universities, PROs, and company labs are becoming more
similar.

7.3.2 Globalisation: A worldwide market for R&D

Research is rapidly becoming a global business. The private sector is leading the way in this
process. Companies with large research budgets such as IBM and Ford Motor Co. have
research establishments in many countries across the globe. This is based on another global
trend; the downsizing of corporate in-house research departments. Increasingly, companies
have abolished corporate-level research departments and either brought them directly under
the business units, or they have spun off research departments. As a result, corporations buy
the research services they need based on quality and price. This opens up new opportunities
for public research organisations if they can deliver.

If a country wants to compete internationally, it requires establishing global excellence in
certain areas. This trend may very well conflict with traditional national (or regional when it
concerns regional institutions) public interest led demands. This leads to contradictory forces
working on PROs: on the one hand they will have to seek international excellence, which can

112
      E.g. Fraunhofer Gesellschaft in Germany, VTT in Finland and TNO in the Netherlands


                                                                                            92
only be sustained by an international market for their services and on the other hand they will
have to serve local, regional or national interests.

7.3.3 Science: Emerging and converging technologies

New scientific developments are increasingly taking place at the interface of established
disciplines, especially biotechnology, information sciences, materials science, nanotechnology
and cognitive sciences. There seems to be a growing common scientific base for the
converging technologies: mathematic modelling, complex systems theory, modelling
biological systems, etc. The convergence of these disciplines is leading to powerful new
paradigms that go significantly beyond a traditional multidisciplinary model.

The convergence of technologies will have a number of implications for PROs. First, to be
effective they will have to be able to adapt their ‗old‘ expertise to new questions posed by the
new technologies. Second, converging technologies may in some cases lead to the
establishment of new research institutes. But, as many PROs are under financial pressure and
Ministries of Science have lost their appetite for creating new research institutes, more
frequently special programs or initiatives are established, based on existing organisations.

7.3.4 Users: Demand-driven innovation

While new scientific developments play an important role in shaping the innovation system,
in many sector technology users also become important actors. Lead users, in most cases
companies, contact and contract research organisations to help solve specific problems for
them in developing improved products and processes. In information and communication
technology end-users have become increasingly involved in adaptation and development of
new applications. Recently, personal manufacturing systems have been announced. 113 And in
the USA patient organisations are increasingly involved in the organization and management
of pharmaceutical research especially on orphan diseases, where they bring government,
corporate sponsors and research institutes together in a research and product development
partnerships.

It may be expected that the dividing line between producers and users will become thinner
and thinner. For research organisations this will have important implications for the way the
R&D processes are organised and managed. Research organisations will interact much more
directly with individuals, organisations, or networks of individuals and organisations. This
requires networking skills, agreements on ownership of IPRs, solving issues on the use of
public funds, etc.

7.3.5 Transparency and accountability: “See-through Science”

New technologies such as biotechnology, nanotechnology, and in some cases ICT have (or
will have) a profound effect on technology users and raise a number of social, ethical, privacy
and safety issues. In many European countries the confidence and trust that citizens have in
research organizations has sharply declined, amongst others because of a number of high
profile controversies over BSE, GM crops and more recently nanotechnology. In many cases
consumers feel they have been ignored and they reject new technologies, such as genetic
modification, for which consumer benefits are unclear and perceived risks are high. It is only
113
   Neil Gershenfeld. 2004. FAB: The Coming Revolution on Your Desktop - From Personal Computers to
Personal Fabrication.


                                                                                                     93
recently that some biotechnology companies and research organization have realized that they
ignore user concerns at their peril. The response of research organisations and governments
has been to ―explain‖ better the benefits of these new technologies to consumers, but with
little success. When educating the public was not effective, researchers started to use
processes of dialogue and participation. But these efforts have not yet proved sufficient.

Demos, an NGO in the UK, has argued that these new technologies require a much stronger
involvement of the public in setting the research agenda and ―expose to public scrutiny the
underlying assumptions, values and visions that drive science.‖114 ―Scientists need to find
ways of listening to and valuing more diverse forms of public knowledge and social
intelligence. Only by opening up innovation processes at an early stage can we ensure that
science contributes to the common good.‖

Generally, there is a demand for research to become much more transparent and accountable
to its stakeholders for its actions and its use of resources. This has implications for public
research organisations. First, performance of research is becoming much more broadly
defined in terms of societal outcomes, rather than exclusively on scientific success. Second,
governments, research organisations as well as private companies are developing new ways of
involving users and stakeholders and to articulate their demands in an effective manner.
Third, there are now systematic efforts to assess the possible impacts of new technology
through activities such as technology assessment, foresight studies, and environmental, social
and economic impact assessments. PROs will need to build capacity to do this type of
research in a professional and credible manner.

