Josip Mesarić, Jelena Franjković, Dario Šebalj: Building competitiveness on IT industry: the case of Osijek Software City Josip Mesarić Dario Šebalj UDK 339.137.2 : 004](497.5 Osijek) Josip Juraj Strossmayer Josip Juraj Strossmayer Preliminary communication University of Osijek University of Osijek Faculty of Economics in Osijek Faculty of Economics in Osijek Received: October 24, 2014 Gajev trg 7, Osijek Gajev trg 7, Osijek Accepted for publishing: December 10, 2014 [email protected] [email protected] Phone: +385912244048 Phone: +385912244147 Jelena Franjković Josip Juraj Strossmayer University of Osijek Faculty of Economics in Osijek Gajev trg 7, Osijek [email protected] Phone: +385912244062 BUILDING COMPETITIVENESS ON IT INDUSTRY: THE CASE OF OSIJEK SOFTWARE CITY* Abstract Although eastern Croatia, due to its natural resources and very good geographic location, used to be in- dustrially highly developed, nowadays it is one of the least developed regions in the Republic of Croatia. Driven by a war situation, the disappearance of traditional industries (textile industry, furniture, food- processing, metal working) contributed to weak development. With market opening and disappearance of labour-intensive industries, the need for change in thinking became obvious, together with education and encouraging of self-employment. Rapid development of ICT in the world on the one hand and the involvement of numerous highly educated and enthusiastic IT experts on the other has increased the development of IT industry in Osijek. This is an industry where market has no limits, entry costs are low and revenues are relatively high. Since numerous IT start-ups were founded in the area of Osijek, several people, mostly owners of those enterprises, decided in 2012 to initiate the project named Osijek Software City (later abbreviated to OSC). In this paper, the case study of OSC will be shown in detail, as well as its influence on the region’s competi- tiveness. The key point of OSC initiative is employment of IT related and educated young people since there is a deficit of quality staff in the regional IT industry. For the purpose of this paper, the interview with the OSC Association secretary has been conducted, which showcases their achievements from the initial stages to the present. In addition, future trends of local IT industry will be assessed. Keywords: IT industry, Osijek Software City, employment God. XXVII, BR. 2/2014. str. 313-326 313 Josip Mesarić, Jelena Franjković, Dario Šebalj: Building competitiveness on IT industry: the case of Osijek Software City 1. Introduction Export of Croatian products was reduced to former Yugoslav countries, significant market of loyal con- sumers, protected by customs duties and lost dur- Even during the Austro-Hungarian Empire, along- ing the war and disintegration of Yugoslavia. On the side Zagreb, Rijeka, Karlovac and Sisak, Osijek be- other hand, new Western European markets were came an industrial centre in development, as the opened, which Croatia was yet to win, as a small capital of East Croatia with an excellent geographi- Balkan country and a former member of the Federal cal location. In that period, natural resources such Republic of Yugoslavia. With opening up the mar- as fertile land and forests were mainly used in man- ket, there were also new competitors who had not ufacturing. The industrial development became been present in the closed domestic market, and stronger during former Yugoslavia wherein Croatia, whose size, strength and experience of business on together with Slovenia, was the most developed re- the open market were a great advantage compared gion (The Miroslav Krleža Institute of Lexicography, to the unprepared and war-devastated Croatian 2014). companies whose adaptation was very slow. In their analysis of the position of Croatian econo- The transition to an open market economy espe- my in Yugoslavia, Druzic and Sirotkovic (2002:114) cially related to industrial production, but unfortu- argue that Croatia in the period from 1945 to 1990 nately, it had „many negative social and economic recorded significant economic growth. According effects: the impoverishment of the population, a rise to The Miroslav Krleža Institute of Lexicography in corruption and economic crime, the devastation (2014), in 1990 Croatia was, with Slovenia and the of industry and an increase of unemployment rate“ Czech Republic, among the most developed Central (The Miroslav Krleža Institute of Lexicography, European transition countries and the level of pre- 2014). war GDP (1990) was only reached again in 2004. The increase in the unemployment rate during the 1990s is shown in Graph 1, as well as indexes of the Graph 1 Indexes in the industry and unem- volume of industrial production and employment in ployment in the 1990’s the industry. Source: adapted from Družić, G. (2001). Kriza hr- vatskoga gospodarstva i ekonomska politika. Za- greb: Golden marketing, pp. 21, based on