The knowledge economy is one of Ukraine’s most promising industries and may emerge as the country’s best chance to leapfrog from its current period of economic instability. During the U.S. Chamber of Commerce’s U.S. – Ukraine Business Forum, Ukraine’s knowledge economy was discussed extensively and, as a result, our companies are more aware of the potential value of the country's high-skilled workforce.
Ukraine will receive a new boost to the knowledge economy Jan. 1 when the Deep and Comprehensive Free Trade Area, under the EU – Ukraine Association Agreement, begins its economic implementation phase. According to the overall agreement, the EU and Ukraine “shall endeavour to contribute to progress in acquiring scientific and technological knowledge relevant to sustainable economic development, by strengthening their research capacities and human potential.” In turn, U.S. investors are wondering what they can expect to see from Ukraine’s knowledge economy in the next few years.
In 2012, a Ukrainian Hi-Tech Initiative report ranked Ukraine among the top 10 countries with the most certified IT professionals. The report also indicates that 16,000 specialists graduate from Ukrainian universities each year. Smartsolutions Law Group estimates that in 2014, Ukraine had roughly 250,000 IT professionals of which nearly 40,000 were certified. These statistics provide evidence that the Ukrainian IT sector is human-capital abundant; however, further information is needed to understand the specific IT work of Ukrainian professionals. Anton Baryshevskiy of the Organization of Ukrainian Developers has surveyed 3,535 Ukrainian IT specialists and found that software and web development, corporate systems, e-commerce, and iOS applications are among the IT subject areas where specialists and entrepreneurs invest the bulk of their time and resources.
Before we conclude that Ukraine’s knowledge economy, including its IT sector, is investment ready, a few questions arise: What is the evolution of the intellectual property framework in Ukraine? Which companies will serve as catalysts for Ukraine’s emergence as a tech power? What is the Ukrainian government doing to support investment in IT, strengthen understanding of the knowledge economy in schools through contemporary coursework, and reduce attrition of Ukrainian IT specialists? Finally, when can investors expect Ukrainian officials to produce a vision and investment plan for their knowledge economy?
Software development and product outsourcing companies continue to comprise over 50 percent of the Ukrainian IT market. In 2011, the potential of this industry was recognized after its services exports exceeded $1 billion USD, and helped award Ukraine with the 26th most attractive outsourcing location. Although the Ukrainian economy has experienced a considerable contraction this year, a depreciating Ukrainian Hyrvnia and low tax rate of 5 percent for IT service providers creates investment incentives for foreign investors, notes a Vox Ukraine report. Two of the largest companies that have established residences in Ukraine, EPAM Systems and Luxoft, combine to over $700 Million USD in worldwide annual revenue, and employ one-fifth of all Ukrainian IT professionals. Still, an educational system that fails to develop students’ practical IT skills, and a high attrition rate of software developers and programmers, seem to be limiting this sector’s potential.
Entrepreneurial endeavors, or IT start-ups, are gaining traction in Ukraine. Andrey Kolodyuk’s recent article in the World Economic Forum’s Agenda indicates that Ukraine has more than 2,000 start-ups currently in operation. In the first half of 2015, Ukrainian IT startups concluded over 30 investment deals accounting for more than $10 million USD. One of the most successful start-ups from this year has been Looksery, a facial tracking mobile application that was recently purchased by Snapchat for $150 million USD. This could provide an incentive for other Ukrainian start-ups that produce mobile applications to accelerate their activities and R&D initiatives. However, entrepreneurs should be careful to not over rely on mobile applications, and officials should only use the industry as a small component of their overall vision on how to strengthen their knowledge economy.
In Ukraine, long-term success of the knowledge economy requires a coherent vision, political stability, transparent procurement practices, and a greater allocation of investment through government funds. However, given the current state of the Ukrainian economy, and the challenging political landscape, this strategy will likely take several years to be realized. Nevertheless, there are some measures available to legislators in the meantime, which can help increase domestic and foreign investment.
To help establish their country’s short-term potential, Ukrainian officials should introduce several pieces of legislation that aim to protect intellectual property rights (IPR) of companies, offer substantial tax breaks for new and existing investors, ensure that telecommunication services are efficient and affordable, and provide educational institutions with more funds to support the efforts and development of researchers, professors, and students that are working to strengthen the knowledge economy. In determining prioritization, protection of IPR must rank high given Ukraine’s low-grade USTR status -- and persistent violation of IPR rights. Ultimately, these recommendations are contingent upon the Ukrainian government’s ability to become more organized and implement modernized legislation that attracts foreign investment.
The combination of industries that comprise a knowledge economy can be diverse depending on the country and region of the world. Ukraine’s agricultural, steel and manufacturing, energy, and IT sectors are the pillars of its economy, rich with skilled laborers and input resources. These sectors can only gain strength by incorporating knowledge economy principles. For example, just take a look at the city of Lviv. The city has roughly 25 percent of Ukrainian IT developers and is beginning to transform into a technology hub. Lviv’s mayor, Andriy Sadoviy, has introduced several initiatives to promote the city as an IT hub, and KPMG has listed the city as one of the world’s top cities for technology outsourcing. Lviv’s transformation incentivizes investors to begin economic forecasting and stock picking within the IT industry. Ukraine can continue this trend by expanding its other sectors through similar, geographical and tech-enhanced mechanisms.
U.S. businesses need to stay informed on the knowledge economy emerging in Ukraine. Through our U.S. – Ukraine Business Twitter account, the U.S. Chamber of Commerce provides our followers with insightful and reliable economic stories and events. Second, investors should keep an eye on the several international funding sources available to support Ukrainian economic reform. The U.S. Chamber’s Ukraine Business Task Force keeps track of these funding sources and offers opportunities to meet the officials that manage the sources. The Task Force aims to help accelerate the Ukrainian economy and expand business opportunities for members. Finally, companies should look beyond the distressed macro-economic environment of Ukraine, and focus on pockets rich with human capital and entrepreneurial spirit. Ukraine’s knowledge economy is likely to crystallize around regional or municipal pockets similar to more successful international clusters.