Feb 17, 2011
In my last article, Globalized Clustering, I described the emergence of entrepreneurial hot-spots around the world, with special attention to the interconnections among them, effectively creating globalized clusters of innovation. This time, I would like to focus on a unique endeavor of the Russian government – the Skolkovo initiative, perhaps the most colossal entrepreneurial undertaking you’ve never heard of. Moscow is putting its weight behind this recent attempt at forging the world’s largest government-backed entrepreneurial hot-spot, built from scratch within a global context. While it is safe to assume that this will not result in a Silicon Valley look-alike, it is also apparent that this initiative is the most significant step that Russia has taken toward modernization and innovation to date. More importantly, this initiative signifies a sincere outreach to the global technological innovation community. The Skolkovo hot-spot, President Dmitry Medvedev’s brainchild, will become Russia’s globalized cluster near Moscow – building on local talent, wealth and favorable regulation, with global reach and scale.
Over the course of the past half year, there has been an impressive amount of activity at Skolkovo, as part of a comprehensive government modernization program. Skolkovo Foundation, a non-profit organization directed by Russian businessman and billionaire, Viktor Vekselberg, and supported by the Presidential Executive Office, was established “to create a special environment that will concentrate intellectual resources and encourage free creativity and scientific inquiry”.(1) The Russian Government has allocated $2.8B for this ambitious project, and has paved the way for the creation of a laissez-faire state within a state, in terms of tax policy and regulation. Compare that environment to California’s $26B budget deficit and its high tax rates, and it’s no wonder that Skolkovo is successfully attracting leading technology players.
In fact, leading global corporations have already committed to membership in Skolkovo Foundation(2): Microsoft, Google, Intel, Cisco, IBM and Boeing (yes, you read that right: Boeing, participating in a Russian government initiative) from the US; Siemens, Nokia, and Philips from Europe; and Tata from India. Leading Russian companies have also been invited, side-by-side: Russia’s oil giant Lukoil and state-owned Rosatom Corporation have also announced their cooperation. Global service providers, such as PricewaterhouseCoopers (which recently presented the Foundation at the Davos Economic Forum), are eager to get on board as well. Finally, MIT has announced an academic partnership with Skolkovo Foundation(3), and the MIT Sloan School of Management is already providing education to Russian MBAs attending the Moscow School of Management Skolkovo.(4)
Skolkovo’s critics claim that this initiative cannot match the success of such entrepreneurial hot-spots as Silicon Valley, Boston or Israel. Indeed, Skolkovo is not comparable to existing entrepreneurial hot-spots, which grew naturally in areas where the right resources were abundant, as described in my previous article. Further claims are that Skolkovo will never stack up to successful government technology support initiatives, such as the European Union’s Framework Program. Once again, Skolkovo is not comparable to other government support initiatives, since these tend to promote and enhance existing innovation, rather than to create new hubs of innovation from scratch. Finally, critics compare Skolkovo to previous unsuccessful Russian technology support initiatives. However, none of the previous Russian attempts have been coupled with this magnitude of government sponsorship – be it financial, regulatory, political, or in investment of public relations. More importantly, none have ever tapped into the global business community in this manner. Historically, comparing Russia to other countries has mostly proven irrelevant, and Skolkovo is no exception.
This is not to say that western experience has not proven applicable to Russian society. In fact, Russia has looked west and embraced foreign innovation and change before. As far back as the late 17th century, Peter the Great, heavily influenced by his foreign advisors, implemented sweeping reforms aimed at Russian modernization. In the late 1980s, Mikhail Gorbachev initiated Perestroika, a dramatic political and economic reform aimed at moving from the previous government-planned economy to a western-oriented market economy. Today, it is Russian businesspeople who are leading a new change, with Russian governmental support, successfully implementing foreign experience into the Russian market.
An example of one such business leader is Yuri Milner, CEO and Founding Partner of Mail.ru Group (née Digital Sky Technologies), and a member of the Presidential Commission for Modernization and Technological Development of the Russian Economy. Milner exemplifies the globalized entrepreneur, a modern Russian businessman who boasts an international résumé, including a theoretical physics degree from the Russian Academy of Sciences, a Wharton MBA, and work experience at the World Bank. After his return to Russia, Milner studied global Internet trends and successfully implemented his ideas within the Russian market, by establishing or acquiring several Internet companies, including Mail.ru (one of the largest web portals in Russia), Odnoklassniki (a popular social network), ICQ Russia (instant messenger), Vkontakte (the largest social network in Russian speaking countries), and Qiwi (online payments). By consolidating these assets, Milner led his holding company to IPO (in November, 2010), and currently owns Europe’s largest listed Internet company, currently valued at approximately $7B.
