National Report on Innovations in Russia-2016

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 Report prepared by a team of authors led by Evgeny Borisovich Kuznetsov NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 TABLE OF CONTENTS

TABLE OF CONTENTS

OPENING REMARKS. HOW TO AWAKEN SLEEPING GIANTS...... 3

EXECUTIVE SUMMARY...... 4 1. From Theory to Practice: Application of Report-2015 Tools...... 6 1.1. Report-2015 as an Instrumental Framework for Innovation Policy...... 7 1.2. Report-2016: Transforming the Concepts into a System of Innovation Policy Measures...... 13 2. From Creating Conditions to Promoting Growth: Problem Definition...... 14 2.1. Ready for Takeoff: Where is the Innovation System Moving?...... 15 2.2. The State’s Innovation Policy Today...... 20 2.3. Why is There no Innovation Breakthrough?...... 28 2.4. Big Business in Russia: Sleeping Giants...... 31 3. How to Awaken the Champions? Making Big Companies Innovative...... 37 3.1. Impact on Big Businesses: Industry Examples...... 38 3.2. Lack of Innovation Erodes Big Companies’ Competitive Position...... 39 3.3. What to Strive for? Opportunities for Innovative Development...... 43 3.4. What are the Hurdles? Barriers to Innovation...... 44 3.5. What Can Be Done? Measures to Promote Innovation...... 50 4. You Can’t Manage What You Don’t Measure: How to Set and Achieve Targets....61 4.1. Innovation KPIs in Russia Today...... 62 4.2. Choosing the “Main Attack Avenue”...... 64 4.3. Cascading KPIs...... 70 4.4. Implementation Issues: Shortcomings of the Current System...... 76 4.5. How to Set Achievable Targets? Global Experience...... 79 4.6. Project Office: Organizational Options...... 85

APPENDIX 1. DASHBOARD METHODOLOGICAL UPDATE: HARMONIZATION WITH IDS-2020...... 89

APPENDIX 2 . KPIS FOR “MAIN ATTACK AVENUE”: METHODOLOGY DETAILS...... 96

LIST OF ILLUSTRATIONS...... 99

SOURCES...... 100

2 Table of Contents OPENING REMARKS

HOW TO AWAKEN SLEEPING GIANTS?

Dear friends, The first national report “On Innovations in Russia”, which was issued a year ago, suggested to the state a set of innovation policy tools, including a “dashboard” to measure the condition of the innovative environment, as well as the overall map for recommendations on priority areas of technological development. In the new second release of the Report, equipped with these tools, we shall evaluate progress over the past year and attempt to work out a range of innovation policy measures that would allow us within a short period to approach the leading countries in terms of technological development. Given that these countries do not intend to rest on their laurels, we need rapid and visible results in order to achieve a successful breakthrough. In recent years, the initiatives taken by the state have mainly focused on areas where the impact yields a delayed effect: the innovative environment, science, education and venture investment. These support measures are critically important for the development of innovation and it is crucial that they continue to be implemented. However, these measures are insufficient in order for us to catch up with the leading countries. In our view, the key source of rapid and significant victories is large business. If we can move large companies in key sectors towards new technologies, even through their own weight they can reshape the country’s economy in a short time; moreover they can favor the emergence of self-reproducing research and business ecosystems around themselves. The recent experience not only of Russia, but also several leading countries – such as the UK, Norway, and South Korea – offers specific successful examples of such action on the part of the state and their major representatives. So how can we awaken our big business – these sleeping giants – to the technological revolution? The task is by no means a trivial one, given the low responsiveness of big business to innovations, the rigidity of sectoral structure and inter-sectoral dealings, heavy regulation of markets and processes, the high degree of state ownership and social significance of large enterprises. However, all of this has been seen in many countries that hold leading innovative ratings. How did they manage to pull themselves up and then stay at the top? The bulk of this report is devoted to an analysis of that experience. The report is intended strictly for practical purposes: we expect that the recommendations set out herein will be applied to operations and will at least have an impact on shaping the government’s technological agenda in the coming years.

Mikhail Abyzov Minister of the Russian Federation

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 3 EXECUTIVE SUMMARY

EXECUTIVE SUMMARY

The objective of this release of the Report is to shift in the oil and gas industry the lack of innovation will from general recommendations about priorities in in- lead to a 6% decline in oil output already in 2025, novative policy, set forth in the 2015 Report, to the de- according to forecasts by the Ministry of Energy. velopment of specific measures capable of speeding up At the same time opportunities exist to develop innova- technological development in the country. tions already in the short term: In 2015-2016 the innovative environment improved in for example, technology for the “connected vehicle” Russia, although innovative activity did not increase. in automotive; Russia’s positions improved in the Global Innovation development of non-capital intensive innovative Index (from 48th to 43rd position) and the Global Com- products, for example in the area of geophysics in petitiveness Index (from 45th to 43rd position), while the oil and gas industry. Russia’s lag behind leading innovative countries also decreased for 12 of the 41 dashboard indicators char- Barriers to innovation exist inside large companies and acterizing the innovative environment (while deteriora- suppliers, as well as on the part of regulation and mar- tion was seen only in five indicators). kets. At the same time, we see mixed performance of inno- The management at large companies does not push for- vative activity without any clear positive trend: ward innovative agenda due to short planning horizon. In addition, low innovative activity over a long period results growth was observed in a number of indicators: state in a situation where companies lack the competencies demand for innovative products, R&D expenses in and processes required to implement innovation. the budget sector, and research cooperation; For innovative development of suppliers the main bar- however, the key indicators show a decline in the fol- riers are their lack of resources for innovation and a lowing areas: patent activity, R&D expenses, and the limited sales market due to a high degree of vertical number of innovative companies integration of large companies and high entry barriers. The main reason for this is that state initiatives were The conditions which prevail on the Russian market – aimed at areas where the effect is either delayed (sci- for example the current pricing system for state de- ence, education, innovative environment), or limited fense orders and limited competition on the part of due to an “open-loop innovative system” (startups, foreign companies – do not produce the incentives re- venture investments). quired to develop innovations at large companies. Big business should be the main source of quick and Moreover, the state lacks a strategic approach to insignificant wins in the development of innovations. dustry standards and consistent policy for financial Efforts aimed at innovating big business should sup- support of innovations. This also has a negative impact plement and create a synergetic effect with initiatives on innovative activity. which have already been taken. To resolve these issues it will first be necessary to cre- Mature business creates the main demand for innovation, ate long-term motivation for the management of large thus activating other channels that can be used to roll out companies, conditions for innovative development of innovation: venture investments and invention activity. suppliers and regulatory incentives. To do this, it will In addition, the focus on large companies will make it be necessary to: possible to directly impact the majority of the economy, create long-term incentive mechanisms for managers as the proportion of large companies is 79% compared of state companies: to an average 42% on average in comparable countries. implement options programs for mid- and top-level management and design long-term incentive mech- In addition, the state has direct levers for impacting anisms for members of the board of directors; big business, taking into account its strong footprint in large companies (81% in the top 10 major companies). offer incentives linked to profit of corporate venture funds to the top management; Nowadays, large companies are unable to unlock their innovative development potential and show low innovative create an executive pool with a focus on innovations, activity, losing their competitive positions as a result. as well as training programs for top management in the area of innovation In a number of industries the level of R&D expenses and the number of registered patents is considerably expand the list of companies slated for the projected lower than at foreign companies, while the average ci- privatization plan; tation rate is next to nil. in order to develop exports of high-tech products the This leads to the loss of competitive positions: following actions should be taken: for example, the proportion of domestic aircraft in develop a package of targeted measures to support Aeroflot’s fleet fell from 75% in 2000 to 11% in 2015; high-tech exports;

4 Executive Summary revise industry standards and assess whether it is When setting KPIs, we suggest the following cascading feasible to harmonize them with international stan- guidelines: dards to facilitate access of Russian manufacturers differentiate between long-term (five years or more) to foreign markets; and short-term (up to five years) horizons; in order to create ways and means to promote tech- take into account the existing resources and powers of nological development in a number of industries the the responsible party to impact KPIs; following actions should be taken: account for time lags required to implement programs set up working groups on the basis of industry ad- (as a rule, this should make it possible to assign re- visory boards with participation of the state and sponsibility only on the long-term horizon); big business to develop and implement industry programs aimed at joint development of promising set target indicators as part of the iteration procedure technologies and bridging gaps in production chains; to endure that they are aligned with action plans and allocated resources; the responsible party should be compile the list of advanced technological stan- allowed to adjust the action plan and have it approved dards/ quality marks subject to development and on an annual basis; implementation; on the long-term horizon cascade targets on the 10 se- amend the methodology for assessment of the imple- lected KPIs within industry/overall economy perimeter mentation of IDPs, focusing primarily on long-term to 10 organizations and agencies which are the biggest collaboration programs with innovative suppliers; contributors to their achievement and are empowered conduct an audit of measures aimed at supporting to develop, propose and implement respective action R&D and high-tech exports in terms of their sim- plans: six industry ministries, Rosatom, Roscosmos; plicity and ease of use both by large companies and the Ministry of education and RVC; SMEs; on the short-term horizon, full and personal respon- in order to promote conditions for the expansion of sibility of the 10 organizations and agencies to reach manufacturers of high-tech components and innova- target indicators arises only if “failure” occurs within tive service companies the following measures should the perimeter of their affiliates/subsidiaries. be taken: In order to frame achievable and balanced targets and single out 2nd and 3rd-tier suppliers in vertically ensure that these targets are reached without radically integrated companies with state participation into revising the country’s governance system, it is suggest- standalone business units with responsibility for fi- ed to assign the task of implementing the proposed KPI nancial performance in order to promote expansion system to the project office. There are two options for of the components market; the implementation of this initiative. promote localization of R&D for international com- The option of a “light” project office as a superstruc- panies and increase foreign investments in compo- ture over the current system of innovative initiatives. Its nent manufacturers; purpose is to revise existing innovative projects, align them with KPI goals of the “main attack avenue” and implement a mechanism for partial funding of ex- monitor the status of their implementation. penses related to industry certification of products; The option of a “heavy” project office in charge of de- in order to create the conditions for innovative develop- veloping and monitoring the implementation of nation- ment of companies that operate in the system of state al innovative project to achieve the 10 proposed KPI defense orders: targets. Its purpose is to develop project roadmaps and amend the pricing system by introducing long-term formulate targets, assist in roadmap implementation contracts and revising the rules used to determine and monitor status. profit (1%+20% formula). In order to manage the KPI program, we suggested to use 10 KPIs, which, on the one hand, correspond to the key bottlenecks of the innovative system, and on the other hand are controllable, measurable and tamper-proof. Seven KPIs refer to production companies: export of Russian high-tech goods, the share of innovative products in output, the share of innovation expenditure in output, the share of innovation companies, investment in intangible assets, the number of PCT patents, and the number of PCT patent applications. Two KPIs refer to science: the amount of research performed and the citation rate. One KPI refers to the venture market: the volume of venture investments.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 5 1. FROM THEORY TO PRACTICE: APPLICATION OF REPORT-2015 TOOLS

F ROM THEORY TO PRACTICE: 1 APPLICATION OF REPORT-2015 TOOLS

6 1. From Theory to Practice: Application of Report-2015 Tools 1.1. REPORT-2015 AS AN INSTRUMENTAL FRAMEWORK FOR INNOVATION POLICY

e explored the overriding importance of the topic of existing resources more efficiently (see Illustration No. Wtechnological development in the country – which 1.1)2. This is an example of “pure” technological innova- also implies state policy aimed at stimulating such a tion, which is difficult to replicate in the real economy development scenario – in one of the opening chapters independently. As a rule, innovations refer to a new piece of the report “On innovations in Russia”, published one of equipment or by means of know-how, which requires year ago. At that time, we wrote that extensive economic funds to purchase; however, even in this case the princi- growth had become exhausted in Russia – by means of ple remains unchanged: new ideas, which are embodied capital, the quantity and quality of the workforce – thus in equipment or labor organization methods, create im- driving home the conclusion that innovations are the petus for growth using the existing resources. only remaining source of economic growth. In order to Russia needs impetus in order to launch innovative de- achieve rapid and efficient results, the state should fo- velopment and restructuring of the economy. That is cus on promoting innovations. not to say that to date the country has not yet achieved An apt illustration of this issue would be such a sport any innovations. On the contrary, researchers estimate as ski racing, in which a skier’s technique gives him a that total factor productivity has accounted for 25-30% 10-percent speed advantage, without requiring any ad- of Russia’s economic growth over the past 20 years.i A ditional resources, but merely allows the skier to use his similar contribution to economic growth can be observed

Growth of economic well-being (GDP per capita) =+++1 2 3 4

How to run faster if all available resources In 1985, the Swedish skier Gunde Svan was the first have been mobilized and energy is beginning to flag? to use the skating stride

1 Athletic training: already at the peak 4 A new, more effective ski technique Workforce improvement (employee skills) Innovations (total factor productivity) Change for the worse due to the government’s inefficient educational policy in the 1990s and The possibility of ensuring long-term economic growth by introducing innovations is decline in working-age population confirmed by the data on China and South Korea for the last 20 years Development of a practice-oriented education system is a long-term objective with impact to be seen in the next generations

2 Sports equipment: already at the peak 3 Effort: already at the peak Capital-labor ratio improvement (available capital per worker) Employment growth (working hours per capita) Working-age population will decline by 10 mn people from 2006 by 20301 Net capital outflow since 2008 – 5% of GDP or 22% of capital investments Limited state support opportunities. The size of the Reserve fund and the SWf amounts to 23% of annual capital investments 1. based on the data of the ministry of Economic Development. Production capacity utilization is 62% (only 10% of respondents mention excess capacity)2 Decline by 2.3 mn people from 2005 through 2011. 2. based on Rosstat data. Source: BCG analysis

Illustration No. 1.1. Innovations as the only available source of growth

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 7 Source: BCG analysis Assessment of reading skills, knowledge of maths and basic scientific results Innovation Quality of regulation Rule of law E-government development n/a ХХХ – indicator added in 2016 Avoidance of uncertainty Size of the innovation-driven economy high-tech exports Intellectual property exports Return on investment in innovation Efficiency of state support for exporters Number of innovative companie s headcount of innovative companies Direct government participation in demand for innovative product s Russia’s ranking in the Global Innovation Index Intensity of competition Availability of training services Compensation of teachers Number of students per teacher Ambition Tolerance Assessment of environmental policy Quality of logistic services Availability of scientists and engineers Quality of investor rights protection barriers to product export Simplicity of taxation Individualism Pragmatism 1 hypothesis or expert judgement due to lack of data no data Scientific and technical publications Russia’s position in the QS World University Rankings Education expenditure Commercialization Consumership hierarchy 2 Venture investment amount Amount of venture investments made by corporate funds Capital efficiency of venture funds Number of startup s Investment in intangible assets Demand for technology Available capital of venture funds Overall labor productivity Labor productivity in non-commodity industries Growth of the total factor productivity favoritism in the decisions of public official s Quality of property rights protection Ease of company registration No dynamics high current performance Citation index Quality of research institutes Quality of education Power generation Access to ICT Availability of funding (venture capital, private equity, debt) Cluster maturity (geographical concentration of suppliers and manufacturers supplementary products) migration of human capital 1 2 Recognition of the prestige research work Recognition of the prestige entrepreneurship Markets: Positive dynamics Insignificant gap Infrastructure: Public education expenditure Graduates with degrees in engineering and research International cooperation of institutes Idea/Invention Public administration efficiency Ease of insolvency resolution Intellectual property protection Culture: Number of worldwide patents granted Quality of patents granted Return on R&D expenditure Conversion of patent applications into patents R&D expenditure R&D expenditure in the private sector R&D expenditure in the public sector National patent activity Worldwide patent activity Employment in R&D (headcount and structure) Research cooperation Global leadership in high-tech markets Employment in the innovation-driven economy Knowledge: Institutions: n/a 2 Stages Leading Lagging Coincident Long-term Coincident The name is updated in the 2015 dashboard: ‘Education expenditure’ is replaced by ‘Public education expenditure’ in the 2015 version. ‘Education expenditure’, an indicator showing total expenditure, is added The name is updated in the 2015 dashboard: ‘Education expenditure’ replaced by ‘Public education version. for the last year or available period 1 2 Largest gap vs. developed countries Negative dynamics Drivers activity support Results Economic Innovative Innovative implications of innovation environment

Illustration No. 1.2. Innovation dashboard (2015)

8 1. From Theory to Practice: Application of Report-2015 Tools in South Korea and China, for example, as well as certain novation factors”) current innovative activity the areas of Western Europe. results of innovative activity We should also note that active efforts on the part of The dashboard clearly shows that bottlenecks form at the Russian government have created many parts of the each stage of the innovation process, depending on how innovative ecosystem and resulted in transformations high the priorities of these areas are in relation to other in many areas. Nonetheless, innovations in the country areas and the general direction in which the regulator were not a key driver of economic growth, as this role needs to move in order to debottleneck. Thus, when up- was played by commodity prices, the rollout of unused dating the dashboard, we can see how trends change in capacities and use of workforce. Innovations should now relation to other countries and draw conclusion about be in the forefront, since other potential drivers have whether we are moving in the right direction, whether the been exhausted. measures are effective and whether any major changes How can the state promote technological development? occurred in the external environment. In Report 2015 we elaborated several clear-cut concepts In and of itself, the idea of a structured depiction of key and tools, which, upon initial application, allowed us to efficiency indicators for managing the innovation pol- frame a number of generalized recommendations for the icy and monitoring its results is nothing new, as there innovation policy – first and foremost a dashboard and is vast global practice in application of dashboard tools functional model for innovation management. (see, for example “Australian key innovation indicators iv In this section, we shall merely enumerate the datacard” ). Russian practice also reveals experience in above-mentioned tools with a view to their subsequent selecting indicators which are critical for the innovation development and application to a plan of action that we policy at the state level – first and foremost the key ef- will elucidate in the following sections. For a more de- ficiency indicators or IDS-2020, which were collected to tailed description of the entire toolkit, see the 2015 Re- measure the performance of the respective state agen- portii. cies in the medium term. Innovation dashboard – a structured kit of indicators The dashboard from the first release of the report, in- used to gauge progress in the country’s innovative de- cluding subsequent amendments, is depicted in Illustra- velopment. For Report 2015 we gathered a uniform data- tion No. 1.2 (details of the amendments compared to the base with over 500 such indicators (on the basis of Rus- initial version are shown in the Appendix). sian statistics, international experience, and innovative Based on readings in the dashboard we reached some ratings) and selected 72 of them in line with two crite- preliminary conclusions about total lag of the innovation ria: (1) evaluation of performance and not the speed of system within relatively decent limits in the area of ed- changes, and (2) making regular evaluations that make ucation and infrastructure, as well as state funding for it possible to compare Russia’s performance with other R&D. From the standpoint of impact areas and prepa- countries in terms of comparative methodology. In this ration for subsequent provision of recommendations, we Report, in an effort to harmonize the dashboard and in- arranged our conclusions into five groups: dicators of Russia’s Innovative Development Strategy for 1. Low return on R&D expenses: state spending on re- the period until 2020 (IDS-2020)iii we raised the number of indicators to 75 (see Appendix). search and development are quite extensive, but they do not result in projects moving along the funnel; proj- Indicators are displayed on the dashboard based on the ects do not turn into competitive ventures or required traffic light principle, based on a comparison of data patents. on Russia with input regarding 15 preliminarily chosen 2. Weakness of the fundamental layers of the system leading innovation countries. A green light is assigned to does not allow for projects to gain support or promo- statistical indicators if the Russian value is at least 75% tion; this is mainly due to the limiting influence of the of the average; a yellow light means the value is between following factors in three main areas: 75% and 50% of the average; and a red light means the value is less than 50% of the average. For survey and a. innovative markets distinguished by low intensity of composite indicators the rationale behind assigning in- competition, high barriers to the development and dicators is slightly more complex; but the sense remains implementation of innovative solutions; unchanged: red signals critical lag, yellow — material b. innovative culture distinguished by weak house- lag, green — small lag, parity or even leadership. hold demand for innovations, low prestige of sci- The dashboard represents a 2D matrix, two axes which entists, inventors and entrepreneurs give the board the cells in which the indicators are lo- c. quality of institutes distinguished by weak pro- cated: tection of the rights of owners and investors, bad indicators are arranged on the horizontal axis along reputation for the efficiency of state management “the innovative progress funnel”: the quantity and qual- and law enforcement practice, resulting in short ity of inventions the commercialization level of in- planning horizons on the part of economic agents. ventions the level of implementation and scalability 3. The low responsiveness of business to technology is of inventions (i.e. innovations proper); not conducive to demand for innovation as a key factor indicators are arranged on the vertical axis in layers in the production process, or as a source of growth of “innovation pyramids”: provision for an innovative or competitiveness; private investors do not support environment funding and promoting demand (“in- the state in R&D expenses, as a result of which the

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 9 NNOPROm)

Directorate of Scientific and Tech. Programs, higher School of Economics, fora (Open Innovations, I

support iR&Dclub business ROSSTAT, Consulting associations VC, Skolkovo, mall business tandards, R S Innovation fund, National Council for Occupational S Association of Innovative Regions of Russia and informatio n Источник: анализ BCG Источник: RVC, SOEs activities fund for Skolkovo, Programs, innovation Initiatives, Training of ministry of for Strategic personnel for Infrastructure Education and on Innovative Development 6 Science, Agency and Educational Parks Science Russian Russian Russian for basic Research, fund for Skolkovo, Programs, humanitie s foundation, foundation Non-Profit Technology Partnership Provision of Educational foundation for infrastructure Association of Infrastructure and and fund for Programs Skolkovo, property , development institutions (corporate innovative strategies), protection 2 Educational Intellectual Infrastructure , 7 Organizational and legal methods RVC, bodies federal Skolkovo, executive Demand RUSNANO, iR&Dclub, programs) stimulation (government of Economics higher School Advisory board, VEb Innovation, Social Agency regional Economic Initiatives, Non-Profit ministry of Assembly, authorities, Partnership framework Development for Strategic Legislative Development Association of Advisory board Education and 1 The President, (Department of the ministry of the Rf federal and Innovation), Science, federal the Government, Technology Parks executive bodies, The creative team of experts from different targets the innovation system is key tool to develop NTI roadmaps. on NTI Development and Implementation, the IAT Innovative Priorities, IAC 4 5 pproval: the President, Rf Government, Presidium of Council for modernization and Innovative Development, S cience Education A . 4 Center Export Export Russian Russian Innovation, foundation cooperation foundation, promotion / international for humanities for humanities RVC, Skolkovo, RUSNANO, VEb Small business Russian Science Innovation fund, for basic Research, Russian foundation Russian foundation Innovation system Rossii Opora Service federal Customs Customs ), the NTI team (NTI roadmaps) incentives 3 The strategy is under development. 3 SmE Center Export (ExIAR) of SmE Russian Economic Promotion ministry of Corporation, of insurance Development (Department Development)

7 bodies federal benefits executive programs) (government Depreciation Indirect economic methods zones special federal Skolkovo economic Tax Service, Tax benefits VEb, fund VEb RVC, Industrial SmE bank Innovation, contributions Development Loans/capital Russian Direct Investment fund Publicly funded organizations (foundations, development institutions, SOEs, etc.). 2 , 7 the ministry of Economic Development (the Innovative Strategy until 2020), Russian Academy Sciences, industr y federal executive bodies (industry-specific strategies), publicly funded organization s Stimulation of the innovation activities federal executive bodies through government programs. 7 VEb Research Programs Direct economic methods foundation, foundation humanities, Educational Monitoring: the ministry of Economic Development, Russian Academy Sciences, other ministries and agencies, Advisory board under Rf Government, publicly funded organizations Control: the Rf President, Government (the Presidential Chief Control Directorate, Department), Accounts C hamber of Rf, Investigative Committee Prosecutor General’s Office tion for basic for Advanced foundation for Research, Rus- bodies (govern- funds, fund for Russian Science Skolkovo, Small business Innova- ment programs) federal executive Russian founda- Grants, subsidies Infrastructure and SOEs (innovative development programs), the ministry of Education and Science (scientific technological strateg y Development: Development: the ministry of Education and Science (Scientific Technological Development forecast), Economic Developmen t (Social industry federal executive bodies (industry-specific forecasts) Approval: the Rf Governmen Collective bodies: the Presidium of Council for modernization and Innovative Development, Science Education, IAT Strategy Implementation, the IAC on Technological Development, forecasting Executive bodies: Presidential Office, Government ministries and agencies, Russian Academy of Sciences sian foundation for tion fund, regional Advanced Research, Inter-agency commission. 6 Tools Implementation Forecasting Strategy and planning Coordination Monitoring and control 1 2 3 4 5 Large companies SME Startups (creative teams) Academic environment (higher education institutions, research institutes) Targets Inter-agency team. The chart specifies key subjects of innovative development. 5 1

Illustration No. 1.3. Functional innovation policy model (2015)

10 1. From Theory to Practice: Application of Report-2015 Tools country lags significantly behind by the number of in- Aside from specific recommendations, we, along with the novation-driven companies and high-tech exports. experts polled by us, made proposals aimed at restructuring the state management system of innovative de- 4. Brain drain: Russia experiences considerably more velopment – mainly as regards the formation of uniform difficulty when attempting to attract talent than oth- priorities, raising efficiency and distributing authority, er leading innovative countries; state investment in removing overlapping functions, cascading responsibili- human capital tends to make other economies more ties and coordinating actions. For the full list of proposed competitive, thus creating an “open-looped innova- initiatives, see Report 2015. tion system” (see Section 3). All the main conceptual recommendations in Report 5. Glass ceilings: innovative start-ups and venture in- 2015 are summarized in Illustration No. 1.4. In Report vestors are faced with a lack of growth mechanisms 2016 and the planned future issues we select the most and/or access: business projects rolled out by the relevant issues (or those best suited to the topic of the local venture market are unable to achieve growth or issue) and use them as the framework for elaborat- find any entry point inside the country, so as a result ing specific action plans and allocating responsibilities they go abroad. among management agencies. In particular, Report 2016 In Section 2 of this report, we update the dashboard us- addresses the following areas of recommendations dealt ing the latest data, pausing to examine the trends of in- with in Report 2015 (highlighted in Illustration No. 1.4): dicators on the board and offer an interpretation of our Innovative markets: findings. develop measures to attract private capital to the An organizational and functional model of innovation innovation system; management – is the second fundamental analytical tool in Report 2015. It maps all key subjects of innova- develop measures to remove barriers to innovative tion policy through “management functions – manage- markets; ment methods” measurements. Each state organization reassess state programs motivating innovation involved in shaping and implementing the respective companies to access the gloabal markets solutions targets its activity either for a certain group of participants of the innovative system – educational Innovative institutions: institutions and research institutions, start-ups, medi- feed intellectual proper of state companies and um-sized and large companies – or else for coordina- state institutions into economic circulation; tion, planning and supervision of the innovation policy, as well as forecasting results. In addition, each organiza- ensure that the rights of owners/investor in innovation uses in its activity a certain set of tools – those with tion companies are duly protected. direct action (grants, subsidies, loans, etc.), indirect ac- Responsiveness of business to technology: tion (various benefits) as well as organizational and legal tools (international collaboration, stimulation of demand, make large companies more open to innovations provision of infrastructure, etc.). take measures to stimulate the creation and growth By arranging the impact targets and tools used on the of technological integrators map along the respective axes (see Illustration No. 1.3), Growth mechanisms for innovation companies: we could see the innovation policy focus areas – based on the number of institutions concerned with one or work out tools to promote innovative exports; another issue. Priority areas obviously include financial work out tools to support medium-sized and large support of academic institutions, as well as small and leading innovation companies. medium-sized business, the provision of infrastructure, consulting and information support. This analysis does Promote innovation at large companies. not mark the adequacy or quality of state support tools, supply extra tools that can be used to promote inno- but makes it possible to say that these tools are at the vation at large companies disposal of a large number of institutions, and all these institutions use them one way or another. Dashboard operationalization: On the other hand, indirect tools – tax and customs ben- cascade indicators on state authorities, develop- efits, insurance, etc. – are required by very few state ment institutions, and strategic planning docu- agencies, development institutions and other innovative ments; development agents. Furthermore, we note a gap in the work out and implement a monitoring system based area of intellectual property protection. In particular, on the dashboard and National Report. large companies do not devote any attention to this issue. Intellectual property protection is an issue that involves not only stimulating innovative activity as such, but also promoting exports of high-tech products. Interested foreign consumers will not be able to copy these products 1 For the sake of brevity, hereafter, we refer to these established but will be forced to purchase either the rights to use norms as “innovation policy”. innovations or the end product. Strengthening the state’s 2 The illustration below was not included in the final text of Report role in this area will be one of the issues that we will ex- 2015 and we decided to use it in the introductory section of this amine in this report. report.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 11 Source: BCG analysis BCG Source: operty of SOEs and state institutions eed intellectual pr Work out tools to promote innovative out tools to promote Work exports; leading out tools to support medium-sized and large Work innovation companies. F into economic circulation that the rights of owners/investorsEnsure in innovation duly protected companies are

• • • • Growth mechanisms for innovation companies innovation mechanisms for Growth Institutions ake a single list of industryake priorities and market uild a uniform system of technology priorities (technology packages) uild a uniform M B Develop a scientific and technological development based on the new strategy system of technology priorities Develop innovation additional tools to promote companies (including innovative in large and the innovation on organization elements of state support, recommendations management system, etc.) Improve the methodology and monitoring system of innovative development programs based on the innovationDetail and adopt indicators dashboard to governmentCascade the indicators agencies, development planning institutions, strategic documents and National Report. out and implement a monitoring system based on the dashboard Work

Technology policy and priorities policy Technology companies in large of Innovation Promotion operationalization Dashboard • • • • • • • • ake large companies more open to innovations companies more large ake M and growth of to stimulate the creation measures Introduce etc.) (universities, technology brokers, integrators Develop to popularize academic and business measures careers Develop a system of financial and non-financial incentives activities research to promote

• • • • Responsiveness of business to technology of business to technology Responsiveness Culture Recommendations covered 2016 byRecommendations Report Update the Innovative Development 2020 Strategy Develop and industry general planning documents strategic initiatives on developing the innovation ecosystem and improving innova - Detail the Strategy’s tive drivers environment Develop talent attraction/re-export tools for Develop basic to from the transition tools to accelerate applied research state support in favor of priority technologies Re-allocate Develop private to attract capital to the innova measures - tion system Develop to remove measures administrative and regulatory to innovationbarriers markets companies to enter to encourage state programs Reassess international markets Optimize the functions of management system subjects to improve the innovation policy coordination of developmentOptimize mandates and the range institutions to eliminate duplication and support to the uncovered of the innovationoffer targets ecosystem KPIs Determine and approve the Strategy’s KPIs valuesDetermine the target of the Strategy’s

Markets coordination policy of the innovation Improvement • • • • • • • • • • • – 2020 Strategy Development Optimization of the KPIs Innovative • • Innovative Development Strategy Development Innovative R&D effectiveness (idea/invention) R&D effectiveness priorities Innovation Innovation monitoring — environment Innovation policy policy Innovation ‘Openness’ of the ‘Openness’ Foundation of the Foundation innovation system innovation Innovation system system Innovation ‘innovation pyramid’ pyramid’ ‘innovation management system management

Illustration No. 1.4. Main groups of initiatives proposed in Report 2015.

12 1. From Theory to Practice: Application of Report-2015 Tools 1.2. REPORT-2016: TRANSFORMING THE CONCEPTS INTO A SYSTEM OF INNOVATION POLICY MEASURES

n Report 2015 we limited ourselves to developing in- What should the organizational mechanism for effi- Istruments and framing higher-level recommendations cient implementation of the proposed initiatives look for the areas of action of the innovation regulator. In this like and what management changes should be made issue of the report we also intend to develop in detail the subsequently? How can a viable incentive and account- operationalization of the conceptual recommendations ability mechanism be built in for every member of the set forth in Report 2015, which are partially summarized system? How should progress be measured and tar- in Illustration No.1.4. gets be set? We will address these issues in Section 4. The keynote theme of the past issue that there is no other As a result, we expect Report 2016 to become a docu- realistic path of development for the country’s econom- ment that will have a direct impact on the state’s inno- ic development except innovation will be developed in a vation policy in the very near future. Unlike Report 2015, practical manner in the new report by addressing the this issue contains a minimum of theoretical conjecture claim that the regulator needs to take actions that would s and maximum practical recommendations that have lead to swift and clear results (as well as qualitative and value only if results are implemented swiftly. sustainable) for all participants of the innovation system and also for the population at large. In financial terms, one may speak of actions conducive to a reduction in the payback period of infrastructure and specific expenses, thus increasing the overall value of the state’s “innovation project”. Right now, when the long-established model of the country’s economic development is exposed to the most serious tests that point to the need for change, is the ideal time for a breakthrough in global innovation competition. The state can and must provide this breakthrough – which has been achieved by many of today’s leading innovative development countries. However, to meet this goal the state should not resort to the directive method, which has proven ineffective on numerous occasions in recent years, but rather strive to effectively promote innovation of economic players. The state’s active, targeted, responsible and ultimately effective participation in the country’s innovative development is the main introductory idea of Report 2016. This approach to the problem entails a number of primary issues, which, if not addressed, will not allow the regulator to devise a realistic action plan. In Report 2016 we frame these issues and attempt – on the basis of vast application-oriented material – to address these issues, providing answers that could be turned into specific recommendations. The sequencing of issues that we shall review is as follows: Where and at what stage of development should the state focus its innovation policy measures in order to achieve the most rapid, widespread, all-encompassing and sustainable result: in the scientific or business environment? in large or small forms of business? We will give preliminary answers to these questions in Section 2. In what direction should efforts be focused? What barriers to innovative breakthrough need to be overcome and what tools should be should to reach this goal? This topic will be addressed in Section 3.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 13 F ROM CREATING CONDITIONS 2 TO PROMOTING GROWTH: PROBLEM DEFINITION

14 1. From Theory to Practice: Application of Report-2015 Tools 2. FROM CREATING CONDITIONS TO PROMOTING GROWTH: PROBLEM DEFINITION

2.1. READY FOR TAKEOFF: WHERE IS THE INNOVATION SYSTEM MOVING?

he efforts of the Russian state in the area of innovative the dynamics and degree of innovative development, re- Tdevelopment undertaken over the past 5-6 years since spectively (there is not such component in the third rating the adoption of IDS-2020 have plainly yielded positive re- - Doing Business - since this rating reflects only the con- sults as shown in global ratings such as Doing Business ditions created by the state), the picture becomes slightly of the World Bank, the Global Innovation Index” of INSEAD less optimistic. business school and the Global Competitiveness Index of Thus, in the GII rating, most of the growth occurred in the the Davos Economic Forum. Innovation Input Subindex component, which reflects in The Doing Business rating contains a target indicator for the same broad sense the country’s investment in inno- two key state initiatives, the National Entrepreneurial Ini- vative development, and also includes efforts to create a tiative and the Innovative Development Rating for the Rus- favorable innovative environment; in terms of this compo- sian regions. It shows that Russia moved from 123rd posi- nent Russia’s position rose during the same six years from tion in 2011 to 51st position in 2016, thus reducing the lag 82nd to 44th, i.e. the country improved its performance al- behind leading countries, which have also not been stand- most two-fold. As for the second component, which re- ing idle during that time, and have improved the way busi- flects innovative activity as such – the Innovation Output ness is conducted by almost two-fold. The Doing Business Subindex – Russia improved its positions only slightly, up rating refers only indirectly to innovations – it measures from 51st to 47th spot. the success of the state’s actions in providing a business The CGI splits countries into three groups depending on environment to all types of companies. Nonetheless, a fa- the main driving force of their economic development at vorable environment is the linchpin of our dashboard and this stage: a key prerequisite for innovative development. countries driven by production factors; According to the Global Innovation Index (GII) Russia has improved its performance over the past six years, moving countries driven by production efficiency; from 64th to 43rd position, i.e. up about one and a half countries driven by production innovation. times1. Almost the same picture can be see in the Glob- al Competitiveness Index (GCI), in which Russia rose from The first group includes very poor countries that survive by 63rd to 43rd over the same period (see Illustration No. 2.1). offering cheap workforce or natural resources; countries of the second group compete by way of efficiency – i.e. they However, when studying the component and the accom- produce something which is already widely available, but panying indicators of the GII and GCI ratings, which reflect they do this better than countries of the first group; and

2006 2008 2010201220142016 40 45 49 43 51 51 54 48 56 51 53 63 60 58 63 63 64 64 64 62 68 66 67

92 100 96

106 112 120 120 120 120 123

140 CGI GII Db

Ranking Источник: ежегодные выпуски индексов «Doing Business», «Global Innovation Index», «Global Competitiveness Index»; анализ BCG Illustration No. 2.1. Trends in Russia’s positions of the ratings Doing Business, Global Innovation Index, and Global Competitiveness Index

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 15 only countries of the third group offer the world innovative solutions, i.e. compete by creating new products and technologies. As of 2010 Russia was ranked in the second group of countries and was unable to reach the first group over the next six years. Thus, having evaluated the state’s efforts to put the country’s economy on an innovative path of development, global ratings have not recorded great headway from these efforts and highlight the weakness of the innovation economy as such. Judging by trends in the ratings, the country has not been able to achieve an “innovation breakthrough” over the past five-six years – since the adoption of IDS- 2020. The initial indicators on our dashboard, examined in detail in Report 2015 and summarized in Section 1 of this document, broadly confirm this picture: the dashboard showed a relatively well developed educational and infrastructure environment amid very weak innovative activity at all stages of the “funnel”. In this report, we present revised dashboard indicators. The revised results are shown in Illustration No. 2.2. The green highlighting shows the indicators that showed improvement – in these areas Russia developed at a faster pace than leading innovation leaders. Conversely, the indicators marked in red show where Russia fell behind. The revised panel shows that the trends seen in past years continued last year: environment indicators improved, activity indicators were variable and did not improve on the whole. More detailed trends can be seen in Illustration No. 2.3., where we show not only the dynamics for dashboard indicators, which reflect the gap between Russia’s positions and the fifteen leading innovation countries (these data frequently show a lag of 1-2 years, since comparative data for the various countries are late), but also the absolute changes in these indicators using the most recent data that give an idea of recent trends. This year we can see an improvement on the most fundamental, institutional level. The dashboard records progress in such indicators as quality of the protection of human rights, how easy it is to set up a business and pay taxes, and other factors that exert a positive impact on the overall environment for innovative activity. Furthermore, the dashboard does not record explicit recovery of innovative activity; trends remain mixed and there is no discernible vector of change. Some key indicators demonstrate a decline – specifically patent activity contracted, total R&D expenses fell, and the number of innovation companies decreased. We do not observe any signs of a major recovery in the innovation economy. Given the improvement in the innovative environment, the lack of activity requires interpretation and explanation. There is reason to believe that the improved environment 1 A change in methodological calculation, i.e. the addition of new in- (but not activity) is directly related to specific targets and dicators in order to increase the objectivity of the overall result, actions taken by the state over the past 5-10 years, which partially helped improve Russia’s ratings. we will examine in Section 2.22. 2 Another factor which evidently has an impact on certain aspects of the environment is well-being of the oil industry, which, despite several interruptions, prevailed until 2014; we do not analyze this factor in the report since is not associated with the innovation policy as such.

