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Russia: knowledge intensive entrepreneurship under conditions of superior foreign competition in a liberal transition/market economy
NATALIA N. DUMNAYA
Editor-in-Chief, PhD of Economics, Professor, Head of Chair «Microeconomics», Financial University, Honored Economist of High School of Russian Federation A. YU. YUDANOV
Deputy Editor-in-Chief, PhD of Economics, Professor of Chair «Microeconomics», Financial University G. V. KOLODNYAYA
PhD of Economics, Professor of Chair «Microeconomics», Financial University E-mail: [email protected], [email protected], [email protected]
DIME - AEGIS - LIEE / NTUA ATHENS 2010 CONFERENCE
"The emergence and growth of Knowledge Intensive Entrepreneurship in a comparative perspective. Studying various aspects in different contexts» April 29-30, 2010.
abstract
The main specific feature of knowledge-intensive entrepreneurship (KIE) in Russia results from the combination of traditionally high educational and scientific potential of the nation and extremely low level of current R&D expenditures. Public R&D expenditures in the last two decades were practically non-existent. The comeback of the government in the last few years to the modernization process of the economy is just starting, and national innovation system is still under construction. In private sector original R&D activity was constrained by powerful globalized competition. In an open liberal economy imitation or even direct use of Western finished goods has proved to be much more efficient than innovation.
To escape from competitive traps Russian entrepreneurial firms developed many asymmetric responses. Indeed the link between KIE in Russia and formal R&D is relatively weak. Entrepreneurial firms grow mainly not because they introduce technical innovations (such cases are also observed), but because they are unique in a way that adds value. Their type of innovation manifests itself in product and market diversification as well as in innovative marketing methods and organization of business processes. In general KIE in Russia has many common features with Western «gazelle-firms». This concept proposed in the 1980s by David Birch, has now become a widely accepted name for firms demonstrating rapid growth over a long period of time. The international experience suggests that formal R&D expenditure is not a necessary precondition for rapid growth of gazelles. Gazelles have a strong impact on national economic development, which is why they are intensively studied all over the world. Post-socialist countries, including Russia, constitute a serious gap in this research. The purpose of this paper is to present the results of the first empiric study of gazelles in Russia. The percentage of gazelles in the population of Russian firms is higher while their relative contribution to national economic growth is lower than that of similar Western firms. At the same time, they play an exceptional role in structural changes in the Russian economy. It has also been established that the rapid growth of Russian gazelles tends to follow an exponential law. The exponential nature of gazelle growth evidently provides empirical support for the hypothesis, that the growth of entrepreneurial firms, and especially of KIE, depends to a greater extent on the firm's ability to create internal specific assets (including knowledge) rather than on demand constraints.
Keywords: knowledge intensive entrepreneurship, national knowledge innovation system, gazelle-firms, fast growing firms, exponential growth, innovation, Russia JEL Classification: L26, O31, O33
1. Introduction
Traditional for the economic science interest to interrelation of entrepreneurship and innovations has gone through a considerable shift in emphases in the late eighties of the XX-th century. If earlier the mainstream in scientific research had a dominant focus on individual entrepreneurship since then entrepreneurship began to be increasingly considered in a context of networks and systems. It was at that time and mainly due to the efforts of Christopher Freeman (Freeman, 1987) and Bengt-Áke Lundval (Lundval, 1985) that the foundation of the modern theory of national innovation systems (NIS) was laid. NIS is usually defined as «the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies» (Freeman, 1995). Of most importance is the fact that within the limits of this approach an idea of a big variety of innovation systems was formed, and essential differences which they may exist in different countries and sectors of the economy were stressed (Freeman, 2002; Malerba, 2005).
At the same time, the nature of innovative activity began to be interpreted wider than that much earlier. Joseph Schumpeter was among the first to distinguish innovative activity of an entrepreneur from introduction of technological innovations and the more so from invention. He stated that, the main task of the entrepreneur is to carry out new combinations which could not only be of technological, but also of marketing (new markets for existing goods) or administrative (new forms of industrial organization) character (Schumpeter, 1951: 131-135). In practice, however, innovations were often considered almost exclusively as development of new technologies. Moreover, the degree of innovativeness of this or that firm or branch was reduced only to easily measurable aspects of their technological activity: to level of R&D expenditures, the number of research personnel or to the number of registered patents. The emergence of concrete quantitative recommendations of OECD (OECD, 1996; 2002; 2005) dividing various branches of economy into categories of «high-tech», «medium-high-tech», «medium-low-tech» or «low-tech» depending on the ratio of the R&D expenditures to the output value of a sector could be considered as the logic completion of this tendency.
