EXPERT VIEW: Drivers of IT industry in Ukraine, Bulgaria and Romania

Analytical Survey by Maryna Yaroshchuk

In the era of global knowledge-based economy, informational technology (IT) plays a unique role in increasing competitiveness of all the different sectors of the economy and the country as a whole, because IT helps to spur productivity in the production process, to bring businesses to the global level, to make government more transparent and keep society informed. The success of the IT industry will be a key determinant of Ukraine’s potential to compete on the international arena, as there is a pronounced need to resort to knowledge-intensive, value-added production for creating wealth for the country and providing sustainable social development. At present, Ukrainian IT is one of the most dynamic sectors in the country, with ICT increase in volume revenues by 23% in 2007 compared to 2006. Although Ukraine cannot yet compete with India or Ireland, but it is no longer terra incognita anymore for foreign customers and investors.

The question is: how successful is the Ukrainian IT sector compared to other countries in transition and what impact does it have on the country’s economy? The valuable lessons can be learned when comparing and contrasting Ukrainian case with Bulgarian and Romanian IT industries. Bulgaria and Romania were chosen as the three countries have a lot in common when it comes to legacies of the past. Bulgaria, Romania and Ukraine had patrimonial type of communist regimes with little rational bureaucratization. Another common feature is that they shared a similar starting point in terms of educational foundation after the collapse of the Soviet Union, which makes it interesting to track the evolution of the IT industry in these three states and to observe features of diversity and commonalities. At a first glance, it is conspicuous that in the 1990s and till 2003 Bulgaria had predominantly local ownership, which is changing rapidly, now with the growing interest of MNCs in the country, whereas Romania has consistently enjoyed increased the presence of multinationals. Thus, the aim is to locate Ukraine on this axis and understand the causes and effects.

To better appreciate the IT competitiveness of Romania (#40), Bulgaria (# 42), and Ukraine (# 56), as rated by the Economist Intelligence Unit in 2007, it is worth evaluating skilled labor supply and governmental policies (factor conditions), domestic and external demand (demand conditions), collaboration and clustering, as well as related and supporting industries.

1. Factor conditions. Skilled Labor

The situation on the labor market in Bulgaria, Romania and Ukraine is ambivalent, and it is worth discussing whether the quantity and quality of workers supplied meets the demand of the market, the reaction of the state to this issue and activities of the business community in this field. For this purpose, software industry is considered, because it serves as a driver of ICT development.

Ukraine is conspicuous among the international IT community, judging from the observation that almost every Ukrainian company has a western project in its portfolio. The most popular trend is IT outsourcing, which is supported by the fact that Ukraine was included in the five most attractive outsourcing directions in some Western countries in 2006.

What are the reasons that prompt western companies to outsource their projects to Ukraine? According to the Global Outsourcing Report, the leading forces in the IT outsourcing market worldwide are now quality and speed to market, not just cost of services. It is commonly known that Ukraine has inherited a scientific base along with its various technological and scientific establishments, mathematics schools and centers of computing technologies. Another fact is that 30,000 computer students graduate each year, who are praised for their analytical and creative skills.

Employers are not satisfied, however, as graduates do not have good command of English, management skills and solid knowledge of the software development process. Thus, despite the large number of capable young workforce the industry experiences a shortage of IT specialists. The larger spending of budget on education (5.4%), compared to Bulgaria (3.5%) and Romania (3.5%), also does not bear fruit yet. At the moment, the percentage of professionals trained by higher educational institutions is growing, but is still low.

As a result, the business community calls on the state to reform the educational system. Companies suggest that the content of curriculum should undergo change, as the quality of IT-education in Ukraine cannot satisfy modern market demands and challenges. Industry observers also point to the problem that educational institutions do not employ practitioners to teach new courses in computer sciences. Consequently, more potential employees go abroad for education.

The representatives of the educational field bring up an argument that national universities should give a good basic foundation, and the rest of skill tailoring is to be done by the industry players, because IT industry evolves rapidly. Nevertheless, most recently Ministry of Education and Ministry of Transport and Communication have started to pay attention to this issue by organizing several conferences, which called for brainstorming solutions to the problem of educational service in ICT discipline, the practical outcome of which is still to be seen.

