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JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
RUSSIAN BIG BUSINESS: NATURAL RESOURCES DEVELOPMENT AND SOCIAL RESPONSIBILITY VS. INNOVATIVE ACTIVITY?*
SABLIN KIRILL,
PhD in Economics, senior lecturer of Kemerovo State University, Economic Theory Department, e-mail: Sablin_ks@mail.ru
Статья посвящена раскрытию предпочтений российского крупного бизнеса. Особое внимание уделяется институциональной среде, которая в значительной степени влияет на выбор стратегий поведения крупного бизнеса. Показана роль инвестиций в НИОКР в рамках данных стратегий.
Ключевые слова: крупный бизнес; институциональная среда; инвестиции в НИОКР.
The paper is devoted to the Russian big business preferences disclosure. Special attention is paid to institutional environment that affects greatly on the choice of big business behavior strategies. The role of R&D investments in these strategies is shown.
Keywords: big business; institutional environment; R&D investment.
Коды классификатора JEL: O43.
INTRODUCTION
The problem of Russian economy modernization is tightly connected with necessity of subjects revelation those are able and ready to implement it. Foreign countries experience (South Korea, Taiwan, Finland, Ireland, Israel), which could realize successfully national projects of «catching-up» development in the second half of the twentieth century, showed that one of the key subjects of economy modernization was big business. Big business could set up high-tech and science-based production and invest its resources to implement modernization projects. For instance, Israel and Finland exported mainly raw materials in the 1960-s. Namely 70% of Finnish export consisted of wood and timber industry materials as well as two-thirds of Israeli export were represented with agricultural production (Sukharev 2008, 593). Nowadays more than 50% of Finnish and Israeli export consists of high-tech and science-based production.
Some of researchers point out the fact that large-scale, economically reliable companies, which have sufficient financial, human and intellectual resources, are more capable to generate various innovations (Baumol 2002; Gonchar 2009). This means that large-scale companies are ready to the maximum to participate in the process of national economy modernization. For instance, Nokia Corporation injects about
* The paper is supported by Russian Foundation for Humanities (grant № 12-32-01234-а2).
© K. Sablin, 2012
50% of all R&D investments following from private sector in Finland; small group of chebols invests resources to carry out R&D researches and that is approximately 75% of all R&D researches, which are implemented in South Korea; foreign large-scale companies (for example, IBM) invest more than two-thirds of all resources in innovative sector of Ireland1. It is crucial to note that the bigger the company the more innovations it tries to generate. For instance, big business injects at average about 75% of all investments following to R&D implementation from private sector in European Union countries while small innovative business invests only 2% (Grablowitz et al. 2007, 14). Also innovative activity is concentrated in small amount of large-scale companies and business-groups in the Russian economy - about 74% of them are innovatively proactive2.
Meanwhile, it is supposed that institutional environment has special meaning because it affects on big business choice of behavior strategies. Obviously, it is more important to note that institutional environment sets incentives for big business to invest resources in more profitable activities. Firstly, it may be productive activities, which are tightly connected with R&D implementation and Schumpeterian innovations commercialization. Secondly, it may be rent-seeking activities aimed to set up «special» relations with national and regional authorities to get official privileges and benefits.
The purpose of the paper is to point out preferences of the Russian big business, which chooses more profitable directions of its economic activities to invest in resources. We examine some large-scale companies and business-groups those carry out economic activities in the Russian regions to get commercial benefits.
KEY TRAITS OF RUSSIAN BIG BUSINESS
In the paper «big business» means national integrated business-groups and companies those carry out economic activities in the Russian regions to get commercial benefits. In turn, integrated business-group is the complex of enterprises from different branches of economy, which, however, stands as a monolith in some essential economic and management aspects. It is worth mentioning that all enterprises are controlled by consolidated group of owners and/or top managers who guarantee this consolidation (Pappe 2005, 91). Russian big business distinctive features are the following: firstly, noncompletion of the process of big business property rights specification, which makes additional grounds for the State to formulate open informal pretensions and lay hands on big business’ assets and incomes; secondly, conservation of big business rent-seeking behavior (and rent-seeking strategies as a whole) that means that companies and business-groups are highly interested to preserve «special» relations with representatives of national and regional authorities (Kurbatova and Levin 2010, 28).
