white paper competitiveness assessment of the moldovan it...
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W H I T E P AP E R
C o m p e t i t i v e n e s s As s e s s m e n t o f t h e M o l d o v a n I T M a r k e t , 2 0 1 1
Sponsored by: USAID
Madalin Lazarescu Dana Samson
November 2011
I D C O P I N I O N
In 2010, the domestic IT market in Moldova expanded 2.4% year on year and
reached a total value of $131.44 million. The IT market has quickly recovered from
the effects of the global crisis and returned to growth after the steep decline of 13.3%
suffered in 2009.
The Moldovan IT market remains hardware-centric, with most spending derived
from hardware acquisitions, hardware-related services, and software associated
with the purchase of new hardware (e.g., system software).
The main reasons behind market growth in 2010 are year-on-year gross
domestic product (GDP) expansion of 6.9% (one of the highest growth rates
among Central and Eastern European, or CEE, countries), a recovery of exports,
growth in private consumption (a 9.0% increase compared with 2009), and a slow
but steady return to investment on the part of the government.
Current government purchasing programs remain quite constrained, but public
spending continues to be sustained by ongoing public investment projects. Gross
investments continued to grow, recording an impressive 17.2% year-on-year
expansion rate in 2010, while foreign direct investment (FDI) was up 55.6% to
$198.9 million for the year. However, FDI is still a long way behind the levels
reached in 2008, when FDI was four times greater. As real wages began to rise
and the availability of credit increased, consumer spending returned to growth in
2010, which had a positive effect on the low end of the hardware market
(notebooks, inkjet printers, handheld devices, etc.)
Other factors will continue to hinder the development of the IT market, such as
political uncertainty, high food and energy costs, high inflation, lack of IT
education and so forth. For example, in most CEE countries, IT spending grows
at a faster pace than GDP, which was not the case in Moldova in 2010 (6.9%
GDP growth versus a 2.4% increase in IT spending), which indicates that IT
investments deserve greater attention from the business community and political
decision makers in order for organizations and government bodies to exploit IT's
full potential as an effective driver of the country's economy as a whole.
In terms of offshore/nearshore activities, in the eight years prior to 2010, Moldova
became one of the preferred sourcing locations across Southeastern Europe
(SEE). This was heavily reflected in the volume of exports of services, which
grew tenfold within this period. Moldova is expected to remain one of the favorite
offshoring locations in the near future due to its advantages in terms of costs,
geographic position, and availability of human resources – all factors that will
continue to give Moldova a strong competitive advantage over its direct
competitors in the region.
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In This White Paper 1
Methodology ............................................................................................................................................. 1
Situat ion Overview 2
Executive Summary .................................................................................................................................. 2 Drivers and Inhibitors ................................................................................................................................ 3
Drivers ............................................................................................................................................... 3 Inhibitors ............................................................................................................................................ 4
Overview of the Hardware Market ............................................................................................................ 5 Overview of the Software Market .............................................................................................................. 8 Overview of the IT Services Market .......................................................................................................... 9 Analysis of the Offshore Market in Moldova ............................................................................................. 11
Overview and Structure of the Moldavian Offshore Market ............................................................... 11 Analysis of the Main Players and Offshore Destinations ................................................................... 12 Assessment of Key Competitive Factors and Offshore Industry Constraints ..................................... 14
Offshore and Nearshore Competitive Factors ............................................................................ 14 High Broadband Speed ....................................................................................................... 14 Unique Economic and Cultural Advantages ........................................................................ 14 Low Taxation ....................................................................................................................... 14 Compatibility with Western European Office Hours ............................................................. 15 Workforce ............................................................................................................................ 15 Continuous Efforts to Improve the Quality of Tertiary Studies ............................................. 15 Foreign Languages ............................................................................................................. 15 Strong Tradition in Technical Education .............................................................................. 15 Lower Business Costs ......................................................................................................... 16 Expertise in High Value-Added Services ............................................................................. 16
Offshore and Nearshore Industry Constraints ............................................................................ 16 Coverage of Communication Infrastructure ......................................................................... 16 Underdeveloped Management Practices ............................................................................ 16 Insufficient Training ............................................................................................................. 17 Lower IT Education ............................................................................................................. 17 Lower Productivity ............................................................................................................... 17
Government Investment Promotion Strategies ......................................................................................... 18 Current Promotion Strategies ............................................................................................................ 18
Free Economic Zones ................................................................................................................ 18 Industrial Parks ........................................................................................................................... 19 Fiscal Incentives for New Investments in the Economy .............................................................. 20
New Promotional Strategies and Specific Future Initiatives .............................................................. 20 Human Resources and Education Strategies ............................................................................. 20 Knowledge Economy Strategies ................................................................................................. 21
Success Stories ........................................................................................................................................ 23 Allied Testing ..................................................................................................................................... 23
Company Overview .................................................................................................................... 23 Services Portfolio and Strategy .................................................................................................. 23 Focus Markets – Verticals, Geographies, and Marquee Customers .......................................... 23
Endava .............................................................................................................................................. 23 Company Overview .................................................................................................................... 23 Services Portfolio/Strategy ......................................................................................................... 23 Focus Markets – Verticals, Geographies, and Marquee Customers .......................................... 24
Pentalog High Tech ........................................................................................................................... 24
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Company Overview .................................................................................................................... 24 Services Portfolio/Strategy ......................................................................................................... 24 Focus Markets – Verticals, Geographies, and Marquee Customers .......................................... 25
IT Moldovan Market Benchmark Analysis: Moldova and Southeastern Europe ....................................... 25
Future Outlook 30
Forecast and Assumptions ....................................................................................................................... 30 Key Forecast Assumptions for the IT Market ..................................................................................... 31 Key Forecast Assumptions for the Offshore/Nearshore Market......................................................... 34
SWOT Analysis......................................................................................................................................... 36
Essential Guidance 36
Key Recommendations ............................................................................................................................. 36
Learn More 38
Definitions ................................................................................................................................................. 38 Offshore ............................................................................................................................................. 38 Nearshore .......................................................................................................................................... 39 Engineering and R&D Services ......................................................................................................... 39 BPO ................................................................................................................................................... 39 Managed Services ............................................................................................................................. 39 Customization Services ..................................................................................................................... 39
Methodology ............................................................................................................................................. 40 Resource Skill Factors ....................................................................................................................... 40 Economic and Political Factors.......................................................................................................... 40 Infrastructure Factors ........................................................................................................................ 40 Business and Regional Factors ......................................................................................................... 40 Financial Factors ............................................................................................................................... 40 Note ................................................................................................................................................... 41
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1 Forecast and Analysis of Hardware Spending (US$M) in Moldova, 2010–2015 .......................... 7
2 Forecast and Analysis of Software Spending (US$M) in Moldova, 2010–2015 ........................... 9
3 Forecast and Analysis of IT Services Spending (US$M) in Moldova, 2010–2015 ........................ 11
4 Comparison of Resources Skill Factors – Tertiary Education Levels, 2010 ................................. 26
5 Comparison of Resources Skill Factors – Tertiary Education Levels, 2010 ................................. 27
6 Work Culture, 2010 ...................................................................................................................... 27
7 Comparison of Economic and Political Factors – Economy, 2010 ............................................... 28
8 Comparison of Infrastructure Factors – ICT Infrastructure, 2010 ................................................. 28
9 Comparison of Business and Regional Factors – Market Experience, 2010 ................................ 29
10 Comparison of Financial Factors – Tax and Country-Specific Costs, 2010 ................................. 29
11 Comparison of Financial Factors – ICT Spending and Penetration Rates, 2010 ......................... 30
12 Key Forecast Assumptions for the IT Market in Moldova, 2011–2015 ......................................... 31
13 Key Forecast Assumptions for the Offshore/Nearshore Market in Moldova, ................................ 34
14 Forecast and Analysis of Offshoring Revenues (US$M) in Moldova, 2010–2015 ........................ 35
15 SWOT Analysis – Moldovan Market ............................................................................................. 36
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1 IT Spending Share in Moldova, 2010 ........................................................................................... 2
2 Systems Spending Share in Moldova by Form Factor, 2010 ....................................................... 6
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I N T H I S W H I T E P AP E R
The government of Moldova is developing new strategic initiatives to boost domestic
sales and exports while increasing the attractiveness of the country for investors. The
IT sector is a part of this strategy, and the sector's contribution to Moldovan GDP has
become significant, as is evident from the healthy growth prior to 2009 and the strong
recovery posted in 2010.
This study is part of the USAID-funded Competitiveness Enhancement and Enterprise
Development II (CEED II) project, which aims to enhance Moldovan enterprises'
ability to compete in the global marketplace and to support the expansion of
Moldova's key industries.
The data and results of this study will serve as a tool for understanding the key
constraints that might hinder the competitiveness of the Moldovan IT industry in the
near future, as well as for identifying the necessary corrective steps that would enable
the central authorities to overcome these constraints. Finally, the overall assessment
of the IT Moldovan industry's competitiveness will be used to develop an action plan
to promote the country as a viable IT destination regionally and globally, thus
attracting further investments into the local IT industry.
The findings and results of this study are grouped into two major parts:
The first part of the report focuses on the current Moldovan IT market size and
structure, reflecting internal demand and the development of internal IT spending
over the next five years. This analysis is based on quantitative data related to the
development of the main IT segments; namely hardware, software, and IT
services. This analysis is important, as it provides the framework for the
development of the IT industry over recent years, and it outlines the increasing
importance and contribution of this industry to the country's future economic
development. The analysis will also assess the Moldovan IT market's current
strengths and weaknesses, as well as the future in terms of opportunities and
threats.
The second part of this report focuses on Moldova's ability to further increase its
capabilities for hosting nearshore and offshore operations and the steps and
initiatives that local and central authorities should undertake in order to increase
Moldova's competitiveness and attractiveness for future foreign investments in
the IT sector.
This analysis presents the key competitive factors, positioning, capacity, and
development of Moldova as a hub for nearshore and offshore activities. It also
outlines the major development constraints and the corrective actions that should be
undertaken in order to achieve the milestones of transition. Several critical success
factors will be analyzed, including education levels, language proficiency, resource
availability, work culture, political commitment, administrative burden, intellectual
property, and national infrastructure.
M e t h o d o l o g y
See the Learn More section at the end of this document for information on the
methodology.
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S I T U AT I O N O V E R V I E W
E x e c u t i v e S u m m a r y
In 2010, the information technology market in Moldova reached a value of $131.44
million, up 2.4% from the previous year. The Moldovan IT market is in its infancy and
therefore very hardware-centric, with a relatively small share of software and IT
services spending. Hardware accounted for the majority of expenditure, at
approximately 74%, while software and services together account for only around
26% of total IT spending.
In terms of IT revenue distribution by vertical market, the bulk of investments
continued to be undertaken by large companies from the public sector, finance,
telecom, and utility verticals. However, while investments from small and medium-
sized businesses (SMBs) and sectors such as agriculture, manufacturing, and
business services are only just beginning, it is safe to say that their share of overall IT
spending is likely to increase, as Moldova relies on exports from subsectors such as
food and beverage processing, textiles, and clothing.
The Moldovan IT market hit its spending peak in 2008, when investments into IT
reached $148.22 million. The IT market is not expected to reach that value again until
2012. IT spending in the country declined substantially in 2009, after several years of
consecutive growth, but IDC predicts that, due to economic recovery, overall IT
spending will expand at a compound annual growth rate (CAGR) of 6.6% over the
five-year forecast period to reach approximately $180 million in 2015.
F I G U R E 1
I T S p en d i n g S h a r e ( %) i n M o l d o v a , 2 0 1 0
Source: IDC, 2011
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D r i v e r s a n d I n h i b i t o r s
Drivers
Rapid Economic Recovery: After a sharp drop of 6.0% in GDP in 2009 caused
by the global economic crisis, Moldova managed to recover quickly and post
6.9% GDP growth in 2010, while further growth of 5.0% is expected for 2011.
The economic recovery will lead to the creation of new businesses and increased
budgets, of which some will be allocated to IT.
Focus on eGovernment: The e-Government Center, founded in the second half
of 2010, aims to ensure the country's sustainable growth, increase transparency,
and improve access for citizens to public information. The first steps involved
launching three portals: the Government to Citizen (G2C) portal, Access to Open
Government Data, and the e-Reporting for Business system. The project's initial
budget of $20 million has already been secured from a World Bank loan. All
these initiatives will increase government spending on IT infrastructure, cloud
computing, and software solutions.
