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Financing Technology Entrepreneurs & Smes in Developing Countries: Challenges and Opportunities

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Financing Technology Entrepreneurs & Smes in Developing Countries: Challenges and Opportunities + innovation & entrepreneurship FINANCING TECHNOLOGY ENTREPRENEURS & SMES IN DEVELOPING COUNTRIES: CHALLENGES AND OPPORTUNITIES FINANCING TECHNOLOGY ENTREPRENEURS & SMES IN DEVELOPING COUNTRIES: CHALLENGES AND UKRAINE OPPORTUNITIES Country Study AN infoDev PUBLICATION PREPARED BY Roberto Zavatta Economisti Associati SRL in collaboration with Zernike Group BV Meta Group SRL June 2008 Information for Development Program www.infoDev.org www.infoDev.org FINANCING TECHNOLOGY ENTREPRENEURS & SMES IN DEVELOPING COUNTRIES: CHALLENGES AND UKRAINE OPPORTUNITIES Country Study AN infoDev PUBLICATION PREPARED BY Roberto Zavatta Economisti Associati SRL in collaboration with Zernike Group BV Meta Group SRL June 2008 Information for Development Program www.infoDev.org ©2008 The International Bank for Reconstruction and Development/ The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved The findings, interpretations and conclusions expressed herein are entirely those of the author(s) and do not necessarily reflect the view of infoDev, the Donors of infoDev, the International Bank for Reconstruction and Development/The World Bank and its affiliated organizations, the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to infoDev Communications & Publications Department, 2121 Pennsylvania Avenue NW; Mailstop F 5P-503, Washington, D.C. 20433, USA; telephone: 202-458-4070; Internet: www.infodev.org; Email: [email protected]. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Cover design by Patricia Hord Graphic Design, Inc. Typesetting by The Word Express, Inc. TabLE of Contents Abbreviations and Acronyms v Executive Summary 1 I. Introduction 3 II. The Country Background 5 II.1 The ICT/ICTE Sector 5 II.2 Policy and Institutional Framework 7 II.3 The Financial Sector 10 Iii. Issues Related to Financing of Ict/icte SME 13 III.1 SME Financing Needs – The Demand Side 13 III.2 Issues in Accessing Financing – The Supply Side 13 III.3 The Financing Gap – Nature and Severity 15 IV. Conclusions and Recommendations 17 IV.1 Introduction 17 IV.2 Measures Aimed at Facilitating Access to Equity Financing 17 IV.3 Measures Aimed at Facilitating Access to Bank Financing 18 IV.4 Improving the Interactions between Supply and Demand 18 AnneXes Annex A – The ICT/ICTE Sector 21 Annex B – Salient Features of Financing Institutions 25 Annex C – List of Entities Interviewed 27 Annex D – Profiles of SME Financing Organizations 29 Annex E – Profiles of ICT/ICTE SME 33 iv Financing Technology Entrepreneurs & SMEs in Developing Countries: Challenges and Opportunities ABBREVIATIONS AND ACRONYMS BPO Business process outsourcing ISP Internet Service Provider CGF Credit Guarantee Fund IT Information Technology CRM Customer Relationship Management MNC Multinational Corporation EBRD European Bank for Reconstruction and NBU National Bank of Ukraine Development NCCR National Commission on EC European Commission Communication Regulation EDP Electronic Data processing SECO Swiss State Secretariat for Economic ERP Enterprise Resource Planning Affairs EU European Union SME Small and Medium Enterprise FMO The Netherlands Development Finance TOR Terms of Reference Company UMLP Ukraine Micro Lending Programme GTZ German Development Cooperation UNDP United Nations Development Program Agency USAID United States Agency for International IC Integrated Circuit Development ICT Information and Communication VAS Value-added Services Technology VC Venture Capital ICTE ICT Enabled VoIP Voice over Internet Protocol IFC International Finance Corporation WTO World Trade Organization IFI International Financial Institutions Exchange Rates US$ 1 = UAH 5.22046 (average 2006) EUR 1 = UAH 6.55945 (average 2006) Abbreviations and Acronyms v vi Financing Technology Entrepreneurs & SMEs in Developing Countries: Challenges and Opportunities of hardware equipment. About 40,000–50,000 EXecutive people are involved in the ICT/ICTE industry. Summary The banking industry dominates the Ukrainian financial system. As of today, there are 173 com- Ukraine is becoming an increasingly important mercial banks active, with total assets in