It’s supposed that owners’ and/or top managers’ preferences as well as their inclination to use productive innovations are shaped according to the interests of public officials because «incentives to use knowledge and skills, which are necessary for
1 See: OECD Science, Technology and Industry Outlook. OECD Publishing, 2008. 116-134.
2 See: Innovative Development - Background of Russian Economy Modernization: National Report. Moscow. IMEMO RAN, SU-HSE, 2008. 87-88. (in Russian).
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
Schumpeterian innovation commercialization, are strongly dependent on the rules of game set by the State» (Lazonick 2005, 34). Moreover, relations between owners and/ or top managers and public officials in the Russian economy are originally embedded in historically formed non-market informal institutions and practices of hierarchical type that means that authorities act as an organizer to operate flows of private business resources and to direct them for supporting development of the Russian regions. In this sense, owners’ and/or top managers’ interests are tightly interwoven with interests of national and regional public officials. At the same time big business is able to be relatively independent actor because companies and business-groups, as a rule, have significant assets beyond frontiers of those regions, where their economic activities are focused, and able to lobby their interests on the national level (Levin, Sablin and Kislitsyn 2011, 200).
PARTICIPATION OF RUSSIAN BIG BUSINESS IN INVESTMENT PROJECTS REALIZATION
The main goal of big business is to get various official preferences in the frames of national large-scale projects of economic development realization. For instance, OJSC MMC Norilsk Nickel takes part in realization of the project «Construction of transport infrastructure to develop mineral resources of south-east of Chita Region». This project provides that business-group will invest 120 786 million rubles during the next nine years, while Investment Fund of the Russian Federation will invest 48 321 million rubles. On the other hand, TATNEFT will invest 113 785 million rubles during the next five years to realize the project «Complex of petroleum-refining and petrochemical plants in Nizhnekamsk», while Investment Fund of the Russian Federation will invest 16 512 million rubles (State register of the projects, which will get resources from Investment Fund of the Russian Federation).
In this case some risks arise and the effectiveness of big business participation to realize such projects causes some doubts because of the following reasons. Firstly, there is opacity of state corporations and federal public officials’ aspiration to get private benefits that is harmfully for effective realization of public investment projects. Secondly, there is opportunity that ineffective economic agents will get resources. Thirdly, there is absence of well-defined mechanism, which would regulate public-private partnership between the State and business (for example, federal law to regulate such partnership isn’t adopted yet). Fourthly, there are consciously unequal positions of the State and big business on the national level that may lead to the situation when the State will choose the projects by itself and appoint the actors who will allocate resources to realize these projects. As a result, federal government is often not able to choose adequate measures and instruments to stimulate economic growth because of the problem of information asymmetry. This problem provides wrong understanding of motivations and incentives system, which is accepted by the companies with high level of capability to adapt innovations. Moreover, given examples of the national investment projects show that the State in the person of Investment Fund of the Russian Federation
prefers to finance infrastructural projects and projects, which create ground for natural resources development. On the other hand, these projects have negligible innovative component to be adequate to realize «presidential» list3 of high technologies.
Owners and/or top managers of large-scales companies and business-groups those are inclined to implement different innovations also participate in the process of regional investment projects realization. In this case they are interested to get definite privileges, which can give regional authorities. The business-groups and large-scale companies have sufficient financial and human resources (human and cultural capital) to realize different innovations as well as they actively accumulate political capital to mobilize narrow special interests groups to set informal interplay with representatives of regional authorities. So, it is supposed that local institutional environment of the Russian regions predetermine owners’ and/or top managers’ preferences to use different capital when it will be more profitable - human and cultural capital to commercialize Schumpeterian innovations or political capital to search new combinations of official privileges and preferences.
