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8/3/2019 EIF Armenian It Industry Report 2003 ENG
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8/3/2019 EIF Armenian It Industry Report 2003 ENG
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EnterpriseIncubatorFoundation ArmenianInformationTechnologySector
1
ARMENIANINFORMATIONTECHNOLOGYSECTORSOFTWAREANDSERVICES
REPORTONTHESTATEOFTHEINDUSTRY
2004EnterpriseIncubatorFoundation
123HovsepEminStreet
Yerevan375051,Armenia
Phone:+37410219797Fax:+37410219777
Email:[email protected]
http://www.eifit.com
Allrightsreserved.
InformationanddatainthisReportareprovidedasitisandwithoutwarrantyofanykind.
Enterprise Incubator Foundation does not guarantee the accuracy of the data and
information included in this Report. Please refer to Appendix 5 for description ofmethodology and assumptions. The Report was developed as of November 2004 and,
unlessotherwisespecified,isbasedoninformationavailableatthattime.
ThematerialinthisReportiscopyrighted.NopartofthisReportmaybereproduced,inany
formorbyanymeans,withoutwrittenpermissionfromEnterprise IncubatorFoundation.
Copies of this Report, however, maybe downloaded from http://research.eifit.com for
personal use. For other uses, please contact Enterprise Incubator Foundation at
[email protected]. All respective trademarks,brands, and names are the property of their
respectiveowners.
DevelopmentoftheReport: NorayrVardanyan,YervandSarkisyan
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PREFACE
Enterprise Incubator Foundation is abusiness development and
incubation agency supporting technology companies in Armenia.Our objectives are to improve competitiveness of Armenian IT
companiesintheglobalmarketplace,buildlinkageswithbusiness
communities in key technology markets, improve access of local
companies to knowledge and information onbest practices and
experience, and assist Armenian firms with attracting local and
foreign investors. An important part of our strategy is the
provisionof researchandanalyticalmaterialsaboutArmenian IT
industry. The goal of this Report is to help better understand
ArmenianITsector,recognizeitsmainneeds,aswellasgaininsightsonpossiblesolutions
toitskeyproblems.
ThisReportistheproductofourrecentneedsassessmentsurveyfinishedinthefirsthalfof
2004 and our twoyear experience with the Armenian IT sector. The Report covers key
aspects of the industry including historical developments, revenues, productivity,
workforceandeducationalsector,policydevelopments,andothers.Inaddition,wediscuss
industryoutlookandpresentourrecommendationsonmostimportantareas,whichrequire
reforms in order the industry to continue and expand its growth. Appendices section
contains information about Armenia, its business environment, and development
institutions and NGOs active in the IT sector. Appendix 5 discusses definitions, key
assumptions,estimationmethods,anddetailsoftheindustryresearch.
TheReportisnotintendedtoprovidesignificantinsightstothosealreadyfamiliarwiththeindustry.RathertheobjectiveoftheReportistobringtogetherinformation,opinions,and
views from a variety of sources into one concise and consistent framework that couldbe
used as a definite source of information for those interested in Armenias IT sector. We
believe that this work is a major step towardsbuilding an internationally competitive IT
industry with robust company base, talented workforce, and high quality educational
institutions.
We would like to thank the team of Development Programs Ltd., which conducted the
needsassessmentsurveyonourbehalf.Weappreciatevaluablecommentsandfeedbackby
our colleagues from McKinsey: Avetik Chalabyan andJens Dinkel. The study could not
havebeenundertakenwithoutnumerousinterviewswithmanagerialandprofessionalstaffof IT companies, faculty and students of educational institutions, representatives of
developmentorganizations,NGOs,trainingcenters,andothers.Weareimmenselygrateful
toalltheseindividualsfortheirtimeandhelp.
Sincerely,
BagratYengibaryan
DirectorofEnterpriseIncubatorFoundation
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3
CONTENTS
Summary........................................................................................ 42003MainIndustryIndicators.................................................... 6IndustryOverview ....................................................................... 7
GeneralCharacteristics.................................................................................................... 7HistoricalDevelopments............................................................................................. 7CompanyFoundations................................................................................................ 9CompanyOwnershipGeography.............................................................................. 9Specializations ............................................................................................................ 10Technologies ............................................................................................................... 11
IndustryRevenues ......................................................................................................... 11Productivity .................................................................................................................... 14HumanResources .......................................................................................................... 16
Workforce.................................................................................................................... 16EducationalSector...................................................................................................... 18
OtherAreas ..................................................................................................................... 21ManagementPractices............................................................................................... 21ResearchandDevelopment ...................................................................................... 22TelecommunicationsInfrastructure ........................................................................ 22PolicyDevelopments ................................................................................................. 23
CompetitiveAdvantagesofArmenia ......................................................................... 24Conclusion................................................................................... 25
IndustryDevelopmentProspects................................................................................. 25Recommendations.......................................................................................................... 27
Appendices.................................................................................. 31
Appendix1:AboutEnterpriseIncubatorFoundation.............................................. 31Appendix2:AboutArmenia ........................................................................................ 32Appendix3:BusinessandLegalEnvironment.......................................................... 33Appendix4:DevelopmentInstitutions,Associations,andNGOs.......................... 34Appendix5:Methodology............................................................................................ 35Appendix6:Abbreviations........................................................................................... 38
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SUMMARY
Armenian information technology industry with its software and services segment1 has
been one of the most dynamic and promising sectors of the economy in the last decade.
Before the collapse of the Soviet Union, Armenia was considered a leading IT and
electronics center with more than a dozen of large R&D institutes and manufacturing
companies asof1985.After thebreakup of theUSSRby the end of the 1980s, the sector
witnessedsignificantcrisis,which,however,hasbeenovercomeasnewcompaniesevolved
inthemid1990s.
Startingfromaround1997,theindustryreceivedanewimpulseforgrowthwhenanumber
of startups emerged in the local market and several western companies established
development centers in Armenia. By 2003, the number of operating IT companies has
reached around 1102. In 2000, the Government of Armenia declared development of
information and communication technologies as one of the priorities for the Armenian
economy,whichfollowedbythecreationoftheICTMasterStrategyandICTdevelopment
implementationplantoestablishArmeniaasaregionalICThub.
INDUSTRYREVENUES
Industryrevenues for theyears19982003grewat30%3andreached$382million in2003.
Nearly two thirds of the total industry revenues are accounted to some 25 foreign
companiesoperatinginArmenia.MorethanhalfofthemhaveUSownership,whileothers
aremostlyRussianorEuropean.
ITservicesandproductsarebeingexportedtomorethan20countries,whichisoneofthe
signs of maturity reachedby the industry. The largest share of exports, 68%, goes to the
United States and Canada; the second largest market is Russia and CIS with 16%; third
comesEurope with 10%. Domesticmarket constitutes $13.5million andexports are more
than $24million, andboth are dominatedby the servicessegment.Local companies play
majorrole in the localmarket,while foreignbranchesaccount formajorshareofexports.
Thedomesticmarketremainssmall,thoughitshowedpositivegrowthduringthelastfew
years. It is expected to grow even faster whenbusinesses and Government realize the
benefitsthatITcanbringintermsofefficiencyandnewopportunities.
PRODUCTIVITYANALYSIS
Our analysis revealed that Armenian software companies involved in the provision of IT
services have relatively high productivity compared to that of the US software services
companies. Productivities of local and foreign firms in the services segment are 41% and
79% of that of the US services segment. The reason for the differencebetween local and
foreigncompaniesisthatthelocalfirmsperformlowervalueservices,andtheylackbrand
namerecognitionexperiencedbytheforeigncompanies.Contrarytotheservicessegment,
average productivity of packaged software companies is 17% of that of the US packaged
softwarecompanies.
1SoftwareandservicesandITsector/industryareusedinterchangeablyinthisReport.2
SeeAppendix
5for
assumptions
and
estimation
methods.
3Ifnototherwisespecified,allgrowthratesareCAGR(CompoundAnnualGrowthRate).
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In 19982003, the industry witnessed an increase in the productivity rates somewhere
around57%,whichwasmostlyattributedtoexportorientedfirms.Companiesactiveinthe
export market generate higher revenues and charge higher rates. In contrast to export
orientedcompanies,firmsfocusedonthedomesticmarketdonotshowsignificantgainsin
productivity.
HUMANRESOURCES
ThetotalworkforceemployedbytheITsectorisaround3,000individuals,whichrepresents
approximately 25% growth during 19982003. The workforce is almost evenly shared
between the local and foreign companies. Around two thirds of the workforce is
concentratedintheservicessegmentoftheindustry.
Annual average salaries of experienced developers range from $3,000 to $7,200, and for
team leadersorprojectmanagers,therange is$6,000$14,000.Salary levelsdependonthe
experience
of
the
employees
and
whether
it
is
a
local
or
foreign
company.
Salaries
are
competitive compared to most of the major IT outsourcing countries like China, India,
Ireland,Israel,andRussia.
