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Contents 1 The Challenge: Renewal of the Russian Innovation System 1.1 Strategic Innovation Replaces Technology 1.2 The Relevance of Strategic Innovation for Russia 1.2.1 Not Diversification but Renewal of Domestic Industries Is Key 1.2.2 Future World Society 1.2.3 Sustainability 1.2.4 Geopolitical Power Shifts 1.2.5 Market Economy quo vadis?! 1.3 Russian Heroic but Unknown Innovation History 1.4 Current Status of Innovation in the Russian Economy 1.4.1 Insufficient Innovation Performance 1.4.2 Insufficient Internationalization 1.4.3 Insufficient Entrepreneurial Activity 1.4.4 Insufficient Contribution of SMEs 1.5 National Innovation System 1.6 Milestones of Innovation 1.7 The Strategy 1.8 Bottlenecks 1.9 Megatrends 1.10 Russia Aims at the Technology Frontier 1.11 Overview of This Book Literature
2 The Solution: Strategic Innovation Money Maker Model Versus Technology Frontier Money Taker Model 2.1 The Need for a New Big Picture
2.1.1 Macro level and Massive Outlook 2.1.2 Meso level and Major Renewal 2.1.3 Micro level and Mega Impact 2.2 Major Developments Requiring Strategic Innovation 2.2.1 Sustainable Economy 2.2.2 Internet of Things and Industry 5.0 2.2.3 New Dominant Regions 2.2.4 World Economy Replaces Globalization 2.2.5 Big Unknown 2.2.6 Common Denominator of Sustainability, Internet of Things, New Dominant Regions, World Economy and Big Unknown 2.3 Consequences for Russia 2.4 Growth Cycle Versus Technology Frontier: Money Maker Versus Money Taker 2.5 Russia ’ s Position on the Growth Cycle Literature 3 The Instrument: Strategic Innovation as a New Foundation for Russian Innovation System 3.1 The Mind Shift from Technology to Future Earning Power Needs New Theory 3.1.1 Strategy Concepts Cannot Explain “What Happens Here?” 3.1.2 Innovation Theories Cannot Explain “What Happens Here?” 3.1.3 Strategy and Innovation Concepts Compared 3.2 From Parrot-Economy to 24-Karat: From Technology Frontier Towards Strategic Innovation
3.3 The Innovation Matryoshka 3.4 The Six Pillars of Strategic Innovation Theory 3.5 Entrepreneurial Function 3.6 Growth Cycle Is More Than Disruption 3.7 Non-technical Innovations 3.7.1 Scope of Non-technical Innovation 3.7.2 Impact of Non-technological Innovation 3.7.3 Non-technological Innovations Are Hard to Imitate 3.7.4 Implicit and Tacit Innovation 3.8 Ultimate Power of Time 3.8.1 Time Is the Master of the Universe 3.8.2 The Basic but Unnoticed Role of Time 3.8.3 Tacit Knowledge Does not Exist, It Is the Time Factor 3.8.4 The Seven Time Dimensions 3.8.5 Time Culture: A Profound Hidden Force of Societal Development and Progress 3.8.6 Time Arrow: Future or Backwards Oriented Society 3.8.7 Time Control: Who Controls Time Owns Power 3.8.8 Timing: Multiplier of Profits and Losses 3.8.9 Time Duration: Creator and Destroyer of Wealth 3.8.10 Time Consumption: From Ubiquity to Scarcity 3.8.11 Time Intensity: Evolutionary, Revolutionary, Speedy and Risky Times 3.8.12 Wrap Up Seven Time Dimensions 3.8.13 Dynamic Production Function 3.9 Dynamic Value
3.9.1 From Profit to Dynamic Value 3.9.2 Multiplier Time Effect and Exponential Growth 3.9.3 Dynamic Value as Modus Operandi of Strategic Innovation 3.9.4 Relevance of Dynamic Value for Russia 3.10 Emulation as Endless Race of Outperforming and not of Disruption 3.10.1 Emulation Is Core of Progress and Prosperity 3.10.2 The 4I Emulation Scheme for Russia needs Tailor Made Approach 3.11 Strategic Innovation Theory Elevates Russia in World Innovation League Literature 4 The Management: Unleashing the Strategic Innovation Potential 4.1 Growth Cycle and Strategic Innovation 4.2 Growth Cycle Phases 4.2.1 Pre-seed and Seed: Lead or Bleed 4.2.2 Start-up Smart 4.2.3 Scale or Fail 4.2.4 Incumbents Defend or Expand 4.2.5 From Renewal to Future Crown Jewel 4.3 Myth Busting the New Economy 4.3.1 Myth 1: Technology 4.3.2 Myth 2: Knowledge Economy 4.3.3 Myth 3: Disruption 4.3.4 Myth 4: Open Innovation 4.3.5 Myth 5: Cooperation 4.3.6 Myth 6: Network Firms
4.3.7 Myth 7: Sharing Economy 4.3.8 Myth 8: Tacit Knowledge 4.3.9 Myth 9: Costless Information 4.3.10 Myth 10: Obsolete Production Function 4.4 Back to Basics for Russian Innovation System 4.5 The Management Basics of Strategic Innovation 4.6 Future Earnings: Creating Company of the Future 4.7 Growth Phase Management 4.7.1 Aspire 4.7.2 Discover 4.7.3 Create 4.7.4 Select 4.7.5 Institutionalize 4.7.6 Expand 4.7.7 Exploit 4.7.8 Dominate 4.7.9 Reset 4.7.10 Emerge 4.8 Longitudinal Management 4.8.1 Strategic Innovation Leadership 4.8.2 Institutional Innovation 4.8.3 Corporate Governance 4.8.4 Business Development 4.8.5 Business Model Formulation and Execution
4.8.6 Industrial Governance as Power 4.8.7 Cross Cultural Management 4.8.8 Dynamic Value 4.9 Russian Volga Amur Model for Industrial Leadership Literature 5 The Internationalization: Russian Cross-cultural Strategic Innovations 5.1 Why Does Russia Have to Integrate Strategic Innovations Across the Border? 5.1.1 From Creativity to Russian Strategic Innovations 5.1.2 From Culture Diversity to Russian Strategic Innovation Context 5.1.3 From Trade Partners to Triple E of Russian Strategic Innovations 5.2 From Lose-Lose to Win-Win, How Can Russia and China Cooperate in International Strategic Innovations? 5.2.1 The Lose-Lose History of Sino-Russia Relationship 5.2.2 The New Strategic Innovation Chances for China and Russia Looking for Win-Win 5.2.3 Huawei as an Example of the Chinese Strategic Innovations in Russia 5.2.4 How Should Russia Work with China? Literature 6 The Cases: Potentials and Opportunities of Russian Strategic Innovations “Urbi, Orbi et Universum” 6.1 Introduction 6.2 Agrofood: Grain, Food Chain and Brain 6.3 Aerospace: Heroic Past and Heroic Future? 6.3.1 Go-Around 6.3.2 Takeoff: Growing into the Sky 6.3.3 Beyond the Cloud: Space Race as Money Maker
