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Soviet ‘science cities’ promote small business

Naukograds, meaning ‘science cities,’ focused largely on science in the Soviet period, but have since become aimed more at small business and business services in the post-soviet era, Denis Ivanov, a Research Fellow with HSE’s International Center for the Study of Institutions and Development, said in the paper, ‘Transition and Path-dependence in Knowledge-intensive Industry Location: Case of Russian Professional Services,’ which was presented at a joint seminar of HSE’s Laboratory for Labour Market Studies and the Centre for Labour Market Studies

Modern realities are increasingly forcing officials and experts to address issues of economic geography. They are trying to understand where to look for new points of economic growth, how to give new direction to monotowns, whose economy is dominated by a single industry or even company, and stimulate the growth of remaining areas. Addressing these issues is impossible without a clear understanding of the factors that lie at the foundation of certain regional areas of focus, as well as an understanding of the link between geographical location and economic activity.

Three hypotheses currently exist for the connection between industries and territories, Denis Ivanov says.

The first hypothesis negates any connection between industries and territories. It states that the location of industries, businesses and enterprises in a specific area happens by chance. In addition, if a force majeure occurs, the configuration will change beyond recognition: a metallurgical region would become agricultural and an agricultural region would turn into Silicon Valley.

The second hypothesis is similar to the first, but states that industries and enterprises that arose in a region by chance develop and make the region suitable for such types of activity over time. For example, industries and enterprises that came about in territories chosen for political or military reason in the Soviet period have become so ‘accustomed’ to the area that they have remained in the post-Soviet and market period.

Finally, the third hypothesis implies fundamental factors that link economics and geography; for example, the development of agriculture in regions with fertile soil.

Personnel decide everything

Denis Ivanov studied the role of the backdrop provided by the Soviet period in placing contemporary business services in Russia. ‘The elimination of central planning is a unique, natural experiment. The development of a market economy began with the placement of labour and other factors of production formed in nonmarket terms. The existing placement of highly qualified personnel may or may not survive depending on market forces,’ he posits.

In the case of manufacturing enterprises, it was more difficult to conduct the experiment, as they are physically located in older territories and moving them hardly makes any sense, even if it is well understood that this would be feasible. The services sector is, however, more mobile, as it is based on human capital and is in no way connected with the legacy of the past. Figuring out how the configuration changed in economic geography is therefore somewhat simpler using the services sector, the author notes.

The study looked at three business services sectors – architecture, design and engineering, and information technology – in 76 Russian regions. The number of employees in 1991 was used as the control variable. Ivanov studied the impact made on these industries by a region’s economic status, urbanization, total population and industry employees with higher education who worked in the field of research and development in the Soviet era.

The study was based on the fact that the Soviet sector of research and development could be a source of skilled workers for the business services sector of the market period.

The conclusion Ivanov made was in line with his hypothesis. It was found that regions with a high number of personnel that worked in research and development as of 1991 are characterized by a high level of employment in the business services sector in the current period (2009-2011).

Small business has attracted academics

The explanation for this phenomenon is based on the theory of human-capital externalities. ‘The business services industry is akin to research institutes. This is the sphere of economics with high workforce productivity and return on capital, and with skilled and highly educated personnel,’ Denis Ivanov posits. It is therefore logical that the regions have gone from a planned economy to a market economy with a similar economic structure and similar types of activities. Thus, it can be said that there is a historical connection between geography and economy, at least as concerns one industry – business services.

At the same time, Ivanov notes, lower wages and a cut in the number of employees at budget-funded research institutes has stimulated a ‘retraining’ of academic employees.

‘In those regions and areas where funding for research institutes has not been cut so dramatically, outflow for business services was not significant. This concerns, among other things, architecture,’ the researcher says.

Ivanov’s study found a link between small business and the number of people in a region that are involved in the sphere of business services. ‘The number of small and medium enterprises was higher in those regions where more people are involved in business services; that is, where science and research was progressing in Soviet times,’ Ivanov notes.

New businessmen and new sectors of the economy thus came specifically from Soviet science, and small business is largely based on this as well, the researcher concludes.

 

June 24, 2014