At the same time, it was established that the essence of innovations can't be reduced only to technological activity of a firm/branch. For example,
with reference to low-tech sector it was shown that the basic volume of innovations used in the finished product does not often lie in its own technological achievements, but in the achievements of other branches and their adaptation to concrete requirements of consumers. It was also found out that in this sector «formalized processes of knowledge generation and use only play an insignificant role», and innovations are based on practical knowledge, which «is generated in application contexts of new technologies and obeys validity criteria such as practicability, functionality, efficiency and failure-free use of a given technology» (Hirsch-Kreinsen, 2008: 27).
Independent of the above, researchers of the fast growing firms, also called gazelle-firms, came to similar conclusions about the importance of informal innovation. David Birch coined the expression «gazelle» in his 1987 study of the job generation process in the USA (Birch, 1987; Birch and Medoff, 1994). Birch's empirical research shows that most large ('elephants') and small ('mice') firms make a very modest contribution to job creation and GDP growth. But there is a small group of firms (those he called «gazelles') that are distinguished by their long-term dynamism. The vast majority of gazelles are small and medium enterprises (SMEs), but size is not an identifying attribute of gazelles. Usually starting out as small firms, they eventually develop, due to their rapid growth, into medium-sized and then sometimes into large enterprises. According to Birch's initial estimates (Birch and Medoff, 1994), gazelles, while constituting only 4% of the total number of firms, created about 70% of all new jobs in the American economy in 1988-1992.
The discovery of a special type of firms with exclusive value for the development of economy could not but attract steadfast attention. No wonder that intensive international research of gazelles have begun. Despite the outspoken criticism in some cases (see, for example, Davis et al., 1996), Birch's conclusions have received considerable acknowledgement (Kirchhoff, 1994; Audretsch, 2002; Delmar, Davids-son, Gartner 2003; Europe INNOVA Gazelles Innovation Panel, 2008; Acs, Parsons, Tracy, 2008). The latest review of the literature devoted to gazelles says: «A few rapidly growing firms generate a disproportionately large share of all new net jobs compared with non-high-growth firms. This is a clear-cut result. All studies find Gazelles to generate a large share, all or more than all net jobs (in the case where
employment shrinks in non-Gazelle firms taken as a whole)» (Henrekson, Johansson, 2009: 14).
While fact establishing, an unexpected result of gazelles research was achieved showing that they not necessarily operate in dynamical high-tech economy sectors. On the contrary, the majority of gazelles are concentrated in mature, low-tech or medium-low-tech branches. As a rule, R&D expenditures of gazelles are not high. In doing so, a more detailed analysis almost in each specific case revealed a «highlight», a certain informal innovation which had guaranteed success of a gazelle. «Even though gazelles are not confined to R&D-intensive firms, they tend to be innovative. This innovation is not confined to R&D alone, however. In addition to new technology-intensive products and services, gazelle innovation also manifests itself in innovative business models (e. g., new concepts for service delivery), in product and market diversification (including internationalization) as well as innovative business processes» (Europe INNOVA Gazelles Innovation Panel, 2008: 6).
The desire to consider innovative activity of entrepreneurs from the systemic view point (networks, sectoral systems, national systems) and in the entire variety of its manifestations (and not just in R&D-intensive type of innovations) has led to the appearance of the term «knowledge intensive entrepreneurship» (see KEINS; AEGIS; Malerba, 2010). With reference to modern Russia the described change in the dominating approaches to research of entrepreneurial activity has appeared especially valuable and timely as it created adequate instruments to study extremely unusual processes which began to develop in our country in the post-socialist epoch.
The thing is that the former, centrally planned NIS in the Soviet Union has not only ceased to exist, the entire R&D activities in the country collapsed. Under almost complete full-stop of the state orders for scientific research (including military) even those centers of science and research which during the Soviet epoch held the leading positions in the world, turned out to be unviable. Highly skilled experts left or for decades were compelled to reconcile with the beggarly salary. Expensive research equipment was written off as wastes for the sake of ridiculous benefit from letting the emptied premises (after the destruction of the equipment the laboratory buildings were often used as warehouses). Even current research expenses (purchase of reactants, account materials and so forth) were not financed.