ThenumberofstudentsenrolledinvariousITrelatedfieldsat14educationalinstitutionsis
approximately 3,900. This number has grown during last decade because of the
opportunitiesandbenefitsthattheITindustryofferstoyoungprofessionals.However,the
educational sector capacity is going tobe one of the major constraints for the continued
growthoftheindustry.
INDUSTRYOUTLOOKDuringitsmajorexpansionin19982003,theindustryhaswitnessedaround25%increasein
the workforce and around 57% rise in productivity, which resulted in higher than 30%
industrygrowth.IfappropriatereformsarecarriedoutbytheGovernment incooperation
withthedonorsandtheDiaspora,theindustrymaykeepitsgrowthtrendandreach$250
million in revenues and 14,000 in workforceby 2010. At the same time, Armenian IT
industry is capable of reaching revenues in therange of$300400million.However, such
high growth rates of 3540% couldbe achieved only with 2530% annual increase in the
workforce and around 78% rise in productivity. To continue current high growth of the
industry and achieve even higher rates require substantial efforts by the Government,
educationalandprivatesectors,aswellassignificantsupport from thedonorcommunity
andthe
Diaspora.
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2003MAININDUSTRYINDICATORS
General
Characteristics
Numberofoperatingcompanies 110
Numberofforeigncompanies 24
Growthinnumberofcompanies,19982003 24%
IndustryRevenues,million
Totalturnover $37.7
Turnoveroflocalcompanies $15.7
Turnoverofforeignbranches $22.0
Averagerevenue
per
company
$0.34
Averagerevenueperlocalcompany $0.18
Averagerevenueperforeignbranch $0.92
Domesticmarket $13.5
Exports $24.2
Packagedsoftware $11.9
Services $25.8
Revenuegrowth,19982003 30%
Productivity
IndustryaveragecomparedwithUSindustryaverage 28%
LocalcompaniescomparedwithUSindustryaverage 23%
ForeignbranchescomparedwithUSindustryaverage 43%
PackagedsoftwarecomparedwithUSpackagedsoftware 19%
ServicescomparedwithUSservices 54%
HumanResources
Totalworkforce 3,000
Technicalprofessionals 2,100Managementandadministrative 900
Workforcegrowth,19982003 24%
Averagenumberofemployeespercompany 17
Averagenumberofemployeesperlocalcompany 11
Averagenumberofemployeesperforeignbranch 35
Averageannualsalaryrangeforexperienceddevelopers $3,600 $7,200
NumberofstudentsinITrelatedspecialties 3,900
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INDUSTRYOVERVIEW
Armenia isoneofthe leading informationtechnologynationsamongtheneighboringCIS
andMiddleEastcountries.ItsITindustryhasbeenoneofthemostdynamicandpromising
sectors of the economy in the last decade. Past successes, qualified professionals and
Armenianentrepreneurialspiritpositiontheindustrytobesuccessfulintheyearstocome.
GENERALCHARACTERISTICS
HISTORICALDEVELOPMENTS
Armenia was one of the major centers for R&D and production in the areas of computer
scienceandelectronicsintheformerSovietUnion.Thispotentialhasbeencreatedbackin
the 1950s. At that time, several major R&Dand semiconductor manufacturingcompanies
were founded. These institutions operated for the Soviet Government and concentratedprimarilyonindustrialanddefenseapplications.
TheleadingR&DinstituteinArmeniafocusedoncomputerrelatedproblemswasYerevan
ScientificResearchInstituteofMathematicalMachines(YSRIMM).Itwascreatedin1956to
design andbuild computers and related equipment4. By the end of 1960s, YSRIMM was
already designing various computers, mainframes, automated control systems, as well as
operating systems, networking and application software. The institute designed and
producedatitsownproductionplantdozensofcomputers,someofwhichwerecompatible
withPDPofDigitalEquipmentandIBMmainframeseries.Asignificantachievementbythe
institutewasaprojecttodesignatelecommunicationsystemforthemissiontothemoon.In
the1980s,YSRIMMaloneemployedaround10,000people,almostthreetimesthesizeofthewhole IT workforce today. In 1957, another major research institution, Institute for
Informatics and Automation Problems was created as part of the National Academy of
Sciences.Researchwasalsocarriedoutatthemajoruniversitiesandotherinstitutions.
A number of manufacturing companies were established after Armenia developed its
scientific and R&D capacity. One of the largest electronics companies was Posistor, an
R&D and production holding with its parent company Sirius. Posistor was one of the
leadingcompaniesintheelectronicsindustryoftheformerUSSR.Itmanufacturedvarious
electronic components and devices. As of 1985, there were more than a dozen of large
radioelectronicsR&DinstitutesandproductioncompaniesinArmenia.Duringthisperiod,
ArmeniawasconsideredaleadingcenterofelectronicsandinformationtechnologiesoftheSovietUnion.
BreakupoftheUSSRbytheendofthe1980sandstartoftheeraofpersonalcomputersled
to the collapse of the whole Armenian technology sector. Gradually, new companies
evolvedtofillemergingopportunitieslocallyandinforeignmarkets.Thepotentialcreated
duringpreviousyearswas themajor force,whichenabledentrepreneursand investors to
startnewbusinessventuresinthefieldsofhightechandIT.
4In1992,itwassplitintotwoseparateprivatecompanies.
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The first private IT company in Armenia, Armenian Software, www.armsoft.am, was
established in 1987. During this period of economic liberalization, many new firms have
been created to provide system integration and custom software development services.
Thesecompaniesfocusedmostlyonservicestothedomesticmarketwithveryfewofthem
doing
business
with
foreign
clients.
Major
areas
of
specialization
at
that
time
were
accounting and financial applications targeted at the local customers, hardware assembly
andsale,andsomeoutsourcingservices.
Startingfromaround1997,theindustryreceivedanewimpulseforgrowthstemmingfrom
thesuccessesofthepreviouslyestablishedcompanies,overallrecoveryoftheeconomy,and
unprecedented growth of the worldwide IT industry. The potential of IT industry drew
attention of larger number of investors, policy makers, and professionals. The industry
started offering higher payingjobs to the young generation encouraging them to pursue
careersintheITfield. Anumberoflocalcompanieswereestablishedtoofferservicestothe
growinglocalITmarketandtoserveforeignclients.WesterncompaniessuchasCredence
Systems
(www.credence.com),
Epygi
Technologies
(www.epygi.com),
HPL
Technologies
(www.hpl.com), LEDA Design5, Lycos Europe (www.lycoseurope.am), Virage Logic
(www.viragelogic.com), and others established development centers in Armenia. Existing
strongscientificandeducationalbasewasamajor factorbehind thesignificantsuccessof
thechipdesignindustry,whichhasgrownintoalargerevenuegeneratingsegmentwithin
theITindustryandattractedanumberoflargeforeigndirectinvestments.
DEVELOPMENTSTAGESOFARMENIANITINDUSTRY
19561987: Period under the Soviet rule with state institutions working on largescale
projects for the communist government. Many industrial and other organizations had in
house
software
development
departmentsfocusingonautomationof
accounting and other organizational
functions.
19871997: First private packaged
software company (Armenian
Software) was founded in 1987 to
provide solutions to the financial and
banking sectors. First branches of
foreign companies were established,
manyconcentrating
in
chip
design
and
relatedareas.
1997Present: During this period,
potential of IT industry has been
recognized by a larger number of
investors, policy makers, and professionals. Previous success stories encouraged
establishment of new localand foreigncompanies.TheGovernmentofArmeniadeclared
developmentofICTasoneoftheprioritiesfortheArmenianeconomy.
5LEDA
was
acquired
in
October
of
2004
by
Synopsys
Inc.,
www.synopsys.com/news/announce/press2004/snps_acqleda_pr.html
0
20
40
60
80
100
120
1956
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Number ofcompanies
Armenian IT Industry Evolution(major milestones in industry development)
R&D /production
Foreign
companybranch
Outsourcing
Local softwareservices firm
Foreignbranch in chip
design
Industrialautomation
Localprivate
packagedsoftware
company
Internetapplications
Major USinvestments
(chip design)
European andRussian investments
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COMPANYFOUNDATIONS
Armenian IT industry is quite young
despitetheoldtraditionsandlonghistory
of computer and software design. While
the first state institution specialized in IT
was establishedback in1956, the average
ageofArmenian IT companies is6years.
First local private firms were established
by the end of the 1980s, and by the
mid1990s first foreign companies were
setup. During the 10 yearsbetween 1987
and1997,thesuccessfulfoundationforthe
future growth of the industry has been
laidout.Inthelastfewyears,theindustry
sawasharpincreaseinthenumberofnewcompanies,bothlocalstartupsandbranchesof
foreigncompanies.84%oftheforeigncompanieswereestablishedwithinthelast6years.
The number of operating IT companies in 2003 achieved around 110, which represents
nearly25%growthduring19982003.Thenumberofregisteredcompaniescitedindifferent
sources varies significantly reaching 250 firms. The reason for such high estimates is that
during the recent growth of the IT sector, the industry drew attention of wouldbe
entrepreneurs who established a number of startups, many of which have stopped
operationsshortlyaftertheregistration.Inaddition,manycompaniesthatarespecializedin
a variety of technology related fieldsbut not necessarily software and services, include
softwaredevelopmentinthelistoftheirspeciliazations.
