Russian Economic Reform


Speech to Baikal Global Start-up Forum 1 November, 2018

Published on November 11 2018
Posted by: jeff

 “Innovation has no rules except a desire to create, and a willingness to accept the risk of failure”

Historical Context

Many people say that today we are in the midst of a fourth “industrial revolution” – the so-called “Industry 4”

Life before the Industrial Revolution (s): People mainly worked growing crops and caring for animals, or lived in towns where the manufacturing that did occur was generally small in scale. Energy came from animals (mainly horses), water and wind mills, and small furnaces (producing heat and sometimes steam).

The First “Industrial Revolution” — second half of the 18th century to the early 19th century: Mechanization allowed “industry” to began to replace agriculture as the main economic structure of society. Advances in steam engine technology (which in its basic form had been around for a very long time), along with advances in metallurgy, led to railways.  

The Second Industrial revolution – beginning in last part of 19th century: Emergence of a new source of energy (electricity, gas and oil), advances in basic materials (steel, chemical etc), and the internal combustion engine brought forth the motor car and the airplane, the telegraph and the telephone. The world’s most influential business writer, Peter F. Drucker, wrote that:

“In the late nineteenth century … a new major invention leading almost immediately to the emergence of a new major industry, surfaced every few months on average. This period began in 1856, the year that saw both Siemens’s dynamo and Perkins’s aniline dye. It ended with the development of the modern electronic tube in 1911. In between came typewriter and automobile, electric light bulb, man-made fibers, tractors, streetcars, synthetic drugs, telephone, radio, and airplane—to mention only a few. In between, in other words, came the modern world.”[2]

Third industrial revolution – second half of 20th century: Mankind discovered the ability to control nuclear energy in the mid-1940s, but the knowledge behind the atomic-bomb “invention” was limited in its application for some time. Drucker wrote that “no truly new major industry was started after 1914 until the late 1950s, when computers first became operational”.[3] This was the era of great advances in electronics, miniaturized material which allowed space research and biotechnology, and increased automation in production, with programmable machines and robots.

Fourth Industrial revolution (Industry 4) is now: Merging technology that blurs the lines between the physical, digital and biological spheres leading to transformations to entire production, management and governance systems. Its most important enabler is the emergence of the Internet.

But what exactly is “Industry 4”?

The Boston Consulting Group has identified some important technologies: autonomous robots, simulation, horizontal and vertical system integration, the Industrial Internet of Things, cyber security, additive manufacturing, augmented reality.[4]

What is Innovation?

The priority areas for the Baikal Global Startup Forum (BGSF) are the National Technology Initiative’s SafeNet, FoodNet, and HealthNet “market group” areas. On the National Technology Initiative (NTI) internet site[5], these are described in the following ways: 

SafeNet –new personal security systems;

FoodNet — system of personal production and food and water delivery;

HealthNet — personal medicine.

Using a similar approach to the Boston Consulting Group, the leaders of the National Technology Initiative (NTI) have also identified the following “technologies”: digital design and simulation; new materials; additive technologies; quantum communications; sensory; mechabiotronics; bionics; genomics and synthetic biology; eurotechnologies; big data; artificial intelligence and control systems; new sources of energy; unit base (including processors)[6]

When I first wrote about the NTI two years ago (after participating in the 2016 “Foresight Fleet” journey down the Volga River)[7] the NTI internet site only identified the “market groups” – with the identified “technologies” more recently added.

The “markets” approach always seemed rather vague, and I assume that the “technologies” have been more recently identified to give a clearer technical direction to the program.

Yet, 30 years ago (in the time before the “Internet age”) Drucker, wrote:

“Innovation is not a technical term. It is an economic and social term. Its criterion is not science or technology, but a change in the economic or social environment, a change in the behavior of people as consumers or producers, as citizens, as students or as teachers, and so on. Innovation creates new wealth or new potential of action rather than new knowledge.”[8] An innovation has to be “new and different”.

He wrote that “innovation is not science nor technology, but value” and that “innovation in a business enterprise must therefore always be market-focused”. “Innovation that is product-focused is likely to produce ‘miracles of technology’ but disappointing rewards.”[9]

So, I think that Drucker would favour the NTI’s “market grouping”, even if many people find it easier to think in terms of “technologies”.

