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The Skolkovo Innovation Cluster: Russian reality or mirage?
Case Study
This case was written by Arnould P; Barthalon N; Bheemaiah K;
Dhatt K; Sandey O; Sudhir K, Tripathi A, under the supervision of
Professor Mark Esposito, Grenoble Ecole de Management. It is
intended to be used as the basis for class discussion rather than
to illustrate either effective or ineffective handling of a
management situation. This case was compiled by published
sources.
2012, Grenoble Ecole de Management & Lab-Center for
Competitiveness. No part of this publication may be copied, stored,
transmitted, reproduced or distributed in any form or medium
whatsoever without the permission of the copyright owner.
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America Rest of the worldwww.ecch.com t +1 781 239 5884 t +44
(0)1234 750903All rights reserved f +1 781 239 5885 f +44 (0)1234
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Introduction
Inthelightoftheeconomicturmoilthathasaffectedtheglobaleconomy,thereisaneedforimprovingbusinessmodelsandgovernmentalpolicies.Thisrealizationhasinstilledageneralbelief
that innovation and competition are themain drivers for improving
not only thenational economy but also the global economy.
Encouraging ideas and
allowingentrepreneurstocomeupwithnewproductsandnewwaystoperformexistingactivitiesisneeded.Enhancementscanbemadeinallspheresofaneconomywiththegoalofanequaldistribution
of wealth in foresight. One way tomake headway towards this goal is
thedevelopmentofclusters.
A cluster is a group of companies or institutions from a
specific sector that areinterconnected geographically. The
threefold effect of clusters to increase
productivity,createopportunitiesforinnovationandstimulatecompetitionalsodiminishesobstaclesfornewfirmstoenter.The
improvementsmadeonamicroeconomic levelbyacluster
leadtomacroeconomic prosperity. As this trend is slowly finding its
feet on a global
scale,governmentsaretakingstepstoencouragethegrowthofclusters.A
prime example of this phenomenon is the Skolkovo Innovation
Center,which is beingnurturedbytheRussiangovernment
inanattempttoreestablish
itselfasaglobalpower.Whatsetsthisclusterapartfromotherestablishedordevelopingclustersisthefactthatitisamulticlusterencompassingfivesectors.TheinvestmentsmadebytheRussiangovernmentand
a number of foreign investors are slowly establishing Skolkovo as
an innovation andtechnologyhub.ThisprojectalsoreflectsRussiasdesire
to transform itself
fromanaturalresourcebasedeconomytoatechnologicalbasedone.However,inordertogainfurtherinsight,itwouldbeessentialtounderstandthecountry,itsobjectives,
iteconomicperformanceandthereasonsleadingtothedecisionof
launchingaproject of thismagnitude. This will also help us explore
the feasibility of the project and
thechallengesthatitmightface,amongotherthings.
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RussiasOverallBusinessEnvironmentandPolicyGeographySpreadacross9
time zones,Russia isgeographically the largestcountry in theworld.
It islocatedbetweenEuropeandAsiaandmostof itspopulation
isconcentrated in theareassurroundingMoscow, itscapital.Russia
isboundedonthenorthandtheeastbytheArcticandPacificoceansand
itborders14countriesAzerbaijan,Belarus,China,Estonia,Finland,Georgia,Kazakhstan,Latvia,Lithuania,Mongolia,NorthKorea,Norway,Poland,andUkraine.
The country has awide variety of landforms, including arctic
deserts, tundra steppe
andforestandboastsofawealthofnaturalresourcesincludingoilandgas.i
EthnicGroupsandLanguagesThemajority of the population is Russian
by ethnicity, however, about 120minor
ethnicgroupsexistandhence,over100 languagesarespoken.The
largestoftheseethnicgroupsare the Tatars, Ukrainians, Chuvash
Bashkir Chechens and Armenians each of
theseminoritieshasoveramillionmembers.Accordingtotheconstitution,theofficiallanguageoftheRussianFederationisRussianbuttherepublicsareallowedtoestablishtheirownstatelanguages.Onlyafewoftheselanguagesaretaughtinschools.Sincethe1990stherehavebeenseveralclashesbetweencertainethnicgroupsandtherestofthecountrybecauseoftheirdesiretoobtainmoreorcompleteindependencefromRussiaiiiii.
ReligionsAlthoughthecountryhasnoofficialreligion,thetraditionalreligionsareRussianOrthodoxChristianity,
Islam, Buddhism and Judaism.Of these, RussianOrthodox Christians
are
thelargestgroupbutinthepresentday,therearelargepopulationsofnonpracticingbelieversandnonbelievers.ivvvi
RegionalInteractionRussiahas leveragedon itssizeandpositionby
formingseveralalliancesorarrangementswithitsneighbors.
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TradewithE.U:TheRussianFederationisoneofthekeytradingpartnersoftheEuropeanUnion
and trade between the two economies continues to grow rapidly. The
EuropeanUnionisRussiasmaintradingpartner,makingup47.1%ofitstradeincomein2010.GoodsimportsfromtheEUtoRussiaamountedto86Billionin2010whileRussiasgoodsexportstotheEU
inthesameyearsummedto159Billion.RussiasexportstotheEUaremainlyenergyandmineral
fuelproducts.Furthermore,75%ofFDIstocks inRussiaoriginate
fromtheEUmembers,makingtheEUthemostimportantinvestorinthecountry.vii
CommonwealthofInternationalStates(CIS):TheCISisaregionalorganizationthatwas
formed in 1991 andwhosemembers are 11of the countries that resulted
from
thebreakupoftheSovietUnion.Ratherthanserveasacustomsoreconomicunion,thepurposeoftheCIS
ismore in linewithpromotingcooperation incertainareas
includingtrade, legalissuesandsecurity.However,over
theyears,certain
firmeragreementsandorganizationshaveemergedbetweenmemberstatesviii.
CISFreeTradeArea:TheideaofafreetradezonebetweenthemembersoftheCIShasbeen
around since 1994 but no firm agreementwasmade until 2011when 8 of
theCISmember states (Russia,Ukraine,Belarus,Kazakhstan,Kyrgyzstan,
Tajikistan,Moldova andArmenia)finallysignedtheagreementix.
State Customs Union: In July 2010, a customs union and common
economic
spacebetweenRussia,BelarusandKazakhstancameintoplace.Theaimofthismovewastoboosttrade
and investment flows between thesemember states. Although the
agreement
hasbeenratifiedbythethreenations,severalunresolvedissuesrelatedtotherefusalofRussiatoremoveexportdutiesonitsoilproductsstillexistx.
In2012,Kyrgyzstanappliedto jointhisunionand it
isexpectedthatthismovewill leadtoother Central Asian countries such
as Tajikistan, Turkmenistan andUzbekistan to join aswellxi.
EurasianUnion (EAU): The EAU is a proposed common economic space
and
customsunionbetweenRussiaandthepostsovietstates.ItwillbeanextensionofthecurrentthreestateunionwithBelarusandKazakhstan.Plans
for thisunion
includeacommoncurrency,politicalintegrationandeconomicintegration.ThisunionisoneofthemajorprojectsofMr.
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Putin,theCurrentPrimeMinisterandPresidentElectxii.
PolicyChoicesxiiiOneofthecharacteristicsoftheRussiangovernment
isthestability intermsofpolicyandleadership
thathaveexistedsince1999.VladimirPutinwaselectedPresident
in1999andhassincespentclosetothreetermsinpower.In2008,whenDmitryMedvedevwaselectedaspresident,heappointedPutinasPrimeMinister.Followingtheelectionsin2012,Putinissettoserveonemoretermaspresident.Thesuccessoftheregimehasbeenevidentintheprogressandstabilitythatthenationhasundergone.
KeyreformsdatingbacktowhenPutincame intopower in1999
includearestructuringofthe tax structure and property ownership
rules. Business licensing and
registrationprocedureshavealsobeenmademoretransparentwiththeaimofreducingthepossibilityofcorruptionoccurring.
Since the early nineties, Russia has transformed from a
socialist regime to amore openeconomy. International integration is
one of the strong focus points for the currentgovernmentandRussias
increasedmembershipof international communities suchas
theG8anditsleadingpositionintheBRICgroupareexamplesofthisfocus.InareassuchasR&Dandenergy,RussiahasformedseveralbilateralallianceswithIran,Japan,ChinaandtheUSA.Forexample,
in2010,Russia initiatedanagreementaimingtoboostcooperation
inenergydevelopmentintheMiddleEastandEasternSiberia.
Russiasmainexportisoilandseveralpoliciestoreducethedependenceoftheeconomyonthissingleresourcehavebeenput
inplace.These includecreditsforcertainexportersandtax reforms,
including tax breaks. The construction of special economic zones
and
tradeareashasboostedthemanufacturingandITsectorsinthecountry.TheITmarketinRussiaisnowthefastestgrowinginCentralandEasternAsia.
Duringthenineties,Russiasawanincreaseinthepovertylevelandthenumberofalcoholordrug
related problems. This and the poor shape of the national
healthcare system
haveincitedthegovernmenttoputpoliciessuchastaxbreaksforbusinessesoperatingwithintheeducationandhealthcaresectorsinplace.