COMPANYOWNERSHIPGEOGRAPHY
ThenumberofforeigncompaniesinArmeniais24.Morethanhalfofthesefirms,suchas
Virage Logic, HPL Technologies, Epygi Technologies, and LEDA Design, have US
ownership. Companies with Russian
ownershiparearecentphenomenon.Inone
of the cases a completely new company
(ABM Soft,www.abmsoft.com) with Russian
capital was established to conduct both
business and technical functions locally. In
another case, a Russian outsourcing
company(VDI,www.vdiweb.com)establishedadevelopmentcenterinArmenia.Thereare
also companies from Germany (Lycos
Europe), Switzerland (Xalt, www.xalt.com),
United Arab Emirates (Systrotech,
www.systrotech.am),andothercountries.
ThereareseveralcasesofacquisitionsoftheexistingArmeniancompanies.Threeofthese
cases include two stateowned Armenian enterprises (YCRDI, www.ycrdi.am, and
Yer.ACSSRI,www.yercsi.am),whichweresoldtoRussianinvestorsbytheGovernment,and
anArmenianbranchoftheUScompany,Brience,whichwassoldtoLycosEurope.
0
2
4
6
8
10
12
14
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Company Foundations by years
Based on a sample of 93 companies
USA62%
Europe
17%
Other
4%
Russia &
CIS
17%
Company Owner ship by Fore ign Countries
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5%
1%
5%
5%
7%
10%
16%
17%
10%
9%
9%
0% 5% 10% 15% 20% 25%
Other
Industrial Automation
Accounting, Banking and Financial Software
IT Services and Consulting
Management Information Systems
Customized Software Development &
Outsourcing
Database Management Systems
Computer Graphics and Multimedia
Internet Applications & E-c ommerce
Internet Service Provider
Web Design and Development
Distribution of Local Company Specializations
2%
2%
2%
5%
5%
7%
7%
7%
11%
16%
23%
5%
5%
5%
0% 5% 10% 15% 20% 25%
Computer Graphics and Multimedia
Industrial Automation
Internet Service Provider
Accounting, Banking and Financial Software
Database Management Systems
IT Services and Consulting
Programming Languages and Tools
Systems Software
Management Information Systems
Web Design and Development
Internet Applications & E-commerce
Networking Syste ms and Communicatio ns
Chip Design / Testing and Related
Customized Software Development &
Outsourcing
Distribution of Foreign Company Specializations
Other sectors, where local companies are active, are mostly related to providing services
and customized development. Generally, local firms tend tobe very diversified, which is
explainedbythesmallsizeofthemajorityoftheindustrysectors.
TECHNOLOGIES
Armeniancompaniesandprofessionalsuseavarietyof technologiesandhaveexperience
withstandalone,aswellasclientserverandnetcentricapplications.Companiesinvolved
in embedded systems design and testing extensively employ C/C++ and assembly
languages.Java and .Net technologies are more popular with companies focused on the
creationofnetcentricsolutions.Internettechnologies,suchasJSP,ASP,PHP,ColdFusion,
HTML, DHTML, XML, and Flash are widely applied. Other languages and technologies
includeVisualBasic,Delphi,Perl,populardatabasesystemssuchasMicrosoftSQLServer,
MySQL,Oracle,andInformix.ApplicationsaredevelopedforWindows,Solaris,Linux,and
recently
for
handheld
platforms.
Open
source
development
is
becoming
increasingly
popularamongyoungprofessionalsandstudents,aswellasITbusinesses.
INDUSTRYREVENUES
In 2003, Armenian IT sector generated
around$38million,whichcorresponds to
nearly 30% growth during 199820036.
Foreign companies accounted for nearly
twothirdsoftheindustryturnoveror$22
million.
Average
revenue
per
company
was$340,000;itwas$920,000and$180,000
perforeignbranchandperlocalcompany
respectively.Tenlargestcompanies,which
constitute only 9% of the total number of
firms,generated48%ofallrevenues;55%
ofcompaniesgenerated89%ofrevenues.
6In
1998,
total
turnover
of
the
software
and
services
segment
of
the
industry
was
around
$10
million.
Source:USAIDICTAssessmentReport,July2000,www.dec.org.
48%
41%
11%
9%
46%
45 %
0%
20%
40%
60%
80%
100%
Companies Revenues
> $1 mln $0.1 - $1 mln < $0.1 mln
Industry Revenue Concentrations
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Although only eight companies are
specialized in chip design, testing and
related areas, the revenue generated by
thissectorisnearlyaquarterofthewhole
industry
turnover.
Other
major
revenue
generating sectors are ISPs, networking
systems and communications, and
customizedsoftwaredevelopment.
In2003,thedomesticmarketconstituted$13.5million,whereasexportswere$24.2million,
or36%and64%fromthetotalindustryrevenuesrespectively.Thereasonforbigdifference
inexportsanddomesticmarketsisthatthelargestcompaniesofthesectorarebranchesof
foreign
firms,
which
almost
completely
export
their
products.
In
addition,
many
locally
owned enterprises also export significant portion of their products and services abroad.
Total market for packaged software amounted to $12 million. Both domestic market and
exports are dominatedby the services segment, which constitutes 82% of the domestic
marketandabout61%oftheexportsrespectively.
Domestic markets and exports are not distributed equally according to the company
ownership geography. Domestic market is almost completely dominatedby the locally
owned companies, 88%, while foreign branches account for nearly 84% of all exports.
Almostallforeignbranchesarecreatedbytheirparentcompaniesmostlyforoutsourcingof
thesoftwaredevelopment.Asaresult,only12%ofthedomesticmarketiscapturedbythecompanieswithforeignownership.
8.3%
3.0%
3.2%
4.0%
4.6%
5.4%
5.6%
6.3%
8.6%
13.8%
14.4%
22.9%
0% 5% 10% 15% 20% 25%
Other
Computer Graphics and Multimedia
Database Management Systems
Industrial Automation
Accounting, Banking and Financial Software
Web Design and Development
Management Information Systems
Internet Applications & E-commerce
Customized Software Development & Outsourcing
Networking Systems and Communications
Internet Service Provider
Chip Design / Testing and Related
Revenue Contribution by Sub-sectors
11.9
3.9
20.31.6
0
5
10
15
20
25
Domestic Market Exports
Local Compa nies Foreign Branches
Domestic Market and Exports by Ownershipmln US$
9.5
14.8
2.5
11.0
0
5
10
15
20
25
Domestic Market Exports
Packaged Software Services
Domestic Market and Exports by Segmentsmln US$
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DOMESTICMARKET
The localmarket forpackagedsoftware is
quite small, constituting around $2.5
million or 7% of all industry revenues.
Total
sales
of
foreign
branches
in
the
domestic market are $1.6 million and are
generated mostly from services. Services
segment dominates the domestic market:
82% of the revenues of the locally owned
companies from the domestic sales are
generated from IT services; it is 80% for
foreignbranches
The small size of the domestic market is
the result of rather low demand for software and IT services frombusinesses and the
Government.
A
number
of
factors
are
responsible
for
this
low
demand
including
low
employee wages, high software piracy rates, little or no understanding of the need for
productivityenhancementtools,financialconstraints,andotherfactors.Becauseofthelow
domesticdemand,thereisnoinducementforArmenianITcompaniestodeveloppackaged
software or offer new and higher quality services. The majority of the software packages
soldonthedomesticmarketincludeaccountingandfinancialsoftwareforlargeenterprises
and banks. Other products and services with the largest demand include enterprise
resource planning solutions, ecommerce, web development services, tools for healthcare
industry,anddistancelearningprograms.
EXPORTS
Armenian
IT
industry
exports
$24.2
million
of
products
and
services
to
more
than
20
countries. The largest share of exports, 68%, goes to the United States and Canada; the
secondlargestmarketisRussiaandCISwith16%;thirdcomesEuropewith10%.However,
EuropeissecondtoNorthAmericabythenumberofclients.
2.1
0.3
9.7
1.3
0
3
5
8
10
13
15
Loc al Companies Foreign Branc hes
Packaged Software Services
Domestic Market by Segments and Ow nershipmln US$
NorthAmerica,
68%
Europe,10%
Russia &CIS, 16%
Other, 6%
Geographic Distribution of Exports
NorthAmerica,
44%
Russia &CIS, 15%
Asia, 5%
MiddleEast, 5%
Other, 2%
Europe,29%
Geographic Distribution of Clients
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Nearly 65% of IT companies are exporting their products or services. The largest part of
exportsor61%areattributedtoservices,whiletheremainingispackagedsoftware.Foreign
companies export more than 90% of their
sales and account for the largest part of
Armenias
IT
exports.
Local
companies
produce16%oftheexportsor$3.8million,
while foreign branches produce 84% or
$20.3million.
