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Innovation Activity of Firms in the Domestic Chemical Industry

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The article specifies the parameters of innovation activity and its general development trend, identifies the factors influencing the innovation activity of Russian chemical firms, and formulates the priority directions of investment and innovati
68
English translation © 2011 M.E. Sharpe, Inc., from the Russian text © 2010 “EKO.” “Innovatsionnaia aktivnost’ predpriiatii otechestvennoi khimicheskoi promyshlennosti,” EKO, 2010, no. 3, pp. 64–75. The article was prepared based on materials from studies conducted as part of the basic research program of the Presidium of the Russian Academy of Sciences, no. 24, “Fundamental Problems of Spatial Development of the Russian Federation: Interdisciplinary Synthesis” (Project 10.3, “Mechanisms for Stimulating Innovations in Mesoeconomic Systems of Siberia”).
S.A. Zabolotskii and L.S. Markov are Candidates of Economic Sciences afiliated with the Institute of Economics and Organization of Industrial Production of the Siberian Branch of the Russian Academy of Sciences, Novosibirsk.
Translated by James E. Walker.
Problems of Economic Transition, vol. 53, no. 11, March 2011, pp. 68–78.
© 2011 M.E. Sharpe, Inc. All rights reserved.
ISSN 1061–1991/2011 $9.50 + 0.00.
DOI 10.2753/PET1061-1991531105
S.A. Z
AbolotSkii
And
l.S. M
Arkov
Innovation Activity of Firms in the Domestic Chemical Industry
The article speciies the parameters of innovation activity and its general development trend, identiies the factors inluencing the innovation activ-
ity of Russian chemical irms, and formulates the priority directions of investment and innovation development of Russian chemical companies for the near future.
The following parameters are taken as a measure of a irm’s innovation activity: spending on research and development (R&D) as a percentage of the cost of production and revenues, and the number of patent appli-
cations submitted by the irm. Only patents obtained on inventions are taken into account.
The analysis was based on statistical data from the Ekspert rating agency,
1
the BiznesInfoResurs consulting agency,
2
and also the quarterly reports of the sixty largest irms in the Russian Federation. We used a data array that includes information on the production and economic activity of the ifty largest chemical companies in the United States, MARCH 2011 69
Canada, European Union, and Japan.
3
In relation to the general popula-
tion, the sample was biased toward large-scale irms because they are the ones for which questions of reequipment and increasing the innovation component are the most critical.
R&D in Russia and abroad
Russian chemical irms invest signiicantly less money in research and development than foreign companies do. On average for the sample, spending on R&D in 2007 was just 0.28 percent of total revenues (the average igure for developed countries is 3.7 percent) (Table 1).
About 11 percent of Russian irms in the sample have not carried out scientiic and technical activity for more than ifteen years. This can be explained by the fact that chemical irms use innovative developments obtained from other business units in holding companies of which they are a part.
Analysis of the rate of change in spending on R&D shows that almost two-thirds of the companies are oriented toward the growth of innovation activity and, in this case, order R&D from outside organizations.
Among irms in the Russian chemical complex, no correlation was found between the percentage of investments in R&D and eficiency parameters (and no signiicant differences were revealed in the average Table 1
Research and Development Spending as a Percentage of Total Revenues of Russian and Foreign Chemical Firms in 2004 and 2007
Region 2004 2007
Average rate of increase in 2004–2007
United States 2.8 3.1 3.3
European Union 4.6 4.7 0.5
Canada 8.6 5.8 –12.1
Japan 3.0 3.2 2.4
Developed countries 3.7 3.7 –0.2
Russia 0.25 0.28 3.8
Source: Chemical and Engineering News.
70 PROBLEMS OF ECONOMIC TRANSITION
proitability igures between chemical irms that do and do not engage in innovation activity). Apparently, the existing economic growth indexes in Russia are based on extensive production buildup, and the growth of innovation activity as a whole has not been strengthened by the growth of the introduction of achievements. Among foreign irms, on the other hand, the percentage of spending on R&D correlates strongly with their proitability: 0.653 (001) in 2007.
Horizontal integration
Horizontal integration can result in the concentration of market power in the relevant markets and lead to reduced competition and, accordingly, decreased spending on innovation activity. A horizontally integrated irm has additional competitive advantages thanks to reduced spending (as a result of consolidating marketing services and production processes) and a synergetic effect (from combining its R&D experience). One irm in a holding company can use inventions and eficiency experts’ develop-
ments from other irms in the holding company (this can partly explain the lack of correlations mentioned above).
