public report 03 04-2013-eng

Advisory

Skolkovo Foundation Russia and Skolkovo’s attractiveness as an R&D destination

Public report

March 2013

The reader of this report understands that the work performed by PricewaterhouseCoopers Russia B.V. (“PwC”) was

performed in accordance with the instructions of our addressee client, the Skolkovo Foundation (“Skolkovo”), and

exclusively for Skolkovo’s sole use and benefit.

The reader also acknowledges that this report was prepared at the direction of Skolkovo and may not include all

procedures deemed necessary for the reader’s purposes.

The reader additionally agrees that PwC, and its partners and employees neither owe nor accept any duty or

responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty),

and will not be liable for any loss, damage or expense of any kind whatsoever that may be caused by any use the reader

chooses to make of this report, or which may otherwise result from the reader gaining access to this report. Further, the

reader agrees that this report is not to be referred to or quoted, in whole or in part, in any prospectus, registration

statement, offering circular, public filing, loan, other agreement or document without PwC’s prior written consent.

i

Important message

Table of contents

Section Overview Page

Introduction

1 International R&D dynamics and trends 1

2 Critical success factors in attracting R&D investment and Russia’s performance 8

3 Overview of R&D incentives globally and availability of support in Russia and Skolkovo

12

4 Skolkovo as an innovation centre in comparison with other development institutions 19

Appendices

1 Glossary 28

iii

PwC

March 2013

Public report

Given its capabilities and investment in R&D infrastructure through Skolkovo, Russia offers favourable opportunities for international R&D investment

Skolkovo Foundation • Russia and Skolkovo’s attractiveness as an R&D destination

MNCs are looking to go international for additional R&D capabilities.

Nowadays, leading MNCs driven by the needs of global markets are intensively looking for unique R&D capabilities that can generate new technologies, products and know-how with strong commercial potential in their respective industries.

Russia is a potentially attractive R&D destination for MNCs as a country with an extensive historical legacy in science and huge market potential. From 2002 to 2011, at least 15 MNCs established R&D centres in Russia. Among the main reasons why MNCs decide to establish R&D centres in Russia are the following:

1) Extensive talent pool available in Russia, ensured by: • High level of education • Long standing scientific and engineering culture and tradition, especially in

aerospace, nuclear science, engineering and software • Renowned universities and research centres • Strong track record in international educational competitions

2) Commercial opportunities driven mainly by attractive domestic market: • B2C market: Russia is one of the largest consumer markets in Europe • B2B market: industrial output with a 5% annual growth rate is among the

highest in the world • B2G market: the Russian government is pursuing an ambitious modernisation

programme covering such diverse industries as healthcare, energy, aviation, transport and utilities

However, the number of foreign corporate R&D centres in Russia is very small in comparison with such countries as China and India, which have attracted the majority of total outbound R&D centres over the past 10 years, at least 224 and 95 centres, respectively.

The average number of foreign R&D centres established annually in Russia per total number of researchers in the country is the lowest among the BRIC countries: two times lower than in Brazil, six times lower than in China, and 18 times lower than in India, meaning that Russia’s R&D environment is relatively less penetrated by MNCs. Meanwhile, the Russian market is also relatively untapped as the average number of foreign R&D centres established annually in Russia per average annual GDP is also times less then in China and India.

In particular, this is the result of the low level of integration of Russian science into the global scientific community and a lack of entrepreneurial culture in Russia, which is due to historical factors. Among other obstacles preventing MNCs from establishing R&D centres in Russia is the country’s outdated

or underdeveloped R&D infrastructure, especially in the Biomedical and Industrial Machinery industries, and administrative barriers, which partially result from investors' unfamiliarity with Russian legislation and business practices.

Currently, the Russian government is focused on improving the country’s R&D environment to increase its attractiveness as an R&D destination.

The Russian government is implementing a policy of economic modernisation and support for innovation. R&D support measures include:

• Tax incentives for R&D: Russia provides a favourable tax regime for R&D activity compared to other countries, including lower rates for major taxes and accelerated depreciation of R&D expenditures at the federal level and/or within SEZs and Skolkovo clusters

• Public funding of science, including grants and venture capital through special development institutions

• Technological platforms aimed at uniting key stakeholders on a specific R&D task: industry (large, medium and small companies), public authorities, research institutions, civil society and the academic and financial communities; such platforms are supported by Russian Foundation for Technology Development providing preferential loans for R&D expenditures

• Organising innovation clusters: the cluster approach to organising R&D allows for creating an innovation ecosystem that offers participants, including MNCs, easy access to partners, financial sources, professional services, infrastructure facilities, etc.

Skolkovo has successfully attracted MNCs to its R&D clusters as it addresses the key issues such corporations face in Russia’s R&D environment. Skolkovo represents the Russian government’s most successful initiative for creating R&D clusters. It has already established partnerships with several MNCs that plan to set up R&D centres at Skolkovo. MNCs see Skolkovo as a particularly attractive R&D location for the following reasons:

• Access to a talent pool through the country’s leading universities and research institutes located in the greater Moscow area that specialise in Skolkovo’s foresight industries (IT, Space and Telecom, Biomedical, Energy Efficiency, Nuclear)

• Availability of public financial support for start-ups and access to high-technology partners

• Cost effectiveness (tax incentives, large-scale construction of infrastructure) • Absence of bureaucracy and red tape

iv

PwC

March 2013

International R&D dynamics and trends

1

Section 1


PwC

March 2013

Public report

Corporate R&D spending is highest in the USA and Europe while the BRIC countries demonstrate the strongest growth

Section 1 – International R&D dynamics and trends

2


Sources: 1) European Commission JRC; 2) PwC analysis

Corporate R&D expenditures by Top-2000 companies, EUR bn , 2005-2010

BRIC

Asia

Europe

North America

Others

RoW

RoW

Others

Comments +4%

35.1%

35.1%

26.6%

2.6%

% of region

460.8

34.7%

0.4%

10.3%

5.5%

4.8%

4.5%

10.0%

21.5%

2.9% 2.2%

1.7% 0.4% 0.4% 0.1%

0.6%

2005

370.1

40.8%

10.4%

5.8%

5.8%

3.5%

8.8%

18.9%

2.8%

0.9%

0.2% 0.1% 0.2% 0.1% 0.6%

2010

1.2%

• MNCs from developed countries still take the lead in R&D spending worldwide; in 2010 they represented 96.8% (EUR 446.1 bn) of corporate R&D spending, but their share has been gradually decreasing since 2005, when it was 98.9%.

