1

Innovation Strategies of Emerging Russian Multinational

Companies
Sergey Filippov
Delft University of Technology (The Netherlands)
Alexander Settles
Higher School of Economics (Moscow, Russia)

Prepared for an international conference

Re-Assessing Emerging Market Multinationals Evolving Competitive Advantage
(Cambridge, UK, 25-27 March 2011)

Date: 14-03-2011

Abstract
The paper explores innovation strategies and processes in emerging Russian multinational
companies. Innovation is a major driver of corporate growth and determinant of
competitiveness of western multinationals. Emerging Russian multinational companies have
started to realise the value creating aspects of R&D and innovation. They devise various
innovation strategies ranging often leading to acquisition of technology-intensive firms in
advanced economies. Russian firms are unique since they operate in a society with a strong
scientific tradition inherited from the Soviet system with limited success in translating these
scientific inventions into innovative products. The paper provides an inventory of such
strategies and provides empirical evidence to exemplify them. Finally, managerial and policy
implications are formulated.
Key words: innovation, Russia, multinationals, acquisition, FDI

1. Introduction

Innovation is universally recognised as a competitive advantage and a key driver of the

growth of multinational companies. Presently, innovation is not limited to western
multinationals, emerging multinational companies start realising the strategic value of
innovation too. As a vivid indication of the importance of this topic, in April 2010, The
Economist published a special report on innovation in emerging markets, titled The world
turned upside down. The report states that the emerging markets are developing their own
distinctive management ideas, not simply imitating the western. It urges to recognise that the
emerging world, long a source of cheap labour, can be a source of disruptive innovation as
well.
Among emerging multinationals, Russian companies represent an interesting case. Russia has
inherited the Soviet science and technology (S&T) complex that enjoyed leadership in many
technological domains. However, the institutional collapse after the break-up of the Soviet
Union has had a profound effect on innovation, science and technology. Dependency of the
contemporary Russian economy on the international commodity markets is often
acknowledged. The exports of oil and natural resources make up to 80 per cent of all Russian
exports. Likewise, many emerging Russian multinational companies operate in the natural
resources sectors.
Diversification of the national economy remains a top priority for the Russian political
leadership. Russian president Dmitry Medvedev has consistently called for the
modernisation of Russias economy and appealed to Russian companies to design and
implement innovation strategies.
Despite the general interest to this topic and its relevance, the role and place of innovation in
emerging Russian multinationals remain under-researched (with some exceptions, e.g.
Podmetina et al, 2009). The objective of this paper is to fill this gap. We seek to explore the
nexus between innovation and internationalisation of Russian companies. More globally, we
aim to reflect whether innovation represent a firm specific advantage - competitive advantage
for Russian emerging multinationals. As the conventional wisdom about EMEs especially
those from Russian fail to innovate even with the extensive state support of state
corporations, scientific institutes, and now technology parks. While there is a lack of
innovative activity of Russian based firms there are firms that operate both in the Russia
market and internationally that have attempted to acquire technology assets or create
innovative capacity in Russia. For example in the telecommunications industry Russian firms
have developed significant competitive advantage in their home market and have extended
these advantages to other emerging markets especially in the area of the former Soviet Union.
Innovation capability is often measured by patenting activity (Acs and Audretsch, 1989);
however in the Russian context patents do not always provide meaningful representations of
innovation process, as the efficiency of R&D measured by patents is low. Other standatd
measures of innovation are not always readily available in Russia. Therefore, the paper relies
on secondary data and circumstantial evidences.
The paper is structured as follows. Section 2 provides a theoretical background by reviewing
academic literature on a number of relevant topics, such as emerging multinational companies
and firm-specific advantages, innovation and internationalisation of R&D and absorptive
capacities. Section 3 sets the context by providing a macro-view on innovation in Russian,
the strategic intentions of the governments policies and innovation in Russian (domestic)
companies. Section 4 examines the interplay between innovation and internationalisation.
Section 5 provides critical reflections and conclusions.

2. Theoretical background
2.1.

Emerging multinational companies and firm-specific advantages

The rise of multinational companies originating from emerging economies has attracted a lot
of attention among the business and economic literature. We start review of this literature by
looking at the classic theories of internationalisation.
The eclectic paradigm originally proposed by John Dunning (1981) yielded many useful
insights that have informed subsequent research; it represent the most influential approach to
study the international activities of multinational companies. This eclectic paradigm can be
considered as an envelope for the existing theories of internationalisation, with the addition
of a new attention to the locational choice of investments (Dunning, 2000). Besides,
according to Dunning (2006), the eclectic paradigm can be easily adapted to include new
features emerging from the recent developments in globalised markets. In its essence, the
eclectic paradigm postulates that the decision of firms to expand their activities abroad via
FDI can be explained by three different advantages. Ownership (O) advantage represents the
ownership of specific resources to be exploited externally. Location (L) advantage depends
on the characteristics of the host country and opportunities it offers. Internalisation (I)
advantage depends on the opportunity to internalise firm-specific advantages rather than to
exploit them on the markets through other transactions.
Another fundamental contribution by John Dunning (1993) is a widely used typology of
motivations drawing FDI. They are: (1) resources-seeking investments aimed at accessing
unique resources specific to foreign locations (e.g. natural resources), (2) market-seeking
investments aimed at entering new markets, (3) efficiency-seeking investments pursuing an
efficient specialisation of firms, and (4) strategic asset-seeking investments aimed at
augmenting the set of proprietary resources of firms.
The key precondition to become engaged in foreign investments is that a firm must possess
some unique competitive advantage, or firm-specific advantages (FSA). The multinational
company needs to build on some type of FSA that, at the simplest level, is nonlocationbound, i.e., easily transferable across borders as an intermediate product. It can be either a
functional, production-related proprietary asset, typically technological, manufacturing or
marketing know-how, or an organisational capability to efficiently coordinate and control the
multinational companys asset base. Hence, the FSA concept covers a very broad set of
unique company strengths (competencies and capabilities). The importance of FSA transfer to
explain performance of the multinational company has become a pivotal in the international
business literature (Rugman and Verbeke, 2001).
Alan Rugman also identifies country specific factors (CSA). The CSAs are the locationbound, exogenous factors in a multinational companys home-market. The CSAs result from
the home countrys economic and institutional environments, such as labour force, factor
endowments, government policies, national culture, productive reputation, or institutional
framework. In fact, both FSA and CSA can be related to the O and L advantages of the OLI
framework.
The OLI framework originally designed to explain internationalisation of companies from
western economies does not directly address the pattern of internationalisation of firms from
less advanced (or emerging) countries. Essentially, companies from emerging economies
might not possess the same competitive advantages as companies from advanced economies

