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Development of Small Innovative
Companies in Zarechny to Serve the Russian Market
Yevgeny N.Loguntsev *
Zarechny Technopolis Development Fund
This report reviews the experience of Zarechny companies involved
in innovation activity. Table 1 briefly
presents information on the companies to be considered.
The main focus of this report is companies that provide an
infrastructure for innovation activity. This category includes the
first four examples cited in Table 1. In
addition, typical examples of enterprises created to carry out
innovation activity (the PGS and Ekorad firms) are also covered.
URALCONVERSION
The Uralconversion enterprise was created as one of the first
open joint-stock companies in the city of Zarechny. Its
initiators were employees of the Sverdlovsk branch of NIKIET
(Scientific-Research and Development Institute of Power
Engineering) who had worked together on projects connected with
materials for use in the atomic power industry. The
company's founding goals included facilitating conversion of
research potential, performing research studies, and putting
their results into actual production. The founders of
Uralconversion included a number of former Soviet
scientific-research institutes and design bureaus from Moscow,
Yekaterinburg, Chelyabinsk, Tomsk, Kazakhstan, and Ukraine that
had previously been involved in working on problems connected
with reactor material development, including the Sverdlovsk
branch of NIKIET. In addition, the group of founders also
included the Zarechny City
* Translated from the Russian by Kelly Robbins.
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TABLE 1 Small Innovative Companies in Zarechny
Company
Founded
Type
Founders
Maxi-mum Staff
Present Condition
Uralconversion
1992
SC
22 entities (research institutes, design bureaus, Zarechny City Administration)
27
Liquidated
Zarechny Technopolis Development Fund
1993
SC
Entities including Zarechny City Administration and private individuals
11
Consulting activity, regional development company
Agropark
1993
CC
Entities including Zarechny Technopolis Development Fund
21
Liquidated
Technopark
1993
CC
Entities including Zarechny Technopolis Development Fund
17
Offers support infrastructure for small business in Zarechny
PGS
1993
CC
Individuals and entities including Technopark
7
Monopolist in the Ural-Siberian region
Ekorad
1992
CC
Individuals
5
Liquidated
NOTE: Enterprise types are listed as SC for Stock Company or CC for Closed Stock Company.
Administration, a Yekaterinburg bank, and the Beloyarsk Atomic Power Plant.
Uralconversion essentially worked on providing engineering support for several projects involving research and development for scientific products. The main such project involved developing, creating, and implementing “clean room” technology for the radioelectronics industry. Having received this major work order, the enterprise as prime contractor distributed subcontract orders to enterprises and institutions, with top priority in this subcontracting process going to the entities that were its founders. Preparatory work on the project was completed successfully; however, at that time the Ministry of the Electrical Industry found that it had exhausted its resources for continuing the work. The project was left uncompleted. No new projects were found to provide work for the enterprise's staff. With the onset of the Russian economic crisis and the total
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curtailment of practically all types of production activity, the
enterprise found itself in critical condition, and its founders
decided to liquidate.
The main problem the enterprise never managed to overcome was the lack
of business activity in the science and technology sphere, a situation
that is pervasive throughout Russia. The enterprise was unable to
diversify its activities, although such attempts were repeatedly
undertaken. The enterprise was also unable to enter the international
market or the market for services for small businesses that were then
operating in the sphere of science-intensive technologies.
ZARECHNY TECHNOPOLIS DEVELOPMENT FUND
The Zarechny Technopolis Development Fund was founded in 1993 in
the form of an open joint-stock company. Its creation was initiated
by the Zarechny City Administration especially to work on preparing
and facilitating the Zarechny City Municipal Development Program.
In essence, the fund was created as an analogue of the regional
development companies, the experience of which is well known. One
such example is the Tennessee Valley Industrial Development
Association in the United States.
The founders of the Fund include the Russian Ministry of Atomic
Energy (Minatom), the government of Sverdlovsk Oblast, the Zarechny
City Administration, the government of neighboring Beloyarsk
Region, major Zarechny enterprises (including the Beloyarsk Atomic
Power Plant and the Sverdlovsk branch of NIKIET), and the
Department of Atomic Energy at the Urals Polytechnic Institute.