It is important to note that we analyzed owners’ and/or top managers’ preferences according to the following requirements: firstly, we tried to find open and reliable sources of information about big business investments; secondly, we examined those regions, where investment projects were realized actively and big business focused its economic activities to get commercial benefits (OJSC MMC Norilsk Nickel in Krasnoyarsk region; EVRAZ, OJSC Siberian Coal Energy Company and Coal Company Kuzbassrazrezugol in Kemerovo region; TATNEFT in Republic of Tatarstan). Also we use broaden interpretation of «innovation activity» concept. This interpretation includes introduction of products, services and technologies, which are new or essentially improved for the world market, as well as adoption and adaptation of existing innovative products, technologies and processes4.
INVESTMENTS OF THE RUSSIAN COMPANIES AND BUSINESS-GROUPS: R&D, SOCIAL RESPONSIBILITY AND NATURAL RESOURCES DEVELOPMENT According to the Annual report Norilsk Nickel invested USD 92 million to conduct R&D researches in 2011, while net sales composed USD 14 122 million5. This is about 0.6% and such share of R&D investments can be reasonably compared with R&D investments of Gazprom, the leader of «Expert-400» ranking. Gazprom invested 0.3% in 2004 and 0.6% in 2010 respectively6.
The key assignments of Norilsk Nickel investment program were the following:
3 The list contains five priorities of the Russian economy innovative development: energy efficiency and energy saving, nuclear technologies, space technologies, medicinal technologies, informational technologies
4 See: Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. Paris: OECD/European Communities, 2005. 47.
5 See: Annual report by OJSC MMC Norilsk Nickel 2011 // Site of Norilsk Nickel. (http://www.nornik.ru).
6 See: Innovative Orientation of Russian Economic Institutions / Ed. by V.E. Dementev. Moscow: Publishing House «LIBROKOM», 2009. 24. (in Russian); The 2010 R&D Scoreboard // Department for Business Innovation & Skills // (http://www.bis.gov. uk).
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
resource base development, modernization and technical rearmament of power supplies, social stability preservation in the regions, where business-group concentrated its economic activities. Also business-group invested USD 542 million to develop resource base in 2011. To be more scrupulous, there were built new industrial facilities and reconstructed old ones to simplify minerals excavation as well as to develop new ore deposits7. On the other hand, business-group devoted USD 164 million to construct non-industrial facilities with an aim to improve infrastructure and provide convenient job and recreation conditions for the Company’s employees. Moreover, Norilsk Nickel top management set up agreements periodically with regional authorities to finance social, transport and communication infrastructure modernization. A. Khloponin mentioned that business-group was being operated on the region territory that is why it’s financial, industrial and social policy could not be separated from the interests of Krasnoyarsk region (Khloponin 2009, 21). For example, in 2010 Agreement was set up to create regional aviation carrier using facilities of «Aviation Company «Taimyr» and State enterprise «KrasAvia». Norilsk Nickel must supply modern aircrafts from Russian and foreign manufacturers (specifically Boeing 737-800 NG) to aviation carrier. Earlier, in 2008, Norilsk Nickel top management invested 2.5 billion rubles to the large-scale reconstruction of Norilsk airport infrastructure.
To compare with, Japanese corporation Nippon Steel invested USD 573 million (1.3% of net sales) to conduct R&D researches in 2010, Australian company OneSteel invested 2.3% of net sales respectively as well as Belgian group of companies Bekaert invested USD 105 million, or 2.4% of net sales, to support innovative activity (see Table 1).
