Both Russians and foreigners are prejudiced against anything thatbears the label “Made in Russia.”

The Economist, 1997

We will pay salaries as usual: little and rarely.

Ministry of Finance, 1999

More than 90 percent of Russian scientists simply wait for someone to give them money. They are not interested in searching for research contracts or grants. They believe the government owes them the financial support needed to conduct research. And they don't pay attention to whether anyone will use the products of their research. They assume that introducing research results into practice is someone else' s responsibility. I had difficulties changing my attitude. I hope other scientists will also change their outlook.1

With these words, Gennady prepared to return to Moscow after a brief visit to the United States amidst the economic chaos in Russia in August 1998. There, his small environmental technology firm would have to find new ways to fulfill its obligations pursuant to ruble-based contracts that he had painstakingly developed and had then triumphantly signed in 1997. Inflation would slash his real income from these contracts by two-thirds. But Gennady had survived financial shocks in the past. As he boarded the Aeroflot plane at Dulles Airport, he was reconciled to simply working harder to find new contracts.

Gennady and his team of a dozen scientists specialize in designing

and operating systems for monitoring environmental pollution. Strapped for financial resources, the team has to make up in ingenuity what it lacks in sophisticated equipment so commonplace in the West. Originally, they developed computer models for estimating air and water contamination levels, using sparse data from monitoring devices already maintained by local government agencies rather than building more advanced monitoring stations. However, they soon realized that without better data, their estimates of pollution patterns would be highly uncertain. They gradually accumulated a financial base for designing and installing new stations that could provide better data, particularly measurements of exposure of children to dangerous levels of toxic chemicals in urban areas.

The story of how Gennady began his company in the early 1990s parallels histories of a number of other technology entrepreneurs in Russia. He was working in an institute of the Russian Academy of Sciences, where pay was uncertain and interest in his research on electronic control systems was minimal. He brought together several computer programmers and successfully competed for a grant to the institute of $65,000 from the European Union. European specialists were not only concerned over Russian pollutants drifting westward, but they were also intrigued by the ability of his group to model complicated pollution pathways on small computers. At about the same time, he landed several smaller contracts with cities in central Russia to assist in assessing local pollution problems. With income for his team guaranteed for two years, Gennady then searched for additional customers.

He quickly realized, however, that a large portion of the funds coming into the institute was absorbed by management. His first response was to include the leaders of the institute as members of his team. For a while his funds were well protected. As the institute fell on more difficult times and needed additional money to sustain its large staff, Gennady witnessed more and more raids on his limited budget.

He established a small independent firm to serve as the vehicle for business arrangements—paying the institute a fee for space rental. The team members working for the firm also kept their formal status as employees of the institute. They received little pay from the institute,

but as institute employees they retained use of the health clinic of the academy and eventually would qualify for state pensions, however small.

With bulldog tenacity, Gennady obtained additional contracts from municipal and regional environmental agencies as he spent many weeks traveling throughout Russia in search of those few local agencies that were prepared to devote funds to environmental assessments. Then, in 1997, he found a new customer. He was awarded a three-year contract with Gazprom to monitor air pollution levels along gas pipelines and near chemical refineries. This contract with the gas industry giant would ensure that paychecks for him and his employees arrived on time well into the future.

As his firm grew, it was refreshing to hear Gennady speak at a governmental forum in Moscow in 1997, organized in response to demands by environmentalists for a voice in national policy. He was one of 25 speakers at the session on environmental monitoring. While other speakers complained about shortages of governmental funds for supporting their work, Gennady's pitch was different. He just wanted the opportunity to compete fairly for the occasional government contracts that were being signed in Moscow and throughout the country. If he lost a competition, so be it. In his view, the government had a responsibility not only to finance environmental assessments to the extent they could but also to select the most efficient firms to carry out the required monitoring.

Business was thriving until the August 1998 financial crisis. Not only did the value of the firm's ruble-based contracts plummet, but financial reserves were lost as the company's bank closed its doors. In September, the firm again set off on the slow road to financial viability. Within a year, they had discovered additional monitoring opportunities near the Caspian Sea, as Gazprom and Russian and foreign oil companies expanded their interests in the lucrative energy resources of that region.

In Russia, 42,000 small firms such as Gennady's, each with less than 60 employees, are classified as innovative. (In the United States, two million firms fall into such a classification.) By 1999, about 10,000 of these had found profitable market niches, although only 1,000-2,000

were performing serious research and development. In a particularly lucrative field, western businessmen had become interested in the computer software activities of 1,000 or more of these small businesses, and they were trying to establish partnerships that would help compensate for the shortage of computer specialists in the United States and Europe.2

Collectively, the 10,000 firms represent about 5 percent of the nation 's innovation potential, but their capabilities are slowly increasing. 3 They are particularly important in pioneering roads around the three-pronged albatross of outdated equipment, outmoded management techniques, and outrageous financial manipulations. A few government officials recognize the significance of small-scale technological entrepreneurship and try to encourage embryonic businesses by providing safe working space and communication services for them.

As to governmental financing of the early research and development stages of innovation, through budget allocations the Russian government supports about 50 percent of the nation's research and development effort spread over many institutions. The remainder is financed by special government contracts, by the commercial sector, by the research institutes' internal funds, and by foreign sources. In recent years, this government investment has been less than 10 percent of the U.S. government's support of research and development (see Appendix A).