6.4 Far Eastern Federal University (FEFU): Vladivostok Valorization 6.4.1 Past Successes, Rankings and New Opportunities 6.4.2 Building Quadruple Helix 6.4.3 FEFU as Strategic Innovation Literature
1. The Challenge: Renewal of the Russian Innovation System Taco C. R. van Someren1 and Shuhua van Someren-Wang1 (1) Ynnovate, Hilversum, The Netherlands
1.1 Strategic Innovation Replaces Technology Strategic innovation will replace technology competition in the worldwide race for growth and development.1 In this book it is advocated that Russia should abandon the chase for technology. Instead Russia should focus on the creation of growth cycles by means of strategic innovation. In the past decade Russia, like many other countries, has been following the trend of technology creation often inspired by successes like Silicon Valley, BMW, Toyota, Samsung, Alibaba, Google and Apple. But in our opinion the future of Russia is depending on strategic innovation and not merely on technical innovations. Strategic innovation is the future of Russia. Russia has the potential to become one of the top players in the world innovation league. In history, Russian people have already proven to be great inventors, creative problem solvers, perseverant and flexible leaders. Among others, all these characteristics are needed to be successful innovators. The great strength of Russia is its people. And innovation is people’s business, not technology. Culturally, Russia is people oriented which is the greatest asset in future world economy. But a true revolutionary change in perspective is necessary to unleash Russia’s innovation potential and to overcome current bottlenecks and grasp opportunities. Innovation is not technology but human being driven business which fits perfectly to Russia. Hence, success needs more than invention and breakthrough technology, it needs strategic innovation to create new enterprises, industries, create a prosperous Russia and change the world economy. Russia needs a mind shift from pure technology to including human being and non-technological oriented strategic innovations. But what do we exactly mean by strategic innovation? Strategic innovation is about creating new business based on technical and non-technical innovations followed by growth, development, employment and prosperity (Someren, 2005, 2015b; Someren & Someren-Wang, 2012, 2013b). Strategic innovation is not about following hypes on technology, management techniques or policies. To understand the relevance of strategic innovation in relation to the knowledge economy Table 1.1 shows the case of economic value of knowledge in relation to academic professors, politicians and football players in the United Kingdom.2 Table 1.1 Value of education, politics and football
Sources data: BBC News Magazine; English Football Wages: 1984 to 2010 by Ahmed Bilal on October 31, 2011 One has to be careful how to phrase the following comparison, but in general and on average, the educational level and state of the art knowledge of professors is the highest followed by prime minister and football players at the lower end. Around 1980 the differences between income levels were more or less in the same league. About 30 years later, a complete different situation emerged. Firstly, the football players were by far the highest income earners followed by a sharp increase of smart politicians. The most professors focused on teaching, doing research and writing Apublications lagged behind. Secondly, it appears that average income was exactly opposite from educational level and cutting edge knowledge. Before the 1980s most football players were amateurs and had to earn money after their career on the pitch by opening a cigar store requiring no knowledge at all. Decades later they are top earners in very early life and multi-millionaire. What has happened in these three decades? Strategic innovations explain the difference in value creation, growth, development and becoming unique. Again the explanation does not come from technology. In the world of football, some smart creative people started to professionalize and commercialize the football game. New markets were created by selling merchandise such as shirts. More importantly, new alliances with business parties from the entertainment industry were formed. TV rights of national leagues were sold to public and private TV stations. The success was dependent on the creativity of the individual player, the success of a team and the attractiveness of a league or tournament. Politicians also followed the principle of strategic innovation but not as successful as the football players. The football players indeed created a new industry and an extraordinary entertainment value. Politicians did not create a new market or even industry but they created a personal market by valorizing their experiences by selling memoires, becoming advisor or giving dinner speeches and high fees in return. Politicians are not valorizing good knowledge or good decisions, even bad decisions or wrong judgments are being paid as long as the public gets excitement back or a view behind the scenes. They are selling excitement and political
