Skolkovo: Russia's Emerging Silicon ValleyPublished: January 26, 2011 in Knowledge@Wharton
"We intended for something better, but it turned out just as it always does."
This famous quip, coined by Russian politician Victor Chernomyrdin in 1993, has become a catchphrase in post-Soviet Russia. It perfectly summarizes the attitude of contemporary Russians toward innovation or any attempt to enact change in Russia. A sense of helplessness has dominated the collective consciousness in the face of pervasive corruption, bureaucracy and outdated Soviet mentalities rampant in the country.
Twenty years after its collapse, the lingering legacies of the Soviet Union continue to prevent Russia from re-emerging as the superpower it once was. Its latest initiative, Skolkovo, has the potential to be the solution the country has longed for since the days of perestroika. It is Russia's first real attempt to transition from the Industrial Age of the twentieth century to the Digital Age of the twenty-first. If Skolkovo can successfully achieve its objectives, it will position Russia once again among the technological and ideological leaders of the world.
Creating a New Russia
In all of Russia's tumultuous history, the last 100 years have seen perhaps the most influential political and social upheavals, which have had a dramatic effect on the Russian psyche. Communist leaders Vladimir Lenin and Joseph Stalin radically transformed a poor country with centuries of outdated agrarian traditions into one of the most modernized industrial nations in the world. The rapid industrialization catapulted the Soviet Union to the forefront of the global political economy, making it a superpower comparable to the United States. Yet the Soviet Union's demise was a result of its sustained path to industrialization and its underestimation of the vital importance of diversifying its base of technologies in a new information age -- one focused on computers and nanotechnology.
According to Sergey Medvedev, a professor at the Higher School of Economics in Moscow and no relation to Russia's current president, "The Soviet Union collapsed partly because the state could not transition to the Information Age. The USSR became complacent -- a victim of its own success. Bigger was no longer better. Russia stayed the modernization course at full speed ahead, while the rest of the world transitioned to new technology based on knowledge and to new organizational schemes based on networks."
Russia's current leadership understands the past failures and is taking the steps necessary to position Russia back at the forefront of the global political economy. Such power moves intend to expedite the country's revitalization, revealing true foresight and a commitment to the goal of advancing Russia into the Technological Age.
Recently, Russian leaders have made efforts to bolster the country's presence in the technology sector. In June 2010, Russian President Dmitry Medvedev made a special trip to California's Silicon Valley prior to attending the G8 and G20 summits. He met with representatives from Google, Apple, Cisco and Twitter, among other major tech companies. He hoped to entice them to invest resources and establish operations in Russia, specifically in Skolkovo, a small region just 12 miles west of Moscow where an innovative new business technology center is being developed. Because of Skolkovo's proximity to the heart of Russian power and enterprise, the new technology center is expected to get the governmental, financial, and entrepreneurial support necessary for its success.
Two major projects are already underway in Skolkovo as a result of collaborations between prominent business leaders and the government. Innograd -- literally meaning "innovation city" -- will be a cluster of numerous technological companies in one geographic location, referred to by the media as the "Silicon Valley of Russia." In addition, a second project, establishing a newly founded and privately funded business school called "Skolkovo-Moscow School of Management," is also underway; its campus just opened for the fall 2010 semester.
Innovation and Entrepreneurship in Post-Soviet Russia
According to Courtney Bain of the University of Glasgow, it should not be at all surprising that in the years immediately following the collapse of the Soviet Union, there was little to no support for innovation in Russia. For almost an entire century leading up to 1990, the country had not allowed entrepreneurs to participate in the economy. All private enterprise had been banned or brought under direct state ownership and control. In the late 1980s and early 1990s, however, the situation for entrepreneurs in Russia slowly and gradually began to improve.
Beginning with Gorbachev's perestroika reforms in 1987 and 1988, the state began to loosen its iron grip on small and medium-sized enterprises. Then, in 1992, under Russia's first popularly elected president, Boris Yeltsin, the new Russian government passed radical legislation in an effort to transition the former Soviet economy to a new free-market system in which innovation could reign. Another law, "On State Support for Small Business in the Russian Federation," was passed in 1995 to further stimulate and regulate the newly created small-business sector of the economy. This law planted the seeds for Skolkovo, calling for government support of the information sphere, such as "assistance with modern equipment and technologies including the creation of a network of business technoparks and business incubators." Despite all of these efforts by the new Russian government, however, the laws proved virtually powerless in light of the pervasive corruption and thuggery in the early Russian Federation.
