Fostering Innovation in Russian Companies in the Post-Crisis Period: Opportunities and Constraints

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1 Yuri Simachev Mikhail Kuzyk Denis Ivanov Interdepartmental Analytical Center Moscow, Russia Fostering Innovation in Russian Companies in the Post-Crisis Period: Opportunities and Constraints EACES 2012 Conference University of the West of Scotland's Paisley Campus 6-8 September 2012 Interdepartmental analytical center

2 Motivations In recent years the Russian innovation policy has made a significant progress - its tool kit has been strongly developed, resource base has increased, etc. However there are no noticeable positive changes in innovation at macroeconomic level There is a lack of studies that provide microeconomic analysis and assessment of the impact of various government incentives on innovation activities of Russian companies The study is supported by the Ministry of Education and Science of the Russian Federation Interdepartmental analytical center 2

3 Main points 1. General characteristics of Russian companies innovation activities in the post-crisis period 2. Stimuli and obstacles for innovation activities in Russia 3. State innovation incentives in Russia and their influence on companies Interdepartmental analytical center 3

4 Some initial hypotheses The competition of Russian enterprises against foreign producers promotes product innovation and stimulates research and development. Competition against domestic producers is more conducive to process innovation aimed to reduce the price of products The beneficiaries of government support for innovation are more likely to be large companies, as well as companies where the government is a shareholder, while the performance of companies does not affect their chances to get support Russian companies are interested in government promotion of their export and support for technology import, rather than in import substitution policy and domestic development of new technologies Interdepartmental analytical center 4

5 Empirical base Survey of 602 Russian industrial enterprises Sep.-Oct Percentage of companies, % Percentage of companies, % Age of company Ownership less than 5 years 9,0 participation of foreign owners 21, years 18,6 of which more than 10% 15, years 24,6 participation of government and/or municipalities 11,1 over 20 years 47,8 Number of employees Industry up to 250 people 35,8 extraction of crude petroleum and natural gas 6, people 28,1 manufacture of food products, including people 16,7 18,8 beverages manufacture of textiles and textile products 13,1 over 1000 people 17,3 manufacture of wood, wood products, pulp, Exporting 13,3 paper and paper products manufacture of chemicals and chemical to the former Soviet Union (FSU) countries 11,0 49,8 products manufacture of rubber and plastic products 7,6 to other countries 29,5 manufacture of basic metals 8,1 Financial condition manufacture of machinery and equipment 9,1 poor 14,5 manufacture of electrical machinery and satisfactory 6,6 65,7 equipment manufacture of transport equipment 8,0 good 19,8 Interdepartmental analytical center 5

6 Percentage of innovative companies in the sample adopting technological innovations innovation activities including R&D 42% innovation activities without R&D 24% no technological innovations 34% The percentage of innovative companies is relatively high but there is a problem with the intensity and sophistication of innovation activities Interdepartmental analytical center 6

7 Indicators of companies innovative activities The ratio of companies expenditures on R&D to their revenue in 2010 The share of innovative products in companies revenues in 2010 The level of novelty of innovative products manufactured by companies no more than 1% no 1-5% over 5% no more than 2% 2%- 10% no over 10% new to company no new to Russia new across the globe Interdepartmental analytical center 7

8 Innovation factors Size of business: small companies (annual revenues of up to 100 million rubles) significantly less likely to innovate and fund research and development Industry: enterprises of metallurgy, chemical industry and mechanical engineering are most active in R&D Financial condition: innovation, as well as R&D funding is significantly more affordable for companies with good financial condition Competition: technological innovation is positively related to the domestic competition, while R&D spending to the foreign competition Interdepartmental analytical center 8

9 Some peculiarities of Russian companies innovation activities in post-crisis period Some companies are quite active in their technological modernization. Thus, there is a significant "polarization" of companies in terms of their technological capability, scope and impact of innovations - especially in such sectors as manufacture of textiles and mechanical engineering Relatively new firms as well as firms with foreign shareholders are more likely to be technologically advanced. The group of companies with world-class technological capabilities more often (compared to a group of technologically backward companies) include: (1) firms established in the last 10 years, (2) firms with foreign owners There is a positive trend to an increase in companies expenditure on technological innovations: about 42% of innovation-active companies in the sample increased their innovative spending in 2011 compared to 2010, and only 13% reduced it The demand for companies innovative products tends to increase: 39% of enterprises surveyed reported its growth in 2011 as compared to 2010 and only 13% of the companies experienced a decrease in the demand Interdepartmental analytical center 9

10 major consumers switching to new technologies and tightening of their technical requirements Corporate innovation stimuli best practices of leading foreign companies tightening of requirements of technical regulations production of new or enhanced materials and components by suppliers ideas and recommendations of external consultants and experts promising developments of Russian R&D organizations tightening of technical requirements of public procurement promising developments of national research universities and other higher education institution ideas and recommendations including informal ones, provided by government officials 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% The main incentives for companies innovation activities are: (1) Vertical - major consumers switching to new technologies; (2) Horizontal - best practices of successful companies Interdepartmental analytical center 10