Research and development is distributed among 4,000 enterprises, research institutes, and universities. Much of the funding provides salaries at nearly dormant facilities. Indeed, leaving aside the 10,000 small innovative firms such as Gennady's, almost all research and development effort likely to lead to new products and processes with paying customers is concentrated in about 1,000 organizations. 4

The government gives priority funding and also tax advantages to 57 State Scientific Centers. While most centers are oversized and not very efficient, they nevertheless are repositories of important technologies. In Soviet times, when the government assured full-cycle funding from research through production, the predecessor organizations of many centers were tightly linked to industrial activities. The enterprises which had been the customers of the predecessors retain much of the nation's capabilities for realizing near-term benefits of technological

innovation, but few are now interested in paying the centers or anyone else for research and development programs with uncertain returns. Thus, the centers are scrambling to find new partners, accepting contracts from whatever sources are willing to provide them.

About 15 percent of the large Russian manufacturing enterprises are performing well despite the economic crisis. Some use modern technologies and effective management and marketing techniques to improve their positions at home and abroad, and a small percentage sponsor research and development activities. But they are the exceptions. Managers of many Soviet-era enterprises continue to believe that raw technical talent at their facilities is the key to financial viability. They have yet to adopt contemporary marketing approaches and effective financial controls so essential to bringing new technologies into the mainstream of business at home or abroad.5

Funding shortfalls within industry and research and development institutions are usually cited as the principal reason for the stagnation of Russian technology. In addition, however, the Soviet industrial legacy inhibits effective use of financial resources that are available. Box 2.1 identifies barnacles of the past that still retard technological development—from an emphasis on quantity rather than quality of products to poor mechanisms for diffusing innovations throughout the industrial base to inflexible research institutions. Also, remnants of the research and development command system limit opportunities for personal initiative and waste resources. Such a system is ineffective in an open market economy, where competitiveness and timeliness are critical to commercial success.6

Organizationally, the best Soviet researchers were concentrated within the enterprises and institutes comprising the defense complex and within the institutes of the Academy of Sciences. These specialists received high salaries and had access to modern facilities and equipment and to foreign scientific journals. Trips abroad for academy scientists and extended holidays for defense specialists were common. In most cases, they had better housing, higher quality medical and child

care facilities, and easier access to foodstuffs and consumer products than their colleagues in other sectors. This practice of favoritism created a significant social stratification within the science and technology community.⁷ With the defense complex having concentrated on military applications and the academy concerned primarily with basic research, the neglected civilian-oriented applied research base that

should have led the technological efforts to spur the economic transition during the 1990s simply languished even further.

Technology gurus who honed their skills in the Soviet defense complex and in the Academy of Sciences want to participate in the emerging market economy. But some have had difficulty understanding that they must both limit their spending habits and find new sources of money if they are to survive the rapid decline of government budgets. Like Gennady, 10 percent or so have been successful in finding new income streams for innovative activities—from foreign governments and international organizations and from other Russian entities still able to pay for research and development support.

A second group has relied on a reorientation of most research activities to technical services hoping that some funds will then be available to also support research and development. To earn immediate income, their institutes install electrical systems in office buildings, produce specialized items for home use from machine shops, modify computers, provide security systems, test the quality of building materials, and analyze chemical compositions of interest to large companies, for example. Also, those with large facilities rent space —to banks, to automobile dealers, to clothing outlets, and to grocery stores. These strategies have provided income, but at the expense of sacrificing innovation capabilities.

Russian survival instincts mesh with any strategy that helps ensure a payroll. Few research institutes have closed. Indeed, only in 1998 was I able to confirm the total abandonment of a single institute. The animal research institute that trained dogs, pigs, and monkeys for the space flights of the 1960s finally closed its doors 35 years after the Soviet Union switched from orbiting animals to cosmonauts.

Meanwhile, the number of active researchers has plummeted from one million Soviet researchers located in Russia in 1991 to less than 500,000 in 1998. Most departees have simply given up their careers in science and engineering. Those reluctant to change professions have remained in their jobs hoping the financial situation will change. A few have uncovered opportunities to participate in international projects that pay well and provide opportunities for further professional devel-

opment. Those who have set up private technology-oriented firms have had mixed results, as we have seen.8

Russian statistics show that a few manufacturing enterprises have been formally closed; but only when you visit an enterprise can you determine what happened. Tours of a rusting animal feed plant in Kirov far to the northeast of Moscow, an abandoned aluminum plant in the heart of the capital city, and a closed paper products plant in Podolsk on the southern edge of the city, for example, provided glimpses of reality. The old facilities were still there. They remained legal entities. Both maintenance crews and nominal managers refused to face reality and expressed confidence that some day the production lines and the associated research and development units would be revived. It is not clear whether these enterprises show up on the official statistics as operating as usual, transformed, or closed. Probably, most are listed as operating as usual.

If recent trends persist, the outlook for technological innovation on a national scale is not good. In short, the financial and administrative barriers to profitting from innovation that are encountered in any market economy, as depicted in Figure 2.1, are compounded by the lingering Soviet legacy. In comparison with other industrialized economies, few customers look toward Russian firms for new products; and few angels are willing to put up venture capital. Meanwhile, greedy officials and criminals seek to siphon off funds that might be available for research and development or other purposes.