Following the financial crisis of 1998, it seemed that all of Yeltsin's efforts would be for naught. The small business sector had once again all but disappeared. When Vladimir Putin came into power upon Yeltsin's resignation in 1999, he continued many of his predecessor's policies. In his introductory speech, Putin said, "it needs to be recognized that without the development of [the small business] sector in the country, there will neither be a steady improvement in economic growth, nor an improvement in people's lives. The more people are involved in small business, the more stable and healthy is the Russian economy."
The difference between Putin and Yeltsin ultimately came down to the fact that Putin ruled Russia with an iron fist and brought more control back into the hands of the federal government. According to Bain, this fact, combined with the economic recovery that followed the financial crisis in 1998, has led to steady growth in the number of small- and medium-sized enterprises every year since 1999. Between 1999 and 2004, the Russian economy grew 48%, the value of the ruble completely recovered, wages increased and unemployment declined to 6.8%. Despite all the economic progress Russia has made in the last decade, however, entrepreneurs still face some of the worst bureaucracy, red tape and most expensive capital anywhere in the world. The Russian administration still has much to do to bring the level of innovation and ease of entrepreneurship on par with its counterparts in the West.
The Silicon Valley of Russia: Innograd
The global financial crisis of the past two years has exposed Russia's one-dimensional economy -- one focused mainly on oil, gas and metallurgy. But unlike previous Communist leaders Kruschev and Brezhnev who resisted change, current democratic decision-makers Medvedev and Putin have realized that Russia's main dependence on limited natural resources is headed toward a dead end. The prevalence of technological innovations and a heightened awareness of "green" initiatives around the world have recently weakened the demand for oil and gas. One of Innograd's major goals is to foster an environment of technological innovation and thought leadership in Russia. The Innograd technology center will focus on research in five priority spheres: energy, information technology, communication, biomedical research and nuclear technology.
Shiv Vikram Khemka, vice chairman of SUN Group and co-founder of the Skolkovo School of Management, believes Innograd will revolutionize the landscape of the Russian economy through diversification and development of essential business sectors in the twenty-first century. "Skolkovo has the potential to bridge the gap between Russia and the rest of the modernized world," he stated, "and could even serve as the model for other developing countries like China and my home country, India."
Why should international companies risk entering this new market? First of all, establishing operations in Russia now gives major technology companies a stronghold in one of the key emerging BRIC countries. These companies can access an educated work force that is also cheaper to employ than those in the U.S. and other fully modernized nations. For example, computer programmers and IT professionals in Russia are paid on average about 55% less than their U.S. counterparts. In combination, these are financially enticing incentives for U.S. companies to build business operations in Skolkovo.
In addition, nearly 43% of Russians have university degrees that have equipped them to pursue advanced research programs and highly skilled jobs. More importantly, of all university graduates, 27% graduate with a specialization in science or technology disciplines, compared to only 16% in the U.S. With such a strong emphasis on science and technology, Innograd should be able to find an ample supply of qualified professionals eager to advance their careers. Furthermore, Innograd can incentivize qualified Russian professionals to remain in Russia to work on technological advances, as opposed to leaving the country for better opportunities and greater financial rewards. By reducing and ultimately eliminating the current "brain drain," Russia can further position itself as an innovative leader in the technology sector.
Finally, international technology companies will be able to see that the Russian government is actively vying for their business and will support their new ventures. Companies will be given access to tax breaks, incentives and fewer regulations. Russia already boasts a corporate tax rate of 20% and an individual tax rate of 13% -- much lower than the 35%-40% rates found in the U.S. Presumably, these political and financial incentives will motivate companies to establish operations in Russia.
If successful, the Skolkovo project will re-establish Russia as a thought and business leader in the global economy. But the question remains whether foreign support will be enough. To attract innovative companies and venture capitalists, basic systematic improvements must be made in the government. For example, unless Russia reduces the political red tape and addresses the day-to-day corporate corruption that is commonplace, U.S. and other foreign businesses will more than likely be deterred from entering.
There are other reasons that the idea of Innograd may be limited to just that -- an idea that will never become a reality. Opponents of the Skolkovo project fear not only that it will fail, but also that the funding will be misused, stolen, or "suspiciously" spent. As Professor Medvedev noted, "Everything in Russia is a scheme; everything eventually turns into massive, legalized theft." Although he believes the overall concept of innovation and nanotechnology is necessary for Russia's development, he doubts it can be implemented successfully under Russia's current political and economic system.
