Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. Moldova Competitiveness Assessment: The ICT Cluster 30 percent. The weighted average net salary in the industry is estimated at USD$309 per month or US$6 per hour. In some cases, the hourly wage can rise to US$8 per hour. This labor rate is one of the lowest in Eastern Europe and is highly competitive with other technology exporting economies. The table below presents a comparative analysis of hourly wages for a select group of companies: 19 Country Project Manager Level Charge per hour (US$) Software Engineer Level Charge per hour (US$) Total Software Exports (US$) India 50 – 80 30 – 60 10 Billion Russia 50 – 70 30 – 50 100-200 Million 20 China 30 – 50 20 – 40 1.5 Billion USA 100 – 200 80 – 120 Over 200 Billion Vietnam 20 – 30 15 – 25 N/A Moldova 6 – 8 2 – 6 N/A Countries with relatively high volumes of advanced factor conditions, including skilled labor, communications, and technology, generally compete well on international ICT markets, particularly if the cost of these conditions is relatively low. Industries within these countries also have an opportunity to self-select their economic and commercial priorities. Software services and ready-made products are well suited to leveraging large numbers of underemployed engineers, while ICT-enabled business services and process outsourcing is a good strategy for well-educated, nontechnical resources with adequate language abilities. In the case of Moldova, both of these conditions exist currently, at comparatively low wages. The challenge for the sector is how to move up the value chain from piecework to fully finished products and services, to capture more of the value-added revenue. Problems A Five-Forces Analysis The problems of the Moldovan ICT sector are best examined within the framework of the Porter Five Forces Model for Industry Analysis: Supplier power: The issue of supplier power is an interesting one, depending on how you define the suppliers. Universities are the most obvious providers of advanced factor endowments, that is, human resources. In this case, the universities have the 19 Source: Global Cybersoft, Inc. and World Economic Forum, 2004. 20 Estimated for 2003; actual trade data are not available. July 2004 • DRAFT Page 9
Development Alternatives, Inc. Moldova Competitiveness Assessment: The ICT Cluster greatest supply of educated people, but the differentiation of supply is quite low. The professionals themselves are also suppliers of intellectual capital to the sector. While technicians are low cost, they are highly mobile, making competition for quality resources keen across the sector. Fortunately, the presence of local substitutes is robust, in the case of labor. Threat of substitutes: The global demand for ICT outsourcing, ready-made products, and services is stunningly high, despite a global slowdown in ICT spending. The supply of providers is also abundant, resulting in downward pressure on prices and low switching costs for customers. Moldova is a small player in a crowded international market that includes powerful ICT exporters also able to provide high quality at low prices. Buyer power: Perhaps the greatest force working on the sector is buyer power, putting Moldova at a distinct disadvantage. Buyers have enormous leverage and volume. Access to information is widespread. Lack of brand and the shadow market weaken Moldova’s position. Customers are very price sensitive. For now, the buyer concentration is high because of little market access. The threat of substitutions always exists and most customers can easily backward integrate their value chain, if needed. Barriers to entry: Unlike manufacturing or other capital-intensive industries, ICT has few barriers to entry. The minimum requirement for individuals or firms is a computer and knowledge. The low cost of switching, and distribution channels, for example, the Internet, makes ICT services accessible to vast numbers of competitors. Unfortunately, Moldova is also at a disadvantage here because the one barrier to entry, brand identity, is something most companies in the sector lack. Degree of rivalry: The sector is diffuse, with little competition, cooperation, or concentration. Specialization and isolation contribute significantly to a lack of firm rivalry, making innovation and industry growth more difficult. A Vicious Cycle The Moldovan ICT sector is caught in a vicious cycle of isolation and exclusion from world and domestic markets. A general lack of local and international brand awareness keeps the industry from fully developing its potential. Underdeveloped formal access to markets has kept wages low for even the most experienced and talented professionals. Consequently, these factors conspire to feed a burgeoning shadow market for software development outsourcing. Companies often find it difficult to retain talent because of low wages and unpredictable employment conditions. Often, when young talent is trained and certified, they leave for better jobs in Western Europe or the U.S., or they enter the shadow market for the promise of slightly higher compensation. Widespread prosperity is elusive because of extremely low foreign investment in the industry and relatively small contracts, gained either through partner companies in other markets or personal relationships with Moldovans living in other countries. While there are some promising signs from these company linkages, the reality is that the foreign partner normally July 2004 • DRAFT Page 10
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