The Ministry of Science and Technology constantly decries the neglect of technological innovation, a necessity in moving from Soviet production, largely isolated from the world, to Russian production that is competitive at home or abroad. In 1997, less than 3 percent of the limited capital investment in industry involved innovation. Less than 5 percent of industry sales had some relevance to innovation. Only 6 percent of exports were in any way new products. These numbers are five times lower than the norm for modern economies.9

Directly linked to the decline of Russia's technological position, the vast majority of new industrial equipment is now imported. Much equipment needed by Russian manufacturers simply is not produced in Russia. Russian-made equipment often is not capable of meeting

FIGURE 2.1 Hurdles to profiting from innovation in Russia. SOURCE: Adapted from Rustam Lalkaka, Technology Transfer Seminar. The World Bank, February 1999.

standards required for producing exports for western markets or is so wasteful of energy and raw materials that the products are too expensive to sell. The label, “Made-in-Russia,” signals questionable quality in the eyes of customers of civilian products in Russia as well as abroad. ¹⁰

The large Soviet research and manufacturing organizations, usually employing tens of thousands of scientists, engineers, and production workers, were made to order for central planners promoting development and use of the latest technologies. New designs reflected instructions from Moscow. Money and materials were available, and shining new equipment was produced. Usually, someone was prepared to use the latest innovations.

Now, however, these large organizations are on their own in find-

ing customers ready to pay for products. They have so many employees demanding pieces of ever-shrinking payrolls that few directors can divert resources to explore risky new technologies with uncertain futures. When the directors succeed in winning contracts of any sort, employees throughout the organizations clamor to share the proceeds. Nevertheless, a handful of enterprises recognize the need to support research and development efforts if their products are to remain of interest to old or new customers, and they earmark funds for research.

Gennady has learned that the largest supporter of research and development activities, aside from government ministries, is Gazprom. The gas company's network includes a number of Russian technology-oriented organizations: three research institutes, three applied geophysics and engineering institutes, a design institute, and more than 15 equipment factories and construction organizations. Also, Gazprom supports a few consulting firms and individual scientists with needed skills.11

Gazprom officials contend they spend several hundred million dollars annually supporting research and development—an eye-opening figure in contemporary Russia. A large portion of these expenditures is not directed to research and development, however, but covers technical services rather than systematic searches for new innovations. Nevertheless, Gazprom sometimes supports innovation—such as adaptation of aircraft turbine engines for use in gas-fired power plants—and their research and development funds dwarf research expenditures of other enterprises for maintaining a technical base within the country. Of course, no other enterprise is in the favorable financial position of Gazprom and has the technical capability to effectively use scientists and engineers from outside the company.12

After a decade of neglect of research and development, a few Russian oil companies realize that applied research can often lead to cost savings. In the late 1990s, they spent tens of millions of dollars annually in improving operating efficiencies. Contracts with western firms help maintain and upgrade field and refinery operations. Significant funds also have gone to Russian institutions and to individual Russian specialists interested in both geophysics and petroleum engineering. However, in 1997 as earnings declined due to the depression in world

oil prices, research support began to shrink; but if oil prices continue the upward trend of 1999, research support should again increase. Meanwhile, the state research institutes established decades ago to support the Soviet oil program search for funds from the new companies —arguing for mandatory research and development taxes on sales of oil.¹³

In another sector, a few aerospace firms are struggling to remain on the frontiers of technology. Most enterprises suffer as the Russian air force scales back its operations, Russian airlines increasingly look to American and European firms as their suppliers of replacement equipment, and the export market for Russian civilian aircraft evaporates. But in space activities, several international business alliances provide for high-tech activities at major Russian facilities. One example is the anticipated purchase by Lockheed Martin of 101 rocket engines, at a cost of one billion dollars, from a joint venture between Pratt & Whitney and Energomash, which is producing the engines in the town of Khimky on the outskirts of Moscow.¹⁴Several such international alliances are discussed in Chapter 9.

Engineering innovation characterizes large numbers of construction projects. Moscow, of course, is a showcase for the building industry —from an underground shopping mall in the very center of the city to several glass towers built for the tax service. Marble has become a building material synonmous with wealth and is being used in unusual ways, particularly by banks. The Russian Nuclear Safety Institute made the mistake of constructing a marble facade on an otherwise rundown building and quickly became a target of widespread interest among a mafia that equates marble with wealth.¹⁵

A less glitzy, but important, example of the continuing need for good construction technology is highway construction in a country subjected to the harshest of climates. The road network of the country is not well developed; and even in the hardest of economic times, asphalt will be in wide demand. Few of the 2,000 asphalt firms in the country are interested in improving their product, however. They simply want to be paid for producing the same old asphalt, even if the quality of the tar has gone downhill as firms cut corners during acquisition of raw materials and during mixing of asphalt.

One exception is Rosasfalt, a giant of the asphalt industry, which works with the German firm, Wirtgen, to improve road durability of its material and to reduce pollution during mixing and spreading. Not unexpectedly, Rosasfalt is campaigning heavily for establishment of new road improvement funds throughout the country. These funds would guarantee money for construction activities, with a little left over for improving the technology.¹⁶

The conventional wisdom that Russia now lacks capacity for innovation is sometimes challenged by Russian engineering companies when they put their works on public display. For example, at the 1997 Russian Industrial Exhibition in St. Petersburg, the holding company Energomashstroitelnaya displayed modern power generation equipment produced by eight firms in its conglomerate, firms with domestic and international sales of about $2 billion annually. Discussions with officials of the companies revealed that the companies have considerable capacity to innovate. But while sales provided stability for maintaining workforces, sales have had limited impact in advancing the companies' manufacturing capabilities. The customers have no stake in reducing production costs of their suppliers, and therefore their contracts do not allow for the suppliers to install and use improved engineering approaches that are available.¹⁷

Progressive management policies that foster innovation can be found in the machine tool sector. The joint stock company, Sverdlov, in St. Petersburg, for example, has an efficient work force of about 500 compared to the bloated force of 4,000 of its Soviet-era predecessor. It has shifted to the model of a small American machine-tool company, customizing products for individual Russian machine-tool manufacturers with orders for exports or licenses. Thus, it works out innovative approaches, designs new equipment, and provides automation systems tailored to specific needs. In providing support for its clients, it does not shrink from spending money to overhaul its own machinery to improve performance.¹⁸

Overall, expenditures for innovation by Russian enterprises are minimal for a country with a large industrial complex—less than 2 percent the expenditures by U.S. companies. Privatized firms have

little incentive to support research. The state firms also use their resources to meet immediate needs.