thriller situations and not excellent strategic insight or new knowledge. Professors need large sums of money to carry out laboratory experiments, they write difficult articles requiring a large time investment for a very small audience which has no value for the big public. Only excellent research for the happy few gets published. Publishing your results costs money and the publisher earns the big money by selling the reviewed journals. Professors get famous but not rich. Only those professors who were able to transform their knowledge into new ventures had chances to valorize their newly created knowledge. Therefore, it is not the knowledge economy that will determine the next decades but entrepreneurs who are able to create strategic innovations. An example of such hype is the Knowledge Economy. The knowledge economy states that the future key production factor is knowledge mostly embedded in new technologies. McDonald’s hamburger case demonstrates that without technology or knowledge a billion dollar business can be built and which is hard to imitate. The hamburger case is revealing. Everybody of us is able to cook a hamburger. Even if you are not a very good cook, you can learn it within a half day. There is no technology or specific knowledge involved. But there is one American who made a multibillion dollar business out of the hamburger. The long time success and profitability of the entrepreneur McKroc, who founded McDonald’s, could hardly be copied by its competitors. How to explain this success of an apparently easy to copy business case? The solution is definitely not to be found in technology or special knowledge. There is something more than technology. Strategic innovation is the continuous process of creating and developing growth cycles by using the interaction in time between technical and non-technical innovations (Someren, 1991, 2005; Someren & Someren-Wang, 2012, 2013b). Examples of strategic innovations are the standardized hamburger by McDonald’s, the supermarket, the Just-In-Time (JIT) manufacturing principle, the IKEA reversed construction by customers, Star Wars movie and its battle between good against bad, Silicon Valley as a region and the bitcoin. It is the secret of strategic innovation explains the success and potential for growth and development. Strategic innovation is beyond technology, beyond new business models and beyond smart policies. Strategic innovation is at the core of the emergence of new firms, new industries, new regions and growth of development of nations worldwide.
1.2 The Relevance of Strategic Innovation for Russia The current starting position of Russia in the worldwide economy is not very favorable. There are many reasons why strategic innovation should be the core issue for Russia in the near future. We only give a few reasons without having the pretention to be complete or comprehensive. But already these arguments are sufficient to adopt and apply strategic innovation approach in Russia.
1.2.1 Not Diversification but Renewal of Domestic Industries Is Key Contrary to mainstream analysis, opinions and media, Russia’s economy is not dependent on natural resources. In Table 1.2 the apparent dependency, also in comparison to other countries, becomes clear. Table 1.2 Contribution of natural resources to gross domestic product Country
Total natural resources rents % of GDP 2013 36.4
Oil rents % of GDP 2013 33.9
Natural gas rents % of GDP 2013 2.3
Coal rents % of GDP 2013 0.0
Mineral rents % of GDP 2013 0.2
Forest rents % of GDP 2013 0.0
Source data: 2015 World Development Indicators, table 3.15 National resources in Russia contribute 18.2 % to GDP (2013) which is indeed relatively high compared to other world countries. In 2013 the share of oil and gas export (excluding other natural resources) in GDP is 68 % (Metelitsa, 2014). This appears to confirm the picture in the media and even some scientific publications presenting Russia as an economy dependent on natural resources. But this media picture and academic parrot behavior is not true because more than 80 % of Russian GDP comes from other sectors than natural resources such as manufacturing, retail, IT, telecom, real estate, construction, transport and finance. The oil and gas industry delivers about half of Russia’s governmental total tax income. The relative and absolute high portion of natural resources exports in GDP exports demonstrates a lack of internationalization of the non-resources industries. Hence, a tremendous potential for internationalization is present. But first innovation capability has to be increased resulting in higher competitiveness and enhanced diversification as a prerequisite for internationalization. In Russia all industries in the economy are present but they need to be reinvented in order to take next steps towards innovation powerhouses, world class competitiveness and ultimately global presence. These other than resources industries do have a large potential for strategic innovation. Strategic innovation revolutionizes the future of Russia towards growth and development. In this respect, Russia could even increase the rents produced on e.g. minerals and forestry by developing added value activities on top of extracting natural resources. A move upward the value chain would be the result. In Russia some steps into this direction have been made. The past decade showed the emergence of incubators, Triple Helix structures, innovation centers and innovation policies. But despite the huge amount of investments in the technology orientated and dominated programs did not yet show bottom line results. The reason is, as we will demonstrate later on, that some critical aspects of strategic innovation have not paid attention to.