• However, MNCs from the BRIC countries have demonstrated outstanding growth in corporate R&D thus increasing steadily their share from 0.6% (EUR 2 bn) in 2005 to 2.6% (EUR 12 bn) in 2010. This rise in the BRICs’ R&D expenses has been driven by strong overall economic growth.

• Among the BRIC countries, the most rapid growth in 2005-2010 was posted by MNCs from China (53%) and India (49%). China holds the leading position among BRIC countries with a share of 49% in 2010. In terms of growth, Russian MNCs placed third among their BRIC peers and in the world with a 29% CAGR in 2005-2010, while Brazilian MNCs posted an honourable fourth place showing with 23% of annual growth from 2005 to 2010.

• Russian corporations spent on R&D EUR 193 m in 2005, while this figure was 3.5 times higher in 2010 at around EUR 679 m.

0.6%

PwC

March 2013

Public report

MNCs are either seeking to access additional (sometimes cheaper) research capacity (talent) or are following manufacturing to adjust development locally. In Russia, access to research skills is currently the main driver

Internationalised manufacturing

Internationalised R&D

1 2

Internationalised research

Internationalised development and

manufacturing

1 2

• MNCs enter new markets to ensure sustainable growth through localising their production facilities. Proximity to customers allows for reducing the time to market.

• At the second stage, MNCs customise and tailor their goods to local needs and regulatory requirements; thus, as a rule, they localise development centres. Occasionally, they may also incorporate a research centre.

• This model is typical for a huge market with relatively low scientific potential, of which China is the best example.

Market-driven model Technology-driven model

Approach

Comments

Example 1883-1891

1992 2005 1974

• Established as two separate firms which merged in 1988

• Hong Kong business formally established

• First manufac-turing operations established

• Opened Chinese R&D centre focused on power systems, robotics & manufacturing technologies

2007 1993 1969

• Samsung Electronics established in Seoul, Korea

• Moscow research centre established

• First plant established in Kaluga, focused on manufacturing household appliances (monitors, TVs, etc.)

Source: PwC analysis



3

1 2

or

• MNCs seek out new ideas and qualified talent to expand their own competencies. By localising their research centres, MNCs can benefit from the host country’s existing track record, legacy and educational system. They can also potentially expand their research activities through development.

• At the second stage, after acquiring a good understanding of a specific market, and if the market is attractive, MNCs may opt to localise their manufacturing operations.

• This model is typical for countries with strong intellectual resources and untapped market potential, or which Russia is the best example.

PwC

March 2013

Public report

The industries most likely to offshore R&D are Telecom, Software, Chemicals, Automobiles, Electronics, Pharma and Semiconductors


4


Top industries for “exporting” R&D centres, Number of centres, 2002-2011

1

2

3

3

5

6

18

21

21

35

36

45

50

62

63

65

69

7 6

88

98

Ø 38

Biotechnology

Gas, Water & Utilities

Oil & Gas

Construction & Materials

Electricity

Alternative Energy

HealthCare E&S

Internet

Aerospace & Defence

Industrial Machinery

Computer Hardware

General Industrials

Computer Services

E&E Equipment

Semiconductors

Pharmaceuticals

Automobiles

Chemicals

Software

Telecom 1

2

3

4

5

6

7

1 2

3 4

6 7 5

Telecom

Primary reasons for “exporting” R&D centres by MNCs

Software

Chemicals Automobiles

Pharma Semiconductors Electronic & Electrical Equipment

Proximity to customers Limited supply of technical talent in home country Proximity to production facilities

Unique specialists New markets Legal limitations in home country

Proximity to manufacturers/customers Quest for talent Opportunity to work with reputable research institutes

High operating costs Lack of qualified personnel at home Proximity to customers

New markets: proximity to manufacturing facilities Search for talent and outstanding technologies

Proximity to suppliers New markets: time to market Proximity to customers

Proximity to producers Lack of specialised talent Proximity to suppliers

Sources: 1) Glorad database; 2) PwC analysis

6.2%

4.7%

4.4%

15.8%

16.3%

6.2%

6.5%

2.4%

2.9%

3.0%

1.9%

3.6%

0.9%

2.0%

0.14%

0.7%

1.0%

2.1%

0.2%

2.2%

68%

nn - Share of industry in total corporate R&D spending (average 2008-10)

- Space Technologies

- ICT - Energy Efficiency

- Biotech - Mix: includes Nuclear Tech

Average share of total R&D spending, 2008-2010

Less than 10, not active “exporter”

PwC

March 2013

Public report

Inbound R&D is highly concentrated – the clear leaders are China, India and the US, with Russia placing only 9-11


5


153

7

9

9

12

14

15

15

15

21

22

24

33

38

61

95

224

RoW

Brazil

Ø 45

UK

Australia

Japan

France

Russia

Canada

Ireland

Israel

Taiwan

Korea

Germany

Singapore

USA

India

China

Criteria for winning models Top countries for “importing” R&D centres, Number of centres, 2002-2011