Internet Penetration: One of the most powerful drivers of IT spending within the
home-user and SMB segments is the fast-growing Internet penetration rate.
Double-digit growth was recorded in the number of Moldovan Internet
connections in 2009 and 2010, with increased provider efforts to cover the
market as fast as possible. Given the persistence of difficult living conditions in
rural areas and generally of all the areas outside of major cities, it is likely that
fixed broadband adoption will soon slow unless a program for universal access is
rolled out successfully in the near future.
PC Market Growth: Accounting for roughly 43% of IT spending, PCs are the
main driver of the IT market, automatically generating demand for software and
hardcopy peripherals. At present, PC penetration in Moldova remains relatively
low, even within the Southeastern European region. However, this gap should
narrow in the coming years.
Privatization: The privatization process is far from complete in Moldova, but it
has been set as a priority area in a recent agreement signed with the
International Monetary Fund (IMF). Among the most important state-owned
companies that will be privatized in the near future are Moldtelecom, Air
Moldova, and the Savings Bank. After privatization, businesses tend to invest
significantly into upgrading their internal IT infrastructures.
Remittances Growth: Since a high proportion of Moldova's population (an
estimated 25%) works abroad, either within the European Union (EU) or the
Commonwealth of Independent States (CIS), remittance transfers represent a
very important driver for domestic consumption and economic growth. It is
expected that remittances will continue to fuel IT consumption over the next few
years.
Competition Among Telcos: Competition on the local telecom market is
becoming fierce, as local and international providers are fighting for a relatively
small but underpenetrated market, especially in the area of mobile services. As a
result, investment in network infrastructure can be expected to grow rapidly.
Free Zones and Other Tax Incentives: Although not specifically tailored for the
IT industry, free zones offer fiscal incentives for registered residents, including
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value added tax (VAT) and excise exemptions. Moreover, in an attempt to attract
as many investments as possible, the corporate income tax was as low as 0%
starting in 2008, although it is expected to increase to 12% in 2012. Additional
fiscal facilities were offered to software developers. All of these contribute to
increased budgets for IT and a growing number of greenfield IT-related
investments.
Unique Geographic Position: Moldova has a unique geographic position,
bordered to the east by the EU (Romania) and to the west by the CIS (Ukraine),
having secured free trade with CIS states and being authorized to trade on EU
markets. This advantage is likely to attract new investors, which will increase IT
spending on the local market.
Inhibitors
Budget Deficit: Moldova, according to its agreement with the IMF, has to reduce
its general budget deficit from 5.9% in 2010 to 3.4% in 2011 and to 2.6% in 2012,
which will be quite difficult given the rigidity of social spending. To achieve this
goal, the Moldovan government must introduce public-sector reforms, which are
likely to generate social pressures, as well as cut public spending, which implies
IT spending cuts.
Lack of Market Education: Many SMBs in Moldova are still unaware of, or lack
confidence in, the clear improvements in efficiency that IT can bring. While
vendors are making efforts to educate the market and align their offers to the
needs of SMBs, these organizations are still restricting investments to those with
immediate and tangible returns on investment (ROI), such as machinery,
production facilities, marketing, sales, and fixed assets, without realizing how
these can be complemented by IT solutions.
Lack of IT Specialists on End-User Side: Most human resource challenges for
the Moldovan IT industry reside in a lack of development specialists. Another
hindrance to IT uptake is a shortage of IT consultants on the end-user side. Until
these HR issues are resolved, end-user organizations will have little to rely on in
terms of in-house guidance and expertise, making them less open to sales
pitches from IT vendors.
Software Piracy: The software piracy rate in Moldova was 90% in 2010. The
Business Software Alliance (BSA) declared that, if licensed, the illegal software
currently used in Moldova would bring in another $36 million to the leading
software market players.
Public Contracts Limited by Price Sensitivity and Lack of Transparency: In
the public sector, most contracts are awarded on the basis of price, which
pressures distributors to keep profit margins at a minimum. Furthermore, levels
of transparency and fairness regarding tender proceedings have been
questioned on several occasions. This serves to discourage bidding by qualified
firms, not to mention undermining FDI.
Low Purchasing Power: Moldova has one of the lowest average wage rates in
the region. As price controls are lifted on utilities and basic commodities,
Moldovans, especially those located outside Chisinau, the capital, are seeing
their already limited purchasing power deteriorate. As a result, basic IT
equipment, such as a PC, is beyond the financial reach of the overwhelming
majority of Moldovans. For the same reason, the country has a relatively low
Internet penetration rate.
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Depletion of HR Pool: In the past few years, the massive exodus of workers to
the EU and CIS has led to shortages in certain labor markets. Demand for IT
professionals is now greater than ever, the consequences of which are marked
salary increases and an inability to satisfy demand. Salary pressure also
markedly reduces profit margins and revenue that would normally be reinvested
into generating organic growth, especially in the case of local companies.
Low Rate of Employable Graduates: In addition to suffering from a depleted
HR pool, most IT companies consider the rate of employable fresh graduates
from IT-related faculties and colleges to be too low and the training period
required for such graduates to be too long (longer than the European average).
As a consequence, investors in the IT field keep their operations in Moldova
small, despite the fiscal incentives offered, or they relocate to neighboring
countries, which are often more expensive but have larger pools of employable
graduates.
O v e r v i e w o f t h e H a r d w a r e M a r k e t
The hardware market in Moldova reached $97.27 million in 2010, up 2.1% compared
with the previous year. The bulk of revenue came from PC shipments, which
accounted for 62.4% of total hardware spending. The second- and third-largest
hardware categories were peripherals and networking equipment, with values of
$17.24 million and $16.56 million, respectively. Spending on storage hardware is still
very low in Moldova, with a value of $2.61 million in 2010 and 2.7% share of total
hardware spending.
The Moldovan PC market is still dominated by local assemblers, which continued to
be responsible for the bulk of PC shipments in the country. However, their share of
total PC shipments declined slowly, from 62.6% in 2009 to 57.0% in 2010. The
dominance of local assemblers is mainly due to the low direct presence of
international vendors, which, in most cases, work exclusively through local partners.
In terms of distribution channels, direct shipments account for 53.5% of total
hardware shipments, with vendor stores representing 40.0% of this channel. Indirect
shipments make up the remaining 46.5%, dominated by traditional dealers, which
claim 29.0% of shipments in this channel. In the absence of substantial corporate and
public-sector projects, the direct channel is expected to continue driving the market in
the coming years. However, retail is also expected to increase its share of overall
hardware shipments once the home-user segment recovers, fuelled by increasing
purchasing power, more accessible consumer credit, and growth in remittances from
the population working abroad.
In terms of form factor, the Moldovan PC market is heavily dominated by desktop
shipments, which accounted for 62.7% of total PC spending in 2010. Local
assemblers benefited from this, as they are able to offer the lowest prices and
customize specific models for the Moldovan small office/home office (SOHO) end-
user segment. Most end-user segments of the Moldovan IT market are hugely
underpenetrated in terms of notebook PCs, and IDC anticipates double-digit growth in
this technology segment in the coming years.
Similar to other emerging countries of Central and Eastern Europe observed years
ago, Moldova recorded the most dynamic growth in the notebook segment in 2010,
with signs of a demand shift toward mobility. However, the notebook segment still
accounted for a small share of total PC shipments (36.0%) last year, up
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approximately 4 percentage points compared with 2009. IDC expects the notebook
segment's share of the overall hardware market to increase steadily in the years to
come.
The x86 server market is very small in Moldova, accounting for less than 1% of
overall PC shipments. In the absence of a strong corporate sector and with
investments from public sector bodies still low, this category is expected to remain
small over the next few years.
F I G U R E 2
S y s t em s S p e n d i n g S h a r e ( % ) i n M o l d o v a b y F o r m F a c t o r , 2 0 1 0
Source: IDC, 2011
Several factors will continue to hinder the development of the systems market in
Moldova in the coming years, including the following:
The online sales model for PCs is still in its infancy in the country for numerous
reasons. First, a lack of credit cards and low PC penetration mean consumers
and small businesses are prevented from making online transactions, and
therefore the online channel for PC acquisitions is underdeveloped. Second, the
market is still in an early stage of development, with customers preferring to see
and examine such technical and expensive items before purchasing them.
Finally, most vendors do not see the online channel as an essential part of their
sales strategies for reaching end users.
Illegally imported PCs and components sold outside of official channels are still a
major problem for legitimate vendors, which are unable to match the low prices of
such illegal imports (no VAT charges). Improved customs controls on Moldova's
borders, however, might limit these practices. Furthermore, the increasing
popularity of on-credit purchases will eventually make it almost impossible to
conduct business without registering VAT.
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Moldova is among the most price-sensitive nations in Eastern Europe due to low
average incomes. Consequently, vendors tend to reduce prices and configure
low-end machines for the home and small-business segments. These market
characteristics have created one of the region's lowest average sales prices
(ASP) for PCs.
The prevailing worldwide economic climate is causing businesses to shift their
focus from expansion to conservation. This minimal investment strategy is having
an effect on every facet of operations, and IT is no exception. Organizations are
evaluating ways to reduce IT spending across the board, often by stretching
existing resources. Hardware lifecycles are being extended, and PC upgrades
are viewed as a low priority behind security, storage, networks, and management
software.
Many companies in Moldova regard IT systems as an expense rather than an
investment. The concept of ROI is not well established in the private sphere, and
medium-sized businesses across the country are still using valuable resources to
maintain obsolete systems without realizing the long-term costs.
Through the 2011–2015 forecast period, IDC predicts that the value of the Moldovan
PC market will expand at a CAGR of 6.5% to reach $83.44 million in 2015. The most
rapid growth will be in the notebook market, but desktops will remain the primary form
factor, accounting for the bulk of sales. Despite an estimated CAGR of 18.9% over
the forecast period, the x86 servers market will remain small in terms of value,
totaling $8.28 million in 2015.
T A B L E 1
F o r e c a s t a n d A n a l y s i s o f H a r dw a r e S p en d i n g ( US $ M ) i n M o l d o v a , 2 0 1 0 –2 0 1 5
2010 2011 2012 2013 2014 2015 CAGR (%)
Systems
High-End Servers 0.88 1.01 1.24 1.50 1.70 1.93 17.0
Mid-Range Servers 1.01 1.23 1.56 1.78 2.01 2.41 19.0
Volume Servers 2.38 3.25 4.02 4.35 5.12 5.87 19.8
Personal Computers 56.49 58.35 61.78 65.33 69.56 73.23 5.3
Systems Total 60.76 63.84 68.60 72.96 78.39 83.44 6.6
Storage
Disk Systems 2.35 2.47 2.60 2.98 3.10 3.23 6.6
Tape 0.26 0.28 0.29 0.30 0.33 0.37 7.4
Storage Total 2.61 2.75 2.89 3.28 3.43 3.60 6.7
Peripherals
Printers & MFPs 7.24 7.65 8.12 8.65 9.02 9.65 5.9
Smart Handheld Devices 3.09 3.45 3.67 4.01 4.56 5.12 10.6
Other HW 7.01 7.56 8.02 8.76 9.20 9.78 6.9
Peripherals Total 17.34 18.66 19.81 21.42 22.78 24.55 7.2
Networking Equipment 16.56 17.22 18.01 18.56 19.12 20.01 3.9
Hardware Total 97.27 102.47 109.31 116.22 123.72 131.60 6.2
Source: IDC, 2011
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O v e r v i e w o f t h e S o f t w a r e M a r k e t
The software market in Moldova remains underdeveloped, despite having registered
a 3.4% year-on year increase in 2010. Software spending reached $14.93 million for
the year and accounted for only 11.4% of domestic IT spending. As a comparison, in
first-tier CEE countries such the Czech Republic and Hungary, software accounts for
over 20% of the total IT market; in second-tier countries like Poland and Romania,
software represents almost 15% of total domestic spending. In terms of primary
markets, spending on applications is split as follows: 35.2% on system infrastructure
software, 21.8% on application development and deployment, and the remaining
43.0% on applications.
