After almost two decades of rapid expansion, Armenia’s information-technology industry is becoming a rare economic success story for this small, blockaded South-Caucasus country.
Oriented toward exports, the information-technology (IT) sector grew by an average of 22 percent annually from 2008-2013, much faster than any other economic sphere, according to government data. With a combined output of almost $380 million, the nearly 400 IT firms operating in Armenia accounted for 3.8 percent of last year’s Gross Domestic Product of almost $10 billion. The sector currently employs over 10,000 computer programmers and software engineers -- a figure comparable to the total workforce of the Armenian mining industry, the single largest source of export revenue.
Yet, according to the Ministry of Economy, more than half of these tech firms have come into existence since 2007. “This is the only area where Armenia is successfully competing on a global, not even regional, scale,” said Yeva Hyusian, the director of the Microsoft Innovation Center Armenia (MICA).
A dozen relatively large firms, most of them subsidiaries of American hi-tech heavyweights, dominate the sector. The Armenian subsidiary of Synopsys Inc., one of the world’s largest microchip designers, now employs more than 500 engineers, making it the sector’s largest enterprise. Other US software giants with an Armenian presence include National Instruments, Mentor Graphics and VM Ware.
Armenia also has been making its mark on the global IT scene through home-grown talents like Artavazd Mehrabian, the 40-year-old developer of PicsArt, one of the world’s most popular mobile photo-editing applications. Another Armenian startup supported by an American partner is expected to release soon a vocal-presentation platform, Voiceboard, intended as an alternative to the ubiquitous Powerpoint software.
Meanwhile, a US-Armenian joint venture plans to start manufacturing Armenian-designed tablet computers later this year.
So far, Armenia’s longstanding problems with corruption, a lack of competition and closed borders with neighboring Azerbaijan and Turkey have had little bearing on the sector’s rapid growth. That leads some experts to conclude that the knowledge-based industry represents the best economic hope for the future.
Part of the reason could lie in the past.
During the Soviet era, Armenia was home to dozens of enterprises that produced about a third of the microelectronic equipment used by the Soviet defense industry. The now defunct Yerevan Research Institute of Mathematical Machines, which designed one of the first Soviet computer systems in 1959, alone had about 10,000 employees as late as in the 1980s.
The Soviet collapse spelled the end of this state industry, but its specialists’ strong skills and modest wage demands offered fertile ground for a new hi-tech sector that emerged after Armenia regained independence. A dozen or so US software companies mostly owned by diaspora Armenians largely drove the trend.
One such firm, Vienna, Virginia-based Synergy International Systems, set up shop in Yerevan in 1999. “We started out with only four people working in a Yerevan apartment,” said Ashot Hovanesian, Synergy’s Armenia-born founder and president. With clients in 55 countries, Hovanesian’s company now has 160 employees and plans to double their number over the next few years.
The rapid emergence of such startups has prompted the Armenian government to expand efforts to support the industry. Over the past few years, the government has teamed up with foreign donor agencies and corporations, including Microsoft and Nokia, to open nine centers in Yerevan providing logistical, technical and even financial assistance to IT entrepreneurs. A government-backed “technopark” serving the same purpose began operating in Armenia’s second largest city, Gyumri, early this year. The sector gained a further boost when the government recently launched, together with private investors, a $6-million venture capital fund for startups.
Tax breaks are in the works too. Parliament is expected to pass later this month a government bill that would give new IT outfits with up to 15 workers a three-year exemption from 20-percent corporate income taxes. It would also grant a heavily discounted 10-percent income tax rate for their employees. The government predicts that between 40 and 60 IT startups will emerge each year as a result. Hi-tech firms are already able to move into Armenia’s first-ever tax haven that began functioning last year on the Russian-owned premises in Yerevan.
“Opening a new IT business in Armenia is now very easy,” commented MICA’s Hyusian. “We didn’t have this infrastructure and [such] opportunities four years ago.”
Newer and better training facilities are still needed: the Armenian IT sector’s number one problem at the moment is the inadequate quality of instruction at Armenia’s underfunded universities. Few graduates from Armenian universities and institutes are qualified enough to join established firms without undergoing additional training, industry executives say. The lack of qualified graduates has translated into an estimated 2,000 job vacancies in the IT sector, a highly unusual phenomenon for a country beset by unemployment unofficially estimated to run well into the double-digits.
Industry executives warn that, without improvement, education standards could affect the sector’s growth in the longer term. The government has repeatedly pledged to address the issue. As a step in that direction, in 2013 it inaugurated a $6.2-million state-of-the-art IT laboratory, mostly financed by the US Agency for International Development and the US firm National Instruments, at the State Engineering University of Armenia.
The private sector is also taking measures. Synopsys, using its own curriculum and technical facilities, sponsors a computer science chair at the State Engineering University of Armenia. Synergy hires new staff from among university students taking its shorter IT courses.
Despite the shortcomings, officials are optimistic. The sector’s average annual growth rate of 22 percent should “at least remain the same in the coming years,” predicted Naira Nikoghosian, head of a Ministry of Economy department dealing with IT.