Competitive Action Plan for the Information Technology Sector

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

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

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

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 and increase sales into high value, globally diverse markets. However, maintaining competitiveness in the Ukrainian IT industry is more a matter of staying ahead of major global competitors, rather than trying to catch them. That is how fast the IT sector moves. As a result, it is not just a matter of identifying the best technologies and markets, but anticipating them. Whereas innovation in a more traditional sector may involve an incremental improvement in production technology and productivity, in IT innovation may be identifying whole new markets, products, and ways of doing business.

This document is structured as follows:

• Section 1: Introduction • Section 2: Findings on the state of the IT sector, including constraints/gaps identified in three major categories. The analysis is based on findings from the activities undertaken and noted above. • Section 3: An overview of a five-year vision for the IT sector and a mapping of the constraints identified into CEP and other donor activities. • Annexes: Details on CEP tasks to be undertaken to support the CAP, key counterparts and markets, and resources used to create this CAP.

2.0 Findings on the IT Sector

2.1 Overview

The pages that follow outline the findings from a CEP analysis carried out leading up to the FY20 workplan. These closely reflect those from the Export Development Strategy and other publicly available documents. A consensus has emerged among the major sector participants as to what the constraints are. Similar to the Export Development Strategy, the constraints here are divided into three main subcategories.

The first are regulatory- and government-related constraints. This section includes current issues with regulations, but also weaknesses found in government-supported education. Since IT is a highly, almost exclusively one might say, human capital-intensive industry, strong education is critical to ongoing success.

The second subcategory is related to constraints and weaknesses that exist at the firm level. Though very dynamic and frequently successful, Ukrainian firms still often lack both the market and technical information and managerial capability needed for ongoing and greater levels of success. The third constraint category addresses those related to the overall environment within which the firms operate, or what is often referred to as the “IT ecosystem.”

Each finding includes a brief discussion of the constraint(s) identified. At the end of each finding are coded indicators noting: 1) the severity of the constraint as low, medium, or high; 2) the anticipated time frame to address, short, medium, or long, and; 3) and the difficulty to address, low, medium, and high. Note that these are known to be subjective. They are CEP’s best assessment based on the data collected and analysis conducted to date. The main purpose of this section is to lay out what the constraints are believed to be in the sector. Resolution of these constraints is left to other sections.

Some precautionary notes are needed here. The IT sector in Ukraine, and the world for that matter, is incredibly diverse. It is not even fair in some ways to refer to an “IT sector.” It is a loosely bound group of numerous firms and workers who all work in some way with information technology. A company making ceramic 3D printers may appear to have little in common with one developing back office software for a major international bank. The challenge then is attributing single constraints to the entire industry.

That said, there are commonalities and CEP tries to capture these in both the constraints and the action plan. Both the 3D printing and outsourcing company are similarly affected by payments and inspections regulations, the telecoms infrastructure, labor regulations, workforce preparedness and training programs, and deficits in global market knowledge. To the extent possible, the conclusions in this CAP can be thought to represent the industry on “average,” while recognizing that considerable variability exists among firms. Certain constraints and related remedial tasks may not affect certain firms, but are designed to affect the industry overall to the extent possible. As specific tasks in the action plan are designed and implemented, the target groups and their particular needs will be more clearly identified and addressed. 6

Though the CAP embraces the IT industry as a whole, the focus of CEP’s analysis and support is mainly on small- and medium-sized enterprise (SMEs). Based on the sector selection analysis previously undertaken, the belief is that potential sector growth is highest among these firms and that they can most benefit from CEP support. The largest of the IT firms are mainly engaged in outsourcing and have sophisticated market research and sales arms. This CAP does deviate from the overall CEP focus in that start-ups are also supported, as this is the best way to reach “emerging industries” in the IT sector. Start-ups can also more aggressively reach for the aforementioned technological frontier than more mature firms.

This CAP should be considered a “working document” that will be updated as progress is made and as additional information and insights are gained of the course of CEP’s work.

Sources of information are in parentheses. To avoid unnecessary redundancy, the findings are only summarized and ranked here for the purposes of this CAP. Considerable additional information on each is available from other sources, as noted. The Annex includes the sector background information which was used to inform the findings.

2.1 Regulatory Constraints

Finding Commentary and Constraints Identified 2.1.a, Poor Although Ukraine has intellectual property protection laws on the books, weak intellectual enforcement leads companies with significant IP to locate that IP abroad under property foreign registration. Lack of IP enforcement can also make foreign companies protection wary of developing significant IP with Ukrainian companies.

Much of the immediate damage in this area is likely to the reputation of Ukraine as a business destination, rather than to shorter term bottom line. While work-arounds are inconvenient and not ideal, it is not clear how much in exports or investment is actually lost at this time.

Resolution will likely take place over the longer term. Investigation and enforcement require significant training and experience that does not currently exist in the regulatory and court systems. Constraint Severity: Low-Medium Time: Medium to long Difficulty: Moderate

Finding Commentary and Constraints Identified 2.1.b, Ukrainian IT companies and associations noted a number of areas of regulatory Inadequate weakness in the range of laws that form the IT sector’s enabling environment. enabling Some of those that have been noted as inadequate are repeated here. Some regulations problems are with legislation, and some are with implementation and enforcement.

Companies commend the recent laws passed on taxes, allowing freelancers to be taxed at a rate that is clear and easy to comply with. Larger companies still find the full tax code to be difficult to follow and plan for, as it tends toward complexity and frequent changes. Unfortunately, this is a problem in many countries, not just Ukraine.

A recent law on the employment of foreign labor was also commended. However, companies find the paperwork and reporting to be burdensome and would like to see that relaxed.

A major area of complaint was about the international payments system and the related restrictions. Firms must transfer half of all foreign currency earnings into hryvnia. Depending on the type of company and the denomination of their expenses, this could be burdensome. Start-ups can be especially affected, since revenues may be low in the beginning.

Another area of concern was the inspections regime. This complaint has been reflected across all sectors with which CEP works. There is a feeling that inspections can be are arbitrary, unfair, and often for the purpose of extracting bribes from the company being inspected.

Investment protection laws were also seen as inadequate, and a primary reason that Ukrainian companies often base their corporate entities outside the country. This area is particularly critical for start-ups seeking funding, especially for foreign entities.

Each of these laws should be examined in greater detail and, if needed, proposals for change put before the government. Constraint Severity: Medium Time: Short to Medium Difficulty/Cost: Low to Med.

Finding Commentary and Constraints Identified 2.1.c, The labor law is very restrictive by international standards and does not well fit Labor law the needs of the IT industry. For example, it is very difficult to hire “gig” restrictive workers or temporary employees, although that is the norm for the IT industry.

Once workers are hired, it can be very difficult and costly to lay them off, even if the project work is completed. Work arounds exist, such as hiring subcontractors rather than employees for short term work. However, these are cumbersome and costly options that violate the spirit of the law. Constraint Severity: Low to Medium Time: Short Difficulty/Cost: Low to Med.

