Not a Large Country... But With a Bright Future
Is there any accuracy in the lay opinion that the BRICS countries, and emerging markets in general, are associated with cheap labor, a talent for copying, high consumer demand, and a complete lack of innovation or breakthrough technologies?
It is a relatively fair judgment with respect to the main BRICS countries, but Russia stands out from the crowd: it is the only one to also be a member of the G8. Brazil, India, China and South Africa are in the throes of their industrialization, while Russia has already been there and done that – way back in the last century. Naturally, there are other major differences: in demography, labor distribution and education levels. Colleagues from developed countries are amazed to discover our high literacy rate, given that the standard in other BRICS countries is so very different. Despite the fact that Russia is rightly considered to be one of the emerging markets, it seems to me that Russia could be the leading BRICS country, acting as a cultural and business conduit between the developed world – of which it is a member – and the developing world.
But are the other BRICS countries ready to see Russia in that way?
In some ways, yes – but in other aspects, no. Both India and China, as we know, are importers of high-tech exports from the Russian defense industry. They have generally been heavily influenced by the Soviet Union. For example, the Chinese Academy of Sciences was built by Soviet academics, just like India’s current education system. Currently, that system is a curious hybrid of classical British schooling and a quintessentially Soviet approach. Incidentally, it turns out that this generates a synergetic effect, and is extremely effective. Our ties with Brazil and South Africa have historically been weaker, but they are now deepening.
The received knowledge is that cutting-edge innovation comes from a small number of countries. Might the intellectual and technological balance shift in 15-30 years?
I think so, yes. And, strange as it may seem, Russia has outstanding opportunities here. Despite the fact that only the USA and India are net software exporters, Russia could yet join that exclusive club. We often do not know how many new technologies are born in Russia, only to find their way into the products of the world’s leading companies. They usually wend their way back to us, fully packaged and under the label of one or other major brand. I only need to list one example – the Skype engine is built on Russian technology!
Can we expect to see a new division of intellectual labor within that same timeframe? And if so, what will the geographical breakdown be?
As regards the prospects for a global redistribution of labor and, most importantly, the prospects for the redistribution of added value and profit margins, we need to understand that the modern, post-industrial economy is shifting from production to engineering and development. Profit is generated not by production facilities, which can even be loss-making in many sectors, but by design, which guarantees the uniqueness of a specific product. The trend is now to move from traditional, vertical integration in all forms of technological business, to horizontal cooperation.
Twenty years ago, people did not know they had a need for mobile telephones. That was an idea that touched a nerve, triggering a genuine psychological need
Twenty-five to 30 years ago, automotive companies did everything themselves, while today the structure is completely different, with several tiers of suppliers, and the car manufacturers themselves acting as developers, designers and systems integrators, choosing between products that either already exist on the market or are manufactured at their request.
The same is true for microelectronics and aviation. That is, the center of added value has shifted from production to development, and here there are plenty of opportunities to participate not only in the markets of developing countries, but in the global economy. I see Russia as a world center for design, with production out-sourced to other developing markets.
In the automobile industry, Russia is seen as a no more than an assembly plant.
No – the assembly plants are China and the new countries of Southeast Asia. Russia is not seen as a player at all in global technological processes – only as a supplier of raw materials. Here, naturally, there is also a large sales market – you can see that from the large volume of high-tech products that are in demand in Russia, from Airbus and Boeing to mobile telephones.
But this is not a massive market; Russia remains a relatively small country. Perceptions of the size of its territory are deceptive for outsiders, who imagine there is an equally large economy and population. I suspect that few people in the world understand that the population of Russia is only a little bigger than that of Japan. And the domestic market of China alone is ten times greater. The population there is huge, although the per-capita GDP is several times lower, and in India it has fallen even farther behind. Yet the potential demand, driven by a decent per-capita income and the rate of growth of the standard of living, make us more attractive.
The mission of RVC aims at the “accelerated creation of a globally-competitive national innovation system.” This sounds rather utopian...
