innovation emerging economies

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Innovation and Entrepreneurship


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To my parents, my husband Andrius and Asta Bangute R.A.


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Innovation andEntrepreneurshipSuccessful Start-ups and Businesses in

Emerging Economies

Edited by

Ruta Aidis

Honorary Senior Researcher, University College London, UK

Friederike Welter

Professor, University of Siegen, Germany and Telia SoneraProfessor for Entrepreneurship, Stockholm School of

Economics in Riga, Latvia

Edward ElgarCheltenham, UK Northampton, MA, USA


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Ruta Aidis and Friederike Welter 2008

All rights reserved. No part of this publication may be reproduced, stored in aretrieval system or transmitted in any form or by any means, electronic,mechanical or photocopying, recording, or otherwise without the priorpermission of the publisher.

Published byEdward Elgar Publishing LimitedThe Lypiatts15 Lansdown RoadCheltenhamGlos GL50 2JAUK

Edward Elgar Publishing, Inc.William Pratt House9 Dewey CourtNorthamptonMassachusetts 01060USA

A catalogue record for this bookis available from the British Library

Library of Congress Control Number: 2008927951

Daly, Herman E.[Selections, 2007]Ecological economics and sustainable development, selected essays of

Herman Daly/Herman E. Daly.p. cm. (Advances in ecological economics)

Includes bibliographical references and index.1. Environmental economics. 2. Sustainable development. I. Title.

HC79.E5D3242 2007338.927dc22

2007001391

ISBN 978 1 84542 973 7

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall


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Contents

List offigures viList of tables viiList of contributors viii

1 Introduction 1

Ruta Aidis and Friederike Welter2 Biocad: innovation in the Russian biotechnology industry 8

Alexander I. Naumov, Irina A. Petrovskaya and SheilaM. Puffer

3 Struggling to survive: the case of a new technology-based

enterprise in Belarus 29

David Smallbone, Anton Slonimski and Anna Pobol4 Overcoming barriers: business consulting and lobbying in

Kazakhstan 48

Gl Berna zcan5 Surviving uncertainty through exchange and patronage

networks: a business case from Kyrgyzstan 69

Gl Berna zcan6 How to be successful in an adverse business environment:

Knitwear Factory in Moldova 89

Elena Aculai, Natalia Vinogradova and Friederike Welter7 Integrating cutting-edge chemical knowledge and entrepreneurial

drive: the case of New Substances in Ukraine 105

Nina Isakova

Index 125

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Figures

6.1 Development of the number of private enterprises 90

6.2 Moldovan enterprises by types of activity

(at the beginning of 2005) 91

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Tables

3.1 World Bank Doing Business Indicators, 2006 31

3.2 General statistics 32

4.1 Changes in perceptions of economic governance in selected

CIS countries, 200205 54

4.2 The perceived effects of corruption in bureaucracy on

business in selected countries 564.3 The use of business associations by Central Asian

entrepreneurs to address problems or consult business

issues in selected countries 57

5.1 Kyrgyzstan and the Commonwealth of Independent States,

2004 73

5.2 Tourism indicators in the Kyrgyz Republic, 200205 76

5.3 The number of tourist establishments in the Kyrgyz Republic,

200204 76

5.4 Aigulas strategy of coping with uncertainty throughnetworks 82

7.1 General information on Ukraine 107

7.2 World Bank Doing Business Indicators, 2006 107

7.3 Dynamics of small business development in Ukraine 109

7.4 Industrial enterprises that spent money on innovation in

2004 and 2005, by size groups 110

7.5 SWOT analysis of the Ukrainian case study 121

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Contributors

Elena Aculai, IEFS, Moldova

Ruta Aidis, University College London, UK

Nina Isakova, STEPS Centre, National Academy of Sciences, Ukraine

Alexander I. Naumov, Moscow State University, RussiaGl Berna zcan, Royal Holloway, University of London, UK

Irina A. Petrovskaya, Moscow State University, Russia

Anna Pobol, Economic Research Institute, Belarus

Sheila M. Puffer, Northeastern University, USA

David Smallbone, Small Business Research Centre, Kingston University,UK

Anton Slonimski, Economic Research Institute, Belarus

Natalia Vinogradova, IEFS, Moldova

Friederike Welter, University of Siegen, Germany, and Telia Sonera Institute

at the Stockholm School of Economics in Riga, Latvia

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1. IntroductionRuta Aidis and Friederike Welter

Little is known about innovative and successful enterprises in countriesthat until 1990 belonged to the Soviet Union. Most previous research hasfocused extensively on the barriers to entrepreneurship and innovation

that exist in these countries, some of which undoubtedly represent a hostileand harsh environment for any entrepreneurial activity. In this book, weoffer a different perspective, shifting the focus to the innovative potentialthat these environments provide, demonstrating how entrepreneurs havebeen able to convert possibilities arising even in hostile business environ-ments into successful businesses. Through this collection of in-depth casestudies, we illustrate how successful and innovative businesses have beenable to develop in six of these countries. The idea for such a book emergedfrom our research in Central and Eastern Europe and our interests in how

enterprises developed during the transition period. Both editors have comeacross fascinating stories that show the enormous adaptability of entre-preneurs in these countries and that are not reflected in statistical research.We hope that in sharing some of these stories with a wider audience thiscollection will contribute to deepening our understanding of what consti-tutes entrepreneurship and innovation in countries that are neighbours tothe enlarged Europe.

Each case study highlights specific aspects of the interplay between theinstitutional setting, the environment and the individual characteristics

of the entrepreneur which created an enabling context for innovativebehaviour to develop and grow, drawing attention to the opportu-nities and constraints offered in each environment. Additionally, each casestudy presents an overview of the countrys key economic indicators andthe broader role of small and medium-sized enterprises (SMEs) in theeconomy.

Below we briefly introduce the case studies contained in this book. Thisis followed by a summary discussion comparing the main themes raised inthe individual case studies.

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SUMMARY OF THE CASE STUDIES

In Chapter 2, Alexander I. Naumov, Irina A. Petrovskaya and Sheila M.

Puffer explore the emergence of Biocad, an innovative biotechnologycompany in Russia founded and headed by a forward-thinking and risk-taking banker, Dmitrii Morozov. Biocad is a leading Russian biotechcompany, developing, producing and distributing generic pharmaceuticalsand new medicines. It began as a distributor of popular generic drugs forthe Russian market, later moving into the development of new medications.The company is a success story in the field of academic and scientific entre-preneurship, as it demonstrates how scientific research can be transferredfrom the ivory tower and applied to the commercialization of products in

the competitive marketplace.Biocad was initiated in September 1999 as an investment project of the

Tsentrocredit Bank. Dmitrii Morozov, then vice president of the bank,created an investment fund for a biotechnology company which would bethe first brand-new enterprise producing genetically engineered products inRussia since the breakup of the Soviet Union in 1991. The privatization ofthe economy in 2001 provided Dmitrii with the additional opportunity ofacquiring a leading state-owned biological research institute at a verymodest price. Staffed by a pool of talented scientists, the institute was an

established resource base that had the potential to be transformed intoa private company commercializing new drug discoveries. All this con-tributed to Biocads development in a challenging business environmentand its ability to overcome the difficulties connected with the transitionperiod.

In Chapter 3, David Smallbone, Anton Slonimski and Anna Poboldiscuss the case of a new technology-based enterprise in Belarus. Sinta hasbeen operating for 14 years in what might be reckoned as one of the harsh-est business environments in the world. In terms of success, the enterprise

is solvent, it has not been subsidized by government loans or grants, andnor is it currently indebted to its employees (through unpaid wages), whichis a common feature of small business development in transition condi-tions. It is a privately owned innovation-based enterprise, albeit one thathas yet to achieve sustained commercial success. Sinta was founded by agroup of scientists who had been engaged in research activities related tothe defence industry during the Soviet period.