do. As Goldstein (2007: 81) argues, If they invest abroad, it is not on the basis of O, and
the parameters that determine the degree of I in their foreign operations are different.
These firms internationalise in order to get access to the strategic resources abroad they need.
This idea is consistent with the classical Dunnings typology of FDI motives. UNCTAD
(2006) identify resource-seeking, market-seeking and efficiency-seeking factors as the main
reasons for outward FDI from emerging countries to the emerging / developing countries. On
the contrary, strategic asset-seeking motives are dominant for outward FDI from emerging
economies to developed countries.
Reflecting on CSA, the domestic environment may be an important advantage for emerging
multinationals, such as the low cost of factors (Barnard, 2008; Cuervo-Cazurra, 2007) and the
monopolistic power at home (Andreff, 2002). The CSA may serve as a push factor; for
instance, home country government policies may create a favourable framework for outward
FDI.
Last but not least, cultural and psychic proximity (in line with the tenets of the Uppsala
Model) is an essential factor is internationalisation of firms from emerging economies. Aykut
and Goldstein (2006) report that that emerging multinationals successfully acquire companies
in their home region since they are able to rely on cultural and ethnic affinities. In the same
vein, Barnard (2008) shows that in knowledge-intensive services cultural and geographical
proximity represent for emerging multinational a source of advantage over developed country
multinationals.
2.2.

Innovation and internationalisation of corporate R&D

The previous section outlined lack of ownership advantages as a reason for firms from
emerging economies to internationalise. Strategic asset-seeking motive, entailing acquisition
of technology-, or R&D-intensive firms, appears as dominant for expansion of emerging
multinationals to developed countries.
A parallel trend is internationalisation of corporate R&D function when multinational
companies engage in R&D at foreign locations. Motives, or location-specific factors, are
divers from characteristics of local or national markets to the properties of national or
regional innovation systems. Establishing a presence in a foreign knowledge-intensive
location is not a guarantee of success, and location-specific factors cannot be automatically
captured (Narula and Zanfei, 2005). Tapping into localised knowledge base require strong
linkages that are expensive and time-consuming to develop (Narula, 2002).
If the location-specific knowledge is internationalised by a foreign subsidiary, it is essential
that it is then transferred to other units of the multinational company. Narula and Zanfei
(2005:334) point out, It is not sufficient for foreign affiliates to internalise spillovers if it
cannot make these available to the rest of the MNE. The multinational company must be able
to co-ordinate and balance its structure, and stimulate and facilitate knowledge flows. As
Narula and Zanfei (2005:334) claim, a dispersion of R&D activities across the globe require
extensive complex coordination if they are to provide optimal benefits. Such co-ordination
requires expertise, managerial and financial resources.
In its turn, the organisational structure is highly linked to the technological and sectorial
nature of the company. Therefore, technological and sectorial differences can account for
some of the differences of patterns of internationalisation and organisational structural
adaptation (Narula, 2002).

A related question is the nature of technology involved, as it can explain specificities of

internationalisation patterns. Technologies can be analytically split in two categories mature
or immature. In Narulas (2002: 796-797) words, mature technologies evolve slowly and
demonstrate minor but consistent innovations over time. The technology is to a great extent
codifiable, widely disseminated, and the property rights well-defined. Competition shifts
towards price, economies of scale and downstream activities in order to add value, as the
original product is priced as a commodity. On the other hand, immature technologies, widely
present in emerging sectors, change rapidly and are difficult to codify.
The sectoral differences, or systematic knowledge base variations between industrial sectors
is a classic argument (Pavitt, 1984). Understanding the specificities of involved knowledge
bases is crucial in order to understand the prospects for, and challenges involved in, creating
corporate learning networks that span different locations, and the need to link up involved
knowledge actors.
Many emerging economies operate in mature technologies and low-tech sectors, and
competition indeed shifts towards the price. For example, as shown by Barnard (2008),
emerging multinationals tend to concentrate their M&A activities in low-tech traditional
industries in which they have accumulated capabilities over time and in which they enjoy
competitive advantages (compared to western multinationals) such as capital-intensive
production, scale economies and assembly-based mass production.
2.3.

Absorptive capacity can emerging multinationals learn from their

international investments?