7.3.6 Governance: Towards networks and open innovation systems

The most pervasive factor of all is the development of networked innovation systems and
networked R&D. Companies and research organization increasingly have to focus on certain
core competencies or core-products. They can only do so by engaging in extensive
networking with other players in the innovation system. R&D has to take account of the fact
that it is embedded in increasingly diffuse and distributed innovation processes. The keyword
in Europe nowadays is open innovation.

In open innovation systems organisations play different roles at different times and in
different technologies. Companies may do research in collaborative programs and projects is
growing, but in many cases they may also transfer funds to PROs to conduct specific research
projects. Universities may be involved in fundamental research, but may also be in the
business of setting up spin-off companies. PROs may at the same time collaborate and
compete with universities in a variety of projects.

Effective linkages between different research and non-research actors are a key condition to
the establishment of open innovation systems ―As distinctions between fundamental and
problem-oriented research have blurred, and demands to make public research more
responsive to the needs of business and civil society have mounted, there is a greater need for
increased and more efficient linkages between science and innovation. Such linkages serve to
both facilitate industry's uptake and commercialisation of public-sector research results and to
ensure that research performed in the public sector is attuned to social and economic
problems. Science-innovation linkages can take many forms, from contract and collaborative
114
      Wilsdon, J., and R. Willis. 2004. See-through Science: Why public engagement needs to move upstream.



                                                                                                             94
research and personnel transfers to technology licences and creation of spin-off firms.‖115 Box
7.1 presents an overview of some of the many different possible mechanisms that can be used
to create effective linkages between innovation organisations.

 Box 7.1 Mechanisms to create network linkages between innovation system actors

 Research-Industry networking

      •   Multi-client research programs
      •   Research programming by industry representatives
      •   Collaborative research programmes
      •   Co-funding programmes: companies fund part of research in return for rights on outcomes
          (10, 25, 50%)
      •   Contract research and technology related consulting
      •   Special technology transfer schemes (e.g. for SMEs) and technology briefings
      •   Advisory boards of industry representatives
      •   Personnel mobility between firms and research organisation
      •   Vocational training for employees of firms
      •   Exploitation and transfer of intellectual property rights by research organisations
      •   Technology Licensing
      •   Spin off and start up companies from research organisation employees supported by the
          research organisation
      •   Self-employment of former employees
      •   Conferences, informal contacts and networks (rapidly growing)

 Research-academia networking

      •   Co-operation in the education of graduate and PhD students in institutionalised joint
          programs, internships, etc.
      •   Personnel exchange, special professorships, etc.
      •   Personnel mobility between academia and research institutes
      •   Exploitation of intellectual property rights, licensing
      •   Institutionalised collaborative research programs
      •   Collaboration in projects or research consortia (can also include industry)
      •   Publications, scientific conference presentations
      •   Informal contacts and networks

 Research-government networking

      •   Long term funding (basic, conditional) based on agreed mission and strategy
      •   Contract research and technology related consulting
      •   Funding of collaborative research
      •   Researchers memberships of government advisory councils
      •   Exchange of personnel
      •   Personnel mobility between government and research institutes
      •   Maintaining a public knowledge base and execution of public tasks (e.g. participation in
          standardization bodies)
      •   Informal contacts and networks

 Source: TNO


115
    OECD. 2004. Science, Technology and Innovation for the 21st Century. Meeting of the OECD Committee
for Scientific and Technological Policy at Ministerial Level, 29-30 January 2004 - Final Communique


                                                                                                     95
One way in which governments have attempted to encourage research organisations to work
together (while at the same time cutting costs as research budgets are under pressure) has been
to resist the call for establishing new institutes for novel types of research (e.g.
nanotechnology). Rather than creating new ―white elephants‖, Governments force existing
organisations to work together in ―special programs‖, ―new initiatives‖, ―knowledge centres‖,
and ―virtual institutes‖. An example is the National Genomics Initiative in the Netherlands,
set up as a (time-bound) network based on existing research institutes.

Important characteristics of these types of ―organisations‖ are that:

      they are temporary in nature (so they can be shut down more easily than institutes
       when they have outlived their usefulness);
      they are periodically evaluated to determine their continued usefulness and relevance;
      they involve a range of research and non-research organisations, including companies;
      they rely on a combination of funding from public and private participants and
       stakeholders; and
      they involve both staff that work directly for the special program and staff that
       continue to be based at the organisations participating in the initiatives.

