A big jump without a parachute

28.05.2013 — Analysis

In the summer of 2013 a program will emerge in the Sverdlovsk region to improve the competitiveness of industry. Officials hope to use this program to overcome the technological backwardness of the region's businesses and to increase the output of innovative products. But they won't find that to be an easy task. The columnist for RusBusinessNews has learned that in developed countries the cooperation of large and small businesses helps to make industry more efficient, but in Russia the oligarchs and the government are doing everything to prevent small-scale manufacturers from operating.

The Sverdlovsk region has set its sights on an ambitious goal: to expand industrial production 1.4 times by 2018 and increase labor productivity 1.3 times. Currently the technology used at local machine-building plants is about where it was between 1960 and 1980, and labor efficiency is one third lower than in developed countries. There are plans to use the targeted program "Developing Industry from 2014 to 2018 and Making it More Competitive" to breathe new life into the real sector of the economy. Officials believe that subsidizing technological modernization will help make companies more innovative and develop new sales markets.

A number of programs are already operating in the region, intended to develop the infrastructure for nanotechnology and innovation, make the Sverdlovsk region more attractive for investment, create highly productive workplaces, etc. Tens of billions of rubles have been budgeted to administer these programs, but the big question is whether such investments will prove effective.

A sociological survey conducted in 2013 by the Sverdlovsk Regional Union of Industrialists and Entrepreneurs revealed that a significant number of manufacturers (42%) believe the development of cooperative relations between companies should be a high priority of both government and business. However, the union notes that none of the programs listed above provide sufficient attention to business partnerships.

The majority of the industries of developed countries consist of large corporations whose operations are deeply entwined with thousands of small and medium-sized companies that supply components, conduct innovative research, and sell patents. Because there is a well-tuned system through which large and small businesses work together, the industrial titans derive great benefit from this cooperation by outsourcing many manufacturing processes.

But that's not how it is in Russia. First of all, there are very few small manufacturing firms. For example, more than half of the "little guys" registered in the Sverdlovsk region are either sales or intermediary firms, and only a few are geared toward working with major companies (each giant firm uses the services of an average of 5-7 small companies, as opposed to over 500 in Western Europe). Second, the "big boys" know very little about the capabilities of small businesses and don't trust them, afraid to risk unmet delivery deadlines and poor quality work. The "little guys" however, have their own complaints about red tape and late payment for orders from the big firms.

Experts say that there are also other factors hindering the cooperation of small and large businesses. For example, there is a lack of motivation and essential infrastructure for the development of small businesses. Those companies cast envious glances abroad, where banks not only provide cheap loans, but also write off part of the principal if the "little guy" develops successfully.

According to Leonid Gunkevich, the chairman of the board of the Sverdlovsk regional branch of the public organization Business Russia, the "big boys" don't really need these "little guys." Russian corporations are so accustomed to controlling their cash flows that they would never outsource orders to small, independent companies. This is one reason why small businesses make such an insignificant contribution to Russia's GDP.

The Small and Medium Business Development Committee of the Sverdlovsk Regional Union of Industrialists and Entrepreneurs has identified an odd pattern: the region's small-business sector grows each year both in the number of entities involved, as well as in terms of a few indicators of quality, (for example, investment in fixed assets), but for the last five years its share of the region's total revenues has remained unchanged, never exceeding 30%. The percentage of workers employed by a small business seems equally insignificant - amounting to only 25% of those contributing to the region's economy.

Alexander Makarov, the first vice president of the Urals Chamber of Commerce and Industry, believes that it is sometimes necessary to compromise the principles of the market and require large companies to offer contracts to small, independent businesses. Otherwise it will not be possible to quickly create a climate of cooperation and a businesslike environment. Something similar is already underway in the Novosibirsk region, where the governor collects promising new ideas developed by these "little guys" and lines up big companies that are able to bring them to fruition.

But it is fairly rare to find successful examples of state support for small business in the Russian regions - more common are regular attempts to squeeze as much money as possible from these "little guys." Mikhail Delyagin, who holds a PhD in economics, evaluated the government’s recent economic policy and concluded that there is declining interest in Russia in any businesses other than mining, financial transactions, trade, restaurants, and real estate.

It remains a mystery how authorities in the Sverdlovsk region are going to increase industrial competitiveness and the production of innovative products under such conditions. As Arkady Bryzgalin, the general director of the Taxes and Financial Law Group noted, "We keep trying to build a plane, but what we need to invent is a parachute."

Vladimir Terletsky