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Fig. 8. Dynamics of the Proportion of Investment at Venture * Stages in the Volume of Investment at Venture and Expansion Stages It is common knowledge that it is early stages when the role of the state (and development institutions) with regard to support of innovation is critical, as at these stages private initiative is missing at most. But the Russian system of public development institutions appears insufficiently mature as far as the said stages are concerned.

On the one hand, Russias development institutions do play the greatest role at venture stages. Thus, we estimated that in 2010 alone, their and their daughter funds direct contribution to the aggregate volume of investment in companies at venture stages accounted for 85% (RAVI estimates it at a level of 75%), and another 45% - in the total volume of investment in companies at expansion stage (Fig. 9). Let us note the critical role played by the Fund for Assistance to Development at the pre-seed stage.

On the other hand, the main increase in Russian development institutions activity in 2010, both investment-wise and in terms of the number of supported projects, was associated with later-stage investment. While comparing the magnitude of public development institutions operations in terms of different stages of the innovation cycle, an insufficient broadness of support (in terms of the number of projects) at venture stages in general (Fig. 10) and with regard to seed investment in particular (despite expansion of the RVCs Seed Investment Fund operations) is particularly noticeable. This substantially constraints possibilities for private investment to embrace later-stage projects and blocs the rise of a steady flow of innovation projects.

and expansion stages As % ofinvestment at venture RUSSIAN ECONOMY IN trends and outlooks Expansion stage Early stage Seed and initial stages 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share in the number of projects Share in the volume of investment * Assessments by RAVI are used as basic values with regard to aggregate volumes of direct and venture investment in Russia.

** The Seed Investment fund, venture funds founded with RVCs participation, regional venture funds, ROSNANO.

Source: estimates by the Interdepartmental analytical center with the use of RAVIs estimates of aggregate volumes of direct and venture investment in Russia.

Fig. 9. Assessment of Contribution* of Public Financial Development Institutions (and Funds Created with their Participation)** in Russian Market of Venture and Direct Investment in 600 500 400 300 200 100 0 Pre-seed Seed financing Investment at Investment at Investment at financing seed stage early stage development stage Number of new projects Total volume of financing Source: estimates by the Interdepartmental analytical center Fig. 10. Estimated Correlation between the Scale of Public Development Institutions Operations on Support of Innovation Projects at Different Stages An insufficient project flow at the pre-seed and seed stages appears a critical challenge to the task of ensuring a broad general economic effect from the development institutions operation. Let us note the limited nature of grant-based support arrangements in the first Total volume of financing Number of new projects Section Institutional Issues place (this modus operandi is noted only for the Fund for Assistance to Innovation and Sklokovo Foundation).

In principle, the state-sponsored grant-based support of projects at the pre-seed stage is unfolding in Russia, but its magnitude has thus far been far smaller than in the US: the grantbased support to GDP ratio displayed by the Fund for Assistance to Development of Small Forms of Enterprises in the Scientific-Technical Sphere is nearly twice as little as the respective figure of its US vis--vis, the Small Business Innovative Research (Fig. 11).

0,0,0,0,0,0,0,0,0,2007 2008 2009 Russia, the Fund for Assistance to Development of Small Forms of Enterprises in the Scientific-Technical Sphere USA, Small Business Innovation Research Source: estimates by the Interdepartmental analytical center on the basis of public information about operation of the Fund for Assistance to Development of Small Forms of Enterprises in the Scientific-Technical Sphere (Russia) and about implementation of SBIR (USA) Fig. 11. Level of State Support of projects at the Pre-seed Stage But the challenge does not lie solely in the above: it is imperative to pay attention to a fairly low size of individual grants the Fund in question is authorized to award (even after the cap was raised up to Rb 1mn) vis--vis other nations practice. Plus, while using such grants, there are stringent restrictions with regard to the volume of spending on equipment (which objectively is explained by the fact that the Funds operation is financed out of the state budget in the frame of the R&D expenditure). This constraints possibilities for effective implementation of the pre-seed stage across a string of cash-intensive technological directions.

We believe that a limited demonstration effect in the innovation sphere from Russian development institutions operations appears to a significant degree associated with external institutional constraints, as well as peculiarities of the authorities expectation overhang. So far there have been substantial institutional barriers in place to implementation of the venture model of innovation development basing on a high activity on creation of new innovation businesses and a rapid expansion of successful companies.

First, the inflow of new entrepreneurs is limited, due to an insufficiently conducive entrepreneurial environment and negative, rather than positive, public perception of entrepreneurship: more specifically, a recent monitoring of entrepreneurship1 evidences that in 2010 only 4.3% of Russian residents were going to start their own business in 3 years to come, but, Verkhovskaya.O., Doronina M. National report Global monitoring of entrepreneurship. Russia. 2010. High School of Management of the St. Petersburg State University, RUSSIAN ECONOMY IN trends and outlooks given that entrepreneurs accounted for a. one-third of them, the prospective inflow of entrepreneurs makes up a meager 2.6% (one of the lowest figures vis--vis other countries). The same research exposed such fundamental challenges to expansion of entrepreneurship in Russia (vs. other nations) as a weak cultural background, nascent competition, and a low level of availability of venture capital.