Finding Commentary and Constraints Identified 2.1.d, Many countries with advanced IT industries have multiple ways that academic IP sharing institutions and companies can work with each other. In Ukraine, professors between are effectively banned from having incomes outside of their teaching, and universities professionals find it difficult to impossible to teach at universities, if they want and faculty to. not in place At the same time, there is little legal framework for the commercialization of technologies, or any type of research and development conducted at universities that let universities, departments, and/or faculty share in benefits from such projects. As a result, faculty research is often divorced from commercial reality and therefore often not on the cutting edge. Those that are able to often leave to work in industry where salaries are higher. Constraint Severity: Medium Time: Medium to long Difficulty: Moderate

2.2 Firm Level Constraints

Finding Commentary and Constraints Identified 2.2.a, Despite successes, many Ukrainian firms are not well aware of or able to access Incomplete markets outside of the ones they are currently in. Outside of the workflow of knowledge major outsourcing companies, the linkages between Ukrainian and other of target markets are often limited. Firms in other countries are often not aware of markets Ukrainian capabilities and may not feel comfortable working with firms due to a lack of understanding of the market and long history in IT. Ukrainian firms often have limited opportunities to reach the market and get in front of buyers or others they might be able to collaborate with.

This is more problematic in some areas than others. As noted, many of the larger outsource companies carry a strong reputation with leading global firms. Smaller firms and those in nascent subsectors are far less connected to markets. That markets and technologies rapidly change makes the problem that much more difficult.

Limited market knowledge is not only about not getting sales. As important, good continuous contact with target markets allows firms to better understand market needs and target product and service offerings. Technical skills can be high, but without the ability to shape to markets, sales may never happen. The limited domestic market for developing new products and services makes intensive knowledge of foreign markets that much more important.

Relative isolation due to the cost of foreign travel is one part of the problem, and one that is perhaps more difficult to resolve in the shorter term. Lack of market knowledge among founders and within firms is another part of the problem and one that can be resolved more readily with training in market research and marketing. This does mean that firms rely on largely virtual rather than physical connections to target markets. Though perhaps easier in IT than other industries, this can still be a challenge. Constraint Severity: Medium to High Time: Medium to long Difficulty: Low to Med.

Finding Commentary and Constraints Identified 2.2.b, Poor This is related to market knowledge but is critical enough to warrant a separate marketing category. Ukrainian IT firms may be able to get good technical information on ability markets and understand the needs. However, as a rule, they are not, well able to present themselves on those markets.

This constraint varies depending on the subsector. For example, Ukrainian firms have a long-standing reputation for basic IT outsourcing and many global firms use these services. On the other hand, it is much more difficult when presenting R&D for investors or for product development capabilities. The environment within which developed market economy firms pitch services and investment opportunities is extremely competitive, and is also extremely particular. A firm pitching in a high value-added area must know the current

players and their capabilities, the terminology, recent market trends, and much more.

That knowledge is only a foundation, as the marketing or investment pitch is a highly refined art with constantly changing parameters. Few Ukrainian companies have the opportunity to refine such approaches. Constraint Severity: Medium Time: Medium to long Difficulty: Medium

Finding Commentary and Constraints Identified 2.2.c, Skills Skills are one of the constraints most mentioned by members of the IT of community. It is generally agreed that these are in short supply. They appear in workforce this section in two places, at the first level and at the “ecosystem” level. At the first level, the constraint appears when firms are not able to hire for the skills they need and must either accommodate that somehow or fail to succeed as they perhaps otherwise could.

As noted, the IT sector is extremely varied. As such, skills requirements range from basic programming to machine learning, the physics of robotics and controls, and materials behaviors in 3D printing machines. Many students graduate from universities with strong basic skills in mathematics and programing. There are some 150 university programs related to IT in Ukraine. Many of these universities do not provide advanced or specialized training, however. Many other skills are acquired on the job, at least at this time.

CEP found that many firms do provide on-the-job training, either on their own or with the support of technical schools. Freelancers are also required to keep their skills up, often with the help of online course sites such as Udemy, Coursera, and Lynda.com (LinkedIn). Fortunately, there are strong incentives to keep skill levels high. According to industry and official sources, compensation in the IT industry is 6-7 times the average in Ukraine. Constraint Severity: High Time: Medium to long Difficulty: Med to High

Finding Commentary and Constraints Identified 2.2.d, Firm Most IT company founders and management come from the sector. They are management particularly skilled in their technical area but usually have not had formal training in management or company administration. Business skills are learned on the fly, as companies are being built. Marketing skills were previously mentioned, but deficits extend into finance and accounting, human resources, Enterprise Resource Planning (ERP) systems, operations, and strategy.

Deficits in these areas were noted both by company management themselves, as well as sector associations. Many companies interviewed by CEP noted these “soft skills” as critical and largely missing in the sector. While entrepreneurial impetus was strong in the sector, the skills to found and build a company were less available. Constraint Severity: Medium Time: Medium Difficulty: Medium

2.3 IT “Ecosystem” Constraints

Finding Commentary and Constraints Identified 2.3.a, As noted elsewhere, the Ukrainian IT sector has a strong reputation in the area Market of outsourcing, with many leading international firms as clients. Several exposure Ukrainian firms are in the top 100 worldwide for outsourcing. However, though for some 70 percent of Ukrainian IT exports are currently in outsourcing, this is Ukrainian neither considered to be the highest value nor the highest future growth area. firms Outside of outsourcing, Ukraine lacks both a general positive image and a reputation in the specific high-growth areas that are being targeting such as AI, robotics, IoT, cybersecurity, additive manufacturing, and other areas.

Numerous respondents have noted the need for a unified and consistent branding and front for Ukrainian IT, with promotion of a Ukrainian brand that gives potential partners and clients a level of comfort. Constraint Severity: High Time: Short to Medium Difficulty: Medium

Finding Commentary and Constraints Identified 2.3.b, The skills gap at the firm level and the issues dealing with that were previously Education noted. This constraint concerns workers’ level of preparation up until they reach the firms, mainly at the university and trade school level.

The state education system has traditionally done a good job of training students in basic mathematics and engineering skills. However, training in more specific areas related to IT, especially outside of programming languages, has been much weaker. Students often need to find other sources for this training, both in country and online. Weaknesses here are noted both in the higher level and more specialized IT skills, but also in the management skills that were previously noted as lacking at the firm level.

Besides the lack of training in more specialized areas, CEP has received comments that the existing IT curriculum is not practical and does not easily lead to knowledge of good commercial value.