11 Factor analysis of the stimuli for innovative activities Factor value of the components Major consumers switching to new technologies and tightening of their technical requirements Best practices of leading foreign companies Tightening of requirements of technical regulations Рroduction of new or enhanced materials and components by suppliers Ideas and recommendations of external consultants and experts Promising developments of Russian R & D organizations Tightening technical requirements of public procurement Promising developments of national research universities and other higher education institutions Ideas and recommendations including informal ones, provided by the government officials The first factor ( innovations supply") explains the incentives for innovative activities in major companies (with the annual revenue more than 15 bln rubles); the enterprises of such industries as oil and gas, electrical machinery, as well as the companies that are focused on the demand from the state and major businesses. The second factor ( vertical cooperation ) has a material impact on major, but not the biggest enterprises (with the annual income 1-15 bln rubles). The industries in focus include metallurgy, as well as the manufacture of electrical machinery t. The third factor ( active government participation ) is connected with the share of the government in the capital of the companies and their orientation on public demand; besides, one can mark out the sector of machinery and equipment manufacture. The forth factor ( foreign best practice ) as well as the first one has a material impact on major companies (with the annual income amounting to more than 15 billion rubles). The same factor influences the enterprises with foreign stake and the companies that face increased both foreign and domestic. Mechanical engineering companies are again most sensitive here. Interdepartmental analytical center 11

12 Barriers for corporate innovation - none no serious internal obstacles to innovation no serious external obstacles to innovation no both internal and external obstacles to innovation no innovations innovation activities 0% 10% 20% 30% 40% 50% According to the executives surveyed the sources of obstacles to innovation activities are mostly external to the companies A significant number of companies have no barriers for innovation but do not innovate. They are likely to be technologically underdeveloped Interdepartmental analytical center 12

13 Barriers for corporate innovation These problems are negatively related to growth of corporate innovative cost This problem is characteristic for enterprises with good financial condition, as well as companies with a considerable (more than 10%) share of foreign investors.

14 Considered instruments of government support for companies' innovation activities Depreciation bonus - the possibility of a one-time write-off of 30% of investment 1 in fixed assets with a useful life of 3 to 20 years Tax incentive 2 Tax exemption of employers' costs for employees' training Tax incentive VAT exemption on imports of technological equipment with no domestic 3 analogues based on a list approved by Russian Government Tax incentive The possibility of accelerated depreciation of fixed assets that are used only for 4 scientific and technical activities Tax incentive Write-offs in the amount of one and a half of R&D expenditures on a list 5 established by the Government Tax incentive 6 Public funding of innovative projects within federal targeted programs Direct funding 7 Public funding of corporate innovative projects in cooperation with universities Direct funding / networking Public funding of projects selected by the Presidential Commission for 8 Modernization and Technological Development of the Economy Direct funding 9 Funding for innovative projects by state development institutes (VEB, RUSNANO) "Quasi-public" funding 10 Funding for innovative projects by venture capital funds "Quasi-public" funding 11 Skolkovo innovation center Innovation infrastructure / "quasi-public" funding 12 Special economic innovation zones Innovation infrastructure Development of technical regulations, establishment of new regulations and 13 standards Regulation Approval and implementation of innovative development programs of the major 14 state-owned companies Regulation / networking 15 Technology platforms Networking

15 Impact of the considered instruments on companies innovation activity Depreciation bonus - the possibility of a one-time write-off of 30% of investment in fixed assets with a useful life of 3 to 20 years Tax exemption of employers' costs for employees' training VAT exemption on imports of technological equipment with no domestic analogues based on a list approved by the government The possibility of accelerated depreciation of fixed assets that are used only for scientific and technical activities Write-offs in the amount of one and a half of R&D expenditures on a list established by the government Public funding of innovative projects within federal targeted programs Public funding of corporate innovative projects in cooperation with universities Public funding of projects selected by the Presidential Commission for Modernization and Technological Development Funding for innovative projects by state development institutes (VEB, RUSNANO) Funding for innovative projects by venture capital funds Skolkovo innovation center Special economic innovation zones Development of technical regulations, establishment of new regulations and standards Approval and implementation of innovative development programs of the largest state-owned companies Technology platforms 0% 5% 10% 15% 20% 25% 30%

