The same week when Russia improved its positions in the 2014 Global Innovation Index, a new package of international sanctions also arrived, creating uncertainty about the future of innovation in the Russian economy. To what extent will Russia’s innovation potential be affected by sanctions and the threat of global isolation?

The 2013 Innoprom International Industrial Trade Fair in Yekaterinburg, Russia. Photo: RIA Novosti

According to the latest version of the annual Global Innovation Index (GII), developed jointly by the Johnson Graduate School of Management at Cornell University, the INSEAD Business School and the World Intellectual Property Organization (WIPO), Russia now ranks as one of the world’s Top 50 most innovative countries. More significantly, Russia continues to advance in the rankings, moving up from 62nd to 49th position in the rankings over the past year.

Unfortunately, the same week the 2014 Global Innovation Index arrived, a new package of international sanctions also arrived, creating uncertainty about the future of innovation in the Russian economy. That leaves one basic question for Russia’s innovation agenda: To what extent will Russia’s innovation potential be affected by sanctions and the threat of global isolation?

To answer this question, it’s useful to examine other attempts at comparing the innovation capability of different countries, including Russia. For example, the latest Bloomberg innovation survey ranks Russia 18th overall in the world. What is most interesting in such rankings is to dig into the peculiarities of the metrics to learn about a country’s specific record in certain fields.

Making sense of the numbers comprising the Global Innovation Index

The logic behind the methodology can be effective in describing the situation and stimulating the future decision-making process for business or macroeconomic policy. The Global Innovation Index is indeed a thorough piece of a research that takes into account 81 different metrics in an attempt to produce a comprehensive and multifaceted view of the issue.

Beginning with the country’s overall record, Russia lags behind Thailand, which ranks 48th, while outpacing Greece, which ranks 50th overall. For a country that launched the first space satellite, surely Russia can do better than this.

Given that Russia is ranked 40th in the world by GDP per capita, it is not living up to its true innovation capability. Two of its peers (as measured by GDP per capita) – Chile and Malaysia – are in comparably better positions  (46th and 33rd, respectively).

On the other hand, Russia ranks 2nd among the BRICS countries, behind China (29th), but well ahead of South Africa (53rd), Brazil (61st) or India (76th). Overall, on the chart showing the statistical relationship between innovation and GDP per capita, Russia is not a statistical outlier: It ranks 49th in innovation and 40th in GDP per capita. 

The GII divides the measurement of innovation into “input” and “output,” meaning that an economy is considered “efficient in innovation” if the score for the latter is higher than for the former. Russia has an efficiency ratio of 0.8, showing some “underperformance” and, sadly, this is not much of a surprise.

A lot has been said in the past decade about Russia’s failure to convert its impressive institutional base of education and research into world-class outputs. Interestingly the GII has recorded a visible improvement in efficiency since 2013. Currently, the country holds the 49th position globally in efficiency, while a year ago it was 104th. Basically, this means that, while still underperforming, Russia has leapfrogged into “satisfactory” from outright “bad”.

What’s holding back Russia’s innovation capacity?

There seems to be a significant degree of consensus within the country and even abroad about what could improve Russia’s innovation potential. It has one of the world’s highest tertiary education enrollments (#15 in the world) with a high proportion of students going into science and engineering (#14), combined with a large workforce of researchers (#17 in “knowledge intensive employment”) producing a significant number of domestic patents and utility model applications (#7 and #8, respectively, when related to GDP).

But what hampers Russia’s innovation odds? One of the factors affecting innovation is the quality and profile of the nation’s institutions. While the scores for “political environment” can be considered to have a built-in bias, the low standing on the quality of regulatory environment (98th position globally) seems to be based on what’s generally found within the country.

Russia is also weak in market experience (#111 globally with special weakness in “credit”) and innovation links (#126), a metric that primarily refers to “university-industry research collaboration” and “state of cluster development.”

Technologically, Russia performs decently in the “outputs” (#34 in the world) but lags behind in producing “creative outputs” (#72), a metric that is measured by such characteristics as “intangible assets” (#114) and “creative goods and services” (#70). At the same time, Russia shows a positive record in “online creativity” (#38).