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FollowingthebreakupoftheSovietUnion,therewasareduction
inthepopulationofthecountry.Toattractworkers,Russiahasafairlyrelaxedimmigrationpolicy.Thisisoneofthecontributingfactorstotheincreasedattractivenessofthecountrytoforeigninvestors.
There are certain issues revolving around the effectiveness of
some of the
policiesmentionedincludinghighlevelofcorruptioninstaterunagenciesandcrimeinthesociety.Astudyperformedby
theWorldBank showed thatalmost80%ofbusinesses inRussiapaybribes to
state agencies. Inefficiency also arises from the lack of clear
allocation ofresponsibility amongst the government owned
organizations, which in turn complicatescoordination.
Programstosolvethecorruptionproblemincludereformsinthelegalsectorssuchasspecialtrainingforjudgesortheprocurementoflegalassistancefromothercountries.
GeneralDiamond
1.
FactorConditionsRussiahasoneofthemosteducatedpopulationsintheworldwithaliteracyrateof99.2%xiv.In
addition, the university system has been undergoing several
consolidation reforms inorder to weed out the substandard
institutions and improve the overall quality
ofeducationxv.Russiausedtoberenownedforitsstrongfocusonscienceandtechnologyandthis
is reflected in the education systemxvi. However, in the area of
business education,Russian institutions are considered as lacking
innovation andmotivation.Many qualifiedRussian students leave
thecountry to
followother,betterqualitymanagementeducationprogramsxvii.
Withregardstothesizeoftheworkforce,thelenientimmigrationpoliciesinplacemakeupfortherelatively
low lifeexpectancy(66.5years),
lowfertilityratesandtheextremelyhighdeathrate.Russiahasthesecondhighestdeathrateintheworld.xviii
Russiahasawealthofnaturalresources.Itistheworldstopoilproducerandistheworldssecond
largestoilexporter.Althoughothernatural resources includenatural
gas, timber,mineralsandmetals, itcanbesaid that theeconomy
isoverlydependentonoil
revenuesandthismakesthecountryvulnerabletoglobaloilpricefluctuations.xix
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Historically,Russiahasbeenheavilyinvolvedinspacetechnologies,however,inthepresentage,
ithas lost itsedgeand is found lacking in theareaofbasic research.
Inaddition, theregistrationofpatentsislowandpiracyisrifexx.
2. DemandConditionsWith increasing regional integration
including the creation of the customs union
withKazakhstanandBelarusandtheproposedEurasianUnion,thesizeofthemarketaccessibletoRussia
is set tocontinue increasing.ThesuccessofPutins regimeand thesurge
in
theglobaloilpriceshaveresultedintheemergenceofthemiddleclassinRussia.Localdemandhasbecomestrongerand
tasteshavestarted tobecomemoresophisticatedascustomershavethe
incometoaffordmorehighendgoodsandservices.TheGDP
(PPP)percapitaofcitizenssawan
increaseof83%between1999and2009.However,this
increasehasbeenfairlyunequalamongstthedifferentregionsinthecountry.xxi
3.
RelatedandSupportingIndustriesFollowingthebreakupoftheSovietUnion
in1991,therewasa largefocusonthedefenseandmanufacturing
industries.However, itwasnotuntil1999thatthese
industriesevolvedtobecompetitiveonan internationalscale.Mainareasof
interest includedchemicalsandpetrochemicals, metallurgical,
machinery construction, transportation equipment, andshipping.
Evidently, the country has built up industries to take advantage of
its naturalendowments. Inaddition, someother seeminglynonrelated
industrieswerecreatedwiththe aimof supportingother areas, such as
themachinery
industry,whichprovidesotherindustrieswiththeequipmenttheyrequiretooperate.Servicesareanupcomingareaoftheeconomy.In2009activities,includingsales,advertising,tourism,financialservicesandretail,summedupto58.4%ofthenationalGDP.
4. Structure,StrategyandRivalryRussia has emerged from a
periodwhen themajority of enterpriseswere owned by
thegovernment.In2003,stateownedenterprisesrepresented64%ofbusinessesbutby2006,this
figurewas cut down to about 30%. State ownership is concentrated in
the fuel
andenergy,militaryandindustrialsectors.Therearealsosignificantlevelsofstateownershipinthemanufacturing,metallurgy,chemicalandpetrochemicalandbankingindustriesxxii.
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Accordingtothe2012DoingBusinessRankingbytheWordBank,Russiaisplaced120thoutof
183 countries in the Ease of doing business. Factors such as the
large amount ofbureaucracy, tedious procedures to start businesses,
difficulty in obtaining credit
anddifficultywithobtainingconstructionpermitscountagainstRussia.Russiahasthepositionoflastplacewithregardstotheeaseofgettingelectricity.
Thehighlevelsofcorruptionthatexistinthecountryresultinunfairnessindoingbusiness.Inordertospeedupcertainprocesses,stateofficialshavebeenknowntoacceptbribesfromcompanies.
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AnillustrationsummarizingtheaforementionedcomponentsoftheNationalDiamond:RussiasOverallEconomicPerformanceThePostSovietUnionSincethedissolutionoftheSovietUnion,theRussianeconomyhasexperiencedtremendouschanges,
transferring from a centrally planned socialist structure to a more
open andintegratedmarket.During this transition, Russiawent through
a time of economic chaos
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with a loss of approximately 30% of its real GDP, massive
capital flights ($150
billionbetween199299)aswellasextremeratesofinflation(2000%in1992,800%in1993),whichreduced
the averageRussiansdisposal incomeby25% (in real
terms)xxiii.Althoughmajoreconomic reforms based on large
prioritizations or price liberalizations had beenimplemented
inordertomodernizetheeconomy,variouscombinedcomplications
ledtoaseriousfinancialcrisisin1998.Thesalientfeaturesofthecrisisincluded:
- The failure to implement fiscal reforms to reduce the
accumulation of
shorttermborrowings,whichwerefinancingbudgetdeficits(reached9.8%ofGDP).
- Russias dependence on oil and other commodities to earn
foreign currencies whichnegatively impacted the countrys foreign
currency reserves and capacity to defend
theRublewhenthesecommoditiesworldpricesplummeted.
-
TheAsiancrisisthatincreasedRussianTreasuryBillprices.Thiswasduetoinvestorsfeartoholdriskyshorttermsecurities.
TheNewRussiaIn 1999, President Yeltsins low popularity and poor
health, combinedwith the
ongoingeconomiccrisis,forcedhimtogiveuphisseattoVladimirPutinwhoisknownforbringingbackbettereconomicconditionsandstabilitytoRussia.Overtheperiod19992008,RussiasGDP
increased on average by 6.9% per year (Exhibit 1), unemployment
decreased from12.6% to6.3%,andaverage realwages
increasedby10.5%peryear.AdditionallyRussianexports dramatically
increased by 525%, which logically improved the countrys
tradesurplusxxiv.
This revivalwas partly due to Putinswill to rationalize the
governments revenues
andexpenditures,toimplementstructuraleconomicreforms(taxations,bankandlabormarkets)and
to integrate the country within the modern global economy.
Negotiations for thecountrys accession to theWTOwere kept in
thebackgroundof these reforms. It is
alsoimportanttonoticethatbecauseoftheboominglobalcommoditiesprices,theimportanceofnaturalresourcesintheRussianeconomyhasalsobeenoneofthemajorgrowthfactors.However,
in 2008 and 2009, the global economic crisis hit the reviving
country, slowingdown theongoing growth. Serious capital flightsmade
theRussian stockmarket
collapseandadramaticfallinglobalpricesofcommoditiesaccentuatedthenegativetrendwhichled
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Russiatohavea7.9%GDPgrowthin2009xxv.
After the crisisMeasuringRussias current economic situationon
aMacroandMicroeconomiclevel:
Macroperformance:
GDP:In2011,Russiahadthe7thlargestGDPintheworld,reaching$2.38trillion,howeveritsGDPpercapitawasranked70thwith$16,700.TheRussianservicessectoraccountedfor58.9%oftheGDP,37%forthe
industryand4.2%fortheagriculturesectorxxvi.Despitethecrisis,theRussianeconomybouncedbackquicklyandsawitsGDPgrowingby4.3%in2010and2011.However,
forecastspredicted thatRussiasGDPs
longtermannualaveragegrowthwouldremain modest due to weak
institutions and declining demography. The
EconomistIntelligenceUnitpredictsthatbetween2011and2030thegrowthwouldapproximatelybe3.6%xxvii.
Exhibit (2) shows the contribution of GDP towards the countrys
growth incomparisontoothercountries.
Inflation:
With a decline from 85% in 1998 to 9% in 2006, Russia appeared
tomanage its priceinstability.However,due to rising international
food andenergyprices, the inflation ratereached15%
in2008xxviii.Despite adecreasing trendbetween2008 and2011
(Exhibit3),inflationremainedveryhighandevenhigher than
theauthorities
targetrangeof67%bytheendof2011.In2011theinflationratereached8.9%,whichwas2pointsabovethe2010inflationrate.TheIMFhasadvisedamoreflexibleexchangerate,asanimprovedmonetaryframework
could contribute to lowering inflation (weakening of the currency
is slowingdisinflation)xxix.
