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Steps Being Undertaken by the Snezhinsk
City Administration to Support Small Innovative Companies
Andrei G.Kruglov *
Snezhinsk City Administration
One way or another, the progress of all civilizations has always
been connected with new technologies and goods based on new
knowledge. It is commonly said that innovations lie at the
foundation of development. In the twentieth century, the role of
innovations especially increased in the evolution of society. Today
it is universally clear that only by relying on knowledge can any
state succeed in solving its internal problems and satisfying the
needs of society as well as winning the competitive struggle for
world markets for products, technologies, and services.
The paradox of the development of the Soviet scientific-technical
sphere was that an immense number of research discoveries were
never implemented in practice. As a result, a country that
possessed a powerful scientific-technical complex produced civilian
products that were uncompetitive on the worldwide market.
Individual scientists and scientific collectives had no economic
incentives to turn their research results into competitive products
in demand on the market. The well-being of scientific organizations
has almost no relation to the results of their work.
In our view the innovation policy of the state must play the
leading role in the formation of the country's economy. The
effectiveness of this policy determines the ability of domestic
manufacturers to incorporate new ideas, work actively, and above
all compete successfully in the world market. Therefore, the
current status of innovation activity and the problem of promoting
innovation processes in our country are more urgent today than ever
before.
* Translated from the Russian by Kelly
Robbins.
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Present worldwide practice indicates that many problems related to research and innovation activity (lack of investments due to the “scientific risk,” selection mechanism for promising areas of scientific research, targeted funding system, sufficient conditions for free creative self-realization, etc.) were successfully resolved over the course of decades in other countries by means of sharing the costs for scientific and innovation-oriented research between the state and private sector. The greater the attention paid by the state to creating scientific-technical potential, the more major companies spent on research and development efforts. Therefore, state funding takes on even greater significance in our country, as there are practically no investments from the commercial sector for this purpose, thus depriving the country of an important funding source.
Regarding Chelyabinsk Oblast in general, it has been established that investments in small businesses are recouped two to three times faster than investments in large industrial enterprises. According to statistical data, labor productivity in small businesses is 50 percent higher in monetary terms than the average for the oblast. The development of small business can solve the employment problem, as this sector is more dynamic in job creation. Furthermore, the cost of job creation in the small business sphere is several times less than in large enterprises. Meanwhile, small business also solves the problem of filling the market with consumer goods and services, improving the quality of life for citizens, and promoting the political stabilization of society.
Despite the fact that small business is one of the most important economic sectors and its development affects the development of our region and Russia in general, the oblast government and the Chelyabinsk Oblast Legislative Assembly do not pay enough attention to issues connected with small business development and support. There are numerous problems affecting this sector: administrative-bureaucratic obstacles, the poorly developed nature of oblast-level legislation on small business, the tax burden, the cumbersome accounting system, the lack of the necessary social protection for owners and employees of small enterprises, the absence of financing in the oblast budget for small business support. All of this has a negative impact on the dynamics small business development. Thus, the lack of regional investments in small business development in our oblast represents a serious financial and economic oversight on the part of the oblast administration.
As for the Snezhinsk city government, the city administration and Snezhinsk City Council have chosen their own way of developing the innovation activities of small business. On the whole, small business support is provided in three main areas: regulatory, financial, and organizational.
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REGULATORY SUPPORT
Regulatory support includes the adoption of laws and regulations that promote the efficient functioning of the system.
In 1999 the Targeted Comprehensive Program for the Support and Development of Small Business in Snezhinsk for 2000–2001 was prepared.
The Regulation on Investment Activity in the Closed Administrative-Territorial Zone of the City of Snezhinsk was adopted in Snezhinsk City Council Resolution 30, dated March 13, 2000.
Taking into consideration the recommendations of the Snezhinsk Entrepreneurs Association, the Snezhinsk City Council issued Resolution 93, dated June 28, 2001, which included a series of measures focused on small business development in Snezhinsk.