Signiicant differences in average R&D spending, for example, for fertilizer producers show that horizontally integrated organizations spend considerably less for this purpose but are ahead of independent companies in their return on assets (Table 2).
Unfortunately, industrial collusion leading to a decline in the inten-
sity of competition can occur under the guise of establishing vertical and horizontal ties in certain markets. Why develop a new product or technology, investing enormous sums in innovation, if you can proit from other competitive advantages? For example, relatively cheap gas feedstock provides an advantage for producers of nitrogen fertilizers. A group of irms that enjoys monopoly power obtains independence from competitors for a long time and can fully afford not to increase R&D spending.
Marketing
Business practice in the petrochemical sector involves distinctive techno-
logical features of production, transportation and marketing of the prod-
ucts, and petrochemical centers are located close to oil-reining centers, transportation and energy infrastructure, and large water supply sources. MARCH 2011 71
A fairly inlexible structure of production has been established, and there are serious constraints on transportation and sales of the products. In this business, everyone knows who sells what to whom.
The inal product obtained from increasingly advanced processing is no longer tied to processors of intermediate products. A producer of mineral fertilizers receives ammonia through a pipeline and then pro-
duces a product from it that has to be sold. In the international economy’s contemporary realities of tight competition, the creation of a distribution network serves as a guarantee of success and eficiency in running a business. For example, the Akron Holding Company bought a fertilizer sales chain in China at the right time and by doing so greatly improved its economic indexes.
Therefore, the type of market in which a irm operates is an important factor in the eficiency of innovation activity because different markets have different needs for sales promotion. The difference is particularly great between markets for industrial and consumer goods. In this case, it is important to understand that the entry of a irm that traditionally oper-
ates in an industrial market that produces, for example, polypropylene (material for plastic products) into a market for consumer goods (e.g., the market for extruded polypropylene products) requires an increase in marketing expenditures and the creation of an extensive sales network.
Here, innovations and the creation of sales networks are complemen-
tary. A high level of orientation toward the consumer increases the rate of technological innovations. Setting up sales networks helps a irm to better interact with the inal consumer and, being focused on the consumer’s needs, to develop or improve the irm’s products.
Proper organization of an in-house or controlled dealer network makes Table 2
Return on Assets and Portion of Spending on Research and Development (R&D) for Horizontally Integrated Organizations and Independent Firms (fertilizer producers) in 2007 (%)
Firms
Average R&D spending as percentage of cost of production
Average proitability of the irm (return on assets)
Horizontally integrated holding companies 0.07 27.3
Independent irms 0.74 9.9
72 PROBLEMS OF ECONOMIC TRANSITION
it possible to cover a larger part of the product market and to minimize expenses. It is no longer enough to simply develop and produce a high-
quality and inexpensive product. With a large number of interchangeable alternative types of products in the market, it is necessary to motivate the customer to buy the product. This is not easy to do. In the petrochemical industry, the marketing function is performed by a distribution network that provides for personal work with consumers, service after the sale, and lexible contract inancing, as well as reliable and timely logistics.
But a high level of orientation toward the consumer has a lip side: it can slow the rate of technological innovations. In contrast to ordinary ones, breakthrough innovations require a search for new customers, which frequently involves a change of consumers and the geography of product sales.
In addition, the creation and servicing of a sales network is a diversion of signiicant resources away from the basic activity, which, in condi-
tions of limited inancial resources, also affects the funding of research and development (R&D). For example, the DuPont chemical company spends twice as much on marketing existing products as on developing new ones: $3.2 and 1.3 billion, respectively.
4
The main question that managers of chemical companies have to answer is, where is the balance between investments in R&D, spending on promot-
ing existing products, and investments in creating innovative ones?
Patent activity of Russian and foreign companies
The leading American, European, Canadian, and Japanese chemical companies register about forty to ifty patents per year on average, while Russian chemical giants register eight to ten. Data on the patent activity of foreign and Russian irms (Table 3) indicate that saturation in produc-
ing existing products has been attained in the economies of developed countries, and hence chemical companies are “doomed” to an ongoing search for innovations.
New materials and technologies
According to Russian patent statistics, the number of patents registered in the past ive years for new technologies to produce existing chemical products and auxiliary substances was 70.9 percent of the total number of patents. This is three times more than the number of patents for in-
MARCH 2011 73
ventions of new chemical compounds and products. The gap between these types of patents has increased at an average rate of 5 percent per year in the past ive years. The reason is that the Russian market for traditional types of chemical products is not yet saturated, and the in-
novation process takes place in the technological sphere of improving traditional products.