The discussion on open innovation systems, fading boundaries and networking leads to a
number of general conclusions:

   1. The overall conclusion should be that, increasingly effective networking is a key
      competence for research organizations and all other players in innovation systems.

   2. In open innovation systems it is increasingly difficult to think in terms of fixed roles
      for the players in the innovation systems and the division of labour between players
      may differ from case to case.

   3. Finding new ways of shared management of assets (IPR) in networked environments
      and establishing PPPs to create an open innovation environment will be a key
      challenge.

   4. Organising networked programs and projects, in particular in the early stages of their
      development, when joint goals and responsibilities have to be established is important.

   5. Open innovation requires the development of new means of being accountable and
      assessing impact as alternatives to increasingly rigid control mechanisms, which can
      only lead to a reduction of the much needed creative behaviour of researchers.

   6. Highly qualified and flexible staff is needed to answer the rapidly increasing
      complexity of R&D problems. In addition staff will need to have excellent
      entrepreneurial and networking skills.

   7. Institutional learning and knowledge management are particularly important to
      increase productivity of PROs, which is a necessity because of growing competition in
      research, development and innovation services.




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7.4 (Re)-Positioning public research organizations in open innovation systems

The idea of open innovation systems is based on the notion that there are multiple sources of
innovation and that innovation often originates in unexpected places. Companies, lead users,
universities, research departments and public research organisations, consumer organisations
and other NGO‘s all play a role in the innovation process. The resolution of conflicts over
new technologies, for example in bio- and nanotechnologies, and the need to better address a
number of societal issues (ranging from obesity to environmental to public safety and security
issues) demands a much more effective involvement of all relevant stakeholders in setting the
research agenda.

The new innovation landscape is no longer characterized by secure positions of established
organisations. Rather, a situation emerges, where flexible contracts or exchange-based
arrangements are the basis for interaction between organizations. Compared to the old S&T
paradigm, there is both more competition and collaboration in the open innovation system,
which requires finding a new balance between the two.

The traditional picture of the R&D system in many countries is well summarized in Figure
7.1., which was taken from an annual report of the Fraunhofer Gesellschaft (FhG) in
Germany. It shows a steady progression from fundamental to applied research and to product
development, with the funding mix changing from 100% public to 100% private.




Figure 7.1: Positioning of German research organisations

A key element of the graph is that applied research organisations define their role as one of
―bridging the gap‖ between academic research and industry application. Recently however the
bridging concept (and therefore the institutionalized linear model of innovation) is being
challenged in many countries. For example, in 2004 an external evaluation of TNO and other
technology institutes in the Netherlands concluded that the traditional intermediary role of
TNO (between universities and the market) was no longer relevant in today‘s highly dynamic
and increasingly fragmented innovation system. Universities, companies and others are all
involved in doing research, are undertaking research commercialization and valorization of
research and are in the process of commercializing their knowledge and intellectual property
and as well as doing projects and consultancies for clients.


                                                                                           97
A key weakness of the linear system as presented in Fig. 7.1 is that – contrary to what was
intended – it strongly inhibits the flow of information between research and its application.
The different institutes tend to focus exclusively on their small part of the innovation
spectrum; the part which they consider to be ―their‖ mandate. It leads to frequent conflicts
between organisations when they see another organisation invading ―their‖ territory. In
addition, companies blame research organisations for the ―academic‖ nature of their work,
which is of no relevance to their daily work. On the other hand, research institutes and
universities blame companies for their limited ability to take up and apply the research results
that they have produced. Since knowledge is the key resource in the ―knowledge economies‖
that European countries try to create, the strong institutional boundaries in the linear model
are clearly detrimental to the innovation process. To overcome this, new forms of
collaboration and competition are emerging between the various innovation actors and PROs
in Europe are becoming increasingly active in all sort of networks, consortia, partnerships and
knowledge centers, both nationally and internationally.


7.5 Key lessons for the Russian innovation system

Much of the thinking in Russia‘s public research organizations is still based on the old
command structure of the former centrally planned economy. The fact that many (if not most)
of the potential clients of public research organisations operate in a dynamic market economy
has not settled in yet. The situation is also somewhat confusing, because the old centrally
planned model is still quite strong in the defence-related industries, where the demand for new
technologies is coming from the government and not from the market.116

A general observation on the future of the Russian innovation system is that it probably can
do better than follow the linear model that is still dominant in many European countries and
that has not served them well. In fact, the obstacles and boundaries inherent in the linear
model are one of the main reasons why the EU in its ―Lisbon agenda‖ is calling for more
dynamic and flexible arrangements in order to make European economies more competitive.