1.2.2 Future World Society There are manifold developments changing the future economy and we only present some illustrations (e.g. Someren, 2015b; Someren & Someren-Wang, 2012, 2013b). One of the most profound developments is the growth of world population and its growing diversity. Included developments are migration, shifting mix between young and old, rich and poor, urbanization and city economies force to rethink function and operation of (mega) cities, regions and nations as a whole. Any organization will be confronted with these and other developments. Possible consequences are for example, a changing client base with different needs or a work force featured by a larger diversity with implications for leadership and ultimately innovation. Of course new technologies are another relevant reason for Russia to rethink their economy. Well known general categories of technology are, among many others, digitalization, renewable energy, biotechnology and nanotechnology. But most of these fields are still in their infancy and their impacts are at the moment hard to judge and to oversee. An alternative view is to think in issues to be solved
like obesities and ageing requiring (technical) solutions. The current globalized world is a Western dominated world. Globalization is an economic system invented by large American and West-European multinationals. Globalization is a cost saving system outsourcing functions like manufacturing, administration and after sales to low cost countries. This short term based system is focused on reducing costs and achieving economies of scale and scope. With the rise of other countries, globalization with Western enterprises at the core will dwindle.
1.2.3 Sustainability The current linear directed value chains are characterized by detrimental social and ecological effects. Consequently, issues like climate change, CO2 emissions, scarcity of some natural resources and biodiversity were largely neglected by the globalization movement of the past decades. In Russia sustainability is not a hot issue yet. Nevertheless, sustainability will be at the core of the future global long growth till the twenty-second century (Someren, 1995; Someren & Someren-Wang, 2012). Very long value chains supported by cheap modes of transport and distribution are a complex system of many different parties. In this classical industrial organization, these parties are needed for the primary process of production and the secondary service processes. For example, long food chains with global reach and numerous involved parties deliver the end product to the consumer. The linear production process does not take into account issues of recycling, emission and other environmental or social effects. This leads to another profound change of our economy being sustainability in every aspect of our industrial organization. The linear mode of manufacturing will be substituted by the circular economy. The circular economy will be accompanied by new firms, new industries and new behavior on markets. Examples are the renewable energy market, new propulsion concepts for automotive and aerospace sector and recycling industries. Sustainability is characterized by long life cycles. The long term consequence of sustainability is in sharp contrast with the short life cycles of some services of the Internet of Things industry. Hence, in the future economy we have to deal with this paradox of simultaneous existence of short term and long term time effects.
1.2.4 Geopolitical Power Shifts In the era of globalization, the Cold War showed the main players of that old time: the Atlantic alliance and Russia and its allies. In the coming decades new potential extreme powerful players enter the world scene. Already in the globalization era, the rise of the so-called BRICS (Brazil, Russia, India, China and South Africa) countries was foreseen. But after a promising start of these countries it appeared that getting into the highest league of economic high performers needed more than a decade of double digit growth based on infrastructure investments and resource exploitation. The biggest challenge for these countries is innovation in every aspect of the economy which needs much more than R&D investments, technology programs and Silicon Valley copycat regions (Someren, 2015a, b). They all need strategic innovation which requires much more than copycat technology or improvements. Moreover, other countries with high economic ambitions also entered the arena like Indonesia, several Arabic countries and Turkey. Of all countries, China seems to be the most promising and best contender of existing world class players like USA and some countries from the EU. For Russia, the relationship with China is a special case with a long history. Not only for the regions along borderline in the Russian Far East but for Russia as a whole, the relationship with
China will be pivotal in the future. There are huge opportunities but also huge risks. The sanctions initiated by US and EU against Russia awakened the Russian economic bear. The logical and still profitable relation with the EU has been cut off, or at least has been put on ice, forcing Russia to turn their head to the East. The sanctions were in fact a wakeup call for Russia to invest in their own production capacity instead of relying on imports. For the Chinese, the timing could not be better. After decades of growth and development, the demand for land, energy and basic research is enormous. Closer relationships between Russia and China seem to have a win-win effect but only under specific conditions dictated by strategic innovation. As we will see later on, in most cases these conditions are not yet fulfilled. As long as this situation continues, the win for Russia is not very likely.
