or none at all."<sup>27</sup> And with continued government funding came continued government dominance over R&D priorities.

In retrospect, the private sector's failure to increase its demand for R&D and innovation is not surprising, given the overall economic downturn following the onset of the transition process. In the context of the struggle for survival, innovation, like maintenance, became a luxury that could easily be postponed, at least for a while.

In 1998, only 6% of all surveyed Russian enterprises engaged in any form of innovative activity. By comparison, one-third of US companies were reported to be "innovationally active."<sup>28</sup> Of those Russian firms which did innovate, only 18% of their innovation expenditures were related to the development of new products, services, and new production processes. The comparable figure for OECD firms exceeded 33%. In addition, survey data suggests that most innovationally active Russian firms are not trying to enter foreign markets. Their goals are less lofty. They are simply trying to preserve their existing share of the Russian and CIS markets. As a result, innovation spending by Russian firms has a low R&D content (marketing, packaging, etc.) which, in turn, leads to a low demand for science and technology outputs. "Most of Russia's enterprises are too inert....Russian businesses never rush to catch up on sophisticated foreign technology."<sup>2 9</sup> Survey data suggests that a larger percentage of SMEs are inclined to be more innovatively active compared with larger firms and that their innovation activities tend to display a much greater R&D intensity. However, there are still too few SMEs to have any noticeable impact on the aggregate demand for S&T. Moreover, the business/innovation infrastructure - tax, capital and financial markets, administrative barriers -inhibits the emergence of a vibrant SME sector. Consequently, SMEs are still not in a position to be the engine of innovation that they are in OECD countries. Large enterprises, on the other hand, tend to have a more stable financial position and diversified source of revenues. They have the financial means to innovate and account for the majority of innovation activity actually currently taking place in the Russian economy. Not surprisingly, more than two-thirds of innovation expenditures are

- 27 Leonid Gokhberg, Merton J. Peck and Janos Gacs, op cit, "Introduction," Chapter 1, p. 4. The Helsinki paper notes, in Para 46 that the aggregate share of business sector R&D financing increased from 15.5% in 1997 to 17.3% in 1998. But the report goes on to caution that "these figures should not be interpreted as a sign of the business community's growing interest in R&D. The share of the business sector's grew only because of the drastic decrease in the share of government spending in the wake of the 1998 crisis."

- 28 All data on innovation activity are from' Leonid Gokhberg and Irina Kuznetsova, Technological Innovation in Russia. Centre for Science Research and Statistics, Moscow 1998 and Sergei Glaziev, I'dar Karimov, and Irna Kuznetsova, "Innovation Activity of Russian Industrial Enterprises," in Gokhberg, Peck and Gacs, _op. cit._

- _29_ "Role of the State in Creating a Favorable Innovation Climate in Russia," Background Report Prepared by the Ministry of Industry Science and Technology for the Helsinki Seminar on Innovation Policy and the Valorisation of Science and Technology in Russia, March 1-2, 2001, Paragraph 18.

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