Immediately upon disintegration of the Soviet Union in 1991, western science policy experts began advocating a downsizing of the large and bloated science and technology infrastructure of enterprise laboratories, design institutes, and research and educational institutions established in the Russian part of the USSR over several decades. Then, at an international conference in Moscow in 1993, western delegates finally heard the words they had waited for. After these delegates had railed at Russian officials for three days over the need to reduce the infrastructure by 50 percent, the Russian Minister of Science and Technology announced he was taking a step in their direction.

His plan was to create a network of State Scientific Centers modeled after the group of a dozen national laboratories of the U.S. Department of Energy. The ministry would pick the very best research institutes, designate them as centers, provide them with ample funding, and let other research institutes gradually shrink as their funding levels dropped. With this initiative setting the pace, the research establishment would eventually become one-half its size in Soviet times. So promised the minister.¹⁹

Neither the minister nor the delegates were interested in my rejoinder that the proposal for State Scientific Centers was not a good idea. Focusing resources on the best Russian institutions and letting other facilities fend for themselves made a lot of sense. But defining a center of excellence as an entire institute made far less sense. Russian research and development institutes often employ more than a thousand scientists and engineers, and supporting an entire institute of such enormous proportions—housing both productive and poorly performing specialists—is contrary to the goal of excellence.

My alternative was to support outstanding laboratories of not more than one or two hundred employees each and then let the less effective laboratories whither on the vine. But Russians were accustomed to

thinking on large scales and entrusting the fate of institutes to directors. The idea of discriminating good from poor within a single institute did not even make it onto the decision screen.

The concept of a system of State Scientific Centers had been born in 1991 when the internationally known physicist Yevgeny Velikhov decided to seek autonomy and stature for the institute where he was the director, the Kurchatov Institute for Atomic Energy. His institute was to be the first independent research center. The analogous laboratories of the U.S. Department of Energy, like the Kurchatov Institute, each employ thousands of specialists and support personnel, although under drastically different economic conditions and management practices than those encountered in Russia.

Velikhov convinced the Ministry of Atomic Energy to cut his institute loose from its jurisdiction. Then the research grants and contracts from the West began rolling in. This new “independent” research powerhouse in Russia reflected western views that decentralization of research, production, and other activities was essential in destroying the communist tradition of central planning and control.

At the time of the conference, the Kurchatov Institute was riding high. The Ministry of Atomic Energy had not fully terminated its support of the breakaway institute. Foreign contracts focused on the institute's capabilities in the national security arena, such as technologies for enhancing the protection from theft of weapons-grade nuclear materials and for detecting nuclear items being smuggled across international borders. However, many institutes that were candidates for status as State Scientific Centers had few active links to national security concerns and were therefore of less interest to western governments.

With only my negative voice at the conference, the Russian government promptly established the system of State Scientific Centers. While I continue to believe that small centers of excellence would be preferable to the large centers, the system that has evolved is certainly a step forward in preserving the most important technological resources. Initially, the government was flooded with over 400 applications from institutes seeking designations as centers. Forty were selected.

By 1999 the list had been expanded to 57 centers (see Appendix B). They have many technical profiles. All are large, with some employing thousands of workers and the others hundreds. The government provides funding for each center, although much less than promised. The centers also are entitled to preferential electricity, water, and telephone rates—at least on paper, and they have a few exemptions from taxes and customs duties.²⁰ In return, the government has the authority to review and approve research programs of the centers and to participate in the selection of center directors.

In mid-1998, the executive director of the association that serves as a voice in Moscow for the State Scientific Centers brought me up to date on their activities. He proudly reported that his staff had succeeded in helping one of the centers climb out of debt, although the other 56 were still operating in the red. How did his staff achieve this turnaround? ²¹

Each center has contracts with various government agencies covering specific research projects and support services. But, when time for payments arrives, the agencies usually do not pay their bills. The centers in turn have no money to pay their own bills. The heat and electricity are sometimes turned off, the staff works on the basis of promises of future salary payments, and the tax authorities keep hovering at the doors.

The highest priority of the staff of the association has been to persuade government and quasi-government creditors—such as the tax inspectorate or the electric company—to write off debts of the centers in exchange for cancellation by the centers of debts of government customers for their services. These debt swaps are frought with arguments and accusations over the details of contractual arrangements and payments that had been made. Nevertheless, debt swapping is a primary activity of the association. The first success clearly boosted the morale of the staff.