The ability for emerging market firms to learn from their international technology acquisition
remains unclear. The historical expansion of R&D activities of multinational companies from
developed economies into new markets was shaped by a firms ability to transfer their R&D
capacity into new situations to take advantage of localisational benefits for R&D, to access
lower cost of labour for highly skilled workers, or to tap into country specific capabilities not
available in the home country. In the case of emerging multinationals, especially those from
Russia, it is unclear whether these firms have the know-how to benefit from their investments
in developed market technology assets. The assumption has been to acquire developed market
technology leaders and then transfer the technology to the Russia operations. Since
multinational companies have been able to transfer their technologies to the Russian market it
assumed that Russian may merely buy the technology and transfer it.
A firms ability to learn from it subsidiaries or cross border acquisitions is a function of its
absorptive capacity. Cohen and Levinthal (1990) define absorptive capacity as the ability to
exploit external knowledge which is predicated on its prior related knowledge built on an
understanding of the most recent scientific or technological developments. This prior
knowledge provide a framework for the firm to recognise the value of new technologies,
knowledge or management innovation and apply them for profitable ends. Absorptive
capacity is the moderator between firm level R&D spending, technology opportunity and
appropriability of innovations for commercial uses. In the case of post-acquisition innovation
performance the level of absorptive capacity will determine whether technology-seeking
investments will pay off for emerging market firms.
The extant research in developed market firms indicates that learning from acquisitions is
difficult as previous results indicate that in developed market that post-acquisition innovation
performance has suffered (Hitt et al., 1994, 1996; Hoskisson et al., 1994; Ahuja and Katila
2001). A deeper understanding of the value of technology seeking behaviour was examined in

the chemical industry by Ahuja and Katila (2001) where they found that the relative size of
innovation output mattered. Innovation activity went up in the post-acquisition period when
the absolute size of the knowledge base was large but was reduced when the relative size of
the knowledge base was high. In case where firms try to absorb their targets knowledge
when the knowledge base is relatively large to their existing knowledge base this reduces
innovation. Firms that purchase relatively large knowledge bases and those in unrelated fields
have fallen into competency traps (Levinthal and March, 1993) wherein they are able to
properly utilise the innovation capacity of their acquisition. The extension of this model and
results to emerging market firms brings into doubt about whether emerging multinationals
will be able to integrate the existing technology competence of acquired firms into their
home-market based operations.

3. Context: Innovation in Russia

3.1.

Macro-view and public policy

The Soviet leadership regarded the S&T complex as a matter of national priority; and it was
particularly crucial in the defence sector. The innovation was assessed from a technological,
not economic perspective. Therefore, it is unsurprising that the situation in other sectors of
the Soviet economy was rather disappointing. The command economy was inherently
resistant to innovation. Introduction of innovation and new technologies would lead to (shortterm) disruption of the existing structure. Because Soviet enterprise directors were not
interested in profit maximisation, innovation and following reorganisation were considered as
a burden. As Berliner (1988: 639) describes it, management must always regard innovation
as a secondary and potentially threatening activity.
The transition to a market economy has not improved the situation, and even worsened it in
many respects. While elimination of the command economy was a necessary condition for
resistance to innovation to disappear, yet it was not the sufficient one (Berliner, 1988).
In the volatile transitional environment of the 1990s, innovation receded into the background.
Most enterprises were struggling for survival in the new economic conditions, and innovation
was perceived as luxury, a risky investment which would pay off in the long term. The
situation has not radically changed in the 2000s. The potential for technology and innovation
to drive Russias productivity growth is severely limited by several factors, such as a weak
regulatory environment, weak intellectual property rights protection, low levels of
collaboration between public and private sectors, and inadequate technological infrastructure.
The private sector remains reluctant to innovation, however. Apart from aforementioned
problems, the fundamental issue is the structure of the Russian economy. It is heavily
dominated by extractive and energy industries where the potential for innovation is limited by
definition. In contrast, R&D-intensive sectors such as biotechnologies and electronics are
under-developed.
The problem is recognised by the Russian leadership and the utmost attention is given at the
top political level. The Governmental Commission on High Technologies and Innovations
was established in 2007, and since March 2010 it is headed by the Prime Minister Vladimir
Putin. Two years later, in May 2009, the Commission for Modernisation of and Technological
Development of Russian Economy was established; it is headed by the President Dmitry
Medvedev. The Russian government started to allocate funding to innovation through a
number of state corporations, such as Rosnano (nanotechnologies), Rosatom (nuclear

technologies), Rostekhnologii (hi-tech industrial products for civilian and military purposes),
etc. In February 2011 the Russian government presented a draft of the National Innovation
Strategy 2020. It aims to increase the number of Russian companies conducting technological
innovations up to 40-50 per cent, and for Russia to reach some 5-10 per cent of the global
market of high-tech products and services.
The landmark project of the Russian president is Skolkovo innovation centre, a planned high
technology business area to be built near Moscow and which is meant to become Russian
Silicon Valley. The site is intended to be an ultramodern complex created to encourage
technology-based companies and start-ups. The objectives are to stimulate Russian
innovation system by creating a springboard to globalise Russian businesses and localise
international R&D activities, facilitate development of new high-tech businesses, new hightech products and services, and to attract foreign talents.
Despite all the energetic actions undertaken by the Russian political leadership, the actual
situation remains disappointing. A vivid indication is a session of the Presidential
Commission for Modernisation and Technological Development held on 31 January 2011. In
the beginning of 2010, the Russian president Medvedev requested the top management of
large state-owned companies to design innovation programmes and increase funding of
innovation. As it turned out, only one third of companies had designed such programmes, let
alone increased funding.
At the session, the president regretted poor progress in modernisation, in spite of massive
investment. Today we have investment and money, though not huge, for innovations projects,
but still have practically no innovations, the president stated. There are very few hi-tech
products which could compete at the world market, he emphasised. The president named
companies performing badly in terms of innovation, There is another issue I would
particularly like to address: almost none of the state-owned companies have people among
their top executives specifically responsible for innovation... I wont name companies that are
doing better right now, but I will name the companies whose R&D spending is very low.
These include Rosneft, IDGC Holding, Sovkomflot, and Aeroflot. .. its just unacceptable.
Corporations must dramatically increase R&D spending; moreover, they must work together
with research centres, and this should also be an obvious step (Medvedev, 2011).
It shows that the heritage of the soviet administrative style is still very dominant, at least in
relation to state-owned corporations. In these companies innovation is something not driven
by market forces but enforced administratively, whilst the company management perceives it
as a burden.
3.2.