As noted, IT education is an area with a tremendous quantity of high-quality training materials available online. Though these can substitute to a degree for some specialized and continuing education, they are not a substitute for strong, multi-year classes and lab-based programs. Most founders of world- class product companies did not learn their skills online. Constraint Severity: High Time: Medium to Long Difficulty: High

Finding Commentary and Constraints Identified 2.3.c, IT A major constraint noted by especially young and growing companies is a lack company of financing. In particular, most smaller companies would be looking for angel funding and/or venture capital (VC) funding. It is well known that many technology (or

any) start-up companies take some time to reach profitability and so do not qualify for traditional bank financing in the early stages.

It is worth making some brief comments here. First, most start-up companies in any market do not actually get outside funding. It is common that VCs only fund at most 1-2 out of each 100 companies they look at, and that is after pre- screening and during times when funding is abundant. The rest rely on founder funding, friends, and family, or do not survive or expand. Most do not survive. It is important to keep that in mind, and that companies all over the world, including in Silicon Valley, complain about difficulty getting funding.

Second, any funding deficit in Ukraine is a complicated constraint that is driven by a number of factors. Perhaps the most important is that there are not a large number of start-ups relative to many other places in the world. This is a circular problem, not enough start-ups means not enough money, and vice versa. The smallish domestic markets, lack of an entrepreneurial culture, lack of support structures and training for company foundation, and a sometimes difficult and inconsistent business environment all contribute here. It is important to tackle these sub-constraints, as well as try to attract funding or support funding initiatives. Most of these are addressed elsewhere in this section.

There are currently 19 registered VC funds in Ukraine, plus several corporate funding initiatives and international and other sources. It is impossible to tell whether these are “sufficient” or not, though it is almost certain that these would expand if the other sub-constraints were addressed.

A different issue that affects all SMEs in Ukraine is the lack of affordable commercial bank funding for profitable companies trying to expand or fund ongoing working capital needs. This is a larger problem that is tied up in the reform and maturity of the banking sector, though since IT companies are often hard-asset (and so collateral) poor, they probably have a more difficult time than most getting working capital loans. Constraint Severity: Medium Time: Medium to Long Difficulty: Medium to High

Finding Commentary and Constraints Identified 2.3.d, There is a reason that start-ups have gone to Silicon Valley for decades despite Start-up the extreme costs of doing business there. There is an environment in the environment area that supports young companies on multiple levels: qualified engineers and other partner founders, overwhelming opportunities for networking, excellent universities and mentors, highly motivated peers, a culture of risk, and the most extensive VC funding opportunities in the world. Many locations have tried to replicate that elsewhere, with varying degrees of success.

Even if full replication is not possible or even desirable, some elements can be imported to newer IT environments to make them more supportive of the

industry. Some of those have already been noted here, such as constraints related to funding and the educational system.

An improved IT association or cluster environment was noted as needed by a number of firms. Some have looked to the very successful Lviv IT Cluster as a model and want to replicate its success. Some capacity building may help ensure that clusters provide good value to their members (like in Lviv).

Smaller start-up members and founders also noted a lack of incubator-type environments, where start-ups can get initial mentoring support, office space, and other basic infrastructure. Constraint Severity: Medium Time: Medium to Long Difficulty: High

Finding Commentary and Constraints Identified 2.3.e, While outsourcing can be relatively straightforward to execute with foreign Limited clients, product development of almost all types benefits from being able to do domestic testing, get market feedback, and reach at least some scale in a local market environment.

The lack of usage of IT solutions by most sectors in Ukraine, except perhaps finance and energy, mean IT firms with potentially good product ideas find it difficult to make initial sales. Research indicates that overall in 2018, Ukraine ranked 58th among 63 countries on the level of digitalization.

Ukraine is ripe for the use of innovative IT products and solutions, with potentially strong sectors such as machinery, aerospace, and agriculture. Programs to increase the level of digitalization can have positive impacts on both the IT sector and other sectors. Constraint Severity: High Time: Short to Long Difficulty: Medium to high

3.0 IT Sector Competitiveness Action Mapping

3.1 Section Overview

In this section, constraints are mapped directly to the tasks designed to address them. This is the heart of the “competitiveness action plan.” As noted, the sector is large and diverse and as can be seen in the mapping, donor support is limited. In fact, few companies interviewed by CEP reported donor assistance in previous years. CEP support will be critical to help close the constraints and must be used judiciously. CEP will work to leverage limited project resources to the greatest extent possible. Several overarching themes help frame the donor mapping and the related CEP support.

First, the relatively large size and sophisticated nature of the sector means there is a range of counterparts who, if well supported, can in turn impact large numbers of firms. For training and export development, support is channeled to associations and clusters in 18 different regions, as well as to the official Export Development Office of Ukraine (EDO). For these and other “ecosystem” related activities, support will go to any number of appropriate institutions, such as the IT Ukraine Association, TechUkraine, Ukrainian Internet Association, Digital Ukraine, Association of Enterprises of Information Technologies (APITU), and private service providers. Much of the sector tasks are focused on these various institutions, who in turn directly support firms.

When dealing with regulatory issues, the action plan envisions CEP working with industry associations, as well as the IT Ukraine Association, Ukrainian Venture Capital and Private Equity Association (UVCA), American Chamber of Commerce (ACC), European Business Association (EBA), and Uangel. Working in this manner in the IT sector allows CEP efforts to be multiplied.

Second, there needs to be a focus on sustainability in the CAP. Fortunately, the work with entities as described above is supportive of this goal. CEP will seek systematically to run smallish pilots of projects, assess them, revise them as needed, then roll them out to a wide range of supportive institutions that can then deliver them with broader impact. The goal is for all assisted projects to be self-sustainable after year 3 of the project, with CEP then providing support for fine-tuning and institution-building. GoU support will be critical for the education efforts. Fortunately, it is on the GoU’s radar and the IT sector is one of the key priorities of the National Export Strategy adopted by the GoU in 2017.

Third, the main focus of the CAP and CEP work is on SMEs. It is believed both that these firms have the main potential to drive growth in the sector, and this is where efforts can have the most results. At the same time, both larger companies and micro-firms will benefit from executing the CAP. All firms can gain from an improved regulatory environment, databases of market contacts, more effective business support organizations (BSOs), a better prepared workforce, and other improvements that are part of this CAP.

The mapping that follows is based on the consensus that CEP believes has evolved among sector participants regarding constraints and directions. As noted, it is a working document and should be updated as needed, with tasks adjusted. Note that the tasks set forth here 15

are from a work plan that is yet to be approved. It is possible that there will be some changes in tasks and/or orientation.

3.2 Vision for the Ukrainian IT Sector

The sector is large, diverse, and growing, which makes characterization difficult now or in the future. However, the below summarizes the consensus vision that emerged from research by CEP and others. Rising above the specific vision for the constraint areas below is a Ukrainian IT sector that is increasingly able to expand into additional foreign and domestic markets and continue to move up the value chain into high profit, intellectual property- intensive areas like IoT, robotics, AI, and 3D printing.

