Competitive Action Plan for the Information Technology Sector
Total Page:16
File Type:pdf, Size:1020Kb
COMPETITIVE ACTION PLAN FOR THE INFORMATION TECHNOLOGY SECTOR COMPETITIVE ECONOMY PROGRAM (CEP) January 10, 2020 Contract No: 72012118C00002 Prepared for USAID/Ukraine c/o U.S. Embassy 4 Ihor Sikorsky St., Kyiv, Ukraine 04112 Prepared by J.E. Austin Associates for Chemonics International 0 Contents Acronyms ................................................................................................................................ 2 1.0 Introduction ...................................................................................................................... 3 2.0 Findings on the IT Sector ................................................................................................... 6 2.1 Overview ....................................................................................................................... 6 2.1 Regulatory Constraints .................................................................................................. 8 2.2 Firm Level Constraints ................................................................................................. 10 2.3 IT “Ecosystem” Constraints ......................................................................................... 12 3.0 IT Sector Competitiveness Action Mapping ..................................................................... 15 3.1 Section Overview ........................................................................................................ 15 3.2 Vision for the Ukrainian IT Sector ................................................................................ 16 3.3 Constraint and Cross Donor Task Mapping ................................................................. 17 Annex 1: CEP FY20 Work Plan with FY21-FY23 Projections ................................................... 26 Annex 2: Written Sources Referenced .................................................................................. 35 Annex 3: Organizations and Firms Referenced...................................................................... 37 Annex 4: Key Anticipated Counterparts ................................................................................ 38 1 Acronyms ACC American Chamber of Commerce AI Artificial Intelligence APITU Association of Enterprises of Information Technologies B2B Business-to-Business BEE Business Enabling Environment BSO Business Support Organization CAP Competitive Action Plan CEP USAID Competitive Economy Program CRM Customer Relationship Management EBA European Business Association EBRD European Bank for Reconstruction and Development EDO Export Development Office of Ukraine EP Export Promotion EPO Export Promotion Office ERP Enterprise Resource Planning EU European Union GIZ German Society for International Development GoU Government of Ukraine IoT Internet of Things IR IT Information Technology PR Public Relations PSE Private Sector Engagement R&D Research and Development SME Small- and Medium-sized Enterprise STTA Short-Term Technical Assistance UVCA Ukrainian Venture Capital and Private Equity Association VC Venture Capital WNISEF Western NIS Enterprise Fund 2 1.0 Introduction The Information Technology (IT) sector is one of the most important in Ukraine. It is also one of the few sectors that is considered to have reached a global standard across a number of sub-sectors. Export growth has been impressive at 211 percent1 since 20152, with an estimated 180,000 people working in the Ukrainian IT industry as of the end of 2019. A number of Ukrainian firms rank in the global top 100 for outsourcing and are well known by the major global technology, financial, and service firms. In addition to outsourcing, an increasing number of Ukrainian firms have diversified into areas further up the value chain, competing globally with their internally-developed IT products and services. Success has been founded on the large number of well-trained STEM graduates from Ukrainian schools. Ukraine has had a tradition of strong STEM education going back many decades. Though many of the cutting-edge technologies are not currently taught in schools (more on that later), the basic foundations in mathematics and engineering principles provide the basis for learning a wide range of IT-related content. A flexible, motivated, freelance workforce often self-trains and moves from project to project. At the same time as these achievements can be well-documented, continued success and growth is not assured. The global IT market is extremely competitive, with IT workers from multiple countries competing heavily for the work currently going to Ukrainian firms and workers. At least as important, these competitor firms are continuously working to dominate the next generation of IT-related technologies that will add more value and employment. Many of these come from countries whose governments are also working hard to train workers and create the environment their firms need to succeed. There are significant weaknesses that could prevent the Ukrainian tech industry from continuing to grow, adapt to new market conditions, and move up the value chain. These weaknesses and the means and programs in place to mitigate them are the main subject of this Competitive Action Plan (CAP). This CAP follows a different path than the others submitted by the USAID Competitive Economy Program (CEP). In more traditional sectors where Ukrainian firms lag their competitors, it is simpler to identify concrete constraints that need to be removed to help firms become more competitive. The global IT sector, and especially given Ukrainian firms advanced place in it, is far more complex and nebulous. Rather than identifying how to catch up, this CAP is more about how to maintain share in an ever-changing market while at the same time getting more Ukrainian firms onto the verge of a cutting-edge technological frontier. That frontier is hard to even identify and it is prone to rapid and unpredictable change. Getting and staying there requires a level of flexibility, innovation, and human capital that exceeds that of many other sectors. The constraints discussed here are those that keep Ukrainian firms from being able to identify, move to, and stay at that frontier themselves. 1 http://www.ukrstat.gov.ua/express/expr2019/08/109.pdf 2 https://eba.com.ua/static/export_it_industryfinal_29092016.pdf 3 The Government of Ukraine (GoU) export strategy for the IT sector states it well: Ukraine must strive to become an innovation-driven, universally-recognized tech destination that delivers high value for the global economy and to continue further growth of revenues in IT sector3. In FY19, CEP conducted extensive data analysis and outreach activities to identify and refine the challenges and constraints facing the sector. These activities included: . Planning meetings with a wide range of associations and clusters; . Obtaining expert opinion from CEP short-term international consultants with deep experience in the development of global IT markets; . Meetings and workshops with numerous IT companies; . Observations made during trade missions to the United Kingdom (London Tech Week), Norway, and Portugal (Lisbon Web Summit); . CEP online and in-person survey of cluster managers representing around 300 companies, members of IT clusters; . Meetings with GIZ IT experts; . Extensive analysis of published reports and statistical data, including the comprehensive IT Export Development Strategy carried out by the Ministry of Economic Development and Trade, with support from GIZ. In the course of conducting this work and reviewing earlier work by others, CEP has been able to identify and categorize the main constraints to ongoing and increasing competitiveness in the IT sector. Out of the chaos of this highly complex market comes a basic understanding and consensus of the direction needed in the Ukrainian IT industry. First, the sector must grow. Despite being the largest and one of the most populous countries in Europe, Ukraine has less than one percent of the global IT markets. Second, there is a need to move up the value chain from outsourcing, where 70 percent of Ukrainian IT workers currently are, to product companies where the intellectual property is Ukrainian. Ukraine must stay in a higher value segment of the market than firms from India and East Asia, not compete for the low end of the market. This will allow local firms to attract and keep the talent they need to arrive and stay at the technological frontier. Third, Ukrainian firms must be able to identify and move into emerging technologies where demand is currently soaring. These include artificial intelligence (AI), the “internet of things” (IoT), cyber security, and other areas to be discussed in greater detail. Finally, and related to the others, Ukraine needs to continue to develop a start-up infrastructure that is conducive to company formation, private investors’ screening for winners, funding, and growth. Risks are high and each of these priorities must be sought in balance. Loss of outsourcing markets, even if not as profitable as other areas, would be devastating. Similarly, a singular emphasis on start-ups is overly risky, as some 95 percent of them fail. One of the significant challenges of a CAP for the Ukrainian IT sector is the large number of priorities that need to be balanced. 3 National Export Strategy for the IT Sector 4 The concept of “competitiveness” is defined a little differently for IT than for a more traditional sector like furniture. The basic factors are the same, namely the ability to maintain