Benchmarking of armenian it policies by Global SPC

Benchmarking of Armenian IT Policies

From the Perspective of Increasing IT Cluster Competitiveness

YEREVAN 2007

Table of Content

T able

E xecutive S ummary

C ontent 6 9

1 . I ntroduction

R esearch O bjectives R esearch M ethod R esearch T opic D efinition

2. O verview

9 9 11

A rmenian IT S ector

3. B enchmarking

ICT I nnovation P olicy

G eneral O verview of ICT I nnovation P olicy B enchmark C ountries for R&D D evelopment R&D D evelopment in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for P atenting P olicy and I ntellectual P roperty R ights M echanisms P atenting P olicy and IPR mechanisms D evelopment I n A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for I nnovation S ector C lustering I nnovation S ector C lustering in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for IT I nformation S upport IT I nformation S upport for A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for D emand - side initiatives D emand side initiatives in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for P ublic P rivate P artnerships in IT P artnerships and networking in A rmenia : F rom the P erspective of B enchmarking

4. B enchmarking

H uman C apital P olicy

G eneral O verview of ICT H uman C apital P olicy B enchmark C ountries for IT H uman R esource D evelopment B enchmark C ountries for E mployment P olicy E mployment P olicy D evelopment A rmenia : F rom the P erspective B enchmark C ountries for E ducational and S cientific P olicy E ducational and S cientific P olicy D evelopment A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for V ocational T raining P olicy V ocational T raining P olicy D evelopment A rmenia : F rom the P erspective of B enchmarking C ountries

5. B enchmarking

F inancial

and

21 23 30 33 37 38 38 39 40 41 48 52 53 55

B enchmarking C ountries

T ax P olicy

G eneral O verview of F inancial and T ax P olicy B enchmark C ountries for F iscal P olicy

4 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

56 58 63 65 66 70 72 73 74 75 78

Table of Content F iscal P olicy of A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for F ree Z ones F ree Z ones in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for R isk C apital R isk C apital D evelopment in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmark C ountries for F inancial S ystem and M arkets F inancial S ystem and M arkets D evelopment in A rmenia : F rom the P erspective of B enchmarking C ountries B enchmarking for A ccounting P olicies A ccounting P olicy of A rmenia : F rom the P erspective of B enchmarking C ountries

6. B enchmarking

of I nvestment

C limate

G eneral O verview of IT I nvestment C limate B enchmark C ountries for I nvestment C limate I nvestment C limate D evelopment in A rmenia : F rom

85 89 92 93 97 99

105 107 108 109

the

P erspective

B enchmarking C ountries

111 116 123

7. G eneral R ecommendations

126

8. M onitoring

130

9. L ist

and

E valuation

R eferences

10. A bbreviations

134 139

5 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Executive Summary

any countries have prioritized the development of their respective Information Technology (IT) sectors as the cornerstone to building a knowledge-based economy. The success of IT sector development depends on the involvement of all related stakeholders. The government initiatives in this direction should aim at supporting the longer term goal of attaining the sustainable growth of the IT sector through such initiatives as the creation of an open business climate capable of attracting greater levels of foreign direct investment (FDI); the formation of flexible fiscal and tax regimes; the attainment of overall competitiveness of human capital; and development of polices designed to support innovation. In this respect, consistent IT-supportive policies, as well as the institutionalization of the IT-related decision-making process serve as leading indicators of state efficiency and as primary drivers of competitiveness. Throughout the scope of this research, the performance of Armenian IT-related policies has been analyzed and compared with the best practices of select countries identified as benchmarks. As a result of benchmarking analysis, Global SPC has formulated several new approaches to improving IT policies for consideration by the Armenian government and IT cluster advocacy groups. More concretely, this research provides specific examples and case studies from countries which have demonstrated a successful record of IT development, and offers several proposed solutions that may be adopted and implemented by Armenian stakeholders, after careful consideration of the countryâ&#x20AC;&#x2122;s unique circumstances. The research has also covered the institutional aspects of supporting and promoting IT development on the governmental level in ways that encourage private sector initiative and investment. The comparative analysis also identifies the best targets and indicators (qualitative and quantitative) which could be utilized to monitor IT policy effectiveness regarding overall competitiveness of the Armenian IT sector. In order to incorporate more efficient benchmarking of national and international IT policies and to provide a holistic approach to sector analysis, four main areas have been separated and thoroughly reviewed. The areas include innovation, human capital, financial and tax policies, as well as the investment climate. Innovation policy is considered to be one of the essential drivers for IT sector development. The research looks at the divide between Armenia and the benchmark countries in terms of research and development (R&D), protection of intellectual property rights, innovational collaboration, and demand-side initiatives in IT such as the promotion of E-society and E-government mechanisms. The other area of the report looks at efficient human capital policy that has been identified as a precondition for a progressive IT sector and a major long-term driver of IT development. This research analyzes the responsiveness of the national education system to contemporary IT market demands, reviews the successful international approaches to elevating the quality of IT education and promoting IT life-long learning. The report analyses financial and tax measures, such as tax and customs incentives to local and foreign IT players, dedicated funds and grants, as well as the level of state IT expenditures. Moreover, the report addresses the indirect fiscal influence on IT from the point of view of creating specific components of the regulative and financial infrastructure, which include the state promotion of IT financing through financial institutions, encouraging IT companies to attract capital through national and foreign markets, and the creation of free-zones. The last area addressed in the report analyzes the current investment climate of Armenia with an emphasis on IT-related investments, outlines the best international practices for creating a favorable investment climate and provides recommendations specifically applicable to Armenia. It also assesses the importance of investment climate and the role of state initiatives to provide a more conducive atmosphere for international cooperation in IT development. The creation of a business and investment climate that is non-discriminatory, simple, transparent, and affordable is a challenge for each state, but is a priority for a country aiming to develop the IT sector.

6 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Executive Summary

Armenia

The research reveals that the Armenian IT sector has matured mainly due to private sector initiatives and foreign investment. As a result, Armenia’s IT sector is predominantly based on outsourcing activities and does not sufficiently contribute to the economic development of the country. The research has shown that although the Armenian IT sector is endowed with comparatively highlyeducated IT specialists, the current education system remains generally incapable of supporting an adequate supply of qualified specialists to supply IT market demand due to insufficient university-industry cooperation, lack of competent academic staff and a low-level of resources. Armenia is seriously in the need of relevant legislative, market and institutional infrastructures, as well as e-society components, for the development of a truly resilient IT sector. Although Armenia has liberalized customs and trade policies, surveys and interviews with Armenian IT sector representatives have demonstrated, the customs administration remains hindered by inefficiencies and redundancies.

Benchmark Countries

The benchmark countries selected for the study include Egypt, Estonia, India, Ireland, Israel, Singapore, and South Korea. The selection of benchmark countries is not solely justified by their best practices in development of a robust IT sector, but also from their relevance to Armenia in terms of geographic and demographic size and IT sector preconditions. The study identifies benchmark countries and their respective IT development best practices for each specific sector. For example, Estonia has been benchmarked for its achievements in E-society development. Moreover, Estonia is considered to be comparable to Armenia in terms of its Soviet legacy, its small economy, and low-cost but fairly high-quality technical workforce. The same set of indicators that affirm Estonia’s success in the field, such as a high rate of internet penetration or a highly liberalized telecommunications market, can be equally applied to Armenia. The research also identified Israel as a benchmark country based on its holistic approach to promoting IT sector development. The success of the Israeli model, viewed as a benchmark, was justified by its mechanisms to attract venture capital and by its R&D capabilities. In particular, publically initiated YOZMA program for venture capital attraction, the government-built R&D infrastructure, strong academic research apparatus, education system, and promotion of university level research. Several key factors of Israel’s success discussed in the research include harnessing the Diaspora as a major source of knowledge and financial resources, targeted development of legal and financial infrastructures, and mainly start-up venture capital. Other important factors include the government’s initiatives for public-private partnership and the mechanisms for the commercialization of innovation and R&D. Taking into account, the fact that Armenia has suffered from the effects of a massive exodus or “brain-drain,” of its skilled population, the research has devoted special attention to the issue of skilled workforce migration and has benchmarked countries that have succeeded in reversing the trend. One of the benchmarked countries in this respect is Israel which has shaped a policy to attract the return of engineers and IT specialists from the post-Soviet Union. Another example of a productive cooperation with a diaspora has been the introduction of measures to reverse the brain-drain has been demonstrated by the Indian experience. The Indian government pursues a number of different bilateral programs which encourage expatriate nationals to undertake short-term consultancies in their home country, making India’s experience especially replicable for Armenia. Ireland, which has a favorable tax regime for promoting IT, has been viewed as a benchmark for Armenia in another regard. The Irish model is notable for its government’s strategic approach to the use of state funds for IT development and support for international cooperation. The best practice of an institutional approach to FDI promotion has been addressed in this research by analyzing the Investment Development Agency (IDA) of Ireland and by recommending to territorialize certain approaches in Armenia. A significant amount of state resources are used for an intensive advertising strategy directed at creating awareness and positioning Ireland as an IT leader, which also makes Ireland a benchmark for Armenia and confirms the concept of branding for the Armenian IT Industry.

7 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Executive Summary Another important best practice is the creation and development of free zones and smart villages, which were one of the driving forces for the development of the Egyptian IT industry. Egypt has set up a special authority, Egypt’s General Authority for Investment and Free Zones, to govern investments and free zone activities, which also reveals the potential application of a similar practice in Armenia. Investment climate is another area benchmarked in the report. Ireland and Israel are selected as benchmark countries for their activities to improve the flow of IT-related investments. Their respective best practices in this area can provide an instructive lesson for its use in Armenian IT sector development. The best practices applied by benchmark countries include the development of domestic policies targeting the attraction of investment to the IT industry, increased trade of IT-related goods and services, and the promotion of e-commerce. Moreover, the success of the benchmarks is also rooted in other factors like measures to combat corruption, mitigate political risk, and lower transaction costs, as well as to protect foreign investments.

Recommendations

The research reveals the necessity of implementing a long-term strategy aimed at developing Armenia’s IT sector competitiveness through a comprehensive approach involving the participation of all stakeholders and use of specific best practice mechanisms based on the model of Israel, Ireland, and other benchmark countries identified in the report. An important step in this regard is the formation of an effective organizational mechanism that would coordinate the management of the Armenian IT sector. Based on the analytical experience from the consideration of the benchmarked countries, the study provides a set of proposed measures bolstered by a recommended institutional structure with an interrelated design embodying key management functions to assist IT sector development. As a result of the analysis of the benchmark countries and the state of Armenia’s IT sector, the study has determined that Armenia needs more efficient policies and better coordination of state efforts to promote IT sector development. Moreover, taking into account the fact that Armenian R&D and innovation receive only nominal state support and the state fails to provide adequate infrastructure for IT development, the study proposes: To create a proactive IT-supportive institutional, policy, and regulatory environment. To promote policies related to IT education capable of upgrading Armenia’s IT workforce capabilities and competitiveness, as well as forging collaboration between universities-industry-IT sectors. To develop a strategic program for enhanced international cooperation in the sphere of R&D, attracting foreign capital to the IT sector in the form of risk capital. To provide sound financial and fiscal policies based on the completion of cost/benefit analyses for that would lead to the expansion of the IT sector and growth in R&D activities. To upgrade the quality of Armenian IT products through imposing production standards and enhancing the development of Armenian IT product branding on local, regional, and international markets.

8 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Introduction

his report is based on thorough benchmarking research and analysis of the Republic of Armenia’s (RA) Information Technology (IT) sector, with the goal of assisting the Armenian government and IT cluster advocacy groups to identify the most effective policy approaches to enhance the overall global competitiveness of the Armenian IT sector. The research study is conducted and produced by Global SPC on behalf of the Competitive Armenian Private Sector Project (CAPS) in conjunction with the United States Agency for International Development (USAID).

Research Objectives The goal of the study is to identify the most effective and applicable policy approaches for the development of the Armenian IT sector through the application of benchmarking for the policy approaches used in other selected countries with similar and relevant preconditions. Specifically, the study: Identifies the gaps and limitations, as well as the strengths of Armenia’s existing IT policy approaches; Identifies benchmarks for national and regional policy approaches used by other countries that may help to develop the Armenian IT industry, while taking into account Armenia’s specific circumstances and conditions; Identifies the best practices applied by the selected benchmark countries to achieve superior results in developing their respective IT industries from an institutional perspective, as well as through government-private sector cooperation; Presents possible institutional approaches to supporting Armenia’s IT industry, which will result in attracting the interest of private sector investment in IT industry; Recommends legislative and policy reforms to develop the institutional structure (framework) necessary for the IT sector; Analyzes and suggests IT development policies to be formulated by public sector entities in order to encourage active private sector participation in IT cluster development; Analyzes and recommends policy relationships between public sector entities, private sector industry boosters, and private investors, focusing on liberalization policies; Identifies and recommends institutions and effective indicators and metrics, both quantitative and qualitative, for evaluating and monitoring the overall efficacy of IT policies and competitiveness in Armenia.

Research Method To meet the objectives set above, Global SPC has conducted thorough benchmarking research and analysis in two basic stages: Collection of primary and secondary data; Analysis of data, which utilizes the benchmarking methodology for identifying benchmark countries and their respective best practices based on the data collection.

Primary data

The primary data collection and analysis process holds particular significance for information gathering and opinion-shaping. The primary data has been collected through the use of expert and IT product user focus groups, and interviews with relevant IT experts. Global SPC interviewed over 30 key local experts, including representatives from both public and private sectors, and has contacted over 50 international experts from select benchmark countries. The interviews have been conducted in person, via e-mail, and by telephone. The composition of the interviewees and focus group participants includes: Interviews with private sector: representatives from IT industry groups and IT professionals; Interviews with public sector: IT policy decision-makers and legal professionals;

9 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Introduction

Interviews with current IT infrastructure users who also routinely adapt it according to their demand for services (small business owners, corporate chief technological officers and software developers, for example); Focus group meetings with IT professionals and stakeholders in Armenia; Focus group meetings with IT users in Armenia. The primary data analysis have been incorporated throughout the study as a basis for understanding existing IT related issues, achievements, and problems from the perspectives of policy decision-makers, private sector representatives, and IT product users. The data reveals the ways in which the IT industry cluster is viewed from different perspectives and how it actually functions or has functioned.

Secondary data

The secondary data set has been collected through the review of local and international literature on the topic. Global SPC has also used secondary sources, when and where necessary, to assess the state of the Armenian IT sector and to enhance its primary research. Moreover, secondary data formed the basis of the benchmarking process. The specific types of secondary sources which have been used include: Review of local and national legislative and regulatory documents; Armenian and foreign IT policies and manuals; Reports, articles, discussion and working papers of international organizations, industry groups, non-governmental and non-profit organizations, and local expert opinion papers; Reports, articles, and papers previously produced by USAID in Armenia and other countries; Academic literature; Internal reports of Global SPC and CAPS; Documents, reports, articles, surveys, and statistics released by public entities.

Benchmarking strategy

The main objective of applying the benchmarking methodology to data analysis relies on the ability of the strategy to support policy-makers by demonstrating specific examples of adequate, well-justified, and well-implemented policies from the experience of other countries. By applying objective and common criteria for benchmark selection, Global SPC has been able to identify actionable practices, to stimulate new ideas and to encourage the process of incorporating “lessons learned” from other successful cases. The benchmarking process comprises several stages. First, Global SPC has prioritized the identification of relevant benchmark countries with well developed IT sectors based on quantitative and qualitative metrics. The benchmarking method applied by Global SPC has also taken into account the following factors when identifying the benchmark countries: The presence of similarities to Armenia’s IT industry preconditions, including a tradition of scientific excellence, a diversity of sectors, a sound educational level, a record of passing through IT policy stages, current IT policy priorities and general economic and geographic conditions; The benchmark country’s superior performance in the global market, with a global recognition of the development of its IT industry; The existence of actionable, replicable best practices that have stimulated the ability to achieve superior performance, as compared to peer countries; The presence of active and successful policies, which are highly ranked by international entities based on both their content and capability to positively affect the IT sector’s competitiveness; A currently high ranking of the country’s IT industry competitiveness as rated by international entities; Integration and conformity of the country with IT related international agreements.

10 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Introduction The selection of benchmarking countries relied on a number of quantitative metrics which are identified more specifically in each section of the research. Some of the metrics include: the ratio of IT industry to the country’s total GDP, the percentage of IT products in terms of total exports, the ratio of R&D expenditures to GDP, the number of students in IT fields as a proportion of the total number of students, the number of R&D institutions in the country, the ratio of researchers in R&D to the total population, the ratio of IT investments to total investment, and the percentage of total venture capital funds allocated to IT companies, among other metrics. The second stage in the benchmarking process is the identification of criteria for measuring the success and efficacy of policies. To this extent, success and efficacy can be evaluated based on two main criteria: Policy formulation – the extent to which the policy meets the objectives and targets set by policy-makers; Policy performance – the capability of the policy to be implemented and to positively affect the IT sector’s competitiveness. Specific quantitative and qualitative metrics have been applied for measuring the effectiveness of policies and for identifying the best practices of the selected benchmark countries. Some of the metrics include: the degree of necessity of the policy, the ability of the policy to achieve results, measurability (performance indicators within the policy which are created for the monitoring and evaluation of effectiveness at different stages of policy implementation), the extent of international cooperation as a result of the policy implementation, and any increase in investment as a result of policy implementation.

Research Topic Definition The development of a competitive IT sector has been regarded as a strategically important issue by the governments of both developed and developing countries alike. Many countries, including Armenia, have identified IT development as a priority and are working to develop policies to enhance the competitiveness of the IT sector. In this regard, countries actively promote local and foreign investment by supporting and stimulating the IT sector in a variety of ways. Although the types of government policies differ from country to country, large-scale efforts (e.g. improvement of the regulatory framework, investment in infrastructure and education, provision of financial and fiscal incentives, etc.) aimed at creating an attractive and supportive environment for IT development are found to be consistent across a number of countries. These policies are necessary to attract foreign direct investment (FDI) in the IT sector mainly due to the role of supportive policies and incentives as core components of location-based advantages. The growth of the IT sector in Armenia has been largely encouraged by private sector initiatives and foreign investment. Since 2000-2001, when the government of Armenia identified the development of IT as one of its priorities for the Armenian economy and developed a Master Plan, several public initiatives, mainly aimed at improving the business environment and infrastructure, have been implemented, based on active public-private dialogue and cooperation. However, the current level and nature of government involvement is inadequate for ensuring the long-term development and competitiveness of the Armenian IT industry. Therefore, this study seeks to provide the Armenian government and other IT stakeholders with actionable recommendations and monitoring tools in order to secure a foundation for more robust growth and expansion of the IT sector. The study is divided into several sections, with each corresponding to a different problem solution pertaining to the development of Armenia’s IT industry. In this regard, Global SPC has focused on the following key sections: innovation policy, human capital policy, financial and tax policy, and the overall investment climate. The study further concentrates on identifying best practice solutions and recommendations for each of these four major issues, addressing the important sub-fields within these fields when appropriate.

11 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Introduction Applying the benchmarking process, Global SPC has identified seven countries based on their superior performance in IT industry development. The benchmark countries have also been selected based on each specific sub-section of the four identified areas. The study provides not only the benchmark countries and policies, but also their specific actionable best practices. The benchmarking countries identified in this study include: Egypt, Estonia, India, Ireland, Israel, South Korea, and Singapore. The best practices demonstrated by each of these countries, along with primary information collected from experts, have been used as the basis for making recommendations and developing a complete strategy for Armeniaâ&#x20AC;&#x2122;s IT industry development. The study concentrates on providing policy level recommendations, as well as highlighting the importance of public-private partnerships and the cooperation of various stakeholders.

12 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector

he role of the IT industry in the overall economic competitiveness of a country has emerged as a dominant theme for the past several decades. The development of the IT sector is considered as both a highly priority and strategic necessity by the governments of various countries. As IT has generally been viewed within the scope of so-called “merit goods”, which means that the supply and demand of IT products may not be regulated solely by market mechanisms, state interventions are, therefore, required, mainly in the form of establishing policies and supporting the IT sector by providing a set of different incentives. A well-developed domestic IT sector acts as not only a factor of a local economic growth but also to defensively counter imports, particularly given the fact that IT product suppliers are based in a relatively small number of countries. The growth of the IT sector in Armenia has been obvious and promising over the past few years. Factors such as a historically developed scientific research capability and a comparatively educated workforce have played impressive roles in establishing and positioning the contemporary IT sector in Armenia. Currently, the IT sector in Armenia continues to offer substantial opportunities for foreign and local investors and this upward trend in IT development is expected to remain positive for much of the coming decade. Thus, the main conceptual issue rests on the extent of IT sector development. In 2005, the Armenian IT sector generated around $84 million, an increase of over 54 percent as compared to $38 million in 2003, comprising around 1.7 percent of Armenia’s GDP in 2005.

Share of IT industry in GDP for 20051 8.62%

3.99%

2.20%

1.71%

1.38% 0.11% USA

Germany

Ireland

Israel

India

Russia

0.53% Estonia

Armenia

0.09%

0.22%

Georgia

Iran

0.01% Turkey

In 2006, the share of the IT sector in Armenia’s GDP was 1.3 percent, which can be compared to the same level as India (1.4 percent) and Germany (1.3 percent). The rate of growth of the Armenian IT sector posted gains of 30 percent annually during 1998-2006.2

Armenian Ministry of Trade and Economic Development. <http://www.minted.am> Norayr Vardanian, “Armenian Information Technology Sector Software and Services, 2006 Industry Report,” Enterprise Incubator Foundation, April 2007. <http://www.eif-it.com/edit/news_admin/news_images/1_123_big.pdf> 1 2

13 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector There were 160 IT companies operating in Armenia in 2006, of which 50 were foreign companies. In 2006, the Armenian software and services sector posted roughly $84 million in total revenue, resulting in a 30 percent compounded annual growth rate during 1998-2006 (in 1998, the software and services sector posted $10 million in revenue).3 In comparison with 2003, the Armenian IT sector has become increasingly more open and less dominated by a few large companies. In 2006, for example, 20 of the largest IT companies operating in Armenia, representing 13 percent of all IT firms, generated 50 percent of total industry revenue, while in 2003, only 9 percent of all companies generated about the same share of revenue.

Armenian IT Industry Revenue4 84.2

53.3

37.7 30.9 24.2 13.5

2003

2006 Domestic Market

Exports

Industry Total

The number of foreign IT companies increased to about 50 in 2006, comprising 30 percent of the IT market. A greater recognition of Armenian software development has attracted a greater number of foreign investors in the Armenian market. Compared to 2003, the share of European investment (from 17 to 23 percent) and U.S. investment (nearly 70 percent) in the Armenian IT sector increased significantly, while the share of Russian/CIS investment decreased by 70 percent.

Company Ownership: Geographical Distribution for 2006 and 20035 Russia & CIS 8%

Other 2%

Russia & CIS 17%

Other 4%

Europe 23%

USA & North America 67%

Europe 17%

USA & North America 62%

Republic of Armenia ICT Assessment Report, SETA Innovative Enterprise Solutions, July 15, 2000. <http://www.usaid.gov/locations/europe_eurasia/pdfs/armeniaictpub.pdf>. 4 Vardanyan, 2007 5 Ibid 3

14 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector The one area of the Armenian IT sector that accounted for the largest revenue share in 2006 was customized software and outsourcing, which generated $18 million in sales. Other leading revenue-generating sectors included web design and development, Internet service providers (ISPs), networking systems and communications and internet applications. In comparison with 2003, the share of revenue from customized software and outsourcing more than doubled and, in dollar terms, increased almost six-fold, from $3.2 to $18.1 million (industry turnover only doubled in 2003-2006).

Company Specializations: Distribution in 20066 0%

10%

15%

20%

25%

30%

Costomized Software and outsourcing Web design and development internet service provider Accounting, banking, and financial software Chip design, testing, and related Databases and MIS Computer graphics, multimedia, and games

Local firms, 2003

IT services and consulting

Foreign branches, 2003

Internet applications and ecommerce Networking systems and communications

Local firms, 2006 Foreign branches, 2006

Other

In 2006, domestic markets and exports were not distributed equally according to geographic company ownership. Locally-owned companies dominated the domestic market, holding an 81 percent share, although foreign branches comprised 78 percent of exports in 2006. Approximately all of the foreign branches operating in Armenia have been founded by parent companies as offshore software development locations. The relatively small size of the Armenian IT sector deters foreign businesses from expanding their sales in Armenia. But in terms the balance between local and foreign companies, in both the domestic market and export sector, local companies are becoming more export-oriented, as seen by an increase of 6 percent in their share of exports and a 7 percent increase in the share of foreign branches in the domestic market.7

6 7

Ibid Ibid

15 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector

Domestic Market and Exports: Local Firms vs. Foreign Branches8 (in Millions of US Dollars)

41.7 5.9

20.3

1.6

11.9

11.6 3.9

Domestic market, 2003

Export, 2003 Local firms

Domestic market, 2006

Export, 2006

Foreign branches

Around 70 percent of Armenian IT companies are engaged in exports to a various degree, with some garnering only a small portion of their revenues from exports, while others are 100 percent export-oriented. Armenian IT exports constitute $52 million in 2006, which is exported to more than 20 countries. Nearly 60 percent of the exports go to the United States and Canada, followed by the European Union, accounting for 20 percent of Armenian IT exports, and another 16 percent of IT exports to Russia and the CIS countries.

Export Revenues: Geographical Distribution9 Russia & CIS 16%

Europe 19%

Other 6%

Russia & CIS 10%

USA & North America 59%

Other 6%

Europe 16% USA & North America 68%

The size of the IT-related workforce in Armenia consisted of 4,700 specialists in 2006, following a compounded annual growth rate of about 17 percent from 2003 and approximately 21 percent from 1998. The main reason for the decline in growth in the sector stems from the inadequate capacity of educational institutions to cope with mounting demand of the IT industry for high-qualified graduates. Almost 70 percent of the workforce consists of technical specialists, such as software engineers, analysts, developers, project managers, and others. Compared to 2003, the ratio of technical staff to management/administrative employees mirrored 8 9

Ibid Ibid

16 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector the same 50 percent share of local and foreign companies. Management and business professionals represent only 15 percent of the total workforce. There is also a gender deviation in the workforce, with males accounting for 72 percent and females only 28 percent of the workforce respectively. Nevertheless, the percentage of females employed in the Armenian IT sector is slightly higher compared to the U.S. (26.6 percent in 2005)10 and is almost twice that of the UK (15 percent in 2006).11

Workforce Distribution: Specialty and Company Ownership12 660

450

990

Local firms, 2003

640

410

1640

1750

Local firms, 2006

Foreign branches, 2006

1130

Foreign branches, 2003 Technical Specialists

Management and Admin

Almost 3,150 of workforce specialists are employed in the services sector, with around 410 working for internet service providers. Workforce distribution within the services sector, as the chart below reveals, has changed only slightly from 2003, with more people working for local companies than for foreign branches. The opposite is true for specialists working in the packaged sector, however.

Workforce Distribution: Segments and Company Ownership13 Foreign Packaged, 26%

Local Services (excl ISPs), 38%

Local Packaged, 7% Local Services (excl ISPs), 9%

Foreign Services (excl ISPs), 20%

Foreign Packaged, 20%

Local Packaged, 9% Local Services (excl ISPs), 10%

Local Services (excl ISPs), 38%

Foreign Services (excl ISPs), 20%

U.S. Department of Labor, Bureau of Labor Statistics. <http://www.bls.gov> Madeline Bennett, “IT industry is losing the feminine touch,” IT Week, March 14, 2007. <http://www.computing.co.uk/itweek/news/2185446/industry-lacks-feminine-touch> 12 Vardanyan, 2007 13 Ibid 10 11

17 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Overview of Armenian IT Sector On December 28, 2000, the Government of the Republic of Armenia officially identified the IT industry as one of the priority sectors of the Armenian economy and prepared a number of government decrees devoted to the development and regulation of the innovation sector. The Armenian Government Action Plan specifically declared that “taking into consideration the increasing growth of information technologies in the international economy, the Government of Armenia shall pay special attention to the development of that field in Armenia.”14 And on May 13, 2001, the government approved its Strategy of the Development of ITC Industry, which was developed by the Armenian Ministry of Industry and Trade and based on the ICT Master Plan, prepared with substantial technical assistance from the World Bank and USAID.15 In July 2001, the Information Technologies Development Support Council of Armenia (ITDSC), chaired by the prime minister, was established by presidential decree. The mission of the Council is to act as a bridge between the government and private sector and to serve as a connecting link between Armenia and its Diaspora. The goals of the ITDSC are to assist the government and the private sector in building a strong and viable IT industry and developing Armenia as an advanced information society.16 The recent “Law on Government Support in Innovation Activity in the Republic of Armenia” (June 14, 2006) and the “Law on E-Communication” (August 13, 2005) established the legal and economic bases of the formation and implementation of the Armenian state innovation policy and the forms of state innovative activities. Armenia’s informational legislation is in the process of formation, with added measures expected to be formulated and adopted in the near future. Moreover, there are a number of draft laws that are currently under consideration in Armenia. These include the draft “law on information, informatization and protection of information resources,” which was only recently presented to the National Assembly (Armenian parliament), and another draft “law on information” that was introduced by a member of the Armenian parliament. According to the representatives from NGOs and independent legal experts, the law contains too many blanket norms and, in its present form, will not have a significant impact on the formation of the legal framework necessary for the development of IT and informational legislation. Therefore, this research on IT sector competitiveness also addresses the institutional aspects of supporting and promoting IT development on the governmental level in ways that encourage private sector initiative and investment. It further offers a review and analysis of leading models of supporting institutions, which implement or coordinate IT sector policy, particularly in collaboration with industry and investors. Examples from countries with successful experience in IT development and suggestions of possible solutions for Armenia, taking into account local circumstances, are also provided. The global goals of the ICT Master Plan adopted on May 13, 2001 included: To create a vibrant and sustainable ICT industry that promotes growth in other sectors of the Armenian economy; To position Armenia in the knowledge -based global economy. A new strategy plan for the IT sector is to be developed in order to drive the next stage of Armenia’s IT sector development by engaging new functions and new tools to meet these goals. The successful implementation of the new strategy must be based on a more aggressive set of goal-oriented tools and policies, based on the experience of other successful countries.

Protocol decision of the RA Government meeting #58 as of 28.12.2000 Armenian Ministry of Trade and Economic Development 16 IT Development Support Council. <http://www.itdsc.am/home/oalsgoals/> 14 15

18 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

nnovation policy (IP) is one of the main prerequisites for the international competitiveness of countries and their economies, and for the development of the IT sector. Small countries usually emphasize existing advantages of their national innovation systems which allow them to be more competitive in certain segments of the international market. IP policies are mostly directed toward the promotion of innovation clusters, technology transfer, R&D financing and the protection of intellectual rights, as well as the creation and integration of networks. R&D activities are considered to be the main driving components of greater productivity and increased competitiveness. Intellectual Property Rights (IPR) protection contributes strongly to IT sector development by stimulating innovation and industrial and scientific R&D, preventing unauthorized copying and intellectual property theft or misappropriation, and by securing benefits to right holders. IPR protection also creates a more positive and transparent environment for foreign direct investment (FDI) and technology transfer. For example, both India and Brazil experienced considerable growth in FDI following the introduction and enforcement of patent, trademark, and industrial property-protection laws.17 National innovation policies also prioritize the creation of a favorable regulatory and legislative framework for private investments, as the private sector, i.e. small and medium-sized innovation firms are the driving force for the growth of the sector’s competitiveness. In this sense, the policies usually emphasize the role of venture funds, techno-parks and incubators, and simplified business regulations and operation mechanisms.

Characteristic features of innovation policy of various countries 18 Direction of the IP Optimization of the structure of the national innovation system

Promotion of innovation cooperation between business and science inside the country

Integration into international innovation networks Regulation of internal innovation networks

Formation of the national innovation system

Characteristic features Optimization of the state governance and planning in the area of innovation Optimization of state financing in the area of science and innovation Development of fundamental research Coordinated promotion of cooperation between universities and corporations Large-scale state investments into science and innovation, involvement of the national private capital Promotion of the innovation activity in the private sector through foreign capital involvement

Countries India, Japan, Norway, Chili US, France, Denmark, Norway, Sweden, Taiwan, Australia, Great Britain Great Britain, Sweden, Slovenia US, Finland Israel, Finland Ireland, Korea, Israel, India, China, Great Britain, Malaysia

Promotion of innovation initiatives in the science sector

Germany, Japan, New Zealand, Denmark

Systemic integration

Israel, Finland, Netherlands, China

Technological specialization

Korea, India, Taiwan, Singapore, Malaysia

Creation of special conditions for the establishment of new links in the area of innovation Promotion of new national regional initiatives

US, Ireland, Norway France, Germany, Finland

Restructuring of the state sector of science

Bulgaria, Poland, Lithuania

Initiating the integration of science and education

Estonia, Latvia, Czech Republic

Involvement of small and medium business in the area of innovation Definition of main import directions in the area of advanced technologies

Estonia, Slovakia, Czech Republic, Chili, Latvia, Hungary, Turkey Hungary, Czech Republic, Turkey, Chili

Kamil Idris, “Intellectual Property – A Power Tool for Economic Growth,” World Intellectual Property Organization (WIPO), March 23, 2005. <http://www.wipo.int/about-wipo/en/dgo/wipo_pub_888/index_wipo_pub_888.html> p.24-31 18 “Science and innovations development strategy of Russian Federation for the period up to 2015,” Ministry of Education and Science of the Russian Federation, Moscow, 2006 17

19 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy The set of indicators for the innovations area provides a specific understanding of this sector, although they are not sufficient for the selection of successful policies and the formulation of unambiguous conclusions regarding these policies. Indicators should be considered in conjunction with implemented measures and selected priorities. The main indicators of innovation policy in an international comparative context are presented in the chart below:

Comparison of the innovation policy indicators of foreign countries19 Indicators of the innovation area

Japan

Germany

South Korea

Russia

Domestic expenditures on research and development in % to the GDP

2,60

3,15

2,55

2,64

1,17

The share of off-budget resources in the domestic expenditures on research and development (%)

68,8

82,3

68,9

76,1

39,4

The share of the higher education sector of science in the domestic expenditures on research and development (%)

16,8

13,7

16,8

10,1

5,5

The share of scientific institutions having access to Internet through dedicated channels (%)

100,0

33,9

The efficiency of the inventive activity (the number of patent applications for inventions submitted by applicants in the ratio to 10000 people)

17,6

24,3

7,9

7,5

1,60

The share of innovation products in the total sales volume of industrial products on the domestic market (%)

n/a

34,3

49,8

5,6

The share of industrial enterprises and organizations implementing technological innovations in the total number of organizations (%)

n/a

65,8

10,5

The share of enterprises implementing organizational innovations in the total number of these enterprises (%)

n/a

68,5

28,5

â&#x20AC;&#x2030;19

â&#x20AC;&#x201A; Ibid

20 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

General Overview of ICT Innovation Policy There are several legal instruments currently regulating the innovation and IT sectors of the Armenian economy, including the June 2006 Law on State Support to Innovation Activities, the Innovation System Development Program for 2005-2010, the August 2005 Law on Electronic Communication and the December 2000 Law on Scientific and Scientific-Technical Activity.20 In addition, there are also several relevant state planning documents, such the Strategy on the Development of Science, the Strategy on the Privatization and Optimization of (Scientific) Research, Planning and Design Organizations, the IT Industry Development Policy, and other agreements, treaties and legislation pertaining to the protection of intellectual property rights. The Armenian Law on State Support to Innovation Activities, which includes the experience, principles and approaches of other countries in the development of innovation system, is considered to be a new approach for the country in developing a knowledgebased economy. These principles became the basis for the elaboration of the Innovation System Development Program for 20052010, which envisages the creation of a national innovation system through the establishment and expansion of inter-related institutions in the scientific-technical and industrial-technological areas, as well as among intermediary organizations, venture and innovation funds, techno-parks, business incubators, and scientific and educational institutions engaged in technology transfer and intellectual property assessment. The main objective of this state program is to enhance the competitiveness of innovation products in the domestic and external markets and to promote the transition to sustainable economic development. Although this program is still in the initial stage, and its performance will not yet provide a complete overview of the existing situation, its selection of organizational priorities is significant, as shown in the chart below:

The status of IP organizational priorities in Armenia Organizational priorities

Current situation

Technology transfer centers

- Any technology transfer center was not found, - Weak enforcement of the legislation pertaining to intellectual property rights

Venture, innovation funds

There is one venture fund

Techno-parks, business incubators

There is one incubator and one techno-park

Creation and development of scientific-educational institutions

- There are research institutions of the NAS, Yerevan State and State Engineering Universities, - There are examples of cooperation between the private IT sector and educational-scientific institutions

The coordination infrastructure of the IT sector includes the government, the IT Development Support Council (ITDSC), the Union of Information Technology Enterprises (UITE), the High-Tech Council, the Armenian Development Agency (ADA), ArmenTech and several other associations, as well as nearly twenty research centers and projects, including USAID (CAPS), the Enterprise Incubator Foundation (EIF), the World Bank and others involved in this process. However, there is insufficient interaction among the entire scope of the sector’s infrastructure, including the National Academy of Science, industry, state ministries and the private sector, it is necessary to have an authorized state body serving in a process coordination role. Although the quantitative indicators of the IT sector of Armenia have enjoyed an increase of between a two- and three-fold expansion from 2003 to 2006, the changes are still marginal, as the overall share of the IT sector in the GDP was a mere 1.7 percent in 2006.21 And many of the leading world IT corporations are still not present in Armenia, although there is some level of specialization in the fields of automated design, optimization and testing systems of semiconductors, complex integral schemes, memory, software resources and packages for advanced systems (Oracle, MS SQL), flexible data analysis systems, search engines, communications and commercial technologies, etc. All relevant laws, treaties and legal agreements are available in both English and Armenian on the Armenian National Assembly website. <http://www.parliament.am/l?lang=eng> or <http://www.parliament.am/l?lang=arm> 21 According to the Armenian Ministry of Trade and Economic Development. <http://www.minted.am/files/docs/25_en.pdf> P. 1 20

21 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy Academic R&D activity in Armenia covers a wide range of theoretical and applied research, but the level of state financing remains relatively low as compared with the countries listed below. Moreover, R&D in Armenia faces substantial development obstacles and requires a greater identification of priorities, the promotion of R&D in business applications for small- and medium-size enterprises (SME) business activity, participation in broader international R&D projects, and more targeted cooperation with the industrial sector. The Armenian government is currently in the initial process of developing e-government. Thus, the table below demonstrates the Innovation Development level of Armenia as compared to the world.

Armenia’s Innovation System in an International comparison 22 10 Singapore

G7 LEVEL

Korea

8 Czech Rep.

Most recent

ENTRY LEVEL Latvia

Romania Mexico

COPING ECONOMIES Kazakhstan China

Turkey

4 LAGGARDS

Slovakia

Slovenia Hungary

USA Israel

Ireland Russia

Estonia

Argentina Poland Belarus Ukraine Georgia Chile Costa Rica

Armenia

Uzbekistan

India

0 0

1995

Based on data from: The World Bank, Knowledge for Development (K4D) interactive benchmarking tool. <http://info.worldbank.org/etools/kam2/KAM_page1.asp> 22

22 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for R&D Development R&D activity is considered to be one of the major components for stimulating the growth in innovative products and assuring their competitiveness. The innovation policies of countries are usually based on various approaches that promote R&D. R&D activity involves the areas of strategic and applied research, with particular importance attached to the involvement of the industrial sector in the strategic research process. The involvement of small and medium research and development organizations is also important for the overall development of research activities. Across a number of countries, national governments tend to promote cooperation between the industrial sector and research organizations around activities focused on the development, commercialization, application and transfer of research and technologies. Technologies that are the main targets for technology transfer are largely those that are affiliated with non-material products (including innovations), useful models, industrial samples, computer software, databases, topologies of integral micro-schemes, technical information, research papers and other scientific and technical information produced as a result of research, experimental, design and technological activities. Small innovation enterprises are the main clients of Technology Transfer Centers, since these are usually the most flexible and dynamic entities in the scientific and research sector, with a flexibility rooted in their ability to quickly adapt to the demand of the science-intensive and high-technology markets. The specific case studies of Israel and Ireland reveal the successful and rapid innovation–based industrial growth for countries with different political systems and varying infrastructures, both of which can be readily applied as models for Armenia.

R&D Comparative indicators of Armenia, Ireland and Israel23 Armenia

Ireland

Israel

Intellectual Property Protection (1-7), 2006 10 Tariff & Nontariff Barriers (0-5), 2006 FDI Inflows as % of GDP, 2000-04 Royalty and License Fees Payments Employment in Industry (%), 2003 (US$ mil.), 2004 Quality of Science and Math Education Science and Engineering Enrolment Ratio (1-7), 2006 (%), 2004 5 Private Sector Spending on R&D Science Enrolment Ratio (%), 2004 (1-7), 2006 High-Tech Exports as % of Manuf. Exports, 2004 Patents Granted by USPTO / Mil. People, avg 2001-05 Patents Granted by USPTO, avg 2001-05

Researchers in R&D, 2004 Researchers in R&D / Mil. People, 2004 Total Expenditure for R&D as % of GDP, 2004

Availability of Venture Capital (1-7), 2006 Manuf. Trade as % of GDP, 2004 University-Company Research Scientific and Technical Journal Articles / Collaboration (1-7), 2006 Mil. People, 2003 Scientific and Technical Journal Articles, 2003 Graph and table from: “Knowledge for Development: Knowledge Assessment Methodology, KEI Indicators,” World Bank, 2006. <http://info.worldbank.org/etools/kam2/KAM_page4.asp> 23

23 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

R&D Comparative indicators of Benchmark Countries R&D Indicators

Armenia

Ireland

Israel

actual

normalized

actual

normalized

actual

normalized

Intellectual Property Protection (1-7), 2006

2.8

1.98

5.3

8.1

5.5

8.19

FDI Inflows as % of GDP, 2000-04

5.81

7.95

16.59

9.62

2.73

4.55

Royalty and License Fees Payments (US$ mil.), 2004

n/a

18443.7

9.82

490.8

7.39

Science and Engineering Enrolment Ratio (%), 2004

6.54

23.3

5.35

29.64

8.37

Science Enrolment Ratio (%), 2004

0.34

0.12

12.26

7.09

10.17

5.23

Researchers in R&D, 2004

4927

3.4

10910

5.53

9161

4.36

1605.93

6.38

2674

7.66

1569.74

6.06

Total Expenditure for R&D as % of GDP, 2004

0.25

2.26

1.21

7.42

4.46

9.89

Manufacturing Trade as % of GDP, 2004

34.66

5.08

75.69

8.79

60.37

7.98

University-Company Research Collaboration (1-7), 2006

2.7

2.41

4.6

8.28

5.2

9.22

Scientific and Technical Journal Articles, 2003

175

4.43

1758

7.02

6941

8.55

58.33

6.41

439.5

8.4

1035.97

9.77

Availability of Venture Capital (1-7), 2006

2.5

1.55

5.1

9.31

5.5

9.83

Patents Granted by USPTO, average 2001-2005

1.2

3.79

170.8

8.03

1093.4

9.02

Patents Granted by USPTO / Mil. People, average 2001-2005

0.4

5.38

42.45

8.26

163.81

9.47

High-Tech Exports as % of Manufacturing Exports, 2004

1.1

1.23

33.8

9.43

18.8

8.03

Private Sector Spending on R&D (1-7), 2006

2.7

1.72

4.7

8.53

5.3

9.4

Quality of Science and Math Education (1-7), 2006

3.8

3.88

5.3

8.36

5.3

8.36

Employment in Industry (%), 2003

14.1

1.5

27.8

7.38

22.6

5.33

7.13

Researchers in R&D / Mil. People, 2004

Scientific and Technical Journal Articles / Mil. People, 2003

Tariff & No tariff Barriers (0-5), 2006

The approaches of Israel and Ireland in forming innovation systems differ greatly. Ireland has concentrated on attracting multinational corporations to the country, while not prioritizing the formation of deeper relations between corporations and local industries. The Israeli IT sector, on the other hand, has been able to achieve superior performance due to the establishment of a strong USIsraeli industrial relationship, defined by domestic firms focusing on product R&D while their American partners focus on sales and marketing. Israelâ&#x20AC;&#x2122;s developmental agencies have also been attempting to lure foreign firms to open R&D centers in Israel.