In accordance with its charter, the development fund engaged in
preparing municipal development programs for the city of Zarechny.
In so doing, it provided a citywide infrastructure promoting the
modern and coordinated development of the city's social and
business spheres. As a result of the fund's work, the oblast
government adopted and successfully implemented the Program for the
Creation of Zarechny Technopolis. Other results included the
preparation and coordination with federal ministries and
departments of plans for the federal targeted program entitled
Creating a Regional Research and Production Complex Zarechny
Technopolis, which is included in the recently adopted Program for
the Development of the City of Zarechny as a Science City. To
implement this program, targeted funds have been allocated from the
oblast government budget, along with investment tax credit funds
from the federal budget and money from nongovernmental sources.
One of the main focus areas for the Zarechny Technopolis regional
industrial complex is innovation activity, not only in the science
and technology sphere but also in the socioeconomic sector. To
develop small business in the science and production sphere, the
fund created two affili
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ated structures, Technopark and Agropark, both of which are closed
jointstock companies. More detailed information on the operating
experience of these enterprises is presented below. The division of
functions between these enterprises and the fund was determined by
joint decision. Specifically, the fund deals with major regional
development projects and works with state enterprises situated in the
area. Technopark works with small-and medium-sized businesses and
supports small projects in the production and scientific-technical
spheres. Agropark deals with projects and enterprises connected with
agricultural production and the manufacture of foodstuffs. Dividing
the functions in this way has turned out successfully, at least with
regard to operations involving small business.
The main problem for the fund has been ensuring the availability of
material support for its ongoing activities. This is a fundamental
problem for all enterprises and organizations involved in innovation
activity within an infrastructural unit. The real support that was
obtained for innovation activity from the federal and municipal levels
had to be directed only to actual project implementation. Expenses for
preparing and promoting the projects could not be financed from
budgetary sources. As yet, there is still practically no demand for
consulting services in this sphere. Therefore, the fund was compelled
to engage in various types of side activities to make it possible to
carry out its function of providing an innovation infrastructure.
The problem here lies in the constant danger that the enterprise will
reorient itself toward more profitable commercial activities, leaving
behind its innovation infrastructure functions. According to existing
information on similar structures, the majority of them have either
ceased to exist, as with Uralconversion, or are successfully operating
in other more profitable fields of business.
The fund managed to overcome this problem and still manages to do so
as a result of constant interaction with its founders, who have an
interest in the fund as an infrastructure. This is particularly true
with regard to the Zarechny City Administration, which in practice
assigns the fund responsibilities for a great number of issues
regarding the management of development in the city. At present the
situation is improving thanks to the economic upswing as well as the
new demand for consulting services in the municipal management sphere,
where socioeconomic and management innovations are vitally important,
and in the newly invigorated sphere of scientific-technical
innovations. The fund is actively developing both of these market
niches.
The second problem, which is connected with the first, is caused by
the fact that the legal form of the joint-stock company is not in
accord with the socially significant but essentially noncommercial
nature of the work the company performs. This problem arose because at
the time the fund was established, Russian legislation did not foresee
such an entity as a nonprofit organization. In addition, the
joint-stock company format has
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some positive aspects in working with programs and with potential
investors. This problem is being overcome by means of a decision of
the shareholders that the fundamental goal of the enterprise is not
making profit, but facilitating regional development.
The third problem lies in the shortage of personnel who are trained
and capable of working in an innovation infrastructure environment.
This problem is being addressed by actively searching for potentially
capable young people, who will subsequently receive on-the-job
training at the fund by working there as experts on a part-time basis.
The Program for the Development of the City of Zarechny as a Science
City includes a special Personnel Bank project to promote broader
searches for promising employees.
The fourth problem involves the lack of legislation at the oblast and
federal levels on matters connected with innovation-oriented
development and merely development in general. These shortcomings are
most acutely evident in the lack of legislation on development
programs, intellectual activity, intellectual property, and rights to
inventions made in the course of employment.
AGROPARK
The Agropark enterprise was created as a closed joint-stock company
on the initiative of the fund to introduce new science-intensive
technologies in agricultural production and foodstuff
manufacturing. Its founders include a number of enterprises located
in the city, including the Zarechny Technopolis Development Fund.