2.81

2.60

1.55

2.35

0.85

4.20

2.85

1.95

3.40

1.05

1.75

3.47

2.21

1.81

All R&D, % of GDP

GDP,USD

tn HuHuge market potential

Low costs, including labour

Pool of talent

Political stability and favourable economic environment

Good infrastructure

Established legislative base, especially in IP

Financial and non-financial incentives

Low administrative barriers

Developed educational and science support system

2.25

15.2

0.31

11.3

0.88

4.47

0.23

3.09

1.39

1.55

2.37

0.18

4.38

2.23

2.25

0.92

1.20 2.23

50%

Sources: 1) Glorad database; 2) Battelle; 3) PwC analysis

2011

Average monthly

salary, USD

2009

4,240

n/a

415

1,200

65

2,230

3,703

n/a

2,633

650

5,005

2,731

4,001

5,467

3,930

565

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

PwC

March 2013

Public report

Some countries score well across industries due to market size, while others score well only for a limited set of industries due to specific strengths (talent, incentives, costs, etc.); Russia is chosen mainly for its scientific talent pool


6


Japan Highly qualified personnel, internationally renowned universities, established IP legislation, developed infrastructure

Countries

China

India

USA

Singapore

Germany

Korea

Taiwan

Ireland

Canada

France


1 2 3 4 5 6 7 8 9 10 11 12 13 14

Qualified staff, English-language capabilities, IP legislation, cost effectiveness, government support , market

Highly qualified personnel, internationally renowned universities, established IP legislation, highly developed infrastructure

Government support, qualified personnel, clustering, infrastructure, hub for East-Asian market

Highly qualified personnel, internationally renowned universities, established IP legislation, developed infrastructure, advanced technologies

IT infrastructure, qualified personnel, tax incentives, favourable labour costs

Proximity to production facilities, strong government support, developed infrastructure

EU membership, developed infrastructure, low taxation, the government's active economic policy, English-speaking manpower, strong educational system and proximity and cultural similarity to the UK and the USA

Developed ICT infrastructure, easy access to US and world markets, superior workforce, quality of life

Highly qualified personnel, internationally renowned universities, established IP legislation, developed infrastructure, convenient geographical location

1- Aerospace & Defence 2- Telecommunications equipment

Huge market, proximity to manufacturing facilities, cost effectiveness, government support

Israel High R&D spending; highly educated population, especially with technical background; large Jewish diaspora abroad, providing access to Western financing resources; developed telecom infrastructure

Key success factors

9- Industrial Machinery 10- Chemicals

7- Semiconductors 8- Electronic & Electrical Equipment

- Industries with the share of more than 8% of the total number of R&D centres

13- Pharmaceuticals 14- Health Care Equipment & Services

Russia Strong Soviet legacy in physics, mathematics and aero-space, government support, improving infrastructure

3- Software 4- Computer Services

5- Computer Hardware 6- Internet

11- General Industrials 12- Automobiles & Parts

PwC

March 2013

Public report

Over the past 10 years, Russia has attracted approximately 15 R&D centres – the leading sectors are ICT, Aerospace & Defence and Telecom


7


Sources: 1) Glorad database; 2) Company sites; 3) PwC analysis

1

1

2

2

2

3

4

Automobiles & Parts

Chemicals

Aerospace & Defence

Internet

Telecommunications Equipment

Computer Hardware

Semiconductors

Comments Russia’s inbound R&D centres, Number of centres, 2002-2011

Over the past 10 years, Russia has attracted 15 R&D centres, both Specialised Contributors and Supported Specialisation.

The majority of R&D centres are localised to take advantage of Russia’s talent pool; but, there are also centres dedicated to product customisation and are thus market-driven.

Currently, there are approximately 48 R&D units in the leading sectors, including:

1. ICT: 21 centres,

2. Aerospace and Defence, Telecommunications: 7 centres,

3. Chemicals: 6 centres.

Among leading MNCs, Russia has hosted R&D centres for EMC, LG, Google, EADS, Boeing, Intel, HP, Siemens, Samsung, DuPont and Corning, among others.

PwC

March 2013

Critical success factors in attracting R&D investment and Russia’s performance

8

Section 2


PwC

March 2013

Public report

Our Interview Programme has shown that for MNCs the most important country selection factors in the R&D localisation process are personnel, stability, know-how and market

Section 2 – Critical success factors in attracting R&D investment and Russia’s performance


6

18

19

20

29

34

37

38

40

42

45

47

50

52

53

Costs

Cooperation

Infrastructure

Legal

Acceptance

Processes

Market/ Customers

Know-how

Stability

Personnel

Image

Critical mass

Location

Culture

Regulations

Ranking of CSF by importance

Sources: 1) PwC Interview Programme; 2) PwC analysis

Must-have

Impor-tant

Comments

In our Interview Programme, we conducted interviews with 24 MNCs from such industries as Telecom Equipment, Aerospace and Defence, Software, Computer Services, Computer Hardware, Internet, Pharmaceuticals, Chemicals, Healthcare Equipment and Services, Electricity, Alternative Energy, Oil and Gas, General Industrials, Electronic and Electrical Equipment, Industrial Machinery, and Automotive and Parts, both with and without R&D centres localised in Russia.

Data is presented in an aggregated form: for both research and development type centres.

Depending on the specific industries and the R&D value chain stage (R or D), the importance of specific factors may differ.

All companies interviewed across all industries indicated that the most important factors are: talent, technology, market and stability (political, social and economic).

9

PwC

March 2013

Public report

Given Russia’s world-class scientific base and its statute as one of Europe’s largest markets, the Russian government has focused on improving the R&D environment to spur corporate capital investment in R&D


10


No. 1

RUSSIA’S HUGE POTENTIAL COMMENTS

World-class, creative, bright

talent

Huge, untapped

market opportunities

Rapidly developing national innovation

system

# of researchers, 2010, ‘000

• With a large number of researchers per 10,000 of its economically active population, Russia is comparable to developed countries and far above developing ones.

• Historically, Russia has been strong in natural and technical sciences, thus these disciplines account for about 92% of the total number of researchers.

• Russia’s B2C, B2B and B2G markets are some of the

most attractive in the world.

• Russia represents one of the largest consumer markets in Europe. The country’s industrial output, with 5% annual growth, is among the highest in the world.

