Enterprise Incubator Foundation

Strategic Vision for year 2030 Develop an advanced information and knowledge based society in Armenia with sophisticated ICT infrastructure, high computer literacy, high computerization and internet penetration rates, large domestic IT market, and widely deployed e-government and e-commerce systems. Transform Armenian IT industry from a provider of low- end outsourcing services focused on cost advantages into an R&D powerhouse offering higher-value added research, development, and engineering services in specialized technology segments. 2

Strategic Objectives: Information Society 3 Strategic Area Computerization: households, % of total households 5%50-70% Computerization: educational sector, % of employees / professors and ¼ of students 10%70-80% Computerization: public sector, % of all employees 10%90-100% Internet penetration, % of total population5%50-70% Government spending on locally developed software and services, % of national budget < 0.1%> 1% Domestic spending on locally developed software and services, % of GDP 0.5%2-4% Government services online, % of all services<1%80-90%

Strategic Objectives: IT Industry 4 Strategic Area Technical workforce, persons3, ,000 Tech workforce productivity, output per employee$25,000$200,000 Industry revenues$85 mln$6-8 bln Exports$53 mln$4-6 bln Large companies with employees > 2, Domestic companies engaged in high-end R&D< Technoparks and incubators Large technoparks / technocities03-5 Venture capital funds committed0>$1 bln Public companies, domestically listed0>300 Public companies, internationally listed0>5

Latest Economic Indicators and Key Issues 5

e-Government Systems in Armenia Online information and e-gov resources: President: Federal /regional governments / agencies: National Assembly: E-Visa and electronic paper management systems at MFA Government sessions e-system Cadastre information system Digital data resources of the Ministry of Justice Border and airport management systems at Zvartnots airport 6

e-Business and other e-Society Systems E-Dram web-based payment systems with online shopping ARCA electronic payment system CBAs Bank Mail inter-bank system Several small e-commerce businesses Several healthcare / hospital management systems e-Learning initiatives at Armenian Universities (AUA, SEUA) 7

IT Industry Main Indicators 8 Indicator CAGR Operating companies % Local firms861129% Foreign braches244826% Industry revenues$38 mln$85 mln31% Local firms$16$3732% Foreign braches$22$4830% Domestic market$14$3132% Exports$24 mln$53 mln30% Productivity (output per employee)$12,000$19,00017% Local firms$9,600$16,40020% Foreign braches$18,300$23,6009%

IT Industry Main Indicators 9 Indicator CAGR Workforce3,0004,70016% Local firms1,4502,30017% Foreign braches1,5502,40016% Technical specialists2,1003,40017% Management and admin8601,30026% Students in IT specialties3,9006,80020% Average gross annual salaries$3-4,000$6-7,00010% Annual costs of operating a small firm in Armenia (~20 employees) $300,000 Annual costs of operating a large firm in Armenia (~120 employees) $1,900,000

Key Issues: Information Society Low internet penetration and computerization rates (<5%); low populations computer literacy rate. Only several e-government services employed; few businesses or individuals, if any, use these services. Few companies or individuals doing business or purchases online Use of electronic payment systems is limited to cards that are not widespread due to infrastructure, financial, and other problems Low usage of IT products and services, especially locally developed, in various sectors of the society; almost no Government spending on locally produced software and services. Poor infrastructure such as ICT and adequate office space. Shortage in qualified IT specialists and university graduates leading to an increase in salaries and overall operating expenses. Lack of venture and other financing mechanisms also focused on start-up development. Aggressive government investment policies in neighboring nations such as Azerbaijan, Russia, and Turkey. 10

Key Issues: IT industry Rate of growth in the number of newly formed companies dropped after In 2006, only 6-8 companies were established in Armenia; similar figures were witnesses in years 1995 through In 2003 – 2006, depreciation of AMD was 40% and inflation was 11%. Together they increased dollar costs by 50%. This contributed to the salary increase of developers from $5K in 2003 to $7.7K in 2006, as well as to the overall rise in operating expenses. 11 Real gain in average dollar productivity was only 10% (60% nominal – 50% dram appreciation / inflation). Productivity relative to that of the US actually decreased by 10-15%.

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

Competitive Analysis of Information Society and IT Industry in Armenia 13

IT Industry Analysis Analysis of Armenias competitive advantage and scope shows that before 2003 Armenian IT industry could be characterized as an industry with a cost focus: reasonable quality outsourcing at low costs. After 2003, the costs of operating a software business in Armenia increased substantially and now reach those of Eastern European countries (for example Romania). Armenia is loosing its competitive advantage, which was based so far on low costs. On the other hand, increased costs are not offset by higher quality products or services. Competitive analysis is based on Michael Porters work, Competitive Advantage of Nations 14 Competitive advantage Lower costDifferentiation Competitive scope Broad targetCost leadershipDifferentiation Narrow targetCost focusFocused differentiation