Innovation in private Russian companies

Innovation in Russia tends to be concentrated in large companies, possessing sufficient

financial, human, intellectual resources for it. The strategic value of innovation and R&D in
large Russian companies has been realised only recently. This phenomenon has been of
limited relevance in Russia in the period of economic transition in the 1990s, when the
economy was characterised by low investments in R&D. The reason is that R&D and
innovation were not among the priorities of Russian companies. The main goals of most
companies at that period were acquisition of state assets in controversial deals, struggle for a
market share, corporate restructuring and consolidation. Investment in R&D did not generate
immediate profits and therefore were considered uneconomical. The focus was on reform the
enterprises to bring immediate returns through efficiency, adoption of international
management practices, and imitation of technology utilised by international competitors.

Russian companies started their internationalisation in the 2000s. While outward FDI were
recorded since the early 1990s, it was rather a capital flight than distinctively designed
internationalisation strategies and establishment of a network of overseas subsidiaries.
Roughly at the same time, many large Russian companies showed a growing interest in
financing R&D and creation of in-house R&D departments.
International growth of some firms was strongly biased towards the former Soviet republics
of the Commonwealth of Independent States (CIS) or Eastern European countries, yet other
emerging Russian multinationals started investing in all regions (Asia, Africa and Latin
America) and particularly advanced economies of Western Europe and North America. It is
expected that access to western technologies and know-how has become a distinctive driver
of this expansion.
Vahtra (2010) aims to depict the scope and potential impact of outward R&D-related FDI by
Russian companies. The study concludes that the evidence of R&D investments by Russian
companies remains notably scarce. One of the explanations is that many emerging Russian
multinationals are concentrated in the low-tech and natural resource-based industries, and the
share of high-tech sectors in Russian economy is marginal. Specifically, only few financialindustrial conglomerates account for significant R&D-related FDI. Moreover, even this small
share of R&D-related FDI does not always prove to be successful. Skolkovo Research (2009)
identifies unsatisfactory knowledge transfer as one the six key operational challenges faced
by Russian multinationals (along with inappropriate organisational structure, low brand
recognition and so on).
In contrast to the EUs Community Innovation Survey, Russian authorities do not
systematically measure innovation activity of businesses. One of the latest private initiatives
is a comprehensive report compiled by the New Economic School and
PricewaterhouseCoopers Russia timed to the commencement of St Petersburgs 2010
International Economic Forum. The survey provides a comprehensive account of innovation
in 100 large companies, with annual turnover exceeding $ 100 million and mostly privatelyowned. The survey results show that innovating companies are the largest ones, especially
foreign subsidiaries and those present on the global market, i.e. Russian multinationals.
Overall, in the period of 2008-2010, 39 per cent of companies introduced innovative
products, 73 per cent innovative technologies, 66 per cent innovative business processes,
as stated by the respondents. One-third of companies believe that they introduced globally
innovative products, technologies and business processes (new to the global market). In
terms of expenditures on innovation, 64 per cent of respondents indicated R&D, 52 per cent
procurement of machinery and equipment, and 40 per cent staff training and
development. According to the survey, Russian multinational companies implement new
technologies and business processes as often as international companies (subsidiaries of
multinational companies operating in Russia).
While this survey is based on self-assessment and self-reflection of respondents, it is however
evident that the need for innovation and breakthroughs at the global level are recognised by
the leadership of Russian companies. In analysing data from Russian firms it should be noted
that innovation has come to have a very broad meaning in Russia and to Russian businessmen
and policy makers. Therefore it should be recognised that innovation in Russian may mean
any management, operation, or production technology or technique adopted to improve
efficiency of the firm.
These findings are broadly consistent with the survey among executives on the role of
innovation in emerging economies of Brazil, China and India conducted by the Boston
Consulting Group. Among the main conclusions are that innovation is becoming a priority in

emerging economies, and companies willingness to spend on innovation and their

satisfaction with the return on innovation spending are inching higher (BCG, 2010).
The actual numbers of R&D expenditures are in contrast with these intentions though.
Russian multinational fall back on R&D expenditures in comparison to multinationals of
other BRIC economies. In our analysis we rely on the R&D Scoreboard annually published
by the UKs Department for Business Innovation & Skills (Table 1).
Table 1 Investment in R&D by Russian companies: Global look
2006
2005/06

2007
2006/07

2008
2007/08

2009
2008/09

2010
2009/10

1250

1400

1000

1000

Gazprom

Gazprom

Gazprom
AvtoVAZ
Sitronics

Gazprom
Lukoil

Gazprom
AvtoVAZ
Lukoil

132.63

254.70

367.82

520.54

683.16

as % of sales

0.5

0.6

0.7

0.3

0.6

as % of operating profit

1.4

1.6

2.2

1.4

2.8

R&D Investment per

employee, 000

0.3

0.6

0.6

0.9

1.1

3
1546.11

6
1263.99

Number of global companies

in the Scoreboard
Russian companies in the
Scoreboard
Total R&D investment, m

Memorandum (number of companies and total R&D investment)

Brazil
3
3
5
448.02
674.81
983.48
China

5
608.87

7
765.66

9
991.91

12
2411.73

16
4595.84

India

3
155.08

7
268.17

15
751.94

7
721.59

12
1066.02

Source: compiled from respective annual editions of the R&D Scoreboard published by the UKs Department
for Business Innovation & Skills

