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Saturday, March 27, 2010

Barriers and bearucracy - but must it be like this?

This country is vast and the opportunities here are extraordinary. And if you grew up or lived abroad in the US, the UK, Europe or parts of Asia, where the rules of the game are more or less understandable after centuries of capitalistic trial and error, it’s easy to spot new market niches or opportunities here which are still open to rapid development.

This has led me on countless occasions over the years to new investment ideas and exhilarating discussions with business partners - only later to be met with countless frustrations when I’ve been told, “Great idea, but we can’t do that here” or “this would be wonderful, but the laws here forbid us from fixing this problem in this way”.

Why? If it can be done elsewhere, why can’t it be done here?

This is the root problem inhibiting the realization of countless entrepreneurs dreams of building a family business, and then growing it first regionally, than nationally, then securing partners and investors, and “boom” going international or reaching for the public financial markets.

Intelligence, creativity, resources, “out of the box” thinking – they are all here, but yet at nearly every turn, the 1,000 plus year-old culture here rears its head and speaks with two opposing voices - one always in control and eager to place even more limits and the other endlessly working to come up with ever more creative ways around the bureaucracy and artifice. Take for example labor laws.

My own small company needed not less than six admin employees to manage the daily reports required by the authorities. I could hardly fathom what had to be reported in such minute detail to the local tax, banking, and who knows which other authorities.

And all to show who was working, when, how many hours, pregnant or not pregnant, on vacation (where?) or in their place, on time? And why? Who else cares about all of this? It’s my company, right?

But no, because there is so little trust between parties, all facts and figures must be checked and rechecked, and then cross checked again. Taxes must be assessed, fines must be found, liars and cheaters identified and dealt with, all in the guise of a “cat and mouse” game between those in authority to control and those trying ceaselessly to work around it.

Of course the normal practice of regulating economic behavior in any market economy is essential to its efficient workings, this goes without saying and bureaucracy does naturally exits everywhere.

But the absurdity and impractical nature of some rules and regulations which I have experienced here, or at least their local interpretation, lead me to wonder why they exist in the first place, and why such rules were written so ambiguously and open to so many different interpretations to start with? I guess old habits are hard to break.

And for me as an honest entrepreneur – well, I’m just caught in the middle, again being told “no, unfortunately, we can’t do that in this way!” Oh, well, another great idea bites the dust.

But several days later, when my friends and I are together in the banya, and we are talking about some new products just hitting the markets in New York, and we began to think of how these products could be produced here, with better quality, faster reactions, and cheaper!

But again, we face barriers.

The inherent cultural conflicts existing in this society have been passed from one generation to the next. It’s an ingrained, on-going effort by the center to hold control over the geographical integrity of the largest country on the planet.

Then add the fact that there are more than 100 different national ethnic groups here, each with their own individual cultures and traditions, and it’s no wonder that Russia has such a problem adapting to the 21st century global economy and emerging as a leading innovation economy.

The realization of any innovative idea requires fundamental trust by all parties. There needs to be a functioning, fair, legal system that that people respect. And there needs to be public and private support for alternative financing for each stage of an enterprises evolutionary development, from seed capital to public markets.

If an entrepreneur is constantly fighting to get around the bureaucracy and overcome an arbitrary legal system, and I am not even talking about the problem of corruption here, but rather just the struggle to initiate something new - then how can a culture of innovation take root and grow?

Innovation, by its very nature is a wide spread, bottom up process involving entrepreneurs taking risks at every stage of a products development. The end result can be the creation of a new innovative winning design which can change the world – and make the creator as rich as Bill Gates or Sergei Brin.

Top down approaches to scientific development definitely have their place in history. A fine example is the US’s Manhattan Project and NASA’s moon launch program, as well as many other such analogous projects from the Soviet Union - where this approach achieved paradigm shifts and history changing results.

But these efforts alone need to be developed in parallel with the individual efforts of millions of young entrepreneurs seeking to compete openly against one another in their own efforts to fulfill their own dreams. The energy and initiative created by this search for individual recognition, personal freedom and wealth is the leading motivational factor in the creation of any successful innovation economy, and this is what needs to be fostered in Russia for this country to adapt to the rapidly changing world we live in.

Take for example Silicon Valley – how did it get its start? The US government played a key role some 60 years ago in investing in numerous research programs there, lavishing federal money on R&D and production contracts from the US military. What happened next? Individual entrepreneurs were invited in and given the freedom, and incentives to create their own private businesses on top of this foundation. Business angel investors sprung up and helped launch the dreams of such entrepreneurs as Mr. Hewlett and Mr. Packard. Does HP ring any bells?

On top of this, California’s liberal commercial and taxation laws, coupled with massive investments into an extraordinary local education system, focused on technology and business entrepreneurship, created what is today one of America’s top Innovation Clusters.

Many more have sprung up around the country in the last 50 years; in Chicago and Evanston, Illinois, in Boston along Silicon Alley, and in Austin Texas, where innovation, creativity and liberal business laws and government support have encouraged risk taking.

I believe that Russia has every chance to follow this same development model and can also create some of the world’s leading innovation clusters in places such as Nizhny Novgorod, Tomsk, Novosibirsk, Chelyabinsk and the areas surrounding Moscow and St Petersburg.

But for this plan to develop in earnest there needs to be a fundamental understanding of what makes such a system work – and that is the trust which must exist between the parties.

Without trust between entrepreneurs and regulators, between innovators and business angles, between central authorities and regional officials – the system itself will not function properly and achieve positive results.

A top down approach on its own, will certainly stimulate innovation development, but will likely miss the boat entirely in creating an efficient, diversified innovation driven economy.

But for now, back to the banya – to realize our brilliant new ideas, we actually need a factory space and imported equipment…and I should further investigate the local banking regulations, ahhh … well, maybe I should save that for another blog...

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