In the first article of this series regarding the Armenian IT industry, we focused solely on key data and interesting facts from the 2011 State of the IT Industry Report produced by Enterprise Incubator Foundation (EIF). This month, we will focus on two themes: (a) how is the IT sector performing compared to other segments of the Armenian economy and (b) how is Armenia performing compared to its peers in aspects related to the technology industry development.
First, let’s look at the two charts below:
Source: EV Consulting, Armenia Investment Map
1. Average Annual Growth 2007 - 2011
2. Compounded Annual Growth Rate (CAGR) 2002-2010
3. Assets average annual growth 2007 - 2011
4. CAGR 2008 - 2011
5. CAGR 2006 - 2011
They tell an interesting story:
- With just 0.6% of total Armenian labor force, the Armenian IT industry produces 2% of the Gross Domestic Product (GDP).
- In other words, each worker in the IT sector produces approximately $30,178 dollars in output. That means IT is already the fourth largest output per capita producer in Armenia after Telecom with ~$50,400 dollars/worker, Mining and Quarrying with $30,178 dollars/worker and Financial Services with ~$34,872 dollars/worker. Bear in mind that this is a non-exhaustive analysis. For instance, the food processing industry should also be among the highest income producing sectors, but we lack the data for calculations.
- IT is also one of the fastest growing sectors of the Armenian economy, growing at 22% annually since 2008. Although the growth rates are not fully comparable, it is possible to have an idea of the dimension of growth and future potential impact.
- $30,178 dollars in output/worker could be much higher if there was a (a) change in the mix of IT subsectors, shifting focus from outsourcing to development of higher value-added segments, such as software-as-a-service (SaaS) products and (b) increase in total productivity since it still has major gaps when compared to more developed economies.
- The main productivity gaps were mapped by a Mckinsey & Co study made in 2004 called “Armenia’s Software Advantage”, which identified productivity gaps related to: (i) administrative, regulatory, tax issues, (ii) scarcity of experienced project managers, (iii) poor product mix (small domestic market), (iv) lack of strategic leadership; (v) sub-optimal ownership structure and (vi) branding discount to global competition. Since then, some of these gaps have been tackled and the results are shown in the strong growth numbers.
Second, let’s take a look at a series of charts that compare Armenia to its peers:
1. Information and communication technology service exports
2. Mobile cellular subscriptions per 100 people
3. Secure Internet servers per 1 million people (Secure servers are servers using encryption technology in Internet transactions).
4. Number of fixed broadband Internet subscriptions per 100 population
5. Internet users per 100 population - UNECE
Also, from the Global competitiveness report we have:
6. GCI 9th pillar: Technological readiness 1-7 (best)
7. Availability of latest technologies (1 = not available; 7 = widely available)
8. FDI and technology transfer
To what extent does foreign direct investment (FDI) bring new technology into the country?
(1 = not at all; 7 = FDI is a key source of new technology)
9. Firm-level technology absorption
To what extent do businesses in your country absorb new technology?
(1 = not at all; 7 = aggressively absorb)
10. Internet access in schools
(1 = very limited; 7 = extensive)
These numbers are encouraging and show a lot of potential, especially as Internet becomes ubiquitous, through widespread use of 4G wireless technologies. The recent news flow only reinforces the growth trend:
- Rostelecom recently announced $30 million investment plan to enter the Armenian broadband market (Rostelecom to invest over $12 million in Armenia next year)
- VivaCell launched 4G network in 2012
- A third mobile telecom operator (Orange) was allowed operation in Armenia in 2009
- The pipeline of multinational corporations interested in investing in Armenia keeps growing. Companies currently active in Armenia: Synopsys, National Instruments. Companies currently investing: D-Link. Companies studying investments: IBM, Intel, Core Cross Inco (from Korea).
Also, the Armenian government has chosen IT as a strategic sector and is committed to its development. There are key initiatives aimed at both making Armenia more attractive to IT investments and also training and tooling the labor force:
- Gyumry Technopark is under development
- Incubator such as Enterprise Incubator Foundation and Viasphere
- TUMO Center for Creative Technologies
- Gyumri Information Technology Center (GITC). Read more about it here
- Armenian-Indian Center for Excellence in ICT (AITC)
The number of companies investing in the Armenian IT sector is likely to grow. It will not take long until we start hearing local startups winning global prizes or reaching global scale, such as PicsArt. But give the labor supply constraints, early movers into the country will clearly have an advantage.
This post is also available in: Armenian