16 2. From Creating Conditions to Promoting Growth: Problem Definition Source: BCG analysis Assessment of reading skills, knowledge of maths and basic scientific results Innovation Quality of regulation Rule of law E-government development Avoidance of uncertainty No data No data on dynamics Intensity of competition n/a Size of the innovation-driven economy High-tech exports Intellectual property exports Return on investment in innovation Efficiency of state support for exporters Number of innovative companie s headcount of innovative companies Government participation in demand for innovative products Russia’s ranking in the Global Innovation Index Ambition Tolerance Indicator not updated Indicator updated Russia’s pos. in the QS World University Ranking s Compensation of teachers Education expenditur e Quality of logistic services Assessment of environmental policy Availability of scientists and engineers Individualism Pragmatism Quality of investor rights protection barriers to product export Simplicity of taxation

2 2 Customer experience maturity hierarchy Availability of training services Scientific and technical publications Number of students per teacher Commercialization Significant positive dynamics hypothesis or expert judgement due to lack of data ХХХ Significant negative dynamics ХХХ Venture investment amount Amount of venture investments made by corporate funds Capital efficiency of venture funds Number of startup s Investment in intangible assets Demand for technology Available capital of venture funds Overall labor productivity Labor productivity in non-commodity industries Growth of the total factor productivity 1 Favoritism in the decisions of public official s Quality of property rights protection Ease of company registration Citation index Quality of research institutes Quality of education Migration of human capital Power generation Access to ICT No dynamics high current performance Availability of funding (venture capital, private equity, debt) Cluster maturity (geographical concentration of suppliers and manufacturers supplementary products ) Recognition of the prestige research work Recognition of the prestige entrepreneurship 1 Markets: Idea/Invention Public administration efficiency Ease of insolvency resolution Intellectual property protection Positive dynamics Insignificant gap Infrastructure: Public education expenditure Graduates with degrees in engineering and research International cooperation of institutes Culture: Number of worldwide patents granted Quality of patents granted Return on R&D expenditure Conversion of patent applications into patents R&D expenditur e R&D expenditure in the private sector R&D expenditure in the public sector National patent activity Worldwide patent activity Employment in R&D (headcount and structure) Research cooperation Global leadership in high-tech markets Employment in the innovation-driven economy Institutions: n/a Knowledge: 1 Stages Lagging Leading Long-term Coincident Coincident Largest gap vs. developed countries Negative dynamics Gap dynamics vs. other countries (taken into account if there is a significant change, i.e. 5% and more) Taken into account in case of data update the primary source starting from 2014 1 2 Drivers activity support Results Economic Innovation Innovation implications of innovation environment

Illustration No. 2.2. Revised dashboard

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 17 Source: BCG analysis BCG Source: Comments ay 7, 2012): increase in the compensations to researchers for for in the compensations to researchers 7, 2012): increase ay M est Available Technology Act, the Waste Actest Available Technology ixed indicator with a survey 80.6 to 81.6 ixed slightly from rose component. The index B M ixed indicator with a survey 50.8 to 56.7 ixed from rose component. The index improved, the ranking from it rose indicator with a surveyixed component. Russia’s indicator with a surveyixed improved component. The ranking the 88th to from indicator with a surveyixed stable at 92 remained component. The index M M M M (2016/15) Survey indicator. The index fell from 3.5 to 3.1 from fell (2016/15) Survey The index indicator. the same (5 out of 7 points), gap (2016/15) Survey The absolute indicator remained indicator. widened due to the growth in peer countries (2016/15) Survey 3.1 to 3.4 The gap narrowed from rose by 22%, the index indicator. 53.5 to 83.5. Several from bills were rose environmental (2015/14) Survey The index indicator. adopted: the 3.75 to 3.68 while other countries slightly from fell (2016/15) Survey The index indicator. growth demonstrated (2016/15) Survey 3.5 to 3.7 The gap narrowed from rose by 6%, the index indicator. (2016/15) Survey 3.96 to 4.23 The gap narrowed from rose by 10%, the index indicator. (2016/15) Survey The gap narrowed by 4.3 to 6% with a slight absolute growth (from indicator. 4.5 points) stable, change for education institutions remained in general (2015/13) The student/teacher ratio the worse in peer countries 2014 8.2 to 9.3. Execution in the number of publications per GDP bn (PPP) from (2015/14) An increase No. 599 ( Decree of Presidential scientific publications in international journals in the number of state-financed openings, lower(2014/12) An increase cost of attendance for technical degrees (2015/11) Lower and secondary over costs on pre-school budget (from 30 education in the federal to 1 bn rubles) by 2.82 to 2.96 rose 6%, from (2016/15) Survey The index indicator. (2015/14) (2015/14) 62nd to the 48th position (2014/13) 74th position (2015/14) (2015/2014) the 27th to 35th place in (2016/2014) Survey from The position worsened indicator. ranking 1 1 dynamics Updated absolute Updated 2 3 1 1

other countries Gap dynamics vs. Gap dynamics vs. Traffic lights Traffic of the 2016 NR 4 Traffic lights Traffic of the 2015 NR New/changed indicator, the traffic lights for the 2015 NR are based on historical data the 2015 NR are lights for the traffic New/changed indicator, 4 Indicator 2012/2011; 3 2013/2012;

2 aturity of clusters

a Availability of funding M Consumership F voritism in the decisions of public officials Ease of insolvency resolution Simplicity of taxation E-government development Competitive intensity policy Assessment of environmental Quality of education institutes Quality of research servicesAvailability of training Number of students per teacher Scientific and technical publications in engineering and with degrees Graduates research Public education expenditure Quality of investor rights protection efficiency Public administration Ease of company registration Innovative environment Innovative 2014/2013; 1 Illustration No. 2.3. Overview of changes in dashboard indicators

18 2. From Creating Conditions to Promoting Growth: Problem Definition Source: BCG analysis BCG Source: Comments igher share of GDP due to lowerigher share of the ruble devaluation GDP in USD as a result enchmark countries showed higher growth due to the private sector. In Russia, In Russia, enchmark countries showed higher growth due to the private sector. H B (2016/15) The ranking improved from the 48th to the 43rd position thanks to the “Institu - improved position thanks (2016/15) The ranking the 48th to 43rd from areas and “Creative content” tions” revenues driver by in USD rose export is higher exports 29%. The key (2015/14) Technology of engineering services (2015/14) by 914 to 793 patents granted 13%, from in the number of PCT (2014/13) A reduction in the number of new(2015/14) A reduction funds, in the amount of investment made and the capital of new funds. Lower of global players availability of funding due to the exit (2015/13) The 2014 fall was caused by in patenting of inventions the drop (utility models level).and designs at a comparable to the level In 2015, the activity increased of 2013 sharply due to the (2015/13) In 2014, the number of worldwide patent applications fell ruble devaluation, to the level but in 2015, it increased of 2013 (2015/13) the internal spending on scientific R&D (in % of GDP) stabilized in 2015 Development (2015/13) In 2014, the second stage of Science and Technology government vs. was the in the public spending Russia launched; an increase program budget allocations in 2015 are in benchmark countries. In Russia, reduction/stability with those of 2014 comparable (2016/15) Survey The gap narrowed by 28% due to the fall in benchmark indicator. countries vehicles, and oil products, machines of coke in the production drop (2015/14) The largest and equipment 0.8% to 0.9% of intangible assets in GDP grew from (2015/14) The share by(2016/15) Survey The gap decreased 5% due to the lower of peer average index indicator. countries (2016/15) Survey 2.95 to 3.32) The gap narrowed from rose by 13% (the index indicator. 1 dynamics Updated absolute Updated 1 1 1 1 1 n/a n/a countries Gap dynamics vs. other Gap dynamics vs. n/a n/a Traffic lights Traffic of the 2016 NR Traffic lights Traffic of the 2015 NR Indicator

igration (retention) of human capital (retention) igration igh-tech exports

Russia’s ranking in the Global Innovation ranking Russia’s Index H Number of worldwide patents granted National patent activity M Intellectual property exports Intellectual property investment amount Venture patent activity Worldwide R&D expenditure in the public sector R&D expenditure cooperation Research Number of innovative companies Investment in intangible assets governmentDirect participation in demand innovativefor products

Results, implications Results, conversions activity, Drivers, Conversions 2014/2013 1 Illustration No. 2.3. Overview of changes in dashboard indicators

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 19 2.2. THE STATE’S INNOVATION POLICY TODAY

he weak results that we highlighted in Section 2.1 revitalize activity aimed at implementing innovative Tshould be interpreted first and foremost in the con- policy to be carried out by state government bodies text of innovation policy – so that it at least becomes clear of constituent entities of the Russian Federation and what the state needs to do or how to change measures it municipal authorities. has already taken to reach a qualitatively new dynamic of In order to fulfill the tasks in IDS-2020, areas were iden- innovative development. tified for the improvement of legislation, methods and First of all, let’s see what group of economic agents on the target size of financial support, the main areas of which the state’s main initiatives should be focused un- actions for the Government and ministry and a list of der the current innovation policy. We have identified five measure. of such groups of agents – which in reality may actually In addition, the main indicators and target indicators overlap: were established for the implementation of IDS-2020; (1) the state itself, state management system of the in- harmonization of these indicators with our dashboard – novation agenda; an issue addressed in the Appendix to this report. (2) the academic environment, i.e. science and educa- As regards the academic environment, steps have been tion as well as the “innovative spirit” of society as a over the past few years to restructure the current sys- whole; tem. The decision to do this took a long time and some new programs and organizations were also created in an (3) entrepreneurs, start-ups and venture investors; effort to modernize and support science and education. (4) mature companies that would be small, medi- To remind, the major initiatives may be summarized as um-sized or large; follows: (5) other peripheral groups and areas – for example, the reorganization of the Russian Academy of Sciences international community. (RAS) was carried out, with the main purpose being to arrange funding for institutes, laboratories and individ- A brief analysis of the actions of state agencies, which we ual scientists on new principles, and also to implement provided in Report 2015, shows that the priority areas of reform in the human resource system in science; the state’s innovation policy from 2010 to 2015 were (aside from self-organization and improvement of the state a number of state support programs were initiated for management system as such) the academic environment education and research, for example “Applied Bache- and start-ups, while mature business was not specially lor’s Degree”, “Global Education”, “5-100”, a program targeted1. for fundamental scientific research, and a program for identification of talent; As regards state management, IDS-2020 was approved, thus determining many subsequent areas of actions, in- the Federal Agency for Scientific Organizations was cluding many of the activities highlighted below. created, as well as the Russian Scientific Fund, the Fund for Promising Research, and the Zhukovsky Sci- The avowed goal of IDS-2020 is to place the Russian entific Research Center. economy on the path of innovative development by 2020. Pursuant to the achievement of this goal, the fol- Improvement of the business environment, conditions lowing tasks were set: for doing business and start-up institutions have been another focus of innovation policy in recent years. As a re- develop HR potential in the areas of science, educa- sult, an entrepreneurial infrastructure was created in all tion, technology and innovation; senses of the word – territorial, financial, informational, raise the innovative activity of business and speed up and regulatory. the emergence of new innovation companies; innovative territorial clusters were built, including the phase in to the greatest possible extent advanced Skolkovo Innovation Center, the Innopolis special eco- technologies in the activities of state management nomic zone; the Technological Valley of the Moscow agencies; State University is currently being built; create a balanced and steadily developing R&D sec- the system of development institutions (Skolkovo Foun- tor; dation), AO RVC, AO Rosnano was created, along with the Innovation Support Fund, the Fund for Infrastruc- foster transparency of the national innovative system ture and Educational Programs, the fund EEB Inno- and economy, while integrating Russia into global vations2, etc.), which have already funded hundreds of processes for the creation and use of innovations; innovative projects and start-ups, while acting as inves-

20 2. From Creating Conditions to Promoting Growth: Problem Definition tors in private venture funds and promoters of commu- state, support for education and science, the creation of nication between funds and entrepreneurs; favorable conditions for startups and venture investors. The surveys which we conducted among experts, as well As part of the National Enterprise Initiative (NEI) a num- as our own analysis of the state’s innovative activity iden- ber of measures were implemented for the purpose of tified the key initiatives outlined below. lowering administrative barriers; state programs were developed, including Economic Development and Inno- As part of the improvement of state management work vative Economy, Development of Science and Technolo- on developing strategic documents continued: gy, Development of Industry and enhancing its Compet- IDS-2020 is being continuously adjusted and updated in itiveness, etc. line with the Prime Minister’s assignment as of Decem- the Agency of Strategic Initiatives was established to ber 2014.VIII The updating of IDS-2020 is necessary due support the development and implementation of Na- to substantial changes in the social and economic en- tional Enterprise Initiative (NEI); under the auspices of vironment and the delay in achieving projected targets NEI promising areas were selected for entrepreneur- by many key indicators. It is now time to revise both the ial activity (“markets of the future) and promising ways target values and the strategy as a whole (see Illustra- and means to support them (“supporting areas”), road tion No. 2.5 below). maps were developed and reviewed for the develop- Furthermore, in 2015-2016 work on of a new document ment of key markets and supporting areas. “Scientific and Technical Development Strategy until As for other major initiatives regarding mature business 2035” (STDS-2035) got under way. (STDS-2035)x. The we note the adoption of the Innovative Development Pro- STDS-2035 Strategy was assigned a target setting sta- grams (here and hereinafter abbreviated as IDPs) for state tus along with the National Security Strategy and Social companies in 2011, although their efficiency has been and Economic Development Strategy of the Russian called into question since then (for example, se Illustra- Federation. STDS-2035 sets the following goals: tion No. 2.4. and proposals to update them were made)3. Focus primary efforts and resources on ‘big chal- It should also be noted that there is a long list of benefits lenges’ that are particularly important to the state applicable to innovative activity, which are handled by the and the nation within the framework of scientific re- Ministry of Finance of the Russian Federation4 – such as search and innovative technology projects. benefits related to R&D expenses, accelerated depreci- Build a unified and comprehensive social institution ation, benefits for IT companies (in all, about 70 types of integrating science, technology and innovations to benefits). However, experts note the limited effect from ensure cooperation between science and innovations application of such benefits in the absence of any real in- in the Russian Federation. centives for innovation on the part of mature and especially large companies, since they are not used or used in Boost the operating efficiency of Russian research a distorted manner because the accompanying conditions organizations, researchers and developers as well as (formal and informal) are ultimately inconvenient. their networks and groups. The state’s activity in 2015-2016 – since the release of the Stimulate fundamental and breakthrough research previous edition of the report – in the area of innovation and developments, build up future scientific and policy confirmed the ongoing vectors of innovation policy technological reserves, while elaborating the under- aimed primarily at planning and self-organization of the standing global natural processes.

“The development of innovative development programs at state companies began in 2011. At the end of the first five years of their implementation it became clear that the system required improvement: both in expanding the requirements for program content and in strengthening control over their implementation. Expert reviews of the innovative development programs for six companies showed that the approach to implementation of IDPs remains quite formal, while it is impossible to assess the effect of funds spent on innovation due to the lack of alignment between the goals, measures and key performace indicators (KPIs) of the programs with the strategies of companies and between each other. A new stage in work with innovative development programs, which calls for updating the programs and implementing a more efficient system to evaluate their realization, with involvement of the expert community in the process, was launched by the Government in December 2015”. “Innovation KPIs: guidelines for state companies”, Open Government website, 2016vi

“Experience from past years has shown that the approach to implementation of IDPs remains quite formal, while it is impossible to assess the effect of funds spent on innovation due to the lack of alignment between the goals, measures and key performance indicators (KPIs) of the programs with the strategies of companies and between each other. It should be borne in mind that the management incentive system is linked to the KPI and is built into the long-term development program of companies, so our task is to build the other remaining modules into this system. Upper-level efficiency indicators of innovative development programs should be an integral part of the upper-level performance indicators of long-term development programs Mikhail Abyzov, Open Government website, 2016vii

Illustration No. 2.4. Interim results of Innovative Development Programs for state companies

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 21 “<…> Attention needs to be focused on problems that arose during the first stage of this strategy. According to federal executive bodies and the Analytical Center for the Government, we have 45 target indicators, one-third of which have not been met, while some indicators lack reliable data. Despite a number of fairly successful projects, there remain significant disparities in the innovative development of various regions and sectors. This is indeed the case: the country is diverse and the difference in innovative development is truly substantial. In this context, it is important to analyze the reasons and then taking into account the current economic situation (which, evidently, cannot be ignored), to update the strategy itself”. Prime Minister Dmitry Medvedev at a Meeting of the presidium of the Presidential Council for Russia’s Economic Modernization and Innovative Development, 2014 ix

Illustration No. 2.5. The Prime Minister on the need to update IDS-2020.

In order to achieve its goals, STDS-2035 suggests com- Pursuant to the instructions of the President, the in- pleting a set of tasks listed in full in the draft strategy. stitutes of Federal Agency for Scientific Organizations STDS-2035 also lays down principles, mechanisms and (FASO) were reorganized in order to join isolated insti- stages of fulfillment of these tasks as well as plausible tutes into more competitive and viable Federal Research scenarios for scientific and technical development de- Centers (FRCs). After the first stage of the reform, about termined by certain parameters underlying the target- 100 scientific organizations merged into 24 FRCs, which ed indicators and monitoring system. Apparently, these have already been granted 1.15 billion rubles from the indicators will require harmonization, including adjust- state budget. The establishment of the FRCs has already ments made to the IDS-2020 indicators. yielded a positive effect which will continue to gain momentum not only as part of restructuring but also as a Science and education systems have also undergone network cooperation model, where scientific institutions substantial changes over the past year (including previ- form a cooperative group for cooperation on a specific ously launched initiatives) as follows: project, while maintaining their status as independent Amendments were made to Federal Law No. 270 in legal entities (see Illustration No. 2.6). relation to the funding mechanisms used for scientific A merger of the Russian Foundation for Humanities activities and operations of scientific research support (RFH) and the Russian Foundation for Fundamental funds. Three new definitions were added to the Law: Research (RFFR) was carried out to increase the vol- “scientific project”, “shared scientific equipment cen- ume of interdisciplinary researchxii. According to the ter” and “unique scientific facility”, with an overview of Deputy Minister of Education and Science of the Rus- funding and other support procedures. These amend- sian Federation Lyudmila Ogorodova, the budgets of ments are aimed at facilitating the import of knowl- foundations will be increased in 2017. “While in 2016 edge, technologies and tools for their implementation 10.9 billion rubles will be allocated to the RFFR and the from abroad. RFH will receive 1.8 billion rubles under the state pro- As part of the state program Development of Science gram For Science and Technology Development, these and Technology, in 2016 as much as 187 billion rubles figures will rise to 18 billion rubles and 2.3 billion rubles (vs. 167 billion rubles in 2015) was allocated to conduct in 2017, respectively”. fundamental research, equip laboratories, issue grants The concept was approved for a new draft Federal Law to leading scientists, including 29 billion rubles provid- “On scientific, scientific and technical, and innovative ed as grants to finance projects approved by technology activity”, which is being worked outxiii. Together with platforms. This state-sponsored program was devel- the Duma members, the concept was also developed oped in 2013 and provides for financing until 2020. for more than 30 months by representatives of the Rus- Implementation of the 5-100 Program designed to en- sian Academy of Science, the Association of State Sci- hance global competitiveness of Russian universities entific Centers, the Ministry of Education and Science also continues. The seven-year program was launched of the Russian Federation5, the Ministry of Economic in May 2013 and pursues the following goals: (1) to en- Development6, the Ministry of Finance and the Public sure that at least five Russian universities rank among Chamber of the Russian Federation. Its key tasks are: the top 100 global universities (Times Higher Education, minimize prescriptive management in this area, create QS, ARWU ratings); (2) to raise the share of foreign stu- competitive and comfortable conditions for studying dents to at least 15% of the total number of enrollment sciences, providing opportunities for self-development in each institution; (3) to reach at least 10% in terms of and self-management within the national scientific and expat employees on each institution’s teaching staff. In technical system, cultivating relations between its par- October 2013, universities that were selected by public ticipants at all stages of the knowledge life-cycle. tender submitted their Roadmaps to Board members, A project designed to support development of a net- i.e. the schedule for implementing their programs to work of science and technology parks for children was enhance competitiveness. In 2015, 14 institutions were launched under the strategic initiative “New Model of granted a total of 10 billion rubles, while as much as 11 Supplementary Education for Children” supervised by billion rubles was allocated to 21 institutions in 2016. the Agency for Strategic Initiatives (ASI). The initiative In addition, the following new programs were also initi- aims to create a sustainable multi-tier system of ex- ated: tra-curricular activities for children and is based on the

22 2. From Creating Conditions to Promoting Growth: Problem Definition “The first stage of the planned restructuring allowed us to form more than 20 new research centers. Over 100 institutes, which have traditionally worked as part of the Russian Academy of Science, were engaged in the process. The first stage of this work has been completed. Now, the process of initiatives launched by our teams has been gaining momentum. To date, we have already received proposals on various forms of integration from 40% of the institutes, so I think that new projects will likely take place. In each case we perform a detailed study of the proposed cooperation, and by no means are all of the initiatives approved. A project may only be implemented if there is a certain goal, which is clear to the scientific community and is supported by the Academy of Science. If it is some kind of routine association that is not capable of improving the quality of research, such projects will most likely be rejected”. Mikhail Kotyukov, Head of the FASO, 2016 xi

Illustration No. 2.6. Restructuring of FASO institutes

“Today, four students from Moscow signed employment contracts with Moscow-based manufacturers providing them with the opportunity of future employment after they graduate from a higher education institution, a college or a children’s science and technology park with such enterprises as Sputnix (a Russian manufacturer of microsatellite components and technologies), Compass (a developer of on-board navigation equipment for the Russian Air Force and Space Forces), AiTek (a developer of smart information systems), and Profilum (an IT company operating in the field of navigation through professions and education). The number of such contracts signed is expected to reach 50 before the end of 2016”. Marina Rakova, the Head of the ASI Initiative New Model of Supplementary Education for Children and the chief ideologist of the Project for establishment of a network of Quantorium science and technology parks, 2016 xiv

Illustration No. 2.7. Quantorium children’s science and technology parks

partnership between public and private organizations Lively communication between development institu- and targets implementation of advanced supplementa- tions also continued and included annual events for ry education programs in order to discover and develop young entrepreneurs. Here are some examples. talents in each and every child. Specifically, the initiative The federal competition Startup Village took place provides for opening Quantorium science and technolo- on June 2-3, 2016 with over 20,000 contestants sign- gy parks throughout the country. One such park, with a ing up, 500 journalists and 1,500 investors, many of total area exceeding 1,000 sq m, was launched in Sep- whom arrived from both neighboring countries and tember 2016 in Moscow (see Illustration No. 2.7). non-FSU countries; around 1,000 people applied to As part of maintaining a favorable business environ- participate in the contest, 278 of them made it to the ment, establishing and developing technology startups semi-final, while 26 of them entered the final round and developing the venture market, previously launched and received a grant worth 300,000 rubles. programs also continued as follows: The annual Open Innovation Forum was held in No- State program “Economic development and innovation vember 2015; during the five days of the proceedings economy” was first announced in March 2013 with a 115 business events took place with over 200 speak- planning horizon until 2020 and was aimed at main- ers from more than 30 countries around the world. taining a favorable business climate and business con- The Forum’s attendees discussed the influence ex- ditions, enhancing innovative activity in the business erted by technologies on operating efficiency, the sector as well as boosting the efficiency of state man- ecosystem, education, health and the entertainment agement. Under this state program funds were allocat- industry. First-stage Roadmaps of the National Tech- ed as follows: nology Initiative (NTI) were also presented at the Fo- rum (see below). In 2015, 19 billion rubles was earmarked for development of the Skolkovo Foundation, where 19 compa- GenerationS, an annual federal accelerator for tech- nies opened R&D Centers in the Skolkovo Village and nology startups, first took place in 2013 and in 2015 eight new laboratories were opened at SkolTech; the number of applicants reached a record number of 2,566 from 14 countries, 141 projects were se- In 2015, 5 billion rubles was allocated to the Inno- lected as participants for corporate accelerators in vation Support Fund with a view to supporting small seven areas. Over 20 Russian corporations acted as innovative businesses and 619 of such small compa- customers and industrial partners for GenerationS, nies received financial assistance; whose interests were upheld when the winners were In 2016, the SME sector will receive total funding of selected and during the project acceleration pro- 9.61 billion rubles to be allocated among the con- cess. GenerationS-2016, the active phase of which stituent entities of the Federation through tenders, will continue from November 2016 until March 2017, including a tender by the Federal Agency for Youth will maintain the traditions of some acceleration con- Affairs (Russian Youth) aimed at selecting constituent cepts, like Smart City and Power&Energy, although entities to participate in the sub-program “For Devel- other concepts are also expected to be incorporatedxv. opment of Small and Medium-Sized Enterprises”.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 23 The Director of Young Professionals at ASI Dmitry Peskov, outlined the National Technology Initiative (NTI) Strategy at a plenary session of the strategic initiative forum Russia on the Global Map until 2035. Challenges in the epoch of a new technology lifestyle” held on July 21 at the Exhibition of Achieve- ments of the National Economy. “If we learn how to export to global markets the security solutions worked out by small NTI tech companies in cooperation with the relevant ministries, we will be able to conquer a market we could not even dream about as soon as 2020” – stated Dmitry Peskov. His vision of 2035 vision encapsulates a world of decentralized networks capable of making humanity’s brightest dreams come true On the other hand, it will be a world of conflicting hierarchies that sells two things: fear and relief from this fear, i.e. a sense of security. Dmitry Peskov noted three key criteria that can be used to identify NTI progress: value-based management (value is more important that goals, people are more important than institutions, vision is more important than documents); fast-track decision-making, which will become a competitive advantage for companies in 2035, means that the shift from idea to investment decision and project implementation will take days or even hours instead of a year of six months; concentration and development of competitive solutions which leverage the country’s specific cultural features. “Tapping into this rationale, i.e. building trust with a focus on speed, concentration and our specific cultural features, NTI markets and our joint solutions may well account for 50% of the Russian economy by 2035” – Dmitry Peskov stressed xvii

Illustration No. 2.8. National Technology Initiative Strategy

Some other new important initiatives were also launched: sian Federation7 in cooperation with the Ministry of Economic Development and Rusnano developed a Implementation of New National Technology Initiative concept to create an industry fund for innovative tech- began: nologies in the Fuel and Energy Complex (FEC). The The NTI Strategy is now being developed (see Illus- fund is designed to promote development of Russia’s tration No. 2.8). The first draft strategy was worked fuel industry based on innovative solutions. Invest- out during the fifth Foresight Fleet in May 2016xvi. The ments in the fund are expected to be made gradually NTI strategy included nine roadmaps, five of which along with selecting higher-priority projects for the (AeroNet, AutoNet, MariNet, NeuroNet, EnergyNet) FEC under the roadmap for implementing innovative have already been approved by the Presidium of the technologies and advanced materials in FEC market Presidential Council of the Russian Federation on sectorsxix. Economic Modernization. In January 2016, Rusnano established two new in- Pursuant to an assignment from the Russian Govern- vestment funds with a focus on specific industries: ment, RVC has started to set up the NTI project of- (1) a USD 500 million fund established together with fice in terms of project management, organizational, Chinese Zhongrong International Trust will be in technical and expert-analytical support, information charge of searching for projects in the electric pow- and financial support for the development and imple- er and O&G sectors as well as microelectronics and mentation of scheduled events (roadmaps) and NTI biotechnologies; (2) a USD 2 billion fund established projects. jointly with Indian NIIF will invest in dual-purpose high-tech solutions and products of the military in- In August 2016, RVC registered the NTI Support Fund dustrial complex. with the aim of funding projects slated for implementation in the roadmaps; the 2016 Federal Budget In October 2016, the State Duma approved in the first provides for about 8 billion rubles to be allocated for reading a governmental draft law on extending tax execution of NTI projects. For the time being, the fund benefits applicable to transactions involving securities has already approved funding for four NTI roadmaps issued by Russian high-tech companies. The prefer- approved by the Council for Economic Modernization ential personal and corporate income tax rate of 0%, (see above). which used to apply to income from the sale of shares in high-tech sector players after ownership for at least RVC and Skolkovo have signed a cooperation roadmap five years now also applies to bonds and units, while the for 2016-2017, including cooperation under the NTI ownership period and has been reduced to one year. Strategy. The roadmap provides for the establishment of a joint venture fund, the launch of an investment con- As regards the promotion of innovation in the mature sulting center, joint efforts for the development of inno- business sector, the state continues to focus its efforts in vation ecosystems and support of high-tech startupsxviii. the following areas: In line with IDS-2020, work is now underway to estab- A number of initiatives are being implemented under lish state-run industry venture funds that are expected the state program For Industrial Development and Im- to promote faster development and modernization of provement of Industrial Competitiveness. This state top-priority industries. program was developed by the Ministry of Industry and Trade of the Russian Federation8 and is aimed at for- In September 2015, the Ministry of Energy of the Rus- ward-looking establishment of innovative infrastruc-

24 2. From Creating Conditions to Promoting Growth: Problem Definition ture to be used as the framework for developing new also includes the Russian Agency for Export Credit and industrial sectors as well as lowering regulatory bar- Investment Insurance (EKSAR) and Roseximbank JSC. riers and ensuring parity conditions when marketing The key functions of the single window REC are: finan- innovative products. In 2015-2016: cial (lending, insurance, warranties) and non-financial support (consulting and information services) to ex- 2.3 billion rubles was subsidized for engineering de- porters, especially those operating in top-priority sec- velopment and establishment of over 30 engineering tors, such as: machine building (including automotive), centers; agricultural complex, IT, microelectronics, consumer Geographical Information System (GIS) was designed goods, FEC and chemical industry, construction and the for industrial parks to enhance their investment ap- wood processing industry. peal; The Industrial Development Fund (IDF) began to oper- investment loan interest rates and R&D expenditures ate in 2015. IDF was established in 2014 by initiative of are also subsidized. the Ministry of Industry and Trade as a tool for modernization of the Russian industrial sector, launching new The Government has launched a new phase in the im- manufacturing facilities and promoting import substi- plementation of Innovative Development Programs tution. The Fund provides preferential co-funding for (IDPs). This phase calls for updating of the programs projects aimed at development of high-tech products, and implementation of a more efficient expert opin- technical re-tooling and rolling out production facilities ion-based evaluation system for their fulfillment. The employing the best available technologies: working group in charge of this phase has issued a number of recommendations for state-owned compa- For industrial projects carried out by large enterpris- nies that should be kept in mind when finalizing IDPs: es, the fund offers loans ranging from 50 to 500 million rubles at a 5% interest rate with a term of up to state-owned companies should, in particular, link seven years; IDP measures to long-term technological trends and use advanced international experience as a bench- In 2016 a total of 11.3 billion rubles out of the avail- mark for estimating their KPIs; able budget of 23.7 billion rubles was allocated for implementation of approved projects. state-owned companies are advised to work out their IDPs with a long-term view taking into account po- Pursuant to the Federal Law “On industrial policy” in tential business diversification, while special atten- 2015 a special investment contract was introduced as tion should be paid to commercialization of their a mechanism to ensure a stable tax and regulatory en- solutions on the global market and maximum possi- vironment and to provide state support for investors. ble increment of export of civilian innovative products Pursuant to the Federal Law “On industrial policy” in as well as maximum possible import substitution and 2015 a special investment contract was introduced as expanding the list of available funding tools; a mechanism to ensure a stable tax and regulatory environment and to provide state support for investors. when developing and updating their IDPs, companies The special investment contract (SPIC) is an agreement are also advised to seek guidance from the relevant between an investor and the state, which sets forth the experience of state-owned corporation Rusatom9 and investor’s obligations to launch production of industri- Aeroflot, which have already proven their innovative al products within a fixed term, and obligations of the development programs to be the most efficient. Russian Federation to guarantee a stable tax and regu- according to methodology guidelines worked out by latory environment, and to provide incentives and sup- the Ministry of Economic Development together with port. (see Illustration No. 2.9) the Expert Council attached to the Russian govern- In March 2016, the Government signed Order No. 475- ment and development institutions, program quality r, which requires the state-owned enterprises (SOEs) evaluation will be added to KPIs for innovative activ- listed in the Order to purchase innovative products ities, which, in turn will then be included in a com- from representatives of small and medium-sized en- pany’s long-term development program and the top terprises. The list comprises 90 SOEs, including SPC management incentive system.xx Dzerzhinsky Ural Wagon Plant, Russian Roads SOE, At the same time, it is worth noting that, in 2015-2016, Gazprom, Federal Grid Company of the Unified Energy the government made a substantial effort to innovate the System, Aeroflot – Russian Airlines, Russian Railroads, largest companies – many new initiatives were launched, Federal Hydro-Generating Company – RusHydro, Ka- including, above all, the following: lashnikov Concern, and Rosneft Oil Company. In May 2016, the Agency for Technological Development The Ministry of Industry and Trade has initiated a pro- was established in order to increase the number of li- gram for support of worldwide patenting. The Program cense agreements stipulated and, consequently, the suggests subsidizing official patent fees. The cost of a number of joint ventures aimed at sharing technolo- patent fee for a Russian company currently averages gies, to improve competitiveness of Russian companies 234,000 rubles at the stage of international registration by way of modernization and technological upgrade as plus 603,000 rubles at the stage of national registration, well as to increase exports of products other than nat- for a total of 837,000 rubles, while the Program helps to ural reserves with a focus on technology transfers. slash the amount in halfxxii. Russian Export Center (REC) was formed as a “sin- In July 2016, the Ministry of Economic Development and gle-window system” for state support to exporters. REC the National Research University Higher School of Eco-

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 25 “SPIC is a tool used to implement the general policy of import substitution in Russia. One of the key tasks of this policy is to expand the scope of products “made in Russia”. This refers not to the country of origin, which is quite a complicated issue, but the country of manufacturing, which, in many cases, has less stringent conditions for a number of products, instead of confirming Russia as the country of origin. The new state regulation is more loyal towards products manufactured under this label. For example, pending compliance with a number of requirements, a company is entitled to participate in government procurement or act as a supplier of goods to state-owned companies. It is a global trend today to purchase locally manufactured goods. There are three ways to obtain the ‘Made in Russia’ status, and SPIC as one of them. A company can sign it and be eligible to use the status in advance even if not all of the required operations are carried out. In turn, according to the Industrial Development Fund, SPIC is as agreement signed with the state outlining a financial investor’s obligations to implement their project in the territory of Russia. Thus, the investor commits to manufacture certain products as well as to pay local taxes, to achieve a certain level of localization, etc”. ГGazeta.ru, “Russia to Support Mercedes-Benz”, 2016 xxi

Illustration No. 2.9. Special Investment Contract

nomics (NRU HSE) launched the National Champions of BRICS countries at their meeting held in October Project. The project is designed to ensure above-aver- 2015, approved a BRICS working plan until 2018 in the age growth of national leading export-oriented private sphere of science, technology and innovation, agreed to high-tech companies and the establishment of Rus- create a platform for coordinating their work and es- sia-based transnational companies on the basis of pri- tablished a direct communications channel between all vate market players. The project aims to roll out over 10 interested parties in the following areas:xxv Russia-based private high-tech companies capable of prevention and elimination of natural disasters showing sales volumes of at least 500 million dollars (“monitoring and early forecasting”): Brazil (National each. A yet, there are no plans to allocate additional Center for Monitoring and Early Warning of Natural funds from the state budget, although the program par- Disasters” – Cemaden); ticipants will be provided with administrative resources allowing them to obtain existing export support tools water resources and water pollution abatement: through development institutions (such as cheap loans, Russia (technology platform for sustainable environ- warranties, insurance) and trade representativesxxiii. mental development); In other areas, international activities should be men- geospatial technologies and their application for tioned: further development: India (National Spatial Data Infrastructure – DST); development of information Implementation of the Information Society Program de- and communication technologies (ICT) and deci- veloped “to create an integral and efficient system for sion-making systems (DMS) based on geospatial employment of information technologies where the na- technology for management of risks associated with tion will receive the maximum benefits”, continuesxxiv. In natural disasters and climate change as well as for 2016, 121 billion rubles was allocated for program de- appropriate flexible planning of further development velopment. The best evidence of successful implemen- in order to achieve a sustainable ecosystem; tation of the Program will be the upgrade of Russia’s index in international ratings assigned based on the level new and renewable energy, energy efficiency (LED of information and telecommunication technologies as lighting as part of SSL): China (Ministry of Science well as the growth in number of citizens using state and Technologies); services on a daily basis. By 2020, the proportion of the astronomy: the Republic of South Africa (National Re- population expected to use state e-services is expected search Foundation) to reach 85% vs. 11% in 2010. The program consists of the following four parts with a total budget of 1.2 trillion In summary, the state’s main actions over the past two rubles until 2020: years (and earlier) are shown in the table (see Illustration No. 2.10). We have not included actions concerning state “Information and telecommunications infrastructure management (or “sundry” initiatives), since we are only in the information society and related services”, which interested in ascertaining which economic agent groups provides for various telecommunications services; experienced the strongest effect from the innovation pol- “The information environment” aimed at develop- icy. ment of the mass media; We would also like to point out that we have mentioned Security Aspects in the Information Society” address- only the most remarkable actions suggested by our ex- ing Internet-related threats; perts and resulting from our own research.. This list cannot be regarded as complete but rather reflects an at- “Information State” aimed at developing e-govern- tempt to demonstrate the balance between the chosen ment and information services in such areas as activities, i.e. the focus, the main areas of actions under- healthcare and education. taken, what worked and was most vividly recalled by ex- The ministers of Science, Technologies and Innovations perts.