The outlook for the future of the State Scientific Centers has not been bright. This outlook became even gloomier following the financial crisis in the summer of 1998. By that time the centers depended for one-third of their budgets on the Ministry of Science and Technology. But the funds were soon in jeopardy. The ministry, and hence the

centers, are constantly short changed, as the Ministry of Finance refuses to release funds for science and technology allocated by the Duma. Also, all centers suffer from the increased costs of electricity. Despite their claims for reduced rates, regional authorities and local electric companies are not interested in “special interest” decisions in Moscow. Finally, the intake of young specialists into the centers has almost stopped. The only incentive for young scientists left is for the government to exempt young specialists who work in State Scientific Centers from the military draft, but obtaining such exemptions is not easy.²²

Despite their oversized staffs and the steady obsolescence of their equipment, the State Scientific Centers should play an important role in promoting innovation. In Soviet times, they housed an estimated 30 percent of the nation's technological capability, including unique international know-how. Much of this prowess remains in place.²³As currently configured, the centers may not be the best models for the future of Russia; but they have both staff and alumni in influential positions in many regions of Russia who will resist change.

Since the early 1990s, a handful of officials of the Russian Ministry of Science and Technology have also promoted much smaller innovating organizations. The ministry's objective is to encourage low-cost efforts of individual scientists and engineers interested in using their talents to build technology-based businesses. The officials have correctly concluded that whatever the macroeconomic framework, the microeconomic framework will be decisive in encouraging or discouraging initiative by potential innovators. They want to accelerate progress toward economic revival by gradual multiplication of small commercial successes rather than trying to upgrade technologies throughout all of industry with new decrees from Moscow. They know that some innovative scientists and engineers, such as Gennady, have already started their own businesses, and they are convinced that others will follow if given limited support.²⁴

Technoparks, incubators, and innovation centers have been iden-

tified as important pathways to modern technology in Russia. Such institutions are temporary homes for small innovative businesses. In 1997, small traders were responsible for most of the 4 percent reduction in imports for the retail sector, while paying 40 percent of the taxes in the most stable regions of Russia. Couldn't small technology innovators who emerged from these temporary homes do as well?²⁵

What are the distinctions among the three innovation concepts? Technoparks are usually located on the grounds of universities. With government funding, the university provides space, utilities, and communication services at reduced rates for entrepreneurs trying to grow technology-oriented businesses, often from scratch. Incubators are also sites—often in rented space of research institutes—where such support is provided at reduced rates. However, the small business occupants already have a greater semblance of a customer base and at least a limited track record in providing commercial products. Innovation centers are more ambitious undertakings that bring together educational institutions, research institutes, and small entrepreneurs to develop advanced-technology businesses that can eventually survive without governmental support. In practice, these three concepts often become mixed. The best approach is “whatever works.”

Two dimensions of support for embryonic technology-oriented businesses are important. Advisory services by resident Russian staffs concerning marketing, intellectual property rights, and contract preparation are usually in high demand. Also, access to low-interest loans or equity investment capital is often critical—for operational costs, for modest equipment purchases, for market testing, and for initial production runs. As we shall see, several Russian funds have been established to provide loan and equity support for projects, usually in the range of $50-100,000 but sometimes up to several hundred thousand dollars.²⁶

There are hundreds of success stories associated with the small offices and laboratories that populate the technoparks, incubators, and innovation centers. Two widely advertised successes are international sales of Russian-English translation software and CD-ROMs containing the art history of Russia based on the collections of the Hermitage in St. Petersburg. Less well known is software that enables

hundreds of Moscow seamstresses to rapidly turn out all types of clothing carefully designed to cling to customers with a variety of body proportions. If you would like a photograph etched on your tombstone, a firm will scan the photo into a computer and chip the marble to very exact specifications, provided you are ready to wait in line for six months. Another firm provides plastic vacuum wrap for food products, having discovered that other Russian wrap is of low quality and imported wrap is expensive. Finally, if you want to make long-distance phone calls to remote areas that are poorly served by the telephone system, a telecommunications service provider is ready. He has an arrangement with a Moscow TV station to send digitized voice transmissions over portions of the satellite band that carries television programs to remote areas.

Unfortunately, technoparks sometimes fall under the control of middlemen determined to extract as much money as possible from both the government and the small entrepreneurs. For example, in 1993 Moscow State University offered interested companies the opportunity to occupy a new building in the adjacent technopark. The rental rates were reasonable. The location was excellent. The university would guarantee all needed support for an acceptable fixed price. The catch was that the building was set back from the main roadway, and the middleman responsible for the financial aspects of the technopark insisted that the occupant build an entire road network for the technopark. He had already received university funds for road construction, but they somehow vanished. Three years later, the building was still empty.

Criminal elements usually lurk in the shadows around embryonic business centers. In response to this threat, the incubator at the Electrotechnical Institute in Moscow is behind towering concrete walls with no external signs of occupancy. The visitor must choose the correct entrance and then pass through three security doors. While not customer friendly, according to the manager it is safe from criminals with extortion in mind. The occupants confirmed that the favorable security conditions were a primary reason they decided to move into the incubator.²⁷

A third consideration is the exaggerated promises of the govern-

ment for supporting small innovative businesses. The innovation center in Obninsk, 60 miles south of Moscow, has impressive plans for stimulating industrial growth in the city and the surrounding region through supporting expansion of high tech organizations already at the starting line. Every senior science and technology official of the Russian government, from the president's office on down, and leaders of the Duma and Federal Council have been to Obninsk to participate in the opening of a new era of innovation. The governor of the region and the entire city council declared the innovation center a new beacon of hope during dismal days. But little money followed the words of encouragement—not even enough to pay all the center's staff let alone stimulate innovative activities.²⁸

Most innovative firms that obtain infrastructure support from the government have a few common characteristics: small-scale production with a lack of access to capital for major expansion; optimistic management, but with management experience limited to low-volume sales; and products and services geared almost exclusively to the Russian market (except for computer software, which often reaches international markets). In time, some will overcome such handicaps and launch operations on a larger scale, some will be absorbed by larger companies, and others will simply continue their modest activities or else go out of business. The outlook for small innovative firms is quite promising since they reflect a pragmatic way to cope with challenges facing technological innovation in Russia in the immediate future.