Like Biocad, Sinta is a good example of scientific entrepreneurship. Oneoutcome of the scientists research into high explosives was the discovery ofa new superhard material produced when explosives are detonated. Theseultra-dispersed diamonds subsequently became known as nano-diamonds.The results of this research encouraged the company to undertake pilot

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production of nano-diamonds and to develop the appropriate industrialtechnology. Overall, the picture that emerges is that of an innovative, know-ledge-based company, with a series of new product applications being

identified and developed over time.For Kazakhstan (Chapter 4), Gl Berna zcan focuses on the

Independent Businessmens Group (IBG), a consultancy firm that tookadvantage of the demand for business services and day-to-day problemsolving. The IBG case shows how energetic and imaginative entrepreneur-ship can turn business consultancy and lobbying into a successful ventureby forging relational politics into a business for enterprise protection inKazakhstan. This case study also illustrates that a new diversification ofpower structures and business consolidation is taking place, with long-

term consequences for the former hierarchical and vertical structures ofthe Soviet economy and society. As the author demonstrates, entrepre-neurs widen their opportunities in relation, not in opposition to, the rulingelite in the market; and the prevailing business norm is to accommodatethe dominant powers that control economic resources as well as politicalincentives and tools. The IBG built on this assumption, forging politicaland patrimonial alliances through the vertical and horizontal relationsthat its founder enjoyed as a close ally of the ruling elite as well as an oldcomrade of the president of Kazakhstan.

Chapter 5 is devoted to the case of an individual entrepreneur, Aigula,who opened a small private guesthouse in the south of Kyrgyzstan. Shechose to operate in a field where she did not have any prior expertise, butshe recognized the future potential of tourism. She established her businessby applying to a small privatization scheme and gaining ownership of aformer store. As the author of the case study, Gl Berna zcan, points out,this example shows the way in which different forms of innovative entre-preneurship can emerge even when there is no obvious market for the goodsand services provided. Aigula dealt with uncertainty by making use of her

existing social networks. However, building a business in a post-Soviet statealso meant coping with market distortions often linked to favouritism andunequal access to resources. In this respect, the case study also illustrateshow the social status obtained in the Soviet system affected post-Sovietbusiness survival and success through the use of exchange and patronagenetworks.

In Chapter 6, Elena Aculai, Natalia Vinogradova and Friederike Welterdiscuss the case of Knitwear Factory, a successful small company inMoldova, one of the poorest countries of the former Soviet Union. Theenterprise was registered in 1994 by a husband and wife team. The ownersboth lost their jobs at a state factory, which forced them to look for income-generating possibilities in order to feed themselves and their three children.

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This type of push motive was common in the transition period inMoldova. However, the couple also showed initiative and entrepreneurialdrive in choosing to open their own firm rather than trying to find new jobs

in a privately-owned company.Since it was started in 1994, Knitwear Factory has constantly been

developing; sales and profits have been growing; the equipment has beenupdated and new jobs have been created. However, business developmentvery much depends on available resources. Business growth is restricted bythe unfavourable environment in Moldova, not by the willingness of theentrepreneur. Almost every enterprise in Moldova is involved to somedegree in the shadow economy, often as a result of coping strategies todeal with corrupt state structures. However, in the long run, the widespread

tolerance of shadow and illegal operations may have a serious negativeeffect on Moldovas economic development as the ethical consequences ofthis kind of behaviour are felt.

Finally, Nina Isakova reports on a Ukrainian case in Chapter 7. NewSubstances is a technology-based small enterprise established in 1997.Now operating on a global scale, New Substances has become a well-known Ukrainian producer and exporter of organic compounds for high-performance bio-screening. Yet the Ukrainian business environmentcontinues to pose major challenges for the firm: the registration procedure

is complicated, time-consuming and expensive, there are no domesticinvestors to be found, and no leasing facilities are available so that majorequipment has to be imported. The Ukrainian business environment is notconducive to innovative entrepreneurship development because of anunderdeveloped business support infrastructure characterized by hightaxes, administrative hindrances and related costs, regulatory interference,a high level of corruption and limited external finance. Despite this,however, the company has been successful. The owner attributes thesuccess of his business to three factors: the type of innovation undertaken,

the particular business sector selected and his previous work experience asa scientist. This case strongly reinforces the idea that companies emergeand develop in a hostile environment primarily as a result of individualinitiative.

BEING INNOVATIVE IN A POST-SOVIET CONTEXT:SOME ISSUES EMERGING FROM THE CASES

Taken together, the stories of the entrepreneurs featured in the case studiesprovide insights into a number of typical features that characterize entre-preneurship in transition economies as well as illustrating some of the



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differences between countries. All cases illustrate both the myriad of obsta-cles facing entrepreneurs in post-Soviet countries and the opportunitiesthat are there to be seized by those who have the knowledge, financial

resources, and political and professional connections, as well as thedetermination and motivation required to realize their objectives in sucha challenging environment. Indeed, entrepreneurial activities are oftenundertaken despite government interference and an adverse business envir-onment. Frequently business opportunities arose out of the transitionprocess itself, as becomes obvious in the cases of Biocad (Russia) and Sinta(Belarus). In essence, one of the characteristics that many of the entrepre-neurs discussed in this book share is an ability to persevere in a turbulentenvironment under adverse conditions.

Given the newness of the private enterprise sector in these countries, it isnot surprising that most of the enterprises were started from scratch;indeed this is a common occurrence in transition countries. The privatiza-tion trend might also be seen as indicator for the entrepreneurial drive thatindividuals in these countries showed once such entrepreneurship wasallowed. Privatization played a role in some of the technology-based com-panies, for example, Biocad (Russia), or more indirectly where scientistsused their research results where they perceived a business opportunity.This reflects not only entrepreneurial drive, but also an environment where

employment opportunities for highly qualified persons are lacking. Inparticular this explains the emergence of scientific entrepreneurs. In theearly 1990s, the most active researchers set up their own businesses as ameans to provide much-needed income since, although they were officiallyemployed, in reality they received no salary or a salary that was insuffi-cient for survival (that is, they represented the so-called hidden unem-ployed). In many cases creating a new venture was the only way to preservescientific expertise and knowledge. Successful innovative companies thusplayed a role in the implementation of research results as well as the for-

mation of the nascent small business sector.The challenges overcome by the entrepreneurs in the transition countriesdepicted in this book also demonstrate the way in which in spite of theobstacles it is possible to be successful in a turbulent and often hostile envir-onment. One such turbulence is caused by weak institutions that allowcorruption, informal networks and bribery to influence private businessdevelopment. It is here that networking takes on particular importance asdemonstrated in most of the case studies. Having contacts, knowingsomeone, or being an old comrade helps in overcoming obstacles in theenvironment, in accessing resources and in exploiting opportunities.However, in an environment where property rights are not fully secured,legal and institutional structures are weak and enforcement is arbitrary,

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social networks retained from the Soviet period often offer the most reliableand efficient ways of dealing with pervasive uncertainty and the day-to-daybusiness problems encountered by entrepreneurs. Indeed, in turbulent envi-

ronments, such networks provide a degree of stability and opportunitieswhich provide the conditions necessary for private businesses to develop.

Thus the transition environment simultaneously posed significantchallenges to business development and provided tremendous opportuni-ties. It also provided additional benefits that have aided the successfuldevelopment of the companies highlighted here. All the case studiesmention the important and positive role played in their business develop-ment by human capital in the form of education inherited from the formercentrally-planned system. As in many new technology-based firms, the

knowledge base underpinning the unique selling point of such companiesresides in the founders and employees. Biocad (Russia), New Substances(Ukraine) and Sinta (Belarus) all represent situations in which foundersand/or employees brought in broad scientific knowledge and qualificationsobtained prior to the start-up of the new private firm.