Among 1000-1400 (depending on the year) global companies in the Scoreboard, with the
highest R&D investments, Russia is consistently represented by only one company
Gazprom. Among others, the carmaker AvtoVAZ, oil and gas producer Lukoil and the
microelectronics company Sitronics. In total, the amount of R&D investment by Russian
firms in the Scoreboard increased from 132.6 million in 2005/06 to 683.2 million in
2009/10. Likewise, there has been a trend in increase of these expenses as a proportion of
operating profit. Nevertheless, performance remain disappointed if measured in terms of
R&D intensity (R&D as a proportion of sales) which remains at 0.5-0.6 per cent. In 2009/10,
this indicator stood at 3.6 per cent on average for all companies in the Scoreboard.
Companies in the life sciences sector have R&D intensity as high as 10-15 per cent. An
explanation, already aforementioned, is that Russian companies such Gazprom and Lukoil
operate in low R&D-intensive sectors as such.

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Comparison with other emerging multinationals (from BRIC economies) is illustrative.

Judged by the amount of companies in the Scoreboard and the sum of their R&D investment,
there is a continuous upward trend. Chinese companies are leading in 2009/10, 16 largest
R&D spenders invested more than 4.5 billion. Chinese multinationals virtually doubled their
R&D investment compare to 2008/09. On the background of other BRIC companies,
performance of Russian companies is disappointing as they are clearly lagging behind.
3.3 Russian Firms Innovation to Compete with Developed Market Firms
The emergence of a middle-income country middle class in Russia has greatly expanded
the market size for consumer goods. DMME rushed into the market in the 1990s and early
2000s overwhelming the domestic manufactures of consumer durables, electronics and fast
moving consumer goods (and created new market segments where Soviet and Russian
producers had not previously provided goods). There are some Russian firms that have been
able to innovate to create products that are more affordable for the Russian consumer by
making products that fit the good enough for local consumers
An example of a successful Russian firm in the consumer durables and electronics market
is VITEK. The firm began as importer of foreign brands and had developed a clear
understanding of the market place. In 1999 immediately after the financial crisis of 1998 the
firm took advantage of the withdrawal of foreign brand operations in Russia to launch its own
brand. Now it has over 650 models of audio, video and home appliances in 60 product
categories and a network of over 350 service centres. The success VITEK can be traced to its
extensive distribution network, the brand and pricing strategy, service centre geographic
distribution across Russia and effective use of Russia based and outsourced manufacturing.
The challenging Russia environment drove VITEK to develop a local approach to import,
distribution, and after-sales services to capture the mid and low range market for appliances
in the Russian market.
4. Interplay of innovation and internationalisation
In this section we aim to examine the interaction between internationalisation of Russian
companies and the role of innovation in it. The literature has shown that technological
resources can significantly influence the internationalisation and international activities of
firms (Brock and Jaffe, 2008; Rodriguez and Rodriguez, 2005). More specifically, the
interplay between internationalisation and innovation was raised by several scholars. For
example, Saarenketo (2004) argues that internationalisation is compulsory for firms in some
high-tech sectors that have only a few potential domestic clients. In line with this, Kafouros
et al (2008) claim that firms need to be sufficiently present in several markets to capture the
fruits of innovation. In other words, these authors present internationalisation as a necessary
condition for innovation. Other authors, as Kylaheiko et al (2010), position innovation and
internationalisation as a trade-off and classified firms according to their degrees of
internationalisation and innovation.
Considering the specific context of internationalisation of Russian companies, two types of
this process can be identified domestic and global internationalisations. The former
means entering nearby (less advanced) markets such as CIS countries. In contrast, the latter
implies internationalisation to more advanced western markets. In terms of the role of
innovation in internationalisation, we identify two types innovation-driven and innovation-

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seeking internationalisation. The first type means internationalisation underpinned by strong

ownership advantages in innovation. In turn, the second type means obtaining access to
innovation as a strategic motive of internationalisation. These approaches are visualised in
Table 2.
Table 2 Interplay between internationalisation and innovation
Domestic Internationalisation
(to neighbouring markets / CIS)

Global Internationalisation
(to the west)

Innovationdriven

Russian companies possess advanced Russian companies internationalise

technological competences and offer globally using innovation as a source
new innovative solutions in less
of competitive advantage.
advanced markets (innovation is not
necessarily new to the world).

Innovationseeking

Russian companies internationalise

by seeking innovation and
technological competences in nearby
markets.

Russian companies internationalise

to acquire innovation and knowledge
abroad, and compensate for the
weaknesses of the Russian national
innovation system.

Domestic Innovation-driven Internationalisation

Domestic innovation-driven internationalisation can be observed in CIS countries. Russian
companies internationalise using products and services not necessarily new to the global
market, yet new to the host country.
Russian firms in the mobile telephony industry have been very successful implementing the
local optimizer strategy (Ramamurti, 2008) of creating services for low and middle income
customers both in Russia and the CIS states. The examples of Vimplecom, MTS, and
Megafon expansion into the near abroad and frontier markets has been a successful strategy
of apply technology solutions developed in the Russian market to these emerging and frontier
markets. Vimplecom during the 2000s entered markets in Russia, Ukraine, Kazakhstan,
Uzbekistan, Tajikistan, Georgia, Armenia, Kyrgyzstan, as well as Vietnam and Cambodia.
MTS has similar operations in Ukraine, Uzbekistan, Turkmenistan, and Armenia and
Megafon in Tajikistan, Abkhazia and South Ossetia.
Mobile telephony is a rapidly changing high technology industry with demanding customers.
The markets are heavily regulated with substantial barriers to entry that must overcome
through relationships with government regulators. Russian mobile phone operators have been
able to partner with handset providers and producers of the cellular network technology to
provide competitive networks to meet the cutting edge technology demands of its customers
while providing service at reasonable cost for low to medium income customers. MTS is also
owned by the Sistema holding company and partners with Sitronics on the development of
new equipment and network systems.
It should be noted that the expertise, technology and innovation that drive expansion of
Russian telecommunication companies to the CIS countries were originally developed in
collaboration with western partners. For Russian telecommunications companies such as

