CIAO DATE: 04/01

Commercialization of Russian Technology in Cooperation with American Companies

David Bernstein

The Center for International Security and Cooperation

June 1999

 

Introduction

The Soviet Union placed a high priority on science and technology and built a huge assembly of research institutes, educational programs, design bureaus, and production enterprises embodying some measure of science and/or technology. This assembly concentrated over—whelmingly on military applications. Approximately three—quarters of this complex was located in Russia, but essential elements of many programs were located in other republics. The nature, structure, size, and operation of this military—industrial complex (MIC) as well as its decline and change during the Gorbachev and post—Soviet periods of economic transition have been documented in the literature. ₁

Starting in the Gorbachev regime there was a recognition that the economy was deteriorating and that it was necessary to reduce military expenditures and increase the civilian economy. A major element of this has been the attempt to direct a much greater effort toward the development of commercial products and services based upon technologies and skills developed in the MIC. This commercialization of Soviet and Russian military technology has been attempted by the Russians both independently, through conversion programs, and in cooperation with foreign partners. The conversion programs have had very limited success. The success of attempts at cooperative commercialization by U.S. companies and Russian enterprises have also been modest, but they illustrate workable models that could be utilized by other cooperative ventures. These cooperative commercialization ventures are the primary subject of this report. ₂

Almost all technology in the Soviet Union resided in the military industrial and research enterprises, and these enterprises designed and produced almost all civilian products with a technological content such as civilian aircraft, consumer electronics, and household appliances. This was a commercialization of technology in the sense that the products came into being for commercial applications, but it was not commercialization of technology in the Western sense of attempting to use advanced technology to make products more competitive in cost or quality. In general these products were not competitive with Western ones, and the only exports of consequence were to satellite or client states. Most importantly, there was virtually no technology developed specifically and initially for civilian applications as there is in the United States, where civilian technology leads military technology in most areas both quantitatively and qualitatively. Hence there was virtually no interest in responding to a market. The advance of science and technology was not reflected in commensurate advances in civilian products.

The United States also has problems with the commercialization of some advanced technologies from the military sphere, but many of the problems are very different than in Russia. In the United States commercialization is an ongoing process in a strong market economy that is based heavily on civilian technology. Many of the fundamental scientific or technological advances are made in response to demand from the civilian economy, which is often far more active in utilizing them than is the military. In Russia technology commercialization is one element of a broad spectrum of economic reforms that are being attempted to stimulate a severely depressed economy. ₃ It is often driven by state policies to enable enterprises to stay in business, although they are de facto bankrupt, rather than by market demand. This subsidized technology push often makes it difficult to assess whether a project is a success or a failure.

There can be various definitions of success in technology commercialization. One could be the establishment of a sustainable business in Russia. This is difficult to assess at this time because of the aforementioned uncertainty of the financial condition of a business, especially when it is imbedded in a larger enterprise that may be subsidized and/or de facto bankrupt. Another definition could be the acquisition of Russian technology by an American company with a resultant improvement in products or processes followed by increased exports of American products. ₄ This is more straightforward to assess but of less interest from the standpoint of the rebuilding of the Russian economy. A third definition could be conversion away from military activities, especially relating to weapons of mass destruction (WMD) and the potential proliferation of such technologies and/or personnel. This is also hard to assess because of the inability to determine what would have happened in the absence of conversion. A venture can be successful by one definition while simultaneously a failure by the others. This also complicates the task of understanding the process itself, but it is possible to study a few cases of technology commercialization in enough detail to gain some understanding of key elements of success and failure. In this study success is judged more by the first definition, the establishment of a sustainable Russian business, although with recognition that success must be considered as interim success and that a potentially successful venture can die in a failing enterprise or a declining economy. The political economy in Russia is too unsettled and the tenures of new business ventures too short to consider any business as being successful in an enduring sense. Even the most successful Russian businesses in this study have marginal momentum or established markets, let alone financial reserves.