Currency:
In1998,Russia
implementedafloatingruble,whichwasofficiallynotpeggedtoanyothercurrency.
However, to guide its daily exchange rate policy, the Russian
central bank()targeteditscurrencysexchangerateagainstits /$
currency basketxxx. However, Russian monetary policies are
frequently altered
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becausetheexchangerateremainsveryvolatileduetohighfluctuationincommodityprices(e.g.oil)andthedebtcrisisinEurope.Forinstance,in2011,theRublestronglyappreciatedbecause
of surging oil prices, but in the second half of 2011, due to
uncertain
globalattitudes,thecurrencysignificantlydepreciatedreachinganexchangerateof28.35RublesperUSdollarxxxi.
Fiscalstability:
Itisimportanttonoticethatin2009Russiasfiscalanddebtoutlookswerelesspressingthaninothereconomies,owingto
lowdebtandfiscaldeficitstoGDPratios(exhibit4).In2011,despite the
fact that the public debt increased to 8.7% of GDP, the fiscal
outcomewasactuallypositiveas thebudget returned tosurplusesdue
tohigheroilandgasprices.Thebudgetwasexecutedwithasurplusof0.4%(revenues:$382.8billion,expenditures:$376.2billion)againstadeficitof3.6%in2010xxxii.Despiteseriousfiscalconsolidation,thenonoildeficit
is lesssolid.
BasedontheofficialRussianamendedbudget,thenonoildeficitwassupposed
to reach 11% of the GDPxxxiii. This fiscal stability and
sustainability have to beperceivedwith prudence due to the countrys
strong dependence on natural resources,which makes it vulnerable to
fluctuations in global commodity prices. The future
oilembargoeswhichwillbe imposedon
IranbytheUSandEurope,however,willstrengthenthepositionofRussiaintermsofbeingasupplierofnaturalresources.
Employment:With75.41millionworkers,Russiawasranked8thintheworldin2011withregardsofthesizeofitslaborforce.In2010,9.8%ofworkerswereintheagriculturesector,27.5%intheindustrysectorand62.7%intheservicessector.Since1999,theunemploymentratehas
largelydecreasedandreachedarateof6.8% in2011(Exhibit6).Theoverall
labormarketsufferedduringthecrisisin2008,howeverthesituationisnowimproving.Althoughthenationalrateisacceptable,itremainsextremelyunevenataregionallevel.In2010theunemployment
rate inMoscowwasclose to1.6%,andclose to2.6% inSt.Petersburg.
Incontrast,insomeregions,therateremainedveryhighorincreasedduringthesameperiodforinstance,itreached49.7%theIngushrepublicxxxiv
Exhibit5:Regionswithhighestunemploymentrates,2010
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Microperformance
Trade:In2011,Russiaexportswereworth$498.6billionanditsimportswereworth$310.1billion
this logicallyprovided thecountrywitha large trade surplusxxxv.
Industries suchastransportation equipment, electronics, chemicals
and machinery were performing well;nevertheless this
performancemeasurement is largely based on a narrow product
base,dominated by natural resources (mostly petroleum and gas
Exhibit 7). In fact, the tradebalanceperformance is strongly linked
toGlobal
commodityprices.xxxvi(Exhibit8).Naturalresourcesrepresented90%ofRussianexportsin2011.
ThelackofdiversificationinRussiacanbemostlyexplainedbytwofactors:
A. Exporters incapacitytoremain inforeignmarkets:For
instance,between1999and2009,only57%ofexportattemptssurvivedmorethan2years
(Exhibit9),which
islowerthantheperformanceofmostoftheBRICcountriesxxxvii.
B.
Themodestdomesticcompetitionconstrainsthepossibleexportperformance:Thisisexplainedbyhigh
levelsofstatedownedcompanies,stateaids,whichcontributetolowerproductivity.
ItisworthnotingthatRussiaisintheprocessofintegratingwiththeWTO.Itisexpectedtoratify
the agreement by July 2012. Thiswould largely force the domestic
companies toimprove their competitiveness, but will also provide
them with more internationalopportunities.
FDI:
Even though the level of inward FDIwas very volatile during the
global economic crisis,Russiahasexperiencedasteady increase in
thevalueofannual inwardFDIbetween2006and 2012 (Exhibit 10). In
2010, 54% of FDI was aimed at creating projects in themanufacturing
sector (e.g. automotive, chemicals, food industry and mineral
products).However,significantpartoftheseprojectsconsistedofRussian
flightcapitalgoingbacktothe Russian economy. For instance, foreign
fund inflows accounted for $114.7 billion
in2010,butFDIonlyrepresented$13.8billionofthisamountxxxviii.
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Education:
In 2008 around 8.1million studentswere enrolled in the 1108
Russian higher
educationinstitutions.AlthoughRussiausuallyspendsasmallerportionof
itsbudgetoneducationascompared with highincome countries, it
allocates the same percentage of its GDP ascountries with similar
economic development. The impact of this spending,
however,producessimilaroutcomesasindevelopednations.(Exhibit11)(Exhibit12)xxxix.
GlobalCompetitiveness:
In the 20112012 Global competitiveness report, Russia was ranked
66th out of 142countries,and recentlymoved from the
stage2ofdevelopment (Efficiencydriven) to
thestage3(Transitiontoinnovationdriven)(Exhibit13).Howeverthecountrydropped3rankssincelastyear,whichaccordingtotheWorldEconomicForum,isduetolackofprogressinthe
institutional framework
(RuleofLaw,ProtectionorPropertyRights,FunctioningoftheJudiciary),
thedomesticcompetition (RestrictionsonTrades,
InefficientMonopolyPolicies,FewLargeCompanies)andthestabilityof
itsfinancialmarkets,reduceRussiascapacitytobenefit from itsmain
strengths. Indeed, it stillhas ahigh capacity for innovation
(ranked38th),alargegrowingmarketsize(8th)andasolidHighereducationsystem(27th)xl.
TheSkolvovoCluster
HistoryoftheSkolkovoProject:Aftertransforming
itselffromaplannedtoamarketeconomy,Russiahasenjoyedbuoyantgrowthfor2decades.The2008economiccrisisledtothecountrysfinancialsectorsufferingablow
asoilprices collapsed,which led to theunderstanding that therewas
aneed forgrowth inentrepreneurial industriesand
lessdependenceonnaturalresources.This
ledtothedevelopmentoftheSkolkovoproject.
In November 2009, the Russian government announced the creation
of a new facilitydedicated to advancement of technology in a
cluster within the areas of InformationTechnology, Biomedical
Technology, Energy Efficient Technology, Space Technology
andTelecommunications, and Nuclear Technology. To harbor this
cluster, Skolkovo, a region
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approximately40minutesfromMoscow,wasselected.ByconstructinganewhighwayandupgradingtherailwaylineslinkingSkolkovotothecapital,theprojectwillbeabletoupholditsisolationfromamajoreconomiccenter,butstillremainwithinreach.
Theprojectaimedtoattractthebestscientistsfromabroadandatthesametimetopreventabraindrainofhome
grown scientistsmoving
abroad.Anestimated$2billionwouldberequiredforthefirstthreeyears,andthetotalestimatedcostwascalculatedtobe$6billion.Initially,
thestatewouldprovide funds toprivatecompanies
tohelpstartnewschemes,acommonpracticeinmostcountries.
TimelineoftheSkolkovoproject:
20094th Quarter: Dmitry Medvedev makes it known to the Russian
Assembly that thegovernment intends to create a center of
innovation to promote the discovery of
newtechnologieswhichwouldbringtogethercompetingorganizationsandresearchinstitutions.The
center was modeled on Silicon Valley in the United States. Leading
businessmanVladislavSurkovistogoverntheprojectscreation.
20101stQuarter:Skolkovo is chosenas the location for theproject
tobeestablished.As
theprojectneededtobeconstructedinarelativelyshortperiodoftime,itwouldbeabletotakeadvantageof
itsgeographicalproximitytoMoscowbybeingwithinaccessofmaterialsandthelaborforce
2ndQuarter:ViktorVekeselburg,alsoaleadingbusinessfigureisappointedasheadoftheSkolkovoInnovationCentre.ThishelpedtoestablishalinkwiththebusinessworldinRussia.3rdQuarter:
For the Skolkovoproject to gain international
acknowledgment,promotionandmarketingbytherightcompanywereimperative.Maxmakers
Ltd., from Switzerland, are chosen to be the creators and
facilitators forintelligible monitoring systems and State Unitary
Enterprise. Mosgorgeotrest was the
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engineering research company chosen for surveying. The Skolkovo
Innovation center
isacceptedbythestate.4thQuarter:ConstructionoftheSkolkovoprojectisinitiated.AnagreementisformedwiththeFederalMigrationServicetoallowforeasierproceedingsforworkvisarequirementsforforeignnationalsworking
in Skolkovo.A subdivisionof the FederalMigration
ServicewascommissionedtobebasedinSkolkovoitself.Cooperation
agreements were entered into with the Microsoft Company to
promoteresearch in collaboration with Russian universities and with
the planned SkolkovoTechnological University. Nokia would also
collaborate with Russian universities withresearchand formpartof
theglobal innovationnetwork.The IntelCorporation
signedanagreementwhichfocusedonresearch.20111stQuarter:Amomentousoccasion
for theproject,with theSkolkovo
InnovationcenterbeingunveiledattheWorldEconomicForum,Switzerland.Anofficewasopened
inSiliconValleycomprisingofSkolkovo,theRussianVentureCompanyandRUSNANO.
