Financing of R&D

The downsizing of Russian R&D after 1990 was accompanied by some shifts in its sources of financing. Enterprises played a small role – no more than 4 percent of R&D was financed by enterprises during the 1989–1993 period (Table 2.4).

Between 1990 and 1992 the macroeconomic situation discouraged such spending.

The government has remained the main source of R&D general funds; non-budget funds were introduced in 1992 to finance R&D of enterprises in specific sectors. The funds are termed “non-budget” because they are derived from vol-untary contributions of enterprises at the rate of 1.5 percent of the value of their sales rather than from taxes. The funds largely support applied R&D of value to the industry of the contributing enterprises (for details, see Chapter 7). However, the amount collected in 1992 was lower, by a factor 15, than the level anticipated, as many enterprises did not pay their share. Moreover, some funds were channeled to financing the introduction of new products manufactured by enterprises. In our estimate, the share of these non-budget funds in 1992 and in 1993 accounted for only 4.4 percent and 4.6 percent, respectively, of Russia’s total R&D expenditures.

The lack of alternatives to government support has compelled the Soviet-style centralized system of R&D financing to continue into the transition years.

Government funds provided over 90 percent of Russian GERD in 1993. The government, however, has failed to provide adequate funds to maintain the Soviet R&D establishment Russia inherited. In 1994 government R&D financing in real terms was only one-fourth that in 1991 (Exhibit A3.8). The decline in financing was so pronounced that an orderly restructuring of R&D institutions was impossible.

The provision of government budget support was also characterized by uncertainty

for only one-half to two-thirds of the planned appropriations for R&D were actually delivered, making efficient management of their use difficult.

During the Soviet period appropriations for R&D occupied a very modest place in government budget spending: from 1970 to 1990 their share was between 3.4 and 4.8 percent of the total budget. As the transition proceeded, government budgetary support of R&D continued to decline with R&D accounting for only 2.8 percent of the government budget in 1994, the lowest share in 25 years (Exhibit A3.9).

Despite numerous declarations, state policy failed to raise R&D to a high-priority position in the years of transition. Instead, R&D became a major victim of budget cuts to reduce the government deficit. In addition, the failure to meet the planned expenditure was greater for R&D than for other expenditures. R&D spending was subject to the so-called residual principle of state budgeting carried over from the Soviet era (Gokhberg, 1991). This principle gives low priority to activities such as R&D and education; only the residual of the state budgets, after the financial needs of high-priority activities have been met, are available for these low-priority activities.

By 1994 two significant changes could be observed in R&D financing (Exhibit A3.4). First, non-budget funds, introduced in 1992, became a more significant factor in R&D financing than earlier (particularly, in the more prosperous industry sectors); they accounted for 6.3 percent of GERD. Second, business enterprise financing became increasingly significant, accounting for 19.9 percent of GERD.

The enhanced role of enterprises resulted from the sharp decline in government spending rather than an absolute increase in financing from enterprises. Still both developments suggest that centralized government financing was gradually being replaced by a variety of sources of which enterprises were the most significant.

Recently, there have been attempts to change the structure of budget appro-priations for R&D. The changes were effected through the shift of the three main budget orientations for civil R&D which are coordinated by the Ministry of Science and Technological Policy of the Russian Federation (MSTP). These items are:

1. Institutional funding of R&D institutions, aimed at maintaining staffs, facilities, and equipment.

2. Financing of R&D by priority objectives in the framework of government S&T programs, programs of federal research centers, and international programs.

3. Financing of specific projects by the newly established goal-oriented budgetary foundations for basic research, humanities research, and promotion of small enterprises in S&T.

The budget appropriations for these items are given in Table 2.5. Institutions in the first category are allocated institutional funding according to their size; funding

Table 2.5. Structure of budget appropriations for civil R&D (%).

1991 1992 1993 1994 1995^a

Institutional funding of R&D institutions 79.9 79.2 83.5 81.7 72.0

Priority R&D objectives 18.1 17.8 14.4 14.0 20.3

Specific budgetary funds 2.0 3.0 2.1 4.3 7.7

Total 100.0 100.0 100.0 100.0 100.0

aPreliminary estimate.

Source: Author’s estimates.

does not depend on the areas or results of research. More than half of this institu-tional funding is targeted to R&D institutions in the industrial sector, meaning that budget funds continue to substitute for applied R&D financing by enterprises. In contrast, the financing of R&D in the framework of government S&T programs and other priority objectives (the second category) is results-oriented. In this category funds are distributed by the MSTP directly to R&D institutions for specific research projects. In spite of the imperfect nature of establishing programs, setting priori-ties, soliciting tenders, and evaluating results, this approach can concentrate limited budget resources on priorities that correspond to the urgent tasks for Russia’s de-velopment. A results-oriented allocation of financing also introduces competition into the activities of research teams through a system of grants and contract awards.

This is a step toward the formation of a new structure for R&D that corresponds to the reality of a market economy. The ratio of the results-oriented financing of R&D to that of R&D institutions is a rough indicator of the effective transforma-tion of S&T policy in the transitransforma-tion. The MSTP is committed to results-oriented allocation of R&D funds, but pressures from the Academy, ministries, and depart-ments have prevented it from moving more radically to distributing R&D funds competitively. Clearly, a more radical move to results-oriented financing would decrease the traditional role of the Academy and the ministries in managing the institutes subordinated to them. Hence the share of the budget appropriation for civilian R&D to fund institutions rather than projects has declined from 80 percent in 1991 to only 72 percent in 1995.

Finally, since 1991 numerous R&D projects have been financed by foreign research centers, commercial companies, and international organizations. In spite of the small share of foreign funds in total Russian R&D effort (2 percent of GERD, 1.9 percent of that in the business enterprise sector[1]), this financing marks the beginning of direct links between Russian R&D institutions and foreign partners.

For a number of organizations listed under the defense industry, foreign orders, largely for civilian R&D, are now their only source of financing.