An analysis of Russian patent activity showed that a larger number of patents for technologies to produce existing products corresponds to a larger number of patents in the ield of invention of new chemical products. In this case, the correlation coeficient, 0.631 (001), means that product innovations are closely interrelated with process innovations.
Unfortunately, the method for studying irms’ innovation activity according to the number of patents registered is imperfect. A patent is only one way to protect new ideas and technologies; it is easiest to check patent violations in the sales stage and almost impossible to do so in production. Therefore, many irms use a different means of protection: commercial secrets.
Table 3
Breakdown of Patents Obtained by Russian and Foreign Chemical Companies in the Past Five Years (%)
Percentage of total number of patents
In Russia
In developed countries
New technologies for producing existing chemical products 53.0 29.1
New chemical products (including new brands of existing products and chemical compounds) 16.2 42.2
New technologies for producing auxiliary substances (catalysts, inhibitors, modiiers and other additives, etc.) 17.9 15.4
New auxiliary substances 3.6 7.7
New technologies for reducing pollutant emissions 4.1 1.2
Energy-saving technologies 2.7 4.2
Other 2.5 0.2
Total 100.0 100.0
74 PROBLEMS OF ECONOMIC TRANSITION
Product diversiication
Producing different inal or intermediate products makes it possible to insure against cyclicity of demand because all products do not usually go into a downturn at the same time.
The analysis of data for the past ten years
5
reveals a signiicant correlation between the degree of product diversiication and the ef-
fectiveness of innovation activity (correlation coeficient 0.598 [0.01]). Firms with a more diversiied product line generally conduct research in more than one direction at the same time. This is because chance plays a fairly signiicant role in the organization of research: some of the best chemical compounds, materials, and chemical technologies to date were invented more by a stroke of luck than as a result of pur-
poseful research.
Consequently, irms that have a diversiied product line invest in several directions of research simultaneously, thereby increasing their chance of making a discovery. With research in one direction (improving one substance or technology), the limit of possibilities may be reached sooner. In turn, research diversiication fosters innovation eficiency, although it is hard to foretell what percentage of new products will be obtained as a result of R&D.
Some chemical irms start as many projects as they can (within the irm’s core competence and relying on its accumulated scientiic and production experience) in the hope that some of them will be success-
ful. In this case, so as not to miss promising directions, the question of specialization or diversiication should be decided personally in each speciic case by the researcher (or developer) whose job it is to look for new ideas.
Special chemistry imports
To produce not feedstock but high-quality inished products it is neces-
sary to use what is called “special chemistry.” This refers to all kinds of catalysts, active auxiliary substances, stabilizers, inhibitors, addi-
tives, colorings, and substances that improve or modify the properties of plastics, rubber products, chemical ibers, and synthetic detergents. There is obviously a shortage of Russian high-tech developments, and the necessary substances cannot always be purchased abroad; they are frequently the know-how of a particular competitor. If these additives MARCH 2011 75
are not used, then the consumer properties of the product will be low, which may have a bad effect on its fate in the market.
The correlation between the percentage of the cost of production spent on R&D and on imported feedstock is negative: –0.578 (001). Acquiring highly effective additives and reagents makes it possible to increase the economic effect of basic petrochemical production processes and save a signiicant amount of money on research and development, and it mini-
mizes all kinds of risks when these substances are introduced into the production process. Moreover, many chemical and petrochemical plants in Russia are technologically reequipped through the introduction of imported technologies. Equipment is supplied on strictly regulated credit terms that obligate the purchaser to also buy all kinds of chemical addi-
tives in coming years, since distinctive characteristics of the technological process are specially designed for a particular reagent or catalyst.
Thus, by importing special chemistry we are funding the foreign sci-
entiic and production base for the development of improved catalysts, inhibitors, and modiiers. The way out is obvious: we need to revive our own production of special chemistry.
Promising development directions
In recent years, demand for polymers such as low- and high-density polyethylene (LDPE, HDPE), polyvinylchloride (PVC), and polypro-
pylene (PP) has grown rapidly, thus also increasing the demand for the intermediate products from which they are produced. We know that in-
novation and investment activity in this segment was a consequence, in turn, of precrisis growth of demand on the part of the construction sector. It is not expected that the galloping precrisis growth rates of housing construction will resume, although the construction of infrastructure facilities and low-rise construction may provide the necessary demand for a number of petrochemical companies that produce construction materials from these polymers.
Following current trends is not always helpful to innovation processes. For a professional whose habits and attitudes were shaped by a growing market and reinforced by successes that have been achieved it is very hard to see different approaches to things that have been known for a long time. The professionalism that he has attained does not allow him to see a problem differently, but breakthrough innovation strategies require new approaches and distancing from traditional ways of thinking 76 PROBLEMS OF ECONOMIC TRANSITION
and acting.