24 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Government-Agencies--Industry relationship 24  Development Agency: fixing market failures of industrial R&D, maximizing R&D activities

Israel

Ireland

GOVERNMENT

 Neutral horizontal technological policies  Policy on R&D grants for private R&D ideas in all sectors  Start-up financing directly through foreign sources or channeled through local venture funds

DEVELOPMENT AGENCIES

I NDUSTRY

INDUSTRY

 Initial growth of indigenous software industry before specific innovation policy development  Development agencies focus on innovative start-ups  Specific industry focused innovative policies  Channeling EU money through local venture funds, financial institutions

Otherwise, the general preconditions and key factors of success in both the Israeli and Irish models offer an important degree of similarity that can be readily applied to Armenia.

Key Success Factors of R&D Sector Key Success Factors of R&D Growth

Israel

Ireland

Current state in Armenia

Talent-high quality workforce

Resources exist

Strong R&D base (strategic and applied research)

NAS institutions and state universities cover wide range of R&D specializations; private sector is in growing phase.

R&D specializations, diversification

Assistance from entrepreneurial abroad (Diaspora), FDI-driven strategy, Off shored business process

World’s largest companies’ R&D centers, investments

High spending on education and R&D, Research Funding

Education system well-formed and in the focus of government policy, R&D financing is still low, but going growth and settled by state budget.

Start-ups support

Main incubator (EIF) provides start-ups support, financing is still at a low level. Can be the one of the major driver of R&D sector.

Geographical proximity and integration to EU, strong policy to international cooperation, BiNational Cooperation

Weak international cooperation. Chance to promote R&D sector, to establish global priorities in R&D, to be involved in cutting-edge R&D. Strong policy to EU integration.

Technology Transfer, R&D commercialization

R&D coordination body, investment promotion.

There is no R&D coordination body like OCS, IDA. NAS RA can lead the same function. Can be organized, there are strong needs of FDI.

Fiscal incentives, funding

Some incentives, weak funding. Need to be applied to encourage the R&D.

Academic institutions have wide range of R&D specializations, private sector quite diversified too, but the R&D priorities are not established well. Armenia has the same chances to get assistance from abroad. The assistance is still weak. Armenia on the way of FDI-driven strategy and off-shoring business process. There are several well known companies but there are no worldwide leaders. There are possibilities to attract leading ICT companies. It can play key role in policy.

There are no TT centers. Way to encourage university-industry cooperation, protection and commercialization of inventions and discoveries made by university scientists.

(+) strong, (+-) good, (-+) weak, (-) absent Dan Breznitz, Innovation and the State; Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland. Yale University Press, New Haven and London, 2007. <http://www2.sa.unibo.it/seminari/Papers/20070522%20Breznitz.pdf> 24

25 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Israel Israel is ranked first regionally and sixth globally in terms of the innovation components of the Growth Competitiveness Index (GCI), is rated first regionally and seventeenth globally in terms of the innovation components of the World Bank’s Knowledge Economy Index (KEI). With a population of around seven million, Israel accounts for roughly one percent of the world’s published scientific papers (and holds the largest number of scientific papers per capita). Thirty out of every thousand workers in Israeli industry are engaged in R&D activities and according to the number of utility patents (per million of population) registered with the US Patent Office, Israel is, on average, ahead of the G7 countries.25 Israel devotes 4.8 percent of its GDP to civilian R&D, compared to only 2.8 percent in the U.S., 3.1 percent in Japan, 3.5 percent in Finland and 4.3 percent in Sweden.26 Other keys factors of scientific success include the availability of a highly trained workforce and the highest number of scientists and engineers per capita (number of engineers per 10,000: Israel–135, U.S.A.–70, Japan–65, and The Netherlands–53).27

R&D support key stages in Israel Results: Thirty out of every thousand workers in industry are engaged in R&D activities. World’s largest number of scientific papers per capita. The highest number of scientists and engineers per capita. 1991-

OCS initiates four new programs: The Technological Incubators, Yozma (VC, $100 million), Inbal program (government insurance company), Magnet program (promotion of the long-term competitive advantage of Israeli NTBFs).

1989-

Flow of technologically-educated workforce from the USSR. The US’ help in raising $10 billion in bonds to finance the settlement of the immigrants

1985

The recognition of software as an industrial branch. Creation of two VC institutions.

1984

R&D law improvement. OCS and BIRD’s activity expansion

The main determinants of success for the Israel’s IT sector and its competitive advantage have been attributed to its focus on Israel’s R&D. The country’s R&D capabilities (government-built academic R&D infrastructure, strong academic research apparatus, education system and sponsored university level research) are the primary contributions to the Israeli IT industry’s success. After the successful adaptation by the Israeli defense industry, these capabilities were diffused by various state polices and distributed throughout the innovation system. The development of the IT industry can be divided in two stages: the successful development of a hardware sector, followed by a vibrant software sector. Such other factors as a large global Diaspora, which helped to leverage a broad networking of technology and venture capital financing, combined with the influx of about 1 million skilled immigrants from the former Soviet Union, resulted in significant contributions to the overall success of Israel’s R&D development. 28 The 1984 Israeli law on research and development, and its formal identification of the software sector as a key industrial branch of the economy the following year, have each played a major role in the promotion of R&D activities.29 The law prioritized R&D activities, developed tools for promoting both strategic- and applied-R&D directions, and provided supportive measures to stimulate R&D activities. The R&D law simplified the processes of R&D funding, stimulated the entrance of international companies, and provided the basis for the establishment of technological incubators. As a result of that pioneering law, Israeli R&D policy has also effectively promoted the equal development of both strategic- and applied-R&D activities. Israeli government presentation, “Seminar on Technology Transfer: The Israeli Experience,” Helsinki, Finland, September 2006. <http://akseli.tekes.fi/opencms/opencms/OhjelmaPortaali/ohjelmat/PINTA/fi/Dokumenttiarkisto/Viestinta_ja_aktivointi/Seminaarit/Loppuseminaari_2006/ Cohen_Helsinki_Seminar.pdf> 26 European Commission, “Key Figures 2003-2004”. <http://ec.europa.eu/research/era/pdf/indicators/benchmarking2003_en.pdf> 27 Israeli government presentation, 2006 28 Dan Breznitz, “Innovation-Based Industrial Policy in Emerging Economies? The Case of Israel’s IT Industry,” Article 3, Volume 8, Issue 3, The Berkeley Electronic Press, 2006. <http://www.bepress.com/cgi/viewcontent.cgi?context=bap&article=1155&date=&mt=MTE4NjEzNDAxNw%3D%3D%0D%0A&access_ok_form=Continue> 29 Breznitz, 2006 25

26 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy Strategic research activities are coordinated by the Israeli Ministry of Science, which prioritizes the funding of projects within specific research areas in which Israel can compete internationally. Funding is generally provided to large, multidisciplinary, multiinstitutional research initiatives. Strategic research programs also seek to significantly increase communication, coordination, and cooperation between researchers in Israel.30 Applied Research activities are coordinated by the Ministry of Industry, Trade & Labor, while applied Industrial R&D is funded by the Ministry’s Office of the Chief Scientist (OCS). Funded projects must be innovative, export-oriented and include appropriate management, production, and marketing strategies. Typically, projects receive funds for up to half of all R&D costs, which are repaid when the project begins to generate revenue. The OCS offers a variety of support programs to assist the development of new, marketable technologies. Additionally, programs from the YOZMA group also support new R&D projects by providing venture capital financing to start-ups.31 Israel is especially strong in the early-stage development of new projects and is well regarded for transforming innovative ideas into marketable products. Marketable R&D products are supported by an R&D Fund, which has a number of programs supporting R&D development through grants. The grants are structured on a sliding scale from 20-50 percent of an R&D budget and are conditional, with royalty payments of between 3-5 percent of future product sales. The fund has annual budget of $300 million and is used to support over 1000 projects from more than 500 companies per year.32

Technology Transfer in Israel33

Each Israeli university endowed with a research component has its own company for technology transfer. It manages all activities relating to the protection and commercialization of inventions and discoveries made by scientists. These companies, owned outright by the universities, are responsible for the analysis of new inventions, filing patent applications, protecting and maintaining intellectual property rights, attracting industry partners to develop discoveries and inventions, and for negotiating, concluding and enforcing research and license agreements reached with industry groups.

International Cooperation in Israel34

Israel holds scientific agreements with around 40 countries. In the last decade alone, Russia, China, India, Korea and several other Asian countries have also joined many Western countries, which traditionally maintain scientific and research relations with Israel. Israeli scientists are known for their intensive international activities and Israel is the only non-European country fully associated with the EU Framework Program for R&D. Israel is also a member of many European and international scientific organizations, which allows Israeli companies and research organizations to more closely integrate into European and international business and science communities. Many of the world’s largest companies such as Intel, IBM, Motorola, Applied Materials, BMC and HP have established R&D centers in the country.

Bi-National Cooperation in Israel35

Bi-national projects have made a major contribution to the transfer of new technologies from academia to the market place. The model of Israel’s bi-national scientific cooperation includes participation in joint research projects with foreign counterparts, joint conferences and workshops, and scientific exchanges. Bi-national research funds and programs were established with the United States, Germany, France, South Korea, China, India, Russia and Slovenia, and Israel has a number of industrial R&D agreements with other countries. Most importantly, companies taking part in these programs are entitled to receive R&D grants.

32 33 34 35 30 31

Israeli government presentation, 2006 Ibid Ibid Ibid Ibid Ibid

27 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy Bi-national industrial R&D funds were established with the US (BIRD), Britain (BRITECH), Canada (CIIRDF), Korea (KORIL), Singapore (SIIRD) and Australia (VISTECH). Grants of up to 50 percent of R&D expenses are provided for each company taking part in the project and, in the case of universities, 100 percent of additional costs and 20 percent of overhead are also provided. Conditional grants have duration of up to three years and are repayable in the form of royalties on sales revenue.

Ireland In a fairly short time span (since the early 1990’s), Ireland has experienced a profound transformation from a virtually nonexistent profile as an IT producer, to becoming one of the largest exporters of IT products in the world. Ireland rank third in the world according to A.T.Kearney’s Offshore Location Attractiveness Index 2004 and provides the best overall investment environment for R&D activities. The compounded annual growth rate of Ireland’s IT sector has been around 19 percent since 1992. The Irish IT-related sectors employ around 80,000 people and generate sales of around $66.3 billion annually, accounting for more than one-quarter of all Irish exports, around 12 percent of GDP, and around 5 percent of Irish employment. The IT sector is comprised of about 1,300 companies.36 Nearly 300 multinational companies are engaged in R&D related activities in the country. Two-thirds of all industry in R&D is performed by overseas companies. In 2002, exports of the Irish IT sector products exceeded US$40 billion, representing 34 percent of all exports.

Some R&D indicators history37 R&D indicators (Eurostat)

1981

1990

2000

2004

Researchers-Per thousand employed, full-time equivalent

1.8

5.8

Gross domestic expenditure on R&D-As a percentage of GDP

0.67

0.82

1.13

1.2

Number of triadic patent families Exports of ICT equipment-Millions of US dollars

13271 (1996)

59 (2003) 26352

24931

The overall policy framework for Ireland’s IT sector was developed in the past two decades. The main aspect of the country’s best practice in its policy implementation was most evident in the organization of an inward investment regime. Irish policy anticipates and addresses the problem of turning an FDI strategy into a sustaining strategy for indigenous IT industry creation. The Irish strategy has been aimed to first attract large numbers of offshore IT firms and then to leverage them in order to stimulate growth of the domestic IT sector and the country’s economy as a whole.

R&D support key stages in Ireland38 Results: 1,300 IT companies, Over 300 foreign R&D companies, 80.000 people in IT sector, IT output: 25 % of Irish exports, around 12 % of GDP and around 5 % of Irish employment 2004

Irish Government introduced a new R&D tax credit of 20 %

2003

Enterprise Ireland- R&D support, VC, skills. Total grants provided to industry were 71,72 million

2003

The Irish Development Agency (IDA) - securing new inward investment in manufacturing and internationally traded services sectors. Budget - EUR 96,5 million.

2001

ICT Ireland (IBEC): policy statements, statistics

2000

The Science Foundation Ireland (SFI) set up - university and industry R&D development, EUR 646 million investments in R&D

1993

Industrial Development Act - Industry obliged to be involved in R&D

“Key Industry Statistics,” ICT Ireland. <http://www.ictireland.ie> Ibid 38 Ibid 36 37

28 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy The Irish Industrial Development Act of 1993 has been a critical driver for the growth of R&D activities. According to the law, all manufacturing, re-manufacturing, and research companies are obliged to cooperate with R&D companies in fields of science, engineering and technological sectors.39

R&D Incentives in Ireland

Tax incentives for R&D activities have been a critical driver in Ireland’s enhanced competitiveness over the past ten years. The policy on R&D incentives is regulated by the Taxes Consolidation Act of 1997 (with prescribed R&D activities) and that were addressed in the Finance Act of 2004, which provides for a 20 percent incremental tax credit for companies initiating R&D activities. The provision has been a driving force for increasing the number of R&D activities and to make Ireland an attractive destination for foreign companies. The incentive serves as a complement to various direct R&D grant supports also available through various agencies of the State. Other fiscal incentives include tax incentives on the distribution of patent dividends, and grants in areas such as third level research and industry-based product development. Moreover, companies that are certified to execute R&D activities and are located in specific free zones get the following tax incentives: a 10 percent corporate tax, VAT and customs duty exemptions, and a 10 percent “‘Manufacturing Rate” of Tax.40 Grant opportunities are provided for foreign researchers that conduct R&D activities on the territory of Ireland, while, local companies involved in European R&D programs also receive incentives for interdisciplinary and combined R&D activities. Relatively large amount of funds have been allocated to support the activities of “Enterprise Ireland” (to stimulate firms in Ireland). Specifically targeted at firms, Enterprise Ireland manages a broad range of R&D support schemes including: 41 Research, technology and innovation scheme (R&D co-funding); Innovation management initiative (skills); Support to strategic and large R&D projects through R&D co-funding; Innovation partnerships collaboration with universities and technology institutes; International R&D opportunities - advice on partners, networking and funding; R&D awareness initiative consultancy for firms without prior R&D experience; Seed and Venture Capital Program to assist in the start-up of firms; Intellectual Property Assistance Scheme advice on the protection, development and commercialization of intellectual property, expertise and collaboration in specific technology areas. R&D infrastructure (scientific and engineering research) in the IT sector is stimulated by governmental initiatives such as Technology Foresight and Science Foundation Ireland (SFI). Between 2000 and 2006, SFI has invested $840 million in academic research and research teams involved in generating new knowledge, leading or cutting-edge technologies, and competitive enterprises in two broad areas: IT and biotechnology. Moreover, all organizations involved in R&D development also provide informational support.

Technology Transfer in Ireland

One of SFI activities directed toward university-industry technology transfer. Ireland stresses the value of technology transfer particularly for the development of IT related SME sector. Technology transfer among SME and universities provides for fast, cheap and less risky innovation development. In the event larger companies were not previously interested in technology transfer, more recent trends have identified vast possibilities for advanced companies to gain from technology transfer. Many large companies currently show interest in technology transfer and perceive it as an actionable and valuable instrument for business development. Moreover, when these companies create their own technologies, they also take into account greater possibilities from technology transfer, for example involving smaller companies. No. 19/1993: Industrial Development Act of 1993 No. 39/1997: Taxes Consolidation Act of 1997. 41 Enterprise Ireland. <http://www.enterprise-ireland.com/> 39 40

29 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

R&D Development in Armenia: From the Perspective of Benchmarking Countries R&D-related activities in Armenia are mainly performed by three key players: the private sector, the National Academy of Sciences (NAS) and Armenia’s State Universities. The growth of the Armenian private sector was mainly due to the entry of foreign IT companies from Europe and the United States. The spectrum of research projects carried out in the area of Armenian R&D is not very wide, but includes a number of modern sub-sectors that are in demand by foreign countries, such as the semi-conductor and electronic industries, operational and applied software programs, and commercial technologies, among others. Nine institutions of the Armenian National Academy of Sciences can be classified as important R&D centers. The R&D activities carried out by these institutions encompass a wide spectrum of theoretical and applied research. At present, these organizations are actively integrating into the international cooperation network of countries (United States, Germany, Japan, France, Sweden, etc.) but remain hindered by the lack of institutional large-scale and comprehensive R&D work and unresolved modernization needs. The research activities undertaken by the Yerevan State University and the Yerevan State Engineering University are concentrated in the areas of mathematical modeling, automated computer design, neuron networks, semi-conductors and other less costly spheres of research. There are no serious incentives available for the development of the R&D area in Armenia. Any activity undertaken in this direction is subject to the country’s general investment and tax environment, making it difficult for Armenia to be competitive in the face of incentives from peer competitors and neighboring countries. The sources of financing for R&D efforts in Armenia are limited by scarce resources allocated from the state budget, several grant opportunities and small-scale foreign investment. About 80 percent of resources allocated to science from the national budget are directed to fundamental research, with only the remainder available for applied research projects. 42

R&D IT Programs in Armenia

The Government of Armenia has signed scientific and technical cooperation agreements with 13 countries, but more specific agreements on cooperation in the IT sector have yet to be concluded. R&D priorities are not clearly defined in Armenia, and there are no national research programs. Although some Armenian research institutes and universities collaborate with foreign research centers, the topic areas are limited to a narrow private focus. The research institutes of the National Academy of Sciences mostly focus on collaboration with foreign academic research centers and private foreign projects, since the current state of Armenian industry is capable of exerting only a very marginal demand for research activities. Research cooperation suffers from weak coordination, while incentives for research cooperation are also lagging behind. Moreover, there are no basic (dominating) local and international cooperation projects for research activities. Concerning technology transfer, there is no single center in Armenia that can serve as an intermediary between an innovator, an author, a license-holder, and the state body which can supervise the application of an innovation, a product, or an invention. Discussing the economic development issues the Government of Armenia has acknowledged the fact that old, outdated technological practices are still far too prevalent in the economy, whereas the effective system transferring contemporary technologies has not yet developed.43

42 43

According to a supplemental agreement adopted on January 20, 2005, relating to the Strategy of Innovation Activities carried out in Armenia Republic of Armenia governmental decree # 691-A, adopted on June 17, 2003, entitled “Republic of Armenia Government Program: Economic Issues.”

30 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy With taking into account the fact that patent output is a key indicator of university technology transfer capacities in the benchmarked countries, the relevance of successful experience of Technology Transfer Centers (TTC) for Armenia can be demonstrated by the cases of the following countries: Israel (where each university has its Technology Transfer Center), Taiwan (whose organization of TTCs is on the basis of selected universities), and Korea (with its own organization of local regional TTCs). Due to the fact that the implementation of such a TTC approach in Armenia is limited by the absence of such centers in Armenia, a more feasible option for the establishment of TTCs may be on the basis of universities and research institutes, accompanied by the involvement of academic researchers in the process and guided by the demand for existing technologies. The experience of Ireland in this context provides an interesting perspective in terms of emphasizing the technology transfer approach for small and medium-sized R&D enterprises. R&D Development

State R&D Development Agency

Policy in state promotion of R&D sector

Financial assistance for developing R&D products

Participation in international and regional programs

Benchmark Country

Ireland Develops policy on R&D grants for private R&D ideas in all sectors; Provides start-up financing directly through foreign sources or channeled through local venture funds;

Israel The policy was implemented in Israel by developing a government-built academic R&D infrastructure, strong academic research apparatus which successfully leveraged the R&D products in the state defense industry. Israel has also adopted a Law on Research and Development and has created the Office of the Chief Scientist. Israel Marketable R&D products are supported by the R&D Fund, through conditional, sliding scale grants of between 20% and 50% of the R&D budget, with royalty payment of between 3-5 % of future product sales. Ireland Ireland provides special grants for R&D companies and stimulates R&D through governmental initiatives such as Technology Foresight and Science Foundation Ireland (SFI). Israel Israel has scientific agreements with around 40 countries and is the only nonEuropean country fully associated with the EU Framework Program for R&D. Israel is a member of many European and international scientific organizations, which allows Israeli companies and research organizations to better integrate into European and international business and science communities.

Armenia

The Ministry of Trade and Economic Development engaged, but not solely concentrating on R&D specified development.

Armenian government implements such policies, but it has not been proven to be effective. There is no such law on R&D in Armenia.

There is no existing precise financial assistance for the implementation of R&D programs in Armenia and stimulation of university-industry collaboration.

The National Academy of Science of Armenia initiates different scientific programs, but which are unsatisfactory for the development of the sector.

Recommendation Global SPC recommends establishing a governmental distinguished body based on the example of Israel and Ireland: R&D Development Agency. The Agency will enable the same functions and will boost R&D sector development. Global SPC recommends the creation of an informational system for R&D sector of Armenia under the R&D Development Agency to provide guidance to foreign investors in the area of local innovations. Global SPC recommends to provide information on R&D projects through a single internet portal which will ensure their coordinated and centralized representation. It will facilitate commercialization of R&D projects. Global SPC recommends the formulation and adoption of a â&#x20AC;&#x153;Law on Research and Developmentâ&#x20AC;?, which will prioritize R&D activities and develop tools for promoting both strategic and applied R&D directions, and provide for creating supportive measures to stimulate R&D activities. Global SPC recommends the creation of the Council of Senior Researchers, based on the Israeli model, which will identify research priorities and decide project implementation.

Global SPC recommends that the Armenian government formulate a policy that would facilitate the provision of financial support for R&D programs. Global SPC recommends granting of benefits to start-ups and foreign investors based on R&D priorities. Global SPC recommends the provision of partial financing of commercialization of products and technology transfer provided to Universities. Conditional tax benefits to industrial enterprises.

Global SPC recommends that the Armenian government negotiate and ratify multinational and bi-national R&D-related agreements and treaties that will encourage the development of the Armenian R&D sector. Integrate priority R&D directions with similar existing international programs; promote involvement of various foreign and international programs into the Armenian research market, and enter into jointly financed bilateral research projects.

31 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

R&D Development

Benchmark Country

Fiscal incentives for R&D

Ireland Ireland has a policy on R&D incentives and provides for a 20% incremental tax credit for companies initiating R&D activities. Moreover, companies that have certified to execute R&D activities and are located in specific free zones get the following tax incentives: 10% corporate tax, VAT and customs duty exemptions, 10% “Manufacturing Rate” of Tax.

Armenia

Simplified tax benefits for all sectors. Armenia does not provide specific fiscal incentives for companies engaged in the R&D sector or for foreign investors.

Recommendation

Global SPC recommends financial policy changes to include the provision of tax benefits for R&D, software development sectors, for the industry cooperating with the local R&D sector, and for commercialization of the products. One such proposed incentive mechanism for R&D is the use of a “tax loan” approach. Global SPC recommends the adoption of tax benefits (conditional tax benefits for capital costs, for international R&D activities) and other incentives for foreign investors.

Global SPC recommends that the Armenian government optimize the adopted policy by inserting fiscal and financial incentives for SMEs engaged in the R&D sector.

Promotion of the lower third-level R&D programs.

Ireland The Irish government has developed tax incentives on the distribution of patent dividends, and grants in areas such as third-level research and industry-based product development.

Industrial collaboration and commercialization of technology

Israel The Israeli success in industrial collaboration and the commercialization of technology stems from the close association with both public research institutes and the Israeli defense industry, with capabilities distributed throughout the innovation system.

Armenia has no official policy on industrial collaboration and has a lack of industrial obligations for cooperation, and weak demand of the local industrial sector for R&D activities

Israel Each university owns a Technology Transfer Center which manages all activities relating to the protection and commercialization of inventions, intellectual property rights, and attracting industry partners.

Armenia lack regulatory framework and mechanisms for creation and promotion of technology transfer. The country also lacks specific technology transfer centers that would link the industry with institutes and universities.

Technology Transfer mechanism

Armenia has an SME-related development policy in effect.

Global SPC recommends the provision of tax benefits to newly established R&D entities by applying temporal differentiations and announcing Armenia to be a free economic zone to promote third-level R&D programs. Global SPC recommends that the management of R&D start-ups in prioritized directions be transferred to innovation incubators (created on the basis of national research institutes). The subsidies provided to national research institutes should be directed to the “incubation” efforts and development of national R&D projects.

Global SPC recommends that large enterprises of the private sector are legally bound to collaborate with public research institutes. In cases of no collaboration firms would be obligated to pay the possible “Innovation Tax,” “Innovation Investment,” or “Innovation Tax Benefits” with respect to private sector industrial enterprises.

Global SPC recommends to draft and adopt a law on Technology Transfer or other regulatory strategic document which will regulate technology transfer processes and incentives (royalties and so on), as well as technology informational systems. Global SPC recommends the creation of technology transfer centers on the basis of techno-parks and incubators such as the EIF.

32 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for Patenting Policy and Intellectual Property Rights Mechanisms The protection of Intellectual Property Rights (IPR) is one of the most crucial factors concerning local markets and regulations that influence decisions on investment or licensing. The most effective method for calculating the rate and return of international earnings on copyrights, trademarks, patents, and trade secrets rests on the use of licensing fees and royalties. Positive net payments of these fees define a country as a technology importer, and increasing net payments show the importance of international transfer of intellectual property. Security becomes an issue when the protection of IPR is inadequate in an importing country, making the greater protection of IPR rights a driving force for companies to engage in technology transfer and export their products. The existence of adequate laws, prudent policies and regulations and the effective enforcement by regulatory entities are indispensable components for success in IPR protection. Internationally, organizations such as the World Intellectual Property Organization (WIPO) work to publicize and fortify IPR protection through specific agreements and registration standards. The table below illustrates a number of treaties which have noteworthy effects on IPR protection:

General Treaties and Agreements on IPR Protection Treaties and Agreements

Purpose

- Berne Convention

Protection of literary and artistic works

- Brussels Convention

Prevention of unauthorized distribution of program-carrying signals transmitted by satellite

- Film Register Treaty

International registration of audiovisual works

- Paris Convention - Phonograms Convention

Protection of industrial property and repression of unfair competition Harmonization and streamlining of formal procedures in respect of national and regional patent applications and patents Protection of producers of phonograms against unauthorized duplication

- Rome Convention

Protection of performers, producers of phonograms, and broadcasting organizations

- Trademark Law Treaty

Simplification and harmonization of procedures of national and regional trademark registration systems

- Washington Treaty

Protection of intellectual property in respect of layout-designs (topographies) and integrated circuits

- WIPO Copyright Treaty - WIPO Performances and Phonograms Treaty

- WTO Agreement on Trade Related Aspects of Intellectual Property Rights

Provides for minimal rules for national intellectual property law in order to prevent member nations from using intellectual property as a hidden trade barrier against other nations

- Patent Law Treaty

Protection of intellectual property rights of performers and producers of phonograms

Involvement in, and the enforcement of, international and bilateral agreements and treaties is an essential component to the development of intellectual property rights protection in developing countries. The table below lists the agreements adopted by the benchmark countries of the study:

Benchmark Countries’ IPR Treaty Participation44 Treaties WIPO Convention Berne Convention Paris Convention WIPO Copyright Treaty WIPO Performances and Phonograms Treaty Budapest Treaty Patent Cooperation Treaty WTO TRIPS Agreement 44

Armenia

South Korea

Estonia

X X X X

X X X X X X X X

X X X

X X

X X X

World Trade Organization. <http://www.wto.org>

33 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy Benchmark countries have either adopted new laws or amended existing laws in order to keep pace with technological advancements. But such amendments to laws have inherent shortcomings, as the ratification of international treaties and agreements involves a more complicated process that includes conformity and harmonization of existing legislation. Such harmonization takes time and often results in a degree of inconsistencies between existing national legislation and the international standards contained in the treaties and agreements.

Indicators Patenting Policy Korea, Rep. 45

and Intellectual

Estonia

Property Rights Mechanisms Korea, Rep.

Armenia, Estonia

and

Armenia

Intellectual Property Protection (1-7), 2006 10 Patents Granted by USPTO / Mil. People, avg 2001-05

Regulatory Quality, 2005 5

Royalty and License Fees Receipts (US$/pop.), 2004

Rule of Law, 2005

Royalty and License Fees Receipts (US$ mil.), 2004

Royalty and License Fees Payments (US$ mil.), 2004 Royalty and License Fees Payments (US$/pop.), 2004

Indicators of Patenting Policy and Intellectual Property Rights Mechanisms of Benchmark Countries Variable

Estonia (Group: All)

Korea, Rep. (Group: All)

Armenia (Group: All)

actual

normalized

actual

normalized

actual

normalized

Intellectual Property Protection (1-7), 2006

4.60

7.16

4.60

7.16

2.80

1.98

Regulatory Quality, 2005

1.43

8.64

0.77

7.05

0.12

5.38

Rule of Law, 2005

0.82

7.80

0.73

7.50

-0.46

4.17

Royalty and License Fees Payments (US$ mil.), 2004

18.00

4.32

4450.30

9.19

n/a

Royalty and License Fees Payments (US$/pop.), 2004

13.85

6.67

92.52

8.56

n/a

Royalty and License Fees Receipts (US$ mil.), 2004

4.00

4.39

1790.50

9.16

n/a

Royalty and License Fees Receipts (US$/pop.), 2004

3.08

6.54

37.22

8.41

n/a

Patents Granted by USPTO / Mil. People, average 2001-2005

2.65

7.50

88.44

8.86

0.40

5.38

â&#x20AC;&#x2030;45

â&#x20AC;&#x201A; World Bank, KEI Indicators, 2006

34 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Estonia In the context of countries in transition, Estonia ranks in the top decile for IPR protection. As per the Economic Freedom Network in 2004, Estonia is rated 34th globally with a score of 5.5 for IPR protection.46 Between 2000 and 2002, Estonia posted an increase in international industrial property patents, industrial designs, trademarks, and plant varieties. Well-designed regulations, especially in the area of IPR protection, have led to a significant increase in Estonia’s FDI between 1999 and 2003. Royalties and license fees payments of the country increased considerably over the same period, which indicates that the country is increasing utilizing foreign IPR and enjoys increasing confidence in its general IPR protection. Domestic development and management also demonstrated progress as well, with receipts showing an increase, thereby indicating progress in Estonia’s own IPR development and management processes. The trends are summarized in the table below:

Annual levels of FDI and Royalties & License Fees47 1999

2000

2001

2002

2003

2004

Foreign direct investment*

305

387

542

284

919

1,049

Royalties and license fees* payments -receipts

5.6 -1.8

7.8 -1.6

11.3 -2.2

14.0 -5.0

14.1 -5.2

17.9- 4.0

* In millions of US$

In the last decade, Estonia has adopted intellectual property-protection policies and strengthened its respective laws amending them to fully comply with the WTO TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights)48 and other international agreements. Moreover, Estonia has adopted vigorous enforcement mechanisms to protect intellectual property rights, resulting in the effective protection of all types of intellectual property rights. Custom authorities are entitled by Estonia’s Customs Act to oversight and take measures against the imports of counterfeit and pirated goods. Estonia’s IPR protection is regulated by an intellectual property office and the Estonian Patent Office. The modern intellectual property office is responsible for IPR acquisition and maintenance. The Estonian Patent Office, which is a government agency under the Ministry of Economic Affairs and Communications, assures the legal protection and implementation of IPR related economic policies and drafting amendments. Besides registering industrial property, the scope of activities of the Office includes development of national and international policies and projects.49

South Korea Another benchmark for IPR protection in developing countries is South Korea. As per the Economic Freedom Network in 2004, South Korea ranks fifth regionally, and 27th in the world with a 5.8 rating for the protection of IPR.50 South Korea has been able to lower the number of piracy-related crimes in the IT sector due to several substantial changes in related legislation. The table below demonstrates the trade losses due to copyright piracy in the country of the period of 2002-2006:

James Gwartney and Robert Lawson, “Economic Freedom of the World: 2006, Annual Report – 2006 Dataset,” Economic Freedom Network – download data, 2006, The Fraser Institute. <http://www.freetheworld.com/release.html> 47 “Balance of payments (USD m), long version,” Bank of Estonia. <http://www.eestipank.info/dynamic/itp1/itp_report_1a.jsp?reference=544&startDay=1&startMonth=1&startYear=1999&endDay=1&endMonth=12&endYear= 2005&reference=541&className=EPSTAT1&step=11&nrOfQuarter=0&lang=en&submit=SHOW> 48 WTO. “Agreement on Trade-Related Aspects of Intellectual Property Rights.”. <http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm> 49 “The Estonian Patent Office,” The Estonian Patent Office. <http://www.epa.ee/eng/1info.htm> 50 James Gwartney and Robert Lawson, with William Easterly, “Economic Freedom of the World 2006 Annual Report, ” The Fraser Institute. <http://www. freetheworld.com/2006/EFW2006complete.pdf> 46

35 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Estimated Trade Losses Due to Piracy and Levels of Piracy: 2002-200651 SOUTH KOREA (in million US dollars) INDUSTRY

2006

2005

2004

2003

2002

Loss

Level

Loss

Level

Loss

Level

Loss

Level

Loss

Level

45%

200.0

46%

276.0

46%

275.0

48%

285.0

50%

Entertainment Software

353.5

68%

415.1

55%

349.0

43%

248.4

36%

381.0

36%

Books

45.0

43.0

42.0

38.0

36.0

Records & Music

0.3

1.3

13%

2.3

16%

3.5

20%

6.9

20%

Motion Pictures

9.0

40.0

20%

40.0

20%

27.0

25%

Business Software

TOTALS

407.8

659.4

709.3

604.9

736.8

South Korea is a signatory to all the international treaties and agreements referring to IPR. Moreover, in December 2006, the government of South Korea adopted the first comprehensive rewrite since 1986 of to its main copyright law, the Copyright Act of Korea (CAK).52 The government has revised the Computer Program Protection law, to strengthen the protection of IPR of software producers and holders, thereby encourage software development. In September 2006, new amendments to the Computer Programs Protection Act (CPPA) took effect. Besides renaming and giving expanded powers to the Computer Program Protection Committee (formerly the Program Deliberation and Mediation Committee), the amendments created an administrative enforcement procedure (in addition to the statutory notice and takedown procedure) for issuance of “corrective orders” against Internet service providers who make available infringing programs or information that enables the circumvention of technological protection measures. Criminal penalties for CPPA violations were also increased.53 Through this measure Korea has: revised a regulation regarding the limit of program code reverse analysis for the protection of software copyright holders; created a new regulation regarding technological protective measures for the protection of software copyright holders’ interests; established a new regulation regarding government control of illegal duplications and supplemented the procedural regulations; established a new regulation regarding exclusive software distribution rights in order to stimulate authorized software distribution and to protect distribution right-holders.54 Moreover, to prevent the infringement of copyright and intellectual property rights related to the use and copying of illegal software and to promote the use of authorized software, the government has initiated a number of educational and public awareness activities. In this regard the Korean government has:

IIPA, “International Intellectual Property Alliance 2007 Special 301 Report: South Korea,” February 12, 2007. <http://www.iipa.com/rbc/2007/2007SPEC301SOUTHKOREA.pdf> p. 419. The methodology used by IIPA member associations to calculate these estimated piracy levels and losses is described in IIPA’s 2007 Special 301 submission at <http://www.iipa.com/pdf/2007spec301methodology.pdf> For information on the history of South Korea under Special 301 review, see < http://www.iipa.com/pdf/2007SPEC301USTRHISTORY.pdf > <http://www.iipa.com/pdf/2007SPEC301HISTORICALSUMMARY.pdf>. 52 IIPA, South Korea, 2007 53 IIPA, Korea, 2007 54 OECD, 2001, “Korea.”. <http://www.oecd.org/dataoecd/9/35/1952762.pdf> 51

36 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy investigated 2,315 institutions and corporations with the intention to identify and penalize offenders for cases involving the illegal duplication and use of software; strengthened educational and public activities on illegal copying of software in order to prevent the infringement of software intellectual property rights and to create an environment that encourages the use of authorized software; increased public awareness of software related intellectual property rights through intensive publicity in mass media and reinforced education.55

Patenting Policy and IPR mechanisms Development In Armenia: From the Perspective of Benchmarking Countries The issues related to the protection of the rights of intellectual property in Armenia are regulated by the Civil Code and a set of relevant laws, including: the June 2006 Law on Copyright and Related Rights, the December 2004 Law on Patents, the March 1998 Law on the Legal Protection of Topographies of Integrated Circuits, the December 1999 Law on Firm Names, and the March 2000 Law on Trademarks, Service Marks and Appellations of Origin.56 Since independence, Armenia has pursued a stated policy of integration with the global economic marketplace, including membership in the World Trade Organization (WTO). Armenia ratified the Bern Convention for the Protection of Literature and Artistic works, the Paris Convention on the Protection of Industrial Property, as well other relevant treaties and agreements. Best Practice

Intellectual Property office for granting and registering IPR

Law “On Computer Programs Protection”

Benchmark Country Estonia Handles IPR management and contributes to IPR development. Provides IPR-registration and protection services, participates in implementing national policies and legislation.

South Korea Maintains the control of illegal production, duplication, and distribution of software. Provides for the organization of public awareness activities pertaining to the illegal copying of software.

Armenia

Recommendation

Armenia has an Intellectual Property Agency which is under the Ministry of Trade and Economic Development The agency’s function is limited to registering IPR and the agency does not participate in policy implementation.

Global SPC recommends expanding and increasing the functions of the agency by capacity building.

Armenia does not have a separate law on the protection of copyright of computer programs and databases. The latter are protected under the “Law on Copyright and Neighboring Rights.” The objects of these two concepts: Copyright and Neighboring Rights and Rights on Computer Programs and Databases are different and need to be addressed in separate laws.

Global SPC recommends to exclude copyright of computer programs and databases from the “Law on Copyright and Neighboring Rights” and to create a separate “Law on Computer Programs and Databases.”

Ibid All relevant laws, treaties and legal agreements are available in both English and Armenian on the Armenian National Assembly website: <http://www.parliament.am/l?lang=eng> or <http://www.parliament.am/l?lang=arm> 55 56

37 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for Innovation Sector Clustering The cluster approach promotes effective collaboration among the private sector, the state, commercial entities, and research and educational institutions in the area of innovation and forms new approaches to the integration of innovation knowledge and experience. Successful clusters are formed in areas where technological progress is expected with opportunities for the introduction of new markets. The cluster approach is actively applied by countries with developed and newly created market models. Industrial policy, which is based on the cluster approach, promotes science and research areas as well as the creation of intermediary institutions in the industrial and research sectors. The cluster approach is capable of drastically changing the content of the state industrial policy. In this case, the efforts of the state should be directed to develop links between suppliers and consumers, end-users and producers, producers and state institutes rather than to support specific sectors and enterprises. Two of the major clustering models are the Scottish and Italian ones. By the Scottish model of clustering, a large company carries out the central role in production process, while SMEs support the activities of the larger company. By the Italian model, the SMEs and larger companies join together in a flexible and legally equal collaboration in the production cycle. Ireland and Israel can be considered as benchmarks with their respective best practice cases for applying the Scottish clustering model, in both countries clusters have been organized on the basis of the worldâ&#x20AC;&#x2122;s leading companies (Dell, Microsoft, etc).

Innovation Sector Clustering in Armenia: From the Perspective of Benchmarking Countries The Armenian IT sector does not have a clear clustering model, although the developments taking place over the past several years have generated some tendencies in the IT sector, such as the design of microchips, applied software support, and others. The cluster development process can be facilitated by the involvement of international regional programs such as the EUREKA European program (on the example of Israel), or close cooperation as a subcontractor to another country which has already engaged in similar programs (again, the Israeli example), or through the involvement of a large international manufacturer (Ireland, Israel). The focus should be determined by the professional specialization of existing research centers as well as by recognizing the strengths and weaknesses of current industry based on an assessment of existing material, technical and human resources.

Innovation Sector Clustering

Clustering of the innovation sector

Participation in large international regional innovation programs

Benchmark country

Israel, Ireland

Clustering

Armenia

Recommendation

Clearly defined clusters are missing in Armenia

Global SPC recommends to promote clustering and specialization of the innovation sector and the involvement of key large international IT enterprises. The involvement of world leading companies can be started by cooperative educational programs, but the policy for prioritized and specialized education must be accepted.

Not complete integration and limited participation in the regional programs

Global SPC recommends collaboration with large clustering international and regional innovation programs or as a subcontractor to another country which has already engaged in similar programs.

38 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for IT Information Support The statistics on IT and innovation activities provides an important mechanism for policy implementation, assessment of results, representation and transparency of the sector. The following statistical criteria are emphasized: Selection of a composition of complete and descriptive statistical indicators; Integration of priority directions in science and education; Collection of data on the technical and experimental base of science, with an assessment of scientific research globalization efforts; Foreign financing sources; Assessment of scientific migration and human resources; Assessment of activities carried out by innovation organizations; Monitoring of technology creation and application; Statistical monitoring of the internal technologies market; Monitoring of the innovation infrastructure industry; Assessment of the statistical measurement and the use of venture capital funds; Monitoring of newly established enterprises and small innovation business entities based on the identification of active segments (including statistical and sociological surveys). The state bodies regulating the sector, incubators, technology transfer centers, and private research centers are the main sources of information analyses of the IT sector. The best experience on the organization and guiding of information on innovation areas has been demonstrated by the Israeli model (information directed to nationals residing in other countries and potential investors, www.investinisrael.org), Ireland (attraction of foreign investors), and South Korea (promote cooperation between South Korea and foreign countries, KOITA), each of which can be considered as a relevant example for Armenia.