While Biocad, Sinta and New Substances are examples of innovativeenterprises in a narrow understanding of the concept new sector orproduct development, also characteristic of mature Western economies the case studies taken more broadly highlight the various forms of innova-

tion that have taken place in transition countries as well as the innovativebehaviour of entrepreneurs in dealing with the constraints of the businessenvironment. Most commonly, innovation in transition countries occursthrough the introduction of a product familiar to Western economies butnew to the developing domestic market (such as Aigulas guesthouse inKyrgyzstan). Here, innovation takes place by creating something new;through taking the risk of introducing a completely new product orservice into a turbulent, ever-changing environment. In many cases, theseentrepreneurs had to be forward-looking risk-takers in terms of the

demand that would develop for their products.Learning by doing can be seen as a form of innovation especially relevantto the turbulent environments that characterize early transition. In all of ourcases, previously neglected areas of products and or services (however famil-iar in mature economies) were introduced into the domestic economy forprofit. There are additional dimensions to entrepreneurial risk in starting anew business in a transition economy: macroeconomic instability and theuncertainty of demand are coupled with an ever-changing regulatory envi-ronment. Moreover, successful innovation in transition countries can haveless to do with technological and product development than with the abilityof individuals to deal with uncertainty in the business environment by devel-oping a successful survival strategy. One might question, therefore, whether



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the factors contributing to the relative success of businesses such asKnitwear Factory in Moldova or Aigulas guesthouse in Kyrgyzstan will alsoresult in their long-term business development. It may be the case that many

of the strategies and factors which have positively influenced business growthso far may in fact have a transient, transition-specific component, whichworks well in a hostile and adverse environment, but restricts sustainablebusiness growth once the business environment has matured. In these cases,it will be the entrepreneurs ability to reorient their business strategies toadapt to a more stable environment that will become paramount, as canperhaps already be detected in the cases from the Ukraine and Russia.

To conclude, the cases in this book illustrate the diversity of innovationand entrepreneurial behaviour in environments where entrepreneurship

was severely restricted during Soviet rule and which have taken differentdevelopmental paths since transition. In this, the case studies also demon-strate a need both for researchers and policy-makers to take intoaccount the specifics of not only the country environment, but also thetransition process and its impact on entrepreneurship development andinnovation. This is crucial if entrepreneurship is to be analysed correctlyand support measures are to be targeted in such a way that these innova-tive firms can contribute to further economic growth and the developmentof a healthy market-oriented system.

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2. Biocad: innovation in the Russianbiotechnology industryAlexander I. Naumov, Irina A. Petrovskaya andSheila M. Puffer

INTRODUCTION

This chapter describes the creation and growth of Biocad, an innovativebiotechnology company in Russia founded and headed by a forward-thinking and risk-taking banker, Dmitrii Morozov. Based on his visionand leadership, the company grew from distributing popular genericdrugs for the Russian market to developing new medications thatmanagement hoped would compete in global markets. The company is asuccess story in the field of academic and scientific entrepreneurship,

and demonstrates how scientific research can be moved from theivory tower and applied to the commercialization of products in the com-petitive marketplace. Creating and growing the business was achieveddespite a myriad of obstacles stemming from the legacy of the Sovietsystem and the chaotic environment of transition toward a marketeconomy. These included difficulties in obtaining funding, implementingmarket-oriented business systems, hiring managers and motivatingscientists to shift from a purely academic mindset to one of creatingmarketable products that would generate profits. On the positive side, the

breakup of the Soviet Union and privatization of the economy pro-vided a valuable opportunity to acquire a leading state-owned biologicalresearch institute at a very modest price. Staffed by a pool of talentedscientists, the institute was an established resource base that had thepotential to be transformed into a private company commercializingnew drug discoveries. The following analysis of Biocads creation anddevelopment draws upon interviews conducted by the authors with thefounder and key employees, as well as published material by industryexperts and journalists.

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BACKGROUND ON RUSSIAN BUSINESSCONDITIONS

Russia, with a population of 114 million and a geographical area of 17million square miles, is the largest country in the Commonwealth ofIndependent States (CIS).1 Its 2004 GDP was $582.3 billion, with GDP percapita amounting to $9721. The private sector constituted 65 per cent ofthe economy, inflation in 2005 was estimated to be 12.8 per cent, andunemployment was reported as 9 per cent (World Bank 2006). In 2006, theruble was made a convertible currency and in early 2007 was valued at$0.037. According to World Bank Doing Business Indicators 2006 (RussianSME Resource Centre 2004), the cost of starting a business was 3.4 per cent

of per capita gross national income compared to 5.3 per cent in OECDcountries, the cost of dealing with licences was 275.3 per cent of income percapita (OECD 72 per cent), hiring costs were 31 per cent of salary (OECD21.4 per cent), and firing costs were 17.3 weeks of wages (OECD 31.3).Costs to register property were 0.3 per cent of property value (OECD 4.3per cent), the total tax rate on profit was 54.2 per cent (OECD 47.8 percent), costs to enforce contracts were 13.5 per cent of debt (OECD 11.2 percent), and costs associated with closing a business were 9 per cent of theestate (OECD 7.1 per cent). No public credit registry existed. Many such

business conditions stem from burdensome bureaucratic red tape, anunderdeveloped legal infrastructure, and corruption that increase cost,time and frustration involved in starting and operating businesses (Pufferand McCarthy 2007).

Small businesses (under100employees)employ only 20 percent of Russiaseconomically active population, in contrast to 80 per cent in Japan, and over50 per cent for European small businesses (under 50 employees). However, inRussia, medium-sized firms (with up to 250 employees) in 2003 constituted94 per cent of all enterprises, employed 49 per cent of the economically active

population, and had a 47per centmarket share of totalsales revenue(RussianSMEResource Centre2004). Thus, small and medium-sized businesses are ofcrucial importance to the Russian economy.

THE GLOBAL BIOTECHNOLOGY INDUSTRY2

In 200304 the worldwide biotech market was estimated at $200 billionwith an annual growth rate of approximately 79 per cent. The totalamount of investments in 2004 was around $20 billion (Abercade 2004).The biotech industry consisted of seven segments: biotech pharmaceuticalproducts (medical biotechnologies); biotech products for application in

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agriculture; enzymes and enzyme products; yeast and live micro-organismcultures production; biotech products for the extracting industries; thehydrolytic industry; and biotech products for environmental protection. In

the mid-2000s, the world market leaders included Amgen, Genentech,Serono, Biogen, Idec, Chiron, Genzyme, MedImmune, Pfizer, MilleniumPharmaceuticals and Applied Biosystems. Biotech medicines sales con-tinue to outgrow the overall medicines market. In 1999 biopharmaceuticalsaccounted for less than 6 per cent of total prescription sales while in 2002their share was almost 8 per cent. This share was expected to grow to about14 per cent in 2009. According to projections, by 2013 the volume of pre-scription drug sales will increase 2.2 times and sales of biotech products, asa part of that group, will increase up to 5.8 times.

Three main types of technologies are used in the production of biotechproducts for the pharmaceutical and healthcare industries: brewing (fer-mentation), recombinant DNA technology (genetic engineering) and cellcultures. Enzyme engineering technology is also used in biotech productionbut not in the production of medicines. The biotech market depends heavilyon R&D investment. As private investment in new drug development isoften seen as risky, government support for this kind of research is veryimportant. According to United States National Science Foundation data(2006), in 2004 the medical sciences share of all government-sponsored

academic research was around 2 per cent in Russia while in Germany,Japan, Sweden and the US it was in the 2529 per cent range. Additionally,in Russia, the share of pharmaceutical research of total industrial R&Dwas less than 1 per cent, while it was around 8 per cent in the US and Japan,1215 per cent in France and Sweden, and 25 per cent in the UK.

THE BIOTECH MARKET IN RUSSIA3

The total value of biotech products consumed in Russia in 2003 was around45 billion rubles (less than $0.5 billion), a mere 0.75 per cent of the worldmarket (Sbiotech 2004). Domestic production accounted for roughly 2530per cent of the market (a little over 12 billion rubles or $100 million), withthe rest coming from imports. However, the size of the Russian biotechmarket was estimated to be 90100 billion rubles for that year, with marketdemand being met at 4045 per cent and domestic producers accountingfor 1213 per cent. In the biopharmaceuticals market specifically, demandwas met at 51.3 per cent.

In 2004, the size of the Russian biotech market was valued at approxi-mately $885.1 million. Pharmaceutical products had the highest share ataround 6070 per cent. Imports of biopharmaceuticals amounted to about



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$495 million, and domestic production was around $67 million, making thetotal size of the biopharmaceutical segment $562 million. The secondlargest segment, agricultural products, amounted to 21 per cent of the

overall biotech market.The variety of pharmaceutical products in Russia manufactured using

biotechnologies is significantly narrower than the global market andconsists of the following product groups: antibiotics, vitamins, enzymes,immunobiological products, biotech blood products and geneticallyengineered drugs. The biggest market by value consisted of imports ofinsulins (28 per cent) and hormones (27 per cent), followed by importedvaccines (13 per cent) and blood serums (11 per cent).