Following are some extracts from the Regulation on Investment Activity in the Closed Administrative-Territorial Zone of the City of Snezhinsk: “This Regulation was developed to create incentives for organizations and individual entrepreneurs to make long-term investments…. The main objectives of promoting and creating incentives for investment activity include creating new production facilities in the city and preserving existing ones, creating additional jobs, increasing the employment rate among citizens, and augmenting the city budget with increased tax revenues. Our policy of attracting and allocating investment funds is based on the principle of providing investors with an economic interest in creating new production assets and establishing new production facilities in the closed city of Snezhinsk through various forms of support provided by local government agencies.”
To varying degrees, these documents highlight the top priorities for small business development in the city. These priorities include expanding the production of competitive science-intensive products; accelerating the transfer of technologies to the production sphere; developing a technology transfer support infrastructure; creating employment opportunities for highly qualified engineers, technicians, researchers, and specialists; and promoting small-scale industrial manufacturing and the production of consumer goods that can replace imports.
In addition, various forms of support for small- and medium-sized business were defined and adopted. This support includes investment tax credits, additional local tax exemptions, loans (credits) and loan guarantees on preferential terms, other nonfinancial privileges (municipal orders on preferential terms, assistance in business infrastructure creation, leasing or sale of municipal lots and nonresidential buildings that have been placed in municipal ownership according to established procedure), and cofounding of economic organizations, with part of the shares of the new companies becoming municipal property.
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FINANCIAL SUPPORT
Taking into consideration the shortage of budget funds, the main
emphasis in small business support has been placed on developing
advanced methods of raising nonbudget resources.
The Municipal Fund for the Support of Small Business
was created by Resolution 774 of the Snezhinsk City
Mayor, dated October 3, 1995.
The Municipal Nonbudget Fund for the Socioeconomic
Development of Snezhinsk was established by Resolution
100 of the Snezhinsk City Council, dated June 23, 1997,
and Resolution 470 of the Snezhinsk City Mayor, dated
June 24, 1997.
These funds are noncommercial organizations, and profit-making
activity is not their main goal. The main objectives of the funds
are as follows: (1) facilitating the implementation of state policy
in Snezhinsk regarding the formation of market relations on the
basis of small business support, and (2) developing competition by
attracting and efficiently using financial resources to implement
targeted programs for the support and development of small
business.
The primary areas of the funds' activities are the following:
participation in the development, expert review,
competitive selection, and implementation of municipal
programs focused on small business support and related
projects in the small business field, including
demonopolization of the economy, development of
competition, satisfaction of the goods market, and
creation of new jobs
participation in the formation of a market
infrastructure providing equal conditions and
opportunities for small business operations
support for entrepreneurial innovation activity,
stimulation of the development and manufacturing of
fundamentally new types of products, assistance in
putting new technologies and inventions into practice
assistance in attracting domestic and foreign
investments to pursue top-priority objectives in
creating a competitive environment and developing small
business
To achieve their primary objectives, the funds are involved in the
following activities:
accumulating monetary resources (nonbudget)
providing financial assistance in conformity with
Russian law on a free and paid basis to develop
competition and increase the goods available on the
market
serving as a guarantor for the obligations of small
businesses
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sharing in the foundation and operation of economic entities
financing activities focused on providing training,
retraining, and professional development for employees of
small enterprises, supporting new economic structures, and
protecting the rights of consumers
funding scientific research, scientific and practical
conferences, symposiums, meetings, and exhibitions, including
international ones
organizing activities focused on attracting and efficiently
using funds provided by domestic and foreign investors
collecting and processing legal, patent, licensing, and other
information of interest to small business entities; studying
domestic market conditions; providing consulting and
organizational-methodological assistance in the development
of programs and projects in the small business sphere
forming creative collectives, expert councils, and
commissions, including those involving foreign specialists
sending specialists for training, retraining, and
professional development, including to programs abroad
Because the financial resources available to the two Snezhinsk
municipal funds differ substantially, there has been a sort of
“unspoken” division of responsibilities between them. The
Municipal Nonbudget Fund for Socioeconomic Development focuses its
resources on supporting and developing medium-sized businesses, while
the Municipal Fund for the Support of Small Business provides
assistance to small businesses, as its name would indicate. For the
sake of clarity, Table 1 presents
quantitative data and the volumes of financial resources provided by
the Snezhinsk municipal funds in 2000–2001 for supporting and
developing small- and medium-sized businesses, including those
involved in innovation activity:
In addition, the Snezhinsk City Administration participates in the
foundation of economic entities, with a portion of the shares of the
new enterprises being secured under municipal ownership. The following
organizations may be cited as examples:
Bars-70
The city administration is one of the founders of this limited
liability company. The main activities of the organization include
developing, designing, manufacturing, and assembling filters,
ventilation systems, and air regeneration systems. The company has
developed its own original ionizing, power-supply, and
precipitation units that differ from foreign models. A patent
search has been conducted regarding these issues. A number of
technical features require more comprehensive patent research in
order to secure patents.