• The Russian government is carrying out an ambitious modernisation programme covering such sectors as healthcare, energy, aviation, transport and utilities.

Sources: 1) IMF; 2) Rosstat; 3) CIA; 4) PwC analysis

• The Russian government launched one of its most ambitious and promising projects – the Skolkovo Innovation Centre – aimed at developing an innovation-driven economy in Russia and covering five clusters: Information and Computer Technologies, Space Technologies, and Telecommunication, Nuclear, Energy Efficiency and Biomedical Technologies.

• Skolkovo hosts a critical mass of stakeholders and offers a comprehensive system of incentives: tax breaks, preferential customs regime, access to funding and infrastructure, and simplified hiring of foreign labour.

1 3 31 5 54 4 2

144

15

65

0

5 0

1 00

500

0

Brazil India Russia China

1,152

USA

1,413

95 1,000

1,500

Per 10,000 of economically active

population

8 2

1 4 33 1 0

4448

15

0

1 0

2 0

3 0

4 0

5 01,400

1,200

200

0

Germany Russia

13

USA India

1,191

China

1,341

GDP per capita, 2011, ‘000 USD

B2C market, 2010, mn of population

PwC

March 2013

Public report

Note: a) Cover several sectors like Electricity, Energy, Alternative Energy, Healthcare Equipment, and Industrial Machinery; b) Also relevant for specialised software in Aerospace and Pharma

In Aerospace, Internet, Nuclear Technology and Software Russia has strong capabilities both in research and development due to the Soviet legacy in physics, mathematics, and space technologies


Capabilities of Russia

- High - Medium - Low

11



• Longstanding scientific tradition in life sciences • Developed infrastructure for clinical tests of specific groups of illnesses • Lower labour cost in the sectors versus competitors • Attractive market size and potential

• Longstanding scientific tradition in physics and mathematics • Strong partnership of research centres with civil/military companies in A&D • Lower labour cost in the sectors versus competitors

R D

Aerospace and Defence

Telecommunications

R D Key advantages of Russia

Softwareb)

Computer Services

Computer Hardware

Internet

Semiconductors

Electronic and Eectrical Equipment (E&EE)


Chemicals

Automobiles and Parts

Pharmaceuticals

Healthcare Equipment and Services

ICB sector

• Longstanding scientific tradition in mathematics proven by strong achievements of students at international contests

• Creative educational process at leading universities that foster the ability to solve non-standard tasks and issues

• Employee potential in software and Internet recognised by leading IT and Internet companies

• Strong Russian market growth for Internet-related industries and in-demand IT goods and services, e.g. growing broadband connectivity

• SME and start-up development in IT sector

• Lower labour cost in the sectors versus competitors • Longstanding scientific tradition in physics and material engineering • Market potential in these sectors due to unsatisfied demand for modern

equipment, services and goods from B2C, B2B and B2G segments

• Longstanding scientific and engineering culture in physics, mathematics, and material engineering

• Globally renowned universities and research centres • Developed infrastructure for working with nuclear technologies


Electricity

Nuclear Technologiesa)

Skolkovo cluster

- Very high

PwC

March 2013

Overview of R&D incentives globally and availability of support in Russia and Skolkovo

12

Section 3


PwC

March 2013

Public report

Globally, governments support R&D start-ups and projects through special mechanisms providing services and infrastructure, and public financing and tax incentives. While Russia does provide tax incentives and public financing for R&D, it has not actively developed business incubators and TTOs

Governments support R&D activity at different stages of R&D projects, mainly through:

• tax incentives for private, innovation-driven companies;

• providing special R&D supporting mechanisms, such as technology transfer offices, business incubators and business accelerators;

• providing non-revocable (grants) and revocable financing for R&D projects (mainly through special funding and development institutions, such as public foundations, state venture funds, development banks, etc.).

Such support can be provided individually or as part of a package based on R&D and R&D/industrial clusters, special economic zones (SEZ), technoparks, technological platforms, etc.

Public project financing usually requires co-financing from private sources (excluding fundamental research), i.e. own capital, venture and private capital funds, and banks.

Currently, the Russian government provides mainly public financing and tax incentives for R&D projects, but lags in providing supporting mechanisms for commercialising R&D results.

Existing innovation technoparks (Sarov, Idea) and innovation centres (Dubna, Zelenograd) mainly provide infrastructure facilities but very limited outsourcing and individual consulting services to their residents.

Skolkovo can be used as a platform for providing supporting mechanisms in accordance with global best practice.

Section 3 – Overview of R&D incentives globally and availability of support in Russia and Skolkovo

13


Comments

Maturity

Incubation

(pre-seed / seed)

Acceleration

(growth)

Stage of development Concept Technical

validation Market

validation

Implementation scaling-up

International expansion

IPO or M&A

Sales Evolution of a

company

Transfer technology office (TTO)

1-2 years (3-5 years for

biotech start-ups)

Up to 1 year

Business incubator

1 2 3

4

5

Supporting mechanisms Business accelerator

Duration Up to 2 years

6

Public financing

R&D tax incentives

Grants Grants, venture

capital Venture capital,

preferential loans

Preferential loans

Tax deductions, preferential tax rates

Investment grants, tax deductions, tax exemptions


Provided by government in Russia

To be developed in Russia

Map of government support by stages of R&D project

PwC

March 2013

Public report

Russia offers a favourable tax regime for R&D, including reduced tax rates, accelerated depreciation of R&D expenditures and tax credits, at the federal level as well as within SEZs and the Skolkovo clusters



Transition economies Mature markets

Russia China India Singapore Israel Ireland USA

Reduced profits tax rate 15% 17% 5%a) 10-25% 12.5%

Profits tax holidays b) c)

Increased tax rebate for R&D expenditures 150% 150% 150%

Tax credit for R&D and investment in high-tech

Accelerated depreciation

Inclusion of some of R&D capex into revenue expenditures

d)

Property tax reduction

Exemption from customs dues e)