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MTS and VimpelCom foreign expertise in the telecommunications sector has become
indispensable for performance improvements, and they have chosen alliances and
partnerships with foreign companies, technological leaders, as a way to access the latest
technologies. They could not integrate any former state-owned research institutes. Both
telecommunications companies were newly established and did not inherit any research
institutes since such labs for mobile telephony did not exist in Soviet times. Moreover,
Russian research institutes did not possess competence in the new telecommunications
technologies rapidly developing in the West. Acquisition of a western company was also
troublesome (as the number of such companies on the market is limited). Both MTS and
VimpelCom entered in partnerships with Ericsson and other leading technology companies.
Strategic alliances and partnerships serve as means for Russian firms to access technology
know-how of developed market firms at a time when these firms do not have the internal
R&D capacities to create the own technology advances. As Russian firms grow and
internationalise it is expected that they will also follow the path of major multinationals to
increase such activities to gain technology advances.
Further, CIS countries may be used as a testing ground for new innovative products or
services before they are offered on a wide-scale in the home country. For example, in April
2006 a Belarusian subsidiary of a Russian telecommunications company MTS (part of the
Sistema JSFC), in partnership with Siemens, launched a trial area of 3G communication
network in the capital Minsk. As the trial proved to be successful, MTS announced the launch
of 3G in its home market Russia in the second half of 2008, or early 2009 (in partnership with
Ericsson). Similarly, with its launch in Ukraine in 2007, MTS became the first operator in the
CIS region to offer Blackberry enterprise services to its subscribers. MTS intends to launch
similar services back in Russia in 2008.
Domestic Innovation-Seeking Internationalisation
A somewhat less common scenario in relation to the nearby markets is the domestic
innovation-seeking internationalisation, whereby Russian companies start internationalisation
from entering nearby markets and obtaining domestic innovative firms/organisations.
Because generally the nearest markets possess lower technological capabilities than in the
home base, Russian companies would rarely employ such strategy. It is however cannot be
completely ruled out. Many Russian companies seek to re-establish their value chain in the
CIS countries broken up with the collapse of the Soviet Union. In this respect, the drive of
Russian companies into CIS countries can be explained not only by efficiency-seeking
motives, but also by the asset-seeking ones. Several examples support this claim. Russian
holding company Elektrozavod acquired former state-owned research institute of
transformer equipment in Ukraine. Likewise, OMZ (Uralmash-Izhora Group), a large Russia
heavy industry and manufacturing conglomerate, acquired control over the Ukraine-based
Central construction bureau Korall (an offshore drilling platforms and crane ships designer)
in 2002-2003. In both cases, these foreign R&D divisions became integrated in the corporate
networks of the acquirers.
Global Innovation-Seeking Internationalisation
Global innovation-seeking internationalisation is a distinctive and very common strategy.
Russian companies internationalise into advanced markets with the strategic intention to
acquire advanced technology and know-how. As Dunning (2006) suggested multinationals
from emerging economies might start internationalisation with advanced economies in order
to improve their ownership advantages, in this case, technology base and innovativeness.

13

Still, they might have a prior internationalisation experience. Below are several examples of
Russian companies acquiring strategic assets in advanced economies.
In mature industries such as metals and mining emerging market firms can be viewed as
global-consolidators (Ramamurti 2008) that leverage their low-cost production FSA to
acquire assets internationally. These firms have been able to utilise what Ramamurti (2008)
refers to as production and operational excellence and privileged access to resources and
markets to compete effectively with western multinationals. In the case of Russian firms that
fit these criteria such as major metals firms such as Evraz Group, Novolipetsk Steel, Evraz
Group, RUSAL, Servestal, and NLMK have made international investments to consolidate
production and build market share, open up new markets, and to acquire new technology
assets. While the metals industry has a comparative low R&D intensity (Cohen & Klepper
1992) and is not either a medium or high technology industry according to the OECD
classification scheme the technology utilised by Russia-based firms significantly lagged
western market EMEs in the same industry. During the commodities boom of the mid-2000s
the metals market firms went on an acquiring spree to diversify the location, resource and
market assets as well as self-report technology asset acquisition process to capture a greater
share of the value created in the final product.
One example of a Russian company that reported the acquisition of technology related assets
is Evraz Group. This multinational company employs approximately 110,000 people across
four continents and has become a dominate player in steel, steel products, and vanadium.
Unlike many resource based firms from Russia Evraz is based on a private firm that was a
metal trading company that acquired production assets. Its expressed strategy is to develop a
cost-efficient integrated mining and production manufacture of end user steel products. The
firm has attempted to build on it lead in the Russia market in railway and construction steel
products markets and acquired the US based Oregon Steel Mills in 2007 as means to gain
access to new technology for rail production. The acquisition of the US based Claymont Steel
in 2008, the Canadian based plate and pipe firm IPSCO Inc. 2008 and the Highveld Steel and
Vanadium Corporation in 2007 further expanded the reach of the firm to North America and
South Africa while diversify its technology base to serve the Russian market as a provider of
rails to Russian Railways, construction steel to growing construction market, pipes for the oil
and gas industry, and alloys for the production of medical equipment and airplanes.
The weakness in connections between the Soviet era R&D centres and production facilities
has meant that Russian firms have had to look abroad for advances in technology. Also the
weak inter-firm rivalry characteristic in natural resource industry and the markets for these
products has not provided the competitive pressure to create new innovations in production or
product development. With the cash resources that Evraz and other firms had available in the
mid-2000s these firms attempted to compensation for their unbalanced diamond in the
domestic market by acquiring firms or starting greenfield developments in competitive
markets.
Other examples can be cited. For instance, the acquisition deal of Kvaerner Process
Technology, a UK-based entity of the Norwegian multinational company Kvaerner ASA, by
the oil company Yukos in November 2001 for 112 mln. In May 2007, the Basic Element
Holding acquired a 10% stake in the German construction company Hochtief
Aktiengesellschaft. Later that year, in April, Basic Element acquired a 25% stake in the
Austrian construction company Strabag SE, through a subsidiary company Rasperia Trading
Ltd, for 1.05 billion.
Considering the engineering sector, the large Russian conglomerate, the Renova Group,
acquired two Swiss engineering companies. Both investments are particularly important as