It should be noted that if this vision is secured, it will also help other sectors across the Ukrainian economy including but not limited to financial services, energy, provision of public services, manufacturing, health, logistics, and agriculture.

2.1 Regulatory and Government

Ukrainian IT firms find the regulatory environment stable, easy to understand, and low cost to comply with. Inspections are predictable and against predictable criteria; taxes are low, consistent, and easy to pay; and intellectual property is secure. Qualified employees move freely to make the most use of their talents and firms can take risks in new areas knowing that if they fail, layoffs can happen quickly and at a low cost. The telecoms industry is regulated in a way that incentivizes ongoing investment and cost control in a world class system. International and domestic payments happen freely and at low cost. Legislation is passed that allows for fair, efficient, and deep collaboration between the public and private education systems and the IT industry. Industry leaders teach the next generation of students and cutting-edge work by university faculty is commercialized under partnership with the private sector. This arrangement allows both companies and educational facilities to symbiotically support each other to move into the next generation of cutting-edge technologies like artificial intelligence, cybersecurity, internet of things, and other areas yet to be conceived of. The Government of Ukraine, per its IT Export Development Strategy, will be fully engaged in the sector, providing support especially in export development, regulatory reform, and education.

2.2 Firm Level Conditions

Domestic and foreign markets become equally familiar to the next generation of Ukrainian IT firms. Marketing and sales managers seamlessly learn about, access, and successfully make sales to firms around the world. They establish and effectively utilize state of the art Customer Relationship Management (CRM) systems and processes to keep in constant contact with their target markets, passing information on product successes and failures to project management teams. Firms effectively use market knowledge to both perfect existing products according to customer needs and develop new ones. Managers across teams effectively convey knowledge from the market, and employees are able to effectively and rapidly modify, innovate, and bring to completion whatever projects that the market requires. The high pay, motivation, and prestige of working in the Ukrainian IT sector drives

workers to continually upgrade their skills, while firms provide them the opportunities to do so. Numerous SMEs grow and achieve leadership positions in global markets, and numerous start-ups survive, thrive, and increase profits and employment.

2.3 IT Sector “Ecosystem”

The overall conditions for starting, growing, maturing, and improving the profitability of IT companies exist and continually improve, largely due to the dynamic interaction between IT companies, start-ups, policy makers, venture capitalists, and educational institutions. Firms both compete vigorously for domestic and international markets, and cooperate to share ideas, lessons learned, management insights, and costs of new ventures. The Ukrainian IT industry is seamlessly integrated into target markets with firms knowing as much about machine learning advances and opportunities in Austin, Texas, as in Odesa (and they will be significant in both). Companies with promise will have access to mentors, other founders, and capital to grow. IT company associations and clusters will provide their members with significant value-added services, including market access, improved international reputation and branding, networking events, educational opportunities, and more.

3.3 Constraint and Cross Donor Task Mapping

In this section, constraints are mapped directly to the tasks designed to address them. At this time, other than planned CEP tasks and some association-building activities by other donors, there is little outside support planned. In this case, and especially given the importance of the sector, it is critical that private associations and the GoU be prepared to carry programs out to a broad range of firms and to continue work after CEP activities end.

Constraint Task and Coverage Comments  CEP/USAID tasks, CC Task A2.4 Strengthen BSO Partnership Network Intellectual property protection can 2.1.a, Intellectual Property to support joint actions of SMEs (started in Y1) be a difficult area in which to achieve Protection high levels of confidence, as this

This task is not currently explicitly in the Business Enabling Environment requires longer term, credible (BEE) workplan, but will become part of the set of regulations to be enforcement by an experienced analyzed and revised as needed. Support for implementation and judicial court system. training will need to be found. Recommend contacting EU sources.

 2.1.b, Business Enabling CEP/USAID, CC Task A1.4. Develop informational and consulting tools There is a wide variety of laws here Environment on business inspections, CC Task A1.1. Facilitate GoU policy and legal and priorities change. CEP will re- initiatives, CC Task A1.2. Support improvements to Ukraine’s position survey sector firms on an annual in the World Bank’s “Doing Business” ranking basis to update the workplan.  World Bank. The Bank maintains the “Doing Business” indicators, some of which are directly related to the issues flagged by IT companies

See above. Though not explicitly in the work plan, the CEP BEE unit will have a task to survey CEP sectors to determine priority laws.

 2.1.c, Restrictive Labor Law CEP/USAID, CC Task A1.2. Support improvements to Ukraine’s position in the World Bank’s “Doing Business” ranking  World Bank. The Bank maintains the “Doing Business” indicators, of which labor law is one of the main components.

See above. Though not explicitly in the work plan, the CEP BEE unit will have a task to survey CEP sectors to determine priority laws.

Constraint Task and Coverage Comments  CEP/USAID tasks, PS Task A3.1, Assess successful academia-IT industry This is a complex political and 2.1.d, Legal Basis for University collaboration and design new collaboration model regulatory issue, but also a major and Industry Cooperation  CEP/USAID tasks, CC Task A1.1. Facilitate GoU policy and legal roadblock in aligning interests of

initiatives (started in Y1) universities and the private sector.  CEP/USAID, SI Task A.3. Support transformational initiatives focused on innovations and education

This task is in the workplan and will be a joint private sector and BEE undertaking. CEP may elect to undertake an analysis of the current environment and best practices from the region and globally. Many countries have struggled with these issues and resolved them in a generally satisfactory way that maintains the integrity of the public education system.

Constraint Task and Coverage Comments  CEP/USAID PS Task A1.1, Create knowledge base on target markets for The knowledge base will be 2.2.a, Poor Knowledge of IT industry, PS Task A1.5, Support Industry’s access to important trade important for ensuring market Target Markets events and facilitate international events in Ukraine contacts and information are shared  CEP/USAID CC Task B1.1. Deliver Export Evolution training program across the sector. with special grants program, CC Task B1.9. Support trade missions, trade shows, incoming buyer missions  Ukrainian Export Promotion Office (EPO), listed as priority sector for support  UkraineInvest  EBRD, note

This area is covered as much as any other, though the need here is also likely the largest. As noted, knowledge of markets is not only about sales, but about product and service development and the entire strategy of the firm.

 CEP/USAID PS Task A1.5. Training will be provided as part of the 2.2.b, Marketing Skills Lacking market access program. PS Task A3.1. Assess successful academia-IT industry collaboration and design new collaboration model  CEP/USAID CC Task B1.2. Deliver a set of trainings for export consultants, CC Task B1.4. Deliver a set of specialized trainings on territorial and sectoral market and business opportunity assessments

Directly improving marketing skills over the longer term will mainly rely on the second PS task noted. To address this problem at scale, better university and continuing education training is needed.