IT Industry Analysis Factor conditions: human resources, knowledge, capital, and infrastructure significant shortage of qualifies workforce, lack of modern knowledge and know-how no viable financing mechanisms poor ICT, transportation, and office infrastructure Demand conditions: large domestic market for locally developed IT products and services extremely low demand for Armenian software in Armenia Related and supporting industries: industries where use of software is considerable or software companies play role of suppliers very limited use in banking sector, thats all Firm strategy, structure, and rivalry: no domestic rivalry, industry is focused purely on low-end outsourcing. 15

Strategic Areas and Ways to Improve Them 16

Strategic Development Areas Armenia should create conditions that would allow building and sustaining strong e-society and globally competitive IT industry through improving and expanding the below areas: Education and management practices Infrastructure and business environment Financing and investment mechanisms Science and R&D Domestic market and IT usage New business formation Country and industry marketing IT industry differentiation 17

Education and Management Practices Revise current teaching strategies and practices at the key IT educational institutions. Increase supply of qualified technical specialists and graduates in business and engineering fields. Start pilot projects in 10 secondary schools and in IT related departments at SEUA, YSU, AUA, Slanovic, and ERIICTA. Target increasing IT workforce at around 1,500 specialists per year (now 600). Create viable mechanisms for ongoing training of IT workforce. Build several major training centers that should have strong ties with the industry, universities, and R&D institutions. Improve management and software development practices. Support the adoption of recognized process and quality improvement certifications and practices. Develop sustainable methods of continuous implementation of recognized software practices such as ISO and CMMI. Target reaching adoption of 1-2 companies per year. 18

Infrastructure and Business Environment Expand and improve ICT infrastructure and increase internet penetration. Build a high-speed and reliable domestic network covering all regions of Armenia and the majority of populated areas. Ensure easy and inexpensive of populations and businesses access to the network. Connect the domestic network to the global Internet via several channels and providers in order to increase the reliability and decrease costs of internet access. Build incubation and high-end office infrastructure to house existing companies and new formed businesses. Construct a number of business incubators and technoparks in Yerevan and especially in the regions. Build several large technocities around Yerevan and in the regions (similar to Egypts Smart Village). Improve business and regulatory environment. Develop and implement targeted measures to support IP protection, newly formed businesses and SMEs. 19

Financing and Investment Mechanisms Develop venture and angel financing mechanisms. Create several venture capital funds that will invest in various sectors of the economy. Target reaching up to $1 billion of investment money. Build working exit mechanisms for the investors including local IPOs. Improve access of domestic firms to foreign financing, increase FDI. Build and implement a viable FDI promotion strategy, offer various incentives and support to foreign investors, capitalize on FDI projects. Pay special attention to attracting major international technology firms such as HP, IBM, Intel, and others. Expand activities of Alcatel, Microsoft, and Sun in Armenia. Expand government support to SMEs. Create various funding and support mechanisms such as grants or inexpensive lending schemes specifically targeting small technology businesses and start-ups. 20

Science and R&D Increase support to public and private research institutions conducting scientific and engineering R&D. Stimulate and support R&D activities at the Armenian universities. Come up with a long-term science and R&D strategy for Armenia. Develop and expand R&D capacity of select institutions in terms of management, infrastructure, equipment base, professionals, and others. Build several R&D institutions with strong capabilities in the strategic areas. Support the research organizations in obtaining R&D projects from various sources including the Government, donor grants, private orders, and others. Stimulate creation of strong competencies in several strategically vital science and engineering fields, stress know-how and IP development, patenting, and so on. 21

Domestic Market and IT Usage Increase usage of locally built IT products and services by the Government and Armenian businesses. Develop strong e-government and e-commerce systems and encourage their use by the private sector and population. Target moving the majority of government services online. Induce businesses to increase IT usage through passage of special regulations and incentives. Increase populations computerization and IT usage. Implement special programs to raise the computerization and computer literacy rates, such as PC for ALL and others. Decrease piracy rated, encourage use of licensed software. Conduct mass computer training of Government employees. 22

New Business Formation Create sustainable and successful new business formation mechanisms. Develop supportive business environment, increase the availability of skilled labor, create financing mechanisms targeted at start-ups, build relevant infrastructure such as incubators and technoparks, expand Government assistance. The Government should increase its support to IT start-ups through special programs: grants, professional help, customized financing, incubation, and others. 23

Country and Industry Marketing Expand international marketing of Armenia and its IT industry, improve the quality image of the sector. Start industry and country marketing and investment promotion offices in key foreign markets such as Europe, Russia, and United States. Participate in major and more specific international events. Develop various analytical and marketing publications. Build an image of IT industry as a key sector of the economy within Armenia. Increase PR campaigns and informational coverage of the industry targeted at various stakeholder groups in Armenia including the Government, public, other private sectors, and donors. 24

IT Industry Global Differentiation Focus on higher value-added products and services, concentrate on specialized fields to differentiate Armenia from other IT exporting nations. Identify key technology areas where Armenia can successfully compete with foreign companies in R&D and engineering services areas. Form and develop clusters of companies each focusing on a priority specialization area. Increase the number of large (500+ employees) firms in the outsourcing arena. Develop a local capacity in IT consulting: several consulting and outsourcing businesses with 500-1,000 or more employees - to implement large domestic IT projects and be competitive in the international outsourcing arena. 25