Table 1
R&D Investment Comparison of Ferrous and Nonferrous Metals Industry Companies (USD million and R&D/Net sales ratio)
Company Country R&D Investment (USD million) R&D/Net sales ratio (%) Year
Nippon Steel Japan 573 1,3 2010
POSCO South Korea 493 1,3 2010
AlCoA USA 173 0,9 2010
Salzgitter Germany 104 0,9 2010
OneSteel Australia 146 2,3 2010
Bekaert Belgium 105 2,4 2010
Norsk Hydro Norway 116 0,9 2010
Norilsk Nickel Russia 92 0,6 2011
Sources: 2011 Annual report by OJSC MMC Norilsk Nickel. (http://www.nornik.ru); The 2010 R&D Scoreboard // Department for Business Innovation & Skills.
(http:// www.bis.gov.uk); Monitoring industrial research: The 2011 EUIndustrial R&D Investment Scoreboard. - Luxembourg: Publications Office of the European Union, 2011.
7 See: Annual report by OJSC MMC Norilsk Nickel 2011, 37-38 // Site of Norilsk Nickel. (http://www.nornik.ru).
According to the Annual report EVRAZ net sales were equal USD 16 400 million in 2011. Unfortunately, there is no information in Annual report about R&D investments. However, we can find information that EVRAZ invested USD 1 280 million of capital expenditures to realize modernization projects and develop new resources fields8. The main direction of resources investments was to support the Program of technical rearmament and reconstruction of mines and enriching mills. It is important to note that EVRAZ invested sizeable resources to preserve social and economic stability in the regions, where its economic activity was focused. For instance, expenditures to support social infrastructure were equal USD 49 million in 2011 (purchasing hi-tech medical equipment, tourist recreation and sport facilities construction, sport teams financial supporting).
Given data show that EVRAZ expenditures for new resources fields development, maintenance of existing production and supporting social infrastructure are priorities. At the same time, we can say that R&D investments don’t play any crucial role in the corporate strategy of the business-group.
TATNEFT invested USD 2 087 million of capital expenditures to enlarge resource base, implement geologic researches and construct industrial facilities in 20119. To develop social infrastructure in the region of economic activity (construction of social facilities, developing education by supporting industry-specific colleges and schools, charity) business-group invested 488.5 million rubles. At the same time 10 852 rationalization proposals were implemented into production in 2011 with the economic effect of inventions introduction, utility models and rationalization proposals amounting to 5 189 million rubles10. However, we did not find any information, which could help us to disclose R&D investments of the business-group. In this case, K. Gonchar pointes out that top management of the Russian big business «are eager to speak about technological modernization, power supplies reconstruction, renewal of production, rationalizers and inventors competitions, but not about R&D investments and innovative potential» (Gonchar 2009, 29).
Mining and enriching production supporting, licenses purchasing to extract natural resources, seaport and railway infrastructure development are the main directions of OJSC Siberian Coal Energy Company (SCEC) investment policy. According to the Annual report OJSC SCEC invested 23.2 billion rubles of capital expenditures to implement these assignments in 2011, while business-group net sales were equal 167 billion rubles11. It is crucial to note that Annual report does not bring any data about business-group R&D investments, but it contains information about capital expenditures to support power supplies modernization, purchasing foreign industrial
8 See: Delivering today. Investing for tomorrow. Annual Report and Accounts 2011 // Site of EVRAZ. (http://www. evraz.com).
9 See: Innovation Development Stage. OAO Tatneft Annual Report 2011. 71 // Site of OAO Tatneft. (http://www.tatneft. ru).
10 See: Innovation Development Stage. OAO Tatneft Annual Report 2011. 50 // Site of OAO Tatneft. (http://www. tatneft.ru).
11 See: OJSC Siberian Coal Energy Company. Annual Report 2011 // Site of OJSC Siberian Coal Energy Company. (http://www.suek.ru).
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
machinery, construction of new industrial facilities.