1.2.5 Market Economy quo vadis?! The free market economy in the real sense of the notion as rational participants with free will and decision power has only existed in economic text books. In the capitalistic and market economy many distortions diluted the free market economy such as monopolization of markets, power concentration, externalization of costs such as ecological detrimental effects, alliances between private enterprises, governments and financial crisis like in financial crisis and so on. Oil and gas market power of OPEC during 1980s and Gazprom are well known and they used power to set prices and have power over energy supplies. Now Google, Facebook, governments, platforms, and banks own Big Data and have power over demand and behavior of individuals and the user is left with empty hands. Furthermore, the text book market economy was based on Western Europe and US context and situations. The market governance in many other emerging countries does not fit to textbook economics. Russia, China and African countries have different market principles. In Russia, government is often identical with market, in the EU government is both a very large market participant as well as shaper of market conditions and in China a market system with Chinese characteristics is being created. Now emerging regions and other countries gain economic power, the market economy in its current form will disappear and be replaced by another system fitting to the future world growth curve dominated by emerging parties. Strong linkages and other forms of symbiosis between private enterprises and governments create a different ‘market economy’. On the macroeconomic level also long term potential changes will rock the fundaments of the market economy. For example, the US is able to exert market power because the dollar is the dominant currency in international trade. Dollar transactions and its clearing through American banking system gives the US the possibility to sanction or fine certain transactions and defend American interests. How will the world look like when the Chinese Renminbi takes over the role of the dollar? The answer to all of these examples of major developments, only strategic innovations and not technological innovation provide the right answer to these profound changes. A new world order will emerge (Someren, 2015b; Someren & Someren-Wang, 2012, 2013b, c, d). Before we elaborate on this central core issue we first have to understand Russian current situation and its historical path to the present.
1.3 Russian Heroic but Unknown Innovation History Russia has a great history in innovation of which most are not aware. But as everywhere, there are
ups and downs in the output and impact of the innovations. In Fig. 1.1 a few examples of great inventions demonstrate the high capability of Russian innovators. In several industries from agro food sector to space technologies, some radical inventions such as caterpillar, radio, television, airliner, firefighting foam and nuclear energy are of Russian origin. Of course, almost any country can produce such a list of inventions with high impact. Most of the time these lists are dominated by new technologies or some physical object. Much more important from an economic point of view is however, the ability to establish and grow new enterprises and new industries. Then the list with famous inventions is not important anymore. More relevant becomes the ability to create a context to transform an invention into an innovation. The innovation is the commercialization of a (technical) invention. As soon as this hurdle of first market introduction has been taken the next challenge is to grow this venture. All over the world this is still one of the key issues of innovation management. It is also a key issue of the current Russian economy but such a context or environment fostering innovation is largely absent. The examples of Russian inventions in Fig. 1.1 exactly demonstrate this omission. There are no Russian world class TV manufacturers, Russian airline manufacturers are not able to compete with top notch manufacturers, solar cell technology is commercialized by German, American, Chinese and Japanese manufacturers and space industry knowledge is not applied commercially. This failing ability to commercialize is not a sudden problem but the result of a historical process with regard to innovation. In the Russian communist era to achieve certain production quantities levels determined by the state were at the core of the total system. Agriculture, mining and heavy industry were believed to be the main pillars of the economy. For innovation was no place. This period of state planning, production and distribution was followed by a glasnost period in which regulation by the state and state planning was left over to a few players. This development lead to (local) industrial concentration and wealth accumulation limited to an inner circle. Again wealth accumulation and distribution was far more important than innovation. Soon after this bonanza, state leaders came to the conclusion that technology should be at the core of future wealth and prosperity. Now innovation is on the radar of the governmental leaders. However, it still largely misses a breeding ground because of history and everything has to be built up from scratch. In recent times, the Russian economy is on the brink of trying to catch up with world leading companies and countries. Although wide spread innovation is absent in the past decades of Russian history, it does not mean Russian innovative activity was completely neglected. On the contrary, some governmental programs, like conquering space, require a bunch of innovations. Furthermore, education and basic research were on a quite high level. But hampered by institutional structures, the basic research and high level education did not get the opportunity to flow into commercial products and services for Russian markets or exports. For the remainder of this chapter we focus on the past decades of innovation development in Russia.
1.4 Current Status of Innovation in the Russian Economy Strategic innovation leads to world class innovation competence, global powerhouses and international top competiveness. The most eye-catching key characteristic of the recent Russian economy is the relatively high dependency on natural resources in exports and the low innovation rate in other industries. But there are more typical factors explaining the current difficulties of the failing growth and development of the Russian economy. These factors are insufficient innovation performance, insufficient internationalization, insufficient entrepreneurial activity and insufficient
contribution of private SMEs.