With the help of the fund, the enterprise managed to obtain funds
to create a number of new technologies and put them into actual use
in the agricultural industry (the use of ozonators in the storage
and processing of foodstuffs and the use of new types of equipment,
for example, electric weeding devices). However, it turned out that
there was insufficient demand for these technologies, and their
implementation did not justify the funds invested. Attempts to
diversify the activities of the enterprise were unsuccessful. As a
result, the founders decided to liquidate the enterprise.
TECHNOPARK
The Technopark enterprise was created as a closed joint-stock
company on the initiative of the Development Fund for the Support
of Small Businesses Working with New Science-Intensive
Technologies. In addition to the development fund, the founders of
the enterprise included the Sverdlovsk Oblast government's
Business Assistance Center and the experimental production branch
of a scientific research and design institute of power engineering.
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Successfully providing an infrastructure for small business and
providing consulting and support services, Technopark fulfilled the
functions of a municipal structure for the support of small business
and took the lead in executing a program for the support of
entrepreneur ship. At present, Technopark continues its small business
support functions taking into account its enhanced capabilities in
this regard. In 2000 the city administration leased production
facilities to Technopark to be used as a business incubator.
One problem encountered by Technopark during the initial stage of its
operations was the insufficient volume of funds allocated in local and
oblast budgets for the support of small business projects. The
enterprise managed to resolve this problem by attracting funds from
various, mainly nongovernmental, sources. A local bank and the local
office of the Employment Fund were successfully recruited to
participate in the specially prepared small business support program,
and grants were also obtained to fund the program.
The second problem involved a lack of projects concerning production,
especially science-intensive production. To resolve this problem,
Technopark worked with the development fund to launch a special effort
to seek out and develop promising ideas. In essence, these actions
were taken in strict accordance with generally recognized venture
capital procedures. One example of a successful venture process is a
project for creating an enterprise to manufacture test gas mixtures.
The project has been taken from the idea stage to full implementation
now that the PGS enterprise is operating successfully and producing a
profit.
The third problem concerned the discord between the joint-stock nature
of the enterprise and the essentially noncommercial nature of its
activities, just as was the case with the development fund. This
problem is especially keenly felt in working with grants, which are
usually awarded to nonprofit organizations. The problem was resolved
by a special notation in the enterprise's charter documents
stating that the fundamental goal of Technopark's activity is the
development and support of small business and that the founders do not
receive any profit earned, as these funds are entirely used for the
company's stated goals.
PGS
The PGS enterprise was created on the initiative and under the
patronage of Technopark for the manufacture of a science-intensive
product, test gas mixtures. The founders of the enterprise were
Technopark, the Laser Diagnostics Clean Technologies Technocenter,
and a number of individuals, namely the inventors and implementers
of the idea of producing such a product.
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The idea of setting up such a production facility was born among
Technocenter personnel who were working on problems connected with
radiation-oriented materials science. The idea received the support of
Technocenter management, but because of a lack of willingness to
expand the effort, the idea was proposed for implementation on a
venture capital basis at Technopark. Thanks to the efforts of
Technopark, the idea was developed into a project, an enterprise was
created, loans were secured to support its operations, and a project
manager and staff were assembled. In its initial phase the enterprise
received assistance in the form of administrative and accounting
services.
Today the enterprise has a monopoly on the production of test gas
mixtures in the Ural-Siberian region.
The enterprise's main problem was effective management oriented to
the needs of the specific market. This problem was resolved by the
selection of a trained Technopark staff member to become director of
the enterprise and by his thorough preparation, including a period of
study in the United States.
The second problem that arose during the most difficult period of the
economic collapse was the failure of customers to pay for the products
they purchased from the enterprise. The problem was solved by
establishing a system of surrogate means of payment (promissory notes)
and by actively working to gain the greatest possible number of
customers so as to require the least possible amount of payments in
monetary form.
The third problem is connected with contradictions between
shareholders and managers of the enterprise regarding the targeted
spending of profits earned. This problem has not been resolved.
Moreover, the conflicts caused the managers to reregister the
enterprise, and, as a result, the production facilities have
essentially changed ownership.