With this at the background, the R&D activities of the newly set up private companies turned out to be almost zero. The Russian economy was being transformed from planned into market under extremely liberal conditions of the international openness. There were practically no signs of protectionism. Consequently, the qualitative superiority of imported products owing to objective (the Soviet industry's lagging behind the developed countries), and the subjective reasons (inexperience of the former socialist enterprises to operate under the market conditions) has proved itself so vividly that caused mass replacement of domestic high-tech production. Whole industries disappeared or switched on to assembling foreign models from foreign components: manufacturing of computers, household electronics, photo equipment, many of the subsectors in engineering, civil aircraft, manufacturing of microprocessors, of industrial robots, etc. Accordingly, semi-finished goods for the branches which stopped to exist, lost their demand.
Process of borrowing foreign knowledge had distinct competitive advantages in comparison with original elaborations. Instead of own R&D activity the Russian firms got and/or copied (legally or illegally) foreign technologies. In other cases the Soviet vertically integrated complex of knowledge creation (from fundamental scientific elaborations to the production of finished goods) was replaced even not with analogous foreign technologies, but with directly imported products, embodying alien knowledge.
At the same time, the high educational and scientific potential of the nation has appeared steadier against shocks, than other elements of the Russian NIS. Despite the menacing volume of the brain drain, millions of highly qualified specialists remained in the country, while higher educational institutions kept on training more and more of them. Under the changed conditions these people found their place in business, and often it was far outside of the academic specialization. In Russia the cases when a successful shoe firm is headed by a Ph.D or certified nuclear physicist, or a confectionery firm is governed by a group of former military engineers became rather rule than exception. No wonder that the combination of profound educational background among the leaders of the Russian business (in particular it is typical for the heads of successful middle-size enterprises) and low commercial return from own R&D expenditures stimulated and promoted huge scope of informal innovative activity.
Knowledge intensive entrepreneurship began to develop in Russia mainly as Gazelle-type KIE, instead of as R&D-intensive-type KIE. Gazelles became initiators of the major structural transformations of the Russian economy. In areas where gazelles began to operate, the introduced by them innovations in a few years changed the profile of the corresponding branches. And the fact that these innovations in technological terms as a rule turned out to be very simple, and were often only successful adaptations of the world experience to the Russian conditions, does not belittled their value, but, on the contrary, represented their strongest side: the most powerful result was achieved with the minimal efforts. In some cases there were observed networking processes (Dumnaya, 2009a; 2009b) when, for example, the innovative consumer goods produced by some gazelles, were promoted through the innovative marketing network organized by other gazelles, and were financed by the innovative credit products advanced in the market by third gazelles.
Development of gazelles had spontaneous character, being based exclusively on the private initiative, without the slightest attempts of management and/or support from the government. In fact it was the process of creation of what in NIS theory is often called «innovation ecosystem»1, meaning innovations as «the result of the interaction among an ecology of actors», as distinct from «innovation system», as the term used for labeling a planned innovation environment.
Lately there has been traced a tendency of return of the government to the innovation sphere. For the first time in history of post-socialist Russia the purposes of modernization of economy are formulated, measures to support R&D-intensive firms are developed, national projects on the major lines of scientific and technical development are affirmed.
Accordingly, this paper is structured as follows: Section 2 considers dramatic cut down in the R&D activity as a result of transition from the socialist to the market economy under the conditions of open liberal economy. Section 3 describes the size and importance for the national economy of the Russian population of gazelles. Section 4 discusses the influence of
1 In the West where the government has never left the sphere of innovations stimulation, similar processes of self organization in the innovative firms community are often considered applicably to technologically complex sectors (see, for example, Iansiti, M., Roy L., 2004; Chesbrough, H., 2003), say to software open platforms.
Gazelle-type KIE on the structural shifts in the Russian economy. Section 5 considers the Russian government's latest plans on economy's modernization and their influence on the development of KIE.
2. R&D Activity in an open Liberal Transitional Economy
Under the socialist epoch, the NIS, which by the level of development and results of the activity was comparable to its analogues in the most advanced economy, was operative in the economy of Russia, though it was built on entirely different principles. The high-quality school education and powerful system of universities which covered the total population of the country, served as the basis of the NIS. It propped up the system of the state R&D organizations (so-called scientific and research institutes and design offices), absorbing almost all intellectual elite of the country in the late Soviet epoch. By the number of researchers the USSR strongly held the first place in the world. And though during the cold war the scientific complex had an obvious military warp, and some spheres of researches fell victims of ideological dogmas (including such important ones for modern technologies as genetics and cybernetics), fundamental science and many branches of applied sciences were at the higher world level in the USSR.
