Innovation Strategies of Emerging Russian Multinationals

1. Innovation Strategies of Emerging Russian Multinationals

2. Presentation Outline Introduction Review of literature and theoretical issues Emerging multinationals Emerging multinationals and innovation / R&D Innovation and R&D in Russia and Russian companies Innovation in Russia: macro-view Innovation in Russian companies Innovation strategies in Russia Innovation strategies abroad Conclusions and Implications

3. Introduction Role of innovation in creating value in MNCs Emerging market multinationals reaching the global stage and desire to engage in innovative activities to increase firm-level value creation Research on innovation strategies of emerging MNCs is scant Besides, Russian MNCs are often overlooked. Objective of this paper is to explore how Russian EMNCs bridge the gap in innovation capacity both in Russia and internationally

4. The Economist 15.04.2010 A special report on innovation in emerging markets �The emerging world will undoubtedly make a growing contribution to breakthrough innovations�.

5. Research question What are innovation strategies of emerging Russian MNCs? How do they organise innovation process in their home base (Russia)? What is the role of innovation-seeking in their internationalisation (to advanced economies)?

6. Explorative study Overview of innovation in Russia and innovation strategies in companies Qualitative approach Variety of data sources (company reports and web-sites, publications, interviews with experts) Limitations of data availability: many companies do not publish annual company reports, companies have closed corporate culture and opaque ownership, wide use of offshore companies Research design and approach

7. Literature on Innovation and OFDI Patel and Vega (1999): European and US-based firms locate their activities abroad in technological areas or fields where they are strong in their home market. Le Bas and Sierra (2002): Japanese firms in Europe seek out locations that have complementary strengths to their own capacities. Chinese companies establish subsidiaries abroad in technologically-advanced regions to benefit from technology spillovers (Jiang, 2000). Foreign subsidiaries serve as �listening points� for the home base (Frost, 2001). Filippaois et al (2009): innovation does not come solely from a central R&D lab, but is based on a scientific heterogeneity of the host country R&D centres, subsidiaries and affiliates. Strategic asset-seeking: seeking learning opportunities rather than investment for strategic purposes (Narula, 2010)

8. OFDI of Russian emerging multinationals The origins can be traced to �red multinationals�, but new Russian multinationals are a new phenomenon OFDI: internationalisation or �capital flight� High OFDI flows into offshore destinations Starting from expansion in the nearest markets (former USSR), proceed to internationalise into advanced economies Driven by the foreign trade experience or export orientation of the firm (Filatotchev et al, 2001; Filatotchev and Nolan, 2001)

9. OFDI of Russian emerging multinationals International expansion due to macro-economic factors (Kalotay 2005, 2010). As the economy grows and firms generate higher revenues they begin to look abroad for new assets Ownership and state involvement (Liuhto and Vahtra, 2007). As state ownership increases, the state�s role plays an increasing importance in the firms OFDI activities. Studies explicitly addressing innovation practices in Russian multinationals are scarce (exception: Vahtra, 2010).

10. Transition from Soviet S&T to Russian NIS Different from developed economies and most emerging economies Knowledge infrastructure of the �world class� (Narula & Jormanainen, 2008) Roughly 60% of R&D is publicly financed. The overall R&D investment is higher than in other emerging economies Russian education system The S&T system does not produce as much innovation and R&D as expected Fragmentation of research institutes and Russian Academy of Sciences (2900 research institutes) Weak IPR regime Access to venture capital / innovative start-ups Innovation in Russia

11. Russia�s Knowledge Economy Index

12. PWC (2010) survey among 100 large companies Over the period of 2008-2010 39% of companies introduced new products 73% - innovative technologies 66% - innovative business processes Innovation in Russian companies

13. Innovation strategies of Russian firms

14. Innovation practices in Russia Acquisition of state-owned research institutes building on the Soviet legacy Creating in-house R&D departments the path towards organic innovative development Strategic alliances with western multinationals importing knowledge from abroad

15. Privatisation of research institutes (formerly parts of the Soviet Academy of Sciences and of respective ministries) Expertise in traditional (low and medium-tech) sectors Acquires are (former) state-owned enterprises that had a prior collaborative experience with these institutes Gazprom: VNIIGAZ research institutes Rosneft: corporate R&D lab and 10 regional centres Surgutneftegaz: SurgutNIPIneft and Lengiproneftekhim Norilsk Nickel: Gipronickel 1. Acquisition of public research institutes

16. Establishment of R&D departments �from scratch� IT sector / low capital investment sectors Benefiting from human capital � engineers and experts trained by the Soviet academic system Lukoil: internal R&D department and RITEC company (est 1992) Sistema (a consumer-focused technology group): in 2006 started establishing R&D centres in each of its main businesses Kaspersky Lab (a leading computer security software developer): start-up in 1997, presently 4th largest global antivirus vendor Auriga � a software R&D and IT outsourcing services provider, a start-up established in 1990 by Soviet engineers 2. Establishment of in-house R&D departments

17. Collaborative agreements with Western companies Expertise missing in Russia Sectors: high-tech (telecom) but also oil and gas Mostly privately-owned multinationals MTS (a telecom provider) and Ericsson Beeline (a telecom provider) and Ericsson Yukos (oil and gas exploration) and Schlumberger ? increase of production rates of oil well by 30%-200% Lukoil and Conoco Philips 3. Strategic alliances with Western companies

18. Asset-seeking motive No formal approval process of international investment, but tacit approval for cross-border deals with the leaders of government Sectors: from medium-tech to high-tech Acquisition of Swiss company Sulzer AG by Renova Oregon Steel Mills by Evraz Group Social networking web-sites (Facebook, ICQ) by Digital Sky Technologies High risk of failure (political reasons / inability to apply foreign technology) Basic Element & Magna International / Sberbank & Opel AG / LDV and GAZ Group 4. Acquisition of foreign technology-intensive companies

19. Collaborative efforts of Russian multinationals / their subsidiaries abroad By acquiring technology-intensive companies abroad, Russian companies obtain access to their networks and partners Russian Technologies state corporation Joint R&D programmes: Sanofi-Aventis, Pirelli, Alcatel-Lucent, Thales, Boeing 5. Collaboration abroad

20. Internationalisation and Innovation Strategies A very idiosyncratic way of innovation process in Russian companies different from the transition period-practices different from many other emerging economies and developed economies Weak ties between Russian firms and Russian R&D centers Acquisition of foreign technology-intensive companies Seeking assets abroad State support and coordination are crucial Role of State Corporations

21. Policy Implications Home country (Russia) Improvement of macro-economic climate for innovation Stimulus for commercialisation of innovation Reform of the public R&D sector (Academy of Sciences) Make IPR regime more effective Host countries (advanced economies) Governments of developed economies are wary of expansion trajectories of Russian multinationals Fear of losing technological assets and advanced know-how Collaboration and strategic alliances cause less concerns

22. Managerial Implications Realise the strategic value of innovation Implement a diversified innovation strategy Foster organisational learning Promote innovative thinking within organisation