The next big outsourcing hub: A tiny country you've never heard of where IT is top priority

Moldova is one of the few countries in Europe to have a Ministry of Technology, and the sector continues to grow at a rapid pace.

The presidential building in Chișinău, Moldova.
The presidential building in Chișinău, Moldova. Image: Shutterstock
A child of two worlds, caught between East and West and just outside European Union's border, the Republic of Moldova is building up its IT and telecoms sector at warp speed, managing to attract large companies thanks to its proximity to Western Europe and costs that are cheaper than Romania or Bulgaria.

Tax exemptions and low salaries - ranging from $350 per month for a junior developer to $1,000 for an experienced one - have lured businesses to Moldova. Outsourcing companies such as Endava and Pentalog are planning to hire hundreds of IT professionals in Moldova in the near future, knowing that the country's culture is compatible with both the Western world and the Russian-speaking region.

The Moldova is, though, far from a promised land for IT, with a political scene divided almost equally between pro-European and pro-Russian parties. Young people have staged street protests to support a Western view, like the Twitter Revolution in 2009, and have become increasingly vocal in the demands for strong anti-corruption measures, witnessing how public prosecutors are changing the situation in neighbouring Romania.

The IT boom

Moldova, the poorest country in Europe, is a "competitive alternative" to classic outsourcing destinations, analyst house IDC noted in a recent report. The country offers low taxes, dedicated professionals, and decent broadband speeds. "Getting in Moldova sooner than later will enable companies to take full advantage of its benefits," IDC added.

The analyst house emphasizes the level of technical skills that IT workers have in Moldova and their proficiency in languages including Russian, French, English, or Spanish. "It is probably just a matter of time before large global players open centers," the analyst house said.

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Moldova has signed the European Union Association Agreement, while being also part of the Commonwealth of Independent States Free Trade Area. The volume of exports in telecoms, computer and information services increased from a mere $58m nine years ago to $188m in 2014, according to the World Trade Organisation.

"We are estimating a 40 percent increase of the IT sector in the following years, but we're trying as hard as we can to double its income by 2020. The growth in the telecoms sector will be slower compared to IT alone," Ana Chirita, executive director of the Moldovan Association of ICT Companies, told ZDNet.

Although fragile and with a Parliament that was unable to elect a president between 2009 and 2012, Moldova's political scene managed to by and large agree on measures supporting technology. The ITC sector reached eight percent in the country's GDP defying the region's turmoil, while the IT industry alone accounts for around 0.8 percent.

Outsourcing companies

Several outsourcing companies are active mainly in the Moldovan capital of Chisinau. "We saw the potential of the Moldovan IT market many years ago," Kumail Jetha, general manager of Endava's delivery centre, told ZDNet. It was the outsourcing company's first location in Eastern Europe before it expanded into Romania and Macedonia.

"In addition to leveraging specific outsourcing advantages related to geography and strong heritage in engineering, our clients also value the effective cultural fit," he says.

The company employs around 350 IT professionals in Moldova, but plans to increase its headcount to at least 500, encouraged by the 50 percent growth the company has seen in the country over the past two years.

"The calibre of engineering talent is high and the work ethic is very good," Jetha says. IT professionals at Endava are involved in the full software lifecycle, from software design and technical strategy, to building and testing. Their projects range from enterprise mobile applications to core payment platforms.

However, problems remain. Serghei Goloborodico, delivery center manager at Pentalog Chisinau, is concerned that the geopolitical situation discourages new investments. The local market is still undersized, he says, and only IT projects for Western Europe and the US can ensure a company's survival.

Moreover, competition for skilled professionals has increased dramatically. "Qualifications given by IT faculties aren't meeting the needs of the industry, and the quantity is not sufficient," he told ZDNet. Many well-trained professionals have decided to cross the border and work in Romania, a country that shares the same language but pays them better. The true asset of Moldova, Goloborodico says, is its people, "clever and diligent students, quick learners, persistent, ambitious, and disciplined".

Goloborodico would welcome more consistency in political decisions at least when technology is involved. "There are fiscal incentives for the IT sector, but we, the IT companies, must fight each five years with new governments to prolong them." Pentalog has 120 professionals in its Chisinau office.

Moldova's workforce

The ICT sector employs 22,000 people in total, a large number considering the country's just three million inhabitants. "Many are very well trained, but we need to further increase their numbers," Ana Chirita, executive director at the Moldovan Association of ICT Companies, told ZDNet.

Every year, six percent of Moldovan graduates majoring in computer science and maths, and another 13 percent in engineering, according to IDC. "Apparently, this should be enough to meet the demand. However, teaching methods and curricula are obsolete. Only a small number of the graduates can be part of high added value projects, while the others need additional training," Moldova's minister of information technology and communications Pavel Filip told ZDNet.

Intel, Microsoft, IBM together with Endava and Pentalog interact with local universities, offer internships, and have created their own informal training programs. Intel organizesIntel Teach to the Future and 1:1 e-Learning. The country also holds local ISEF competitions, covering aspiring engineers' trips to ISEF USA.

"From my personal point of view, faster implementation and more investments will automatically bring better outcomes. Moldova is going in the right direction, it just needs to speed up implementation a little bit," Dmitry Kalita, Intel's Ukraine, Belarus, and Moldova director told ZDNet.