Factors hindering growth of exports
include still insufficient knowledge about
Armenia and its IT industry by the
international business community;
language issues, which are, however, less
importantnowas theyounggeneration is
becomingmore
proficient
in
English
and
other
foreign
languages;
long
distance
from
the
keyITmarkets(atthispoint,only10localcompanieshavesomekindofpresenceabroad).
PRODUCTIVITY
Productivity estimates for the Armenian IT companies were madebased on the annual
revenues generated by the companies per employee. Analysis, which was conducted
separatelyforlocalandforeigncompanies,
shows that PPPadjusted productivity of
local companies stands at 23% of the US
average
levels
and
productivity
of
the
foreign companies is at 43% of US levels.
As the chart shows7, industry average
productivity was at 28% of the US
productivitylevels.Theproductivityofan
averageArmenian ITservicescompany is
at 54% of that of an average US services
company productivity, while packaged
software segment operates at levels of
productivitycloseto20%ofthatoftheUS
softwarepackagedsegment8.
7Sectionsinthechart:industry,packagedsoftware,andservicesshouldnotbecomparedwitheach
other. While, for example, the chart shows that the packaged software productivity for local
companies issignificantly lowerthanthatoftheirservicessegment, inabsolutetermstheseratesdo
notdifferasmuchfromeachother.Comparisons,therefore,shouldbemadewithinthesectionsonly.8Complicationsinestimatingproductivityforforeignbranchesarisebecausewehadtouseturnover
figuresoftheArmenianbranchesinsteadofthoseoftheirparentcompanies.Therefore,productivity
rates for foreignbranches within industry and packaged software segments as it is depicted in the
chartmay
be
underestimated.
We
suggest
that
the
rates
of
the
services
segment
be
used
as
abase
for
productivityofforeignbranches.
8.9
0.53.3
11.4
0
5
10
15
20
25
Loc al Companies Foreign Branc hes
Packaged Software Services
Exports by Segments and Ownership
mln US$
28%
19%
54%
23%
16%
41%
79%
27%
43%
0%
20%
40%
60%
80%
Industry Packaged Software Services
Industry Average Local Compan ies Fore ign Branches
Industry Segments P roductivity: Armenian vs. US(US level = 100% )
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HighproductivityoftheservicessectorcomparedtothatoftheUSservicessegmentcanbe
explainedbythefollowingmajorfactors:
lowcapitalrequirementsalloweasyentryandexitbyentrepreneursandforeignfirms, the formercoupled with thenonregulatednatureof the industrycreatescompetitiveenvironmentforcompanies,andfinally servicesarenotsubjecttopiracy,whichseriouslyimpedesgrowthinproductivityrates.Itshouldalsobenotedthattheaverageproductivityintheservicessegmentiselevatedby
thehighproductivityofforeignbranchesconcentratedintheservicesarea.Productivityof
these companies is at 79% of that of the US services segment levels. On the other hand,
productivity of local services firms is at 41% of US service companies productivity. The
reasonfor38%differenceintheratesisthatthelocalcompaniesperformlowervalueadded
services for both local and foreign clients, and they lack the brand name recognition
experiencedbytheforeigncompanies.
In 19982003, the industry witnessed an increase in the productivity rates somewhere
around57%,whichwasmostlyattributedtoexportorientedcompanies9.Itisapparentthat
exportorientedfirmshadproductivitygainshigherthantheindustryaverage.Companies
find ways to the foreignmarkets, thusbecomingable to generate higherrevenuesand to
chargehigherratesas theybuild theirreputationamong theexistingandnewcustomers.
Additionally, software professionals,project managers, and companies in generalbecome
moreexperiencedastheyparticipateinlargerandmoreadvancedprojects.
Incontrasttoexportorientedcompanies,thosethataremainlyfocusedonthelocalmarket
donotshowsignificantgainsinproductivity.Theygrowprimarilythroughtheincreasein
the
number
of
employees.
The
major
problem
for
the
low
productivity
of
Armenian
IT
companies is thatnosignificantvalue iscreatedwithinArmeniabecauseof the following
factors:
Locally owned companies are either focused only on the domestic market, which islimited and does not present highvolume and/or fee opportunities. Or they provide
smallscale customized development and outsourcing to small or medium sized
internationalcompanies,whichdoesnotprovidehighvalueorreturns;
Foreignbranchesactonlyasoutsourcingcentersandarepaidoperatingexpensesplusaninsignificantmarginovercosts.Nosizeablevalue,therefore,isretainedinArmenia.
9Due
to
unreliability
of
historical
data,
as
well
as
significant
changes
in
the
industry
structure,
growth
inproductivityisdifficulttoestimate.Therefore,ratesprovidedhereshouldbeusedwithcaution.
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HUMANRESOURCES
WORKFORCE
According
to
our
estimates,
the
total
workforce employed by the IT sector in
2003 was around 3,000 professionals,
which represents nearly 25% growth in
1998200310. More than 70% of the total
workforce is technical specialists such as
software engineers, analysts, developers,
project managers, and others. In addition,
around 1,000 technical professionals are
employedbythelocallyownedcompanies,
while nearly 1,150 specialists work for
foreign
branches.
Management
and
administrative staff constitute less than 30% of the total workforce. In total, about 1,450
individualsor48%oftheworkforceisemployedbythelocallyownedcompaniesand1,550
or52%workforforeignbranches.
On average, an IT company has 17
employees, from which 14 are technical
and 3 are managerial and administrative
specialists11. Local companies have on
average11employeeswith8technicaland
3nontechnicalstaff.Foreignbranches,on
the
other
hand,
employ
on
average
35
people with 31 technical and 6
nontechnicalstaff.Mostoftheworkforce,
around 2,100 individuals or 71%, is
concentrated in the services segment of
the industry. From these, around 330 or
11% of the workforce, work for internet
serviceproviders.
The number of specialists employed by
companies varies significantly within the
industry.About
6%
of
companies
employ
100 and more specialists, while 76% has
less than 25 employees. These 6% or 7
companiesemploy1,250peopleor42%of
theentireworkforce.17%or19companies
employ from 25 to 99 people, which in
totalisaround850individualsor29%oftheworkforce.84firms,or76%,withlessthan25
peopleemployabout880individuals,or30%oftheworkforce.
10Reliableandconsistenthistoricdataonworkforcewerenotavailable.Substantialdifferencesexist
amongvarioussources,whichcitefiguresintherangefrom500to1,500fortheyear1998.Wedecided
touse
1,000,
which
creates
relatively
consistent
picture
of
the
industrys
historical
growth.
11SeeAppendix5onhowtheaveragecompanysizewasestimated
990
450
410
1,130
0
500
1,000
1,500
2,000
2,500
Technical Spec ialists Management and Admin
Local Companies Foreign Branches
Distribution of Employees bySpecialty and Company Ownership
Foreign -Packaged,
20%
Local -Services -
ISPs, 11%
Foreign -Services
(excl ISPs),
31%
Local -Packaged,
9%
Local -Services
(excl ISPs),
29%
Workforce Distribution per Segments and Ownership
>= 100, 6%
50-99, 6%
25-49, 11%
< 25, 76%
Distribution of Companies per Number of Employees
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Over75%oftheITworkforcehasover5yearsofexperience.About60%ofemployeeshave
5yearBachelor&MasterofScience (BSMS)degreeswithanother38%havingBachelors,
Masters,orPh.D.degrees.Thesearemostlytechnicalspecialistswithfewhavingmajorsin
economics,finance,andotherareas.About2%oftheworkforceholdsbusinessdegrees.
Armeniahasbeenchosenasanoffshoredevelopmentdestinationbytheforeigncompanies
partlybecause of its inexpensive and highly productive labor. Annual average salary for
experienceddevelopers(morethan twoyearsofexperience) isaround$3,600 in localand
$7,200 in foreign companies; developers
with two years of experience get $3,000
and$5,400respectively.Team leadersand
projectmanagersearnonaverage$6,000in
local and $14,000 in foreign companies.
Some of the exceptionally good technical
managers may earn up to $20,000 yearly.Salaries for entry level positions range
from $1,800 to $2,400 annually. These
salariesarecompetitivecomparedtomost
of the major IT outsourcing countries like
India,Russia,Israel,Ireland,andChina.
Manyofthecompaniespracticenonpaid internshipswhenselectingfreshgraduates.It is
commontohostinternsandtotrainthemanduseforlowvalueaddedjobsandthenselect
thebest for permanent positions. New employees usually do not start working at full
capacityforperiods longerthantwomonths.Formanycompaniesthis isa limitingfactor
hindering growth and making employers complain about the quality of education. ThisissueiscommonalsoforcompaniesinIndiawherefastgrowingcompaniescannotbillfor
newemployeesforthefirst36months12.
EMPLOYEEDEVELOPMENT
Significant differences for employee development exist among locally owned companies
and foreignsubsidiaries.Branches,aspartof theirstrategicmanagement,constantly train
their employeesboth in Armenia and at the head offices. In addition, they havebuilt
resourcecentersandlibrariestoassistemployeesintrainingandknowledgemanagement.