In the 1950s, a well-developed antibiotics industry was created in then-

Soviet Russia. In 1990 production amounted to 3000 tons per year, and wasbased on locally found strains. Such large-scale manufacturing was possiblebecause products were sold not only in the domestic market but also incountries of the former communist bloc, including Eastern Europe.However, in the 1990s, with the collapse of the USSR, antibiotics produc-tion began to decline sharply, coming to a virtual halt as a result of cuts ingovernment subsidies to enterprises, and high inflation which left cus-tomers without the money to pay for drugs. In the case of injected products,production fell by more than half. In 2002, imports of substances and end-

use antibiotic medicines amounted to $23 million (450 tons) and $70million (55 tons) respectively. The total 2004 volume of immunobiologicalproduction was around 5 billion rubles and the sector included about40 manufacturers producing more than 500 items. The demand forimmunobiological products in Russia was met 8090 per cent by domesticproducers (Abercade 2004). Total sales of Russian genetically engineeredproducts amounted to $3 million in 2000 or about 0.02 per cent of theworld market for genetically engineered medicines. In 2003, geneticallyengineered products accounted for 10 per cent of the world pharmaceut-

ical market and were forecast to grow to 25 per cent by 2010. Production ofgenetically engineered insulin began in Russia in 2004.Biologically active substances, additives and other products of plant

origin are also referred to as a part of the bioindustry. In 2004 more than2500 biologically active products were made in Russia by more than 600manufacturers. Market size was around $125 million, with domestic prod-ucts accounting for 70 per cent of the market in volume and around 25 percent in value (DSM Group 2004).

Diagnostic in vitro products are the most dynamic biotech segment withan annual growth of over 10 per cent and market size of about $100 million.Around 40 small and midsize companies are engaged in manufacturingthese products and their combined market share is around 30 per cent, with



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imports accounting for the remaining 70 per cent. Biologic microchips areconsidered a high-potential area and several institutes are conductingresearch in that field.

BIOTECHNOLOGY AS A BUSINESS

By the early 2000s, biotechnology was experiencing growth, with the micro-biology industrys growth rate reaching 68.7 per cent. This was the result ofactive investment by a few private investors and also by the governmentwhich, in 2002, allocated 90 million rubles to enterprises in that industry.However, the market still had not generated a great deal of optimism because

there were no real means to attract investment into microbiology fromprivate companies, commercial banks or industrial groups.

After the breakup of the USSR in 1991, around 60 per cent of Sovietenterprises in the microbiology industry were within Russia, the remainderbeing located in newly-independent republics. Having lost their statesubsidies, the majority experienced severe economic difficulties, and someswitched to completely unrelated production in order to survive. Investingin the biotechnology industry was seen as unattractive because of heavyR&D requirements and complexity, and because it could take three to

seven years to recover project expenditures. Although potential Russianinvestors assessed the market, few made any investments, and what littleinvestment was made went into modernizing existing manufacturing facil-ities. The formula science generates innovations while government andbusiness finance them, although well established in the Western world, wasnot yet a reality in Russia. In other words, there was no consensus abouthow the biotechnology market should be commercialized.

In contrast to the leading global pharmaceutical companies, whichspend millions of dollars on R&D every year, 90 per cent of Russian

producers spent virtually nothing. Instead, they simply produced genericversions of foreign products. The progressive 10 per cent of companiesfocused their R&D specialists from time to time on specific research. Butin general, medical research and production existed in two separate worlds.Only foreign companies realized the potential of Russian R&D innova-tions, and they bought ideas and know-how cheaply and were known tomake millions of dollars commercializing them. For example, the Russianmarket capacity for immunological products in the mid-2000s was almost$1 billion. About 80 per cent of the medicines in this particular group wereimported and used in the prevention and treatment of chronic and severeviral diseases. Biocad expected to produce these medications 30 per centmore cheaply than imported analogues.



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BIOCAD: FROM DISTRIBUTION TO PRODUCTIONTO RESEARCH AND DEVELOPMENT

BiocadisaleadingRussianbiotechcompanythatdevelops,producesanddis-tributes generic pharmaceuticals and new medicines. Biocads mission, asdescribed on its website, is to prolong human life and improve its quality bydeveloping effective and affordable biopharmaceuticals through the use ofthelatesttechnologyandincollaborationwithscientistsandmedicaldoctors.Thecompanyidentified a number of principles and values asbeing importantin accomplishing its mission: quality, leadership, innovativeness, effectivenessand results, teamwork, care for the customer, and respect toward people.

Biocad started in 1999 as a distributor of generic versions of popular

medications. To have the capability to develop new biotechnology products,in December 2001 the company acquired a former-Soviet immunologi-cal research institute staffed by experienced scientists. And in April 2003Biocad opened a new, world-class manufacturing facility to producebiopharmaceuticals. These three components positioned Biocad to becomean innovator in developing, producing, distributing and commercializingbiotechnology products. According to Biocads CEO, Dmitrii Morozov, in2005 sales were more than 320 million rubles ($10.5 million), and thecompany became profitable, with a small net profit of 100,000 rubles (under

$5000) (Nihon Keizai Shimbun 2006).

A Biotech Founded by a Banker

Biocad grew from an investment project of Tsentrocredit Bank initiated inSeptember 1999. The medicines market growth rate inspired the banksinterest in the pharmaceutical industry. Dmitrii Morozov, vice president ofthe bank at the time, initiated an investment fund to create the biotechnol-ogy company which would be the first brand-new enterprise producing

genetically engineered products in Russia since the breakup of the SovietUnion in 1991.Dmitrii Morozov was born in 1965 and was exposed to science at an early

age, his father being a physicist who emigrated to the US in the 1980s andworked in Californias Silicon Valley. Dmitrii lived for a time in the US butreturned to Russia for his education. Rather than pursuing science, Morozovchose a business education instead, graduating from the PlekhanovAcademy of Economics in Moscow with a major in finance and credit, fol-lowed by an MBA in management in 1998 from the Moscow business school,Mirbis. In the mid-1990s he worked with an aluminium company, assistingits management in gaining control of several metals factories at a time whenbusiness dealings were rife with danger and crime. He found himself involved



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in conflicts, noting in a 2002 Wall Street Journal interview: When I wasyoung I traveled around firing directors and convincing miners not to strike this was the reality of Russia at the time (Whalen 2002). At the time, private

banking was an emerging sector in Russia and this attracted Morozov. Heworked in commercial banks, eventually becoming vice president of theboard of directors of AKB Tsentrocredit, which in 2003 was ranked fifty-second among Russian banks based on owners equity.

Morozovs interest in starting a biotechnology company arose unexpect-edly from hisearlier participationin an extensive Yeltsin-era government pro-gramme of market-oriented practical training for young Russian managers.In 1998 he completed a programme in corporate strategic development, mar-keting and human resources management at Moscow State University

School of Business Administration. Through an exchange programme withKeiyo University Business School he spent two weeks in Japan, where hevisited technology companies and attended lectures on venture capital. Hereturned to Russiaconvinced that communication technology, entertainmentand biotechnology were the most attractive industries from an investorspoint of view. While the first two sectors were highly competitive and capital-intensive, Morozov realized that the Soviet government had made largeinvestments in scientific research in biotechnology, to the extent that, up tothe mid-1990s, the country was on par with the West. In the summer of 2003,

after attending a biotechnology conference in the US, Morozov came tobelieve that Russian companies still had competitive potential, and thatproper strategic positioning would be the key factor for their success.

His business experience led Morozov to view administrative barriersmerely as potential excuses for not being proactive. In his opinion, bureau-cratic barriers, lack of money, and high taxes were used as excuses byimpatient people lacking perseverance. Most of those who start their ownbusiness expect quick results. They are not ready to have four to five yearsof routine and systematic work focused on growing the business. They

simply cannot maintain their entrepreneurial passion.