Second, the national policy on support of small-sized business has thus far been to a greater degree oriented towards its social mission, that is, a mechanism to generate new job opportunities and mitigate social problems, rather than a major driver of economic development and emergence of new sectors. There emerged a significant tax lacuna for small businesses, due to which (as well as because of risks of increase of the administrative burden and a limited array of instruments of support tailored for small businesses) their motivations to transition to (over time) the category of medium-sized ones prove substantially arrested.

Third, the pace of the process of formation of a civilized market for mergers and takeovers has been very slow, which can be ascribed primarily to problems with protection of property rights, including intellectual ones, and risks associated with raiders operations. Because of this, on the one hand, owners motivations to capitalize their companies are limited, while venture investors have problems with an efficient walkaway from corporate capital, on the other.

Fourth, there exist external constraints to a cardinal increase of the number of projects supported at the pre-seed and seed stages. There of course exists a potential positive short-range effect from measures on development of organizational infrastructure for formation of new innovation projects (e.g. a model with venture partners for search of projects and assistance in preparing high-quality business offers, which is implemented by the Seed Investment Fund).

But we believe that the future will see an increasing exhaustion of scientific-technological capacity across a number of demanded by business thematic directions and an adverse impact of the insufficient effectiveness of instruments of assistance to commercialization of R&D outputs.

The governments underestimation of external constraints and its excessive expectations, in our view, lead to a certain deformation of motivations behind, and assessment of, the development institutions performance.

The first peculiarity in this regard is the strive to demonstrate to a broad array of stakeholders notable successes in the innovation sphere already in the short run, at the expense of the development institutions operation.

At the development institutions level, this results in stronger motivations to demonstration of their outputs, implementation of milestone, worth-bragging-about projects. That the development institutions have received sizeable resources is an additional factor fuelling the anticipation of significant and understandable to a broad audience deliverables. Conceptual opponents to the development institutions accentuate an insufficient efficiency of their contribution to economic development, while individual groups of champions of the governments proactive role in encouragement of innovation criticize them for a slow pace of spending.

An inseparable and fundamental component of development institutions operation is securing a demonstration effect for private businesses, diffusion of best practices, improvement of regulation, the environment for innovation and, ultimately, a gradual overcoming of market failures. That said, principles of assessment of the development institutions performance Section Institutional Issues appear to a far greater degree oriented toward their direct performance metrics, with the emphasis on employing formal indicators which characterize the use of resources.

Due to their profile, development institutions respond to expectations of the public administration system and various interest groups by boosting the scale of their projects, their uniqueness, spending, and by launching new initiatives.

Second, strive for ensuring dynamic structural shifts, scientific and technological breakthroughs through the development institutions.

We believe this sometimes results in development institutions operation in certain cases beginning to drift away from general market trends and investors preferences. This problem is further exacerbated by the view that capitalization of the development institution and expansion of their operational scale can help promptly compensate for drawbacks of the investment climate. Having been oriented toward support of huge projects, development institutions become prone to a strong political pressure, which gives rise to preconditions of their following the agent of - the government model, rather than the development institution one.

Even with locally efficient operations and successful direct project outputs, such an approach arrests possibilities to attract private investment in development institutions operation, fuels their hunger for additional public resources and encourages their shift from the PPP model to a public-quasipublic partnership one, concentration of the state banks and development institutions resources on implementation of individual projects.

Third, the desire to increase direct return from their operation, no readiness for risk-taking (costs- wise), strive for localization of all the effects in the frame of the national economy.

The problem of bolstering the development institutions efficiency is often viewed from the perspective of the need for their concentration solely on provision of financial support to projects implementation, without pursuing any organizational, educational and methodological goals. With very stringent criteria of assessment of success of projects they support and direct effectiveness of the development institutions costs there arise extra motivations to shifting main risks with regard to failures in innovation projects implementation onto recipients of the support.

Focusing on early stages, development institutions appear objectively limited in delivering immediate results, as main positive effects from their operation become visible at later stages.

In this regard more motives emerge to extend the development institutions resources at the later stages which are capable to demonstrate the said results.

Despite the above problems with improvement of the development institutions system (which to a significant extent can be ascribed to costs of its rapid growth), basically, it can be ascertained that there has been made a substantial progress in the area concerned. More specifically, development institutions secured the following positive qualitative effects:

- demonstration to business of possible prospects with regard to obtaining support at different stages of development;

- cementing trust in development institutions on the part of the business community and the new, medium-sized business in the first place;

- working out various new, complex patterns of support of innovation and investment activity; laying ground for diffusion of respective qualifications and skills;

- design and promotion of proposals on improvement of market regulation and investment climate;

RUSSIAN ECONOMY IN trends and outlooks - identification of policy bottlenecks and critical challenges in the area of innovation development; a substantial public administration systems progress in appreciation of tasks and instruments of innovation policy.

In conclusion, let us single out the following possible avenues of improvement of the Russian system of development institutions:

1. It is imperative to expand the scope of their support of early-stage innovation, primarily at the pre-seed and seed stages. For a steady flow of projects to rise it is necessary to substantially broaden the array of the supported projects: up to several thousand at the level of the Fund for Assistance to Development, and up to several hundred at the level of the Seed Investment Fund.

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