The small size of the domestic market is the result of low demand for software
solutions. A number of factors are responsible for this, including, but not limited to,
low wages, high software piracy rates, limited demand for productivity enhancement
tools, and financial constraints. Because of relatively low domestic demand,
Moldovan IT companies have less incentive to develop packaged software. The
majority of software packages sold on the domestic market are accounting and
financial applications for large enterprises and banks.
The applications market is dominated by basic enterprise software solutions, such as
accounting and financial applications, a clear sign that the enterprise application
software (EAS) market is just emerging. Usually, this is the first step that clients take
in order to streamline one of the most important functions in the organization –
accounting. Very few customers already have an integrated EAS system; those that
have include the recently privatized large telecom operators, utility providers, and
banks. In terms of BI applications, the adoption rate is almost insignificant; the first
such module was only implemented in 2010.
However, the situation is likely to change soon, as the Moldovan government has
emphasized that privatization will be one of its main short-term priorities, which will
provide a significant boost to integrated EAS solutions. The main players in the
applications market are Russian software companies that sell versions of their own
EAS, such as 1C. Romanian vendors like Siveco, TotalSoft, and Wizrom have also
made several attempts to penetrate the Moldovan market, but they were not very
successful because the Moldovan accounting system is closely related to Russian
financial reporting. Large international vendors such as SAP, Oracle, and Microsoft
have a very limited presence.
Revenue in the systems infrastructure software space derives mostly from operating
systems (mainly Microsoft) and very basic security software solutions. Large
companies in the finance, oil and gas, and telecom sectors usually have more
complex security solutions in place and at least basic storage software functions,
such as data protection and recovery. Joint efforts by international vendors, the
Moldovan government, and local independent IT associations to reduce piracy will
spur growth in the Moldovan systems infrastructure software market in the near
future, driving it above the average growth of the overall software market.
The penetration rate for database management software, which still represents the
largest part of the application development and deployment primary software market,
is low, partly due to a limited number of large contracts. The negligible installed base
of servers requires very few installations of middleware applications, and the infant
stage of EAS software penetration limits investments into advanced analytics
solutions.
©2011 IDC #CEMA17850 9
Moldova was one of the very few CEE countries to post significant GDP growth in
2010, at 6.9%, with agriculture and industrial production recovering very well after a
contraction in 2009. Unfortunately, the structure of the Moldovan economy, which is
heavily reliant on agriculture and lower-margin manufacturing like food processing
and textiles, and the economic issues faced by the country's main export markets in
the EU and Russia, were major inhibitors to software spending last year.
Most large international software vendors do not have a direct presence in Moldova.
Those that are present, such as Microsoft, focus on reducing the piracy rate rather
than being actively involved in business development. According to BSA, the piracy
rate in Moldova is constantly deceasing, but it was still at a huge 90% in 2010 (down
2 percentage points). Software piracy represents one of the biggest inhibitors to the
expansion of the Moldovan IT market. Vendors such as Oracle are only present
through partners. In most cases, large vendors coordinate their activities in Moldova
either from Romanian or Ukrainian offices, a situation that leads to reduced flexibility
and limited go-to-market strategies customized for the domestic market.
IDC believes the Moldovan packaged software market will expand at a CAGR of 7.4%
though 2015 to reach $21.37 million. Software's share in the total Moldovan IT market
will increase to 11.8%, mainly at the expense of hardware.
T A B L E 2
F o r e c a s t a n d A n a l y s i s o f S o f t w a r e S p en d i n g ( US $ M ) i n M o l d o v a , 2 0 1 0 – 2 0 1 5
Packaged Software 2010 2011 2012 2013 2014 2015 CAGR (%)
System Infrastructure Software 5.25 5.56 6 6.76 7.23 8.03 8.9
Appl. Development and Deployment 3.26 3.5 3.73 4.09 4.56 5.02 9
Applications 6.42 6.44 6.7 7.31 7.56 8.32 5.3
Packaged Software Total 14.93 15.5 16.43 18.16 19.35 21.37 7.4
Source: IDC, 2011
O v e r v i e w o f t h e I T S e r v i c e s M a r k e t
The IT services market in Moldova reached $19.24 million in 2010, up 3.7% on 2009.
The IT services market accounted for 14.6% of total IT spending in 2010. The low
level of IT spending on services is also influenced by the fact that most large state-
owned companies have their own IT subsidiaries, providing a whole range of
additional services – a very common phenomenon in underdeveloped markets.
The dominant IT services category by far is the implementation activity group, which
is no surprise given that Moldova is still a hardware-centric IT market. The second-
largest activity group is that of support services, in direct correlation with the growth of
the hardware installed base. In most cases, the support activity group only consists of
basic services such as post-installment warranty support.
Demand for IT services is at an early stage, mainly because of an underdeveloped
large and very large enterprise segment and a lack of large projects in public
institutions, which account for large proportions of spending on IT services in more
developed countries. The adoption of IT services in all segments of the market is also
hindered by the price sensitivity of most end-user organizations. Frequently, IT
10 #CEMA17850 ©2011 IDC
purchase decisions revolve around the dual tasks of acquiring basic software and
hardware infrastructure along with the needed technical assistance for
implementation. In such cases, services are often viewed as being of secondary
importance to the overall infrastructure that is being acquired.
However, the Moldovan government has some initiatives regarding the IT market,
with an egovernment project being the core of its strategy. The plan is to build up an
integrated eplatform for Moldova based on private cloud. This project will certainly
attract major players in the IT market and might represent a huge opportunity for
attracting further investments if it is well managed. Two of the biggest issues related
to public acquisition processes in Moldova are a lack of transparency and the
government's unjustifiable inclination to favor local state-owned IT providers that
might not have the expertise or the capacity to manage large-scale projects.
The delayed adoption of IT technology could have its advantages, as Moldova could
skip some costly and now unnecessary intermediary stages in technology
deployments and take steps toward newer delivery models such as cloud computing.
However, the issue of Internet availability outside of major cities should be addressed.
Moldova has very fast Internet speeds (among the top 20 in the world), but, outside of
Chisinau, Internet availability is quite scarce. Improving this situation will involve
massive investment into networking and communications equipment.
Lately, concerns about meeting inflation-rate targets imposed by the IMF (0.8% in
2011) were raised; measures for keeping prices in certain product categories under
control may not turn out to be as successful as planned. In addition, the deficit target
for 2012 may not be met, leading to delays in implementing some scheduled public
infrastructure projects. This will make it more difficult to divert money from
expenditure savings to infrastructure improvements, endangering any projects
dependent on domestic budgets.
Given the small size of the Moldovan IT services market, it is more likely that only
local vendors will be active and directly involved in the market; the activities of large
regional and global players will generally be limited to working with channel partners,
systems integrators, and solutions partners, which have greater flexibility and can
adapt better to the specific realities and requirements of the local market. As a
general trend, very large vendors such as IBM, Oracle, and HP usually try to win new
markets through global strategies, products, solutions, and offerings, an approach
that is usually successful on large underdeveloped domestic markets but less so on
small ones such as Moldova.
IDC believes that the Moldovan IT services market will expand at a CAGR of 7.7%
over the forecast period to reach 27.86 million in 2015 and account for 15.4% of total
IT spending. The operations management activity group will be the most dynamic,
driven by the expansion of the outsourcing market. Revenue from training activities
will also grow at a fast rate, as new investments will create the need to educate
customers on the use and utility of newly implemented solutions. This will lead to
increased awareness of the advantages of enhanced solutions and technologies,
which, in turn, will drive other areas of the IT services market.
©2011 IDC #CEMA17850 11
T A B L E 3
F o r e c a s t a n d A n a l y s i s o f I T S e r v i c e s S p en d i n g ( US $ M ) i n M o l d o v a , 2 0 1 0 – 2 0 1 5
Services 2010 2011 2012 2013 2014 2015 CAGR (%)
IT Consulting 1.72 1.82 2.14 2.34 2.65 3.02 11.9
Implementation 11.35 11.94 12.55 13.02 13.87 14.15 4.5
Support Services 4.44 4.47 5.09 5.35 6.03 6.56 8.1
Operations Management 0.80 0.92 1.14 1.34 1.78 2.01 20.3
Training and Education 0.94 0.94 1.12 1.56 1.82 2.12 17.8
Services Total 19.24 20.09 22.04 23.61 26.15 27.86 7.7
Source: IDC, 2011
A n a l y s i s o f t h e O f f s h o r e M a r k e t i n M o l d o v a
Overview and Structure of the Moldavian Offshore Market
With the increasing cost of doing business in the Central European countries, many
international vendors specialized in offshore/nearshore activities started to look more
toward the East for viable locations for hosting their development operations.
Countries such as Romania, Bulgaria, Croatia, Slovenia, and Moldova soon became
preferred locations for offshore/nearshore activities due to several factors, including
lower operational costs, availability of highly skilled workers, language proficiency,
and labor force size.
Among these countries, Moldova stood out as an increasingly attractive location, with
many vendors choosing to set up their offshore/nearshore operations in the country.
The advent of Moldova as an important offshore/nearshore location was also
reflected in the value of IT services exports, which recorded a tenfold growth rate over
the seven years to the end of 2010, from merely $2.6 million in 2004 to a little over
$31 million last year.
Several factors have contributed to Moldova's appeal as a sourcing location, factors
that will be thoroughly analyzed in this report. However, it is worth mentioning at this
point that the main competitive advantages offered by Moldova reside in its proximity
to both the CIS and the EU, the country being the cheapest place to do business in
the region, investment incentives offered by the Moldovan government, and the
availability of highly skilled human resources.
Despite these competitive advantages, several factors need improvement in order to
maintain and increase the country's attractiveness for future foreign direct investment,
including bureaucracy, business transparency, corruption, and private-public
partnerships related to education and human resources. Nevertheless, despite the
current drawbacks, the long-term ICT investment prospects for the country appear to
be positive.
Although a few local Moldovan companies have developed and exported proprietary
IT products, the major strengths of local IT services providers reside in custom
development services (software development on demand) and testing and support
services around applications for the finance, telecom, manufacturing, and government
12 #CEMA17850 ©2011 IDC
sectors. Moldovan IT services companies should thus continue to capitalize on their
ability to develop integrated solutions in these areas.
In terms of export revenue structure, the overwhelming majority of IT services
revenue comes from customization services (including custom application
development services and application customization) and support services. These
two categories accounted for over 80% of total IT services exports in 2010. The other
traditional outsourcing services, such as business process outsourcing (BPO),
managed services, and research and development services, are less popular in
Moldova, together accounting for less than 20% of total IT services exports. Since
Moldova is one of the smallest countries in the region and has a limited pool of
human resources, companies involved in offshore/nearshore activities with more
specialized operations tend to set up here, as opposed to those with large-scale
activities, such as BPO services, which require huge pools of human resources.
The second half of 2008, which also marked the beginning of the economic crisis in
the region, including Moldova, did not affect the growth of IT exports in the country.
Moreover, once the crisis has fully receded, countries in southern and eastern
Europe, including Moldova, will still be able to make their cases based on
comparatively low costs, which will continue to be the major consideration for
companies looking to source all or parts of their IT operations.
Local and central authorities should endeavor to increase the market's attractiveness
for offshore/nearshore operations through the following actions (among others):
Creating innovative incentive plans to attract top global players, which will help
keep highly skilled professionals and graduates at home
Continuing to upgrade transport infrastructure and develop ICT networks
Continuing to make the business environment more open and transparent, while
reducing the administrative burden
Keeping current fiscal incentive policies
Maintaining the free trade zones and investing in creating new ICT industrial
parks
Continuing to invest in education and encouraging the public/private partnerships
(PPP) in this area
Analysis of the Main Players and Offshore Destinations
Worldwide offshore IT services appear to be more popular than the classic delivery
model. IDC forecasts that the worldwide offshore IT services market will grow 19.7%
(at constant currency), from $33.9 billion in 2010 to $40.6 billion in 2011, with a five-
year CAGR of 15.3% through 2015, when the total offshore IT services market will
reach $69.2 billion. The Moldovan IT services export market, which reached
approximately $31.17 million in 2010, will expand at a similar rate. This assumption
rests upon on the current development of the Moldovan market. Based on IDC's
experience and benchmarking exercises undertaken with other emerging economies,
IDC believes that the Moldovan market will grow little beyond revenue of $50 million
through the end of 2015. In absolute terms, the market reached approximately $31
million in 2004. Although the total value of the IT market in Moldova over the seven
years up to the end of 2010 increased by an average of $4 million per annum, 2009
©2011 IDC #CEMA17850 13
and 2010 were way below this average due to the difficult global economic conditions.