2ndQuarter:AnothermilestoneisreachedfortheprojectasTheSkolkovoOpenUniversitybeginsoperations.Theeducationsectoroftheprojectflourishesfurtherwiththesigningofan
agreement between theMassachusetts Institute of Technology (MIT) to
assist in thecreationoftheSkolkovo
InstituteofScienceandTechnology.TheEricssonCompanywouldalso
contribute towards theprojects infrastructure, research
anddevelopment
andworkcloselywiththeSkolkovoUniversityofTechnology.AnagreementissignedwiththeMinistryof
Transport, Innovation and Technology of the Republic of Austria,
enabling ties
withAustrianbusinessesandeducationalfacilitiestoo.
Innovations
intheareaofhealthcarearestrengthenedbyagreementsigningsbetweenthefoundationwithJohnsonandJohnsonandJanssenPharmaceuticals.Anew60millionEurosresearchfacilityistobefundedbyboththeSkolkovoprojectandSiemens
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3rd Quarter: The third quarter sees yet another milestone
achieved with the SpaceTechnologies and Telecommunications cluster
beginning operations. A division of theRussian Emergencies Ministry
is established within Skolkovo to provide a securityinfrastructure
for theproject. Further tieswithRussianMinistries included an
agreementwiththeChamberofAccounts.
Cooperation agreementswere signedwith theUnited Kingdom business
community
andeducationaltieswereestablishedwithinthefieldofresearchwithCambridgeUniversity.
4thQuarter:TheSamararegionalgovernmententersintoanagreementwiththeSkolkovoprojectestablishingfuturetiesthatwouldbenefittheregionalongsidetheprojectitself.Thisshowsthespillovereffectthattheprojecthas.ItisannouncedthattheSkolkovoUniversityofTechnologywouldcommence
in2012attracting itsworkforce fromStanfordUniversity,Harvard
andMIT. The first official programwould begin in 2013with research
programsstarting in2014.CiscoSystemsenters intoagreementwith
theprojectat
theCiscoExpo,2011,heldinMoscowtobeginitsoperationsin2012.
TheClusterToday:
ThecompaniesthatwillmakeuptheclusterarehandpickedbytheSkolkovoFoundationbyarigorousandcompetitiveprocess.The
initiativenowhas422companies.Thebreakupofthese422companiesisgivenbelowxli:
ITCLUSTER BIOMEDCLUSTERENERGYCLUSTER
SPACETECHNOLOGIES&COMMUNICATION
NUCLEARTECHNOLOGIES
CLUSTER142 116 109 28 27
ITCluster:ThegoaloftheITclusteristodevelopinnovativeandstrategicpathwaysintotheITsectorinRussia.
The cluster houses a wide range of diverse companies who specialize
in searchsystems to advanced cloud computing systems. There are
over a 100 companies in thiscluster and this number is
growing.Within the framework of goal in place,
threemainobjectiveshavebeenidentifiedfortheITclusterxlii:
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1)TofocustheresourcesandskillsintheITsectorToachievethisgoalanexpertboardpanelwithworld
class scientists, researchers and innovatorsof the IT
industryhasbeensetup.ManyMemorandumsofUnderstanding
(MoUs)havebeensignedwithmajorplayersof the IT industry
(CISCO,Microsoft, Intel,Nokia SiemensNetworks, Siemens
andHoneywell).AlsoJointProgramsandcourseswiththetopinstitutesoftheRussianAcademyofsciences
(Kotelnikov InstituteofRadioEngineeringandElectronics,Lebedev
InstituteofPhysics,KeldyshInstituteofAppliedMathematicsetc)havebeeninitiated.
2)ToprovideaplatformforITinnovations
Educational contests have been arranged for children with the
aim of fosteringinnovationinthem.
A joint grant program along with Microsoft to encourage startups
has beendeveloped.
A global innovation competition, the I Prize, is held regularly
in partnershipwithCisco
3) To develop Innovative IT systems in the vital sectors of the
RussianeconomySystemssuchas theMinistryof
InformationTechnologyandCommunications,Rosneft,MinistryofEducationandScience,MinistryofEconomicDevelopmentandTrade.InOctober2011,theSkolkovofoundationtook13startupstotheSiliconValleyasapartofaroadshowandtheinitiativewasamassivesuccess.TheyrangedfromavarietyofdifferentIT
sectors such as location services, visual search, mobile, 3D
animation, data analysis,games, New Generation Search engines,
Advanced Digital image processing techniques,Mobile Applications,
Advanced IT security systems, Cloud computing, IT in
education,medicineandhealthcareandGreenIT.
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BiomedicalCluster:TheBiomedicalclusterinitiativeisfosteredinordertodevelopthegloballeadersinthelifesciences
industry. The cluster encompasses of around 150 companies with
cuttingedgetechnologiesandworldclassinfrastructurexliii.Thisclusterfocuseson4significantsectorsoftheindustry:
Clinical medicine and healthcare: The aim is to bring in
innovations in thedevelopment and implementation of the Russian
technologies and to gain the
industrialknowhowfromabroadinareasincludingInnovativehealthcaremethods,technologiesandcustomizedmedicines.
Biomedical and life sciences: The foresight of this is to
transform the Russianpharmaceutical sector froman infancy stage
toanactuallydeveloped
stage.Keyareasoffocusinthisregardincludeinnovativepharmaceuticalse.g.AnticancerdrugsandAntiviraldrugs.
Bioinformatics: The goal is tonurture thedevelopments in the
areasof
infrastructure,computingtechniques,knowledgemanagementandplanningofclinicaltrialsthroughdataanalysisandcomputersimulateddrugdesign,forexample.
Industrial biotechnologies: The purpose of this is to develop
new expansions in theproduction ofmedicines, bioremediation and
development ofwaste processing systems.Crucial target sectors
include Bioremediation, biodegradation and ecology
andenvironmentalprotection.EnergyCluster:TheEnergyclusteraimstodevelopinnovativesolutionsintheEnergysectorfocusingmainlyonreducingtheenergyconsumptionbyindustries,households,publicutilitiesandmunicipalservices.
The goals of this cluster are broadly classified into two
categories EnergygenerationandEnergyConsumptionxliv.
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Targetareasrelatedtoenergygeneration:
Advanced solutions for the improvement and enhancement of the
disposal of thesecondaryheatfrompowerplants.
Enhancedefficiencyintherenewableenergysources.
Materialsandtechnologiesfocusedondecreasingheatlossesduringenergytransfer
(superconductivitytechnologies,adaptivenetworks,energytransfersafety).
Targetareasrelatedtoenergyconsumption:
Solutions for the integrated use of energy sources and
electricity including theconsumptionoftherelatedgas.
Engineeringsolutionsandmaterialsaimedatenhancingtheenergyefficiencyoftheindustry
in the fields of metallurgy, oil and gas etc. and augmenting the
energyefficiencyofbuildingscomprising
insulation,energyefficientwindows, internal
lightingwithlightdiodes,andexternallightingwithdischargelamps.
There are many key projects that are underway at present
(Development of low andmedium capacitywind generators, Sewage
processing operations, development of a newresearchcenter
forresearchandproductionof
innovativesemiconductormaterialsbasedupon thinfilm concepts). Few
associates in this cluster are the Center of
InnovationDevelopmentSTM,MetakonInnovationCompany,KyumodulLaboratoryLLC,OptoganLtd.,RUSAL
Engineering and Technological Center, and AdvancedMagnetic
Technologies andConsultation.
SpaceCluster:TheSpaceand theTelecommunicationsclusteraims
toboostRussiascompetitiveedge inthe respective sectors and expected
total volume is estimated to be around 300
billiondollars.TheSpaceindustryhasbeenanintegralpartofRussiaformanyyearsnowandhashad
a global impact. This cluster is intended to provide the impetus
for developinginnovative processes in spacecraft designs and to
diversify the industry in many otherrealms.The initiative focuseson
twomaindomainsSpace forEarth (SpaceApplications)
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and Earth for Space (Aerospace technologydevelopment
anddiversificationof the Spaceindustry).
Thedirectionofthiscluster issplit
intotwomaincategories,onebasedonPriorityandtheotherisaGeneraldirectivexlv.
Priorities:
Space Spaceprojects formissionoriented systems, Functional Space
technology,InvestmentprojectsforindustrialspaceexpertiseandAerospaceprojects.
TelecommunicationsMobilecommunications,
Innovativecommunicationprojects,Investmentprojectsfordevelopmentprojectsineducationandinformation.
StrategicDirectionsandPriorityAreasofDevelopmentPassedonDec62011,thisinitiativeaimsinformulatingguidelinestoensuretheclustersdirectivesaremet.