6
That is why, even though the irst signs of stagnation in the construction sector already appeared in 2004 (HDPE, PVC, and PP are used in producing plastic windows and linoleum, plastic pipe, etc.), many irms continued to increase their output and invest in new capacities for producing these polymers.
There is a clear example from international practice when rapid growth of demand for terephthalic acid (an intermediate product for producing polyethylene terephthalate) caused a price increase to $1,000 per ton in 1996 and motivated producers all over the world to invest in construct-
ing additional capacities. When they went into operation, prices fell to $250–300 per ton.
7
Innovations largely follow market trends. This explains why in the Russian chemical industry innovations are seen in the sphere of improving the technologies for traditional products rather than creating new ones.
At this time, there are not many plants, or whole subsectors, in Russia that could meet the domestic demand. More than 50 percent of Russian consumption is covered by imports in the following groups of polymers: linear high-density polyethylene, polyethylene terephthalate, acrylonitrile butadiene styrene (ABS) plastic, polyurethane, polycarbonate, polybuty-
lene terephthalate, and luoropolymers, including polytetraluoroethylene (Telon), polyacetates, and polysulfones, as well as various silicone poly-
mers (Table 4).
In the near future, major Russian polymer producers undoubtedly will start moving into these market niches. The only question is, will a backlog be created for a Russian research and design component? Or will all of the equipment be acquired from foreign colleagues, and will turnkey plants be built? However, this way can also be successful: in China (back in the day of Deng Xiaoping) they followed the principle of “technology in exchange for the market,” which meant letting for-
eign companies have part of the local market in exchange for supplying modern, progressive technologies. Of course, this meant creating joint ventures. It might be possible for Russian industry to follow this prin-
ciple, the more so as the crisis has led to a considerable decrease in the cost of foreign technologies.
Conclusions
•Withacertaindegreeofcaution,itcanbesaidthatthe
innovation component of business in the Russian chemical MARCH 2011 77
industry remains low. While most irms do systematically engage in technological innovations, they resort to using foreign scientiic developments increasingly often and sometimes use turnkey construction to modernize their production process.
•Theconcentrationofinancialandhumanresources,and
accumulated experience, is also an important factor. For example, two or three companies that have concentrated all of the scientiic engineering potential are dominant in the United States and Western Europe: Lummus, Kellog (United States), Linde (Germany), and Technip (France). These companies create all of the signiicant breakthrough inventions and sell licenses and technologies to other irms (which, in turn, produce the inal chemical products).
•InRussia,effortsaredispersedamongalargenumberof
companies; a critical mass of knowledge, experience, and inances is thus lacking, and inventions only involve improving what has already been invented. Emergence of a critical mass capable of creating breakthrough technologies, materials, and chemical compounds requires the accumulation of all types of resources. For an individual business that has limited inancial capabilities, it is too risky to invest in innovation projects. Under Table 4
Imports of Polymers Consumed in Russia in 2007
Polymers %
Polybutylene terephthalate 100
Polycarbonates 99
Linear high-density polyethylene 90
Polyethylene terephthalate 74
ABS plastic 65
Fluoropolymers 60
Expanded polystyrene (EPS) 40
Polypropylene 35
Polyvinylchloride 30
Polyamides 28
General-purpose polystyrene (GPPS) 12
Impact-resistant polystyrene 10
78 PROBLEMS OF ECONOMIC TRANSITION
these conditions, the intensive intervention of government institutions is needed, at least to create the infrastructure and legal conditions for future construction of innovative irms.
Notes
1. Khimicheskii kompleks Rossii, no. X, RA Ekspert electronic database, 2007.
2. BiznesInfoResurs analytic information system, http://bir.prime-tass.ru.
3. Chemical & Engineering News, reports, http://pubs.acs.org/cen.
4. K. Lukach, “My liubim sotrudnichat’. Etim i unikal’ny,” Ekspert, 2007, no. 46 (587); vailable at http://expert.ru/printissues/expert/2007/46/qa_lukach.
5. Only patents for the invention of new chemical products or technologies are taken into account; patents for producing prototypes and trademarks are disre-
garded.
6. C. Bijon, “La strategic de rupture,” Harvard-L’expansion, Autumn 1984, pp. 98–104.
7. O.B. Brazinskii, Mirovaia neftekhimicheskaia promyshlennost’ (Moscow: Nauka, 2003).
To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.
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