As a result, IDC's 2011–2015 forecast tends on the side of caution.
The local IT services market was valued at $19.24 million last year, while experts
estimate that exports of services performed by freelancers amounted to an additional
30%.
According to the largest freelance European project hub, oDesk.com, an additional
$15–16 million can be attributed to Moldova's export of services. However, these
revenues are not officially counted or taxed and are received in the form of work
remittances. Although these freelancers' revenues can prove hard to track, register,
and collect taxes on, they show an additional pool of human resources already
existing on the local market that could solve Moldova's short-term qualified personnel
shortage. By comparison, Moldova's freelancers worked approximately 57% of the
total time worked by Romanian freelancers, even though Romania has a significantly
larger human resource pool. This indicates that significant numbers of former
freelance professionals from Romania have already been successfully hunted by
international corporations, a course that is likewise open to representative offices in
Moldova.
The global economic crisis in 2008 and 2009 did not put a stop to Moldova's IT
services export growth. Increasing numbers of U.S. and Western European
companies started to look for cheaper alternatives to their overwhelming personnel
costs. With the crisis curtailing salary inflation in the region, Eastern European
countries became more attractive. Moldova, for instance, has the lowest
compensation plans in the region – lower than in Romania, the Ukraine, or Bulgaria.
Due to the combination of skilled human resources, multilingual proficiency, and
relatively cheap infrastructure, Moldova's offshore/nearshore proposition became
even more valuable than Asian locations. It is no secret that even Indian-based
players use resources based in Eastern Europe to serve their international clients for
reasons of proximity and time-zone compatibility. However, Moldova has several
direct competitors in SEE: Romania, Bulgaria, Serbia, and the Ukraine (tier-one
competitors) and Montenegro, Croatia, Slovenia and the Baltic States (second-tier
competitors).
Regional players such as Endava, Allied Testing, Pentalog, and CEDACRI opened
local offices in Chisinau. Among the smaller players in terms of local business size
(up to 50 employees) are Q Systems, Tacit Knowledge, Computaris, and Amdaris.
Most of the projects are commissioned from the U.K. and the U.S., followed by
France, Germany, and Romania. The services offered are diverse, ranging from
hardware support to telecommunications solutions, EAS, and customer relationship
management (CRM) to portals, ecommerce, and payroll and billing solutions.
While the offshore IT services market will continue to grow at a substantial rate, the
rise of cloud services will challenge the offshore model. All offshore players will need
to make significant adjustments to their businesses to ensure longer-term success in
light of increased cloud services adoption. These include the following:
Pursuing transformational opportunities by helping customers shift to more host-
based models of services delivery (e.g., cloud), including rationalizing and
transforming application portfolios
14 #CEMA17850 ©2011 IDC
Investing heavily in automation across the full lifecycle of services, from
development and testing to operations and delivery of infrastructure and
application services to help drive down costs while meeting faster time-to-market
requirements
Investing more heavily in local (developed) markets to help ensure current and
future growth, with attention to supporting the shift to cloud services in key
industries (e.g., healthcare, energy, and government)
Developing application and infrastructure outsourcing, particularly datacenter
outsourcing – the basis of cloud services
Developing a portfolio of cloud-based services and solutions that aligns with core
competencies such as platform as a service (PaaS) for custom application
development, testing as a service (TaaS) for testing services, infrastructure as a
service (IaaS) for infrastructure outsourcing, and software as a service (SaaS) for
application outsourcing (AO)
Building partnership ecosystems for cloud-based services that include such
partners as cloud-based independent software vendors (ISVs),
telecommunications providers, and management system vendors for provisioning
utility-based operational and business services
Assessment of Key Competitive Factors and Offshore Industry
Constraints
Offshore and Nearshore Competit ive Factors
H i g h B r o a d b a n d S p e e d
Moldova has one of the highest Internet connection speeds in the world, especially in
the capital, Chisinau, where most offshore/nearshore companies are located. This
represents a huge advantage for developers/testers accessing remote applications,
databases, and so forth, as well as an important precondition for future cloud
investments.
U n i q u e E c o n o m i c a n d C u l t u r a l A d v a n t a g e s
Due to its geographic position and its cultural background, Moldova has affinities with
both Western European countries and Russia. Moldova is also the only CIS country
that has preferential economic agreements with the EU, while benefiting from the
advantages of preferential trade agreements within the CIS.
L o w T a x a t i o n
The overall taxation rate is quite low in Moldova: 31.3% forecast by the World Bank
for 2012, while most European countries have percentages of over 40% on profit.
This factor, along with the small number of taxes (only 48), ranks Moldova much
higher than most neighboring countries in the World Bank's Doing Business Report.
Moreover, during recent years, Moldova has continuously simplified the process of
opening a business, with only 10 days required compared with the European and
Central Asia average of 32 days and the worldwide average of 16.6 days. The total
cost of starting a business, at 10.9% of per capita GDP, is considerably lower than
the European and Central Asia average of 14.1%.
©2011 IDC #CEMA17850 15
C o m p a t i b i l i t y w i t h W e s t e r n E u r o p e a n O f f i c e H o u r s
Moldova is only GMT+2, which gives it a significant advantage over Asian countries,
especially for live support services, while costs are similar and European language
skills are better.
W o r k f o r c e
In 2010, approximately 6,000 specialists were employed in the software sector alone,
while the number of total employees in the ICT sector was around 20,000. Some 83%
of these employees are technical specialists, such as software engineers, analysts,
developers, and project managers. Management and business professionals
represent 17% of the total. Foreign companies have chosen Moldova as an offshore
development destination partly because of its inexpensive and efficient labor force.
However, due to a limited supply of qualified specialists and the appreciation of the
local currency, salary costs have increased in recent years. Nevertheless, Moldova is
still considered a low-cost offshore development location, one in which salaries are
lower than those of many European IT outsourcing countries such as Romania
(where the average salary is about $1,100/month in IT) and Bulgaria (with an average
of around $950/month in IT), not to mention more expensive offshoring locations such
as Hungary, Poland, and Russia. It is fair to say, however, that, in some cases,
Moldova's salary levels are comparable to those of neighboring countries, especially
for positions such as project manager and project leader.
Factors hindering the export of IT services include insufficient knowledge of Moldova
and its IT industry among the international business community; language issues,
although the problem is subsiding, as the young generation is becoming more
proficient in English and other European languages; and the country's relative
distance from some of the key Western European IT markets.
C o n t i n u o u s E f f o r t s t o I m p r o v e t h e Q u a l i t y o f T e r t i a r y S t u d i e s
In some cases, local IT professionals help tertiary educational institutions to align
their curricula and study programs to the latest industry trends and requirements.
Today, institutions are coming to recognize that, in addition to technical skills,
students need to be proficient in business areas.
F o r e i g n L a n g u a g e s
Teaching foreign languages such as English, French, and Russian is also considered
extremely important for developing high-quality ICT professionals, particularly those
aspiring to management positions. Despite recent improvements in the educational
system in Moldova, many consider current teaching methods to be inadequate and
thus unable to meet the IT industry's need for high-quality human resources.
S t r o n g T r a d i t i o n i n T e c h n i c a l E d u c a t i o n
Moldova has a strong tradition of higher technical education, with universities placing
great emphasis on training students in the fundamentals and educating them to
understand general engineering principals, reminiscent of the former Soviet system.
Today, this tradition is enhanced with new ideas and approaches resulting from
Moldova's adoption of free market principles. Nonetheless, despite recent
improvements in the educational system in Moldova, many consider current teaching
methods to be inadequate and thus unable to meet the IT industry's need for high-
quality human resources.
16 #CEMA17850 ©2011 IDC
ICT-related education is also becoming increasingly popular, and the number of
students and fresh graduates is increasing (2,233 fresh ICT graduates in 2011, 2,039
in 2010, and 1,642 in 2009). This shows that the ICT sector in Moldova is on a fast
ascent; as a comparison, the numbers of fresh ICT graduates in most other SEE
countries (e.g., Romania, Bulgaria, Slovenia, and Croatia) have declined by 5–10%
since 2008.
L o w e r B u s i n e s s C o s t s
According to Colliers International, rent in Chisinau for prime office space is around
EUR 20 per square meter, which is three or four times less than in Bucharest, for
example. In addition, salaries for all personnel, even for highly qualified senior
professionals, are significantly lower than in all other countries in Central and Eastern
Europe; the average monthly salary in June 2011 was EUR 219. Furthermore, the
government has extended exemptions for personal and security tax for IT specialists
until 2016.
E x p e r t i s e i n H i g h V a l u e - A d d e d S e r v i c e s
Moldovan ICT specialists should continue to capitalize on their proven long-term
experience in high-value-added services such as analysis and design, application
development, and testing services. In terms of applications types, three main areas
should continue to be exploited: business applications (especially financial, office
productivity, and BI applications), Web development applications, and mobile
applications (embedded systems). In terms of software, Moldova boasts long-term
experience in open source and proprietary (distributed client server) operating
systems.
Offshore and Nearshore Industry Constraints
C o v e r a g e o f C o m m u n i c a t i o n I n f r a s t r u c t u r e
Moldova may have managed to solve the issue of Internet speed, especially in large
cities, but the country still needs to address the issue of transport and
telecommunications infrastructure outside of Chisinau, unreliable Internet
connections, and high voice tariffs to North America and EU countries. Steps toward
remedying the last issue are already being taken as a part of tariff harmonization with
the EU.
U n d e r d e v e l o p e d M a n a g e m e n t P r a c t i c e s
Significant differences exist between locally owned companies and branches of
foreign firms in terms of how companies are managed. The majority of local branches
of international firms do not engage in common practices such as business
development, marketing, and strategic management; such activities are handled by
head offices abroad. In addition, foreign companies, when compared with locally
owned firms, employ more advanced project management practices and use better
documented and designed methodologies. The reason is that, in most cases,
processes employed by the parent companies are simply copied to the Moldovan
branches. Commonly accepted management practices employed in free-market
economies have been slow to take hold in the Moldovan business community, the IT
sector in particular, since the collapse of the Soviet economy. As a result, many local
IT companies do not have sufficient experience or knowledge of the best
management practices widely employed by Western companies. The major reasons
are a lack of high-quality managers with appropriate education and background, the
©2011 IDC #CEMA17850 17
early stage of the newly developing market economy, and insufficient experience with
international clients.
However, as companies grow and develop, their management practices are
becoming more sophisticated. Western practices are becoming part of the day-to-day
management of, for example, local software firms. While, for many years, marketing
and project management functions were conducted by a company's director, most
firms now have separate departments dedicated to marketing, HR, operations, and
other areas. Companies now accept a larger number of business graduates than
previously and pay more attention to management training and professional
development.
I n s u f f i c i e n t T r a i n i n g
On average, around 25% of technical and business specialists received training in
2010. Training budgets are still very low, accounting for less than 5% of a company's
total turnover on average. Differences exist between locally owned companies and
foreign subsidiaries in terms of employee development. International firms present in
Moldova ensure constant employee training (i.e., training levels are maintained), both
locally and at head offices, as a part of their strategic management processes. In
addition, they have built resource centers and libraries to assist in training employees
and knowledge management. Employees of certain foreign branches in Moldova are
offered employee stock options and other non-salary incentives. International
branches normally enjoy low staff turnover rates and greater employee commitment.
In contrast, few local companies are able to provide training on a constant basis,
although they do accept training as an important part of development. Staff training is
greatly affected by the availability of funds and qualified trainers. One option for local
firms is that of free/low-cost training offered through government programs, which
tend to focus on general industry needs rather than specific companies' requirements.
Salary levels being lower than those adopted at local branches of international
companies and inadequate employee incentive plans were the major factors behind
the high staff turnover rates at local firms for many years. Recently, however, various
forms of incentive have become more widespread at local companies. During the last
few years, staff turnover rates at local organizations have decreased substantially as
a result of improving salaries, better working conditions, and the emergence of strong
teams within companies, among other factors.