Israel57

The Israeli government has established offices of chief scientists in ministries (the Office of Chief Scientist, or OCS), offering a variety of support information in order to assist the development of new technologies. The Ministry of Science bridges basic research and applied industrial research sectors.

Ireland

The Industrial Development Agency58 (IDA) of Ireland can be described as a central point of contact and information for foreign firms and investors, with information on specific Irish strengths (its workforce, taxes, role as a gateway to Europe, pro-business regulatory framework, regions and clusters, etc.) and links to several specific instruments (such as the Enterprise Ireland and Science Foundation Ireland). The IDA also provides data, market analysis and supporting studies (e.g. sector studies and information on regional and sectoral clusters) on the IT sector in Ireland.

South Korea59

To promote greater cooperation between South Korea and foreign countries, KOITA regularly hosts foreign visitors, providing them with insights and contacts, relating to South Korea industry. KIOTA regularly publishes R&D’s best practices obtained from technologically-advanced countries. The association maintains close contacts with its overseas counterpart organizations, organizes an executive technology management course in conjunction with overseas educational institutions, participates in international conferences and hosts international seminars. Ministry of Industry, Trade and Labor of Israel, “The Office of the Chief Scientist - An Overview”. <http://www.moit.gov.il/NR/rdonlyres/CD3AF19B-2619-415B-B2F4-B747101C5202/0/TheIntellectualCapital3550.pdf> 58 Industrial Development Agency of Ireland. <http://www.idaireland.com/home/index.aspx> 59 Korea Industrial Technology Association. <http://www.koita.or.kr/eng/data/Brochure.PDF> 57

39 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

IT Information Support for Armenia: From the Perspective of Benchmarking Countries The official statistics of the Armenian IT sector is presented by the National Statistical Service of Armenia. The major sources of statistics are limited to a few organizations that study the IT sector (EIF, ADA, E&V, etc.) and whose statistics are based upon their own observations, public surveys and can not, therefore, be viewed as sufficiently complete or objective information. The primary issues to be addressed by the domestic statistical system include the reporting and recording of overall statistical data and priority directions of the IT sector. The following issues are currently pending resolution: the organization of the statistical methodology and research, the modernization of statistical tools, and the application of international measurement standards.

IT Information Support for Armenia New innovation patterns

Benchmark country

Formation of the national and private statistical and analytical systems of the innovation system

Armenia

Recommendation

Some information is provided by non-governmental organizations and from the private sector

Global SPC recommends developing the methodology of the national statistical system in the area of innovation based on international standards.

The national statistical system does not provide complete information on the IT sector

Global SPC recommends organizing a unified informational statistical and analytical system in the innovation area based on uniform electronic reports submitted by the sector entities and creating an electronic analytical database. Formation of an authorized body for the unified informational statistical and analytical system (for example, the National Statistical Service or State Register).

Israel organizes and guides information on the innovation area through providing information directed at nationals residing in other countries. Formation of the national statistical system and methodology of the innovation system

40 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for Demand-side initiatives There are three different perspectives for developing the IT industry. The dominant perspective is based on prioritizing IT industry development. A second perspective that has emerged only within the past 5-7 years is the deployment of IT for delivering government services. The third perspective defines the role of electronic media and communication within a society.60 Completing the transition to a well-regulated and competitive service remains the fundamental step to providing IT access. Many developing countries retain monopolies on fixed local and international service. Nevertheless, the developing world has seen huge progress in assuring the provision of basic IT infrastructure.61 For most developing countries, the lack of adequate infrastructure and the high cost of initiatives remain as the most serious obstacles to the development and expansion of the IT sector. There is a continued need for government support to enhance IT related infrastructure. Increased private sector-led competition within the IT infrastructure sector lies at the heart of most estrategies’ plans for infrastructure. Many innovative partnerships between governments, businesses, and civil society have been formed to build networks and deploy advanced IT applications in such sectors as government, commerce, and education. Such public-private partnerships allow developing countries to overcome the obstacles of insufficient resources, expertise, and project management skills and to leverage limited government funds to achieve far greater impact. A major step towards regulatory reform is to establish clear and transparent governance structures. To succeed, a country needs to adapt its legal and regulatory frameworks to ensure a sound basis for IT infrastructure, given that most e-applications require greater bandwidth and stable or permanent Internet connections, to ensure the cross-border interoperability of Internet-based applications. The strategy should also specify which agencies will take the lead responsibility for each project, and estimate the resources required to complete the projects. In terms of the e-strategy pyramid, licensing is considered as a strategic priority.

E-Services

Improvements in the delivery of government services are important for many developing countries. Electronic delivery can improve efficiency, reduce delays for citizens, lessen corruption and increase transparency, increase citizen participation in public decisions and management, and deliver cost savings to businesses and time savings to citizens.62 Delivering e-government services requires either a high level of penetration of Internet services in homes, or the presence of a large number of public access areas, such as kiosks. There is a need to establish the enabling legal framework for handling e-payments and facilitating e-commerce in order to build trust between consumers and vendors and between citizens and government for remote transactions over long distances. Government holds a dual role in enhancing readiness for the electronic delivery of services. The government should take the initiating role and deliver government services electronically as well as adopt an enabling role that encourages the private sector to deliver electronic services. Governments need to develop a vision and strategy, create an organization to support and catalyze e-government, build human capacity and enact policies that will attract private investment in infrastructure and application development. E-Government can advance the agenda of governance and fiscal reform, transparency, anti-corruption, empowerment and poverty reduction. The potential has been well recognized, but its implementation remains difficult. Pioneers in several countries have shown that the gains can be real and projects can be implemented successfully. The challenge is to promote its widespread use. UNDP APDIP, “ICT Policies and e-Strategies in the Asia-Pacific,” 2004. <http://www.apdip.net/publications/ict4d/ict4dsayo.pdf> 103 “Economic Solutions to Global Communications Issues”, NERA. <http://www.nera.com/image/BRO_Communications_COM058_FINAL_revBP.pdf> 62 UNDP APDIP, 2004 60 61

41 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy At the national level, officials empower and decentralize government services and ensure national coordination between states or regions and between ministries, while harmonizing policies across the board. Any nationwide rollout will require a buy-in from citizens, which means that a consultative process with civil society and the private sector to plan appropriate directions for the policy is required. Government must also involve grassroots organizations and NGOs in interpreting the needs of rural citizens and making information or e-government services accessible to them. To solicit private investment, government facilities can be offered as a test-bed for new private-sector products and services. The examples of Estonia and South Korea in this area have shown that the strong organization of national information and communication infrastructure (according to international rankings), well organized e-government (even) infrastructure and efficient e-strategy and can be accepted as benchmarks for Armenia (also Taiwan in some aspects).

E-Society’s comparative indicators of Armenia, Estonia and Korea, Rep.63 Armenia

Estonia

South Korea

Regulatory Quality, 2005 10 ICT Expenditure as % of GDP, 2005" Rule of Law, 2005 Extent of Business Internet Use (1-7), 2006 Availability of e-Government Services (1-7), 2006 Price Basket for Internet (US$ per month), 2003 Internet Users per 1000 People, 2004 International Internet Bandwidth (bits per person), 2004

Government Effectiveness, 2005 5

Control of Corruption, 2005 Adult Literacy Rate (% age 15 and above), 2004 Internet Access in Schools (1-7), 2006 Public Spending on Education as % of GDP, 2003

Quality of Science and Math Education (1-7), 2006 Mobile Phones per 1,000 People, 2004 Total Telephones per 1,000 People, 2004 Main Telephone Lines per 1000 People, 2004

Computers per 1,000 People, 2004

World Bank, K4D Interactive Benchmarking Tool

42 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

E-Society’s comparative indicators of benchmark countries E-society indicators

Armenia

Estonia

South Korea

actual

normalized

actual

normalized

actual

normalized

Regulatory Quality, 2005

0.12

5.38

1.43

8.64

0.77

7.05

Rule of Law, 2005

-0.46

4.17

0.82

7.80

0.73

7.50

Government Effectiveness, 2005

-0.17

4.70

1.03

7.95

1.00

7.73

Control of Corruption, 2005

-0.64

3.03

0.88

7.80

0.47

6.97

Adult Literacy Rate (% age 15 and above), 2004

99.40

7.50

99.80

8.33

97.90

6.59

Internet Access in Schools (1-7), 2006

2.40

1.38

6.00

8.88

6.40

9.66

Public Spending on Education as % of GDP, 2003

3.20

2.12

5.70

7.35

4.60

5.04

Quality of Science and Math Education (1-7), 2006

3.80

3.88

5.30

8.36

5.10

7.84

Total Telephones per 1,000 People, 2004

259.70

3.33

1260.10

7.88

1302.80

8.11

Main Telephone Lines per 1000 People, 2004

192.50

5.15

329.20

7.20

541.90

8.94

Mobile Phones per 1,000 People, 2004

67.20

2.20

930.90

8.71

760.90

7.42

Computers per 1,000 People, 2004

66.10

4.76

920.70

9.92

544.90

8.73

International Internet Bandwidth (bits per person), 2004

11.90

2.61

3409.90

8.61

1484.50

7.74

Internet Users per 1000 People, 2004

49.60

3.33

496.70

8.48

656.80

9.62

Price Basket for Internet (US$ per month), 2003

44.80

1.67

13.60

8.18

9.70

9.32

Availability of e-Government Services (1-7), 2006

1.69

0.36

6.14

9.82

5.46

9.36

Extent of Business Internet Use (1-7), 2006

3.20

2.26

6.00

9.74

6.10

9.83

ICT Expenditure as % of GDP, 2005”

n/a

6.91

6.35

Estonia Estonia is a successful implementer and user of information technology. Estonia has been a leader among Central and Eastern European countries in liberalizing its fixed-lines telecommunications market. The Estonian telecommunications infrastructure is advanced and has been completely upgraded. There is state-financed Internet access in Estonia for government, education, and medical sectors and affordable dial-up Internet costs for the public (Ranking in Internet Price and Quantity: 21). The nation is also the regional leader in Networked Readiness with its twenty-third overall ranking, comparable to the levels of France and Israel. Estonia is ranked third in Ranking of Online Government Services, fifth in Ranking of e-Government micro-index, and second in Ranking of Internet-based Payment Systems.64

Alzhan Braliev and Tarmo Kalvet, Archimedes Foundation, Center for International Development, Harvard University. <http://www.cid.harvard.edu/cr/profiles/Estonia.pdf> 64

43 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Estonia’s E-Society Stages65 ESTONIA’S E-SOCIETY INFRASTRUCTURE PUBLIC SECTOR

PRIVATE SECTOR

PRINCIPLES OF THE ESTONIAN INFORMATION POLICY COORDINATORS The regulator of the telecommunications

The coordinative agency of ICT

State Information Systems Development Center

INFRASTRUCTURE FOR PUBLIC SECTOR PeaTee (MainRoad)

KülaTee (Village Road 1,2)

X-Tee (X-Road)

PUBLIC SERVICESPortal) / GOVERNMENTAL PORTAL “eRiik“ (e-government)

“Teabeportaal“(Information Portal)

“Kodanikuportaal“(Citizen‘s Portal)

Public key infrastructure (ID Card and digital signature)

TIGER LEAP

PROGRAM (1996)

E-CITIZEN - CO-OPERATION CITIZENS AND THE PUBLIC SECTOR USING THE INTERNET The success of Estonia’s IT development relies on an active private sector and ambitious public sector. The new banking sector has been the most visible innovator with most significant impact on IT development in the country. The banking sector representatives have created electronic banking infrastructure. Small companies assembling hardware from prefabricated components, programming software or providing Internet or IT infrastructure services were the next active players in information society development. Principal actions and initiatives that have influenced the development of information society include:66 “Principles of the Estonian Information Policy”: the basic policy document in the field of information society; Coordinative Agency of ICT, which enacts IT policies and coordinates different implementation initiatives within the public sector; National Tiger Leap Program for computerization of Estonian schools; Pea Tee Project for connecting government institutions through backbone network; KülaTee (Village Road) to enhance the e-connectivity of the regions; State Information Systems Development Center to guarantee permanent internet connection on 90 percent of Estonia’s territory; X-Tee (X-Road): data exchange layer between registries and databases, which later became the basis for creating egovernment service package; Public key infrastructure - ID card enabling secure personal authentication and digital signing; Governmental portal which consist of 3 central components: “eRiik” (e-government), “Teabeportaal“(Information Portal), “Kodanikuportaal”(Citizen‘s Portal); E-Citizen: nation-wide project for co-operation between Estonian citizens and the public sector; B2C project – to increase e-commerce field. Constructed by Global SPC based on information from �� “ICT best practices in Denmark, Estonia, Finland, the Republic of Korea, Sweden and Switzerland,” Schriftenreihe der Rundfunk und Telekom Regulierungs-GmbH. <http://www.rtr.at/web.nsf/deutsch/Portfolio_Schriftenreihe_nach%20Datum_SchriftenreiheDatum_SchriftenreiheNr32006/$file/Schriftenreihe_03_06.pdf> 66 Ibid 65

44 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy The Tiger Leap Program developed the IT infrastructure of schools, helped Estonian teachers to acquire basic computer skills and ICT resources for teaching, interactive learning environment, encourage creation of original software dealing with Estonian language, culture, history, and nature. As a result, three-quarters of all the schools have online Internet connections and the remaining schools have a dial-up option. Tiger Leap+, which is the second phase of the program, provided premises and conditions to create a learning environment in general education schools of Estonia with four priority fields: ICT competencies, virtual learning, sustainable development of infrastructure, collaboration of all parties involved. Pea Tee (MainRoad) was the first major project in public sector of IT field with the aim to connect all Estonian governmental institutions via backbone network enabling data exchange with speed 8 Mbits/s. KülaTee (Village Road) project established the data communication services in the regions and joined the information systems of local governments with those of public administration institutions. The second KülaTee Project (Village Road 2) created an e-network of Estonian public libraries. Public key infrastructure ID cards are used for authentication, digital signature, encryption, IDticket, and e-elections. Through authentication by the national ID card or via electronic banking, this product offers all users the possibility to fill in and submit electronic forms, access their personal data on X-road. In the framework of the E-Citizen project, every Estonian citizen has received his/her own information system (virtual office), which can be accessed through the Public key infrastructure ID card. As part of B2C e-commerce development, the number of online banking transactions is increasing rapidly, and Estonians are taking advantage of more developed online activities such as trading equities, submitting tax declarations, buying drugs, purchasing IT supplies, and accessing the latest news reports.

South Korea South Korea has the world’s highest number of broadband services per capita. By early 2007, around 29 percent of the population, or 90 percent of all households, were broadband subscribers.67 In the area of e-government, Korea ranked fifth in the world according to the e-Government Readiness Index (UN, 2005).68 Korea also ranks third in the National Informatization Index (NCA, 2005) following Sweden and the United States and, overall, ranked 16th in 2007 (18th in 2006) for E-Readiness by the Economist Intelligence Unit.69 South Korea’s information society’s success is seen as a result of the following factors: Strong government leadership: implementation of TDX, National Basic Information System, KII, and e-government projects, directed by Committees of the Prime Minister and the President; Robust legal framework : the Computer Network Act of 1986, Framework on Informatization Promotion Act of 1996, Digital Signature Act of 1999, to Closing Digital Divide Act of 2001; Aggressive investment strategy: the establishment of Informatization Promotion Fund and the initiation of the “settlement after investment” project, which minimized restrictions and maximized the effects of investment; Rapid adoption by the private sector: under the changing environment, traditional industries eagerly adopted e-commerce and IT to create added value and cope with the trend. South Korea adopted the UNCITRAL Model Law on Electronic Commerce (Model Law), which is a generic law which aims at developing e-commerce.70

“South Korea Broadband Market: Overview and Statistics,” Budde.Com, July 2007. <http://www.budde.com.au/Reports/Contents/South-Korea-Broadband-Market-Overview-Statistics-3775.html?r=51> 68 UNPAN, “UN Global E-government Readiness Report,” 2005. <http://www.unpan.org/egovernment5.asp> 69 “The e-readiness rankings,” Economist Intelligence Unit, 2007. <http://globaltechforum.eiu.com/index.asp?layout=rich_story&channelid=4&categoryid=29&doc_id=10599> 70 UNDP APDIP, 2004 67

45 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy Government-led nationwide efforts to promote information society and create e-government in South Korea started with the launch of National Basic Information System Project to deploy IT applications and systems and to handle administrative services in 1990s. The rapid development of the Korean information infrastructure hinged on key government organizations that were responsible for the informatization strategy: the Informatization Promotion Committee, chaired by the prime minister; the Informatization Strategy Meeting, chaired by the president; and the Ministry of Information and Communication.71 The Korean government established four master plans for the development of the information society. In 1995, the Informatization Promotion Act was enacted, and the first master plan for promoting informatization was formulated a year later. The second master plan, Cyber Korea 21, was established in 1998 to cope with the changing environment influenced by the Asian financial crisis. In 2002, when most of the policy goals set up by Cyber Korea 21 had been already achieved ahead of the original schedule, the third blueprint, e-Korea Vision 2006 was laid out. The blueprint was later modified to fit the policy directions of the “Participatory Government” and was renamed to “Broadband IT Korea Vision 2007.”72 Korea‘s informatization can be largely divided into 5 phases corresponding to the major policy directions at each stage:

Korea‘s informatization stages 73 U -K OREA (2006 –UP TO DATE)

e-Korea Vision 2006 / Broadband IT Korea Vision 2007 (mid 2000’s)

CYBER KOREA 21 / E-GOVERNMENT I NITIATIVES (LATE 1990’ S – EARLY 2000’ S)

BENEFITS OF IT ANYTIME AND ANYWHERE K EY GOVERNMENT ORGANIZATIONS

I NFORMATIZATION PROMOTION C OMMITTEE I NFORMATIZATION STRATEGY M EETING M INISTRY OF I NFORMATION AND C OMMUNICATION

Legal and institutional reforms to increase the capacity of utilizing IT in all areas

I NFORMATIZATION MASTER PLAN FOR CONSTRUCTING A CREATIVE KNOWLEDGE - BASED ECONOMY . ELEVEN KEY PROJECTS (E -SERVICE C ENTER , E -PROCUREMENT , H OME T AX SERVICE , D IGITAL SIGNATURE ETC ).

Korea Information Infrastructure (KII) Initiative (KII-Government, KII-Public and KII-Testbed) (mid 1990’s)

National Information superhighway, backbone network

National Basic Information System (NBIS): 10-year plan (late 1980’s)

Public administration, defense, national security, finance, education and research

Informatization Promotion Committee. <http://www.ipc.go.kr/> “ICT in Korea - Achievements, Implications, and Opportunities,” Ministry of commerce, industry and energy, Washington, D.C., May 19, 2005. <http://www.immr.org/Downloads/Dr_%20Phil%20Hendrix%20-%20ICT%20in%20Korea%20-%20U.S.%20-%20Korea%20Business%20Forum%20-%20 May%202005.pdf> 73 ICT best practices 71 72

46 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

1st Phase: National Basic Information System (NBIS) (late 1980’s)

As the first national IT plan of Korea, the 10-year plan of the National Basic Information System (NBIS) aimed at building basic information systems in key areas such as public administration, defense, national security, finance, and education, and research. These projects were funded with the “settlement after investment method,” which was directed to solve problems with long-term investment inherent in a single-year annual budget system. Under this method, the organization tasked with implementing an informatization project would first invest its own funds to carry out the project and at a later stage request settlement from the relevant state budget agency. In order to supply the required capital, large informatization funds were created. One of the more important projects for enhancing public administration was the National Administrative Information System (NAIS), which was composed of six subsystems: residents, real estates, vehicles, employment, customs and clearance, and economic statistics, which resulted in a greater awareness of the benefits of IT, enhanced the citizens’ convenience, and eliminated the digital divide between cities and provinces by providing equal access to services and information.

2nd Phase: Korea Information Infrastructure (KII) Initiative (mid 1990’s)

A new policy initiative for a national information infrastructure, the Korea Information Infrastructure (KII), provided tools for competitiveness and economic development. The KII project was composed of three parts: KII-Government, KII-Public and KIITestbed. The KII-G (Korea Information Infrastructure-Government) project was aimed at constructing a backbone network with government funds. This network allowed groups (such as government agencies, local governments, educational institutions, and research labs) to use multimedia services at a low cost. A high-speed and high-capacity fiber-optical transmission network of 155 Mbps-40 Gbps was established in 144 major cities. A commercial ATM banking network was also constructed in major cities across the nation. Under the KII-P (Korea Information Infrastructure-Public) project, telecommunication providers invested in the establishment of the Information Super Highway. These investments have enabled citizens to enjoy high-speed Internet services and the open competition policy among telecom companies has led to a cheaper and more affordable fixed-rate for broadband access. With the KII-T, Korea’s advanced Research Network (KOREN) supports research environment for such next-generation Internet technologies as IPv6, QoS, and Multicasting. KOREN also has several international links to other countries’ NGI research networks including those in Japan, Singapore, and the United States.

3rd Phase: Cyber Korea 21 / e-government Initiatives (late 1990’s – early 2000’s)

In March 1999, the Korean government formulated “Cyber Korea 21,” which was an informatization master plan aimed at constructing a creative knowledge-based economy to overcome economic difficulties and to establish new paradigms for the development of a knowledge-based society. The main objectives of the project included increasing the GDP share of knowledge-based industries to reach the level of OECD member countries and to develop the nation as one of the more advanced knowledge-based societies by 2002. The project also sought to improve the nation‘s overall productivity and to foster new industries utilizing IT. Eleven key projects were selected and were subsequently completed in 2002, including the Government e-Service Center, Government e-Procurement, Home Tax Service, Digital Signature and e-Seal.

4th Phase: e-Korea Vision 2006/Broadband IT Korea Vision 2007 (mid 2000’s)

The fourth phase focused mainly on the utilization and advancement of infrastructure and technologies already developed. The goal of “e-Korea Vision 2006“ was to reform legal and institutional systems and to increase the capacity of utilizing information technologies in all areas of society including the government, private companies, and individuals.

5th Phase: u-Korea (2006 –up to date)

U-society is defined as a society in which all people can freely enjoy the benefits of IT- anytime and anywhere- with objects made more intelligent through electronic embedded chips and connected to each other via networks. As convergence technologies are currently being developed, Korea expects to see the u-society concept realized in the near future.

47 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Demand side initiatives in Armenia: From the Perspective of Benchmarking Countries The January 2005 Armenian “Law on Electronic Documents and Electronic Digital Signature”74 regulates issues related to electronic documents and the form and use of electronic digital signature. The area of electronic commerce (or e-commerce) remains under-developed in Armenia. Although the main obstacle to developing electronic commerce in Armenia is the lack of legal regulation of on-line contracts, the Armenian Card (ARCA) plastic cards payment system recently implemented an important virtual cards project. Some banks introduce this instrument for clients via their websites, bank-client systems, and prepaid cards have a wide distribution (Internet cards, E-Dram, VoIP cards etc.) in Armenia. The government of Armenia has currently started the process of creating a unified electronic communication network for state institutions aimed at ensuring communications security and establishing modern communication and informational systems between various state bodies, agencies and ministries. The first components of e-government have been already been put into operation in Armenia and the widespread introduction of a broadband optical network is in the last phase of implementation. Armenia’s November 2003 “Law on Public Notifications”75 through the Internet is currently being enforced in Armenia and regulates the terms and procedures of public notifications made in Armenia through the Internet in cases provided by the local legislation. The Armenian government also plans to discuss a new draft “Law on Information Technologies, Information and Information Security in 2007.76 The responsibility for the submission of the draft law to parliament has been assigned to the Ministry of Transport and Communication. In 2007, the Government of Armenia planned to begin the implementation of a project on the introduction of an electronic procurement system, with the development and introduction of system of electronic tenders administered through the Ministry of Finance and Economy, in accordance with the adoption of the Strategy on the Introduction of the Electronic Procurement System.77

74 All relevant laws, treaties and legal agreements are available in both English and Armenian on the Armenian National Assembly website. <http://www.parliament.am/l?lang=eng> or <http://www.parliament.am/l?lang=arm> 75 Ibid 76 Ibid 77 The annex to the Republic of Armenia Government decree #137-N, January 26, 2006

48 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Demand side initiatives in Armenia: From the Perspective of Benchmarking Countries Demand side initiatives

Benchmark country

Armenia

Recommendation Global SPC recommends that the Armenian government revise and approve a new telecommunications policy approach in conformity with international practices and priorities (low start-up costs of establishing mobile communications networks, higher bandwidth and permanent Internet connections, better support for wireless and broadband services, transition to wellregulated and competitive service provision, secure Internet servers, government support to “access” and application initiatives, expanding IT use in governments and schools, efforts to collect and share IT data, encouraging the entry of new service providers to compete with incumbents, the establishment of a non-partisan, independent regulatory authority to ensure the enforcement of laws, encourage confidence in the IT market, encourage market-based approaches and easier market entry, the promotion of business confidence and clarity, enhancing transactional enforceability; ensuring interoperability (of systems, standards, networks, etc.), protection of consumer rights, since the country in its current stage of development is lagging behind countries having advanced experience in this area. It is more preferable to use the approaches and technologies of advanced countries instead of existing outdated ones. Global SPC also recommends that the government design the informatization plan of the country.

Telecommunications infrastructure plan, policy Informatization master plan

South Korea, Estonia

Although the infrastructure is currently in place, approaches to telecommunications policy need to be revised in compliance with international tendencies and priorities, and the country’s informatization master plan has yet to be drafted.

Guidance of the informational telecommunications framework by state authorities: ministries and committees

South Korea, Estonia

Regulating bodies are in place, processes are underway, but it is necessary to put together new intensive development programs in this area.

Global SPC recommends to the Armenian government that it draft intensive development programs in the area of telecommunications and their coordination in accordance with the strategic policy.

South Korea, Estonia

The process of development of state and public networks is underway (optical connectivity), the quality and the tariffs for internet connection need to be improved substantially, and the development of wireless connectivity is still lagging behind.

Global SPC recommends to the Armenian government that it promote innovative SME business development programs, involve state research institutes, and to make amendments to the “Law on Telecommunications.” Global SPC also recommends the development and implementation of wireless connectivity installation programs.

Estonia

Unlike in other countries, the special guiding organizations do not yet exist. Their creation with a special functional specialization can become a significant guiding force.

Global SPC recommends the establishment of the Enterprise Armenia global coordinating agency, which will coordinate the science, education, industry, public, state, local and foreign business integration processes, while the IT sector will be the main connecting link of the components listed above. The product of this enterprise will be high technology-based society and economy as well as high quality human resource base. Global SPC also recommends the adoption of a system approach for the promotion of the IT sector, since its development on its own has very limited perspectives and dependence on external environment.

South Korea, Estonia, Singapore

The country-wide network of optical connections is being developed, but Wi-Fi is not widely spread. There is a wire network between banks which is being modernized.

Global SPC recommends the development and implementation of wireless connectivity technology introduction projects.

Establishment of high speed state and public networks (internet, optical and wireless connectivity)

Special state guiding agencies (national “enterprises” and associations)

Statewide broadband - connection of governmental institutions, regions, public libraries

49 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Demand side initiatives

Internet penetration and permanent connection

Public information about state agencies, their functions and services.

Public key infrastructure (ID Card and digital signature), citizensâ&#x20AC;&#x2122; virtual offices, identification for electronic services,

Public Services for citizens and businesses: - car insurance, issuing of driving licenses and motor registration, passport, birth certificate, social security, and collection of fines, - Trade facilitation, - e-Procurement, Tax Service, Digital Signature and e-Seal, business registration and licensing, etc.

Benchmark

Armenia

Recommendation

South Korea, Estonia

Although access to the Internet is constantly spreading (reflected in the growth of the number of internet providers, the installation of local regional networks, etc.), high Internet tariffs are a serious barrier for its further expansion and application of permanent and high-speed internet connection.

Global SPC recommends: 1. Reduction of high internet tariffs that will serve an impetus for the implementation of various e-government projects. It is worthwhile considering the opportunity of providing internet to state agencies, higher education institutions, and research centers at special reduced rates as a mandatory condition to promote and ensure linkage with the innovation area. 2. An alternative option may be the automatic information dissemination systems on public services delivered through telephone landlines. 3. Internet clubs can be a means of access for the regional population to the Internet and various public and state electronic services. It is necessary to promote the creation and spread of internet cafes in regions.

Estonia

State agencies (ministries, regional administrations, etc.) are represented through their Internet web sites, but the information contained in the sites is not directed to the provision of public services by these agencies.

Global SPC recommends that state agencies (ministries, regional administrations, etc.) modify the format of their Internet sites for the electronic delivery of public services and synchronize the design with the respective phases of the project on electronic delivery of public services â&#x20AC;&#x201C; State Electronic and Non-Electronic Services Publicity and Delivery Project.

Estonia

The system of electronic ID cards is not yet in place in Armenia, but the national payment system through plastic cards (ARCA) is functioning well, and is the social cards system. The combination of both systems will make it possible to set up a social electronic ID system, which will be used in egovernment and other public and private systems.

South Korea, Estonia

Public services delivered to citizens are in their initial stage of development. Some achievements are already noticeable (Job Search system and so on). There is no progress in terms of electronic public services directed to the business sector, however.

country

Global SPC recommends: 1. To design short- and long-term e-government projects. Initially, priority can be given to simple public services (submission of data to statistical offices, Job Search) to gain more experience in this area. At the first stage of the program it would worthwhile to create a national electronic ID cards system in order to introduce the specific type of public and business services which will require electronic identification of both citizens and legal entities in the second stage of the project (for example: car registration, certification of birth and marriage, corporate tax, Value Added Tax, registration of a new company, customs online, etc.). The national plastic cards payment system (ARCA), the social cards system, and the State Register of Legal Entities together can become the basis for the creation of the electronic ID system. 2. The need for the introduction of public and private sector services must be justified based on the results of national marketing studies. 3. E-government projects should be implemented on a competitive basis, with the advance development of sub-projects of specific programs (national electronic services). In order to ensure the involvement of the IT sectorâ&#x20AC;&#x2122;s small and medium business enterprises, the projects should be implemented with the participation of incubators and techno-parks. The operation of specific e-government systems should be partially authorized to small and medium business enterprises on a competitive basis.

50 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Demand side initiatives

“Law on Electronic Commerce”

Benchmark country

Armenia

Recommendation

South Korea

The lack of a “Law on Electronic Commerce” in Armenia is a serious problem. E-commerce has developed only slightly, due mainly to private sector participation. However, it is not yet wide-spread, whereas foreign e-commerce resources are not easily available due to barriers connected with the application of local financial instruments (local plastic cards) and the delivery of products.

Global SPC recommends the formulation and adoption of a “Law on Electronic Commerce” which will regulate issues related to the e-commerce sector.

51 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Benchmark Countries for Public Private Partnerships in IT Public-private partnerships (PPPs) are fundamental to the development and diffusion of the IT sector. The government is the driving force behind partnerships, which are necessary to enlist private funds for public projects. Private participation in ICT development free up government resources, improve the efficiency of ICT use and delegate activities and risks to others. The two prominent forms of PPPs involve incubators—as a means to spur growth and jobs and extending rural access to telecommunications as a way to enhance equity. The need to generate economic growth without compromising societal equity illustrates two potentially competing priorities for policy makers. The success of PPPs depends on the creative design, conductive policies, and constant re-assessment of the partnership. International experience demonstrates that auxiliary and guiding infrastructure, as well as government support is vital for the creation and development of organizations engaged in innovation activity, since the initial formative stage for these enterprises is quite costly. In this sense, PPPs can support start-up IT-related companies by creating IT hubs, techno-parks, and incubators which will facilitate start-ups through the provision of public infrastructure and informational support.78

Incubators, Techno-Parks, High Technology Segments

Incubators and high technology techno-parks are a relatively new phenomenon in international practice but are spreading rapidly. They usually enjoy tax incentives offered by the state, and have their own specialization, particularly in the programming segment. Small programming enterprises are convenient for incubation also from the perspective of small state grant funding. According to a number of U.S. and OECD studies, incubators, with the support of the state, can double the number of opportunities for newly-created IT enterprises at the initial start-up stage, while the incubators also generate the creation of numerous workplaces in adjacent areas. Incubators are usually not-for-profit organizations, and the existing commercial ones generally have public or private financing. In the second case, incubated organizations are offering shares or royalties from sales. The “lifecycle” of incubators is usually limited to durations of one-year periods and, therefore, incubated enterprises must become fairly self-sufficient after the initial start-up stage. Incubators are usually connected with universities, which is to the advantage of incubators from the point of view of access to educated and cheap student labor.

Israel Incubators are mainly established through government, university, and business partnerships. The military sector has also had a vast influence on the development of incubator infrastructure. Initially, R&D related incubators were linked to a military cluster. Currently, incubators have grown to include not only military-related IT projects, however. Due to its large Diaspora, the Israeli government has promoted the creation of incubators aimed at attracting the Jewish ex-Soviet IT workforce. Incubator-based companies have provided jobs to over 65,000 IT-related specialists who have emigrated from the former Soviet Union. The main scientific incubator in Israel is the Computer and Data Communication Network Center. Eighty percent of research of incubators is conducted at seven universities and the Israeli military plays an active role in technology diffusion. Currently there are 26 incubators implementing 200 projects with a total $30 million budget, each conducting on average between 8-10 projects. Over 300 incubator-based projects graduated from the incubation phase, 173 after incubation continued on their own (123 of them secured capital investments ranging from between $50,000-$5.2 million). Incubator-based projects are funded with the assistance of the Office of Chief Scientists.

UNDP APDIP, 2004

52 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

South Korea In South Korea, incubators are mostly organized on the basis of research institutes. South Korea has over 300 incubators, with the Institute of Technology and the Daedeok Science Center as the major scientific incubators. These incubators host 251 research centers and venture start-ups, and have around 20,000 employees, and 19 state-funded R&D centers. Moreover, South Korea is among the few countries with successful virtual incubator practices.

India India prioritizes the creation of software production through techno-parks and incubators. Software Technology Parks of India (STPI) is a public organization with the objective to encourage, promote and boost the software exports from India. As of 2005, India had over 40 IT industry related incubators and techno-parks, which export IT products for the value of $10 billion. The STPI aims to increase the exports to 50 billion by the end of 2008.

Ireland Ireland has 25 Business and Techno-parks. Incubators are generally organized around industrial research clusters. Incubators and techno-parks are coordinated by SFI Centers of Science, Engineering and Technology. The main objective of SFI centers is to create campus-industry partnerships (CSET) and to support research collaboration linking scientists, engineers, and industry through incubators. Partnerships are aimed at funding scientists who build collaborative efforts that develop internationally competitive research clusters allied to industry. Grants normally range from between $1.3 to $6.5 million per year and are intended for up to ten years.

Partnerships and networking in Armenia: From the Perspective of Benchmarking Countries In accordance with the Armenian government’s action plan, state resources targeted to support small and medium entrepreneurship are to be used for the implementation of projects based on relatively risky innovations and modern technologies.79 The IT sector organizations are usually engaged in programming of software applications, internet services, computer and network service, and IT consulting. The Enterprise Incubation Foundation (EIF) created jointly by the Armenian government and the World Bank is the only agency engaged in the development and incubation of IT SMEs in Armenia. Its objective is to increase the international competitiveness of Armenian IT enterprises, facilitate linkage between key local technologies and international business markets, ensure access of local enterprises to international experience and knowledge and support them in securing foreign capital. EIF’s activities evolve around two basic components: business support services and technical assistance, because the EIF was not established to encourage innovation. There is no other program for start-ups in the country except for the EIF. There is also one private techno-park - VIASPHERE, which hosts several IT enterprises on its territory, but the state is not actively promoting its activity.

The Decision of the Republic of Armenia Government #691-A, June 17, 2003; “The Government Program”, “4.2.2, Improvement of business and investment environment.” 79

53 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of ICT Innovation Policy

Partnerships and Networking Benchmark

Armenia

Recommendation

Incubators are established jointly by the government, universities and the business

Lack of involvement of businesses and universities in the process of establishment of incubators

Global SPC recommends the promotion of the private business for the establishment of Incubators, and the creation of a system of incentives (shares of created enterprises, royalties, etc.).

The operation of incubators is coordinated by the coordinating organization

There is no specialized coordinating body to regulate the operation of incubators.

Global SPC recommends the creation of a specialized coordinating body for the establishment and support to incubators.

Weak linkage between techno-parks and incubators. Value added activity of IT companies in Armenia is inefficient.

Global SPC recommends the creation of guiding programs by techno-parks for incubators, citing the need for specialized programs for IT companiesâ&#x20AC;&#x2122; efficiency improvement.

Techno-parks guide the activity of incubators

The growth in the number of incubators has been promoted through the organization of business opportunities for foreign compatriots

country

Israel, South Korea, Ireland, India

Incubators, techno-parks

Weak involvement of foreign compatriots (Diaspora) in the establishment of enterprises through incubators

Global SPC recommends the formulation of a program and system of incentives to encourage the involvement of foreign compatriots (Diaspora) in the establishment of small and medium business enterprises through incubators.

54 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

he knowledge-based economy has created an unprecedented need for qualified workers possessing information technology (IT) skills. Today’s reality requires IT skills not only for workers in IT sector, but also in all other sectors including but not limited to transportation, healthcare, and government. Moreover, IT specialists increasingly need managerial and marketing skills in order to stay competitive in the global market.

In order to develop the IT sector, both developing and developed countries prioritize and pay special attention to the development of human capital of the IT industry and develop relevant policies in the field. Human capital constitutes the total capabilities of the workforce in terms of education, knowledge, health experience, motivation, intuition, entrepreneurship, and expertise. The human factor is crucial for creating value and guaranteeing sustainable development. There is a strong correlation between higher education and the development of the technology sector. Without skilled workers, technology firms would not be able to grow and expand. The index below reflects the skills development for the technology sector’s labor force:

Skills Developed for IT sector workforce80 0

100

US Singapore UK Australia South Korea Ireland Taiwan New Zealand Japan Finland Canada Israel Sweden Norway Slovenia Spain France Denmark Italy Germany

Base on data from: “The means to compete: Benchmarking IT industry Competitiveness,” Economist Intelligence Unit, 2007. <http://www.bsa.org/~/media/12EB624EB30C486FBEA0A4B653DD5E89.ashx> 13. 80

55 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

General Overview of ICT Human Capital Policy Due to geographical constrains, such as being a landlocked country and having scarce natural resources, Armenia’s strength in development relies on its human capital, which can be effectively used to develop IT industry and spur economic development of the country.81 Telecommunications, as well as software and IT services are among the most significant sectors with a higher growth potential for productivity and employment. The IT industry has helped Armenia to post two-digit growth rates over the last decade (16 percent since 1999). Nevertheless, the inefficiency of human capital, including the lack of a managerial class of workers, and inconsistency in higher education remain among the most serious constraints on sector productivity.82 Key Indicators of the Armenian IT industry in 200682 Total industry revenue ($ million)

$71.0

Number of companies

150

Number of employees

4156

Taxes ($ million) Productivity ($)

$12.0 $17,143

According to the Enterprise Incubator Foundation, the annual growth of IT industry revenue for 1998-2006 was 30 percent, while the labor force also grew at a corresponding rate of 19 percent. The number of companies in the IT industry grew by 20 percent, with many new start-ups entering the industry. Several international brands, such as Synopsis, Lycos, Virage Logic entered the market. In 2006, the number of professionals employed in IT sector exceeded four thousand workers.83 Below are presented the major issues to be addressed in the context of IT-related human capital development.

Employment policy84

Brain Drain. The annual average of negative migration from Armenia is greater than the natural population growth. Thousands of highly educated people leave the country annually, making “brain drain” a primary issue that needs to be addressed and considered while developing IT employment policy. According to an Enterprise Incubator Foundation report, “the scarce and limited labor supply will be the major constraint for the future growth of the industry.”85 Women under representation in IT sector. Finding ways to expand access of women to post-secondary education and careers in IT have the potential to expand the pool of qualified labor to address short- and long-term labor market needs.

Educational and scientific policy86

Small number of higher educational institutions providing IT related education. Given the fast pace of ICT sector development and advancement, the demand for educated IT specialists rises each year in Armenia, as in other countries. As of January 2007, out of 17 state higher educational institutions in Armenia, only five provided IT related education, and out of 51 private accredited higher educational institutions, only one provided IT related education.

Audrey Selian, “The use of information and communication technologies as tools for institutional transformation in Armenia,” Global Development Network, Armenian International Policy Research Group (AIPRG), 2005. <http://www.gdnet.org/middle.php?oid=237&zone=docs&action=doc&doc=11396> 82 “Key Levers for Productivity Improvement and Software and IT Services Sector Potential,” McKinsey & Company, 17 May 2003, Armenia 2020:Studies, Reports and Analysis, Yerevan 2005, p. 30 83 “Armenian Information Technology Sector: Industry Growth Model,” Enterprise Incubator Foundation, 2007. <http://www.eif-it.com/edit/news_admin/news_images/1_109_big.pdf> 12 84 Annex to the Minutes of the Decision of the RA Government Meeting # 24 of 25.06.2004 (ÐÐ Ï³é³í³ñáõÃÛ³Ý 25.06.2004Ã. ÃÇí 24 ÝÇëïÇ ³ñÓ³Ý³·ñ³ÛÇÝ áñáßÙ³Ý Ñ³í»Éí³Í §´Ý³ÏãáõÃÛ³Ý ÙÇ·ñ³óÇ³ÛÇ å»ï³Ï³Ý Ï³ñ·³íáñÙ³Ý Ñ³Û»ó³Ï³ñ·Á ÐÐ-áõÙ¦) 85 “Armenian Information Technology Sector: Industry Growth Model” 4 86 Annex to Minutes of Cabinet Meeting # 53 of 29.12.2005 (§ÐÐ Ï³é³í³ñáõÃÛ³Ý 29.12.2005Ã. ÃÇí 53 ÝÇëïÇ ³ñÓ³Ý³·ñ³ÛÇÝ áñáßÙ³Ý Ñ³í»Éí³Í §Ø»Í³Ñ³ë³ÏÝ»ñÇ ÏñÃáõÃÛ³Ý Ñ³Û»ó³Ï³ñ·Ç ¨ é³½Ù³í³ñáõÃÛ³Ý Ù³ëÇÝ¦) 81

56 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy Poor quality of IT education. The Armenian IT labor market simultaneously experiences both “shortages” and “surpluses,” occurring because of skill mismatches, which result in an inadequate quality of education in Armenia. Despite the remarkable increase in the number of IT department graduates, the workforce still remains the main impeding factor for further industry expansion. The quality of IT education does not comply with internationally recognized standards and even the needs of local companies. It forces companies to make additional investments in the labor force. Highly qualified IT specialists are not attracted to academic work, mostly because of the low level of wages. It is estimated that the gap of IT education is about $1,384,320 annually.87 Lack of cooperation between the real businesses and the educational institutions. Greater cooperation is needed in order for IT specialists to better correspond to market requirements in terms of professionalism and to meet the number of professionals needed. In this regard, an agreement of cooperation has been signed between Synopsis and the State Engineering University of Armenia. Synopsis took responsibility for the development of a chair on “Micro-electronic schemes and systems.” Previously, it was under the responsibility of Leda (currently, Synopsis). According to the agreement, over the course of the next five years, an interdepartmental chair will function, aimed at developing professionals qualified for work in the company. International cooperation is also important in order to have networks, to be a part of the global IT environment and to have access to knowledge and skills held by foreign professionals. Lack of IT facilities in educational institutions. In order to keep up with the pace of IT sector development, facilities are also needed. And in order to create interest toward the IT profession in schools, students must have the opportunity to use IT facilities during classes at school. As of 2007, for 1467 schools in Armenia, with 465,403 students overall, the number of computers was only 5,699, or one computer per 82 students.