OtherDirections:
Earth to Space Space Telecommunications, Technologies and
Softwaredevelopmentforspacenavigation(GPS,GLONASS),Spacetourism
insuborbitsandPilotedmissionexperiments.
Earth Space Space radio electronics, R&D for rocket and
space engineering,Advanced jetpropulsion
techniques,Studyofhypomagneticeffectson
thehumanbodyandotherbiologicalspeciesonlongrangemissions.
The New Space Economy Pilot projects in upstream segments,
EURussiapartnership formodernization,BusinessProjects
fororbitalandsuborbital
tourismandinthefieldsofremotesensingandsatellitecommunications.
Developing a Legal Framework to govern the commercial activities
in space andtelecommunications.
Someofthekeyplayers:
TheSpaceclusterhasbeenarevelationamong
theSkolkovoclustergroupand
thesizeoftheclusterisrapidlygrowing.ManynewimplementationsandinitiativeshavebeendevisedinordertofosterthedevelopmentoftheclusterandoneofthemwastherecentSkolkovo
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Roadshow on the Space Cluster. The show beamed in Russias
partnershipwith the UKfocusingmainlyupon thehigh technology
companies inRussia.PartneringwithUK SpaceAgency, RAL space and
ISIC, the cluster is cultivatingmany of the local startups in
theindustrytoalargeextentingatheringinnovation.
NuclearTechnologyCluster:Thisclusternotonly
intendstoshapeupthenucleartechnology
inRussia,butalsoaimsatcreatinginnovativebreakthroughsinthefieldanditsassociatedprocesses.DuringtheSovietUnion,nucleartechnologywascomprisedofprocessesbasedonnuclearphysics,chemicaltechnologies,
fluid and thermodynamics. Over time these technologies have
significantlyimproved and proved the basis formany vital creations
in a variety of fields. Themostimportantbreakthroughs in this
sectorhavebeen the radiationcontroland
technology.Anumberofhighlyadvancedequipmentsandengineeringcreationshavebeenmaterializedupontheseconceptsinthelikesofatomicreactors,particleaccelerators,lasers,microwavetechnologies,neutrongenerators,particleand
radiationdetectorsetc. In thispresentera,these technologies have
been implemented not only in themilitary and the
engineeringfieldsbutalsoextensively in themedical field for
treatingdeadlydiseases
(Cancer,MEMSbasedsurgeries)andalsointhefieldsofgeophysicsxlvi.
TheNuclearTechnologyclusteraimsinpromotingtheseaspectsofthefieldbyencouragingR&Dbypartneringwithworldleadersandqualifiedscientistsalongwiththemanystartups,whicharewithinthecluster,tocomeupwithnewscientificinnovations.
Thenuclear technology clusterwill alsohave its ramifications in
noncommercial sectors,suchas:
Inradiationtechnologyintherealmofbeamacceleration.
Constructionofmaterialpropertiesforecastinganddiagnosing.
CreationofcompactXraylasersbasedonlaserplasmaacceleration.
Virtualtechnologiesspecificallyin3Dvisualizationandsupercomputingcalculations.
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KeyPlayersInTheCluster
SkolkovoInstituteofScienceandTechnologyInstitute(SkolkovoTech)
TheaimofSkolkovoTech istocreateaclassofstudentswhocancomeupwith
innovativesolutions that address the critical and vital areasof
science technology and innovation inRussiaandtheworld.
InJune2011,MITandSkolkovoTechannouncedthattheywouldbecollaboratingwith
each other in an effort to increase international cooperation in
highereducation, researchand innovation at
SkolkovoTech.This3yearagreementalsoaims
todevelopanewgraduateresearchuniversitybothinRussiaandtheUSinordertobreaknewgrounds
in the fields of teaching, research, innovation and
entrepreneurship. This is
acompletelynewmodelforRussiasetupwithseveralcriticalgoalsinmindxlvii:
FosteranewenvironmentofInnovationacrossthefieldsofScienceandEngineering.
Integrateanecosystemof
innovationandentrepreneurshipwithintheuniversity in
bothformalandinformaleducation.
Createaworldclassresearchuniversitythatcanattracttalentfromvariouscountries
apartfromRussia.
SkolkovoTech intendstooffer5Mastersand5Ph.Dprogramsspecifically
inthefieldsofinteresttotheclusterInformationScienceandTechnology,EnergyScienceandTechnology,Biomedical
Science and Technology, Space Science and Technology, and civilian
NuclearScienceandTechnology.
15 Research centerswill be associatedwith the university, each
focusing on a
particularresearchmission.Thestudentsoftheuniversitycancarryouttheirresearchwork
inthesecenters in their respective fields of expertise. The key
partners of the clusterswill alsofeatureapartoftheirresearch
inthese labs
incollaborationwiththeuniversitysongoingresearchtopics.
IntellectualPropertyCenter
ThisarmoftheSkolkovoFoundationdealswith
issuesofIntellectualPropertyRights
inthecluster.HeadedbyVitalyKastalskiy,Managerof the
IntellectualPropertyDirectorate,
thefollowingaresomeoftheservicesofferedxlviii:
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ConsultingandmanagementofIPrights(IPR)ofthevariousparticipants.
FilingnewapplicationsandinitiationsforIPR. Submission and
management of projects to the Federal Service for Intellectual
Property,PatentsandTrademarksRegulations(Rospatent)togetpatents,copyrightsandtrademarksetc.
Managementofclaims,draftsandrefiling,includingprecontractualwork.
TheSkolkovoFoundationBoardandOtherInvestors
DmitryMedvedevheadstheBoardofTrusteesoftheSkolkovoFoundation.ThefoundationisresponsibleforallthemajordecisionsoftheSkolkovo
Innovationcenteranddecidesonthekeyplayersofeachsector.TheSkolkovofoundationreceivesover50applicationseveryweekandtheboardselectstheprojectswhichareeligibleforagrant.Theselectioncriteriaare
based on certain requirements to dowith the quality and intensity
of the
particularproject.Researchgrantsrangingbetween1.5millionRUR300millionRURaregivenouttotheparticipantsoftheclusters.Untiltoday,thefoundationhasissuednondilutivegrantsofaround6.3billionRURandhasbeensupportedbyseveralthirdpartyfinancingsourcesforanamountover4.4billionRUR.
Venturecapitalistsarethekeyplayersinthiswholeinitiativeandtheboardensuresareturnon
investment for all the investors. In addition to venture capital,
cofinancing programscombined with low tax rates and smooth business
regulations have been developed.Additionalbenefits in the
formofaccreditationsareoffered toventure capitalists this
inturnallowsthemtoapplyforresidencewithinSkolkovoundercertainconditions.
Thecurrentnumberofventurecapitalists is34andthisnumber
isgrowing.ThisbringsthetotalamountavailabletotheSkolkovofoundationtoover$430million.
CustomsandFinanceCompany
Skolkovosscustomsand financecompanyknownasTFKSkolkovowassetup in
July2011andwasadded to
theRussianFederationRegisterofCustomsRepresentativesonAugust2011.Thecompanyxlix:
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Manages the customsoperations related to the transferofgoods
importedby theparticipantswithintheSkolkovoproject.
Processesdocumentsrelatedtothecustomauthorities.
Consultsandassistswithrespecttocustomsrelatedissues,VATandimportcustoms
tax. Deliverstransportanddispatchservices.
ClusterDiamondAlthough the conceptof theSkolkovo cluster iswell
foundedandhas received
significantfinancialaidfromthegovernmentcoupledwithFDI&thirdpartycofinancing,anendeavorofthismagnitudeisboundtobefraughtwithcomplicationsintermsoftheexecutionofitsstrategy.
FirmStrategiesandRivalries:Inordertoattractandretain
international
intellectualcapital,theSkolkovoprojectwillbelocatedinthemiddleofafreeeconomiczoneandwillthereforebenefitfromauniquelegalframework
in Russia. Since Russia is disreputable for having a legislation
that
hindersinnovation,RussianauthoritiesandtheSkolkovoFoundationhaveagreedonasetofrulesthat
would clearly distinguish Skolkovo from the rest of Russia. Two
federal laws
wereadoptedonSeptember28,2010:theFederalLawNo.244FZtheSkolkovoLawandtheFederalLawNo.243FZtheLawonAmendmentsl.Provisionsofthesetwolawsdealwith:
Tax and other fiscal incentives (No VAT and corporate profits
tax in the first tenyears),
Use of foreign workforce, customs regulations, regulation on
land use anddevelopment,
Highereducation,healthcare,advertisingandinsurance.
However,thesettingupofaneconomiczonedoesnotonlyrequirelawsthatareconvenienttobusiness,itmustalsoensurefirmswillingtoinvestthattheirinterestswillbeprotected.ThispromptedPresidentMedvedevtoannounceanimprovementoftheRussianintellectualproperty
rights law inApril2011and thecreationofan Intellectualproperty
rightscenter
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withintheSkolkovoInnovationCenterli.Also,theSkolkovoregionwillbefreeoftheRussianGovernmentjurisdiction,withitsownGovernment&legislationtherebydeemingtoattractforeigninvestments.