excess of player in the global Information and US$70 billion. Lending activities have steadily Communication Technology/ Information and increased over the past few years, particularly long- Communication Technology Enabled (ICT/ICTE) term loans (above one year), which represent a industry. This is mainly due to: (i) the availability of considerable share of the banks’ assets (about US$37 a large pool of highly qualified human resources; billion). The banking industry is very fragmented, (ii) a fast growing outsourcing of ICT services in the and the largest institutions have recently passed past few years; and (iii) the proliferation of software under the control of foreign banks. Few banks offer houses and ICT/ICTE service providers. As of credit schemes for Small and Medium-sized 2006, more than 1,000 enterprises have been active Enterprises (SMEs). These schemes have most often in this line of business. One-third of these are been developed through the Ukraine Micro Lending primarily involved in the outsourcing segment. In Program, which is an International Financial addition, there are at least 600 dealers of hardware Institution (IFI) sponsored facility that provides and packaged software, about 50–100 manufactur- refinancing and technical assistance. Ukraine hosts a ers and assemblers, about 300 Internet service relatively developed venture capital industry, which providers, and about 3,000 cybercafés. Most has mobilized nearly US$1.0 billion. Most facilities Ukrainian ICT/ICTE firms are very small. The are development-oriented operations financed by relatively few medium and large-sized firms are IFIs (EBRD, IFC, SECO, FMO, etc.) or foreign- principally Multinational Corporation (MNC) affili- owned schemes. Ukrainian’s venture capital (VC) ates and foreign-owned firms. This is especially true firms tend to focus on well-established enterprises of hardware assemblers and dealers, and software that have reached a certain point of development: outsourcing companies. most of deals are in the range of US$3.0 to 10.0 million. Except for one small technology-oriented Ukraine can count on a solid outsourcing industry, fund, all other VC firms appear to be little interested which likely encompasses about 300 major players. in the ICT/ICTE industry. Less than ten out of 200 Ukrainian professionals are especially versed in fields transactions closed in the past decade were related to such as software engineering and automation. enterprises in this sector. Therefore, outsourcing activities tend to concentrate on the areas of R&D, software testing, application Evidence from the fieldwork suggests that Ukrainian developments, infrastructure software, etc. ICT/ICTE enterprises face severe obstacles in Traditional Business Process Outsourcing activities, accessing financing. This financing gap is evident for such as customer centers and back office services, are enterprises that are at the development or first comparatively less developed. Due to the large degree expansion stages, and for amounts ranging from of informality that prevails, precise data on the US$50,000 to above US$1.0 million. It is particu- turnover of the ICT/ICTE industry is difficult to larly severe in the US$100,000–500,000 range. The estimate. In 2006, it was estimated to be around main factors that describe this situation can be US$2.0 billion, with the bulk in hardware manufac- summarized as follows: turing and sales, and about one-third related to software development and other ICT/ICTE services. ■ Financing Policies: Banks tend to have very Software and IT services comprise most of the conservative attitudes. SME-lending schemes, exports, which in 2006 amounted to US$0.5–0.6 although expanding, still have a limited diffu- billion. Ukraine also exported US$100 million worth sion. Venture capitalists are oriented toward late- Executive Summary 1 stage deals and ‘established’ operators, and with envisaged to reduce the gap, and to facilitate access few exception are not interested in the ICT/ to financing for small hi-tech firms. ICTE industry; ■ Limited Diffusion of Alternatives: Financing First, concrete actions should be aimed at increasing instruments such as credit guarantees and leasing the amount and the accessibility of equity financing are still in their infancy. There are few business in order to reduce the dependence
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