Constraint Task and Coverage Comments  2.2.c, Workforce Skills in Need CEP/USAID, PS Task A3.1. Assess successful academia-IT industry This constraint is extremely varied of Updating collaboration and design new collaboration model and will continue to be addressed  EU, EU4Business, for all SMEs (peripheral to IT sector) both through IT-specific and general  Private firms, i.e. collaborative programs implemented in data business skills and management science, machine learning, AI, IoT in Lviv Catholic University and trainings. Polytechnic, internal Data Science corporate program at Vodafone  Open enrollment courses by top IT outsourcing companies. With Ministry of Education plans to abolish licensing requirements (announced by Deputy Minister in Kharkiv), IT outsourcers might compete for students (pretty successfully) for their training and employment, with conventional universities and IT training courses.

The main level at which these will be addressed is in improving academic/industry collaboration to ensure the correct and most updated skills are taught. Much current updating will continue to be done by individuals through online and continuing education programs. In all reality, the rapidly changing nature of the IT sector and the skill requirements mean that workers will always be updating their skills. The scale of online courses may mean that will be the most optimal way to keep up-to-date.

 CEP/USAID, PS Task A3.1. Assess successful academia-IT industry Many of these skills are universal 2.2.d, Firm Level Management collaboration and design new collaboration model. PS Task A1.5. across different industries. They can Skills seen as Lacking Training will be provided as part of the market access program be learned in non-IT-specific training  EU, EU4Business, for all SMEs (peripheral to IT sector) courses.  Online training. Managers can be exposed to most business skills and practices by taking online courses that are available for nominal fees in many cases

See above three components. As with workforce development, much of the solution here will be in some combination of targeted activities (i.e. in marketing) and ongoing improvements in formal and continuing education programs.

Constraint Task and Coverage Comments  CEP/USAID, PS Task PS Task A1.3. Support IT industry’s development These projects can be more difficult 2.3.a, Market Exposure for of the National IT Sector Portal. PS Task A1.5. Support industry’s to justify since results are generally Ukrainian Firms access to important trade events and facilitate international events in longer term and difficult to directly Ukraine attribute. It is widely understood  GiZ, previous support for TechUkraine has been for a limited pan-IT that exposure to foreign markets is sector informational website. CEP will pick up this support in Y2 good (for qualified firms), but it is  GoU EDO has prioritized IT exports and will represent abroad. hard to know which results were CEP/USAID support, CC Task B1.7. Reinforce EPO’s strategic focus driven by that exposure. through quarterly strategic sessions, CC Task B1.8. Support professional development of EPO staff

This differs from the market access and knowledge tasks in that the focus is on joint marketing and branding of the Ukrainian IT market. In other countries, foreign service officers have been enlisted and trained to represent their firms in leading industries.

 2.3.b, Educational CEP/USAID, PS Task A3.1. Assess successful academia-IT industry The educational issue is longer term Environment collaboration and design new collaboration model in that it will require continual  CEP/USAID, SI Task A.3. Support transformational initiatives focused assessment and updating, and IT on innovations and education sector requirements change.  Multiple Ukrainian educational institutions Coordination with and cooperation of various GoU entities is critical for As noted, education is a multi-faceted issue. In this set of tasks, the success. problem of inadequate preparatory education is addressed. Private and public educational institutions are involved in the solution.

Constraint Task and Coverage Comments 23

 CEP/USAID, PS Task B1, xxx Overall perceptions of stability are 2.3.c, IT Company Funding  CEP/USAID, CC Task XX, Start-up grind activity critical for both start-up funding and  CEP/USAID, EO SI Task A2. Provide transactional support for promising low-cost working capital. Current early-stage innovative and tech enterprise funding positive political trends can do much  Task for improving the angel and venture environment to help reduce the effects of this  DAI/USAID project constraint.

As noted in the constraint discussion, there are many facets to this constraint. Resolution is not a matter of just trying to get more funding mechanisms established. It is critical for Ukrainian companies to continue to distinguish themselves and to have a local market to expand into. CEP is planning activities to improve the investability of firms by helping them refine their business models and pitches.

 CEP/USAID, PS Task A3.1. Assess successful academia-IT industry Unlike many other constraints, it is 2.3.d, Start-up Environment collaboration and design new collaboration model. PS Task A1.4. not always clear what a good start- has Limited Support development of a Lviv Oblast IT cluster B2B marketplace up environment looks like. There is Resources/Support  CEP/USAID, SI Task A.1. Support continuous incubation and strategic considerable variation in different development of eō Business Incubators successful IT regions globally.  GoU, educational institutions become more engaged in Ukrainian Similarly, even companies that grew start-up scene up in Silicon Valley can struggle identifying exactly what about the Building a supportive “ecosystem” is a multi-faceted task involving many location “works.” players. The line is often blurred between which tasks build the “ecosystem” and which assist in funding, intercompany coordination, market research, and education and training.

Constraint Task and Coverage Comments

 CEP/USAID, PS Task A2.1. Promote Ukrainian IT products to non-IT The lack of a strong and competitive 2.3.e, Domestic Market for IT SMEs (Digital “Demo-Days” project) domestic market is perhaps one of Products and Services Limited  All other donor SME support activities the larger hinderances to high-value  GoU, digitalization project start-ups. It is simply more difficult  CEP/USAID, possible BEE unit support to encourage legal action to to start AND scale outside your motivate GoU spending in IT and incentivization of private spending home market.

Success in this area will require a combination of education, investment capital in local firms, government support, and time. The latter is unavoidable no matter how sound the programs that are put in place. Good government support and spending on innovative IT projects will help alleviate this constraint.

Annex 1: CEP FY20 Work Plan with FY21-FY23 Projections

The tasks from the CEP FY20 work plan are given below, with some modifications. Some internal CEP elements are removed, such as the IR results and CEP team designations. The main modification is the addition of FY21-FY23 projections for CEP activities. These are not part of any approved work plan. They are given to indicate the extent of CEP support over the majority of the timeframe of this CAP.

PS Task A1.1. Create a knowledge base on target markets for IT industry

Task Description 1. Support market research into target export markets (IT markets, buyers, major trade events, competitors, regulations, etc.). 2. Create database structure, process for data collection, storage, and updating market information. 3. Inventory products and services offered by the IT market by collecting data from multiple sources. 4. Select target export markets based on IT sector capabilities and preferences with special attention to assist SMEs. 5. Organize and store data and make available to the broader IT sector. Notes This activity is a prerequisite to developing marketing and communications plans, and it will contribute to the results achieved through a wide range of company activities in target markets, which may be reflected in the results connected with other tasks described in the CEP IT implementation plan. Responsible IT lead, Export Promotion (EP) Team, STTA: Market Research Expert, Teams Grants, Communications Counterparts TechUkraine, EPO, IT Ukraine Association, and regional IT clusters Resource Budget Internal resources and grants – $34,063 (including STTA) Expected January 2020 – February 2020 Timeline Expanded • Institutionalize the collection, storage, and dissemination of market Timeline Years knowledge and contacts. 3-5 • Train firms on use of the markets database and on gathering of market information. • Continue to add to the stock of knowledge.