The availability of large enterprises with high technologies and a highly skilled labour completed the vertically integrated NIS, allowing to transform technical elaborations into finished goods. Besides, a considerable part of the foreign trade resources of the country and the activities of secret services were aimed at achieving access (legal or illegal) to the western technologies.
The most vulnerable part of the Soviet NIS was the absence of knowledge intensive entrepreneur-ship or any of its analogues. The bureaucratic system had no stimulus to display entrepreneurial alertness which would be aimed at revealing the requirements of the economy. With a few exceptions which mainly related to the military sphere, discoveries and inventions did not turn into innovations, while the latter did not cause large-scale investment. Therefore in case of removal of the entrepreneurial activity deficit, the basic, fundamental potential NIS of Russia could be very big. After the end of the market transformation the country was expected to perform an «economic miracle» and swiftly join the world leaders, including those in the sphere of new technologies.
< 80
Russian authors ш engush
Figure 1. The Number of Research personnel in Russia (in thousands of persons at the yearend)
Source: Russia in figures 2009, Moscow, Rosstat, p. 354
However it didn't happen. Having copied the main frame institutions of the developed market economies, having privatized the enterprises, having liberalized the prices and having opened economy for foreign economic relations, reform makers hoped that it will automatically start the motor of market self-regulation and economic growth. Regretfully, hopes have not come true. The ultra-liberal economy which existed in Russia in first 10-15 years of the reforms, turned out to be the unfavorable environment for the preservation of knowledge intensive elements in the Soviet system.
First of all, there was a catastrophic curtailment of the state demand for hi-tech production and scientific elaborations. In real terms by 1996 the state financing of science was reduced approximately 7 times as compared with level of 1990, while for military R&D this reduction was 10-12 times (War-shavskj, 1998). As a result there was a collapse of all major innovative activity indicators.
Thus, the number of researchers has decreased almost 3 times as compared with the late Soviet period and 2 times as compared with the first year of Russia's independent existence (Figure 1). The R&D expenditure dynamics in percentage to GDP (Table 1) was about the same. It is characteristic that both indicators after the termination of sharp decrease were stabilized but have not returned to the initial level, though from 2000 on 2008 the country lived through a continuous period of economic growth. Many scientific schools of thought have been lost. Fundamental research has been dramatically reduced. But most of all, though it may seem a paradox, applied research institutions have been affected.
Table 1
R&D expenditures in russi
Year Rbl. millions (in 1989 prices) In percentage to GDP
1985-1990* - 3,5-4,0
1991 7,3 1,43
1992 3,2 0,74
1993 3,1 0,77
1994 2,9 0,84
1995 2,5 0,85
1996 2,7 0,97
1997 3,0 1,04
1998 2,6 0,95
1999 2,9 1,00
2000 3,3 1,05
2001 3,9 1,18
2002 4,3 1,25
2003 ОЭ 1,28
2004 4,6 1,15
2005 4,5 1,07
2006 4,9 1,07
2007 5,6 1,12
* Our estimation, Russia as a part of the USSR
Source: Russia in figures 1995-2009, Moscow, Rosstat, an estimation
of authors
400-Average Ferrous metallurgy Non-ferrous metallurgy Transportation Food Industry Oil & gas Telecommunications Polygraphy Diamond Industry Chemical Industry Mechanical engineering
0
0,5
1
1,5
T-2
2,5
Figure 2. R&D Expenditures in Russian Large Enterprises (2007, in% of total revenue) source: «expert-400», expert, № 39 (628), 6.10. 2008
State financing of such institutions has been completely withdrawn, since it was supposed that they could earn money themselves. In fact, almost all applied research institutions went bankrupt and were closed (Rogov, 2010). At last, the productivity of a R&D activity has fallen down. In mid 80s about 150 thousand copyright certificates for inventions (the Soviet analogue of patents) were issued in the country annually. By mid 90s this figure has fallen down to 15 thousand (Kudrjavtsev, 2004).
Curtailing of the state innovative activity could be in principle compensated by the private sector. But it didn't happen either at the moment of state leaving the sphere of innovations, or many years later. We will dare to bring about an emotional estimation of the innovative activity in the largest Russian corporations, made by the producers of «400 Largest Russian Enterprises» rating list, better known as «Expert-400» (Grishankov, 2008): «We are labouring under a dangerous misapprehension regarding innovations. The point is, there have not been any. More precisely, there are some innovative processes, but their scale is appallingly small. According to our rating data, many large Russian companies spend more on corporate parties than on research and development. So at the very least it would be naive to speak of innovative development».