26 2. From Creating Conditions to Promoting Growth: Problem Definition The summary table clearly shows that until 2015 the Over the past two years the balance has significantly shift- greatest efforts were devoted to supporting science and ed to mature business, especially large enterprises – we startups, namely such initiatives that managed to change can see various initiatives aimed at providing companies the innovation landscape as: RAS restructuring, estab- with real opportunities to gain support and addressing lishment of development institutes, construction of sci- various aspects of business, such as patenting, export, ence and technology parks, implementation of NEI, and government procurement, and new large-scale projects. development of NTI. At the same time, considerable at- The effect from stimulating this area is still not entirely tention was also paid to mature business, primarily in clear, but it is definitely visible taking into account stron- terms of planning (IDPs), targeted incentives and grants. ger initiatives.

1 It should also be noted that numerous measures were taken in re- Companies with State Participation, State Corporation and Federal lation to mature companies, although in this case the main issue State Unitary Enterprises, Higher School of Economics, 2015. will be their low actual efficiency; the senior staff of the relevant 4 Hereafter - MinFin companies note that they are aware of many measures, but they not actually feel any effect from these measures. 5 Hereinafter - the Ministry of Science

2 Further, respectively, Skolkovo, RVC, Rosnano, the Innovation As- 6 Hereinafter - the Ministry of Economic Development sistance Fund, the Fund for Infrastructure and Educational Pro- 7 Hereinafter referred to as the Ministry of Energy grams, and VEB Innovations 9 Hereinafter referred to as the Ministry of Industry and Trade 3 See, for example, Methodological Materials for the Development (Updating) of Innovative Development Programs of Joint Stock 9 Hereinafter referred to as Rusatom

Before 2015 2015-2016 (new)

• RAS Reorganization • Restructuring of Federal Agency for Scientific • State-sponsored programs: 5-100, Applied Science Organizations (FASO), establishment of Federal Test B.A., Fundamental Science Research Center (FTC) • Establishment of Federal Agency for Scientific • Merger between Russian Foundation for Humanities Organizations (FASO), Russian Science Foundation (RFH) and Russian Foundation for Fundamental Research & Higher (RSF), Advanced Research Foundation (ARF), Scientific Research (RFFR) Education Institutions Research Center Zhukovsky Istitute • F ederal Law and minimization of prescriptive man- • Improvement of funding mechanisms (amendments to agement F ederal Law No. 270) • Development of a network of science and technology • Funding under the Program for Science and Technology parks for children Development

• Construction of innovative territorial clusters: Skolko- • Development of NTI Strategy vo, Innopolis, MSU Valley • NTI Project Office • Establishment of Development Institution System • F unding of NTI Roadmap • Implementation of NEI • RVC and Skolkovo cooperation roadmap Startups • Development of NTI • Industry venture funds • Funding under the state-sponsored program on • Tax breaks for stock ownership Economic Development and Innovation Economy • Events: Open Innovations Forum, Startup Village, GenerationS

• Development and further actualization of IDPs, • Establishment of Technology Development Association implementation of KPIs (TDA), Russian Export Center (REC) • Approval of incentives for innovative businesses • Establishment of FID, launch of project funding (approx. 70) • Implementation of Special Investment Contract (SPIC) Mature Businesses • Engineering development subsidies mechanism • Subsidizing investment loan interest rates and R&D • Mandatory state procurement from SMB expenditures • Support of worldwide patenting • National Champions Project

Source: BCG analysis Illustration No. 2.10. The State’s actions in innovation policy (2010-2015)

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 27 2.3. WHY IS THERE NO INNOVATION BREAKTHROUGH?

he review of innovation policy in recent years, includ- High-tech startups are undoubtedly a good source of Ting 2015-2016, set out in Section 2.2. of this report, the most “disruptive” innovations capable of essentially shows that the state, although being active in all five ar- modifying technological paradigm and economy struc- eas outlined in the beginning of Section 2.2., initially was ture. This is often the reason for longer periods required and still remains focused on: for finding ideas and entrepreneurs, for launching their businesses and raising funds, for designing a prototype (1) supporting science and education; and, finally, scaling up business. Furthermore, as regard (2) providing favorable conditions to entrepreneurs and the ecosystem, its establishment and entrenchment re- venture investors; quire not only a favorable environment but also evidence of invariability of the environment, stability of the condi- (3) providing targeted financial and non-financial sup- tions offered by the state, including periods of economic port to startups. recession, financial crisis and other external stress. Only in recent years has the state begun to vigorously In addition, it should be noted that at each stage of the promote innovations at large enterprises, the effect of “innovation swirl” (see the 2015 Report) the process of which, however, has not yet been recorded in the dash- business initiative development is likely to slow down board. and/or stop, which, in turn, may result in the slowdown Can it be the policy focus on the academic and business of startup ecosystem development. Only 3% of patents environment that hinders the innovation activity? Chanc- will actually reach the commercialization phase one way es are that science, education, innovation environment or another (Key 2011)xxx. Moreover, not all of the patents and startups, even if established and supported, either will pay back as startups. At the next stage (early survival do not necessarily promote innovative activity as a whole, and subsequent scaling-up) of the “swirl” 90% of start- or do but with a big time lag which has not yet been over- ups will fail (Griffith 2014) . come. Supporting startups and venture investors, in turn, col- Evidently, such a lag is a characteristic for education and lides with the problem of an “open-loop innovation sys- fundamental research activity. The time lag between re- tem” that was described in our 2015 Report and sum- search results and an innovation technology developed marized in Section 1. Technological solutions and their on the basis of such research, quantified based on avail- developers keep leaving our country striving to nest in able experience, ranges from 6 (Mansfield 1998)xxvi to 17- the existing innovation hubs moved by a general centrip- 23 (Morris et al 2011)xxvii years. etal force without sufficient domestic demand that could help withstand that force. It is noteworthy that both fundamental science and the state’s active position in organizing and funding scientific Success in arranging a favorable environment and even surveys are undoubtedly necessary and vital. Research- targeted support to startups still fail to diminish the at- ers note a material payback from fundamental research tractiveness of the existing global hubs. Entrepreneurs which will only rise over time and eventually reach up to tend to find themselves in a familiar social environment 700% (Gruss 2009)xxviii. In particular, the analysis by the and to be closer to investors and target markets. This is Stanford University estimates annual return on the in- why it is critical to create extra beneficial conditions and vestment made in the fundamental stem cell research at allow for a longer period in maintaining a solid reputation 120% to 236% during the 30-year payback period (Stan- as an alternative attractor in order to restrain the existing ford 2004) xxix. centripetal force and encourage entrepreneurs to refrain from migrating to the existing hubs. Nonetheless, scientific activity, even if well-organized and generously funded, is not capable of yielding a quick Such seemingly unrestrained migration of entrepreneurs effect in and of itself. It is important to see not only the to California is not only Russia’s problem but is also typ- findings of specific research but also its general effect ical for countries with a highly developed innovative en- on the innovative ability of the country’s economy as well. vironment such as Australia. Moreover, even other areas Needless to say that such effect will require a much lon- of the US traditionally deemed attractive for talents (like ger timeframe, even decades. Boston) suffer from an outflow of entrepreneurs to Cali- fornia (see Illustration No. 2.11). The focus of the innovation policy on creating a favorable business environment should apparently yield quicker The problem of “brain drain” to innovation hubs is in- results at least due to the initial aims of startups and tensified by low demand for innovative solutions from venture investors at obtaining a rapid and evident result. mature Russian business, especially large enterprises. Yet, startup activity also demonstrates a delayed effect. As estimated by businesses themselves and taking into The transition from creation and enhancement of a fa- account total investments in intangible assets, actual vorable environment to a tangible inflow of commercial demand for technologies and innovation in Russia re- innovations from successful high-tech companies may mains quite weak. In the 2015 Report we provided the take quite a long time. data reflected in the Illustration No. 2.12 and supporting

28 2. From Creating Conditions to Promoting Growth: Problem Definition “ For Australian start-ups dreaming of making it big in the US, the transition time from launching to jumping on a pan-Pacific flight seems to be getting shorter all the time. This week, Flightfox, a Sydney business that proactively searches for the best flight deals on behalf of customers, was accepted into famed US accelerator Y Combinator, after raising a hefty $800,000. The move comes just a few short months after the business was chosen by Startmate, the Australian accelerator, to be part of its 2012 program. The headlong rush to America isn’t without its downsides, as Startmate founder Niki Scevak eloquently put it in his StartupSmart blog this week, pointing out that Silicon Valley isn’t a “magical kingdom of start-ups.” But that hasn’t stopped a growing number of Aussie ventures from aiming big and setting their sights firmly in the direction of California, and beyond.” Startup Smart, “10 Aussie start-ups gunning for Silicon Valley”, 2012 xxxii “<…>This has certainly been Scribd and Parse co-founder Tikhon Bernstam’s experience; He argues that Silicon Valley has a much richer offering than merely the cash injected from investors’ fat wallets. “It’s not just about the money, it’s the people that help you when you’re going astray,” he said. “That’s incredibly valuable, because it’s very easy without help to go in the wrong direction for a long time. We started Scribd in Boston, but in San Francisco, in Mountain View and Palo Alto, you feel this completely different energy, in the sense that there are many smart people that have done so many amazing things, and they’re all happy to talk to you, and give you advice, and you’re a first-time founder and you have no idea what you’re doing,” he said. This was one of the key drivers behind the move to California for Australian-founded online document collaboration startup Nitro, with the company’s founder and CEO Sam Chandler arguing that the move to San Francisco from Melbourne was more about connections than funding. “When we made that decision, it wasn’t just about capital; it was also about accessing talent,” Chandler told TechRepublic. “The Bay Area’s culture — there’s an openness to new things, an embracing of new things in the Bay Area that is unlike anything else. It’s not just about money.” TechRepublic, “Less is more for Australian startups”, 2014 xxxiii

Illustration No. 2.11 Attractiveness of global innovation hubs the idea that the demand for technologies in Russian is global markets. At the same time, the strategy of enter- low. This claim is also reaffirmed by many experts and by ing the domestic market is not read as a true-to-life de- IDS-2020 (See Illustration No. 2.13). velopment scenario. “The Russian market is too narrow for a modern startup” – this is a widely used argument Sweden 6,4 which also implies, among all, the idea of low demand Switzerland 6,2 from Russian business for innovations. South Korea 5,8 Raising startups under the pressure of low domestic de- Ireland 5,2 mand from innovations does not lead to increased activi- france 5,0 ty but to outflow of technologies to foreign markets from where they will be reimported by Russian consumers as Austria 4,5 end-user products. As a result, Russia’s venture market, finland 4,4 although being quite internationally competitive in terms Netherlands 4,4 of investments, does not match the size of the economy. Israel 4,2 These findings were also represented in the 2015 Report Great britain 3,7 (see Illustration No. 2.14). Germany 3,5 Therefore, there is every reason to assume that Russia’s Australia 2,9 state innovation policy is unlikely to show quick and ev- Italy 2,7 ident results (“quick wins”) for the following three reasons due to its focus on the academic and business en- Chile 1,7 vironment: Russia 0,3 Investments in intangible assets, 2014 (% of GDP) Source: National accounts of OECD countries (main aggregates 2007-2014) changes in fundamental science and education are geared towards the long period; Illustration No. 2.12 Low demand for technologies in creating favorable innovative environment will result in Russia higher innovative activity but with a time lag; with low domestic demand, supporting high-tech projects and startups provides a limited effect. Given such low demand for new solutions from the existing businesses, it is only natural that Russian researchers and entrepreneurs would look for their customers on foreign markets. Expert employees of venture funds, who were interviewed for the purposes of this Report, confirmed that a high-tech startup may only be viewed as attractive if it pursues the strategy of early entry into

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 29 “Where we allocate budget funds to finance early development of a product but fail to put the product to mass production due to low domestic demand, we, in fact, finance technological growth of our rivals that are eager to buy our innovations and launch large-scale manufacturing of products to be then sold to our consumers”. D. Belousov, Center for Macroeconomic Analysis and Short-term Forecasting (CMASF), quote from HSE release “Foreseeing the Future”, 2014 xxxiv

“Our country is a country of big business – largest part of markets is governed by state monopolists unmotivated to grow and compete with other companies – they feel good anyway. They are not interested in startups as an instrument of development or a source of new business ideas. These companies lack demand for innovations at a strategic level.” G. Bikkulova, Director of Development at RVC, Expert, 2016 xxxv

Today, the responsiveness of business entities to technological innovations remains very low. In 2009, only 9.4% of all Russian industrial companies developed and implemented technological innovations, which is substantially lower than in Germany (71.8%), Belgium (53.6%), Estonia (52.8%), Finland (52.2%) and Sweden (49.6%). The share of businesses investing in purchasing new industrial technologies accounts for 11.8% of all companies. The share of expenditure on technological innovations in the total production cost of shipped goods, work and services incurred by Russian manufacturers accounts for 1.9% vs. 5.4% in Sweden, 3.9% in Finland and 3.4% in Germany.” Russia’s Innovative Development Strategy until 2020 xxxvi

Illustration No. 2.13. Weak responsiveness of business to innovations

Venture investments as % of GDP as of 2014 0.44 Israel USA ...

0.08 Canada

finland South Korea 0.06 Sweden Ireland RSA1 Great britain 0.04 Norway Portugal Switzerland 1 Denmark Japan hungary Estonia france New Zealand Netherlands Germany 0.02 Austria Luxembourg Australia Czech Republic Poland Russia Greece Slovenia Italy Slovakia Spain Venture investments in USD mln as of 2014 0 0.1 1 10 100 1 000 10 000 100 000 1Data on Japan and South Africa as of 2013 Source: Eurostat Databases (European Labour force survey)

Illustration No. 2.14 Correlation between the size of the venture market and the economy

30 2. From Creating Conditions to Promoting Growth: Problem Definition 2.4. BIG BUSINESS IN RUSSIA: SLEEPING GIANTS

o, what focus of the innovation policy will make it pos- this case, time is required to change the public’s cultur- Ssible to convert the progress achieved in recent years al patterns. Innovations should be assigned the status from improving the innovative environment into stronger of a “serious occupation” that could potentially lead to innovative activity, especially in the shortest possible commercial success. Ready-made inventions should be time with a tangible effect? introduced to the market by their creators to the market, including the capital market; for this purpose, making a This question may be answered through the process of profit on an invention coupled with its commercialization elimination. As it can be seen from the previous Section, should become a key prerequisite in the creative process focusing solely on the academic environment, venture both for investors and the State. investments and startups will not likely help to achieve quick success. In fact, there are only two areas left to be In Report-2015, we devoted an entire section to the im- explored: individual inventors and mature business. portance of cultivating a positive public attitude towards the process of creation and creators of something new, Individual inventors – i.e. people devoted to inventions i.e. a favorable social environment aimed at promoting (or the so-called “garage innovations”) which pursue their creatively thinkers and active people who can turn their own aims (although they may be commercially motivated ideas into commercial products. We noted that an unfa- but lack the ambitions required to grow them into a large vorable social attitude towards scientists and innovators business) and outside any organized projects – form the has deep cultural roots and any material and enduring basis for generating a flow of ideas suitable for further changes will require a long time, perhaps even as long as commercialization. According to expert estimates, almost several generations. This, however, does not mitigate the 10% of the adult population are involved in one form or significance of the task but removes inventors from the another of inventing things (see Illustration No. 2.15). list of agents capable of providing a “quick win”. Not all inventors of new technology products become Therefore, targeting mature business and intensive technology entrepreneurs, launch startups or raise stimulation of the latter’s innovative activities is an area venture investments – but the invention stage is near- that could offer potential for achieving stronger results. It ly mandatory for startups that intend to introduce their is the mature business today which, although accounting breakthrough ideas to the world and that have a modest for the bulk of the economy, remains the worst devel- support base amid existing technologies and operating oped – for example, in Russia this area comprises only businesses. one third of all patents unlike its international peers from The problem with inventors targeting inventors under the leading countries, where mature business dominates in innovation policy is the same as in the case of science terms of patent activity (see Illustration No. 2.16). This and startup targeting – namely, the waiting period is too fact shows the enormous potential for transformation of long before the first commercial results are obtained. In the corporate sector.

“<…> According to research conducted within the framework of the Monitoring Survey of Innovative Behavior of the Population implemented by the Higher School of Economics (HSE), 9.6% of the grown up population can be considered inventors. One third (32.5%) of them, however, have never heard anything about innovations but this does not stop them from inventing. Notably, the bulk of their innovations – from garden tools to autonomous energy supply systems – are intended either for their personal use or as help for their family and friends. “The main reason for user innovations, such as household inventions is neither the goal to enter the market nor commercialization. This is what distin- guishes them from the traditional model of innovative activities where the company plays a central role. Commercial success for a firm is a matter of survival, while for a user (either a firm or an individual) the main motivation is satisfying their needs,” explains co-author of the project Associate Professor of the HSE Institute for Statistical Studies and Economics of Knowledge Konstantin Fursov. The user and traditional innovations are conceptually opposed to each other. Over the past few years, at least five countries conducted a survey similar to the one by the HSE. Having compared their results and statistical data, “Kommersant Money” reached the conclusion that the fewer the number of patent applications in a country – the larger the number of inventors. Thus, in our sample, it was South Korea (1.5%) that ranks second in the world in terms of the number of patent applications per million economically active inhabitants (8,700 annually). In terms of patent activity, Russia ranks last on our list, while it is number one in terms of the inventiveness of its population. A similar situation has been observed with respect to such statistical indicator as the proportion of investments by commercial entities in total domestic R&D investments. The leaders of our research by this indicator are Japan and South Korea (77% and 75%, respectively, according to the Global Innovation Index), while Russia lags behind all other countries under review (27%)”. “Mother Wit for Domestic Consumption”, Kommersant Money, 2016 xxxvii

Illustration No. 2.15 Inventors in Russia

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 31 Patents issued in 2011-2014 100% 1% 2% 4% 5% 7% 1% 5% 5% 3% 2% 1% 2% 13%32% 6% 3% 3% 4% 9% 4% 4% 8% 12% 10% 11% 17%18% 19% 33% 80% 16%

11% 60%

34%

40%

20% 33% 84% 96% 95% 92% 91% 90%89% 87%85% 85%81% 81%79% 71%57%

0% Average by country Companies Individual inventors Research institutes/universities1 based on the analysis of top 1000 patents using bCG Quality Index Source: BCG analysis, Thomson Innovations

Illustration No. 2.16. Weak patent activity of the Russian corporate sector.

Exactly what type of existing businesses should be taken mass for a quick and firm “answer” to the innovation pol- as the primary target, given that a quick reaction is re- icy. It is noteworthy that a similar problem also exists in quired? Should the State focus either on small business, leading countries where the results demonstrated by the medium-sized companies or large enterprises? “gazelles” in response to the measures implemented under the innovation policy, fail to comply with the required Small business is marked by insufficiently elaborated stability even if the speed is appropriate. An example is organizational structure and is exposed to the strong, or given in an abstract from the article referred to in the even dominating, influence of its founder. At the same Illustration 2.17, where instability in operating results time they are not necessarily new or innovative. On the clearly stems from employment issues in high-growth contrary, mature small businesses are most likely tradi- gazelles. tional and often family-run. In this report we do not study this group as a priority target for innovation police for the The issue of overly slow institutional development of evident reason of their small total size and non-applica- gazelles is even more relevant in Russia, where large- bility in terms of a “quick win”. Nevertheless, it is worth scale business is wary of entering into agreements with noting that they may also play an important supporting medium-sized companies due to the unpredictability of role in innovative infrastructure: for example, the avail- results that quite often depend on instant circumstances ability of advanced urban services is an important factor faced by the owner or management of such a gazelle. in attracting creative young people. The measures prescribed by state policy may have zero effect given that a medium-sized business is more flexi- Medium-sized business, especially its promising tech- ble than a large enterprise and it can easily withdraw into nology section – the so-called “gazelles”, is a far more the shadows, be reorganized or even be wound up. attractive target when it comes to using innovation policy tools. The State is already taking steps to develop Now, let’s take a look at large-scale business. In Rus- this sector. Thus, in July 2016 the Ministry of Econom- sia large enterprises make up the bulk of the economy, ic Development together with NRU HSE announced the which is much bigger than in developed countries. When National Champions Project (see Section 2.2). Another targeting large-scale business, Russia’s innovation pol- competition, TechUp, has been held annually over the icy entity automatically covers nearly 80% of economy. last few years and is designed to seek out and find those Such a huge proportion of large enterprises already pro- gazelles. In 2016, the Ministry of Economic Development vides a compelling reason to expend the utmost effort in plans to select 30 leading companies, which will then be innovation programs. provided with various means of support, including, above Furthermore, the Russian government holds ownership all, continuous supervision and assistance and support in a large number of big businesses, which, again, to a in overcoming different administrative barriers. far greater extent than in other countries (see Illustration However, unlike leading innovation countries, the pro- No. 2.19). Such direct ownership gives the State strong portion of medium-sized business in Russia is very low leverage for exerting control over and influence on en- – under 21% (see Illustration No. 2.18). Russia’s medi- terprises, particularly through resolutions adopted by um-sized business has yet to gain the necessary critical boards of directors and shareholder meetings, especial-

32 2. From Creating Conditions to Promoting Growth: Problem Definition “ Young high-growth ﬁrms, or gazelles, have predominately been investigated with respect to their outstanding short-term performance. The paper at hand takes a different approach and analyzes their long-term performance in order to shed light on the sustainability of these job creator machines. Using the Danish Integrated Database for Labor Market Research, we ﬁnd that former gazelles are not able to sustain their performance head start in the long run. We show that gazelles are often outperformed by initially slower growing competitors, as they achieve lower employment growth, higher employee turnover, and lower survival rates in the long run. Moreover, in the long term, rapidly growing startups show slower staff growth and a higher turnover rate of employees. We explain this counterintuitive observation by arguing that high initial growth rates impede the emergence of a stable and efficient routine structure in the newly founded venture, if the expansion is undertaken too hastily.” “Heroes today - but what about tomorrow? Gazelles and their long run performance”, Pernille Gjerløv-Juel et al, 2012 xxxviii

Illustration 2.17. Unstable effect from targeting medium-sized businesses.

Share of GDP State ownership in the top 10 companies*

100% 100% 96%

21% 58% 48% 51% 53% 58% 59% 59% 60% 60% 61% 63% 68% 88% 81% 80% 80%

69% 68% 67%

60% 60% 59% SmEs 50% 48%

40% 40% 37%

23% 20% 79% 42%52% 49% 47% 42% 42% 41% 40% 40% 39% 37% 32% 20% 17% 16% 15% 13% Large businesses 11%

0% 0% UAE Italy India brazil Israel China Korea Russia Russia Greece france Ireland Norway Norway finland finland average Sweden Country Thailand Germany Germany malaysia Australia Indonesia Singapore Switzerland Netherlands Saudi Arabia

United Kingdom Note: Only countries with the share of the public sector >10% are shown. Note: Small business including micro-enterprises. Large businesses are companies with over 250 employees. *Calculated as the average of the state shares in the revenues, asset value and capitalization amount Source: Eurostat (2012), ABS (2012), British Columbia's Statistical Service (2012), of the top 10 companies Asian Development Bank (2014), Rosstat (2015), BCG analysis Source: "State-owned enterprises in the global economy: reason for concern?" P. Kowalski et al (2013).

Illustration No. 2.18. Contribution of small, medium and Illustration No. 2.19. Government’s share in top 10 large business to GDP of Russia and developed countries enterprises in various countries. ly as regards the appointment of a company’s manage- The innovation race has been gaining momentum, which ment, investment and financial decisions. The speed of makes participating countries search for ideas and decision-making and implementation of such decisions tools capable of enhancing their technological develop- is the main driver for “quick wins” in the innovation policy. ment. The greater the role of large enterprises and the state-regulated sector in the national economy, the more Both factors – namely, a large share of enterprises in attractive that sector becomes for promoting innovations. the national economy and the State’s substantial ownership in large enterprises – make this group a particular- Illustration No. 2.21 gives the examples of targeting ly attractive target for the innovation policy. Illustration large enterprises under the innovation policy in Europe- 2.20, which shows the three “forks” addressed above in an countries that appear to be more relevant and attrac- this and previous Sections, represents a summary of ar- tive in terms of comparison with Russia in the context guments in favor of choosing large-scale business as a of economic structure, rankings in innovation indices top-priority target for “quick wins” under the innovation and/or upward dynamics of their ratings; thus, we made policy. a choice in favor of Great Britain, Germany, Norway and Finland but the list could be expanded to other countries, Interestingly, such focus of the innovation policy on ma- including, apparently, countries outside Europe. A more ture, especially large-scale, business is also a recent detailed consideration of the situation in Great Britain is trend in many leading innovation countries worldwide. given in Illustration No. 2.22.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 33 Science and inventors

Startups and early-stage companies What to focus on? 1

SMEs Corporate sector 2 Why: The biggest lag is in corporate innovations Development of science and inventors Mature companies 3 has a delayed effect Why: Development of startups is not efficient in the absence of business demand for technologies Large businesses “Disconnected innovation system” Why: High share of large businesses in the economy High share of public sector provides direct levers The key question is how to turn Will have an effect on SMEs via creating demand the large business into an innovation driver for their products and developing an SME ecosystem around large manufacturers

Source: BCG analysis Illustration No. 2.20. Targeting forks under the State’s innovation policy.

GII ranking in 2016 Key measures to support innovations in large/mature companies

• Creation of the Department for Business, Energy & Industrial Strategy with the following priority goals: –– get the metal industry out of the crisis UK 3 –– build an atomic power plant • The Eight Great Technologies program focuses on technologies, in which the country already has a considerable background

• One of the objectives announced in the Research and Innovation Policy Review 2015–2020 is to ensure a more efficient use of R&D results by large companies Finland 5 • Focus on support of innovations in large companies: –– “help large businesses to avoid the fate of Nokia”

• The innovation strategy Hightech-2020 focuses on supporting the existing competencies: –– continuous upgrade of major industries (automotive, engineering, chemistry) and Germany 10 companies –– advanced training and retraining –– development of priority research areas

• The innovation policy is based on providing industry support to “national champions”, in which the government holds considerable stakes: Norway 22 –– oil and gas (Statoil), TMT (Telenor), aluminium (Norsk Hydro), fertilizers (Yara), banks (DnBNor), electric power (Statkraft), etc.

Illustration No. 2.21. Innovations in large/mature business as an important target for the innovation policy of European countries’

34 2. From Creating Conditions to Promoting Growth: Problem Definition Efficiency of the exclusive bottom-up approach has been questioned at different levels, including among governmental experts, for quite a long time now. For example, in May 2014, NESTA Agency’s expert wrote: “Big business is often rather overlooked in when it comes to innovation policy, which, it has been argued, focuses too much on startups. Improving the UK innovation ecosystem demands that we move beyond a fetishism around entrepreneurs and growth (particularly when linked to an erroneous celebrating of soaring self-employment figures) and add to our focus the role that big businesses are really playing in the innovative ecosystem”.xxxix After voting for the exit of Great Britain from the European Union and after Prime Minister David Cameron’s resignation, the new Prime Minister Theresa May stated her intention to rethink the approach to innovation policy. The key idea of the reform is to switch from supporting competences and entrepreneurship to the concept of “industrial strategy” and even “industrial policy” (particularly, furthering the clean energy concept) – a term and ideology, which has always been far from popular among the Conservatives. As a result, in July 2016, the Department of Business, Innovation and Skills – the ministry in charge of innovation policy – was renamed the Department of Business, Energy, and Industrial Strategy (BEIS). Innovations, or more precisely, the policy direction denoted by this word, were excluded from the Ministry’s task list, while the mission of creating skills and competences was delegated to the Department of Education. The newly appointed Minister Gregory Clark described his vision for his objectives as follows: “I am thrilled to have been appointed to lead this new department charged with delivering a comprehensive industrial strategy, leading government’s relationship with business, furthering our world-class science base, delivering affordable, clean energy and tackling climate change.” xl His first tasks will include resolving the crisis in the steel industry and making a final decision about whether to build a new nuclear power plant at Hinkley Point. Experts have expressed diverging opinions on the new priorities. Thus, some of them have misgivings about the term “industrial policy” bearing in mind the fact that the term was discredited in the 1970s. Conversely, other experts strongly welcomed the return of the State to participating in the development of cooperation with large-scale businesses. BCG Research, new releases (see links in the text)

Illustration No. 2.22. Shift in priorities of the innovation policy in Great Britain as an example

It is worth emphasizing that the actions undertaken to dia-content generators, etc. support innovations in big business may not replace co- Illustration No. 2.23 shows Google’s Innovation Ecosys- operation with other agent groups that make up the sci- tem as an example (based on Harvard Business Review entific, educational, entrepreneurial and business envi- xli. ronment. Hence, similar or even greater attention should as of 2008) be paid to these areas. Innovation of big enterprises is However, the issue of promoting innovative development the correct way to accelerate innovative development in big enterprises should not be underestimated. In Re- by targeting a large and directly controlled share of the port 2015 and at the end of the previous Section we diag- economy; such innovation cannot on its own put the nosed and highlighted weak responsiveness of Russian economy on a new footing, since the largest number of business to innovations and its technological underde- most creative people prone to action tend to be concen- velopment in general. This is especially applicable to big trated outside the large corporate sector. This environ- enterprises well known for their sluggishness and comment, namely universities and startups, is also the cra- mitment to deeply rooted organizational and operational dle of most breakthrough and ultimately the most valued principles, technologies and research methods which solutions. The only things required for this purpose are are not considered to possess destructive potential. time and support, including from large-scale business. The problem of successful innovation in large companies Big business amid the current technology transformation is no secret and has been the object of considerable re- is able to provide within the shortest term real commer- search. Yet, in Russia this issue is even more acute giv- cial demand for the academic and business environment. en the State’s high degree of business ownership, which This will make it possible to obtain a synergetic effect in implies direct intervention on the part of the State, thus existing operations with hi-tech startups, the innovative reducing even further the management’s appetite for environment and increase the efficiency of stimulating change. The beneficial ownership of state companies is the venture. On the other hand, an improved environment highly dispersed (among all citizens) and, therefore, one and scientific area will improve incentives for innovations of the main concerns is the agency dilemma, where the and efficiency of R&D at large companies. managers are incapable of approving their own agenda as if they were the owners. Furthermore, given that their This is why, with the focus of the innovation policy on agenda may seriously differ from the one suggested by supporting innovations within the existing business en- shareholders since the managers’ interests focus on de- vironment, the State can create a mechanism for accel- riving short-term profits, on the one hand, and, on the erating innovative development, both for business and other hand, on expanding their “business empire” – quite the economy as whole, thus promoting a “fusion” of the often to the detriment of the company’s long-term value. innovation system and development around large-scale business of innovation ecosystems made up by research- The best illustration to the existing problem is the state’s ers and startups, as well as by well-informed users, me- virtual inability to “force” big business to take a new path

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 35 Media companies, 132 million unique visitors per day individuals (as of 11/2007) Create information Search for information on areas of interest Google’s innovation Stimulate consumer interest ecosystem Consume advertising content foster creation of communities and advertised products Provide delivery mechanism Validate appeal and test performance for targeted ads of Google innovations Media Consumers Contribute ideas for improvements of Google product

The Google platform

Mashup software creators and vendors, Google engineers, open source community Over 1 million companies Advertisers Innovators Together, make up a diverse product and individuals development and improvement network Deliver relevant ad content to search-identified users Develop new applications that help retain consumers Generate a major revenue stream for Google Generate revenue for themselves and for Google help monetize new offerings Distribute Google technologies

Source: Harvard Business Review 2008 xlii Illustration No. 2.23. Google’s Innovation Ecosystem (2008)

of accelerated innovative development by implementing the Innovative Development Programs (IDPs) and Long- term Development Programs (LDPs) described in Sec- tion 2.2. Thus, as we can see, the main issue to be addressed under the innovation policy is how to make large enterprises become innovative. How to awaken the sleeping giants? The next section is devoted to this problem and we shall see that this question can be answered with due regard to the specific features of each sector as we study possible ways and means some business sectors to innovate using research and studies based on the successful experience gleaned from other countries’.