14

they offer Renova access to new technologies that may be used on the Russian market. The
first acquisition was the Swiss engineering company Sulzer AG. Sulzers activities include
machinery, equipment, surface technology and thermal turbo machinery. Another asset is the
Swiss company OC Oerlikon, the leader in the market of semiconductor and vacuum
technologies, manufacturing of textile machinery and data storage technologies. Besides, the
company develops innovation technologies in outer space exploration, solar energy, laser and
nanotechnologies.
Acquisition of foreign assets is recorded not only in the resource-based and manufacturing
sectors, examples can be found in such R&D-intensive sector as biotechnology. For example,
on 18 August 2009, Human Stem-Cell Institute, Russias largest bank of umbilical chord
blood, acquired a 25 per cent stake ( 1 million) in Germanys SymBioTec GmbH, a
developer of treatments for cancer. The Russian company gained access to the latest biotech
competences.
Not all acquisitions have been successful, and have not reached the intended results. The
acquisition of LDV, a British van producer, by the GAZ Group in 2006 is illustrative. GAZ
aimed to adapt the British van for emerging markets; it would allow GAZ to leapfrog the
technological divide and boost its competitive advantage. However, three years later (in early
2009), GAZ abandoned its plan as it could not adapt the design of LDVs product and it
announced the intention to create a new van model on its own (Skolkovo, 2009).
CTV, a Russian equipment manufacturer acquired Silvatec, a Danish producer of forestry
machines. The company intended to scale up production of Silvatecs harvesters and
forwarders, and customize them for the Russian market. As the acquirer realised, the
engineering at Silvatec was done on an ad hoc basis, not as a consistent system. CTP had to
bring standardisation in engineering processes; and only after that it was able to benefit from
R&D capabilities of its new subsidiary (Skolkovo 2009).
These examples show that the acquisition of a technology-intensive company is only an
initial step. The challenge is how to codify and benefit of the knowledge and competences
embedded in a newly established subsidiary. Furthermore, the mother company should be
able to receive and integrate this knowledge, in other words, it should possess a certain level
of absorptive capacities.

Global Innovation-driven Internationalisation

Last but not least, it is global innovation-driven internationalisation. It is inherent to most
western multinationals, entering foreign markets using their Ownership advantages that can
be a unique technology or know-how. Most Russian multinationals operate in the resourcebased and low-tech sectors, and it hence this scenario is hardly applicable. However, several
examples can be found in the IT sector.
Russian firms that have expanded into western market in search of innovation resources are
engaging in the practice of global internationalisation as a means to rebalance their
competitive resources and to gain access to R&D and know how to absorb new technologies.
An example of this strategy is the Russian company Sitronics a company involved in the
telecommunications industry, information technologies, system integration and consulting,
and the development and production of microelectronics. Sitronics is part of the Russian
conglomerate Sistema was established through the merger of the JSC NIIME & Micron and
the Czech manufacturer of telecommunications equipment and software STROM Telecom.
The Russian part of the firm was a privatized state concern connected to a Soviet era institute.