SincetheSkolkovoproject istransforming
fromtheconceptualizationphase,analyzingthecompetition among local
rivals ispremature.However, analyzing the statuses of the
firststartups in thisprojectandhow theywillbe supportedcanassess
the scaleof the futurecompetition. In 2011, the Skolkovo Foundation
selected a group of 330 startups
andprovidedthemabout$190milliontohelpthemturntheirinnovativeideasintobusinesses.This
example clearly highlights the fact that the local customer needs
will bemet
andcompetitionwithineachclusterwillbeinnovationdriven.Nevertheless,thefundingsystemof
the foundation shouldprogressivelydiminish, allowing venture
capitalists to step in astheyhavebeendoingintheSiliconValley.
Indeed,inthelongrun,startupsneedtobeindependentfromstatefundingandtherefore,the
foundation signed an agreement with 22 major Venture Capital funds,
who havecommitted themselves to provide $265million to local
startups in the next five
yearslii.Thus,thecompetitionwillnotonlytakeplacebetweenthebigplayersbutalsoatthestartuplevelsincethelatterwillhavetovieforfunds.
Demandconditionsforfirms:Eachclusterisexpectedtogenerateaninnovationecosystem,whichimpliesthatacompanythatbelongs
toagroupofcompaniesora sectorwill find its
individualbusinessactivitiesbeingaffectedbythebytheactivitiesofthewholegroup.Therefore,
localdemandwillbecreatedexnihiloandshouldbecomemoreandmoresophisticatedasnewpartnershipsaresigned
between the Skolkovo innovation center and themajor players of the
respectiveindustries.AsparticipantcompaniesinSkolkovogenerateanorganicgrowthwiththeirownsupply
anddemand, firms in the clusters should be sufficiently innovative
to have needswhich firms located elsewherewill not have at the same
time. Collaborationwithin theclusterswillbeofgreat importance
inSkolkovoscaseliii,especiallyas
thebusinessculturewillbecreatedsimultaneously.
Firmswillfinditeasiertoexchangetheirrespectiveneedsbecauseoftheirproximitytoeachother.Theconcentrationof
international intellectualcapital turnsout tobeaprerequisite
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for entering into very specialized segments. The outcome of
cooperation shall spur
newinnovationdrivensolutionsthatwillsellathomeandabroad.For
instance,thebiomedicalclusterisexpectedtoprovidesolutionsinBioinformaticswhereitwillattempttomodelbiomolecular
structures to design drugsliv and in industrial Biotech where it
will focus onindustrialdrugproductiontechnologieslv.
A great clout will be given to entrepreneurs in the form of
grants from the
Skolkovofoundation,especiallyforthosewithbreakthroughinnovations.Inthe20112013period,$1billion
are to be given to startups selected by the Skolkovo foundationlvi.
Thus the
localdemandforinnovativesolutionsshallremainstrongovertime.
RelatedandSupportingIndustries:Each ecosystem thatwill be
created by the associated clusterwill utilize local
suppliers.ExpertsspecifictoeachclusterwillselectallthemembersoftheSkolkovoInnovationcenter.Therefore,thisprocessofselectionallowstobettermeettheneedsofthecompaniesthatare
already a part of the project. As of April 2012, 422 companies have
committedthemselves to theSkolkovo innovationCenter:116 in
theBiomedicine technologycluster,109 in the Energy efficient
technology cluster, 142 in the IT cluster, 28 in the
Spacetechnologyclusterand27inthenucleartechnologycluster.Highernumbersofapplicationswouldmostlikelyleadtothepresenceofhighlyinnovativecompaniesoperatingwithintheclusters.
Considering the number of applications received (50 each week),
Skolkovoscredibility is increasing and thus is bound to attract
some of the most innovative
andaccomplishedcompaniesaroundtheworld.
Theinterconnectionbetweenthe5majorclusterswillcreatesubclusters.Forinstance,theIT
clusterwill be useful inmanaging the residential and social
infrastructurewithin theSkolkovo Township. Similarly the Energy
efficient technology cluster would turn
theeconomyintoaGreenEconomywithnewinnovationsthatleadtosmarter&lowerEnergyconsumption.
The nuclear technology clusterwill serve themilitary purposes
aswell asmedical purposes. Indeed, in order to treat certain
diseases, there has been a
growingdemandforradiation&laserdiagnostics.Thus,thebiomedicalclusterwillbeintandemwiththenuclearclustertosuchpurposes.
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FactorConditions:Large companies are willing to invest in
Skolkovo because of the idea of bringing
theirresearcheffortsclosertotheirpotentialproductandservicemarkets.Thepotentialofthisproject
in terms of human resources, capital resources, physical
infrastructure,administrative infrastructure, information
infrastructure and scientific and
technologicalinfrastructureisindeedappealingandinvestorfriendly.
Forthispurpose,abrandnewcitywiththeSkolkovoInnovationCenterhasbeenbuiltinthesuburbs
of Moscow offering modern physical infrastructure. Along with, an
urbandevelopment firm, Siemens has aided to build this city by
applying sophisticatedconstruction methodologies and relying on
energy efficient solutionslvii. The
SkolkovofoundationisinchargeofalltheadministrativetasksoftheSkolkovoInnovationCenter.
IdentificationofStrategicIssuesAndConstructingPartsOfTheDiamond:
1)ContextforfirmstrategyrivalryThecurrentinvestmentmodelcanposeathreattotheSkolkovoinnovationcenterbecauseitisessentiallydependentonthefundsoftheRussiangovernment.Inordertofosterarisktaking
culture as in the Silicon Valley, the goal of the center should be
to becomeindependent of state funding and should support a market
approach to
innovation.EntrepreneursknownfordynamicinnovationsareslowlygrowinginnumberintheSkolkovoinnovationcenter.ObserversexplainthisfactbythelackofentrepreneurcultureandskillsinRussia.
The Russian government supports the startups through the funds
given by theSkolkovo foundation.Thisapproachto innovation
isclosertoatopdownapproachthanabottomupapproachwhichadvocatesanorganicgrowth.Theproblemliesinthefactthatitdoesnotprepare
startups to the scenario inwhich theonly sourceof funding
isventurecapitalists. The role of the government is pivotal at the
early stage of development ofclusters, however no communication has
been made around the transition from
statefundingtoprivatefundingandwhethertheRussiangovernmentexpectsanyfinancialreturnfrom
the grants given to companies so far. Therefore, this may be deemed
as
unfaircompetitionforventurecapitaliststhatexpectafinancialrewardforeach
investmenttheymake.
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2)Factorconditions:In theearlystageof theSkolkovo
innovationcenter,attractingWorldclassdignitariesandtalented
nonresident Russians in the field of Science & Technology will
be the mainchallenges in terms of human capital.According to
independent reports, 80 000 Russianscientists
leftthecountryshortlyaftertheendofthecoldwar.Duringhisterm,PresidentMedvedevreceivedanopen
letterfromRussianscientistswhohavemigratedtowarnhimabout
thisbraindrainand theeventualdeathof science inRussia if the
current situationremains unchangedlviii. Therefore, even if
prominent foreign scientists agree to join
theSkolkovoinnovationcenter,therewilllikelybeaninitialshortageoflocalscientistscapableofbuildingontheideasofforeignresearchersandscientists.
Thesettingupofaneducationalsystemthatcanmeetthedemandoflocalandforeignfirmscan
be deemed the second challenge that the Skolkovo foundation needs
to take intoconsideration.TheSoviet legacy
intermsofhighereducationdidnotfit inwellthemarketeconomy,mainly
because of a difference in ideals: initiative, competition,
autonomy
andresponsibilitylix.However,aseriesofeducationalreformshavebeenundertakensince2001and
improvements have been made in the following fields: institutional
organization,infrastructure, personnel policy, content standards,
educational system and qualityassessment.
Theinformationinfrastructurewillhavetobeastransparentaspossible,sothattheRussiangovernmentshallnothaveanycontrolonthe
flowof informationrelativetotheSkolkovoinnovation center.This
isofgreatconcern forpotential investorswhowillhave toobtainreliable
informationwhen decidingwhether or not to invest in the Skolkovo
innovationcenter.
The issue of capital flight needs to be addressed as foreign
firms and the Russiangovernmentcantbetheonlyonesto invest
intheclusters.Venturecapitalist
investmentsneedtobeencouragedandmeasurestodosohavebeensuccessfulintheshortrun.
3)Relatedandsupportingindustries:Several innovation ecosystems
are supposed to coexist in the new city of
Skolkovo.Althoughthereareclearexamplesofhowsomeclusterscanbecomplementary(Forex.the
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IT cluster integratedwith all the other clusters),
severalquestions need to be answered:Should
therebeaprioritizationof theclusters in termsof financing?Howcan
therebeabetterintegrationoftheclusters?HowimportantisthespaceclusterforthemodernizationfortheRussianeconomy?Towhichextentcanconfidentialactivitiessuchasthedefense&militaryprojectsof
thenuclearclusterbeopen to foreign scientistsandcompanies?Howcan
the Skolkovo foundation retain companies after the VAT and
corporate profits taxexemptionperiodends?lx
4)Demandconditions:AnimportantissuetoconsiderinthecaseoftheSkolkovoinnovationcenteristheabsenceofclaritywhen
itcomes tocommercial
issues.Althoughanarrayofpartnersandprojectshavebeen inplacewithin
the clusters, it remainsunclearonhow the findingsof
variousinnovationswould be translated into products and how
firmswill collaboratewith eachother to launch such innovative
products and solutions. There has been hardly
anycommunicationbetweenthefirmsinvolvedinthefiveclustersuptilldateandmostpartnershave
signed to run projects on their own based on the negotiations with
the Skolkovofoundation.