As mentioned above this research is based primarily on the study of several cases of cooperative attempts by U.S. companies and Russian enterprises to commercialize Russian technology. Additional information has been gathered through participation in workshops and conferences including sessions or presentations on technology commercialization. There is no attempt to determine the total amount of such activity, but foreign investment of all types in Russia has been very small. These cases may not be representative of what is going on at many defense enterprises, especially those that do not have foreign partners. They do, however, show models of what can be achieved, as well as some of the problems encountered in technology commercialization. While the cases illustrate many important aspects of technology commercialization, there are limitations on the data and analysis that must be borne in mind:

• The cases do not span all of the important sectors of the economy.
• Both U.S. and Russian organizations are far more willing to discuss successes than failures.
• Organizations discussed their ventures with varying degrees of openness.
• Certain data are simply not reliably available; these include quantitative financial performance, some market and sales data, relationships to government subsidies, and the role, if any, of corruption. It is because of this lack of reliable data that I have eschewed a quantitative analysis.

This study is one of a series dealing with various aspects of microeconomic reform which have been prepared by the Stanford Project on Industrial Restructuring and the Political Economy in Russia. ₅ The research for this report began in early 1997. The last set of interviews were conducted in Moscow in the fall of 1998. Some enterprises reported benefits of the economic crisis in that the costs of their products were reduced compared with foreign imports; however, it is not clear how much inflation will erode those benefits. I have attempted to indicate when various data were taken. I am unable to assess the coherence of the data prior to and after the financial and economic crisis of August 1998. The effects of this crisis will not be known for some time to come. Many of the observations about factors that contribute to the success or failure of a technology commercialization project appear to remain qualitatively reasonable, assuming that the Russian government will not dramatically change the rules. However, the time to success is undoubtedly lengthened by the crisis in most cases.

Most of the Russian enterprises interviewed in the fall of 1998 did not think the crisis would have much effect on them, largely because they did not have much money in failed banks or in defaulted government securities. While their assessment of these direct effects may be accurate, I believe that they are all bound to suffer from the indirect effects of the myriad dislocations that will ripple through the entire economy.

Chapter II deals briefly with several aspects of the political and economic environment in which technology commercialization is being attempted. It also compares the processes of adjustment to demilitarization in the United States and Russia; this is primarily to show the difference in available strategies in market and transitional economies. Finally, it discusses some of the key factors to be considered in analyzing technology commercialization.

Chapter III contains the case studies of cooperative technology commercialization projects, usually from both American and Russian perspectives.

Chapter IV is an analysis of the case studies. I have attempted to verify the accuracy of the case studies themselves as presented in Chapter III with the interviewees; however, the analysis is my own.

Chapter V contains the conclusions and recommendations that I have drawn from this study.

 

Full Text of Paper (pdf)

Note 1:   Julian Cooper, “ Military Cuts and Conversion in the Defense Industry,” Soviet Economy 7, no. 2 (1991): 121—142; Julian Cooper, The Soviet Defense Industry: Conversion and Economic Reform (New York: The Royal Institute of International Affairs and Council on Foreign Relations, 1991); Clifford Gaddy, The Price of the Past: Russia’s Struggle with the Legacy of a Militarized Economy (Washington, DC: Brookings Institution Press, 1996); David Holloway, The Soviet Union and the Arms Race (New Haven: Yale University Press, 1984); Sharon Leiter, Prospects for Russian Military R&D (Santa Monica, CA: RAND, 1996) ; Kevin O’Prey, A Farewell to Arms? Russia’s Struggle with Defense Conversion (New York: The Twentieth Century Fund Press, 1995); Glenn Schweitzer, Experiments in Cooperation: Assessing U.S.—Russian Programs in Science and Technology (New York: The Twentieth Century Fund Press, 1997). Back.

Note 2:  This research was sponsored by Carnegie Corporation of New York and the United States Department of Commerce. Back.

Note 3:  This report was written shortly after the financial and economic crisis of August 1998. The future course of economic reform is as yet unclear. Back.

Note 4:  In this report “products” includes both products and services. Back.

Note 5:  Two previous studies that are closely related to the current one are David Bernstein, editor, Defense Industry Restructuring in Russia: Case Studies and Analysis (Stanford, CA: Center for International Security and Arms Control, 1994) and David Bernstein, editor, Cooperative Business Ventures between U.S. Companies and Russian Defense Enterprises (Stanford, CA: Center for International Security and Arms Control, 1997). Back.