The IT sector in Bulgaria has been surging recently, which predictably led to a shortage of highly qualified labor force in the software industry. Unlike in Ukraine, the competition for professionals became even more intensified with an impressive influx of MNSs. According to InvestBulgaria, in the last 3 years big name companies decided to capitalize on Bulgarian advantages, among which the most prominent are IBM, HP, Tumbleweed, Software AG, Jonson Controls, Microsoft, and Cisco. At present, Bulgaria produces only 3,500 software engineers per year and it becomes more challenging for foreign companies to find suitable employees. A common feature is that the education system appeared not to be ready to produce specialists with the “right profile” at such a fast rate of market growth.

However, unlike in Ukraine, the key technical universities in Bulgaria have already introduced new programs that meet international standards and industry’s demands: The Faculty of mathematics and informatics (FMI) of Sofia University, Plovdiv University, and the American University in Bulgaria implemented an updated computer science curriculum, as well as joint research labs in cooperation with the abovementioned MNCs. Moreover, the Bulgarian government started to be active since 2005 in its support for the industry by providing PCs in the schools, but mostly via cooperation with foreign companies.

Having the same problem, the key divergence between Bulgaria and Romania is that the government of the latter started to act earlier and more vigorously. Such a commitment on behalf of Romanian authorities, as well as the evolution of policies and introduction of various programs commissioned by the state, can be explained by Romanian accession to the EU. The emphasis is put on strengthening the research base, providing competitive financial incentives to decrease the digital divide in the society, and furthering the certification program for IT professionals. Therefore, the EU enlargement has positively influenced an interaction between the actors and stakeholders. The commonality between Bulgaria and Romania lies in the fact that both MNCs and the EU enlargement prospect gave external push to the IT market development.

I think that no industry can stay competitive long enough just based on the inherited factors of production and without support from the government in the form of favorable policies. Of course each state has its own tradition and blindly duplicating policies in order to gain competitive advantage can lead to unexpected outcomes. However, it is useful to look at the strategies of the three states and to check to what extent they are similar or different.

2. Governmental Policies

As it is impossible to imagine any innovative advancement without IT, officials have declared information technology among priorities for national development. Thus, at the beginning of 2007 the previous parliament adopted the Law of Ukraine “On the Foundations of the Development of Ukrainian Information Society in 2007-15”, which was followed by the Action Plan on Implementing the Tasks Envisaged by the Law of Ukraine. The goal of the law and the subsequent documents is to promote an information society in Ukraine, hence strengthening basis for IT sector development.

The growth of the IT market is conditioned also on improvement of investment climate. In this domain, president Yushchenko issued a decree at the end of 2005 which created a State Agency for Investment and Innovations (SAII). Two more additional bodies where brought into existence in 2006, such as the Ukrainian Center for Investment and the State Company for Innovations, which later were brought under the auspices of SAII. In May 2007, thanks to initiative of SAII and the National Technical University “Kyiv Polytechnic Institute” a special corporation was born, Science Park “Kyiv Polytechnic”, which now brings together academia, science researchers and manufacturers to reinforce innovative and informational development of the country. Yet, according to Anatoliy Zayets, the First Deputy Head of the State Agency for Investment and Innovations, “one key effort needed to improve the situation is the development of a sustain¬able strategy in creating legislation that would help build institutional infrastruc¬ture in this industry.”

Explanation for the absence of a concrete strategy on behalf of the state is mentioned by business community. They argue that if the IT industry is considered per se, then its current share of GDP is only 3%, whereas the threshold figure is 10%. Thus, according to the General Director of Microsoft Ukraine, Vitaliy Lanovenko, when IT industry in Ukraine reaches this point, it would be difficult to neglect it, and then it could be more realistic to expect assistance from the state. Thus, the IT market has to grow by at least 3 times before the state will take notice of it. Yet, this poses a puzzle, as it seems that such support is already badly needed, especially when it comes to IPR protection laws and their enforcement, alleviation  of draconian taxes, custom rules, changes in copyrights, etc. The light at the end of the tunnel is given by such influential companies, as Microsoft, Intel, and Oracle, which repeatedly engage in discussions with the government to take necessary steps in this direction.

The root problems can also be eliminated by Ukraine’s eventual accession to WTO, which imposes certain sets of laws, standards and society’s awareness of IPR issues. Accession to WTO, should serve as a positive boost for export-oriented industries, which is also a feature of Ukrainian IT at the moment. Consequently, an additional optimistic prospect for the Ukrainian economy will be the launching of a Free Trade Area with the EU as a part of the upcoming Enhanced Agreement, which is currently under negotiation. These two milestones are the last chances for Ukraine to bring its regulations into compliance with international standards.