Russian managers have many master plans for reversing the decline of their institutes—inevitably long on ideas but short of cash. Some plans may seem like blue-sky dreams to western visitors. To Russian patriots, however, they reflect an unwavering confidence in the future of their technological ingenuity. On occasion this confidence is rewarded.

One of the most imaginative institute directors is the previously mentioned Yevgeny Velikhov. In the fall of 1998, he briefed specialists from a leading western oil exploration company on his proposal for

finding and extracting off-shore oil and gas under the Arctic ice. Donning his second hat as president of the Russian company, Rosshelf, which was founded by his institute in cooperation with Gazprom and the Russian navy, Velikhov planned to mount a drilling platform between two nuclear submarines that would place it on the seafloor. With adequate power from the submarine reactors, drilling into the seafloor would proceed until subsurface oil and gas deposits were located and well characterized. Then, pumps and well heads would be placed on the seafloor, with the oil and gas brought to port by submarine tankers. Although skeptical and not prepared to invest their own funds, the western experts mused that the project might just work. Perhaps increases in oil prices in 1999 will provide capital to move beyond theoretical studies of the concept.

Seven years earlier, Velikhov had unveiled another plan to a skeptical audience from Russia and abroad that turned into a success story. He established Relcom, a 50-50 venture of the Russian Commodities Exchange and the Kurchatov Institute as the first Russian internet service provider. By 1994 Relcom had enlisted 70,000 subscribers throughout the country. Relcom used the Russian telephone lines for internal communications. In addition, with the help of western private foundations, Velikhov obtained a dedicated telephone line from Moscow to Helsinki. Once e-mail messages were in Finland, they were into the world-wide Internet system.

By reinvesting all profits, Relcom managed to double in size each year until 1997, when capital needs outstripped available resources. It then joined forces with the former telecommunications monopoly, Rostelcom, with the Kurchatov Institute retaining only a 5 percent ownership in the new company, called Business Network. Still, there are many professional opportunities for underemployed institute specialists. Also, the new company supports a variety of research and education activities at the institute.²⁹

Fifty miles south of Moscow, the Institute of Immunological Engineering for many years was heavily dependent on contracts from the military-industrial complex. This support has disappeared, and Russian funding for public health-oriented research is very small. On the wall of the director 's office is a photo of one very important asset—a

large land area in a pleasant setting not far from Moscow. The map shows that eight new buildings were scheduled for construction in the undeveloped part of the territory.

But times changed. Four foreign companies were interested in renting space in the undeveloped territory. A French company was already manufacturing irons and frying pans in 1999. Another French company was producing yogurt. Alcoa was producing plastic cups for soft drinks. Finally, Bristol-Myers Squibb was considering production of generic drugs. With a slimmed down staff and a guaranteed source of income from its rental activities, the institute was in a reasonably good position to maintain its core research competences: molecular immunology, cell biology, physiology, and immunobiotechnology.³⁰

Also related to the interests of the pharmaceutical industry, but located 2,000 miles to the east of Moscow, is the State Scientific Center for Virology and Applied Biotechnology, called Vector. The Soviet military establishment set up this institute in the 1970s to investigate the most dangerous viruses, such as smallpox and ebola. As Russia disclaimed interest in biological weapons in the early 1990s, the center struggled to find new ways to utilize its capabilities, with an emphasis on serving the nation's public health needs.

By 1999, Vector had reduced its workforce by more than 30 percent, with 2,000 employees still in place. Also, there had been a dramatic transformation of the institute from one of total secrecy to one that was on the agenda of hundreds of foreign scientists visiting Russia during that year. It was featured in documentaries on American TV networks about the history of biological weapons and the new threat of bioterrorism. In 1998, the institute leadership proudly proclaimed that it had opened all formerly locked doors for specialists from the West to witness the transformation to an exclusively civilian institution. Indeed, a number of western experts have visited some of the most tightly guarded buildings of the past.

With no support from the Russian military establishment, how was the institute surviving? As a State Scientific Center, it received some funds from the Ministry of Science and Technology. But most of the institute's income was from commercial activities—sales of the following products within Russia and the former Soviet republics:

• Test systems for diagnosis of infectious diseases

• Vaccines for hepatitis A and measles

• Recombinant cytokines including interferon

• Medicinal and veterinary drugs

• Nutrient media for cultivating viruses and cells

• Sera of calves, cattle, pigs, and sheep

• Enzymes and reagents

The U.S. government has provided research grants to encourage researchers to redirect their expertise to public health problems—encephalitis, liver fluke, hanta virus, and other infections of concern. Other countries as well, including China and South Korea, have invested in drawing on the technical capabilities at Vector.³¹

A sterling example of commercial success in taking research results to the market can be reported from Nizhny Novgorod. In this case, the activity moved out of a cloistered research institute to a more appropriate location in the center of this major Russian city.

The story began in June 1994 with my visit to the formerly secret city of Sarov, also known by its post office designation as Arzamas-16. This atomic city was the birthplace of the Russian nuclear weapons program and was not accustomed to receiving foreign visitors at that time. My task was to interest researchers in working on western-funded civilian projects in order to reduce temptations to look to rogue countries for financial support, but with the provision that their efforts would be subject to scrutiny by specialists from the West. Prior to my visit, Lyudmila Nesterenko, a talented mathematician, was among those designated by the institute as project leaders. While only one female in a group of 20 project leaders may seem unfair, the fact that even one woman was permitted to rise to such a senior position in this masculine environment was noteworthy.