As ironic as it may appear, our assessments and those of key foreign analysts researching the venture market and its influence on innovative entrepreneurship in our country, suggest that the accelerated development of our venture industry is all but guaranteed. If we look at the Dow Jones report published by the Wall Street Journal at the end of January, we can see that Russia has reached fourth place in Europe in terms of the absolute volume of venture investments, after Great Britain, France and Germany, and is in first place in terms of market growth rates.
What level of interest is private capital showing in these markets – will private capital compete for these projects?
Private capital is the backbone of this market, while state interests account for no more than 10%. The competitive environment has already formed definitively. Yes, the market is unbalanced, and includes strong distortions. This primarily concerns specific sectors. A huge proportion – more than 70% of investment – goes towards the internet and commercial IT projects that target the domestic market. They are simple, and built on tried-and-tested business models. So, quite literally, they take a model that has proved to be effective in other markets, and simply deploy it here under a new name. Such projects do bring a return very quickly, but they suffer from one fundamental drawback: they have no competitive advantage in the world market. Even the very successful Yandex, which was launched almost simultaneously with Google, is today encountering problems as it tries to develop in foreign markets, and Odnoklassniki and Vkontakte cannot transform themselves into the next Facebook. However, other technological segments are heavily under-invested. For example, there is very little investment in alternative energy, one of the main targets for investment in developed markets.
Which of the large group of developing countries has come closest to achieving your formula – that is, to have created a system of accelerated, globally-competitive development?
China – simply because that country set itself the task 20 years before Russia did. China invested more effort to attract foreign, mainly American, competencies. The issue is not even foreign investments, although those undoubtedly were present, but specifically competencies – that is what we have an acute need for.
Meanwhile, Chinese companies are often accused of stealing technologies.
You need to understand that the way a business is organized, market analysis and supply chain business models are not subject to protection, and core skills are needed specifically for this section of technological business. I have a pet theory, and in 30 years in this business I have seen it proved many times over: technology is the easiest box to tick. Technological business has nothing to do with technology; the crux of the matter is all about inspired people, relevancy and latent potential.
The most successful projects remain relevant today, and we are interested in those things that have the potential to become relevant. Twenty years ago, people did not know they had a need for mobile telephones. That was an idea that touched a nerve, triggering a genuine psychological need. As a rule, such things are impossible to predict. After all, no research ever indicated that people across the world had the need to constantly stay in contact. The same can be said of social networks. Before online communication technologies appeared, nobody knew that there was such a need. Therefore, all the copying of systems and mechanisms is a matter of catch-up modernization. This is the sort of development that can never produce a fundamental breakthrough.
Beijing is pursuing the right policy, intelligently shifting skills in business – and copying technologies is of little significance there. They do more than just copy: they learn how to properly manage markets, perform analyses and build business models
So, China is engaged in catch-up modernization – and what about Russia?
Eugene Kaspersky discovered a need before it had truly materialized, and became one of the world leaders in that market. The same is true for Parallels, for example. We have companies that have discovered latent niches. There are far fewer of these than we would like, but they do exist. I do not know of any such Chinese companies. Beijing is pursuing the right policy, intelligently shifting skills in business – and copying technologies is of little significance there. They do more than just copy: they learn how to properly manage markets, perform analyses and build business models. Even China, with its massive scale, has almost completely exhausted its potential for industrial development. The low cost of local labor is driven in the same way as the industrialization of the Soviet Union was fuelled in the 1930s – by peasants. This resource is almost exhausted. We can expect a significant redistribution of markets, with emphasis re-shifting to domestic demand, while the domestic market becomes globally attractive.
All this suggests a different form of criticism. Leading companies that generate a demand for new products make people spend their lives chasing after imagined needs, wasting their time and energy. By conjuring up yet another dubious need, such as endlessly ‘hanging out’ in social networks on ever more convenient tablets, these companies actually diminish our quality of life. So although we are now mobile, permanently reachable and online, we also think less, and live less. What do you think of accusations like these?