1.4.1 Insufficient Innovation Performance Governments are interested in the number and scope of their new policies but show low concern about their implementation, effectiveness, results and impacts. We are mainly interested in their bottom line results. Innovation without added value and impact is lost effort. Therefore, we have to look at the current status of innovation in Russia. Innovation cannot be caught in a single figure or measurement representing the state of innovation economy. For this reason, we took in Table 1.3 some well-known and generally accepted indices to show the position of Russia in the recent years. Table 1.3 A few key data Russian economy Measure R&D expenditure % of GDP
Globalisation index (A. T. Kearney Foreign Policy Magazine)
Global Innovation Quotient (R&D related, Bloomberg)
Global Innovation Index (innovation level of countries, INSEAD, WIPO)
The European Innovation Scoreboard (European Commission)
Sources data: RVC (2013, 2014, 2015); The Future of Russia’s Innovation Economy. No. 6, September 2014. p. 9; European Commission, http://www.gks.ru/wps/wcm/connect/rosstat_main/ rosstat/ru/statistics/science_and_innovations/science/ In Table 1.3 a common index of innovation activity is the percentage of GDP spent on R&D. For Russia the R&D expenditure has risen from 1 % in 2009 to 1.5 % in 2013. This is a hopeful sign but R&D is not a measurement of innovation (the commercial product or service) but only of potential invention or prototype. Moreover, R&D is not a measurement of non-technical innovation at all. Nevertheless, whatever restrictions can be made about this indicator the upward trend cannot be
denied. However, the rankings should be considered critically because most innovation indices focus on input factors, R&D, education or scientific papers as output (e.g. Edquist & Zabala-Iturriagagoitia, 2015). From the perspective of strategic innovation, only dynamic value, growth and development would be the real measure (Someren, 1991; Someren & Someren-Wang, 2013b). What is more revealing about the state of the Russian economy with regard to innovation is the number of Russian firms involved in innovation. For Russia about 10 % of all firms are involved in innovation. This fits to the share of governmental investments in R&D which is between 66 and 75 % in the period 2010 till 2014. When measuring Russia along a few indexes, Table 1.3 shows a clear trend. According to the Globalisation Index, the role of Russia in the global economy is decreasing. Although the Global Competitiveness Index indicates a slight improvement in 2013/2014, other indices seem to confirm the revolving up and downward trend of Russia. In the ranking of the Global Innovation Quotient, Russia tumbled from rank 14 (2013) to 18 (2014) and back again in three years’ time. In the Global Innovation Index, a short improvement in ranking (2012) was followed by an even lower position in 2013 compared to 2007 and a small comeback in 2014. The European Innovation Scoreboard confirms this downtrend in ranking of innovation country performance. In Fig. 1.2 the Russian position compared to other BRICS and some other countries is presented measured by the global innovation performance index in the period 2010–2011 (EU, 2014, p. 29). (Note: Average performance is measured using a composite indicator building on data for 12 indicators ranging from a lowest possible performance of 0 to a maximum possible performance of 1).
Fig. 1.2 Global innovation performance. Source data: EU Scoreboard (2014, fig. 25, p. 29, 2015, fig. 27, p. 32)
In 2011, South Korea with an innovation index of 0.74 is the leader very closely followed by the United States (0.736) and of the other Asian countries Japan (0.711) is second. The EU (0.63) is close to this top three. China (0.275) is ahead of all BRICS countries and Russia is lagging behind with an innovation performance index of 0.191. In 2012, Russia maintained its position with a score of 0.190 whereas South Korea, US, Australia, Brazil and China improved their performance. When comparing Russia and China on policy measures, some differences in choices are based on history of being a plan economy and different insights concerning measures. With regard to Science,
Technology and Innovation policies, Li and Wang (2015) conclude that Russia favors infrastructure support whereas China adopts policy instruments for administrative support, financial support, industry and R&D institution collaboration and tax incentives. Furthermore, both Russia and China implemented Science and Technology policies to stimulate innovation generation. Although the end goal of becoming an innovative nation did not differ much, the operationalization showed several differences. The degree of authority in Russia (‘top down’) was significantly higher than in China (Li & Wang, 2015). Russian policies were predominantly issued by Ministries and bureaus. In Russia about 70 % of all policies were issued by Ministries. Both countries were keen on commercializing military technology. But China put more effort in promoting technical transformation of knowledge into commercial products and generating earnings. Compared to Russia, China implemented twice the number of policies to stimulate technical transformation. Russia put more effort to absorb new technologies. Formally, Russia put more effort in the implementation of innovation into laws by the Duma than China. To our opinion, this formal implementation rate is not very relevant. More important is the implementation in economic reality by enterprises and entrepreneurs. Here, the entrepreneurial spirit of China is far ahead of Russia and contributes to the explanation of the higher innovation performance. But being and staying a frontrunner or becoming a serious contender and take over top positions depends also on the growth rate of innovation over a longer period of time. This innovation growth rate is shown in Fig. 1.3.
Fig. 1.3 Global innovation growth rates. Source data: EU Scoreboard (2014, fig. 26, p. 29, 2015, fig. 28, p. 32)
Over the time period of 2006 till 2013 the growth rate of South Korea (6.0 %) and China (5.8 %) is relatively big compared to other countries. Therefore, in the period 2006–2013, South Korea was able to improve its position against many rival countries. Russia has as the only country in this benchmark a negative growth of −1.8 %. Due to its higher growth rate, the EU was able to close the
gap with the US and Japan. South Korea, US and Japan do perform well because of indicators capturing business activity as measured by R&D expenditures in the business sector, public-private co-publications and PCT patents (EU, 2014, p. 29). However, in the period 2007–2014, Canada and South Africa joined Russia in the negative growth league but Russia managed to slow down its negative growth rate. Between 2007 and 2014, only Brazil and India improved their positive innovation growth rate. The negative growth rate of Russia is not a single year with an extreme bad performance but an overall declining situation as Fig. 1.4 reveals.