L o w e r I T E d u c a t i o n
Even though the number of ICT-related fresh graduates is quite high, at around 2,000
per year (from approximately 28,000 annual graduates overall), in general,
representatives of large IT firms regard the existing number of students as
insufficient, especially for development plans involving larger offshore projects. In
addition, the quality of certain graduates is deemed inadequate, requiring on-the-job
training to become qualified enough to fill full-time positions.
L o w e r P r o d u c t i v i t y
Average annual productivity in Moldova's IT services industry in 2010 was around
$30,000 per year in revenue per technical employee involved in IT offshoring. The
figure is comparable to other CIS countries, such as Ukraine and Armenia, but it is
quite low when compared with the average numbers reported in major SEE offshoring
centers ($71,000 per year). However, it is important to note that this relatively low
number relates to the nature of the services that are offshored in Moldova at this
18 #CEMA17850 ©2011 IDC
stage and not to actual employees' performance. For example, Romania grew from
around $30,000 in revenue per year per technical employee in 2005 to almost
$75,000 per year in 2010, mainly due to the nature of the offshoring activities, which
moved from support-centered activities to consulting and customization activities.
Obviously, the industry needs to change the current economic model from low-end
outsourcing services, such as software support services, to higher-value activities,
such as software research and development (R&D). We are already seeing progress;
some companies, both foreign and domestic, have started offering software
engineering, design, and R&D services. It is important to improve productivity
considerably, since Moldova does not have the enormous workforce of India or
China, and focus should therefore be on boosting output per employee in order to
increase industry revenues. Moldovan IT services companies need to secure access
to foreign markets, as business abroad will boost revenues and provide necessary
experience via larger and more-complex projects to improve brand image and
company reputation, which will subsequently enable them to demand higher rates.
Providers of IT services that focus mainly on the domestic market are unlikely to see
significant gains in revenue per employee.
Several factors are responsible for the low productivity of Moldovan IT services
companies, including:
A small domestic market for software and IT services and thus low demand for
more complex software applications
A focus on low-end outsourcing services and insufficient emphasis on packaged
software and other higher-value segments, such as research & development,
customization services, and consulting services
A shortage of high-end software engineers, project managers, and general
business professionals with top-management skills
A lack of recognized management-process-related certifications, such as ISO
9001
A lack of specialized support facilities and instruments, such as venture capital
funds, startup incubators, and technology parks
G o v e r n m e n t I n v e s t m e n t P r o m o t i o n S t r a t e g i e s
Current Promotion Strategies
The Moldovan government has been actively promoting Moldova as an attractive
offshore/nearshore destination and has taken several steps in this regard over the
past seven years. Before undertaking any promotional or communication activities,
the Moldovan government focused on setting up an attractive business, legislative,
administrative, and fiscal framework. Several measures were initiated for this, with the
three main pillars being free economic zones, industrial parks, and fiscal incentives
for new investments.
Free Economic Zones
The free economic zones are a part of the customs territory of the Republic of
Moldova. These zones are distinct from the rest of the country in that they provide
beneficial conditions to new businesses of specific types, whether such companies
are backed by local or foreign investors. Several free economic zones and zones of
©2011 IDC #CEMA17850 19
similar status exist in the country: Expo-Business Chisinau, which is located in the
capital; Ungheni-Business, which is 107km to the northwest of Chisinau; Tvardita,
115km to the south of Chisinau; Otaci-Business, 220km to the north of Chisinau;
Valkanes, 200km to the southwest of Chisinau; Taraclia, 153km to the south of
Chisinau; the International Free Port of Giurgiulesti, 210km to the south of Chisinau;
and the Free International Airport of Marculesti, 126km to the north of Chisinau.
Companies operating in the free zones benefit from several advantages: lower
operating costs for infrastructure (transport, water, gas, and electricity); exemption
from VAT and customs and excise duties on goods imported into the free zones and
subsequently exported; a 0% corporate tax rate; and 10 years' protection against
adverse changes in legislation. More specifically, these benefits include:
Legal protection from the state on investments made within the territories of the
free zones
Legislation relating to the regulation and legal status of free zones being
prioritized
A guarantee of the current legislation's applicability for a period of 10 years from
establishment in a free-zone
The possibility to transfer profit abroad
The impossibility of free-zone businesses' assets being expropriated,
nationalized, requisitioned, or confiscated other than by court order
Exemption from import duties and from customs and excise duties on the import
and export of goods and services to/from the free zones
Exemption from quotas and licensing related to the import and export of goods
and services to/from the free zones
The possibility to transfer the ownership rights of the goods and services traded
in free zones from one business to another without additional taxation
Three years' exemption from all income tax on the export of goods and services
from free economic zones to territories outside of Moldova following investment
of at least $1 million in a free zone
Five years' exemption from all income tax on the export of goods and services
from free economic zones to territories outside of Moldova following investment
of at least $5 million in a free zone
Industr ial Parks
These are delimited zones in which economic activities, industrial production, the
provision of services, scientific studies, and technological development take place
with the aim of contributing to the development of a specific region by increasing
employment and making better use of locally available material resources. The fiscal
benefits provided for free zones are also provided to industrial parks. Three zones are
designated as industrial parks: Floresti, an area of 60ha close to the border with
Ukraine; Ungheni, 50ha close to the border with Romania; and Cainari, 23ha. The
main benefits derived from operating in an industrial park include the right to use the
agricultural land available in these parks for purposes other than agriculture, such as
20 #CEMA17850 ©2011 IDC
for buildings, without paying the costs associated with changing the land's designated
use. Essentially, no bureaucratic hurdles exist to investments made within an
industrial park.
Fiscal Incent ives for New Investments in the Economy
ICT companies investing in Moldova benefit of several fiscal incentives, such as 0%
corporate income tax, 0% income tax on all IT staff, and a low flat rate for social
welfare payments for employers. Other incentives for larger investments in the
Moldovan economy, not necessarily related to ICT, include the following:
Companies that are set up with operating capital of at least $250,000 and
companies making investments amounting to at least $250,000 pay 50% less
income tax for a period of five years provided that at least 80% of the tax break is
reinvested in product and/or service development.
Companies that are set up with operating capital of at least $5 million and
companies making investments amounting to at least $5 million are exempt from
all income tax for a period of four years.
In addition to the measures outlined above, the government of Moldova has signed
trade agreements with several EU, CIS, and other countries. The most important
trade agreements include:
EU: The Autonomous Trade Preferences (ATP) agreement, extended until 2015,
which is likely to be replaced by the Deep and Comprehensive Free-Trade Area
(DCFTA) agreement; and the Central European Free-Trade Agreement
(CEFTA), 2006
International: Joined the World Trade Organization (WTO) in 2001 and, in 2011,
signed the Convention on the Settlement of Investment Disputes Between States
and Nationals of Other States
CIS: Signed bilateral free-trade agreements with all CIS countries except for
Tajikistan; joined the Organization of Black Sea Economic Cooperation; signed
the Southeast European Cooperative Initiative; and was party to the formation of
the international economic organization known as GUAM (Georgia, Ukraine,
Azerbaijan, and Moldova)
New Promotional Strategies and Specific Future Initiatives
Despite the measures that have already been taken to create an attractive investment
environment for offshore/nearshore investors, the government should continue with
its current strategy of consolidating Moldova's appeal. This strategy involves
measures implemented at several levels, including the country's infrastructure and
economy, the harmonization of legislation with EU norms, and HR retention and
education (particularly relating to eskills). Since the major threats to the current
environment for offshore/nearshore activities are a decrease in the level of education
and the depletion of the human resources pool, we will focus in the following chapters
on initiatives that might contribute to an improvement in these two areas.
Human Resources and Educat ion St rategies
Greater investment into vocational training and education skills is urgently needed so
that present and future workforces have the requisite skills in the developing labor
market, as well as skills that could enable them to set up their own businesses. One
©2011 IDC #CEMA17850 21
option for local firms would be to benefit from the free or low-cost training offered
through government/non-governmental organization (NGO) programs, following the
general trend adopted in some of the CIS countries in order to revive training in
technical related industries; however, it is important to note that such training
sometimes tends to focus on general industry needs rather than on specific
companies' requirements. The former may be a solution for large countries such as
the Ukraine and Russia but not for smaller ones such as Moldova, which should focus
more on company-specific training.
Efforts to establish partnerships between government, industry, and NGOs across
Moldova should be intensified with the ultimate goal of training Moldova's knowledge
workers of tomorrow by bringing IT skills into the mainstream of school curricula.
These partnership programs should also be used to train current and future IT
professionals by supporting educational institutions across Moldova to provide first-
class degree-level education in the latest technologies. A good example is Endava, a
company that has extended its partnership with the Moldovan Technical University for
the inclusion of software engineering courses in the university's study programs.
Beyond civil infrastructure projects such as roads and mass transit systems, the
government should also be tapping into PPPs as an alternative means of expanding
services, modernizing education and healthcare systems, and increasing the
availability and diffusion of ICT throughout the state. Currently, a few PPPs are in
operation; for example, a project involving land concession (contracted for 20 years)
for parking and other facilities near Chisinau Airport and the financing, construction,
and equipping of a radiotherapy center and a diagnostic center. Other projects under
consideration include the construction of an apartment complex (Balti City) and a
refuse incineration plant (Edinet City).
The government of Moldova should create a competitive working environment within
the country so that IT specialists do not seek work abroad and instead contribute to
the growth of the local economy.
Knowledge Economy Strategies
Knowledge economies require an increasing range of skills and eskills. Research
shows that eskills are increasingly the entry ticket to better jobs and to employment in
general. Correspondingly, they have become the key not only to digital inclusion but
also to social and economic inclusion. In nearly all contexts, eskills should be treated
by the government as a component of a broader strategy toward building a
knowledge economy by fostering competitiveness, growth, employment, and
education. An example that can be followed is an eskills initiative launched in
Romania in 2010.
Within the context of this initiative, the www.e-aptitudini.ro portal (the Romanian
translation of eskills) represents a bridge between IT resource providers and young
people in need of IT skills in order to obtain employment or to start their own
businesses. In October 2009, a consortium comprising Microsoft Romania, Junior
Achievement Romania, and a number of Romanian NGOs launched an eskills
campaign in response to a study conducted by IDC. The results of the study showed
that, within five years, 90% of all jobs in all fields in Romania will require applicants to
have IT skills. The project is funded by the European Commission's e-Skills initiative,
involving 21 countries, the purpose of which is to raise awareness of the ever-
increasing importance of ICT not only for one's career but also for one's personal
development.
22 #CEMA17850 ©2011 IDC
Other possible strategies for fostering a knowledge-based economy in Moldova
include:
Developing digital content
Boosting Internet penetration – not only in Chisinau but also in the other major
cities
Supporting PC penetration in the home segment
Increasing awareness of technology through laws relating to ICT and
egovernment readiness programs
Taking steps to decrease the software piracy rate
Developing programs to improve soft skills through university-level education
Increasing the capacity for innovation to improve the patent count
Nurturing growth in the percentage of information workers in the total workforce
Encouraging university-industry collaborations through incentives offered either
by the vendors (internships) or by the government (paid scholarships)
Efforts to meet the above objectives should also be accompanied by specific
promotion strategies to increase awareness among prospective foreign investors of
the conditions, opportunities, and benefits of Moldova as an offshore/nearshore
destination. The government should be actively and regularly involved in activities
such as:
Regular investment missions to capital exporting countries (e.g., the U.S.,
Western European countries, and Japan)
Frequent domestic investment seminars and workshops
Publishing and disseminating promotional materials on specialized Internet
offshoring community pages and targeted events
Regular consultations with private-sector organizations for input into national
plans and annual budgets and to obtain feedback on current government
policies, rules, and regulations
Regular reviews of policies, incentives, and procedures to improve Moldova's
investment climate
Undertaking targeted strategies to promote Moldova as an offshore/nearshore
destination among specific key stakeholders, such as foreign investors, through a
range of online learning resources, awareness campaigns, speaking
engagements, and customized presentations
Capitalizing on the expertise and work of offshore specialists to develop direct
engagement strategies and feedback loops for a diverse range of stakeholders to
reinforce the benefits of the market
©2011 IDC #CEMA17850 23
Engaging in support strategies with targeted communities and agencies, as
identified through stakeholder consultation, reviews of awareness campaigns,
and feedback from casework and compliance
S u c c e s s S t o r i e s
Allied Testing
Company Overview
Established: 2000
Locations: Russia (Moscow), Serbia (Belgrade), Belarus (Minsk), and Moldova
(Chisinau)
Staff Total/Staff in Chisinau: 900+/350
Revenue Total/Offshore Revenue: $30 million in 2010/100% offshore
Services Portfo l io and Strategy
Allied Testing is a quality assurance (QA) and testing company focused on capital
markets, trading, and the finance industry. The company offers a full range of QA
capabilities, from process audit and strategy consulting to implementation and
ongoing service delivery, including both onsite and offshore/nearshore.