Technologies such as cloud, analytics, mobile, social and security can bring "new opportunities for countries like Moldova, that have clearly set their priorities towards European Union integration", Michael Paier, general manager at IBM South East Europe, told ZDNet.

IBM, Microsoft, USAID, the Moldovan Association of Private Companies, and the local Technical University have joined forces to launch an IT Excellence and Innovation Center, set to open by the end of this year. It should offer training courses, certification programs, as well as coaching, mentoring and funding for startups.

"Every year, the center aims to provide training for 1,000+ individuals and to influence up to 50 startups, helping 20 of them accelerate," IDC's report reads. The cost was estimated at $2m, money that will come through USAID, as a non-refundable grant. Multinationals such as IBM and Microsoft are also investing.

Moldova can't compare with India or China in terms of population and so isn't well suited to high-volume operations. "IDC's examination of the combination of available skills suggests that Moldova is particularly well positioned for core activities, such as web development and basic coding, and high-value activities, such as analysis and design and software development and testing," according to the analyst house.

Incentives for tech companies

The corporate tax rate in Moldova for the ICT sector is only 12 percent, lower than many of the countries in the region. "Most software companies can qualify for reduced social insurance contributions (based on a fixed percentage of just two months' salary rather than the same percentage applied to the total annual wage)," IDC says.

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In addition, entry and mid-level software professionals benefit from an income tax exclusion that applies to salaries below MDL 9,000 per month, the equivalent of €470. This is set to apply at least through 2016, and has been previously extended.

"The government is aiming to make it easier for IT companies to create and develop businesses in Moldova," the ICT minister says. Over the last six years, the country has jumped 45 places in the World Bank's Ease of Doing Business ranking, reaching 63rd place this year. "IT companies are mobile and prefer to be in countries where the business environment is comfortable. Moldova wants to ease the administrative burden they have to undergo."

At the moment, setting up a business in Moldova takes an average of six days, "to days less than Romania, nine days less than Croatia, 12 days less than Bulgaria, and a whopping 24 days less than Poland," IDC notes. The costs are also lower. "Business startup expenses in Romania and Russia run around 50% higher than in Moldova; in places such as Poland and the Czech Republic, they are an order of magnitude higher."

There are also incentives designed for companies in general. Free economic zones and industrial parks offer "VAT and duties exemptions, discounted or zero tax rates depending on the activity, and 10 years of protection from changes to laws that could adversely impact businesses," according to the analyst house.

The Moldovan Technology Ministry wrote a bill concerning IT parks and fiscal incentives for businesses registered there. "Among the measures is a seven percent sales tax that will cumulate all the taxes currently paid by an IT company," Filip says. "Also, we are proposing an exemption from custom taxes and a VAT exemption for the equipment."

Authorities will welcome not only physical companies in the new IT Parks, but virtual as well. "Residents can work from offices located throughout the Moldova, after they register to a park." This bill will be discussed by the new government.

"By 2021, the turnover of the IT sector should increase fourfold, and the number of companies and employees should triple," Pavel Filip told ZDNet.

The beginning of a startup scene

Moldova's startup scene is shy, but on the right track. The first co-working space has just opened in the capital, and locals dream about becoming the Zuckerberg of the East. "If you want to start a company, that's simple. Things get complicated when you need funds," says Ionela Titirez, the IT industry manager for USAID's CEED II Project.

"There are neither formal organizations or investors to turn to. However, successful Moldovan startups can apply for the funding offered by several European and international programs," she told ZDNet. USAID organizes the local Startup Weekend, and an annual Moldova ICT Summit held at the end of this April, which has a category dedicated to entrepreneurs.

An advocate for the startup community, Titirez says there are a few success stories. Among those is Noction, a startup founded in Chisinau that later moved its HQ to the US. If offers BGP network performance automation, helping companies take advantage of the network performance for online retail or VoIP. Another example is privesc.eu platform, which offers live broadcasts of events. Titirez also mentions the online ads tool AdEasy, and ADD Grup, specialized in energy saving devices.

Is Moldova a credible business partner?

With a geographic location that comes with both benefits and downsides, the Republic of Moldova is slowly beginning to make a name for itself on Eastern Europe's tech scene. It has managed to keep walking despite the numerous bumps in the road that sometimes have shaken it up heavily.

"The high level of bureaucracy, corruption and the political scandals are negatively influencing foreign partners thinking of investing in Moldova. Moreover, we're neighbours to Ukraine, where there is an ongoing conflict," political analyst Angela Gramada told ZDNet.

Influenced by both European and Russian cultures, Moldova is beginning to choose its side. "Officially, we're closer to the EU. Unofficially, it's very hard for us to get rid of all the illegal businesses, the Russian energy dependence, and the homo sovieticus mentality," she argues.

"The last political crisis has proven that our leaders and their backers do business with both European Union and Russia. That said, it's likely they will oscillate between the two without firmly choosing a side."

However, Moldova has showed in its recent history that young people can make a difference. Back in 2009, in Chisinau alone, more than 30,000 protested after the Communist Party won the election. People claimed it was rigged and asked for a recount or a new election. Even though the recount didn't change the result, four parties created a governing coalition and forced the Communist party into opposition.

Those same young people are the ones building the country's ICT sector, aiming to live in a modern economy. Republic of Moldova is slowly shaping its national identity, and IT is a part of that.

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