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. Last Updated: 07/27/2016

World Bank Urges Action on R&D

Russia lags behind many of its neighbors, including Bulgaria and Poland, in its ability to invest effectively in innovation, and must do more to encourage business involvement in the sector if it is to become a knowledge-based economy, the World Bank said in a report released Monday.

The government needs to provide more incentives for scientists and businesses to work together, but should be careful not to simply pour state money into research and development, the World Bank said. State support should go hand in hand with making a push to attract more private-sector funding for R&D, it said.

The report, which analyzes innovation capabilities of countries in Eastern Europe and Central Asia, ranks Russia 11th out of 25 countries in its ability to invest productively in R&D.

Estonia tops the list as the region's most effective investor in R&D, while Tajikistan comes in last place.

The ranking is based on a set of indicators in such areas as education, economic incentives, government institutions and information technology infrastructure.

"Translating research and development into commercial success is key to achieving sustained, long-term economic growth in the Europe and Central Asia region," Shigeo Katsu, the World Bank vice president for the region, said in a statement. "This will only happen if we create the incentives for researchers and businesses to work together."

Russia has a strong tradition of education and the region's highest ratio of researchers per capita -- more than 3,400 per 1 million people, compared with the region's average of approximately 2,000 researchers per 1 million people, according to the report.

Nevertheless, the disconnect between research projects and business needs, inadequate incentives for risky innovation projects, and a weak rule of law are holding Russia back from catching up with advanced knowledge-based economies, the report said.

Last Friday, Economic Development and Trade Minister German Gref outlined a slew of initiatives to encourage investment outside oil and gas as part of the government's effort to diversify the economy. These initiatives include the creation of special economic zones with tax and other benefits for technology companies, as well as state investment funds for innovation sectors, according to, an official government news web site.

Gref said the ongoing creation of the so-called "fund of all funds" -- a state-supported venture capital fund -- aimed to encourage private venture capital investment for start-ups and other innovation companies, reported.

In addition, 1.12 billion rubles ($40.43 million) from the federal and regional budgets is earmarked for six regional private-government venture funds to be managed by venture capitalists, Gref said. The funds are expected to begin operating in the third quarter of 2006, quoted Gref as saying.

Earlier this month, the IT and Communications Ministry submitted a proposal for the creation of another state-supported investment fund to beef up the country's IT industry.

The World Bank, however, said the government should proceed cautiously with state-supported funds and warned that in other countries "state-owned and state-managed venture capital in particular have proved to be especially prone to failure." "Government officials usually do not have the crucial technical expertise and risk-taking mindset to support innovations at their commercialization stage," it said.

Itzhak Goldberg, an author of the report, said that "government funds are scarce and should be used to fund research only when the conditions are in place for them to bear fruit."

These conditions include broad public access to the Internet, protection of intellectual property rights and determined efforts to fight corruption, according to the World Bank.

Russia is often rapped for not doing enough in any of these areas.

Only about 20 percent of Russians log on to the Internet at least twice a year, according to figures from the Public Opinion Foundation. A U.S.-based copyright holders' lobby has said Russia is one of the world's most egregious violators of intellectual property rights, surpassed only by China. In addition, human rights organizations point out that corruption at all levels of government remains a problem.

Some 67 percent of all R&D spending is publicly funded across Eastern Europe and Central Asia, nearly twice the 35 percent share of R&D money that comes from government sources in Western Europe, the report said.

Simply dumping more government money into R&D is not likely to improve Russia's performance in the innovation sector unless it is accompanied by more active involvement of the private sector, it said.

The high-risk nature of R&D investment and its lack of easy, short-term returns, however, means that Russian companies are often dissuaded from betting on innovation projects, said a recent study that was sponsored jointly by the Russian Managers Association and Sistema and surveyed more than 150 Russian companies in a variety of sectors.

Additionally, businesses often complain that the ongoing R&D work does not match their needs, the study found.

Many top innovation economies, such as Finland and Israel, address this discrepancy between research and commercial needs by requiring scientists to work with private companies when applying for funding.

A research institution's grant application for bankrolling an R&D project is not accepted unless it is cosigned by a business that has a need for the research in question, Goldberg said by telephone.

Large multinational corporations, such as Shell, General Electric and IBM, could also potentially provide vast resources to fund innovation in Russia, the World Bank said.

Receiving funding from global corporations, which are interested in bankrolling start-ups to strengthen their supply chain, may be easier for smaller companies than getting funds from venture capitalists.

Only one out of every 200 small and mid-sized companies in emerging markets is able to secure venture capital financing, compared with one in 100 in the United States, the report said.