12India:
The
Growth
Imperative,
McKinsey
Global
Institute,
September
2001;
www.mckinsey.com/knowledge/mgi/India
Bachelor's(BS/BE),
15%
Master's(MS/ME),
16%
MBA, 2%
Bachelor &Master
(BSMS), 59%
Ph.D., 7%
Other, 1%
Employee Educational Background
Based on a sample of 56 companies
1-2, 2%
3-4, 21%
5-6, 32%
7-10, 27%
>10, 18%
Employee Average Experience
Based on a sample of 56 companies
$7,200
$4,800
$14,400
$6,000
$14,400
$2,400
$1,800
$3,600
$3,000
$6,000
$3,000
$6,000
$2,400
$2,400
$5,400$3,000
0 15,000
Entry level developer
Developer (2-year experience)
Developer experienced
Test engineer
PM
Sys Admin
Managerial
Support
Foreign Branches Local Companies
Annual Salary Levels
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Employeesofanumberof foreignbranchesareofferedemployeestockoptionsandother
nonsalary incentives. Branches normally enjoy low turnover rates and high employee
commitment.
In
contrast,
although
local
companies
accept
training
as
an
important
part
of
the
development, fewareable toprovide trainingonapermanentbasis.Mostof the training
needs are greatly affectedby the availability of funds and training personnel. One of the
options isfreeor lowcosttrainingsofferedbythedevelopmentorgovernmentprograms,
which, however, are mostly targeted at general industry needs rather than a specific
companys requirements. Salary levels lower than those adopted at the foreignbranches
andlackofproperemployeeincentiveplanswereformanyyearsmajorfactorsbehindthe
high turnover rates at the local firms. Recently, however, various forms of incentives are
becomingmorewidespreadatthelocalcompanies.Duringthelast23yearsturnoverrates
havedecreasedsubstantially,whichwastheresultofhigherjobandsalarystability,better
workingenvironment,emergenceofstrongteamswithinthecompanies,andotherfactors.
EDUCATIONALSECTOR
Armeniahasastrong traditionofhighereducation,whereuniversitiesputgreatstresson
training students in the fundamentals and in educating them to understand the entire
engineering process. Today this tradition is enhanced with new ideas and approaches,
whicharetheresultsofArmeniasadoptionoffreemarketprinciples.
UNIVERSITIES
State Engineering University of Armenia (SEUA), www.seua.am, and Yerevan State
University (YSU), www.ysu.am, are the oldest and largest institutions developing
engineering professionals for the computer industry13. SEUA offers specializations in
computer and hardware design, software design and development, electronics and chip
design;YSUprovidesmajorsinalgorithmiclanguages,discretemath,systemprogramming
andmodeling.
American University of Armenia (AUA), www.aua.am, an affiliate of the University of
California, offers degrees in Master of Business Administration and Master in Computer
andInformationScience. EuropeanRegionalInstituteofInformationandCommunication
Technologies in Armenia (ERIICTA),www.eriicta.am, establishedby the European Union,
offers degrees in Software Engineering and IT Business Management. RussianArmenian
(Slavonic) University,www.rau.am, establishedby the initiative of Armenian and Russian
Governments,providesmajors inmathematicsandmathmodeling,systemprogramming,
electronics and microelectronics. A number of other colleges and universities established
recentlyaredevelopingrapidlytomeetexistingandfuturedemandofITspecialists.
Current educational system, except for a few universities, is inherited from the former
Soviet Union. After the independence, however, demand for professionals has changed
significantly, which resulted in discontinuation of many fields and specializations and
emergence of new ones. While the 5year degree system practicedby Soviet educational
institutionsisstillwidespreadinArmenia,anumberofuniversitiesrecentlyhaveadopted
13SEUA
is
the
successor
of
Yerevan
Polytechnic
Institute,
which
was
established
in
1933;
YSU
was
foundedin1919
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thewesternstyletwoleveleducationalsystemwithBachelorsandMastersdegrees.Many
universitiesofferpostgraduateeducationandPhD.
The main issue facedby the educational sector is inadequate funding: tuition fees and
governmentsupport
are
not
sufficient
for
the
majority
of
educational
institutions.
At
the
sametime,manyuniversitieshavenointentiontoraisetuitionfeesbecausetheyarealready
high for an average Armenian student. Other issues facedby many schools are lack of
textbooks and professional literature, outdated library, limited availability of computer
equipmentandInternetconnection.
FACULTYANDTEACHINGMETHODS
14 educational institutions participated in our research employ around 460 faculty
members14. Most of them are concentrated in YSU and SEUA with the remainder spread
throughoutothertwelveuniversities.Themajorityofeducationalinstitutionsconsidertheir
curriculaandteachingmethodsbeinguptodateandmeetingindustryrequirements.Many
professors
develop
their
classes
using
experience
of
leading
European,
Russian,
and
US
universities and with their assistance. In some cases, local IT professionals are invited to
helpfacultyinaligningthecurriculatothelatestindustrytrendsandrequirements.Today,
more and more institutions recognize that besides technical skills students need to be
proficient inbusinessareas aswell.Differentbusinesscoursesareofferedatanumberof
universities including marketing, management,business ethics, law, and other subjects.
Teachingof foreign languagessuchasRussianandEnglisharealsoconsideredextremely
importantfordevelopinghighqualityengineeringandmanagerialcadre.
Despite therecent improvements in theeducationalsystem,current teachingmethodsare
consideredby many as inadequate in the attempt to meet the IT industrys demand for
highquality
human
resources.
In
addition,
two
major
interrelated
issues:
low
wages
and
aging facultyresult in the facultysizebeingconstantordecreasingover timewhile the
studentbodygrowingeachyear.
STUDENTS
Approximately 75,000 individuals, ages
1723, or 2.3% of the total population, are
students of higher educational
institutions15. In2003,approximately3,900
students were enrolled in various IT
relatedfieldsat14educationalinstitutions.
Around70%
of
all
these
students
study
at
SEUA and YSU. 87% attend public
institutions and 13% attend private
universities16. 81% of students are from
Yerevanand19%arefromtheregionsand
abroad. Foreign students from Europe,
Russia & CIS, Middle East, and other countries study in Armenia, and their number is
growing over time. Overall quality of the enrollees hasbeen improving for the last 35
14 Educational Sector section discusses only institutions, their departments, faculty, and students
associatedwithITmajors.Allfiguresanddescriptions,therefore,applytoITspecializationsonly.15
UNESCOInstitute
for
Statistics,
Global
Education
Digest
2004,
www.uis.unesco.org.
16Informationinthissectionisbasedoninterviewswith474studentsfrom11educationalinstitutions.
SEUA, 1,550 ,40%
YSU, 1,190 ,30%
Other, 1,180, 30%
Distribution of Students by Universities
Based on a sample of 14 educational institutions
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years.AdmissionstoITdepartmentsareveryrigorous,especiallyincaseofSEUAandYSU.
Programming, information and applied mathematics, automated control systems and
microelectronicsarethemostpopularmajorsforapplicants.
Languageskills
are
deemed
by
students
as
very important for the successful career
and professional development. Around
64% of the students participated in our
research considered their English as
excellent or good, while around 91%
thought that their Russian is excellent or
good.ThesefiguressuggestthatArmenian
universitiesandsecondaryschoolsneedto
providebetterandmorerigorousteaching
ofEnglishasaforeignlanguage.
Overall,around30%ofthestudentsbelievethatthecoursestakenpreparethemwellforthe
IT industry, while over 40% considered courses not meeting the current demands of the
sector.Ingeneral,universitiesensuresatisfactorylevelofprofessionalskills,teachstudents
tothinkanalyticallyandworkindependently.Nevertheless,studentsacquiremajorpartof
necessary knowledge and skills during the employment. Currently, around 55% of the
students are employed; more than 70% of those work for IT companies. As a rule, top
studentsgetjobsduringtheir2ndand3rdyearsofbachelorstudies.
In general, the representatives of IT firms regard the current number of students as
adequate tomeet industrysdemand in technicalspecialists.At thesame time, theypoint
that
the
overall
quality
of
the
graduates
does
not
meet
the
needs
of
the
industry.
Many
graduatesrequireonjobtraininginordertobecomequalifiedforfulltimepositions.
COOPERATIONWITHINDUSTRY
Cooperationbetween the industry and the educational institutionswas rather weak for a
numberofyears.However,thistrendhaschangedrecently.Examplesofsuchcooperation
areLEDADesign,whichfoundedmicroelectronicsdepartmentatSEUAandtogetherwith
CadenceDesignSystemsprovided$25millionworthofsemiconductordesignsoftwareand
servicestothedepartment;LycosArmenia,whichestablishedincooperationwithEIFtwo
centers for internet technologies at SEUA and YSU. Students graduating from these
educationalfacilitiesareacceptedbythecompaniesforemployment.Atthispoint,industry
anduniversity
cooperation
does
not
go
further
than
teaching
and
training,
which
main
goal
istopreparequalityprofessionalsforseveralcompaniesandindustryingeneral.