The above estimation sounds even more tragic in view of the fact that the matter is about the largest
Russian firms, obviously much better provided with financial resources to sustain R&D expenditures than other companies in the country. Nevertheless, there is no exaggeration: the R&D expenditures of the large business in Russia are really insignificant small (Figure 2). On average they do not exceed 0.5% of the total revenue. In a way of comparison, we would like to remind that by the OECD classification the companies with the above indicator lower than 0.9% are attributed to the «low-tech» category. Only the firms represented in the list «Expert-400» for mechanical engineering, spent on R&D 2.25% of the total revenue, with chemical companies this indicator reached 1% (by the OECD classification this level is characterized as «medium-low-tech»). Companies in all other branches had considerably lower expenses on R&D while companies in the super-rich Russian gas and petroleum branch they made only 0.2%.
Where do the reasons for low R&D activity in the Russian private business lie? In our opinion, the main ones can be combined into three groups.
First, interest to the R&D activity was undermined by short time horizon in the activity planning of the Russian companies. Up to the middle of the first decade of the XXI century2 it did not exceed 1 year and, less often, 3 years. Under the institutional
2 Later there appeared a tendency to extend the horizon of planning but it was disrupted by the begun world crisis.
Table 2
New advanced industrial technologies introduced in Russia
2002 2003 2004 2005 2006 2007 2008
AH new technologies, of which: 727 821 676 637 735 780 854
possessing novelty for Russia 606 582 569 538 642 653 738
possessing novelty for the whole world 70 56 52 60 52 75 54
Share of technologies with the world novelty (in %) 9.6 6.8 7.7 9.4 7.1 9.6 6.3
Source: Russia in figures 2009, Moscow, Rosstat, p. 361.
instability of the emerging economy combined with the availability of ways of fast enrichment, interest to long-term projects of any kind was rather limited. It was pertinent to both long-term investments (thus, projects of reshaping of available capacities repeatedly prevailed over plans of radical modernization or new construction); and granting loans for term over 1 year; and the establishment of long-term partner contacts. But it was the R&D activity which suffered most of all since it is interfaced not only to long terms of return on investments, but also with big risk.
Second, the vertically-integrated structure of the Soviet NIS made it extremely vulnerable to withdrawal of some elements from the system. It was what was exactly happening in the post-Soviet epoch. The first wave of the system decomposition was provoked by the disintegration of the Soviet Union. Enterprises and laboratories, which previously functioned as a single mechanism, finding themselves assigned to different states, quickly lost contact with each other or, at least, turned into unreliable suppliers. Inside Russia similar processes were also under way: some enterprises earlier entering into a uniform technological chain were closed or changed their industrial profile; the state scientific institutes were liquidated; the specialized equipment became outdated and/or was written off; prominent experts died or left for the West, without living replacement. As a result not only demand, but also possibilities for the supply of R&D-intensive production and services were radically reduced. Though sad it may be to state, many branches of the NIS in modern Russia are not able to solve problems of the level of complexity which was quite available for the Soviet NIS 20 years ago.
Both above-mentioned reasons, however, would hardly predetermine such a low level of the R&D activity of the Russian private business what is
observed in reality, unless there was the third reason which is foreign competition. From the point of view of the consumer interests, under the open liberal economy, all the described difficulties can be solved easier and more profitably with the help of the application of the achievements of NIS from other countries ... in many cases paying for this additional comfort the cost of loss of the Russia's own NIS.
It is true, that Russian enterprises-consumers of hi-tech production deal much easier not with the Russian but with foreign equipment. Even if the latter is not of the latest fashion, it, as a rule, provides a big step forward. As distinct from the domestic, it has been repeatedly tested, provided with guaranteed good service; financial schemes of its acquisition are profitable and do not raise any doubts in legal terms. Very often the imported equipment is also cheaper than that of the Russian manufacturers offer (Medovnikov, Imatudinov, Ros-mirovich, 2009).
As we can see it from Table 2, the process of introduction of new industrial technologies in Russia, in the overwhelming majority of cases, consists in the application by the domestic industry of the already known technologies. The percentage of the technologies possessing world novelty, in all the new technologies mastered in Russia is low (6.3% in 2008) and is not increasing with time.