DEVELOPING A BIOTECH BUSINESS

Distribution Company

The distribution company was the starting point of Biocads business. Thefirst task was to develop a product line that would generate revenue asquickly as possible. Biocad started with bifidumbacterin, one of the sim-plest biotechnology products produced by many companies. The producthad typically been sold in glass vials with metal caps that had to be opened



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with a knife, but Biocad innovated from the start by delivering the productin a more appealing form as a powder in attractive packets. According toMorozov, the most important factor was to position the product properly.

He explained: We do not satisfy peoples need for bifidumbacterin. Wesatisfy the need for a comfortable life. If you are grumbling about life oryou have problems with your bowels, this powder will help you.

The distribution company sold bifidumbacterin produced by Biocad. Todifferentiate the product in the marketplace, the company offered it in threedifferent forms and was developing two more with vitamins and in variousflavours, such as lemon, banana and strawberry. Morozov even came upwith an advertisement featuring a railroad car filled with boxes of bioyo-gurts that were then replaced by a package with beneficial strains. Another

product they considered developing was candles based on different medi-cines. The company also worked on the development of medicines usingrecombinant albumens. The distribution company was Biocads subsidiaryand had its own budget. Morozov explained: Managers of the distributioncompany fully understand that if money earned by them is invested inresearch it will earn money for all of us.

Acquiring an R&D Institute

Initially Morozov planned a relatively small laboratory. However, he hadworked at NRI, which was later merged into RAO Biopreparat, the largestSoviet-era plant to manufacture immunobiological products, and in May2000, in conversation with a manager at Biopreparat he learned that itsresearch institute, which had been earning money mainly by renting its facil-ities, was going bankrupt because it no longer received state subsidies andhad accumulated debts to gas and electricity providers and other creditors.

When I started doing research on the current state of biotechnology inRussia, Morozov said,

I realized that not all of the scientists were gone and that we had research accom-plishments at the world level. It is an exaggeration to say that there are many, butstill there are some. Russia had invested more than a billion dollars in biotech-nology. It was an opportunity for me to enter the market, and I realized it wouldbe difficult to start from scratch. At the same time, it would not be easy to gethigh-quality results quickly. The research projects were incomplete, and fewproducts had gone through pre-clinical and clinical testing or had technicaldocumentation for mass production. If we did not bring these ideas to themarket, they would just keep gathering dust on the shelves.

The former Soviet biotech research institute, RAO Biopreparat, had beenengaged primarily in research on biological warfare, including developing



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medicines and vaccines to protect the military from the effects of biologicalwarfare, but researchers had also worked on developing treatments for trop-ical diseases, common stomach problems and the like. Denis Lvovich

Aleksandrov, who had a PhD in medicine and worked there at the time,recalled:

Compared with other similar institutes, our institute was declining. The problemwas that due to his personal ambitions, the director was unable to see what wasgoing on around us. For me there is no point in scientific research without prac-tical implementation. When I met Dmitrii Valentinovich [Morozov] I persuadedhim to buy part of the institute and establish an R&D centre for Biocad.I believed in the centre then and I still do.

Morozov recognized that the institutes financial crisis presented himwith a valuable opportunity to buy an established R&D operation at a verymodest price: I needed a strong R&D division in order to establish a chainbeginning with developing medicines and ending with marketing them, herecalled. I had been let down a couple of times before, and I came to theconclusion that I needed to organize such a division myself.

Morozov reached an agreement with creditors and managers of theinstitute that the R&D division and its 3000 square-metre facility would bedesignated as the Centre for Immunological Engineering. In December

2001 the deal was completed, and with substantial financial help fromMorozovs investor friends, Biocad acquired a scientific research centre thatcomprised the entire operations of the institute, including laboratories andequipment, where biotechnological research had been conducted for morethan 20 years. Morozov admitted:

Of course, it was a risky step to acquire our own R&D centre when the companywas still not making money. I was very lucky to get the centre. A small laboratorywould have been a dead end, since the added cost in our production is the knowl-edge of the people there. If I had tried to create such a centre from scratch,it would have dragged the process out for five more years buying equipment,recruiting employees, getting them to work together, and so on. We [the investors]acquired the centre only after we had done a SWOT analysis. Nobody regrets ourdecision even though there have been a lot of problems. The centre changed ourstatus. In the end we completed the chain that we wanted to.

Centre for Immunological Engineering

The Centre for Immunological Engineering engaged in all stages of drugdevelopment, from genetic engineering to clinical trials, focusing on treat-ments for cancer, neurological disorders, urological conditions and infec-tious diseases. In 2006 it had seven products in the pipeline and one,



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Genferon, already on the market. Launched on the Russian market in 2005,Genferon, with recombinant interferon-a2b, was a suppository with antivi-ral, immunomodulatory and anaesthetic properties for treating urogenital

infections. Also that year, Phase II drug trials were successfully completedfor Leucostim, the first domestic recombinant granulocyte colony stimu-lating factor, which the centre developed as a generic cancer treatment thatwas expected to be much less expensive than other treatments. Plans wereto launch the product in late 2006 pending government approval. In 2002,the centre added a branch in Novosibirsk to attract scientists from Siberia.In 2004, it received a $1.76 million grant from the US State Department todevelop a new IFN-beta preparation. By 2006 the centre employed 48scientists, 14 of whom had PhDs. The sales team consisted of more than

40 full-time medical representatives, all with MD degrees, who covered30 regions in Russia including all major cities. Additionally, Biocadcounted five of the largest Russian distributors as its clients.

Morozov also sought collaboration with other institutes in cases whereBiocad lacked the necessary resources:

In the centre I planned an organizational system that allowed any idea that fitour profile to be transformed into a finished product. If the experts at the centrebelieve we do not have the necessary resources to carry out our research to pro-duction, we will search for and invite other institutes to the project. We are

already working in cooperation with the epidemiology and microbiology depart-ments of the Russian Gabrichevskii Research Institute.

A World-class Manufacturing Plant

In April 2003 Biocad opened its $6 million world-class biopharmaceuticalmanufacturing facility, which was compliant with Russian medical stand-ards (GMP) and harmonized with European Union quality standards andregulations. Located in the Krasnodorsky district in the Moscow region,

the plant had the capacity to manufacture 70 million suppositories a year,with expansion in 2006 adding capacity for producing 10 million vialsannually.

COMPETING THROUGH QUALITY AND PRICE

Morozov was confident that through R&D innovations Biocad wouldcapture a 40 per cent share of the Russian immunity products market.Biocads plans required considerable investments in their own R&D centrein order to switch from being simply a packaging company to one with acomplete production cycle. According to company estimates, the R&D



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centre would need to attract $15 million in investments and would have aneight-year payback. Representatives of some foreign pharmaceutical com-panies did not take the attempts of medium-sized Russian companies to

enter the biotech market seriously. Oleg Petrov, a product manager atF. Hoffman-La Roche, commented: It is a pity that Russian companiesusually lack enough money to perform all the necessary research andtesting. He believed that it would cost $1 to $2 billion in R&D to create agenetically engineered product like interferon from scratch; such costs aretypically a reason why the largest international companies merged. YetMorozov thought that the foreigners were mistaken: We have Russianproducts in this field that are almost finished and are sufficient for the next10 years. We intend to compete with foreign companies offering cheaper

products at a quality level consistent with international standards.According to Nikolai Demidov, a marketing specialist in the company

PharmExpert, this was something that no private investor had ever tried todo in the pharmaceutical market: This is an interesting project. The BiocadR&D Centre answers the question that has long been the focus of attentionof a lot of people whether anybody in our country needs such R&D prod-ucts. According to Demidovs estimates, the Russian market for geneticallyengineered antiviral products was $80 million per year, and that market wasalmost completely served by foreign companies.

Biocads management was committed to operating according to inter-national quality standards. One indication of that commitment was thatBiocad was one of 17 members of TEMPO, founded in 2004 with fundingand intellectual support of the BioIndustry Initiative Program of the USDepartment of State. The goal of the TEMPO programme was to trainRussian biotech scientists in good laboratory practices to meet internationalquality standards in drug production and protection of human subjects.