Within five years, Nesterenko had successfully directed several western-funded software development projects at Sarov. Then, with a contract from Intel in hand, and realizing that government support may well be short-lived, she decided to move 65 miles north to Nizhny Novgorod and establish her own firm. She would be free from reliance on uncertain funding from either the Russian or western governments.

Such a move was remarkable. The security services allowed her to move to an open city with intensive contact with foreigners. She was willing to take a chance on her untested entrepreneurial skills. She even succeeded in finding an apartment.

Nestorenko chose Nizhny Novgorod over Moscow and St. Petersburg because good schools and a bad economy in that Volga city gave her a buyers market in recruiting personnel. Also, she believed that the work ethic in the provincial capital was higher than in the larger cities. Finally, industrial security problems were less intense, which was important in protecting software.

She obtained contracts with Philips, Motorola, Toshiba, Gazprom, and several smaller firms and assembled a staff of 40, including several colleagues from Arzamas-16. Soon, in a smart move, she turned over the reins of running the company to a physicist with more business experience while she concentrated on the technical aspects of software development. By 1999, her firm had grown to 160 employees, with Intel contracts being her principal source of support. The American Embassy in Moscow, reflecting on the initial U.S. government grant five years earlier, described her activity as a textbook example of how to successfully incubate small, high-tech companies from Russia's closed research establishment.³²

The foregoing examples of capitalizing on modern technologies to penetrate the marketplace are encouraging. They are the exception rather than the rule, however, and the size of the activities is not always great. They give some hope, nevertheless, that clever people can continue to bring technological achievements into the economy, looking to the day when, in the aggregate, their efforts will have a significant impact on economic growth.

There are rays of hope for technological revival on the horizon as a few large enterprises press ahead with modern manufacturing lines and small innovative entrepreneurs increasingly find their market niches. When foreign companies left Russia in 1998 and imports into the country became prohibitively expensive, both large and small firms

suddenly had unprecedented market opportunities on their doorsteps. As one example of the response, a converted defense facility in Kazan quickly became home for more than 40 small innovative enterprises, with almost all turning a profit.

Even without this impetus, the Russian science and technology community has been incredibly resilient. Despite the absence of economic incentives, excellent specialists throughout the country are prepared to devote their careers to research and development. The story of Viktor Vyshinskiy, who learned his trade in the fluid dynamics department of an institute engaged in testing missile systems, sends a message that the game is far from over. He tried his hand at designing pollution control devices, but had no success in attracting customers. He tried to improve timber drying, with the same outcome. And he turned to flood prediction, which no one would support. Then, with characteristic doggedness, he had better luck in stimulating the interest of the Boeing Company and other aviation firms in new techniques for predicting turbulence created by airplanes at commercial airports.³³

Vyshinskiy and others pick themselves up off the floor of despair every day and plunge again and again into the uncertain world of innovation. After the economic crisis of 1998, the veterinarian responsible for the avarium at the Shemyakin Institute of Bioorganic Chemistry in Pushchino told me that he had used his meager personal paycheck to buy feed for the carefully bred mice under his care. I knew that research was far from dead in Russia.³⁴

But scientists and engineers, however determined, cannot succeed on a significant scale without help from the government. Substantial funding by the government to support introduction of new technologies into industrial processes when there is a clear demand for such technologies is necessary if Russia is to have a sustainable economic recovery. Contracts and grants that are carefully targeted and controlled to avoid misuse of funds are not only appropriate but essential, despite the obsession of free marketeers for opposing any program that smacks of corporate welfare.

Skeptical reformers often have difficulty with concentrating more research and development funds in a central bureaucracy for supporting their favorite projects. But they should look carefully at govern-

ment incentives for technology development in western countries. Western practices include, for example, defense contracts and associated funding of overhead costs that support dual-use technologies with clear civilian applications. Government research programs are designed to enhance the technical capabilities of small businesses, and government research and development funds are provided to even the largest multinational companies on a project-by-project basis to improve their global competitiveness.

The Soviet Union's industrial might was built on government subventions. Old-line managers and researchers—now saddled with both overhead costs that are difficult to shed and outdated equipment—will operate effectively only when they have some level of government support. Industry simply will not revive in the foreseeable future without help from the government.

Hopefully, in one or two decades, Russia will have a new type of economy requiring few government subsidies. In the interim, the remnants of the old Soviet industrial complex, the reoriented State Scientific Centers, and the growing number of small innovative firms will be the flagships of technological change. They all need help. Government research grants with matching contributions from the intended industrial users of new innovations is one attractive option. Re-equipping laboratories to perform research and development of priority interest to the government is another. Guaranteed purchases by the government of innovative products is a third.

Those Russian technology entrepreneurs who can make it on their own do not welcome such suggestions. Government grants could give competitors an edge. But, in the larger scheme, the choice is governmental support of Russian technologies or continued industrial stagnation.

1. Author interview in Washington, D.C., August 1998, as well as previous interviews in Moscow. The Russian scientist is Professor Gennady Yarigin, who had a distinguished career as a control systems specialist in the military-industrial complex, as a professor, and as a senior researcher at several institutions before

turning to the problems of environmental monitoring after the collapse of the Soviet Union.

2. Author interviews in Moscow of Russian experts involved in support of small innovative firms, November 1999. The estimates are consistent with general writings on the topic, particularly writings in the Russian press and in Russian reports.