15

This born global firm established in 2002 has been focused on the Eastern European,
Eurasian and developing country markets. The firm invests heavily in R&D and out of 10,000
employees approximately 3,500 work directly on R&D activities. Its network of R&D
facilities connects Russian and Ukrainian specialists with Czech, Slovak, and Greek facilities.
Through this network the firm has been able to create commercially viable patents and other
intellectual property.
Sitronics capitalizes on the unused and low cost research capacity in Russian and Ukrainian
research centres and through private ownership and the use of modern management
techniques has been able to reorganize the innovation system within the firm. The solving of
the ownership problem that faces many Russian firms was accomplished through the
privatisation process and then later listing on the Russian markets and then in 2007 on the
London Stock Exchange. With outside investors including 17.55% in a free float and 3.07%
held by EBRD the firm has outside pressure to increase shareholder returns and through
EBRD advice on how to enter and be successful in the international marketplace. There are
non-Russians on the board of directors and all members of the top management team either
have education from abroad or have worked abroad. They also have strong links to the
Russian and Eastern European telecommunications industry having served in top
management teams in mobile phone operators or at competitors of Sitronics.
The R&D activities are of high priority to Sitronics and in the 2008 Annual Report the firm
reported a series of research partnerships with major Russian research institutes. The R&D
results for 2008 were two patents and eight patent applications pending. By combining
research activities in Russia and international development and production activities Stironics
has been able to overcome the institutional weakness to innovate in the Russian market. To
overcome institutional rigidities inherent in the Russian business environment Sitronics was
established as a separate company within the Sistema business group. Instead of in-house the
development of new mobile phone technologies within MTS (Sisemas group mobile phone
provider) the founder and board of directors of the Sistema group decided to separate the
R&D and high technology production into its own entity that can be transparent to remainder
of the group. The adoption of different system of human resource management and incentive
plan by Sitronics allowed the tailoring of the motivation of employees to the technology
innovation market.
Overall Sistema is Russias leading consumer focused technology group. As part of its longterm corporate strategy, the company began establishing R&D centres in each of its main
businesses in 2006. The centres are to engage in the development and introduction of new
technologies for the operating companies in their businesses area. On the corporate level,
Sistema has created a Department for Innovation Projects to identify and coordinate priority
R&D projects for each business area and the corporation as a whole. This office will maintain
a single database of on-going innovation projects and house a special service to ensure the
corporation's intellectual property rights are protected in Russia and internationally. In 2006,
the strategy was successfully implemented in the telecommunications business area, where all
R&D centres were unified in a single structure, Intellect Telecom. In 2007 Intellect Telecom
focused on developing R&D and technical strategies and solutions for products and services
for Sistemas telecommunications companies. Also during 2007, a concept was developed for
the creation of an R&D centre for the Radar and Space business (Sistema, 2010).
Kaspersky Lab is a Russian computer security company, founded in 1997, offering anti-virus,
anti-spyware, anti-spam, and anti-intrusion products. The company was founded with
virtually zero investments and presently, Kaspersky Lab is a privately held company
headquartered in Moscow with regional offices in India, Germany, France, the Netherlands,

16

the UK, Poland, Romania, Sweden, Japan, China, South Korea, and the USA. It provides
antivirus software for leading global corporations such as Microsoft, IBM and Cisco. Further,
in 2010, it released technology that protects mobile devices without straining their batteries,
ingeniously spreading the power burden throughout a cluster of phones that share the security
system.
Another example, also in the IT sector, is ABBYY, a software company that provides optical
character recognition, document capture and language software for both PC and mobile
devices. The company is headquartered in Moscow and distributes its products worldwide. Its
development history is virtually identical to the Silicon Valley model for advanced
technology companies. A group of students at the Moscow Institute of Physics and
Technology, one of the Russias leading research universities, got together to form a software
company led by its current chairman David Yang. Their first product was Russian-English
dictionary software Lingvo in 1989. Since then the company has grown by producing an
ever-wider range of products. Today, ABBYY is a leading provider of document conversion,
data capture and linguistic technologies, in over 130 markets worldwide. It has over 900
employees in nine offices across the world Russia, Ukraine, Cyprus, Germany, the UK, the
US, Japan and Taiwan.
5. Analysis and conclusions
The paper examined internationalisation of emerging Russian multinationals in conjunction
with innovation and technology. Russia has a rich history and legacy of breakthrough
inventions, and science and technology. However, with the collapse of the Soviet Union and
command economy, the S&T sector suffered substantial (financial, human and intellectual)
losses. Besides, the fragmentation of the S&T sector itself as well as its disconnection from
business poses a great challenge for Russian firms. Russias potential country-specific
advantage in science and technology is not easily transferred to internationalising companies.
Most Russian multinational companies operate in resource-based, low-tech sectors where the
need for innovation and new product development is limited. Innovation in low-tech industry
primarily takes the form of concrete problem-solving, according to customer requirements
and within certain pre-defined budget constraints; that can be viewed as incremental
innovation. Overall, innovation in these companies is rarely perceived as a source of
competitive advantage.
In certain industries there are clear advantages that Russian firms can gain through
innovations that they have developed to overcome weak institutions, operating in an economy
outside of the WTO, geographic distances and climatic conditions, and other cultural factors
of the Russian business environment. These innovations that have given Russian firms
significant competitive advantage in their home market have been able to be extended in
other emerging markets with similar institutions or business environments. In the
telecommunications and natural resource sectors Russian multinationals have been able to tap
into this ability to conduct reverse innovation to be competitive against DMME. It should
be noted that the innovations created by Russian multinationals are not always viewed as
positive as their FSA may be related to how well they can influence government decisions,
clear their goods through customs, reduce the cost of labour, etc.
The interplay between internationalisation and innovation is equivocal. Innovation is used as
a competitive advantage facilitating internationalisation, but only in specific sectors (such as
IT and software development) and mostly in the neighbouring CIS countries. At the same

17

time, innovation-seeking global internationalisation emerges as the main form of this nexus.
Russian firms increasingly acquire technology-intensive assets abroad (in advanced markets).
The market motive can be considered as the prime driver; and technology and knowledge is
regarded through the in-house competencies of the target asset. Through these acquisitions,
Russian companies aim to foster their innovation and technology base and execute
international expansion strategy. That creates potential for positive technology and
knowledge spillover effects. However, the majority of Russian multinational companies are
in the resource and low-tech sectors. Therefore, the actual contribution of these acquisitions
(and potential spillovers) to development of high-tech sectors and enhancement of
technological capabilities remains contentious.
State support for innovation in Russia is strongly voiced. Russian leadership political
consistently expresses the need to modernise the Russian economy and to diversify it away
from reliance on commodities. Similarly, state-owned corporations are instructed to design
and fund innovation programmes. It seems that innovation is politically imposed, and is not
perceived as a source of competitive advantage for these companies.
Overall, as innovation is becoming a critical factor of firms competitiveness and the
international expansion of emerging multinationals (including Russian firms) is on the rise,
the interplay between innovation and internationalisation of companies from emerging
markets will remain a promising avenue of research.

18

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