Throughout history, Russians have successfully executed extremely ambitious and complex projects in remarkably short time frames. This stems from the centralist government’s capacity to concentrate and mobilize tremendous forces under its command, and underlies Russia’s business culture as well. Russia boasts a rich history of scientific and technological achievement, and its academic leadership is the source of patriotic self-respect. Russia has historically been a world leader in space and in atomic energy, technologies that were darlings of Russian government support over several decades. Indeed, these fields are also currently defined by President Medvedev as two of the five focuses of the Skolkovo initiative, the other three being information technology, medicine, and energy efficiency, in line with current global trends in technology innovation.
It is safe to say that Skolkovo Foundation has already garnered the initial support required from government, academia and the global marketplace, and thus has successfully achieved its first milestone in becoming Russia’s globalized cluster. Skolkovo is well on track to become yet another remarkable project executed in a short time frame, and a new source of Russian pride. That being said, just as with any young entrepreneurial venture, numerous pitfalls lay ahead for the Skolkovo initiative, which still lacks essential pieces of a self-functioning innovation ecosystem.
One blatantly absent component of this entrepreneurial ecosystem is, well, its entrepreneurs. Prof. Fiona Murray, Associate Director of the MIT Entrepreneurship Center who also serves as MIT Sloan’s Faculty Director for Moscow School of Management Skolkovo, teaches us: “When science and technology exist in an economy, then large technology companies are typically its recipients, translating ideas into returns. However, entrepreneurs are necessary to speed innovation and increase the impact of investments in science and technology. Without them, the ecosystem may experience steady growth, but it will not see the green-field ventures that lead to drastic, exponential growth. To that extent, Skolkovo’s hope, and its expectation, is to attract entrepreneurs, not only established corporations”.
The Russian nation is world-renowned for its creativity and technological prowess. Where, then, is its innovative entrepreneurial drive? Where are its start-ups? Why must the government artificially create an entrepreneurial hot-spot, in lieu of a naturally-formed one? I turned to Marat Kapelyushnik, a Russian-speaking serial entrepreneur and General Manager of Astelion, a firm that provides consulting and business development services to entrepreneurs and investors. Drawing on his experience working with technology ventures in Europe, the US, Israel and Russia, and his firm’s current focus on Skolkovo, I was hoping he could provide an explanation of this absurdity. His contention is that “although there may be hundreds of valuable ideas, and plenty of Russian innovators who could perfectly act as future CTOs, there is no such mass of Russian entrepreneurs equipped with the necessary skill-set to convert these ideas and technologies into successful ventures to meet the standards of foreign or even domestic investors. Throughout the Soviet era, engineers were tasked with the creation of new ideas, yet there was never a need to justify the development of those ideas financially”. The result is a Russian society that does not foster entrepreneurial spirit. Failure is typically looked down upon, rather than acknowledged as an unsuccessful attempt to achieve something novel and grand.
Another lacking component that is essential in any successful globalized cluster is its entrepreneurial-oriented professional services industry, i.e. law firms, accounting firms, patent and intellectual property consulting firms, and business consultants. Russia’s historic isolation from the international business environment has led to the development of isolated standards in intellectual property rights, accounting practices, and corporate law. Even where Russia has officially subscribed to aligning its regulation with international standards, frequently the historic “law of the land” is what prevails in practice. Service providers may be well-versed in Russian regulations and processes, but are typically not as familiar with these international standards. Kapelyushnik notes that “Russian-speaking service providers, proficient with international business practices, are essential to guide emerging Russian technology ventures throughout their lifecycle. The previous deficit of such professionals, who are able to act as a bridge to the west, is now exacerbated by Skolkovo’s globalized context.”
Skolkovo is the new Perestroika, a ground-breaking government initiative with the potential of having tremendous socio-economic impact. The jury is still out regarding the initiative’s chances of success in becoming a prosperous hub of innovation and attracting the entrepreneurs and managers that Russia so desperately needs. Whether Skolkovo achieves its next milestone and provides a comprehensive support network for Russia’s innovators or not, one thing is certain – Russia will never be the same after the globalization and modernization that the Skolkovo initiative brings.
1. The Skolkovo Foundation official website: http://www.i-gorod.com/en
2. Membership terms are still being negotiated with founding members, though several have already committed to project investments over $1B each.