R&D researchers do not work with appropriate equipment or facilities. Even with recent replacements, much R&D equipment is obsolete and of declining value. UNESCO (2010) reports that 25 percent of machinery and equipment used in R&D is more than 10 years old and 12 percent is more than 20 years old, with a degree of wear and tear for R&D equipment of 55 percent. This is particularly problematic for high-tech sectors where depreciation of equipment is higher and faster than in other less technologyintensive sectors. Also, between 1998 and 2005 the value of capital assets used in R&D declined by more than 50 percent, in constant prices. The lack of adequate replacement of R&D equipment forced some research institutions to discontinue regular scientific experiments (Yegorov 2009). UNESCO (2010) also reports that only 7 percent of installations where research is carried out were specifically designed for R&D.

Old equipment is prevalent, even though growth in machinery investment has surpassed GDP growth to become the most important innovation-related expense. In 2007 the purchase of machinery and equipment accounted for 58.5 percent of total spending on technological innovation, R&D itself 16.5 percent (MoES 2009). Between 1998 and 2008 the accumulated growth in investment in machinery and equipment was higher – at around 210 percent – than overall GDP growth of 100 percent (Crane and Usmanov 2010). In that regard, Russia’s innovation expenditure structure is similar to that of countries like Korea during its catch-up phase, when it relied heavily on acquiring machinery and equipment to gain access to foreignembodied knowledge.

One upshot of these negative trends among the Russian R&D workforce can be seen in the low and falling number of publications. Besides what was presented in Figure 2, case study evidence corroborates the fall in R&D human capital performance. For instance, within the Siberian branch of the RAS – generally reckoned one of the more active and successful branches – an estimated 20–25 percent of researchers have published nothing for at least three years (Yegorov 2009).

# **II.3. Early-stage Financing**

Firms view lack of access to financing as the major impediment to commercializing R&D outputs. Among firms polled in an enterprise survey conducted by the Interdepartmental Analytical Centre in Moscow in 2006, 57 percent cited funding difficulties as the major impediment to such commercialization.

In Russia, a large majority of firms rely on retained earnings to finance R&D. However, the shortage of own funds and the cost of borrowing are the principal barriers to investment and innovation, notably affecting small and medium-sized enterprises (SMEs). R&D activities in Russia are highly concentrated in large firms, while the gap between desired and actual levels of R&D activity, as a share of turnover, is much higher for smaller firms (Gianella and Tompson, 2007). Access to finance appears to be much more constraining for SMEs and start-ups.

The Russian government has taken steps to address the lack of funding through the creation of the Russian Venture Company (RVC).<sup>7</sup> RVC was established in accordance with Resolution No. 838-p of 7 June 2006 to stimulate the creation of the venture investment industry and considerably increase funding for such venture foundations, development of innovation industries, and access to world markets for Russian science–intensive technological products and services (Box 1).

> 7 Other government funds include the Investment Foundation of the Russian Federation; Open Joint Stock Company Russian Band for Development; and the Open Joint Stock Company Russian Investment Foundation for Information-Communication Technologies. RVC is the biggest.

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