Vocational Training Policy

Lack of lifelong learning and education opportunities for the older generation. The changing and upgrading of technology requires a permanent updating of professional knowledge and skills. Presently, there is no education policy in Armenia that addresses the lifelong learning and education opportunities for the older generation. Developments in this area would help to use the IT manpower potential of older people and keep the skills and knowledge of IT professionals up to date and corresponding to local and international business requirements. Lack of the professional development of teachers/professors. Since the professional development of future IT professionals depends not only on the existence of updated equipment, but primarily on the knowledge and the skills they acquire during study. The teachers/professors also need to go through periodical trainings in order to keep up with international standards. The professional development of teachers/professors is crucial for developing IT education in Armenia. Lack of the managerial and marketing skills in IT industry. For domestic companies, strategic management skills and branding discounts are especially relevant.

“Armenian Information Technology Sector: Industry Growth Model,” 5

57 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Benchmark Countries for IT Human Resource Development India IT is one of the fastest-growing sectors of Indian industry. During 2005-2006, Indian IT continued to sustain remarkable doubledigit growth, and is estimated to grow to $23 billion from $17 billion, showing an increase of nearly 35 percent.88 Some of the facts reflecting the strength of Indian IT sector include 100 countries importing Indian software; India’s 20 percent share in the global cross country customized software development market, and one-third of E-commerce start-ups in the Silicon Valley are founded by Indians. In 2004-2005, the IT sector comprised 4.1 percent of India’s national GDP and, as of March 2005, one million professionals were employed in IT-related sectors. According to projections, manpower demand in the IT sector will reach more than 9 million in 2008.89 The government of India acknowledges the importance of human resource development through improving the quality of IT education and increasing its availability. In order to achieve sustained growth in the IT sector and maintain India’s competitive edge in the field, the government has undertaken various initiatives, such as the creation of the National Task Force on Human Resources Development in IT in July 2000 and the establishment of Indian Institutes of Information Technology (IIITs) as centers of excellence in many Indian states.90

South Korea According to the IMD’s Growth Competitiveness Index, Korea ranked second in terms of “technology infrastructure” in 2005. In the UN’s E-government Readiness Index, Korea was ranked fifth, and in fourth place in the E-participation Index, which measures citizen’s online involvement. And it maintained first place among OECD countries in terms of broadband Internet penetration for several years.91 The Korean IT industry has been steadily growing with the software industry posting annual growth of 14 percent from 2000-2005, and sales in the IT service industry saw a 4.1 percent increase in 2005 as compared to the previous year. Adoption of the IT839 Strategy in 2004 has further outlined the positive development strategy in the IT sector, and has helped to develop several cutting edge technologies. Another positive outcome of this Strategy was the strengthening of Korea’s leadership roles and its cooperation with the world’s leading companies, through the creation of R&D centers of Intel, IBM, and Motorola.92 The Korean government always understood the importance of the development of the human pool, thus the investments were made not only in the technological development, but also in human factor development.93 Various programs were initiated, among them the Brain Korea 21 program in 1999, that was aimed to improve the quality of education system focusing primarily on advanced science and technology areas such as IT and biotechnology.94

“Explore IT in India,” Ministry of Communications and Information Technology. <ttp://www.mit.gov.in/default.aspx?id=99> “Advantage India,” Ministry of Communications and Information Technology. <http://www.mit.gov.in/download/advantage.pdf> 1-2 90 “Tenth Five Year Plan 2002-07,” Planning Commission Government of India. <http://planningcommission.nic.in/plans/planrel/fiveyr/10th/volume2/v2_ch7_4.pdf> 802. 91 “Informatization White Paper 2006,” Informatization Promotion Committee, 2006. <http://www.ipc.go.kr/ipceng/public/public_view.jsp?num=2360&fn=&req=&pgno=1> 7. 92 “Informatization White Paper 2006” 46-48 93 Yang Seung-taik “Digital Divide & Cyber Korea 21 Initiative,” UNPAN, 2002. <http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN007358.pdf> 3. 94 “IT Labor Market,” American University. <http://www.american.edu/carmel/jw6194a/Korea_files/labor.htm> 88 89

58 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Ireland According to the 2007 World Competitiveness Report, Ireland was ranked first in terms of labor productivity per person, worker motivation, and in flexibility and adaptability of the workforce when faced with new challenges.95 And according to the 2007 independent IMD World Competitiveness Report, the educational system in Ireland is one of the best in the world, with almost 1 million people engaged in full-time education. The same source cites Ireland as the country with the highest percentage (40percent) of the population that has attained at least tertiary education. The total IT graduate output in 2005-2006 was 23,837 people, which is more than 77 percent of the total 30,918 university graduates in the same period.96 All these factors have made Ireland one of the most attractive locations for investment in information and communications technology (ICT) and have contributed to the influx of more than 300 overseas IT companies, with seven of the world’s top ten IT companies having a substantial base in Ireland.97

Israel Large and effective investments in education, a steady rate of immigration, an egalitarian culture, and a vast Diaspora network are among the key factors contributing to the development of Israel’s IT sector.98 Being a small country, Israel’s government realized that qualified human capital is the basis for the country’s competitive advantage and developed policies for human capital development accordingly.99 Israel’s workforce is ranked as one of the most highly educated in the world and Israel is also home to top-level educational institutions. People with secondary education comprise 77 percent of the population, and 20 percent hold academic degrees. The number of scientists and technicians per 10,000 workers is 140, which exceeds the level for any developed country. Israel is ranked first in the world for the number of engineers, 135 per 10,000 workers. Moreover, some 54 percent of the total workforce, employed as professional and technical workers, are women.100 Israel is the 14th most creative country in the world according to the Global Creativity Index, which measures technology, talent, and tolerance of countries.101 In 2003, Israel’s software and IT service sector productivity (nominal) was 146 percent, using a nominal U.S. productivity rate of 100 percent. Armenia’s figure for the same year showed an 8 percent rate of productivity (nominal).102

“Quality People,” IDA Ireland, 2007. <http://www.idaireland.com/home/index.aspx?id=33> “Education,” IDA Ireland, 2007. <http://www.idaireland.com/home/index.aspx?id=97> 97 “Industry Profile – ICT,” IDA Ireland, 2007. <http://www.idaireland.com/home/index.aspx?id=56> 98 “Armenian Information Technology Sector: Industry Growth Model.” 51 99 Augusto Lopez-Claros, Irene Mia, “Israel: Factors in the Emergence of an ICT Powerhouse,” Invest in Israel. <http://www.investinisrael.gov.il/NR/rdonlyres/2672AEBF-0846-4CBB-87E9-9211D2CC2B4E/0/IsraelFactorsintheEmergenceofandICTPowerhouse.pdf> 90 100 “The Intellectual Capital of the State of Israel.” 23-24 101 Lopez-Claros. 91 102 “Key Levers for Productivity Improvement and Software and IT Services Sector Potential.” 60 95 96

59 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Immigration to Israel for 1990-2004 1200

1000

800

600

400

200

Singapore Singapore incorporated the educational system into the process of becoming a technology center, realizing that human resources are its competitive advantage. Now it is one of the most IT literate societies in the world.103 The number of employed ICT manpower reached almost 120,000 in 2006, which was a 7.5 percent growth compared to 2005. Singapore’s ICT manpower has relatively higher qualifications: 83 percent have higher education. Women comprise about 30 percent of the overall ICT manpower employed, as of 2006.104 In secondary schools and junior colleges in Singapore, back in 1999, the ratio of students to computer was 5 to 1, in primary schools - 7 to 1.105 At present, for Armenia, the rate for secondary schools is 82 to 1.106 Children learn computer skills in most kindergartens in Singapore through play and special teaching methods.107 Developing IT manpower through vocational trainings and educational programs has been included in ICT development policy and has been given much attention since 1981 in Singapore. National IT plans and policies since then addressed the issue of IT education and IT manpower and have offered strategies for development. IDA (Infocomm Development Authority), a state body responsible for IT policy and development, plans and implements programs that address IT education and IT manpower development.108

“The Cybercity and National Policy,” The Cyber City. <http://www.american.edu/carmel/sw0143a/analysis.html#education> “Infocomm Manpower for 2006,” Infocomm Development Authority. <http://www.ida.gov.sg/doc/Publications/Publications_Level2/20061205092557/ASInfocommManpower06.pdf> 105 “IT Revolution & Singapore,” Tamil.net. <http://tamil.net/list/1999-07/msg00039.html> 106 Center for Education Projects PIU Report, (§ÎñÃ³Ï³Ý Íñ³·ñ»ñÇ Ï»ÝïñáÝ¦ ÌÆ¶ äÐ-Ç Ñ³ßí»ïíáõÃÛáõÝ) 107 “IT Revolution and Singapore.” 108 Chia Siow Yue, ”Singapore and the IT Revolution,” Tokyo Club Foundation for Global Studies, 2005. <http://www.tcf.or.jp/data/20000512_Siow-Yue_Chia.pdf> 5 103 104

60 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Human Capital Comparative Indicators of Armenia, Ireland and Israel.109 Israel

Ireland

Armenia

Human Development Index, 2006 10 Science and Engineering Enrolment Ratio (%), 2004 Brain Drain (1-7), 2006 Extent of Staff Training (1-7), 2006

Researchers in R&D / Mil. People, 2004

Quality of Science and Math Education (1-7), 2006

Total Expenditure for R&D as % of GDP, 2004

0 Prof. and Tech. Workers as % of Labor Force, 2004

University-Company Research Collaboration (1-7), 2006

Public Spending on Education as % of GDP, 2003

Adult Literacy Rate (% age 15 and above), 2004

Internet Access in Schools (1-7), 2006

Gross Tertiary Enrollment, 2004

Human Capital Comparative indicators of Benchmark Countries Variable

Israel (Group: All)

Ireland (Group: All)

Armenia (Group: All)

actual

normalized

actual

normalized

actual

normalized

Human Development Index, 2006

0.93

8.23

0.96

9.69

0.77

4.77

Science and Engineering Enrolment Ratio (%), 2004

29.64

8.37

23.30

5.35

6.54

0.00

1569.74

6.06

2674.00

7.66

1605.93

6.38

Total Expenditure for R&D as % of GDP, 2004

4.46

9.89

1.21

7.42

0.25

2.26

University-Company Research Collaboration (1-7), 2006

5.20

9.22

4.60

8.28

2.70

2.41

Adult Literacy Rate (% age 15 and above), 2004

97.10

6.14

100.00

8.41

99.40

7.50

Gross Tertiary Enrollment, 2004

56.50

7.68

58.50

7.84

26.20

4.64

Internet Access in Schools (1-7), 2006

5.80

8.36

5.00

7.07

2.40

1.38

Public Spending on Education as % of GDP, 2003

7.30

9.03

4.30

4.25

3.20

2.12

Prof. and Tech. Workers as % of Labor Force, 2004

28.86

7.90

23.58

5.93

n/a

Quality of Science and Math Education (1-7), 2006

5.30

8.36

5.30

8.36

3.80

3.88

Extent of Staff Training (1-7), 2006

5.10

8.02

5.40

8.71

2.80

1.47

Brain Drain (1-7), 2006

4.90

8.43

5.50

9.48

2.60

2.43

Researchers in R&D / Mil. People, 2004

109

“KAM - interactive benchmarking tool”, World Bank. <http://info.worldbank.org/etools/kam2/KAM_page1.asp>

61 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Human Capital Comparative Indicators of Armenia, Singapore and Korea, Rep.110 Korea, Rep.

Singapore

Armenia

Human Development Index, 2006 10 Science and Engineering Enrolment Ratio Brain Drain (1-7), 2006 (%), 2004 Extent of Staff Training (1-7), 2006

Researchers in R&D / Mil. People, 2004

Quality of Science and Math Education (1-7), 2006

Total Expenditure for R&D as % of GDP, 2004

0 Prof. and Tech. Workers as % of Labor Force, 2004

University-Company Research Collaboration (1-7), 2006

Public Spending on Education as % of GDP, 2003

Adult Literacy Rate (% age 15 and above), 2004

Internet Access in Schools (1-7), 2006

Gross Tertiary Enrollment, 2004

Human Capital Comparative indicators of Benchmark Countries Variable

Korea, Rep. (Group: All)

Singapore (Group: All)

Armenia (Group: All)

actual

normalized

actual

normalized

actual

normalized

Human Development Index, 2006

0.91

8.00

0.92

8.08

0.77

4.77

Science and Engineering Enrolment Ratio (%), 2004

41.09

9.88

n/a

6.54

0.00

3187.00

8.09

4999.00

9.36

1605.93

6.38

Total Expenditure for R&D as % of GDP, 2004

2.64

9.25

2.25

8.71

0.25

2.26

University-Company Research Collaboration (1-7), 2006

4.60

8.28

5.20

9.22

2.70

2.41

Adult Literacy Rate (% age 15 and above), 2004

97.90

6.59

92.50

4.92

99.40

7.50

Gross Tertiary Enrollment, 2004

88.50

9.84

n/a

26.20

4.64

Internet Access in Schools (1-7), 2006

6.40

9.66

6.30

9.57

2.40

1.38

Public Spending on Education as % of GDP, 2003

4.60

5.04

3.70

3.19

3.20

2.12

Prof. and Tech. Workers as % of Labor Force, 2004

17.98

4.20

28.88

8.02

n/a

Quality of Science and Math Education (1-7), 2006

5.10

7.84

6.30

9.91

3.80

3.88

Extent of Staff Training (1-7), 2006

5.20

8.36

5.40

8.71

2.80

1.47

Brain Drain (1-7), 2006

3.70

6.09

4.90

8.43

2.60

2.43

Researchers in R&D / Mil. People, 2004

â&#x20AC;&#x2030;110

â&#x20AC;&#x201A; Ibid

62 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Benchmark Countries for Employment Policy Immigration policy/Israel Due to its large Diaspora, not only human capital, but also international networking has become a key competitive advantage for Israel.111 The government of Israel welcomes and supports immigration. This attitude is an important factor in the development of the state, considering the number and the skills/talent of potential and real immigrant diasporans. After the collapse of the Soviet Union, during 1989-1999, almost 1 million people immigrated to Israel, from which approximately 100,000 were scientists and engineers. As a result, the number of engineers (per capita) in Israel became the highest in the world - 140 per 10,000 employees.112 The massive immigration provided the human capital needed for the development of the ICT sector. On the other hand, the role of the government was crucial in assisting those people to integrate into society and find their place in the job market. The government organized retraining and business development programs to match their skills with the industry demand.113 In 1991, Israeli government started the Incubator Program, which supported immigrants and start-ups to acquire knowledge about market economy and language skills.114 Israel has benefited from the immigration of ethnic Jews for more than a century. People entering their new homeland brought with them their social networks, their talents and skills, their well-developed social responsibility and the willingness to succeed in and for the homeland.115

Government-Diaspora Partnerships/India Understanding the possibility of falling short of the skilled IT workforce and to address the effects of brain drain, Indian government considers policies that engage non-resident Indians to promote the domestic IT sector. This concept that is called ‘brain circulation’ was successfully implemented with the Indians who immigrated to Silicon Valley in the US. As a result of partnership with the Indian diaspora of IT professionals, The Indus Entrepreneur (TiE) and the Silicon Valley Indian Professionals Association were established. Besides those, a High Level Committee on the Indian Diaspora was formed in 2000 by India’s Ministry of Science and Technology in order to facilitate cooperation between expatriates and locals, and to encourage their companies to partner with Indian firms for software development or other production processes (e.g. Sun Microsystems). The Indian government is also pursuing a number of different bilateral programs, such as the Transfer of Know-How through Expatriate Nationals (TOKTEN) program, which encourages expatriate nationals to undertake short-term consultancies in their home countries. In India, TOKTEN has enabled 650 professionals to visit 250 institutions from 1980-2001. Another initiative was organizing advisory panels with non-resident Indian IT experts, which resulted in several IT joint ventures. Through these various programs and incentives, India has found an effective way of combating the ‘brain drain’ which could bring to the shortage of the most valuable resources, a human capital of the country.116

Lopez-Claros 93 Ibid, 92 113 Ibid 114 “Armenian Information Technology Sector: Industry Growth Model.” 52 115 Lopez-Claros, 93 116 Sarala V. Nagala, “India’s Story of Success: Promoting the Information Technology Industry,” Stanford Journal of International Relations, 2006, July 24, 2007. <http://www.stanford.edu/group/sjir/6.1.05_nagala.html> 111

112

63 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Female ICT Professionals/South Korea The Korean government acknowledges that advancing female ICT professionals is an effective strategy for building democratic country and an information powerhouse for the 21st century. In view of the growth of ICT industry, the development of highly qualified female ICT workforce might alleviate problems related to the labor shortage, and at the same time improve national competitiveness. In the context of cultivating female ICT professionals, The Ministry of Gender Equality provides a variety of IT training courses for women to integrate them into the ICT industry. As a result of the ministry’s activities, 587 women were trained in 16 universities and 6 female workforce development centers. In 2001, with the funding from the Informatization Promotion Fund by the Ministry of Information Communication, the ministry was planning the implementation of a “Cyber Female IT Education” project to help women make their way into the IT industry. 117 In the frames of Cyber Korea 21, an initiative headed by the Ministry of Information and Communication, Korean government has launched a ‘Comprehensive Plan for National ICT Education’ that incorporates education for women in its curriculum. In addition, the Ministry of Gender Equality developed the ‘Basic Plan for Women’s Informatization’ outlining the framework for a systemized effort in women’s ICT education. Major achievements of these initiatives were the provision of aid to 43 women resources development centers, four women’s development centers, 19 affiliated education institutes in women’s universities, 10 Girl Scoutallied facilities, nine welfare facilities for women and children, and Korea Women’s Development Institute. As a result, 70,000 people completing the ITC trainings and around 1,500 becoming certified in 2000-2001, with more than $6.5 million budget allocated during 1998-2001.118

S.J. Chang,“Situation of the Female Workforce in Korean Information,” Ministry of Gender Equality, 2001. <http://www.itu.int/ITU-D/gender/documents/Asia-PacificlWrkshopKorea/Doc3-3.pdf> 8. 118 Young-Joo Paik, “ICT Education for Women: Case Study of the Republic of Korea,” United Nations Division for the Advancement of Women, 2002. <http://www.un.org/womenwatch/daw/egm/ict2002/reports/Paper-YPaik.PDF> 3, 8. 117

64 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Employment Policy Development Armenia: From the Perspective of Benchmarking Countries Employment policy

Benchmark country

Armenia

Recommendation

India -This concept of “brain circulation” was successfully implemented with the Indians who have immigrated to Silicon Valley in the US. - The Indus Entrepreneur (TiE) and the Silicon Valley Indian Professionals Association were established, as a result of partnership with the Indian diaspora of IT professionals.

Policy to reverse brain-drain

-High Level Committee on the Indian Diaspora was formed to encourage cooperation between companies where expatriates work and Indian firms for software development or other production processes (e.g. Sun Microsystems). -Transfer of Know-how Through Expatriate Nationals (TOKTEN) program was implemented, which encourages expatriate nationals to undertake short-term consultancies in their home countries.

Draft law on migration No specific policy to attract IT specialists from Diaspora.

Global SPC recommends: Promote government-diaspora partnerships, provide incentives for diasporans to immigrate and/or transfer their skills through temporary teaching/exchange programs in IT sector Transfer of Know-how through Expatriate Nationals (TOKTEN) – diaspora IT experts do consulting for the IT industry/IT sector companies Establish joint-ventures with diaspora Organize trainings and establish matching bodies – to train and match the immigrants/temporary residents to the needs of the labor market/IT industry.

-Advisory panels were organizing with nonresident Indian IT experts, which resulted in several IT joint ventures. Israel -The government supports and encourages immigration, and provides trainings for immigrants so that their skills match the labor market. South Korea -The Ministry of Gender Equality provides a variety of IT training courses for women to integrate them into the ICT industry.

Policy to increase women representation in IT sector

-In 2001, with the funding from Informatization Promotion Fund by the Ministry of Information Communication, the Ministry was planning the implementation of a “Cyber Female IT Education” project to help women make their way into the IT industry. -In the frames of Cyber Korea 21, an initiative headed by the Ministry of Information and Communication, Korean government has launched “Comprehensive Plan for National ICT Education” that incorporates education for women in its curriculum.

no policy

Global SPC recommends: Expand the opportunities available to women in the sphere of post-secondary education and careers in IT. (By taking advantage of the ‘networked’ nature of much of IT work, creative use of telecommuting and flexible scheduling many women can be attracted to the field.) Organize/fund trainings for women and prepare them for jobs in IT. Develop an IT development strategy that would consider and make use of women IT workforce.

-Ministry of Gender Equality developed the “Basic Plan for Women’s Informatization” outlining the framework for a systemized effort in women’s ICT education.

65 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Benchmark Countries for Educational and Scientific Policy DOEACC Society/India119 In order to realize India’s ambitious plans in the development of IT industry, the Department of Information Technology of Indian Ministry of Communications & Information Technology has established an autonomous body-DOEACC Society that has revolutionized computer knowledge dissemination, by offering its meticulously prepared curriculum through the non-formal sector. DOEACC Society works together with All India Council for Technical Education, and the Department of Information Technology (formerly Department of Electronics (DOE) in implementing a scheme to develop IT manpower. The aim of the scheme is to use the potential and the expertise of accredited computer training institutes for developing IT manpower. DOEACC offers the following courses: CCC Certificate on Computer Concepts; O Level Equivalent to Foundation level course; A Level Equivalent to Advanced Diploma in Computer Applications; B Level Equivalent MCA Level; C Level M. Tech Level. Besides conducting accredited courses in Authorized Institutes, the DOEACC Society provides Long Tem Courses and Short Term Courses in the area of IECT in ten Centers all over the India. Other than these courses, DOEACC is also conducting few other courses in bio-informatics and hardware. DOEACC is known for its quality in computer education in non formal sector in India. The Institutes apply to DOEACC Society to get accreditation and be able to disseminate computer knowledge. As of January 2004, 839 institutions received the right to conduct 1,133 DOEACC accredited courses. The DOEACC Society also targets underprivileged sections of the population to undergo the Society’s courses. Thus, The DOEACC Society provides a Scholarship Scheme for SC/ST/Physically Handicapped and Female Students to attend O/A/B/C Level of courses at Accredited Institutes authorized to conduct the DOEACC Courses. The numbers of physically handicapped and female candidates registered during April to December 2006 were 12,411 and 287, respectively. In the frames of its ITES-BPO Customer Support program, the DOEACC Society has trained over 4,500 people, including around 2000 women. The DOEACC Society also provides courses in Telemedicine, and has trained 210 Nurses in its Center in Aizawl. The Society has also trained 240 teachers in e-Learning that has created the multiplier effect and has facilitated the use of IT technologies and has created awareness about the usage of information tools.120

Investment in ICT Related Research in Higher Education/Ireland In the recent years, investments in technology, innovation and scientific R&D has been a centerpiece of the economic development strategy of the government in Ireland. In the frames of the National Development Plan for 2000-2006 the investments in technology, innovation and scientific research has increased five times to €2.48 billion, with the majority of funding programs being concentrated primarily in the third level institutions. Education Institutions in Ireland are actively engaged in the research of new technologies. “Irish Universities, Institutes of Technology, technology centers and state-backed programs in advanced technologies have more than doubled their combined annual spending on research.”121 Under the Program for Research in Third-Level Institutions that was initiated by the Higher Education Authority of Ireland, large amounts of State investment were directed to research in higher education, which allowed third-level institutions to build infrastructure and strong researcher base. The six ICT projects selected for inclusion in the PRTLI program have been granted €39 million, and have provided opportunities for approximately 190 researchers to address scientific and technology issues. For improving the quality of processing power through grid technology, $ 26.6 million has been used. Also, many of the research programs that received funding under the PRTLI had a significant impact on the educational sphere through the development of new degree programs.122 DOEACC Society, 2005. <http://www.doeacc.edu.in > “Information Technology: Annual Report 2006/2007.” Ministry of Communications and Information Technology. <http://www.mit.gov.in/download/annualreport2006-07.pdf> 47-48. 121 “Ireland,” CORDIS, 2006. < http://cordis.europa.eu/ireland/> 122 “The Programme for Research in Third Level Institutions (PRTLI): Transforming the Irish Research Landscape,” Higher Education Authority, 2006, July 17, 2007. <http://www.hea.ie/uploads/pdf/HEA%20PRTLI%20Directory%20-%20Section%202.pdf> 55. 119

120

66 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy Several national centers for excellence in information and communications technology with a strong reputation both nationally and internationally have been created under the Program for Research in Third Level Institutions Initiative. Among those are Research Institute for Networks and Communications Engineering based in the School of Electronic Engineering at Dublin City University in Ireland; Telecommunications Software & Systems Group (TSSG), a research center based at Waterford Institute of Technology; National Microelectronics Research Center, which is the largest multidisciplinary research centre in Ireland and is recognized as a centre of excellence in selected Information and Communications Technology fields; The Interaction Design Centre, an interdisciplinary research group in University of Limerick’s Department of Computer Science and Information Systems focused on the design, use and evaluation of information and communications technologies.123

Higher Education-Industry Relationships/Ireland In the recent years, the most dynamic and innovative countries have developed policies to encourage enterprise-higher education cooperation. It’s a mutually beneficial arrangement, as higher education institutions, being an invaluable source of scientists and researchers, may supply industry with new knowledge, expertise and the latest technologies, while enterprises may insure the demand for the products of knowledge institutions and provide the opportunity to see their research brought to market for the benefit of society. For Ireland, this cooperation is crucial as there is relatively small number of applied and industry-focused public sector research institutes, and enterprises has to rely on higher education researchers.124 The most important cooperation links between major research institutions and enterprises have been established in the ICT sector via the Centers for Science Engineering and Technology (CSETs).125 Science Foundation Ireland is encouraging HE-enterprise interaction through the seven CSETs, among which are Centre for Research on Adaptive Nanostructures and Nanodevices, Digital Enterprise Research Institute, NUIG, Centre for Telecommunications Value-Chain-Driven Research, TCD, Lero - Irish Software Engineering Research Centre, UL, etc.126 These CSETs conduct research in the fields that are of interest to the enterprise. The enterprise contributes 20 percent of the overall budget. The cooperation turned out to be very successful, since it does not require much compromise on the part of the academic partner concerning its research interests.127

Higher Education-Industry Relationships/Israel The government of Israel encourages and assists the educational institution-industry connections in order to balance and match the demand and supply of IT specialists. In the early 1990s, industry leaders expressed a need for more qualified manpower in electronics and computer science. Task forces were created and a major boost was given by the universities to these particular areas. Public universities in Israel adapted their programs and were successful in changing the career priorities in order to match the knowledge and skills of future IT professionals with the industry needs.128 To strengthen collaboration between higher education institutions and the IT industry, a program called Magnet was launched in 1993. It was a scheme that provided funding for developing pre-competitive generic technologies. Only one project that assumed the collaboration of private companies and at least one higher education institution was funded the first year, which included the coverage of 66percent of the budget. As a result of the program, in 2005, 31 consortia functioned in Israel. The duration of the grants given by the Magnet Program is 3-5 years, and the consortium is obligated to make the resulting technologies available to any local interested party at a moderate price.129

“R&D in Academia,” IDA Ireland, 2007, July 20, 2007. <http://www.idaireland.com/home/index.aspx?id=300> “Promoting Enterprise–Higher Education Relationships,” Advisory Council For Science, Technology And Innovation, March 2007, July 17, 2007. <http://www.sciencecouncil.ie/reports/acsti070404/forfas070404_enteprise_higher_education_report.pdf > 2, 3 125 “Promoting Enterprise–Higher Education Relationships.” 19 126 “The SFI Centres for Science, Engineering & Technology (CSET),” Science Foundation Ireland, July 16, 2007. <http://www.sfi.ie/content/content.asp?section_id=419&language_id=1> 127 “Promoting Enterprise–Higher Education Relationships.” 14, 19 128 Lopez-Claros. 91 129 “Armenian Information Technology Sector: Industry Growth Model.” 52; Lopez-Claros. 97-98 123 124

67 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Cooperation Between Industry and Academia130 Norway

6.04

Belgium

6.17

Sweden

6.37

Austia

6.37

Canada

6.5

Switzerland

6.77

Israel

6.89

USA

6.92

Singapore

7.1

Iceland

7.17

Finland

7.82 0

Military’s Role in IT Education/Israel The military of Israel plays a significant role in educating IT specialists. The military service in Israel is compulsory, and the military has the advantage to choose and train the most talented young people in elite IT units. After trained programmers return from their military service, they provide a wide network between the industry organizations and research teams in the army. The twoway collaboration resulted in the development of Israeli army research capabilities, through the state incentives and funding for projects with an IT component. Israel’s IT training in the army is conducted by the Computer and Data Communications Network Center. The training has a continuing and sustainable character, since the young specialists get re-trained every year when they return to the unit for reserve duty. On the other hand, the reservists share their new experience with people that are still in the service, thus providing a mutual experience exchange between the IT and the military sector. The development of a firewall by Check Point is a successful example of such collaboration.131

“Invest in Israel, where breakthroughs happen,” Invest in Israel, 2006. <http://www.moit.gov.il/NR/exeres/B82150CF-12A2-41E5-AB04-F6B505243E5C.htm> 7 131 Lopez-Carlos. 91-92 130

68 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

International Collaboration/Singapore The Singapore Management University (SMU) collaborates with the Carnegie Mellon University (CMU) in preparing its students as IT professionals. In 2003, the universities entered into collaboration to develop SMU’s School of Information System’s educational and research program. In 2006, a joint ‘Fast Track Program’ was launched. It is one of the initiatives of Infocomm Development Authority (IDA) of Singapore within National Infocomm Scholarship Program.132 The Fast Track Program is an initiative aimed at developing Singapore’s IT workforce. The scholarship recipients will return and be employed in leading ICT companies in Singapore, after completing their studies. The scholarship includes two years of study of business oriented IT programs in SMU, and another two years in CMU, where the last year or year and a half will be spent on acquiring a master’s degree. The program also will connect and require the graduates to work at a certain company in Singapore for four years after graduation.133 The collaboration is especially of great significance, since it allows the students gain hybrid skills in business analysis and IT programming.134

132 Teresa Thomas, “New “Fast Track” Program Offered in Collaboration With Singapore Management University,” Carnegie Mellon Today, March 29, 2006, July 25, 2007. <http://www.cmu.edu/cmnews/extra/060330_singapore.html> 133 Liaw Wy-Cin, “Bachelor-master’s in IT study award offered,” The Straits Times, March 18, 2006, July 25, 2007. <http://www.smu.edu.sg/news_room/smu_in_the_news/2006/sources/ST_20060318.pdf> 134 Thomas

69 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Educational and Scientific Policy Development Armenia: From the Perspective of Benchmarking Countries Educational and Scientific Policy

Benchmark country

Armenia

Ireland -In the frames of the National Development Plan for 2000-2006 the investments in technology, innovation and scientific research has increased five times to â&#x201A;Ź2.48 billion, with the majority of funding programs being concentrated primarily in the third level institutions.

Investments in IT higher education institutions

-Under the Program for Research in Third-Level Institutions that was initiated by the Higher Education Authority of Ireland, six ICT projects has been granted â&#x201A;Ź39 million, and has provided opportunities for approximately 190 scientific researchers - National centers for excellence in information and communications technology with a strong reputation both nationally and internationally has been created under the Program for Research in Third Level Institutions Initiative. Singapore

Synopsys Funding of educational programs (236 students+ 44 professors) Distance Learning classrooms in SEUA; computer labs at YSU & MIET Funding Presidential Awards for the best IT students

Recommendation

Global SPC recommends: Improve financial conditions for teachers/professors/researchers to attract and retain talent. Set funding/investment priorities for the IT sector. Provide funding/scholarships for international experience/exchange for IT students. Cooperate with international/global firms/companies to bring in international expertise and higher-technologies. International cooperation on the university level.

-The government of Singapore provides scholarships, so that IT students can spend 2 years in the United States and enrich their IT skills. The scholarship assumes that the students serve Singaporean companies upon school completion. Israel -The government of Israel encourages and assists the educational institutionindustry connections in order to balance and match the demand and supply of IT specialists. To boost the mutual cooperation task forces were created and state incentives in the form of funding for cooperative projects were established.

Intersectoral Cooperation /education-IT industry, military-education-IT industry/

-The interaction between the military IT education and the IT industry is maintained by the Computer and Data Communications Network Center. Young people on duty get trained and re-trained at the center and serve as network when they return to civil life. Ireland -The most important cooperation links between major research institutions and enterprises have been established in the ICT sector via the Centers for Science Engineering and Technology (CSETs). Science Foundation Ireland is encouraging HE-enterprise interaction through the seven CSETs.

Discussion on creating publicprivate consortium for raising the quality of IT education in public universities As state funding is limited, the state has encouraged publicprivate partnership during the past two years. However, the results are not seen yet. Synopsys has signed Cooperative Agreements with SEUA in 2004; with YSU in 2005; and with MIET in 2006.

Global SPC recommends: Constant interaction between the ICT industry, government and the educational institutions in order to develop and design courses that impart appropriate ICT knowledge and skills, including cognitive skills. Create task forces in order to match the IT skills with industry needs. State incentives (financial, etc) for industryeducation cooperation. Encourage the cooperation between different sectors â&#x20AC;&#x201C; military, healthcare, etc., to enhance the entrance of technologies into other fields and let those fields help in preparing IT manpower.

70 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy Educational and Scientific Policy

Benchmark country

Raise the quality of IT education

India -DOEACC Society founded by All India Council for Technical Education and Department of Information Technology, Government of India, to develop quality manpower in IT by utilizing the expertise available with the computer training institutes who are granted accreditation for conducting specified Levels of courses, subject to their meeting well-defined norms and criteria.

Armenia

Synopsis Funding Presidential Awards for the best IT students Armenian Microelectronics Olympiad

Recommendation

Global SPC recommends: Strict control on the quality of education given, by continuous monitoring of the ICT education curriculum as well as pedagogy, by a national authority; Establishment of national and regional skill certification and accreditation centers Modernize curricula, invite foreign experts, potentially establish international university partnerships with respect to majors related to Computer Science

71 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy

Benchmark Countries for Vocational Training Policy CSR in IT/Singapore135 Microsoft Singapore, in collaboration with the Central Singapore CDC launched the first community IT education in Singapore, in 2004. The program was called the Microsoft-Central Singapore CDC LearnIT. The first beneficiaries of the program included 100 residents of Central Singapore, who went through a free training course in Microsoft programs (Word, Excel, PowerPoint.) 60 percent of beneficiaries were more than 46 years old, 38 percent were semi-skilled, and 40 percent were unemployed. This is a joint initiative and every dollar spent by Microsoft is matched by CDC. Learn IT is a part of a bigger CSR initiative by Microsoft, which aims to develop the IT manpower of Singapore through lifelong learning. Microsoft not only provides training, but also provides access to modern computer technologies. The final aim of the program is to increase the potential of employability and the probability for one to find a job based on upgraded IT skills.

Strategic Manpower Conversion Program/Singapore136 In April 2000, the Ministry of Manpower and Infocomm Development Authority in Singapore launched the Strategic Manpower Conversion Program (SMCP), which became popular quite fast. Within six months the number of interested people to take part in the program reached 300. But the program targeted employers only. It gives incentives to employers to send their present employees, or hire new workers and send them to take part in the program and convert into IT specialists. The number of employers benefiting from the program reached 60 within the first six months. The participants went through a training, as a result of which they would be able to work as database administrators, system analysts, and programmers among other IT specialties. As a complement to this program, a new Facilitator Scheme was started in October 2000, to meet the needs of individuals as well. The scheme allows individuals who want to change their career and become an ICT specialist, to take part in the program. The program has facilitator organizations, where people can sign up and go through training. The facilitator on its turn chooses the trainees on the basis of their potential to find an infocomm job after the training. Upon completion of the training, the graduates get assistance from the facilitators for finding a relevant job in the ICT market. In case the individual gets a job within the first three months of the graduation, he/she is eligible for 30 percent reimbursement of the cost of training. The SMCP and its Facilitator Scheme were a response to raising demand of ICT manpower across all industries in Singapore.

Higher Educational Institutions Offer Vocational Education/Singapore137 One of the research institutes of National University of Singapore, the Institute of Systems Science (ISS), provides lifelong IT education programs for workers in the field. It was originally established aiming to train the IT manpower for the national computerization program, as well as encourage managers involve IT in their activity in order to stay globally competitive. ISS collaborates with Singapore Manpower Conversion Program. It assists in providing IT skills to professionals in such fields as architecture, finance, engineering, and sciences. ISS also has a Master of Technology Program. This is a successful program in combining IT management and marketing skills with IT skills. The graduates learn how IT can create business value and are introduced to the strategic aspects of IT. The annual competition for this program is three to one. Another collaboration of ISS is with IT Skills Certification Program. The program targets IT managers, who can benchmark and develop their skills. The program provides IT management skills to IT professionals, who as a result can handle high risk and high quality IT projects. The program has proven to be successful, and the participants have been able to demonstrate competence in managing complicated and large-scale projects. “Microsoft Singapore and Central Singapore CDC Launch First Community IT Education Initiative,” Microsoft, May 10, 2004, July 25, 2007. <http://www.microsoft.com/singapore/mssg_docs/1655.aspx> 136 Strategic Manpower Conversion Programme (Infocomm) Facilitator Scheme,” October 17, 2000, July 25, 2007. <http://www.ida.gov.sg/News%20and%20Events/20061117113739.aspx?getPagetype=20> 137 “Speech by Professor SHIH Choon Fong,” National University of Singapore, Infocomm Development Authority, 2001, July 31, 2007. <http://www.nus.edu.sg/president/speeches/2001/issopening.htm> 135

72 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Human Capital Policy ISS has also launched an e-learning program, which has significantly expanded the number of its beneficiaries. A studentcentered e-learning platform provides knowledge and skills for IT professionals, who otherwise do not have the time and/or the possibility to attend classroom-based courses. This provides a wider range involvement in classes and in IT skills learning both for students and for IT professionals.

Vocational Training Policy Development Armenia: From the Perspective of Benchmarking Countries Vocational Education Policy

Lifelong learning

Benchmark country

Singapore -Strategic Manpower Conversion Program (SMCP) gives incentives to employers to send their present employees, or hire new workers and send them to take part in the program and convert into IT specialists. Facilitator Scheme, a complement to SMCP allows individuals who want to change their career and become an ICT specialist, to take part in the program. -Institute of Systems Science has launched an e-learning program, which has significantly expanded the number of its beneficiaries, reaching out to people who otherwise donâ&#x20AC;&#x2122;t have the time and/or the possibility to attend classroom-based courses.

Armenia

Recommendation Global SPC recommends: State incentives to encourage employers/individuals to undertake/participate in strategic manpower conversion programs (convert into IT specialists). Higher education institutions providing lifelong education

Law on higher and post-graduate education There is no specific policy on promoting lifelong learning in IT

Promote E-learning in the sphere of IT education in order to expand outreach and involve more IT students and professionals Provide basic IT education to masses Professional development for IT teachers/professors Preparing workers for specialized fields such as architecture, engineering, medicine, etc. Include lifelong learning section in the law on higher

Promoting CSR in IT

IT management and marketing skills

Singapore -Microsoft Singapore, in collaboration with the Central Singapore CDC launched the first community IT education in Singapore, in 2004. This is a joint initiative and every dollar spent by Microsoft is matched by CDC.

Singapore -IT Skills Certification Program targets IT managers, giving them the opportunity to benchmark and develop their skills. The program provides IT management skills to IT professionals. -Master of Technology Program of the Institute of Systems Science is a successful program in combining IT management and marketing skills with IT skills.

No incentives to encourage IT companies to do CSR in related education

Yerevan State University Economics Department provides MA Degree in Management Information Systems

Global SPC recommends: Collaboration with industry in providing lifelong education Attract global IT firms (Microsoft, Lycos) to provide/finance IT professional development

Global SPC recommends: Higher education institutions providing IT management skills to IT professionals Enrich technical courses with interdisciplinary know-how( e.g. project management, marketing, business case writing)

73 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

inancial and tax policies have huge impact on the establishment and further development of IT sector. Therefore, the development of favorable fiscal and tax policies is one of the most vital areas in which the government exerts influence on the development of the IT sector. On one hand, fiscal and tax policies contribute to the development of the IT sector by providing important tax incentives and tax holidays for IT-related companies. On the other hand, developed financial system with its markets, existence of venture funds make it easy for IT companies to get financial resources required for both start ups and flourishing IT companies.

Fiscal policy

Many countries, with the Asian governments as leading pioneers, have used fiscal and export incentives in forms of reduced tax rates, tax subsidies, waivers and exemptions to specific groups of companies (especially in the start-up stage) and to investors (in terms of venture capital) in order to build a more competitive IT sector. Benchmark countries routinely reform their tax legislation to promote capital-intensive industries focused on high technology by allowing loss carryovers, adjusting rules on the depreciation of fixed capital assets and through the modification of expense rules on capital investments. Tax policy can be used to support the IT sector in two general ways. The general tax structure can be revised to provide such stimuli as a reduction in rates, sales tax exemption on machinery and equipment, and through income tax rebates. Secondly, various tax incentives can be used to reward specific business practices, including credits for R&D expenditures. Fiscal incentives involve not only providing supportive tax rates, but also adopting regulations that will maintain IT sector development, as well as state procurement that indirectly impacts both the demand and the public sector supply. Governmental bodies and international organizations appear to be the biggest principals and purchasers of IT technologies.

Free Zones

Special free zones and industrial economic zones (hereafter, free zones) are among one of the most vital economic tools contributing to national economic development. Established in distinguished areas, free zones promote the development of exportoriented industries, attract modern technology, provide employment opportunities, and maximize foreign investments. As a result, free zones, which are mostly located in areas which were not previously well-developed in terms of infrastructure and employment opportunities, contribute to regional development. Free zones are established in locations that provide a competitive destination for investors. Free zones are designated areas with special incentives, usually exemptions from VAT and customs duties, but they can have even more incentives such as the relaxation of environmental or labor standards.