PS Task A1.2. Support development of the Digital Promotion and Communication plan for international and domestic markets

Task Description Contribute to the development of the Digital Promotion and Communication plan for select IT industry segments and select markets (industry/region) (based on outputs from task A1.1.), to be executed by Lead Partner via digital and traditional marketing means and channels. Notes Prerequisite: completed task A1.1. This activity is essential for all of the IT sector’s digital marketing and public relations (PR) initiatives. Developed and pursued in partnership with TechUkraine, EPO, IT Ukraine Association,

and the IT community, it will involve developing and testing strategies for promoting IT sector capabilities and communicating key messages to targeted markets and stakeholders in international and domestic markets. CEP will agree with stakeholders on a Lead Partner. The plan will be developed by Communication/(Digital) Marketing expert in collaboration with the Lead Partner and the other stakeholders (IT clusters, export and investment promotion, and other state agencies). Implementation will be coordinated by the Lead Partner and supported by all regional clusters. Responsible IT lead, STTA: Communication/Digital Marketing Expert, Grants, Teams Communications Counterparts TechUkraine, EPO, IT Ukraine Association, IT clusters Resource Budget Internal Resources and grants – $13,496 (including STTA) Expected February 2020 – May 2020 Timeline Expanded • Develop the plan and document the process. Timeline Years • Embed the capabilities into an appropriate institution or set of 3-5 institutions.

PS Task A1.3. Support IT industry’s development of the National IT Sector Promotional Website

Task Description As requested by industry partners, the IT sector should be branded, promoted, and marketed through relevant digital and traditional means and channels. The National IT Sector Portal should become the key, most reliable resource and gateway to Ukrainian IT/Tech sector for potential clients and investors. Since the TechUkraine initiative launched a portal (based on a Dutch template) with similar concept and ambitions, it should be considered as a partner in order to shorten time-to-market and optimize resources and budget on portal development, initial and regular content management, and maintenance. Tasks include: 1. Review of the portal structure, content, and services; suggest improvements. 2. Data maintenance plan development (data sources and procedures; required effort and budget). 3. Development of a sustainability model for portal operations with support from the IT industry. 4. Deployment of digital marketing tools and techniques in order to position and promote the portal on the target markets as well as to build potential customer base and track their activities when visiting portal; structure/content adjustments based on statistics and feedback. 5. Selecting the editorial team: editors, copywriters, journalists, audio/video editors, and contracting contributors from IT clusters and other IT ecosystem stakeholders, including public institutions and agencies.

6. (Re)Branding the portal (if needed) in accordance with selected Ukrainian IT sector design standard. 7. Generate and execute a marketing plan around the website. This is the majority of the effort, not site development.

The Ukrainian IT sector portal should be designed and developed with financial and technical support from the Ukrainian IT sector and ecosystem, and export-, trade-, and investment-promotion government agencies. Notes Prerequisite: completed tasks A1.1. and A1.2. Through acting as a unique national entry point to the Ukrainian IT and high-tech market, this portal will play a key role in directing potential business partners, clients, and investors to the Ukraine market and will play a role in enabling sales and investment, as well as contributing to a growing demand for IT specialists.

It is anticipated that it will take some time to complete the design and development of the portal, to deploy digital marketing tools and practices, and to achieve self-sustainability.

In case of partnership with potential grantee TechUkraine, the CEP grant would be used to cover the costs of further improvements (of content and services), data and software maintenance, hosting, and portal editorial costs. Responsible IT lead, STTA: Digital Marketing and IT Industry Experts, Grants, Teams Communications Counterparts TechUkraine, EPO, IT Ukraine Association, IT clusters Resource Budget Grant – $49,947 (including STTA) Expected April 2020 – September 2020 (6 months) Timeline Expanded • Work with the supporting institution(s) to ensure sustainability of the Timeline Years site, maintenance, and updating. 3-5 • Conduct an opt-in survey of site visitors in year 3 to determine quality and effectiveness.

PS Task A1.4. Support development of a Lviv Oblast IT cluster B2B marketplace

Task Description 1. Review of B2B digital marketplace concept and design proposed by Lviv IT cluster: structure, functionality, and horizontal (with other regions) and vertical (with national portal) interoperability; evaluate feasibility and requested budgets, procedures for B2B marketplace governance and management. 2. Support development of the B2B marketplace solution as a cloud service for IT clusters/association in other Ukrainian regions. 3. Advise and support IT clusters in B2B marketplace cloud service implementation, management, and cluster member data maintenance.

4. Monitor outputs and outcomes of the B2B marketplace cloud services on regional and national levels. Notes The Lviv IT cluster B2B marketplace platform provides SMEs with capabilities for digital marketing via the cluster platform instead of investing in their own technology. Furthermore, the B2B marketplace will be an important tool for promoting the cluster and region to international markets as a location concentrating many businesses with IT expertise and capacity.

The Lviv IT cluster is projecting annual sales of around $35 million generated through the portal once it is fully operational (Fall 2020). It is expected that as many as 1,000 IT SMEs (members and non-members) will participate on the B2B platform, including SMEs from other regions. Responsible IT Lead, Grants, Communications Teams Counterparts Lviv IT Cluster, SMEs Resource Budget $100,000 – grant (includes STTA) Expected October 2019 – September 2020 Timeline Expanded • TBD Timeline Years 3-5

PS Task A1.5. Support Industry’s access to important trade events and facilitate international events in Ukraine

Task Description 1. Review the list of international events proposed by the EPO, IT Ukraine Association, and IT clusters to agree on best match between IT sector capabilities and the needs of target markets (determined from the market research A.1.1). 2. Support participant selection and preparation of participants for participation.

Notes Prerequisite: completed tasks A1.1. and A1.2. Attendance at up to six events is for connecting with potential partners; resulting sales and investments may occur in Years 3-5. Responsible IT lead, STTA: Sales and Marketing Trainer, EP team, Communications Teams Counterparts TechUkraine, EPO, IT Ukraine Association, and regional IT clusters Resource Budget Internal resources Expected March 2020 – September 2020 (in accordance with Communication plan Timeline and calendar of international trade shows/exhibitions) Expanded • Continue to support trade events until the end of CEP. Timeline Years

3-5 • Ensure that the full range of capabilities for executing and getting the most from trade shows is fully embedded in the appropriate firms and institutions, including EPO and the clusters.