Fig. 1.4 Innovation performance Russia. Source: EU Scoreboard (2014, p. 39, 2015, p. 40)
Between 2006 and 2013 the average innovation performance of Russia benchmarked against the EU has dropped gradually each year. Except in 2014, it improved from 30 in 2013 to 31 in 2014. According to the EU on innovation performance: “The strong decline in 2012 is due to a sharp decline in new doctorate graduates from 1.4 to 0.4 per 1000 population aged 25–34”…and… “Russia is performing worse than the EU on 10 indicators, in particular on Public-private copublications, License and patent revenues from abroad, Patent applications, International copublications and Mostcited publication and Doctorate graduates”. (EU, 2014, p. 28). With regard to innovation growth performance, Russia is “…Russia’s growth performance is worse than that of the EU with growth in 10 indicators being below that of the EU, especially for Doctorate graduates, International copublications, R&D expenditures in the business sector, Patent applications and License and patent revenues from abroad. Growth was above that of the EU in R&D expenditures in the public sector and Exports of knowledge-intensive services.” (EU, 2014, p. 39). In 2015 the same conclusion was drawn (EU, 2015, p. 40). Despite this downward trend on innovation there are certainly some positive signals. In the IT sector several start-ups in high tech demonstrate the willingness and entrepreneurial sparks in Russia society. Because of sanctions, in the agro food sector the strive for self-sufficiency replaces the import of food stuff like tomatoes. However, in this stage the main priority is to install production capacity and innovation is not yet a core issue.
1.4.2 Insufficient Internationalization
1.4.2 Insufficient Internationalization For Russia not diversification is the key issue but, firstly, renewal of existing private and public enterprises, secondly, creation of new industries, and thirdly, internationalization. From Table 1.1 we have learned that the share of natural resources in GDP is above average but that still more than 80 % of GDP is earned in other than natural resources sector. Contrary to mainstream economic analysis, from the perspective of strategic innovation there is no real big diversification problem but an innovation and internationalization issue. The only way out is, firstly, to renew existing industries, secondly, to create new industries and new enterprises, and thirdly, to internationalize all industries. The first two steps are necessary conditions for a successful conquering of world markets and a diversification of the export portfolio. Strategic innovation leads to a broadening and diversification of industries and not the other way around. Existing enterprises need to be reinvented, entrepreneurs should not only start new ventures but also formulate a growth path. Russia possesses large quantities of natural resources ranging from fresh water, land, minerals, oil and gas. Contrary to most other resources, particularly oil and gas have been successfully commercialized and the Russian oil and gas exports fed the treasury in the Kremlin to a very high extent. However, even for oil and gas the main activity is exploration, mining and selling the crude oil and gas resources. Knowledge for exploration is often supplied by foreign partners like BP and Shell. Internationalization of Russian enterprises requires a lower dependency on foreign partners and a reinvention of exploration activities and a global presence. Moreover, except from extraction often higher added value activities based on natural resources are rather underdeveloped. Hence, the value chain potential is not developed very well. The recent plunging crude oil prices due to American shale gas, the reentering of Iran on the market and the flexible high production levels of Saudi Arabia in particular confronted Russia with the downside of the oil and gas bonanza. For all the other natural resources the value chain has the potential to be explored and exploited to a much greater extent. For example, the fishing and forest industries offer huge opportunities waiting for exploration, exploitation and internationalization. Innovating and diversifying the economy is everyone’s advice. But how? It is easy to write a White Paper or a Policy to create new industries but these kinds of papers never say how to do it or only in very general terms with no practical value. It is an extremely difficult challenge and there are no standard recipes. What works in country A is not necessarily a solution for country B. What we do know is that innovation is inevitable and should be somehow part of the solution. But here again the awkward question “How?” is at the table. As we will see, in the past decades Russia has issued several policies, programs and invested huge sums of money into innovation.