Meanwhile, original domestic R&D activity can be replaced even not with the imitation of analogous foreign technologies, but also with directly imported products, embodying finished alien knowledge, i. e. without any technology transfer. We will allow ourselves to bring about one more quotation from the above-mentioned study of the innovative activities at Russian large enterprises: «Modernization and billions-worth of government orders (that long-awaited element of demand) might have led to an incredible
rise in the electrical engineering sector and afforded a unique chance for an innovative breakthrough. But this never happened. Or rather it did happen — but not in Russia. So far only the Russian cable industry has expanded. Neither human resources nor industrial capacities nor research and development capabilities were sufficient to achieve more. There have been many examples of this kind in recent years» (Grishankov, 2008). We see, even the long-awaited governmental plans of modernization of the country (see Section 5) are far from giving guarantees for the improvement of the situation with R&D activity at the Russian enterprises.
3. The Russian Population of Gazelles (Analysis Technique and General Results)
In the first decades of the post-socialist development R&D-oriented way of developing knowledge intensive entrepreneurship turned almost closed for the Russian firms. At the same time, high educational level of the population as a whole and in particular of that its part which under the market economy acted as founders and top-managers of private enterprises, created preconditions for informal innovations. The broad world outlook of these people objectively promoted entrepreneurial alertness, as it is called in the terminology of neo-Austrian school. In such a case innovations are to a lesser degree connected with persistent inventive activity, than with the ability to notice what is lying literally speaking underfoot but has not been used by other firms (Kirzner, 1997).
It is easy to note that the matter is about the availability of preconditions for the formation of the KIE type which is rather similar to the one observed in the developed countries among high-growth gazelle-firms. It is true that while describing innovative activity of gazelles it is usually said that «with regard to gazelles, in particular, innovation is understood in a broad sense i. e. managerial, organizational and technological». Moreover, «innovation in gazelles is more remarkable in the new applications of resources and in new organizational structures than in the generation of new technologies». It is also noted that «gazelles develop mostly incremental (rather than radical) innovations». Finally, «contrary to popular perception, only around one-third of gazelles are «high-tech» companies. Fast-growing firms whose success comes from innovative approaches to marketing, organization or
distribution can be found across a wide range of ac-tivities» (INNO GRIPS, 2007: 18).
But are there any gazelles in the Russian economy today? Until recently there was no answer to this question in reference not only to Russia, but also to other post-socialist countries. One of the latest review of the literature (Henrekson, Johansson, 2009) recorded only 20 empirical studies throughout the entire history of gazelle research. But all of them were concerned with 11 developed market economies of North America and Western Europe.
Empirical studies of gazelles in Russia were started in the Finance Academy (Moscow) in 2003 in the form of case studies of the most successful enterprises in the food and pharmaceutical industries, the banking sector and the high-technology sector (Yudanov, 2007a). In 2006, our group joined forces with the Russian business weekly Ekspert (Expert) group3 and proceeded to a systematic analysis of large databases compiled by this weekly (Yudanov, 2007b).
We had at our disposal official statistical information on 17 thousand enterprises for 1999-2006,4 and also official (but with not fully comparable time series) databases on 25 thousand enterprises for 2003-2007 and 2004-20085. The information on each firm included revenue, fixed assets, net profits, R&D expenditures and debts. A significant flaw in these databases was the absence of data on the number of employees at the enterprises.
Thus, we had within our view an overwhelming majority of large and medium enterprises in Russia with an opportunity to trace the history of most gazelles from the time when they were still small enterprises. The period under review (1999-2007) is notable as well. It covered the entire time of strong economic expansion in Russia from the end of the catastrophic national crisis of 1998 to the beginning of the global crisis of 2008. Thus, the material at our disposal provoked the question of how important a role can gazelles play in the emergence and development of a new market economy.