Croatian Bureau of Statistics, Statistical Yearbook 2000 and monthly statistical report 12/2000 314 God. XXVII, BR. 2/2014. str. 313-326 UDK 339.137.2 : 004](497.5 Osijek) / Preliminary communication Table 1 Enterprises in the ICT sector Item 2009 2010 2011 2012 2013 No. of enterprises 4,474 4,886 4,966 5,386 6,057 No. of employees 31,287 31,660 32,851 33,168 33,510 This gradually set aside about thirty IT companies, Source: created by the authors (according to the Cro- primarily local, and some of them became region- atian Bureau of Statistics) ally significant, both in the distribution and sales of IT equipment, as well as in the areas of system in- It can be concluded that poor indexes in the indus- tegration, software production and implementation try affected greatly the rapid growth of unemploy- of software solutions. ment. However, economic activities that were slowed With gradual disappearance of traditional industrial down during the war, inadequate privatization with branches and large (mainly manufacturing) compa- severe consequences, lack of industrial strategy and nies, there was an appearance and intense growth of appropriate incentive policies, relatively modest private initiative in many areas, particularly in the economic growth, overvalued Kuna, along with the commercial sector. limitations of a relatively small market, have result- ed in the Croatian IT losing the race with neighbor- An identical phenomenon occurred also in the IT ing countries (Lovrek, Frkovic, 2012:16). sector. As Lovrek and Frkovic state, “at the begin- ning of the twentieth century, with the disintegra- tion and disappearance of then relatively large IT 2. Trends in ICT industry in Croatia companies as well as computer centers of a number of big companies that disappeared in the privatiza- tion process, the IT industry disintegrated. Enter- The predominant part of the ICT sector nowadays prising IT professionals, former employees of these are small enterprises, so that in 2013 the number companies, created hundreds of new small IT com- of companies with 1-9 employees amounted up to panies, so that in 1999, out of a total of 1,141 reg- 92.1% of the total number of enterprises in the sec- istered IT companies, only three had a little more tor. The following (Table 1) will show the number than 100 employees, while 958 had less than 10” of firms, number of employees and turnover in the (Lovrek, Frkovic, 2012:15). ICT sector (Group J - Information and communi- cation according to NACE1 in 2007) for the period Initially, these companies were mainly involved in 2009-2013. the sale of computer equipment and final configura- tions, and there was virtually a negligible number of Compared to 2009, the number of firms in the those who were engaged in creating software solu- ICT sector in 2013 increased by slightly more than tions, in other words, selling their own knowledge. 35%. According to unofficial data, the growth has Even these companies were doing simple business continued in 2014. At the same time in the whole applications for small and medium enterprises. The economy (according to data of the Central Bureau same authors (Lovrek and Frkovic, 2012:16) argue of Statistics) the number of companies increased by that the reason was the inability of the company to 18%, which means that the number of companies in reach a critical mass in terms of technical expertise, the ICT sector grew twice as much as in the whole financial strength, and management and marketing economy. Kovacevic and Vukovic (2007) find that skills necessary to work on larger and more com- higher rates of inputs in the ICT sector compared plex IT projects. With time, the enterprising and to the Croatian average are the result of the fact that successful among them established partnerships this is a young industry, and that there is a growing with international IT companies. By doing so, they market demand for their products. The fastest cre- gained necessary expertise, began to realize faster ated were new companies involved in ICT services, growth and expand business in the whole country, as opposed to those that deal with assembling com- and then to neighboring countries. puter equipment (57 companies in 1999 and only 9 in 2009). (Lovrek, Frkovic, 2012:18) God. XXVII, BR. 2/2014. str. 313-326 315 Josip Mesarić, Jelena Franjković, Dario Šebalj: Building competitiveness on IT industry: the case of Osijek Software City Table 2 shows the number of enterprises by number From Graph 2 it can be concluded that the num- of employees. Number of employees is divided into ber of employees in the ICT sector continues to in- four grades – 1 to 9, 10 to 49, 50 to 249 and more crease (in 2013 there were 7% more than in 2009), than 250 employees. unlike the industrial production as a whole and the economy in general. Table 2 Number of enterprises by class size of The biggest growth in the IT industry in 2013 was employees noted in the area of packaged software (4.7%).