Enterprise Incubator Foundation. Strategic Vision for year 2030 Develop an advanced information and knowledge based society in Armenia with sophisticated.

Enterprise Incubator Foundation

Strategic Vision for year 2030

Develop an advanced information and knowledge based society in Armenia with sophisticated ICT infrastructure, high computer literacy, high computerization and internet penetration rates, large domestic IT market, and widely deployed e-government and e-commerce systems.

Transform Armenian IT industry from a provider of low-end outsourcing services focused on cost advantages into an R&D powerhouse offering higher-value added research, development, and engineering services in specialized technology segments.

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Strategic Objectives: Information Society

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Strategic Area 2006 2030

Computerization: households, % of total households

5% 50-70%

Computerization: educational sector, % of employees / professors and ¼ of students

10% 70-80%

Computerization: public sector, % of all employees

10% 90-100%

Internet penetration, % of total population 5% 50-70%

Government spending on locally developed software and services, % of national budget

< 0.1% > 1%

Domestic spending on locally developed software and services, % of GDP

0.5% 2-4%

Government services online, % of all services <1% 80-90%

Strategic Objectives: IT Industry

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Strategic Area 2006 2030

Technical workforce, persons 3,500 30-40,000

Tech workforce productivity, output per employee $25,000 $200,000

Industry revenues $85 mln $6-8 bln

Exports $53 mln $4-6 bln

Large companies with employees > 2,000 0 5-10

Domestic companies engaged in high-end R&D <10 50-100

Technoparks and incubators 2-3 30-50

Large technoparks / technocities 0 3-5

Venture capital funds committed 0 >$1 bln

Public companies, domestically listed 0 >300

Public companies, internationally listed 0 >5

Latest Economic Indicators and Key Issues

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e-Government Systems in Armenia

Online information and e-gov resources: President: www.president.am Federal /regional governments / agencies: www.gov.am, www.region.am National Assembly: www.parliament.am

E-Visa and electronic paper management systems at MFA Government sessions e-system Cadastre information system Digital data resources of the Ministry of Justice Border and airport management systems at Zvartnots airport

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e-Business and other e-Society Systems

E-Dram web-based payment systems with online shopping ARCA electronic payment system CBA’s “Bank Mail” inter-bank system Several small e-commerce businesses Several healthcare / hospital management systems e-Learning initiatives at Armenian Universities (AUA, SEUA)

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IT Industry Main Indicators

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Indicator 2003 2006 CAGR

Operating companies 110 160 13%

Local firms 86 112 9%

Foreign braches 24 48 26%

Industry revenues $38 mln $85 mln 31%

Local firms $16 $37 32%

Foreign braches $22 $48 30%

Domestic market $14 $31 32%

Exports $24 mln $53 mln 30%

Productivity (output per employee) $12,000 $19,000 17%

Local firms $9,600 $16,400 20%

Foreign braches $18,300 $23,600 9%

IT Industry Main Indicators

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Indicator 2003 2006 CAGR

Workforce 3,000 4,700 16%

Local firms 1,450 2,300 17%

Foreign braches 1,550 2,400 16%

Technical specialists 2,100 3,400 17%

Management and admin 860 1,300 26%

Students in IT specialties 3,900 6,800 20%

Average gross annual salaries $3-4,000 $6-7,000 10%

Annual costs of operating a small firm in Armenia (~20 employees)

$300,000

Annual costs of operating a large firm in Armenia (~120 employees)

$1,900,000

Key Issues: Information Society

Low internet penetration and computerization rates (<5%); low population’s computer literacy rate.

Only several e-government services employed; few businesses or individuals, if any, use these services.

Few companies or individuals doing business or purchases online Use of electronic payment systems is limited to cards that are not widespread due to

infrastructure, financial, and other problems Low usage of IT products and services, especially locally developed, in various

sectors of the society; almost no Government spending on locally produced software and services.

Poor infrastructure such as ICT and adequate office space. Shortage in qualified IT specialists and university graduates leading to an increase in

salaries and overall operating expenses. Lack of venture and other financing mechanisms also focused on start-up

development. Aggressive government investment policies in neighboring nations such as

Azerbaijan, Russia, and Turkey.

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Key Issues: IT industry

Rate of growth in the number of newly formed companies dropped after 2004. In 2006, only 6-8 companies were established in Armenia; similar figures were witnesses in years 1995 through 1998.

In 2003 – 2006, depreciation of AMD was 40% and inflation was 11%. Together they increased dollar costs by 50%. This contributed to the salary increase of developers from $5K in 2003 to $7.7K in 2006, as well as to the overall rise in operating expenses.

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0

5

10

15

20

25

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<=1990 1992 1994 1996 1998 2000 2002 2004 2006

New Companies Established in Armenia from 1990 to 2006 Real gain in average dollar

productivity was only 10% (60% nominal – 50% dram appreciation / inflation) . Productivity relative to that of the US actually decreased by 10-15%.

Challenges

Legal Environment State Policy Education Business Environment and Infrastructure International Cooperation Financial and Economic Incentives

Competitive Analysis of Information Society and IT Industry in Armenia

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IT Industry Analysis

Analysis of Armenia’s competitive advantage and scope shows that before 2003 Armenian IT industry could be characterized as an industry with a cost focus: reasonable quality outsourcing at low costs.

After 2003, the costs of operating a software business in Armenia increased substantially and now reach those of Eastern European countries (for example Romania). Armenia is loosing its competitive advantage, which was based so far on low costs. On the other hand, increased costs are not offset by higher quality products or services.