The initial list of companies was narrowed down by discarding all non-market enterprises (such as unitary state-owned companies, non-commercial partnerships, etc.). The total number of remaining
3 Tatiana Gurova, Yuri Polunin, Andrei Vinkov.
4 All Russian enterprises that in 2006 had revenue of over $10 million and had existed for at least three years.
5 All Russian enterprises (without age constraints) that in 20072008 had revenue of over $10 million.
Table 3
Number of Gazelles in Russia
Period Number of permanent firms Number of gazellesa Percentage of gazelles among permanent firms Average annual percentage of fast growing firmsb
1999-2003 6524 4 CO 4 7.4 51.5
2000-2004 7348 527 7.2 48.7
2001-2005 8244 587 7.1 48.3
2002-2006 9381 744 7.9 49.1
2003-2007 10 174 830 8.2 48.8
2004-2008 n.a. 916 n.a. 45,3
a Including subsidiaries of large corporations (including foreign). b Percentage of firms with revenue growth rates of over 20% (at constant prices) in the entire population of firms (permanent firms plus new firms). Source: Finance Academy - Expert Database
firms ranged from 7 thousand to 21 thousand in different years. We singled out permanent firms, i. e., firms existing throughout the period under review, into a special group. For the entire 1999-2007 period the number of permanent firms was around 6.5 thousand, and for shorter five-year intervals their number ranged between 6.5 thousand and 10 thousand. After making a list of gazelles, we compiled dossiers on many of them (about 360 firms). The top executives of 42 gazelles responded to a questionnaire, and 14 firms gave in-depth interviews.
In the literature there is no generally accepted technique for identifying gazelles. As a basis, we took David Birch's algorithm according to which any company that has grown at 20% per year or greater in each year for at least a five-year period is ranked among gazelles. A significant amendment was that revenue time series were deflated to remove the effect of high Russian inflation, which varied in different years from 10% to 15%.
Birch's algorithm, in contrast to other widespread methods for identifying gazelles6, places emphasis not only on high rates of firm growth, but also on the sustainability of this growth over time. This cuts off firms whose significant revenue growth is only accidental. For example, according to Birch's technique, a small firm that doubles its revenue in the first year but then stops growing is not included among gazelles, although its average
6 Gazelles are often identified based on the average growth rate for the period, see: Kirchhoff (1994), Schreyer (2000), Deschryvere (2008), Acs, Parsons & Tracy (2008). In this case, growth rates may in some years be low or even negative.
annual growth rate for the five-year period will exceed 20%.
This property of Birch's algorithm as applied to Russia provides researchers with an effective instrument for identifying the nature of growth at different types of firms. Indeed, the opportunities for a onetime, fragile success in an emerging market economy are very wide. As can be seen from Table 3, in the 1999-2007 period of economic expansion about half of the Russian firms surveyed (mostly medium-sized enterprises) annually showed rapid growth, i. e., their revenue growth rate (at constant prices) was 20% or over. This huge mass of firms sporadically achieving high growth rates provides a background for steadily growing gazelles. This mass can on no account be equated to gazelles, because far from all firms occasionally showing rapid growth build on a solid foundation.
As for gazelles proper, according to calculations using the databases at our disposal they made up 7-8% of the number of permanent firms (Table 3). This figure is already large by international standards: Birch's algorithm is sufficiently rigorous, and in developed countries its requirements are usually met by only 3-5% of firms.
But there are reasons to believe that the above calculations significantly underestimate the actual number of gazelles in Russia. First, our databases did not include small enterprises,9 a category to which most gazelles are known to belong (see, for example, Henrekson, Johansson, 2009: 1). Second, many Russian gazelles are organized, for tax and security reasons, not as single firms but as so-called «groups of enterprises». This means that
Table 4
Revenue Dynamics (2003-2007, constant prices)
Revenue 2003 (billions of rubles) Revenue 2007 (billions of rubles) Average annual growth rate (%) Increase (billions of rubles) Contribution to revenue increase of permanent firms (%)
Gazelles (830) 285 2900 78 2615 23.1
Top 10a (Rosstat version) 1969 2985 11 1016 9.0
Top 10a (Expert-400 version) 2413 4560 18 2147 19.0
Permanent firms (10174) 12 393 23 707 18 11 314 100
a Gazprom, Lukoil, Surgutneftegaz, Nornikel, Transneft, Tatneft, Severstal, MMK, NMK, AvtoVAZ. The Rosstat (Federal State Statistics Service) version takes into account only parent companies, while the Expert-400 version includes consolidated data for subsidiaries as well. Source: Finance Academy - Expert Database
even a not very large firm is artificially divided into a number of formally independent small and micro firms, with the result that it «disappears» from the official statistics we used. In the event, a «group of companies» can have its own website where it will appear as a single firm (which it actually is) and can even publish an unofficial consolidated balance sheet. We had access to such unofficial consolidated data for firms operating in the Russian high-technology sector7. Comparing these data with official statistics, we found that more than half of all actually existing gazelles — at least in this sector — were not reflected in the estimates given in Table 3. Third, the data we used did not include banks, whereas the banking sector, as we know from previous studies, has generated the largest number of gazelles in Russia.
