“National Technology Initiative” Likely Failure!
Overview
Russia’s National Technology Initiative (NTI) (https://asi.ru/eng/nti/) aims to boost the country’s high-tech “production” and exports. If Russia wants to make serious advances in high-tech “production”, it needs an NTI that puts less emphasis on misguided efforts to identify new markets and things to “produce” and puts more emphasis on promoting Russian “usage” of technology. Much technological progress actually flows from the initiatives of “users” and the feed-back they give to “producers”.
Apart from education, one of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform – because competitive pressures encourage organizations to become better “users” of existing technology and potential testing grounds for new high-tech products.
If Russian does not become a better “user” of technology, there is a risk that other countries will get greater benefit than Russia from Russian developed high-tech products. If Russian high-tech products are developed using government budgetary funds, this would also mean that Russian tax-payers are subsidizing high-tech “users” in other countries.
It is important to note that, irrespective of government policy actions (including the NTI), the rapid pace of technology change and falling tech prices (relative to other prices) means that, at the country level, “users” can easily receive greater economic benefits than “producers” because of improvements in their “terms of trade”. This is a particular possibility when the “producers” are a very small part of the economy in one country, but the “users” are a very large segment of an economy is another country.
1. Reasons for this paper
This paper had its genesis during my participation in the 2016 “Foresight Fleet” (four boats) journey down the Volga River in May. Jointly organized by the “Agency for Strategic Initiatives” (ASI) and the “Russian Venture Company” (RVC), it aimed to consider various aspects of the “National Technology Initiative” (NTI) which is billed as “a program for creation of fundamentally new markets and the creation of conditions for global technological leadership of Russia by 2035”. (https://asi.ru/eng/nti/ )
I found it to be (at least on my boat, the “Global Markets”) an intellectually stifling event. The discussion groups on pre-designated topics supposedly produced considered group recommendations. But, they in fact operated to produce forced recommendations as the generation of output quantity was prioritized over output quality.
The NTI internet site says that 2035 is a “planning horizon” – that is, “the extreme point to which we extend our forecasts and projects”. “Meanwhile, the NTI roadmaps will be built at the level of practical actions for 2015-18 with control of their implementation every six months.” This 20-year gap in thinking is intellectually jarring. Why is 2035 there at all?
Talking to the few other foreigners (and quite a few Russians) on my boat, I found considerable agreement with my views. I thus set about to produce a very short report on ways for Russia to take more productive steps to improve its capacity to be a major “producer” and exporter of technology – and perhaps, even high-tech products and services!
2. What is “high-tech”?
A December 2015 McKinsey Global Institute report, “Digital America: a Tale of the Haves and Have-Mores”, would seem to broadly equate much “high-tech” with “digitalization”, IT and ICT (Information and Communications Technology).
On this issue, I was present at one of the “Foresight Fleet” group discussions which eventually got to the issue of specifying “high-tech”. There was no clear answer! While this paper would seem to leave out such areas as “bio-tech”, I use “digitization” as a proxy for all “high-tech” because many of the needed policy responses are the same.
According to McKinsey (“In Brief” section), “digitization is not just about buying IT equipment and systems. The most explosive growth is now in usage as companies continue to integrate digital tools into an ever-widening variety of business processes”. “In fact, most sectors across the (US) economy are less than 15% as digitized as the leading sectors. We see this pattern at the company level as well as the sector level.”
McKinsey (p19) also say: “The ICT sector is the engine of digital innovation, but its represents only the supply side of the equation. …harder to quantify is what is happening on the demand side as companies …etc acquire technology tools and put them to work. … This broader activity constitutes what we refer to as the ‘digitization’ of the US economy.”
3. Is it better to be a high-tech “producer” or high-tech “user”?
There seems to be an automatic assumption in Russia that being a very significant high-tech “producer” (and exporter) is now essential for Russia’s future prosperity.
Given the size of the Russian population and potential market, I certainly agree that – from a variety of points of view – Russia should aim to be a significant high-tech “producer”. However, given Russia’s extensive natural resources, I would argue that is equally important to be an efficient “user” of technology – including high-tech!
Technology can boost the productivity of organizations (and countries) which are “producers” because of higher value-added in the form of profits and wages. But, it can also boost the productivity of “users” because the way technology it is applied to other activities and boosts the value-added (ie productivity) of these.
Generally, economists claim that the huge boost to productivity from IT during the late 1990s/early 2000s has since significantly slowed. Industries most affected are both those that “produce” IT and those that “use” IT intensively. There are many views on why this has occurred.
According to McKinsey (p51): “Digitization helped to fuel robust productivity gains from 1995 to 2005, but it remains a puzzle that the ensuing decade of dazzling technological progress has coincided with a slowdown in productivity growth. At least part of this disconnect could be explained by the fact that many recent technological advances have benefited consumers and society far beyond what is captured in GDP measurements. Another issue could be that relatively recent digital adopters in sectors such as transport, government, and manufacturing have invested in digital assets but have yet to complete the organizational and process changes necessary to fully realize the benefits of technology. This would imply that the economy is experiencing a pause before the resulting productivity gains become apparent.”