Note: a) Minimal rate for a time period up to 10 years; b) Based on individual agreements; c) For designated companies; d) Only hardware for IT companies; e) Dues are not collected Sources: 1) Incentives for innovation 2010, PwC; 2) Russian Federation Tax Code; 3) PwC analysis

Transition economies tend to provide higher tax rebate for R&D

expenditures

Mature markets offer tax credits more often Tax polices are generally based on

individual countries’ conditions; however, similar economies may have similar policies

Available in Skolkovo

and/or SEZ

Available in Skolkovo

and/or SEZ

14

PwC

March 2013

Public report

Russia has all major types of development institutions providing public funding for R&D at different project stages

National development institutions in top countries/regions for inbound R&D (with overall budget)

Administrator of government

programme

China

Ministry of Science and Technology

N/A

India USA EU Russia

National venture capital

provider

Development banks

Clusters/ Special

economic zones

Council of Scientific and

Industrial Research

USD 150m

US Small Business

Administration

USD 172m

The Federal Ministry of

Economics and Technology,

Germany

N/A

Skolkovo Foundation

USD 200m

N/A

US Small Business

Administration

USD 8.2bn

The European Investment

Fund

USD 1.8 bn per year

Not used for innovation

development


development


development

The European

Investment Bank

EUR 1.4bn per year

MSP-Bank (affiliated with

VEB)

EUR 1.25bn per year

Shenzhen SEZ

Usually used for manufacturing

and foreign trade

Skolkovo,

SEZ Dubna


development

Israel

Chief Scientist’s

Office

~USD250m

Yozma

N/A

--

N/A

Russian Venture

Company

USD 851m

N/A N/A

Sources: 1) Development institution websites, 2) Erawatch, 3) PwC analysis



15

Comments

The Russian government is implementing a comprehensive innovation promotion programme and developing various mechanisms for the financial support for R&D, while most of other R&D-active countries focus on specific types of development institutions.

In particular, the Russian government provides public funding for R&D through special government grant programmes, a venture capital fund of funds, a development bank (preferential credits) and SEZs (preferential tax regime).

PwC

March 2013

Public report

Although public funding in Russia is sufficient, access to venture capital and loans for R&D is limited


16


Loans and credits for

R&D

Grants

Venture

capital

Access to grant funds on terms that are aligned with other countries’ policies

Grant programmes cover all stages of the R&D cycle

Grant programme requirements are in line with other countries’ practices and relatively easy to meet

R&D loans and credit instruments are focused only on commercialisation stage

Budgets of R&D soft loan providers are limited with voluntary contributions from Russian companies

State bank-provided funding for preferential R&D credits requires a patent, thus significantly limiting the range of potential borrowers

Financing sources critical

for SMEs

Available amount

Ease of access

1

2

3

High High

High Low

Medium Low

Skolkovo/Russia benchmark versus other countries

Comments on Russia

Large number of investment funds with capital to invest.

RVC provides private seed capital and risk sharing mechanisms for private funds.

Access to venture financing for SMEs and start-ups is limited as a result of the lack of innovation support structures and mentoring systems (business angels, professional intermediaries)

Skolkovo, Russia

SBIR, USA

OCS, Israel

Russia USA Israel

Russia Europe

1. Total funds (USD bn)

2. Max. sum of grant (USD mn)

3. Time required for funding decision (days)

1. National VC Funds available (USD bn)

2. VC availability a)

1. Development banks budgets (USD bn)

3. Ease of access to loansa) (for Europe – Germany)

87 90 70

10 1 0.8 (Average)

0.2 2.5 0.3 (2010)

1 8.2 0.1

3. Quality of proposals (based on interviews)

2,3 4.0 4.5

Low High High

2,4 3.o

1.6 1.8

2. Number of R&D credits provided by banks (indicative)

Low High

Note: a) Country indicator, Global Competitive Report rating, where 1 is the lowest, 7 is the highest Source: 1) The Global Competitiveness Report 2011-2012, 2) Development institution websites; 3) PwC Interview Programme; 4) PwC analysis

PwC

March 2013

Public report

Initiatives introduced by the Russian government are improving Russia’s attractiveness for R&D



Innovation commercialisation and growth management

programme

Initiatives Description Status

Innovation projects support programme

Presidential programme “Innovations and Risks in

Business”

Allows managers to gain advanced knowledge and learn necessary traits in the area of commercialising innovative projects and managing innovative companies for the purpose of achieving competitiveness and providing substantial business growth

The programme is aimed at stimulating innovative activity between students, researchers and scientists in the area of information security and related industries

The main objective of the programme is to educate a new category of specialists who will manage the development of a new product as well as its introduction to the market

TACIS project

Innovation and technological project contest ‘Technovation

Cup”

The main goal of the "Support of Export-Orientated Innovative SMEs“ project initiated by the Russian agency and realised on its base is to support and co-operate in the process of developing innovation-driven and export-oriented SMEs with the ultimate goal of expanding trade relations between EU countries and the Russian Federation, as well as developing a “common economic space.”

The main objective of the Cup is to help project teams to market their product or technology in the real sector of the economy and to turn their ideas into businesses

Sources: 1) Programs’ websites, 2) PwC analysis

Education - Moscow State University

Was running 2006-2008, now closed

Research Grant -Kaspersky Lab

Type of program- Executive agent

Running since 2008

Education – Commission of Executive Education

Running since 2009

Developing SMEs - Moscow Physics and Technology Institute

Running

Developing SMEs - Enterprise Europe Network Running

17

PwC

March 2013

Public report

Russia is establishing technology platforms, primarily following the EU’s example