INNOVATIVE HUMAN RESOURCE POLICIESMorozov set himself the task of creating and implementing a set of innov-ative human resource policies that would bring out the best talents andwork ethic of all employees and motivate them to work effectively in thecompetitive marketplace. He created a set of principles valuing employeestalents and efforts that underlie Biocads human resource policies. Asdescribed below, Morozov used his management knowledge and expertiseto create innovative human resource policies in the areas of recruitment,training and professional development, motivation and reward systems,delegating decision-making and fostering accountability, and changingscientists mindsets to get them to focus on commercializing their ideas



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and creating new products that would be competitive and in demand.Additionally, he introduced a crucial management tool a research plan-ning system to track the stage of development of every new product.

Attracting Managers and Scientists

Having acquired the R&D institute, Morozov sought to retain the most tal-ented managers and scientists for his new venture. My credibility was verylow at the time I acquired the institute, he admitted. The institute was inbankruptcy and along came a businessman who told the researchers thatfrom then on they would be conducting R&D for him. Morozov firstaddressed everyone, asking them to think about transferring to the centre. In

the beginning all agreed, but later many of them declined the offer. The divi-sion managers were the first to decline, saying they did not believe that thecompany would be successful. Morozov recalled: I told them that we weregoing to manage it and we would make decisions together. Those whowere not used to working hard rejected this appeal. Others who had a passionfor work joined me, including Olga Petrovna Tumanskaia, director of thelaboratory, who was followed by others. So the process was under way.

Recruiting Senior Management

Morozov needed a person who could effectively manage the Centre forImmunological Engineering. Following the recommendation of a profes-sor from the Pirogov Medical Institute (now the Russian State MedicalUniversity) in Moscow, he approached an alumnus, Matvei Iurev, about theposition. Recognizing that Iurev was knowledgeable about the researcharea and had the potential to be a manager, in November 2001 he invitedhim to head the centre as director of scientific research. Iurev was 37 yearsold at the time, had defended his doctoral thesis, and had already worked

in the RAMN Cardio Centre and at Lanit, a leading Russian IT company.Iurev explained: Initially, I did not want to be a director. Administrativeresponsibilities were not part of my initial plans. But as a project manager atLanit, I gained some experience in managing research teams, and I was alsofamiliar with the foundations of business and management. In a series ofmeetings with Morozov, Iurev came to believe that they would make a goodteam: We were a good tandem. It was impossible for me to reject the offerto become director of the centre once I understood that it was necessary tochange management practices to solve the problems of the new centre.

Morozov had also considered others from Biopreparat to head the centre.Denis Lvovich Alexandrov had been working there since 1986 and rejectedthe directors position on account of his age. Similarly, Olga Tumanskaia



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was not interested, remarking: The director has to be a tough person and Iam not that way. It is necessary to be tough to organize a working team,otherwise you will have to do the work of your subordinates.

Creating a New Structure

Iurev was responsible for reorganizing the research centre and Morozovcredited him with some success in creating a new structure. But forother tasks, especially those regarding new product introductions to themarket and implementation of a research planning system, deadlines werefrequently extended. Iurev explained:

A lot of administrative tasks were assigned to me: equipment, supplies manage-ment, repairs, and so on. For example, it was difficult to explain to an R&D insti-tute employee that the equipment he was working on was to be transferred to thecentre when it was unclear whether he would work there himself. It was verydifficult to negotiate with the R&D institute managers as we were constantlytrying to take something from them. Conducting research was hard with somany administrative problems in the way.

Morozov was aware of the situation: I tried to exert control over him.We got together regularly and discussed the problems. I did not require him

to prepare written reports. But from then on I initiated written records ofthe work.Iurev mentioned that as far as relationships with the division managers

were concerned, he and Morozov recruited staff from the R&D institute:

Researchers there lived primarily on American grants. They created their owncentres, financed them, and gathered specialists. We attempted to negotiate theirtransfer to us. They had to make a decision either to continue relying on grantsand writing only reports rather than scientific publications, or to transfer toBiocad where they would have to produce an actual product within a certain

time frame. Alexandrov came to us on his own while we had to persuade otherswho were interested in the salary and opportunities in the centre.

Once staffhad been recruited, Iurev needed to create a team and a struc-ture to produce the planned products, starting with interferon. He workedon the project with Morozov and Andreev, Biocads marketing manager,who was also an alumnus of the Pirogov Medical Institute and who hadintroduced him to Morozov through a professor there. Iurev explained thedifficulties he had encountered:

I think I was able to establish the team and the structure of the centre and it wasaccepted. I did not recognize any age problems. If you start paying attention to



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age and titles, you will fail. But I was unable to get the team to fully take part inevery process in which Biocad was engaged. I failed to establish effective rela-tionships between Biocad and the plant. I tried to set the foundations for team-

work. Besides giving directions, I asked for suggestions about planning the work.I am not a specialist in every area of biotechnology. If I knew everything, thenwhy would I need others? I wanted to formalize research and I implementedwork plans and organized regular meetings. There was some resistance in thebeginning. They regarded the control over their work time with fear. Thecommunication got easier when they basically understood the work. By askingthem how much time they needed to perform this or that process or experimentI knew the right answer. I established my relations with them depending on thesituation. Work plans were not new to them since everyone had worked underthem in Soviet times. Still, in this case they had been in shock for some time andI was afraid to stir things up. I succeeded in making an annual plan, but failed

in formalizing reports.

In establishing relationships with colleagues, Iurev tried to impose hisadministrative authority. According to Morozov:

What he wanted was impossible, and they defeated him. He could only have per-suaded them to adopt his faith in the projects. They value only authorities intheir field of science and it was not easy for him. He had to travel both to theplant and to the centre. He may have had family problems as well. But he did notcomplain. He had the unique opportunity to lead an R&D centre at the age of

37. Was it even possible to dream about it in the past? He had the opportunityto communicate with professors and leading scientists. Watching over his work,I let him know several times that, although I did not tell him this or that expli-citly, I saw what was going on. I only had to walk around the centre and talk withthe people there to know what was going on. I asked him to remember that.

Iurev came to realize that with so much resistance to his managementstyle he had to resign. Morozov elaborated: The decision to replace himformed earlier. The other shareholders wanted him to be fired much earlier,but I kept postponing that moment. Iurev recounted the reasons behind

his forced resignation:

My appointment as director of the centre was a rather horizontal move for me.It was an administrative position, which I didnt like, and I wanted to do some-thing different. The organizational period was too drawn out and I didnt feelmy professional skills were being used. Also, I did not want to become an ownersince I understood that it wouldnt provide a return in the short run. Andanother consideration was the long distance of the centre from my home. So Igradually leaned toward resigning.

In May 2003 Iurev came to the centre for the last time, for a meeting ofthe research board, of which he was a member, and asked questions butgave no further input.



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After Iurevs resignation, for a time Morozov managed the researchcentre himself. He had become comfortable using scientific terminology,but he above all viewed the operation as a businessman: I am not interested

in biology; I am interested in management. I tell my researchers: Yourideas are worth nothing until they are transformed into a system, into abusiness. At the same time he recognized that he could not head thecentre indefinitely: We must again find and attract a young person andprepare him to become director of the centre.

Motivation and Reward System

Morozov considered himself lucky to have found a multidisciplinary group

of scientists genetic engineers, microbiologists and biochemists whoshared a common understanding and worked well as a team. To make themeffective in the new commercial conditions, he needed to introduce market-oriented management practices and a new motivation system and to setclear goals and tasks. He noted that the scientists wanted to be treated asbusiness partners:

They want to know the companys position in the market and what its businessis. They do not want just to be assigned tasks, but to see what products are mostattractive commercially. By creating and marketing those products we will getfinancial resources that will allow us to sustain development. Once scientistsunderstand the systematic approach and their own part in the process theyreadily do their work and do not need to be pushed.

Morozov was pleased that he had managed to create a team ofresearchers who were interested in the final result, which he considered tobe the most important motivating factor. He also applied the latestmanagement methods to science, revived the Soviet system of additionalpayments for scientific degrees (the average monthly salary in the centre

was $300), and planned to introduce additional payments for knowing aforeign language. As an additional motivator, several Biocad scientists weresent to international conferences for professional development, with theadded benefit, Morozov recognized, of building the companys reputation.