51%
17%
7%
29%
6%
47%
40%
3%
0%
20%
40%
60%
80%
100%
Russian English
Excellent Good Average Poor
Student Language Skills
Based on a sample of 474 students representing 11 educational institutions
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TRAININGCENTERS
Approximately 18 training centers in Armenia provide IT related courses. In 2003, the
numberofindividualstrainedandtrainerswereapproximately4,500and190respectively.
The most popular courses taught at the
centersare
computer
basics,
graphics
and
design, programming languages, software
engineering,andnetworkadministration.
Mosttrainingcenterstrytokeepabreastof
IT industry trends. Some of them
cooperate with various organizations,
universities, local and foreign companies.
The majority of the training centers are
interested in increasing their capacity to
handle more trainees, which, however, is
difficult
to
implement
due
to
the
lack
of
spaceandequipment.Representativesofthetrainingcentersbelievethatloweringtuitions,
increasingmarketingtoandrecruitingfromuniversitiesshouldhaveapositive impacton
theirgrowthperspectives.
OTHERAREAS
MANAGEMENTPRACTICES
Significant difference existsbetween locally owned companies andbranches of foreign
firms on how companies management is carried out. The majority ofbranches do not
engage in common management practices such asbusiness development, marketing, and
strategic management: these activities are accomplishedby the head offices. In addition,
foreigncompanies,whencomparedtolocallyownedfirms,employmoreadvancedproject
managementpracticesandusebetterdocumentedanddesignedmethodologies.Thereason
isthat,inmostcases,processesemployedbytheparentcompaniesaresimplycopiedtothe
Armenianbranches.
After the collapse of the planned Soviet economy, commonly accepted management
practices have only recently entered Armenian business community and IT sector in
particular.Asaresult,manylocalsoftwarecompaniesdonohavesufficientexperienceand
knowledgeofthebestmanagementpracticeswidelyemployedbywesterncompanies.The
major reasons are the lack of highquality managers with appropriate education and
background,newlydevelopingmarketeconomy,insufficientexperiencewithinternational
clients.
However,ascompaniesgrowanddevelop,theirmanagementgrowstobemoreandmore
sophisticated.Westernpracticesarebecomingpartofthedaytodaymanagementof local
software firms. While several years many marketing and project management functions
were conducted by a companys director, now the majority of firms has separate
departments dedicated to marketing, HR, operations, and other areas. Companies accept
largernumberofbusinessgraduatesandpaymoreattention tomanagement trainingand
professionaldevelopment.
ComputerBasics, 44%
Graphics andDesign, 22%
ProgrammingLanguages,
17%
SoftwareEngineering,
11%
NetworkAdmin, 6%
Most Popular Courses
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RESEARCHANDDEVELOPMENT
Historicallymajorresearchhasbeencarriedoutinspeciallycreatedinstitutionsmostlyfor
defense and industrial projects financed by the Government. Departments at the
universities focusedonsmallerscaleresearchprograms.Afterdisintegrationof theSoviet
Union,governmentfundinghassharplydecreased,which inturnforcedtheseinstitutions
to look for new sources of funding to finance their research activities. Several private
companies havebeencreatedon thebasisofstateownedresearch institutions to develop
and market commercial products and to perform smallerscale research activities. Now,
aroundone fifthof theprivatecompaniesare involved insomesortofresearchactivities.
Thisresearch,however,ismostlyofappliedengineeringandcompanyspecificnatureand
isdirectedatquickcreationofintellectualproperty.Incaseofforeignbranches,theresults
oftheirresearchare transferred totheparentcompanies in theirrespectivecountriesand,
therefore,donotnormallycreatecompetitiveadvantagesforArmenia.
Public research is conducted mostlyby the major universities (SEUA and YSU) andby
instituteswithintheNationalAcademyofSciences.Researchiscarriedout inthefieldsof
computer aided design, theory of algorithms, discrete mathematics and combinatorics,
cognitive algorithms and expert systems, software engineering, networking, distributed
processing,patternrecognition,math logic,computationalmethodsandsignalprocessing
systems,andothers.Generally,inrecentyearstherewasashifttowardsappliedasopposed
tothefundamentalresearch,whichraisesconcernsoverthelongtermviabilityofresearch
byuniversitiesandresearchinstitutions.
Institutions involved inR&Dactivitiesare facedwithseveral issues.Themajorone is the
level of funding, which although has been growing in recently, nevertheless is still
consideredasinsufficient.GrossdomesticexpenditureonR&D(GERD)wasaround0.32%
of GDP17 in 2002. This negatively compares to R&D expenditures in more advanced
economies that normally have spending levels at 13% of GDP18. Other issues are weak
commercializationmechanismsandmodestcooperationbetweentheindustryandresearch
organizations.
TELECOMMUNICATIONSINFRASTRUCTURE
Theproviderof telecommunicationsservices inArmenia isArmeniaTelephoneCompany
or Armentel, www.armentel.com, which major shareholder is the Greek company OTE.
Armentel has a monopoly on all local and international telecommunications services.
Armentels channels include fixed line communications network, cellular phone network
(GSM900),internationalandsatellitechannels.Currentnetworkallowsphonecallstomorethan 200 countries. Satellite communication is providedby two earth stations via Intelsat
and Express systems. Fiber optic communication to major international networks is
provided throughTransArmeniaOpticalNetwork (TAOS)andotherchannelsviaRussia
andIran.
Internet services market hasbeen growing very rapidly in the recent years. In 2003, the
number of ISPs reached more than 20 firms. The number of internet users has alsobeen
17 We make comparison for the whole economybecause separate data on IT R&D is not available.
R&Dexpenditure
in
2002
was
$7.7
million;
source:
National
Statistical
Service,
www.armstat.am.
18GovernmentrhetoricandtheirR&Dexpenditure,FrankGannon,EMBOreports,VOL4,No2,2003.
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consistentlygrowinginthelastfewyearsreachingupto80,000usersin200319.Connection
totheInternetismadethroughvariousmeans:dialup,ISDN,satellite,DSL,orleasedlines.
Currently,thepricesforhighspeedinternetconnectionarehigherinArmeniacomparedto
thoseofotherITexportingcountriessuchasChina,India,andRussia.
POLICYDEVELOPMENTS
In 2000, The Government of Armenia declared development of information and
communication technologies as one of the priorities for the Armenian economy, which
followed by a number of specific actions to bring this decree into effect. In 2001, the
Governmentjointlywith theWorldBank,USAID, foundations,academic institutions,and
private enterprises developed the ICT Master Strategy and ICT development
implementationplan topromote ITandestablishArmeniaasaregional ICThub. InMay
2001, the Government approved the ICT Development Concept Paper and Action Plan
preparedby the Ministry of Trade and Economic Development in accordance with the
recommendationsoutlinedintheICTMasterStrategy.
InJuly2001,InformationTechnologiesDevelopmentSupportCouncilofArmenia(ITDSC),
www.itdsc.am,chairedbythePrimeMinisterwasestablishedbythedecreeofthePresident
ofArmenia.ThemissionoftheCouncil istoactasabridgebetweentheGovernmentand
theprivatesectorandtoserveasaconnectinglinkbetweentheDiasporaandArmenia.The
goalsoftheCouncilaretoassisttheGovernmentandtheprivatesectorinbuildingstrong
andviable IT industry anddevelopingArmenia intoanadvanced informationsociety. In
2002,EnterpriseIncubatorFoundation,www.eifit.com,wasestablishedbytheGovernment
of Armenia and the World Bank to support the development of information technology
industry in Armenia. EIF is the largest development initiative within the IT industry in
Armenia20.Informationtechnology isconsideredbytheGovernmentasan importantarea
forinternationalcooperation.Variousprojectsareinitiatedinthisarea,thelargestbeingthe
EuropeanRegional Instituteof InformationandCommunicationTechnologies inArmenia
(ERIICTA),www.eriicta.am, which was established with the financial assistance from the
EuropeanUnion.
While today theGovernment ismoreactive in the ITsector thanseveralyearsago,many
companies,nevertheless,expectsubstantiallyhigherinvolvementoftheGovernmentinthe
sectordevelopment.Expectationsincludesuchactivitiesasfosteringtheuseoflocallymade
softwarebyothersectorsand,bythat,increasingthedemandfordomesticITproductsand
services, improving the legislative framework including reforms in tax regulation,
providing larger support to universities, eliminating monopoly on telecommunications
services,andsupportingITfirmswithfinancingandinternationalmarketing.
19 Towards a knowledge economy, ereadiness assessment, Armenia, H. Hakobyan, L. Galstyan, S.
Vardanyan,2003,
Yerevan.
20SeeAppendix1:AboutEnterpriseIncubatorFoundationformoreinformationaboutEIF.