Focus Markets – Vert ica ls, Geographies, and Marquee Customers
Verticals: finance (banks, brokerage institutions, and investment funds)
Geographies: Western Europe (mostly the U.K.) and the U.S.
Marquee Customers: Barclays Capital, Cheuvreux, Deloitte Touche Tohmatsu,
Fidessa Group, EquiTec Group LLC, Equiduct, HSBC, Fujitsu, JPMorgan Chase
& Co, Infinium Group, and Thomson Reuters
Endava
Company Overview
Established: 2000
Locations: U.K. (London and Wallingford), U.S. (New York), Romania
(Bucharest, Cluj, and Iasi), and Moldova (Chisinau)
Staff Total/Staff in Chisinau: 650/200
Revenue Total/Offshore Revenue: $45 million in 2010/98.7% offshore
Services Portfo l io/Strategy
Endava designs, implements, and manages business-critical systems and digital
services for some of the world's leading finance, telecommunications, sports, and
media companies. The company's business model is based on industry-specific
expertise, an agile "blended" delivery model, and a strategic pan-European presence
that enables access to a large pool of IT talent in Eastern Europe.
24 #CEMA17850 ©2011 IDC
Endava is able to support customers throughout the IT lifecycle by offering a wide
range of services, including:
Analysis and Design: Both agile and planned iterative approaches based on
domain-specific experience
Application Development: Business applications, Web development, mobile
applications (iPhone, iPad, Android, and Windows Phone), .NET Framework,
Enterprise Java, Sitecore CMS, and alls type of integration environment
Software Testing: Promotional testing model, end-to-end expertise, and
ITSQB/ISEB certifications
Managed Services: 24/7 performance monitoring and IT service desk, technical
support, and IT security
The TEAM adaptive model is Endava's unified approach to delivering projects for
both local and distributed engagements.
Focus Markets – Vert ica ls, Geographies, and Marquee Customers
Verticals: Finance, telecommunications, media, and business services
Geographies: U.K., U.S., Sweden, Ireland, Moldova, and Romania
Marquee Customers: IMG Worldwide, Cision, UBS, Cadbury, and MAIB
Pentalog High Tech
Company Overview
Established: 1993
Locations: France (Orleans), Romania (Bucharest, Cluj, Brasov, Sibiu, and Iasi),
Germany (Frankfurt), Israel (Tel-Aviv), and Vietnam (Hanoi) and Republic of
Moldova (Chisinau).
Staff Total/Staff in Chisinau: 650+/110
Revenue Total/Offshore Revenue: $23 million in 2010/98.7% offshore
Services Portfo l io/Strategy
The services Pentalog High Tech offers are organized around two business lines:
Information Systems: The development and organization of information
systems (specific developments: standalone, add-on, desktop, third-party
application maintenance, consulting, audits, studies, project management
assistance, business intelligence, infrastructure management, cloud computing,
Web site hosting, SaaS application hosting, and setting up and configuring EAS
and CRM integration software packages)
Embedded Systems: Outsourcing the R&D activities of customers (conception,
embedded development, software and hardware integration, testing and
validation, third-party maintenance, and chip design)
©2011 IDC #CEMA17850 25
Focus Markets – Vert ica ls, Geographies, and Marquee Customers
Verticals: Finance, telecommunications, utilities, business services,
retail/wholesale, manufacturing, and healthcare
Geographies: France, Germany, Romania, Israel, U.S., Morocco, Bulgaria,
Kenya, Netherlands, and Switzerland
Marquee Customers: Orange, Vodafone, BRD, Mobias Banca, Veolia, Energie,
Elster, Altadis, Loxam, Leroy Somer, CERIB, Ericsson, KVB, Ubisoft, and Look
Voyages
I T M o l d o v a n M a r k e t B e n c h m a r k A n a l y s i s :
M o l d o v a a n d S o u t h e a s t e r n E u r o p e
Cost is most often the primary driver when decision makers are considering where to
source parts of their operations. The pros and cons of sourcing in SEE – such as
cost, size of the labor force, and available skills – vary greatly from country to country.
Individual companies must evaluate their specific and varied needs and each SEE
country's ability to meet those needs.
In the past three years, Romania has become one of the most sought-after
offshore/nearshore destinations in the region. With the fourth-largest population in the
region and a technically skilled, multilingual labor force, the country has attracted
many high-profile vendors for sourcing operations. Lower costs and relatively low
levels of administrative burden have helped ease large international vendors'
transitions into the country. Romania is also a member of the EU and boasts several
large cities, giving vendors freedom and security when locating their operations inside
the country.
Bulgaria's attractiveness as a sourcing location lies in the country's very low labor
costs, investment incentives, and low levels of administrative burden. It is also now a
member of the EU, which testifies to investors the country's commitment to a more
transparent business environment and support for foreign investment in the local
economy. Salaries are among the lowest in SEE, but levels of corruption and
software piracy remain high. Long-term ICT investments in the country appear to be
lucrative.
Croatia borders two EU countries, although it is not a member itself. Advanced
language skills make the country potentially attractive as a sourcing location, although
high salaries, a relatively small size, and perceived high levels of corruption still
hinder offshore/nearshore ICT investments. Croatia is better suited to smaller, more
specialized, sourcing operations.
Slovenia has an open business environment, well-developed ICT infrastructure, EU
member status, and a labor force with some of the best language abilities across
SEE. Slovenia, however, is also one of the smallest countries in the region, with a tiny
labor pool, the highest average monthly salaries, and some of the highest levels of
administrative burden in the SEE region. As such, the country is better suited for
more specialized and much smaller operations, similar to neighboring Croatia.
Ukraine's suitability as a sourcing location is rooted in its large labor pool, availability
of technically skilled professionals, and very-low average salaries. The country's
challenges to attract investment stem from chronic political uncertainty, high levels of
26 #CEMA17850 ©2011 IDC
perceived corruption, and a less-than-transparent operating environment dominated
by local players.
Moldova is well positioned for specialized outsourcing activities around high-value
services such as analysis and design, and software development and testing. Similar
to Croatia and Slovenia, Moldova is well suited for smaller-scale operations, but the
country has the advantage of the low cost of doing business – still the lowest in the
region. With a high percentage of the labor force proficient in foreign languages,
especially English and French, the country is also well positioned for support activities
(support call-centers); unfortunately, however, these lines of business are not
exploited enough.
T A B L E 4
C o m p a r i s o n o f R e s o u r c e s S k i l l F a c t o r s – T e r t i a r y E du c a t i o n L e v e l s , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Tertiary Education Levels
Completed Tertiary Education (ISCED 5, 6) * 0.8% 0.9% 0.8% 0.6% 1.4% 0.7%
Social sciences, Business, and Law Graduates** 50.0% 51.0% 53.2% 37.7% 44.0% 49.7%
Life-Sciences Graduates ** 1.7% 1.4% 0.6% 1.5% n/a 1.2%
Mathematics and Statistics Graduates ** 2.4% 0.9% 0.2% 1.0% n/a 0.4%
Computing Graduates ** 3.5% 2.9% 2.2% 2.9% n/a 1.9%
Engineering, Manufacturing, and Construction
Graduates **
12.7% 14.4% 15.3% 11.7% 20.3% 12.6%
Notes: * the percentage of fresh graduates of the total population in 2010; ** the percentage of total fresh graduates in 2010
Source: IDC, Eurostat, 2011
Moldova has the highest percentage of fresh IT graduates within the overall number
of fresh tertiary-education graduates in 2010 of all the countries listed in the table
above and one of the highest in Central and Eastern Europe (CEE). It is important to
note that IT studies are becoming increasingly popular in the country, even though
the absolute numbers of students involved are still relatively small. Moldova followed
the general trend in SEE during the crisis (2008–2011) in that its overall number of
fresh tertiary-education graduates declined, but interest in developing IT skills,
especially driven by market demand, was reflected in the increasing number of IT
graduates (in terms of both share and absolute numbers). Conversely, in most SEE
countries, the number of fresh IT graduates declined more rapidly than the overall
number of fresh tertiary graduates.
©2011 IDC #CEMA17850 27
T A B L E 5
C o m p a r i s o n o f R e s o u r c e s S k i l l F a c t o r s – T e r t i a r y E du c a t i o n L e v e l s , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Tertiary Education Levels*
English Language Education 46.0% 95.9% 86.2% 98.3% n/a 98.3%
German Language Education 3.0% 11.6% 38.5% 65.6% n/a 76.0%
French Language Education 51.3% 83.0% 15.0% 34.0% n/a 10.8%
Note: * the percentage of pupils/students (all levels – primary, secondary, and tertiary)
Source: IDC, Eurostat, 2011
By and large, the tuition of English in regular school curricula is still in the early stages
in Moldova, although the level of actual English proficiency among the population is
improving considerably. In terms of other languages, the French speaking population
in the country – one of the highest proportions in SEE and the broader CEE – is
definitely large and, as yet, unexploited in terms of labor. For example, Romania,
which ranks first in terms of French language levels in schools and the population,
has managed to take full advantage of its French speaking employable population,
and now 45% of its BPO centers and more than 30% of its IT offshore centers involve
the use of French.
T A B L E 6
W o r k C u l t u r e , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Average Hours Worked Per Week 31.4 39.6 34 40.9 41 35.1
Annual Leave 28* 21 20 18 24* 20
Statutory Holidays 12 11 11 13 9 13
Note: * calendar days
Source: IDC, Eurostat, ILO 2011
Moldova stands out as the country with one of the lowest average number of weekly
working hours, mainly due to the large number of people involved in agricultural
activities. As a comparison, in most SEE countries, the number of weekly working
hours is 40, while the number of working hours in IT-related activities is even higher.
Moldova should adjust its number of working hours to be in line with the SEE
average, as it is expected that foreign outsourcing companies looking to open
offshore centers in Moldova will be looking for similar numbers.
28 #CEMA17850 ©2011 IDC
T A B L E 7
C o m p a r i s o n o f E c o n o m i c a n d P o l i t i c a l F a c t o r s – E c o n o m y , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
GDP Per Capita $1,630.00 $8,666.00 $7,243.00 $13,776.00 $3,003.00 $23,009.00
Purchasing Power Parity $3,082.00 $12,358.00 $13,563.00 $17,818.00 $6,656.00 $28,030.00
FDI* 12.0% 2.1% 9.4% 0.7% 3.5% 2.1%
Inflation** 7.3% 6.1% 2.8% 1.1% 15.0% 1.8%
Unemployment 7.4% 7.6% 9.2% 11.8% 8.4% 10.6%
Source: Eurostat, Bank Austria Creditanstalt, IMF, NSOs, IDC, 2010
To evaluate the strength of a country's economy better, purchasing power parity is
often used, as it takes into account variations in inflation and overall prices across the
local economy. Purchasing power parity of less than GDP per capita reflects high
costs within a country. From this point of view, Moldova had the lowest cost of doing
business in 2010 in the SEE region and is expected to remain so in the following
years, which should encourage international vendors to set up new businesses in
Moldova.
T A B L E 8
C o m p a r i s o n o f I n f r a s t r u c t u r e F a c t o r s – I C T I n f r a s t r u c t u r e , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
PC Penetration 11.4% 16.3% 13.2% 25.4% 18.9% 39.5%
Fixed-Line Penetration 32.6% 17.5% 30.4% 43.1% n/a 31.1%
Mobile Penetration 88.8% 133.1% 144.0% 150.5% n/a 109.5%
Internet Penetration 6.5% 15.1% 14.6% 19.4% n/a 31.4%
Broadband Penetration 6.4% 14.8% 13.8% 17.6% n/a 26.5%
Level of Local IT Spending Per Capita 36 95 132 259 64 435
Level of Local ICT Spending Per Capita 176 260 389 729 179 961
Source: IDC, 2011
PC, mobile, and broadband penetration is still quite low in Moldova compared with the
other countries of SEE, but the growth rate is much higher, and we expect Moldova to
catch up soon with the penetration levels of neighboring countries. Furthermore,
despite the low broadband penetration rate, Moldova has one of the highest Internet
speeds in Europe when it comes to urban areas, which is generally what offshore
vendors require. Equally important, while IT spending per capita has declined in SEE
as a whole, the rate of decline in Moldova has been much lower than the average,
with demand for IT remaining relatively strong among businesses and, to a lesser
extent, consumers.