To summarize the above, the actual number of gazelles in Russia can be roughly estimated at 8-15% of the number of permanent firms. This is a very large figure several times higher than Western indicators.
So how did the numerous Russian gazelles grow and what role did they play in the country's economy? As regards growth rates, they were high indeed (see Table 4). Gazelle revenue increased on average by 78% per year, whereas the average annual growth rate of all permanent firms in general and Russia's ten largest corporations in particular did not exceed 18%. In other words, Birch's algorithm has really made it possible to identify a group of firms whose activities are based on outstanding business ideas. Otherwise it is impossible to explain the ability of Russian gazelles to nearly double their revenue every year over a long period of time.
7 Published by the Russian news agency CNews.
As for the contribution of gazelles to national economic growth, the situation here is more complicated. Given the weak starting positions of gazelles, their contribution can be regarded as significant. It is true that in 2003 they accounted for an insignificant part of the total revenue of permanent firms (about 2%), but due to their super-dynamic development they managed to contribute almost a quarter (23.1%) of the increase in this indicator for 2003-2007. At the same time, this figure is only a fraction of the aggregate economic impact typical of Western gazelles. In developed economies it is usually estimated at an average of 50% to 80% (Europe INNOVA Gazelles Innovation Panel, 2008: 6).
Is there any rational explanation for the strange combination of the properties of the Russian gazelle population: larger numbers and lower economic impact? In our opinion, both follow from the wide opportunities for rapid growth offered by the young, emerging market economy.
On the one hand, an environment conducive to rapid growth helps to increase the number of gazelles. There are still many free niches in the Russian market providing ample opportunities for long-term dynamic development. On the other hand, in contrast to Birch's classical «mice» and «elephants», which are static and contribute little to economic growth, Russian «non-gazelles» can at times grow very rapidly. After all, as Table 3 shows, rapid growth is annually demonstrated not by 8-15% of firms but by half of the entire population of firms in the country. Consequently, the relative importance of the contribution of Russian gazelles is lower than in the West simply because in Russia they are not the only fast growers.
At the same time, the role of gazelles in the Russian economy should not be underestimated either.
Table 4 shows, for comparison, the increase in the revenue of Russia's ten largest corporations, which mostly belong to the oil-and-gas and metallurgical industries. Public opinion clearly associates the 1999-2007 economic expansion in Russia precisely with their successes, in turn determined by external factors: rising raw material prices. But as it follows from Table 2, the increase in the revenue of the Russian Top 10 is significantly smaller than the increase in gazelle revenue. And this is so not only when the revenue of the Top 10 is estimated based on Rosstat data taken from the same database from which we took the data on gazelles, but also when it is assessed using the Expert-400 version, which takes into account the revenue of the Top 10 corporations in consolidated form, including the revenue of their subsidiaries.
Of course, a direct comparison of the revenue of gazelles and natural resource companies is not very revealing. They belong to different sectors, have a different degree of vertical integration of production, create different value added, etc. Moreover, an appropriate question to ask in this context relates to the causes of gazelle growth: it is very doubtful that this growth would be as impressive as it is today without constant «infusions» of natural resource revenues. Nevertheless, it is interesting to note the very fact that a larger increase in revenue, despite an
unprecedented favorable pricing environment in the world market, was generated not by giant natural resource corporations but by gazelles, most of which are SMEs and among which there are no oil-and-gas or metallurgical companies8. It is only natural to regard gazelles at least as a mechanism for translating oil revenues into general economic growth or even as an emerging non-natural-resource engine of the Russian economy.
Another typical feature of Russian gazelles is their «ubiquity», i. e., their ability to appear in totally unexpected areas. In the literature on gazelles, this is often emphasized using «lists of NOTs» (the following is based on Europe INNOVA Gazelles Innovation Panel, 2008: 11). Thus, Russian gazelles, like their Western counterparts, are NOT necessarily start-up firms. It is true that most new gazelles are start-ups, but the percentage of incumbent firms that have accelerated their growth at a certain stage of development is by no means small. In different years it ranges from 40% to 45% of all new gazelles. Our research also confirms the thesis that a firm of any age can become a gazelle, except that in Russia there are simply no firms over 20 years old.
8 More precisely, only 3 of the 830 gazelles belonged to these sectors