18


Energy ICT Bio-based

economy

Production &

processes Transport

Biofuels ARTEMISg) FABREk) Construction

Platform Aeronautics

SmartGrids ENIACh) Food European

Steel Rail

TPWindc) Integral Satcom

Initiative

Global animal

health

Sustainable

min resources Road

Photovoltaics Net!Works NanoMedicine Manufuture Waterborne

ZEPd) Networked &

Elect Media Plants Future textiles

& clothing Space

SNEPTe) NESSIi) Forest-based Water supply &

sanitation

RHCf) EUROP SusChem

EPoSSj) EuMat

Photonics21 Industrial

safety

Σ 36

Medicine and

bio-

technologies

Medicine of

future

BioTech2030

Bioenergy

ICT

Nuclear and

radiation

technologies

Electronics

and machinery Transport

Programming

platform

Nuclear fuel

cycle

Mechatronics,

robotics

Auto and rail

roads

Super-

computer

Thermonuclear

fusion UHF tecb) High speed rail

transport

Photonika

Radio-

technologies

Ocean

exploration

Polymer

composites

LED techa)

Power system Ecology tech Metallurgy tech

Aviation

mobility

Thermal power High tech

systems

Solid minerals

Space Platform

Renewables Textile and

light industry

Satellite

platform

Σ 30

Photonics

Aerospace

Power

Small

distribution

Metallurgy and

new materials

Mining and oil

& gas

processing

Mining tech

Ecology

development

Deep

processing

• Technology platforms are centralised, industry-led initiatives aimed at strengthening research and setting strategic research agendas

• Technological platforms include as stakeholders: industry (large, medium and small companies), public authorities, research institutions, civil society and the academic and financial communities

Sources: 1) EU Cordis; 2) Russian Federation Ministry of Economic Development; 3) PwC analysis

Note: a) Light-emitting diod; b) Ultra high frequency; c) Technology Platform; d) Zero Emission Fossil Fuel Power Plants; i) Sustainable Nuclear Energy Technology Platform; f) Renewable Heating & Cooling; g) Advanced Research & Technology for Embedded Intelligence & Systems; h) The European Nanoelectronics Initiative Advisory Council; i) Networked European Software and Services Initiative; j) European Technology Platform on Smart Systems Integration; k) Farm Animal Breeding and Reproduction

PwC

March 2013

Skolkovo as an innovation centre in comparison with other development institutions

19

Section 4


PwC

March 2013

Public report

R&D clusters like Skolkovo provide a platform for efficient and effective R&D set up and facilitation of innovation

Clusters increase productivity and

efficiency

Clusters stimulate and enable innovation

Clusters facilitate commercialisation and

new business formation

Co

mp

eti

tiv

en

es

s

How R&D clusters impact on a company’s competitiveness

Efficient access to specialised inputs, services, employees, information, institutions, training programmes, and other “public goods”(local outsourcing)

Ease of coordination and transactions across firms

Rapid diffusion of best practices

Ongoing, performance comparisons and incentives to improve against local rivals

Proximity of rivals encourages strategic differentiation

Greater likelihood of perceiving innovation opportunities (e.g., unmet needs, sophisticated customers, combinations of services or technologies)

Presence of multiple suppliers and institutions to assist in knowledge creation

Ease of experimentation given locally available resources

Opportunities for new companies and new lines of an established business are more apparent

Spin-offs and start-ups are encouraged by the presence of other companies , commercial relationships, and concentrated demand

Commercialising new products and starting new companies is easier because of available skills, suppliers, etc.

Sources: 1) Clusters, Innovation, and Competitiveness: New Findings and Implications for Policy, M. E. Porter, Institute for Strategy and Competitiveness Harvard Business School, 2008; 2) PwC analysis


Section 4 – Skolkovo as an innovation centre in comparison with other development institutions

20

PwC

March 2013

Public report

This is why the majority of top R&D investors prefer to localise R&D centres in clusters across industries

Distribution of new outbound R&D centres established worldwide by top MNCs in 2002-2011 by type of localisation, Number of R&D centres

Top clusters by number of new foreign R&D centres established in 2002-2011

Individual R&D centres

Other Energy and

Nuclear

64

78%

22%

Industrial machinery

35

57%

43%

Automobiles and parts

69

67%

33%

Chemicals

76

63%

R&D centres in clusters

37%

Biomedical Technologies

84

79%

21%

Aerospace and

Telecom

119

63%

37%

ICT

320

87%

13%

• Essentially, clusters can be considered as geographical concentrations of different players which simultaneously compete and cooperate within the same industry sector

• If they are efficiently organised, the clusters are able to generate superior returns by focusing innovation to create region-specific competitive advantage

ICT

Aerospace Telecom


Energy Efficiency

Shanghai, China

Beijing, China

Bangalore, India

Singapore

Detroit, USA (automotive)

Cluster Key foreign investors

Ruhrgebiet, Germany Bangalore, India

Shanghai, China

Biopolis, Singapore

Beijing, China

Sourcse: 1) Glorad database; 2) PwC analysis



21

PwC

March 2013

Public report

In Russia, there are three main destinations for MNCs’ R&D centres; Skolkovo is the only one that has strong federal government support and commitment

Voronezh Centre Of Microelectronics and Nanotechnology (2006) No foreign residents

St. Petersburg SEZ (Strelna) (2005). No foreign residents

Irkutsk Baikal Nanotechnology Cluster (2009) No foreign residents

Tomsk SEZ (2005)

Kazan “Idea” Technopark (2004) No foreign residents

Sarov Technopark (2005) Foreign rResidents: • Intel • CD-Adapco • Nokia – Siemens Networks

Dubna SEZ (2005) No foreign residents

Zelenograd SEZ/ Technopark (2005/1997) Foreign residents: • Beneq

R&D clusters in Russia Comments


Information and Computer Technologies

Energy Efficiency Technologies

Nuclear Technologies Space Technologies and Telecommunication

Specialisation

Source: 1) Skolkovo; 2) PwC analysis

Most existing technopark initiatives and special economic zones (SEZ) mainly focus on domestic investors and have not yet demonstrated the ability to successfully attract foreign corporate R&D centres

Moscow and St Petersburg have specialised zones with an adjusted tax regime for residents

Only selected foreign investors have opted to localise their R&D centres in technoparks such as Sarov Technopark and Zelenograd SEZ