36 2. From Creating Conditions to Promoting Growth: Problem Definition HOW TO AWAKEN 3 THE CHAMPIONS? MAKING BIG COMPANIES INNOVATIVE

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 37 3. HOW TO AWAKEN THE CHAMPIONS? MAKING BIG COMPANIES INNOVATIVE

3.1. IMPACT ON BIG BUSINESSES: INDUSTRY EXAMPLES

hich innovation tools of big companies at the gov- ments to acquire existing foreign assets, but will neces- Wernment’s disposal have proven their efficiency? In sitate rapid innovative development to gain a competitive this report, we will survey industry and technology ex- advantage. Those conditions are met by manufacturing perts, specialists in innovation and industrial policy, and industries, among which we select transport engineer- take a deep dive into the experience of various countries ing as those most familiar to a wide range of consumers. and industries to reveal viable universal recipes, i.e. To remind, our focus is on two subsectors of transport those applicable to various countries and industries, as engineering - the road transport and air transport in- well as to the various stages of technological and overall dustries. economic development. This makes it possible to avoid, Agriculture is considered as the industry that has ben- to a certain extent, such situations, where a recipe does efited the most from the import substitution policy and not work when applied to new conditions or a new indus- that has huge potential both in terms of extensive growth try with its unique characteristics and status. and breakthrough innovation-based development (such For the purposes of this research, we suggest to focus as precision farming, genetic engineering, etc.). This in- our attention on four industries that, first, are important dustry is quite fragmented, which, hypothetically, reduc- for the Russian economy; second, have a potential for in- es the economy of scale when applying innovation policy novations; and third, are in different competitive and eco- tools to each specific company, i.e. it is the least respon- nomic situations. Such approach will demonstrate the sive to the innovation policy. On the other hand, produc- efficiency of the industrial policy as such, regardless of tivity improvement in the agricultural sector is, among the specific features of any particular sector. The focus other things, a matter of national security and is viewed industries are: as a top priority for the government. Therefore, we would like to check applicability of the tools we selected for in- oil and gas - upstream; novation in agriculture and clarify what we mean by in- agriculture; novation in this case. transport engineering, the study of which will cover: road transport; civil air transport. The industries selected are primarily characterized by major Russian companies, which constitute the subject of this report. Thus, the upstream oil and gas sector is dominated by the largest players of the Russian economy - Gazprom, Lukoil and Rosneft. The automotive industry is also strongly consolidated, and its leading manufacturers are AvtoVAZ, GAZ, Sollers, KAMAZ, and AVTOTOR Holding. Consolidation is even stronger in the civil aircraft industry with its two major groups – UAC and Russian Helicopters. The agricultural sector, on the other hand, is quite fragmented, but here as well there are some major players, such as Sodrugestvo Industries, Miratorg Agricultural Holding and Cherkizovo Group. The relative size, consolidation degree and size of the state’s stake in the oil and gas industry are such that to envisage practical applicability of this report we simply must include this sector in the scope of our analysis. Evidently, successful efforts in introducing innovations to the oil and gas industry will have the maximum effect in terms of magnifying the impact on the entire economy. To avoid all the known convergence and overlaps, the second industry we pick is not from among energy and commodity-based sectors, but lies further downstream in the production chain. At the same time, it should demonstrate a favorable response to the innovation policy. In particular, such industry should have a potential for organic growth of international sales, which will create an almost unlimited market, and will not require invest-

38 3. How to AwAKEN the Champions? Making Big Companies Innovative 3.2. LACK OF INNOVATION ERODES BIG COMPANIES’ COMPETITIVE POSITION

t is no surprise that we observe low innovative activity though there is no visible impact of the higher expen- Iin all industries selected for our analysis. All those in- diture on observable indicators, such as the number of dustries have operated in their current form for quite a patents. In the case of Tatneft, R&D expenditure results while - since the Soviet era - and have not seen any major in a large number of patents. breakthrough developments since then. Lack of innova- However, the quality of those patents, measured by the tions affects the production performance and, ultimately, number of reference to them in third-party patents, is causes a loss of competitive edge both in international very poor for all Russian companies as their patents are and Russian markets. almost never sought for further developments in Russia As a result, the government has to intervene and protect or abroad, unlike the patents of foreign companies (see the largest industry players using administrative bar- Illustration 3.1). Hypothetically, this could be due to the riers, which, in turn, has a negative impact on manag- formal approach to R&D at Russian companies, where ers’ incentive for change. Such a policy creates a spiral R&D activities (especially, FEED) are mostly designed to of deterioration in innovativeness and competitiveness, achieve reporting and tax benefits, while the actual out- which drives large businesses into a situation where a put technologies are either already obsolete, or simply “smooth” transition to a technological transformation is irrelevant. Another reason may be the incompatibility of no longer possible, and aggressive and sometimes se- Russian and international R&D standards. In any case, vere measures are necessary. Let’s analyze each of the we do not see innovative activity in the Russian compa- industries separately. nies that would be consistent with global efforts to support the overall technological transformation of the oil The long history of prosperity of the conventional Rus- and gas industry. sian oil and gas sector – although disrupted at times by global financial crises – constituted until recently the Meanwhile, the lack of innovations in the Russian oil and highest barrier for industry development. As a general gas industry may lead to a significant decline in produc- rule, commercial innovations do not emerge in compa- tion as soon as the mid-term. Thus, in accordance with nies that are already performing well, as the search for the forecasts set forth in the Energy Strategy of Russia and implementation of new solutions imply an expensive until 2030xliii, within 10 years the difference between the and risky process that makes sense only when the exist- scenarios of readiness and unreadiness of Russian oil ing solutions are clearly insufficient to stay competitive in and gas companies to develop tight and offshore oil re- the foreseeable future. serves will amount to 32 Mt, i.e 6% of the country’s total production (see Illustration No. 3.2). At the current oil There is every reason to believe that the current oil and prices, this difference translates into total revenue of ap- gas crisis is not of a financial, but of a technological na- proximately 12 billion dollars per year. ture. Wide implementation of technologies for production of shale oil and gas has radically changed the structure The situation in the Russian transport engineering sector of the industry, allowing independent players to enter and – both in the automotive and aircraft engineering – is exit the market en masse depending on the current busi- fundamentally different due to historically much stronger ness environment. Add to this other technological fac- international competition as compared to the oil and gas tors, not yet very noticeable, but clearly posing a threat sector, which led to considerably stronger market pres- to conventional oil and gas production: this includes, in sure forcing companies to search for and implement new particular, alternative energy sources and electric cars. technological solutions to improve their product and/or reduce the prime cost. Thus, for the first time in ages, oil and gas companies have faced the risk of long-term profitability decline and In such a tense environment, any delay in innovations – are forced to search for new technological solutions to even for 1 year – results in a dangerous lag. Yet, Russian remain competitive in new and not yet entirely clear tech- auto and aircraft manufacturers systematically under- nological conditions. All global players are under the ne- spent on the search for new solutions compared to in- cessity of carrying out research and innovations ranging dustry standards, and therefore the quality of their R&D from alternative energy sources to significant improve- output is close to zero (see Illustration No. 3.1). ments to the existing production technologies. Such a policy and the lack of strategic vision have re- Russian companies are no exception. R&D capex of Rus- sulted in the lack of modern cars, civil aircrafts and their sian players is lower than that of the global leaders, how- components in the Russian market, and more important- ever Rosneft and Tatneft manage to withstand the com- ly, in the absence of related services and infrastructure. parison with them quite well. Moreover, in recent years The logical result was the loss of competitive edge by Rosneft has rapidly increased its R&D expenditure and Russian auto and aircraft manufacturers in the domestic caught up with the global leaders in this regard, even market with no significant wins in international markets

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 39 6% 6% 5,9 5,6 0.8% 5,1 0,7 before 2012 – 0.4% or less 4,8 4,6 0,6 0,6 3,8 0.6% 4% 3,4 4% 3,5 0,5 0,4 0,4 2,6 2,5 0.4% 0,3 2,1 2,0 2% 2% 0,2 1,2 1,4 1,2 0.2% 0,2

0,0 0,0 0,0 0,0

R&D expenditure % of revenue 0% 0% 0.0% z Z rd bP VW Gm GA UAC yota fo usta Shell nault CNPC CNOO Lukoil Airbus To Statoil nmobil KamAZ boeing Ag Tatneft Sollers Avtova Rosneft Chevron Re Peugeot Embraer Gazprom Ex xo bombardier Russian heli Number of citations per patent1 Number of citations per patent1 Number of citations per patent1 0,8% 0,8% 1,0% Gm Shell ford boeing 0,8% 0,6% 0,6% Exxonmobil bmW Embraer bP Airbus 0,6% Chevron 0,4% Nissan Toyota 0,4% marathon 0,4% Statoil bombardier 0.2% GAZ VW 0.2% Lukoil hyundai 0.2% Sollers 3 Rosneft AvtoVAZ Russian Helicopters Tatneft KamAZ UAC3 Gazprom CNOO CNPC Number and quality of patents granted 0.0% 0.0% 0.0% 020406080 0510152025 0123417 Number of patent families / revenue2 Number of patent families / revenue2 Number of patent families / revenue2 1Adjusted to the patent age. 2Total over 2006-2015. 3Revenue for 2013-2015, extrapolated for 2006-2015. Источник: годовые отчеты компаний, Thompson Innovation, анализ BCG Illustration No. 3.1. Patents and R&D in Oil&Gas, Automotive Engineering and Aircraft Engineering

Automotive: Aviation: Oil: loss of domestic market and lack of position Russian airlines choose lack of innovations will in the international market foreign suppliers for fleet renewal cost 6% of production in 10 years

The share of Russian vehicles (excl. assembly) Aeroflot Group fleet (%) Long-term forecast of oil production in Russia, in the Russian market (%) 2012-2040 (mt) 100 95 100 600 82 25242835363642 52 64 73 91 91 87 88 88 89

50 50 Scenario 35 30 550 of Energy 27 21 23 Strategy-2035

75 76 72 65 64 64 58 48 36 279 91312 12 11 0 0 32 mt 2000 20052010 2015 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 (6%) foreign Russian 500 Export of AvtoVAZ, Sollers and GAZ �(K units) fleet of Russian air companies (units, 2015) 200 200 CIS 30 173 Other Scenario of poor appetite for developing 150 150 139 heavy and offshore oil reserves 450 100 83 100 61 53 53 50 43 36 50 5 28 3 15 31 11 10 10 8 16 19 152 78 66 33 37 26 0 0 12 ral S7 400 2000 2005 2010 2015 U Utair yamal Russia 201022015 020 2025 022035203 040 Pobeda Aeroflot Source: Rosstat, UAC, Ministry of Energy of the Russian Federation, Aeroflot’s annual report Illustration No. 3.2. Future competitive edge loss in the Oil&Gas, Automotive Engineering and Aircraft Engineering industries

40 3. How to AwAKEN the Champions? Making Big Companies Innovative (except, perhaps, for some markets of the CIS and other In turn, the low yield and low labor productivity were due developing countries). to the poor levels of mechanization and overall technological support. Together, those issues caused low at- The proportion of Russian car manufacturers in the Rus- tractiveness of the industry and the lack of skilled work- sian market dropped from almost a full monopoly (95%) force (see Illustration No. 3.4). in 2000 to a mere 20% in 2014. And even this modest share would not exist without government protectionism. Some Russian experts note yet another reason for the The country’s market share showed some growth (up historically extensive character of the domestic agricul- to 23%) only in 2015 driven by a sharp price increase in tural sector – it is the relatively low price of agricultural foreign-made cars after ruble depreciation, while export lands, making it more cost-effective to expand croplands sales are still next to nil (see Illustration No. 3.2). rather than improve yields. This situation in Russian agriculture is radically different from, for example, Europe- Civil aircraft manufacturers, operating in a much less an agriculture, where the price of land is very high, and protected domestic market, have almost totally lost their thus implementation of technological solutions is more positions to large international players, while technolog- economically justified. ical obsolescence and wear of domestic-made aircrafts led to their replacement, mainly by Boeing and Airbus Until recently, no one cared about innovation expendi- products (see Illustration No. 3.2). tures of Russian agricultural producers – except for some kinds of produce (e.g. poultry), as the flow of cheap im- The situation began to improve only in 2012, when United port made agricultural players worry about their survival. Aircraft Corporation commissioned the Sukhoi SuperJet However, this situation changed with the introduction of 100, the first Russian mass-produced aircraft since the sanctions and launch of the import substitution policy Soviet era. In June 2016 the Russian aircraft industry (Ir- that protects the domestic market from foreign produc- kut corporation, also a member of the UAC) presented ers and provides financial support to domestic players. the MC-21, the first Russian mid-range airliner to com- Both the actual profitability of the existing agricultural pete with Airbus A320 and Boeing 737, although serial companies, and the expected return on new projects production of this aircraft has not yet begun. have risen sharply. At the same time, the sanctions cut The situation in agriculture differs from both the oil and off sources of cheap finance for agriculture, thus making gas and the engineering sectors. The main barrier to government support necessary (see Illustration No. 3.5). innovations in the oil and gas industry is what we may However, additional funds have not yet resulted in a tech- call “excessive well-being” and unwillingness to foresee nological transformation of the agricultural sector, but future issues; while in transport engineering sector it is have been spent to increase asset utilization (e.g. tractor gradual degradation during the Soviet years followed by utilization - see Illustration No. 3.4) and, often, to pro- the inability to withstand global competition. Meanwhile, duce a low-quality imitation of agricultural produce from Soviet/Russian agriculture (for the sake of specificity, we European countries. Given the need to direct the new shall focus on grain crops) has shown low yields already funds to innovative development, the President of Russia starting from the post-war period. Yields started to rise instructed the government to develop and approve a sci- only in 1980s (see Illustration No. 3.3)xliv, then dropped ence and technology development program for the Rus- off steeply in the 1990s and resumed growth only in the sian agricultural sector for 2017-2025. 2000s. And yet, the bulk yield changed only very slightly due to cropland shrinkage.

Wheat yield, hundred kg/ha Gross grain yield, mt 40 300

USA (hundred kg/ha) Russia (hundred kg/ha) 250 Russia (mt) 30

200

20 150

100

0 0 1900 1920 1940 1960 1980 2020 Source: see reference in the text Illustration No. 3.3. Wheat yield and gross grain yield in Russia and the USA

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 41 Average grain crop yield, hundred kg/ha, 2014 Number of tractors per thousand ha of cropland 100 15 belgium 11 11 Netherlands 10 10 9 Ireland 8 7 6 80 6 5 5 USA 5 44 3 Egypt

Czech Republic Denmark 0

Slovakia 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Chile Luxemburg 60 france hungary Total cropland, mn ha Sweden 150 bulgaria Greece Portugal 118 112 brazil 103 96 Ukraine Lithuania Norway 100 Romania 88 84 40 belarus Poland 78 76 75 78 77 78 79 Canada finland mexico Estonia Spain Paraguay moldova 50

Russia 20 0 0 500 1 000 1 500 2 00019901995 2000 2005 2010 2015 Number of tractors per farm, 2005-2009 (latest available data) Source: World Bank; Rosstat Illustration No. 3.4. Low agricultural mechanization

“The profitability of the Russian agricultural sector without government support reached 10%,” said Deputy Prime Minister Arkady Dvorkovich, speaking at the Moscow Financial Forum. According to Mr. Dvorkovich this indicator was less than 5% not so long ago. He explained that higher profit was due to the improved efficiency of the grain business. Earlier, the Minister of Agriculture Alexander Tkachev said that the production of grain was profitable throughout Russia with profitability ranging from 10 to 100 percent depending on the region. In his speech at the Financial Forum, Arkady Dvorkovich also mentioned that Western sanctions were harmful to the Russian agricultural business that could no longer turn to international financial markets for cheap funding. “Our response is only aimed at mitigating the damage inflicted against agriculture. And we are providing just enough support to offset the damage,” emphasized the Deputy Prime Minister. “Profitability of agriculture without government support has grown...”, Agronovosti, 2016 xlv

Illustration No. 3.5. Agriculture amid sanctions

42 3. How to AwAKEN the Champions? Making Big Companies Innovative 3.3. WHAT TO STRIVE FOR? OPPORTUNITIES FOR INNOVATIVE DEVELOPMENT

n the previous section we showed that large business- emerging to develop ADAS and connected car technol- Ies in Russia are currently demonstrating low innovative ogy. activity. At the same time, our analysis of the current Recently, the domestic aircraft industry has come up state and technology development trends in the focus with several projects that may be quite competitive in the industries proves that there are opportunities for inno- global marketplace, such as the above-mentioned SSJ- vative development already in the medium term. Those 100 and MC-21. It is necessary to support further devel- problems should be solved rapidly and successfully to opment of the existing projects and continue developing support the competitive ability of those industries in the aircrafts for niche segments of civil aviation, where com- long term. petition is less fierce. Another area for innovations is the In the upstream oil and gas sector, for example, there supply of high-tech components, such as failure-proof are several areas for innovative development. One of top fuel systems, to international manufacturers. Russia priorities for all oil and gas players is to increase oil re- already has successful examples of such cooperation – covery ratio at the existing fields from the current 27-30% thus, Irkut corporation supplies components to Airbus. to the global 35-40%1. This will require active use of en- In the agricultural sector we can see two major areas hanced oil recovery methods, which implies localization for innovation. First, development and implementation of of relevant technologies, such as multi-stage hydrofrac- novel process solutions, such as satellite tracking, ae- turing and directional drilling. ro-monitoring, precision agriculture, and industrial pro- The second group of innovations required to support process automation. Currently, the most developed area in duction volumes concerns the development of tight re- Russia is the satellite tracking and provision of analytical serves. Among Russian companies there are examples findings on its basis. The second promising area is the of successful innovations in this area, such as the experi- development of domestic cattle and seed breeding. To- ence of Tatneft in extracting hard-to-recover bituminous day, those areas are practically non-existent in Russia.3 oil. Development of the Bazhenov formation may become a breakthrough project. Gazprom Neft is carrying out projects to study the formation, and in June 2016 the company finished boring a horizontal hole, thus implementing the full cycle of process solutions for extracting shale oil2. It should be noted, however, that industry experts have not formed a uniform position regarding the possible impact of development projects related to the Bazhenov formation . The tax policy is one of the key development drivers for those areas. The third possible area for innovations is the creation of internationally competitive non-capital intensive products in the areas where Russia already has competencies, such as software development, geophysics, sen- sors, and electronics. The global automotive industry is undergoing rapid changes driven by increasing penetration of information technologies in car systems a rapid tightening of environmental standards resulting in development of hybrid and electric cars. Our experts believe that Russia has every chance of finding its niche in this market. We distinguish three promising areas for Russian innovations: connected car technology, advanced driver assistance systems 1 Source: Report on “Import substitution in the Russian oil and gas (ADAS), electric/ hybrid cars and unmanned vehicles for sector” and other data of the Ministry of Energy, Schlumberger application in agriculture and the mining industry. Rus- 2 Source: Gazprom Neft is the first Russian company to implement a sia has preconditions for further development in each of complete process of shale oil extraction to develop unconventional these areas: LADA Connect project has been launched; reserves, August 29, 2016, http://www.gazprom-neft.ru/press-cen- electric car prototypes have been created; KAMAZ and ter/news/1114411/?sphrase_id=748674 GAZ are developing unmanned vehicles; start-ups are 3 See for example: https://regnum.ru/news/2169901.html

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 43 3.4. WHAT ARE THE HURDLES? BARRIERS TO INNOVATION

n this section, we will attempt to identify the main bar- conservative mindset, who aim to maintain the status quo Iriers for the development of innovation, which affect big and are interested, among other things, in lobbying state business either directly or indirectly. We have broken support measures that ensure the perpetuation of the these problems into four main areas (see Illustration No. current model, and not innovative development. 3.6): The end result of management’s lack of incentive for in- domestic hurdles facing big business; novation and its short planning horizon is that companies have no systematic experience in implementing innova- market obstacles tion. The long-term lack of innovative spirit leads to two barriers for innovative development of suppliers; problems that can be observed within companies. barriers related to regulation and state support. The first is the lack of executives who possess the skills required to successfully implement innovation, including DOMESTIC HURDLES FACING BIG management of changes, risks, large-scale results, and organizing a culture of constant improvement. This problem BUSINESS is felt most acutely in agriculture (see Illustration No. 3.7). Domestic hurdles for the development of innovation at large companies are focused on two areas: the manage- “People are the main and only problem. We cannot move forward and ment’s lack of motivation for long-term growth of the begin to work until we have the right people. And right now we don’t. company and (partially related to the first hurdle) the company’s inability to implement innovative ideas. We’ve tried hiring foreigners, but they do not fit into our environment”. xlvii Almost all of the industry experts we surveyed pointed Maxim Basov, General Director or Rusagro, FIRRMA, 2016 out that the main problem is the lack of management’s accountability for the company’s development over the Illustration No. 3.7. Lack of qualified executives in medium term. There are several reasons for this. First, the low predictability of the economic environment and the agriculture short-term nature of management’s contracts results in a reduction of the planning horizon as all key targets slated for implementation are short term in nature. Second, The second problem is that internal processes at large declared innovative plans are of long-term nature, which companies are focused on short-term operating tasks and means that the current management is not directly respon- are not geared towards phasing in innovation. This refers sible for the end result. Medium-term innovative develop- to at least two processes: management of innovation and ment plans do not exist, or there is no actual responsibility procurement. for their implementation. Thus, the main priority becomes Frequently, companies lack an innovation management that of resolving operational tasks and maximizing profit in system; for example there are no clear-cut or transparent the short term. Such a situation wreaks havoc on innovative criteria for selecting innovation projects as part of project projects with an implementation horizon of 5-10 years, i.e. management. This, for example, tends to promote a cul- beyond the medium-term planning horizon. ture of fear at companies that innovation cannot be suc- One result of this is another key barrier – management is cessfully implemented and that employees will face sanc- not interested in promoting an innovative agenda. Even tions from the management at a later time. As a result, it at state companies, where there are officially approved is safer not to undertake anything, since sanctions will not IDPs and LDPs, including issues related to innovative de- be taken for not acting. Consequently, companies have no velopment, it is not possible to make innovation a priority interest in implementing even their own initiatives. for the management, since there is no responsibility for Similar problems can be seen in the procurement system, the implementation of these plans. The only instance which is focused on the price of supply and not the quality when an executive of a large company was fired “for fail- of the proposed goods, thus undermining potentially inter- ure to implement innovation programs” – the dismissal of esting innovative ideas. Such processes do not work well Alexei Fedorov from United Aircraft Corporation (UAC) – when it comes to the procurement of non-standard prod- 1 may have also involved other more serious reason . ucts for which there is no way to make a direct compari- Thus, many examples of successful development of in- son in terms of price analogs. This makes it very difficult novation at large companies are directly associated with to tender services for the development of prototypes, or personal ambitions and the management’s motivation for components used to produce them, which are required to phasing in change. Nowadays, however, the management perform R&D. As result, this hinders the development of of large companies is comprised of people with a more innovation at companies.

44 3. How to AwAKEN the Champions? Making Big Companies Innovative Source: BCG analysis BCG Source: Источник: анализ BCG Consumers and markets No incentives for innovation and cooperation development in the SDO pricing system No competition with foreign companies, even in the Russian market No competitive offering for export No strategic approach to industry standards No hard commitments to cut support for chronic loss makers Lack of support for innovation including the export of high-tech products Purchasing procedures and requirements for industrial safety prevent innovation activity Support and regulation Enterprises (large businesses) management does not promote innovation agenda No mid-term responsibility No competencies for R&D management Internal processes prevent innovation development Suppliers and contractors Limited number of subcontractors due to the vertical integration of large business No funds for innovation high barriers to entry Illustration No. 3.6. Barriers for the development of innovation the development for No. 3.6. Barriers Illustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 45 MARKET OBSTACLES a number of industries, it is suppliers and subcontractors, most of which are small and medium-sized businesses, A serious hurdle is the fact that the prevailing domestic mar- are innovation drivers. For example, in the oil and gas ket model for doing business does not create the conditions sector small oil service companies are the ones that work required to develop innovation. For example, let’s examine out new, innovative solutions. In Russia these compa- the current pricing system for state defense orders: nies could also be a source of innovation, but the existing First, pricing based on cost recovery and the stipulation mechanisms for them to deal with large companies hin- of short-term contracts with annual price review results ders their innovative development. in a lack of incentive for lowering the cost. Thus, raising One of the main barriers is surplus vertical integration of productivity per employee amid fixed profitability (cost- large companies in a number of industries, such as avia- plus model) leads to a reduction in the company’s profit tion (see Illustration No. 3.9). In such holdings, competen- when reviewing the cost of the contract for the next year. cies are arranged in such a way to ensure fully integrated Second, the current 20% + 1% pricing rule (profit under production, as a result of which there is hardly any subcon- a state defense order contract cannot exceed 1% of the tracting. Experience in the development of major global cost of payment for the items purchased and subcon- companies, for example Boeing and Airbus, shows some tracting and 20% of in-house expenses) directly moti- opposite trends: large companies perform only the key vates companies to achieve maximum vertical integra- functions, such as conceptual design, whereas the remain- tion and reduce subcontracting. This, in turn, hinders ing stages of production are assigned to subcontractors. As the innovative development of suppliers. the example of these companies shows, increased competition among suppliers urges them to continuously improve Another problem in the domestic market is the lack of their products and seek constantly to achieve innovation. competition with foreign companies even on the Russian market. For example, a survey of experts in the aviation Another factor that is limiting the development of suppli- industry showed that a stable volume of state defense or- ers for a number of industries is high entry barriers. For ders, for which access is limited to only a few companies, example, in aviation such barriers may include licensing aside from the above-mentioned negative factors also re- and certification for aircraft designers. Without a doubt, duces incentive to manufacture civilian products. In the the complexity and risks in operating aircraft mandate oil and gas industry, there is often a lack of competition stringent regulation of the approach to admitting new for access to field development. In agriculture, the count- players, but UAC could play a new role here: for example er-sanctions are limiting access to foreign products on the by holding tenders among independent companies and Russian market, thus lowering incentive for manufactur- further providing financial and technical support for the ers to raise efficiency. winners. Other barriers include dual-use technologies. First, the high proportion of such technologies in the avia- In a number of cases, such a situation has caused large tion industry prevents the industry from opening up to out- domestic companies to focus excessively on the Russian side players (suppliers, design offices). Second, the fact market. This ultimately leads to problems in exporting that intellectual property is owned by the RF Ministry of goods due to the lack of competitive supply relative to Defense considerably limits access to it. global producers. In the aviation industry, an example could be the low level of service and after-sales support: Another problem mentioned by representatives of all the speed in the supply of components, availability of pilot above-mentioned industries is the lack of innovative training centers, etc. (Illustration No. 3.8). means on the part of suppliers and subcontractors. Outside the above-mentioned industries an example may There are various reasons for this situation. For example, in be cited from another segment of transport engineering the automotive industry this is the result of a substantial de- – locomotive production. Most procurements on foreign cline in the domestic market. A considerably different sit- markets are made under life cycle contracts, while Rus- uation has arisen in the oil and gas sector. In recent years, sian companies do not yet have standard operations in that amid high oil prices oil and gas companies often hired large model, especially due to the lack of service and repair units foreign oilfield service companies and hardly ever turned to abroad. It should be noted that such contracts have already local players. This led to a shortage of domestic suppli- begun to be used in Russia, for example when components ers capable of providing enhanced recovery techniques and for the Moscow subway were purchased in 2014.2 xlix business development solutions. Thus, domestic oilfield service companies essentially saw their profit cut in half in 2013 compared to global peers (see Illustration No. 3.10). BARRIERS FOR INNOVATIVE DEVELOPMENT OF SUPPLIERS Starting in 2014, after a sharp decline in oil prices and the imposition of technological sanctions, oil companies be- Large companies are not always responsible for the de- gan to turn increasingly towards local players. However, velopment of innovation. Global experience shows that in

“Spare parts are mainly delivered from abroad, there is a waiting period of about a month, by comparison: Boeing and Airbus components arrive within 24 hours <...>. Sukhoi Civil Aircraft has a reliability rating of four breakages per 1,000 hours of flight time, while Boeing has two breakages”. Vedomosti “Aviation companies do not fly much on the Sukhoi SuperJet 100”, 2016 xlviii

Illustration No. 3.8. A example of problems with SSJ-100 service

46 3. How to AwAKEN the Champions? Making Big Companies Innovative the lack of activity during the period of predomination by between Russian and international standards as regards foreign companies led to a situation where domestic oil- the promotion of Russian standards, mutual alignment field service companies had neither the facilities nor the of standards to simplify exports, or their differentiation to staff to meet this type of demand. Thus, despite the need protect the domestic market. for innovative products, large companies today are reluc- In terms of innovations this results in two problems. First, tant to participate in the development of subcontractors, the difference between Russian and international stan- for example, co-investing in R&D or suppliers or guaran- dards constitutes a substantial barrier for the develop- teeing demand for a certain product. ment of exports. Second, a number of industry standards have not been revised for a long time and do not meet BARRIERS RELATED TO REGULATION modern requirements (see Illustration No. 3.11). AND STATE SUPPORT Another problem is that there are no strict obligations The state plays an important role in promoting develop- to lower support for chronically loss-making manufac- ment amid the prevailing situation in Russia. However, we turers. The state’s policy currently focuses on promoting can see a number of major problems in the state’s policy demand or covering the losses of large companies. Such as such. One of them is the lack of a strategic approach measures, while reaching support goals for social stabil- to industry standards, as shown by the state’s lack of a ity, lower the management’s incentives to raise efficiency clear-cut action plan relative to the existing differences or improve the quality and volumes of products sold (see Illustration No. 3.12).

Integrator Level 1 Level 2 Level 3 Level 4 (OEM) (packages and systems) (assemblies and units) (parts and components) (feedstock and materials)

Vertically integrated company Russia limited cooperation

Final integrator (OEM) World

Source: Ministry of Industry and Trade, expert interviews, BCG analysis Illustration No. 3.9. A comparison between the aviation production chain in Russia and in other countries.

World average 22%

17% Operating profits of top-10 Russian oilfield service companies, 2013 х1,8 16% 16%

13% 12% 11%11% Russian average 13% 10% 8%

Center for KATKoneft Eurasia Investgeoservice PetroAlliance Gazprom Drilling Siberian Spetspetroservice Petrotool Integra horizontal Drilling Service Group drilling Company Company

Source: SPARK Interfax, Thomson Reuters, Oil-gas.ru rating of oilfield service companies, company reports, media analysis, BGC analysis Illustration No. 3.10. Operating profit of oilfield service companies in 2015

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 47 RUb bn programs such as “Development of Industry and Improv- 100 ing its Competitiveness”, as part of which, for example, 52 92 support is planned for R&D and the expansion of production competencies. 75 However, a survey of industry exports and analysis of the implementation of these state programs shows that some The only targeted support support programs, which are important for industry de- item indirectly related 50 velopment, are not being executed (see Illustration No. to technical upgrade 5 3.13). For example, a program aimed at resolving an im- of the automotive 20 2 industry portant issue in the aviation industry – developing service 25 maintenance – was not carried out on schedule. In addi- 10 tion, support of Russian exports is considerably less than 3 in other countries (see Illustration No. 3.14). 0 Subsidies Scrappage Purchasing Support of Leasing Labor Total Another barrier to innovation is the ongoing contradiction for gas program of vehicles purchases plan market between the current procurement procedures (including engines for in the subsidies support government agricultural Federal Law 223 and Federal Law 44), industrial safety re- purposes sector Source: Autostat (February 2015) quirements and innovation activity, as well as lengthy pat- Illustration No. 3.12. State support of the automotive enting procedures, thus limiting innovative activity. industry (direct and indirect) in 2015 It should be noted that in recent years the state has created a large number of tools aimed at developing inno- 1 See, for example: https://lenta.ru/articles/2011/02/01/oak/ vation, including increased exports of high-tech products. 2 Department of Transport and Development of Road Transportation Such tools include the Russian Export Center (REC) and Infrastructure for the City of Moscow, annual reports of Trans- EKSAR, which is part of REC Group, the adoption of state mashholding

Non-compliance with AP MAK and EASA/FAA hinders the development of exports in the aviation industry Non-compliance with the Russian standard AP MAK and EASA/FAA2 with European and American standards makes it necessary for aviation products and components to obtain additional validation, thus requiring some components to be redesigned. Such a process considerably increases the timeline and cost of entering foreign markets. F urthermore, there are no harmonized requirements for the system of management quality and audit standards. Such differences result in overlapping processes of product certification. For example, GOST R EN 9100 “Aerospace series. Management quality system. Requirements.“ is close to AS/EN 9100, but there are no audit, evaluation and certification standards. In addition, Russia has not managed to implement ICAO environmental standards. In 2016 the ICAO developed new CO2 emission standards which provide for terminating use of all SSJ-100 aircraft, including the current model. “The position of the Russian aviation industry is being worked out. On the agenda is the issue about what emission level could be painlessly adopted so that the Russian aviation industry is not isolated”. O Panteleev, ex. director of “Aviaport, Rossiiskaya gazeta”, The Sky Will Set a Filter”, 2016 l

Obsolete GOST national standards, construction standards and regulations hinder growth of Russian roads Key GOST national standards, construction standards, and other standards applicable to road construction were developed in the 1960s and do not meet modern requirements. As a result, highway parameters are calculated using an obsolete method that does not reflect the structure of modern traffic and load of the road network. It could take years to work out the new statutory framework, since the suitable approach would be to study and adapt foreign standards. Avtodoroga experts are preparing proposals to use Finnish and Swedish design and construction standards. “The system was disrupted and as a result the traffic has become chaotic, with a number of technical committees having been set up, including small ones that are concerned with one type of work and huge committees like a technical committee for construction, which is concerned with all aspects of our habitat. Each fiefdom now does its own documents and there is a huge problem when it comes to streamlining them between sectors and regions”. A. Tsernant, dep. General Director of Research Institue for Transport Construction. RBC “Development of Russian roads hindered by obsolete GOST national standards and construction standards.li

Illustration No. 3.11. Examples of problems with industry standards

48 3. How to AwAKEN the Champions? Making Big Companies Innovative State program “Development of industry and raising its competitiveness”. Sub-program “Auto- motive Industry” Part of this program was a plan to expand the suppliers of components, especially the development of bearings . However, the planned measures were not fulfilled due to the lack of funding from the federal budget. Furthermore, this problem – the low quality of components – was highlighted by industry experts as one of the most important factors constraining the development of innovation. The same program also planned to support R&Dliii but the relevant measures were not carried out. The reason was the lack of applications from companies In our opinion, this shows that the process for receiving state support is overly bureaucratized. State program “Development of the aviation industry for 2013-2015” One of the areas of state support includes development of service maintenance in the aviation industry – one of the main barriers for development of industry exports. In particular, the plan called for creating service centers in early 2016 in a broad effort to provide support. However, based on the results of the first six months of the year, the planned events were not fulfilled: the logistics operator and the authorized scientific center were not established. State funding was confirmed only in the third quarter of 2016 lv Source: BCG analysis

Illustration No. 3.13. An example of unimplemented state programs

Exports insured by the leading Export credit support by export credit agencies the leading EXIM banks 2015, % of non-fuel1 exports (USD bn) 20152, % of non-fuel1 exports (USD bn) finnvera Eximbank (finland) 3,25% 7,38 (Turkey) 3,59% 20,18 NExI SEK (Japan) 2,61% 64,34 (Sweden) 2,32% 12,41 EKN fEC (Sweden) 2,00% 10,70 (finland) 2,03% 4,61 Eximbank Kexim (Turkey) 1,80% 10,12 (Rep. of Korea) 1,70% 34,14 EDC ExIAR 0,90% 6,54 (Canada) 1,05% 14,72 GIEK OeKb (Norway) 0,85% 2,02 (Austria) 0,97% 5,56 OeKb ECN (Austria) 0,73% 4,18 (Norway) 0,93% 2,21 EDC Eximbank (Canada) 0,37% 5,19 (India) 0,42% 4,55 K-Sure JbIC (Rep. of Korea) 0,25% 5,02 (Japan) 0,14% 3,80 ECGC (India) 0,03% 0,29 Roseximbank 0,02% 0,19 01%2%3%4%01% 2% 3% 4% 1. Export, except for line 27 of Goods Nomenclature for Foreign Economic Activities (TNVED)/ Comtrade. 2. For Russia and Japan, as of 2014. 1 2 Source: annual reports of agenciesExport, except and banks; for line BCG 27 of analysis Goods Nomenclature for foreign Economic Activities (TNVED)/ Comtrade. for Russia and Japan, as of 2014. Source: annual reports of agencies and banks; BCG analysis Illustration No. 3.14. Comparison of the amount of export support in Russia and in other countries