I do not agree – over the past decade we have lived through massive changes, comparable to the industrial revolution at the turn of the 19th century. After that, the world was never the same again. Today, we have reached a unique moment in history, when the minority is capable of feeding the majority. At the beginning of the 19th century, 95% of the population met the basic needs of 100%, but now 5% can accomplish the same feat. Therefore, the remaining 95% are left in an unfamiliar situation: they have a lot of free time on their hands. In the past, only the elite would have leisure time. Now this resource has become accessible to almost everyone, and this is a major social change, because the challenge is to fill that time constructively.
When there is no longer any need to keep one’s nose to the grindstone to earn a crust, we can focus on elevating our minds and our souls, rather than simply being mindless recipients of organized feeding, like turkeys before Thanksgiving. And this is how needs that had remained latent, undiscovered and unsuspected, and for which no technologies had been developed, suddenly become drivers of growth. The volume of information being processed has already multiplied by a factor of tens and hundreds.
Yes, but how productive is this data processing?
It is productive for someone. In previous centuries, the aristocracy included people who spent their entire lives enjoying social pleasures, while there were others who created great works of literature. This will never be evenly balanced, because people will by definition always be different; they are not born equal. The most that society can offer is the potential for self-realization, and whether people realize their potential or not, that is up to each of us, individually.
I am convinced that we are now on the threshold of a major social change, and even the economy itself is of secondary importance to that. This is something of a taboo subject in some circles, but an elementary analysis of our history shows that the driving force behind the development of social relations has, throughout the last 100 years, always been technology.
My parents’ generation could rest assured that, upon graduation from university at 25, they would live off the knowledge they had acquired until the end of their lives. For my children’s generation, I suspect that they will be studying throughout their lives
Can this be enough to change the structure of society?
Yes, over the course of the 20th century a number of structural changes have taken place in society, and they were linked not to revolutions, but to the birth of automobile transport and passenger aviation, which boosted our mobility. Computers, and later the internet, generated an explosion in the availability of technologies that help us handle information. Today they are generating even greater social changes than the automobile did 100 years ago. After all, every social structure, starting with tribes and ending with states, has been tied down to geographical territories. But today, distance is completely irrelevant for communication, and this cannot fail to produce social changes on a global level. But it is impossible, as yet, to predict where change will happen, or what it will look like.
If we change focus from general existential matters to our day-to-day lives, are we going to become narrowly specialized within a specific profession, education, and mode of thinking?
This is an important question, but I am afraid there is no unambiguous answer. Any effective professional must have a deep knowledge of his field, and at the same time must possess a broad understanding of related sectors, as well as how the world works in general. The problem of excessively narrow specialization may yet be resolved, ironically, by the appearance of even more, new, communication systems!
Those generations that are now coming of age are certainly not going to have accumulated sufficient knowledge during their youth. My parents’ generation could rest assured that, upon graduation from university at 25, they would live off the knowledge they had acquired until the end of their lives. But I have had to go back to school two or three times. For my children’s generation, I suspect that they will be studying throughout their lives.
All of this can incite populist criticism of the increasing differentiation of human capital. The economic differentiation of society is a scientific fact, even if it is not particularly well-known. The global Gini coefficient was almost identical in 1900 and in 2000. But it fell to almost half in the middle of the century. That is to say, throughout the 20th century property differentiation at first fell heavily, and then started to grow again towards the end of the century.
And I am confident that the role of traditional finance capital will fall, while we will see a growth in the significance of other types of capital: intellectual, human, social and organizational. At the end of the day, financial capital is just an accounting tool. In recent years, the financial sector has developed at a high speed compared to more tangible industries. Derivative financial instruments have started to appear, which are a new kind of nonsense. A derivative of an accounting method is just a different accounting method, and nothing more than that. The importance of these tools will fall, and real capital will again be of primary importance.
Of course, the issue is not the financial physical assets, and not natural resources, but people engaged in science, education, and business.
You’ve said that the changes taking place in the world today are shifts “on the level of civilizations.”
