What Agglomeration Externalities Impact the Development of the Hi-tech Industry Sector? Evidence from the Russian Regions

This paper continues the ongoing debate on the importance of agglomeration externalities that may impact innovation development and the high-technology sector in regional economies. Previous studies suggest that the evidence for agglomeration externalities is strongly context-specific. We aimed to expand this discussion to Russian regions by utilising statistical evidence. We constructed a panel dataset with 83 regions and used various spatial econometrics and statistic techniques to test our hypothesis. Our study made two essential contributions. First, we found that regions with a high density of used high technologies tended to co-locate next to each other. Secondly, the localization of employment, sales volume, and paid wages in the electrical equipment, electronic, and optical equipment sector demonstrated a positive association with hi-tech usage density. These externalities suggest the presence of positive direct or indirect spillover effects among regions in Russia within the examined industry sector. However, the localization of investment did not display any association and, thus, does not suggest the presence of any spillover effects. These contrasting findings reveal the peculiarities of Russian business reality, such as vast territories of the country, uneven infrastructure, lack of funding, and small cooperate networks. The federal government is expected to provide appropriate financial and legal support to stimulate clustering processes and innovative activities. Recommendation for further research is provided at the end of the paper.

Agglomeration; Innovation; Localization; Russia; Spillovers

    After the collapse of the Soviet Union in 1991, the newly formed Russian Federation went through a prolonged financial and economic crisis, the consequences of which are being felt well into the 2010s. During this time, industrial sectors that were traditionally dependent on state funding, such as the military sector, research and development (R&D) and social services, saw state contributions significantly reduced (Oglobina et al., 2002). As a result, R&D investment fell dramatically, and a significant downsizing of the Russian R&D system occurred. Russian enterprises and multinational corporations gave preference to imported products instead of innovating their own.  This was due to the low costs of imported goods and quick financial returns, whereas R&D investment involved a high level of uncertainty. Business innovation in Russia became weak (Klochikhin, 2012; Kudryavtseva et al., 2020).

       Furthermore, the innovation activity of Russian companies remains considerably uneven across regions, which is due to a lack of funding, state support, and dominating industrial sectors (Rodionov and Velichenkova, 2020; Moskovkin et al., 2016). According to Kuznetsova and Roud (2014), most Russian companies across different industries do not give high priority to increasing the innovativeness of their products. Only a small number of firms are active on the market and regularly update their product lines by introducing innovations. This could be due to how companies structure various types of innovation efforts, outdated models of development strategies, and ineffective internal management (Bessonova and Gonchar, 2017). Given the close link between the integration of technologies and innovation, long-term sustained growth and an increase in general productivity may be under threat. The policymakers in Russia attempted to transform the R&D sector, mainly through new legislation and tax incentives (Rodionova et al., 2018)

       In this study, we intend to examine the electrical equipment, electronic, and optical equipment sector in Russia, which is typically labeled as the “hi-tech” sector and involves technological development and innovations by the Russian Federal State Statistics Service («???????»). The federal government has given the hi-tech industry significant attention in Russia in its attempts to stimulate innovative development in the country (Crescenzi and Jaax, 2017; Samsonov et al., 2017). The general research question is as follows: Does the existence of the companies operating in the hi-tech industry sector in one region generate the use of hi-tech products by companies located in other regions? More specifically, the goal of this study is to investigate what agglomeration externalities impact the development of the hi-tech sector in the Russian regions.

       Our paper is structured as follows. The next chapter provides a theoretical discussion regarding the concept of clustering, agglomeration economies, spillover effects, and how these are important for innovation development. Then, data collection and analysis methods are described. The fourth section presents and discusses the test results. Finally, the paper analyzes the findings in light of the existing theoretical debate. It concludes with a reflection on the implications for future development of the hi-tech sector across the Russian regions and recommendations for further research. 

    This paper extends the discussion regarding the significance of agglomeration externalities in the development of regional economies. The foundation of our debate is the concept of clustering and agglomeration economies that have been actively researched over the last 30 years in the academic literature (Porter, 1990; Becattini et al., 2003; Delgado et al., 2016). In our study, we examined the factors that stimulate the creation of the spillover effects in the hi-tech sector among Russian regions in the period ranging between 2008 and 2018. Results revealed two core findings. First, we discovered that the regions with a high density of the used high technologies tended to be located in close proximity. In general, they tended to collocate as either high–high or low–low. This trend could be explained by the unevenly developed infrastructure and the initial industrial foundation of certain regions. In other words, more developed regions in Russia have a higher density of the used high technologies than others and subsequently impact other more developed regions in the same manner, which demonstrates the agglomeration effect. Second, the concentration of high levels of employment, sales volume, and paid wages in the electrical equipment, electronic, and optical equipment sector revealed the positive association with hi-tech usage density. These externalities suggest the presence of positive direct or indirect spillover effects among the regions in Russia within the examined industry sector. This is consistent with the existing debate on the effects of agglomeration economies and their benefits (Feldman et al., 2005; de Groot et al., 2016). The result of such development is a loop in which the initial attraction of labor force, human resource management, and sales revenues attracts even more investors and prompts business activities. Moreover, a high level of employment, sales growth, and robust business practices further stimulate the development of the clustering process (Ketels, 2013; Delgado et al., 2014).

        Our study uncovered a contradictory finding in which the concentration of investments did not display any positive association with hi-tech usage density. In the Russian case, it means that investments do not cause any direct or indirect spillover effects. As we have already mentioned, the hi-tech sector is essentially u    nderfunded in Russia, as well as being negatively affected by cultural perceptions in terms of innovate entrepreneurship and business uncertainties. However, standard academic views suggest that investments, both from private and public institutions, are necessary for the development of any industry, especially for the stimulation of innovative activities (Iammarino and McCann, 2006; Ketels and Memedovic, 2008). The fundamentals of cluster implementation are competition and cooperation (Porter, 1990). If local or foreign private investors cannot provide the necessary funding for the region, the government has to assist with financial support (Vernay et al., 2018). Considering the realities of the Russian business world, the critical question remains: How to distribute necessary investments and funds to the regions so as to ensure their balanced development or so as to stimulate the effects of agglomeration externalities even in the remote areas of the country. The issue of uneven infrastructure foundations and severe disproportionate development of the regions remain relevant. Hence, recommendations for further research should involve the inclusion of more variables in statistical tests to conduct more sophisticated analysis of the hi-tech industry and its consequences and agglomeration effects. Calculations that include lag in their results would also be beneficial.

    The reported study was funded by RFBR, project number 19-310-90069.

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