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 49 3.5. WHAT CAN BE DONE? MEASURES TO PROMOTE INNOVATION

n the previous section, it was shown that barriers for the sary to develop options programs pegged not to the value Idevelopment of innovation are associated both with the of the company but to its various departments or innova- internal problems of large companies and external fac- tive businesses (spin-offs). tors. In this section, we will show what capabilities the In Russia this mechanism has already been used by a state has to resolve the existing problems. The proposed number of innovation companies. Such companies as measures are again grouped into four main areas (see Yandex, Mail.ru Group Limited, and AFK Sistema uses Illustration No. 3.15). options to reward their employees. In particular, AFK removal of internal barriers; Sistema’s long-term incentive program was launched in 2010 and was recently extended until 2017 (see Illustra- development of suppliers and subcontractors; tion No. 3.17). removal of hurdles on the part of markets; It should be noted that in 2015 such concepts were in- amendment of regulations and state support for inno- troduced in the Civil Code as “the option to stipulate an vation agreement” and “options agreement”, thereby removing one of the key obstacles in using this incentive mech- 3 REMOVAL OF INTERNAL BARRIERS anism . However, for successful use of options as a means of incentive at state companies it will be neces- In the previous section, we outlined four main problems sary for some of the company’s shares to be in free float. facing the development of innovation inside large compa- This means that partial privatization is necessary. nies. To resolve the first problem – the lack of responsi- Phasing in this incentive mechanism at state companies bility in the medium term – it will be necessary to make should promote an influx of valuable executives from pri- the management interested in the company’s long-term vate companies. Private companies will begin to make development. After analyzing successful global and Rus- broader use of such incentive program in order to retain sian experience, we have identified two ways to resolve key employees. Thus, this method could be implemented this task. not only at state companies but also at private compa- One solution for state companies would be their partial nies. privatization. In addition, the best way to ensure suc- It should be noted that innovation incentives need to be cess would be to search for an interested strategic in- offered not only to the company’s employees, but also vestor that has the capabilities and the skills required to members of the board of directors. This is particularly ensure long-term development of the company. A nota- relevant for state companies where civil servants repre- ble example of the implementation of such a mechanism sent the interest of the main shareholder - the state. In is the privatization of Kalashnikov concern: in a matter cases where an options model is not applicable (for ex- of just two years the company managed to improve its ample, when limited incentives are available to civil ser- financial performance and significantly expand its line of vants), alternative long-term incentive methods should proposed goods. be worked out. Another tested and tried way to create incentives for Aside from the solutions directly related to the long-term development of companies is to provide op- above-mentioned issues, during preliminary hearings of tions for employees: an employee who holds an option the report experts noted than innovation management at in the company’s shares has a vested interest in the state companies through KPIs is inefficient, since there long-term growth of their value and will therefore have is no real responsibility and the sanctions prevent them a greater incentive to implement long-term projects on a from being implemented. The failure to meet KPIs has horizon of 5-10 years. Meanwhile, given the short-term no affect on a manager’s future career. In order to re- nature of managers’ current contracts (no more than solve this issue it will be necessary to work out and im- three years), it will be necessary to perpetuate the term plement ways to make background checks and gauge of the option so that it will not end after the validity term the prior performance of employees when appointments of the manager’s employment contract expires. are made. In this way, a manager’s track record should One guideline in creating a long-term employee incen- become a part of is CV, as it reveals the actual results tive system for innovation is by making it end-to-end in and sets the stage for future appointments on grounds nature. The incentive system should be applicable to all of personal merit. upper levels of management (top management), both to The user of manager incentives for the company’s long- mid-level managers and the company’s key experts. term expansion should help make innovation a priority. In cases when it is not possible to offer stock options (for This will help partially solve the second problem - the example, in non-public state companies) it will be neces- lack of innovation on the management’s agenda. How-

50 3. How to AwAKEN the Champions? Making Big Companies Innovative Source: BCG analysis BCG Source: Источник: анализ BCG Consumers and markets Change the SDO pricing: use long-term contracts, change the "20-to-1" rul e Create clear guidelines for using life-cycle contracts in state-owned companies Strategic revision of industry standards, harmonization / differentiation vs. world standards as require d Introduce advanced standards/ quality marks Coordinate large players to jointly develop technologies the industry requires Develop targeted incentives to support high-tech expor t Improve purchasing procedures and industrial safety requirement s User experience audit of supporting measures Support and regulation Enterprises (large businesses) Option programs for senior and middle management, incentives from corporate venture funds’ profits CEO talent pool program focused on innovation Localize R&D of foreign companies as a market entry condition Long-term motivation of boD member s Co-financing of corporate venture fund s Personnel training programs including top management Partial privatization of state-owned companies Suppliers and contractors Develop a competitive component market: develop integrators, attract foreign investors, organize component manufacturers in separate business units with P&L responsibility Long-term cooperation of large businesses and suppliers: long-term contracts, access to intellectual property, access to testing areas and facilities for certification Recovery of certification expenses lllustration No. 3.15. Measures aimed at promoting innovation aimed at promoting No. 3.15. Measures lllustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 51 Privatization of the concern led to widespread change at the company, enabling it to considerably improve its financial performance

В Kalashnikov Concern was established in 2013 on the basis of NPO reduced and work in progress was cut by 20% in 2015. Izhmash. State-owned Rostech1 retained a 51% stake in the company, These measures made it possible for the concern to improve its financial while private investors received 49%. This year saw the adoption of a performance considerably. Thus, for example, in 2014 the company man- development strategy until 2020, including an investment program worth aged to break even in terms of net profit for the first time in seven years. over 4.5 billion rubles. The company also managed to quadruple its order book of exports to USD The important changes include expansion of the range of products2: 230 million amid sanctions (ban on deliveries to the USA and Europe) by development and production of speed boats (delivery of high-speed refocusing on the markets of Africa, Asia and Latin America landing vessels (BK-16) and assault vessels (BK-10) for the Ministry of The financial indicators of the concern in 2013-2015 are shown below. Defense), development and production of UAVs, and the development of remote-controlled military modules. Large-scale optimization of production was also carried out. Five main Revenue, bn rubles production workshops were upgraded: the current range of machine tools Net income, bn rubles 8.2 was updated, the premises were renovated and cutting-edge IT solutions were implemented. Investments totaled over 3 billion rubles in 2014- 2.3 2.9 2.1 2015. Moreover, a unified logistics center was established instead of 33 old-style warehouses. A lean manufacturing program was launched in or- -1.9 -0.3 der to reach the goal of cutting in half the cost of production. As a result 2013 2014 2015 of this program, for example, the time required to deliver an order was

Source: annual reports and press releases of Kalashnikov concern, BCG analysis Illustration No. 3.16. Privatization of Kalashnikov concern ever, implementation of the above measures is by no etc. based on international experience (see Illustration means sufficient. The upper management needs to have No. 3.18). The resolution of these two main problems will the necessary competencies and be personally motivat- offer incentives for managers to change processes and ed when it comes to introducing innovation. An execu- develop the competencies needed for innovation. The tive management pool should be formed in order to find state’s role in this process is to spearhead support pro- candidates for upper management positions. Such a grams as required in the main areas, i.e. executive devel- pool can be formed only by shifting towards innovation opment and the acquisition of operating competencies. the existing pool of executives under the auspices of the The continuation and expansion of existing HR training President of Russia, or by setting up a similar executive state programs should include: pool. Meanwhile, this register should be available both to state and private companies. Notably, the experts indi- active promotion of collaboration between large com- cated that this pool currently exists only on paper. Thus, panies and institutions of higher education; such pro- in future it will be necessary to make concerted efforts grams will allow companies to hire the most compe- to foster executive development, for example, through tent employees; advanced training programs, international internships,

Yandex Mail.ru Group JSFC Sistema

Program type • Employee Stock Ownership • Restricted stock units • Employee Stock Ownership

• A new program until 2026 • A new program until 2022 • A new program until 2017 Program conditions • 15% of company stock are reserved • 5% of stock are reserved for the • ~1-3% of stock are reserved for for the stock option program stock option program the stock option program

• Top management • Top management • Top management Participating • Mid-level managers • Mid-level managers • Mid-level managers employees • Most valuable employees • Most valuable employees

Sources: company reports, press search, BCG analysis

Illustration No. 3.17. Application of options programs in Russia

52 3. How to AwAKEN the Champions? Making Big Companies Innovative advanced training support programs, including those 2012 to 2014) Malaysia managed to raise about USD 490 held at special training centers or financial support for million of foreign investment and localize the R&D of six training in Russian or foreign educational institutions; international oilfield companies. creation of conditions for attracting foreign employees: The establishment of corporate venture funds is an im- offering tax breaks, cutting red tape, for example, as portant and viable way to promote innovation. This mech- regards issuance of visas, work permits, etc. anism makes it possible to single out the innovation management process from among the company’s processes The key focus should be programs to develop skills of by reducing the influence of inertia and conservatism in top management and the Board of Directors, such as the overall corporate governance system. An analysis of programs involving exchange of experience (for example, similar funds shows that aside from developing the main Sberbank University). business, they are also geared towards expanding new Another mechanism for state support of expanding areas. Thus, for example, the corporate venture funds of competencies at large companies could be localization international companies in the oil and gas industry are of R&D at international companies. Based on the suc- designed to seek out and develop technology related to cessful experience of other countries, the state should alternative energy, biofuel, and smart power supply grids embrace the following promotion measures: (see Illustration No. 3.19). legislative regulation at the industry level, for example It should be noted that the state has already worked out requiring a certain degree of localization as a criterion measures to support corporate venture funds. Needless for admission to the market; to say, it will be necessary to continue these initiatives, including active participation in co-funding corporate provide tax breaks; venture funds. To expedite implementation of this mech- co-fund R&D, especially in the area of fundamental re- anism at state companies, we suggest directly incentiv- search; izing the upper management to roll out such funds, for example, by carrying over interest from profit.4 establish clusters as part of certain projects/areas;

provide protection for intellectual property; DEVELOPMENT OF SUPPLIERS develop professional competencies, for example, by AND SUBCONTRACTORS opening training centers. In the previous section we identified three main barriers Some successful examples include the experience of that prevent suppliers and subcontractors from turning Norway and Malaysia in the localization of R&D in the oil into innovation drivers. They were all related to the ex- and gas industry. isting mechanism for their interaction with big business. The example of Norway illustrates the viability of legisla- In order to resolve the first problem – excess vertical tive regulation. In the 1980s the government established integration of big business – it will be necessary to de- localization of at least 50% of the R&D as a prerequisite velop a competitive components market as part of large for issuance of a field development license. Furthermore, vertically integrated companies. For example, in the avi- companies were awarded tax breaks for R&D carried out ation industry this refers to tier 2-4 suppliers. We have inside the country. Given high taxes in the Norwegian oil identified three possible measures that the state could and gas industry, this move was another incentive for lo- take to encourage them to open their procurement. calization. As a result, Norway managed to become a leader in offshore oil production. First, it will be necessary to create incentives to raise efficiency and lower costs all across the production chain. The example of Malaysia shows that international compa- To achieve this, we suggest identifying component man- nies can be attracted by creating a favorable investment ufacturers and breaking them down into business units climate. The government’s work on implementing The with their own financial reports. This should also help National Program for Transformation of the Economy instill in the managers of these business units a sense included the task of localization for international oilfield of responsibility for the financial performance of the service companies with efforts focused on four main ar- various divisions and therefore an incentive to find the eas: best possible suppliers of goods to lower the cost of pro- help in building mutual relations between overseas duction and seek out alternative sales markets to boost and local players, including the promotion of local oil- revenue. The state’s role in this process is to guarantee field service companies on international markets; implementation among state companies, while innovative development programs could become a policy tool. develop professional competencies calibrated with advanced industry requirements, and establish training Second, the state could raise the quality of products and development centers; through suppliers not used by large companies, thus diversifying procurement by large companies through interact with peer agencies in other countries: UK drawing foreign investments into the development of do- Trade & Investment, Scottish Development Interna- mestic component manufacturers and establishing joint tional, Energy Industry Council, Innovation Norway and ventures with Russian suppliers. This will also encour- Greater Stavanger Economic Development; age greater exports of high-tech products through joint harmonize legislation and regulation. entry into foreign markets. Possible state measures to raise foreign investments are described above in detail As a result of this work over a period of two years (from

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 53 2,723 1,620 1,444 1,822 UK: practical trainings UK: practical 4,045 P 1 mn profit growth). P 1 mn profit B 2,572 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 0 50-70% of costs related to the employment of university graduates graduates of university to the employment 50-70% of costs related 6,000 4,000 2,000 Corporate advertising per quarter, 2014-2015 Corporate advertising per quarter, UK government promotes practical training in private firms and covers firms and covers in private training practical promotes UK government Source: https://www.theguardian.com/news/datablog/2011/nov/11/student-finance- Source: https://www.gov.uk/performance/bis-graduate-talent-pool-graduate- employeebenefits, employer-registrations In the scope of Knowledge Transfer Partnerships, companies can hire for tempo - for companies can hire Partnerships, In the scope of Knowledge Transfer rary or academic staff to adopt new university graduates/post-graduates projects the academic new and acquire the company and for knowledgeprocesses both for The government and covers partially assumes the risks 50-70% of the partner. costs. retention help the scientists to improve work,These projects the quality of research while partici - the companies achieve program (on an average, financial results practical pants record G pants record service, Pool can advertise the employers With Talent Graduate the use of free graduates. opportunities for training practical employment for graduates was launched in 2009 to better prepare The program in UK is offered in the scope of this program training in the long run. Practical in many industries. companies operating The government evaluates with the use of a web-based monitoring performance dashboard. China: foreign companies China: foreign international companies in China oreover, the SOEs attract middle-age employees of international corporations middle-age employees of international corporations the SOEs attract oreover, train employees abroad and hire best people from multinational and best people from and hire abroad employees train State-owned enterprises in China actively adopt practices and talents, adopt practices enterprises in China actively State-owned Source: http://chapmancg.com/news/thought-leadership/2015/01/the-war-for-talent- Source: in-china; http://www.chinabusinessreview.com/creating-an-innovative-talent-pool/ M authority and self-fulfill - more limits by their career offering they reached where ment opportunities. initiatives,The government including campaigns and different launched extensive - back to China experi to recruit Program” “Thousandthe most recent Talent S&T (science and in China’s roles on leadership enced individuals who can take technology) system. Government officials dispatch talented young people overseas advanced for them to top international standards to expose experience education and research of science and technological know-how. Chinese state-owned committed to achieve enterprises (SOEs) are international Chinese nationals who work abroad they aim to hire currently leadership; market and in multinational Chinese-based corporations. employees of interna - the promising financial incentives for Chinese SOEs offer stock salaries and attractive pre-IPO tional firms, including higher guaranteed purchases. Ali Bin Nasser Al-Ghafis, Governor of TVTC (2012) Saudi Arabia: corporate academies corporate Saudi Arabia: the pool of best technical talents in Saudi Arabia (2012) the pool of best technical talents in Saudi Arabia "TVTC to to team with GE, a world-class technology company, is proud of the cornerstone and technicians who will form the engineers train industry TVTC'sthe Saudi energy reflects The agreement of tomorrow. with the private to build partnerships sector to implement strategy that support Vision initiative 2020, Saudi Arabia's programs to promote newdiversification, create jobs and drive overall welfare.” GE creates a Technical Academy in partnership with TVTC Academy in partnership to extend a Technical GE creates Source: http://www.genewsroom.com/press-releases/ge-establishes-technical- Source: academy-partnership-tvtc-grow-saudi-technical-talent-pool GE signed a strategic partnership agreement with the Technical and Vocational and Vocational with the Technical agreement partnership GE signed a strategic (TVTC) Corporation to establish a technical academy in Saudi Arabia. Training of Saudi the graduates 150 talents selected from The academy will annually train skills in the extended technical universities. They will be able to acquire Arabia and of gas turbines, electrical motors maintenance and repair like areas key of electricity. critical to the efficient generation that are generators the opportunity to join GE's business in will be offered Successful graduates sector in Saudi Arabia. energy growing GE Saudi family to support the expanding Illustration No. 3.18. International experience in implementation of the executive pool in implementation of the executive No. 3.18. International experience Illustration

54 3. How to AwAKEN the Champions? Making Big Companies Innovative management energy sources energy and communications iofuel and energy efficiency iofuel and energy B fossil fuels, nuclear technologies fossil Prioritized technologies Prioritized ostly in exploration and production areas and production ostly in exploration energy sources, energy efficiency, water efficiency, energy sources, energy Source: corporate web-sites, targeted press search, BCG analysis BCG search, web-sites, press corporate targeted Source: M Renewable energy sources, energy performance, performance, energy sources, Renewable energy Oil and gas production and processing, renewable and processing, Oil and gas production Oil and gas, alternative energy, novel materials, IT Oil and gas, alternative energy, Exploration and production areas, some renewable areas, and production Exploration Renewable energy sources, energy efficiency, waste efficiency, energy sources, Renewable energy 2 1 $1 bn No data No data $90 mn $300 mn $250 mn Invested capital Invested $120 mn (invested so far) areas Objective opportunities energy sources energy production solutions production technologies of the future inding technologies to improve operational F operational activities and uncoveroperational new growth Adoption of best practices for accelerated and Adoption accelerated for of best practices Identification of technologies to strengthen key key Identification of technologies to strengthen Accelerated development and deployment of new more extensive commercialization of clean energy of clean energy commercialization extensive more technologies, mostly in exploration and production and production technologies, mostly in exploration performance of Statoil in oil and gas, or renewableperformance accelerate developmentaccelerate and launch in Saudi Arabia Investing in challenging revolutionary “new energy” Worldwide investmentsWorldwide in prioritized technologies to Development of next-generation energy technologies energy Development of next-generation

anagement not including STI investmentsanagement not including STI M AE Ventures Total Energy Ventures Energy Total Shell Technology Ventures Shell Technology Statoil Technology Invest / Invest Statoil Technology Corporate venture fund venture Corporate Energy Capital Management Energy Energy Technology Ventures Technology Energy Chevron Technology Ventures Technology Chevron Saudi Aramco Energy Ventures Energy Saudi Aramco Energy Capital Energy 2 ased on the Coller Capital’s STV acquisition price. ased on the Coller Capital’s B

Illustration No. 3.19. An example of corporate venture funds in the oil and gas industry venture of corporate No. 3.19. An example Illustration 1

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 55 Experience in developing the Sukhoi Superjet 100 – a successful example of limiting vertical integration and expanding subcontracting The project began with the establishment of Sukhoi Civil Aircraft in 2000 Sukhoi, which before this had been concerned for nearly 70 years exclusively with military hardware, decided to open a civil division the purpose of which right from the start was to create a global product for the global market. The idea of a global product which involved competitive selection not only of domestic component suppliers but also foreign competitors, was a revolutionary concept for the Russian aviation industry. This decision required dramatically rethinking the entire approach to aircraft design, work ethic in the design office, staff requirements, and first and foremost, an understanding of the certification standards for civil aviation aircraft. The need to create a competitive product on the global market in a short period of time led to a complete reassessment of the approach used for the technical design of aircraft. The prevailing industry practice of designing aircraft with complete integration of all technical solutions provided by a single design office was no longer suitable for the new environment. For this reason, it was decided to outsource the detailed design as the most work-intensive, although it did not require the highest qualification. In our report, we examine the approach used for design based on the example of a key part of the aircraft design – its wing. When designing the wing of the SSJ-100, the designers of Sukhoi Civil Aircraft entered into close cooperation with scientists of TsAGI and SibNIA as leading global centers of aviation science. The work was arranged as follows: Sukhoi Civil Aircraft was placed in charge of the overall wing concept (its size, blueprint shape and target parameters, such as the level of supporting features and aerodynamic quality plus the requirements for manufacturing techniques), while TsAGI scientists were in charge of its profile using 3D CDF optimization methods. Based on this collaboration with TsAGI to determine the optimal wing profile, Sukhoi Civil Aircraft designers conducted the ideal design, i.e. embodying the optimal wing profile in design structures, the frame designs and fitted it with mechanical devices. Using a similar approach, work was arranged with SibNII to optimize wing mechanization. This approach to design made it possible to dramatically reduce the timeframe for development and lower design risks by harnessing the computing power of TsAGI and unique wing profile optimization techniques. It should also be noted that an innovative approach was used in designing the SSJ-100 which involved paperless design and production start-up, as result of which the stage of experimental production was altogether eliminated. The digital blueprints of the aircraft were immediately submitted for serial production at a plant in Komsomolsk-on-Amur, which was retrofitted with advanced CNC machine tools, thanks to which the first flight model was built using technology which was as close as possible to mass production. After mass production was launched this process was repeated for launch of the SSJ-100LR model, which has major differences in terms of its frame design. The first experimental aircraft was built without halting the conveyor belt and once testing was completed the plant switched over to manufacturing SSJ-100LR models without any disruption in the production cycle. Source: interview with industry experts, BCG analysis

Illustration No. 3.20. Experience in developing the Sukhoi Superjet 100 as measures required to localize the R&D of internation- The state’s initiatives in this area include a new strate- al companies. gy for development of the aviation industry until 2025, developed by the Ministry of Industry and Trade, which Third, the state should provide support to integrators contains the projects required to resolve the above-men- of technological solutions. This will make it possible tioned issues. to remove the gap between the needs of big business (ready-made components/assemblies) and the capabili- The second problem – lack of funds for innovations – ties of SME innovative companies (parts/components). It can be resolved by developing long-term cooperation should be noted that this area was mentioned as one of between the large business and innovation program pro- the areas in the draft strategy for the scientific develop- viders. Examples of such cooperation include: sign- ment of Russia in the long termlvi. ing of long-term contracts to supply high-tech products, providing access to intellectual property, co-funding of An example that illustrates the successful expansion of R&D, technological support, such as providing access subcontracting is the experience of development and to field test sites/stands and ensuring quality standards. production of the Sukhoi Superjet 100 regional aircraft. The state should play an active role in this process and This project was innovative not only based on the tech- use different tools to create incentives for large enter- nical component of the aircraft, but also in the way that prises. Such tools may be: regulation, including antitrust work was organized and incentives for the engineering regulation, financial incentives, setting KPIs for IDPs of and design operations. Specifically, component suppli- state companies, coordinating a dialog between big busi- ers were sourced on a tender basis, including foreign nesses and suppliers. manufacturers. However, the most indicative issue is the design process of the aircraft: the design office Sukhoi South Korea can be referred to as a successful exam- Civil Aircraft was only in charge of the conceptual design, ple of implementing such measures. In 2010, the South while detailed design was assigned for development to Korean government initiated the Cooperative Develop- dedicated centers, for example, TsAGI (Central Aero-Hy- ment Program aimed at incentivizing large enterprises drodynamic Institute. Zhukovsky). For details see Illus- to invest in the development of their suppliers and sub- tration No. 3.20. contractors. As a negative incentive, the state has tightened its legal arsenal and enhanced control over legal

56 3. How to AwAKEN the Champions? Making Big Companies Innovative Promoting long-term cooperation between big business and suppliers in South Korea

In 2010, the South Korean government, after a large scale survey among ranking in the Cooperative Development Index, suppliers and subcontractors (mostly SMB) of big enterprises, arrived at the amount of R&D support for suppliers and subcontractors, conclusion that it was necessary to support them and to change the nature number of cooperative development contracts, of their cooperation with big business, such as unjustified understatement of volume of technological support for suppliers and subcontractors. price or failure by big business to comply with payment terms. Below are examples of successful implementation of support programs With a view to improving the situation, the state launched the Cooperative for suppliers and contractors at big companies Development Program aimed at increasing the share of subcontractors in the Samsung added value of large companies. Reaching that goal was made the top-pri- Cooperative development contracts signed with 5,200 suppliers in ority task for the Fair Trade Commission. As a result, the state has tightened 2011. its legislative framework and enhanced control over legal compliance on the Financial support totaling USD 5.7 billion in 2011, including R&D part of large enterprises. The main focus was on unjustifiably low prices support worth USD 1.7 billion by big business, making it easier for suppliers and subcontractors to raise free access to intellectual property and technology prices in case of higher prices for materials, as well as stronger protection of suppliers and subcontractors’ intellectual property. In addition, the Fair LG Trade Commission espoused the concept of signing Cooperative Develop- F ree access to 5,200 patents ment Contracts between large enterprises and suppliers and subcontractors. technological support, such as the availability of an industrial 3D printer F urthermore, the government has worked out the Cooperative Development Index specifically calculated for 56 major companies based on quantitative Hyundai (such as number of cooperative development contracts signed) and qual- cooperative development contracts signed with 1,585 suppliers in itative factors (such as interviewing suppliers and subcontractors). The 2011 leaders of the rating will be provided with incentives from the state, such as; USD 3.9 billion in financial support, including USD 2.3 billion for state support for R&D, tax breaks, subsidies, etc. R&D in 2011 establishment of a group of 300 members to support suppliers’ Implementation of the above measures resulted in a higher priority of the R&D activities task among large enterprises. Today, most of them have set the following KPI targets for cooperative development: Source: annual reports of companies, Korea Fair Trade Commission (KFTC), BCG analysis

Illustration No. 3. 21. Cooperative Development Concept in South Korea

compliance in pricing (antitrust laws) and protection of of pricing for state defense procurement, where there suppliers’ intellectual property. As a positive incentive, is a lack of incentive to improve efficiency and develop the state worked out the Cooperative Development Index subcontracting. One possible solution to this problem is which ranks large companies in terms of their involve- to implement anindexed pricing approach, namely long- ment (SOI) in cooperation with suppliers. The companies term contracts with a fixed base-period price for the first topping the rating will be provided with benefits from the five years with subsequent annual indexation at an agreed state, including tax breaks. As a result of the newly im- rate. Pursuing this strategy will provide companies with plemented policy, successful development of suppliers greater flexibility thanks to cancellation of annual reports has become a top-priority task for large enterprises (see on actually incurred expenses. This, in turn, will promote Illustration No. 3.21). higher efficiency of such companies in a number of ways, including stronger cooperation. One of the main barriers to accessing orders from big businesses is product certification under industry stan- As can be seen from the previous Section, the lack of dards. This issue is particularly crucial for state defense competitive exporting options at large enterprises is procurement. The state needs to elaborate mechanisms due to relatively low (compared to foreign peers) service aimed at facilitating the certification process, such as re- quality and hardly any experience in stipulating long- covery of expenses incurred for certification of products term contracts, for example, such as a life-cycle con- and plants, similar to the programs applied in different tract. The state can solve this problem by creating on the regions to reimbursement of expenses for ISO certifica- Russian market a favorable environment similar to the tion.lvii one that exists on foreign markets. For example, it could be helpful to increase procurement volumes by signing REMOVING MARKET OBSTACLES life-cycle contracts. This measure, if introduced, along with positive experience of dealing with such contracts, In the previous Section we described key barriers on will also help domestic companies to upgrade the quality both Russian and foreign markets that may hinder the of their services and after-sales support. This will also implementation of innovations. The main obstacle for in- help to switch from price competition to efficiency com- novations on the Russian market is the existing system petition and total cost of ownership (TCO).

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 57 Complete implementation of this mechanism in state en- ing or telecommunications sectors, require promoting terprises requires development of specific methodology domestic standards, In some sectors, the state may de- instructions for its applicability, such as methods of cal- velop and implement consciously differentiated domestic culating the value or a standard for such a contract. It is standards in order to protect the Russian market. worth noting that the Ministry of Economic Development, Another applicable measure would be to launch a “quali- together with the Ministry of Finance and the Federal ty mark” as the state’s guarantee of high product quality. Antimonopoly Service (FAS) have already proceeded to At the same time, however, the actual ability of an indus- develop this issuelviii. try to introduce and, where required, implement support Needless to say, the state should also provide support for programs should also be borne in mind. Some of Rus- exports of high-tech products. We will address this issue sia’s industries can already share their success stories of in the next section. implementing such new standards. For example, a new standard for associated gas utilization rate can be cited UPGRADE OF REGULATION AND STATE as a good example in the oil and gas sector (see Illustra- tion No.3.22). SUPPORT FOR INNOVATION Nevertheless, implementation of industrial standards Generally speaking, the state is required to play a more cannot resolve all of the industrial hurdles. Some is- active role in developing industrial policy with a key focus sues, such as enhancing the oil recovery ratio (ORR) in on innovative development. As was outlined in the pre- the oil and gas sector, require fundamentally new tech- vious Section, the state today lacks a strategic approach nical solutions. Nowadays, Russian big companies tend to industrial standards. The first step towards resolv- to resolve such issues on their own. Global experience ing this problem involves revising the existing industri- shows that cooperation of companies aimed at solving al standards. For this purpose, each industry should be industry-wide problems (such as design and develop- required to determine its future strategy for developing ment of technologies or eliminating disruption in produc- industrial standards. In a number of sectors, such as tion chains) is a far more efficient way to find a solution. aviation, it is necessary to align Russian and internation- Implementation of such initiatives in Norway and Great al standards in order to facilitate the export of products. Britain’s oil and gas sector may be cited as examples of It is also advisable that Russian standards be aligned two different approaches. rather than adapted to international standards. On the contrary, some areas, such as energy machinery mak- The example of Norway illustrates the top-down ap-

Implementation of new standards for increasing the volume of associated gas utilization is a good example of successful implementation of technological standards in Russia “Today, after nearly three years since the approval of the document, we can confidently say that the system is a sort of “carrots and sticks” offered by the Ministry of Natural Resources and Environment of the Russian Federation6 and has proven to be very efficient.” S. Donskoy, head of the Ministry of Natural Resources (Ministry of Natural Resources 2015) In 2012 Russia was a global “leader” (along with Nigeria and Iran) in terms of associated petroleum gas flaring. In order to improve the situation, in late 2012 the Russian government approved a Resolution designed to increase the volume of associated gas utilization, including a sharp increase in charges for hazardous emission and deduction of expenses incurred for construction of utilization facilities from applicable charges for hazardous emission. Implementation of this standard resulted in a higher utilization rate, despite rising production. Associated petroleum gas production and flaring in Russia in 2000-2015 Associated petroleum gas recovery 2000-2015 (bn cub. m) (%) 80 90

84 60

40 72

Production 20 66

flaring 0 60 2012 2013 2014 2015 2012 2013 2014 2015 Source: Analytical Center for the Russian Government, Russian Federal State Statistics Service, Resolution No. 1148 of the Russian Government as of November 8, 2012, BCG Research

Illustration No.3.22. Implementation of a new standard for associated gas utilization rate

58 3. How to AwAKEN the Champions? Making Big Companies Innovative The PETROMAKS 2 project in Norway is an example of vibrant state coordination of general industry tasks Historically, in Norway the state plays the key role in the development of the oil and gas sector. For this reason, most projects are initiated and implemented on a top-down basis. In 2004, the Norwegian government launched a 10-year development program for attaining an optimal oil resource management known as PETROMAKS. This project has become one of the key instruments for developing the industry and implementing the long-term development strategy7. Its main focus was on the innovative development and industrial realization of such projects with the state playing the leading role in it – first of all, it selected long-term targets and set the industry’s KPIs for recovery efficiency, environmental standards and safety of oil recovery. In addition, the state played a leading role in implementation. First of all, it set long-term goals and KPIs both as regards the efficiency of production, as well as environmental and safety standards. F urthermore, the state financed both fundamental and applied innovations. Over the decade of the program implementation, budget funds were allocated to more than 400 projects involving more than 450 scientists. Under this program, funding and support were also provided to other projects that were not connected with oil recovery (up to 30% of the funds allocated by the Committee). In addition to the above, the state’s task was to ensure successful implementation of financial projects in order to create a favorable ecosystem by forming consortiums of oil recovery companies, oilfield service companies, component suppliers, scientific and financial institutions. The program proved to be efficient and resulted in the decision to launch its successor, PETROMAKS 2. As of early 2016, the program portfolio was comprised of 95 active projects and was worth USD 35 million allocated from the budget. Below are examples of funded projects:

• Project for studying technologies of employing wind energy in offshore • Project for studying icing environment on the Arctic shelf oil fields

Consortium leader Consortium leader

Partners Partners Scientific partner (independent research organization) Oslo University

State financing State financing

Source: Research Council of Norway, Oil & Gas in the 21st Century (OG21) Strategy, PETROMAKS / PETROMAKS 2 Programs, BCG Research

Illustration No. 3.23 Implementation of the PETROMAKS 2 project in Norway proach where the state plays the major role, namely: set- viability and ease of use while paying special attention ting long-term development targets, KPIs, coordinating to sufficient adaptability and applicability to large enter- cooperation between the key industry players, allocating prises. funds for innovations, creating the necessary ecosystem In addition to financial support, it is vital to develop regu- by vigorously involving local suppliers and the scientific latory and administrative support institutions (for exam- community in the process (see Illustration No. 3.23). ple, support in patenting). This will help to cut expenses On the other hand, the example of Great Britain demon- incurred in passing through all necessary stages and to strates the bottom-up approach, where big business acts reduce the period for launching innovative products into as the main driver, while the state’s role is only to ensure commercial use. In this area, the focus can be on revising a productive dialog between the major sector players the tools used by support institutions with regard to their (see Illustration No. 3.24). applicability to large enterprises. It goes without saying that the state should continue its Taking into account the above-mentioned barrier arising existing programs for export support, R&D funding and from conflicting regulations, it is necessary to consider using other tools to support innovative companies. Ac- the possibility of making amendments to the existing cording to experts, the only limits to the advantages of laws and regulations governing procurements in order to such projects are set by the challenges in applying them. adjust procurement standards and procedures (including One problem arises from their inconvenience (complexity Federal Laws No. 223 and 44), industrial safety and in- of procedures for receiving support, excessive reporting novative activity requirements, and to reduce time-con- requirements and slow interaction). Another problem is suming patenting procedures for promoting innovative that the tools for such projects are focused on SMB com- activity. panies, while specific issues at large enterprises are not Implementation by the state of more stringent require- addressed. Therefore, it seems necessary to revise the ments to be met by big businesses for receiving financial existing range of support tools with due regard to their

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 59 PILOT is a joint initiative between the British oil and gas industry and the state The work group for this project was formed to implement joint projects aimed at addressing general industrial issues in the oil and gas sector and supported by the state in order to promote competitiveness of the national oil and gas industry, ensure energy security and set up a dialog between market players and the state. The projects are developed by work subgroups based on specific areas, such as: innovations and technologies, regulation and licensing, environment and sustainable development, etc. Below are examples of successful PILOT projects: Industry Technology Facilitator (ITF) is a partnership of 32 oil producers and oilfield service companies designed for joint development of technologies the oil and gas industry. ITF projects cover all levels of oil production, for example: fULLWAVE is an initiative for implementing a technology of full-wave tomography in oil and gas field exploration; Dura Drilling is a project for developing a next generation High Speed Dual String (HSDS) drilling system; etc. LOGIC is the headquarters for implementing all jointly coordinated projects aimed at boosting workforce efficiency at offshore fields VantagePOB is a system for offshore personnel tracking in order to ensure logistics efficiency, personnel and site safety and safety of emergency service personnel; Flightshare is an initiative designed for offshore personnel to share excess seat capacity on North Sea helicopter flights; Standardization of oil and gas production contracts. Source: the government of Great Britain, including the report UK Oil and Gas Business and Government Action, Oil and Gas Authority, BCG analysis lllustration No. 3.24. PILOT Project in Great Britain support should become the main difference in the new financial support model compared to the current situation. This goal can be achieved by transitioning from the principle of financing an industry as a whole to the principle of supporting each innovative project individu- ally. Such an approach will make it possible to switch from the annual practice of covering “budget holes” at large enterprises to targeted support of truly competitive projects and solutions. Such differentiation will create incentives for a company’s managers to enhance industrial efficiency, namely by modernization, development of subcontracting, pursuing lean manufacturing principles, and will help to refocus manufacturing on producing more competitive and innovative products. Illustration No. 3.15. represents a summary of the proposed measures.