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COMPETITIVEADVANTAGESOFARMENIA
ThefollowingarethecompetitiveadvantagesthatArmenianITindustryhas
relieduponandshouldexploitheavilyinthefuture:
Worldclass R&D capabilities in computer science, physics, andmathematics
Welleducated and talented workforce with a high degree of technicalskills
Stronguniversityprogramswithspecializationsincomputerandrelatedsciences
Highlycompetitivecostoflabor SolidGovernmentsupportofthesector Continuedrobustgrowthoftheindustry StrongandsuccessfulDiasporainEuropeandNorthAmerica Extensiveexperiencewithlargemultinationalcompanies SoundlawsandregulationsforIPprotection
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CONCLUSION
Attheend,wepresentourviewontheITsectorsdevelopmentprospectsforthenext56
years,discussbarrierstothe industryexpansion,aswellasprovideourrecommendations
forsupportingfurthergrowthoftheindustry.
INDUSTRYDEVELOPMENTPROSPECTS
Armenian IT industry iscapableofreachingrevenues in therangeof$300400millionby
2010. Such high growth rates of 3540% per anum couldbe achieved with 2530% yearly
increase in the workforce and around 78% rise in productivity. So far, in 19982003, the
industry has witnessed around 25% increase in the workforce and around 57% rise in
productivity,whichresultedinnearly30%industrygrowth.Theseratesmaybesustained
andraised inthefutureonly ifappropriatereformsare implementedby theGovernment,
educationalandprivatesectors.Wediscussactionsrequiredforensuringthehighgrowth
ratesoftheindustryintheRecommendationssection,whileherewepresenttheoutlookfor
workforce,productivity,andindustrydevelopment.
WORKFORCE
SupplyofITprofessionalshasbeengrowingovertime,whichmaycontinueintothefuture
as the industrysdemand forspecialistsrisesover time. Higher demand forprofessionals
will createsignificant competition among companies, which, in turn, will induce firms to
providebetteremploymentconditions.Already, the ITprofession ishighlyrespectedand
popularamongyoungergeneration.Eachyeara largernumberof individualsapply toIT
relatedspecialties,and,atthesametime,theuniversitiesincreasetheadmissionquotas.In
addition, more educational establishments start offering IT specializations and new
institutionswithsuchspecializationsemerge.Thesetrendswillallowtheworkforcetogrow
somewhereintherangefrom15%to20%.Thesepercentagescorrespondtoaround400600
specialistsin2004,500700in2005,and600800in2006.Accordingtoourestimates,in2003
the educational sector supplied around 700800 graduates in IT related specializations.
Assuming thatpartof thegraduatesgoes towork forothersectorsorswitchprofessions,
educational system will be able to support 1520% workforce growth in 20042006. In
addition,asadmissionquotasare increasedandmore institutionsstartofferingITmajors,
the supply of graduates will increase as well. Therefore, we may expect that 1520%
workforcegrowthmaybesustaineduntil2010.
PRODUCTIVITY
Development of the domestic IT market is a key contributing factor towards the rise in
productivityof the local IT firmsandrapidgrowthof the industry.Sofar, themarket for
local packaged software was primarily in the field of enterprise solutions, and this trend
willcontinueinthenext45years.ThedomesticmarketforITproductsandserviceswillbe
shapedbythewayothersectorsofeconomydevelop.Theexampleofthebankingindustry
showsthatasindustriesexpandtheystartusingmoreproductsandservicesfromthelocal
ITcompanies.Thedevelopmentofthebankingsectorcanbe,tosomedegree,projectedto
that of the other sectors of the economy, which indicates a rise in the demand for local
software products from other sectors of the economy. However, domestic market is not
largeenough to support the highgrowth inproductivity,which requires largerscaleand
complex projects for the companies in the services segment and much higher number of
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customers for the firms in the packaged software segment. As a result, exportoriented
companies willbe,as it is now, the major contributors to thegrowth in productivityand
industryrevenues.
Asthe
industry
develops,
the
local
companies
will
seek
more
opportunities
in
the
foreign
markets.Ascompaniesengageinalargernumberofprojectswithforeigncustomers,they
willgainexperienceandbuildreputation.Higherqualityproductsandbetterknownbrand
nameswillallowlocalfirmstosellmoreproductsandservicestoforeignclientsandcharge
higherratesfortheirwork.Hence,theexportorientedlocalcompaniesmaybeabletogain
highproductivitygainsof710%peryear.Thistrendwillslowdown,however,asthelocal
companiesreachoptimallevelsofproductivity,whichweconsidershouldbeclosetothat
oftheforeignbranches.Atthesametime,companiesfocusedonthedomesticmarketand
newfirmsenteringtheindustrywillslowdowntheoverallindustryproductivitygrowth,
whichmaystayintherangeof37%orlower.
INDUSTRYOUTLOOKIn this section, we provide three industry expansion scenarios: slow growth, continued
growth, andbenchmark. They present different growth trendsbased on the level of the
Government, as well as donor community and Diaspora, involvement in the industry
development.
Slowgrowthscenarioassumesnoor insignificantsupportof theGovernment to thesector
development, which results in declining workforce and productivity growth rates. If no
majorreformsarecarriedoutbytheGovernment,weexpectthattheeducationalsectorwill
support on average 15% annual expansion of the IT workforce. At the same time, the
productivitygrowth rate may decline toaround 3% as newcompanies emerge andmore
inexperienced
specialistsenter
the
workforce.
The
industry
would
grow
at
18%
annually
andreach$120millioninrevenueswithtotalworkforceofaround7,900by2010.
Continued growth scenario assumes that the Government, donors and the Diaspora are
actively involved in the sector development. These efforts ensure that the current
highgrowthtrend issustained into the futureaswell.Theseassumptions:workforceand
productivitygrowat25%and5%respectivelysupportindustrygrowthof31%peranum.
For this scenario, the expected size of the industry and the workforce in 2010 are $250
millionand14,000respectively.
Underthebenchmarkscenario,weassumethattheGovernment,donorcommunity,andthe
Diaspora
will
work
in
tandem
with
the
private
and
educational
sectors
to
substantially
increase the quality and supply of the IT professionals, improve Armenias telecom
infrastructure, enhance marketing and investment opportunities, as well as provide
assistance in other important areas. Substantial and effective support to the sector may
result in the workforce and productivity growing at 2530% and 78% respectively. The
industry,inthatcase,wouldgrowataround3540%andreach$300400millioninrevenues
andupto19,000inworkforce.
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RECOMMENDATIONS
Inthissection,werecommendasetofactionsthatshouldbeundertakentoensurefurther
high growth of the Armenian IT industry. Recommendations are arranged into two
sections: workforce and productivity two factors that determine the industry growthtrends. Recommendations are intended for the Government, and representatives of the
educationalandprivatesectors.TheroleoftheGovernment isextremely importantanda
substantialinvolvementfromitspartisassumedandexpected.
WORKFORCE
Supply of qualified workforce is a substantial impediment to the industry growth. The
currentnumberofprofessionalsenteringITworkforcewillnotallowthe industrytokeep
and,moreover,reachhigherthanhistorical30%growthrates.Variousmeasures,therefore,
shouldbeimplementedinordertoincreasethesupplyofITworkforcetonotonlysustain
high rates witnessedby the industry in the recent years,but also support even larger
expansionofthesector.
IncreaseSupplyofITGraduates
Admissionofstudents to ITrelateddepartmentsofexistinguniversitiesshouldberaised.
Infrastructureofexistingeducationalestablishmentshouldbeimprovedinordertoincrease
theircapacityandoverallquality.Atthesametime,existinguniversitiesmaynotbeableto
meet the longterm demand in graduates. Therefore, new educational establishments
specialized in IT related disciplines maybe required to fulfill this demand. In addition,
universityindustryeducationalinitiativessimilartothosestartedbyLEDAandLycos/EIF
couldprovideadditionalinfluxofhighqualitysoftwaretalent.
IncreaseSupply
of
Business
Specialists
Atthesametime,specialattentionshouldbepaidtothesupplyofbusinessprofessionals.
Current educational system does not have the capacity to fulfill the industrys and the
economyslongtermneedsinhighqualitymanagersandbusinessspecialists.Universities
shouldstartofferingBachelorandMasterlevelbusinessmajorssimilartothoseprovidedat
westerneducationalinstitutions.Ideally,businessschoolsprovidingtopundergraduateand
graduateeducationshouldbeestablished.
ImproveFaculty
Highqualitysoftwareprofessionalsshouldbeattractedtoteachatleadinguniversities.This
effort requires that the current compensation level of professorsbe revised. At the same
time, software specialists willing to enter teaching positions must be trained in latestteachingmethodsandtechniques.
ProvideContinuousEducation
Opportunitiesforcontinuouseducationshouldbesignificantlyexpanded.Trainingcenters
are one of the places where IT andbusiness professionals wouldbe able to continuously
update theirknowledgeanddevelop theirskills.Universitiesshouldstartofferingclasses
notonly for fulltimestudents,butalso toall individualswhoare interested inparticular
classesormajors.
