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22 February 2018

Innovations vs. Replications

Dmytro Shestakov

Managing Partner of the Innovations Development Platform

"There are development directions which should be the top priority directions for Ukraine. To identify such directions, we should rely on certain essential aspects – the priority industries shall have a strong innovation potential and focus on exports. They should be based on the existing knowledge base and practical experience, which are the key competitive advantages of the intellectual capital of Ukraine"

Republished from National Industrial Portal

We talked about innovations development and making of replications with Mr. Dmytro SHESTAKOV, the Managing Partner of the Innovation Development Platform, and an innovation project implementation expert.

So, which industries are we going to talk about?

Agricultural, IT, engineering and defence industries.

However, it should be noted that, in this case, the agricultural industry is viewed not only as the seller of agricultural raw materials, but also as the industry producing highly processed goods, and the IT industry is primarily considered in terms of offering of advanced software solutions developed in Ukraine, rather than in terms of outsourcing.

In the engineering industry, the existing potential has not been presently unlocked, but I’d rather say that it is out of use. And, it’s worth mentioning that the R&D direction has, in general, nearly the biggest potential.

The defence industry could have its production output increased by times, and not only in terms of the number of metal units manufactured, but also in money terms of hi-tech products.

The historic question is what should be done to have such potential unlocked

No doubt, all of the said directions require support, and, primarily, the ideological support. We should adopt the strategic idea saying: ‘Let’s make use of our potential!’ 

Education. We have a very strong school of technical and mathematical education, and, at the same time, considerable outdated training techniques in certain areas. Taking into account our human and intellectual capital advantages, we’d rather focus on development and updating of educational curricula at all training levels.

Laws. For instance, the land moratorium should be lifted, and formation of the legal basis for financing infrastructure development should be supported. It’s not only about agricultural industry intensification, but it rather concerns all of the directions. What should be done immediately is the alignment of our effective laws with the current global business environment, and harmonisation of numerous contradicting acts and statutory provisions. The changes should concern the possibility to make spin-offs and the engineer’s ability to receive royalties from involvement in developments financed by governmental institutions, which would also contribute to commercialisation of such developments.

Defence industry. We have the vital need in innovation developments and their commercialisation. Otherwise, the industry will keep on loosing its position in the global production and become extinct in 12-15 years. State-run companies of the defence industry should have the ability to set up joint ventures that enable commercialisation and scaling of innovative developments. The statutory impossibility of such cooperation prevents nearly all foreign partners from implementation of joint projects with our state-run companies. Instead, the actual majority of such intents evaporate after signing of memorandums of understanding. Moreover, 99% of projects are killed by the archaic statutory restrictions existing in Ukraine.

IT. The primary goal here is the support of the existing tax incentives for market players and supplementing of the same following the examples set by China, India, the United States, and Israel. Again, tax incentives won’t work without the relevant legal basis, since these integration factors are efficient if combined.

The difference between replications and innovations should be seen

Ukraine has good replications, i.e. the developments having technical parameters on level with similar solutions and being more cost efficient. In dynamics, it means the best mechanism of cost minimising or product development cost saving. In other words, when you make a product with the price three times lower than prices of similar global products, the benefits are evident.

The way of cost efficiency ensuring is the other question. The first approach implies low-cost labour, lower taxes, and cheap raw materials, like it was in China, for example. The second approach is focused on technology solutions that enable cost efficiency of a product. We have both approaches. However, we are known as ‘the European China’ in Europe because our highly qualified human resources are the cheapest in the world. For instance, a nuclear physicist having a scientific degree who works in the National Academy of Sciences of Ukraine earns 200-300 US dollars monthly. Still, in other cases, the cost efficiency of a product is achieved through innovative solutions in manufacturing methods and technologies.

Economic factors behind replication

It should be understood that replication of sophisticated products is not an easy task. The Chinese and Indians invest billions of dollars in replications, but still fail. We can do it. We have a practical knowledge base. Practical developments have been popular in our country since the time of the former USSR.

If we can generate export flows to sell replications, such opportunity shall not be missed. It would be profitable and open new opportunities in future. However, we should not wait for help from the Government. Some populists often refer to no financial support, but, to tell you the truth, it sounds like exoneration. At least for practitioners who demand definite acts, such as formation of the appropriate working environment, the basis for development and supremacy of law, rather than budgets. The private business sector has the ability, and welcomes independent handling of the investment and business climate that would contribute to engagement of allocated funds within or beyond Ukraine.

What is the difference between replication and high-quality modification? If we take unmanned aerial vehicles (UAVs) as the example, the majority of them are replications. The Chinese previously disassembled the UAV and copied it. We adopted the other way – we have created, from ground zero, a separate direction for development of tactical unmanned aerial vehicles. This direction is partly prospectless due to the lack of organic financing. Why? I’ll try to explain through the following example – the domestic market of unmanned aerial vehicles is not developing since our growers are not ready to use modern products. The development is not bad; the problem is that our brains are not yet ready for that. I mean here that our domestic unmanned aerial vehicles are replications. However, it would cost you much cheaper to purchase them from us than from Israeli manufacturers. The same way was adopted by the USSR from time to time. It was also practiced in the USA at certain time. It’s a normal practice, and one of the best ways to implement a topical technical solution within a short time period.

Understanding of the need in replications or innovations is tried out through marketing, intensification of the cognitive process, learning of possible advantages and training. The other question is who should handle it, since development of innovative products is not cheap. The nearest implementable alternative option is, obviously, a global solution – the cluster model of regions and industries development.

However, the partnering culture is only beginning to develop in Ukraine, and what we can see now is the normal evolution process. The Soviet model was based on vertical directives of the Central Committee, cascading tasks downwards, which in no way contributed to development of the business mindset. Western models have other logics.

So, what is the right choice: innovations or replications? Surely, innovations! Since, at least, a unique ready product has a higher added value, brings about competitive advantages and ensures a sustainable growth. Furthermore, it should be borne in mind that the innovation model of economic development is an understandable and quite predictable development and competition tool, rather than a black box of mysterious methods with unknown results.