The European Bank for Reconstruction and Development has just issued a 96-page report on the Russian economy. The report takes a detailed look at policies that can help achieve the country’s economic diversification.
“Ending [the Russian economy’s] heavy reliance on exports of oil, gas and minerals, [is] a very specific and difficult challenge,” the report states, with two chapters dedicated to the development of innovation and related issues.
Here are some excerpts from the report.
- In terms of innovation, Russia has continued to lag behind other countries – advanced ones as well as leading emerging markets.
The EBRD cites the World Economic Forum, which in 2011 ranked Russia 71st out of 142 countries with respect to innovation.
Although Russia has provided a relatively stable economic environment over the past decade, there is broad agreement that the economy has largely failed to innovate and increase productivity.
Russia currently spends around 1 per cent of its national income on R&D. This is significantly below the average for countries belonging to the Organisation for Economic Co-operation and Development (OECD), let alone the levels seen in certain European and Asian economies, as well as Israel, but not markedly different from that seen in other emerging markets.
As a result, considerable gulf continues to separate the country’s policy objectives – which are notionally designed to make technology and innovation the centrepieces of Russia’s diversification and modernization program – and realities on the ground.
- The bulk of R&D support comes from the government, not the private sector
Most of Russia’s R&D spending is carried out by publicly funded or directed institutions. Indeed, nearly 75 per cent of all R&D is currently conducted by public organizations (such as research institutes in specific industries), with the bulk of funding coming from the federal budget. In other words, R&D in the business sector is, in fact, mostly funded and conducted by government agencies that are organisationally separate from the companies themselves. Company-level spending on R&D accounts for less than 9 per cent of expenditure.
Such funding has historically been provided to established institutions, being cost-based and often tied to employment levels in those institutions. There have been perverse incentives for efficiency, while little attention has been paid to linking research to the market and customer demand. Consequently, many of these government and industry-level organisations are effectively unreformed, unproductive and immaterial to the creation of high-quality R&D. The legal framework has begun to move in the right direction, but recent changes are yet to bear fruit.
In conclusion, the public funding of basic research has failed to really act as a catalyst. This has resulted in weak company-led innovation and weak links between R&D spending and the application of that research.
- Government innovation policies have shown mixed results so far
To its credit, the Russian government has accompanied by a range of policy initiatives targeting key drivers of innovation. In particular, innovation policy has focused on improving the standard of publicly funded research, as well as investing in infrastructure (notably through technology parks, SEZs and other mechanisms promoting clustering).
Consequently, technology parks, SEZs and other such arrangements have become a feature of the post-Soviet landscape. By 2011, there were (notionally, at least) 64 technology parks scattered across 35 regions or oblasts in Russia, of which between one-third and half were actually functioning as intended. Most remain linked to universities, while firms operating within those parks have been there for an average of around 10 years – considerably longer than in most equivalent arrangements in other countries.
Recent embellishments to the basic model have been the “IT parks” that the government began to encourage in 2007. There has, as yet, been no proper evaluation of the performance of IT parks and technology parks, although anecdotal evidence suggests mixed results. The technology park in Tomsk, for instance, has been held up as an example of good practice.
Reviews of international experience suggest that innovation enclaves are less likely to lead to success than clusters that are reasonably well integrated into the wider economy. In this respect, China’s experience highlights the role of such clusters in attracting FDI and increasing exports. Some of these features are replicated in certain regions of Russia (such as Kaluga, where activity is centred on the automotive sector), but this approach is rather different from the “beacon model” exemplified by a project such as the Skolkovo initiative.
- A questionnable top-down approach
The dominant approach espoused by government so far has been the favouring of publicly driven and financed top-down initiatives. The state has played an activist role as regards funding, the provision of information and the clustering of activity.
However, in this pronounced dirigiste or top-down feel, it is not always clear whether these privileged sectors have been selected on the basis of a robust analysis of Russia’s likely dynamic advantages, rather than on an aspirational and conjectural basis.
In addition, the top-down approach raises the obvious question of whether Russia’s relatively low innovation rates can be attributed mainly to major market failures, requiring significant public intervention and funding, or whether other factors also play an important role.
Among these other factors are poor protection of property rights, poor economic institutions, an education system that lags behind those of other countries, and inefficient public R&D activity, with limited spillovers to the rest of the economy.
- Notable progress in the legislative framework, but IPR still poorly enforced
A key element in the fostering of more effective R&D is the improvement of incentives for innovators, notably with regard to their ability to appropriate the returns from innovation and invention. A part to this concerns legal enforcement. If intellectual property rights are poorly enforced – as is presently the case in Russia – it is hardly surprising that innovation remains subdued.
While considerable progress has been made in terms of establishing a legislative framework that ensures adequate legal protection for intellectual property rights – notably the intellectual property rights clause in the Civil Code, which came into force in January 2008 – pervasive limitations remain in terms of enforcement. An intellectual property rights court has yet to be set up and become operational.