Risk Capital

One of the most important financial provisions used to support the development of the IT sector is the provision of risk capital to IT-related start-ups. The government holds a substantial role in attracting and securing risk, or venture, capital. Governments may either increase the availability of venture capital (VC) and support entrepreneurs through attracting business patrons to the sector, or facilitate the creation of a stock market exchange for IT companies. The development of risk capital markets is viewed as a mechanism for countries to actively participate in IT sector development. The availability of risk capital, through the establishment of venture funds, regional risk funds, and business networks, assures the development of IT start-up companies, thus contributing to overall IT sector development. Success in IT is mostly the result of a combination of access to excellent research and the availability of risk capital in early stages, with a strong focus on markets once established. Specific policies targeted at the venture capital sector may serve as a successful basis for creating IT-related venture funds, if favorable background conditions, such as the existence of IT companies

74 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy and a demand for IT related venture capital already exist. Moreover, the success of such policies depends on a pre-emergence period with a significant amount of informal risk capital attraction-related activities. The timing of such policies is also important for policies to lead to the early and rapid accumulation of reputation and capabilities.

Financial System and Markets

The financial system is one of the most essential sectors related to the overall economic development of a country. Globally, the largest proportion of transactions is conducted through financial intermediaries, such as banks and credit organizations. Stock exchange markets also have a vital impact on connecting local businesses to international markets, as well as in attracting foreign investment into the country. The global players of the financial system are described in the table below: 138 Financial System Players Lenders

Financial Intermediaries

Financial Markets

Borrowers

Individuals Companies

Banks, Credit Organizations Insurance Companies Pension Funds Mutual Funds

Interbank Stock Exchanges Money Markets Bond Markets Foreign Exchanges

Individuals/Households Private Companies Governments Municipalities State Companies, etc.

In most cases, Central Banks are performing the functions of the primary regulatory body overseeing the financial markets. Several models of financial market regulatory entities exist throughout the world. Generally, the Central Banks control monetary policy and supervise the banking sector. In some countries, Central Banks have more power and they also regulate the overall financial market and financial intermediaries. Central Banks are independent from government and are responsible for developing laws and regulations.

Accounting Policy

Accounting policy in itself does not directly affect the development and competitiveness of the IT industry, but it does affect the decisions of people which afterwards can either boost or suppress IT cluster’s dynamics. Therefore, in the long run, it is extremely important that accounting numbers reflect the accurate profile of companies’ assets, profits and losses.

General Overview of Financial and Tax Policy Armenia currently lacks sound financial and tax policies capable of encouraging IT industry development. Government initiatives, such as fiscal and financial incentives for R&D and high-tech export oriented products have not yet been introduced in Armenia. Moreover, there is no legal infrastructure for incubator development and for the attraction of global venture capital to fund risky innovative start-ups. There are no free zones that would provide tax incentives for attracting IT-related companies. Armenia is in need of solid and effective financial markets (especially capital markets) that would support business initiatives and, in particular, venture capital exit strategies.

Fiscal Policy

Armenia has no IT-specific tax policy that would encourage the rapid growth of the sector. One other major problem hindering IT sector development, relies in the underdeveloped tax administration mechanisms in place. Armenia lacks e-mechanisms that would ease the tax administration process. As for the e-tax system, the impossibility of using an electronic digital signature, even though the respective law has been adopted, remains as a major obstacle for e-tax and e-registration systems’ development. The December 2004 “Law on Electronic Documents and Electronic Digital Signature” includes a clause on the right for creating electronic processing centers for facilitating electronic identification process, yet the lack of incentives for using e-documents and the voluntary basis of their creation, has resulted in an absence of such centers, making the law ineffective.

138

Wikipedia Free Encyclopedia, accessed August 10, 2007. <http://en.wikipedia.org/wiki/Financial_market>

75 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy Major customs difficulties faced by IT-related companies are viewed as being connected with the import of IT goods. The increase in costs for the importer, caused by mismanagement in customs, places a subsequent tax burden on the customer and, more broadly, hampers the development of the IT sector. The major issues hindering import of IT-related goods include but are not limited to: Non-proper definition of customs codes for IT goods, outdated product coding database; Unfair estimation of the prices of imported (usually technologically sophisticated) IT items, which changes the VAT subject to payment, and subsequently affects the market price of the imported goods; Claimed abuses of the customs administration’s right to disregard the manufacturer’s certificate and demand additional national certification prior to custom clearance.139 Another problem, though less frequently encountered, but nevertheless significant in terms of favorable tax framework, is related to the re-export and temporary import of IT-related products. Improper methodologies which are used for indicating the accounting status of such products create administrative difficulties with customs clearance in cases such as the re-export for servicing and modifying products. Similarly, the temporary import of IT-related services is also hampered by vague administrative procedures, namely seen in terms of tax liabilities that occur in cases of on-site servicing and with the installation of imported IT goods by representatives of manufacturers or foreign servicing agents.

Government Spending on IT

Governmental bodies and international organizations appear to be the biggest principals and purchasers of IT technologies. World Bank projects, such as a $19 million credit to the Armenian government through the Education Quality and Relevance Program, has created significant market demand for computer technologies, and have emerged among the largest clients of the IT equipment and servicing market. One such state initiative that has indirectly affected the development of the IT sector is the cba.net, a network created by the Central Bank of Armenia (CBA), which provides connectivity between the CBA and financial institutions under their supervision. Another large scale state co-funded project is the Armenian Card clearing, processing and plastic cards system (ArCa). 140 There are no precise statistics on budget spending specific to IT, whereas the state expenditures for science and R&D remain stagnant, barely rising from 0.89 percent of GDP in 2003 to 1.2 percent of GDP in 2007. The following state expenditures that have most influenced IT market supply side have occurred since 2006: $100,000 of state funds was allocated to the Educational Technologies Institute in 2006 for the establishment of computer training centers in 300 schools and their inclusion in the revolving computer fund, as well as for the installation of IT network and communication data; State funds allocated to science (including IT education) in 2006, similar to 2005, equaled only 0.2 percent of GDP. The 2007 Armenian Government Program states that it intends to continue encouraging IT sector development.141 And according to official policy, state funds are to be allocated to scientific, R&D, IT development, and educational activities in the amount proportional to the overall increase of the budget revenue side, compared to the previous year.

Financial and Capital Market

The one stock exchange operating in Armenia (ArmEx) introduced foreign exchange trading in November 2005. Turnover in corporate equities, however, remains less than $1.5 million annually.142 Core activities include securities listing, organizing an exchange trade in securities and foreign currency, disclosure of information on listed companies and providing exchange trade results. According to the “Law on Securities Market Regulation,” ArmEx is also authorized to carry out the registration of securities.143 Enterprise Incubator Foundation, “Aharon Paradigma” Consulting and Research Company, “Fin-Consult” LLC, Analysis Report Business and regulatory framework in IT sector in Armenia; A look at the end of 2005, Yerevan, April 2006. 140 http://www.arca.am/index.php-en 141 Government of Armenia Program 2007, June 21, 2007, Yerevan, Armenia 142 US Department of State,2006 Investment Statement-Armenia. <http://www.state.gov/e/eeb/ifd/2006/61960.htm> 143 ARMEX Armenian Stock Exchange. <http://www.armex.am/en/legislation.htm> 139

76 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy In April 2007, the largest Nordic stock exchange operator OMX AB agreed to buy the small Armenian bourse and the Central Depositary of Armenia. OMX introduced integrated technology solutions throughout the transaction chain, thereby enabling efficient securities transactions for over 60 exchange organizations in more than 50 countries. OMX is a Nordic Large Cap company in the financial sector and is listed on the OMX Nordic Exchange.144 According to the assessment of the Vice President of OMX, there are efficient steps needed to increase the interest towards the capital market of the country. One such lever may become the provision of tax benefits to companies that express readiness to place their shares on the Stock Exchange. Another condition for the development of capital markets may stem from pension reforms. There are many concrete examples in other countries demonstrating that the basic driving force for the development of capital markets is the pension system. According to the forecasts of the OMX Vice-President, within ten years “we will be dealing with an efficiently functioning” Armenian capital market.145 The biggest player of the Armenian financial market is the banking sector which accounts for about 95 percent of assets of the financial system. E-banking is also seriously underdeveloped in Armenia. The main reasons and constraints stem from several factors, including the relatively low rate of internet users, the low level and small scale of international internet bandwidth, the incomplete availability of e-government services, the poor extent of business Internet use, and low education regarding access to the Internet. 146 Currently, the Armenian electronic payments market consists of two major players: 1. “EDram,” with the major objective to provide e-commerce-related services was created in 2003. EDram supports access to the network of HayPost’s branches, as well as providing information about utility payments, the preservation and storage of transactions’ history, and the archiving of payment receipts. 2. “ArCa” payment system was established in March 2000 by the CBA and ten commercial banks. The main services of the modern ArCa payment system include cash advances, payments in trade/service points for purchasing goods or services, utility payments via ATMs, electronic payments (including utility payments), account balance monitoring, ECommerce, and card-to-card money transfers.

Mondo Visione, “OMX To Acquire The Armenian Stock Exchange And Central Depository,” April 27, 2007. <http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=66636>. 145 “Nordic Firm to Buy Armenian Stock Exchange,” Radio Free Europe/Radio Liberty (RFE/RL), Yerevan, April 28, 2007. <http://www.armeniadiaspora.com/ADC/news.asp?id=2232> Note: On May 25, 2007, the OMX Group announced its merger with the NASDAQ Company, Source: Banks.am Financial Armenia. <http://www.banks.am/eng/index.php?sub=shownews&newsid=20070606_1> 146 Central Bank of Armenia. <www.cba.am> 144

77 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Benchmark Countries for Fiscal Policy Economists often argue that inequalities in applying taxation rates for business, such as preferences for prioritizing IT and granting tax exemptions, tend to restrict healthy competition. Nevertheless, an amicable tax regime, as well as tax exemptions to the companies engaged in IT-related production, import and export are among some of the measures used to encourage IT development that have been applied by many knowledge-based economies and countries that have prioritized IT development. A combination of flexible tax exemptions and institutional solutions has made South Korea, Ireland, and Israel into clear benchmark countries for Armenia in the context of using fiscal initiatives to encourage IT sector development.

Israel The 2005 tax system reform in Israel has resulted in a greater competitive advantage against other low-tax jurisdictions by supporting IT sector players, and not only by virtue of its low tax rates average. The tax burden, including income and property taxes, customs duties, VAT and national insurance, has been permanently decreasing, from 41.2 percent in 2001 to 28.6 percent in 2006.147 The revised personal income tax rate is also progressive, starting at 10 percent and increasing to a maximum of 49 percent, the VAT was lowered to 15.5 percent (effective as of July 1, 2006), corporate income tax rate decreased from 34 to 31 percent, while individual corporate tax was fixed at the rate of 29 percent (down from the previous 34 percent rate). As a result of the reforms, tax revenue for 2006 reached 28.9 percent of GDP.148 The table below shows the gradual decrease of the tax burden and corporate tax rate within the periods of 2001 to 2007.

Tax burden and corporate tax rate decrease (2001-2010)149 45 40 35 30 25 Overall Tax Burden 20

Corporate tax rate

15 10 5 0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Moti Bassok, “Israel moves up in economic freedom,” Ha’aretz, July 8, 2005, and Hadad Manor, “Israel up 22 places in world competitiveness rankings,” Globes , May 31, 2006 148 A further decrease is to be exercised as follows: 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010, according to: “Israeli Tax Reform of 2005,” Worldwide Tax Systems, PriceWaterHouseCoopers, 2005. <www.pwc.com/il/eng/about/press-rm/TNN_IsraelTaxReform05.pdf> and, “Israel Tax News 2007,” Worldwide Tax News, 2007. <http://www.worldwide-tax.com/israel/isr_econonews.asp> 149 Table based on data from Worldwide Tax News and PriceWaterHouseCoopers reports 147

78 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy The corporate income tax regime is favorable for foreign direct investment (FDI) which attracts foreign capital both in the form of purely-foreign company establishment and foreign-local joint ventures. Corporations with foreign investment are taxed at rates ranging from 10 to 25 percent, depending on their proportion of foreign investment, versus the ordinary corporations that are taxed at a fixed 31 percent as indicated in the chart below.

Tax Rates for Companies with Different Level of Foreign Capital Participation150 Percentage of foreign ownership

Company tax rate (percent)

Over 25 percent but less than 49 percent

49 percent or more but less than 74 percent

74 percent or more but less than 90 percent

90 percent or more

Tax incentives

In terms of the impact on the IT cluster, constructive laws, tax incentives, and a skilled workforce brought in investment of $5 billion into Israel, making it a country with the second largest IT company concentration after the United States. The Israeli government has divided the country into three “national preference zones,” where zone A concentrates in mostly high-tech companies. Within these zones, companies are granted different status, such as “Approved” or “Beneficiary Enterprises,” from which they are provided with merit based tax incentives, as well as government grants covering 24 percent of fixed tangible assets.151 The Israeli government is lining up proposals to encourage foreign investors, by amendments to the country’s Capital Investments Encouragement Law. Companies investing $100 million receive a ten-year exemption from Israel’s 36 percent corporate tax rate.152 Those investing less than $100 million are allowed to take advantage of a reduction in corporate tax to 10 percent, with dividend taxes unlikely to exceed 15 percent. Such firms are required to earmark between 20 and 25 percent of production for export. Additional tax breaks will last for up to seven years. Corporate tax under this scheme is charged at 10 percent to 15 percent with dividend tax charged at 15 percent.153 Besides maintaining an overall favorable tax pricing, the government provides individual tax incentives for national and foreign investors in the IT sector and in companies oriented to R&D related activities. Certain port destinations have been declared free zones, and investors in authorized enterprises in these ports may receive additional direct and indirect tax benefits.

State initiatives

Fiscal incentives offered to the innovative players are institutionalized and centrally administered by the Industrial Research and Development Administration. The Research Committee, headed by the Office of the Chief Scientist (OCS) of the Ministry of Industry and Trade, decided on the programs qualified to receive assistance, as well as on the amount of government participation. The government also assesses the “business utility” of the project proposed by providing networking to private business and encouraging the private sector company to invest in the project. In cases where the private sector’s interest is expressed, the government usually makes a decision to participate in the project as well. The Office of The Chief Scientist is aimed at the development of innovative products by giving out grants and by co-financing the whole production cycle against royalties. The OCS supports R&D and IT-related projects which have export marketing potential. The assistance is given for the first two years of operations, including finding financial resources, consulting and other related activities. Gerry Seligman, Shlomi Zehavi, PriceWaterHouseCoopers. <http://e-fpo.fpo.go.th/e-fiscal/PWGuides/summaries/DOCS/wcd00000/wcd00076.htm> Lopez-Carlos and Mia 96 152 Capital Investment Law, amended March 29, 2005, Source: Israel Venture Capital Journal, The law for the encouragement of capital investment in Israel. <http://www.altassets.com/casefor/countries/2005/inz6871.php> 153 Israel Lines Up New Tax Incentives For Foreign Investors. http://www.onshore2offshore.com/news/Israel+Lines+Up+New+Tax+Incentives+For+Foreign+Investors 150 151

79 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy OCS has specifically tailored programs such as the Sunshine Projects (grants of at least 40 percent of the approved budget), Technological Incubators (grants of up to 85 percent of the approved cost) that besides promoting innovation, creates competition for grants as well. National spending on civilian R&D in Israel totaled $6 billion as of 2005. As a proportion of GDP, this was 4.6 percent, down from 4.7 percent in 2003, and 4.8 percent in 2002. Israel is ranked first in the world for civilian R&D spending as a proportion of GDP.154 Initiatives of promoting e-government were successful and Israel has reached the e-government micro index of 26 (within a Global Competitiveness Index ranking and Networked Readiness ranking of 20).155 Tax report forms are downloadable and possible to submit online, which reduced the waiting time for the submission of declarations, increased transparency and optimized tax administration. The Israel Government Gateway Provides common online access to information, forms, bids and services, in addition to e-mail contacts to ministers, their spokespersons and senior government executives.

Foreign Cooperation

International IT networking is a priority for the Israeli government. Agencies and funds that deepen international cooperation in IT and R&D receive direct financing from the government. For example, BIRD is a joint bi-national fund of the United States and Israel that supports R&D projects common to both nations, and another fund is the TRID Fund that assists the joint programs of Israel, Jordan and the United States.156 Furthermore, Israel has concluded free-trade agreements with the United States, the European Union, and the European Free Trade Association (EFTA). Israel has entered into tax treaties with 36 countries, including many EU countries, China, the US and others, and draft agreements with additional countries are currently in the discussion stage, mainly for tax exemptions and/or lower rate taxes levied on royalties, dividends, capital gains and other taxable actions in the jurisdictions of the signatories.157

South Korea The South Korean government provides encouraging conditions for R&D and IT Development. For 2006, the overall tax revenue as a percentage of GDP was 24.6 percent, which shows the effect of a prudent balancing of tax rates and tax incentives. Although South Korea has a high income tax rate (38.5 percent), its corporate tax rate (20 percent) is rather moderate.158 In 2005, the tax regime of South Korea underwent primary reforms. As a result of these reforms, Korea has phased-out nontaxation benefits and tax incentives, thus broadening its tax base. The table below shows the change of corporate tax rates after revision in 2005.

Revised corporate tax rates as compared to previous rates in South Korea159 Previous Tax base $0.086 million

Revised Tax rate

20percent (24percent)

Tax base

Tax rate

$0.1 million or less

20percent

over $0.1 million

$0.02 million + 34percent of an amount in excess of $0.1

Unlisted Large-scale Corp: 33percent (39.6-41 .25percent) over $0.086 million

Non-Profit Corp: 27percent (32.4-33.5percent) Corp, other than the above: 30percent (3637.5percent)

156 157 158 159 154 155

Globes, May 10, 2005 World Economic Forum, “Global Competitiveness Report 2006,” Davos http://www.worldwide-tax.com/israel/isr_invest.asp “Israel Double Taxation Prevention System,” World-Wide Tax, 2006. <http://www.worldwide-tax.com/israel/isr_double.asp> <www.ey.com/global/download.nsf/Korea_K/Korean_Tax_Bulletin_-_2005-Jan/$file/korea_tax_bulletin.pdf> “South Korea: Taxation,” Asia Trade Hub. <http://www.asiatradehub.com/s.korea/tax1.asp>

80 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Tax Incentives

Tax credits for productivity enhancing facilities targeted to IT (such as ones for process improvement and auto-immunization, advanced technology and skills, electronic corporate recourse management and e-commerce)160 are available in South Korea. Importers and producers of such facilities are subject to merit-based corporate taxes and VAT exemptions (up to 30 percent) upon their applications to the Tax Administrative Body. These fiscal incentives are the major drivers for the development in the innovative and ICT fields, and are significant in terms of attracting FDI. Companies with foreign investment that engage in certain high-technology businesses, as designated by the government, or that settle into a foreign investment area designated under the Foreign Investment Promotion Act, can apply for a 100 percent exemption from corporation tax for five years. The exemption is applicable starting the first year of profitable operations or the fifth year if no profits are generated by that time, thereafter a 50 percent reduction is applicable for two years in proportion to the ratio of foreign investment. An exemption from withholding tax on dividends is eligible for foreign investors in the same manner as above during the same grace period. In addition, companies can apply for 100 percent exemption from acquisition tax, registration tax, and property tax on assets acquired for their business for five years after business commencement date and 50 percent exemption for the following two years.161 The government supports the IT industry by providing tax benefits for R&D, product testing, plant improvement or construction of new facilities as well as provides personnel training. Focusing on regional cooperation, the South Korean government has ratified a Double Taxation Avoidance Agreement among 64 signatory countries, including Japan, Russia, India, Malaysia, Indonesia, Thailand, and Vietnam, among others.162 Aiming at attracting foreign IT-related specialists, South Korea applies an individual approach to tax exemptions providing personal income tax exemption for foreign R&D personnel, namely a 100 percent wavier for the first 5 years of activity in the country. Cash grants are being provided to new foreign investors who invest over $10 million in high-tech industries or $5 million in R&D facilities.163 e-system

The Korean tax system is the least burdensome in Asia, in terms of both rates and the administrative process, as shown by the table below. The introduction of an e-tax system not only raised the effectiveness of tax levying, increased transparency, but also reduced the time for dealing with tax administration.

Total Number of Payments and Average Time Spent on Tax Payment in Korea 2007164 South Korea

Amount of taxes on profits paid by

Total number of tax payments per year

Time (in hours per year)

Value added tax (VAT)

One

550

10 percent

Corporate income tax

One

1120

14.3 percent, 27.5 percent

the business

Under the new system, all necessary documents are handled online with no paperwork involved. As a result, the National Taxation Service is able to rely on a computer system for monitoring and regulating tax rates and payments. The Home Tax Service (HTS), a vital pillar of National Tax Service of Korea (NTS), is an e-tax administration office. It operates through a website where the tax payers, by using their personal identification access codes, can obtain various services from the following four categories: Electronic payment of tax; Electronic filing of tax returns; “Incentives for ICT Adoption: Canada and Major Competitors,” ITAC Paper, Information Technology Association of Canada, July 2005 “Foreign Investment Zones,” Invest Korea, 2005. <http://www.investkorea.org/templet/type0/1/read.jpg> 162 “Facts and Figures about KOITA and National R&D,” 2005. <http://www.koita.or.kr/eng/index.htm> 163 Statistics of R&D in Science and Technology, Total R&D Expenditure, Ministry of Science and Technology of Republic of Korea, March 2005. 164 “Table of Tax Comparison: Taxes and mandatory contributions that a medium-size company must pay or withhold in a given year in Asia”, World Bank Group’s Doing Business Comparison Table: Runckel & Associates. <http://www.business-in-asia.com/asia/taxation_asia.html#korea> 160

161

81 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy Electronic billing of payable tax; Electronic issuance of tax-related certificates. Support systems such as the e-Approval & e-Document Exchange, e-Signature and e-Seal System and the Integrated Computing Environment, complement the Korean e-government system.165 The HTS is also an interactive system that has an option of e-notification, provision of tax-knowledge and specific consultations to taxpayers both via e-mail and SMS.166 The e-tax service has become tremendously popular and, “as of August 2004, 94.4 percent of corporate income tax returns, 81.7 percent for withholding tax returns, 44.2 percent for individual income tax returns and 55.3 percent for VAT returns were filed electronically. The HTS provides an opportunity to obtain tax-related certificates electronically as well, with 33 different types of certificates that may be issued through the HTS and, as a result, 52.8 percent of tax-related certificates have been issued electronically in 2004.”167 The positive effects of e-tax administration are numerous, namely through the reduction in costs for taxpayers, including such savings as transportation costs and salaries, etc., of over $38 million annually, and decreased administrative expenses such as printing costs, postal expenses, and salaries to tax inspectors, etc., of over $12 million each year. The saved funds are directed to the maintenance of consultative staff, web-site and system administration, favorable tax inspectors’ salaries increase, and for the professional training of the staff.168

Ireland Ireland has a favorable tax regime with a flexible corporate tax rate of 10 to 25 percent (for different sources of income and depending on the company), a slightly higher than moderate VAT rate, and an ultimate mechanism of tax incentives and special regimes. As an EU member state, Ireland has an obligation to follow directives concerning VAT, having it fixed at the rate of 21 percent. A stimulating corporate tax rate of 10 percent on profits is guaranteed for certain internationally traded services and manufactures until the end of 2010, besides that a general rate of 12.5 percent corporate tax is guaranteed from the beginning of 2003 until the end of 2025. The US corporate tax rate, for comparison, is more than triple as much as in Ireland, the country with the lowest corporate tax rate in Europe as of 2003. 169

“South Korea Leads the Way in IT,” Korea.Net, Gateway to Korea. <http://www.korea.net> Kang Jonghoone, “Home Tax Service in Korea,” Home Tax Services, Korea. <http://www.hts.go.kr> 167 “Realization of E-government. E-Tax Service,” National Tax Service. <http://www.nts.go.kr/eng/menu/AboutNts/Best_Policy/taxforms/e~Tax%20Service.pdf> 168 National Tax Service Statistics, 2000-2003, Statistical Yearbook of National Tax. 169 KPMG, “Corporate Tax Rate Survey,” January 2003 165 166

82 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Corporate Taxes in European Union in 2007 45 40 35 30 25 20 15 10 5 0 Germany

Ireland

Hungary

France

Czech Republica

Denmark

Switzerland

Luxembourg

Foreign-directed initiatives

Export markets are a priority for Ireland, a small-scale and moderately consuming country, thus no VAT is levied on export, and moreover, companies that export up to 75 percent of their production are subject to a 100 percent VAT exemption on almost all their goods and services.170 Being the biggest software exporter in the world, Ireland has 80 percent of its software developing companies trading overseas.171 Ireland has acted as an attraction for high-tech companies over the last ten years, attributable to a combination of its highly favorable tax regime, English-speaking and well-educated human recourses. The country has ranked second out of 41 countries in the European region in respect to the Economic Freedom Index in 2006.172 Low effective tax rates on capital investments attract FDI, which, as a share of GDP, is relatively high in Ireland (18.2 percent of GDP).173 Non-resident companies engaged in business in Ireland are liable to corporate tax on their Irish-sourced income only. Ireland has comprehensive double taxation agreements in force with 44 countries generally covering income tax, corporate tax and capital gains tax (direct taxes). A minimum of 10-15 new treaties are intended to be ratified by 2012, with an immediate focus on key jurisdictions with which Ireland does not yet have a tax treaty.174

Tax Incentives

The R&D Tax Credit is designed to encourage both foreign and domestic tax-resident IT-related and R&D companies that carry out R&D activity in Ireland. A tax credit is available to Irish companies engaged in in-house qualifying R&D undertaken within the European Economic Area (EEA), provided such expenditure is not otherwise eligible for tax benefit elsewhere within the EEA. “Guide to Tax in Ireland 2007,” IDA Ireland Ireland as a Location. ICT Ireland, April 2004. <http://www.ibec.ie/Sectors/ICT/ICTDoclib4.nsf/wvIndustryAnnouncementsByDate/579F519192F9A14780256F420043C85D?OpenDocument> 172 Economic Freedom Index 2006 173 “2005 International Tax Competitiveness Report: Taxes in leading economies serious disincentive to capital investment,” Finfacts Team, September 21, 2005 174 Ireland Information: Taxation and Off-Shore, “Ireland Double Tax Treaties”. <http://www.lowtax.net/lowtax/html/jir2tax.html> 170 171

83 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy In practice, R&D expenditure covers wages, related overheads, plant and machinery and buildings. The 2007 Finance Act has improved the tax credit in two important ways. First, the base year expenditure, against which raising expenditure on R&D is measured under the tax credit scheme, is being fixed at 2003 base, for further years running to 2009. Second, starting January 2007, non-affiliated companies that sub-contract R&D work (mostly IT and Education sector representatives) also qualify for up to a maximum of 10 percent tax credit on their overall R&D expenditure. IT field-specific tax credits are granted to the companies, providing that the corporate tax is irrecoverable over 8 years on a straight-line basis and that the companies use software made in Ireland for their business purposes.

State initiatives

Government spending on education (including IT-related fields, namely engineering and applied sciences), amount to 20 percent of the budget. The government has a strategic approach to the state funds distribution for IT development. With its agencies and cooperation schemes, market demand for IT specialists is being comprehensively tracked and funds are being directed to support IT sector. State expenditure on IT assistance is made both directly, and as co-financing of state-created networks. A good example of state, education and business cooperation upon the government’s initiative is the support to the Microelectronics Industry Design Association. A tremendous amount of state resources are being routed to intensive advertising strategy directed at creating awareness and positioning Ireland as an IT center. A vast amount of state funds are being allocated to an indirect promotion of IT, such as creating institutional framework and infrastructure for attracting inputs into the IT sector. Among others, the National Development Plan 2000-2006 has provided a state grant for the creation of Ireland’s Investment Development Agency (IDA Ireland) seeking the promotion and development of foreign direct investments in the IT and other prioritized sectors. The IDA has contributed in attracting almost all international IT market players. Since the IDA is acting as the government’s agent securing new investment from overseas, it also encourages existing investors to expand and develop business, including IT in general, advanced manufacturing projects in the IT, medical technologies, software and e-Business. International companies supported by the IDA subsequently employed 45,000 people in Ireland (2002), and, in 2002, exports from the Irish IT sector exceeded $38 billion, representing 34 percent of all exports. In 2003, 39 IDA-backed IT companies undertook to invest over $120 million in R&D. More than a thousand companies supported by the IDA are operating in Ireland and currently employ some 150,000 people, of which more than 50 percent are in the IT sector.175 e-system

In May 2001, the Irish government introduced a package of e-commerce measures, which included extensions to international connectivity and provided improvements to regional broadband infrastructure. As a result of the first call for proposals under the E-Commerce Infrastructure Measure of the National Development Plan, approximately $20 million of infrastructural investment had been implemented by the end of 2002. After a successful completion in 2006, the second NDP has been launched for 20072013, with a total budget of $250 billion, some $30 billion of which is to be directed to enterprise, science and innovation.176 In 2002, an Information Society Action plan was issued, followed by a second issue in 2005, which among other, things, included goals of ensuring that basic public services were interactive and accessible for all (by end 2004) and that the significant part of public procurement was carried out electronically, cutting costs and raising efficiency in government procurement by the end of 2005.177 This significantly impacted the creation of an advanced e-society and affected e-government deepening initiatives seriously.

IDA Data. <http://www.ictireland.ie/Sectors/ict/ictDoclib4.nsf/vLookupHTML/Key_Industry_Statistics/OpenDocument> “Ireland’s National Development Plan (NDP), 2000-2006,” European Union Structural Funds, 2007. <http://www.ndp.ie/docs/NDP_Homepage/1131.htm> 177 e-Government Note: eEurope 2005 finished at the end of 2005 and was followed by the i2010 initiative. <http://ec.europa.eu/information_society/eeurope/2005/all_about/egovernment/index_en.htm>. 175 176

84 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy The Irish e-government system provides users with the opportunity of making all utility, tax and customs payments on-line, as well as an opportunity to obtain certificates and fill-in applications for tax exemptions, driving test applications, public appointments and enquiries.178 Government procurements are made using the e-submission of bids, an anonymous evaluation of contracts and electronic signing, both of which provides utmost transparency and time/resource optimization. Government agencies use the web as an informative and interactive tool as well. Each state agency has its own web-site and a permanent IT staff that widens the range of services provided. Recently, an SMS notification service upon receipt of tax reports has been introduced for the use of Irish taxpayers. Ireland was ranked second tier with Denmark and behind only Sweden for the online sophistication of its services by the forth E-Europe Action Plan.179

Fiscal Policy of Armenia: From the Perspective of Benchmarking Countries Referring to tax policies, there is no specific IT-related tax regime in Armenia. According to Armenia’s “Law on Simplified Tax,” article 4 states that “legal entities and individual entrepreneurs shall be considered to be simplified taxpayers if during the previous reporting year, the total amount of turnover of the sale of goods supplied and services rendered by taxpayers (exclusive VAT) has not exceeded 50 million drams.”180 Tax rates for companies operating in this favorable regime vary from 3.5 percent to up to 20 percent of revenue collected, depending on the activity.181 IT-related goods-producing firms are subject to the same taxation regime as others and enjoy only a simplified tax exemption, if applicable. Since IT is a labor intensive industry, major taxes paid by IT sector companies include income tax and social security payments for their employees. Representatives of the IT companies surveyed by Global SPC within the scope of this research have claimed that this is an overwhelming tax burden, although some representatives have admitted that administrative informality pertains much less to IT than to other industries. According to the Armenian customs laws, the import of most IT-related products and the export of all products are exempt from custom duties,182 suggesting that the customs regime can be considered favorable for IT-related products. Import VAT is subject to payment on-site and subsequently reimbursed or is offset from income of IT product importers upon sale.

Ireland, Information on the Irish State. “Sustaining Progress 2003-2005: Third Progress Report,” September 16, 2004. <http://www.finance.gov.ie/documents/publications/cspvgjan05/cso.pdf> 179 Ireland Information Technology Policy Survey 2004 180 “Law On Simplified Tax,” Tax Laws of the Republic of Armenia, Official Republication, Yerevan 2006, p. 174 181 “Law On Simplified Tax,” p. 177 182 Republic of Armenia “Law on approval of the list of products imported by organizations and individuals with zero rate customs duty and exempt from excise duty, for which VAT is not calculated and levied by Customs Services,” adopted June 29, 2001 and amended on June 13, 2006 178

85 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Fiscal Policy

Benchmark Country

Israel Gradual decrease of corporate tax rate. Corporate tax exemptions

South Korea Productivity enhancing IT facilitiesâ&#x20AC;? users and producers are exempt of corporate taxes. Ireland Lowest corporate tax rate in EU, one of the lowest in the world.

Armenia

Recommendation

No corporate tax exemptions for IT related companies. Corporate tax-friendly regime is for small income companies only, not IT-specific (Simplified tax regime).

Global SPC recommends the creation of favorable corporate tax regime for IT related companies, including: -A decrease of current 20 percent corporate (profit) tax to up to 10 percent, if the company reinvests the proportional percentage (up to 10 percent) of its previous yearâ&#x20AC;&#x2122;s profit into companies IT related activities specified by the government. -Provide IT related all start-ups with corporate (profit) tax exemption (100 percent) for 2 years, and for 5 years if the start-up is located in incubators, free zones, or techno-parks created by the government.

Tax regime attitude to star-ups is not specifically encouraging, namely in IT.

Global SPC recommends creating a policy, property and incorporation tax exemptions, as well as facility provisions such as buildings and infrastructure for IT sector investors.

Foreign or co-owned companies are subject to the same corporate tax rate as local companies, including IT companies.

Global SPC recommends providing corporate tax holidays to IT companies with foreign capital participation for a fixed number of years.

Israel Qualified IT companies receive grant benefits of 24percent of their fixed assets. Company start-up benefits, property benefits

South Korea Government creates incentives for attracting foreign investors by providing with cash grants at the initial stage of investment. Ireland Tax credits on plants, machinery and buildings for local companies related to R&D until 2009.

Favorable corporate tax regime for foreign companies. Encouraging foreign SME with tax incentives.

Israel Depending on the volume of foreign participation, companies enjoy corporate tax exemptions from rates of 25 to 10 percent. South Korea Foreign start-up businesses with no profit in first years of business incorporation enjoy 100 percent corporate tax exempts. Ireland Foreign companies are subject to corporate tax levying only from their incomes derived in Ireland

86 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Fiscal Policy

Fiscal Incentives to importers

Individual approach to IT companies, individual merit-based tax incentives

Benchmark Country

Armenia

South Korea Up to 100 percent tax exempts for companies who import, produce or export IT related goods.

Global SPC recommends exempting IT importers from taxes upon imported IT products and disregarding the mechanism of VAT onsite payment and reimbursement.

Ireland Zero-percent customs duties on most IT products. VAT is subject to payment on customs, and reimbursement upon sale.

Israel Merit based tax incentives to corporations - Tax exempts to individual R&D related investors and employees. -Chief Scientist’s office evaluates and decides on co-financing of projects on the base of merits of an applied company -Individual tax exemptions for foreign investment projects. South Korea 5-year full waivers of individual income tax and taxes derived from activity in the country for foreign employees enrolled in R&D.

Recommendation

No special state preference to IT Companies, lack of ITmerit estimation tax incentive provision.

Global SPC recommends assigning a state body/ mechanism of identification and meritbase tax regime establishment for companies related to IT development.

Absence of e-government features, as such. Nonenforced law on electronic signature hinders electronic and online submission of declarations and tax forms.

Global SPC recommends amending the “Law on Electronic Documents and Electronic Digital Signature,” by obliging tax and customs service to create respective offices, and demanding that documents to be submitted online or electronically. There is a necessity for a state program to equip all respective offices with sufficient facilities to be able to process electronic and online documents.

Ireland R&D tax credits on wages and overheads of companies making business in EEA. Israel Financial Statements and Declarations are easy to submit online, all payments are possible to be done via electronic transactions.

E-tax and ecustoms systems

South Korea E-tax state services such as state registration and licensing, payment of taxes, info on tax exemption eligibility are available online and in an interactive manner. Ireland Effective e-government regime that provides high-quality state services, such as on-line certification, notification, tax payment etc.

87 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Fiscal Policy

Exemption of double taxation in IT sector

State body responsible for IT related investments, Availability of state co-financing and grants for the qualified projects, Increasing state expenditure on IT development

Benchmark Country

Israel Customs unions and intergovernmental agreements on exemptions of double taxation with USA, EU, EFTA, etc. Israel has 40 agreements with other countries for avoiding double-taxation. South Korea International agreements on exemption of double taxation with 64 signatory countries. Improvement of anti-haven legislation. Ireland Agreements with 44 countries on avoiding double taxation.

Israel Chief Scientistâ&#x20AC;&#x2122;s Office approves and co-finances innovative projects, and seeks royalties for successful projects. Evaluation of business viability of the venture by attaching a private sector company to the business. South Korea Ministry of Information Technologies of Korea is in charge of promoting allocating funds to IT-related companies, according to an adopted strategy. Ireland Government encourages and participated in the creation of foreign investment attracting and infrastructure institutions. State expenditure on IT Education is 20 percent of the budget.

Armenia

Recommendation

Special taxation regimes with 30 countries. Complication and vagueness of tax and customs systems does not allow enjoying friendly customs and tax regimes.

Global SPC recommends further steps on joining international treaties/agreements and creating bi-lateral agreements regulating the exemption of double taxation between Armenia and IT-related strategic partner countries.

Absence of an integrated approach to prioritizing and state financing of IT projects. Government is the biggest IT purchaser, as well as IT supply and demand-side activator.

Global SPC recommends the institutionalization of the decision making on promoting IT sector initiatives, namely, to create an independent institutional unit that will provide financing for priority IT projects. Based on Global SPCâ&#x20AC;&#x2122;s judgment, besides more effective decision-making, stricter eligibility criteria and impartiality will create a competitive atmosphere and increase productivity of the field.

88 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Benchmark Countries for Free Zones Many governments in developed and developing countries contribute to the development of IT industries by creating “free zones.” These free zones stimulate sector development by providing incentives such as custom and tax exemptions, thereby, supporting the development of infrastructure and communication facilities in the free zones. There are over 3000 free zones globally. As free zones contribute to attracting international capital, promoting exports and developing previously unused land areas, the establishment of such zones has become an important worldwide development factor.

Egypt As an important investment vehicle alongside inland investment, the use of free zones is a major priority for the Egyptian government.183 Egypt prioritizes IT development and is building a strong and durable information society. Creation and development of free zones and techno-parts is an important pillar of Egypt’s overall strategy for developing IT industry, advancing universal access to IT products and job creation. As a large portion of Egypt’s territory is occupied by deserts, which has not been previously fully utilized, the Egyptian government has prioritized the creation of free zones and techno-parks on such areas of its territory. The number of companies operating in the field of ICT has increased from 312 in 1999 to 1,428 in 2005. The creation of favorable conditions in free zones has contributed vastly to this increase and the sector employed over 40,000 specialists during the same period.184 Egypt has both public and private free zones. Egypt’s free zones target an increase in exports, and seek to attract foreign investments, introduce new technologies, especially in the industrial fields, and provide regional employment opportunities, thus generating a skilled workforce. Private free zones are created for a specific project or company. Such free zones are mostly aimed at warehousing, handling and repacking, and manufacturing activities. Egypt currently has 10 public free zones, which were established by the General Authority for Investments and Free Zones.185 The public free zone is managed by a board of directors and its management also includes an administrative entity, which is responsible for providing technical, economic and legal advice to companies. The entity is also responsible for issuing licenses and facilitating projects in the free zone.186 Free zones and special economic zones are regulated by the laws listed in the chat below: 187 Law

Field of regulations

Provisions for Free Zones

Investment Guarantees and Incentives Law (8/1997)187

Free Zones Investment System Inland Investment System

- Imports to a free zone project are exempted from import duties or customs regulations; - Free zone projects are subject to a duty of 1 percent of the value of goods entering or leaving the zone, or to an annual duty of 1 percent of the annual value added in the project; - A company formed to operate in a Free Zone is exempt from all Egyptian income taxes for an unlimited period.

Law on Special Economic Zones (83/2002)

Special Economic Zones

- Establishes special economic zones (SEZ) in non-urban areas with the purpose of developing industrial, agricultural, and service sectors.

185 186 183

“Free Zones,” Ministry of Trade and Industry of Egypt. <http://www.tpegypt.gov.eg/FreeZone.aspx> “Why invest in Egypt?” Smart Villages. <http://www.smart-villages.com/default.asp?action=article&ID=30 > “Free Zones,” Ministry of Trade and Industry of Egypt “There are two types of Free Zones in Egypt,” Kish Trade Promotion Center. <http://www.kishtpc.com/Free-En/free_egypt.htm>; “Free Zones,” Ministry of Trade and Industry of Egypt 187 Luciano Loffredo, “Policies for business in the Mediterranean Countries: Arab Republic of Egypt,” Centre for Administrative Innovation in the Euro-Mediterranean Region. <http://unpan1.un.org/intradoc/groups/public/documents/caimed/unpan018699.pdf> 184

89 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy In 2003, the Egyptian government initiated the project of creating the “Smart Village,” which is modeled on the prototype of Silicon Valley located in the US state of California. It is a technology park that provides state-of-art infrastructure and facilities for hosting local and foreign IT companies. Smart Village is located close to Cairo and contains 67 office areas, which can host 30,000 employees. Smart Village provides all the necessary facilities in terms of infrastructure, including high-speed fiber-optic telecommunication lines, while maintaining a modern, environmentally-friendly look. Microsoft, Vodafone, Hewlett Packard, and Ericsson have already established offices there. Smart Village is specialized in attracting IT related companies. It provides IT sector companies with the opportunity to rent, lease, or buy office space.188 Moreover, Smart Village is home to Egypt’s Ministry of Communication and Information Technology. The ministry was designed to facilitate the transition of the country into a globally competitive information society and regional leader. Following its creation, the ministry introduced the Egyptian National Communications and Information Technology Plan that seeks to increase the exports of IT products and create employment opportunities in the IT sector. 189 Egypt has also set up a special authority to govern investments and free zone activities. Egypt’s General Authority for Investment and Free Zones (GAFI) is a one-stop shop for investors, local or foreign, that integrates all relevant administrative bodies to make investment more simple and straightforward. The GAFI is the authority responsible for incentives and guarantees for all investments, foreign included, established under the country’s 1997 Investment Law. It constitutes the most tangible step taken by the Egyptian government to streamline investment procedures. The GAFI also offers successful factors through an integrated system that provides the best advantages, incentives, exemptions, and guarantees, and expands the establishment of new specialized free zones as well. It introduces updated investment activities abiding by the free zones system and facilitates project establishment through the one-stop shop which provides services, data, and information to investors. At the initial stage, the government has shown special treatment to software companies through incentives such as ten-year tax holidays for IT companies in free zones, as opposed to five-year tax holidays for IT companies not operating in free zones. Software products are also made free of customs and sales tax. Moreover, companies operating in distant areas are provided with 20-year tax holidays. This resulted in a dramatic increase in value in terms of exported IT products.