So, the important McKinsey point is that “users” may be on the verge of further great productivity gains.
The late 1990s/early 2000s productivity surge was quite marked in Australia – which is a very significant exporter of natural resources, but directly produces very little high-tech (or digital) product. It is however, a relatively enthusiastic high-tech “user”. Combined with structural economic reform and favorable “terms of trade” (ratio of import to export prices), this has allowed Australia to become a very wealthy country.
An Australian “Bureau of Communcations Research” paper, “A Primer on Digital Productivity”, May 2015, (no page number) says that “it is clear that it was sensible strategy for Australia to concentrate on accessing the productivity gains from using ICTs. There has been very strong international competition in the production of ICTs and Australia could effectively import spillover gains (productivity gains from ICT use) generated by overseas manufacturers. Moving into the production of ICTs is any substantial way was neither necessary nor a sensible way to access productivity gains from ICTs”.
According to McKinsey (p25), “in real terms, the price of ICT goods and services tumbled 63% between 1983 (near the beginning of the desktop and PC wave) and 2010. This decline was especially steep through the 1990’s, and particularly so for digital hardware.”
The uncertain future of technology change means that the relative prices of high-tech things is uncertain, but the balance of probabilities would seem to be that these prices will continue to fall – ie the “terms of trade” will continue to favor “users”!
4. If Russia wants to be a high-tech “producer”, what is the role of domestic “use” in raising/setting Russian “production” standards?
Very competent technology “users” can help high-tech “producers” understand what buyers (domestic and foreign) may want in terms of details of changes to products and new models.
“Using” high-tech helps boost understanding of the importance of “complementary” investments – ie those less/non-tech investments that allow the high-tech to be more effectively used.
The Australian “Bureau of Communcations Research” paper, “A Primer on Digital Productivity” (no page number) says:
“Complementary investments could be in: research and development to develop suitable software systems; gathering customer information and setting up databases; training staff in new information systems; restructuring an organization and reassigning tasks and responsibilities consistent with the introduction of new business models.”
de Jong, Jeroen P.J., and Eric von Hippel, “Transfers of user process innovations to process equipment producers: A study of Dutch high-tech firms”, MIT Sloan School of Management Research Paper No. 4724-09, 2009, reported that (Abstract) “a detailed survey of 498 ‘high-tech’ SMEs in the Netherlands shows that process innovation by user firms to be common practice”. It says (p3):
“Empirical research by innovation scholars has now clearly documented that many of the innovative products we buy from producers are in fact developed, prototyped, tested and improved by ‘lead users’. These individuals and firms often innovate in order to solve their own, ahead-of-market needs. Later, when a commercially-attractive market emerges for these products, producers adopt or learn from products lead users have already developed as an important feedstock to their own product development and commercialization efforts.”
For those of a different mind-bent to understand this more fully, consider the progression of military technology during a war. The soldiers at the front give feedback to the weapons designers and producers, and a process of improvement is implemented.
Russia is a much bigger market than, for example Australia, and domestic development of high-tech rather than importing might in many cases make more sense. In some areas there will be research and/or production economies of scale, particularly if wide-spread Russian “usage” and “production” could be closely and quickly matched to influence each other in a common language and cultural market space.
5. How can Russian domestic “use” be improved?
Thierry Tressel, “Does Technological Diffusion Explain Australia’s Productivity Performance?”, IMF Working Paper (WP/08/4), January, 2008 (Introduction) concluded that “technological diffusion crucially depends on domestic R&D intensity and human capital.”
Education (ie building human capital) is probably the most important potential government policy tool. I recently conducted a survey of highly-educated Russians using LinkedIn, and found that educating people about using technology ranked number one in suggested ways to improve Russian productivity. However, even educated “users” will find it difficult to improve their own productivity if multiple layers of government and organizational regulation stand in the way of process improvement. This is a particular problem in Russia (and very obvious for someone, like me, from Australia).
But why does “domestic R&D intensity” matter?
Era Dabla-Norris, Giang Ho, and Annette Kyobe, “Structural Reforms and Productivity Growth in Emerging Market and Developing Economies”, IMF Working Paper (WP/16/15), February 2016, (p9) said:
“As countries move up value chains, technology transfer tends to be more skill intensive, requiring sufficient R&D in the recipient country to adapt new technologies to local conditions.”
Adaptation to “local conditions” are the crucial words here. Russia is a big market (both geographically and population wise) with its own language, cultural and climatic conditions. This should give Russian “produces” of high-tech a competitive advantage in meeting the needs of “users” – provided they make an effort to get feedback from them!
Thus, higher “domestic R&D intensity” may assist a process which McKinsey (p6) describes: “When digitization reaches critical mass across industries, it can spark fierce price competition, shifting profits, and competitive churn across commercial ecosystems.”