In addition, there are some discrepancies between the outside view of Russia’s innovations and self-perceptions within Russia. While some issues (like collaboration between universities and business) were recognized within Russia and targeted through policy steps, other institutional weaknesses – like low availability of credit – are not part of the general discussion of the issue domestically.

What role should the state be playing in developing innovation?

Photo: Skolkovo Community

The role of the government in developing innovation is another question that the Global Innovation Index addresses. To what extent should the state be engaged in dealing with innovation within Russia? The authors of the GII methodology can answer this question easily enough: “Probably the state is doing too much.”

Generally, the character of the GII metrics implies the classic vision of “private enterprise, driven by market forces,” even though the authors do take into account specific cases of state guidance of the innovative transformations of certain economies, for example, in the United Arab Emirates.

Thus, any weaknesses in the performance of Russia when it comes to innovation might come not from the lack of “state” efforts, but rather, from the deficiencies in private enterprise and the institutions designed to support it.

So, does extensive state control (which usually comes hand-in-hand with protectionism) work for innovation? The Global Innovation Index is ambivalent in its answer. Some of the countries that are commonly viewed as examples of coordinated state guidance over private initiative do traditionally score high on innovation – Singapore (#7), Republic of Korea (#16), China (#29), Malaysia (#33) or the UAE (#36). 

On the other hand, some other “classic” cases of protectionism and state regulation – like India (#76) and Argentina (#70) – are not so impressive. Yet, there is a pressing need for Russia to have the true answer for the question – as it is essential for the evaluation of the effect of the sanctions and formulating the appropriate policy to overcome their consequences.

Next steps for Russia’s innovation sector

An increasingly popular view within Russia holds that any sanctions that limit the presence of the international “majors” and thereby decrease the level of competition on the Russian market may turn out to be beneficial for Russia’s innovation capabilities. These sanctions would stimulate the development of local “substitute” technologies, leading to a shift in capital flows as investors pump their money into local companies. 

And the frequent accompaniment to this idea is that it will be the “state” – probably through state-run companies – which will constitute the market for innovation and technology. It is only the state sector that is wide and deep enough to prevent any unnecessary turbulence, the thinking goes. The idea of the “wastefulness” of market competition seems to be strongly internalized here. Why spend resources on the parallel development of essentially the same thing?

But can the example of the successful Asian economies, all of them with a strong government role, tell a different story about the role of competition? All of them – Japan in the 1960s, South Korea in the 1980s, China in the 1990s and Vietnam in the 2000s – were deliberately seeking participation in competitive global markets. They were exporting cars, consumer electronics or textiles and selecting the target countries on the basis of market size, not the ease of entrance.

In contrast, India, Argentina or Brazil adhered to the idea of focusing on the protected domestic markets in order to “nurture” the local industries. The policy did work in a few specific cases – like Embraer (a Brazilian aerospace conglomerate that produces commercial, military, executive and agricultural aircraft and provides aeronautical services) or Tata Motors (an Indian multinational automotive manufacturing company headquartered in Mumbai) – but not for the economy in general.   

In the current context of the big decisions that need to be taken on the issues of economic policy, Russia’s leaders should be careful with the temptation to view the thinning competition as blessing, and see the “state” as the effective substitute to the market. Such an approach will definitely not improve Russia’s standing in the ratings on innovation – in the absence of “market sophistication” Russia is unlikely to hold on to a Top 50 position. What is more important, real-world innovation capability may also suffer.

The time to enter the “open market” from under the protectionist umbrella always comes, sooner or later, and this move can turn out to be really disappointing for a “nurtured” company that did not have a chance to check the attractiveness of its innovations against the global competition.

In the challenging new international situation for Russian business, the state should avoid playing the role of a mega-buyer or mega-contractor. Instead, it should focus on creating effective competitive markets for innovation. Domestically, it requires stimulating the general economic effectiveness of any business operations. Innovation flourishes when it becomes part of everyday business, not an isolated stream of activity. It remains to be seen if external economic pressure can be the tool to achieve this.

With the projected ease of competition on the internal market every effort should be made to stimulate Russian innovators to “go out” and “think big” in regard to exports. Here they may need some “macro” support and encouragement, but this should not be at the expense of the market risks and challenges. It is through stubbornly competing where it pays, not where it is easy, that innovative economies have been built.