Today information holds greater contributing power than anything else. Knowledge and data can tremendously change the willingness to compete in various sectors. Information and communication stimulate productivity and effective processes to bring organizations to a global level. The question that is put forward in our article is how is successful Ukrainian IT industry as compared with IT industry in Romania i.e. outsourcing Romania vs Ukraine.
To better compare two countries we will use a Diamond Model introduced by Michael Porter. The model is a set of criteria required for a deep cross-national analysis:
- Factor conditions that include natural, human, capital resources, physical, administrative, information, scientific and technological infrastructures, etc.
- Demand conditions which include sophisticated and demanding local customers, unusual local demand in specialized segments that can be served globally, customer needs that anticipate those elsewhere.
- Strategy, Structure, and Rivalry: the local context that encourages appropriate forms of capital and sustained upgrading, vigorous competition among locally based rivals.
- Related and Supporting Industries: the presence of capable, locally based vendors, the presence of competitive related industries.
Factor conditions and skilled labor
Ukraine and Romania have recently caught an eye of foreign clients in terms of ordering IT projects offshore. These two countries are seriously considered due to the low rates and qualified human resources. However, we will compare the situation on the labor market of both countries to see which one is doing better. Let’s discuss whether the number of employees and their expertise meet the demands of the market.
Software production serves as a driver of ICT enhancement and an attractive sector for international companies that are using software firms’ solutions. Hi-Tech Initiative, a local alliance of technology organizations, claims that almost every Ukrainian software engineering firm has a project associated with Western customers in its portfolio. The most trending direction is IT outsourcing which is supported by the fact that Ukrainian firms are included in the list of most attractive outsourcing companies in the world. What are the reasons which encourage foreigners to outsource their projects to this country? Quality and improved speed to market, not just reasonable price of services, are determinative factors that companies consider when choosing a business partner offshore.
Given the high quality of education and favorable location, such a trend is conducive to the rapid advancement of the ICT sector. It is commonly known, Ukraine has inherited a scientific base along with its various technological establishments, mathematical schools, and R&D centers.
Another fact is that 30,000 computer students graduate each year, with strong analytical and creative skills. However, employers are not always satisfied, as it may happen that graduates don’t have a good command of English or management skills.
Software companies also draw attention to the problem that educational institutions don’t employ practitioners to teach new courses and trends in computer science. As a result, more potential employees go overseas for education. People engaged in the educational field bring up an argument that national universities should give a good basic foundation, and the rest of skill tailoring is to be done by the industry players because IT industry evolves rapidly. How do Ukrainian neighbors react to the problem of the lack of a specialized workforce in IT world?
Having the same problem, the government of Romania started to act earlier and vigorously. Such a commitment on the behalf of Romanian officials, as well as the evolution of policies and introduction of various programs focused on IT outsourcing Romania and commissioned by the state, can be explained by Romanian accession to the European Union. The emphasis is put on strengthening the research base, providing competitive financial incentives to decrease the digital divide in society, and furthering certification programs for IT professionals. Perhaps, no industry can stay competitive long enough just relying on the inherited factors of development and without support from the authorities in form of favorable policies.
It is impossible to fancy any innovation without information technology that’s why officials have declared IT one of the priorities for national development. Ukraine is aimed at promoting information society and strengthening the basis for IT development.
Among specific incentives for investment into the industry, only noticeable government policies were a change in VAT taxation, depreciation rates for fixed assets, increase of an education budget (to 6,5% of budget) and a visa-free regime for European and American citizens.
Although the ICT sector is dominated by multinational firms with prevalent outsourcing, as well as foreign prominence in production and exports, it doesn’t mean that the government did not play a role in its successful development. The state must have realized that the growing IT industry, even if it is foreign-owned, provides numerous opportunities for a bunch of consultancy firms, R&D centers, and ICT industry enhancements in general.
Even a mature market has problems that it cannot solve on its own, and governmental involvement is needed, especially when an industry is facing such a cumbersome matter as high piracy rates. As a result of governmental intervention into this issue, the stability and growth in the sector became possible.
Nevertheless, up to 70% of software used in the country remains to be illegal. Actions of the Romanian government are not on ad hoc basis, but rather a part of a sound strategy. The initiatives supporting the government’s vision to turn the country into a zone of high technology are as follows:
- Exemption of people employed by software companies from income taxes
- Reduction of income tax for developers from certain universities
- 25-month VAT postponement for new goods
- 50% depreciation during the first year for new goods
- Right for every citizen and firm in Romania to an electronic signature
IT success depends on the quality of telecommunication infrastructure, internet penetration, and PC use. Provided that the industry is receiving a high level of foreign investment, it is likely that the communication services will continue to increase while the respective fees will decrease with increasing competition.