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PRODUCTIVITY
Productivity is the second factor, which has tobe improved significantly to enable the
industry development. Emergence of new companies and entrance of a larger number of
inexperienced specialists into the workforce result in declining productivitygrowthrates,
which,in
turn,
makes
itdifficult
to
sustain
historical
industry
growth
of
30%.
A
number
of
actionsfromtheGovernmentandtheprivatesectorarerequiredtoaddressvariousissues
affectingproductivitygrowth.Theseissuesaregroupedintotwomaincategories:external
andinternal.Externalaspectsaremostlyrelatedtotheindustrywideandglobalissuesand
intended primarily for the Government. Internal factors are aimed at companies internal
operationsandintendedfortheprivatesector.
ExternalIssues
ImproveBusinessEnvironmentandInfrastructure
TheGovernmentshouldintroducevariousincentivesforbothforeignandlocalinvestorsin
IT and hightech areas. Such incentives couldbe in the form of reductions in profit and
other
taxes,
tax
incentives
and
matching
grants
to
IT
companies
to
invest
in
employee
development, as well as similar incentives for companies in other sectors of economy to
invest in IT solutions. Such policies wouldbe one of the major drivers for accelerating
industry growth and demonstrate the readiness of the Government to support its
declarationofITasaprioritysectoroftheeconomy.
The Government should also support the creation of excellent highspeed internet and
telecom infrastructure with widely availablebroadband network services. This willboth
attractFDIandenableITfirmstoenterservicessegmentsrequiringhighspeedconnections.
Establishment of software hubs, technoparks, incubators, and VC firms should be
promoted.Viasphere
Technopark,
www.viasphere.com,
SolarEn,
www.solaren.com,
and
EIF
are
the first organizations in the country focused on building infrastructure and
commercializationmechanisms.ThecaseofViasphereTechnopark,thefirsttechnoparkand
hightech VC firm in Armenia, proves that this model could very successfully facilitate
creationofnewbusinesses,particularlyinhighvalueaddedareas.
ShifttoHigherValueaddedProductsandServices
Private companies should shift their focus to packaged software and larger and more
complex projects, which offer higher profit generation opportunities. More importance
shouldbeplacedontheprojectshavingsignificantdesignelementsorinvolvingsolutions
tocomplexproblems,e.g. in theareasofmathandengineering.Sincenosinglecompany
hasacritical
mass
of
programmers
and
managerial
staff
(500+
employees)
to
compete
in
the
middle or highend outsourcing markets, industrywide consolidation efforts maybe a
necessity.Partnershipsandalliancesarealsorequiredtoservetheevergrowingcomplexity
oftheprojects.
ThereisaseriousneedtoincreaseR&Dspendingtoremaincompetitiveandtocreatenew
opportunities.SignificantpartoftheindustrywasbasedontheR&Dpotentialbuiltduring
the Soviet period. Increased R&D spending should partly come from the government
budgetandpartlyfromprivatesources.Publicprivatepartnershipsaretobestrengthened
inorder tocreatemechanismsand incentives for theprivatecompanies to invest into the
R&Dconductedbyuniversitiesandresearchinstitutions.
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IncreaseDomesticMarketSize
A strong and sophisticated domestic market is important forbuilding a competitive and
growing industry and promoting exports. Limited domestic demand for software
applicationswillprevailforthenextseveralyearsifnoradicalpoliciesareimplementedby
theGovernment
to
promote
utilization
of
IT
solutions
by
all
the
sectors
of
the
economy.
The
GovernmentitselfshouldbeoneoftheprimeconsumersofsophisticatedandlargescaleIT
solutions. Local companies should be given priority over temporary project offices of
foreigncompaniesin implementationofgovernmentprojects, including thosefinancedby
USAID, WB,andother donors. The Governmentshouldalsosupport dissemination of IT
for the wider population in Yerevan and regions of Armenia, e.g. through local
egovernance projects, computerization of schools, libraries, and other public
establishments.Andfinally,theGovernmentshouldtaketheleadingroleinsponsoringthe
creationofITinfrastructureswhicharenotcommerciallyprofitableforanysinglecompany
butwhichmayhavesignificantpotentialincreatingcommercialapplications.Examplesof
suchinfrastructureswouldbeinternetpaymentsystems,opensourcemapsofYerevanand
Armenia,and
morphological
dictionary
of
Armenian
language.
ImproveAccesstoForeignMarkets
There is a need to focus on extensive and targeted marketing and country promotion.
Companiesandthepublicinstitutionsneedtoexerciseexcellentmarketingcommunication;
participate in overseas exhibitions and forums; createjoint representations abroad; and
createanArmenianbrandname.Strongcountrybrandnameshouldbecreatedbythejoint
effortsoftheGovernment,industryassociations,publicinstitutions,privatecompanies,and
theDiaspora.
Being one of the strongest competitive advantages of Armenia, the Diaspora was so far
crucialin
the
development
of
the
Armenian
IT
industry.
Diaspora,
particularly
in
Europe,
shouldbebetterutilized tocreatebothnewsales opportunitiesandattractFDI.Diaspora
representatives shouldbe involved in policy and industry development and invited to
conferencesandforumsinArmeniatocreatestronglinkageswithArmeniancompaniesand
publicinstitutions.
Industryassociations,publicorganizations,andprivatecompaniesneedtocollaboratewith
counterparts worldwide. Such collaboration will help establishing international linkages,
buildinganimageofArmeniaintheglobalmarkets,andprovidingaccesstouniqueskills
andhighvalueaddedprojects.CooperationwithotherCIScountries(Belarus,Russia,and
Ukraine)maybeoneofthestrategiestojointlybuildregionalleadership.
InternalIssues
ImproveManagementPractices
Privatefirmsshouldpayspecialattentiontothegeneralcompanymanagement,aswellas
management of the software development projects. Many firms are managedby people
with technical background who do not have sufficient managerial knowledge and
experience.Companiesshouldinvolvemorebusinessgraduatesintheirmanagement.They
should also involve experienced project managers to improve software development
processes.Reverse braindrainthroughattractingArmenianprofessionalsworkingabroad
would be another option to acquire the best world practices. High salaries may be
compensatedby the latest project management, marketing, and technology expertise that
suchprofessionals
can
bring
to
the
companies,
thus
making
them
competitive
in
the
world
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markets. Such practice was successfully usedby Ireland, which, similar to Armenia, had
largepoolofprofessionalsworkingabroad.
Companies should focus on the improvement of internal processes, introduction of
documented
practices,
procedures,
and
standards.
They
should
start
acquiring
widely
recognized software process maturity certifications, i.e. CMM/CMMI or ISO. For the
companiesoutsourcingtoforeignmarketsobtainingsuchcertificationswillbeamajorstep
towardsaccesstolargerandmorelucrativeprojects.
EnhanceEmployeeDevelopment
Local companies should concentrate on training and employee development, for which
budgetsandstrategiesshouldbeestablished.Betterutilizationofthepersonnelwillenable
companies to increase output and perform activities with a higher and more consistent
quality. Again, the Government should create tax incentives for the companies to invest
heavilyinemployeedevelopment.
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APPENDICES
APPENDIX1:ABOUTENTERPRISEINCUBATORFOUNDATION
Enterprise IncubatorFoundationorEIF isabusinessdevelopmentand incubationagency
operatinginYerevan,Armenia.EIFwasestablishedbytheGovernmentofArmeniawithin
the framework of the World Banks Enterprise Incubator project to support the
developmentof InformationTechnologysector inArmenia.Ourobjectivesare to improve
competitivenessofArmenian ITcompanies intheglobalmarketplace,build linkageswith
business communities in key technology markets, improve access of local companies to
knowledge and information onbest practices and experience, and assist Armenian firms
withattractinglocalandforeigninvestors.
EIFprovidesacomprehensivepackageofservicesviaitsthreeinterrelatedcomponents:
Business Services unit focuses on assisting local technology firms in a variety of areas
including business development, marketing and promotion, networking, management,
accounting and finance, legal, and other areas vital to the success of a firm. Business
Services unit helps existing companies in growing theirbusinesses within Armenia and
internationally,facilitatesthedevelopmentofITstartups,andassistslocalentrepreneursin
buildingtheirideasintosuccessfulbusinesses.
SkillsDevelopment component promotes the improvement of professional andbusiness
skillsofITsectortodevelopandbuildonlocaltechnicalandmanagerialcapacities.Italso
supports thecreationof learningpartnershipswithin the industryand theuniversitiesby
initiating
specific
projects
to
foster
mutuallybeneficial
relationships
among
technology
private companies and universities to reestablish linksbetween private and educational
sectors,andtomaketheeducationalprocessmoreinlinewiththeITmarketrequirements.
Facility Services component provides highend facilities to existing IT companies and
startups. Options included in thebase package are office space, shared meeting rooms,
sharedresourcecenterwithaccesstoliteratureandotherinformationresources,highspeed
Internetconnection,receptionistandsecurity,24/7accesstothebuilding.
EIFsignifiesthedevelopmentoflongtermrelationshipswithorganizationsandindividuals
worldwide interested inmutuallybeneficialbusinesscollaboration.