In the greater St Petersburg area, MNCs have localised their R&D in the SEZ (Strelna), driven mainly by non-tax factors (proximity to pool of scientists, city and R&D infrastructure)

Skolkovo has managed to attract MNCs by providing a comprehensive value proposition



Other St. Petersburg area Foreign Residents: • Corning

• Giesecke & Devrient

• LG Electronics

• Siemens

• Synopsys

• Google • EMC • Hewlett-Packard • Sun • Intel • Alcatel-Lucent • Motorola

Foreign partners:

22

• Cisco

• IBM

• Microsoft

• EMC

• Alstom

• Nokia

• J&J

• Siemens

• EADS

• GE

• NSN

• Ericsson

• Intel

• SAP

• Honeywell

• Sсhneider

PwC

March 2013

Public report

Skolkovo is an ambitious project supported by the federal government with the aim of creating five industry innovation clusters in Russia



23

Source: Skolkovo

Skolkovo Innovation Centre structure

Clusters

Technopark

University

City

Skolkovo has created five clusters (IT, Nuclear, Energy Efficiency, Space and Telecommunications, Biotechnology), which specialise in developing Russian R&D projects within selected industries.

The Skolkovo Foundation, which provides grants for R&D commercialisation activities, is the main vehicle for project support.

The Skolkovo Technopark is a specialised platform which provides assistance to innovation-driven companies.

The main services the Technopark provides for start-ups are: accounting, HR, business training and providing offices and R&D equipment.

Skoltech University is intended to be a specialised educational institution which will help develop Skolkovo’s main areas and provide partner companies with well-qualified specialists.

According to planes the University starts work in 2014. Now students have been attracted for learning in partner institutes, Open University provides special training programmes for students.

In 2018 15 centers of science, innovation and education are planned to launch.

Skolkovo is aiming to become a city-laboratory, where innovations developed onsite will be introduced and approved.

The total building space within the Skolkovo municipality will exceed 2.4m square metres.

PwC

March 2013

Public report

Skolkovo will help Russia overcome major obstacles in the R&D environment by providing an innovative ecosystem necessary for accelerating commercialisation through easy access to network partners and finance

Key issues in Russia’s R&D investment climate

Cluster mechanisms for overcoming challenges faced

• Build strong financial infrastructure and assist with venture capital and seed financing

• Attraction of anchor R&D investors and SMEs

• Build R&D supply infrastructure

• Technology Transfer Organisations

• Business Incubators, Accelerators

• Role model entrepreneurs teaching platform • Entrepreneurship mentoring programme

• Social infrastructure and financial aid for mobile workforce

• Visa support/special employment terms

• Cluster international visibility and international collaboration

Gap between fundamental & applied research and development / gap

between S&E and business

Low demand for technological innovation in the economy

Poor entrepreneurial environment / intolerance of failure by

entrepreneurs and start-ups

Difficulties with risk-tolerant financing for SMEs

Low awareness of the country’s attractiveness as a destination for

corporate R&D centres

Low level of workforce mobility

Clusters as an R&D ecosystem platform

Formation Conception

Maturity Growth

Lack Lack of qualified managers specialised in technological

implementations

Technology Transfer

Commercialisation

Clusters & Networks

Incubators/ TTOs/ Training centres

Strong cluster organisation

Regulatory Environment

Universities & Research

institutions

Public and Private irrevocable funding

Technologies

Venture capital

Critical mass of researchers

employed

Industry and research Collaboration/ Partnerships

National and international research competitions National

reputation

Structured cluster organisation

International visibility

Shared platforms and infrastructures

VCs are well established

• Attracting top MNCs and R&D investors with strong management practices to the cluster

• Networking initiatives by cluster organisation

Knowledge Creation

Source: 1) PwC Interview Programme; 2) PwC analysis



24

PwC

March 2013

Public report

Stakeholders aiming to be organised in

clusters

Emerging Clusters

Developing Clusters

Mature clusters

World class clusters

Most internationally known clusters are developed and have an industrial specialisation. Skolkovo is at the embryonic stage of development, but is expected to become an emerging cluster by the end of 2014

Degree of cluster development

Cluster performance

Bubble size is proportional to the number of clusters present on the worldwide market, indicativea)

Resources Technology

Génopole, France (●)

Medicon Valley, Denmark and Sweden (● / ●)

Oslo Teknopol, Norway (●)

Hokkaido, Japan (●)

St. Hyacinthe, Canada (●)

Biocat, Spain (●)

Bioval, Spain (● /●/ ●)

Rio, Brazil (●)

Zhangjian, China (● )

Skolkovo plan (end of 2014)

Biotech Umea, Sweden (●)

Biovalley, France, Germany and Switzerland (●)

IAR, France (● / ●)

Hamburg, Germany (●)

Food Valley, The Netherlands (●)

UAFC, Austria (●)

Ghent, Belgium (●)

Munich, Germany (● / ●) Technion, Israel (● / ●)

• Biomed

• Agrofood

• Energy

• Maritime

• ICT

• Aerospace

• Nuclear Energy

Skolkovo, Russia (● /●/ ●/ ●/ ●)

Nancy, France (●)

Note: a) On this slide clusters are mostly represented at the highest level of maturity: This is due to the fact that these clusters have been widely studied and used as models by PwC Source: PwC analysis

San Diego, USA (● / ● / ●)

Cambridge, UK (●)

Toulouse, France (●)

Hyderabad, India (● / ●)



25

PwC

March 2013

Public report

Skolkovo plans to attract a critical mass of companies and employees in its five clusters, which would move them to the emerging stage of development (cont’d)



Skolkovo plan (end of 2014) Skolkovo “As is” (March 2013) Cluster driving forces

Emerging stage criteria

• Jobs have been created • Some visibility (reputation)