On the other hand, OJSC SCEC pays great attention to social responsibility in the regions, where its economic activity is focused. Business-group’ performance is directed to create propitious social environment and solve the most important social problems in the regions. Main directions of business-group’ social investments are the following: social infrastructure development as well as cultural, educational and public health services establishments supporting. Unfortunately, there is no information about amount of social investments in the Annual report. However, OJSC SCEC signs up annual agreements with regional authorities to maintain social and economic cooperation by financing social programs and ceremonies since 2003.
According to the Annual report JSC «Coal Company Kuzbassrazrezugol» invested 12 817 million rubles of capital expenditures to purchase new industrial equipment and construct industrial facilities in 2011, while net sales were equal 50 764 million rubles12. These data about capital expenditures do not give an opportunity to estimate company’ R&D investments, but we can compare company’ capital expenditures as percent of net sales with foreign mining companies capital expenditures (see Table 2).
It is important to note that Coal Company Kuzbassrazrezugol invested sizeable financial resources to realize social programs, which had been taken place on the Kemerovo region territory. For this purpose Coal Company Kuzbassrazrezugol set up social and economic agreement with authorities of Kemerovo region to invest 966.9 million rubles to support regional social programs and priority national projects realization in 2011.
Table 2
Mining Companies’ Capital Expenditure as % of Net Sales Comparison
Company Country Capital expenditure as % of net sales Year
Vale Brazil 38,9 2010
China Coal Energy China 19,4 2010
Rio Tinto Great Britain 12,4 2010
BHP Billiton Great Britain 20,3 2010
Kuzbassrazrezugol Russia 25,2 2011
Siberian Coal Energy Company Russia 13,9 2011
EVRAZ Russia 7,8 2011
TATNEFT Russia 19,2 2011
Sources: The 2010 R&D Scoreboard // Department for Business Innovation & Skills. (http://www.bis.gov.uk); OJSC Siberian Coal Energy Company. Annual Report 2011 // OJSC Siberian Coal Energy Company, (http://www.suek.ru); Annual Report of JSC «Coal Company Kuzbassrazrezugol» 2011 // JSC «Coal Company Kuzbassrazrezugol». (http://www.kru.ru); Delivering today. Investing for tomorrow. Annual Report and Accounts 2011 // EVRAZ. (http://www.evraz.com); Innovation Development Stage. OAO Tatneft Annual Report 2011 // OAO TATNEFT. (http://www.tatneft.ru).
12 See: Annual Report of JSC «Coal Company Kuzbassrazrezugol» 2011 // Site of JSC «Coal Company Kuzbassrazrezugol». (http://www.kru.ru) (in Russian).
PREFERENCES OF THE RUSSIAN LARGE-SCALE COMPANIES AND BUSINESS-GROUPS
This analysis was fulfilled to highlight large-scale companies and business-groups investment directions. It shows that R&D investments, which form ground for productive innovations commercialization, are not so crucial if compare them with gigantic investments to maintain existing raw production, guarantee social responsibility of business and natural resources development. Some business-groups (for example, TATNEFT, Norilsk Nickel, Siberian Coal Energy Company) participate actively to realize investment projects and invest billions rubles to exploit natural resources, but not to adopt or introduce new technologies. Authors of the Background Report «National Innovative System and State Innovative Policy of the Russian Federation» note that investments to conduct R&D researches of the Russian companies, which are monitored by Rosstat, are three times smaller if compare them with Nokia Corporation similar investments (National Innovative System and State Innovative Policy of the Russian Federation 2009, 96). Nowadays Nokia Corporation is the leader of European science-based and high-tech companies. In 2010 Nokia Corporation invested € 4 938 million to conduct R&D researches that composed 11.6% of its net sales13.
From our point of view, owners and/or top managers of large-scale companies and business-groups are interested to establish and conserve «special» relations with administrative and political elites of those regions, where they concentrate their economic activity. That is why they are ready to invest great amount of financial resources to support projects, which are top-priority for regional authorities (for example, social stability preservation). At the same time these projects imply sizeable financial expenditures for large-scale companies and business-groups.