188 189

“Smart Village,” Smart Villages. <http://www.smart-villages.com/default.asp?action=article&ID=27> Luciano Loffredo

90 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Comparable Tax Regimes 190 Companies Law No. 3/1998

Investment Law No. 8/1997

Investment Law No. 83/2002

Traditional Regime

Favorable Non Free Zone Regime

Free Zone Regime

Special Economic Zone Regime

Standard rate is 40% 32% for profits arising from exports and for industrial companies

Income tax

Basically ranging from 5% to 70% depending on product

Important duties

Export duties & Sales tax

Payroll Tax

Export Minimum

10% of value of all sales transactions

Ranging from 20% to 32% depending on salary level

No export minimum

Tax holiday ranging from 5 to 20 years depending on location and sector After tax holiday see traditional regime

5% of value of incoming fixed capital assets

Strong projects: 1% of total value of incoming goods Industrial projects: 1% of value added of outgoing goods

10% of profits for all projects

Service project: 1% of profit

No duties

No duties when exported outside Egypt

No duties on domestic components when sold in Egypt

10% of value of non-domestic components when sold in Egypt

10% of value of nondomestic components when sold in Egypt

See traditional regime

5% of all salary level

No export minimum

Ranging from 50% to 80% depending on zone board’s decision and GAFI’s approval

Depending on zone board’s decision

No duties on other imports

No duties on domestic components when sold in Egypt 10% of value of non-domestic components when sold in Egypt

According to UNCTAD, incentives for free zones have raised occupancy to almost 80 percent in the two largest zones in Egypt, Alexandria and Cairo, and close to 60 percent in the other zones as of 2005.191 As of 2007, with the introduction of a new income tax law, Egypt has abolished the tax incentives previously granted to investment companies.192

Luciano Loffredo “Egyptian Reforms Could Herald More Foreign Investment, Says UNCTAD,” UNCTAD, Press Release, March 10, 2005. <http://www.unctad.org/Templates/Webflyer.asp?docID=5810&intItemID=2068&lang=1> 192 “Egypt,” Tax Summaries, PWC, 2007. < http://www.taxsummaries.pwc.com/uk/wwts/wwts.nsf/id/SAGE-6RUPJT?OpenDocument > 190 191

91 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Free Zones in Armenia: From the Perspective of Benchmarking Countries Currently, Armenia is in the process of drafting a “Law on Free Zones” which will create the legal basis for developing in this sphere. The government and the local business community are exploring the possibility of establishing several industrial parks/ zones that would involve the Zvartnots International Airport, the Megri border region and large electronics companies such as Mars (a local electronics firm) and Transistor. These zones and industrial parts are planned to enjoy free trade zones’ regime in the future. A government-owned bonded warehouse also exists near Gyumri in northern Armenia.193 Besides these activities, Armenia currently operates the Viasphere techno-park and the Enterprise Incubator Foundation, which is a government and private joint effort. Both entities support IT companies, by providing infrastructure and facilities for rent or lease. During the soviet era, Soviet Armenian government created several industrially-specialized satellite cities, namely Abovian, Hrazdan, and Charentsavan, among others. The government endowed the cities with the appropriate infrastructure and standards for industrial progress. These cities produced various industrial goods, which were directly exported to other specialized satellite cities of the Soviet Union. Therefore, these cities can be viewed as prototypes of special economic zones.

Free Zones Free Zones

Egypt

Armenia

Mobilizing desert territories

Egypt has created free zones and industrial territories on areas which were previously not utilized, such as the desert areas of the country.

Armenia has satellite city heritage from Soviet times, which are not efficiently utilized currently.

Global SPC recommends the redevelopment of Soviet era industrial regions of Armenia into free industrial zones, as these regions already contain infrastructure and skilled labor force.

Ministry of Communication and Information Technology

Egypt has set up the Ministry of Communication and Information Technology in 1999, which facilitates the development of IT industry, through its Egyptian National Communications and Information Technology Plan.

Armenia’s IT industry is regulated by the Ministry of Trade and Economic Development.

Global SPC recommends creating a separate ministry, which will be responsible for regulating IT industry, including IT investments and IT exports.

General Authority for Investment and Free Zones

Egypt has created the General Authority for Investment and Free Zones, which is a one-stop shop for all investors. The authority integrates all relevant administrative bodies to make investment simple and straightforward.

There is no policy and thus also no authority regulating Free Zones in Armenia.

As the Armenian government is currently drafting a “Law on Free Zones,” which aims to regulate free zone related issues, Global SPC suggests to include a clause on creating an institution for regulating free zones. The institution should be designed in a way to provide all the assistance in one place (a one-stop-shop).

Egypt provided 10 year tax exemption for companies producing in free zones. Software products are exempt of customs and sales taxes

Currently, Armenia has a Law “On Foreign Investments,” which provides tax holidays for entities with at least of 30percent of foreign capital. The law provides guarantees for such type of entities, who do business in Armenia. (Active till 2008)

Global SPC recommends to include a clause in the draft of Law “On Free Zones,” that would provide the companies producing IT related goods within free zones with tax exemptions.

Tax incentives for IT related products in free zones

193

Recommendation

“Armenia: Free Trade Zones/ Free Ports,” Kish Trade Promotion Center. <http://www.kishtpc.com/Free-En/free_armenia.htm>

92 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Benchmark Countries for Risk Capital Risk Capital Comparative Indicators of Armenia and Israel194 Israel

Armenia

Composite Risk Rating, 09/2005-08/2006 10 High-Tech Exports as percent of Manuf. Intellectual Property Protection (1-7), 2006 Exports, 2004 5 Availability of Venture Capital (1-7), 2006 0

University-Company Research Collaboration (1-7), 2006 Government Effectiveness, 2005

Domestic Credit to Private Sector as percent of GDP, 2005

Regulatory Quality, 2005

Rule of Law, 2005

Israel Venture capital has played a central role in transforming Israel into a high-tech power and for developing its IT industry. More than 90 percent of venture capital is invested in the electronics and software sector start-ups. During 1995-2004, investments backed by venture capital represented 65 percent of foreign investments and 50 percent of exports and were responsible for the 40 percent growth of GDP and 15 percent growth of employment. In 2005, companies with venture capital investments produced more than 40 percent of the electronics and software products, registering a four-fold increase since 1995. During 1999-2004, of the 11.4 percent growth of the high-tech sector, over 4 percent was directly attributable to a venture capital contribution. As of 2005, Israel had the world’s highest level of venture capital as a percentage of GDP.195 In the second quarter of 2007, some 118 Israeli high-tech companies were able to raise $436 million from venture investors, consisting of both local and foreign (as seen in Chart 1). The amount increased by 7 percent, from $406 million raised by 121 companies in the previous quarter, and 8 percent ahead of the $404 million raised by 109 companies in the second quarter of 2006. In the first half of 2007, total capital raised reached $842 million, up 10 percent from first-quarter 2006 levels.196 The average high-tech financing amount was estimated at $3.7 million, up 9 percent from both the previous quarter and the second quarter of 2006. Eighty-one companies attracted more than $1 million and, of these, some 15 companies raised $5-10 million each, and 12 companies raised more than $10 million each.197

Graph and table taken from: “Knowledge for Development: Knowledge Assessment Methodology, KEI Indicators,” The World Bank, 2006. <http://info.worldbank.org/etools/kam2/KAM_page4.asp> 195 Yacov Sheinin and Chen Herzog, “Venture Capital’s Contribution to Israeli’s Economy,” Israeli Venture Association, 2005. <http://www.iva.co.il/data/uploads_EN/zip/VC_new_6_english.zip> 196 “Summary of Israeli High-Tech Company Capital Raising Q2 / H1 2007,” Venture Capital in Israel, 2007. <http://www.ivc-online.com/> 197 Ibid 194

93 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Israeli Venture Capital (VC) Investment Activity

In the second quarter of 2007, Israeli VCs invested $193 million in Israeli companies, an increase of 13 percent from the previous quarter ($171 million) and 25 percent above Q2 2006 levels of $154 million. In the first half of 2007, Israeli VCs invested $364 million in Israeli companies, an increase of 10 percent from H1 2006 ($331 million).198 The Israeli VC share of the total amount invested in Israeli high-tech was 44 percent in the second quarter, with the remainder of capital coming from foreign investors as well as non-VC Israeli investors.

Capital Raised by Israeli High-Techs by Quarters in Million USD 199 1200 Financing Rounds Without Israeli VC Participaton 1000

Foreign & Other Entities Israeli VCs

800 691

600

398 190 428

400

45 179

200 93 76

123 99

158 121

281

392 217

261

36 31

36 160

203

140

305

251 207

400

43 121

263

201

180

168

138

127

62 86

20 87

118

50 127 94

35 118 129

52 37

113

208

158

150

132

176

157

173

163

105 104

158

156

194

Capital Raised by Israeli High-Tech Companies by years200 3500

3000

Foreign & Other Investors Israeli VCs

2500 1822 2000

1500

1174 800

1000 577 500

657 1270 812

436

682

971

590

481

421

2002

2003

478 665

655

651

2004

2005

2006

364

0 1999

2000

2001

H1/2007

Ibid “Invest in Israel,” Venture Capital in Israel. <http://www.investinisrael.gov.il/NR/exeres/A19A138D-87A7-416B-8D62-1C968E035E13.htm> 200 Ibid 198 199

94 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy As a result of raising capital for expanding the IT sector, Israel also has the highest proportion of IT contribution to the GDP in the world as of 2005. Over 1992 -2006, Israeli venture capital funds raised about $11.07 billion which were allocated to investments in Israeli technology companies. In 2005, Israel attracted $1.5 billion of investments and about $1 billion of funds were raised by Israeli managed venture capital funds.201 The Israel Venture Association (IVA) is responsible for international affairs and for the attraction of foreign risk capital. As a result of its active lobbing activities and well-designed strategy, the Israel Venture Association (IVA) has been able to attract vast amount of funds from around the world. Currently, Israel attracts most of its venture capital from international sources, with more than 130 foreign venture capital funds have made investments in IT-related companies in Israel over the period of 2000–2004.202

Venture Capital Funds

The success of Israel’s venture capital industry depends on several factors, ranging from a risk-taking culture, a well-developed IT industry, and a wide pool of specialists which are required to support the development of start-up companies in the field. Moreover, a financially stable and skillful Diaspora has also been of significant importance to the venture capital industry and IT industry development in Israel. Since the beginning, the success of the venture capital industry in attracting foreign capital was dictated by the ability of the country to demonstrate its strength in the IT industry and, thus, to provide investors with profitable returns on their investments in the given sector. The high potential of the IT companies, the availability of manpower, and average annual returns on investment of about 30 percent have vastly contributed to the attraction of foreign capital venture funds in the country.

Foreign Investment in Israeli Venture Capital 203 500 450 400 350 300 250 200 150 100 50 0

Catherine de Fontenay and Erran Carmel, “Israel’s Silicon Wadi: The Forces Behind Cluster Formation,” Stockholm School of Economics. <http://web.hhs.se/site/research/conferences/DormantProjectsIsraelIsrael’s%20Silicon%20Wadi%20June.pdf> Yacov Sheinin and Chen Herzog 202 Augusto Lopez-Claros, Irene Mia, “Israel: Factors in the Emergence of an ICT Powerhouse,” Global IT Report 2005-2006, World Economic Forum, Geneva, Switzerland: Palgrave Macmillan, 2006; “About IVA,” Israeli Venture Association, 2006. <http://www.iva.co.il/content.asp?pageId=9> 203 Ibid 201

95 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy Israel’s venture capital industry has been built with initial financial support from the government and based on foreign capital which has been attracted and coordinated by the initiative of the government. In 1990, the country had only two venture capital funds with a mere $59 million in capital. In 1993, Israel government set up the Yozma fund, which is considered as the architect of the Israeli venture market. Initially, the YOZMA group targeted public funds in order to attract foreign capital into the country. Overall, through its two funds (Yozma I and II), the group has managed over $170 million and has directly invested in over forty companies. To facilitate the development of the venture capital market and stimulate international venture capitalists to invest in Israeli high-tech firms, the government provided $100 million.204 Moreover, the government was providing equity guarantees for foreign investors, linking local and foreign companies, locating business opportunities for Israeli firms and guiding the successful firms to be listed on foreign stock exchanges. In the early 1990s, over 50 percent of venture capital was attracted by public venture funds. As of 2000, venture capital in Israel had developed to such an extent that the private equity of the funds was exceeding public investments by several times. Currently, the public venture capital comprises a minor portion of total equity.205

Business angel networks

Due to its large Diaspora and well-developed connections, Israel has been able to attract wealthy individuals (business opportunities) to invest in the IT industry start-up companies. Realizing the importance of business opportunities, the government of Israel has facilitated their entry to the market by providing foreign investors with tax incentives and initiating programs that would link small firms and venture capital funds with foreign-based institutions and business investors. Moreover, to strengthen the links between the diaspora and local IT start-ups, the government has initiated the formation of foreign representation offices of venture funds in the United States and Europe. These offices help portfolio companies with contacts, finding co-investors, and maintaining an awareness of technological and market developments abroad. Given the small indigenous market, such relationships are important to the development of venture firms and can be duplicated in countries such as Armenia. Government Institutions Authority for Small and Medium-Sized Businesses in Israel (ISMEA)

Aims

Activities

-Attract attention of business investors to IT SMEs.

Management programs, trainings and awareness activities for SMEs.

-Locate markets and promote exports of start-up companies’ export. -Link business investors and start-ups.

Helps IT start-ups to evaluate domestic and international markets for their products and services. Provides consultancy and networking activities for locating foreign capital.

-Support technology incubators

Provides advice, facilities and finance for scientists and entrepreneurs wishing to start a business. First established in 1991, the incubator program provides US$30 million annually for support of start-ups.

Israel-US Binational Industrial R&D (BIRD) Foundation

-Create links between business investors, venture funds and start-up IT companies.

Works with the venture capital community by providing matchmaking services to VC companies and their portfolio companies to identify business angels. Funds R&D in start-ups. It has financed about 40percent of Israeli companies listed on NASDAQ.

US-Israeli Science and Technology Commission

- Is based on an bilateral agreement to foster international R&D.

Provides contacts for venture-backed firms.

MATIMOP (Israeli Industry Center for R&D) Israel Export Institute MESSER (Israeli Idea Promotion Center)

The Ministry of Industry and Trade

204 205

Augusto Lopez-Claros, Irene Mia, 2006 “Invest in Israel,” Venture Capital in Israel. <http://www.investinisrael.gov.il/NR/exeres/A19A138D-87A7-416B-8D62-1C968E035E13.htm>

96 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Training and Support

Israel is a benchmark country in the provision of management assistance by venture capital funds. Although Israel has a large pool of skilled IT professionals, many of them lacked business management skills. As the management abilities and skills of IT companies minimize the risks for investors, Israel stresses the importance of providing sufficient vocational training in management for IT-related entrepreneurs interested in starting their own company. Curriculum includes evaluating the technological and financial feasibility of projects, providing the new entrepreneurs with management tools, providing assistance in attracting finance through the fund network of contacts, and advising on business and financial planning. As a result of this intangible investment in managerial skills, Israeli start-ups have become attractive to business investors and venture funds.

Tax Incentives

With the new tax reform of 2002, Israel promotes the attraction of foreign risk capital by providing foreign investors with tax incentives such as a permanent exemption from capital gains tax on investments in local venture capital funds and in high-technology start-ups. Prior to 2002, the government used temporary tax exemptions for foreign investors. Moreover, Israel has removed all restrictions on foreign ownership related to IT sector companies. Foreign companies have full rights to repatriate profits and dividends in the country.

Risk Capital Development in Armenia: From the Perspective of Benchmarking Countries Currently, Armenia prioritizes the creation of funds to attract risk capital to the IT industry. In this framework, government of Armenia is in the process of developing a new state policy to promote risk capital attraction. Presently, Armenia has a March 2006 draft “Law on Venture Funds” and a December 2005 draft “Law on State Support to Innovative Activities” under consideration. These draft laws are addressed to regulate the establishment, development, and management of venture funds. It also intends to regulate all the activities related to venture funds in Armenia. There are no official venture funds active in Armenia. Nevertheless, the Cafesjian Foundation, together with the semi-government funded Enterprise Incubator Foundation, have initiated the first venture project, which aims to fund 4 IT start-ups. The total capital of the venture project is $1 million, which is planned to be distributed equally among the 4 start-ups. Aside from provide seed capital, the venture project is also aimed at supporting the start-ups through providing consulting and technical assistance. According to some experts, most of the funds to IT industry start-ups are attracted through individual business investors, who are mostly foreign individuals of Armenian origin, or diasporan. Nevertheless, there are no business angel networks as well as no government initiatives to minimize the risks of such individual investments.

97 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Venture Funds Risk Capital

Israel

Armenia

Recommendation

Venture policy: “Law on Venture Capital”

Israel has a policy which supports the development of venture funds in the country.

Currently, Armenia has no policy on venture funds. There is a draft of “Law on Venture Funds: that addresses the regulation of the establishment, development, and management of venture funds. It also intends to regulate all the activities related to venture funds in Armenia.

Government support to set up a venture fund

Israeli government started YOZMA group, which is a venture capital fund investing in high-technology start-ups. YOZMA group administers public funds in order to attract foreign capital into the country.

There is no similar support from the Armenian government and there are no venture funds to date. Recently, a venture project has been established in Armenia for IT start-ups with the funds of Cafesjian Foundation and EIF.

Government support for foreign investors

-In the initial stage of attracting risk capital Israeli government was providing equity guarantees for foreign investors. -Currently, government also provides tax incentives for foreign venture investments to IT industry.

There are no investment incentives and guarantees by the government to attract venture capital.

To develop venture capital industry, Global SPC recommends introducing equity guarantees for foreign funds to invest in local IT start-ups. It is also suggested to introduce tax incentives to both local and foreign investors interested in investing venture funds in start-up companies.

Business Investors

Israel has a strong network of business investors. The Israeli government has sought foreign investors through offering tax incentives and initiating programs to link small firms and venture capital funds with foreign-based institutions and multinational enterprises as well as individuals.

As a result of a strong diaspora, most of the risk capital in Armenia is attracted through individuals (business investors). Nevertheless, the Armenian government has not initiated any specific actions to attract diasporans to IT industry.

Global SPC urges the Armenian government to initiate activities similar to those of Israel to create relations between foreign individual investors and funds and attract foreign capital to IT start-ups.

Venture Association

Israel has a Venture Association (IVA), which is an active lobbying organization. The Israel Venture Association represents Israeli VC community and promotes venture capital investments from around the world.

There is no similar association in Armenia.

Global SPC recommends developing public-private partnerships in the sphere, with the future intention of creating a Venture Association.

As the current law is already drafted, Global SPC recommends the following changes to the draft: -provide the definition of venture funds’ activities in the draft of the law, and -clarify and assure the consistency of the provisions of the draft with the norms of the Armenian Civil Code.

There is a need for establishing government support programs and venture funds to attract capital to IT start-ups. Global SPC suggests creating public venture funds, which, in cases of high returns on investment, will also attract private investments.

98 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Benchmark Countries for Financial System and Markets Financial System Comparative Indicators of Armenia, Israel, and Estonia206 Estonia

Israel

Armenia

Composite Risk Rating, 09/2005-08/2006 10 Gr. Capital Formation as percent of ICT Expenditure as percent of GDP, 2005" GDP, 1995-2004 Extent of Business Internet Use (1-7), 2006

Price Basket for Internet (US$ per month), 2003

Soundness of Banks (1-7), 2006

Interest Rate Spread, 2004

Domestic Credit to Private Sector as percent of GDP, 2005

Internet Users per 1000 People, 2004 International Internet Bandwidth (bits per person), 2004

Internet Access in Schools (1-7), 2006

Computers per 1,000 People, 2004

Mobile Phones per 1,000 People, 2004

Financial System Comparative Indicators Estonia (Group: All)

Variable

206

Israel (Group: All)

Armenia (Group: All)

actual

normalized

actual

normalized

actual

normalized

Composite Risk Rating, 09/2005-08/2006

76.11

6.02

71.87

4.75

66.91

2.46

Gr. Capital Formation as percent of GDP, 1995-2004

29.12

9.07

21.75

4.88

20.43

3.64

Soundness of Banks (1-7), 2006

6.30

7.50

6.30

7.50

4.90

2.76

Interest Rate Spread, 2004

3.50

8.41

3.80

7.94

13.70

1.12

Domestic Credit to Private Sector as percent of GDP, 2005

60.00

6.61

97.50

8.19

8.10

0.63

Internet Access in Schools (1-7), 2006

6.00

8.88

5.80

8.36

2.40

1.38

Mobile Phones per 1,000 People, 2004

930.90

8.71

1057.30

9.70

67.20

2.20

Computers per 1,000 People, 2004

920.70

9.92

741.00

9.52

66.10

4.76

International Internet Bandwidth (bits per person), 2004

3409.90

8.61

2500.90

8.09

11.90

2.61

Internet Users per 1000 People, 2004

496.70

8.48

470.70

8.18

49.60

3.33

Price Basket for Internet (US$ per month), 2003

13.60

8.18

29.80

3.41

44.80

1.67

Extent of Business Internet Use (1-7), 2006

6.00

9.74

5.40

8.70

3.20

2.26

ICT Expenditure as percent of GDP, 2005”

n/a

8.27

8.51

n/a

Graph and table taken from: “Knowledge for Development: Knowledge Assessment Methodology, KEI Indicators,” The World Bank, 2006

99 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Estonia Origin of the Estonian Financial Sector and efficient capital markets 207

The overall financial sector of Estonia is contemporary and efficient. The government and Central Bank policies support the free flow of financial resources. The terms of provided credits are quite competitive and foreign IT investor may obtain credits on the local market without any difficulties. Legal, regulatory, and accounting systems are transparent and correspond to international norms. The Estonian Security Market Law complies with EU requirements and enables other EU securities brokerage firms to deal on the market without establishing a local subsidiary. In 2002, the Helsinki Stock Exchange (Finland) bought a controlling interest in the Tallinn Stock Exchange, merging the two entities, thus making the small market more attractive to foreign investors. The Central Bank and the government do not acquire shares in the banking sector. In 2001, the Central Bank of Estonia supported the establishment of a consolidated Financial Supervision Authority (FSA). The FSA is an agency with autonomic competence and a separate budget and conducts financial supervision on behalf of the state and is independent in its financial supervision. The Authority was established to enhance the stability, reliability, transparency, and efficiency of the financial sector, to reduce system risks, and promote prevention of the use of the financial sector for criminal purposes.

Estonian stock exchanges

The Tallinn Stock Exchange and Estonian CSD are the leading securities market infrastructure operators in Estonia. Through these two enterprises, market participants are provided with an environment for carrying out transactions with securities, clearing and settlement of securities transactions, listing of securities, operating of central securities register, and funding of the pension fund register in Estonia. The Tallinn Stock Exchange is the only regulated securities market in Estonia. The main supervisory body of the market is the Financial Supervisory Authority (FSA). The Tallinn Stock Exchange performs market supervision over market participants and issuers of securities traded on the market, with respect to the price formation of the securities traded on the market, conducting and execution of transactions and fulfillment of provisions of the rules and regulations. The Tallinn Stock Exchange and the FSA shall co-operate in the course of exercising market supervision.208 As of the first half-year of 2007, the number of companies registered with the Estonian Central Securities Depository was 6,507. During the first half of 2007 there was an increase in the number of private limited companies (209) that register their shares and decreasing the ones of public limited companies (35). The total value of securities registered with the Estonian Central Securities Depository amounted over $14.1 billion.209 Nordic stock-exchange operator OMX owns and operates stock exchanges in Copenhagen, Stockholm, Helsinki, Riga, Tallinn and Vilnius. International financial markets analysts have viewed the OMX case as a very successful one. Liquidity has increased across all OMX markets on the Nordic Exchange during the first half-year 2007. Since the peak in 2000, the daily share trading volumes on the Nordic Exchange have increased by 67 percent. The Nordic Exchange now includes 834 companies.210 As a unique success story of a stock exchange for IT companies, the NASDAQ offers an important model of a virtual (listed) exchange, where all of the trading is done over a computer network. The process is similar to the above, in that the seller provides an asking price and the buyer provides a bidding price electronically. As the largest US electronic stock market, NASDAQ encompasses both US and foreign countries listings. The NASDAQ Global PlatformSM provides companies throughout the world access to US capital formation. NASQAD includes listings of successful companies from different business sectors, mainly from technological IT, retail, communications, financial services, transportation, media and biotechnology.211 US Department of State, 2006 Investment statement Statement-Armenia. <http://www.state.gov/e/eeb/ifd/2006/62321.htm> Tallinn Stock Exchange. <http://www.ee.omxgroup.com/?id=2665> 209 OMX, The Nordic Exchange, Statistics and Analysis. <http://www.omxgroup.com/nordicexchange/Themarket/Statisticsanalysis/?languageId=1> 210 Simon Kennedy, “NASDAQ to buy OMX exchange for $3.7 billion, Fate of buyer’s London stock Exchange stake is uncertain,” Market Watch, May 25, 2007. <http://www.marketwatch.com/news/story/nasdaq-agrees-buy-omx-37/story.aspx?guid=%7B6D0E7894-62F2-46C8-AB40-0CBAA2B8BFD1%7D> 211 Wikipedia Free Encyclopedia. <http://en.wikipedia.org/wiki/NASDAQ> 207 208

100 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Estonian Banking Sector

Ten banks operate in Estonia, including three branches of foreign banks. Five representative offices of foreign banks were established by December 2005. The Estonian banking sector is known to be one of the most developed among Scandinavian banks, which provides different sets of services (such as Internet and telephone banking) at very competitive terms.212 The number of banks in Estonia started to increase last year after Estonia joined the European Union. While initially the Estonian Branch of Nordea Bank from Scandinavia was the sole banking institution in the country, more recent entrants included the Parex Banka from Latvia and the Bayerische Hypo- und Vereinsbank group from Germany. At the end of 2004, nearly 90 percent of the share of capital of banks belonged to foreign owners. However the banking market in Estonia remains over-concentrated. The biggest bank in Estonia, Hansapank, had a share by assets of 48 percent at the end of 2004, and the second biggest was Eesti Ühispank, with 31 percent.213 The telecommunications sector, financial (mainly banking), wholesale and retail trade, and governmental structures are the most important drivers of the emerging Estonian IT cluster, as they demand most of the production generated by the IT sector. Constantly developing demand in Internet banking fosters IT development, as the banks need qualified software and innovative IT products on a constant basis. For the last decade, Estonian banks began to introduce new innovations in the market in order to make distribution channels more cost efficient and to create an “innovator image” through existing and potential clients.214

Estonian Electronic Banking 215

Estonia has a highly advanced Internet banking system, with 68 percent of inhabitants making their everyday transactions via Internet banking. The relatively high penetration of personal computers and Internet access has also made Estonia very suitable for electronic banking. The percentage of Internet uses was 55 percent of the Estonian population aged 15-74 in 2005 and Internet penetration among Estonians is higher than in other East European countries.

US Department of State, 2006 Mart Sõrg and Olga Luštšik, “Transition Banking May Be Highly Profitable: Estonian Case,” Banks and Bank Systems, Volume 1, Issue 1, 2006 214 Tarmo Kalvet, Tarmo Pihl and Marke Kerem, “Analysis of the Estonian ICT Sector Innovation System,” Archimedes Foundation and PRAXIS Center for Policy Studies, 2002, pages 23-24 215 Internet Banking in Estonia, Katri Kerem, PRAXIS Center for Policy Studies., 2003. <http://unpan1.un.org/intradoc/groups/public/documents/UNTC/UNPAN018529.pdf>. 212 213

101 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Internet penetration 3Q 2005 (percent of population, selection of countries) 216 75% 70%

69%

68%

64%

63%

63% 57% 50%

47% 42% 37%

35%

34% 28%

28%

14%

The Estonian population uses Internet bank services very actively. Most of the payment transactions are accomplished through various e-channels. On average, 95 percent of the total volume of all payments are concluded via e-bank facilities – via online and offline Internet banks and other electronic channels.

Internet penetration and internet banking penetration by OECD Financial Markets Trends Survey, April 2002 217 60 50 40 30 20 10 0

Internet penetration 216 217

Internet banking penetration

Internet Banking in Estonia, 2003 OECD in Washington, newsletter May 2002. <http://www.oecdwash.org/NEWS/LOCAL/oecdwashmay2002.pdf>

102 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy In one of the biggest Estonian banks, Hansabank, the percentage of transactions done over the Internet has been continuously growing and, in the past few years, e-channels became the main transaction channels. The part of branch network in payments area decreased from 27 percent in 1999 to 5 percent in 2002.

Usage dynamics of different transaction channels in Hansabank from 1999 to 2004 (percent of total transactions numbers) 218 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Branch

Call center

Periodic payment 1999

2000

ATM 2001

Direct Debit 2002

2003

Online bank

Offline Pc bank

2004

Estonian Insurance Market and banking219

In Estonia it is compulsory to carry a valid vehicle third-party liability insurance contract. It has been possible to prolong the insurance policy through the Internet since April 2000 and, currently, three insurance companies have cooperation agreements for this transaction with the banks. It is predicted that banks will only continue to be involved in providing third party services, but in the future the main access point to the service will not only be the bank’s Internet site. The current third party services have a very wide user base and therefore it is justified to offer the also on the banks’ sites.

218 219

Based on Hansabank data, author’s calculations The Estonia Insurance Report, 2005. <http://www.businessmonitor.com/insurance/estonia.html>

103 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Israel History and Origin of the Israel Stock Exchange

The Tel Aviv Stock Exchange plays a large role in the economic development of the country. The Israeli stock market has become an essential market-place for the trading securities of all types. Israel’s Stock Exchange, or the Tel Aviv Stock Exchange (TASE), is the only stock exchange in Israel. The Exchange Bureau of Securities was the prototype for the TASE, which was established by the Anglo-Palestine Bank (which turn into Bank Leumi) in 1935. After the formation of the state of Israel, the growth of the Israeli economy was rapid and to keep pace, a previous stock exchange was integrated and started operations in Tel Aviv in 1953. The exchange moved to Tel Aviv in 1983. During the 1990s the Tel Aviv Stock Exchange (TASE) was able to compete with the standards of the most advanced exchanges in the world and introduced a computerized system known as TACT. Many major Israeli companies are enrolled on the TASE as well as the NASDAQ. TASE is controlled by the 1968 Securities Law and is under the direct supervision of the Israel Securities Authority.220 The Sapiens International Corporation N.V. (NASDAQ and TASE: SPNS), a member of the Formula Group (NASDAQ: FORTY and TASE: FORT), is a leading global provider of proven IT solutions that modernizes business processes and enables organizations to adapt quickly to change. The company announced the customization of the INSIGHT™ information system in conformity with the new requirements of the Israeli capital market that evolved as a result of the Bachar Committee’s recommendations in November 2005.221 Sapiens INSIGHT™ provides operational solutions mandated by capital market reforms regarding to life insurance, pension and provident funds and long term saving schemes. Until recently, the capital market was restructured into four distinct segments, consisting of banks, insurance companies, pension funds and provident funds. As a result of the Bachar reforms, the parameters that used to define the capital markets were unified, allowing various entities to engage in all four segments through newly-developed services that cut across previous limits, resulting in increased competition. Sapiens’ fullyintegrated INSIGHT™ solution responds to the needs of all segments and Sapiens INSIGHT™ for Life & Pensions was developed in collaboration with Sapiens’ key customers in Israel. Having launched production at the Menorah Insurance Company several months ago, it will soon be rolled into the New Mivtachim pension fund while also being evaluated by several provident funds in the banking sector.222 After the US and Canada, Israel has more companies listed in NASDAQ than any other country in the world.223 And in 2004, Israeli high-tech companies raised more capital than any country in Europe, with nearly $1.5 billion invested in start-ups and the number of venture capital transactions reaching roughly 10 percent of the total for the United States.224 In 2000, Israel ranked on par with the US Silicon Valley in venture capital per capita.225 A major number of companies supported by venture capital have successfully completed IPOs, with 70 Israeli companies listed in NASDAQ and about 30 listed in European stock exchanges.226 Top investors, whose stocks are listed in TASE include IBM, Intel, General Electric, Siemens, Deutsche Telecom, Frutarom, AfricaIsrael Investments Limited, Magic Software Enterprises, ABETRANS(Commerce and Service), R.H.Techno (Industry), among others.

Finance MapsofWorld.com, Israel Stock Exchange. <http://finance.mapsofworld.com/stock-market/israel-stock-exchange.html> Bachar Reform, Israel. <http://www.bacharreform.com/index.html> 222 Securities Information from SecInfo. < http://www.secinfo.com/drzV3.zh.htm> 223 “Israel’s Technology Industry: Punching Above its Weight,” Economist Intelligent Unit. <http://www.eiu.com/index.asp?layout=displayIssueArticle&article_id=1579577143&text=cluster+singapore> 224 Lopez-Claros and Mia, 100 225 De Fontenay and Carmel, 4, 24 226 “VC In Israel – Today,” Israeli Venture Association (IVA), April 8, 2006. <http://www.iva.co.il/content.asp?pageId=38> 220 221

104 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Israel banking sector227

The banking sector of Israel has started its development process only during the last decade. Due to the Bachar reforms and as a result of the development of the high-tech sector, the banking sector in Israel started to develop rapidly, although banks continue to dominate the allocation of savings to investment. However, Israel does not provide any specific crediting terms to IT companies, in order to maintain healthy competition in the market.

Israel Insurance Market

Insurance, Provident Funds, Pension Counseling and Pension Marketing, Distribution Commission related fields are determined by the Minister of Finance of Israel. In 2006 there were 24 insurance companies active in Israel. Three of the insurance companies are government corporations: the Fund for the Insurance of Natural Disasters in Agriculture, “Inbal,” which insures government activity, and “Ashra” (formerly the Israeli Foreign Trade Risks Insurance Company), which is involved in the insurance of long-term (over one year) foreign trade risks.

Financial System and Markets Development in Armenia: From the Perspective of Benchmarking Countries Armenia has always recognized the need for the development of its financial sector. Therefore, there are a number of serious issues hindering the proportional development of all the markets of financial system. As of December 31, 2006, the Armenian financial market numbered 21 commercial banks (with 299 branch offices and total equity amounting to $325 million).228 According to the Central Bank’s quarterly reports, Armenian banks’ aggregate assets comprised 19.57 percent of GDP by late March 2007 against 20.41 percent earlier in the year.229 Although the parliament has adopted various laws covering the markets of the financial system230 which are in compliance with international best practices, much of the legal framework remains inactive and has not been effectively applied, implemented, or enforced.231 As of January 1, 2007, among other players of the Armenian financial market were the three money transferring companies (HayPost, CJSC, Armenian Express CJSC, Depi Toun LTD) and one organization dealing with processing and clearing of payment instruments and e-payment documents (Armenian Card CJSC). 232 Currently, there are 20 licensed brokerage firms specialized in the Armenian securities market. Six of which have license to trust management; one has a license to depository activities; and two are self-regulating entities (the Armenian Central Depository and Armenian Stock-Exchange trade foreign currency and securities). The current state of capital markets in Armenia is a result of several major factors (non-transparent management and accounting, existence of closed-pocket companies, etc.) that hinder both the development of financial markets and the investment capital inflows by foreign reputable investors that, in turn, could have introduced a culture of market economics and management, and also would have accelerated the learning process. Though a priority sector for Armenia, IT does not acquire any advantageous terms that financial market representatives may provide to IT start-up or existing companies.

Meir Sokoler, “Changes in the Israeli banking system,” 2004. <http://www.bis.org/publ/bppdf/bispap28p.pdf> Central Bank of Armenia. <www.cba.am> 229 ARKA News Agency, “Central Bank of Armenia to Lay Necessary Groundwork for Banking Sector’s 40-Percent Growth,” July 2007. <http://www.armeniadiaspora.com/ADC/news.asp?id=2350> 230 Central Bank of Armenia 231 Ibid 232 Ibid 227 228

105 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Financial Systems and Markets Financial System and Markets

Capital Market development

Estonia

Armenia

Nordic stock-exchange operator OMX owns and operates the Tallinn Stock Exchange. In May 2007, NASDAQ Stock Market Inc. has agreed to buy Nordic stock-exchange operator OMX, which will give further opportunity for Estonian IT companies to access the number one virtual exchange, as well as easy US and non US capital investments in the Estonian IT sector. The favorable conditions boosted the development of Capital market of Estonia.

Armenia’s securities market is not well developed. The market is mainly limited to trading Armenian Government bonds. In April 2007, the largest Nordic stock exchange operator OMX AB agreed to buy the Armenian bourse as a long term investment. As a long term investment, OMX representatives may not develop an aggressive, goal-oriented strategy for capital market development.

Recommendation

Global SPC recommends - to develop new policies following the example of the Tallinn stock exchange to develop the market and integrate into the international market in the shortest possible timeframe. - together with OMX experts create an association of capital markets for IT companies, invite experts from NASDAQ for training, etc. - establish NASDAQ’s professional platform in the Armenian stock exchange and integrate into the virtual trading processes by promoting the IT companies access.

Global SPC recommends Estonia has a high rate of ebanking (Internet bank usage rate is 22 percent) usage. Developed e-banking and e-commerce is one of the key reasons of constant demand for IT products. The main factors that encouragement are:

Armenia has low level of e-banking and e-commerce because of several major factors:

-stimulate the entrance of internet provide companies and the de-monopolization of internet and communication market;

- low internet penetration rate

-grants to increase the internet usage skills and knowledge;

- relatively high prices on internet use

-develop free of charge internet usage centers in villages and regional cities;

- high rate of internet usage skills

- low level of internet usage skills

- adopt effective laws (laws on digital signature, privacy protection laws, etc.);

- readiness of long term investments in IT by banks and private sector

- lack of long-term investment feedback oriented management mentality

- favorable legislation scope for developing e-banking and e-trade (such as “Law on Digital Signature,” “Effective privacy protection laws and Law on Personal Data,” etc.) business.

- ineffective and absent laws that accelerate the development of Internet banking.

- expanding management skills and education for bank managers pertaining to the need for increasing long-term investments in IT products and services that will create a large new market for II companies and enhance bank efficiency by making lowering transactions costs and raising profits.

- high internet penetration rate Banking sector/ Internet Banking as a factor of IT market boost

-regulate the prices of internet;

- low prices on internet

- Create a payment council with representatives from all major shareholders in Armenia in order to prepare, discuss and reach an agreement on a longterm vision and implementation framework for the payment system.

106 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Benchmarking of Accounting Policies Accounting is widely referred to as the “language of business.”233 The accounting statements of any company provide a numerical profile of its performance and, therefore, directly affect its overall valuation as a business. The analysis of a company’s periodic accounting reports influences not only the view of its own employees, executive managers, major owners, and tax authorities, but also forms the way it is perceived in the market, for example, by investors, shareholders, banks and other stakeholders. Accounting is becoming ever more challenging in an increasingly knowledge-driven “New Economy,” as the key economic resources underlying wealth production are no longer based solely on competitive advantages of access to and use of fixed assets, but relate more to access to and use of new intangible assets, such as information systems, software, intellectual property, patents, the Internet, and e-Business, etc.. In light of the new rapid pace of technological development, traditional accounting is losing value relevance. This effect is of particular significance after the rise of the New Economy in the early 1990s, especially for firms belonging to ‘new economy’ industries. The main limitation of traditional 500-year old financial accounting and reporting systems is that they measure the realization of value which is based on transactions. In the modern knowledge-intensive economy, there is an increasing separation, either in time or function, between the creation of value and its subsequent realization, and hence, measurements based on value realization hold increasingly less relevance to investors and for those entrusted with the governance of large commercial organizations. For example, for technology-based start-up firms, positive results of expenses on R&D as measured by traditional value realization accounting might be achieved only in an indefinite time period sometime in the future. However, it is essential to have a reliable method for calculating the company’s performance in creating value that will be available for subsequent realization.234 On the grounds of this observation, commentators argue in favor of a change to the current accounting model. Recommended amendments include: Widening of intangible asset recognition criteria, including the capitalization of R&D, advertising and human resource expenditures; Measurement of intangibles at fair value, instead of purchase price; More flexible policy in defining the useful period of intangible asset and its consistency with tax policy in terms of impairment and loss/gain measurement; The capitalization of in-process R&D; and, Improved disclosure modes.235 Accounting policy itself does not directly affect the development and competitiveness of IT industry, rather it affects the decisions of people, which afterwards can boost or suppress IT cluster’s dynamics. Therefore, in the long run, it is extremely important that accounting numbers reflect the real picture of companies’ assets, profit, and losses. In the contemporary world, where the business environment becomes increasingly global and companies are routinely listed on stock exchanges, the need for consistent worldwide reporting standards is prioritized. This also significantly concerns the Armenian economy, as it currently prioritizes the attraction of foreign investments to the IT sector. In such a situation, IFRS, formerly known as IAS, clearly addresses this issue, as its main objective is to create comparable, consistent, reliable and transparent financial reporting statements that will facilitate greater cross-border capital raising and trade.

Meigs, Walter B. and Robert F. Meigs. Financial Accounting, 1970, p.1 “What are the limitations of the traditional accounting framework in the 21st century?” Performance Insights for the 21st Century. <http://www.totalvaluecreation.com/TVCfaq/4.htm> 235 Lev Baruch, “New Accounting for the New Economy.” 233 234

107 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Financial and Tax Policy

Accounting Policy of Armenia: From the Perspective of Benchmarking Countries Armenia adopted international standards of accounting and auditing during the period 1998-2000 according to a decision by the Ministry of Finance and Economy in assistance with the USAID “Accounting Reform in Armenia” project. In 1998, the Armenian parliament adopted the “Law on Accounting” and in the same year, the government adopted a decision on accounting reform in Armenia. The resolution aimed to reform the legal code of accounting in accordance to the existing and future amendments of International Standards of Accounting issued by International Accounting Standards Board (IASB). The Armenian accounting standard covers accounting rules for intangible assets. Examples of technology-based intangible assets include patented technology, computer software and mask works, unpatented technology, databases including title plants etc. The objective of ASRA 16 is to prescribe the accounting treatment for property, plant, and equipment, including computer hardware. Value irrelevance of accounting reports in Armenian companies is not the effect of time-irrelevant accounting policy. The main reason is the intention of businesses to hide some part of income to avoid a tax burden, as in Armenia tax authorities are the primary users of the Financial Statements. The table below reflects some certain similarities and differences of IAS, US GAAP and Armenian accounting policies: Criteria

IAS

US GAAP

Armenian Accounting Standards

The Primary Aim Of Financial Statements

To provide shareholders with information

To provide internal and external users with information

Major Users

Investors, shareholders, employees

Mainly Shareholders

Mainly Tax authorities, executive managers.