©2011 IDC #CEMA17850 29
T A B L E 9
C o m p a r i s o n o f B u s i n e s s a n d R e g i o n a l F a c t o r s – M a r k e t E x p e r i e n c e , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Offshore BPO F&A and HR Centers 0 6 2 0 1 0
Offshore BPO Customer-Care Centers 0 20 8 3 1 5
Offshore ITS Centers (Hosting, CAD, and Support) 1 10 10 2 0 0
Offshore Technology R&D Centers 8 14 6 0 55 2
Others 6 0 6 0 0 0
Source: IDC, 2011
The number of offshore centers has continued to grow in the region in recent years.
This increase has been most evident in the low-wage countries of Moldova, Bulgaria,
Romania, and the Ukraine; in contrast, only a limited number of offshore centers have
been set up in more developed countries, particularly Poland, Slovakia, and Hungary.
In this context, IT vendors have often moved – and keep moving – to second- and
third-tier cities, where costs are lower and workforce competences are similar to
those in major cities, especially for activities that do not require very high standards of
qualification, such as BPO and support services. Moldova could therefore benefit
from the vendors' choice to move east in their search for lower costs, especially for
activities that do not require high technical skills and for which training can be
conducted in house and in a relatively short period of time.
T A B L E 1 0
C o m p a r i s o n o f F i n an c i a l F a c t o r s – T a x a n d C o u n t r y - S p e c i f i c C o s t s , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Corporate Tax Rate 0.0% 16.0% 10.0% 20.0% 25.0% 20.0%
VAT/Import Tax 20.0% 24.0% 20.0% 23.0% 20.0% 20.0%
Employee-Related Costs 30.6% 34.0% 23.3% 20.9% 43.3% 20.6%
Government Incentives Yes Yes Yes Yes Yes Yes
Source: National Investment Agencies, World Bank Doing Business Report, IDC, 2010
Moldova represents one the most attractive countries in terms of fiscal regime,
comparable only with Bulgaria – the only country in the region that made efforts
during the economic downturn period to attract investors by lowering some taxes
(mostly employee-related costs). All other countries in the region increased fiscal
pressure in order to compensate for budget deficits. Bulgaria's strategy proved quite
efficient, and the number of offshore centers opened in the country between 2008 and
2011 almost doubled.
30 #CEMA17850 ©2011 IDC
T A B L E 1 1
C o m p a r i s o n o f F i n an c i a l F a c t o r s – I C T S p e n d i n g an d P en e t r a t i o n R a t e s , 2 0 1 0
Moldova Romania Bulgaria Croatia Ukraine Slovenia
Level of Local ICT Spending as % of GDP 10.5% 3.1% 5.3% 5.2% 6.1% 4.2%
Level of IT Spending as % of GDP 2.3% 1.2% 1.8% 1.9% 2.2% 1.9%
Hardware Spending* 74.0% 60.5% 70.6% 52.3% 87.0% 44.4%
Software Spending* 11.4% 16.5% 15.8% 14.5% 5.8% 19.0%
IT Services Spending* 14.6% 23.0% 13.6% 33.2% 7.2% 36.6%
Note: * the percentage of total IT spending
Source: IDC, 2011
The rise of the Moldovan ICT industry is reflected very clearly in the ratio IT
expenditure to GDP, which remains the highest among the listed countries. More
interestingly, the ICT to GDP ratio is what really stands out in Moldova, showing the
country's ongoing investments into communications equipment and ICT infrastructure.
The dynamism of the country's telecommunications sector is an indicator of a coming
boom in IT spending (most countries in the region followed such a pattern).
F U T U R E O U T L O O K
The Moldovan IT market is expected to expand at a CAGR of 6.6% over the five-year
forecast period to reach $180.83 million in 2015. Hardware spending will increase at a
CAGR of 6.2% to $131.60 million in the same year. Spending on software and IT
services is expected to follow a similar pattern, with CAGRs of 7.4% and 7.7%,
respectively, over the same period.
The Moldovan offshore/nearshore market is expected to expand at a CAGR of 7.4%
over the five-year forecast period to reach $44.55 million in 2015.
F o r e c a s t a n d A s s u m p t i o n s
Below we present the major forecast assumptions used in our analysis.
©2011 IDC #CEMA17850 31
Key Forecast Assumptions for the IT Market
T A B L E 1 2
K e y F o r e c a s t A s s u m p t i o n s f o r t h e I T M a r k e t i n M o l d o v a , 2 0 1 1 – 2 0 1 5
Market Force IDC Assumption Impact
Accelerator/
Inhibitor/
Neutral
Certainty of
Assumption
Macroeconomics
GDP Growth Moldovan GDP is forecast to
increase 5.0% year on year in
2011 and 4.5% in 2012.
High. The IT market was
affected by the declining
economy in 2009. GDP growth
from 2010 to 2012 will continue
to have a positive impact on IT
spending.
Exchange Rate The national currency
appreciated approximately 7%
last year as a result of the
growth of remittances from
workers abroad and surging
exports. However, the
Moldovan leu is forecast to
return to a path of slow
depreciation against the U.S.
dollar starting in 2012.
Low. The effect on the
domestic market will be limited,
as remittance transfers are
usually in foreign currencies
(dollars and Euros), and the
slow depreciation of the
national currency is not
expected to pose a serious
threat to IT spending over the
forecast period.
Foreign Direct
Investment
After a dramatic fall in 2009,
FDI increased more than 55%
year on year to $0.2 billion in
2010. FDI is expected to grow
over the forecast period.
Moderate. The drop in FDI
reflected reduced interest in
greenfield/brownfield projects
as the economy declined and
investors started to regard
Moldova as a risky investment.
A rebound in FDI forecast for
2011–2015 is likely to result in
increased IT spending.
Political Situation Political uncertainty continues
in Moldova, as the parties
forming the Alliance for
European Integration (AEI)
have been in dispute over the
presidential elections. Such
political uncertainty is unlikely
to cease in the near future.
Moderate. The political
situation typically only affects
the public sector. However,
because the public sector
accounts for much of software
and IT services spending in
Moldova, IDC expects these
spending categories to suffer
as a result of political
skirmishes.
Unemployment In 2011, the official
unemployment rate is expected
to reach 7.8%, which will be the
highest in the last five years.
The unemployment rate is
expected to decrease to 7.6%
in 2012.
High. Higher unemployment
leads to a drop in IT spending.
32 #CEMA17850 ©2011 IDC
T A B L E 1 2
K e y F o r e c a s t A s s u m p t i o n s f o r t h e I T M a r k e t i n M o l d o v a , 2 0 1 1 – 2 0 1 5
Market Force IDC Assumption Impact
Accelerator/
Inhibitor/
Neutral
Certainty of
Assumption
Global Economic
Climate
Economic problems within the
EU and in the U.S. are
threatening to cause another
worldwide economic crisis. The
core problems will certainly
persist in the short term if not
beyond.
High. The previous worldwide
crisis negatively affected
Moldova's IT spending, and a
second crisis would have the
same effect.
Technologies
Software-Specific
Applications
Software vendors will
experience growing demand for
industry-specific solutions.
High. Companies in rapidly
growing industries will need
internal systems to plan growth,
react to changes, and connect
to suppliers and partners.
Broadband
Penetration
Demand for broadband is
increasing at a rapid pace, both
in the business sector and the
home segment, and this is
expected to continue
throughout the forecast period.
High. Companies across all
verticals and users in the home
segment will increase their
hardware and software
investments (smart handhelds,
laptops, desktops, networking
equipment, and various specific
applications).
Datacenters and
Telecom Services
The increasing need for
datacenter solutions and
telecommunications services
will trigger large deployments of
hardware, software, and
networking equipment.
High. The modern way of doing
business, involving industry
specific-solutions, disaster
recovery, storage, security,
cloud computing, hosting, and
managed services, will require
software, hardware, and IT
services, both on the client side
and the provider side.
Software and
Services Exports
Moldova is an attractive
offshoring/nearshoring
destination because of the
multilingual skills of the
population and the fairly large
pool of professionals and
freelancers. The volume of
business from
offshoring/nearshoring is
expected to grow over the
forecast period.
High. Although software
development and other types of
IT services exported from
Moldova do not count toward
internal demand, investments in
ICT infrastructure – hardware,
software, and networking
equipment – and telecom
services have to be made.
Market
Characteristics
Privatization The privatization of state assets
will boost IT spending, as
changes to business processes
High. The need for
restructuring and business
process reengineering as a
©2011 IDC #CEMA17850 33
T A B L E 1 2
K e y F o r e c a s t A s s u m p t i o n s f o r t h e I T M a r k e t i n M o l d o v a , 2 0 1 1 – 2 0 1 5
Market Force IDC Assumption Impact
Accelerator/
Inhibitor/
Neutral
Certainty of
Assumption
will entail investment into basic
infrastructure, consulting, and
the latest software.
result of privatization will
require the support of IT
technology and related
services.
Labor Market Labor costs are increasing
rapidly, especially in the IT
field, forcing companies to
invest less in expansion. Again,
this situation is unlikely to
reverse in the near future.
Moderate. Higher labor costs
are forcing companies to
reduce IT expenses. However,
the impact will be minimal, as
businesses must invest into IT
to stay competitive in global
markets.
SMB Segment After a very difficult 2009, the
Moldovan SMB segment is
expected to recover gradually.
Increases in both private and
government consumption will
trigger the opening of new
businesses and the
development of existing ones in
the medium term.
High. The segment is expected
to generate IT investments
across several technologies.
The most sought-after
technologies will be basic
hardware and network
infrastructure.
Consumer Credit Consumer credit growth will
trigger the development of
retail, online payments,
ecommerce platforms, and so
forth.
High. The large-scale
availability of consumer credit
will spur IT-related acquisitions
in the home-user segment.
Legend: very low, low, moderate, high, very high
Source: IDC, 2011
34 #CEMA17850 ©2011 IDC
Key Forecast Assumptions for the Offshore/Nearshore Market
T A B L E 1 3
K e y F o r e c a s t A s s u m p t i o n s f o r t h e O f f s h o r e / N e a r s h o r e M a r k e t i n M o l d o v a ,
2011–2015
Market Force IDC Assumption Impact
Accelerator/
Inhibitor/
Neutral
Certainty of
Assumption
Market
Characteristics
Project Markets As European economies
stabilize, companies are
starting to consider new IT
projects and are increasing
their investment budgets. Cost
efficiency will still remain a
priority over the forecast period,
and interest in outsourcing
activities will increase.
High. Increasing interest in
outsourcing activities will
translate into greater demand
for offshore/nearshore services.
United Kingdom
Versus the Rest of
Western Europe
The U.K. has led the way for
offshore services in Western
Europe, and the rest of the
countries are currently
increasing adoption of offshore
services through a mix of their
usual service providers and
offshore players. The
Netherlands and Nordic
countries have been slightly
ahead of the larger countries of
France and Germany.
However, companies in these
latter two countries are also
increasingly looking to
offshoring to decrease IT
operational costs.
High. Spending among
organizations in the U.K. on
offshore services currently
represents the majority of
offshore services spending in
Western Europe. However,
other countries are accelerating
spending, and the number of
projects is expected to increase
for the nearshore areas.
Moldova can benefit to a large
extent from this trend owing to
its multilingual proficiency,
skilled personnel, and low
costs.
Offshore Services
Specific Aspects
Competition in
Delivery of
Offshore Services
Providers of offshore IT
services are seeing increasing
competition for offshore
services delivery from both
large international suppliers
such as IBM and Accenture
and Europe-based service
providers building up their
global offshore and nearshore
delivery capabilities. In addition,
countries and regions other
than India/the Subcontinent
(Morocco, Egypt, Kenya, the
Philippines, Latin America, etc.)