PS Task A2.1. Promote Ukrainian IT products to non-IT SMEs (Digital “Demo-Days” project)

Task Description 1. Select implementer of the Digital “Demo Days” and finalize criteria for selection of industries for inclusion in the project and for award of micro-grants in collaboration with the selected Digital “Demo-Days” implementer. 2. Support promotion of the Digital “Demo Days” project in six regions, including training to SMEs on assessing needs and IT products. 3. Monitor linkages established between IT service providers and buyers, and process of matching IT services to SME buyer needs. 4. Supervise the call for micro-grants for IT services and product implementation and selection of non-IT SME beneficiaries of grant support. 5. Review the Terms of Reference/Specifications developed for the non- IT SMEs for product implementation by the IT providers selected by them. 6. Monitor implementation of IT product implementation and impact on buyer operations. 7. Disseminate project results to industries to stimulate take-up of IT services. Notes The project will involve IT companies in all six targeted regions (Kharkiv, Lviv, Kyiv, Odesa, Dnipro, Rivne) and will collaborate with local Chambers of Commerce and partner IT clusters to ensure inclusion of all IT companies that have products and services to offer to potential domestic buyers. CEP will aim to include focal sectors amongst SMEs participating in Digital “Demo-Days.” Note: there will be a time lag between project implementation and impact on beneficiaries’ sales. Larger sales are expected in the following year. Responsible IT Lead, STTA, Grants, Communications Teams Counterparts SMEs/companies, IT clusters, Implementer of Digital “Demo Days” project Resource Budget $150,596 of grants (including STTA) Expected Oct 2019 – September 2020 Timeline Expanded • Conduct assessment at completion of pilot and design a larger Timeline Years program for stage 2. 3-5 • Execute a full-scale project for the adoption of IT solutions by Ukrainian companies. • Repeat task 3 as possible. • Continually assess the effectiveness of the program both in terms of IT investments and the effectiveness of those investments.

• Ensure program design has sustainability built in, that those who are benefiting do so sufficiently to continue with these and similar programs.

PS Task A3.1. Assess successful academia-IT industry collaboration and design new collaboration model

Task Description 1. Conduct a detailed analysis of Lviv IT cluster and Lviv public and private universities collaboration practices and document it. 2. Assess and document international and especially regional experience on collaboration practices. 3. Analyze Ukrainian legislation on higher education and check compliance of the Lviv IT cluster’s approach to collaboration with universities with respect to the law. 4. Develop framework and guidance for academia-IT industry collaboration (based on Lviv IT cluster best practices) for adapting and extending university curricula and engaging IT professionals in teaching at IT universities. 5. Support IT clusters in other regions of Ukraine in initiating and fostering collaboration with regional IT universities. 6. Best practice sharing between regional IT clusters/IT universities. Notes This sub-task will build upon the experience gained by the clusters that have successfully engaged with academia to adapt or update curricula despite regulatory obstacles, in particular the Lviv IT cluster. Focus areas include faster introduction of new curricula, regular updates of IT programs, engagement of teachers/speakers from industry, and availability of more real-life internships. This will impact workforce availability, likely in subsequent years. It is expected that in the first year, some students will be employed in companies whilst studying, which is why an increase in jobs is projected. Responsible IT lead, Legal and IT Education STTA, Grants, Communications Teams Counterparts Lviv IT cluster, Regional IT clusters Resource Budget Internal resources plus grants worth $35,200 (including STTA) Expected January 2020 – March 2020 Timeline Expanded • Following the analysis, work with the GoU to make needed legislative Timeline Years changes, if any. 3-5 • Design a pilot program around the analysis recommendations and execute and assess for a period of not more than one year. Though this is not enough time for the program to be fully implemented, enough should be learned to proceed. • Roll out additional university-industry collaboration initiatives in additional educational institutions. • Assess all initiatives and develop a short “best practices” manual at the end of CEP’s performance period.

SI Task A1. Support continuous incubation and strategic development of eō Business Incubators

Task Description 1. Conduct incubation of three more start-up cohorts at eō Business Incubators, including: • Hold demo day for cohort 1 (Oct 2019); • Recruit start-ups for cohort 2 (Oct 2019), 3 (spring 2020), and 4 (summer 2020); • Manage incubation of cohorts 2-4, i.e. workshops, public lectures, sprints; • Organize demo days for cohorts 2 and 3. 2. Identify legal architecture for Incubators and conduct explicit activities to ensure finalizing long-term contract arrangements for incubation (training, mentoring) and operating Incubators. 3. Conduct preparations and finalize due diligence to relocate Incubators to permanent facilities in Kyiv and in Kharkiv (preliminarily at university dedicated spaces). Implementation CEP will conduct several rounds of start-up recruitment, resulting in Notes about 35 promising start-ups being incubated during Year 2 via three 4- month training cycles (cohorts), ending with investor demo-days (to enable funding of strongest teams by investors). Within Year 2, CEP will conduct due diligence to finalize long-term contractual arrangements with the local counterparty that will manage incubation and with the counterparty related to operating Incubator spaces. Upon completion, Incubators will be relocated to permanent facilities, preliminarily identified at universities in Kyiv and in Kharkiv. Responsible Private Sector Engagement (PSE) team, EP team, Communications Teams Counterparts America House, universities, lecturers, mentors, startups, VCs Resource Budget Internal resources, due diligence on identifying a local operator. 35 start- ups incubated, 2 permanent incubator facilities launched, Incubator lecture and operations teams, etc. (Total est. $668,000) Expected April 2019 and ongoing Timeline Expanded • Develop and execute a sustainability model for the Incubator. Timeline Years • Work with other incubators to share lessons learned at eō. 3-5 • Continue the initiative and replicate as possible given sustainability considerations.

SI Task A2. Provide transactional support for promising early-stage innovative and tech enterprises

Task Description In addition to eō Business Incubators, CEP will focus on other activities which will support early-stage innovative tech enterprises. These activities are aimed to help firms complete product development, attend events to raise funding and find customers, etc. Specifically:

1. Conduct short-term traction camps in key tech cities (e.g. Odesa, Dnipro/Zaporizhya/Mariupol, Kyiv or Western Ukraine), targeting business matchmaking, mentoring, and networking. 2. Identify relevant foreign tech exhibitions for promising early-stage innovative and tech enterprises to support participation of Ukrainian business delegations via dedicated booth and thematic events (primarily in the EU and USA). 3. Assess feasibility to launch a special grant program for post-R&D promising early-stage innovation and tech enterprises to verify product market-fit. Implementation CEP will partner with capable implementing organizations that are a part Notes of the tech commercialization ecosystem and have a good reputation in the tech community and access to tech entrepreneurs in Kyiv, Kharkiv, and Lviv. This will be done via grants or directly by CEP with support of such organizations. Responsible PSE team, EP team, Communications Teams Counterparts Business schools (e.g. Lviv Business School), Incubators/accelerators (e.g. IoT Hub), tech ecosystem NGOs (clusters, TechUkraine), WNISEF, EPO Resource Budget The following outputs could be expected: 1. 70 visitors during traction camps, 40 early-stage tech and innovation enterprises participate in traction camps: $60,000. 2. Support for participation in 1 tech exhibition: $50,000. 3. Development of a special grants program for early-stage innovation and tech enterprises: $100,000. Expected Starting from October 2019, ongoing Timeline Expanded • Assess all initiatives on an ongoing basis to determine which are Timeline Years suitable for replication, both based on effectiveness and real 3-5 potential for sustainability. • Embed successful initiatives into other institutions.