I have always had the feeling that the collapse of the USSR was not only due to the sheer cost of the arms-race with the USA, which many commentators seem to think is the case. The lack of “market” mechanisms for determining allocation of resources (to produce Drucker’s “value”) probably played a large part in the USSR (including Russia) not taking advantage of the advances in electronics which was a major part of the 3rd industrial revolution.[10]

A much more recent (2017) book by Eric Schmidt (a former CEO of Google) and Jonathan Rosenberg, “How Google Works”, focusses on the “Internet age” and also emphasises the importance of the market and usefulness (ie “value”).[11] They wrote:

“To us, innovation entails both the production and implementation of novel and useful ideas”. Novel is defined as not only “radically new functionality”, but also “surprising”. “If your customers are asking for it, you aren’t being innovative when you give them what they want; you are just being responsive”.[12] 

They also offer a “more inclusive definition”, saying “innovation isn’t just about the really new, really big things”: Google “releases over 500 improvements to its search engine each year. Is that innovative? Or incremental?” While they are “new and surprising” and “useful”, each one is not “radically useful” – but “put them all together, though, and they are.” Thus, “Google’s search team, working on a product that is 15 years old, is just as much in the innovation business as Google(x), the team working on the self-driving car.”[13] 

So, in their view “innovation” does not necessarily need to be a product, but may be a new way of making better use of an existing product. In 2010, a Tencent senior official dismissed cloud computing as “old wine in a new bottle, nothing new”. However, Alibaba’s Jack Ma said: “[If] we don’t do it, we will die in the future.” Alibaba is now the biggest player in China’s cloud sector.[14]

Drucker and the authors of “How Google Works” are in agreement that aspiring technology start-up founders need to consider much more than their technical skills if they want to succeed.  

The term National Technology Initiative clearly puta an emphasis on technology. But how much technology does a “start-up” need?  

Kyle Young, in a recent Harvard Business Review (HBR) article entitled, “The Simple Question That Can Make or Break a Start-up”, describes the “Chop House Burger” restaurant in Texas which sells “six innovative burgers”.[15] I have not been to this restaurant, but I am almost certain that there is a limit to how much technology can be fitted into a hamburger! 

But, there was serious intent behind this burger example. It was the “value of establishing demand before you launch” a business. Young refers to an early 2018 “extensive review” of business failure by CB Insights: “After analysing 101 start-up post-mortems, the reviewers found that 42% suffered from a lack of demand for the product or service being offered.” “This one flaw harmed significantly more companies than well-known start-up challenges such as cash flow (29%), competition (19%), and poor timing (13%), to name a few.” 

This leads to the obvious question of how to measure the possible demand before you start-up (as a verb) your start-up (as a noun)! Quite a bit has been written about this issue,[16] and I will not delve in to this issue here in any depth.  

However, the authors of “How Google Works” had this to say:  

“Before innovation, there needs to be the proper context for innovation. This is usually found in markets that are growing quickly and full of competition (eg self-driving cars). Don’t look for empty space and then be lonely; it is much better to use an innovative approach to become a player in a space that is or will be large. This may seem counterintuitive, since many entrepreneurs dream of entering ‘greenfield’ markets that are brand new and hence have no competition. But usually there is a reason the market is empty. It’s not big enough to sustain a growing venture. It still may be a good business opportunity …. but if you want to create an innovation, it is better to look for big markets with huge growth potential. Remember, Google was late to the search-engine party, not early.”[17] 

Yet, the same authors also write that “giving the customer what he wants is less important than giving him what he doesn’t yet know he wants”.[18] 

Presumably there was plenty of “empty space” for the light bulb and the airplane? So, does the product meet market demand, or does the product create the market?  

The same authors also say that “if you focus on your competition, you will never deliver anything truly innovative”[19]. Yet they say that Google “focussed on search because it was something we felt we were better at than anyone else”,[20] and, indeed, they relate how the 2009 Microsoft launch of Bing “intensified our efforts on search”.[21] 

The authors of “How Google Works” wrote that account needs to be taken of evolving technology, and that would be innovators need to realistically consider their ability (talent) to take advantage of it.[22] Having said this, Jack Ma of Alibaba “stands out as a tech company founder with no background in technology”. In 2013 he said: “Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet.”[23] 

Innovation has no rules …

Drucker wrote about the “dynamics of innovation”, and that “there are so many factors in whatever causal patterns may exist that no one can possibly unravel them”. But he disagreed with what he described as the “common belief that innovation is haphazard and incapable of being predicted or foreseen.”[24]

He wrote that “an innovation does not proceed in a nice linear progression. For a good long time, sometimes for years, there is only effort and no results. The first results are then usually meager.”[25]

He added that “timing is of the essence”. “For every successful innovation that has results faster than anyone anticipates, there are five or six others—in the end perhaps, equally successful ones—which for long years seem to make only frustratingly slow headway. The outstanding example may be the steam-driven ship. By 1835 its superiority was clearly established; but it did not replace the sailing ship until fifty years later. Indeed, the “golden age of sail” in which the great clippers reached perfection began only after the steamship had been fully developed. For almost half a century, in other words, the steamship continued to be ‘tomorrow’ and never seemed to become ‘today’.”