Instead, as the awareness in Russia increases that changes in the research system are
inevitable to build a more effective innovation system, policy makers should consider
working towards a more open innovation system, with more flexible arrangements for
organisations to work together and to compete where needed. Building such a system in
Russia will by no means be easy as there is no tradition of organisations to collaborate and
share information, knowledge and resources. So the transition from a relatively closed S&T
system to an open innovation system in Russia will take time and strong political support.

Reflecting the specific characteristics of the Russian S&T system and the structure of its
economy, Russian innovation policy should pursue a two-track innovation strategy, which
would include both a technology-push and a demand-pull approach. The technology push
model recognizes that Russia continues to have a strong, and in some cases unique, scientific
base on which to build a much stronger capacity to develop technologies and high-tech
products for a range of national and international clients. As R&D is becoming a global
business and international clients ―source‖ research services where they can find the highest
quality, in the technology-push model Russian research should be able to compete with the

116
   Another major challenge is to turn the overcapacity in the defense industries into civilian industries. This
requires a major effort in identifying new products and clients.


                                                                                                                  98
best of the world. The model requires a strong commercialisation drive and an improved
international presence of Russian research and technology.

The demand-pull model needs to recognize that Russian research institutes have been
especially weak in catering for the needs of high-tech consumer good industries and the needs
of society at large such as health and the environment.

A number of practical steps may be taken to move towards a more effective and open
innovation system for the Russian Federation.

   1. In the time of global research, the Russian research system needs to identify a number
      of world class technologies and promote and commercialise them effectively to
      national and international corporate clients. To achieve this, Russian research
      organisations need to develop much closer links with the productive sector. Setting up
      spin off companies to commercialise technologies has so far been a difficult issue
      especially because of uncertainty of IPR issues.

   2. The Russian research system has in the past ignored innovations for consumer goods
      and innovations that help solve social problems. Russian research organisations need
      to become much more effective in turning user demands and social issues into
      researchable questions and produce innovative products and services for Russian
      consumers and citizens.

   3. The Russian Government as the main financer of research should encourage more
      competition in the research system through the introduction of financing instruments
      such as competitive matching grants to put more emphasis on engaging and
      empowering end users. The purpose of introducing competition is to open up the
      research funding to all institutes based on the quality of research project proposals. As
      a country with a very large research system, Russia may introduce competition
      between as well as within organisations (e.g. between institutes of the RAS).

   4. The Russian Government needs to remove legal and structural obstacles to
      organisations working together on innovation problems. An example is the mandate of
      the RAS, which is currently defined in terms of fundamental research exclusively. The
      mandate of the RAS should be broadened so that it (alone or in partnership) has the
      opportunity to cover the entire knowledge chain.

   5. There is a need to positively encourage collaborative research and development
      activities that focus on developing new technologies, products and services for a
      variety of users. This can be done through a wide variety of funding and other linkage
      mechanisms that promote the exchange of ideas, knowledge and persons. Specific
      budgets to promote collaborative R&D are required.

   6. Open innovation requires transparency, so that all participating organisations know in
      advance who will contribute how much, and how the benefits will be shared. An
      urgent problem here is the issue of intellectual property rights of publicly funded
      research which are not well defined at the moment.

   7. There is a also a need to develop practical guidelines for research institutes on how to
      engage in partnership with the private sector in a variety of ways.


                                                                                            99
8. Collaborative research and innovation is new to most researchers in Russia. At a
   personal level training will be needed to develop the entrepreneurial skills of
   researchers. At an organizational level incentives (salaries, promotions, awards)
   should reward, rather than punish collaborative work and commercialization activities.

9. Finally, Russia will need to develop its own innovation system. This requires
   experimentation, learning and dissemination of good practices. Research institutes in
   Russia need to encourage and promote such experiments with new ways of doing
   R&D.




                                                                                     100
Chapter 8: Conclusions and Recommendations

By Johannes Roseboom and Govert Gijsbers.

In recent years, Russia has moved from a narrow ―S&T policy perspective‖ that only looks at
the generation of new knowledge to a broader ―innovation policy perspective‖ that looks at
both the generation and application of new knowledge. As illustrated in figure 8.1, the whole
idea of a knowledge economy is that the economic revenues and social benefits created by
knowledge (here crudely referred to as ―money‖) are substantially bigger than the investments
going into the creation of that knowledge. In this way knowledge constitutes in developed
countries a source of economic growth many times more powerful than capital.




