Russia boosting innovation

Article by: THE ECONOMIST
Updated: July 16, 2012 - 5:46 PM

In the home of the five-year plan, a high-tech incubator is rapidly rising. But will it work?

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Workers are already building pieces of what Russia plans to become a place where businesses can take root and grow.

Photo: James Hill, New York Times

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The guards at the gate kept us waiting for half an hour. The taxi driver didn't have the right papers, apparently.

"We know that Russia's bureaucracy is a big problem," the guide said. "That's part of what we want to solve."

Welcome to Skolkovo, Russia's bid to build a new Silicon Valley.

On the construction site things move faster. Dozens of workers are putting in walls and heating ducts. If things go according to plan, Skolkovo, a city near Moscow, will be one of the world's biggest high-tech centers in a few years. At nearly 1,000 acres, it is twice the size of London's Olympic Park. It will boast a research university with 1,800 students, 40 corporate research-and-development centers and a "Technopark" housing as many as 1,000 start-ups.

More important will be what doesn't meet the eye. Skolkovo will be a special economic zone, a bit like Shenzhen in China. Companies there will receive substantial tax breaks, and also will get special treatment when it comes to visas and imports.

The aim is for Skolkovo to become the basis for a vast ecosystem that spans all of Russia and brings together researchers, entrepreneurs and investors in five clusters: information technology, biomedical, energy-efficiency, space and nuclear technologies, all of which have deep roots in Russia. This new ecosystem, its champions hope, will help Russia modernize.

In other countries such ambitious, government-led schemes have usually flopped. But Skolkovo's backers remain optimistic. Dmitry Medvedev, then Russia's president, gave the green light in 2010. Since then the government has earmarked $3 billion over four years for the project, and will spend billions more indirectly, for instance, via tax breaks.

The planning of the construction is going well. Half a dozen architectural firms are designing and developing the city's districts. Nobody seriously doubts Skolkovo will rise in one form or another.

Conor Lenihan, former Irish innovation minister in charge of Skolkovo's corporate partnerships, praises the Russian government's decisiveness. "In a typical European democracy," he says, "it would have taken three to five years to get this far."

For an undisclosed sum, the Massachusetts Institute of Technology has agreed to set up the Skolkovo Institute of Science and Technology, or SkTech. In August, the first 21 Russian students will start taking courses, spending their first year studying abroad.

Skolkovo has already lured some big names. Attracted by the perks and anxious not to upset the Russian government, their largest customer in the country, some 20 companies have signed up, including Cisco, IBM and SAP. Each will open a sizable R&D lab and cooperate with SkTech.

It will be harder, however, to create the rest of the ecosystem. Silicon Valley has a critical mass of entrepreneurs and venture capitalists and, more important, a culture of turning crazy ideas into profitable businesses. Such a culture takes decades to evolve. The Skolkovo Foundation, which runs the project, wants to jump-start it with cash, some $1 billion over five years.

The aim is to build a long pipeline of start-ups to reside in Skolkovo. The Skolkovo Foundation will provide them with some cash and hope venture capitalists invest.

Firms apply for "resident status" and are reviewed. If they pass muster, they are eligible for the city's tax breaks and other preferences and can apply for grants, usually $150,000. If they want more money, they have to find a matching investment from a venture capitalist.

So far more than 500 firms have obtained resident status. More than 100 have received money from the Skolkovo Foundation, and about half of these attracted regular venture capital, mostly from Russian firms. Local capital is limited and foreign money is not pouring in, because Western investors deem Russia too risky.

A small version of Technopark, with 25 firms, is in place in part of the Skolkovo School of Management near the new city. Many firms use them only occasionally and do the real work elsewhere.

That may prove a lasting problem: Being a Skolkovo resident does not mean a firm has to base its operations in the city, even after it is built.

The project doesn't exist in a vacuum. Russia is a tough place to work. Fortunes have been made by grabbing a share of the country's mineral wealth -- but try to think of a Russian who has grown rich by inventing something and you'll probably think of someone like Sergey Brin of Google, who moved to America when he was 6.