Biocads managers believed that the most effective way to motivate sci-entists was with intrinsic motivation, once their basic needs were met.Morozov was convinced that if they trusted the managers, if they wereconfident in the stability of their professional development and felt that thecompany needed them because of the success of their products, they wouldbe much more committed to the company than if they received only mate-rial rewards. Denis Lvovic Alexandrov, vice-president of research, had

just such an experience when he was delivering interferon to a clinic. He was



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impressed by how eager the doctors were to get the medicine: You shouldhave seen their eyes. They were eager to get it and I felt I was helpfuldelivering it to them. Morozov continued:

It is very important for the scientists to see the results of their work in pharma-cies and hospitals. The distribution of the results of their work is equally import-ant. In Soviet Union times scientists were constantly exploited in terms of theirownership rights and their rewards. It is better for me to share my profit withthem than to deceive them. The patent for the new product is assigned to Biocad,but the proprietary rights are assigned to the inventors. We have clearly set aschedule for the accounts of these rights. The licensing fees that we would havebeen obliged to pay if we had been using foreign patents are now being paid toour scientists. They will easily calculate their income after we give them our salesfigures. We are readily disclosing this information to them.

Morozov noted that not everyone was able to adapt to the new marketconditions and the work regime it required: In the beginning a lot of themwent through hard times of adaptation and some left. With persistentexplanations the researchers started realizing that the market was dictatingthe direction of their work. Under the current conditions the other way isimpossible for the survival of any R&D organization. He admitted, forinstance, that he had failed to tap the potential of an employee from theeconomic planning division: He was a smart economist but he was doing

only what I had assigned him to do. If he did not get an assignment in themorning, he would sit and do nothing the whole day, and at exactly 6 p.m.he would leave. In order to get more effective work from him I had to spendtoo much time. With this type of employee you have to constantly prod himor give him well-defined tasks. This is an example of the Soviet legacy inwhich the meagre reward system and monopolistic economic system fos-tered a weak work ethic in many people.

Morozov saw recruiting new talent as a priority: At the moment my mostimportant task is to attract promising young people to rejuvenate the staff.

We have already started searching for capable graduates from theBiotechnological Institute. We have to convince them to come and work withus rather than go abroad, and we have already been successful in persuadingsome graduates who had such plans to stay here. We provided them withgood salaries, board, and wonderful laboratory equipment, as well as oppor-tunities to go abroad and communicate with their foreign colleagues.

Delegating Decisions and Fostering Accountability

In his quest to create an innovative and market-oriented company culture,Morozov introduced market-oriented management methods that he hadlearned in Russian and Japanese business schools, including delegating



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decision-making to scientists and other staffmembers and holding themaccountable for their actions. This was a radical change from the Soviet-erapractices that most of the staffmembers were accustomed to and in which

the enterprise director made most decisions and was the person heldaccountable for them. Morozov believed that the key to managing scientistswas to obtain their agreement on goals set out in a series of interdependentsteps and leave the process to them. Whenever possible he delegateddecision-making and encouraged staffmembers to be accountable for theiractions, including finding ways of resolving their own conflicts.

In one particularly tense situation, a conflict overwork standardsflared upbetween a group of scientists from Novosibirsk and those in the Moscowregion facility, with thefirst group accusing the other of not doing enough in-

depth study and the Moscovites arguing that their colleagues were too slow.Emotions ran high and they appealed to Morozov for a resolution. Ratherthan taking disciplinary measures, he handed them a popular managementtextbook by Moscow State University professors Vikhanskii and Naumovand urged them to read the section on conflict resolution. They determinedthat they were experiencing intergroup conflict and that they should resolveit through collaboration. They came to an agreement that such conflictualemotions would not be tolerated in the research process. Biocads deputydirector of R&D, Lev Denisov, in a 2003 Vedomosti interview, credited

Morozov with achievingthesuccessful resolution of theconflictbynottakingsides, recalling that he said to the scientists: You are adults, and I am notgoingtoaccuseyouorpraiseyou.Takethisbookandreadit(Chernov2003).

Changing Scientists Mindsets to Commercialize New Products

A major challenge for Morozov was to introduce innovation to thescientific environment and accustom scientists to business methods andstrategic planning in order to commercialize new products. He commented

in a 2003 interview in Expert magazine: In practice, it was very hard totrain scientists to strive not only for a scientific result but also for a finishedmedication, and to work with a deadline (Kostina 2003). This required anew mindset for the Russian scientists whose tradition was that of drillingdeeper into their subject, perhaps even to digress to other areas of interest.A senior scientific officer in the genetic engineering laboratory, BorisRadko, commented in the same Expert article: It is clear that you arefussing with gene structures not only to satisfy your scientific ambitions,but to create a treatment that hundreds of thousands of seriously ill peoplehave been waiting for. Eventually, through Morozovs leadership andvision, the scientists came to realize that the companys results depended onthe linked chain of science, production and distribution.



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MOROZOVS VISION FOR THE FUTURE

Morozov believed that growth would be based on a new group of medicines

that he hoped would compete in the global marketplace. While still at thelevel of basic research, pharmaceuticals were being developed based oncytokines, which when malfunctioning in the body, can lead to asthma,allergies, rheumatoid arthiritis, Alzheimers disease, and Parkinsonsdisease. While Biocad might be able to be the first to develop these prod-ucts, Morozov foresaw that a lack of resources might create problems withgetting them to market: But even if this occurs, I would prefer to wait awhile and let Western competitors go ahead and [they] could prepare themarket. We wont be able to scratch up the marketing funds.

Nonetheless, he believed that Russian pharmaceuticals might eventuallybecome competitive on international markets on the grounds of highquality and low cost, in contrast to the high quality and high cost of USpharmaceuticals, and Asian and South American products which were lowcost but also lower quality. He also had plans to expand to other countriesin the Commonwealth of Independent States. With unflagging optimism,in a late 2003 interview with Expert, Morozov set out his vision for thefuture: Im convinced that in about 10 to 15 years, when we have workedout our business methods and will make enough money to carry out R&D

and marketing activity, well not only produce our own medicines to fightincurable diseases but will also create the market for them. Then, well bein a position to compete with the global giants.

A few years after Morozov made that prediction, some positive develop-ments occurred. In 2006, the Russian government announced an allocationof $5.25 billion to a programme to promote biotech from 2006 to 2010.This included a publicprivate venture capital fund to invest in the indus-try, although the amount targeted, $70 to $140 million, was seen as modestby some analysts. And foreign investors, including venture capitalists,

showed increasing interest in Russian biotech. With its early start in com-mercializing medicines, its talented scientists, integrated managementsystems and visionary leader, Biocad appeared poised for growth in anindustry that was showing signs of promising opportunities ahead.

CONCLUSION

Dmitrii Morozov, an energetic and entrepreneurial young banker, tooka leapinto a complex, scientific industry in which he had no prior background.What might have appeared as foolhardy and naive actually involved taking awell-calculated risk. Morozov researched the attractiveness of the Russian



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biotech market and consulted with knowledgeable scientists and industryanalysts. Seeing business opportunities in the chaos of the post-Soviet era,he bought an established but languishing state scientific research institution

at a very attractive price, and hired talented scientists who had been unem-ployed or under-employed. He utilized his valuable networks in banking andindustry to help finance his venture, including construction of a state-of-theart manufacturing plant. Additionally, his previous business experienceenabled him to deal successfully with government officials and navigatethrough bureaucratic mazes. Morozov also applied his knowledge of market-oriented management methods to create effective management systems aswell as to attract, motivate and reward employees. Throughhis charisma, cre-ativity and entrepreneurial talent, Dmitrii Morozov created a company that

showed promising potential for growth. By 2006, while retaining his positionas chairman of the board, he had put a top management team in place thatfreed him from involvement in daily operations. He then turned his attentionto teaching entrepreneurship at Moscow State University and looking forother entrepreneurial opportunities, both activities being potential ways offurthering new business creation on his part and on the part of others.

