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Expert article 881 Baltic Rim Economies, 21.12.2011 Quarterly Review 5�2011 Internationalization of high-tech industries – lessons for the Russian government By Kalman Kalotay The Russian Federation is a laggard country in terms of the internationalization of its high-technology (high-tech) industries. This is quite paradoxical, as the country has in principle all the ingredients required for a more vigorous insertion into the global network of high-tech activities: a strong science, technology and innovation based inherited from Soviet times (slightly eroded since then), a vast and well trained labour pool (with skills again a bit eroded but still important), and recently large foreign direct investment (FDI) inflows and outflows. Indeed, by 2010, the country had become the 8th largest recipient of the world in terms of FDI inflows ($41 billion) and also the 8th largest source of the world in terms of FDI outflows ($52 billion). The laggardness of the internationalization of high-tech industries may seem to be evident for most observers; however it is not easy to quantify it. The main methodological difficulty arises from the fact that practically all FDI statistics lump high-tech industries (their common list includes pharmaceuticals, aircraft & spacecraft, medical, precision & optical instruments, radio, television & communication equipment, and office, accounting & computing machinery) with medium-high-tech industries (electrical machinery & apparatus, motor vehicles, trailers & semi-trailers, railroad & transport equipment, chemicals & chemical products, and machinery & equipment). If we accept the merging of these two groups as still a good proxy of the propensity to engage in high-tech FDI, latest available statistics reveal a striking difference between the world average (11.3% in inflows and 9.5% in outflows) and Russian data (4.1% and 4.3%, respectively, see table 1). Note that inward and outward industry classifications do not necessarily match, because the former reflect the industries of the investor, while the latter the industry of the host firm, and the two often differ. Another proof of the laggard status of the Russian Federation is in the universe of the largest transnational corporations (TNCs) of the country: in 2008, none of them were from high-tech industries although some of them undertook important research and development (R&D) activities. These large firms accounted for more than half of the country’s outward FDI stock, with Lukoil and Gazprom together representing almost one-quarter, other naturalresource-based firms about one-fifth, and non-resourcebased firms of the top 25 for about one-tenth. As a result, high-tech firms, although they exist, and sometimes internationalize, are invisible on the overall radar screen of Russian FDI. Studies examining the Russian high-tech internationalization paradox usually conclude that the country’s laggardness almost fully policy made. The 2009 Knowledge Economy Index of the World Bank for example shows that the country fares well in terms of its education system (despite all the well-founded criticism of its distance from real life), innovation, and information and communication technologies, but sorely lags behind almost all countries of the world in terms of “economic incentive regime”. The score of the Russian Federation is even lower than the average of the low-income countries of the world. China’s and India’s indices are twice as high, and that of Brazil almost three times. The distance from developed economies is even larger: almost five times. 34 The policy lessons from countries that succeeded with the internationalization of high-tech industries are usually straightforward. The secretariat of the United Nations Conference on Trade and Development has analysed the cases of Canada and Singapore in detail. One of the common lessons of these successful cases is the need for a holistic approach towards general national development policies, science, technology and innovation policies, and inward and outward FDI promotion. In the Russian Federation, this interconnectedness in missing, largely due to the fact that inward and outward FDI policies are at a nascent stage, and whenever they exist, they do not seem to coordinate with other policies. Another problem is in the country’s approach to science, technology and innovation, inherited from Soviet times, when business applications were seen as unnecessary, and sometimes even suspicious. Soviet science attained very high levels but cruelly failed on practical application. Finally, international benchmark countries such as Canada and Singapore have overcome the stage where concerns about the strategic nature of high-tech industries (if they are high-tech, by nature they should have some strategic value, at least) prevented their internationalization. Instead, they introduced policies such as strong intellectual property measures, which minimize eventual strategic leakages of very sensitive technology. They also adopted a flexible approach to the internationalization of high-tech industries, combining equity (traditional FDI type) investment in some segments with non-equity forms (e.g. licensing, franchising, non-equity based R&D joint ventures) in more sensitive activities. In contrast, a more rigid approach to strategic issues prevails in the Russian Federation. It goes beyond the formal restrictions of the Strategic Investment Law (Law on the procedure of foreign investment in companies having strategic significance for the preservation of national defence and State security) of 2008, which singled out aircraft and airspace as strategic industry, leaving other high-tech activities in theory outside the realm of the law. Moreover, the law intended to apply relatively simple procedures for approval. However, reality has proved to be more complex, the procedures in practice has been more burdensome than foreseen, and the other high-tech industries remained mostly in a grey zone, where officially they are not strategic but de facto are treated similarly. Beside policy issues, the case of the Russian Federation is very different from the “best practice” countries in terms of institutions supporting inward and outward FDI. In Canada and Singapore, they have existed for a long time, and have received clear mandates in promoting their respective countries’ technological upgrading in the international scene. They also have mandates to follow these goals with important financial means. In contrast, the Russian Federation lacks such well-structured agencies. Instead, inward and outward FDI promotion is done more on an informal basis, on an ad-hoc basis and at the high political level. This arrangement fits the current structure on inward and outward FDI, in which large resource-based firms with mega-projects dominate. This way the country can well control the development of natural resources and main manufacturing facilities at homer and strategic expansion of flagship national firm � Pan-European Institute � To receive a free copy please register at www.tse.fi/pei �
Expert article 881 Baltic Rim Economies, 21.12.2011 Quarterly Review 5�2011 abroad. However, it has the disadvantage that high-level politicians by default can not devote the same (100%) attention to investment promotion matters as investment promotion agencies specialized in the field, as the formers’ main aim oversight over the general development of a vast and complex country. Moreover, firms in high-tech industries tend to be smaller than natural-resource-based firms, and change more rapidly. Only specialized agencies can keep track of those developments and prepare a quick strategic response. Given the fact that most of the problems of the Russian Federation are policy made, or are due to a weakness of institutions, change is more easily possible and desirable than in the case of countries that lack the basic science, technology, innovation and skills base of the internationalization of their high-tech industries. It requires mostly a strong political will to change, consensus building about such changes, and institutional development (including the generation of sufficient resources for the proper functioning of institutions. The case of Canada also proves that the complexity and the federalism of the country do not necessarily hinder coordinated policy action at the national level, only the process of consultations is longer, as it involves federal entities. The Russian Federation in principle has all the ingredients require for a rapid improvement of the situation. 35 The views expressed in this article are those of the author, and do not necessarily reflect the opinion of the United Nations. Kalman Kalotay Economic Affairs Officer United Nations Conference on Trade and Development Table 1. Share of selected industries in the FDI inflows and outflows of the world and of the Russian Federation, latest period available (Per cent) World inflows 2007–2009 Russian inflows 2010–March 2011 World outflows 2007–2009 � Pan-European Institute � To receive a free copy please register at www.tse.fi/pei � Russian outflows 2010–March 2011 Mining, quarrying and petroleum 0.4 6.8 9.5 6.1 Metal and metal products High- and medium-high-technology 2.6 4.3 2.8 2.2 industries a 11.3 4.1 9.5 4.3 Source: Author's calculations, based on data from the UNCTAD FDI/TNC database (world flows) and from the Bank of Russia (Russian flows). a The list of high- and medium-high technology industries includes chemicals and chemical products, machinery and equipment, electrical and electronic equipment, precision instruments, motor vehicles and other transport equipment.
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