“But then, after a long, frustrating period of gestation, the successful innovation rises meteorically. It becomes within a few short years a new major industry or a new major product line and market. But until it has reached that point it cannot be predicted when it will take off, nor indeed whether it ever will.”

Timing can be lucky or unlucky. There is often a need for “complementary innovations” – that is innovations in related areas. For example, the first steam trains depended on advances on metallurgy to enable railway lines that were strong enough to support their great weight.

When has an innovative product been innovated enough?

The authors of “How Google Works” wrote that “new ideas are never perfect right out of the chute, and you don’t have time to wait until they get there. Create a product, ship it, and see how it does, design and implement improvements, and push it back out. The companies that are fastest at this process will win.”[26] “In the Internet age, “product development has become a faster, more flexible process … (with) lots of iterations. The basis for success then, and for continual product excellence, is speed.”[27] “The products should be great at what they do, but it’s OK to limit functionality at launch.” “Figure out some way to let people experience the product, and use the data to make the product better.”[28][29]

The advice on “How Google Works” is very focussed on the “Internet age”, and its advice is not practical on many other areas.

Steve Jobs delayed the planned roll-out of the first Apple Store by 3-4 months after being persuaded that the layout should reflect “what people might want to do” with its products (in other words, their “usefulness”) rather than being organized by the “type of products” (ie “technology”) being sold. Jobs said: “We’ve only got one chance to get it right.”[30] The same applies to other physical products such Tesla and General Motors automobiles cars (which of needed, are very expensive to recall for modification)!

… Willingness to fail

If you are afraid of failure, do not attempt to innovate.

Drucker wrote: “The majority of innovative efforts will not succeed. Nine out of every ten “brilliant ideas” turn out to be nonsense. And nine out of every ten ideas which, after thorough analysis, seem to be worthwhile and feasible turn out to be failures or, at best, puny weaklings. Innovative strategy therefore aims at creating a new business rather than a new product within an already established line. It aims at creating new performance capacity rather than improvement.”[31]

However, the authors of “How Google Works” might disagree with Drucker when it come to Google’s 500 “improvements” each year to its search engine!

Nevertheless, Drucker continued, writing that innovation “aims at creating new concepts of what is value rather than satisfying existing value expectations a little better”. “The aim of innovating efforts is to make a significant difference. What is significantly different is not a technical decision. It is not the quality of science that makes the difference. It is not how expensive an undertaking it is or how hard it is to bring it about. The significant difference lies in the impact on the environment.”[32]

Drucker wrote that “the first products” of innovation efforts “are rarely what the customer will eventually buy”. “The first markets are rarely the major markets. The first applications are rarely the applications that, in the end, will turn out to be the really important ones.”[33] 

According to the authors of “How Google Works”: “To innovate you must learn to fail. Learn from your mistakes. Any failed project will yield valuable technical, user, and market insights that can help inform the next effort.”[34] “Most of the world’s great innovations started out with entirely different applications, so when you end a project, look carefully at its components to see how they may be reapplied elsewhere.” They give the example of radio which was initially sold only as a means of ship-to-shore communication, and the steam engine as a water pump.[35] 

The authors of “How Google Works” wrote:

“We have long felt that the start-up model, with small, autonomous teams located in one office led by passionate founders, is the most effective way to achieve remarkable new things (or fail quickly in the effort).” So they devised a way to “think big (solving big problems by taking advantage of big-company assets such as talent, resources and technology) while simultaneously acting small (growing ‘start-ups’ built through bottom-up insights and with the autonomy to move fast)”.  