1 Hereinafter referred to as Rostech 2 Including purchases from outside manufacturers 3 Amendment to the Civil Code of the Russian Federation, Article 429.2 and Article 429.3 4 Carried interest 5 Shared growth 6 Hereinafter referred to as the Ministry of Natural Resources 7 Oil & Gas in the 21st Century Strategy

60 3. How to AwAKEN the Champions? Making Big Companies Innovative Y OU CAN'T MANAGE WHAT YOU 4 DON'T MEASURE: HOW TO SET AND ACHIEVE TARGETS

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 61 4. YOU CAN'T MANAGE WHAT YOU DON'T MEASURE: HOW TO SET AND ACHIEVE TARGETS

4.1. INNOVATION KPIS IN RUSSIA TODAY

he government’s innovative management system re- organizational and functional model for the innovative de- Tquires control and incentive tools to function efficiently. velopment management system outlined the roles of most One such tool is the system of key performance indica- of these documents. In this section, we focus on them tors (KPIs). The KPI system is a management tool that from a KPI analysis perspective. has made its way into government management from the The foundational document is the Innovative Develop- corporate world, where it has been widely adopted since ment Strategy (IDS-2020). In its current iteration, IDS- the 1980s. An increasing number of government organi- 2020 offers 45 target indicators for implementation in ac- zations around the world are adopting this perspective to- cordance with eight basic strategic directions: day. The best-known examples of countries that are using forming innovative activity competences, KPIs as project management tools are Malaysia, Australia innovative business, and the UK. Russia’s government management system effective science, is no exception in terms of the KPI system: performance innovative government; indicators are being implemented in various government innovative infrastructure, organizations. involvement in the global innovative system, Two main goals that follow the adoption of the KPI sys- innovative territory, financing. tem are measuring results and increasing the motivation Each of the indicators has proposed target values for of responsible persons. Setting measurable goals makes 2020, however no responsible persons have been named it possible to evaluate progress toward their achievement, for achieving these indicators. Responsible persons are as well as the effectiveness of activities relative to peers assigned not to the KPIs, but rather to the main activities or competitors. This information, in turn, helps to deter- for implementing IDS-2020, which are established in the mine areas that are lagging and correct them in a timely implementation plan for the period. Note that most of the manner. More than anything else, this is why KPIs have activities have several federal executive bodies that are gained such popularity as a motivational tool: compensa- collectively responsible and there is no evaluation of the tion is tied to the results of an individual employee, busi- activities’ contribution toward achieving the KPI. ness unit or organization. KPIs, bonuses and promotions are now combined into a unified personnel evaluation and Innovative Development Programs (IDPs) are implement- compensation system. ed by companies that are partially managed by the state, according to a list1 of more than 60 companies. They inde- One of the pillars of the KPI system’s development is limiting pendently select innovative activity KPIs and establish tar- the number of indicators, which further highlights the impor- get values for the KPIs based on the Ministry of Economic tance of rigorous selection. KPI metrics must meet four key Development’s methodological recommendations. As such, criteria, which we will discuss in detail in the next section. innovative KPIs may differ significantly between companies. (1) KPIs must be vitally important for achieving the or- One of the initiatives from 2016 was to integrate inno- ganization’s goals. When selecting alternative KPIs, it vative KPIs (IKPIs) in the Long-term Development Pro- is important to focus on what is most important. This grams (LDPs) of state-linked companies2. The proposal is will often be the indicator that requires the most at- to combine three or four IKPIs according to the innovative tention and concentration of resources for improve- life cycle stage. The companies themselves develop the ment. IKPIs based on the Ministry of Economic Development’s (2) KPIs should be controllable: the responsible person recommendations. The remuneration of top management should be able to influence the result. at companies is planned to be pegged to this indicator. (3) KPIs should be reliably measurable: their score The various government programs for innovative develop- should be able to be conveniently and transparently ment and economic modernization do not use a standard- calculated. ized methodology for setting innovative KPIs. Most of the programs have established responsible parties and target (4) KPIs should be tamper-proof: the person responsible indicators, however their cascading principles may vary. for their implementation should not be able to distort the actual results. For example, the Ministry of Industry and Trade is responsible for the “Industrial Development and Improvement of The KPI system can already be found in many government Industrial Competitiveness” state program. The program innovation planning documents, first and foremost in IDS- has a list of 20 top-level KPIs, as well as 159 KPIs at the 2020. KPIs are also included in the Innovative Develop- subprogram level. Some of the KPIs are part of IDS-2020, ment Programs for state companies (IDPs), Long-term for example exports of Russian hi-tech goods, technologi- Development Programs (LDPs), innovative development cal innovative costs, and R&D costs. That said, there is only institute strategies, state and federal targeted programs, partial cascading of the target values from government and industry development programs. programs down to the subprogram level, and the IKPIs In Report 2015 (see chapter 9), the tasks for creating an do not cascade to industry. The KPIs are also not clearly

62 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets bound to responsible persons. The status of subprogram (2) KPIs are not synchronized between the various doc- stakeholders in achieving KPIs has not been defined, and uments. There may be contradictions between the the Ministry of Industry and Trade has also been made re- same KPIs in different initiatives. For example, the sponsible for implementing all of the subprograms, i.e., “Number of citations per 1 publication of Russian there is effectively no KPI cascading. researchers in scientific journals indexed in the Web of Science database” is listed as a target KPI in both Other government programs propose setting target values IDS-2020 and the “Science and Technology Develop- at the top level with a high-level list of people responsi- ment” state program (subprogram 1. ”Fundamental ble for achieving the KPIs. For example, the “Science and Scientific Research”). The target value for 2020 in Technology Development” state program (responsible: IDS-2020 – in both the current and updated versions Ministry of Education and Science) has set the target at – differs from the values in the state program by more 2.46% for the KPI “Specific weight of the Russian Feder- than two times: IDS-2020 requires four citations per ation in the total number of scientific publications in the article, while the state program requires 1.8. world indexed in the Web of Science database” in 2020 for 13 organizations (including the Ministry of Education and (3) Overall, the system has too many KPIs and does not Science itself, as well as the FASO, RAS, etc.). However, prioritize them. In such situation, it is difficult to de- there is no breakdown of quantitative targets among the termine what the responsible organization should fo- responsible parties for 2017-2020. cus on, which leads to poor motivation and an inability to achieve the desired goals. Innovative KPIs are also included in the charter documents of innovative development institutions, initiatives Aside from the above-mentioned government documents, of federal executive bodies responsible for innovative the Report 2015 also had its own KPI-Set and measure- development, and industry strategies. ment perspective dashboard. As a reminder, the dashboard offers 75 KPIs for monitoring trends in innovative Innovative development institutions independently set KPIs development in Russia versus leading countries. in compliance with their primary regulatory acts and internal documents regulating their work. For example, RVC has Given such a wide range of initiatives proposing IKPIs, as three KPI levels: long-term (through 2020), medium-term well as the abovementioned areas for system optimization, (for three years) and short-term (annually). When develop- it can be concluded that there is a need to consolidate the ing the medium- and long-term KPIs, RVC takes into ac- disparate efforts of many actors: prioritize and harmonize count IDS-2020 priorities. Likewise, Skolkovo independently KPIs, and cascade them down to the responsible parties. forms strategic objectives and KPIs that the Fund’s Board It is important to note that work is currently underway to up- approves. In this case, the starting point for KPI formation date a number of documents regarding setting KPIs. In the is the “Creation and Development of the Skolkovo Innovative updated version of IDS-2020, which is currently being ap- Center” subprogram of the “Economic Development and proved by the Government, responsible parties are assigned Innovative Economy” state program, including eight KPIs. to KPIs, and a cascading perspective has been proposed (5 of The Ministry of Economic Development’s innovative devel- 38 KPIs have been distributed among agencies by industry). opment initiatives also include setting KPIs. For example, As part of the IDS update, the IKPI development require- the initiative to develop innovative territorial clusters pro- ments have been updated: they should take into account poses methodological materials for developing and im- LDP goals and KPIs, relevant state programs, industry strat- plementing programs for their development and regional egies, and other strategic planning documents. Companies cluster policy, proposing cluster-level IKPIs. that are implementing IDSs and LDPs must include inte- Although industry strategies do not usually focus on de- grated innovative activity KPIs in the IDSs, thereby achieving veloping innovative activity, they can also include IKPIs uniformity of the top-level KPIs. Of the IKPI’s weighting, with quantitative goals. The development strategy for the 30% comprises “updated IDS quality (in the year developed/ chemical and petrochemical complex includes R&D ex- updated) or IDS implementation (in recent years)”3. penses. There is no KPI cascading (the Ministry of Indus- There remains an acute need to optimize the system de- try and Trade and the Ministry of Energy are responsible spite the initiatives that have begun. Based on the underly- for implementing the strategy). ing KPI system principle of limiting the number of top-lev- All of these documents fit together into the system of plans el KPIs, we propose selecting a short list from the total and responsible parties for carrying them out, and all of them range of KPIs available of the critical KPIs that will help us to some extent or another share the following three main measure the most important innovative activity metrics. types of problems hindering the effective setting of KPIs. (1) There is often no responsible party for achieving the KPI defined. The KPIs are rarely connected to responsible parties, which makes it impossible to use KPIs as 1 Approved by the Presidium of the Presidential Council for Econom- motivational tools, only as monitoring tools (for exam- ic Modernization and Innovative Development of Russia on 17 April ple, in the current version of the IDS, responsiblity is 2015 . set for the activity). In cases when responsible parties 2 Government-owned corporations and joint-stock companies in are actually assigned, there is usually no delineation of which the Russian Federation has a total stake exceeding 50%, individual responsibilities, i.e., a KPI has a high-level nearly 50 of the 91 listed. list of responsible parties. The absence of mechanisms 3 KPI recommendations for innovative activity included in LDPs and to assign individual consequences for failing to achieve KPI systems used to motivate the management in state-owned collective goals erodes responsibility. companies and the Ministry of Economic Development.

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 63 4.2. CHOOSING THE “MAIN ATTACK AVENUE”

ive the KPI requirements discussed above, we have and markets. The middle includes drivers of innovative Gformulated our task as follows: choose a small num- development, innovative activity and innovative results. ber of KPIs (5-10) that will address the key problems fac- At the top are the economic consequences of innovation. ing innovative development. We will refer to them as the When searching for “main attack avenue” KPIs, we ex- "main attack avenue". cluded all of the fundamental layers of the pyramid, ex- We have chosen the “main attack avenue” KPIs in three cept for knowledge, for two reasons. First, most of the steps, which we outline below and show in Illustration KPIs at these levels are difficult to reliably measure. In No. 4.1. We further explore each of them in greater detail. practice, surveys are used, but their accuracy and objectivity are seriously limited. Second, it is impossible to as- (1) As a starting point, we used the innovation pyramid, sign specific responsible parties that are able to directly a concept introduced in Report 2015. Recall the pyr- control most of them. amid’s structure: it is made up of nine layers, five of which are the foundational layers that support We also excluded the top of the pyramid. Similar to the innovation, three are the middle layers that define foundation, it is impossible to assign specific responsible innovative activity, and the top layer, economic con- parties for top-level KPIs, as too many factors influence sequences. Not all nine layers are equally suited for them. Furthermore, their contribution to innovative activ- setting KPIs, first of all due to their varying degrees ity growth has a long lag time, and they are also strongly of control and measurability. We choose only those influenced by a number of ‘non-innovative’ factors (e.g., layers that are suited to the task at hand. capital ratios). (2) From there, in order to choose the most important As such, we propose to focus on the middle of the pyra- parts of the pyramid, we introduce the understand- mid. The middle elements are suitable for setting KPIs ing of the “innovative system critical path,” i.e., the for the following reasons: sequence of its bottlenecks, each of which restrains most middle-level KPIs can be measured statistically; the development of the next. By identifying the bottlenecks and analyzing their interdependencies with- they can be assigned specific responsible parties; in the pyramid, we form three critical paths for find- it is possible to definitively determine the interdepen- ing the “main attack avenue”. dencies among KPIs, which helps choose the most im- (3) The final step is choosing KPIs that are capable of portant ones in the next step (see below). measuring the elements of the critical paths that have been selected. STEP 2: IDENTIFYING CRITICAL PATHS STEP 1: CHOOSING AN INNOVATION As discussed at the beginning of the chapter, KPIs should indicate what is really significant. In order to focus on the PYRAMID LAYER truly important elements of an innovative development sys- As mentioned above, the innovation pyramid is made up tem, i.e., those areas that most require the government’s of three large blocks. The pyramid’s foundation includes attention from the perspective of trend acceleration and KPIs for institutions, knowledge, culture, infrastructure closing the gap with the leading innovative countries, we propose the “critical path” concept. Recall that we define

Step 1 Step 2 Step 3 Select innovation Identify critical Select KPIs KPIs for key directions Elements of the pyramid layers paths innovation pyramid

10 KPIs 16 elements 29 elements 43 elements Source: BCG analysis

Illustration No. 4.1 Three steps in choosing “main attack avenue” KPIs

64 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets the critical path as the sequence of bottlenecks in the inno- This gives us three branches that form the bottleneck vative system that limits its development the most. sequencings that limit the country’s innovative development the most. We call them the three critical paths of In order to identify the sequence of bottlenecks, we first innovative development (see Illustration No. 4.3), which rely on a high-level analysis of the interdependencies merge at the “Total number of innovative companies” and among innovation pyramid elements. The effect at each lead to the resulting KPI that is oriented on the country’s layer of the innovation pyramid is described by a series external economic development: innovative product ex- of KPIs on the innovation dashboard. For ease of analy- port. sis, similar KPIs can be grouped into larger pyramid elements. Following this methodology, we have identified Entrepreneurial path - from invention to startup. 43 elements (see Illustration No. 4.2). These elements This path is connected to the development of innovative influence one another, though the nature of the influence activity among private inventors, i.e., primarily with the depends on the layer of the pyramid. The following ob- number of ideas and inventions that can be commercial- servations can be made: ized. The number of innovative ideas that are ready for (1) All foundation layer KPIs influence all middle layer commercialization is one of the two necessary conditions KPIs. For example, the institutional environment or for the emergence of startups, along with the venture culture has a substantial influence on KPIs along market. The starting point for the first path is the num- the entire innovative funnel in the middle layer of the ber of commercialized ideas, which is measured as the pyramid. percent of inventions that have been patented by individuals. The leading countries outpace Russia by 9x on this (2) In the middle layer of the pyramid, the primary in- measure. It is important to continue working on this path terdependencies between elements can be mapped, by fostering the emergence of and increasing the activity but they are fairly complex and confusing (see Illus- levels of inventors, boosting their social status, and pro- tration No. 4.2). moting science, technology and entrepreneurialism (see (3) The top of the pyramid is determined by activity on all Report 2015). middle layers of the pyramid along the entire innova- Venture path - from demand for technology to startups tive funnel. The second path is focused on investment as a vital con- In order to formulate the critical paths themselves, we dition for the emergence of startups. We view demand for begin with the key resulting element, for which we have ready-to-use technology as the starting point. This de- chosen innovative product export. For all elements that mand is what determines whether investors - primarily influence it directly, we evaluate the extent to which Rus- private - are ready to enter the venture capital market. sia is lagging behind the leading countries on innovative As such, it is important to look not only at the overall development (we used either dashboard data or expert venture investment volume, but also at its sources: pri- evaluations for this). We propose that the element (or vate and state investment. Based on OECD data, Russia elements) with the most lag has the greatest limiting lags behind the leading countries 8x in overall venture effect on those above it. We repeat the process at this investment volume as a share of GDP, and more than 10x bottleneck. The process is repeated until we reach the in private investment. Improving venture capital market end, i.e., the element that is influenced solely by KPIs efficiency requires boosting the government venture cap- from the foundation of the pyramid. The sequencing of ital multiplier (i.e., the amount of private investment per bottlenecks that we receive from this analysis is the crit- ruble of government investment). ical path. Experts then refined and confirmed the result. Corporate path - from research to innovative compa- An example can be found in Illustration No. 4.3. Innova- nies tive product export (top block in the illustration) is only influenced by manufacturing in this system, so we think The third branch of the critical path is related to inno- this element falls on the critical path. From there, the vative development activity at mature companies. The interdependencies are more complex. Innovative product quality of a country’s research base and the efficiency of manufacturing is influenced by three factors: total num- its R&D spending determine its level of patent activity. ber of innovative companies, headcount, and productivi- Measured as the number of international patent appli- ty. The dashboard shows that the gap with comparable cations, Russia lags behind the leading countries by 30x countries is the largest for the number of innovative (2014 WIPO data1). There is a similar lag in the overall companies (more than 3x), therefore this is the narrowest number of international patents received that provide bottleneck and should be added to the critical path. We protection in foreign jurisdictions. Despite the sizeable further analyze the elements that determine the number lag in number of international patents, the overall num- of innovative companies. ber of mature innovative companies in Russia is closer to the benchmark countries (3.4x when measured as Note that in most cases, the bottlenecks are immediate- the share of innovative companies in the total number ly visible, as their gap can reach 10-30x, compared with of manufacturing companies). This is readily explainable: 2-3x for the remaining factors. However, in some places the number of international patents per innovative com- there are several bottlenecks. For example, the low num- pany in Russia is also lower. ber of startups is influenced by both the narrow access to commercialization ideas and the low venture investment The improvement in this path is primarily due to the de- volume. Our discussions with experts have led us to the velopment of the overall research base, as well as re- conclusion that both elements are bottlenecks, which search cooperation between scientific institutes and splits our critical path. business. Support measures concern both developing

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 65 Source: BCG analysis BCG Source: companies headcount of innovative products Export of innovative Logistic services Demand for entrepreneurs Availability of technological Total number of innovative products innovative companies manufacture of innovative products Competition mature Number of innovative companies Electric power Researchers and engineers innovation markets Global leadership in ideas % of Amount of investments public venture commercialized Involvement in inventions Other institutions amount startups Education Venture investment Availability of ready- Environmental policy Number of innovative to-commercialize ideas Availability of public financing technology Private vs. investments Demand for ready-to-use public venture Culture Quality ICT of research Labor productivity % R&D in R&D patents expenditure of corporate Employment Availability of private financing Number of patents Private vs. expenditure public R&D Number of applications research papers Number of patent sector of non- Amount know-how formalized in the public Customs regulation R&D expenditure Innovation infrastructure Knowledge Markets R&D Number obtained efficiency Research of licenses cooperation expenditure Culture Infrastructure Institutions Illustration No. 4.2. Main interdependencies among elements of the innovative pyramid among elements of the innovative No. 4.2. Main interdependencies Illustration

66 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets 3x tors with a gap of >5x. of PCT patents 1,2х per 1 article Quality of research % of the total number Number of citations Share of corporate patents companies 3x 3x 29x 37x Corporate critical path Productivity of innovative R&D expenditure efficiency Vs. the total labor productivit y Source: National Report on Innovations in Russia-2015, BCG analysi s 0,3х Number of mature innovative companies PCT patents per Total number of patents USD 1 of GDP (PPP) Quality of research resources per USD 1 of GDP (PPP) Number of corporate patents Number of research papers per USD 1 of GDP (PPP) PCT patent applications Number of patent applications % of industrial companies Scientific and tech. publication s companies 7x 1,8х headcount of innovativ e Vs. the average country - level headcount of companies

know-how % of GDP R&D expenditure Private vs. public venture investments Amount of non-formalized Number of licenses obtained Private RUb per 1 public 0,6х % of GDP the public sector 5x 3x 1,5х R&D expenditure in The color coding corresponds to that of the National Report 2015, but we also use dark red mark statistical indic a manufacture % of GDP 3х Total number of % of the output innovative companies of innovative products Export of innovative products % of industrial companies financing investments 8х Availability of private % of GDP y, Chile, Australia, USA, Canada, China � Amount of public venture for the last period available. 7х % of GDP 11х Venture investment amount technology investments 7х Venture critical pat h assets as % of GDP Demand for ready-to-use Private vs. public venture Investment in intangible Private RUb per 1 public 0,5х Per 1 mn of the able-bodied population Number of innovative startups based on the size of economy, N times based on the size of economy, 1 h Involvement in inventions % of the population ideas Availability ~9х s gap vs. peer countries a’ of ready-to-commercialize Russi No numerical estimation, criticality is based on expert judgement No numerical estimation, criticality is based on expert Entrepreneurial critical pat 3x of entrepreneurship % of inventions patented by individuals % of commercialized ideas Recognition of the prestige Notes. Sample countries: finland, Germany, Norway, South Korea, Switzerland, United Kingdom, Netherlands, Israel, Ireland, Ital 1. Average indicators of the 15 sample countries vs. Russia’s (statistical and mixed). Calculated based on data Illustration No. 4.3. Logical map of interdependencies between innovative system elements system innovative between No. 4.3. Logical map of interdependencies Illustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 67 research centers in big business, as well as external third most important metric in the innovative statistics centers that are already working with or could potentially is specific weight of organizations engaged in innovative work with business. Researchers need to be encouraged activities (also included in the target KPI list). An overall to intensify their search for new technological solutions. listing of the proposed KPIs can be found in Illustration No. 4.4. STEP 3: CHOOSING “MAIN ATTACK AVENUE” KPIS After identifying the critical paths, which helped us find the main criterion for KPI selection - importance for achieving goals - we needed to choose those elements that satisfied the remaining requirements and are suitable for use as KPIs. For each of the elements on the critical paths, statistical metrics were proposed for measurement purposes. We selected these metrics primarily based on data from IDS or the dashboard. We came up with a list of more than 20 KPIs. Their suitability was evaluated based on the three KPI selection criteria that we discussed at the beginning of the chapter: they should be controllable, measurable and tamper-proof. Controllable means that the party responsible for the KPI should have control tools that allow them to directly influence the result. The share of ideas that can be commercialized is difficult to control, because there is no responsible party with the necessary tools to control whether private inventors patent their designs. Measurable implies that statistical data are available from a reliable source. When selecting among several alternatives, we gave preference to those metrics that are measured in the Russian statistics on science and innovation. Statistics on innovation in Russia are in methodological compliance with the generally accepted international standards and are regularly updated. Rus- sian companies’ weak understanding of the methodology has an impact on the quality of statistics, but this can be corrected with additional training, and there is already successful experience in this area2. Tamper-proof is the most important KPI selection principle because KPIs are intended to motivate responsible parties to achieve real results, rather than to artificially reach target values by creating the appearance of activity. China can serve as an excellent example here, as it set a KPI on the number of national patents, which led to a sharp spike in the metric because people in the country began patenting intellectual property that was outside the state innovative policy’s focus (for example, traditional medicine recipes). After evaluating each metric using the three criteria, we reduced the list to 10, which can be seen in the table below (Illustration No. 4.4), and the number of elements on the critical path to nine, due to the lack of reliably measurable metrics for several elements. For example, the 1 World Intellectual Property Organization “private to state venture ratio” and “number of startups” 2 "Overall, the experience in Russian regions where work was car- elements were excluded. ried out to explain to businesses how to correctly fill out the innovation surveys is evidence of its effectiveness. After receiving survey As such, one KPI was proposed for each of the remaining forms that were filled out more completely and correctly, these “main attack avenues,” with the exception of “innovative regions saw a one-year increase in innovative product volume and product manufacturing.” We propose leaving two KPIs for innovation spending of 1.5-2x" – "System of evaluating and moni- this element, both of which are related to the key inno- toring innovative development in Russian regions", I.M.Bortnikov, vative statistic: specific weight of innovative goods and et al., "Innovative economy", 2012 (https://www.hse.ru/pubs/share/ specific weight of innovative technology spending. The direct/document/85057531)

68 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets Impossibility Controlla- Measurabil- Source of Key direction KPIs for the key direction Source of manipula- bility ity inputs tion Export of Export of Russian high-tech F ederal Customs NR1 - innovative products products, USD Service Share of innovative products, operations and services in the total NR IDS Rosstat volume of products shipped, opera- Manufacture of tions and services performed, % innovative products Share of costs on technological innovation in the total volume of - - Rosstat products shipped, operations and services performed, % Total number Share of innovative organizations in of innovative the total number of organizations NR IDS Rosstat companies reviewed, %2 Venture investment Total venture investment amount, NR - RVCA amount RUB Demand for ready- Ratio of investment in intangible NR - Rosstat to-use technology assets to GDP, %3 Number of patents recieved abroad Total number of under the PCT procedure (national NR5 - WIPO patents phase entries)4 Number of patent applications Number of patent submitted by residents under the NR6 - WIPO applications PCT procedure5 Number of citations per 1 publication of Russian researchers in Thomson Quality of research - IDS scientific journals indexed in the Reuters Web of Science Share of Russian publications Number of in the total number of scientific Thomson - IDS research papers publications in the world indexed in Reuters the Web of Science, %

1. Normalized to GDP in the National Report. 2. Corresponds to Rosstat’s indicator “Innovative activity of organizations — share of organizations, which introduced technological, organizational and marketing innovations in the reported year among the total number of organizations reviewed”. The National Report uses the “Share of innovative companies in the total number of industrial companies”. 3. Rosstat’s indicator “Intangible assets” (normalized to GDP) is used. 4. 2b- Grant for PCT national phase entries. Normalized to GDP (PPP) in the National Report. 5. 1b- PCT national phase entries. Normalized to GDP (PPP) in the National Report.

Source: National Innovation Report 2015, Innovative Development Strategy 2020, BCG analysis Illustration No. 4.4. List of “main attack avenue” KPIs

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 69 4.3. CASCADING KPIS

fter determining the list of CPI areas for the “main reaching target industry indicators should depend Aattack avenue” it will be necessary to frame the ap- on where the failure occurred; proach to cascade them to level of responsible parties. a. affiliates/subsidiaries: full and personal responsi- This task essentially involves continuation of the work bility of the management of 10 organizations and begun under the updated IDS-2020 (as noted above, agencies; IDS-2020 proposes cascading five indicators to the responsible parties on a sectoral basis). As is the case in b. private companies: the above-mentioned 10 IDS-2020, we refer to Federal Executive Bodies (FEBs) agencies are responsible for implementation of (specifically sector ministries), innovative development state policy target goals and making proposals to institutions (in various legal forms) and state corpora- adjust them if the plan does not reach the target tions as parties responsible for KPIs. indicators; The following guidelines are suggested when framing c. FEBs affiliated with a state corporation: respon- KPIs: sibility should lie with the management of these state corporations, while the 10 above-mentioned 1) when developing KPI target indicators for the inno- agencies should likewise be responsible for im- vation strategy long-term (five years and more) and plementation of state policy. short-term (from one to five years) planning horizons should be taken into account; For example, in application of the KPI “Export of Russian high-tech goods” the proposed cascading will look as fol- 2) when developing target indicators it will be neces- lows (see Illustration No. 4.5): sary to take into account the existing resources of the responsible party and its ability to impact KPIs; 1. as for the economy as a whole, the Russian government is responsible for correctly developing the tar- 3) responsibility should be assigned for the implemen- gets and providing the tools and resources required tation of measures taking into account the time lags to meet the targets; required to fulfil the programs (such responsibility is usually of long-term nature); 2. at the industry level, KPIs are cascaded to the Min- istry of Industry and Trade as well as Roscosmos. 4) to reach such long-term target indicators, the fol- Furthermore, they are responsible in the short term lowing conditions will be required to take the follow- for reaching target indicators for implementation of ing measures: state policy and identify deviations in target KPI indi- a. such target indicators should include dialog - the cators. In the long term, the Ministry of Industry and iterative process of adjusting target indicators, Trade is responsible for reaching target goals action plans and resources allocated to ensure 3. at the company level, the Ministry of Industry and Trade their alignment; as well as state corporations are responsible for reach- b. for this purpose, FEBs (state corporation)/devel- ing target indicators for their affiliates. For other areas opment institutions should be able to adjust the of industry efforts should be made only to reach target action plan and approve it on an annual basis, indicators related to implementation of state policy and thus providing flexibility on a horizon of five years for monitoring and to identify deviations in target KPI. or more in selecting the tools used to reach up- Delineation of responsibility for long-term fulfillment of per-level targets; the 10 “main attack avenue” KPIs on an industry basis is 5) set long-term target indicators by industry/economy shown Illustration No. 4.6. as a whole for the 10 selected KPIs, it will be neces- We shall now see what the decomposition of a quanti- sary to single out the 10 organizations and agencies tative industry target for specific state institutions looks that make the biggest contribution to their achieve- like in the above-mentioned structure “Export of Russian ment and are capable of working out, proposing and high-tech goods” provide an apt illustration of such an implementing their own action plans: indicator1. To do this, we take a number of proposals re- a. Innovative activity, patenting and technology de- garding their future trends. mand – six industry ministries (Ministry of Indus- As a starting point we take historical data from the try and Trade, Ministry or Energy of Russia, the Federal Customs Service of Russia. We consider the Ministry of Transport of Russia, the Ministry of total volume of high-tech exports from1H 2014 - 1H Agriculture of Russia and state corporations Ro- 2016 as per TN VED codes according to the approved satom and Roscosmos. list of codes for high-tech products. We also consider b. Scientific research work – Ministry of Education the ratio of the indicator to GDP in current prices. and Science This relationship is one of the dashboard indicators. c. RVC venture fund; Russia currently lags behind the 15 leading innovative countries by about 4x. We use the trends in this rela- 6) on the short-term horizon, the responsibility of the tionship to send targets, considering two main options: above-mentioned organizations and agencies for best-case and baseline scenarios

70 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets in the best-case scenario we expect color of the instrumental level. We agree with this, but only partially. dashboard traffic light to be green. This means Needless to say, it is important to set instrumental KPIs, that the volume of Russia’s high-tech export and these targets will arise as part of the specific plans products as a percentage of GDP should be at and initiatives for reaching macro-level targets. Essen- least 75% of the average for comparable coun- tially, the proposed W process is also an algorithm which tries (in other words, the country average should makes it possible to translate macro-level targets into not exceed that of Russia by more than 1.3x, tak- instrumental KPIs. However, we think it is also important ing into account growth in the leading countries. to set targets on the macro level, otherwise there is a in the baseline scenario we set the target for Russia risk of lapsing into imitation of activity, i.e. of generating to reach the yellow light on dashboard by 2030. In inefficient projects and “successful” implementation of this case, the volume of Russia’s high-tech exports targets without actual movement in the right direction. as a percentage of GDP should reach at least 50% Second, as regards setting targets on the government of the average for comparable countries (the country level, it was proposed to set targets for Russia’s position average should not exceed that of Russia by more in the Global Innovation Index and technological compo- than 2x, also taking into account growth in the lead- nents of the Global Competitiveness Index. We support ing countries. this proposal: if a similar target gains sufficient politi- We use the GDP growth forecast provided by the Minis- cal support it could actually encourage innovative activity try of Economic Development. in the same way as a growth target on Doing Business rating nowadays actually determines the agenda for im- We expect growth in the proportion of high-tech prod- proving the investment climate, primarily in the regions. ucts in GDP vs. comparable countries to increase by 3.3% annually until 2030. This increment is based on the forecasts for absolute growth in high-tech exports – up 9% (according to HSBC data) and GDP growth of 5.5% per year (IMF). We believe that the proportion of high-tech products split between special-purpose goods (“closed” exports) and civilian products remains stable. Thus, we lock in the 2015 proportions for the entire time period. Likewise, we think that the relationship between industries overseen by the Ministry of Industry and Trade, and products manufactured by Rosatom will remain at the 2015 level. Based on these proposals, we are able to calculate target indicators and the proper rate of growth. As a result, we found the target value of high-tech exports to be 21.5 trillion rubles under the baseline scenario and 32.3 trillion rubles under the best-case scenario in 2030 (see Il- lustration No. 4.7). In order to reach these figures, the average annual growth of exports in absolute terms in 2017-2030 should be 18% under the baseline scenario and 21% under the best-case scenario. These figures look quite ambitious in the current environment, where this indicator is in decline. It should be noted (principle 4(a) above that the target indicators calculated in this way cannot be placed in front of the responsible parties “as is”. They can only serve as “input” for the iterative W-shaped planning process, which guarantees that the output targets are reachable and underpinned by specific plans, initiatives and resources for their achievement. The key steps in this process are shown in Illustration No. 4.8. We would like to clarify two key issues at the end of this section which came to light during expert discussions on the preliminary version of this report. First of all, an important comment was made, the es- sence of which is that the proposed 10 KPIs (macro-level KPIs) cannot be used to set targets and cascade responsibilities, at least not in the current system. Targets can and should be set only using KPIs at the instrumental 1 We will measure this indicator as Export of Russian high-tech level. It was proposed to create matrix or algorithm to goods, USD Classification of high-tech products according to Min- support transition from the 10 macro KPIs to KPIs of the istry of Industry and Trade Order No. 1597 dated October 3, 2013

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 71 Source: bCG analysis Other industries There are KPI could the current be set when goods under is worked out no high-tech classification Trade/federal of the ministry of Industry and a classification Customs Service ind . Space industry USD billion USD billion Nuclear industry USD billion USD billion USD billion USD billion

1 Government and Trade of Industry The Ministry USD billion Processing industry WHO IS RESPONSIBLE FOR THE ACHIEVEMENT OF A TARGET INDICATOR USD billion Private business USD billion USD billion USD billion 1. Organizations affiliated with the ministry of Industry and Trade outside perimeter Rostech LEVEL Industries Economy on the whole Various companies Illustration No. 4.5. Cascading the KPI Export of Russian high-tech goods No. 4.5. Cascading the KPI Export of Russian Illustration

72 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets basis Source: BCG analysis BCG Source: Ministry Transportation State Statistics Agency does not gather innovation data on a sectoral of Transportation Ministry Agriculture and food industry ind. of Agriculture логические товары отехно Ministry and utilities Construction of Construction Ministry of Education and ICT Telecom Ministry of В текущей классификации отсутствуют высок and Mass Media Communications Ministry of Energy Power industry, oil and gas industry ind. Space ind. Nuclear Industry and Trade Ministry of Processing industry (aviation, automotive, etc.) Industries goods Proportion innovations of innovative Proportion of expedit. on tech. Quality of research Quantity of research Total number of patents products Number of patent applications innovative Volume of venture investments Number of innovative companies Export of Russian high-tech goods Production of Demand for ready-to-use technology KPI Illustration No. 4.6. KPI cascading scheme for responsible parties responsible No. 4.6. KPI cascading scheme for Illustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 73 3% 3% % 25% 72% 21.5 25 2030 72% 32,3 2030 ministry of Industry and Trade 2027 13.5 18,6 2027 4 % 8. 21 18,5% 10,6 2024 2 4. 2020 2024 10.6 2020 Source: Rosstat, FCS, IMF, UN Comtrade, HSBC, BCG analysis Confidential data 2 2 OUTCOMES 2. 2. 2016 2016 7 7 2. 2. 2015 2015 Rosatom 9 1. 1.9 2014 2014 0 0 600 25 15 Innovation exports — RUb tn Innovation exports — RUb tn 35 25 15 Retain the export proportion of ministry Industry and Trade / Rosatom ‘closed’ Steady narrowing of the gap starting from 201 7 х1,3 х2,0 2030 2030 Russia 2025 2025 Use the inputs of federal Customs Service Use the forecast of ministry Economic Development ASSUMPTIONS 0 2020 202 Peer countries х4,1 2015 2015 х4,1 0 0 20 10 20 10 Innovation exports as % of GDP Innovation exports as % of GDP The growth of high-tech exports share in the GDP of peer countries is 3% p.a. Russia is narrowing the gap vs. developed countries, from 4.1x to 1.3x (corresponds to the green color of the traffic lights on the dashboard)

Russia is narrowing the gap vs. developed countries, from 4.1x to 2.0x (corresponds to the yellow color of the traffic lights on the dashboard)

assumptions

Base case case Base Aggressive scenario scenario Aggressive General General Illustration No. 4.7. Options for setting decomposition targets for the indicator Exports of Russian high-tech goods the indicator Exports of Russian for setting decomposition targets No. 4.7. Options for Illustration