      Money                Knowledge




Figure 8.1: From investing in knowledge to exploiting knowledge

Regarding the generation of new knowledge, the study observed the following:117

          Russia has still a good reputation in producing new knowledge as reflected in
           winning many Nobel prizes, scientific publications, etc.
          However, due to funding cuts knowledge output has declined quite substantially
           during the 1990s.
          Delayed restructuring of public research organizations has affected efficiency. There
           is a lot of dead wood – institutes that exist on paper but hardly produce anything
           worthwhile.
          There is a huge motivation problem due to low salaries; and
          Hardly any new research staff has been appointed over the past 15 years, which has
           made that Russia is lacking behind in new science areas. In part this has been due to
           a drastic reduction in positions, but in part also due to low salaries. Becoming a
           researcher is not an attractive proposition at the moment.

Regarding the application of new knowledge, the study observed the following:

          Russia has a relatively poor record when it comes to turning knowledge into
           economic or social benefits. This is where the centrally planned economy tended to
           fail – during Soviet times investment levels in R&D were similar if not higher than in
           the EU but this did not lead to the production of superior, innovative consumer
           goods.

117
      Also see the Functional Analysis Study that complements this Critical Analysis Study.


                                                                                              101
       Russia‘s economy has some important structural problems. Except for aerospace and
        defense, the economy has relatively few high-tech industries. In addition, Russia has
        only a small pool of SMEs from which new industries can emerge.
       Russia‘s innovation system is only slowly adjusting to a market economy. New
        modes of operation are needed. The supply of new knowledge should be driven more
        strongly by the needs and aspirations of the productive sector. That brings us to the
        last point:
       Russia‘s innovation system is still strongly supply-driven rather than demand-driven.

In addition to this more general perspective, this study looked critically into a series of more
specific topics of relevance to the Russian innovation system. It did so, by benchmarking the
Russian experience against European and other international experiences. The six topics that
were studied in detail are:

         The emergence of an innovation policy
         The regulatory framework to support innovation
         Financing of innovation activities
         Technology transfer and commercialization practices
         Public-private partnerships in innovation
         The roles of public research organizations in open innovation systems

All these topics are highly interrelated, and it is only jointly that they can make an impact.

This chapter presents a set of specific recommendations derived from the critical analysis.
These recommendations have been discussed and reviewed during the Interim Innovation
Policy Forum held in Moscow on 6 December 2005. They will form the basis for a more
concise Innovation Policy Paper targeting Russian policy makers that is planned to be
produced during the first quarter of 2006. During the Forum several additional
recommendations were introduced, which have been recorded in a separate document.

In the remainder of this chapter we will present our recommendations in four clusters,
reflecting the discussion groups during the Interim Innovation Policy Forum.


8.1 Russia’s innovation system and policy

Based on our critical analysis, the following recommendations were formulated regarding
Russia‘s innovation system and policy:

   1. Proclaim the development of a National Innovation Policy a priority of highest
      national importance. In spite of long discussions and the development of various legal
      documents, Russia still does not have a truly integrated national innovation policy that
      consolidates all parts of the system. This complicated problem is a serious challenge
      that can be coped with only if all resources are mobilized. It is recommended to
      proclaim Innovation Policy a national priority at the highest political level, and also to
      define clearly, what the term ―innovation economy‖ implies, how the tasks of 1)
      acceleration of innovation development as the engine of economic growth and of 2)
      making all the economic, industrial, scientific and regional policy programmes more
      ―innovative‖ can be realized. Accordingly, it‘s very important to mobilize political
      elite and business as well as the society on the whole. It is necessary to build the

                                                                                                 102
      mechanism of ensuring the priority of innovation development in the budget, political
      and legislative process and to make decisions concerning large public programmes
      funding.

   2. Stimulate the demand for innovations by the business sector. The prepared draft law in
      the field of innovation policy is rather biased towards public research organizations
      and does not provide for a more active role of the private sector. It is therefore
      recommended that the Government pays much more attention to stimulating
      innovation by the business sector. Issues that come to mind here are the development
      and enforcement of legislation that protects IPR and regulates fair competition,
      financial incentives for investors who invest in innovations and start-ups, etc.

   3. Stimulate private investment in R&D. Compared to international competitors, Russian
      companies make relatively small investments in own R&D. It is recommended to plan
      an active campaign to stimulate private sector investment in R&D and develop
      measures (taxation, grants, etc.) for its realization. In addition, the government should
      more actively support newly created high-tech companies.

   4. Restore the scientific potential and reputation of Russian science and education.
      Russia‘s public research and education system is loosing rapidly its reputation both
      within and outside the country. The past 15 years can be characterized as a period of
      stagnation, decline and fight for survival. The system needs to restore its research
      potential and expand into new fields of knowledge. Serious reforms are needed to
      change the situation. Some measures have already been announced, for example, a pay
      rise for researchers and professors combined with considerable reduction of staff, but
      these declarations should be practically realized.