3. Ibid. Also see Nikolay Rogalev, Technology Commercialization in Russia: Challenges and Barriers (Austin, TX: University of Texas IC2 Institute, 1998); and S.G. Polyakov and M.V. Rychev, Incubators for Business: Russian Experience (Moscow: U.S. Agency for International Development, 1996).

4. Author interview in Moscow with experts in the Russian Ministry for Science and Technology, September 1999.

5. Presentation at the National Academy of Sciences in Washington, D.C. by Boris Milner, Deputy Director of Russian Institute of Economics, November 1999. For more general background see Russian Science: Conditions and Problems of Its Development, Second All-Russian Seminar, State Committee for Science and Technology, Moscow, February 11-12, 1997.

6. Boris G. Saltykov, “Russian Science on the Threshold of a New Stage of Reform,” Russian Science and Industrial Policy: Moscow and the Regions, Conference Report, March 24-25, 1997, Center for Eurasia, Russian, and East European Studies, Georgetown University, pp. 1-9.

7. Leonid Gokhberg, Merton J. Peck, and James Goes (editors), Russian Applied Research and Development: Its Problems and Its Promises, International Institute for Applied Systems Analysis, Vienna, April 1997, p. 12.

8. L.G. Zubova, Values and Motivation of Scientic Work, Center for Science Research and Statistics, Moscow, 1998, p. 52.

9. Report of Activity during 1998, Fund for Development of Small Firms in the Science and Technology Sphere, Moscow, 1999. This report is based on data provided by the Center for Science Research and Statistics of the Ministry of Science and Technology, Moscow.

10. N. Gaponenko, “Innovation and Innovation Policy during Transition to a New Technological Order,” Voprosi Ekonomiki, No. 9, 1997, pp. 84-92.

11. Speech at the St. Petersburg State Mining Institute by R.I. Vyakhirev, President of Gazprom, “Conditions and Perspectives for the Gas Industry of Russia,” November 3, 1998.

12. Ibid.

13. Author interviews in Moscow with Russian oil company executives and energy research specialists, April 1996 and November 1998.

14. “Lockheed Martin To Buy 101 RD-180 Rocket Engines from Russian-American Joint Venture,” Press Release, Lockheed Martin Company, June 17, 1997.

15. Author interview in Moscow at the Nuclear Safety Research Institute, April 1998.

16. “It Is Not Necessary to Chrome Plate the Roads,” Passport Express, No. 8, 1998, p. 20.

17. “The Russian Industrial Exhibition,” Studies on Russian Economic

Development, Vol. 9, No. 2, 1998, pp. 207-8; “On the Energy Front,” Russia Review, March 27, 1998, p. 44.

18. “The Russian Industrial Exhibition,” pp. 207-8.

19. Discussions in Moscow during OECD-sponsored conference on Russian Science and Technology Policy, May, 1993.

20. Leonid Gokhberg and Levan Mindeli, Research and Development in Russia, Trends of the 1990s, Center for Science Research and Statistics, Moscow, 1997, pp. 9-10.

21. Author interview in Moscow, July 1998.

22. V.B. Kozlov, “State Scientific Centers in the System of Scientific-Technical Progress, ” Russian Science: Conditions and Problems of Development, Second All-Russian Seminar, Moscow, February 11-12, 1997, State Committee for Science and Technology, 1997, pp. 90-103.

23. Ibid.; Gokhberg and Mindeli, Research and Development in Russia, pp. 9-10.

24. Author interviews in Moscow, April 1998. See also brochure of the Fund for Development of Small Firms in the Science and Technology Sphere, available in Moscow since April 1998; I.M. Bortnik, “Experience of the Fund for Development of Small Firms in the Science and Technical Sphere in Engineering Innovation Management,” Technology Development and Commercialization: Russian and Global Experience, Proceedings of International Conference, TechnoCon 97, St. Petersburg, July 7-10, 1997, (sponsored by the State Committee for Science and Technology), pp. 19-20.

25. Ibid.

26. Ibid.

27. Author visit to incubator and interviews with entrepreneurs in Moscow, April 1998.

28. Author interviews in Obninsk, July 1998; Author interviews with specialists from Obninsk in Bellagio, Italy, September 1998. Also see I.V. Gonnov, O.P. Luksha, A.P. Sorokin, “The Business Innovation Center as Infrastructure for Small Innovation Business Development in Obninsk and International Cooperation in the Sphere of Technology Transfer,” Technology Development and Commercialization: Russian and Global Experience, Proceedings of International Conference, TechnoCon 97, St. Petersburg, July 7-10, 1997, (sponsored by the State Committee for Science and Technology), pp. 214-216.

29. Author interviews with Yevgeny Velikhov, July 1992, August 1995, and November 1998.

30. For a description of the institute's research activities see the brochure of the Institute of Immunology, available in Lyubchany, Russia, November 1998.

31. Author interviews at Vector in Koltsovo, Russia, November 1998 and September 1999.

32. Author interview in Moscow with U.S. Embassy official who had visited Nesterenko in Nizhny Novgorod, July 1998; Additional, updated interview in Moscow with Russian specialist knowledgable about her activities, November 1999.

33. David Hoffman, “Why It's Wrong To Write Off Russia Now,” The Washington Post, September 9, 1999, p. B-2.

34. Author interview in Pushchino, Russia, November 1998. For an optimistic assessment of future projects see Leonid Gokhberg and Irina Kuznetsova, Technological Innovation in Russia, Center for Science Research and Statistics, Moscow, 1998, p. 10.