Accounting rules contents

The rules for several vital types of activity are absent

The rules determine everything to the smallest detail

The rules of IAS apply to Armenia

Connection With Tax Legislation

Taxes are calculated in accordance with tax legislation of the country

There are two kinds of accounting, for taxation purposes and financial accounting

Tax and financial accounting may have differences, especially when calculating gains and losses, transferring loss to the next reporting period. This is an issue of Impairment Intangible Assets, when the useful period actually turns out to be much shorter than 10 years in fast changing IT world.

Reporting Frequency

Annually

Quarterly

Annually Balance Sheet (daily for banks), Monthly Social Reporting, Quarterly Income Statement and VAT, Monthly VAT for companies with turnover of 60 million and up.

Historical Factors

Free market economy

Transition from centralized government regulation and planned economy to market relations.

Role in the Company

Significant influence on decision-making.

Supplementary role- mainly controlling function

Significant influence on decision-making

108 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Concept Definition

The investment climate can be defined by three broad variables: Macroeconomic context, expressed through fiscal, monetary and trade policies; Governance and institutions; Infrastructure. The business and investment climate consists of much more than simply tax rates and fiscal incentives available to business, but encompasses several other critical components, including political stability, the rule of law, macroeconomic conditions, perceptions of government and the regulatory environment. Government policies also exert a particularly significant influence on the investment climate through their impact on costs, risks and pertaining to barriers to competition.

Investment promotion

Improved policies and governance are among some of the most important long term incentives for foreign investors. Incentives must be reviewed regularly, however, and either adapted or phased once they have achieved their purpose. At the same time, the cost-effectiveness of incentives also needs to be carefully assessed, depending on the circumstances.

Investment promotion agencies (IPAs)

Investment promotion agencies are an important mechanism for attracting investments. A national investment promotion agency is a key element in the development of a country’s image as an attractive investment destination, for improving the investment climate, and in actively attracting foreign investors. The success of an investment promotion agency is ultimately measured by the extent to which it achieves its ultimate goal of increasing foreign direct investment. Greenfield investment should be the crucial point of an IPA’s efforts.

Investment incentives

It is essential to create a business and investment climate that is non-discriminatory, simple, transparent, generally offering a low-cost environment.

Fiscal and Financial incentives

Governments offer a wide range of fiscal or tax incentives to investors, usually to foreign investors, designed to make their country a more attractive and appealing investment destination. Some common fiscal incentives include : Reduced corporate income tax rates; Ability to deduct profits that are reinvested into company operations from corporate income taxes; Tax holidays or abatements in which companies do not have to pay corporate income tax or social security taxes for a specified period of time; Ability to carry forward losses incurred during the early stages of investment to later years; Reduced or zero social tax obligations for hiring employees, such as recent university graduates, veterans, etc.; Exempted or deferred payments of VAT or fast-track VAT refund; Accelerated depreciation on capital investments; Exemption from taxes on the conversion of agricultural land into industrial land; Grants for training initiatives or job creation in disadvantaged areas.

109 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Industrial parks

An industrial park can be defined as an area of land that is set aside for industrial use and specific development. Industrial parks/ estates consist of three basic ownership models including state industrial park authority; private sector; and public-private partnerships or joint ventures between the state and the private sector. Industrial parks are usually, but not always, located in areas endowed with an excellent communication and transport infrastructure, access to energy, and a locally-available workforce. While industrial parks may have many names (industrial estates, exportprocessing zones, business parks, high-technology parks, industrial development zones, and eco-industrial parks), they all have a number of shared distinguishing characteristics. They accommodate a number of firms in close proximity within a common parcel of land set aside for a specific purpose, and share infrastructure and utilities. Industrial parks also share a common management structure to oversee park activities. Industrial parks that host IT-related companies, for example, are commonly called techno parks or high-technology parks. Such parks generally possess high-quality IT-related infrastructure and are aimed at attracting and engaging leading foreign and local IT sector companies.

Investment guarantees and political risk insurance

Investment decisions are vastly influenced by a country’s unique investment climate and political environment. These factors can create too much risk to proceed with the investment, however, and, in order to promote investment in these circumstances, countries often provide investors with so-called “sovereign guarantees,” which serve as financial guarantees against losses or non-payment as a result of political, legal or economic instability or crises.

IT Trade Liberalization and Competitiveness

It is widely recognized that the spread of IT and the Internet contributes significantly to an increasingly globalized and interconnected digital world, creating new economic and social landscapes and fundamentally changing the way enterprises, and economies as a whole, function. IT affects all sectors of society and the economy by influencing economic development, affecting international trade and investment, and creating new market opportunities for companies in developing countries. The growth in IT goods and services has been consistently higher than the growth in total trade.236 The development of domestic policies targeted to attract investments in the IT industry, enabling the trade of IT-related goods and promoting e-business in general, are vital for IT industry development. Trade in IT-related goods is addressed by a number of multilateral trade agreements, including the World Trade Organization (WTO) Agreement on Basic Telecommunication Services (for the telecommunications sector), the moratorium on e-commerce, the Information Technology Agreement (ITA) (for IT goods), General Agreement on Trade in Services (GATS) (for IT services and the electronic delivery of services), as well as the General Agreement on Tariffs and Trade (GATT) (for digitized products).” 237

“Measuring the Information Economy,” Organization for Economic Cooperation & Development (OECD), Paris, 2002. Much of the discussion presented in this section is based on Susanne Teltscher, “Electronic Commerce and Development: Fiscal Implications of Digitized Goods Trading,” World Development, Vol. 30, No.7 (2002), pp.1137–1158 236 237

110 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

General Overview of IT Investment Climate Despite some obstacles to investment, particularly stemming from problems with corruption, Armenia’s investment and trade policy is rated as among the most open in the CIS. The Armenian economy depends heavily on remittances, foreign trade and investment, and the Armenian government has made significant efforts to attract additional investment.238

Foreign Direct Investments to Armenia 239 Foreign Direct Investment

actual

nominal

FDI Outflows as % of GDP, 2000-041998

0.16

4.47

FDI Inflows as % of GDP, 2000-04

5.81

7.95

Investment policy is one of the most important components and directions of the Armenian government’s economic policy. For the effective implementation of investment policy it is necessary to have effective institutions and infrastructure in place that are concerned with the issues of support and promotion, as well as the protection of investment and investors. The investment promotion and investors’ protections are mainly implemented through the following state institutions: The Ministry of Trade and Economic Development is responsible for the elaboration and implementation of investment policy, the improvement of Armenia’s investment climate and for the maintenance of the country’s overall investment rating; The Business Support Council is responsible for the continuous improvement of administrative procedures related to entrepreneurship activity, the reduction of administrative barriers and the resolution of many common problems that arise for businessmen in Armenia; The Armenian Development Agency is responsible for the implementation of state investment policy and provides services to investors based on the “one-stop-shop” principle. Currently, there are 46 companies with foreign capital in the IT sector in Armenia, with U.S. ownership constituting the largest share (59 percent).240 Companies with Russian or CIS capital have decreased from 17 to 11 percent from 2003 to 2006, while IT-related investments from Europe increased from 17 to 28 percent over the same period. 241

Investment Promotion Agency242

The Armenian Development Agency (ADA) was established in 1998 by the Armenian government to facilitate foreign direct investments and promote Armenian exports. The ADA acts as a “one-stop-shop” agency for investors, assisting them to establish businesses in Armenia, helping in project implementation, performing a liaison role with the government, and providing information on investment opportunities in the country, as well as explaining investment-related regulations and laws. In terms of its export promotion activities, the ADA helps to find markets for products, undertakes market studies, and seeks partners for joint ventures aimed at increasing the volume of exports and development of Armenian enterprises. The ADA also organizes international conferences, business-forums, trade fairs, and exhibitions. The ADA is a member of the World Associations of Investment Promotion Agencies.243

U.S. Department of State, 2006 Investment Climate Statement-Armenia. <http://www.state.gov/e/eeb/ifd/2006/61960.htm> World Bank, Knowledge for Development (K4D). <http://info.worldbank.org/etools/kam2/KAM_page3.asp> 240 Companies such as Epygi Technologies, Synopsys Inc., and Virage Logic 241 Norayr Vardanyan, “Armenian Information Technology Sector Software and Services. Report on the State of the Industry,” Enterprise Incubator Foundation, 2006, Armenia. <http://www.eif-it.com/index.php?page=res&category=1> 242 The Armenian Development Agency (ADA), Republic of Armenia. <http://www.ada.am> 243 Wikipedia. <http://www.waipa.org/members.htm> 238 239

111 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Fiscal and Financial Incentives244

Companies with foreign investment are subject to the same tax regime as Armenian companies. According to the “Law on Profit Tax,” Armenia provides fiscal incentives in corporate taxation (exemptions) to companies with foreign investment exceeding 500 million AMD (roughly $855,000), as shown in the table below.

Tax Incentive Scheme for Foreign Investments to Armenia245 Year of investment

Deduction from Profit tax for each year 100%

50%

1998

1999-2000

2001-2008 inclusive

1999

2000-2001

2002-2009 inclusive

2000

2001-2002

2003-2008 inclusive

2001

2002-2003

2004-2007 inclusive

2002

2003-2004

2005-2006 inclusive

2003

2004-2005

2004

2005-2006

2005

2006-2007

2006

2007-2008

2007

2008-2009

2007 is the last year when new investments by foreign firms qualify for tax holidays in Armenia. Firms investing a minimum of 500 million Drams (1 US$=365 Drams) benefit from a 100-percent forgiveness from the profit tax in both 2008 and 2009.

Industrial Parks/Technology parks246

Viasphere Technopark, a subsidiary of Viasphere International headquartered in California, US, is a state-of-art technology park located in Yerevan, Armenia. In Armenia, Viasphere Technopark interacts with technical universities and institutes in the areas of advanced research. With facilities, infrastructure and support services already in place, companies can achieve greater and faster access to markets with minimal start-up costs. Enterprise Incubator Fund provides office space and services to IT companies. The complete list of facility services includes the following options: Lease of space of various sizes; Shared meeting and conference rooms with equipment; Shared resource center with access to literature, on-line databases, etc.; Shared printer, fax and copier services; Local area network (LAN) and high-speed Internet connection; Security with full access; Parking facilities. Citadel is a new business park located in the center of Yerevan, owned by Leda Holdings based in Texas, US. Citadel is designed as a state-of-the-art, multi-purpose real estate facility supporting businesses, education and entertainment services and offering a wide range of rental possibilities for foreign and local businesses.

The Armenian Development Agency (ADA) The Armenian Development Agency (ADA), Republic of Armenia. <http://www.ada.am/html/investment_incentives.html> 246 Ibid 244 245

112 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Investment Guarantee and Political Risk Insurance247

The Investment Incentive Agreement between the Government of the Republic of Armenia and the Government of the United States of America of 1992 provides a legal framework for the U.S. Overseas Private Investment Corporation’s (OPIC) operations in Armenia. OPIC offers political risk and anti-expropriation insurance for investors in Armenia. OPIC also insures against currency inconvertibility, but only on a case-by-case basis. Armenia has also joined the Multilateral Investment Guarantee Agency (MIGA), a body affiliated with the World Bank, which promotes foreign direct investment in emerging economies by providing: Political risk insurance; Advisory and capacity-building services for investment promotion intermediaries; On-line information on global investment opportunities.

Labor, Human recourse and IT Educational sector

Armenia has been selected as an offshore destination by several foreign companies partly because of its inexpensive and highly productive labor. However, due to a low supply of qualified specialists and a pronounced appreciation of the local currency, the Armenian Dram, (which increased in value by some 35 percent in 2003-2006), salary costs have increased sharply over the last three years. Total salary costs per employee, for example, have increased from $4,500 to $7,600, a rate of around 70 percent. Nevertheless, Armenia can still be considered as a low cost outsourcing destination, where salaries are still competitive in comparison with most of the major IT outsourcing countries like China, India, Ireland, Israel and Russia. Nevertheless, the economic forces underlying the appreciation of the Armenian Dram and the poor capacity of educational institutions also have exerted a considerable negative impact on the cost effectiveness of Armenian software firms and on the overall competitiveness of the sector. Other factors that negatively influence the attraction of foreign capital to the Armenian IT sector include the lack of global business community awareness (aside from the Armenian Diaspora) of the sector’s capacity, and inadequate knowledge of foreign languages. The language issue has become less important more recently, however, as the younger generation of Armenian specialists is more equipped with foreign language skills.

Capital markets and portfolio investments

Armenia’s securities market is not yet well developed, although there is a system and legal framework in place. There is trade in Armenian government bonds and the country’s first commercial bond was issued in December 2005. The Armenian stock market (ArmEx) introduced foreign exchange trading in November 2005. Turnover in corporate equities, however, is less than $1.5 million annually.248 Based on the series of interviews with experts conducted by Global SPC, the current state of the Armenian capital market has been identified as one of the most serious obstacles to the entrance of more international IT companies into the Armenian market.

Corruption249

Corruption remains another serious obstacle to foreign investment in Armenia. In order to address this problem, the Armenian government has introduced a number of reforms during the last four years, including the simplification of licensing procedures, reform of the civil service system, the introduction of a newly revised criminal code, and the dissemination of laws and regulations. In 2001, the Armenian government crated a concept paper for a new anti-corruption strategy, which was endorsed by the international community and resulted in a World Bank grant to further develop the strategy. Given the special importance of fighting corruption, a steering committee was also formed in January 2001 specifically empowered to coordinate the government’s anti-corruption efforts.

Ibid Armex, “Armenian Stock Exchange”. <www.armex.am> 249 “Anti-Corruption Program,” Government of the Republic of Armenia. <http://www.gov.am/enversion/programms_9/korup_prog.htm> 247 248

113 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Trade liberalization policies250

Armenia has bilateral investment treaties (BITs) in force with 32 countries and, as of mid-2007, is currently engaged in negotiations over BITs with eight other countries. Armenia is a signatory to the CIS Multilateral Convention on the Protection of Investor Rights. Currently, Armenia has a liberal foreign trade regime in place, with a simple two-band import tariff regime (at zero- and ten-percent), no taxes on exports, and no quantitative trade restrictions. Import, export, and domestic production licenses are required only for health, security, and environmental considerations. There are no limits on hard currency imports and the new Armenian State Customs Code (in force since January 2001) streamlines customs procedures and complies with World Trade Organization (WTO) rules.

Currency issues/USD devaluation impact on Investors

The appreciation of the local currency, the Armenian dram (AMD), and the resulted loss in productivity rates have lead to lower competitiveness of Armenian IT companies and other export oriented industries in the international markets. According to estimates, the AMD has appreciated on average by 20 percent in recent years. Investment companies operating in Armenia are exporting most of their products and services and mostly in U.S. dollars. In this case, the USD devaluation in Armenia was especially serious during the previous two years and has become more of a global issue. Therefore, the companies that plan all their contractual obligations and projects based on dollars see expenses realized in ever-declining dollars as well. As it turns out, the annual expenses planned by such companies increased by 20 percent or more (with the dollar devalued on average by 20 percent during the years of 2004-2006 alone). It means that the head offices of the companies must start to send 20 percent more dollardenominated capital into Armenia. There have been many discussions, interviews, where directors of big IT companies such as Synopsis,251 expressed an opinion that if the headquarters of the company decides that Armenia is an unfavorable country to work in, they may simply withdraw from Armenia. This will have a very negative impact on the international positioning and branding of Armenian IT sector, if any of the big investors left the market.

AMD/USD Exchange Rate Fluctuations 2005-2007252 340 360 380 400 420 440 460 480 500

High prices on utilities and internet

Telecommunications services in Armenia were monopolized by Armentel, a joint venture with a Greek telecommunication company “OTE” for more than a decade, and enormously constrained the development of the Internet and cellular phone industry as well as TV companies. High prices for Internet and telecommunication services and a lack of completion have been the major factors hindering the attraction of IT-related investments. Armenian Development Agency (ADA), Republic of Armenia “Investors lose millions because of USD devaluation,” 168 Dzham, Yerevan, December 24, 2006. <http://www.168.am/en/articles/3824> 252 “International Financial Statistics,” International Monitory Fund. <http://www.factset.com/www_92.aspx> 250 251

114 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Armenian Diaspora as a precious source of IT investments253

During the period of 1994-2004, investors from Armenian Diaspora constituted 69 percent of all foreign investors engaged in the Armenian economy. Generally, there are three distinct leading countries serving as sources of Diaspora investors in Armenia – Russia, USA and Iran. The number of investments from these countries comprises 60 percent of all Diaspora-related investments from 1994-2004. Although IT is considered as a prior sector for Diaspora-related investments, the proportion of the Diaspora’s investment share may be much larger, if Armenian IT-promoting organizations develop more aggressive target-oriented policies with potential investors from different regions.

Investment Climate Comparative Indicators of Armenia, Ireland and Israel 254 Israel

Ireland

Armenia

Human Development Index, 2006 10 High-Tech Exports as % of Manuf. Exports, 2004 Composite Risk Rating, 09/2005-08/2006 Availability of Venture Capital (1-7), 2006

Tariff & Nontariff Barriers (0-5), 2006 5

FDI Inflows as % of GDP, 2000-04

Soundness of Banks (1-7), 2006 0

FDI Outflows as % of GDP, 2000-04

Intensity of Local Competition (1-7), 2006

Domestic Credit to Private Sector as % of GDP, 2005

Political Stability, 2005

Cost to Register a Business as % of GNI Per Capita, 2006 Days to Start a Business, 2006

Rule of Law, 2005 Regulatory Quality, 2005

Variable

Israel (Group: All)

Ireland (Group: All)

Armenia (Group: All)

actual

normalized

actual

normalized

actual

normalized

Human Development Index, 2006

0.93

8.23

0.96

9.69

0.77

4.77

Composite Risk Rating, 09/2005-08/2006

71.87

4.75

84.99

8.98

66.91

2.46

Tariff & Nontariff Barriers (0-5), 2006

2.00

7.13

2.00

7.13

2.00

7.13

Soundness of Banks (1-7), 2006

6.30

7.50

6.80

9.57

4.90

2.76

Intensity of Local Competition (1-7), 2006

5.50

7.72

5.60

8.07

4.00

1.23

Domestic Credit to Private Sector as % of GDP, 2005

97.50

8.19

164.80

9.45

8.10

0.63

Cost to Register a Business as % of GNI Per Capita, 2006

5.10

7.66

0.30

9.76

5.10

7.66

Days to Start a Business, 2006

34.00

4.68

19.00

7.66

24.00

6.69

Regulatory Quality, 2005

0.89

7.27

1.56

9.17

0.12

5.38

Rule of Law, 2005

0.76

7.58

1.63

8.79

-0.46

4.17

Political Stability, 2005

-1.16

1.44

1.08

9.24

-0.22

4.47

FDI Outflows as % of GDP, 2000-04

1.73

7.72

3.11

8.33

0.16

4.47

FDI Inflows as % of GDP, 2000-04

2.73

4.55

16.59

9.62

5.81

7.95

Availability of Venture Capital (1-7), 2006

5.50

9.83

5.10

9.31

2.50

1.55

High-Tech Exports as % of Manufacturing Exports, 2004

18.80

8.03

33.80

9.43

1.10

1.23

“The Role of the Diaspora in Generating FDI Armenia,” CRRC, 2006. <http://www.crrc.am/store/files/RoleofDiasporainFDIinArmenia.pdf> Graph and table taken from: “Knowledge for Development: Knowledge Assessment Methodology, KEI Indicators,” The World Bank, 2006. <http://info.worldbank.org/etools/kam2/KAM_page4.asp> 253 254

115 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Benchmark Countries for Investment Climate Ireland255 Ireland is one of the most notable examples of a country where investment policies have been promoted by a strong business and investment climate and has had a major impact on IT sector development. The 1970s and 1980s saw a mass migration by Irish workers to the United States and other locations because of high unemployment and poor economic growth. In the mid-1980s, Ireland faced an unemployment rate of nearly 20 percent, and the highest rate of per capita debt in the world. In the 1990s, Ireland underwent an economic transformation, becoming one of Europe’s wealthiest countries per capita, coming third, only after Norway and Switzerland. Ireland’s proximity to the USA, its English-speaking population, and European Union (EU) membership has each contributed to its economic growth over the past fifteen years. But what makes Ireland’s case special is that without an established industrial base or significant natural resources, it has been able to maximize its indigenous advantages by developing an outstanding business climate and creating intelligent policies that resulted in attracting the most powerful IT multinationals into the local market. Ireland is consistently rated among the world leaders in international indexes on “openness to foreign investment,” “globalization,” and “ease of doing business.”

Ireland GDP components 256 GDP

Consumer spending

Government

Investment

Exports

Imports 0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Competitive environment

14.0%

Ireland is a leader in IT software exports, with 600 firms operating in the industry and employing over 19,000 people. Ireland’s IT sector is dominated by US and European multinationals, although some Irish companies (especially in telecommunications) are of a global scale. IT in Ireland attracts significant foreign direct investment (FDI).Nineteen of the top 25 computer firms in the world have manufacturing operations in Ireland. The majority of world’s leading IT companies have a substantial base in Ireland including Microsoft, Intel, Google, Dell, IBM, and Hewlett-Packard.

255 256

LawTax.net. <http://www.lowtax.net/lowtax/html/jiroltr.html> PriceWaterHouseCoopers, Economic Views, July 2007. <http://www.finfacts.com/biz10/PWCJuly2007.doc>

116 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate Nevertheless, according to global standards, local Irish IT-related companies are generally small in size in terms of the number of employees. Indigenous Irish IT companies tend to introduce innovative practices, outsourcing and managed services as opposed to consulting and development services to meet the demand of the market.

Trade, Tariffs, regulations and customs257

Ireland is part of the harmonized trade system of the European Union, where Common Customs Tariff (CCT) is applicable to goods from non-EU countries, including Australia. Certain products can only be sold in Ireland if they conform to the appropriate EU directives and display their certification, which affirms that the product meets designated EU standards. It is worth noting, especially for knowledge or database management products, that European standards for data protection are very strict. Licenses for telecoms hardware and services in Ireland are issued by the Office of the Director of Telecommunications Regulation. The Value Added Tax (VAT) rate of 21 percent applies to all telecommunications products irrespective of country of origin. Most duties are ad valorem (percent), based on the GATT258 Valuation Code which is approximately the Cost Insurance and Freight (CIF) value.

Fiscal and financial Incentives259

Ireland transformed its business climate and offered businesses: Competitive costs due to a young, well skilled workforce prepared to work for moderate wages; The Shannon Free Zone- tax-reduction initiatives: Upon certification the qualified company enjoys tax benefits of the Free Zone (10 percent corporation tax rate, VAT and customs duty exemptions, although). An environment free from unnecessary government intervention and focused on competition and deregulation; Infrastructure: including a good international airport with access to a wide number of European and North American destinations, and a good base of universities and institutes of technology; Partnership between government, labor, and industry; A keen interest in development and a concern to attract the best companies to locate in Ireland. Thought, the core factor of the sharp rise in Ireland’s IT investments is mainly considered the attractive fiscal incentives; Chief Executive of IDA Sean Dorgan stresses that besides tax benefits, there were factors such as knowledge, innovation, flexibility, and connectedness that had positively influenced on the Ireland’s high competitiveness. The important factors that had an impact on Irish Miracle besides the low tax rates were: Development of human capital. The high quality education, both secondary and university, based on IT knowledge and skills have always been an attractive factor for IT investment decision making. Strong policy of national investment in infrastructure. Becoming the part of EU enabled Ireland to access different broad markets. The very accession granted long term projects, such as six-year plans for infrastructural investments. Co-operation between lab and industry – a “social partnership”. With the ongoing assistance of the IT related unions and specialized educational institutions enabled Irish government to develop private and public cooperation. Targeted investment promotion. Ireland’s promotion of foreign direct investment has also been targeted, focusing on four sectors. The first sector is the IT industry: the information and communications technologies. Investors include Intel, Dell, IBM (now Lenovo), and Hewlett-Packard. The second major area is the pharmaceutical and healthcare industry. The third area is the international financial services industry. The sector that has been growing most in recent years

is the international service industry: software, customer service and support, and shared service activities.

LawTax.net. <http://www.lowtax.net/lowtax/html/jiroltr.html> General Agreement on Tariffs and Trade 259 IDA Ireland, Ireland’s inward investment promotion agency, 2007. <http://www.idaireland.com/home/index.aspx?id=659> 257 258

117 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Investment Promotion Entities

Ireland’s Investment Development Agency (IDA Ireland), an autonomous state sponsored agency funded through a government grant under the National Development Plan 2000-2006, holds the main responsibility for the promotion and development of FDI in the targeted sectors. Formed in 2000, the IDA already supported 1,094 companies operating in Ireland in 2002, employing 133,246 people, of which more than 50 percent are of the IT sector. In 2003, 39 IDA-backed IT companies undertook to invest over $120 million in R&D. Direct investment in Ireland totals more than $17 billion, in an economy with population of only 3.5 million people. Ireland’s example demonstrates that developing and transitioning countries can attract FDI by exploiting their competitive advantages and developing strong business and investment climates.260 A strong indicator of comparative advantage in IT industry is the IT sector trade balance.261 In 2002, a positive IT sector trade balance was achieved in only six OECD member countries, Ireland topping the list with 22.1, followed by Korea with 12.5. According to the OECD, in 2002 Ireland topped the list of countries with 40 percent of all merchandise exports being IT-related products. Moreover, 40 percent of all packaged software and 60 percent of all business software sold in Europe are produced in Ireland. As of 2002, Ireland was a world leader in software service exports in value (mainly computer and information services) and “in terms of the national share of software in total services exports (33 percent).”262 Ireland also offers attractive investment incentives to foreign investors. According to the Economic Freedom Index 2004, compiled jointly by the Wall Street Journal and the Heritage Foundation, although Ireland accounts for just one percent of the Euro-zone market, it receives nearly one-third of US investment in the EU. Ireland has retained its seventh position in the list of the world’s freest economies in 2006. The IMD World Competitiveness Yearbook 2006 ranks the investment incentives available in Ireland to foreign investors as among the best in the world.263

Israel Israel’s IT industry has developed due to the cluster strategy in 1990s.264 Israel’s IT clusters ranked in the top quartile globally by the State of Cluster Development Index of 2004-2006.265 In 2004, capital raised by the Israeli high-tech companies has exceeded the amounts raised by any European country.266 In proportion to its population, Israel has the largest number of start-up companies in the world. The number of start-up companies in Israel is ranked at the second place after the US (3,500 companies mostly in the IT sector).267 Israel’s highly educated population comes from over 100 countries across five continents, assuring multi-lingual and multi-cultural skilled work-force to IT sector. In addition to Israel’s two official languages, Hebrew and Arabic, many Israelis are fluent in English, as well as other languages such as Chinese, French, German, Italian, Russian, and Spanish. Israel has an extensive network of international trade and economic cooperation and agreements with countries throughout North America, Europe, and Asia including: free trade area agreements, R&D programs, protection of investments agreements and treaties for the avoidance of double taxation. Israeli trade policy continues to prioritize the expansion of its network of bilateral trade agreements following the thorough unilateral trade liberalization program, implemented in the early 1990’s to expose domestic industry to foreign competition.

IDA Ireland, Ireland Investment Promotion Agency. <http:// www.idaireland.com> The IT sector trade balance is calculated as IT exports minus IT imports divided by total manufacturing trade 262 Science, Technology & Industry Scoreboard, OECD, 2003, January 28, 2004 263 Heritage Foundation. <www.heritage.org/index> 264 Catherine de Fontenay and Erran Carmel, “Israel’s Silicon Wadi: The Forces Behind Cluster Formation,” Stockholm School of Economics, Jun. 2002, April 10, 2006 265 Lopez-Claros 264; Augusto Lopez-Claros, Irene Mia, “Israel: Factors in the Emergence of an IT Powerhouse,” Global IT. Report 2005-2006, World Economic Forum, Geneva, Switzerland: Palgrave Macmillan, 2006 100 266 Lopez-Claros and Mia 100 267 <http://www.lionpac.org/funfacts.shtml> 260 261

118 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate The government of Israel provided major impetus for the emergence and development of dynamic high-tech cluster. By means of investment incentives, capital market reforms, smart immigration policy, financing and other ancillary services, government has created favorable environment for investors.268

Foreign Direct Investment in Israel in US$ mln269 7000

6000

5000

4000

3000

2000

1000

0 1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Israel’s competitiveness270 Country Rank Total expenditure on R&D as % of GDP Number of mobile telephones per 1000 people Total public expenditure on education as % of GDP University education meets the needs economy Skilled labor availability Total R&D personnel in business per capita, full time work equivalent (FTE) per 1000 people

Israel’s Competitiveness 1st

2nd

3rd

Israel

Sweden

Finland

Israel

Luxemburg

Hong Kong

Denmark

Israel

Canada

Finland

Singapore

Denmark

Israel Iceland

Luxemburg

Ile-De-France

Israel

Investment incentives

To attract investment and to diversify investment geography, Israel has passed a Law on the Encouragement of Capital Investment (LECI) in 1959, which has served as a base for promoting both domestic and foreign investment to less developed regions of Israel. The law has been revised several times, with the last amendments being effective from of April 2005.

Another important factor was Israel’s army, which played a catalytic role in training and transforming young bright people into engineers and scientists, and establishing links between research teams created in army and the industry, as revealed in Lopez-Claros and Mia 91-92, and “Israel’s Technology Industry: Punching Above its Weight.” 269 Bank of Israel. <http://www.bankisrael.gov.il/firsteng.htm> 270 IMD World Competitiveness Yearbook, 2004. <http://www.imd.ch/about/pressroom/pressreleases/IMD-World-Competitiveness-Yearbook-2004.cfm?bhcp=1> 268

119 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate At the initial stage a result of the law, the country was divided into three National Preference Zones, without industry specific priorities. Zone A was comprised of Jerusalem, Jordan Valley, the Galilee, and the central and southern Negev. Currently, the zone is concentrated on attracting investment to high-tech companies and provides the most attractive incentives for investments. Zone B included Galilee and the northern Negev, while Zone C encompassed the rest of the country.271 Further, the law has provided foreign investors with special benefits and preferential treatment, as one of the goals of the policy was to attract multinational corporations to bring in foreign capital, know-how, innovative approaches, and for training local ITrelated workforce. As a result of the policy and availability of skilled human capital in IT sector, Israel has been able to position itself as one of the top global destination for multinationals, attracting high-tech giants such as Motorola, Intel, and IBM. Currently, Israel is among world leaders for highest amount of high-tech companies in the country. Further, the policy has resulted in drastic increases in FDI, especially to the IT sector.272

Fiscal and Financial Incentives273

The amended Law on the Encouragement of Capital Investment also addresses fiscal and financial incentives, including new automatic incentive. The incentive programs can be divided into 2 main groups: 1. The Grants program that is administered by the Israel Investment Center (IIC)274, as well as the Department of the Ministry of Industry, Trade and Labor. 2. The Automatic Tax Benefits program that is administered by the tax authorities.

Grant Program

The amount of the government grant is calculated as a percentage of the original cost of land development and investment in buildings (except of Zone C), in machinery and equipment. This cost includes installation and related expenses. The percentages are: Priority Zone A*

Priority Zone B

Industrial projects Up to $70 million

24%

10%

Industrial projects Above $70 million

20%

10%

Investment in hotels and other accommodations

24%

10%

Other tourist enterprises

15%

* Plus an additional grant of up to 8% for companies locating in the south (“Negev Law”)

Time to Completion

The grant scheme requires 20 percent of the approved program for industrial projects for 24 months from the date of approval and for 5 months for the investment program.

Lopez-Claros and Mia, 94,104. Moreover, according to Bank of Israel figures, between 1994 and 2003, the bulk of investment went to the electronics sector, which rose at an annual average growth rate of 20 percent, compared to 5 percent in traditional industries—such as food, textiles and so on—and no growth for the agricultural sector, as in Lopez-Claros and Mia, 94 -95, 99, 102 273 <http://www.moit.gov.il/NR/rdonlyres/299F02CE-FFE7-4705-B133 E2BB9074B47F/0/InvestmentincentivesintheLawfortheEncouragementofCapitalInvestment.pdf> 274 Invest in Israel, Ministry of Trade of Israel. <www.investinisrael.gov.il> 271 272

120 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

Tax Benefits Grant Program

Companies choosing the grant program receive tax benefits as well, for a period of seven consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income). Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25 percent of an approved enterprise’s owners are foreign investors, the enterprise is eligible for a 10-year period of tax benefits.

Tax benefits table (%) Company that is not an Approved Enterprise

Company owned by Foreign Investors 90 to100

74 to 90

49 to 74

Less than 49

Taxable Income

100

Company Tax

Balance

13.5

12.75

11.25

17.25*

23.5

27.75

36.25

38.25

Tax rates by ownership stake (in %)

Dividend tax: 15% of balance Total tax on distributed income * Based on a 25% standard dividend tax

Automatic Tax Programs

There are three types of automatic tax programs which include alternative tax program, priority area program, and strategic program.

1. Alternative tax program Priority Zone A: 10 years of complete tax exemption

Priority Zone B:

Zone C / Central Israel:

6 years of complete tax exemption and 1 year of tax benefits, 4 years for a foreign investor*

2 years of complete tax exemption and 5 years of tax benefits, 8 years for a foreign investor

2. Priority area program

For companies investing in Priority Area A, benefits include: a. Corporate tax rate of 11.5 percent b. Dividend tax rate of 15 percent, total tax rate of 24.5 percent For a foreign investor, the dividend tax rate is 4 percent and a total tax rate of 15 percent The benefit period is for seven years. If at least 25 percent of the company is foreign owned then the benefit period is 10 years. A. Greenfield (new) investment or at least $1.5 million B. Expansion- at least $1.5 million or an amount equal to the “approved rate” of the productive assets (the higher of the two) as in the table below: Value of productive assets (mil US$)

Required investment as % of the productive assets

Up 70

12%

70-250

250+

121 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate

3. Strategic program

This program is intended mainly for large multi-national companies meeting the following criteria: an annual turnover of at least $3 billion and a minimum investment of $130 million in the project itself. Location: Priority Area A Benefits include: a. Corporate tax – 0% (i.e. complete tax exemption) b. Dividend tax – 0% c. Benefit period – 10 years

Capital market reforms

There has been enabled several reforms aimed at developing capital market in Israel. The reforms resulted in the decrease of banks’ reserve requirement from over 30 percent in 1980s to 4 percent in the late 1990s; reduction of the obligatory investment share by pension and provident funds (largest institutional investors) in government bonds; modernization of the stock market turning it into one of the most technologically advanced stock markets in the world, and elimination of other administrative restrictions. Reforms of the financial system led to the establishment of many start-ups since credit was made more accessible. Israel has the highest high-tech start-up density in the world (about 2,500 start-ups per 6 million population), with a success rate of 50 percent, as compared to only 10 percent in the US.275

Immigration Policy

The Israeli government has developed various immigration policies that advocated the return of many highly qualified professional immigrants in 1980-1990. Most of these immigrants brought knowledge, talents and skills in both the managerial and technical fields. During the same period, more than a million immigrants have returned to Israel, including at least 100,000 scientists and engineers. Israel is currently considered as having the world’s highest number of engineers per capita.276 The government initiated various programs in order to integrate returning immigrants through training and specialized programs. Professionals from Silicon Valley or other technology centers were also stimulated to return and establish R&D centers in Israel. Through the government’s efforts, Israel was able to rise to the sixth country in the world in terms of the number of the USPTO277-granted patents per capita. The initiation of these policies and the utilization of business and social networks, as well as the powerful Diaspora, allowed Israel to become one of the most integrated countries with technological international markets.278 Israel’s government established several bi-national funds279 for IT and for specific R&D companies. The largest of which is considered BIRD Foundation280, that was established by the U.S. and Israeli governments in 1977 to generate mutually beneficial cooperation between the private sectors of the U.S. and Israeli high-tech industries, including start-ups and established organizations. BIRD provides funding covering up to 50 percent of project development and product commercialization costs BIRD supports approximately 20 projects annually with a total investment of around $11 million per year.281

Free Trade Agreements (FTA)282

Israel has signed several trade agreements reducing tariffs and other trade barriers between the participating countries. Israel enjoys FTAs with North America and most of Western Europe that cover close to 80 percent of Israel’s foreign trade. Israel has signed an association agreement with the European Union. The FTA provides for import-duties exemptions for most Israeli-made products arriving in the EU. Lopez-Claros and Mia. 94-96, 99 140 per 10,000 employees, two times higher than in the US and Japan 277 US Patent and Trademark Office 278 Lopez-Claros and Mia 92, 98 279 Britain (BRITECH), Canada (CIIRDF), Korea (KORIL), Singapore (SIIRD) and Australia (VISTECH) 280 BIRD Foundation. <http://www.birdf.com/> 281 Ibid 282 “International Economic Agreements,” Invest in Israel, Investment Promotion Center. <http://www.investinisrael.gov.il/NR/exeres/EB02E1F3-B574-46B7-9EE8-C5B838554A5C.htm> 275 276

122 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate Complementing its EU agreement, Israel has also concluded FTAs with the EFTA countries, as well as with Turkey. Across the Atlantic, Israel has signed separate FTAs with all three NAFTA member countries - U.S.A., Canada and Mexico. Israel has also signed an Agreement on Trade and Economic Cooperation with the Kingdom of Jordan which includes significant tariff reductions in bi-lateral trade.

Protection of Investment Agreement and Avoidance of Double Taxation283

The main goals of the international agreements are promotion and legal protection of the flow of capital for the productive sector with regard to direct foreign investment (FDI) on the basis of reciprocity. Israel has concluded agreements with over thirty countries, including Argentina, China, Germany, India, Kazakhstan, Poland, Romania, South Korea, Turkey, South Africa, among others. Treaties for the avoidance of double taxation are aimed at reducing tax impediments to cross-border trade and investment. Israel has concluded treaties with some forty countries.

International Institutions284

Israel is a member of the following institutions: Israel is a member of the WTO since its establishment in 1995. Israel is one of the signatories of the WTO Government Procurement Agreement (GPA), which offers mutual market access for government purchase to its members. Israel is an observer and active participant in several committees and working parties within the OECD, including the Industry Committee and the Committee on Science and Technology Policy. Israel is also a member of the 35 country Euro-Mediterranean Partnership, a framework for political, economic and social relations between European and non-European Mediterranean states.

Israel’s Trade Policy Goals

The goals of Israel’s trade policies are aimed at: Expansion of international agreements’ network to promote trade, facilitate market access and neutralize non-tariff barriers. Development of economic activities in old and new markets. Optimization of Israel’s export and investment promotion infrastructure. Deepening an attractive climate for potential investors. Establishing the competitiveness of Israeli industry in domestic and foreign markets.

Investment Climate Development in Armenia: From the Perspective of Benchmarking Countries Armenia prioritizes the attraction of foreign investments in the IT sector. The “Law on Foreign Investments,” adopted in July 1994, regulates foreign investments in Armenia and provides guarantees to foreign investors and protects investors from changes in the business related laws for five years. According to the law, the term foreign investor refers to any foreign state, foreign legal entity, foreign citizen, stateless person, citizen of the Republic of Armenia permanently residing out of the territory of the country, as well as any international organization which engages, in accordance with the legislation of the country of its location, in investment in Armenia. “Foreign investment” shall mean any type of property, including financial resources and intellectual values, directly invested by a foreign investor in commercial and other activities implemented in the territory of the Republic of Armenia to gain profit (revenue) or to achieve any other beneficial result. Currently the Armenian government is drafting a new “Law on Investments,” which is to include new mechanisms in the investment climate of Armenia. 283 284

Ibid “International Economic Agreements,” Invest in Israel

123 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate Taking into consideration the prioritizing of the investment climate in Armenia, two benchmark countries were short-listed by the experts of Global SPC based on the progressive and exceptional investment policies in the ICT sector over the past 30-40 years. Based on the thorough analyses of the investment climate in Ireland and Israel, several specific recommendations were generated by Global SPC experts. Investment Climate

Ireland

Armenia

Recommendation

Investment policy: Law “On Investments”

Government of Ireland has a policy which supports the development of foreign investments in the country. Irish policies include special incentives for investors such as the 10% ‘Manufacturing Rate’ of Tax that could be claimed by a branch of a foreign company as well as by companies established in Ireland operating in several IT related submarkets.

The RA “Law on Foreign Investments” is outdated already as the fiscal incentives provided to foreign investors are not affective started from 2008. Currently the Government of RA is drafting a new “Law on Investments,” which will include new mechanisms in the investment climate of RA.

Global SPC recommends to include in the current draft of the “Law on Investments” special part dedicated to specifying incentives for IT investors as a priority sector for Armenia, by considering it not as discriminative factor for other investors, but rather as a factor that will enhance the competitive advantage of the country in general that will bring further new investments from other sectors.

Investment promotion agencies

IDA Ireland (Industrial Development Agency) is an Irish Government agency with responsibility for securing new investment from overseas in manufacturing and internationally traded services sectors. It also encourages existing investors to expand and develop their businesses. IDA targets IT investors and as a result the country has the biggest number of IT global representation in Irish IT sector.

Armenian Development Agency (ADA) is the Investment Promotion Agency operating in RA. ADA was established in 1998 by the Government of the Republic of Armenia to facilitate foreign direct investments and promote exports. ADA facilitates FDI and promotes export in general, but it is not concentrated on promoting and engaging IT multinational companies into Armenian market.

Global SPC urges that ADA must prioritize the investment sectors and maintain a department (professional team with deep knowledge and information on international IT market) targeting IT global companies. ADA is recommended to develop capacity building, by optimizing IT general information and incentives accessibility to foreign investors. Global SPC recommends that ADA maintains a separate sub department dealing with promotion of Diaspora related IT investors, in order to foster the entrance of Diaspora-related investor in IT sector.

Government’s support in developing capital market

Ireland has a very developed capital market that has been one of the key factors for boosting IT foreign investments in the country.

The current state of the capital market and stock exchange of Armenia represents a serious hindering factor for attraction of foreign investments into IT sector. In April 2007, the largest Nordic stock exchange operator OMX AB agreed to buy the Armenian bourse as a long term investment. As a long term investment, OMX representatives may not develop aggressive, goaloriented strategy of RA capital market development.

Government’s support in reducing USD/ AMD sharp fluctuations

Ireland government provided all the conditions for IT foreign investors. Moreover, Ireland’s policies are adjusted to favor foreign investors.

USD devaluation during the previous several years represents a serious hindering factor for foreign IT investors operating in Armenia and for the new comers.

Global SPC recommends that the Government urges the CBA to consider the big investors complaints in the adjustments and development of the currency exchange policies.

Government’s support in developing IT sector free trade agreements

Part of Ireland economic and investment success was due to its accession to the EU. The other part was due to international free trade agreements relevant to IT sector that have also assisted to the progress of Ireland’s miracle.

Armenia has signed bilateral treaties on reciprocal promotion and protection of investments with 37 countries. Favorable conditions have been created for all kind of foreign investors in the RA. Thus, there are no specific trading incentives for IT market participants.