   5. Improve the coordination of innovation activities initiated by the different
      departments. It is recommended to ensure real, not formal, coordination and
      cooperation. In order to do so, it is recommended to mobilize the various actors
      around some nationally important innovation projects that receive serious political
      support. Examples: technoparks, special economic zones, megaprojects.

   6. Introduce an independent system of monitoring and evaluation with regard to the
      implementation of the innovation policy. Also, monitoring and evaluation of
      legislation can be useful.

   7. Set priorities for the development of the innovation system. It is recommended to
      prepare preliminary suggestions to limit the number of priorities and measures for the
      most effective realization of tasks set by the document called ―Main directions of the
      innovation system development policy of the Russian Federation up to 2010.‖ These
      suggestions should be discussed with the stakeholders.

   8. Improve and streamline the governance of the national innovation system. It is
      recommended to develop innovation programmes in all the ministries, which deal with
      innovations, not only in the Ministry for Education and Science, which is nowadays
      the main coordinator of all innovation programmes.

Regarding the role of public research organizations (PROs) within the Russian innovation
system, the following specific recommendations were made:


                                                                                           103
       1. Orient scientific research to the market and the end users of the new knowledge.
          Russian PROs still use mostly a technology-push instead of technology-pull strategy.
          As a result, technologies are often developed that are not demanded by the market but
          draw away resources and efforts. To avoid these problems in the future, it is
          recommended to change the process of research priority setting. The end users of the
          new knowledge and technologies (business, government and society) should have
          much more opportunities to take part in research prioritizing and result evaluation as
          well as in the financing of such research.118

       2. Provide for transparency in the relations between PROs and the private sector. Clear
          and simple regulations are needed that facilitate partnerships between PROs and the
          private sector. Current fiscal and budget regulations create a lot of problems for
          innovators inside the PROs.

       3. Stimulate a pro-active innovation approach on the part of scientific community. Most
          PROs in Russia understand very well, that their future depends on their capacity to
          ensure the country‘s innovative growth. But they should use more effective
          instruments. In spite of the fact that it is very important to focus on business-sector
          demand for innovations (including existing large and small companies and start-ups),
          it is recommended to adopt special governmental programmes and measures aimed at
          developing a pro-active approach to promotion of scientific research results on the part
          of the scientific community.

       4. Enhance the mobility and ―renewability‖ of research staff. To revive the public system
          of scientific research young researchers should be immediately recruited by research
          institutes. At the same time it is necessary to abandon the idea of a research career as a
          lifelong occupation. This approach should result in higher mobility of staff, which will
          make it possible to combine the most valuable knowledge inside the innovation
          system.

Regarding the role of the Russian Academy of Sciences within the Russian innovation
system, this study recommends the following:

       1. Give the Russian Academy of Sciences a new mandate that covers the whole
          innovation spectrum from basic to applied research as well as the commercialization
          of research. This will provide the RAS with the necessary flexibility to reposition
          itself in a dynamic and competitive innovation market.

       2. At the same time, eliminate the current monopoly of the RAS on basic research. Let it
          compete with other potential providers of basic research such as universities.


8.2 The regulatory framework for innovation

This part of the document contains recommendations concerning legislative support of the
process of creating an effective national innovation system. The main recommendations are:


118
      See recommendation 2 under financing innovation how this could be done.


                                                                                                104
1. Clarify who owns the intellectual property rights (IPR) regarding research results
   derived from publicly funded research, as the present situation is unclear and impedes
   the commercial exploitation of knowledge. After many years of discussion, the
   Government finally approved a decision on 17 November 2005 that clarifies the
   situation and transfers, under certain conditions, IPR to the public research
   organisations. This is indeed an important step; however, it is recommended:

       a. To clarify modalities of implementation of this decision;
       b. To set up rules for IPR for the results obtained by the research organisations in
          the past; and especially
       c. To set up legal and economic mechanisms of technology transfer, such as laws,
          guidelines, instructions etc. It is important to cover dual use technologies by
          such mechanisms.

2. Stimulate, through commercialization, the transfer of IPR from public research
   organizations to the industry. The experience with technology commercialisation in
   the EU is good reference point when developing relevant mechanisms to stimulate
   commercialisation. For the moment, however, existing mechanisms are rather de-
   motivating. For example, as the PROs are budget organisations, they have to transfer
   all income received thanks to licensing agreements back to the state budget. Hence
   there is little incentive for them to engage in commercialization. This is clearly an
   issue that needs to be resolved. It is proposed to develop a formula that distributes
   such income between individual researchers, institutes and intermediaries in such a
   way that it provides them with sufficient incentive to engage in S&T
   commercialisation.