Based on the idea that Google employees are “allowed and encouraged to work on projects of their own choosing” for 20 percent of their time, Google developed a new program called Area 120. A “select group” of Google employees are given “the opportunity to spend 100 per cent of their time on 20 per cent projects (100+20=120!)”. “Teams are given the money, space, and autonomy to pursue their ideas”. “We attempt to re-create the Darwinian world of start-ups by establishing aggressive milestones and timelines. For example, of the inaugural class of 14 teams at Area 120 in September 2016 (selected from more than 300 applicants), we expect half to fail within 6 months.”[36] 

Drucker wrote that “it is as important to decide when to abandon an innovative effort as it is to know which one to start”. It is important to be able to “admit that what seemed like a good idea has turned into a waste of men, time, and money”. “And near-success can be more dangerous than failure. There is, again and again, the product or the process that was innovated with the expectation that it would ‘revolutionize’ the industry only to have it become a minor addition to the product line, neither enough of a failure to be abandoned nor enough of a success to make a difference. There is the innovation which looks so ‘exciting’ when work on it is begun, only to be overtaken, during its gestation period, by a more innovative process, product, or service. There is the innovation which was meant to become a ‘household word’ that ends up as another ‘specialty’ which a few customers are willing to buy but not willing to pay for.”[37] The Segway is sometimes given as an example of this.[38]

The authors of “How Google Works” agree that “the timing of failure is perhaps the trickiest element to get right”,[39] and argue that a “good failure is a fast one” so as to “avoid further wasting of resources”.  If the innovative product idea is not working out, do not be afraid to abandon it. And, it should not be forgotten that some of the information and ideas from the failed product, might be very useful for a new product.

What Can Governments Do?

You may have noticed that my 2016 article on the National Technology was quite dismissive of the NTI – at least in the way that it was being promoted at that time![40]

Apart from the flawed “Foresight Procedure”[41], one of my criticisms was the NTI envisaged designation of high-tech “national champions” – whether it be companies or products – means that someone 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.

I asked: “Who will be the final arbiter here? Would the arbiter of only a few years ago have designated Nokia and Research in Motion (manufacturer of the BlackBerry) as national champions if they had been Russian companies? “National champions” can quickly become “national failures”.

An excellent 2015 McKinsey report says that “digitization seems to intensify competitive churn. Today’s market leaders are vulnerable to being knocked off by the next wave of innovation.”[42] And this probably remains true today.[43]

The last thing that Russia needs is some government officials, no matter what their good intentions may be – making such decisions about which innovation projects to spend money and other resources on.[44]

My main criticism of the NTI was on the emphasis on developing new technology and the lack of emphasis on “using” available technologies.

Australia, with a similarly “resource cursed” economy to Russia, has developed few new technologies or been particularly innovative, but has been good at taking advantage of existing technologies and innovations and using these to create additional value.

Russian President, Vladimir Putin, speaking at the Valdai Discussion Club, in October 2018 said: “Of course, the American economy is high-tech and introduces contemporary innovative technologies quickly, so both Russia and China have something to work on and to learn from our American colleagues.”[45]

So, maybe the Russian government is moving a little closer to my point of view.[46]

Chinese bureaucracy, and the desire for government control, does impeded the adoption of innovative technologies in many areas. But, China has had the advantage of a rapidly increasing consumer market – and competition for it can be an enormous driver of innovation. The Chinese consumer has been allowed to receive many innovative products, particularly those associated with the Internet.

In Russia, lower income growth and a more comprehensive bureaucracy – generally based on the period of the 3rd industrial revolution – seems to impede the adoption of contemporary technologies.[47]

The authors of “How Google Works” argue that the “defining characteristic” of innovation is its “lack of process”. It cannot be forced; instead it must be “allowed”[48] by those in power.

One of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform because increasing competitive pressures encourage organizations to become better “users” of high-tech.

In general, apart from limited areas associated with national defense issues, the best approach of government to innovation is to get out of the way as much as possible – that is, do not try to pick winners! Governments should not try to stop use of new innovations just to protect some existing interest group! But Government does have a role to protect IP and to ensure that innovations are not abused for dishonest and anti-competition purposes.  


For innovative people thinking about starting a technology orientated “start-up”, there are no rules except a desire to create, and a willingness to accept the risk of failure (and some would say, even embrace it).

For governments, the rules for an innovative society are two-fold:

Firstly, get out of the way. Russia (and China) need to reduce the extent (including number of forms and people involved) in controlling what happens in society. This is the case at any official level.

Secondly, getting “out of the way” does not mean abandoning the responsibility for ensuring that honesty is the basis of society relations and business dealings.

PDF print version of this article with footnotes is available here:

Speech to Baikal Global Start-up Forum 1 November, 2018


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