EKORAD
The Ekorad enterprise was created on the initiative of employees of
the Sverdlovsk branch of NIKIET as a closed joint-stock company for
the development and manufacture of standard samples used for
checking analytical instruments and monitoring the environment. The
project participants were individuals involved in manufacturing
such samples at NIKIET and workers from the All-Russian
Scientific-Research Institute of Metrology and Standard Samples
(VNIIMSO) who were engaged in developing standards and standard
samples. The enterprise successfully began production of one type
of standard sample with the support of the Sverdlovsk branch of
NIKIET and VNIIMSO, which had an interest in such products.
However, Ekorad was unsuccessful in launching full-scale
production. Its losses accumulated, and the enterprise closed down.
The
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reason for the failure and the main problem was the lack of a trained
manager who could organize production efficiently and produce specific
science-intensive products.
CONCLUSIONS
An analysis of the experience of these and other enterprises makes
it possible to draw conclusions on fundamental prospects for
innovation activity and, in particular, venture capital activity
under current Russian conditions. However, the specifics of this
sphere superimpose particular conditions on organizational
structures for the support of innovation and venture capital
activity. It must be kept in mind that Russia completely lacks the
innovation infrastructure that traditionally exists in the West.
There are no venture capital funds. Such activity is prohibited for
the pension fund. Banks do not engage in such activity because of
the lack of the necessary normative documents.
At the same time, a potential for such efforts does exist in the
form of the scientific and technological developments that have
been achieved at research institutes and universities. Potential
investors have recently begun to appear; but to link these and
other necessary elements, it is essential that raw ideas be
developed into projects that are acceptable to investors. It is
this work that is most required to add impetus to innovation
processes.
The function of developing ideas into full-fledged projects can
only be carried out by specialized enterprises organized along the
lines of venture capital funds. These enterprises must have
connections and work experience in science and technology, and at
the same time they must have experience working in business and
interacting with investors. Only in this case will we see the
formation of the only productive structure for the venture capital
triangle (author of idea→enterprise supporting
technology→venture capital enterprise) or venture rectangle
(author→enterprise supporting
technology→investor→venture capital enterprise).
In cooperation with the Sverdlovsk branch of NIKIET and with
institutes of the Urals Branch of the Russian Academy of Sciences,
the development fund is currently working to establish venture
capital procedures. Protocols have been signed with each partner
regarding joint actions on the commercialization of ideas and
scientific-technical developments not used by institutes in their
primary activities. The institutes submit to the fund specially
selected ideas of their employee-inventors, which are then
developed into project form by the fund in collaboration with the
inventors themselves. During this process, additional scientific
and technological studies are conducted, the potential market for
the product is researched, a business plan for the project is
prepared, and investors are sought. Then, depending on needs and
conditions, the project is either
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transferred to a third party for implementation (in the mode of
selling a business) or is carried out by the inventors themselves with
the support of the fund and the institute. To increase the scale of
these efforts, plans for financing the Project for Creation of a
Regional Innovation Center are included in the draft Program for the
Development of the City of Zarechny as a Science City.
To make activities in this area more successful, the oblast needs to
pass a law on innovation activity and establish a program for the
development of innovation activity, including the creation of venture
capital centers to provide an infrastructure for promoting
innovations. Plans for such a concept of innovation activity have
already been worked out, with the development fund being involved in
this effort.
At the federal level, a package of legislation is needed regarding
innovations and the support they require. Drafts of such laws are at
the Ministry of Industry, Science, and Technology and the State Duma.
Efforts are needed to move them forward. In addition, initiating
actions are necessary similar to those taken by the science ministry
regarding innovative technology centers. However, it would be
expedient to link such centers not with scientific institutions but
rather with more flexible, active structures with more resources at
their disposal. Such structures could be found in the boards of
directors of Science City programs established at the time the
programs are approved and their status is confirmed.
The functions of establishing an innovation center or performing the
functions of such a center should be recorded as mandatory state
orders for each Science City. The functions of innovation centers
could also be successfully carried out by Minatom cities regardless of
whether they have been accorded the status of Science Cities or not.
Representative terms from entire chapter:
innovation activity