Competitive analysis is based on Michael Porter’s work, “Competitive Advantage of Nations”

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Competitive advantage

Lower cost Differentiation

Competitive

scope

Broad target Cost leadership

Differentiation

Narrow target

Cost focus Focused differentiatio

n

1998

2003

2003

2006

IT Industry Analysis

Factor conditions: human resources, knowledge, capital, and infrastructure significant shortage of qualifies workforce, lack of modern knowledge and know-how no viable financing mechanisms poor ICT, transportation, and office infrastructure

Demand conditions: large domestic market for locally developed IT products and services extremely low demand for Armenian software in Armenia

Related and supporting industries: industries where use of software is considerable or software companies play role of suppliers very limited use in banking sector, that’s all

Firm strategy, structure, and rivalry: no domestic rivalry, industry is focused purely on low-end outsourcing.

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Strategic Areas and Ways to Improve Them

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Strategic Development Areas

Armenia should create conditions that would allow building and sustaining strong e-society and globally competitive IT industry through improving and expanding the below areas: Education and management practicesInfrastructure and business environmentFinancing and investment mechanismsScience and R&D Domestic market and IT usageNew business formationCountry and industry marketingIT industry differentiation

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Education and Management Practices

Revise current teaching strategies and practices at the key IT educational institutions. Increase supply of qualified technical specialists and graduates in business and engineering fields. Start pilot projects in 10 secondary schools and in IT related

departments at SEUA, YSU, AUA, Slanovic, and ERIICTA. Target increasing IT workforce at around 1,500 specialists per year (now 600).

Create viable mechanisms for ongoing training of IT workforce. Build several major training centers that should have strong ties with the

industry, universities, and R&D institutions.

Improve management and software development practices. Support the adoption of recognized process and quality improvement certifications and practices. Develop sustainable methods of continuous implementation of

recognized software practices such as ISO and CMMI. Target reaching adoption of 1-2 companies per year.

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Infrastructure and Business Environment

Expand and improve ICT infrastructure and increase internet penetration. Build a high-speed and reliable domestic network covering all regions of

Armenia and the majority of populated areas. Ensure easy and inexpensive of population’s and businesses’ access to the network. Connect the domestic network to the global Internet via several channels and providers in order to increase the reliability and decrease costs of internet access.

Build incubation and high-end office infrastructure to house existing companies and new formed businesses. Construct a number of business incubators and technoparks in Yerevan

and especially in the regions. Build several large technocities around Yerevan and in the regions (similar to Egypt’s Smart Village).

Improve business and regulatory environment. Develop and implement targeted measures to support IP protection,

newly formed businesses and SMEs.

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Financing and Investment Mechanisms

Develop venture and angel financing mechanisms. Create several venture capital funds that will invest in various sectors of

the economy. Target reaching up to $1 billion of investment money. Build working exit mechanisms for the investors including local IPOs.

Improve access of domestic firms to foreign financing, increase FDI. Build and implement a viable FDI promotion strategy, offer various

incentives and support to foreign investors, capitalize on FDI projects. Pay special attention to attracting major international technology firms such as HP, IBM, Intel, and others. Expand activities of Alcatel, Microsoft, and Sun in Armenia.

Expand government support to SMEs. Create various funding and support mechanisms such as grants or

inexpensive lending schemes specifically targeting small technology businesses and start-ups.

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Science and R&D

Increase support to public and private research institutions conducting scientific and engineering R&D. Stimulate and support R&D activities at the Armenian universities. Come up with a long-term science and R&D strategy for Armenia.

Develop and expand R&D capacity of select institutions in terms of management, infrastructure, equipment base, professionals, and others.

Build several R&D institutions with strong capabilities in the strategic areas. Support the research organizations in obtaining R&D projects from various sources including the Government, donor grants, private orders, and others.

Stimulate creation of strong competencies in several strategically vital science and engineering fields, stress know-how and IP development, patenting, and so on.

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Domestic Market and IT Usage

Increase usage of locally built IT products and services by the Government and Armenian businesses. Develop strong e-government and e-commerce systems and encourage

their use by the private sector and population. Target moving the majority of government services online.

Induce businesses to increase IT usage through passage of special regulations and incentives.

Increase population’s computerization and IT usage. Implement special programs to raise the computerization and computer

literacy rates, such as PC for ALL and others. Decrease piracy rated, encourage use of licensed software. Conduct mass computer training of Government employees.

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New Business Formation

Create sustainable and successful new business formation mechanisms. Develop supportive business environment, increase the availability of

skilled labor, create financing mechanisms targeted at start-ups, build relevant infrastructure such as incubators and technoparks, expand Government assistance.

The Government should increase its support to IT start-ups through special programs: grants, professional help, customized financing, incubation, and others.

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Country and Industry Marketing

Expand international marketing of Armenia and its IT industry, improve the quality image of the sector. Start industry and country marketing and investment promotion offices in

key foreign markets such as Europe, Russia, and United States. Participate in major and more specific international events. Develop various analytical and marketing publications.

Build an image of IT industry as a key sector of the economy within Armenia. Increase PR campaigns and informational coverage of the industry

targeted at various stakeholder groups in Armenia including the Government, public, other private sectors, and donors.

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IT Industry Global Differentiation

Focus on higher value-added products and services, concentrate on specialized fields to differentiate Armenia from other IT exporting nations. Identify key technology areas where Armenia can successfully compete

with foreign companies in R&D and engineering services areas. Form and develop clusters of companies each focusing on a priority specialization area.

Increase the number of large (500+ employees) firms in the outsourcing arena. Develop a local capacity in IT consulting: several consulting and

outsourcing businesses with 500-1,000 or more employees - to implement large domestic IT projects and be competitive in the international outsourcing arena.

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