1.4.3 Insufficient Entrepreneurial Activity It does not always require innovation to earn money. But creation of value needs entrepreneurial activity. In the past decades, the Chinese showed how to make huge amounts of money with ‘copypaste’ and ‘imitate-improve-emulate approaches’ combined with low cost labor manufacturing, export and increasingly large home market. In Table 1.4 the entrepreneurial activity in different stages in Russia compared with some other different countries in 2014 are compared. Table 1.4 Phases of entrepreneurial activity in the GEM economies in 2014 (% of population aged 18–64) Country Nascent New business (2014) entrepreneurship ownership rate rate Brazil 3.7 13.8
Early-stage Entrepreneurial activity (TEA) 17.2
Established business Discontinuation of ownership rate businesses (% of TEA) 17.5
Source data: GEM (2014, Table 2.4, pp. 35–37) In Table 1.4 the entrepreneurial activity along the growth cycle (from start to discontinuation) is presented. Compared to the US, Brazil and China, the entrepreneurial activity is relatively low. The low indicator for entrepreneurial activity is result of capability, situation and (perceived) opportunity. But it is also result of Russian policies to favor imitation strategy carried out by large incumbent firms and national champions knowing their way in Russian sources for financing (EBRD, 2012, p. 68). Hence, value creation based on a non-technical basis can be very rewarding in an emerging country situation. But then also other elements of competition besides innovative capacity become relevant. One of these issues of non-technical innovation is branding and creating world brand names. In Table 1.5 the top world brand names are listed including all Russian brand names and values in the top 500 ranking positions. Table 1.5 Global top 500 Brands 2015 Brand name Apple
Rank 2015 Rank 2014 Industry 1 1 Technology
Country Brand value ($M) 2015 Brand value ($M) 2014 US 128,303 104,680
Conglomerate S. Korea 81,716
General Electric 8
Oil and Gas
Oil and Gas
Source data: Global 500, 2015, The annual report on the world’s most valuable global brands, February 2015
Brand names and trademarks are an expression of the ability to commercialize new or existing ideas, products or services. They are not necessarily a measure of innovation but innovation can be the major content of the brand or trade mark. From Table 1.5 it becomes clear that for consumer technologies a great brand name is linked to success. But also retailers with a famous brand name like Walmart are able to belong to the top 10 ranked brand names. Even China Mobile achieved rank 9 based on a large home market. The top six Russian brand names are far below on the brand value and position rankings. Most of the top Russian brands lose value from 2014 to 2015. The rather poor performance of Russia on brand value is caused by the underdeveloped integration into the world economy, the low innovation capabilities and low commercialization and valorization competences across industries. The trend in brand value is confirmed by the general trend on trademark creation. In Fig. 1.5 the number of trademarks are compared between Russia, US, China and Benelux.
Fig. 1.5 Trends in number of trademarks in Russia, Benelux, US and China. Source: based on Someren and Someren-Wang (2013, Fig. 4.9, p. 128)
The US is able to constantly create and add new trademarks into the domestic and world economy. After a slow start in the 1990s, China has emulated the US by creating even more trademarks after 2005. In sharp contrast to these two contenders, Russia is lagging behind with a relatively very low increase of number of trademarks. It reflects the low entrepreneurial activity in Russian economy. In a market economy, for stock companies, the market capitalization, the value on the stock market, is the ultimate measure of successful business. Or not? Table 1.6 presents the market cap as of on 2 February 2016. Table 1.6 Stock value world top 10 Rank Company 1 Alphabet
Industry Conglomerate, IT
Market cap in billion $ (02.02.2016) 12 months change on 02.02.16 (%) 537 +46.7
Oil and Gas
Johnson & Johnson Medical, Pharma, Consumer
Technology and Finance
Source data: http://www.dogsofthedow.com/largest-companies-by-market-cap.htm The first impression from Table 1.5 is the dominance of well-known IT enterprises like Alphabet (the mother company of Google). However, from the perspective of strategic innovation, market cap rankings should be taken with care for several reasons. Firstly, the market caps are daily values and vulnerable for unexpected external and internal events. For example, VW plummeted after the diesel gate. Only because of oil price decrease, the former leading market caps such as Shell and Exxon disappeared from the top ten. Secondly, although market value is based on net present value of expected profits, the long term value creation capability could look differently. Apple dropped down the list due to doubts on future innovative products. Thirdly, what’s behind the figures? Alphabet is Google plus new ventures. Google’s revenues are for about 90 % dependent on advertisements (Vijayan, 2015). Most of Google’s other ventures are future investments in other sectors without value contribution. Fourthly, other industries like natural resources are dependent on commodity markets and world economic outlook. But still, these industries do have good prospects for value chain activities and cross over industries. Fifthly, the top ten does not reflect the entire economy. On the contrary, even the lower regions of the top 2000, there are many other industries and smaller market cap enterprises, the hidden champions, which can form the true solid backbone of an economy. Therefore, for Russia there are still opportunities in IT but other sectors as well which fit to the country’s profile and strengths.
1.4.4 Insufficient Contribution of SMEs In most countries like US, EU and China the SME sector plays a significant role in market dynamics and particularly innovation. The Russian definition of SME is comparable to criteria used in EU. The federal law #209-FZ “On small and medium business development in the Russian Federation” defines SMES as, firstly, the ownership structure, the SME’s stake held by one or several legal entities, which are not small or medium businesses, should not exceed 25 %; secondly, workforce, the number of employees should not exceed 250 people, and thirdly, volume of revenue, the annual turnover should not exceed 25 million euros (Federal web portal for small and medium sized enterprises in Russia, 2015). In the period between 2008 and 2012, Russia’s private sector lost 300,000 jobs while the state added 1.1 million workers to public companies. The contribution of SMEs in the EU is on average of 40 % of GDP in Russia SMEs contribute just 15 %. Nevertheless, since 2005 the role of SMEs in Russia, in number and turnover, has steadily grown by almost 30 % from 3.4 million to 4.4 million in 2012 (EIB, 2013, p. 9). The number of