POLICY PAPER
Putting Russia’s modernizationin theoretical perspective
By Pr. Dr. Peter W. Schulze,Professor h.c. of Political Sciences, International Relations and RussianStudies at Georg August University of Goettingen
February 2012
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Introduction
All economically successful nations have, at one moment of their development, pursued strongindustrial and technology policies aimed at gaining and securing a competitive advantage in theglobal economy. The objective of such policies is of course to maintain or even improve a currentstandard of living but also, through the support to a country’s industrial and R&D sectors, tofoster the emergence of innovative commercial products that will secure the country’scompetitive advantage. This process, which often occurs over a long period of time andcorresponds with an effort to adapt to new competitive and technological conditions is what isoften referred to with the word “modernization”.The concept of modernization therefore doesn’t only apply to industrial, structural and socialadaptation processes in developed nations trying to “renew” their economies, but can also beused in relation to the efforts of developing countries to catch up with their competitors in thedeveloped nations. At the heart of all modernization efforts lies the need to renew thefundamental technological and industrial structures of a country.As a result, modernization strategies don’t differ dramatically from each other, even thoughvariations are possible, and they can be applied in most countries around the world. This is alsotrue for Russia, where modernization initiatives are already being implemented in a number ofeconomic sectors.The following modernization efforts appear particularly important for Russia:
Acquiring foreign technological know-how
The acquisition of technological know-how and the recruitment of highly-skilled employees canbe achieved with the purchase of foreign technology companies or through foreign directinvestments in the country’s R&D sector – which often benefits from strong state-supportedmeasures. Tax incentives for direct investments and joint ventures with international partnerscan play an important role here, although foreign investors tend to be very cautious with regardto potential technology transfers.In Russia, the country’s 24 special economic zones have played a key role in attracting foreigninvestors, promoting the diversification of the economy and enhancing the country’s innovationpotential. The Russian state has invested $1.5 billion in special economic zones since theircreation in 2006, and private investors have contributed another $8.3 billion. The specialeconomic zones cover crucial sectors for Russia’s economic modernization such as industrial tools,ship building and logistics. Private investors there benefit from tax rebates, public subsidies andless bureaucratic procedures.
Promoting import substitution
Despite the gradual disappearance of blatant protectionism, public authorities in most countriescontinue to use tools allowing them to purse, albeit indirectly, a modern form of importsubstitution policy. These include, for instance, agreements with foreign companies according towhich imported high-end products consist - at least to a certain extent - of parts manufacturedlocally (so-called “local content clauses”). Such indirect protectionist measures are useful forsupporting the development of innovative production capacities.
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A particularly appropriate example of such a strategy in Russia is of course the car industry, inwhich the so-called “decree 166” creates incentives for foreign car makers to expand theirproduction capacities in Russia. On the basis of “decree 166 agreements”, which will be graduallyphased out over the next seven years as a consequence of Russia’s membership in the WTO,foreign car manufacturers are granted customs and tax rebates on the condition that they committo assembling at least 300,000 new vehicles per year in Russia and that the proportion of vehicleparts manufactured locally rises to 60 percent within five years. In light of the rapid developmentof Russia’s car market, numerous leading car manufacturers such as VW and Daimler have enteredinto such agreements with Russian producers and the Russian authorities. This allows the Russianeconomy as a whole to benefit from the huge investments being made in Russia’s automotivesector, and in particular to actively foster the modernization of the car parts supplier sector as awhole.However, the potential negative impact of such a policy on a country’s trade relations with itseconomic partners should not be ignored, evident in Russia’s protection of its local car industryproving to be a significant obstacle to its WTO accession. This is why the Russian governmentconsistently insisted throughout WTO negotiations on the provisional nature of the measure –which according to the terms of Russia’s recently sealed WTO membership will have to beabolished by 2019.
Supporting local research and innovation
Another crucial pre-condition for a successful modernization policy is the support of localresearch and innovation activities, with a focus on the development of tangible commercialinnovations. This implies providing support to local research institutions and universities in orderto train a big enough pool of innovative scientists and entrepreneurs to guarantee thesustainability of a country’s modernization efforts.Another very important task in this regard is the ongoing integration of a country’s scientificinstitutions into global scientific networks and opening them to the world’s leading scientificactors.The Russian government has taken a number of steps aimed not only at improving Russian scienceand research, but also at promoting the local development of innovative commercial products.The creation of the Skolkovo innovation center was a flagship initiative in this respect, whereRussian start-ups benefit from a particularly favorable administrative and regulatory frameworkas well as from the experience of leading global companies.Russian authorities have also taken several initiatives to open Russian science to internationalresearch through the“mega grants”allocated by President Medvedev to a number of foreign andexpatriate scientists in May 2011. These mega grants finance the conduct of internationalresearch projects in Russia with a view to benefiting to the development of Russian research andscience as a whole. Another example is the very intense cooperation between Russian researchinstitutions and the German Environment Ministry in the area of biomass research. Thiscooperation has led to the establishment of biotech research clusters in Nizhny – Novgorod,Kaluga and Kazan.
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Putting Russia's Modernization in Theoretical Perspective
A policy paper via www.ModernRussia.com - The Russian economy’s modernization - a theoretical analysis by Dr. Peter W. Schulze.
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