State-Owned Enterprises

as innovation agents in

Russia

Ivan V. Danilin PhD in Political Sciences Head of Section for Innovation policies Institute of World Economy and International Relations (IMEMO), Russian Academy of Sciences E-mail: danilin.iv@imemo.ru

ISA 2015 Annual Convention New Orleans

State-Owned Enterprises (SOEs) in Russia: general information

• Starting from 2000 Russian corporate sector is characterized by ongoing consolidation of some most important assets under federal control

• One of basic rationales: eliminating waste and resource duplication, creation of global actors, comparable with leading Multinational Corporation

• As to 2009 SOEs and so-called State Corporations (SCs) evolved as a nation-wide economic superactors (20-50% of GDP by expert estimates)

• SCs mostly control most important defense, dual-use high-tech and some medium-tech industries

Since 2009-2010 significant rise of national innovation activities under President Dm.Medvedev

SOE/SCs are viewed as one of key innovation agents and “System integrators” for National Innovation system (demand, support, etc.)

Starting from 2010 several initiatives in place to support and enforce innovation strategies of SOE/SCs • Programs for Innovation Development (PIRs) • Technology Platforms • Innovation Territorial Clusters • Involvement of SOE/SCs in Skolkovo project • Stimulation of SOE/SCs to engage in venture capital • Roadmaps and other documents of the Agency for Strategic Initiatives, etc.

Federal Russian policies to use SOE/SCs as

Innovation development agents: general directions

General reasons are systematic in nature: • SOE/SCs have limited ability to create commercial innovations and/or support

outside actors due to industrial specifics: – a) defense/security or dual use; – b) low-tech (gas, oil…) – c) infrastructure (power grids, pipelines…)

• Macroeconomic conditions are unoptimal for innovation: high interest rates, lost competitiveness of labor market, etc.

• Government or government-related bodies are bad innovators, inflexible and not sensitive to market signals

• Unoptimal institutions, etc.

Results of PIR`s monitoring and analytics: Innovation effect of SOE/SCs stimulation and enforcement – moderate

(acknowledged even by Presidents Medvedev and Putin)

Results of Russian policies to use SOE/SCs as

Innovation development agents are moderate

…considering historical evidences of government and SOEs or affiliated big private (or quasi-private) businesses role in developing innovation…

1. Whether the accent on SOE/SCs as key or one of the key innovation actors can be effective, justifiable and prospective?

2. Are decision-making and management issues also important in supporting SOEs role as innovation Agents?

A further study of Russian Policies rise several

important questions

Some key issues on study of SOE/SCs role as

innovative development Agents

• Articulation of the Principal’s interest + associated costs, efficiency of controls and motivation of the Agents (Challenge of Controls)

• Viewing Principal-Agent relationships in a more broad context - as an element of a socio-economic System of Systems (Redefining Principal)

Challenges of controls (1)

Difference between industrial (manufacturing) and high-technology development and innovation development • in clear formulation of vision (target state of a system) – -what does it means to be “innovative” or when economy, or industry,

or enterprise becomes “innovative”?

• In formulation of desired targets (basis for controls): – innovation development is far less certain and quantifiable (in reality

full spectrum of consequences and benefits are revealed years after implementation of innovation)

– formal target indicators not always reflect innovativeness, or innovation development, but potential for innovations

– even some most “obvious” and “objective” metrics not always reveal the actual potential of innovations – consider Solow paradox

– disruptive innovations are even harder to define (A.Sen); – Intangible (most important for NIS) features of innovative

development are very hardto quantify (Lundvall, ed., 1992; Chesborough, 2003; Etzkowitz, 2008; Horowitt, Hwang, 2012).

VISION (Target State of the System)

Target goals and tasks

Control indicators and their target meanings

Actual controls (instruments)

What is being innovative? When nation/enterprise

becomes innovative?

What should be real (not philosophic)

tangible or intangible goals and tasks?

What to measure and how to measure in

innovative development?

How to implement “fuzzy” indicators?

Challenges of controls (schematization)

Resulting problems: • Great costs of proper targets and controls construction and monitoring system • Problem of an information asymmetry on the Principal side is deepened

substantially

Since Principal`s (Government) monitoring system over SOE/SCs innovation activities must be constructed (financial and public accountability, issues of control over Agent, etc.) this result (and proved by) in following problems of Russian policies: • Great formalization of control (R&D expenditures, R&D intensity, absolute and

relative numbers of R&D expenditures on universities, number of patents…) • Ignoring or formalizing qualitative aspects • Subjectivity of decisions

Resulting effects on SOE/SCs side: • Rise of volumetric innovation-related activities – in many cases without some

important supportive and other activities s • Formal compliance vs economically viable innovative activity

Challenges of controls (2)

Redefining the Principal (1)

• In a more broad view Government itself is an Agent of public

• Government`s socio-economic obligations (formulated by the Public as a Principal) are transferred on the Principal-Agent relations with SOE/SCs

Result:

• mixed, in many cases mutually contradictive requirements to SOE/SCs

• lowering their flexibility and rising costs of compliance and fulfillment of Principal`s (Government) requirements and controls

The latter point is supported by the evidences from Russian innovation policies – energy efficiency vs low energy prices for the

population and controlled gas prices on internal market, rise of productivity vs employment as requirements for SOE/SCs, etc.

• Despite in innovation development area SOE/SCs acts as an Agent, they also appear to be a part of a Principle in general economic context

• Enormous economic and social importance of an SOE/SCs

Result:

• Principle (Government) is forced to overspend resources for Agent`s costs reimbursement, if not “secure” it from negative consequences od creative destruction

The latter argument is supported by the evidences from Russian innovation policies – significant part of Dm.Medvedev and

V.Putin priority directions “for innovation breakthrough” and other measures coincide with SOE/SCs interests

Redefining the Principal (2)

Government

Redefining the Principal (schematization)

Principal

SOE/SCs

Principal Agent

General public (society) Agent

Short-to-medium-term interests may not coincide with innovative development or be in contradictions with it

General Socio-Economic “Game” Innovation Development “Game”

Securing market benefits, businesses and assets

Employment, welfare, stability…

Creative destruction (as an ideal goal)

Conclusions (preliminary)

• Problems with defining of target states, controls and other features could be attributed to the unexisting market and innovation institutions

• Attempts to replicate industrial-era successes lead to use of mobilization, hierarchical instruments – poorly works for heterogeneous, horizontal innovation area

• Institutional functions are assigned to the Agents (considered to be well-compensated)

• SOE/SCs generally loosely perform institutional functions – especially in an ill-defined, information-scarce situation with weak loopbacks

Building institutions as key recommendation vs support of SOE/SC and using them as innovation

development Agents?

Problems with “institutional” conclusions and

recommendations

• Building of Institutions as a recommendation is often unsubstantial:

– who are the Agents of this process and could they appear in an unoptimal institutional environment? (a chicken-or-egg problem)

– How to adapt novel institutions, transferred from established NIS?

• What to do with unique resources and possibilities on behalf of SOE/SCs (longer planning , resource mobilization competences, etc.) in a situation of relative weakness of other actors?

A possible solutions for innovation development

dilemmas with SOE/SCs

• Moderate fragmentation (where possible and without necessarily destruction of existing organizational bodies) of SOE/SCs

• Step-by-step alienation from a direct Government control and support (also by creating a substitute financial or quasi-business intermediate bodies)

• Enforced communication loopbacks between SOE/SCs and the Principal

• Possible inclusion of a special information Agents • Diversified training “games” in order to create experiences,

alleviate possible hurdles and create confidence and competence capital –with global dimension!