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TABLE 1 Support for Small- and Medium-Sized Businesses in Snezhinsk
Funding Sources
Number of Projects
Total Amount of Financing
Municipal Nonbudget Fund for the Socioeconomic Development of Snezhinsk
20
71,802,000 rubles
Municipal Fund for the Support of Small Business
70
17,737,000 rubles
In addition, Bars-70 has obtained a loan in the amount of 2,448,000 rubles from the Municipal Nonbudget Fund for the Socioeconomic Development of Snezhinsk to develop promising areas of activity.
Spectrum-Conversion Research and Production Enterprise
The focus of this limited liability company involves organizing and carrying out work in industrially promising fields of geological and geotechnological research in the development of the mining potential of the Urals and other Russian regions. The company also pursues research and production activity concerning the development and application of new technologies in production; the implementation of scientific-technical achievements in the mining and processing of precious and rare stones and metals; and the development and application of low-waste, environmentally clean, and resource-saving technologies.
Spectrum-Conversion is currently carrying out the following innovation projects:
organization of serial production of high-temperature electric heating devices
creation of a production facility for improving precious stones
organization of production of traffic safety equipment and devices using super-bright diodes
At the time of its foundation, the enterprise had authorized capital stock of 6,506,000 rubles, with 99.88 percent belonging to the City Administration Committee for Property Management. In addition, Spectrum-Conversion received 10 million rubles in loans from the Municipal Fund for the Support of Small Business.
ORGANIZATIONAL SUPPORT
In 2000, with the active support of the Foundation for Russian-American Economic Cooperation and the U.S. Department of Energy,
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the Snezhinsk City Administration and the Snezhinsk City Council
established the Snezhinsk International Development Center (IDC)
Foundation. The IDC is a nonprofit organization with the following
main areas of activity:
promoting a favorable investment environment in the closed
city of Snezhinsk
aiding in the search for investors for industrial
diversification projects and assisting with market
analyses
organizing training for employees laid off from nuclear
enterprises
providing information to enterprises about access to
financial resources to fund projects and activities
helping to identify and create new favorable economic
opportunities in the closed city of Snezhinsk
providing consulting and informational support for the
investment activities of state and municipal enterprises
and private businesses and in the preparation and
development of promising technologies and production
facilities
providing assistance in developing and conducting expert
reviews of investment projects and programs aimed at
supporting the economy in the closed zones
helping local government agencies to develop investment
stimulation programs, strategic plans, and development
concepts
rendering information and consulting services to
businesses and local government agencies in the field of
investment opportunities
On October 24, 2000, a conference for entrepreneurs entitled
“Small Business in Snezhinsk: Problems and Prospects” was
held in Snezhinsk. Having heard and discussed the reports and
presentations made by local government leaders, representatives of
municipal nonbudget funds, other city organizations and institutions,
entrepreneurs, and small business managers, conference participants
stated that the city has created a functioning system for providing
financial support to small business. At the same time the current
climate is not sufficiently favorable for the development of business,
including innovation-oriented business. Many entrepreneurs gave
pessimistic forecasts regarding their further business prospects. The
lack of funds and production facilities is urgently felt. Existing
“administrative barriers” also hinder business development
in the city, and owing to a number of objective reasons, these
barriers are much stronger in the closed zones than in other cities
and regions of the oblast. Interest rates are still rather high for
small business, and having collateral or a guarantor is an obligatory
condition for obtaining loans, which limits credit opportunities for
businesses at the start-up or expansion stage.