Being a late comer to the ICT market, Bulgaria has to catch up with the leaders by implementing necessary steps even more adroitly and massively, but in the shorter lapse of time. The government realized this, and especially right after Bulgaria joined the EU, it has put software industry and ICT as a whole on top of its policy agenda. The character of policies is naturally driven by the EU, which has high standards that Bulgaria is now striving to reach. Bulgaria has also created the State Agency for Information Technology and Communications to expedite its integration to the EU club of information societies.

Apart from the numerous projects supported by the EU and the funds from international financial institutions, the government of Bulgaria has also served as a main procurer of IT services and equipment. Governmental purchases totaled 50% of market sales, which grew last year by 23% (in dollar value). However, according to the observers from the Bulgarian ICT Cluster, there is a problem in absence of control over execution of public procurement contracts for IT projects. Although there is a Public Procurement Act, it is an implementation and interpretation of the law that is obscure (a pattern characteristic for majority of post-Soviet states). On a positive side, as mentioned by InvestBulgaria, the latest incentives are “annual depreciation rate of 30% for machinery & equipment, 50% for new equipment used in new investments or expansion projects and 50% for software and hardware”. ICT business community has considerable bargaining power in voicing their dissatisfaction or proposing new measures, because industry accounts for a considerable 9,9% of GDP (in 2003 it was 7%). Furthermore, business representatives could draw the attention of state authorities to experience of Romania, which had introduced encouraging tax incentives for local IT companies earlier.

In Romania the state must have realized that growing IT industry, even if it is foreign owned, provides numerous opportunities for mushrooming consultancy firms, research and development centers and ICT industry growth in general. The actions of the Romanian government are not on an ad hoc basis, but rather a part of a sound strategy. Starting from 2001 the government has recognized the ICT sector as a strategic priority for the national economy. Consequently, a separate body was created, the Ministry for Communication and Information Technology, whose responsibility is to devise necessary policies for the industry. Additionally, as reported by Businessmonitor, since 2004 the government started to lead IT spending and is recognized, along with banks and telecoms as the largest spender.

The most pronounced policies are exemption of employees employed by software companies from income taxes, reduction of income tax for programmers from certain universities, and a 25-month VAT postponement for new goods. Another possible explanation for increasing attention to such incentives is that the “brain drain” still remains an issue for the industry. Thus, the government tries to reward those active industry players and indirectly tries to create more benefits and better conditions for IT specialists.

Thus, the capability of government to prioritize and focus on development of a specific sector by devising and deploying a clear strategy along with providing financial investment, can be an effective driver of progress. Looking at the dynamics of the IT industry development in the region and comparing the approaches that state governments have adopted in order to aid this development, it can be seen that although Bulgaria and Romania have been in more or less similar condition in the beginning, the Romanian government’s timely efforts to recognize the potential for the IT industry and to coordinate efforts in order to build up the sector has been paid off by the country’s leading position among the two. In comparison to its neighbors. Ukraine has yet to model their successful practices and attempt to avoid the dangers.

Conclusion

The success of IT industry was discussed in 3 NIS countries, which are currently in the focus of international investment community. Although Ukraine, Bulgaria and Romania had similar starting point in terms of the former regime and educational base, the trajectories of development varied respectively depending how the opportunities were embraced and strategies were employed by the key actors (state, business and universities). When reviewing factor conditions, it becomes apparent that favorable and timely governmental policies still play a significant role in improving the country’s image needed for international investment and for normal functioning of domestic industry players. In this respect, Ukraine can learn from regional leaders, which in turn emulated best practices of mature international IT nations. First, a clear-cut and balanced state strategy is needed in Ukraine to support the growing market, which, on the one hand, has a critical set of attraction factors, but, on the other hand, suffers from a weak business environment. Then, links with international markets can be more easily achieved due to improved credibility rating. Thus, work is to be done on two fronts: domestic and international, because a combination of strong players both local and foreign-owned is more beneficial for the country’s economy as a whole. While international companies serve as drivers most of the time (for policies, collaboration initiatives, etc), local firms are perceived as necessary for development of high-value added national products needed to maintain competitiveness in future. While Ukraine rates better in terms of market size, salary level, and potential for growth, it still has to catch up with Bulgaria and Romania when it comes to relevant educational policies, share of services and infrastructure to maintain favorable local and international demand. Therefore, the key to success is to be ready when the opportunity comes

Maryna Yaroshchuk

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