Yes. For a long time, there has been an ongoing process whereby the main core of development is shifting from Atlantic civilizations to Pacific ones. Here, incidentally, Russia is presented with another set of opportunities: few countries have a foot in each of these worlds. But Europe is gradually slipping into the periphery – it has exerted much effort to that end over the last decades.
Last fall we brought potential investors from Southeast Asia, and they showed an interest, but only at the level of initial contacts. Equally, Russian investors do not focus on developing markets, but head for Silicon Valley, simply because they understand what is happening there
Is Europe doomed to become a theme park?
Yes, and this is generally true of continental Europe. From the viewpoint of innovation-driven development, it will be on the periphery. Today, the center has to be recognized as the west coast of the USA, and Southeast Asia, plus some pockets of Europe, as well as Israel and Great Britain.
In Russia itself you focus on Moscow – we can see this in the RVC project portfolio – with Tomsk in second place, as a critical Russian center of innovation. Why Tomsk, rather than Novosibirsk or St. Petersburg?
That is just the way it happened. I don’t even know how to answer. It also appeared to me, starting in the time of the Soviet Union, that Novosibirsk was far more advanced, and has always attracted more investment – even Akademgorodok [‘Academy Town’] alone, which is a world-class university campus.
However, in the new economy, Tomsk turned out to be far better adapted and effective. Tomsk is an atypical Russian city, which is only comparable, I think, with Oxford, where students also make up a significant portion of the total population. There is investment there, and companies that are present in the global market, and business incubators. Despite the geographical isolation, Tomsk is at the very forefront of globalization in Russia.
RVC also has companies in St. Petersburg. However, St. Petersburg has proved to be very ineffective over the last decade. Here, national factors come into play: the attitude of regional authorities to business and the economy play a very significant role. For example, progress in Tomsk is largely the achievement of the governor, Viktor Kress. He understood that the economy of the region would not develop sufficiently if they focused on natural resources, although Tomsk is enviably rich in that respect. In Tatarstan they understood this too. But in St. Petersburg there is a slightly condescending attitude to innovation, and this generates multiple management errors.
As the Soviet state ran out of steam, St. Petersburg – then Leningrad – turned out to be the most highly-educated city. One quarter of the adult population had graduated from university or college – no other city in the USSR could match that achievement. The main body of the educated population worked in structures linked to the military-industrial complex, which collapsed in the 1990s. Subsequently, the city failed to find any application for that impressive intellectual resource. On the other hand, now we can see a paradoxical phenomenon: St. Petersburg, or ‘Peter’ as Russians call it, hosts Russia’s leading software development cluster.
Progress in Tomsk is largely the achievement of the governor, Viktor Kress. He understood that the economy of the region would not develop sufficiently if they focused on natural resources, although Tomsk is enviably rich in that respect
Many transnational companies are now deciding which city to work in, i.e. which is the ideal technological capital and a good alternative to Skolkovo – and St. Petersburg, of course, is number one on the list. This is not the achievement of the local authorities, but rather that of several universities that retained a pool of educators, and several large corporations that produce technical managers. Unfortunately, they were never supported by the people who are responsible for development. Instead, emphasis is placed on depressing industrial projects, like car assembly plants.
Can you see a conscious interest amongst investors in the developing countries with respect to Russia and, conversely, interest amongst Russian investors with respect to the developing markets?
I can see some rudimentary interest, but not tangible investment. Last fall we brought potential investors from Southeast Asia, and they showed an interest, but only at the level of initial contacts. Equally, Russian investors do not focus on developing markets, but head for Silicon Valley, simply because they understand what is happening there.
In this sense Alisher Usmanov, and Yuri Milner with his DST, are not revolutionaries, but following a well-beaten path?
I think so, yes. In general, in order to provide oligarch-type capital growth rates on the technology market, you really do need to follow the well-beaten paths. These should be low-risk, understandable investments, or financially inexpensive seed capital.
Developing markets have high country-specific risks, and I understand the investors who are scared of getting burned. Investors from Silicon Valley must swallow such risks in order to get access to human capital, but there is simply not the same appetite for Russian human capital.