SI Task A3. Support transformational initiatives focused on innovations and education

Task Description To develop the tech commercialization ecosystem, CEP will assess and support selected transformational initiatives, laying the foundation for an entrepreneurship culture, early-stage innovative enterprises’ investment mechanisms, and bridges for Ukrainian tech with international business and investment circles. 1. Support entrepreneurship education for students and early-stage entrepreneurs via university clubs, labs, and accelerators. 2. Conduct training for potential angel investors and matchmake them to early-stage innovative tech enterprises to unlock early-stage investments. Implementation CEP will partner with capable implementing organizations that are part Notes of the tech commercialization ecosystem, have a strong reputation in the tech community, and have access to promising early-stage innovative

tech enterprises. This will be done via grants or direct CEP activities, partnering with such organizations. Responsible PSE team, EP team, Communications Teams Counterparts Start-up consulting organizations (e.g. Civitta), tech ecosystem NGOs (e.g. YEP), WNISEF Resource Budget Entrepreneurship education, grants: $50,000 New potential angel investors trained to unlock new angel investments during next 3-5 years, grants: $60,000 Expected October 2019 — October 2021 Timeline Expanded • Assess all initiatives on an ongoing basis to determine which are Timeline Years suitable for replication, both based on effectiveness and real 3-5 potential for sustainability. • Embed successful initiatives into other institutions.

Annex 2: Written Sources Referenced

A.T. Kearney https://www.atkearney.com/digital-transformation/gsli/2019-full-report THE COUNTRY THAT CODES. IT Sector in Ukraine. 2019 Market Report

State Statistics Service of Ukraine http://www.ukrstat.gov.ua/express/expr2019/08/109.pdf “Tech Ecosystem Guide to Ukraine” UNIT.City, WNISEFF, 2019

Peter Weill, Stephanie Woerner; “What's Your Digital Business Model?: Six Questions to Help You Build the Next-Generation Enterprise”, Harvard Business Review Press, 2018 https://i8.ventures/six-questions-your-organization-needs-to-address-to-thrive-in-the- digital-era/

EBA and PwC report. https://eba.com.ua/static/export_it_sectorfinal_29092016.pdf Unit.city.Tech Ecosystem Guide to Ukraine

Ukraine Digital News. IT Ukraine 2016. http://www.uadn.net/files/ua_hightech.pdf

Infoshare CEE Developer Landscape 2017 https://infoshare.pl/news/one,66,248,1,central- eastern-europedeveloper-landscape-2017-a-report-by-stack-overflow.html

National Investment Council of Ukraine https://www.slideshare.net/OfficeNIC/invest-in- ukraine-it-sector

ResearchGate. Top Countries for Hiring Freelancers. https://www.researchgate.net/figure/Top-hiring-countries-and-topfreelance- countries_fig3_282729746

IT Ukraine Report. Q2 2018. https://itukraine.org.ua/en/files/img/illus/reports/Q2Report2018.pdf

State Statistics Service of Ukraine. Export-Import Structure. http://www.ukrstat.gov.ua/operativ/operativ2008/zd/dseip/dseip2007_u.htm

Lviv IT Cluster. IT Research. https://itcluster.lviv.ua/en/projects/it-research/

Gartner Gartner. Offshore/Nearshore Countries for Outsourcing in EMEA, 2017

The World Bank The World Bank. ICT Service Exports

DOU. Ukrainian IT Specialist Portrait 2019 https://dou.ua/lenta/articles/portrait-2019/

DOU. Ukrainian Universities 2018 https://dou.ua/lenta/articles/ukrainian-universities- 2018/?from=doufp

DOU. IT Schools Ranking https://dou.ua/lenta/articles/it-schools-rankings- 2016/?from=doufp#prog

DOU. Language Rating 2019 https://dou.ua/lenta/articles/language-rating-jan-2019/

DOU. Top 50 Ukrainian IT Companies https://dou.ua/lenta/articles/top-50-jan-2019/

DOU. Jobs and Trends 2018 https://dou.ua/lenta/articles/jobs-and-trends-2018/

DOU. Ratings 2018 Analytics https://dou.ua/lenta/articles/ratings-2018-analytics/

Annex 3: Organizations and Firms Referenced

Alexandr Davidenko COO Petcube Deborah Fairlamb Consultant and Adviser to Minister of Finance of Ukraine Oksana Markarova Ukrainian National Startup Fund Kateryna Glazkova Executive Director SUP, a union of Ukrainian entrepreneurs Meghan Iorianni Advisor U.S. Federal Trade Commission Lyubomyr Khodak Chairman Ivano-Frankivsk IT Cluster Hennadiy Kobalsky Project Manager Techinservice Sergii Kutuzov Director Eleks Yaroslav Lyubinets Chairman SoftServe Kiril Mazur Imperious Group VC ($25 million VC fund) Jaanika Merilo Deputy Mayor Dnipro City Council Svetlana Novikova Director IT Enterprise Yurii Ohonovskyi Event Director Lviv IT Cluster Maryana Ozorovych CEO Ivano-Frankivsk IT Cluster Ivane Petrenko Manager Lviv Business School, Entrepreneurship Center Vitaliy Pogosyan Director, Department of City Administration: Department Economics and Investment of Economics and Investment + City Centre of innovations Olga Shapoval Executive Director IT Cluster Kharkiv, other IT companies Dmitry Sophina Founder Vinnytsya IT Association, Winstars Technology Natalya Veremeeva CEO Kyiv IT Cluster Taras Vervega Co-Founder SoftServe Stepan Veselovskyi CEO Lviv IT Cluster Charles K. Whitehead Director, Law, Technology, Cornell Tech, Cornell Law School and Entrepreneurship Program Valeriy Yakovenko Co-Founder Drone.ua Maksim Yakover Founder UNIT City, the first Ukrainian innovation park Alexandr Yurchak General Director Association of Industrial Automation of Ukraine

Annex 4: Key Anticipated Counterparts

• National Technical University of Ukraine • Ihor Sikorsky Kyiv Polytechnic Institute • Kharkiv National University of Radio Electronics • National Technical University “Kharkiv Polytechnic Institute” • Zhukovsky National Aerospace University “Kharkiv Aviation Institute” • Lviv Polytechnic National University • Taras Shevchenko National University in Kyiv • National University “Kyiv-Mohyla Academy”

Alternative education initiatives include private training courses, paid online courses, and free online resources. Potential counterparts include:

• Computer Academy “Step” • Main Academy, CyberBionic Systematics • UNIT Factory • Lviv IT School • Sigma Software University • QALight • SoftServe IT Academy • Projector • Ukrainian IT SchoolGoIT • uData School • 18 IT clusters throughout the country • Export Development Office of the Government of Ukraine