• Some funding sources have been mobilised

• Cluster organisation has been set up

• First strategic plan

Cultural

Supporting

Financial

Scientific

Industrial

Market

• Entrepreneurs are present • Critical mass of entrepreneurial

activity is developing

• Lack of entrepreneurs • Entrepreneurs present • Critical mass of entrepreneurial

activity is developing

• Cluster organisation has been set up • Services for supporting the technology

commercialisation process are provided through appropriate mechanisms

• Cluster organisation is in the process of formation

• Strategic plan is developing

• Skolkovo grant programme has been launched

• Number of investment funds are accredited by Skolkovo

• 50% co-financing of Skolkovo participants

• Venture capital has been mobilised

• Research assets/labs have been inventoried

• Lack of awareness on the importance of disclosure of innovation

• Three shared service centres have been launched

• First residents work in Technopark • A number of renowned universities

and research organisations close to Skolkovo

• Two core facility centres and 4 additional shared service centres are to be launched

• Techopark is being developed • Launching 5 centers of science,

innovations and education within SkTech

• Cluster strategy is in the line with market needs

• Adoption and transfer of new technology ensured

• Cluster strategy is developing • Cluster strategy is in the line with

market needs

• 1000 participants • 50 R&D centers

• Some visibility (reputation)

Sources: 1) Skolkovo KPIs to end 2014; 2) Skolkovo management; 3) PwC Interview Programme; 4) PwC analysis

26

PwC

March 2013

Public report

Skolkovo’s current partners confirm that it is an attractive destination for R&D localisation



27

“I don’t see too much bureaucracy and decisions are made quickly.

That is very important.”

Lack of bureaucracy and red-tape

The right place for a cluster

“We hope to find good conditions for R&D activity at Skolkovo, good price being one of

them. We needed to find a place for R&D and Skolkovo was a natural choice for us.”

Attractive conditions and costs

2

3

Proactive and supportive actions

4

“We have not experienced any challenges yet. And at this moment we don’t foresee any future challenges, thanks to great support

from the Skolkovo clusters and Key Partners Department.”

Positive feedback from Skolkovo’s partners

1

“The possibilities offered by Skolkovo in terms of infrastructure, proximity to

high-technology partners and financial advantages make Skolkovo an easy

choice for the location of our centre.”

“Skolkovo is close to Moscow and St. Petersburg, where most of the country’s

talent pool is concentrated.””

“Our presence at Skolkovo will give more visibility to our R&D in Russia.”

“Everything went smoothly.”

“Skolkovo is close to our markets.”

“When we were choosing a location for an R&D centre we were looking at

different options including Moscow, Kiev and other cities. Access to talent and other resources was an important

factor for choosing Skolkovo.”

“We were attracted by the idea of the Skolkovo innovation ecosystem with access to talent. We also wanted to associate our brand with Skolkovo.”

Optimal positioning opportunities

5

“From a government relations point of view, it is a good idea to establish an R&D centre in

Skolkovo.”

+


PwC

March 2013

Glossary

28

Appendix 1


PwC

March 2013

Public report

Glossary

A&D Aerospace and Defence

ASEAN Association of Southeast Asian Nations

bn billion

BRIC Brazil, Russia, India, China

BMI Business Monitor International

BB broadband

B2B Business-to-Business

B2C Business-to-Customer

B2G Business-to-Government

CAGR Compounded Annual Growth Rate

CAPEX Capital Expenditures

CSFs Critical Success Factors

CIS Commonwealth of Independent States

CT Corporate Technology

D Development

E&EE Electronic & Electrical Equipment

EIF European Investment Fund

EU European Union

EUR Euro

FDI Foreign Direct Investment

FPSES&T Russian Foundation for Promotion of Small Enterprise in Science and Technology

FTSE Financial Times Stock Exchange share index

GERD Gross Domestic Expenditure on R&D

GDP Gross Domestic Product

GE General Electric

HW Hardware

HQ Headquarters

HR Human Resources

HSE Higher School of Economics

ICB Industry Classification Benchmark

ICT Information and Computer Technologies

ILO International Labour Organisation

IMF International Monetary Fund

IP Intellectual Property

IPR Intellectual Property Rights

IT Information Technology

JRC Joint Research Centre

JV Joint Venture

KPIs Key Performance Indicators

kW kilowatt

MEPhI National Research Nuclear University MEPhI

m million

MNC Multinational Corporation

MISIS National University of Science and Technology MISIS

MSU Moscow State University

M&A Mergers & Acquisitions

NPD Network of Product Development

N/A not available

N.a. not appropriate

OECD Organisation for Economic Co-operation and Development

PwC PricewaterhouseCoopers

Phystech Moscow Institute of Physics and Technology

R&D Research and Development

R² R-square, goodness-of-fit measure in regression analysis

R Research

RFBR Russian Foundation for Basic Research

RFTD Russian Foundation for Technology Development

RSFF Risk-Sharing Finance Facility

RoW Rest of the World

ROI Return on Investment Skolkovo Foundation • Russia and Skolkovo’s attractiveness as an R&D destination

Appendix 1 – Glossary

29

PwC

March 2013

Public report

Glossary (cont’d)

RVC Russian Venture Company

S&E Science and Engineering

S&T Science and Technology

SBIR Small Business Innovation Research

SBIRI Small Business Innovation Research Initiative

SEZ Special Economic Zones

SME Small and Medium-sized Enterprises

STTR Small Business Technology Transfer

sq.m square metre

TACIS Technical Assistance for the Commonwealth of Independent States

tn trillion

UNESCO United Nations Educational, Scientific and Cultural Organisation

TIP Technology Innovation Programme

TTO Technology Transfer Office

UK United Kingdom

US / USA United States of America

US NSF United States National Science Foundation

USD United States Dollar

VAT Value Added Tax

VC Venture Capital

WB World Bank

WEF World Economic Forum

94 FL 94 Federal Law

24/7 24 hours a day, 7 days a week


Appendix 1 – Glossary

30

© 2012 PricewaterhouseCoopers Russia B.V. All rights reserved. In this document "PwC" refers to PricewaterhouseCoopers Russia B.V., which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

www.pwc.ru