The unknowns of Russia's infrastructure may prove to be too great a risk for U.S. investors to supply the kind of capital necessary for an international tech center like Innograd to succeed, observers say. Proponents will be hard-pressed to turn Innograd into a "Silicon Valley" without smart governance and legal reforms. Skolkovo's main hurdle will be convincing businesses to invest in building their intellectual capital and operations in Russia while not merely outsourcing cheap labor to Russia's blue-collar class.
Innograd vs. Silicon Valley
President Medvedev has said that Innograd will try to replicate Silicon Valley's success while paving its own way to completion. Therefore, it is important to analyze some of the factors that led to Silicon Valley's success and to determine whether Russia will be able to cultivate the right environment for Innograd to be successful.
Silicon Valley became the main technology center of the U.S. due primarily to funding from the U.S. Department of Defense in combination with an influx of highly trained graduates from the engineering departments of reputable universities in the area, such as Stanford and U.C. Berkeley. Interaction between Silicon Valley and these graduates fostered a culture conducive to technological progress. President Medvedev's goal is to create a similar environment in Skolkovo, promoting the development of technology in Innograd and fostering diversification of Russian business with the proposed MBA program. Innograd has underpinnings very similar to those of early Silicon Valley, with a high level of government support and several Moscow universities in close proximity to the technology center.
For Innograd to succeed, Russia will need motivated entrepreneurs trained in emerging markets, with specific knowledge and skills pertaining to the Russian landscape. The Skolkovo-Moscow School of Management is intended to provide precisely such training. For graduates lacking interest in the volatile oil and gas sectors, Innograd is looking to attract the leaders who wish to remain in Russia to pioneer new entrepreneurial technology-based businesses. Therefore, the relationship between Innograd and the Skolkovo-Moscow School of Management will mirror, in theory, the existing relationship between Silicon Valley and its local universities.
However, there is a key difference between traditional business schools like Stanford and the Skolkovo-Moscow School of Management. The intent of the Skolkovo MBA program was never to "reinvent the wheel" or imitate the West by cloning the model of well-established graduate business programs such as Wharton, Harvard and Stanford. Rather, the program is intended to design a Russian-branded institution from the ground up. The result is a program in which students spend a total of only four months on campus in Skolkovo. The remainder of the 16-month program is spent working off campus on consulting projects in both the private and public sectors in India, China and the U.S.
Interestingly enough, the concept for the Skolkovo-Moscow School of Management predates the concept for Skolkovo's Innograd by about eight years. The idea for the MBA program originated when Shiv Khemka's family in India and Rajat Gupta, former managing director at McKinsey, recognized the need for talented local managers to run its Russian companies. Nand Khemka, Shiv's father and chairman of SUN Group, approached Herman Gref, Russia's minister for economic development and trade, in 2001 to discuss the possibility of starting a Russian business school. Eventually, eight like-minded leaders of prominent Russian companies and nine well-known oligarchs -- including Alexander Abramov, Roman Abramovich and Ruben Vardanian -- partnered with the Khemka family and agreed to fund the venture privately. The founders remain actively involved in the leadership of the Skolkovo MBA program.
As optimistic and exciting as the project sounds, the founders realize that developing a previously non-existent business school in Russia is a risky endeavor. They have already spent over half a billion U.S. dollars on the project. The campus alone cost over US$250 million to build. Designed to resemble a painting by the famous modernist Russian painter Kazimir Malevich, it is purportedly visible from outer space. However, if the MBA program is unable to establish a decent reputation and garner sufficient external support, it is likely to end up as another expensive scrap heap like the countless other fully funded but abandoned Soviet projects. Another unanswered question is whether Skolkovo's graduates will be able to compete with the graduates of the already-established and well-respected MBA programs around the world. If not, the school will have trouble attracting potential students in the future. Nonetheless, if successful, the Skolkovo model could become the new standard for graduate business education, making more traditional models such as Harvard and Stanford seem irrelevant and perhaps even obsolete.
The distinction between Skolkovo's Innograd and its business school is profoundly important because, although they are different organizations under different management bodies with different sources of funding, both initiatives share the same name and a common purpose. A symbiotic relationship will likely evolve between the town and the school, further developing the entrepreneurial and technological sectors that the Russian economy currently lacks. President Medvedev's warm reception abroad this summer seems to be a strong indicator that other countries are beginning to recognize the importance of investing money, time and resources in Russia. Such efforts by Skolkovo's leadership are clearly intended to create something better for the country. And this time it seems quite plausible that it will not "turn out just as it always does."
This article was written by Robert Thornock and Wesley Whitaker, members of the Lauder Class of 2012.