On the other hand, regional authorities give some privileges, preferences and guarantees to business-groups and large-scale companies (for example, they guarantee that there will be no any economic or administrative penalties) and set the rules of the game in their regions. In this sense it’s more profitable for top management of business-groups and large-scale companies not to invest in technological or organizational innovations, which lead to effectiveness advancement and competitiveness strengthening, but to seek actively new combinations of official (and informal) privileges and preferences (see Baumol and Strom 2010), which are supplied by regional authorities as trade-off to support infrastructural and social development of regions. It’s supposed that owners and/or top managers are ready to participate in the process of federal and regional investment projects realization when these projects aimed at new natural resources development as well as the State invests sizeable budget resources and guarantees different privileges, preferences and tax relieves.
As a result, Schumpeterian innovations are not located at the central position of large-scale companies’ and business-groups’ corporate strategies. Moreover, large-scale companies and business-groups are the «leaders» in the sphere of introduction,
13 See: Monitoring Industrial Research: The 2011 EU Industrial R&D Investment Scoreboard. Luxembourg: Publications Office of the European Union, 2011. 124.
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JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
adoption and adaptation of innovations only if compare them with relatively low level of innovation activity of medium and small business. In this sense private industrial enterprises do not experience any needs to use intensively technological innovations and do not play any crucial role in the key elements of innovative policy - to select and adapt technologies in manufacturing process (Vlaskin and Lenchuk 2005, 15). For instance, peripheral position of technological and organizational innovations in Gazprom’s and Lukoil’s corporate strategies is confirmed with leading Chinese and Brazilian large-scale companies comparison, which operate in base material sectors of their national economies (see Table 3).
Table 3
R&D Investment Comparison of Russian, Chinese and Brazilian Companies from Mining and Oil & Gas Production (Net sales ratio %)
Company Country Branch R&D/Net sales ratio (%) Year
Vale Brazil Mining 1,9 2010
China Coal Energy China Mining 2,1 2010
PetroChina China Oil & gas producer 0,8 2010
Petroleo Brasiliero Brazil Oil & gas producer 0,8 2010
Gazprom Russia Oil & gas producer 0,6 2010
Gerdau Brazil Mining 0,7 2010
Lukoil Russia Oil & gas producer 0,1 2010
Sources: The 2010 R&D Scoreboard // Department for Business Innovation & Skills. (http://www.bis.gov.uk); Monitoring Industrial Research: The 2011 EUIndustrial R&D Investment Scoreboard. - Luxembourg: Publications Office of the European Union, 2011.
RESUME
From our point of view, further conservation of such business strategy may become the reason that «vicious circle» of economic development will appear (see Krueger 1993). Russian large-scale companies and business-groups may be caught by this «vicious circle» if compare them with foreign companies: relatively small amount of R&D investments worsens competitive positions on the world markets of goods, services, technologies and raw materials. This situation may lead to even worst scenario because of net sales decreasing and, as a consequence, Russian large-scale companies and business-groups will invest fewer resources to conduct R&D research that is the reason of further net sales decreasing and so on.
Experience of foreign countries shows that «vicious circle» may be broken when owners and/or top managers have strong incentives to invest their resources not to seek new combinations of official privileges, preferences and «special» relations, but to conduct R&D researches and commercialize Schumpeterian innovations. In this case Russian large-scale companies and business-groups may become a real subject of
economy development. However, essential meaning will have position of federal and regional public officials who form the rules of the game for Russian big business.
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Annual report by OJSC MMC Norilsk Nickel 2011 // Site of Norilsk Nickel. (http:// www.nornik.ru).
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JOURNAL OF ECONOMIC REGULATION (Вопросы регулирования экономики) • Том 3, № 4. 2012
Scoreboard. Luxembourg: Publications Office of the European Union, 2011. 124.
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