McKinsey (p34) says that “the threat of competition, especially from disruptive new business models, prompts firms to digitize. Digital asset intensity (in the US) rose sharply in telecom, transportation, utilities, and finance at the time that these sectors were deregulated. Tradable services such as finance, information and professional services are more exposed to global competition, and are also more digitized than other services. The threat of impending competition is a greater spur to digitize than actual degree of competition; for instance, business entry and exit rates in a sector (a measure of competitive churn) have no clear link to digitization intensity.”
The overall message here is that is the threat (at least) of competition promotes digitization, once digitization begins it can spread very fast (most likely assisted by domestic R&D intensity) and has great effects on productivity. So, policies to promote competition should not be evaluated solely on the initial (or first-round) effects.
My own LinkedIn based survey suggested that policies to increase competition in the Russian economy ranked along with “deregulation” and “improved general tax and investment policies” as the second most positive thing that policy makers could do to promote “usage”.
Despite my own generally negative view of the “Foresight Fleet”, I understand that some subsequent steps are being taken by the RVC to formulate policies to boost R&D at the university level. If sensibly implemented, this should help over time to boost “domestic R&D intensity”. But, in my view, much more than this is needed in Russia.
6. Things that Russia should not do!
On the NTI internet site, the “Foresight Fleet” is described as a “key point” for “developing ‘roadmaps’ for Russian technological companies – national champions – to emerge in these (designated) markets by 2035”.
Such designation of high-tech “national champions” – whether it be companies or products – means that some-one must make a decision on which high-tech issues are to be pursued. The rapid changes in technology make this selection process very difficult – and mistakes can be very costly!
RUSNANO would appear to provide plenty evidence of this!
According to McKinsey (p70):
“Given the speed with which new innovations, new markets, and new disruptions appear, creating a five- or ten-year plan is becoming an exercise in futility. Long-term forecasting exercises are less relevant and reliable, while agility is more critical than ever. Large incumbents cannot afford to maintain cumbersome decision-making processes and slow-moving corporate cultures. Borrowing a page from winning tech firms, they need a new mindset that focuses on learning, experimenting, and iterating. Even the most successful tech giants never stop innovating, pivoting, and adjusting their platforms.”
McKinsey (p70) also say that “digitization seems to intensify competitive churn. Today’s market leaders are vulnerable to being knocked off by the next wave of innovation.”
That is, any “national champions” can quickly become “national failures”!
Moreover, a “national champion” for high-tech / digitalization is unlikely to set sufficiently high standards for high-tech exports. Michael Porter’s book, “The Competitiveness of Nations”, extensively examined the impact of domestic competition in increasing the international competitiveness of companies.
The NTI says nothing about subjecting “national champions” to such domestic competition; except to the extent that it is interested in competition, it is a competition for government funds!
The NTI sensible says (internet site) that it “has no task of import substitution” but emphasizes “the creation of strategies to develop fundamentally new markets”. “However”, it says, “a part of key technologies that form precursor markets may appear within the process of import substitution”.
The danger is that the every domestic producer of what-ever technology will want to be nominated as a “part of key technology”. Which then takes us back to the issue of “key technology” national champions!
Even “part of key technology” import-substitution is likely to impede increasing high-tech producer standards by reducing competition. While too much import competition might destroy local producers, the right amount will push them to adapt and boost efficiency by, amongst other things, also becoming better high-tech “users”.
7. How should Russia move forward?
One thing is very clear. Policies such as the NTI by themselves will bring little benefit because they concentrate on the desire for “national champions” – at least at the product level – and attempt to bring a form of central-planning to rapidly changing markets. The “Foresight Fleet” approach to help identify these “national champions” is flawed.
Import-substitution (even if limited to “part of key technologies”) may boost some industries for a time, but the great risk is that lack of ongoing competitive pressure will impede “digitization” (as McKinsey use the term) and the use of high-tech.
Interestingly, McKinsey (Executive Summary) say that (in the US) “utilities, mining, and manufacturing … are in the early stages of digitizing and connecting their physical assets, and they could be at the forefront of the next wave of digitization. Labor-intensive industries such as retail and health care are expanding digital usage, but substantial parts of their large workforces do not use technology extensively. Industries that are both highly labor-intensive and localized, such as construction, leisure and hospitality, also tend to rank lower in usage, notably in the way they conduct customer transactions.”
In all of these sectors, there would seem to be great opportunities for Russia to improve productivity.
According to McKinsey (p20): “Digitization spread slowly at first, as early advances centered on computing power and affordability. While those trends continue, more recent innovation has focused on connectivity, platforms, data, and software – all of which have inherent network effects and can spread faster than hardware.”
If Russia wants to make serious advances in high-tech “production”, it needs an NTI that puts less emphasis of identifying new markets and things to “produce” and more emphasis on promoting “usage” to take advantage of these network effects.
If Russian does not become a better “user” of technology, there is a risk that other countries will get greater benefit than Russia from Russian developed high-tech products. If Russian high-tech products are developed using government budgetary funds, this would also mean that Russian tax-payers are subsidizing high-tech “users” in other countries.