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TheSkolkovofoundationwantsthe5clusterstobecompetitiveonaglobalscaleandatthesame
time to help modernize the local economy. This means that a local
demand
forproductsoftheSkolkovoinnovationcentermustemergeandinturn,triggeraselfsustainedgrowth
tocreateaneconomicdevelopment.Thegrowthshouldnotonlybe fueledby
the
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government demand but also by private companies and individuals
who believe in thequalityof theproducts& services from
theSkolkovo Innovationcenterandalso from
theparticipantswithinthecluster.
RecommendationsfortheSkolkovoClusterBasedonthefactsthatwehaveexploredinthecluster,ouranalysisregardingthesituationinRussia,thescopeoftheprojectandtheglobaltrendofinnovation,wehavecomeupwiththefollowingrecommendations.Asthedifferentiatingfactorwithrespecttothevariousrecommendationsistimebased,therecommendationshavebeencategorizedintolongtermandshorttermrecommendations.Longterm:
1. FosteringLocalCompetitionandForeignCompetition:In order for
the cluster to grow and have a dynamic effect on the economy,
localcompetition has to be increased within the economy. The
arrival of foreign firms willdefinitely improve thenatureof
competitivenesswithinRussia,but it isvital for the
localfirmstogrowfirstandcompeteinordertoavoidbeingtakenoverbyforeignfirms.
Onepossiblewaytoaddressthisissueisbycapitalizingonthecountryslargemarketsize.Alargemarketsizeraisesproductivityasitenablesbusinessestorealizeeconomiesofscale.Alargemarket
sizehas alsoother advantages, inparticularhigher attractiveness to
foreigninvestors, which brings many spillover effects such as
transfer of management
andtechnologicalknowhow.Bybringinginmoreoutsidecompetitors,localcompetitionandtheforeigncompetitioncanbeincreasedatthesametime.Onewayoffacilitatingthistransitionis
to reduce export tariffs. Taxation distorts competition and
disincentivizes investment.This
isaproblemfacedbyRussianexporters.Russiascoreshighwhen
itsexporttariffsarecomparedwithother countries (5.7percent,
corresponding to the102nd
rankoutof125countries).Inaddition,joiningtheWTOwillenablethecountrytoreducethesebarriersandfurtherdevelopexports.
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2.
CapitalizingOnTheCISFreeTradeAgreement.Buildingupfromtheabovepoint,onewayoffurtherincreasingthemarketcap,istobenefitwiththeCIStradeagreement.ApointtobetakenintoconsiderationisthefactthattheCISpossessesnominalpowers
intheareasoftrade, finance, lawmakingandsecurity.
IfRussiacanrecognizetheopportunityinvolved,thenextstepasanimprovementtotheCIScanbemadewithrespecttoIPRandthushelpingpromotedomesticentrepreneurship.Forthistooccur,theDumahastopasslegislationintermsofimprovingthestructureoftheCIStoonethat
resembles thatof the EU.By copying this framework, there couldbe an
increase inRussiaspowers and at the same time,
theunionwillbemademore legitimate as itwillinvolvemore
countries.Thiswill in turn increase trade, foster theexchangeof
ideas andbolster innovation and entrepreneurship. Thus the Skolkovo
mindset will no longer berestricted tooneparticularareabutcanbeseen
todevelopandbranchout intodifferentsectorsofbusiness.
The EU regulations that can be adapted to Russia include the
antimonopoly regulation,industrial regulation and trade regulation.
There aremany limitationswith regulations
inRussia,oftenassociatedwithalackoftotallegislationtheimportationofthebestEuropeanUnionlegalpracticeswouldallowsignificantprogressinaddressingtheseissues.
Stepstobetakentoaidinthisdirectionwouldbe:
DirectcontactbetweenRussianandEuropeanbusinessandpublicorganizations
Moredirect interaction amongEU agencies (governmentbodies), and
theEU as a
whole,withfederalauthoritiesinRussia.
3.
PrivatizedBankingSectorinSkolkovo:OneideaworthconsideringisdevelopingabankingsectorinSkolkovo.Thiscouldconsistofsubsidiaries
or branches, branches thatwould be able to deliver services
tailored to
theneedsofentrepreneurs.Similaritiescanbedrawnwiththecurrentbankingsituationnoticedin
theUS.Reasons foradopting thisoutlookare twofold.Firstly if
studentsor
innovatorscomeupwithentrepreneurialideastheywishtopursue,byhavinglocalizedaccesstofundsatreduced
interestrates,theycanhavetheresourcestopursueanddeveloponthe
idea.
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Thiswillhelpboostinnovationeveninsmallsizedprojects.Inaddition,theRussianfinancialandbanking
sector is inefficient in termsofavailabilityaswellasaffordabilityof
financialservices, having a ranking of 92nd and 109th,
respectively. Therefore, Skolkovo canwelcomeforeignbankstowork
incollaborationwith localbanks.Thisgivesthe localbankscompetition,
increasesthepossibilityofmergers,
increasestheconsumercapofthebanksandultimatelyprovidestheentrepreneurseasieraccesstofundsthatwillpushinnovation.
4.
SkolkovoandTheRussianMilitary:Forthelastfewyears,armiesaroundtheworldhavebeendownsizingtheirtroopswiththeaimofreducingspending.ThisisevidencedbycasessuchasthesharingofaNavybetweentheUKandtheincreasinglystringententryrequirementstoenlistinmostEuropeanarmies.The
trendbeingnoticed is thatmilitariesacross theworldaregettingmore
sophisticatedwithgreaterdependenceonsmartwarfareandtechnologies,ratherthanonpersonnel.
Russia isnoexceptiontothistrend.With its
largeexpenditureonthecountrysmilitary, interms of share of GDP,
Russias expenditure on the procurement ofweapons,
scientificresearchandthetestingofmilitaryequipmentfornationaldefenselagsbehindonlytothatoftheUnitedStates.
Skolkovocouldcapitalizeon thisbystarting toconsider tying
innovativeprojectswith
thecountrysmilitaryindustrialsector.Historyhastaughtusthatdemandfornationalsecuritycreates
increaseddemand for resultsofboth fundamentalandapplied
science,aswellashightechproduction.Theseareintertwinedwithstimulatinginnovation.ItshouldbenotedthatthiswouldallowSkolkovoaccessto
funds fromthissectoraswell.Furthermore,withthe largenumberof
foreign investors and theendof animosities, further
cementedwithpeace treaties and trade agreements, the threat of
hostility is drastically reduced. It
isbelievedthatamovementinthisdirectionwillalsoallowdefenselogisticcompaniessuchasAssaultandEADStoconsiderSkolkovo,thusattractingmoreinvestors.
5.
BoostingEntrepreneurship:Russianeedstopromotedomesticentrepreneurshipsothat
localbusinesscansupporttheforeign firms and act as local suppliers.
Instilling trust in local entrepreneurs, that
theirbusinessandideasarelegallyprotectednotonlyinSkolkovobutalsoinRussia,isthewaytogo.Thisshallbejustoneofthemanystepsthatneedtobetakentoimproveitsrankingin
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theEaseofdoingbusiness index. Inaddition, thegovernmentneeds
toreducered tapeand shoulddo itsbest tobolsterdomestic companiesand
integrate themwith themajorfirms thatmakeSkolkovo theirnewhome in
thecomingyears.This integrates the foreignfirms better in the
business ecosystem, develops domestic business scenario and
alsoincreases the exit cost for the foreign firms forcing them to
stayput even in the faceofeconomicadversity.
6.
UtilizingtheSkilledWorkforce:Russiahasoneofthebesteducatedpopulationsintheworldwithalmost100%literacyrate.However,
the productivity of this educated work force has reduced
drastically over
thedecades.TherehasbarelybeenanygroundbreakingresearchortechnologicalimprovementinRussia,whichwasonceperceivedasoneofthemosttechnologicallyadvancedcountriesin
direct competition with the USA. To give the Skolkovo cluster a
jumpstart,
thegovernmentisattractingforeignresearchersandlaureatesbyprovidingthemheftybenefits.Butnotmany
topnotch scientistswouldbewilling to come toRussia for something
thatlookspromisingotherissuessuchasadjustmentissuesandculturaldifferencesmayhindertheirlongtermstayinthecountry.Thus,theaimshouldbetofosterhomegrowntalentinthe
long run. The government should therefore provide incentives to low
earning
youngindividualstoenterintobothbusinessandtechnicaleducationsotheycancontributetothegrowingneedofskilled
labor inthecluster.Peoplewithonlyabachelordegreeshouldbegiven
incentives topursuemastersdegreesand theneitherchoose toworkorenter
intoresearch.Further,onewaytoattractworldclassscientistsisbycollaboratingwithbignamesintheeducation
industry,andprovidingthem
incentivestochooseRussiaovertheirhomecountrytoconductresearchin.