74 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets of target indicators of plans and achievement monitoring the implementation and achievement of target indicators Implementation of plans action plans, and allocation of resources final approval of targets, request for resources Reworking of action plans, of plans, adjustment request for reworking Determination of gap, of initial target indicators development of new plans Revision of existing plans, indicators long-term target formulation of initial action plans Existing action plans Strategy development, long-term vision benchmark analysis, Social and economic Government/ consultative body Industry , Rosatom, Roscomos, Ministry of Education and Science RVC Illustration No. 4.8. W-process used in setting long-term targets for industryand agencies organizations for used in setting long-term targets No. 4.8. W-process Illustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 75 4.4. IMPLEMENTATION ISSUES: SHORT- COMINGS OF THE CURRENT SYSTEM

he analysis of practice in setting KPIs and the opin- ment to achieve KPIs set out in IDS-2020 (see Illustra- Tions of surveyed experts show that practical imple- tion No. 4.10). mentation of the model outlined in Section 4.3 may col- The Smart Grid or the Smart Grid for Electricity Supply lide with a serious problem which can be resolved in is an integrated electric energy supply system notable the ways addressed below in this section. The problem for two key characteristics, namely: (1) application of lies in insufficient control over the achievement of KPI a method of digital data processing and transmitting targets on the part of industry ministries. through a power grid and (2) connecting distributed en- Industry ministries emphasize three main reasons that ergy sources (including renewable sources) to the grid. could shed a light on such the insufficiency of KPI con- The Smart Grid collects information on the manufactur- trol. The first problem, above all, is a shortage of re- ing process and energy consumption, which allows for sources. On the one hand, this can translate into insuf- adjusting volumes of consumption and redistributing ficiency of decision-making authority, and on the other them depending on the existing needs. hand – into a shortage of organizational resources, Implementation of the Smart Grid entails a number of such as: projects, infrastructure, financial resources, strong advantages over the traditional electricity supply workforce, which can be simultaneously employed by system. other agencies. The second problem lies in the limited influence of non-administrative levers, such as: mea- Automated metering, monitoring and control over sures applied to private business may only have indirect energy transmission using smart metering systems, effect on the industry and KPIs. The third problem is the which help to improve metering accuracy and cut excessive bureaucratic role of managers in large enter- losses (including energy theft detection). prises and state corporations. Reduced expenses for both suppliers and consum- Let us focus on the most important of the above issues, ers. Using a multitude of distributed energy sources i.e. the problem of shortage of resources available to removes the need for expensive backup generators industry ministries that are required to achieve their used to carry the peak load. A consumer is also enti- prescribed KPIs. To illustrate the problem, we will use tled to choose tariff differentiation depending on the two examples: the first is the example of insufficient en- time of day. titlement to make decisions; the second is an example Higher reliability and safety. In case of breakdown, a about the shortage of organizational resources. failing grid segment can be supplied with energy re- Insufficiency of decision-making powers implies that, located from the neighboring facilities. The system together with the ministry directly supervising the sec- also allows for remote monitoring and is designed to tor, the decision-making process for a wide range of is- prevent breakdowns. sues also involves other government agencies. In such Two-way communication and inclusion of consumers case, the responsibility for achieving KPIs is split and into the system as energy producers: consumers in the KPI owner quite often loses its leading role. Thus, possession of their own energy generators may sup- when implementing tax breaks or insurance benefits, ply such energy to the grid. the industry ministry is limited in its authority to the extent to suggest potential amendments. The right to take IDS-2020 sets for the Ministry of Industry and Trade a decision is also granted to other state agencies (such KPIs for innovative product exports, including as part as the Ministry of Finance, Federal tax Service, State of such products, power engineering equipment (for ex- Duma) (see Illustration No. 4.9). ample, smart meters, computer equipment, renewable energy source equipment such as: windmills, solar col- The shortage of organizational resources can be illus- lectors, etc.), where the Ministry of Industry and Trade trated by an example of Smart Grid, which could have turns out to be one of the major beneficiaries of such become for the Ministry of Industry and Trade an instru- Smart Grid projects given that development of energy

An example of responsibility split between an industry ministry and the Ministry of Finance could be the extension of reduced insurance premiums for IT companies. The Ministry of Communications and Mass Media of the Russian Federation1 worked out amendments to the Tax Code in order to extend reduced insurance premiums (from 30% to 14%). The Ministry of Finance for a long time disputed such extension referring to a shortage of budget funds and to this initiative conflicting with the long-term pension system development strategy. The amendments proposed by the Ministry of Communications, however, managed to pass to the next level of approval only following the President’s instructions as of May 25, 2016 in which he voiced support for the idea to extend the reduced premiums for IT companies. Source: Vedomosti lix

Illustration No. 4.9. Example of split responsibility for KPIs

76 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets projects inside the country are crucial for achieving KPI is largely a beneficiary of this initiative, it does not take targets set for export of Smart Grid equipment. part in the implementation of such projects. The projects that are being implemented in Russia un- Since the agenda of pilot project participants does not der the Smart Grid label do not include the Ministry of completely match the agenda of the Ministry of Indus- Industry and Trade as one of the members in charge, try and Trade, there is a risk that not all of the targets thus creating a gap between the interests of the latter set for innovative Smart Grid equipment exports will be as a beneficiary and the interests of those in charge. achieved. Thus, the Ministry of Industry and Trade cannot impact This problem can be illustrated with examples of al- the scaling-up of standards and regulations that are ready completed projects. For example, according to necessary to develop Smart Grid technologies and, re- Smart Metering project results in Perm suggested spectively, equipment manufacturing inside Russia. amendments to legal regulatory documents and tech- For example, a number of2 Smart Grid pilot projects in- nical regulations and standards have never been made volve Russian Grids (ROSSETI) as the executive contrac- (see Illustration) tor, while the Ministry of Energy and Reliable and Flex- Therefore, within such configuration of project manage- ible Distribution Grid Consortium (with business and ment and KPI target setting, the Ministry of Industry and science representatives included) act as co-contrac- Trade cannot be held fully responsible for export KPIs tors. And although the Ministry of Industry and Trade due to the lack of resources to be used as levers to pro-

The Smart Grid or the Smart Grid for Electricity Supply is an integrated electric energy supply system notable for two key characteristics, namely: (1) application of a method of digital data processing and transmitting through a power grid and (2) connecting distributed energy sources (including renewable sources) to the grid. The Smart Grid collects information on the manufacturing process and energy consumption, which allows for adjusting volumes of consumption and redistributing them depending on the existing needs. Implementation of the Smart Grid entails a number of strong advantages over the traditional electricity supply system. Automated metering, monitoring and control over energy transmission using smart metering systems, which help to improve metering accuracy and cut losses (including energy theft detection). Reduced expenses for both suppliers and consumers. Using a multitude of distributed energy sources removes the need for expensive backup generators used to carry the peak load. A consumer is also entitled to choose tariff differentiation depending on the time of day. higher reliability and safety. In case of breakdown, a failing grid segment can be supplied with energy relocated from the neighboring facilities. The system also allows for remote monitoring and is designed to prevent breakdowns. Two-way communication and inclusion of consumers into the system as energy producers: consumers in possession of their own energy generators may supply such energy to the grid. The Smart Grid has been used abroad for quite a long time already: the concept runs successfully not only in Western countries, but also in China and India. The success of the technology implementation in the USA and EU is driven by a multitude of small and medium generating and supplying companies that tend to use standardized methods of communication and data transmission. In turn, in China the success of the Smart Grid implementation has been underpinned by the following two key factors: detailed regulatory documents and standards and a rapidly expanding hardware and software market. In Russia, implementation of the Smart Grid is part of a number of state projects and documents, such as: EnergyNet roadmap of the National Technology Initiative (NTI); national project Intellectual Energy Systems, the Energy Strategy of Russia until 2030, Energy Efficiency and Industry Development state program, etc. Some elements of the system have already been launched (such as new relays and smart meters) and now it is only required to make them all work as a whole. However, at the current stage, Smart Grid implementation is limited to a few pilot projects, such as: In Belgorod, Helios automated lighting control system – launched in 2009; In Perm, a project for installation of smart meters – implemented in 2010-2012; In Ufa, a project for modernization of the electric grid complex under the Smart Grid initiative – in process since 2013 and partnered by Siemens; In Kaliningrad, within the framework of EnergyNet, YantarEnergo launched in 2016 a pilot project to implement the Smart Grid system; Within the framework of EnergyNet roadmap, other pilot projects are to be implemented in order to test different segments of the Smart Grid technology (in Sevastopol, Moscow, St. Petersburg, in the Urals, the Volga region, etc.). Source: “Innovative development of the electric energy sector based on the Smart Grid concept” by B.B. Kobets, I. O. Volkova; “The Smart Grid in Russia; practices and prospects” Information Systems; “Prospects and challenges of implementing Smart Grid technology in Russia” by B. A. Kunikeev, Engineering Bulletin

Illustration No. 4.10. Smart Grid Project

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 77 The Smart Metering System (one of Smart Grid’s components) is an intelligent system for metering energy resources that employs two-way communication meters installed on the consumer’s premises. The system is designed to collect and process grid statistics and aims to help operators predict problems and quickly find accurate grid control solutions. The pilot Smart Metering project was implemented in Perm in 2011-2012 with the direct participation of FGC UES, MRSK Ural and the Ministry of Energy under supervision of the Presidential Council for Russia’s Economic Modernization and Innovative Development. Within the framework of the project, over 50,000 were installed. The main focus of the project was as follows: To design, implement and test a standard technical solution for installation of smart meters; To detect systematic problems and options for their lawful settlement; To develop and test methods for promoting effective electric energy consumption by end users; To roll out and scale up the project throughout Russia. As a result, only a few of the designated targets were achieved. Thus, recommendations were worked out for development and approval by federal agencies of legal regulatory acts aimed at governing the procedure and scope of data on resource consumption and availability of meters, as well as introducing higher tariffs for resources supplied without meters. Additionally, monthly power grid waste was reduced by 3.8 million kWh, off-the-meter consumption was eliminated and electricity supply volumes were measured based on actual consumption readings (vs. approved standards). However, the key goal, namely rolling out and scaling up the project throughout Russia, has yet to be achieved. During project implementation, a number of problems were detected that hinder the expansion of Smart Metering technology in Russia. The first reason is a lack of applicable technical standards, such as the lack of standard requirements for the last generation meters, lack of uniform data transfer protocols for meter manufacturers, lack of uniform federal system for a site or equipment identification within an information model. The second reason includes such regulatory gaps as: lack of legally established requirements for the system of fiscal electricity metering systems, irrelevance of data from the meters installed under the project in forecasting and estimating purposes, lack of legally established obligation of a grid company to install meters, inability to install smart meters at all sites with no exception in view of the restrictions envisaged under Federal Law No. 261 “On Energy Efficiency”, according to which no new generation meters can be installed other than by the decision of the end user. Source: Smart Metering project implementation results of MRSK Ural, Calculate-Save-Pay Project, Smart Metering Project– smartmetering.ru, “Smart Metering as part of the Smart Grid Concept” by I.M. Nesterov

Illustration No. 4.11. Smart Metering project mote exports, i.e. to stimulate development of technologies inside the country. The issue of insufficient oversight of all available levers by the agency in charge of achieving KPIs should be resolved for the purpose of optimization the organizational structure of governing bodies. The next section aims to outline possible ways and means to achieve such optimization based on the experience of other countries.

1 Hereinafter referred to as the Ministry of Communications and Mass Media 2 Shown as part of the roadmap of Energynet NTI

78 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets 4.5. HOW TO SET ACHIEVABLE TARGETS? GLOBAL EXPERIENCE

hat is international best practice? By analyzing in- This approach directly solves the main problem that is Wternational best practice, we found three models - typical for industry ministries in many other countries, they are briefly described in Illustration No. 4.12. including Russia - a lack of resources to achieve KPIs - because the resources and management levers are con- The first model is creating a strong industry ministry, centrated in a single industry ministry. i.e., consolidating sufficient resources in the industry executive body to manage and develop the entire indus- Creation of a special organizational structure for the try. One successful example that demonstrates this ap- task - a fundamentally different approach enabling the proach is Norway, where increasing the existing industry consolidation of the resources necessary to influence ministry’s authority facilitated the achievement of real the industry. The government is flexible regarding the results in developing the oil and gas industry (see Illus- organizational structures in its agencies and can alter tration No. 4.13). For example, the industry had a long- them in order to focus on solving top-priority tasks. The term goal of enhancing oil recovery from 46% to 68%, best example if this approach is the UK, where it has and the 60% threshold has already been passed. been applied at the level of individual industries as well as the broader economy. The Oil & Gas Authority (OGA) It would have been difficult to achieve this result with the was formed to address a crisis in the oil and gas sector. Ministry of Oil and Energy’s resources limited. However, Three main areas fall under its functional management: it has a wide range of levers to directly influence the in- regulation, encouraging stakeholder collaboration, and dustry. The most important lever is ownership of stakes promotion. The regulatory mandate is a key aspect of its in the largest state companies. Additionally, the Ministry success: the OGA issues licenses, meets with operators, issues licenses, regulates production taxes, as well as resolves conflict, and can impose sanctions (see Illustra- approves and has the ability to amend annual production tion No. 4.14). and R&D plans.

Norway: United Kingdom: Malaysia: strong industry ministry task-oriented structure project approach

• Industry ministry • New structure • Responsible ministry –– Ministry of Petroleum & Energy –– Oil & Gas Authority –– KeTTHA1 –– Dept for Business, Energy & Industrial –– Ministry of Higher Education

Responsibility Strategy

• Growth of the average oil recovery index • Reduction of the average OPEX per barrel • Amount of foreign investments in oil-field from 46% to 68% by 30% by 2019 service industry, 6 JVs created by 2014

KPI • Increase in the volume of proven reserves • Increase in the production by 250 mn bbl to 5 bn barrels2 by 2015 by 2021

• Management of SOEs through BoD/Super- • Concentration of state regulation tools • Project management office reporting to visory Board required for the task Prime Minister –– A roadmap to achieve KPIs

Key tool Key –– Implementation tracking –– Impact on ministers’ careers

1 Ministry of Energy, Green Technology and Water. 3. Mn BOE

Source: Oil & Gas Authority, UK Government, Wood's report, PEMANDU, ETP Program, E. Lesley 2014, Norwegian Ministry of Petroleum and Energy, Norwegian Petroleum Directorate, Norwegian Office of the Auditor General, Norwegian Act 29 Nov.1996 No. 72 relating to petroleum activities and Regulations to Act relating to petroleum activities

Illustration No. 4.12. Three international models for managing priority government tasks

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 79 Strong industry ministry as a pillar of Norway’s oil and gas industry development F rom the very beginning of oil production on the Norwegian shelf, the state has played a key role in the industry’s development. The Norwegian Ministry of Oil and Energy has been responsible for maximizing value from production. It has every possible mechanism for achieving the tasks set before it. First, the Ministry creates the legal framework for the industry’s development, distributes production licenses (and has the authority to revoke licenses), and even has the right to amend companies’ production plans for oil fields, for example to change the production technology or replace foreign suppliers with domestic ones1. A notable example is the introduction of a mandatory requirement to localize at least 50% of R&D as a condition for receiving a production license. Second, the Ministry controls a stake in Statoil, Norway’s largest oil producer. Thus, it has direct levers to influence the company’s development strategy and can promote the necessary agenda. Third, the Norwegian Petroleum Directorate, which is part of the Ministry, is one of the oil and gas industry’s main investors in scientific research. The Ministry finances large programs like DEMO 2000 and PETROMAKS/PETROMAKS 22. Source: Ministry of Oil and Energy data, OG21 oil and gas sector development strategy, management report from the chief auditor of the Government of Norwaylx

Illustration No. 4.13. Norwegian Ministry of Oil and Energy

A new structure for a new task: the British approach As a result of the sharp decline in oil prices in 2014, oil and gas production from the UK shelf decreased. To address this issue, the government spun off the Oil & Gas Authority – a state company acting as an independent industry regulator – from the Department of Energy and Climate Change3. The OGA’s role encompasses three main areas aimed at improving the efficiency of oil and gas production from the shelf. First, the OGA regulates the exploration and development of oil and gas fields on the shelf and along the coast. Second, the OGA plays an important role in fostering a culture of cooperation and collaboration among industry players, as well as in reducing production costs. The Authority works with all stakeholders: representatives from industry, government, trade associations, universities, etc. Third, the OGA promotes investment growth (primarily via reduced tax rates), increased export, and distribution system development. The OGA was assigned broad powers to ensure that it could do the job. For example, it can impose fines of up to GBP 1 million, and in special cases up to GBP 5 million with the potential for exploration license revocation. The OGA also has the right to attend all significant company meetings and has access to all necessary company data. Immediately after being spun off as an independent regulator, the OGA determined the critically important projects and areas for further development4, distributing their implementation along a three-year horizon through 2018. Going forward, as part of the 2021 development strategy5, it defined specific KPIs for each area, for example increasing production efficiency to 80%, reducing OPEX to 30%, and boosting production to 250 million barrels. Source: UK Oil & Gas Authority reports and documentslxi

Illustration No. 4.14. UK Oil & Gas Authority

In the UK, it is possible to create a special structure The third model for giving stakeholders access to the nec- not only at the industry level, but also for the broad- essary resources is creating a project office. In recent er economy. For example, in July 2016 the Department years, the government management sphere has seen for Business, Energy and Industrial Strategy was creat- widespread adoption of the Delivery Units model, i.e., ed to replace the Department for Business, Innovation specially created supra-agency organizational units that and Competence. The organizational change came in promote the leadership’s agenda using a project model. response to changed economic policy priorities and the This approach has been applied in the UK, Australia and need to address the economic development issues that Malaysia. One of the most successful examples of Delivery were most acute at the moment: in this case, industrial Units is Malaysia’s PEMANDU6 (see Illustration No. 4.15). policy. There are three main drivers of the PEMANDU project The ability to change the organizational structures of model’s success. state agencies makes the management system flexible (1) First, the transformation program has a single own- and capable of adapting relatively quickly to changing er with broad powers (PEMANDU). It sets the ideol- conditions. Giving structures the necessary mandate al- ogy and project plans, coordinates roadmap and KPI lows them to overcome the lack of resources that face development, facilitates cross-functional coordina- industry ministries. tion, and performs the work of the project offices.

80 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets (2) Second, the roadmaps are studied in great depth PROJECT OFFICE ORGANIZATION BEST with clear goals, objectives, and delineation of re- PRACTICES: PEMANDU ANALYSIS sponsibility: the depth of the detail extends to the level of weekly planning, which ensures transparent PEMANDU is formally accountable to the prime minister and efficient implementation monitoring. and is split into two structural units responsible for ETP and GTP, respectively. ETP is the most relevant: innova- (3) Third, the existing model makes it possible to solve tive development is one area of economic development. cross-functional problems at four levels: project taskforce, project office (PEMANDU), Steering Com- A key differentiator of PEMANDU’s work is that the mittee, Prime Minister. project work is organized in two levels. First, the Econ- omy Transformation Programme itself is essentially After discussing these three models with experts, we a megaproject that is managed by PEMANDU and the concluded that the first two models do not meet Rus- prime minister. The program is structured around 12 sia’s innovative development goals, though the project NKEAs, i.e., top-level projects. From there, an autono- approach could become a real enabler for reaching that mous project management system is formed within each goal. Increasing the authority of industry ministries is of these areas. Each area has its own Steering Commit- essentially an analogue of creating state-owned com- tee and project office (PEMANDU uses the term Delivery panies: it does not correspond to the country’s current Management Office), which coordinate the lower level development stage. In Russia’s case, creating a structure projects (Entry Point Projects, or EPPs). Entry Point Proj- for the task with a mandate to foster innovative develop- ects are organized as a taskforce with a single person ment in the country would imply setting up a “ministry of responsible for project deliverables. innovation.” This would be difficult to implement because its mandate would conflict with those of the industry The prime minister serves as the chairman of PEMAN- ministries. DU’s board of directors. He evaluates the results of ministers’ work in implementing key areas of the transfor- However, forming a strong project office is a model that, mation program for the period. with the correct approach and project structure, delineation of responsibility and granting project stakeholders The PEMANDU director is appointed directly by the the necessary powers, could provide real results. Let’s prime minister and is a cabinet member. He has a man- take a closer look at Malaysia, where the current proj- date to evaluate the activities of ministers responsible for ect office organizational model helps facilitate effective implementing areas of the program jointly with the prime cross-functional collaboration and gives stakeholders minister. The PEMANDU director takes part in “six eye” access to the necessary tools and resources. meetings: closed meetings of a minister, the prime min-

PEMANDU - a vital tool in Malaysia’s transformation PEMANDU is an organization tasked with managing the results of Malaysia’s transformation program. It was created at the initiative of Malaysia’s new Prime Minister, Najib Razak, who entered office in April 2009 and set ambitious goals to transform the country. The program’s goals are for Malaysia to reach high-income status7 by 2020, i.e., to double gross national income per capita. In September 2009, Najib Razak announced the creation of PEMANDU and appointed as its director Idris Jala, former head of Shell Malaysia and Malaysia Airlines. PEMANDU is implementing the country’s transformation via two key programs: Government Transformation Programme (GTP). The program’s main task is to improve the quality of life and make government management more efficient, including by drawing on private sector experience. The program includes seven National Key Results Areas (NKRAs), from improving the quality of life to reducing corruption. Economy Transformation Programme (ETP). The program’s main task is to reach 6% annual economic growth (by 2020). ETP consists of two inseparable elements broken down into eight strategic reform initiatives and 12 National Key Economic Areas (NKEAs). The 12 NKEAs are essentially the drivers of the economy: “Oil, gas and energy,” “Palm oil,” “Financial services,” “Tourism,” “Professional services,” “Electronics,” “Wholesale and retail trade,” “Education,” “Information and communications technology and infrastructure,” “Agriculture,” and “Kuala Lumpur - Klang Valley.” A total of 131 projects have been launched in these 12 NKEAs, and more than 60 promising projects have been identified for possible future implementation. The effectiveness of PEMANDU’s project principle has already been proven by both programs: GTP has helped significantly reduce crime rates (35%), make progress in the fight against corruption, and improve infrastructure and the quality of life in rural areas. ETP’s overall annual KPI score exceeds 100%. In the four years from 2010 to 2014, 1.5 million new jobs were created, dependence on the oil and gas industry was reduced from 40.3% to 29.7%, and GDP growth reached 6% in 2014 Source: PEMANDU roadmap and annual reports

Illustration No. 4.15. Malaysia’s PEMANDU

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 81 ister and the PEMANDU director to discuss work results. their contribution to the high-level program goal, which The director also monitors program implementation creates a transparent link between activities and top-lev- weekly using operational KPIs. el goals. This feedback facilitates identifying and reacting to the causes for failure to achieve the established goals PEMANDU Economic Transformation Program Units in a timely manner. (ETP Units) are comprised of teams formed around key NKEAs that work on an ongoing basis. PEMANDU’s pri- KPI development begins with setting the initial goal of mary task is to coordinate all processes of the project annual gross national income (GNI) growth of 6% from work and act as a liason with the prime minister. During 2010 to 2020. The choice of NKEAs is determined by the the program launch and structuring phase, PEMANDU size of the industry, as well as its forecast GNI contribu- staff are responsible for organizing work to select the tion and job creation on a 10-year horizon. Within each main areas and project, in particular for organizing road- area, the projects being considered are also evaluated map development “laboratories” with the best minds based on their impact on GNI and job creation, as well as from the public sector, business and communities of on the efficiency of state investment in the project. An ex- expertise for daily collaboration on the roadmaps over a ample of the effect that the “Wholesale and retail trade” period of 6-8 weeks. NKEA had on GNI can be seen in Illustration No. 4.17. PEMANDU staff play the leading role in the work of each For each NKEA, operational KPIs and milestones are area’s Delivery Management Office (DMO) from the set during the roadmap "laboratory" phase for the ini- perspective of cross-functional coordination and opera- tial period that are drivers for the resulting metrics: GNI tional support. The DMO requests information about the and job creation. Thus, the “Wholesale and retail trade” current status, prepares standard KPI reports, identifies NKEA’s operational KPIs for the initial period of program problem areas, prepares and structures questions for implementation were: submission to the taskforce. Metrics and key events from Modernizing 100 small retailers via the TUKAR pro- all projects are uploaded weekly to a high-level database gram8; that the cabinet of ministers has access to. Additional- ly, the DMO prepares a consolidated report for the area, Creating five hypermarkets and 13 supermarkets; as well as key questions for submission to the Steering Canceling import duties on select retail products. Committee. PEMANDU staff can become involved in the course of the project where necessary in order to ad- Goals for the next period are established depending on dress cross-functional issues. In particular, in the event the level of achievement of operational KPIs for the peri- that any government structures do not wish to assist with od and the roadmap. This cycle of setting goals and eval- project implementation, PEMANDU can suggest that uating results repeats going forward. they change their position, basing their recommendation on the project’s priority in the prime minister’s agenda. The Steering Committee consists of key stakeholders from various ministries and government agencies, as well as business leaders. The Steering Committee makes strategic decisions about the course of project implementation, e.g., the need to reallocate resources, include or exclude projects from the area. The Steering Committee chairman is a minister from a relevant agency responsible for implementing an area. The chairman is responsible for overall KPI achievement on projects within their area. The organization coordinator is directly responsible for project implementation, and in most cases this should be a representative of business, not government. The EPP taskforce also includes other co-executives: stakeholders from government agencies and other companies. It is important to highlight that when launching the program, all government stakeholders publicly pledge to use all available resources to achieve the established goals, which facilitates cross-functional communication. As noted earlier, cross-functional tasks are solved at four levels. Problems that cannot be solved at a lower level 1 Act 29 November 1996 No. 72 relating to petroleum activities, Reg- are escalated to a higher level. The escalation continues ulations to Act relating to petroleum activities until the problem has been solved. Examples of how this 2 These programs are described in detail in previous sections mechanism works can be seen in Illustration No. 4.16. 3 Department of Energy and Climate Change 4 Published in the report "Call to action: Six months on" One of the key success drivers of project-based PEMAN- 5 OGA corporate plan 2016-2021 DU’s approach is the elaboration of a step-by-step road- 6 Performance management and delivery unit map implementation plan that includes key project mile- 7 According to World Bank classifications stones and KPIs. Projects and KPIs are formed based on 8 TUKAR – Small Retailer Transformation Program

82 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets - 4 levels of coordination among agencies to the last-minute agreement of ministries regulation of Indonesia, the key export market. The barriers were removed by using diplomatic channels (ministry of foreign Affairs, External Trade Development Corporation — mATRADE) the malaysian Investment Development Authority (mIDA) for financing above plan the tonnage KPI dropped by 4.5x due to lack of working capital in cooperatives and farmers were reluctant to join as they needed cash. The team local banks agreed on overdraft for cooperatives.

Inquisition Through SteerCo Through PEMANDU In a team • In 2013, there was 1 meeting and 18 issues on the agenda (within all areas) • A day before the meeting number of issues had dropped to 6 due • The export KPI within the healthcare area was not achieved due to protectionist • If there is a proven lack of project implementation resources, PEmANDU can ask • When cooperatives of small farmers were being created (a Palm Oil project) Performance management and delivery unit Economic transformation programme Delivery management office 1 2 3 4 3 2 1 1 sons Learned from Malaysia" sons Learned from Source: Malaysian Economy Transformation Programme roadmap; World Bank report “Doing, Learning Being: Some Les Bank report World roadmap; Programme Economy Transformation Malaysian Source: 1 Other projects • ... • ... 3 1 ... Medical / biocluster Area 2 —Energy

Steering Committee • Ministry of Health • ministry of Defense • ministry of International Trade and Industry • business • ... • Project coordinator — UM Holdings • ministry of Defense • University of malaya • ministry of health • Economic Planning Unit • ... Area 1 — Healthcare 1 Area 12 — Greater Kuala Lumpur area Prime Minister Example: Healthcare PMO 2 Export of generics 3 • Project coordinator — Ministry of Health • ministry of International Trade and Industry • External Trade Development Corporation • Investment Development Authority (mIDA) • Companies: biocon, hovid, Ranbaxy, etc. DMO • PEMANDU • ministry of health 1 PEMANDU CEO PEMANDU Key source of influence — the mandate to assess the performance of ministers 4 Illustration No 4.16. PEMANDU organizational structure and problem escalation mechanism and problem structure No 4.16. PEMANDU organizational Illustration

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 83 Contribution to GNI by 2020 (myR bn)

200

57.2 165.0

150

22.2 107.8 100 45.2

50 9.9 2.1 40.4 4.1 24.3

0 modernization Globalization Innovation Confidential Total business multiplier Total GNI in 2009 GNI in 2020 projects projects projects projects1 startup opportunities contribution projects and growth to GNI

vs. baseline

Source: Malaysian Economy Transformation Program roadmap Illustration No. 4.17 Components determining target GNI change

84 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets 4.6. PROJECT OFFICE: ORGANIZATIONAL OPTIONS

ow that we have reviewed global experience in or- tation mechanisms, i.e., the project office does not get Nganizing national innovative projects, we will turn involved in the roadmap development process. to Russia to look at how this knowledge might be most After the KPI targets have been approved, the project of- effectively applied in the country. Directly copying the fice is responsible for regular monitoring: it updates the mechanisms that have been successful in other coun- status of goal achievement quarterly, both overall and for tries is unlikely to replicate their effectiveness, because each individual activity. As needed, the project office can we are not starting from scratch: we already have an in- demand that corrective measures be developed, and in novative policy organizational structure in place and have the event of a systematic failure to reach the established accumulated plenty of our own experience - both positive goals, can escalate problems to a higher consultative and negative - of implementing similar initiatives. body. Generalizing the examples given above, we see two op- The second option is to form a “full” project office that tions for setting up an innovative development project is responsible for implementing innovative development office in the country: projects and achieving the “main attack avenue” KPI tar- (1) as a “light project office” or organizational super- gets. Unlike the first option, a full project office is directly structure over the existing structures and initiatives, responsible for developing and implementing an entirely i.e., a kind of integrator of disparate projects and new project, i.e., it is essentially the project owner. The stakeholders, on one hand, and innovative develop- working mechanism in this option is shown in Illustration ment goals, on the other; No. 4.19. (2) as a “full project office” developing a new innovative Goals are set by developing the overall project roadmap. project and providing a mechanism to implement is The project office is responsible for coordinating road- at interface with existing initiatives. map development, and must attract a wide range of stakeholders for this work: organizations responsible for We describe these two options below. Note, however, that implementing subprojects, including representatives of this report is not trying to decide which of the existing business, industry ministries and the community of ex- agencies and government bodies could play the roles pertise. Parts of existing initiatives can also be integrated outlined below (“higher consultative body” and “project into the new project: integration methods should be dis- office”). These questions should be addressed in the cussed at this stage. Key KPI targets and the subproject course of introducing the options presented below. management structure, including Steering Committee The first option is to create an organizational super- membership, are also formed during roadmap develop- structure over the existing system that would play the ment. role of coordinator for end-to-end KPI and project in- Note that there are two levels of project office staff integration. This organizational unit would essentially be volvement: first, at the overall project level, and second, a “light” project office whose task would be to ensure at the subproject level. The project office’s primary role that the dozen “main attack avenue” KPIs are reached is coordinating and constantly monitoring project imple- by monitoring the implementation of existing initiatives mentation progress, with instructive support where nec- (acting as a “smart filter,” i.e., an open-minded and qual- essary. The project office monitors subproject milestone ified evaluator of initiatives) and developing precise new progress weekly and helps develop corrective measures. initiatives where needed. The organizational implemen- In the event of a systematic failure to reach the estab- tation mechanism used in this approach and stakeholder lished goals, the project office can escalate problems to roles can be found in Illustration No. 4.18. the higher consultative body. The mechanism for developing and approving initiatives As part of the second option, we suggest structuring the includes several stages. The initial goals are formulat- project as follows: eight industry subprojects and two ed by the project office itself (top-down approach). The functional subprojects. Industry subprojects include in- project office then gathers information from responsi- novative development of the manufacturing industry, ble ministries regarding existing measures and initia- nuclear industry, aerospace industry, energy, oil and gas tives that could contribute to reaching the established industry, telecommunications and ICT, construction and KPI goals. It analyzes whether the existing initiatives are utilities, agriculture and food industry, and transport. sufficient to achieve the established goals, i.e., it essen- The respective industry ministries will be the subproject tially conducts a review of existing initiatives. If they are owners. Functional subprojects include science and ed- insufficient to achieve the KPIs, the current target values ucation (owner: Ministry of Science and Education) and could be adjusted, or new measures could be developed. the venture market (owner: RVC). This brings the approved KPI target values into compliance with the measures being implemented. The industry subprojects will have seven “main attack avenue” KPIs: demand for ready-to-use technology, num- In this case, it is important to note that the ministries ber of patent applications, total number of patents, num- themselves develop the new initiatives and implemen-

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 85 1 Higher consultative body 7

2 PMO 4 6

3 Ministry of Energy … Ministry of Industry and Trade 5

5 SmartGrid Initiative • Rosseti • Owner • ministry of Energy, • Co-owners region, suppliers

• Sets preliminary KPI targets top-down 1 • Reviews the existing initiatives of ministries and their contribution to target achievement, defines the gap

• Instructs ministries to develop initiatives in order to bridge gaps 2 • Proposes engagement of previously unengaged beneficiaries / resource holders in existing initiatives

• Develops new initiatives 3 • fine-tunes the management system for existing initiatives

4 • Reviews the developed initiatives, sets final targets

5 • Directly implements the measures of the roadmap on a daily basis

• Tracks the status of initiatives and target achievement on a quarterly basis 6 (in total and contribution of individual projects) • Requests development of corrective measures, escalates issues to the higher consultative body

• Reviews reports of ministries and the PmO (on a quarterly basis) Each ministry — once or twice a year; ‘lagging’ ministries — as required 7 • Determines consequences for target achievement / non-achievement • makes decisions on modifying targets and roadmaps, allocating resources to ‘own’ initiatives or gives similar recommendations to other project owners

Source: BCG analysis Illustration No. 4.18. Option 1 - “light” project office

86 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets 1 Higher consultative body 7

1 PMO 6

Subproject SteerCo 5 Subproject SteerCo • Ministry of Energy, • Ministry of Industry and Trade • ministry of Industry and Trade, • Engaged government bodies, SOEs regions, Rosseti • Private sector • SOEs • Private sector

Subproject PMO Subproject PMO

3 SmartGrid Initiative • Rosseti • Owner • ministry of Energy, • Co-owners region, suppliers

Energy subproject Manufacturing Industry subproject

• Defines the program structure and the SteerCo setup • Reviews reports of the teams and the PmO on initiative status • Develops roadmaps with the participation of federal executive 5 (every 1–2 months on each initiative) 1 bodies, SOEs and the private sector • Allocates resources, rewards/punishes for results • Sets KPI targets linked to specific projects • Defines coordination with existing initiatives: include in roadmaps, cooperate, ignore • Tracks the status of individual projects (every week/month) • Tracks the achievement of end-to-end KPI targets 6 • Gives a second opinion to the higher consultative body 2 • Approves the program structure, roadmaps and the SteerCo setup • Escalates issues with government bodies

3 • Directly implements the measures of the roadmap on a daily basis • Reviews reports of ministries and the PmO (on a quarterly basis) Each subproject — once or twice a year; projects with problems — as required • Tracks the status of milestones every week 7 • Determines consequences for target achievement/non-achievement 4 • Gives a second opinion to the SteerCo • makes decisions on modifying targets and roadmaps, • Submits information to the head PmO allocating resources

Source: BCG analysis Illustration No. 4.19. Option 2 - “full” project office

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 87 ber of innovative companies, share of innovative goods, only each of their strengths and weaknesses, but first share of innovative technology spending, and Export of and foremost should also be based on the established Russian high-tech goods. The KPI for the “Science and objectives, level of ambition, available government re- Education” subproject will be the quantity and quality sources and specific economic conditions at the decision of research papers, while that for the “Venture Market” time; that is why this report does not give a priori prefer- subproject will be the venture investment volume. This ence to either of them, instead leaving room for a deeper system essentially copies the KPI cascading scheme (see analysis of the optimal structure. Illustration No. 4.7), which is not surprising, given that We also note that regardless of the project office model the project structure is chosen so as to give the responsi- that is chosen, implementing innovative projects requires ble ministers a mechanism to achieve the targets for the efficient work with all stakeholder groups in the process: “main attack avenue” KPIs that they have been assigned. government bodies, state corporations and companies, Each of the two options has its own strengths and weak- development institutes, and private business. Stake- nesses, which ultimately boil down to the need to account holders need to be involved both directly (via government for existing structures and initiatives. The strengths of bodies) and indirectly, through the positions of high-level the first option (superstructure) are: federal executive authorities, directives from the Federal Agency for State Property Management, or by entering it ensures that goals are compliant with the initiatives the initiative roadmaps. designed to achieve them without leading to a conflict of “old vs. new,” and without sparking an unproductive bureaucratic battle; it gives the KPI owner a mechanism to attract the required resources and counterparts (including from government organizations, state-owned companies, private business, etc.) that they lacked before in the absence of a high-level coordinating body; it acts as a “smart filter” for existing initiatives, giving and open-minded and qualified second opinion regarding their viability, which helps increase budget spending efficiency. However, the first option also has its weaknesses: the existing initiatives do not have a common owner (e.g., they could be curated by various committees or the president), which complicates the project office’s escalation mechanism and could potentially lead to conflict; there is the possibility of conflicting goals between the “main attack avenue” and the original priorities of the existing initiatives, which could hinder their implementation. The second option (full project office) has mostly the same strengths: it ensures alignment between the goals and initiatives designed to achieve them, because potentially conflicting initiatives and structures are only taken into account if they can be of use to the new project; to the same extent as for the first option, it gives KPI owners a mechanism to attract the resources and counterparts that they need; it allows relatively ineffective existing initiatives to be replaced with new ones that have been developed in line with best practice. The second option’s weaknesses are: unclear potential integration of the new programs and project offices with the existing initiatives and structures, and potential difficulty interfacing with them; the danger of competing with existing programs (NTI, state programs, and industry ministry projects). Choosing one of the two options should account for not

88 4. You Can't Manage What You Don't Measure: How to Set and Achieve Targets APPENDIX 1. DASHBOARD A1 METHODOLOGICAL UPDATE: HARMONIZATION WIT H IDS-2020

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 89 APPENDIX 1. DASHBOARD METHODOLOGICAL UPDATE: HARMONIZATION WITH IDS-2020

his Appendix aims to update dashboard indicators in Salary to teachers – a green traffic light in the dash- Tcompliance with IDS-2020 target indicators in order board, stable dynamics. to harmonize the two instruments and ensure consisten- E-government development – yellow traffic light, neg- cy of the findings resulting from the adjusted indicators. ative dynamics. Total alignment of the indicators is not possible and is not required given that they are underpinned by different Detailed comparison tables for the dashboard indicators selection and calculation principles. and IDS-2020 target indicators are shown in Illustration No. A.2. Dashboard indicators are designed to estimate Russia’s position compared to the target list of leading innovation countries. Therefore, the dashboard only includes the indicators that are updated on a regular basis by such international organizations as the OECD, World Bank, etc. On the other hand, IDS-2020 indicators are primarily intended to set KPIs for state agencies in charge of innovation policy within their sectors, which is why there is no requirement for the IDS-2020 indicators to be internationally consistent, since their main focus should be on the measurability, responsiveness and unambiguity of each of them. As a result, the two sets of indicators constitute inter- secting, but not coinciding, aggregates: Both documents contain identical indicators (or indicators with a slight difference in methodologies and/ or data sources), although there are only a few of them – in this case no adjustment is required, although update of methodology or data source in any one of the documents is acceptable. There are also similar indicators, i.e. those reflecting the same information but formulated otherwise or calculated by different methodologies. In this case, we will try to replace the indicator in the dashboard if there are any comparable data available on leading innovation countries. Some of the indicators are represented in IDS-2020 but not included in the dashboard. In this case, we make a decision whether to include an indicator in the dashboard on an individual basis taking into account its conformity with certain criteria (such as applicability to leading countries, frequency, availability of statistical data, etc.) Some of the indicators, on the contrary, were included in the dashboard but not in IDS-2020. In this case, no adjustment is required given that the update of the IDS- 2020 indicators falls beyond the scope of this report. Illustration No. A.1. reviews these groups of indicators and reflects our recommendations above. We suggest adding three IDS-2020 indicators to the dashboard, which will help us to increase the number of indicators applicable to both instruments from five to eight. Below is a description of the three added indicators: Education spending – yellow traffic light in the dashboard-2016, stable dynamics. It is important to note that this indicator includes total expenditures for education. Provided that the 2015 dashboard had a simi- larly entitled indicator which, however, was calculated based on education expenditures incurred solely by the state we suggest renaming the latter “State education expenditures”, while the newly introduced indicator will remain “Education expenditures”.