Global SPC recommends developing a system of trade representatives of RA abroad, one of the main tasks of which should be attraction of foreign investments by precise and goal oriented targeting of investors in ICT sector. Introduction of high standards of corporate governance.

Global SPC recommends RA government to consider the development of secondary market as a very high priority goal. As soon as secondary market is established in Armenia, it must be promoted and linked to international markets, especially from RA IT companies’ perspective.

124 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Benchmarking of Investment Climate Investment Climate

Ireland

Armenia

Recommendation

Government’s support in constant development of countries positioning indexes285.

Ireland is ranked among the most attractive countries in terms of international indexes provided by the WB, HF, WEF, Moody’s, Fitches. Ireland provides the most favorable risk insurance for foreign investors. Ireland has become the most attractive branded country that justifies the high quality of its IT products and services internationally.

The factors that hinder a better position for Armenia in different world rankings (corruption rate, administrative barriers, many required documents during the registration process etc). Armenia doesn’t pay much attention position itself as a developed high tech hub for developed and developing countries. Also, development of insurance system in accordance with the international standards in order to insure investments against possible risks.

Global SPC urges that state policies pay more attention on a better positioning of the country on the international IT market based on the outlined competitive advantages of Armenian IT cluster. The promotion of the country as a free and attractive brand name in terms of IT investments attractiveness must become a prioritized goals for the country.

Policies on investment incentives - fiscal - financial

Government of Israel adopted the “Law on The Encouragement of Capital Investment”, adopted in 1959 acted as groundwork for investment incentives directed at stimulating domestic and foreign investments especially in the most remote and less developed regions of Israel. The Law (LECI) divided the country into three National Preference Zones. Jerusalem, Jordan Valley, the Galilee, the central and southern Negev presented zone A concentrating high tech companies. Lower Galilee and the northern Negev were included in zone B, and C represented the rest of the country. Investment incentives (fiscal and financial) were the most generous for companies situated in Zone A (IT sector).

The “Law on Foreign Investments” adopted in 1994 is outdated already as the fiscal incentives provided to foreign investors are not affective started from 2008. Armenian government doesn’t provide specific fiscal and financial incentives for specifically foreign investors in IT sector. Currently the Government of RA is drafting a new law “On Investments”, which will include new mechanisms in the investment climate of RA.

Investment promotion specific foundations/ Diaspora related investors targeting

BIRD was established by the U.S. and Israeli governments to generate mutually beneficial cooperation between the private sectors of the U.S. and Israeli high tech industries, including start-ups and established organizations. BIRD provides both matchmaking services between U.S. and Israeli companies, covering up to 50 percent of project development and product commercialization costs.

As a result of strong diaspora, most of risk capital in Armenia is attracted through individuals (business angles). Still, the potential of Diaspora related investments in IT sector may be several times more than it actually is. Government of RA does not initiate any specific actions to attract the diasporans to IT industry. Initiatives include Armenia Diaspora 3rd Conference.

Global SPC urges Armenian government to initiate activities similar to those in Israel to create relations between foreign individual investors and funds and attract foreign capital to IT start-ups. For this purpose foundations in the countries where the biggest Armenian Diaspora is accumulated are recommended to be established, which will connect Armenian and foreign IT businesses and coordinate business relationship between the two parties.

Government’s support in developing capital market

TASE286 is controlled by the Securities of Law (1968), and is under direct supervision of the Israel Securities Authority (ISA). After the US and Canada, Israel has more companies listed in NASDAQ than any other country in the world. About 70 Israeli companies listed in NASDAQ and about 30 listed in European stock exchanges.

The current state of the capital market and stock exchange of Armenia represents a serious hindering factor for attraction of foreign investments into IT sector. In April 2007, the largest Nordic stock exchange operator OMX AB agreed to buy the Armenian bourse as a long term investment. As a long term investment, OMX representatives may not develop aggressive, goal-oriented strategy of RA capital market development.

Global SPC recommends dividing Armenia in investment zones and considering the distinct specializations and incentives for each zone in the currently drafted law “On Investments.” Based on the experience of Israel, Global SPC recommends to divide country territory into three main zones A,B,C. Zone A may include the most prioritized sectors like IT and telecommunications, zone B and C the rest of important sectors. Global SPC recommends that the cities for Zone A be the ones that have always been technological centers for Armenia, also during the soviet period such as Charentsavan, Hrazdan and Abovyan.

285286

285 286

“Doing Business”- World Bank, “Economic Freedom”-Heritage Foundation, “Network Readiness Index”-World Economic Forum, “Globalization Index”. Israel Stock Exchange or the Tel Aviv Stock Exchange (TASE).

125 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

General Recommendations

he state of the Armenian IT sector can be described as a “self-matured” achievement directed mostly to outsourcing activities. Nevertheless, the sector holds significant potential for growth but lacks substantial components that would spur the development of Armenian IT production in the international arena. The major pitfalls that Armenia’s IT sector faces are concentrated in four major groups which are: the development of IT-related R&D policies, strengthening and improving the capacity of IT-related human capital, creation of financial and fiscal policies, and facilitation of IT-specific investment attraction. Currently, Armenia needs active and aggressive IT-related policies that would establish Armenia as one of the leading IT countries. Armenia should aim to become the top IT producer within the Commonwealth of Independent States (CIS), as the cases of Ireland in Europe, Israel in Middle East, and Egypt in North Africa have demonstrated. In the long run, Armenia should develop IT sector infrastructure based on the best practices applied by the above mentioned leading IT countries. The ultimate goal for Armenia should be two-fold: to emerge as a leader among developing countries and to establish a global clearly-recognized specialized IT brand. To develop a strong IT sector endowed with “spill-over benefits” capable of spurring increased domestic productivity, expanding job creation, and strengthening R&D capacities, as well as bolstering related economic growth in other sectors of the Armenian economy, there is a need for identifying the major weaknesses that the sector and related components face. The creation of a strong E-society and generation of IT-product demand are among these major related components contributing to the graduation of Armenian IT products and services to a higher stage of international competitiveness and to the solidification of Armenia’s IT brand globally. The fundamental weaknesses within these interrelated components include but are not limited to: E-Society

Market Demand

 Incomplete legislative framework and weak eregulations

 Lack of IT priority segments (undefined development strategy)

 Limited financing for IT sector, absence of venture capital

 Incomplete EGovernment mechanisms

 Insufficient Diaspora involvement in demandcreation

 Lack of financial incentives to attract investments

 Low level of local and international demand for the development of IT products

 Lack of incentives for promoting R&D activities in IT-related production

 Lack of specialized IT education, limited IT specific workforce and opportunities

 Weak Public-Private Partnerships

 Low level of E-Product demand and limited EServices  Limited Internet and broadband penetration, lack of unified platforms, underdeveloped facilities  Lack of public awareness and low level of E-literacy  Limited financing for ESociety initiatives

 Ineffective protection of Intellectual Property Rights for innovative and IT-related products (high level of piracy)  Lack of international and bilateral agreements and programs  No technology transfer policies  Armenian currency appreciation

IT Production Sector

 Ineffective universityindustry cooperation 

Insufficient presence of incubators and technoparks; absence of special free zones

 Incomplete IT-related laws and regulations  Burdensome business barriers  Absence of adequate capital and stock markets

126 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

General Recommendations

IT Sector Drivers In order to forge a competitive IT sector in Armenia, there are five critical “drivers” or avenues necessary to sustain the process of building a strong IT sector. These five key drivers include: Key Drivers

Key Steps

Clustering through Sector Segmentation and Prioritization

Based on thorough analysis of the existing IT production sector, identify 3-5 priority IT production segments, which would be targeted as the primary areas for attracting capital, providing specialized education, and generating exports. These segments might in future initiate the creation of IT clusters targeted at increasing the effectiveness of the sector

Legal Framework and Regulations

To develop effective regulatory environment through IT-related laws and regulations, such as law on R&D. Creation of effective enforcement mechanisms and implementing bodies. Implementation of IPR protection mechanisms for IT products. Implementation of one-stop-shop mechanisms for easing business barriers and burdens

Specialized Education/ Availability of Workforce

Creation of basis for assuring demand-driven specialized IT education and segment-specific workforce through improved IT-related educational base (introduction of demand driven IT-related curricula in major universities, creation of public-private partnerships in empowering the educational system, establishment of public-private vocational IT professional training centers);

Public Private Partnerships

Creating public-private partnerships for attraction of seed and venture capital to the sector, creation of university-industry transfer centers for protection and commercialization of R&D products and inventions, development of incubators and techno-parks;

Sectoral Financing and Incentives

Creating venture capital funds (with public funding at initial stage), mobilization of business angel networks to promote the development of start-up IT companies; implementation of possible tax incentives for IT sector companies; initiation of financial and fiscal incentives for promotion of R&D activities. Organization of bilateral and international agreements for joint IT-related and R&D projects and attraction of funding to IT sector.

Objective To implement a long-term strategy aiming at developing Armenia’s IT sector competitiveness through a multisided (comprehensive) approach involving the participation of all stakeholders and use of specific best practice mechanisms based on the model of Israel or Ireland.

Means Adopting and applying the lessons learned from the experience of benchmarked countries for IT sector development initiatives.

127 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

General Recommendations

IT Sector Organizational Structure Global SPC recommends the formation of a detailed organizational and functional scheme to be applied to the management of the Armenian IT sector. As shown in the diagram above, this proposed scheme consists of a hierarchically organized infrastructure endowed with strong interrelated links and key management bodies, formed on the basis of the best practices of select benchmark countries. Below is presented a detailed organizational and functional scheme which provides a full picture of IT management model’s components and its interrelations.

IT sector management Detailed Organizational and Functional Scheme IT demand through Foreign Investments and Agreements

State IT and R&D Funds, IT demand

Foreign Сommunication Body

E-Society(egovernment projects)

Local Industry

IT local demand, funding (risk capital, government funding)

IT sector Executive Body Coordination of Agencies, Industry cooperation IT and R&D information data Center

Incubators Agency

Funds, Incentives, Projects

Techno-Parks Agency

Office of Chief IT R&D Scientists

Technology Transfer Center Agency

IT R&D products, Reports & information

IT Development Support Council

Public Sector Free Zone Private Sector IT and R&D Companies

NAS RA (3-5 institutions)

Universities

Institutes IT R&D clusters

IT R&D faculties

Incubators

Private Sector IT and R&D Companies

IT R&D Laboratories

Techno Parks Technology Transfer Centers SMEs, LEs

Stock Exchange

More specifically, the recommended IT infrastructure consists of the following core components:

128 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

General Recommendations Foreign Communication Body – a channeling body similar to the Ireland’s Ireland Development Agency, to attract international IT R&D demand (leveraging bilateral agreements with benchmark countries, international IT R&D programs), leading foreign technology firms, and international funds (including FDI from Diaspora), and workforce exchange. IT Sector Executive Body – an executive body empowered to facilitate the implementation of IT policy, infrastructure and manpower development, and oversight the monitoring and evaluation process. It also serves as a manager for: IT R&D information centers crafting and filing obligatory reports and serving as a reliable and informational point for Armenian IT sector statistical and analytical data, and which organizes international and local IT R&D workshops, conferences, seminars and S&E exchange programs; The coordination of subordinated agencies and bodies acting for the public and private sector: EIF- Global Agency (incubators coordinator), TP Global Agency (techno-parks coordinator), TTC Global Agency (technology transfer coordinator); Office of Chief IT R&D Scientists (like the OSC in Israel), which is the buffer and filter between IT demand and funds flows from abroad, state and local industry, and the IT supply from the public and private Sectors. It analyzes and suggests prioritized IT development directions to the ITDSC and periodically reports on the state of the IT sector; establishes the criterion for financial, fiscal and other incentives granted to local IT firms and foreign investments; defines the free zones on the basis of prioritized clusters, geographical location (cities, R&D institutions, universities) and allows the entrance of firms into free zones based on the established criterion; oversees incentives to local industry for R&D demand generation for local IT firms and manages the venture fund created from the inflows of “Innovation Tax” from industry; and selects (through open tender) IT firms for E-government projects. Public Private Partnership: industry-university cooperation, commercialization of products; IT Development Support Council (ITDSC) – as the intersectoral link between the government, public, and private sectors, responsible for carrying out the interaction between the sectors and coordination of multi-stakeholder dialogue for decision-making. The body may also serve as the primary responsible actor for the monitoring and evaluation of IT-related policies.

Public and Private Sectors, Local Industry Public sector includes universities, which provided the results from the PPP cooperation with leading IT companies (specialized educational programs, international R&D projects and specialized manpower for prioritized IT clusters), local industry (commercialization of products); The Armenian National Academy of Sciences and its affiliated institutions, selected on the basis of IT sector priorities. These institutions may organize and manage between three and five prioritized IT clusters with the appropriate infrastructure - “Institution-Incubator-Techno Park-Technology Transfer Center.” The clusters designated as a Free Zone by Office of Chief IT R&D Scientists, which sets the list of applied incentives and criterion for firms in this zone. The incentives can be applied differentially (in terms of both values and terms) on the basis of Free Zones’ hierarchical structure defined by the Office. Private sector organized on the basis of the chain of growing SMEs (Incubator level, 2-3 years), formed or existing private IT firms (Techno-parks level) and separate IT firms, which accomplish prioritized IT projects. Technology transfer centers provide the commercialization process for the whole public and private sector and industry. Local industry involved in IT-related R&D in an obligatory way, through the “Innovation Tax” (venture fund managed by the Office of Chief IT R&D Scientists) or with three to five IT R&D projects involving the public or private sector via the Office of Chief IT R&D Scientists.

129 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Monitoring and Evaluation

or the development of the Armenian IT sector, there is an essential need to formulate and implement a consistent and continuing monitoring and evaluation mechanism capable of ensuring IT sector empowerment. Moreover, such a continuous monitoring and evaluation mechanism must be in place for all stages of strategic development and implementation, and as a core component of IT policy.

Monitoring and evaluation (M&E) activities are also applied to addressing the priorities and goals set forth in the Strategy, serving to evaluate the efficacy of proposed measures. Given the complexity of the scope of IT policy implementation, which generally covers a period of between five and ten years, the process of policy implementation and its evaluation requires the active involvement of all relevant stakeholders, in all stages. The set of policy evaluation tools should also be centered on monitoring the policy goals, strategic priorities, key initiatives and specific measures set forth in the IT Master Plan. Therefore, the availability of well-designed monitoring and evaluation mechanisms will enable both stakeholders and decision-makers alike to timely diagnose possible deviations from the major goals and priorities, thus enabling the identification of possible steps to improve the quality of proposed measures during the implementation process. Moreover, effective monitoring and evaluation mechanisms within benchmark countries have tended to concentrate on a definition of clear procedures for M&E, the identification of specific indices, the establishment of a reasonable time frame, and the creation of budgetary mechanisms. National IT policy reviews further help policymakers to revise and formulate policies taking into account the evolution of IT sector components and their impact on the overall information economy, in the context of their overall development plans. IT policy reviews also serve as a basis for a continuous adjustment of existing IT-related plans, policies, and implementation mechanisms. The following principles should, therefore, be taken into account when developing IT policy monitoring tools: Policy implementation as a process, whereby a large number of measures envisaged in the policy exert a long-term impact, both in terms of the process of its implementation and in regarding its effects. Moreover, there is an inherent risk of inappropriate or incomplete assessments of the impacts of certain measures in relation to the projected goal, as well as for the inability to fully comprehend the projected effects; Taking into account that the government has prioritized IT-sector development as a major driver for overall economic growth of Armenia, there is a need for a more proactive approach to the monitoring and evaluation of the process through a comprehensive and ongoing commitment to the policy implementation; The implementation should foster the maximum participation of all institutions and stakeholders involved in policy implementation, including an active institutional monitoring system; To achieve greater efficiency, there is a need to develop mechanisms to measure budget conformity, with an identification of the financial and budgetary impact through different stages, and to ensure the appropriate allocation of funds accompanied by a thorough cost/benefit analysis; Develop a mechanism to link IT policy implementation plans with human resource capacities and other available resources, in a realistic approach. The success of IT policy is largely defined by policy achievements and IT penetration in the broader context of all related economic players, such as the industry sector, IT companies, and households, for example. The cooperation and alliance between the public and private sectors is more than obligatory in this sense and offers one effective measure for achieving success through forging cooperation among all ministries and bodies.

130 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Monitoring and Evaluation The government should also concentrate on involving the State Statistical Agency and relevant ministries to provide data in order to: Measure the success of the formulation and implementation of IT policies; Identify the effectiveness of such policies; Establish links between IT policies and the performance of specific related sectors; Monitor IT sector growth and the use of ICT tools over time; Conduct research and analyze the impact of IT on productivity and job creation, economic growth, trade, enterprise development, and educational quality. As demonstrated below, the UNCTAD introduced a relevant model framework for the formulation of national strategy assessment mechanisms for reporting and monitoring the implementation and institutional mechanisms that also integrated ICT policy within successful IT policy.

Assessment of IT Sector Master Plan IT Environment

ICT Policy Framework

Implementation and Institutional Framework

IT infrastructure and Objectives and priorities Consistency of IT policy access ICT Infrastracture with National development Access and use of ICT by Legal Framework plans Institutional set-up individuals Human resources skills for implementation Access and use of ICT by E-Government Financial resources IT businesses IT Trade and Investment policy implementation Trade of IT goods and policy R&D services Indicators of Achievement - identification of success factors, best practices, lessons learned and challenges ahead Transparent and continuous consultation process with all involved stakeholders budget assessment

Recommendations There are specific aspects of the evaluation method that can be applied to Armenia, including the application of both a “checklist” approach and a dual system of qualitative and quantitative metrics. More specifically, there are three levels of monitoring and evaluation indicators. The first set, of “soft indicators,” includes qualitative values such as the perception and awareness of the usage and accessibility of ICT services. So-called “hard indicators” comprise the second set of indicators and includes more concrete quantitative factors ranging from the IT sector in proportion to economic statistics (GDP, labor market, productivity, etc.) to national figures for Internet penetration, broadband and Wi-Fi availability, and e-literacy. The third set, of “binary indicators,” consists of an analysis of the positive-negative state of key areas, such as measurable quantities and qualities of the IT sector. Based on these three sets of specific indicators, the following are four broad set of national indicators to be used for evaluating the success of IT policy and measuring outcomes at different stages of implementation. These four sets of general indicators are also bolstered by a narrower and more defined toolbox of metrics.

131 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Monitoring and Evaluation

IT contribution to the economy

IT growth, as a proportion of overall economic expansion; IT employment, as a ratio of total employment; Rate of increase of IT diffusion among SMEs; Improvement of the country’s IT ranking by international ratings.

Competitiveness of the country’s IT industry

Ratio of IT expenditures to GDP; Total value of software (domestic and export); Share of Armenian software industry in the world market; Increase in the proportion of the IT sub-industries to GDP.

IT and community development

Value of local content of IT products and services in Armenia; Amount of local traffic in relation to total Internet access; Increase in the creation and use of Armenian domains.

IT role in human resource development

Increase in the use of e-learning; Availability of IT tools and experts in both formal and non-formal education systems; Ratio of knowledge workers to the total workforce;

In addition to the four sets of general indicators outlined above, there is an additional set of narrower and more defined toolbox of metrics. These narrower metrics, which stem from a set of internationally accepted strategic indicators, should be considered for measuring the effectiveness of the IT policy from all aspects throughout the larger process, looking at each component of Armenia’s progress in implementing the Master Plan. In order to conduct a more holistic policy assessment and evaluation, it is recommended for Armenian policy makers to select from the following list of proposed indicators designed by Global SPC, based on the goals and priorities set by Armenia’s Master Plan:

Local IT sector competitiveness

Number of qualified researchers, software developers, and certified professional developers; Total value of government IT projects with private sector involvement; Government’s IT budget (for both hardware and software); Expansion of software market within the country; Total value of exported software; Total value of exported IT products; Ratio of domestic software development and open-source software systems to total value of software market; Increase in number of software entrepreneurs and market capitalization; Decline in imported software; Increasing demand for IT recruitment; Increase in wages for IT professionals; Number of open-source training and service centers.

132 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Monitoring and Evaluation

R&D capability enhancement

Expenditures on IT R&D in both the government and private sectors; Usage of locally assembled PCs; Usage of locally developed software; Number of locally assembled lower-cost PCs; Number of network computing courses taught in universities; Number of graduate students in network computing; Number of software developers with skills in network computing.

IT Human Capital development

Size of workforce that can access ICT; Size of workforce that can conduct ICT-related research; Number of graduates in any levels that can utilize ICT; Ratio of computers to the number of students at all levels; Computer courses taught at every educational level; Number of people attending and completing certified professional training courses; Number of people completing ICT training courses from the Ministry of Labor; Number of communities that can apply ICT to their local economy.

IT sector expansion to international markets

Market value of e-commerce; ICT employment in every industry; Increase in the ratio of IT employment to overall employment; IT investment in every industry; Ratio of ICT expenditures to the total increase in economic value; Number of people with IT skills training from the Ministry of Labor.

IT in SMEs Operations

Number of SMEs utilizing ICT in back-office systems; Number of SMEs utilizing ICT in mainstream operation; Number of SMEs joining supply chain management; Value of ICT investment by SMEs; Number of SMEs listed on government portal sites; Number of SME websites.

IT in government administration and services

Number of government agencies fully utilizing ICT in their administration; Internal administration systems within government agencies utilizing ICT; Number of basic e-government services at any levels; Number of advanced e-government services at all levels; Government services that are linked to other agencies; Government procurement by electronic means; Number of government agencies with secure information systems and security-code systems (national security-related bodies in particular).

133 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

List of References

168 Zham. “Investors lose millions because of USD devaluation.” Yerevan. 24 Dec. 2006. <http://www.168.am/en/articles/3824> Advisory Council for Science, Technology and Innovation. “Promoting Enterprise–Higher Education Relationships.” Mar. 2007. <http://www.sciencecouncil.ie/reports/acsti070404/forfas070404_enteprise_higher_education_report.pdf > American University of Ireland. “IT Labor Market.” 25 Jul. 2007. <http://www.american.edu/carmel/jw6194a/Korea_files/labor.htm> Armeniadiaspora.com. <http://www.armeniadiaspora.com/conference2006/> Armex. “Armenian Stock Exchange.” <www.armex.am> Bank of Estonia. “Balance of payments (USD m), long version.” <http://www.eestipank.info/dynamic/itp1/itp_report_1a.jsp?reference=5 44&startDay=1&startMonth=1&startYear=1999&endDay=1&endMonth=12&endYear=2005&reference=541&className=EPSTAT1&ste p=11&nrOfQuarter=0&lang=en&submit=SHOW> Bank of Israel. <http://www.bankisrael.gov.il/firsteng.htm> Bennett, Madeline. “IT industry is losing the feminine touch.” IT Week. 14 Mar. 2007. <http://www.computing.co.uk/itweek/ news/2185446/industry-lacks-feminine-touch> BIRD Foundation. <http://www.birdf.com/> Braliev, Alzhan and Tarmo Kalvet. Archimedes Foundation. Center for International Development. Harvard University. <http://www.cid. harvard.edu/cr/profiles/Estonia.pdf> Breznitz, Dan. “Innovation and the State; Political Choice and Strategies for Growth in Israel, Taiwan, and Ireland.” Yale University Press. New Haven and London. 2007. <http://www2.sa.unibo.it/seminari/Papers/20070522%20Breznitz.pdf> Breznitz, Dan. “Innovation-Based Industrial Policy in Emerging Economies? The Case of Israel’s IT Industry.” Article 3. Volume 8. Issue 3. The Berkeley Electronic Press. 2006. <http://www.bepress.com/cgi/viewcontent.cgi?context=bap&article=1155&date=&mt=MTE4NjE zNDAxNw%3D%3D%0D%0A&access_ok_form=Continue> Budde.Com. “South Korea Broadband Market: Overview and Statistics.” Jul. 2007. <http://www.budde.com.au/Reports/Contents/SouthKorea-Broadband-Market-Overview-Statistics-3775.html?r=51> CORDIS. “Ireland.”8 Mar. 2006. <http://cordis.europa.eu/ireland/> Caucasus Research Resource Center. “The Role of the Diaspora in Generating FDI Armenia.” 2006. <http://www.crrc.am/store/files/ RoleofDiasporainFDIinArmenia.pdf> De Fontenay, Catherine and Erran Carmel. “Israel’s Silicon Wadi: The Forces Behind Cluster Formation.” Stockholm School of Economics. Jun. 2002. Division for the Advancement of Women. 2002. <http://www.un.org/womenwatch/daw/egm/ict2002/reports/Paper-YPaik.PDF> DOEACC Society. 2005. “Corporate Profile.” <http://www.doeacc.edu.in/jsp/corporate_profile.jsp>

134 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

List of References Economist Intelligence Unit of Israel. “The e-readiness rankings.” 2007. <http://globaltechforum.eiu.com/index.asp?layout=rich_story&c hannelid=4&categoryid=29&doc_id=10599> Economist Intelligence Unit. “The means to compete: Benchmarking IT industry Competitiveness.” 5 Aug. 2007. <http://www.bsa.org/~/ media/12EB624EB30C486FBEA0A4B653DD5E89.ashx> Economist Intelligent Unit of Israel. “Israel’s Technology Industry: Punching Above its Weight.” 12 Nov. 2005. <http://www.eiu.com > Enterprise Incubator Foundation “Armenian Information Technology Sector: Industry Growth Model.” 2007 <http://www.eif-it.com/edit/ news_admin/news_images/1_109_big.pdf> Enterprise Ireland. <http://www.enterprise-ireland.com/> European Commission. “Key Figures 2003-2004.” <http://ec.europa.eu/research/era/pdf/indicators/benchmarking2003_en.pdf> Friedewald, Michael, Dr. “Benchmarking national and regional policies in support of the competitiveness of the ICT sector in the EU.” Final Report prepared for the European Commission. Fraunhofer Institute Systems and Innovation Research. Karlsruhe. Germany. Nov. 2004. <http://ec.europa.eu/enterprise/ict/policy/doc/ict-pol-finrep.pdf> Government of the Republic of Armenia. “Anti-Corruption Program.” <http://www.gov.am/enversion/programms_9/korup_prog.htm> Gurdjian, Pierre and Andre Andonian. “Key Levers for Productivity Improvement in Armenia.” McKinsey & Company presentation to Armenia 2020 conference. Yerevan. Armenia. 25 Oct. 2003. <http://www.armeniadiaspora.com/projects/arm2020/McKinsey_ Productivity.ppt> Gwartney, James and Robert Lawson, with William Easterly. “Economic Freedom of the World 2006 Annual Report.” The Fraser Institute. <http://www.freetheworld.com/2006/EFW2006complete.pdf> Heritage Foundation. <.www.heritage.org/index> Higher Education Authority. “The Programme for Research in Third Level Institutions (PRTLI): Transforming the Irish Research Landscape.” <http://www.hea.ie/uploads/pdf/HEA%20PRTLI%20Directory%20-%20Section%202.pdf> History of South Korea under Special 301 review. <http://www.iipa.com/pdf/2007SPEC301HISTORICALSUMMARY.pdf> ICT Ireland. Key Industry Statistics.” <http://www.ictireland.ie> IDA Ireland. 2007. <http://www.idaireland.com> IDA. “Strategic Manpower Conversion Programme (Infocomm) Facilitator Scheme.” 17 Oct. 2000. <http://www.ida.gov.sg/News%20 and%20Events/20061117113739.aspx?getPagetype=20> Idris, Kamil. “Intellectual Property – A Power Tool for Economic Growth.” World Intellectual Property Organization (WIPO). 23 Mar. 2005. <http://www.wipo.int/about-wipo/en/dgo/wipo_pub_888/index_wipo_pub_888.html> IIPA. “International Intellectual Property Alliance 2007 Special 301 Report: South Korea.” 12 Feb. 2007. <http://www.iipa.com/ rbc/2007/2007SPEC301SOUTHKOREA.pdf> IMD World Competitiveness Yearbook. 2004. <http://www.imd.ch/about/pressroom/pressreleases/IMD-World-CompetitivenessYearbook-2004.cfm?bhcp=1> Industrial Development Agency of Ireland. <http://www.idaireland.com/home/index.aspx>

135 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

List of References Infocomm Development Authority. “Infocomm Manpower for 2006.” 19 Jun. 2007. <http://www.ida.gov.sg/doc/Publications/Publications_ Level2/20061205092557/ASInfocommManpower06.pdf> Informatization Promotion Committee of South Korea. “Informatization White Paper 2006.” <http://www.ipc.go.kr/ipceng/public/public_ view.jsp?num=2360&fn=&req=&pgno=1> International Monitory Fun. “International Financial Statistics.” <http://www.factset.com/www_92.aspx> Investment Promotion Center. “International Economic Agreements.” Invest in Israel. <http://www.investinisrael.gov.il/NR/exeres/ EB02E1F3-B574-46B7-9EE8-C5B838554A5C.htm> Israeli Government Presentation. “Seminar on Technology Transfer: The Israeli Experience.” Helsinki. Finland. September 2006 <http://akseli.tekes.fi/opencms/opencms/OhjelmaPortaali/ohjelmat/PINTA/fi/Dokumenttiarkisto/Viestinta_ja_aktivointi/Seminaarit/ Loppuseminaari_2006/Cohen_Helsinki_Seminar.pdf> Israeli Venture Association (IVA). “VC In Israel – Today.” <http://www.iva.co.il/content.asp?pageId=38> IT Development Support Council. <http://www.itdsc.am/home/oalsgoals/> Korea Industrial Technology Association. <http://www.koita.or.kr/eng/data/Brochure.PDF> LawTax.net. <http://www.lowtax.net/lowtax/html/jiroltr.html> Lopez-Claros, Augusto, Irene Mia. Invest in Israel. “Israel: Factors in the Emergence of an ICT Powerhouse.” <http://www.investinisrael. gov.il/NR/rdonlyres/2672AEBF-0846-4CBB-87E9-9211D2CC2B4E/0/IsraelFactorsintheEmergenceofandICTPowerhouse.pdf> Lopez-Claros. “Armenian Information Technology Sector: Industry Growth Model.” McKinsey & Company. “Key Levers for Productivity Improvement and Software and IT Services Sector Potential.” 17 May 2003. Armenia 2020: Studies. Reports and Analysis. Yerevan. 2005 Microsoft. “Microsoft Singapore and Central Singapore CDC Launch First Community IT Education Initiative.” 10 May 2004. <http:// www.microsoft.com/singapore/mssg_docs/1655.aspx> Ministry of Commerce, Industry and Energy. “ICT in Korea - Achievements, Implications, and Opportunities.” Washington. D.C. 19 May 2005.<http://www.immr.org/Downloads/Dr_%20Phil%20Hendrix%20-%20ICT%20in%20Korea%20-%20U.S.%20-%20Korea%20 Business%20Forum%20-%20May%202005.pdf> Ministry of Communications and Information Technology of India. “Advantage India.”<http://www.mit.gov.in/download/advantage.pdf> Ministry of Communications and Information Technology of India. “Explore IT in India.” <ttp://www.mit.gov.in/default.aspx?id=99> Ministry of Communications and Information Technology. “Information Technology: Annual Report 2006/2007.” <http://www.mit.gov.in/ download/annualreport2006-07.pdf> Ministry of Education and Science of the Russian Federation. “Science and innovations development strategy of Russian Federation for the period up to 2015.” Moscow. 2006. Ministry of Industry, Trade and Labor of Israel. “The Office of the Chief Scientist - An Overview.” <http://www.moit.gov.il/NR/rdonlyres/ CD3AF19B-2619-415B-B2F4-B747101C5202/0/TheIntellectualCapital3550.pdf> Ministry of Trade and Economic Development. Republic of Armenia. <http://www.minted.am>

136 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

List of References Ministry of Trade of Israel. Invest in Israel.<www.investinisrael.gov.il> Nagala, Sarala V. “India’s Story of Success: Promoting the Information Technology Industry.” Stanford Journal of International Relations. 24 Jul. 2007. <http://www.stanford.edu/group/sjir/6.1.05_nagala.html> National Assembly of Republic of Armenia. <http://www.parliament.am/l?lang=eng> National University of Singapore. “Speech by Professor SHIH Choon Fong.” Infocomm Development Authority. <http://www.nus.edu.sg/ president/speeches/2001/issopening.htm> NERA. “Economic Solutions to Global Communications Issues.” <http://www.nera.com/image/BRO_Communications_COM058_ FINAL_revBP.pdf> OECD. “Korea.” 2001. <http://www.oecd.org/dataoecd/9/35/1952762.pdf> OECD. Science. Technology & Industry Scoreboard. 28 Jan. 2004. Organization for Economic Cooperation & Development (OECD). “Measuring the Information Economy.” Paris. 2002. Planning Commission Government of India. “Tenth Five Year Plan 2002-07.” <http://planningcommission.nic.in/plans/planrel/fiveyr/10th/ volume2/v2_ch7_4.pdf> PriceWaterHouseCoopers. Economic Views. Jul. 2007. < http://www.finfacts.com/biz10/PWCJuly2007.doc> Republic of Armenia governmental decree # 691-A, adopted on 17 Jun. 2003. “Republic of Armenia Government Program: Economic Issues.” Republic of Armenia ICT Assessment Report. SETA Innovative Enterprise Solutions. 15 Jul. 2000. <http://www.usaid.gov/locations/ europe_eurasia/pdfs/armeniaictpub.pdf> S.J. Chang. “Situation of the Female Workforce in Korean Information.” Ministry of Gender Equality. 2001. <http://www.itu.int/ITU-D/ gender/documents/Asia-PacificlWrkshopKorea/Doc3-3.pdf> Schriftenreihe der Rundfunk und Telekom Regulierungs-GmbH. “ICT best practices in Denmark, Estonia, Finland, the Republic of Korea, Sweden and Switzerland.” <http://www.rtr.at/web.nsf/deutsch/Portfolio_Schriftenreihe_nach%20Datum_SchriftenreiheDatum_ SchriftenreiheNr32006/$file/Schriftenreihe_03_06.pdf> Science Foundation Ireland. “The SFI Centres for Science, Engineering & Technology (CSET).” <http://www.sfi.ie/content/content. asp?section_id=419&language_id=1> Selian, Audrey. “The use of information and communication technologies as tools for institutional transformation in Armenia.” Global Development Network. Armenian International Policy Research Group (AIPRG). 2005. <http://www.gdnet.org/middle.php?oid=237&zon e=docs&action=doc&doc=11396> Tamil.net. “IT Revolution & Singapore.” 25 Jul. 2007. <http://tamil.net/list/1999-07/msg00039.html> Teltscher, Susanne. “Electronic Commerce and Development: Fiscal Implications of Digitized Goods Trading.” World Development. Vol. 30. No.7. 2002. The Armenian Development Agency (ADA). Republic of Armenia. <http://www.ada.am> The Cyber City. “The Cybercity and National Policy.” <http://www.american.edu/carmel/sw0143a/analysis.html#education>

137 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

List of References The Decision of the Republic of Armenia Government #691-A. 17 Jun. 2003. “The Government Program.” “4.2.2. Improvement of business and investment environment.” The Estonian Patent Office. “The Estonian Patent Office.” <http://www.epa.ee/eng/1info.htm> The Ministry of Industry, Trade and Labor of Israel. “The Intellectual Capital of The State of Israel.” <http://www.moit.gov.il/NR/ rdonlyres/804B5798-D051-4525-A010-DFC1510AE3CF/0/TheIntellectualCapital1434.pdf> Thomas, Teresa. “New “Fast Track” Program Offered in Collaboration With Singapore Management University.” Carnegie Mellon Today. Mar. 29, 2006. <http://www.cmu.edu/cmnews/extra/060330_singapore.html> U.S. Department of Labor. Bureau of Labor Statistics. <http://www.bls.gov> U.S. Department of State. 2006 Investment Climate Statement-Armenia. <http://www.state.gov/e/eeb/ifd/2006/61960.htm> UNDP APDIP. “ICT Policies and e-Strategies in the Asia-Pacific.” 2004. <http://www.apdip.net/publications/ict4d/ict4dsayo.pdf> UNPAN. “UN Global E-government Readiness Report.” 2005. <http://www.unpan.org/egovernment5.asp> US Department of Commerce. “Education and Training for the Information Technology Workforce.” Jun. 2003 <http://www.technology. gov/reports/ITWorkForce/ITWF2003.pdf> Vardanyan, Norayr. “Armenian Information Technology Sector Software and Services. Report on the State of the Industry.” Enterprise Incubator Foundation. 2006. Armenia. <http://www.eif-it.com/index.php?page=res&category=1> World Intellectual Property Organization. 27 Oct. 1994. <http://www.wipo.int/> World Bank. “Knowledge for Development: Knowledge Assessment Methodology, KEI Indicators.” 2006. <http://info.worldbank.org/ etools/kam2/KAM_page4.asp> World Economic Forum. Report 2005-2006. Geneva. Switzerland: Palgrave Macmillan World Trade Organizaiton. <http://www.wto.org> Wy-Cin, Liaw. “Bachelor-master’s in IT study award offered.” The Straits Times. 18 Mar. 2006. <http://www.smu.edu.sg/news_room/ smu_in_the_news/2006/sources/ST_20060318.pdf> Yang, Seung-Taik. “Digital Divide & Cyber Korea 21 Initiative.” UNPAN. 2002.<http://unpan1.un.org/intradoc/groups/public/documents/ APCITY/UNPAN007358.pdf> Yue, Chia Siow. ”Singapore and the IT Revolution.” Tokyo Club Foundation for Global Studies. 25 Jul. 2007. <http://www.tcf.or.jp/ data/20000512_Siow-Yue_Chia.pdf>

138 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Abbreviations

ADA

Armenian Development Agency

ADS

Asymmetric Digital Subscriber Line

AMD

Armenian dram

ARCA

Armenian Card processing center

ASRA

Accounting Standards of the Republic of Armenia

ATM

Automated teller machine

BIRD

Bi-national Research and Development Foundation (Israel)

BITs

Bilateral investment treaties

Bio-technology

CAGR

Compounded annual growth rate

CAPS

Competitive Armenian Private Sector Project

CBS

Central Bureau of Statistics (Israel)

CCC

Certificate on computer concepts

CCT

Common customs tariff

CDC

Community Development Council (Singapore)

CDMA

Code-division multiple access

CommunautĂŠ EuropĂŠenne

CIF

Cost Insurance and Freight

CIS

Commonwealth of Independent States

CJSC

Closed joint stock company

CMU

Carnegie Mellon University

CSD

Central Register of Securities in Estonia

CSR

Corporate Social Responsibility

CSETs

Centers for Science Engineering and Technology

DOE

Department of electronics

DOEACC

Department of Information Technology of Indian Ministry of Communications & Information Technology (India)

DRAM

Dynamic random access memory

E-Dram

Electronic prepaid cards

EDP

Enterprise Development Program (Ireland)

EEA

European Economic Area

EFTA

European Free Trade Association

Enterprise Ireland

EIF

Enterprise Incubator Foundation

European Union

EUREKA, COST, CERN

European and international scientific organizations

E&V

Economy and Values

139 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Abbreviations FDI

Foreign direct investment

FSA

Financial Supervision Authority

GAFI

General Authority for Investment and Free Zones (Egypt)

GATS

General Agreement on Trade in Services

GATT

General Agreement on Tariffs and Trade

GDP

Gross Domestic Product

GPA

Government Procurement Agreement

Human Capital

HTS

Home Tax Service

IAS

International Accounting Standards

IASB

International Accounting Standards Board

ICT

Information and Communication Technology

IDA

Industrial Development Agency (Ireland); renamed in 1993 as IDA Ireland

IECT

Impulsive Ergodic Collision Theory

IIC

Israel Investment Center

IIITs

Indian Institutes of Information Technology

IMD

International Institute for Management Development

IDA

Info-Communications Development Authority in Singapore

IFRS

International Financial Reporting Standards

Innovation Policy

IPAs

Investment promotion agencies

IPO

Initial public offering

IPR

Intellectual property rights

IRDA

Israeli R&D Associates

ISA

Israel Securities Authority

ISMEA

Authority for Small and Medium-Sized Businesses in Israel

ISP

Internet service providers

ISS

Institute of Systems Science

Information technology

ITA

Information technology agreement

ITDSC

IT Development Support Council in RA

ITES-BPO

IT enterprise sector business process outsourcing

IVA

Israel Venture Association

KAM

Knowledge assessment methodology

KOITA

Korea Industrial Technology Association

LCD

Liquid crystal display

LECI

Law on the Encouragement of Capital Investment

LTD

Limited liability company

M&E

Monitoring and evaluation

MIET

Moscow Institute of Electronic Technologies

140 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Abbreviations MIGA

Multilateral Investment Guarantee Agency

MNC

Multinational corporation

NAS

National Academy of Science

NASDAQ

National Association of Securities Dealers Automated Quotations system

NAIS

National Administrative Information System (Korea)

NUIG

National University of Ireland, Galway

NBIS

National Basic Information System (Korea)

NDP

National Development Plan

NGOs

Non-government organization

NSC

Non-scientific companies

Nano-technology

NTBF

New technologyâ&#x20AC;&#x201C;based firm

NTS

National Tax Service (Korea)

OCS

Office of the Chief Scientist (Israel)

OECD

Organization for Economic Co-operation and Development

OPIC

Overseas Private Investment Corporation

PCs

Personnel computer

PPP

Public-private partnership

PKI

Public key infrastructure

PRTLI

Program for Research in Third-Level Institutions (Ireland)

Republic of Armenia

R&D

Research and Development

S&T

Science and technology

SBIR

Small-business innovation research

SCS

Seed Capital Scheme (Ireland)

SEZ

Special Economic Zones

SEUA

State Engineering University of Armenia

SFI

Science Foundation Ireland

SME

Small and medium-sized enterprises

SMCP

Strategic Manpower Conversion Programme

SMS

Short Message Service

SMU

Singapore Management University

SPNS

Sapiens International Corporation N.V. (NASDAQ and TASE: SPNS)

TASE

Israel Stock Exchange or the Tel Aviv Stock Exchange

TCD

Technology Center of DuPage

TFT LCD

Thin-film transistor liquid-crystal displays

TiE

The Indus Entrepreneur

TOKTEN

Transfer of Knowhow Through Expatriate Nationals

TSSG

Telecommunications Software & Systems Group

Technology transfer

141 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness

Abbreviations UITE

Union of Information Technology Enterprises

United Kingdom

Unites Nations

UNCTAD

United Nations Conference on Trade and Development

UNPAN

United Nations in Public Administration and Finance Online Network

USAID

United States Agency for International Development

United States

USD

United State dollar

US GAAP

Generally Accepted Accounting Principles in the United States

USPTO

US Patent and Trademark Office

VAT

Value added tax

Venture capital

VoIP

Voice over Internet protocol

vs.

Versus

World Bank

WLAN

Wireless local area network

WTO

World Trade Organization

YSU

Yerevan State University

142 Benchmarking of Armenian IT Policies From the Perspective of Increasing IT Cluster Competitiveness