16 Characteristics of beneficiaries of the considered instruments Instrument Depreciation bonus - the possibility of a one-time write-off of 30% of investment in fixed assets with a useful life of 3 to 20 years Tax exemption of employers' costs for employees' training VAT exemption on imports of technological equipment with no domestic analogues based on a list approved by the government The possibility of accelerated depreciation of fixed assets that are used only for scientific and technical activities Write-offs in the amount of one and a half of R&D expenditures on a list established by the government Public funding of innovative projects within federal targeted programs Public funding of projects selected by the Presidential Commission for Modernization and Technological Development of the Economy Funding for innovative projects by state development institutes (VEB, RUSNANO) Funding for innovative projects by venture capital funds Skolkovo innovation center Special economic innovation zones Development of technical regulations, formation of new regulations and standards Approval and implementation of innovative development programs of the largest state-owned companies None of the instruments has influenced the company Characteristics of companies Age: -- more than 20 years Financial condition: ++ good -- bad Exporting: +++ to the countries of former USSR +++ to far-abroad countries Age: -- more than 20 years Ownership: - government stake Financial condition: +++ good Age: + less than 10 years -- more than 20 years Financial condition: +++ good - bad Exporting: + to the countries of former USSR ++ to far-abroad countries Number of employees: ++ more than 1, less than 250 Age: --- more than 20 years Financial condition: - bad Exporting: +++ to the countries of former USSR +++ to far-abroad countries Industry: ++ manufacture of machinery and equipment + manufacture of chemicals and chemical products + manufacture of rubber and plastic Age: -- more than 20 years Exporting: ++ to far-abroad countries Industry: +++ manufacture of transport equipment Financial condition: +++ good Age: - less than 10 years Financial condition: ++ good Number of employees: ++ up to 250 Financial condition: ++ good Age: - less than 10 years Financial condition: +++ good Age: - less than 10 years Industry: +++ extraction of crude and gas + manufacture of electrical machinery Export: - to far-abroad countries Industry: ++ extraction of crude and gas Ownership: + government stake Financial status: - good Industry: - manufacture of transport equipment Financial condition: + bad - good Exporting: --- to far-abroad countries --- to the countries of former USSR

17 Focuses of the considered innovation policy instruments Most of the instruments are "neutral" to the size of companies, as well as to government stake. The exception, as a rule, is the measures originally aimed at companies of particular size groups or forms of ownership. There is a lack of mechanisms that support innovative activities of relatively new firms (operating less than 10 years). The use of two instruments has sectorial priorities: public funding under federal targeted - manufacture of transport equipment; development of technical regulation - extraction of crude and gas. The influence of most of the considered tools is connected to positive financial status and/or export orientation of companies. Companies that has experienced no influence of the innovation policy instruments arе significantly less likely to be exporters and wealthy firms. Thus it can be supposed that in general government innovation policy targets successful companies rather than poorly performing ones. Interdepartmental analytical center 17

18 Disadvantages and problems of tax instruments nonoptimal base for calculating benefits (costs accepted, etc.) insufficient rates (coefficients) insufficient clearness of tax regulation, risk of conflicts with tax authorities increased attention of tax authorities and risk of additional audits difficult justification of implementation, complex tax accounting 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% The most important problems for the companies surveyed are those that are caused by imperfect tax regulation and administration. Comparison of assessments obtained from heads of companies - beneficiaries of the tax instruments and those who did not use these options shows that the former more frequently mentioned insufficient rates and coefficients, while the latter difficulties of justification and imperfect tax regulation. Interdepartmental analytical center 18

19 Disadvantages and problems of public funding instruments lack of information on the instruments of public finding and conditions for its attracting support is excessively targeted for large businesses support is excessively targeted for small businesses support is excessively targeted for large projects support is excessively targeted for small projects excessive demands on the expected effectiveness of the projects too restrictive duration (payback period) of projects excessive demands of the state about co-financing projects from own or borrowed funds additional requirements on the scale of production realization, participation of the young, publications, patents, etc. excessive bureaucratization of support obtaining procedure (many documents needed for concourse, etc.) requirement for excessive accounting and reporting need for disclosure of the information on the project, risks of industrial espionage need for disclosure of the information on the enterprise excessive interference of the state in the activities of the company during the implementation of the project 0% 10% 20% 30% 40% 50% 60% Interdepartmental analytical center 19

20 Concluding comments The low commitment to innovation in Russian companies is largely due not only to problems in their implementation, but also to the lack of motivation for companies. There remains a strong positive potential of the impact of increased competition on companies innovation activities. In addition, the government now insufficiently uses the opportunities associated with public procurement of innovative goods. A significant potential in motivating companies to innovate also consists in further development of technical regulations. Lack of business environment stability is a significant barrier to the expansion of innovation. Thus, to establish the stability of control is the major problem, as even a positive change in the regulation gives rise to uncertainty and increases the risks. In those markets where changes are much needed, appropriate adjustments in the regulation should be as predictable for the business community as possible. A characteristic feature of the public innovation policy in Russia is the excessive scope of active instruments, but in general they are rather poorly focused on new innovative companies fostering. The effectiveness of innovation support tools is largely constrained by their mismanagement. It is important to combine creating general pro-business environment with the support of innovative projects, but with a focus on demonstration effects, on support of relatively young companies that need risks sharing. Interdepartmental analytical center 20

21 Thank you Interdepartmental Analytical Center Interdepartmental analytical center 21