In conclusion, this case illustrates the myriad of obstacles facing entre-preneurs in Russias transition market economy as well as the opportunitiesthat can be seized by those who have the knowledge, business acumen,

financial resources and political and professional connections, as well as thedetermination and motivation required to realize their objectives in such achallenging environment.

NOTES

The authors gratefully acknowledge the assistance of Northeastern University MBA stu-dents, Denitsa Bekova and Dimcho Dimitrov, in preparing this case.

1. The Commonwealth of Independent States, created in December 1991, consists of

Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia,Tajikistan, Turkmenistan, Uzbekistan and Ukraine.2. Material used in this section, unless otherwise noted, is based on information obtained

from Academy of Sciences (2002).3. Material used in this section, unless otherwise noted, is based on information obtained

from Academy of Sciences (2002).

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29 2002 / ), 29 January.Vedomosti(2003a), Bacteria that make a billion (, , - ), 26 March.



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3. Struggling to survive: the case of anew technology-based enterprise inBelarusDavid Smallbone, Anton Slonimski andAnna Pobol

INTRODUCTION

This chapter is concerned with the development of a technology-based busi-ness in one of the harshest operating environments for private business any-where in the world. The fact that the business has survived in such conditionssince its establishment in 1992 is an achievement in itself, although its devel-opment path reflects specificities of the Belarusian context, which include

major institutional defi

ciencies (Smallbone and Welter 2006). At the sametime, some of the development issues and challenges that the firm has facedare shared with young technology-based firms in mature market economies.

Sinta is a successful enterprise in the Belarusian context, where privatefirms are few and far between and survival itself can be a major challenge.Apart from surviving for 14 years, the enterprise is solvent and has not beensubsidized by government loans or grants; nor is it currently indebted to itsemployees (through unpaid wages), which is a common feature of smallbusiness development in transition conditions. It is a privately ownedinnovation-based enterprise, albeit one that has yet to achieve sustainedcommercial success.

THE ENVIRONMENT FOR BUSINESS IN BELARUS

In terms of external conditions, the operating environment for business inBelarus is currently one of the most hostile in the world. Based on EBRDassessment, Belarus is one of the transition countries where only slowprogress has been made with respect to the reforms required to establish a

market economy. TogetherwithTurkmenistan,Belarus is atthebottomof theEBRD league table in this regard (EBRD 2005) and has been for many years.

29


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The approach to macroeconomic management in Belarus has involvedkeeping a majority of productive resources under state control, linked to astrong administrative system that encompasses all levels of government.

Negative consequences from a business perspective have included over-regulation associated with the desire of the state to exercise control overproductive assets and transactions in the economy, which has in turn led tocomplex and expensive systems of inspection and control of enterprises.

Negative consequences have also included frequent changes of the rulesgoverning business activity (that is, laws, decrees, regulations), whichincreases the uncertainty faced by business managers. This particularlyapplies in the case of small firms, where the costs of compliance areexacerbated by the limited internal resource base, with less scope for man-

agerial division of labour than in the case of large enterprises (Bannock andPeacock 1989). For example, on most of the indicators included in Table 3.1,from the World Banks Doing Business survey, Belarus appears to facehigher non-wage costs and greater administrative burdens than the othercountries that feature in this book.

In this context, it is hardly surprising that the number of privately ownedenterprises remains small (approximately 33 000 small enterprises by theend of 2005 employing about 456000 people) (Ministry of Statistics andAnalysis of the Republic of Belarus 2006) and their contribution to eco-

nomic development limited. In the assessment of the World Bank (2003), thelevel of development of private businesses in Belarus lags behind all neigh-bouring countries. Table 3.2 indicates that only 25 per cent of GDP is gen-erated from activity of the sector indicated as private, which is the lowestproportion of any of the countries listed. However, in practice, this refers toall non-state enterprises (which includes large and medium-sized joint-stockenterprises, where the majority of shares belong to the state), which meansthat the contribution of the private sector is even less than that shown.

SME development is hampered by price controls, which affect the

profi

tability offi

rms; an ineffi

cient and distorted banking system; andlimited privatization that threatens to crowd out private business develop-ment from some sectors of the economy. Inadequate and imperfectly imple-mented legislation aggravates the situation. Bankruptcy laws are not alwaysenforced on state companies, which mean that some continue to operatedespite being loss-making, with implications for their suppliers. This con-trasts with an increasing tendency for the government to issue restrictivelaws and regulations on non-state-owned businesses, which hinders theefficient development of the private sector.

As in some of the other Commonwealth of Independent States (CIS),following the collapse of the former Soviet Union, the early 1990s saw theestablishment in Belarus of a number of science and technology-based



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31

Table3.1WorldBankDoingBusinessIndicators,2006

Belarus

Georgia

Kazakhstan

Kyr

gyzstan

Moldova

Russia

Ukraine

Uzbekistan

Region

Startingabusiness

26.1

10.9

7.0

9.8

13.3

3.4

9.2

14.1

14.1

(%percapincome)

Dealin

gwithlicences

17.5

71.7

35.0

5

10.4

165.0

275.3

186.5

258.2

564.9

(%percapincome)

Hiring

workers

39.1

20.0

22.0

24.5

29.0

31.0

38.8

31.0

26.7

(%sa

lary)

Firing

costs

21.7

4.3

8.7

17.3

28.8

17.3

13.0

30.3

26.2

(weeksofwages)

Regist

eringproperty

0.1

0.5

1.8

1.9

1.5

0.3

3.4

10.5

2.7

(%propertyvalue)

Public

creditregistry

0

0

0

0

0

0

0

0

1.7

coverage(%adults)

Totaltaxrate

186.1

37.8

45.0

67.4

48.8

54.2

60.3

122.3

56.0

(%profit)

Enforcingacontract

21.1

20.5

11.5

12.0

16.2

13.5

16.0

13.5

15.0

(%debt)

Closin

gabusiness

22.0

3.3

18.0

14.5

9.0

9.0

42.0

10.0

14.3

(%es

tate)

Source:WorldBank(2006b).


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32

Table3.2Generalstatistics Be

larus

Georgia

Kazakhstan

Kyrgyzstan

Moldova

Russia

Ukraine

Uzbekistan

Populationinmillionsa

9.8

4.6

15.1

5.1

3.9

144.9

47.3

26

Area(

000sq.km)a

207.6

70

2728

200

33.8

17075

604

448.9

GDP(inbillionUS$2004)a

22.9

5.1

40.7

2.2

2.6

582.3

65

12.2

GDPpercapin2004at

6894

2914

7436

1931

2170

9721

6414

1

867

curre

ntinternational

US$

(PPP)a

Privatesectorsharein

25

65

65

75

60

65

65

45

GDP

(%)in2005a

Inflation2005estimation(%)a

10.6

9.4

6.8

4.9

12

12.8

14.1

10

Unem

ploymentrate2005

12

9

10

8

9

8.6

(%oftotallabourforce)b

FDIinflowsin2004

0.7

10

13.6

5.9

5.7

0

3

2

(as%

ofGDP)a

Est.levelofrealGDPin2004111

45

103

80

44

82

57

115

(1989

100)a

Sources:a.EBRD(2005);b.WorldBank(2006a).


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enterprises, as the funding of state science programmes was cut and entre-preneurship was seen as one of the options for technical and scientific staffaffected by these cuts. However, few of these technology-based enterprises

survived and many of the entrepreneurs who set up technology-based firmsin the 199295 period were forced to move into lower value added activities(such as retailing or wholesaling) through a combination of external envi-ronmental pressures and resource constraints. Moreover, changes in theregulations governing non-state enterprise activity after 1996 forced manysmall firms into liquidation and others into operating abroad in neigh-bouring countries, as the regulation of entrepreneurship by the state inBelarus became tighter and increasingly centralized.

More generally, since the early 1990s, the overall economic environment

in Belarus has constrained both the creation and subsequent developmentof small businesses as a result of the combined effect of multiple exchangerates, import/export restrictions, poor access to loans, and the crisis in thelate 1990s caused by the collapse of the Russian ruble. Although some ofthese factors have been eliminated and government claims to support s

innovation emerging economies

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