Whereas 40 million Ukrainians are using cell phones, only 4 million have access to the Internet, as estimated by Microsoft Ukraine. Although the number of users grows each year, it is still very low compared to the European level. At the moment the Internet penetration rate is less than in neighboring countries. To sum up, the market is far from saturation and the growing dynamics will persist in the next 3-4 years.
Investments in ICT infrastructure are still insufficient and important investments are not being considered for the near future. In this country, a large rural population is a key issue when it comes to developing connectivity. Since it is not very economically efficient to expand fixed lines networks in rural areas, wireless solutions and cable TV are perceived as cost-saving alternatives.
Among numerous motivations for increased interest in the CEE region is a geopolitical one. In this respect, one of the reasons that could draw attention from the trusted market leaders, such as India, Israel, and Pakistan, and shift it towards CEE countries is the uncertain political situation in the Middle East.
Thus, Ukraine has an opportunity to benefit from the relocation of market resources and snatch a slice of a pie in future. Culture and distance are the main triggers for the pervasive inclination towards nearshoring, as it provides more advantages for international collaboration. The small difference in time facilitates communication between the headquarter office and a Ukrainian team.
European companies pose as the most interested ones in outsourcing their tasks to Ukraine. Among those, Germans top the list. According to GoalEurope, there are about 60 companies from Germany employing 6% of Ukrainian developers.
One of the tactics of attracting qualified professionals is increasing the salary offers, which consequently raise the price of the entire project.
The demand from domestic forces is considered to be weak at present, but the one that will grow with time. This will happen with the advancement of technological culture and ability of Ukrainian managers and government officials to use technological tools for strategic decision making, not mere calculations or communication procedures.
Currently, the demand for hi-tech products comes from telecommunications, financial, and insurance companies. These areas face fierce competition, are client-oriented. These features put pressure to innovate and to be able to provide timely service to customers.
International demand serves as a trigger for Ukrainian IT industry development, especially considering that foreign companies are more demanding. Yet, Ukrainian IT companies have started to pay more attention to the needs of the domestic market. The increasing number of orders from both sides will drive up the competition among software firms which will strive to provide the better quality of products and also add value to services.
The quality of Romanian developers is also associated with the international community, as they are among the top-ranked at global programming competitions. Moreover, according to Brainbench, Romania is the European leader in the number of IT professionals per capita. Additionally, Romania climbs the rankings in terms of location selection, due to significant improvements in project management and business processes.
However, Romania’s relatively higher costs put it among the middle of the pack at 33rd place. The increase in salaries can be explained by the growth in competition prompted by the predominant presence of multinational companies, as according to latest estimates, nearly 90 percent of some 1,000 IT companies in Romania are foreign-owned. Hence, domestic companies had to offer additional financial benefits to lure in professional specialists.
Related and supporting industries
We’ve decided to introduce this information in the form of visual aid because actually, both states have a lot of areas that are closely interconnected with IT.
We discussed two countries which are currently in focus of international investment community. Although Ukraine and Romania had a similar starting point in terms of history and educational base, the software development outsourcing directions differed greatly depending on how the opportunities were embraced and strategies employed by the key factors. When reviewing these factors, it becomes apparent that favorable and timely governmental policies still play a significant role in enhancing the state’s image needed for international investment and for normal functioning of domestic industry players. In this regard, our country can learn from regional leaders, which in turn emulated best practices of mature international IT nations. First, clear-cut and balanced state tactic is needed in Ukraine to support the forever changing market, that, on one side, has a critical set of attraction factors, but, on the other, experiences the weak business environment. Then, links with international markets can be easier achieved due to the enhanced credibility rating. Thus, the work is to be done in two fronts: domestic and international, because a combination of strong players both local and foreign-owned ones poses as a more beneficial for the country’s economy as a whole.
While international companies serve as drivers most of the time, local firms are perceived as necessary for the development of high-value-added national products required to maintain competitiveness in the future. While Ukraine costs are better in terms of market size, wages level, and potential for growth, it still has to catch up with Romania when it comes to effective policies in education, services, and infrastructure to maintain favorable local and international demands. Therefore, the opportunity to succeed is to be caught when it comes.
We were focused on giving you a general concept of IT market in both countries and not convincing you to choose one or another. Follow DICEUS blog to regularly get IT news.