   Along with assignment of the property rights for R&D results, it is advisable to
   consider introduction of a regulation within the Russian legislation, defining
   commercialization as one of main domains of activity for research organisations.

3. Create incentives and an appropriate legal framework for the commercialisation of
   S&T results developed by public research organizations.

4. Stimulate the creation of new enterprises (start-up companies). The legal constraints
   for setting up start-up companies by public research organisations, oriented to
   commercialization of technologies, should be eliminated. Elaboration of legal
   regulations, creating conditions for legal participation of public institutes in setting up
   start-up companies is an indisputable priority for legislative activity, oriented to
   stimulation of commercialization in Russia.

5. Clarify and strengthen the various financing tools that the government can use to
   stimulate innovation:

       a. Grant financing mechanisms. It seems advisable to adopt a legal framework,
          specifying the status of State R&D Foundations (e.g., RBRF) and fixing the
          specificity of grant financing mechanism as a form of non-repayable funding;
       b. Return financing. There is a need to adopt a legal framework, creating
          opportunities for commercially important projects (in particular, through the
          Foundation for Assistance to Small Innovative Enterprises) to return public
          contributions; and


                                                                                          105
          c. Co-financing mechanisms. It is advisable to use some elements of the foreign
             R&D organisation experience – in particular, approbation of joint R&D
             agreement practice (similar to CRADA), under the condition of transferring the
             created IPR to developer organisations and industrial firms, including SMEs.

   6. Promote public-private partnerships (PPPs). PPPs should become a key component of
      the new Russian innovation policy. Though the present legal system of Russia
      provides some opportunities for using new legal, organizational, economic and
      financial instruments to support PPP programmes, the federal authorities are rather
      constrained in using them. A number of clauses of the Russian legislation hamper the
      development of public-private partnerships in the S&T commercialization area.

   7. Strengthen the powers of the Russian Anti-Monopoly Agency in order to restrain
      monopolistic tendencies in the Russian market and unfair competition. Such
      tendencies very much impede innovation processes. It is also recommended to develop
      and implement programmes to improve the judiciary practice in the field of anti-
      monopoly legislation. The participants of the Interim Innovation Policy Forum did not
      endorse this recommendation. The present powers of the Anti-Monopoly Agency were
      considered as adequate. In addition, participants did not understand how this issue was
      of relevance to innovation. The opinion of the European experts is that this issue does
      matter more than most people think. Lack of competition in the market can constitute
      a major constraint to innovation as it reduces the need for companies to innovate.

   8. Improve and enforce technical standards and safety norms. The participant of the
      Interim Innovation Policy Forum working group unanimously declared that there is no
      longer any serious problem in this area and that this recommendation can be deleted.

   9. Introduce a mechanism to monitor and evaluate the impact of all legal acts of
      relevance to innovation. This mechanism can help to improve the existing legislation
      and eliminate ineffective legislation. In addition, we suggest that Russia adopts the
      European philosophy to steer the innovation system by means of incentives rather than
      restrictions.


8.3 Financing of innovation

Regarding the financing of innovation, this study suggests the following recommendations:

   1. Pay researchers a decent salary. The present low salaries are demoralizing. The
      government is already taking action on this front and has announced a major pay rise
      for researchers and university professors.

   2. Tie public R&D funding more closely to the needs of the productive sector and the
      society at large. One option is that of introducing a matching competitive grant facility
      (similar to the Basic Research Fund) targeting applied research of relevance to the
      industry. This may also be an instrument to compensate for the decline in non-budget
      funding for R&D.




                                                                                           106
   3. Adopt a long-term policy of shifting the responsibility for financing and conducting
      R&D more to the private sector. This is in particular of relevance in the consumer
      goods industries.

   4. As part of the above policy, stimulate R&D activities within Russian companies
      through an effective R&D tax credit facility. R&D tax facilities are quite common
      among OECD countries. In Russia, however, the instrument was cancelled in 2001,
      because specific tax reductions did not fit with the philosophy of the new tax system.
      It is recommended to provide all companies the right to a tax credit that can be
      calculated in advance and is unconditional, i.e. it does not depend on whether the
      company makes a profit or not. In this way the instrument is most effective in
      stimulating private R&D spending.

