Russia has been hard hit by the global economic meltdown. How can this crisis present governments and entrepreneurs with opportunities to create new incentives for innovation?
The speed with which the economic crisis spread across the globe, devastating so many economies, surprised many. The catalyst for the crisis can be laid at the feet of creditors, but its rapid contagion from one country to another can be explained by the globalization of supply chains.
Business is entering its third stage of evolution -- what IBM chairman Sam Palmisano calls the "globally integrated enterprise." The first stage was the 19th-century's "international model," when corporations established sales offices in foreign countries with minimal economic impact on host countries.
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This article was originally published in The Moscow Times on Thursday, March 26, 2009
A Rusnano display at a recent technology conference. The Russian Corporation of Nanontechnologies is a part of the government's efforts to promote an economy based on technological innovation and less dependent on exporting natural resources
Photo by: Amphoralabs.ru
When I worked at Ford Motor Company in the 1970s, it grew by replicating itself with small versions of "me too's" in foreign countries, each with their own management, manufacturing, logistics, purchasing, human resources and supply chain operations and staff. This second stage is being replaced by globally integrated enterprises executing their strategies, operations and investments where work is best done in the world. Instead of separate, self-contained supply chains for each market, third-stage enterprises have a global footprint with a single supply chain.
Global supply chains mean new opportunities flowing to countries and enterprises with the right skills and a focus on expertise, openness and cost. Globalization of the supply chain enables small and medium-size enterprises, or SMEs, to learn from their customers, accelerating skill transfer and knowledge creation for them to leverage domestic success into opportunities to sell globally. It enables multinationals to capitalize on local resources and talent. But it has another outcome: It locks producers, customers, financiers, investors and citizens together in ways unimaginable 25 years ago, such that a falloff of demand in Melbourne has a ripple effect on economies from Mumbai to Miami to Moscow.
It's natural for Russia to look for ways to break international supply links and to boost domestic production and content. While import substitution has positive elements to it, this actually runs counter to the diversification goals that President Dmitry Medvedev and Prime Minister Vladimir Putin have set for the country. Innovation and knowledge creation thrive best when parties collaborate and cooperate to share development costs and risk. While it is counterintuitive to seek more international integration now, that is exactly what is needed to make diversification a reality for Russia.
The key objective for Rosnano and the Russian Venture Company is to build a knowledge-based economy. The goals of these two companies are complementary: Rosnano invests in domestic innovation and the Russian Venture Company finances Russian technology venture funds, while they both encourage global investors to be become active on the Russian technology market. While such a goal is worthwhile for the long term, it is too ambitious in the current economic environment.
The priority of U.S. and European venture capital investors now is to conserve cash in their funds and portfolio companies. Yet investee companies of venture investors continue to seek international opportunities. Multinationals are investing close to home, as evidenced by Intel's $7 billion commitment to upgrade manufacturing facilities in Arizona, Oregon and New Mexico for its next generation, high-performance 32-nanometer chip, which is code-named "Westmere." They and others remain open for collaborative partnerships with researchers and developers from around the world.
Hewlett-Packard researchers, for example, are building what they call "a central nervous system for the Earth," with nanosensors and IT technologies to gather, transmit and monitor data on a global scale from networks of intelligent nanofabrics that absorb and recover from attacks. Hewlett-Packard seeks partners to share in the development costs, and this need is an opportunity where Rosnano can carve out its niche by financing a domestic supplier of nanotech components without requiring Hewlett-Packard or others to invest in Russia.
IBM announced the "Smart Planet" initiative to develop intelligent networks for infrastructure and smart roads and buildings. Like Hewlett-Packard, Smart Planet requires hundreds of partners with nanotechnology components and systems for execution. But unlike Hewlett-Packard, IBM required a cadre of local partners to "localize" solutions for their country and ensure a common platform so the system talks clearly to all users.
The Russian Venture Company can speed up Russia's integration into the global supply chain, too. The action needed from the Russian Venture Company is to link their funds and investee companies with technology SMEs that don't know how to enter Russia or where to start. Helping foreign SMEs access Russia creates opportunities for new supply chain transactions and SME formation.
Some groups have a specific technology focus like Research in Motion's Blackberry fund, Silicon Valley venture capital Kleiner Perkins with their iPhone fund and Google with the Android Developer Challenge. Each invests in and seeks new applications from SME developers that increase the usability, functionality and appeal of smart phones. In just 15 months, these three groups have received more than 5,000 business plans and invested more than $50 million into 30 SMEs and developers.
Such results demonstrate the value potential that a technology platform has to catalyze new innovation, ideas and thinking to make money. They generate new SME creation and more entrepreneurship. In 2007, for example, Stanford associate professor of music Ge Wang didn't own an iPhone. Today, he is an entrepreneur and co-founder of Smule, whose Ocarina application, which costs less than $1, is one of the best-selling iPhone applications in the United States and in 10 other countries.
"The product made hundreds of thousands of dollars in its first month," Wang said. "You don't need to be a big development company [to sell in the iPhone space]. It doesn't take a lot of time to try ideas on this thing. Ocarina was built in just two weeks." Smule currently employs seven full-time and seven part-time employees, up from zero when the company did not exist two years ago.
Working with Blackberry, iPhone and Google catalyzes developer and scientific attention to new business creation in Russia, and this advances the Kremlin's chief modernization goal of economic diversification. It gets the Russian Venture Company, its investee funds and their companies to collaborate with these investors and demonstrate the potential by working with Russian developers and attract international investment funds into Russia.
A golden rule of innovation is that the most powerful ideas frequently come from the most unexpected places. Working collaboratively from different parts of the world as integral parts of a global supply chain reduces risk and investment for all -- a win for everybody in the current economic environment.
Venture Capitalist Tom Nastas, founder of Innovative Ventures Inc., is also member of the Board of Directors for Sotsgorbank and the Independent Directors Association of Moscow. He is also Professor of Marketing, American Business & Economics College in Moscow.