Moderate. Competition from
international vendors and new
offshore destinations will
represent a threat to Moldova's
export of services in the long
term.
©2011 IDC #CEMA17850 35
T A B L E 1 3
K e y F o r e c a s t A s s u m p t i o n s f o r t h e O f f s h o r e / N e a r s h o r e M a r k e t i n M o l d o v a ,
2011–2015
Market Force IDC Assumption Impact
Accelerator/
Inhibitor/
Neutral
Certainty of
Assumption
are looking to provide offshore
services to the U.S. and
Western European countries.
Multi-Sourcing
Strategies
Multi-sourcing strategies will
shift, with buyers reducing the
number of the traditional
providers they use but signing
up new providers for SaaS,
cloud, and offshore services.
Accordingly, new offshore/
nearshore propositions will be
taken into consideration in an
effort to reduce costs.
High. The overall objective of
this strategy shift will be to
reduce costs. The diversified
multi-sourcing strategy could
affect certain offshore locations,
as customers will be willing to
turn to cheaper offshore
destinations for pilot projects.
Legend: very low, low, moderate, high, very high
Source: IDC, 2011
T A B L E 1 4
F o r e c a s t a n d A n a l y s i s o f O f f s h o r i n g R e v en u e s ( US $ M ) i n M o l d o v a , 2 0 1 0 – 2 0 1 5
2010 2011 2012 2013 2014 2015 CAGR
Offshoring Revenues 31.17 33.05 35.34 38 41.11 44.55 7.4%
Source: IDC, 2011
36 #CEMA17850 ©2011 IDC
S W O T A n a l y s i s
T A B L E 1 5
S W O T A n a l y s i s – M o l d o v an M a r k e t
Strengths Weaknesses
High Internet connection speeds and ample
availability of office space
Favorable geographic location in proximity to both EU
and CIS countries, allowing easy access to these
markets for trade
Educated labor force with good technical skills and
proficiency in languages
Government involvement and availability to negotiate
directly with potential foreign investors on fiscal, legal,
and social incentives for doing business in Moldova
The existence of free zones and industrial parks that
offer important benefits
Tax breaks for IT companies
High rate of corruption
Cumbersome bureaucracy
Lack of business culture
Limited understanding of IT benefits
Poor compliance with management practices, standards,
and regulations
Decreasing human resources and a drop in the quality of
education
Underdeveloped infrastructure in terms of transportation,
poor ICT network availability, and limited Internet
penetration outside of major cities
Underdeveloped ecommerce due to a lack of modern
banking tools
Increasing cost of doing business in Moldova in terms of
office space, wages, and living expenses
Opportunities Threats
Be prepared for the steady recovery of the economy
as the negative effects of the financial crisis abate
Take advantage of the gradual consolidation of the
SMB segment
Continue to pursue government initiatives for
technology adoption, especially through the rollout of
egovernment projects
Increase consumer spending through flexible and
easy-to-access credit tools
Harness increasing remittances coming into the
country from the population working abroad
Put in place strategies to enable the development of
datacenters and telecommunications services
Push strategies to develop high-end infrastructure
such as midrange and high-end servers and
networking equipment
Potential exodus and brain drain of IT specialists possibly
reducing the supply of IT professionals
Potential late integration into the EU and tough visa regimes
with EU countries
Political instability and uncertainty
Lack of financial aid from international institutions
Failure to finalize large-scale projects because of
bureaucracy and corruption
Lack of transparent tender processes and delays in the
privatization process
Changes in fiscal incentives for IT companies possibly
hindering the market's attractiveness to potential investors
Slow response to proposed PPPs
Source: IDC, 2011
E S S E N T I AL G U I D A N C E
K e y R e c o m m e n d a t i o n s
Measures aimed at boosting IT internal spending:
Initiate a PC Voucher Program: The Moldovan government should allocate
financial resources to initiate a PC voucher program based on the model
implemented in Romania. In Romania, such a program ran for several years, and
it had a huge impact on local PC sales – both locally assembled machines and
international brands. In the 2008–2010 period, more than 100,000 new PCs were
©2011 IDC #CEMA17850 37
sold through this program, with desktop PCs accounting for only 30% of the total
volume.
Enact an Electronic Archiving Law: The Moldovan government should speed
up the process of adopting this law. A similar law was passed in Romania in
2007, and, since then, it has had a substantial impact on spending related to
technologies companies need to comply with this law, such as storage and
archiving software and hardware, backup and recovery and business continuity
software, and document management applications.
Decrease the Software Piracy Rate: The Moldovan government should make
every effort to decrease the software piracy rate so as to increase tax revenues
from legal software transactions. This can be done through several measures:
Roll out campaigns in cooperation with BSA and the most important ISVs
aimed at increasing awareness of the advantages and benefits derived from
using licensed software applications (e.g., access to free upgrades, hot-line
support, and software maintenance).
Increase the penalties and sanctions for using pirated software with the aim
of discouraging potential users of illegal software.
Roll out the Economic Impact model, which shows a direct connection
between reducing the piracy rate and increasing software spending, further
translated in additional taxes to the state budget.
Promote Transparent Public Procurement Through Adequate Legislative
Measures: A specific law aimed at improving the transparency of the public
procurement process will increase the confidence of international vendors to bid
for contracts and projects and to establish local operations.
Incentivize IT Investments: The Moldovan government should provide
incentives, such as tax breaks and subsidized training, to encourage private
companies to make ICT infrastructure investments.
Ensure Universal Basic Telephony Access: A law to ensure universal access
to basic fixed telephony services and payphones is a must. The most common
method of achieving such universal access is through designated operators of
telecenters for the provision of basic fixed telephony and fixed broadband. As an
example, in Romania, the adoption of such a law resulted in the establishment of
633 telecenters by the end of 2008, enabling basic connectivity services to more
than 600 remote villages. It also necessitated massive investments in networking
hardware equipment and software applications.
Increase and Strengthen Customs Control: IT vendors, with the support of the
Moldovan government, should endeavor to cooperate with customs authorities to
ensure ICT products entering the country are genuinely imported goods. To
ensure all such goods comply with import laws, holding and search facilities must
be set up in which such goods can be unpacked and checked for authenticity and
conformity to customs procedures. Checks must be made for a period of at least
one year. Such strategies have proven very effective elsewhere in SEE in
diminishing the black importation of ICT goods.
Measures aimed at boosting the export of services:
38 #CEMA17850 ©2011 IDC
Change Curricula Within Technical Universities: The Moldovan Ministry of
Education should work with IT vendors to change and map curricula in technical
universities so as to align them with real market and business needs. Such a
move would reduce the period necessary to train fresh graduates upon entering
the workforce, which would have a direct positive effect on their productivity and
efficiency.
Include Freelancers in the Official Taxation System: Moldovan authorities
should work on discouraging freelancers from working on the basis of contracts
that are not subject to taxation. If successful, such measures would have a
twofold benefit: They would increase tax revenues, which could be further used
for investments in public infrastructure; and they would increase the availability of
the official pool of human resources, thus attracting new outsourcing companies
into the country.
Increase the Education Budget (as a Proportion of GDP): The budget for the
education system as a percentage of national GDP should be increased so as to
enable more consistent investment into IT infrastructure in schools and
universities. This would increase access to technology among students and
would have a direct positive impact on the quality and competencies of fresh
graduates.
Be More Active in Promoting Moldova's Benefits: The government of
Moldova should directly organize, or at least take part in, promotional campaigns
and events to disseminate relevant information about Moldova's attractiveness as
an offshore destination. Local providers of outsourcing services should also
consider playing a direct role in such events. An outsourcing summit similar to
the Black Sea Forum, which took place in Romania in 2011 and focused on
outsourcing services and matching up providers and potential customers, could
serve as a viable example. Several outsourcing companies and government
representatives from countries such as Albania, Turkey, Serbia, Russia, the
Ukraine, and Iran were present at the event in Romania.
Leverage the Population's French Language Skills: Despite the large number
of French speaking people (the second highest in the region after Romania), little
has been done to promote this resource so as to attract new offshore businesses
from Western Europe and, in particular, from French speaking countries (France,
Belgium, Luxembourg, and Switzerland). Moldova should be positioned to exploit
this resource, especially to attract investments in non-IT offshore centers (such
as customer-care or helpdesk centers) that do not require technical
competencies.
D e f i n i t i o n s
Offshore
The use of the term offshore generally implies locations from which to source low-cost
project-oriented or outsourced IT and business services. The term offshore is usually
used from a US-centric view and thus pertains to locations such as India and China,
but also to CEE. Using a broader view, or a more European perspective, IDC includes
what is referred to by the term nearshore.
©2011 IDC #CEMA17850 39
Nearshore
The use of the term nearshore usually implies a region in which pricing is/costs are at
a moderate level compared to the major hubs (also referred to as onshore) of IT and
business services, such as the U.S. and countries in Western Europe, but at a higher
level compared to places such as China and India. Additionally, nearshore usually
includes geographies that are contiguous, or in close proximity, to onshore locations.
Examples of nearshore locations that are contiguous, or in close proximity, to an
onshore location include Canada and Ireland; in regional terms, they include Central
and Eastern Europe.
Engineering and R&D Services
These include the activities and business processes associated with the creation of
products or services. Specific activities may include R&D, product development, and
product testing in various industries, such as IT – both software and hardware –
manufacturing, and aerospace.
BPO
This is the comprehensive outsourcing of most or all of the responsibility for the
management and administration of one or more processes to a third party in addition
to transaction processing.
Managed Services
IDC views managed services as falling under the larger umbrella of outsourcing,
referring to the management of a "discrete" environment (silo) as part of an
outsourcing arrangement. Examples would include areas such desktops, networks,
applications, servers, storage, security, and business continuity.
Managed services involve a third party's management of a client's IT and network
infrastructure. Such services can be onsite or hosted and delivered over a network.
They 1) do not usually include any transfer of IT assets, 2) do not include any large-
scale transfer of personnel to a third party, and 3) are generally shorter than
outsourcing contracts.
Managed services involve a medium-term (1–5 years) contractual arrangement in
which a service provider takes responsibility for managing part of a client's IS
infrastructure, applications, and/or operations.
These are selective services, which can be delivered in three main ways, onsite
(traditional), hosted, or as a utility (on the basis of pay per use).
Customization Services
Services in this category include implementing and integrating standard packaged
applications, modifying existing packaged applications, and customizing packaged
applications for specific business requirements. Contracts relating to software
assessment are also included within this category. This category, however, excludes
contracts covering software development, the installation of system software, and the
customization of IT operating environments.
40 #CEMA17850 ©2011 IDC
M e t h o d o l o g y
The data used for the analysis included in the first part of the report focusing on the
current size of the Moldovan market was collected from a variety of primary and
secondary sources, including, but not limited to, IDC trackers, face-to-face meetings
with the main IT players on the Moldovan market, discussions and interviews with the
local and central authorities, and desk research.
The five year-forecast was primarily compiled using IDC's forecast assumptions tool,
which provides a good framework for projecting future market development, as well
as reliable benchmarking techniques.
In the second part of the report, in deciding upon which factors to include, IDC
analyzed the key variables that multinational companies identified as being relevant
when determining where to establish an offshore center. These variables were
grouped by the main categories listed above, along with the following sub-categories:
Resource Skill Factors
Education levels
Language proficiency
Resource availability
Work culture
Economic and Political Factors
Political commitment
Regulatory environment
Intellectual property protection
Economy
Infrastructure Factors
ICT infrastructure
Transportation
Business and Regional Factors
Location
Employee acquisition and dismissal
Market experience
Real estate
Financial Factors
Compensation
©2011 IDC #CEMA17850 41
Tax and country-specific costs
Fixed costs and variable costs
Note
The factors identified above were classified into market drivers or industry constraints
based on discussions with local and central authorities, local agencies, and
associations, as well as vendors involved in offshore/nearshore activities. For
offshore industry constraints, IDC has come up with a list of recommendations
regarding future initiatives aimed at turning the constraints into competitive
advantages. IDC has also proposed a list of promotion activities aimed at increasing
awareness on Moldova as an offshore/nearshore destination.
C o p y r i g h t N o t i c e
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used in advertising, press releases, or promotional materials requires prior written
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deny approval of external usage for any reason.
Copyright 2011 IDC. Reproduction without written permission is completely forbidden.