7. InvestmentModelSelection:TheSkolkovoprojecthasbeen subject to
criticismby thepressandmediabecauseof
itsinvestmentmodel.Severalarticleshavebeenpublishedciting that
thecurrent investmentmodelemployedbythegovernment is
inappropriateand ismoreofatopdownapproachfrom the government. This
allegedly undermines the role of investment bankers in
thedevelopmentofthecluster.Webegtodifferonthisallegationandbelievethattogetthecluster
up and running it is appropriate to adopt a topdown approach in the
short run.Although, eventually in the longer run the government
needs to step back and slowly
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introduce the investmentbankers in themix. This shallwelcomemore
andmore foreigninvestmentinthelongerrun.
8. ImprovingPublicHealthcare:Russiahaspretty low
lifeexpectancyrateduetoalcoholismandthefragilities in
itshealthinfrastructure.Russiashouldinvestinimprovingpublichealthandshouldtrytodeveloptheinfrastructureforthesameandshouldaimatprovidingbettermedicalaidtoallitscitizens.Bydoingso,itisnotonlytakinggoodcareofitscitizensbutisalsoprovidingbettervalueformoneyforinvestors.
ShortTerm
9.
ReducingTheEconomicDisproportionAndHighUnemploymentRate:Russia
suffers with a high economic diversity with more than a 40%
difference
inunemploymentrateindifferentpartsofthecountry.Onewayofapproachingthissituationis
by increasing the powers and the legality of the CIS. This way we
can offer moreopportunitiestothoseunemployed.The factthatthere
isacommonlyspoken language isalreadyaplus.
Another point to be considered is that despite the positive
development over the pastdecade,thegapbetweenRussiaandOECDeconomies
intermsofGDPpercapitaremainssizeable, amounting to about 47
percent. Although some structural factorssuch asdemography, the
employment structure, and the number of hoursworked per
persondonate toclosing thegap, the largedifference inprosperity
isattributed todifferences inlaborproductivity.According to
theWorldEconomicForum, laborproductivity inRussia isless thanhalf
thevalueachievedbyworkers intheOECDmemberstates.Stepsshouldbetaken
to address this issue. A work ethicmodelmore similar to European
orWesterncountriescanbeadoptedbyorganizations inorder to realize
theweakpointsof the localpractices.Amixofthe
localandforeignpracticescouldthen
leadtothecreationofanewworkmindsetmoretailoredtotheRussianculture.
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10.
MisuseOfSkilledLabor:Thereductionofthemanufacturingsectorsisaprocessthatmosttransitioneconomieshaveundergone.
However, the decline of Russianmanufacturing beyond the initial
transitionperiod isaworrying trend.While thenumberof jobs
inmanufacturinghasdeclined,employment in the government sector has
grown. This indicates that the government ispartaking in the
redistribution of resources rather than creation of value. It is of
vitalimportanceforthegovernmenttorealizetheimpendinglimitationitiscreatingbyfollowingthispath.Onewayofsolvingthisproblemwouldbetousetheirhighlyeducatedworkforce.Therearemorequalifiedpeople
inRussiathantheotherBRICcountries.ThisgivesthemahighpotentialfordevelopingR&Dactivitiesandhighendmanufacturingandservicesectors.Hence
the regime should focusmoreon theseareasandprovide jobs in these
sectors
inordertodiversifyandavoidthecurrenttrenddecliningvaluecreation.
Also a number of studies show that thewaning inmanufacturing
sectors is due to
thecombinationofanincreaseinrealwagesandinadequaciesofthebusinessclimate.ThisputsRussiaatadisadvantageinternationally.AlthoughproductivityinthecountryishigherthaninIndiaandChina,highRussiansalariesmeanthatforeachdollarofwage,aRussianworkeryieldshalftheoutputofhis/herpeers.ByadoptingCompetitivenessenhancingreformsasstated
above,willhelp advance thebusinessenvironment, increaseefficiency,
andutilizemanufacturingoutputbetterwithinternationalwageproductivityratios.
11.
ReducingTheLanguageBarrierThelanguagecanbeabarriertoattractingforeigninvestorsandhumanresourceintoRussiaconsideringthefactthatmanystatesareallowedtohavetheirownregionallanguages.Thisshallnotbeaproblemaslongasthereisoneofficiallanguage,preferablyEnglish.AsofnowRussianistheofficiallanguageandRussianisnotamongoneofthemostpopularlanguagesin
theworld. (ranked8th/10most spoken languages in theworld;Russian
146million)lxiThustheGovernmentshouldincludemandatoryEnglishlessonsfromjuniorschooltoensurethat
all citizens have a sound knowledge of the most global language.
Further it isunderstandable if Russia wants to keep Russian as
their official language tomaintain auniquenational identity.
Insuchcasetheyshouldworkwithtwoofficial
languagesRussianandEnglishtobemorecompetitiveonaglobalscale.
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12.
LeveragingOnItsOilReserves:Russiashouldrealizeitsbargainingpowerintermsofoilreserves,whichitcurrentlyexportsheftily,majorlytotheEU,tofundalionsshareofthegovernmentsexpenditures.Russiaisthebiggestexporterofmineralfuels,distilledproductsandoil
intheworld.Lookingatthecurrentstateofworldaffairs,thisaspectisofastoundingimportanceforRussia.InJanuary2012,theEUagreedtolevyanoilembargoonIranwhichcomesintoeffectfromJuly2012.Thisbanwas
approved in the lightof an allegation that Iran
isbuildingnuclearweaponswhich it intends touse in thenear future.
Thus,Russianowhaseven greaterbargainingpowerandcanuse
itsoilreservesasa leveragingtool inordertostrikedealswiththeEUand
the US to further invest in the Skolkovo project. This could be in
the form of newtechnologies to help increase the oil extraction
process fromwells or bywelcoming
oilcompaniesbasedintheEU/UStomakeinvestmentsinSkolkovo.Although,Russiaisobligedto
selloilandenergy to someEUnationsaspartof
theEuropeanUnionRussiaCommonSpaces agreement it should bargain to
export less and rather invite EU based firms
toestablishproductioninSkolkovoandusetheenergylocally.
13. ROI:There is a lack of clarity regarding the returns the
governmentmightwant on its initialinvestment into various new
projects within Skolkovo. This is discouraging
manyentrepreneursfrom investingorsharingtheir
ideasopenly.Thus,thegovernmentneedstobemoretransparentinitsapproachintheshortrun.
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EXHIBITS
Exhibit1
19922008AnnualGrowthofRealRussianGDP(in%)Source:CRSconstructedfromdatabytheEconomistIntelligenceUnitExhibit2
ContributiontoGDPGrowth
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Exhibit3 RussiaInflationExhibit4 PublicDebtComparisons
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Exhibit5: UnemploymentRatesWithinRussia
Exhibit6:19992010:RussianMonthlyUnemploymentRateDynamics
,
Source: World Bank estimates based on Rosstat data.
Figure 1.8: Unemployment Hotspots: Regions with highest
unemployment rates, 2010, in percent
Sources: Rosstat, World Bank staff calculations.
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Exhibit7: OilandGasDominateRussiasExportsSource: TheWorld Bank :
Russian Federation: Export Diversification through competition and
innovation:Overview.April2012
Exhibit8 OilPricesandTheTradeBalance
Source: CBR and World Bank staff estimates.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
2008
Gas
Other exports
Petroleum
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Exhibit9: BRICExportRelationships
0.2
.4
.6
.8
1
0 5 10Analysis Time
Russia BrazilChina India
Survival Rate 1999-2008
Source: TheWorld Bank : Russian Federation: Export
Diversification through competition and
innovation:Overview.April2012
Exhibit10: RussiasPositioninTheGlobalEconomy
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Exhibit11: OECDPartnersBasedOnEducationExpendituresExhibit12
RussiasPublicSpendingonEducation
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Exhibit13: GlobalCompetitivenessIndex
Source:WorldEconomicForum:TheglobalcompetitivenessReport20112011Exhibit14:
Summaryofthemulticluster
Source:http://themoscownews.com/infographics/20110829/188975599.html
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Exhibit15: SkolkovoValueChain
Source:http://www.kooperationinternational.de/fileadmin/cluster/moskau/Skolkovo_Sitnikov_USRBC.pptExhibit16:
SkolkovoDevelopmentMasterPlan
Source:http://www.kooperationinternational.de/fileadmin/cluster/moskau/Skolkovo_Sitnikov_USRBC.ppt
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Exhibit17: Foresights
Source:http://www.sk.ru/Model/AboutFund/Clusters/BioMed.aspx
Exhibit18: InvestorsinTheBMTClusterinSkolkovo
Source:http://www.sk.ru/Model/AboutFund/Clusters/BioMed.aspx
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Exhibit19:NuclearClusterPriorities
Source:http://www.sk.ru/Model/AboutFund/Clusters/NuclearTechnology.aspx
Exhibit20:MapofRussia
Source:CIAFactbook
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