90 Source: BCG analysis BCG Source: 9 NR indi - 21 IDS indicators as they 21 IDS indicators into the NR 3 IDS indicators Proposals on harmonization Proposals NR indicators harmonized with the IDS NR indicators 2020 No actions r K Introduce Not to intr No actions r are completely identical are - 5 indicators only indicators have no comparable data on other countries have no comparable to ensure comparability with other comparability to ensure cators countries

8 • equired • eep the NR methodology for • • oduce • — harmonization of NR equired 5 9 – 38 24 indicators indicators indicators indicators IDS indicators 5 9 – 72 58 indicators indicators indicators indicators NR indicators TOTAL Identical Indicators Similar Indicators Indicators existing in the NR, but missing existing Indicators in the IDS Indicators existing in the IDS, but existing Indicators missing in the NR Illustration No. A.1. Harmonization of dashboard indicators with IDS-2020 target indicators No. A.1. with IDS-2020 target Illustration indicators Harmonization of dashboard

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 91 - al State Statistics eder F Notes is based on information from the from is based on information Service Indicators will be tracked starting from 2016 starting from will be tracked Indicators NR indicator is more indicative in terms of Russia’s position indicativeNR indicator is more in terms of Russia’s to benchmark countries compared The NR employs UNESCO data for comparison with bench - data for The NR employs UNESCO mark countries The NR indicator is more indicative in terms of Russia’ indicativeThe NR indicator is more in terms of Russia’ infrastructure sufficiency of ICT According to different sources. The NR employs OECD data sources. According to different comparison with benchmark countries , while IDS-2020 for The NR employs GDP per hour worked according to pur according The NR employs GDP per hour worked chasing power prices of 2010, while IDS parity (PPP) in fixed 2013 as 100% the indicator for tracks Recommendation No adjustment required – identical indictors No adjustment required – identical indictors No adjustment required – identical indictors No adjustment required – identical indictors No adjustment required It is suggested to retain the NR indicator It is suggested to retain No adjustment required – identical indictors No adjustment required the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain Similar Indicators Identical Indicators NR Indicator Relative share of innovative share Relative goods, works and services in the total volume and services of goods, works in global high-technology of high-technology exports Share exports in GDP exports of intellectual property Share Number of innovation support provided with federal clusters after 2010 that managed to double high technology exports after such support was provided, cumulative total Average score of the country’s three best universities in the three of the country’s Average score QS world university rankings Share of state education expenditures in GDP of state education expenditures Share of innovationShare companies in the total number of industrial companies The index consisting of five parts: 1) number of fixed consisting of five parts: 1) number of fixed The index telephone lines per 100 people; 2) number of mobile phone per 100 people; 3) international Internet connec - contracts 4) Share tion capacity (bps) and number of Internet users; of privateof private 5) Share households with computers; households with access to the Internet Share of R&D expenditures in GDP of R&D expenditures Share Added value per manhour - IDS-2020 indicator Share of innovative goods, works and services goods, in the works of innovative Share and services of shipped goods, work total volume industry) (by in total exports high-technology of Russian Share exports global high-technology exports Technology with federal provided clusters Number of innovation to double high support after 2010 that managed provided, after such support was exports technology total cumulative Number of Russian universities ranking among top ranking universities Number of Russian to global univer according 200 global universities sity ratings State education expenditures in the organizations of innovation share Relative % (by under review, total number of organizations industry) Share of private households having broadband broadband households having of private Share Internet access Internal R&D expenditures Workforce productivity (by industry) (by productivity Workforce Illustration No. A.2. Comparative tables for the dashboard indicators and IDS-2020 target indicators indicators and IDS-2020 target indicators the dashboard No. A.2. tables for Illustration Comparative

92 - orm No. 4. It F of Science Database, B Notes eder F on the innovative goods, works and services as in is suggested that the NG methodology be used to compare data. data on exported al State Statistics Service’s includes all publications in the WE to the humanities, social sciences including those related and arts It is suggested that the NG methodology be retained givenIt is suggested that the NG methodology be retained is not available on the countries under com that information under IDS-2020 parison required The NR employs OECD methodology, while IDS is based The NR employs OECD methodology, The NR employs GII as an index estimating the number of The NR employs GII as an index scientific and technical publications, while IDS indicator It is suggested that only PCT patents be included, as It is suggested that only PCT for globally applicable procedure obtained under a more international patenting. Extending the indicator (by including patent agency) to a targeted patent applications filed directly its quantitative harmonizatrion with IDS 2010. will not require Recommendation It is suggested to retain the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain It is suggested to retain the NR indicator It is suggested to retain It is suggested to add the indicator in NR Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison - Used in IDS-2020 but not NR times H NR Indicator Number of publications cited at least Share of high-technology exports in GDP of high-technology exports Share Number of scientific and technical (scientific engineer ing) publications per billion PPP$ GDP. Number of patent applications filed by Russian residents residents Number of patent applications filed by Russian per 100 billion PPP$ GDP. procedures, under PCT IDS-2020 indicator Share of exported innovative goods, works and goods, works innovative of exported Share by services of goods exported in the total volume industry)industrial and service % (by organizations, Russia’s share in the total number of internation - share Russia’s in the WEB of al scientific publications indexed Science Database - Rus Number of quotations per one publication by in in scientific periodicals indexed sian researchers the WEB of Science Database Number of patent applications filed by Russian Russian Number of patent applications filed by applicants under international procedures Average salary to teaching staff in general educa - salary to teaching staff in general Average monthly to average tion institutions as compared region income in the relevant employment education of students at general share Relative state education institutions educated under federal state education 2018 the federal (by standards will apply to all G1-8 students) standards within one employed of graduates share Relative in the total number since graduation calendar year educated under the major higher of graduates education programs of students participating in academic share Relative in the levels competitions and contests at different total number of students

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 93 Notes It is suggested that the indicator should not be included of the sector do not necessarily since higher expenditures mean better innovative development Recommendation Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR Not applicable to the NR – no available data on the coun - tries under comparison It is suggested to add the indicator NR Not applicable to the NR – no available data on the coun - tries under comparison NR Indicator - IDS-2020 indicator viewees aged 25-64 years aged viewees patent applications funded Number of registered applicants, Russian filed by the state budget from prototype) total (per innovation/industrial which patent mainte - patents for Number of Russian paid was nance fee right as exclusive Number of patents registered patents - technological innova for Intensity of expenditures of expenditures (share tions in industrial production in the total cost technological innovations for and services performed of goods shipped, work industry) (by provided old years under 39 (inclusive) of researchers Share in the total number of researchers to staff as compared salary to research Average of the Russian region salary in a relevant average Federation - of higher education in internal R&D expendi Share tures Share of population involved in lifelong education in lifelong of population involved Share the last 12 months), in total number of inter (for Share of funds granted for R&D in the total amount for of funds granted Share to the sources all available allocated from of money universities leading Russian in the UN Global E-Government rating Russia’s Survey of population using state and municipal Share form services in the electronic

94 Notes It is suggested that Internal education expenditures also It is suggested that Internal education expenditures otherwisebe added as an indicator, only state education can be estimated now. expenditures - IDS-2020 suggests studying of R&D expendi the structure of funding based of the source tures Recommendation Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison Not applicable to the NR – no available data on the coun - tries under comparison is a technology export Not applicable – in the NR there indicator Not applicable to the NR – no available data on the coun - tries under comparison It is suggested to add the indicator NR Not applicable to the NR – no available data on the coun - tries under comparison Used in NR but not IDS-2020 NR Indicator 58 dashboard indicators that do not require any adjustments given falls beyond that the update of IDS-2020 indicators that do not require indicators the scope of this report. 58 dashboard IDS-2020 indicator Number of newly established small innovation com - established small innovation Number of newly Assistance for the Foundation panies supported by Enterprises in Science and to Small Innovative (FASIE) Technology researchers young by projects Number of innovative (under 28 years of enaging youth under the policy entrepreneurship old) in innovative of scientific acting as users Number of organizations scientific equipment equipment in the shared centers supported Number of engineering centers technology for turnover, trade Foreign Number of constituent entities the Russian support under new provided that were Federation support to constituent entities of federal programs in invest which actively Federation of the Russian total cumulative activity, innovative Internal education expenditures Share of work-related regulations issued for civil issued for regulations of work-related Share servants that contain certain qualifications criteria skills in the total num - language foreign regarding civil servants for regulations ber of work-related skills for language foreign to have required who are the purpose of their job duties Internal R&D expenditures by source of financing source by Internal R&D expenditures (budget/extrabudget)

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 95 APPENDIX 2. A2 KPIS FOR "MAIN ATTACK AVENUE": METHODOLOGY DETAILS

96 Asppendix 1. Da hboard Methodological Update: Harmonization with IDS-2020 APPENDIX 2. KPIS FOR "MAIN ATTACK AVENUE": METHODOLOGY DETAILS , urther F eign or F EACN). F inistry of Industry and Trade, inistry of Industry and Trade, M , industry grouped are indicators urther F Approach to decomposition Approach EACN codes refer to the EACN codes refer F ost urther urther OKVED is used as the basis for decomposing data on the total OKVED is used as the basis for volume and services of goods, works and the total amount of on technological innovationsexpenses by state organizations with their industryand agencies in accordance specialization. OKVED is used as the basis for decomposing data on the total OKVED is used as the basis for volume and services of goods, works per state organizations with their industryand agencies in accordance specialization. The indicator is not decomposed The indicator is decomposed on the basis of Economic Activity ( Commodity Nomenclature and agencies in industry to state organizations refer indicators with their industryaccordance specialization. M and Rosatom. to Roscosmos those which refer for except F of the two indicators. ratio is the of agency the relative share each organization , for F of the two indicators. ratio is the or agency the relative share each organization , for econmomic activity). with their and agencies in accordance state organizations for industry specialization. industryWeighted based on turnover indicators of organizations each OKVED were used since no data were availablefor on the under reviewnumber of organizations The indicator is decomposed on the basis of OKVED (types Data source eder Rosstat F Customs al Service Rosstat RVCA Rosstat orm No. F vation orm No. 4-Inno F Description inistry of Industry and Trade Order No. 1597 dated October 3, 2013 Order inistry of Industry and Trade M arket of Direct and Venture Investments” Investments” and Venture of Direct arket to the list approved by the “On approval modernization of the in view for of the list high-tech products of priority areas economy”. Russian of servicesThe indicator does not include exports or software works, services complete received when organizations complete received when organizations and the “total volume of goods and services”, 4-Innovation on technological innovations Expenditure - shown related in monetary as actual expenses, form on the company scale of various performed types of innovativeto the performance activity, innovation include current in the list may country). costs recorded region, (industry, Technological and capital expenditures. and expenses M The indicator measures the proportion of innovation the proportion The indicator measures - companies in the total number of organiza The calculation is based on the OKVED indicator published by (Rosstat) tions studied by Rosstat. innovations and marketing technological, organizational, which perform of organizations “share under review”. in the total number of organizations year, during the reporting volume the aggregate venture of investmentsThe indicator measures market. on the Russian Investing “Overview Venture Association for by a report the Russian used from Data are of the The indicator measures the proportion of innovative the proportion The indicator measures in the total volume- products of goods pro duced. The calculation is based on OKVED data published by the State Statistics Agency (Rosstat) on the total volume of innovative services goods, works, and the total volume of innovative goods, innovative cost to produce products of an organization’s the proportion The indicator measures published in the total volume The calculation is based on OKVED indicators of goods produced. technological innovations for or organizations” by “costs the State Statistics Agency (Rosstat) The indicator measures the volume of exported goods classifiable as high-tech products according according goods classifiable as high-tech products the volumeThe indicator measures of exported element of the Corresponding Corresponding innovation pyramid innovation anufacturing of innovative anufacturing of innovative Total number of innovation Total companies of venture investmentsVolume M products M products Exports of innovative products Indicator Share of innovation goods, of innovation Share services in total works, of goods shipped, volume services performed, works % provided, techno - of costs for Share in total logical innovations of goods shipped, volume services performed, works % provided, which of organizations Share activity engage in innovative - in the total number of orga % nizations under review, of venture volume Total Rub investments, Export of Russian high-tech Export of Russian goods, USD

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 97 , industry to state refer indicators urther F Approach to decomposition Approach The indicator is not decomposed The indicator is not decomposed econmomic activity). with their industry and agencies in accordance organizations specialization. The indicator is not decomposed The indicator is not decomposed The indicator is decomposed on the basis of OKVED (types - - Data source SE, Thom SE, Thom H H son Reuters son Reuters WIPO WIPO Rosstat ain M igher School H SE report “ SE report H ain indicators of ain indicators M SE report “ SE report H Description SE) “Science indicators” (2010, 2013-16) and the SE) “Science indicators” H SE) “Science indicators” (2010, 2013-16) and the SE) “Science indicators” H igher School of Economics ( Web of Science. To make the calculation, we used an indicator from reports of the the calculation, we reports used an indicator from make of Science. To Web of Economics ( publication activity”. mathematics, chemistry, biology, physics, areas: articles in the following The indicator measures earth science and engineering and technology, clinical medicine, bio-technological research, also indexed. are space science. Journals listed in the SCI and SSCI indexes H of publication activity”. indicators mathematics, chemistry, biology, physics, areas: articles in the following The indicator measures earth science and engineering and technology, clinical medicine, bio-technological research, also indexed. are space science. Journals listed in the SCI and SSCI indexes The indicator measures the proportion of publications by Russian authors in the total database of authors of publications by the proportion Russian The indicator measures of the the calculation, we reports used an indicator from make of Science publications. To Web The indicator measures the number of patents received by Russian companies using the PCT the number of patents received companies using the PCT byThe indicator measures Russian procedure - to the agree Pursuant on patent cooperation. is an agreement Treaty) Cooperation (Patent PCT to facilitate one-time patenting or can be made in order ment, an “international application” (over of the validity to PCT of a patent to territories which adhere 140 states). extension future The indicator measures the number of applications using the PCT procedure, which are received by which are procedure, the number of applications using PCT The indicator measures companies. Russian - to the agree Pursuant on patent cooperation. is an agreement Treaty) Cooperation (Patent PCT to facilitate one-time patenting or can be made in order ment, an “international application” (over of the validity to PCT of a patent to territories which adhere 140 states). extension future in the indexed authors the number of quotations per one article Russian The indicator measures The indicator measures the ratio of net book value the ratio of intangible assets on the balance sheets The indicator measures data on the finan - The indicator is calculated on the basis of Rosstat GDP. companies to Russia’s the property which characterize 1.6.5. “Indicators of organizations: indicators cial performance the property which characterize and 1.32.3. “Indicators and financial position of small companies” and financial position of companies” element of the Corresponding Corresponding innovation pyramid innovation Number of research papers Number of research Total number of patents Total Number of patent applications Quality of research Demand for ready-made Demand for technology Indicator Russia’s share in the total share Russia’s number of scientific publica - in the WEB of tions indexed Science Database Number of patents received Number of patents received the PCT through abroad in the national procedure phase Number of patent applica - - proce tions using the PCT residents submitted by dure Number of quotations per Russian one publication by in scientific researchers in the periodicals indexed WEB of Science Database Ratio of investments in of investments Ratio % intangible assets to GDP,

98 Appendix 2. KPIs for "Main Attack Avenue": Methodology Details LIST OF ILLUSTRATIONS

Illustration No. 1.1. Innovations as the only available source of growth...... 7 Illustration No. 1.2. Innovation dashboard (2015)...... 8 Illustration No. 1.3. Functional innovation policy model (2015)...... 10 Illustration No. 1.4. Main groups of initiatives proposed in Report 2015...... 12 Illustration No. 2.1. Trends in Russia’s positions of the ratings Doing Business, Global Innovation Index, and Global Competitiveness Index.. 15 Illustration No. 2.2. Revised dashboard...... 17 Illustration No. 2.3. Overview of changes in dashboard indicators...... 18 Illustration No. 2.4. Interim results of Innovative Development Programs for state companies...... 21 Illustration No. 2.5. The Prime Minister on the need to update IDS-2020...... 22 Illustration No. 2.6. Restructuring of FASO institutes...... 23 Illustration No. 2.7. Quantorium children’s science and technology parks...... 23 Illustration No. 2.8. National Technology Initiative Strategy...... 24 Illustration No. 2.9. Special Investment Contract...... 26 Illustration No. 2.10. The State’s actions in innovation policy (2010-2015)...... 27 Illustration No. 2.11. Attractiveness of global innovation hubs...... 29 Illustration No. 2.12. Low demand for technologies in Russia...... 29 Illustration No. 2.13. Weak responsiveness of business to innovations...... 30 Illustration No. 2.14. Correlation between the size of the venture market and the economy...... 30 Illustration No. 2.15. Inventors in Russia...... 31 Illustration No. 2.16. Weak patent activity of the Russian corporate sector...... 32 Illustration No. 2.17. Unstable effect from targeting medium-sized businesses...... 33 Illustration No. 2.18. Contribution of small, medium and large business to GDP of Russia and developed countries...... 33 Illustration No. 2.19. Government’s share in top 10 enterprises in various countries...... 33 Illustration No. 2.20. Targeting forks under the State’s innovation policy...... 34 Illustration No. 2.21. Innovations in large/mature business as an important target for the innovation policy of European countries’...... 34 Illustration No. 2.22. Shift in priorities of the innovation policy in Great Britain as an example...... 35 Illustration No. 2.23. Google’s Innovation Ecosystem (2008)...... 36 Illustration No. 3.1. Patents and R&D in Oil&Gas, Automotive Engineering and Aircraft Engineering...... 40 Illustration No. 3.2. Future competitive edge loss in the Oil&Gas, Automotive Engineering and Aircraft Engineering industries...... 40 Illustration No. 3.3. Wheat yield and gross grain yield in Russia and the USA...... 41 Illustration No. 3.4. Low agricultural mechanization...... 42 Illustration No. 3.5. Agriculture amid sanctions...... 42 Illustration No. 3.6. Barriers for the development of innovation...... 45 Illustration No. 3.7. Lack of qualified executives in agriculture...... 44 Illustration No. 3.8. A example of problems with SSJ-100 service...... 46 Illustration No. 3.9. A comparison between the aviation production chain in Russia and in other countries...... 47 Illustration No. 3.10. Operating profit of oilfield service companies in 2015...... 47 Illustration No. 3.11. Examples of problems with industry standards...... 48 Illustration No. 3.12. State support of the automotive industry (direct and indirect) in 2015...... 48 Illustration No. 3.13. An example of unimplemented state programs...... 49 Illustration No. 3.14. Comparison of the amount of export support in Russia and in other countries...... 49 lllustration No. 3.15. Measures aimed at promoting innovation...... 51 Illustration No. 3.16. Privatization of Kalashnikov concern...... 52 Illustration No. 3.17. Application of options programs in Russia...... 52 Illustration No. 3.18. International experience in implementation of the executive pool...... 54 Illustration No. 3.19. An example of corporate venture funds in the oil and gas industry...... 55 Illustration No. 3.20. Experience in developing the Sukhoi Superjet 100...... 56 Illustration No. 3.21. Cooperative Development Concept in South Korea...... 57 Illustration No. 3.22. Implementation of a new standard for associated gas utilization rate...... 58 Illustration No. 3.23. Implementation of the PETROMAKS 2 project in Norway...... 59 lllustration No. 3.24. PILOT Project in Great Britain...... 60 Illustration No. 4.1. Three steps in choosing “main attack avenue” KPIs...... 64 Illustration No. 4.2. Main interdependencies among elements of the innovative pyramid...... 66 Illustration No. 4.3. Logical map of interdependencies between innovative system elements...... 67 Illustration No. 4.4. List of “main attack avenue” KPIs...... 69 Illustration No. 4.5. Cascading the KPI Export of Russian high-tech goods...... 72 Illustration No. 4.6. KPI cascading scheme for responsible parties...... 73 Illustration No. 4.7. Options for setting decomposition targets for the indicator Export of Russian high-tech goods...... 74 Illustration No. 4.8. W-process used in setting long-term targets for industry organizations and agencies...... 75 Illustration No. 4.9. Example of split responsibility for KPIs...... 76 Illustration No. 4.10. Smart Grid Project...... 77 Illustration No. 4.11. Smart Metering project...... 78 Illustration No. 4.12. Three international models for managing priority government tasks...... 79 Illustration No. 4.13. Norwegian Ministry of Oil and Energy...... 80 Illustration No. 4.14. UK Oil & Gas Authority...... 80 Illustration No. 4.15. Malaysia’s PEMANDU...... 81 Illustration No. 4.16. PEMANDU organizational structure and problem escalation mechanism...... 83 Illustration No. 4.17. Components determining target GNI change...... 84 Illustration No. 4.18. Option 1 - “light” project office...... 86 Illustration No. 4.19. Option 2 - “full” project office...... 87 Illustration No. A.1. Harmonization of dashboard indicators with IDS-2020 target indicators...... 91 Illustration No. A.2. Comparative tables for the dashboard indicators and IDS-2020 target indicators...... 92

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 99 SOURCES i. The Conference Board Total Economy Database, 2015 (https://www.conference-board.org/data/economydatabase/index. cfm?id=27762) ii. National Report on Innovations in Russia, issue No. 1, RVC, 2015 (https://www.rvc.ru/upload/iblock/b70/NROI_RVC.pdf) iii. Strategy for Innovative Development until 2020 of the Ministry of Economic Development. 2010 (http://government.ru/docs/17169/) iv. "Australian key innovation indicators datacard", Department of Industry, Innovation and Science (http://www.industry.gov.au/ innovation/reportsandstudies/Documents/AustralianKeyInnovationIndicatorsDataCard.pdf) v. Strategy for Innovative Development of the Russian Federation for the Period Until 2020, Analytical Center for the Government of the Russian Federation, 2014, (http://ac.gov.ru/files/attachment/4843.pdf) vi. “Innovation KEI: guidelines for state companies”, Open Government website, 2016 (http://open.gov.ru/events/5514994/) vii. http://open.gov.ru/events/5515292/ viii. “Innovative development programs for state companies will be subject to independent expert review”, Open Government, 2016 (https://www.vedomosti.ru/technology/news/2014/12/30/medvedev-poruchil-aktualizirovat-strategiyu-innovacionnogo) ix. “On Progress in the Implementation of Russia’s Innovative Development Strategy for the Period until 2020, the Russian Govern- ment, 2014 http://government.ru/news/16196/) x. Draft Strategy for Scientific and Technological Development of the Russian Federation until 2035, Ministry of Education and Sci- ence, 2016 http://sntr-rf.ru/upload/iblock/4c6/%D0%A1%D0%9D%D0%A2%D0%A0%2005.05.2016_редакция%2022.pdf) xi. Head of the FASO: “About 40% of institutes under the Agency’s jurisdiction support the idea of a merger”, TASS, 2016 (http://tass. ru/pmef-2016/article/3372656) xii. Arkady Dvorkovich: The consolidation of the RFH and the RFFR will increase the volume of interdisciplinary research’, FASO of Russia, 2016 (http://fano.gov.ru/ru/press-center/card/?id_4=36911) xiii. “Concept of the draft Federal Law “On scientific, scientific and technical, innovative activity in the Russian Federation”, Ministry of Education and Science of the Russian Federation, 2016 (http://минобрнауки.рф/документы/7894/файл/7100/1.pdf) xiv. “Children’s science and technology parks Quantorium with a total area of over 1,000 sq m opened in Moscow”, ASI News, 2016 (https://asi.ru/news/60092/) xv. On GenerationS Projects”, RBK, 2016. (http://generation-startup.ru/about/) xvi. “FORESIGHT FLEET 2016 submitted 70 projects for the NTI Strategy”, Agency for Strategic Initiatives (ASI), 2016 (https://asi.ru/ news/52127/) xvii. Dmitry Peskov: “The NTI Strategy is a technology of free sale of content and security on the global market”, ASI, 2016 (https://asi. ru/news/57241/) xviii. "RVC and Skolkovo Foundation sign a roadmap for coordination”, RVC, 2016 (http://www.rvc.ru/press-service/news/company/87592/) xix. “The Ministry of Energy of the Russian Federation discussed creating an industry fund for innovative technologies in the FEC”, Ministry of Energy of the Russian Federation, 2016 (http://minenergo.gov.ru/node/2056) xx. “Innovation Development Programs of state-owned companies shall be subject to independent expert review”, Open Government, 2016 (http://open.gov.ru/events/5515292/) xxi. “Russia to Support Mercedes-Benz”, Gazeta.ru, 2016 (https://www.gazeta.ru/auto/2016/09/07_a_10181327.shtml) xxii. “The Ministry of Industry and Trade to subsidize worldwide patenting of Russian inventions”, GMP News, 2016 (http://gmpnews. ru/2016/08/minpromtorg-subsidiruet-patentovanie-rossijskix-razrabotok-za-rubezhom/) xxiii. Medium-size business went sort of unnoticed’, Expert, 2016 (http://expert.ru/2016/07/15/chempionyi/) xxiv. “State-supported Information Society Program for 2011-2020”, 2011 (http://minsvyaz.ru/ru/activity/programs/1/) xxv. “Meeting of the Ministers of Science, Technology and Innovation of BRICS countries”, Analytical Center of ICISTE, 2015 (http:// mniop.ru/vstrecha-ministrov-briks-po-voprosam-nauki-tehnologiy-i-innovatsiy-stran-briks.html) xxvi. "Academic research and industrial innovation: An update of empirical findings", Edwin Mansfield, Research Policy 26 1998 773–776 (http://sjbae.pbworks.com/f/Mansfield_1998.pdf) xxvii. "The answer is 17 years, what is the question: understanding time lags in translational research", Zoë Slote Morris et al, J R Soc Med December 2011 vol. 104 no. 12 510-520 (http://jrs.sagepub.com/content/104/12/510.full) xxviii. "Basic Research Is the Key Driver of Innovation", Peter Gruss, MaxPlanckResearch Special 2009 г. (https://www.mpg.de/799746/ W000_Viewpoint_006-009.pdf) xxix. "Proposition 71: California Stem Cell Research and Cures Initiative", Laurence Baker et al, Analysis Group Economic Impact Anal- ysis Report, 2004 г. (http://www.analysisgroup.com/uploadedfiles/content/news_and_events/news/proposition_71_report.pdf) xxx. "One simple idea", Stephen Key, McGraw-Hill, 2011 г. (https://www.allbusiness.com/97-percent-of-all-patents-never-make-any- money-15258080-1.html) xxxi. "Why startups fail, according to their founders", Erin Griffith, Fortune, 2014 г. (http://fortune.com/2014/09/25/why-startups-fail- according-to-their-founders/) xxxii. "10 Aussie start-ups gunning for Silicon Valley", Oliver Milman, Startup Smart, 2012 г. (http://www.startupsmart.com.au/advice/ growth/10-aussie-start-ups-gunning-for-silicon-valley/) xxxiii. "Less is more for Australian startups", Leon Spenser, TechRepublic, 2014 г. (http://www.techrepublic.com/article/less-is-more- for-australian-startups/) xxxiv. "Foreseeing the Future", HSE, 2014 (https://prognoz2030.hse.ru/press/124321392.html) xxxv. “Ask me How”, Expert, 2016 (http://expert.ru/ural/2016/36/sprosi-menya-kak/) xxxvi. Strategy for Innovative Development until 2020 of the Ministry of Economic Development.2010 (http://government.ru/docs/17169/)

100 Appendix 2. KPIs for "Main Attack Avenue": Methodology Details xxxvii. “Mother Wit for Domestic Consumption”, Kommersant Money, 2016 (http://www.kommersant.ru/doc/3058997) xxxviii. "Heroes today - but what about tomorrow? Gazelles and their long run performance", Pernille Gjerløv-Juel et al, 2012 г. (file:///C:/ Users/Khaliullin%20Alexey/Downloads/gazelles.pdf) xxxix. "Rethinking the role of big business in the UK's innovation ecosystem", NESTA blog, 2014 г. (http://www.nesta.org.uk/blog/rethinking-role-big-business-uks-innovation-ecosystem) xl. "Industrial strategy welcomed as part of government's new business policy", The Guardian, 2016 (https://www.theguardian.com/ politics/2016/jul/14/industrial-strategy-welcomed-as-part-of-governments-new-business-policy) xli. “Reverse Engineering Google’s Innovation Machine", Bala Iyer and Thomas H. Davenport, Harvard Business Review, 2008 (https:// hbr.org/2008/04/reverse-engineering-googles-innovation-machine). xlii. "Reverse Engineering Google’s Innovation Machine", HBR, 2008 (https://hbr.org/2008/04/reverse-engineering-googles-innovation-machine) xliii. Energy Strategy of Russia until 2030. Russian Ministry of Energy, 2009. (http://minenergo.gov.ru/node/1026) xliv. “Development of the Russian economy over 100 years: 1900-2000. Historical series, century trends, institutional cycles”, Sim- chera V.M., 2006 http://www.library6.com/3596/item/322900); "Grain crop yields in Russia, 1795-2007", Rastyannikov V.G., Deryu- gina I.V, 2009 (http://www.library6.com/3596/item/314111); Rosstat, FAOSTAT xlv. “Profitability of agriculture without government support has reached 10 percent”, Agroinfo, 2016 (http://agroinfo. com/2309201602-rentabelnost-selskogo-xozyajstva-bez-gospodderzhki-vyrosla-do-10-procentov/) xlvi. Decree of the President of Russia “On measures to implement the state science and technology policy for the benefit of agricultural development”, RF President Website, 2016 (http://kremlin.ru/acts/news/52572) xlvii. Maxim Basov, Rusagro On Tech Days “We’re looking for people”, Firrma, 2016(http://www.firrma.ru/data/s_opinion/8823/) xlviii. Aviation companies do not fly much on the Sukhoi Super Jet 100", 2016 (https://www.vedomosti.ru/business/articles/2016/05/16/641064-sukhoi-superjet) xlix. “Annual report of Transmashholding for 2014-2015” (http://ru.railfgk.ru/media/70829/annual_report_2014.pdf) l. “The Sky will Set a Filter”, Rossiiskaya Gazeta, 2016 https://rg.ru/2016/02/09/v-ikao-vyrabotali-novye-ekologiches- kie-standarty-dlia-samoletov.html) li. “Development of Russian roads hindered by obsolete GOST national standardsand construction standards (http://www.rbc.ru/ economics/11/04/2011/5703e5f79a79473c0df1cb1d) lii. State program “Promoting the development of Russian manufacturers of bearings”, RF Government, 2014,(http://programs.gov. ru/Portal/programs/passport/17) liii. “State program Subsidies for Russian producers of wheeled vehicles as compensation for R&D expenses and experiments conducted for wheeled vehicles under the sub-program Automotive Industry of the RF state program State program Development of Industry and Raising its Competitiveness (other budget allocations)”, Russkaya Gazeta, 2014 (https://rg.ru/2014/12/23/avto-site- dok.html) liv. Portal of RF state government programs (https://programs.gov.ru/Portal/programs/quarterMonitoring16&quarter=2&type=pgp&i d=E3320825-A4E9-4DFB-B74F-044F8911CB2D&detail=0) lv. RF Government Resolution No. 648 dated July 9, 2016 (http://government.ru/media/files/3bPQAbmcAXEWswkAcdQWQH- K2qIOyDDtp.pdf) lvi. “On the Strategy for the scientific and technological development of Russia in the long term, 2014. (http://regulation.gov.ru/projects#npa=49964 http://sntr-rf.ru/) lvii. Reimbursement of certification expenses”, 2016 (http://www.worldico.org/ico/iso.html); “Subsidies for partial compensation of expenses incurred for receiving an international certificate” (http://dnpp.mos.ru/subsidies-for-partial-compensation-of-expenses-connected-with-the-receiving-of-the-international-cer.php); Section 2.3 of Resolution No. 201 of the St. Petersburg Govern- ment as of March 23, 2016 (https://gov.spb.ru/law?d&nd=537991049&nh=1) lviii. "State enterprise procurements may revive”, 2016 (http://fas.gov.ru/press-center/fas-in-media/detail.html?id=46405) lix. Reduced Rate for Russian software developers to be extended for six years”, Vedomosti, 2016 (http://www.vedomosti.ru/technology/articles/2016/08/30/654926-stavka-rossiiskih-softa); “Ministry of Finance against benefits for IT”, Vedomosti 2016 (https:// www.vedomosti.ru/technology/articles/2016/03/14/633330-minfin-vozrazhaet-protiv-it-lgot) lx. "Report on government regulation of the oil and gas industry", Government of Norway, 2016 (http://www.norskpetroleum.no/ en/, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/15593/4016-mou-app1.pdf), "Oil and gas sector development strategy OG21", Government of Norway, 2016 (http://www.forskningsradet.no/servlet/Satellite?blobcol=url- data&blobheader=application%2Fpdf&blobheadername1=Content-Disposition%3A&blobheadervalue1=+attachment%3B+file- name%3DOG21Bookletteknologiogmilj.pdf&blobkey=id&blobtable=MungoBlobs&blobwhere=1274467401079&ssbinary=true ), "Chief auditor’s report", Government of Norway, 2016 (https://www.riksrevisjonen.no/en/Reports/Documents/AnswerMinister.pdf) lxi. OGA Corporate Plan 2016-2021 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508803/ OGA_Corporate_Plan_March_17th.pdf) , Call to action: six months on (https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/458591/OGA_Call_to_Action_Six_Months_on.pdf), OGA overview (https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/499160/OGA_Review.pdf), OGA site (https://www.ogauthority.co.uk/regulatory-framework/ powers-sanctions/)

NATIONAL REPORT ON INNOVATIONS IN RUSSIA-2016 101