   5. Provide adequate incentives and support for commercialisation activities. As
      mentioned earlier, a formula of sharing IPR revenues can be drawn up in such a way
      that all actors involved will receive stimulus to engage in the commercialisation of
      S&T results. Model contracts, model employee agreements, and distribution of
      commercial income guidelines need to be developed. Transparency of minimum rates
      for private contract work, bonus payments schemes for supporting spin-out and other
      commercial activities needs to be developed as well.

   6. Expand and improve the quality of the venture capital funds. Start-up companies not
      only need capital, but also advice. It is latter that determines the quality of the venture
      capital fund.

   7. Develop really active Regional Technology Venture funds (this recommendation can
      be tested as regional pilot projects). There are a number of Russian regions where a
      high level of science, technology and innovation commercialisation activities is being
      undertaken in a well planned and methodical manner. However, they are often
      hindered by lack of financial support at the early phase of market development. A
      Regional Venture funds which could fill the gap between research funding and the
      larger venture funding could provide significant advantages. Target group for such
      regional Funds could be technology based companies (funding the early stages of
      collaborative science and technology commercialisation between a Russian SME and
      the regionally based public research organisation); regionally based start-ups created
      from public research organisations, and technology based SME. It shall be noticed
      that, again, the unsolved IPR issue is a constraint on forming VC funds. The FASIE‘
      START programme which provides seed capital is an example of attempt to address
      the shortage of regional capital.


8.4 Technology Transfer & Commercialisation

One should keep in mind that the recommendations provided below are general, and will not
always apply equally across all generators of technology or across all industry sectors.
Specific needs will differ, in some cases information will be paramount and in others the
quality of human resources will be more important. Key recommendations in this area are:

   1. Develop mechanisms that can help companies (and SMEs in particular) to link up with
      research organisations (such as a knowledge bridge funds and R&D capacity building


                                                                                             107
   within SMEs). For example, there could be government funding available for SMEs to
   undertake R&D; or tax credits. One approach could be, to increase Government
   support to the FASIE, so that all the categories of SMEs engaging in varying levels of
   R&D listed below get ―Bortnik Fund‖ input. It is recommended to make different
   types of grants (for example, providing matching funding) available aimed at
   supporting different types of research and development projects (e.g., Micro Projects,
   Research Projects, Development Projects, Exceptional Projects). The Bortnik Fund
   can be a good platform from which to grow these capabilities.

2. There is significant lack of access to high quality market information, which often
   creates isolation and lack of knowledge of the international R&D market, international
   quality standards and market trends which leads to significant wasted R&D resources.
   Hence it is recommended to facilitate access to nationally funded research data and
   market information resources, such as:

       a. Patent information - National and International;
       b. Market Intelligence - Key market sectors based on the Regional and PRO
          research strengths, national R&D target areas;
       c. International Standards and Quality – To avoid wasted research resource and
          eventual rejection of the product in international markets;
       d. Research information such as research papers and citations;
       e. Product or technology information sheets to inform potential research and
          commercialisation partners of possible products and services; and
       f. Business and industry sector news feeds.

   It is recommended to make this information available to all public research
   organisations and technology transfer and commercialisation organisations free of
   charge for a minimum of 3-5 years, via an access through a national portal. It should
   also be noted that while there are many Russian technology databases (public and
   private, mostly regional), these are not comprehensive and are not linked.

   Coupled to the information access portal, it is recommended to provide a subsidy (up
   to 50% of the costs) to innovation infrastructure organisations to enable them to
   purchase research and market intelligence reports relevant to their commercialisation
   activities.

3. Facilitate access of companies to young graduate students. Specifically, it is
   recommended to introduce, as a part of high education curricula, 6-months on-the-job
   training of students at the private firms, as it is done in many countries. Secondment of
   academic researchers to the private sector, especially large companies is considered
   important. Overall, the quality of staff at both SMEs and large enterprises was
   considered in need of improvement.

   The teaching of innovative management should be encouraged at university level.
   Distance learning is considered more effective than traditional instruction for such
   education within the RAS or other research generators. This recommendation was
   ranked as No 1 during the Interim Innovation Policy Forum.

4. Introduce measures stimulating innovative entrepreneurship. Specifically, large scale
   programme(s) aiming to stimulate innovative entrepreneurship need to be launched,


                                                                                        108
   possibly as a pilot project on the regional level. Best practice needs to be promoted
   through show case and innovative companies. Introduction into the school national
   curriculum young entrepreneurs programmes is also recommended.

5. Stimulate and expand international research and commercialisation partnerships
   between Russian public research organisations and foreign research organisations or
   private entities. The goal of the partnership shall be commercial-based, and not
   research-based. It should produce a corporate / research organisation network.

6. It is recommended to support on a long-term basis the aims of collaborative regional
   actions to support the aims of technology transfer.




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