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IT Firms See Continued Growth, But Urge More Government Action

By Emil Danielyan

Armenia's nascent information technology (IT) industry saw further expansion last year, making it, according to official figures, the most rapidly growing sector of the struggling economy.

But industry officials caution that it still has a long way to go before becoming an engine of broader economic recovery -- a key goal of the Armenian government. The government, they say, has yet to take meaningful steps to spur an IT boom registered in other parts of the world in the 1990s.

"There is progress, but it's not as fast as one would like to see," says Artem Baghdasarian of the Armenian Union of IT Enterprises (UITE).

Some company executives are more skeptical. "There is more talk about developing the sector than real action," says Hovik Musayelian, chief executive of the Armenian subsidiary of the Texas-based firm LEDA Systems, a worldwide supplier of semiconductor components.

Musayelian says the government's IT promotion effort has been largely irrelevant to LEDA's rapid expansion in Armenia. The Yerevan branch had only 20 employees when it was launched in mid-2000. It now employs some 100 well-paid specialists and plans to double or even triple the staff in the coming years.

Last summer the company's Armenian-born founder, Vahram Mouradian, joined forces with two other businessmen to launch a separate $11 million investment project in Armenia. Their Amarast joint venture is due to manufacture silicon chips for telecommunication equipment.

LEDA is a relative newcomer in the Armenian IT sector. At least a dozen US firms, including such Silicon Valley names as HPL, Virage Logic and Credence, already had branches in Armenia when it established its presence in the country.

The UITE business association estimates that about 200 IT companies were active in Armenia as of last September. That includes small firms involved in computer hardware sales and user training. Their number has shot up in the last two years, reflecting a much stronger demand in computers. About 60 companies deal with software development. According to the UITE, 26 of them operate with foreign, mostly American, capital.

Between 3,000 and 4,000 professionals are thought to be employed by the sector. Government officials estimate that its aggregate output soared by 30 percent last year with exports alone exceeding $20 million. According to Armen Grigorian, executive secretary of the government's IT Promotion Council, the growth rate will at least remain the same this year.

"There has definitely been progress," Grigorian assures. "Several new firms have been created, while some of the existing ones have increased their staffs."

The consultative body was formed in July by Prime Minister Andranik Markarian in a sign of growing government interest in IT. The government has declared the sector's development as one of its chief economic priorities.

However, business executives who are members of the council complain that the main obstacles hampering growth are still there. They warn that Armenia may be faced with a shortage of skilled labor (its main trump card until now) in the near future unless it revamps its educational system. With most of the available IT specialists already having jobs in or outside Armenia, the high-tech industry's further growth requires a sustained influx of new skilled cadres. The majority of young university graduates do not meet industry demands, however.

"We need six to seven months to train them further," says LEDA's Musayelian. "That's a big luxury for us."

This is what prompted LEDA to sponsor a new IT program at the Armenian State Engineering University. Under an agreement signed with the university last year, the company's Armenian branch pledged to select 30 third-year students each year who will continue their studies under a special LEDA curriculum and join the company upon graduation. The prospect of an average monthly salary of $800 must be quite an incentive for the students. The first group was selected in September.

Another factor stifling the industry is the lack of cheap and reliable Internet connection. Industry executives unanimously criticize the Greek-owned telecommunications monopoly ArmenTel on which they strongly depend. Government attempts to abolish the monopoly have failed so far.

Industry complaints about Armenia's business environment, strongly criticized by Western donors, are less frequent. A UITE report issued last year concluded that IT firms face "comparatively fewer problems" than other businesses. Jan Kloos, a Yerevan-based Dutch businessman, believes that problems with the rule of law are often exaggerated.

"If they were that big I would not have been in Armenia," he argues. Kloos's Daily Sports Holdings group, which runs one of the world's leading soccer websites, moved most of its operations from Holland to Armenia last year as part of its expansion strategy.

Kloos and other IT chiefs agree that the government could give a strong boost to the sector by offering locally-owned IT start-ups with tax breaks and appropriate infrastructure. One way of doing that is to create so-called "technoparks" or "IT incubators" that would provide new firms with office space, computer facilities, training and relevant information.

The first such incubator in Yerevan, the Viasphere Technopark, opened its doors last summer and now accommodates seven mainly US-owned firms employing about 300 people. The director of the state-of-the-art facility, Aram Vartanian, says the companies are enjoying "greenhouse conditions." The biggest of them is a subsidiary of America's Epygi Technologies which has pledged to invest $20 million to produce software, laser and fibro-optic equipment and semi-conductors in Armenia.

Another technopark is expected to be created later this year with a $5 million loan provided by the World Bank last December.

The government pins big hopes on a major international conference on IT to be held in Yerevan in April under the auspices of the European Union. It says the EU now regards Armenia as a regional IT hub and is ready to support its development.

But industry officials sound a note of caution. Hovannes Avoyan, who manages the Yerevan branch of the San Francisco-based company Brience, says the authorities should follow India's example in attracting foreign high-tech investment. Over the past decade India has emerged as a major player in the global IT market and boasted $88 billion in exports in 2001.

"We offer less favorable conditions for IT business than the Indians," Avoyan says, adding that the country has so far capitalized only on the ethnic Armenian factor.

Indeed, virtually all IT investors, including Epygi owner Sam Simonian and Viasphere boss Tony Moroyan, who have opened shop in Armenia are of Armenian descent. Government officials acknowledge this fact. The IT council's Grigorian reckons that the country needs to generate at least as many new IT jobs as it already has if the industry is to have a snowball impact on its otherwise depressed economy.