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Entrepreneurs at the conference made the following suggestions:
Snezhinsk local government agencies should provide for increased credit resources at the municipal funds in order to reduce interest rates for small business. A venture capital loan mechanism should also be developed.
The possibility of using city funds to construct office and production space for start-up companies should be considered.
Unfortunately Russia is ill prepared to initiate efficient development of the venture capital business, and Snezhinsk is no exception. Those with financial resources are scarcely starting to realize that investing for a period of several years is the norm, and moreover it can be profitable. The country lacks the necessary number of managers for new venture companies, though this problem is slowly being resolved. There are legal problems, mainly in the sphere of taxation. A system for the interaction of inventors and investors has not yet been worked out, and there are many issues of an infrastructural and psychological nature. For instance, it is no secret that inventors have little concept of the structure of costs required for product development and marketing. Many years of statistical data indicate that development costs rarely exceed 25–30 percent of total costs even in developed countries where skilled labor commands very high wages. About another third of the total costs goes for setting up full-scale production, and the same amount for marketing operations regarding product promotion and distribution. In Russia, development costs are usually lower, but promotion costs and costs of organizing full-scale production are higher because production lines are worn out and almost 100 percent of the necessary equipment must be purchased.
Inventors and investors are not yet ready to compromise. Inventors are hardly willing to prepare serious business plans, including assessments of the market and product prospects based not on speculative conclusions but on market facts. Investors are reluctant to consider projects when the business plan is not yet complete.
Current tax legislation also presents a big problem in the development of the venture capital business. If as a result of budget shortfalls we cannot provide effective support for technology-oriented business now, as it is done in the developed countries, which have two-stage grant systems, then at least we need to introduce tax benefits regarding stock investments in projects. At the very least, this should be done for the companies that are commercializing the newest Russian technologies. A high-tech project is not a bakery that can pay back investments a week after its equipment has been installed. Here we are talking about three or four years or more. Therefore, certain special conditions should be created for such projects:
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Venture investors must take on many more functions connected primarily with establishing and developing business processes in the company in which they invest, so they should be compensated for this in the form of more favorable partnership conditions. Many projects do not pay proper attention to the issue of creating incentives for investors. Mainly, they emphasize the technical advantages of the product.
When resources are in short supply, it becomes more important to join several similar projects separately developed by various participants into one larger project that could include all their best features. Solving the problem of finding potential participants and forming a single overall project would substantially increase the chances of the project's success.
Loan financing will play a significant role for projects that have reached the stage of commercial implementation and are looking to expand. Accordingly, many projects should be adapted with an eye to the specific requirements of lending organizations.
Thus, we should place special reliance on efficient, nonstandard solutions, which have often led to success in many undertakings. One such nonstandard solution could be the creation of innovation centers or business incubators, that is, appropriate facilities used by their owner to provide entrepreneurs with the following services on mutually beneficial terms:
long-term rental of office and production space
a range of services to facilitate innovation and economic activity
The goal of such a business incubator is to promote the preservation and development of scientific-technical potential by supporting the innovation process carried out by entrepreneurs at its facilities.
It may also be said that the majority of innovation projects are sufficiently well elaborated from the technical standpoint. However, the following general defects are noted:
no clear market positioning of products and company trademarks and no qualitative comparative analysis of competitors
unresolved intellectual property and patent protection issues, in many cases
At the same time, one of the most substantial factors hindering the development of innovation-oriented business lies in the undeveloped nature of the information infrastructure focused on serving the interests of both investors and entrepreneurs.
In conclusion, I would like to add that the investment policy of Snezhinsk local government is aimed at supporting and assisting small
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business, not creating it. The Municipal Fund for the Support of Small
Business has conducted a sociological study entitled “Focus on
the Small Business.” Based on the results of this study,
specialists reached the following conclusion: “Entrepreneurs are
rather well informed about available municipal forms of small business
support, but in fact almost none of them ever use this information in
practice.”
Representative terms from entire chapter:
city administration
