EV and World Bank Case study | 2014
IT and High technology sectors are one of the fastest growing sectors in the economy of Armenia.
Since 2006, the sector, excluding Internet service providers, has grown with a CAGR of 22% reaching the total output of $294m in 2013. The number of companies operating in the sector has reached to about 380, the number of employees- ~8,000. About 13% of the companies operate in High-technology domain, while the rest are IT companies.
One of the driving factors of the sector growth was its attractiveness for foreign companies to establish branches in Armenia. The prime competitiveness pillar is the availability of relatively cheap and competitive human resources in Armenia. Currently, Armenia seems on the verge of losing this competitive advantage.
Due to growing number of IT companies in Armenia, demand in IT specialists will continue to increase. According to the conservative estimation, if the market and productivity continue to grow with an average rate of 18% and 1% respectively, the absorption potential of additional IT specialists will grow at a rate of 17% annually and reach ~15,000 by 2017.
The sector is undergoing a major transformation right now: there is an increasing shift from the outsourcing model to the model of own product development and entrepreneurship in the sector. This model of growth requires a higher level of knowledge, new skills (such as sales skills), entrepreneurial knowledge.
The outsourcing model mostly fostered the growth of the sector as well as attraction of international companies and FDI. The model is based on the outsourcing activities, which can be sustained because of low-cost on a global labor market and high-quality workforce, beneficial to foreign companies. Thus, the model is built on the basis of cost-competitiveness.
The current developments in the sector are towards higher value added entrepreneurship model. The presence of international companies, which bring sector-specific culture into the country, and international startup boom force the development of the model among IT and high-tech specialists. The further developments are expected to drive the market towards the more value-added and growth of the sector. Educational sector needs to quickly adapt and reflect these challenges in order to sustain the sector competitiveness.
In order to sustain the growth based on the high quality labor force, the country currently faces the issue of providing sufficient supply. The increasing demand for IT skills is a global trend, but in Armenia it is more constraining due to small size of the labor force and the country and increase in competition between the local industry and multinationals. At the current point of development of the sector, this is a complex issue, as the skills gap increases with the positive dynamics and development of the industry. This implies that the shortage of the skills is increasing in parallel with the sophistication of the industry.
IT and High-technology companies view the mismatch between the supply and the demand of the skilled IT labor as a key factor that hinders the growth of the sector.
Currently, the university degree is not viewed as a crucial decision factor in recruitment by companies, indicating the diminishing role and image of higher education in the sector due to the insufficient quality of graduates. Companies consider the Master’s degrees to have a limited benefit on top of knowledge gained through undergraduate studies. This observation demonstrates that Master’s Degree programs in IT and High Tech are not adequately meeting market expectations. Also, there is a possibility of a limited sophistication of the IT market that doesn’t yet require high end skills obtained from Master’s Degree.
Overall, the higher education system in Armenia lacks the competitive dynamism and efficiency when it comes to IT skills. The quest to join European Higher Education Area pressures Armenia to reform. Armenia is undertaking reforms through the Bologna process in order to join the European Higher Education Area.
Currently, the number of graduates with IT specializations annually closely coincides with the annual demand in the overall market, but only 45% of the graduates consider or qualify to be employed in the sector, thus, creating a quantitative imbalance of workforce.
The number of specialists demonstrates the demand only in IT and High technology sector and does not include non-IT and non-high technology companies, which are also in need of IT specialists. Thus, the actual demand in the market might be much higher than 2,000 new specialists per year.
In addition, due to the positive and fast industry dynamics there is also a qualitative skills gap conditioned by the following factors:
- Teaching programs are not correlate with the private sector standards: the private sector assessment for practical and theoretic knowledge of graduates is below average
- No effective links between university and private sector companies are in place to organize internships and recruitment procedures
- Professional standards in teaching staff is lower than desired and there is no opportunities to requalify
- Teaching staff is aging, while the younger generation with hands-on experience has little interest in academic career
- The university programs do not accentuate self-development and self-educational capabilities of graduates, essential for the dynamically developing industry
- There are limited alternatives such as certification programs to formal university degree program
- There are limited post graduate re-qualification training programs for base and senior level specialists
To address the sector issues short and long-term recommendations are suggested.
- A new university curriculum would benefit from the inputs of private sector to correspond to industry needs. For this purpose, it is recommended to establish special curriculum development boards and elect board members from the industry specialists and executives.
- It is recommended that the policymakers explore the possibility of increasing the quota of the students in IT-related faculties, whose tuition is funded by the Government. Provided there is additional budget, the higher number of the free student quota, which is allocated to students based on their entrance exam results, will attract more qualified candidates.
- The link between the universities and private sector should be strengthened through reinvigorating the role of mandatory internship/apprenticeship programs. The dialogue between the parties can be strengthened through creation of a new standard of internship programs - apprenticeship, mandatory for students to receive the degree.
- More young professionals from sector should be encouraged to teach in the universities through a guest lecturer programs.
- The urgent need in entry level and senior level specialists can be satisfied via creation of special certification training programs, currently limited on the market.
- Co-financing schemes for workforce development by means of training centers creation can help smaller companies to close the skill gap.
- Special matching co-financing schemes can be developed supported by the government to support establishment of special training centers co-shared by the companies.
- Widespread and targeted communication campaigns shall be organized to highlight the prospects and strong market demand for the engineering profession.
- The quantity of applicants in technical faculties is to be stimulated by information campaigns on the engineering profession, where the engineering career is presented to be at the core of modern economy.
- The university funding needs considerable increase as well as diversification through research grants and endowment foundations.
- The government approach to supporting skills development need to be focused on solving and comprehensive.
- The number of university-based laboratories, which are established with the help of multinationals, should be scaled up. Similar to the establishment of ANEL together with National Instruments, USAID and Government, more laboratories need to be established on the university premises to enable the technical environment for the students.
- Creating an alternative program such as certifications and associates degree to prepare software programmers in less than 4 years will help increase the supply of labor in the medium term.
- The universities may consider revitalizing their career centers in order to support their graduates.
- If Armenia aspires to transition from outsourcing, development center destination to one of innovation centers functioning under entrepreneurship model, it has to integrate fundamental research and development practices into its university system. The development of innovation, R&D capabilities is easier to inculcate if students are accustomed to performing fundamental research from early years of their study.
- High tech accelerators can become a valuable resource for entrepreneurs.
- As the entrepreneurship model will require a more innovative and high end solutions and product development, it eventually requires high level graduate and post graduate base and radically new approaches to education and skill development to move up the innovation value chain.